Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial
results for the first quarter of fiscal 2011, ended November 30, 2010.
For the first quarter of fiscal 2011:
-- Revenue increased by 4.5% to reach $342.8 million;
-- Operating income before amortization(1) grew by 6% to reach $137
million when compared to the first quarter of fiscal 2010;
-- Operating margin(1) increased to 40% when compared to 39.4% in the
first quarter of fiscal 2010. The growth in the operating margin stems
primarily from the cable subsidiary, and reflects rate increases
implemented in the second half of fiscal 2010, partly offset by the
continued impact of the retention strategies and additional marketing
activities in the European operations;
-- Net income amounted to $16 million compared to $22.7 million in the
first quarter of the prior year. In the first quarter of the prior
year, net income included a favourable income tax adjustment, net of
non-controlling interest, of $9.6 million related to the reduction of
Ontario provincial corporate income tax rates for the cable
subsidiary. Excluding this amount, net income in the first quarter of
fiscal 2011 represents a growth of $2.8 million, or 21.7%, when
compared to adjusted net income(1) of $13.1 million in the
corresponding period of fiscal 2010;
-- In the first quarter of the year, a negative free cash flow(1) of
$24.3 million was posted which included the recognition of current
income tax expense of $78.1 million primarily attributable to the 2010
fiscal year, as a result of previous modifications made to the
corporate structure in the cable sector. For the same period of last
year, a positive free cash flow of $67.1 million was generated which
included a one-time tax recovery of $22.2 million also stemming from
the modified corporate structure;
-- A dividend of $0.12 per share was paid to the holders of subordinate
and multiple voting shares, an increase of $0.02 per share, or 20%,
when compared to a dividend of $0.10 per share the year before;
-- In the cable sector, revenue-generating units ("RGU")(2) grew by
90,869 net additions in the first quarter, for a total of 3,270,218
RGU at November 30, 2010.
"COGECO's first quarter financial results are very positive. Cogeco Cable
demonstrates strong internal growth and is in an excellent position to achieve
superior performance in 2011. In Canada, this quarter generated an increase of
70,690 RGU. Our European operations continued to improve, adding 20,179 RGU in
Portugal", said Louis Audet, President and CEO of COGECO.
"As for the radio activities, we are well positioned to increase our leadership
now that the transaction to acquire Corus Quebec's radio stations is about to be
concluded in the following weeks. In light of these positive results, management
has revised most of its guidelines for the 2011 fiscal year. Projected RGU
growth, operating income before amortization, operating margin and free cash
flow have been increased to reflect the expected trend generated by the strong
financial results we delivered in this quarter", declared Louis Audet, President
and CEO of COGECO Inc.
(1) The indicated terms do not have standard definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and therefore,
may not be comparable to similar measures presented by other companies.
For more details, please consult the "Non-GAAP financial measures" section
of the Management's discussion and analysis.
(2) Represents the sum of Basic Cable, High Speed Internet ("HSI"),
Digital Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
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Quarters ended November 30,
2010 2009 Change
($000, except percentages and per
share data) $ $ %
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(unaudited) (unaudited)
Operations
Revenue 342,766 328,003 4.5
Operating income before
amortization(1) 137,031 129,263 6.0
Operating margin(1) 40.0% 39.4% -
Operating income 73,892 63,562 16.3
Net income 15,975 22,748 (29.8)
Adjusted net income(1) 15,975 13,128 21.7
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Cash Flow
Cash flow from operating activities 57,572 (1,410) -
Cash flow from operations(1) 42,499 135,518 (68.6)
Capital expenditures and increase in
deferred charges 66,799 68,387 (2.3)
Free cash flow(1) (24,300) 67,131 -
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Financial condition(2)
Fixed assets 1,329,837 1,328,866 0.1
Total assets 2,890,734 2,744,656 5.3
Indebtedness(3) 1,144,213 961,354 19.0
Shareholders' Equity 394,565 381,635 3.4
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RGU growth 90,869 89,785 1.2
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Per Share Data(4)
Earnings per share
Basic 0.95 1.36 (30.1)
Diluted 0.95 1.35 (29.6)
Adjusted earnings per share(1)
Basic 0.95 0.79 20.3
Diluted 0.95 0.78 21.8
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(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
of the Management's Discussion and Analysis.
(2) At November 30, 2010 and August 31, 2010.
(3) Indebtedness is defined as the total of bank indebtedness, principal
on long-term debt and obligations under derivative financial instruments.
On November 16, 2010, Cogeco Cable completed the issuance of $200 million
Senior Secured Debentures Series 2. Proceeds from the issuance were mainly
used to redeem Cogeco Cable's $175 million Senior Secured Notes Series B
on December 22, 2010.
(4) 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 economic downturn experienced over the past two years makes
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 downturn
may have on future results. Forward-looking information is also subject to
certain factors, including risks and uncertainties (described in the
"Uncertainties and main risk factors" section of the Company's 2010 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 2010 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.
Cable sector
During the first three months of fiscal 2011, the Company's subsidiary, Cogeco
Cable Inc. ("Cogeco Cable" or the "Cable subsidiary"), invested approximately
$30 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 three months ended November 30, 2010, the number of RGU in the
Cable subsidiary increased by 90,869, or 2.9%, to reach 3,270,218 RGU, mainly as
a result of targeted marketing initiatives in the Canadian operations and
customer acquisition and retention strategies in the European operations
designed to improve penetration, and to the continuing interest for high
definition ("HD") television service. As a result of the strong RGU growth in
the first quarter of the year, Cogeco Cable expects to surpass its fiscal 2011
guidelines of 250,000 net additions, and accordingly is revising the RGU growth
guideline to 275,000 net additions for the 2011 fiscal year, representing growth
of approximately 8.6% when compared to August 31, 2010. RGU growth is expected
to stem primarily from the continued strong interest in Digital Television
services, enhanced service offerings, and through promotional activities. Please
consult the fiscal 2011 revised projections in the "Fiscal 2011 financial
guidelines" section for further details.
Operating income before amortization and operating margin
For the first quarter of fiscal 2011, operating income before amortization grew
by $7.8 million, or 6%, to reach $137 million, and operating margin increased to
40%, from 39.4%. Primarily as a result of the increase in the RGU growth
guideline, and to include the projections related to the forthcoming acquisition
of 11 Quebec radio stations from Corus Entertainment Inc. (the "Quebec Radio
Stations Acquisition") in light of the Canadian Radio-television and
Telecommunications Commission's ("CRTC") decision rendered on December 17, 2010,
Management has increased the projection for fiscal 2011 operating income before
amortization to $560 million, an increase of $22 million, or 4.1% over the
projection of $538 million in operating income before amortization issued on
October 27, 2010. Please consult the fiscal 2011 revised projections in the
"Fiscal 2011 financial guidelines" section for further details.
Free cash flow
For the three-month period ended November 30, 2010, COGECO reports negative free
cash flow of $24.3 million, compared to positive free cash flow of $67.1 million
in the first quarter of the prior fiscal year, representing a decrease of $91.4
million. The negative free cash flow in the first quarter of fiscal 2011
reflects the timing of the recognition of income tax liabilities as a result of
modifications made to the corporate structure of Cogeco Cable in fiscal 2009,
and will return to positive free cash flow in the second and following quarters
of the 2011 fiscal year. Mainly as a result of the improvement of the operating
income before amortization and the Quebec Radio Stations Acquisition, Management
expects an increase in cash flow from operations(1) in fiscal 2011 while the
increase in capital expenditures and increase in deferred charges should remain
unchanged from the October 27, 2010 guidance. Management has revised its free
cash flow guidelines for fiscal 2011 to $80 million, an increase of $20 million,
or 33.3%, when compared to the free cash flow guideline of $60 million issued on
October 27, 2010. Please consult the fiscal 2011 revised projections in the
"Fiscal 2011 financial guidelines" section for further details.
(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 fall 2010 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.
On April 30, 2010, the Company concluded an agreement with Corus Entertainment
Inc. ("Corus") to acquire its Quebec radio stations for $80 million in cash,
subject to customary closing adjustments and conditions, including approval by
the CRTC. On June 30, 2010, the Company submitted its transfer application for
approval to the CRTC. On December 17, 2010, the CRTC approved the transaction
essentially as proposed. On January 11, 2011, the Company was served with an
application by Astral Media Radio Inc. ("Astral") to the Federal Court of Appeal
("Court") for leave to appeal the CRTC decision approving the transaction, and a
related application by Astral for a stay of execution of that decision until
final judgement of the Court. Management believes the applications filed by
Astral are without merit and the Company will vigorously challenge them with a
view to having them dismissed by the Court. Management still plans to close the
transaction with Corus on February 1, 2011.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended November 30,
2010 2009 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 342,766 328,003 4.5
Operating costs 205,735 198,740 3.5
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Operating income before amortization 137,031 129,263 6.0
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Operating margin 40.0% 39.4%
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Revenue
Fiscal 2011 first-quarter revenue improved, mainly from the cable sector, by
$14.8 million, or 4.5%, to reach $342.8 million. Cable revenue increased by
$14.2 million, or 4.5%, for the first quarter when compared to the prior year.
For further details on the Company's operating results, please refer to the
"Cable sector" section.
Operating costs
For the first quarter of fiscal 2011, operating costs amounted to $205.7
million, an increase, mainly in the cable sector, of $7 million, or 3.5%, when
compared to the prior year. For further details on the Company's operating
results, please refer to the "Cable sector" section.
Operating income before amortization and operating margin
Operating income before amortization grew by $7.8 million, or 6%, to reach $137
million in the first quarter of fiscal 2011 when compared to the same period the
previous year. The cable sector contributed to the growth by $6.8 million during
the first quarter of fiscal 2010. COGECO's first-quarter operating margin
increased to 40%, from 39.4% in the first quarter of the previous year. For
further details on the Company's operating results, please refer to the "Cable
sector" section.
FIXED CHARGES
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Quarters ended November 30,
2010 2009 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Amortization 63,139 65,701 (3.9)
Financial expense 16,905 16,277 3.9
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(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.
First-quarter 2011 amortization amounted to $63.1 million, compared to $65.7
million for the same period of the prior year. The decrease is mainly
attributable to the Cable subsidiary's reduction in amortization in the European
operations stemming from certain acquired assets that are now fully amortized
and the depreciation of the Euro in relation to the Canadian dollar in fiscal
2011, partly offset by additional capital expenditures in the Canadian
operations arising from customer premise equipment acquisitions to support RGU
growth.
First-quarter financial expense amounted to $16.9 million, compared to $16.3
million in the prior year. The financial expense for the first quarter of the
current year includes a foreign exchange gain of $0.3 million, compared to $0.5
million in the first quarter of the prior year. The variance in foreign exchange
gains is mainly due to fluctuations in the relative value of the US dollar to
the Canadian dollar, with the US dollar affecting mainly the Canadian operations
as the majority of customer premise equipment is purchased and subsequently paid
in US dollars. The remaining increase of $0.5 million in the first quarter is
due to the timing of fluctuations in bank indebtedness when compared with the
same period of the previous fiscal year.
INCOME TAXES
Fiscal 2011 first-quarter income tax expense amounted to $18.2 million, compared
to an income tax recovery of $13.8 million in the comparable period of the prior
year. The income tax recovery in the first quarter of the prior year included
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"), which reduced future income tax expense by $29.8
million. Excluding this prior year impact, income tax expense would have
amounted to $16 million for the first quarter of fiscal 2010. Fiscal 2011 first
quarter income tax expense increase is mainly due to the operating income before
amortization growth combined with the decrease in amortization, partly offset by
the previously announced annual declines in the enacted Canadian federal and
provincial income tax rates.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7%
in Cogeco Cable's results. During the first quarter of fiscal 2011, the income
attributable to non-controlling interest amounted to $22.8 million due to the
cable sector's positive results, compared to $38.4 million in the first quarter
of fiscal 2010 mainly as a result of the income tax recovery from the reduction
of Ontario provincial corporate income tax rates.
NET INCOME
Fiscal 2011 first quarter net income amounted to $16 million, or $0.95 per
share, compared to $22.7 million, or $1.36 per share for the same period in 2010
which was favourably affected by the reduction of Ontario provincial corporate
income tax rates described in the "Income taxes" section. Excluding this prior
year impact, adjusted net income(1) would have amounted to $13.1 million, or
$0.79 per share(1) in the first quarter of fiscal 2010. The growth in net income
of $2.8 million, or 21.7%, and of $0.16 per share, or 20.3%, when compared to
the adjusted net income in the prior year, has resulted mainly from the growth
in operating income before amortization and the decrease in amortization expense
in the first three months of the fiscal year.
CASH FLOW AND LIQUIDITY
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Quarters ended November 30,
2010 2009
($000) $ $
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(unaudited) (unaudited)
Operating activities
Cash flow from operations 42,499 135,518
Changes in non-cash operating items 15,073 (136,928)
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57,572 (1,410)
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Investing activities(1) (66,799) (68,226)
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Financing activities(1) 171,267 47,453
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Effect of exchange rate changes on cash and cash
equivalents denominated in a foreign currency (229) 202
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Net change in cash and cash equivalents 161,811 (21,981)
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Cash and cash equivalents, beginning of period 35,842 39,458
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Cash and cash equivalents, end of period 197,653 17,477
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(1) Excludes assets acquired under capital leases.
(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.
Fiscal 2011 first quarter cash flow from operations reached $42.5 million, 68.6%
lower than the comparable period last year, primarily due to the recognition of
current income tax expense relating to the modifications to the corporate
structure of the cable subsidiary which took effect in the prior year. Changes
in non-cash operating items generated cash inflows of $15.1 million, mainly as a
result of an increase in income tax liabilities, partly offset by a decrease in
accounts payable and accrued liabilities. In the prior year, changes in non-cash
operating items required cash outflows of $136.9 million, mainly as a result of
decreases in accounts payable and accrued liabilities and income tax liabilities
and an increase in income taxes receivable.
In the first quarter of fiscal 2011, investing activities, including mainly
capital expenditures and the increase in deferred charges, amounted to $66.8
million, a decrease of $1.4 million, or 2.1% when compared to $68.2 million for
the corresponding period of last year. The most significant variations are in
the cable sector and are due to the following factors:
-- A decrease in customer premise equipment spending in the Cable
subsidiary, mainly due to the timing of equipment purchases in the
Canadian operations and the depreciation of the value of the Euro
relative to the Canadian dollar, which offset the increase in customer
premise equipment spending required to support RGU growth in the
European operations;
-- An increase in scalable infrastructure in the Canadian operations to
improve network capacity in existing areas served;
-- An increase in support capital reflecting mainly the improvement of
business information systems.
In the first quarter, negative free cash flow amounted to $24.3 million,
compared to positive free cash flow of $67.1 million in the comparable period of
fiscal 2010, representing a decrease of $91.4 million. The decline in free cash
flow over the prior year is due to an increase of $100.4 million in current
income tax expense, mainly from modifications made to the corporate structure,
which offset the increase in operating income before amortization in the first
quarter of fiscal 2011.
In the first quarter of fiscal 2011, indebtedness affecting cash increased by
$182.1 million mainly due to the increase in cash and cash equivalents of $161.8
million from the net proceeds of $198.3 million as a result of the issuance by
Cogeco Cable, on November 16, 2010, of Senior Secured Debentures Series 2
("Fiscal 2011 debentures") to repay on December 22, 2010, the cable subsidiary's
$175 million Senior Secured Notes Series B due on October 31, 2011 and the
related make-whole premium on early repayment. Indebtedness affecting cash also
increased due to negative free cash flow of $24.3 million and the dividend
payment of $7.6 million described below, partly offset by the cash inflows of
$15.1 million from the changes in non-cash operating items. Indebtedness mainly
increased through the issuance of the Fiscal 2011 debentures described above,
partly offset by a net repayment of $13.8 million on the Term Revolving Facility
in the cable sector. Indebtedness affecting cash increased by $56.5 million in
the prior year, mainly due to the decrease in non-cash operating items of $136.9
million and the aggregate dividend payments of $6.3 million described below,
partly offset by the free cash flow of $67.1 million and the decrease in cash
and cash equivalents of $22 million. Indebtedness mainly increased through an
increase of $46.3 million in bank indebtedness and a net amount of $14.9 million
drawn on the Cogeco Cable's Term Facility.
During the first quarter of fiscal 2011, a dividend of $0.12 per share was paid
by the Company to the holders of subordinate and multiple voting shares,
totalling $2 million, compared to a dividend of $0.10 per share, or $1.7 million
the year before. In addition, dividends paid by a subsidiary to non-controlling
interests in the first quarter of fiscal 2011 amounted to $5.6 million, for
consolidated dividend payments of $7.6 million, compared to $4.6 million for
consolidated dividend payments of $6.3 million in the first quarter of the prior
year.
As at November 30, 2010, the Company had a working capital deficiency of $166.6
million compared to $202.9 million as at August 31, 2010. The decrease in the
deficiency is mainly attributable to the cable sector and caused by an increase
in cash and cash equivalents and a decrease in accounts payable and accrued
liabilities. This decrease was partly offset by an increase in the current
portion of the long-term debt, combined with an increase in income tax
liabilities which exceeded the decrease in future income tax liabilities,
reflecting the modifications made to the corporate structure of the cable
subsidiary. 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 Cogeco Cable'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 cable subsidiary to
use cash and cash equivalents to reduce Indebtedness.
At November 30, 2010, Cogeco Cable had used $114.5 million of its $750 million
Term Revolving Facility for a remaining availability of $635.5 million and the
Company had access to the full amount of $50 million available under its Term
Revolving Facility.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to
approval by the subsidiaries' Boards 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, 2010, there have been significant changes to the balances of
"accounts payable and accrued liabilities", "income tax liabilities", "future
income tax assets", "future income tax liabilities", "long-term debt",
"derivative financial instruments" "cash and cash equivalents" and
"non-controlling interest".
The $66.1 million decrease in accounts payable and accrued liabilities is
related to the timing of payments made to suppliers. The increase of $80.2
million in income taxes liabilities and the decreases of $10 million in future
income tax assets and of $71.9 million in future income tax liabilities
primarily reflect the timing of the recognition of income tax liabilities as a
result of modifications made to the corporate structure in the cable subsidiary.
The increase of $175 million in the current portion of the long-term debt
reflects the maturity in 2011 of Cogeco Cable's Senior Secured Notes Series B
which were redeemed on December 22, 2010 pursuant to the issuance of the Fiscal
2011 debentures. The $161.8 million increase in cash and cash equivalents is due
to the factors previously discussed in the "Cash flow and liquidity" section
combined with the fluctuations in foreign exchange rates. The decrease of $5.8
million in derivative financial instruments is due to factors discussed in the
"Financial management" section. The $15.4 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 December 31, 2010 is presented in the
table below:
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Number of Amount
shares/options ($000)
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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 30,000
Exercisable options 30,000
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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 2010 Annual Report, have not
materially changed since August 31, 2010, except as mentioned below.
On November 16, 2010, Cogeco Cable completed, pursuant to a public debt
offering, the issue of $200 million Senior Secured Debentures Series 2. These
debentures mature on November 16, 2020 and bear interest at 5.15% per annum,
payable semi-annually. These debentures are indirectly secured by a first
priority fixed and floating charge and a security interest on substantially all
present and future real and personal property and undertaking of every nature
and kind of Cogeco Cable and certain of its subsidiaries. The net proceeds of
sale of the debentures were used to redeem in full, on December 22, 2010, Cogeco
Cable's Senior Secured Notes Series B due October 31, 2011 for an amount of $175
million plus accrued interest and make-whole premium, and the remainder for
working capital and general corporate purposes.
DIVIDEND DECLARATION
At its January 12, 2011 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.12 per share for subordinate and multiple
voting shares, payable on February 9, 2011, to shareholders of record on January
26, 2011. 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
Cogeco Cable has entered into a swap agreement with a financial institution to
fix the floating benchmark interest rate with respect to a portion of the
Euro-denominated loans outstanding under the Term Revolving Facility, and
previously the Term Facility, for a notional amount of EUR111.5 million, which
has been reduced to EUR95.8 million on July 28, 2009, and to EUR69.6 million on
July 28, 2010. The interest rate swap to hedge these loans has been fixed at
2.08% until the maturity of the swap agreement on July 28, 2011. In addition to
the interest rate swap of 2.08%, Cogeco Cable will continue to pay the
applicable margin on these loans in accordance with its Term Revolving Facility.
In the first quarter of fiscal 2011, the fair value of interest rate swap
increased by $0.5 million, which is recorded as an increase of other
comprehensive income, net of income taxes and non-controlling interest, compared
to a decrease of $0.1 million which was recorded as a decrease of other
comprehensive income, net of income taxes and non-controlling interest, in the
prior year.
Cogeco Cable has also 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 on 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. During the first three months of fiscal 2011, amounts due under the
US$190 million Senior Secured Notes Series A decreased by $7.6 million due to
the US dollar's depreciation relative to the Canadian dollar. The fair value of
cross-currency swaps decreased by a net amount of $6.3 million, of which a
decrease of $7.6 million offsets the foreign exchange gain on the debt
denominated in US dollars. The difference of $1.2 million was recorded as an
increase of other comprehensive income, net of income taxes and non-controlling
interest. In the first quarter of fiscal 2010, amounts due under the US$190
million Senior Secured Notes Series A decreased by $7.5 million due to the US
dollar's depreciation over the Canadian dollar. The fair value of cross-currency
swaps decreased by a net amount of $5.8 million, of which $7.5 million offsets
the foreign exchange gain on the debt denominated in US dollars. The difference
of $1.7 million was recorded as an increase of other comprehensive income, net
of income taxes and non-controlling interest.
Furthermore, Cogeco Cable'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. This debt is designated as a
hedge of a net investment in self-sustaining foreign subsidiaries and,
accordingly, the cable subsidiary recorded a foreign exchange loss of $1.9
million in the first quarter, compared to a foreign exchange gain of $0.6
million in the comparable period of the prior year, which is deferred and
recorded in the consolidated statement of comprehensive income, net of
non-controlling interest. The exchange rate used to convert the Euro currency
into Canadian dollars for the balance sheet accounts as at November 30, 2010 was
$1.3326 per Euro compared to $1.3515 per Euro as at August 31, 2010. The average
exchange rate prevailing during the first quarter of fiscal 2011 used to convert
the operating results of the European operations was $1.3833 per Euro compared
to $1.5732 per Euro in the first quarter of fiscal 2010. Since Cogeco Cable's
consolidated financial statements are expressed in Canadian dollars but a
portion of its business is conducted in the Euro currency, exchange rate
fluctuations can increase or decrease revenue, operating income before
amortization, net income and the carrying value of assets and liabilities.
The following table shows the Canadian dollar impact of a 10% fluctuation in the
average exchange rate of the Euro currency into Canadian dollars on European
operating results in the cable sector for the first three months ended November
30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended November 30, 2010 As reported Exchange rate impact
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 43,263 4,326
Operating income before amortization 4,271 427
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 13 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net additions % of
Penetration(1)
Quarters ended
November 30, November 30,
November 30,
2010 2010 2009 2010 2009
--------------------------------------------------------------------------
RGU 3,270,218 90,869 89,785
Basic Cable service customers 1,142,398 7,626 8,357
HSI service customers 742,708 20,464 22,715 66.6 62.8
Digital Television service
customers 760,919 41,649 32,220 67.2 56.6
Telephony service customers 624,193 21,130 26,493 58.0 50.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
In the cable sector, first quarter RGU net additions amounted to 90,869,
compared to 89,785 RGU in the comparable period of the previous fiscal year.
Fiscal 2011 first-quarter RGU net additions were higher than in the comparable
period of the prior year, and the Canadian operations continue to generate RGU
growth despite higher penetration rates, category maturity and aggressive
competition. During the last half of fiscal 2010, Cogeco Cable's European
operations generated net basic subscriber growth as a result of its general
policy re-assessment during the last half of the 2009 calendar year. Economic
conditions in Portugal continued to be difficult and Management has not yet
detected clear signs of a sustained economic recovery. Consequently, Cogeco
Cable continues to closely control costs and is focusing on generating RGU
growth in the near term. The rate of growth for our services has diminished in
this environment.
The net customer additions for Basic Cable service customers stood at 7,626 for
the first quarter, compared to 8,357 in the first quarter of the prior year.
Basic Cable service net additions in fiscal 2011 were mainly due to expansions
in the network and the combined effect of continued growth in HSI and Telephony
services in the Canadian operations. In the quarter, Telephony service customers
grew by 21,130 compared to 26,493 for the same period last year, and the number
of net additions to the HSI service stood at 20,464 customers compared to 22,715
customers in the first quarter of the prior 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 in the Canadian operations, and promotional and customer
retention activities throughout the cable subsidiary's operations. For the
three-month period ended November 30, 2010, additions to the Digital Television
service stood at 41,649 customers, compared to 32,220 for the comparable period
of the prior year. Digital Television service net additions are due to targeted
marketing initiatives to improve penetration, the launch of new HD channels and
the continuing interest for HD television service.
OPERATING RESULTS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2010 2009 Change
($000, except percentages) $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 331,519 317,365 4.5
Operating costs 195,447 188,418 3.7
Management fees - COGECO Inc. 6,644 6,341 4.8
------------------------------------------------------------------
Operating income from before amortization 129,428 122,606 5.6
------------------------------------------------------------------
Operating margin 39.0% 38.6%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenue
Fiscal 2011 first-quarter revenue improved by $14.2 million, or 4.5%, to reach
$331.5 million, when compared to the prior year.
Driven by RGU growth and rate increases implemented in the second half of fiscal
2010 and the revenue related to the new levy amounting to 1.5% of gross Cable
Television service revenue imposed by the CRTC in order to finance the new Local
Programming Improvement Fund ("LPIF"), the Canadian operations' first-quarter
revenue rose by $23.9 million, or 9%, to reach $288.3 million.
In the first quarter of fiscal 2011 European operations' revenue decreased by
$9.7 million, or 18.4%, at $43.3 million, mainly due to the decline of the Euro
in relation to the Canadian dollar and reflecting the impact of retention
strategies implemented in the second half of fiscal 2009 in order to curtail
customer attrition. Revenue from the European operations in the local currency
for the 2011 first quarter amounted to EUR31.3 million, a decrease of EUR2.4
million, or 7.2%, when compared to the same period of the prior year.
Operating costs
For the first quarter of fiscal 2011, operating costs, excluding management fees
payable to COGECO Inc., increased by $7 million, to reach $195.4 million, an
increase of 3.7% compared to the prior year.
In the Canadian operations, for the three months ended November 30, 2010,
operating costs excluding management fees payable to COGECO Inc. increased by
$10.9 million, or 7.5%, at $156.5 million. The increase in operating costs is
mainly attributable to servicing additional RGU, the launch of new HD channels
and additional marketing initiatives.
As for the European operations, fiscal 2011 first-quarter operating costs
decreased by $3.8 million, or 9%, at $39 million, mainly due to the decline of
the value of the Euro over the Canadian dollar which surpassed increases in
operating costs related to additional marketing initiatives and the launch of
new HD channels by Cabovisao. Operating costs of the European operations for the
first quarter in the local currency amounted to EUR28.2 million, an increase of
EUR1 million, or 3.5% when compared to the corresponding period of the prior
year.
Operating income before amortization and operating margin
Fiscal 2011 first-quarter operating income before amortization increased by $6.8
million, or 5.6%, to reach $129.4 million. Cogeco Cable's first-quarter
operating margin increased to 39% from 38.6% in the comparable period of the
prior year.
Operating income before amortization in the Canadian operations rose by $12.7
million, or 11.3%, to reach $125.2 million in the first quarter, mainly due to
the increased revenue exceeding the growth in operating costs. Cogeco Cable's
Canadian operations' operating margin increased to 43.4% in the first quarter
compared to 42.5% for the same period of the prior year. The growth in the
operating margin for the first quarter stems from rate increases, RGU growth and
the introduction in the second quarter of fiscal 2010 of customer billing for
the new LPIF which offset the associated operating costs.
For the European operations, operating income before amortization decreased to
$4.3 million in the first quarter from $10.2 million for the same period of the
prior year, representing a decrease of $5.9 million, or 58%, mainly due to
decreases in revenue which outpaced the decreases in operating costs. European
operations' operating margin decreased to 9.9% from 19.2% in the first quarter
of fiscal 2011. Operating income before amortization in the local currency
amounted to EUR3.1 million compared to EUR6.5 million in the first quarter of
the prior year, representing a decrease of 52.2%.
FISCAL 2011 FINANCIAL GUIDELINES
Consolidated
Management has revised upwards its guidelines to include the projections related
to the forthcoming Quebec Radio Stations Acquisition in light of the expected
closing date of February 1, 2011 and to reflect the improved performance of the
cable sector in the first quarter of fiscal 2011.
As a result of these factors, projected revenue, operating income before
amortization, net income and free cash flow were revised upwards. The projected
revenue should increase to $1,442 million from $1,380 million. The operating
income before amortization should increase to $560 million from $538 million and
net income should increase to about $50 million. Free cash flow should increase
to $80 million from $60 million.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revised
projections Projections
January 12, October 27,
2011 2010
Fiscal 2011 Fiscal 2011
(in millions of dollars, except net customer
additions and operating margin) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,442 1,380
Operating income before amortization 560 538
Financial expense 75 70
Current income taxes 64 65
Net income 50 45
Capital expenditures and increase in deferred
charges 341 341
Free cash flow 80 60
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable sector
Given the improved financial results during the first quarter and the expected
trend, guidelines for the 2011 fiscal year were revised upwards to reflect
higher than expected RGU growth and average revenue per unit in its Canadian
operations mainly attributable to effective marketing strategies and the
continued demand for cable telecommunications services. For its European
operations, Management has taken into consideration the impact of the rate
increases implemented in January 2011 combined with the impact on consumer
spending of the increase of the value added tax from 21% to 23%, which may
impact customers' capacity to pay for their products and services, among others,
and from the austerity measures recently introduced by the Portuguese
government.
Subsequent to these adjustments, projected revenue, operating income before
amortization, operating margin, net income and free cash flow were revised
upwards. The increase in projected revenue to $1,360 million from $1,340 million
should come from the Canadian operations. The operating income before
amortization should increase to $545 million from $530 million, operating margin
should increase to 40.1% from 39.6% and net income should increase to about $140
million. Amortization expense has been reduced to $265 million from $275 million
to reflect the impact of lower than expected capital expenditures in fiscal 2010
as well as the revised timing of 2011 capital expenditures.
As a result of the revised projections, free cash flow is now expected to reach
$70 million from the $55 million initially anticipated last October.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revised
projections Projections
January 12, October 27,
2011 2010
Fiscal 2011 Fiscal 2011
(in millions of dollars, except net customer
additions and operating margin) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,360 1,340
Operating income before amortization 545 530
Operating margin 40.1% 39.6%
Amortization 265 275
Financial expense 72 70
Current income taxes 63 65
Net income 140 120
Capital expenditures and increase in deferred
charges 340 340
Free cash flow 70 55
Net customer additions guidelines
RGU 275,000 250,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 at November 30, 2010, and have concluded that they were adequate.
Furthermore, no significant changes to the internal controls over financial
reporting occurred during the quarter ended November 30, 2010.
However, in the first quarter of fiscal 2011, the Company introduced a new
financial suite under an integrated Oracle platform. This project was required
in order to adequately support the implementation of the International Financial
Reporting Standards ("IFRS") and to remain current with the operational platform
used by the Company. Following the introduction of this new financial suite,
internal controls over financial reporting have been updated in order to support
adequate disclosure controls and procedures.
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, 2010.
A detailed description of the uncertainties and main risk factors faced by
COGECO can be found in the 2010 Annual Report.
On April 30, 2010, the Company concluded an agreement with Corus Entertainment
Inc. ("Corus") to acquire its Quebec radio stations for $80 million in cash,
subject to customary closing adjustments and conditions, including approval by
the CRTC. On June 30, 2010, the Company submitted its transfer application for
approval to the CRTC. On December 17, 2010, the CRTC approved the transaction
essentially as proposed. On January 11, 2011, the Company was served with an
application by Astral Media Radio Inc. ("Astral") to the Federal Court of Appeal
("Court") for leave to appeal the CRTC decision approving the transaction, and a
related application by Astral for a stay of execution of that decision until
final judgement of the Court. Management believes the applications filed by
Astral are without merit and the Company will vigorously challenge them with a
view to having them dismissed by the Court. Management still plans to close the
transaction with Corus on February 1, 2011.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates
and future accounting pronouncements since August 31, 2010, except as described
below. A description of the Company's policies and estimates can be found in the
2010 Annual Report.
Future accounting pronouncements
Harmonization of Canadian and International accounting standards
In March 2006, the Canadian Accounting Standards Board ("AcSB") of the Canadian
Institute of Chartered Accountants ("CICA") released its new strategic plan,
which proposed to abandon Canadian GAAP and effect a complete convergence to the
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's first interim consolidated financial
statements presented in accordance with IFRS will be for the quarter 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 Key activities Status
impact
--------------------------------------------------------------------------
Scoping and Pervasive Perform a high-level impact Completed
diagnostic assessment to identify key areas
that are expected to be 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 Identify the specific changes Completed
analysis, area required to existing accounting
evaluation and identified policies.
design in the
scoping and
diagnostic
phase
Analyse policy choices permitted
under IFRS.
Present analysis and
recommendations on accounting
policy choices to the Audit
Committee.
----------------------------------------------------------
Pervasive Identify impacts on information Completed
systems and business processes.
Prepare draft IFRS consolidated
financial statement template.
Identify impacts on internal
controls over financial
reporting and other business
processes.
--------------------------------------------------------------------------
Implementation For each Test and execute changes to Completed
and review area information systems and business
identified processes.
in the
scoping and
diagnostic
phase
---------------------------------------------
Obtain formal approval of In progress
required accounting policy - to be
changes and selected accounting completed in
policy choices. fiscal 2011
---------------------------------------------
Communicate impact on accounting To be
policies and business processes completed
to external stakeholders. during
fiscal 2011
----------------------------------------------------------
Pervasive Gather financial information In progress
necessary for opening balance - to be
sheet and comparative IFRS completed in
financial statements. fiscal 2011
Update and test internal control
processes over financial
reporting and other business
processes.
---------------------------------------------
Collect financial information In progress
necessary to compile IFRS- - to be
compliant financial statements. completed
during
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
implement changes to the completed
standards as they apply to the throughout
Company. transition
and 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.
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee ("EIC") of the Canadian AcSB
issued a new abstract concerning multiple deliverable revenue arrangements,
EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142,
Revenue arrangements with multiple deliverables. EIC-175 requires a vendor to
allocate arrangement consideration at the inception of the arrangement to all
deliverables using the relative selling price method, thereby eliminating the
use of the residual value method. The amendment also changes the level of
evidence of the standalone selling price required to separate deliverables when
more objective evidence of the selling price is not available. EIC-175 should be
adopted prospectively to revenue arrangements entered into or materially
modified in the first annual fiscal period beginning on or after January 1,
2011, with early adoption permitted. The Company has elected not to early-adopt
this EIC, and in light of the harmonization of Canadian and International
accounting standards taking effect at that same date, this EIC will not be
applicable to the Company.
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 November 30,
2010 2009
($000) $ $
-----------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operating activities 57,572 (1,410)
Changes in non-cash operating items (15,073) 136,928
-----------------------------------------------------------
Cash flow from operations 42,499 135,518
-----------------------------------------------------------
-----------------------------------------------------------
Free cash flow is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November
30,
2010 2009
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operations 42,499 135,518
Acquisition of fixed assets (63,307) (65,182)
Increase in deferred charges (3,492) (3,064)
Assets acquired under capital leases - as per
note 11 c) - (141)
--------------------------------------------------------------------------
Free cash flow (24,300) 67,131
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 November
30,
2010 2009
($000, except percentages) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Operating income 73,892 63,562
Amortization 63,139 65,701
--------------------------------------------------------------------------
Operating income before amortization 137,031 129,263
--------------------------------------------------------------------------
Revenue 342,766 328,003
--------------------------------------------------------------------------
Operating margin 40.0% 39.4%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 November 30,
2010 2009
($000, except number of shares and per share
data) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Net income 15,975 22,748
Adjustments:
Reduction of Ontario provincial corporate
income tax rates, net of non-controlling
interest - (9,620)
--------------------------------------------------------------------------
Adjusted net income 15,975 13,128
--------------------------------------------------------------------------
Weighted average number of multiple voting and
subordinate voting shares outstanding 16,728,184 16,721,277
Effect of dilutive stock options 10,970 6,594
Effect of dilutive subordinate voting shares held
in trust under the Incentive Share Unit Plan 74,014 64,053
--------------------------------------------------------------------------
Weighted average number of diluted multiple
voting and subordinate voting shares outstanding 16,813,168 16,791,924
--------------------------------------------------------------------------
Adjusted earnings per share
Basic 0.95 0.79
Diluted 0.95 0.78
--------------------------------------------------------------------------
--------------------------------------------------------------------------
ADDITIONAL INFORMATION
This MD&A was prepared on January 12, 2011. Additional information relating to
the Company, including its Annual Information Form, is available on the SEDAR
website at www.sedar.com.
ABOUT COGECO
COGECO (www.cogeco.ca) 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, January 13, 2011 at 11:00 a.m.
(EST)
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: 27875882
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until January 20, 2011, by
dialling:
Canada and USA access number: 1 800 642-1687
International access number: + 1 706 645-
9291
Confirmation code: 27875882
Supplementary Quarterly Financial Information
(unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended November 30, August 31,
($000, except percentages
and per share data) 2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue 342,766 328,003 333,671 316,284
Operating income before
amortization(1) 137,031 129,263 137,785 144,654
Operating margin(1) 40.0% 39.4% 41.3% 45.7%
Operating income 73,892 63,562 73,942 76,244
Impairment of goodwill
and intangible assets - - - -
Net income (loss) 15,975 22,748 12,265 14,631
Adjusted net income(1) 15,975 13,128 12,265 7,647
Cash flow from operating
activities 57,572 (1,410) 198,492 177,032
Cash flow from
operations(1) 42,499 135,518 127,230 108,744
Capital expenditures and
increase in deferred
charges 66,799 68,387 108,515 94,002
Free cash flow(1) (24,300) 67,131 18,715 14,742
Earnings (loss) per
share(2)
Basic 0.95 1.36 0.73 0.87
Diluted 0.95 1.35 0.73 0.87
Adjusted earnings per
share(1)(2)
Basic 0.95 0.79 0.73 0.46
Diluted 0.95 0.78 0.73 0.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended May 31, February 28,
($000, except percentages
and per share data) 2010 2009 2010 2009
--------------------------------------------------------------------------
Revenue 330,933 316,310 329,087 311,825
Operating income before
amortization(1) 127,928 126,624 124,363 123,505
Operating margin(1) 38.7% 40.0% 37.8% 39.6%
Operating income 64,008 62,623 58,370 60,171
Impairment of goodwill
and intangible assets - - - (399,648)
Net income (loss) 10,740 10,704 10,511 (115,210)
Adjusted net income(1) 10,740 9,157 10,511 8,741
Cash flow from operating
activities 110,756 99,873 117,498 117,322
Cash flow from
operations(1) 119,140 92,718 120,331 97,193
Capital expenditures and
increase in deferred
charges 69,511 60,302 74,549 65,104
Free cash flow(1) 49,629 32,416 45,782 32,089
Earnings (loss) per
share(2)
Basic 0.64 0.64 0.63 (6.90)
Diluted 0.64 0.64 0.63 (6.90)
Adjusted earnings per
share(1)(2)
Basic 0.64 0.55 0.63 0.52
Diluted 0.64 0.55 0.63 0.52
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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
of the Management's Discussion and Analysis.
(2) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations. However, the customer growth in the Basic Cable and HSI services
are 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 $9.2 million, which is expected to be paid in the first six
months of fiscal 2011. For fiscal 2010, 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 2010 fiscal year.
Cable Sector Customer Statistics
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, 2010 August 31, 2010
--------------------------------------------------------------------------
Homes passed
Canada 1,600,938 1,593,743
Portugal(1) 905,445 905,359
Total 2,506,383 2,499,102
--------------------------------------------------------------------------
Homes connected(2)
Canada 990,533 979,590
Portugal 269,553 269,194
Total 1,260,086 1,248,784
--------------------------------------------------------------------------
Revenue-generating units(3)
Canada 2,421,267 2,350,577
Portugal 848,951 828,772
Total 3,270,218 3,179,349
--------------------------------------------------------------------------
Basic Cable service customers
Canada 881,543 874,505
Portugal 260,855 260,267
Total 1,142,398 1,134,772
--------------------------------------------------------------------------
High Speed Internet service customers
Canada 575,929 559,057
Portugal 166,779 163,187
Total 742,708 722,244
--------------------------------------------------------------------------
Digital Television service customers
Canada 588,332 559,418
Portugal 172,587 159,852
Total 760,919 719,270
--------------------------------------------------------------------------
Telephony service customers
Canada 375,463 357,597
Portugal 248,730 245,466
Total 624,193 603,063
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Cogeco Cable is currently assessing the number of homes passed.
(2) Represents the sum of Basic Cable service customers and High Speed
Internet ("HSI") and Telephony service customers who do not subscribe to
the Basic Cable service.
(3) Represents the sum of Basic Cable, HSI, Digital Television and
Telephony service customers.
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars, except per share data) 2010 2009
$ $
--------------------------------------------------------------------------
Revenue 342,766 328,003
Operating costs 205,735 198,740
--------------------------------------------------------------------------
Operating income before amortization 137,031 129,263
Amortization (note 3) 63,139 65,701
--------------------------------------------------------------------------
Operating income 73,892 63,562
Financial expense (note 4) 16,905 16,277
--------------------------------------------------------------------------
Income before income taxes and the following
items 56,987 47,285
Income taxes (note 5) 18,244 (13,818)
Gain on dilution resulting from the issuance of
shares by a subsidiary (5) -
Non-controlling interest 22,773 38,355
--------------------------------------------------------------------------
Net income 15,975 22,748
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share (note 6)
Basic 0.95 1.36
Diluted 0.95 1.35
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2010 2009
$ $
--------------------------------------------------------------------------
Net income 15,975 22,748
--------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized losses on derivative financial
instruments designated as cash flow hedges,
net of income tax recovery of $966,000
($2,141,000 in 2009) and non-controlling
interest of $3,296,000 ($2,551,000 in 2009) (1,571) (1,218)
Reclassification to net income of unrealized
losses on derivative financial instruments
designated as cash flow hedges, net of income
tax recovery of $917,000 ($1,007,000 in 2009)
and non-controlling interest of $4,512,000
($4,386,000 in 2009) 2,152 2,093
Unrealized gains (losses) on translation of a
net investment in self-sustaining foreign
subsidiaries, net of non-controlling interest
of $2,128,000 ($1,844,000 in 2009) (1,015) 882
Unrealized gains (losses) on translation of
long-term debt designated as hedges of a net
investment in self-sustaining foreign
subsidiaries, net of non-controlling interest
of $831,000 ($1,415,000 in 2009) 396 (676)
--------------------------------------------------------------------------
(38) 1,081
--------------------------------------------------------------------------
Comprehensive income 15,937 23,829
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2010 2009
$ $
-------------------------------------------------------------------------
Balance at beginning, as previously reported 253,169 211,922
Changes in accounting policies - (7,894)
-------------------------------------------------------------------------
Balance at beginning, as restated 253,169 204,028
Net income 15,975 22,748
Excess of the value attributed to the incentive
share units at issuance over the price paid for
the acquisition of the subordinate voting shares 45 -
Dividends on multiple voting shares (221) (184)
Dividends on subordinate voting shares (1,786) (1,494)
------------------------------------------------------------- -----------
Balance at end 267,182 225,098
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(In thousands of dollars) November 30, 2010 August 31, 2010
$ $
--------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents (note 11 b)) 197,653 35,842
Accounts receivable (note 13) 79,534 74,560
Income taxes receivable 43,362 45,400
Prepaid expenses and other 10,869 14,189
Future income tax assets 4,799 6,133
--------------------------------------------------------------------------
336,217 176,124
Investments 739 739
Fixed assets 1,329,837 1,328,866
Deferred charges 28,277 27,960
Intangible assets (note 7) 1,041,805 1,042,998
Goodwill (note 7) 144,297 144,695
Derivative financial instruments - 5,085
Future income tax assets 9,562 18,189
--------------------------------------------------------------------------
2,890,734 2,744,656
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 740 2,328
Accounts payable and accrued
liabilities 182,671 248,775
Income tax liabilities 80,767 558
Deferred and prepaid revenue 45,361 45,602
Derivative financial instrument 674 1,189
Current portion of long-term debt (note
8) 177,339 2,329
Future income tax liabilities 15,257 78,267
--------------------------------------------------------------------------
502,809 379,048
Long-term debt (note 8) 953,206 952,741
Derivative financial instruments 1,263 -
Deferred and prepaid revenue and other
liabilities 12,532 12,234
Pension plan liabilities and accrued
employees benefits 11,417 10,568
Future income tax liabilities 229,787 238,699
--------------------------------------------------------------------------
1,711,014 1,593,290
--------------------------------------------------------------------------
Non-controlling interest 785,155 769,731
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 9) 118,703 119,527
Contributed surplus 2,784 3,005
Retained earnings 267,182 253,169
Accumulated other comprehensive income
(note 10) 5,896 5,934
--------------------------------------------------------------------------
394,565 381,635
--------------------------------------------------------------------------
2,890,734 2,744,656
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2010 2009
$ $
--------------------------------------------------------------------------
Cash flow from operating activities
Net income 15,975 22,748
Adjustments for:
Amortization (note 3) 63,139 65,701
Amortization of deferred transaction costs and
discounts on long-term debt 778 762
Future income taxes (61,899) 6,404
Non-controlling interest 22,773 38,355
Gain on dilution resulting from the issuance
of shares by a subsidiary (5) -
Stock-based compensation 678 708
Loss on disposals and write-offs of fixed
assets 320 98
Other 740 742
--------------------------------------------------------------------------
42,499 135,518
Changes in non-cash operating items (note 11 a)) 15,073 (136,928)
--------------------------------------------------------------------------
57,572 (1,410)
--------------------------------------------------------------------------
Cash flow from investing activities
Acquisition of fixed assets (note 11 c)) (63,307) (65,182)
Increase in deferred charges (3,492) (3,064)
Other - 20
--------------------------------------------------------------------------
(66,799) (68,226)
--------------------------------------------------------------------------
Cash flow from financing activities
Increase (decrease) in bank indebtedness (1,588) 46,324
Net increases (repayments) under the Term
Facilities and Term Revolving Facilities (13,800) 11,425
Issuance of long-term debt, net of discounts and
transaction costs 198,320 -
Repayments of long-term debt (826) (1,224)
Acquisition of subordinate voting shares held in
trust under the Incentive Share Unit Plan (note
9) (1,282) (1,049)
Dividends on multiple voting shares (221) (184)
Dividends on subordinate voting shares (1,786) (1,494)
Issuance of shares by a subsidiary to non-
controlling interest 290 -
Acquisition by a subsidiary from non-controlling
interest of subordinate voting shares held in
trust under the Incentive Share Unit Plan (note
9) (2,258) (1,744)
Dividends paid by a subsidiary to non-
controlling interest (5,582) (4,601)
--------------------------------------------------------------------------
171,267 47,453
--------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents denominated in a foreign currency (229) 202
--------------------------------------------------------------------------
Net change in cash and cash equivalents 161,811 (21,981)
--------------------------------------------------------------------------
Cash and cash equivalents at beginning 35,842 39,458
--------------------------------------------------------------------------
Cash and cash equivalents at end 197,653 17,477
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See supplemental cash flow information in note 11.
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 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 November 30, 2010 and August 31, 2010 as well as its
results of operations and its cash flows for the three-month periods ended
November 30, 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, 2010. These unaudited interim consolidated financial
statements have been prepared using the same accounting policies and methods as
the most recent annual consolidated financial statements.
Future accounting pronouncements
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee ("EIC") of the Canadian
Accounting Standards Board issued a new abstract concerning multiple deliverable
revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which
amended EIC-142, Revenue arrangements with multiple deliverables. EIC-175
requires a vendor to allocate arrangement consideration at the inception of the
arrangement to all deliverables using the relative selling price method, thereby
eliminating the use of the residual value method. The amendment also changes the
level of evidence of the standalone selling price required to separate
deliverables when more objective evidence of the selling price is not available.
EIC-175 should be adopted prospectively to revenue arrangements entered into or
materially modified in the first annual fiscal period beginning on or after
January 1, 2011, with early adoption permitted. . The Company has elected not to
early-adopt this EIC, and in light of the harmonization of Canadian and
International accounting standards taking effect at that same date, this EIC
will not be applicable to the Company.
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
November 30,
$ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 331,519 317,365 11,247 10,638 342,766 328,003
Operating
costs 202,091 194,759 3,644 3,981 205,735 198,740
Operating
income
before
amortization 129,428 122,606 7,603 6,657 137,031 129,263
Amortization 62,990 65,565 149 136 63,139 65,701
Operating
income 66,438 57,041 7,454 6,521 73,892 63,562
Financial
expense 16,700 16,141 205 136 16,905 16,277
Income taxes 16,101 (15,766) 2,143 1,948 18,244 (13,818)
Gain on
dilution
resulting
from the
issuance of
shares by a
subsidiary (5) - - - (5) -
Non-
controlling
interest 22,773 38,355 - - 22,773 38,355
Net income 10,869 18,311 5,106 4,437 15,975 22,748
----------------------------------------------------------------------------
Total assets
(1) 2,847,210 2,702,819 43,524 41,837 2,890,734 2,744,656
Fixed assets
(1) 1,326,099 1,325,077 3,738 3,789 1,329,837 1,328,866
Intangible
assets (1) 1,016,465 1,017,658 25,340 25,340 1,041,805 1,042,998
Goodwill (1) 144,297 144,695 - - 144,297 144,695
Acquisition
of fixed
assets (2) 63,209 65,157 98 166 63,307 65,323
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At November 30, 2010 and August 31, 2010.
(2) Includes fixed assets acquired through 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
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Revenue
Canada 299,503 274,998
Europe 43,263 53,005
--------------------------------------------------------------------------
342,766 328,003
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2010 2010
$ $
--------------------------------------------------------------------------
Fixed assets
Canada 1,106,812 1,098,760
Europe 223,025 230,106
--------------------------------------------------------------------------
1,329,837 1,328,866
--------------------------------------------------------------------------
Intangible assets
Canada 1,041,805 1,042,998
Europe - -
--------------------------------------------------------------------------
1,041,805 1,042,998
--------------------------------------------------------------------------
Goodwill
Canada 116,243 116,243
Europe 28,054 28,452
--------------------------------------------------------------------------
144,297 144,695
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3. Amortization
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Fixed assets 59,260 61,701
Deferred charges 2,686 2,807
Intangible assets 1,193 1,193
--------------------------------------------------------------------------
63,139 65,701
--------------------------------------------------------------------------
--------------------------------------------------------------------------
4. Financial expense
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Interest on long-term debt 15,892 15,901
Foreign exchange gains (332) (488)
Amortization of deferred transaction costs 489 407
Other 856 457
--------------------------------------------------------------------------
16,905 16,277
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Income Taxes
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Current 80,143 (20,222)
Future (61,899) 6,404
--------------------------------------------------------------------------
18,244 (13,818)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides the reconciliation between income taxes at the
Canadian statutory federal and provincial income tax rates and the consolidated
income tax expense (recovery):
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Income before income taxes 56,987 47,285
Combined income tax rate 28.91% 31.43%
Income taxes at combined income tax rate 16,475 14,862
Adjustments for losses or income subject to lower
or higher tax rates (953) (2,422)
Decrease in future income taxes as a result of
decrease in substantively enacted tax rates - (29,782)
Utilization of pre-acquisition tax losses - 4,432
Income taxes arising from non-deductible expenses 170 209
Effect of foreign income tax rate differences 2,461 247
Other 91 (1,364)
--------------------------------------------------------------------------
Income taxes at effective income tax rate 18,244 (13,818)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Earnings per Share
The following table provides the reconciliation between basic and diluted
earnings per share:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Net income 15,975 22,748
--------------------------------------------------------------------------
Weighted average number of multiple voting and
subordinate voting shares outstanding 16,728,184 16,721,277
Effect of dilutive stock options (1) 10,970 6,594
Effect of dilutive subordinate voting shares held
in trust under the Incentive Share Unit Plan 74,014 64,053
--------------------------------------------------------------------------
Weighted average number of diluted multiple voting
and subordinate voting shares outstanding 16,813,168 16,791,924
--------------------------------------------------------------------------
Earnings per share
Basic 0.95 1.36
Diluted 0.95 1.35
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) For the three-month period ended November 30, 2009, 32,782 stock options
were excluded from the calculation of diluted earnings per share as the
exercise price of the options was greater than the average share price of
the subordinate voting shares.
7. Goodwill and Other Intangible Assets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2010 2010
$ $
--------------------------------------------------------------------------
Customer relationships 26,913 28,106
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
--------------------------------------------------------------------------
1,041,805 1,042,998
Goodwill 144,297 144,695
--------------------------------------------------------------------------
1,186,102 1,187,693
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a) Intangible assets
During the first three months, intangible assets variations were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses Base Total
$ $ $ $
--------------------------------------------------------------------------
Balance at August 31,
2010 28,106 25,120 989,772 1,042,998
Amortization (1,193) - - (1,193)
--------------------------------------------------------------------------
Balance at November
30, 2010 26,913 25,120 989,772 1,041,805
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Goodwill
During the first three months, goodwill variation was as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$
--------------------------------------------------------------------------
Balance at August 31, 2010 144,695
Foreign currency translation adjustment (398)
--------------------------------------------------------------------------
Balance at November 30, 2010 144,297
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Long-Term Debt
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Maturity Interest November August 31,
rate 30, 2010 2010
% $ $
---------------------------------------------------------------------------
Parent company
Term Revolving
Facility 2013 - - -
Obligations under
capital lease 2013 9.29 68 72
Subsidiaries
Term Revolving
Facility
Revolving loan -
EUR80,000,000
(EUR90,000,000 at
August 31, 2010) 2014 2.81 (1)(2) 106,608 121,635
Senior Secured Notes
Series B 2011(3) 7.73 174,793 174,738
Senior Secured Notes
Series A -
US$190,000,000 2015 7.00 (4) 193,859 201,387
Series B 2018 7.60 54,619 54,609
Senior Secured
Debentures Series 1 2014 5.95 297,538 297,379
Senior Secured
Debentures Series 2
(5) 2020 5.15 198,326 -
Senior Unsecured
Debenture 2018 5.94 99,812 99,806
Obligations under 6.71 -
capital leases 2013 9.93 4,910 5,429
Other 2011 - 12 15
---------------------------------------------------------------------------
1,130,545 955,070
Less current portion 177,339 2,329
---------------------------------------------------------------------------
953,206 952,741
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Interest rate on debt as at November 30, 2010, including applicable
margin.
(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 a portion of Euro-
denominated loans outstanding under the Term Revolving Facility, and
previously the Term Facility for a notional amount of EUR111.5 million
which have been reduced to EUR95.8 million on July 28, 2009 and to EUR69.6
million on July 28, 2010. The interest swap rate to hedge the Euro-
denominated loans has been fixed at 2.08% until the swap agreement
maturity of July 28, 2011. In addition to the interest swap rate of 2.08%,
the Company's subsidiary will continue to pay the applicable margin on
these Euro-denominated loans in accordance with the Term Revolving
Facility.
(3) On December 22, 2010, the Company's subsidiary, Cogeco Cable Inc.,
redeemed the 7.73% Senior Secured Notes Series B in the aggregate
principal amount of $175 million. As a result, the aggregate redemption
cash consideration that the Company's subsidiary paid totalled
$183,771,000, excluding accrued interest. The excess of the redemption
price over the aggregate principal amount will be recorded as financial
expense during the second quarter of fiscal 2011.
(4) 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.
(5) On November 16, 2010 the Company's subsidiary, Cogeco Cable Inc.,
completed pursuant to a public debt offering, the issue of $200 million
Senior Secured Debentures Series 2 (the "Debentures"). These Debentures
mature on November 16, 2020 and bear interest at 5.15% per annum payable
semi-annually. These debentures are indirectly secured by a first priority
fixed and floating charge and a security interest on substantially all
present and future real and personal property and undertaking of every
nature and kind of the Company's subsidiary and certain of its
subsidiaries.
9. Capital Stock
Authorized
Unlimited number of:
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
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November August 31,
30, 2010 2010
$ $
--------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,959,338 subordinate voting shares 121,347 121,347
--------------------------------------------------------------------------
121,359 121,359
95,358 subordinate voting shares held in trust
under the Incentive Share Unit Plan (71,862 at
August 31, 2010) (2,656) (1,832)
--------------------------------------------------------------------------
118,703 119,527
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first three months, subordinate voting shares held in trust under the
Incentive Share Unit Plan transactions were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Number of Amount
shares
$
--------------------------------------------------------------------------
Balance at August 31, 2010 71,862 1,832
Subordinate voting shares acquired 36,085 1,282
Subordinate voting shares distributed to
employees (12,589) (458)
--------------------------------------------------------------------------
Balance at November 30, 2010 95,358 2,656
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Stock based plans
The Company and its subsidiary, Cogeco Cable Inc., offer, for certain executives
Stock Option Plans, which are described in the Company's annual consolidated
financial statements. During the three-month periods ended November 30, 2010 and
2009, no stock options were granted to employees by COGECO Inc. However, the
Company's subsidiary, Cogeco Cable Inc., granted 66,700 stock options (63,695 in
2009) with an exercise price of $39.00 ($31.82 in 2009), of which 35,800 stock
options (33,266 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 $166,000 ($337,000 in 2009) was recorded for the three-month period
ended November 30, 2010.
The fair value of stock options granted by the Company's subsidiary, Cogeco
Cable Inc., for the three months period ended November 30, 2010 was $9.55 ($8.11
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 1.44 1.49
Expected volatility 29 29
Risk-free interest rate 2.05 2.67
Expected life in years 4.9 4.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
At November 30, 2010, the Company had outstanding stock options providing for
the subscription of 30,000 subordinate voting shares. These stock options can be
exercised at $20.95 and up to October 19, 2011.
Under the Company's Stock Option Plan, the following options were granted and
are outstanding at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2010 62,382
Expired (32,382)
--------------------------------------------------------------------------
Outstanding at November 30, 2010 30,000
--------------------------------------------------------------------------
Exercisable at November 30, 2010 30,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Stock Option Plan, the following options were granted
and are outstanding at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2010 716,760
Granted 66,700
Exercised (11,660)
Forfeited / Cancelled (3,170)
Expired (448)
--------------------------------------------------------------------------
Outstanding at November 30, 2010 768,182
--------------------------------------------------------------------------
Exercisable at November 30, 2010 576,369
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company and its subsidiary, Cogeco Cable Inc., also offers senior executive
and designated employee Incentive Share Unit Plans ("ISU Plans") which are
described in the Company's annual consolidated financial statements. During the
three-month period ended November 30, 2010, the Company granted 36,085 (41,571
in 2009) Incentive Share Units ("ISUs") and Cogeco Cable Inc. granted 58,088
ISUs (55,094 in 2010) of which, 10,000 ISUs (9,981 in 2009) were granted to
Cogeco Inc.'s employees. The Company and its subsidiary establish the value of
the compensation related to the ISUs granted based on the fair value of the
Company and its subsidiary's subordinate voting shares at the date of grant and
a compensation expense is recognized over the vesting period, which is three
years. A Trust was created for the purpose of purchasing subordinate voting
shares of the Company and Cogeco Cable Inc. on the stock market in order to
guard against stock price fluctuation. The Company and its subsidiary instructed
the trustee to purchase 36,085 and 57,203 subordinate voting shares (41,571 and
55,094 in 2009) on the stock market. These shares were purchased for cash
consideration of $1,282,000 ($1,049,000 in 2009) and $2,258,000 ($1,744,000 in
2009), 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 held in trust under the
ISU Plans in reduction of capital stock or non-controlling interest. A
compensation expense of $403,000 ($187,000 in 2009) was recorded for the
three-month period ended November 30, 2010 related to these plans.
Under the Company's ISU Plan, the following ISUs were granted and are
outstanding at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2010 71,862
Granted 36,085
Distributed (12,589)
--------------------------------------------------------------------------
Outstanding at November 30, 2010 95,358
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s ISU Plan, the following ISUs were granted and are
outstanding at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 57,409
Granted 58,088
Forfeited / Cancelled (885)
--------------------------------------------------------------------------
Outstanding at November 30, 2010 114,612
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 three-month periods ended November 30, 2010 and
2009, the Company and its subsidiary did not issue any Deferred Share Units
("DSUs") to the participants in connection with the DSU Plans. A compensation
expense of $109,000 ($184,000 in 2009) was recorded for the three-month period
ended November 30, 2010 for the liabilities related to these plans.
Under the Company's DSU Plan, the following DSUs were issued and are outstanding
at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2010 21,630
Dividend equivalents 74
--------------------------------------------------------------------------
Outstanding at November 30, 2010 21,704
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s DSU Plan, the following DSUs were awarded and are
outstanding at November 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2010 10,855
Dividend equivalents 47
--------------------------------------------------------------------------
Outstanding at November 30, 2010 10,902
--------------------------------------------------------------------------
--------------------------------------------------------------------------
10. Accumulated Other Comprehensive Income
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Translation of a net
investment in self-
sustaining foreign Cash flow
subsidiaries hedges Total
$ $ $
--------------------------------------------------------------------------
Balance as at August 31, 2010 4,993 941 5,934
Other comprehensive income
(loss) (619) 581 (38)
--------------------------------------------------------------------------
Balance as at November 30, 2010 4,374 1,522 5,896
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. Statements of Cash Flows
a) Changes in non-cash operating items
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Accounts receivable (5,112) (5,494)
Income taxes receivable 2,009 (20,514)
Prepaid expenses and other 3,293 (1,105)
Accounts payable and accrued liabilities (65,393) (72,789)
Income tax liabilities 80,214 (39,224)
Deferred and prepaid revenue and other
liabilities 62 2,198
--------------------------------------------------------------------------
15,073 (136,928)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Cash and cash equivalents
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2010 2010
$ $
--------------------------------------------------------------------------
Cash 184,327 35,842
Cash equivalents (1) 13,326 -
--------------------------------------------------------------------------
197,653 35,842
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) At November 30, 2010, term deposit of EUR10,000,000, bearing interest
at 0.90%, maturing on December 6, 2010.
c) Other information
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Fixed asset acquisitions through capital leases - 141
Financial expense paid 21,109 21,047
Income taxes paid (received) (2,077) 39,517
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. 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
November 30,
2010 2009
$ $
--------------------------------------------------------------------------
Contributory defined benefit pension plans 915 870
Defined contribution pension plan and collective
registered retirement savings plans 1,277 1,126
--------------------------------------------------------------------------
2,192 1,996
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. 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 November 30, 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 large customer. At November
30, 2010, no customer balance represents a significant portion of the Company's
consolidated trade accounts receivable. 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 areas 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:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November August 31,
30, 2010 2010
$ $
--------------------------------------------------------------------------
Trade accounts receivable 79,894 76,243
Allowance for doubtful accounts (9,011) (8,531)
--------------------------------------------------------------------------
70,883 67,712
Other accounts receivable 8,651 6,848
--------------------------------------------------------------------------
79,534 74,560
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2010 2010
$ $
--------------------------------------------------------------------------
Net trade accounts receivable not past due 50,087 46,291
Net trade accounts receivable past due 20,796 21,421
--------------------------------------------------------------------------
70,883 67,712
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 November 30, 2010, the available amount of the Company's Term Revolving
Facilities was $685.5 million. Management believes that the committed Term
Revolving Facilities will, until their maturities in July 2013 and July 2014,
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:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2011 2012 2013 2014 2015 Thereafter Total
$ $ $ $ $ $ $
---------------------------------------------------------------------------
Bank
indebtedness 740 - - - - - 740
Accounts
payable and
accrued
liabilities(1) 168,102 - - - - - 168,102
Long-term debt
(2) 175,012 - - 406,608 - 550,054 1,131,674
Derivative
financial
instruments
Cash outflows
(Canadian
dollar) - - - - - 201,875 201,875
Cash inflows
(Canadian
dollar
equivalent of
US dollar) - - - - - (195,054) (195,054)
Obligations
under capital
leases (3) 2,203 2,322 915 13 - - 5,453
---------------------------------------------------------------------------
346,057 2,322 915 406,621 - 556,875 1,312,790
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Excluding accrued interest
(2) Principal excluding obligations under capital leases.
(3) Including interest.
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 November 30, 2010 and their respective maturities:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2011 2012 2013 2014 2015 Thereafter Total
$ $ $ $ $ $ $
---------------------------------------------------------------------------
Interest
payments on
long-term
debt 47,859 54,918 54,918 54,543 34,070 95,915 342,223
Interest
payments on
derivative
financial
instruments 9,828 14,614 14,614 14,614 14,614 7,306 75,590
Interest
receipts on
derivative
financial
instruments (8,567)(13,654) (13,654) (13,654) (13,654) (6,826) (70,009)
---------------------------------------------------------------------------
49,120 55,878 55,878 55,503 35,030 96,395 347,804
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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
November 30, 2010, all of the Company's long-term debt was at fixed rate, except
for the Company's Term Revolving 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 a portion of the Euro-denominated loans outstanding under the Term Revolving
Facility and previously the Term Facility, for a notional amount of EUR111.5
million which have been reduced to EUR95.8 million on July 28, 2009 and to
EUR69.6 million on July 28, 2010. The interest swap rate to hedge the
Euro-denominated loans has been fixed at 2.08% until the swap agreement maturity
on July 28, 2011. In addition to the interest swap rate of 2.08%, the Company's
subsidiary will continue to pay the applicable margin on these in accordance
with the Term Revolving 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 Revolving Facilities is approximately $0.1 million
based on the current debt at November 30, 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 November 30, 2010, cash and cash equivalents denominated in US dollars
amounted to US$6,748,000 (US$13,613,000 at August 31, 2010) while accounts
payable denominated in US dollars amounted to US$13,268,000 (US$15,850,000 at
August 31, 2010). At November 30, 2010, Euro-denominated bank indebtedness
amounted to EUR384,000 (cash and cash equivalents of EUR187,000 at August 31,
2010) while accounts payable denominated in Euros amounted to EUR6,000 (EURnil
at August 31, 2010). 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 $0.7 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 November 30, 2010, the
net investment amounted to EUR176,206,000 (EUR182,104,000 at August 31, 2010)
while long-term debt denominated in Euros amounted to EUR80,000,000
(EUR90,000,000 at August 31, 2010). The exchange rate used to convert the Euro
currency into Canadian dollars for the balance sheet accounts at November 30,
2010 was $1.3326 per Euro compared to $1.3515 per Euro at August 31, 2010. 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 $4.1 million net of non-controlling
interest of 8.7 million.
Fair value
Fair value is the amount at which willing parties would accept to exchange a
financial instrument based on the current market for instruments with the same
risk, principal and remaining maturity. Fair values are estimated at a specific
point in time, by discounting expected cash flows at rates for debts of the same
remaining maturities and conditions. These estimates are subjective in nature
and involve uncertainties and matters of significant judgement, and therefore,
cannot be determined with precision. In addition, income taxes and other
expenses that would be incurred on disposition of these financial instruments
are not reflected in the fair values. As a result, the fair values are not
necessarily the net amounts that would be realized if these instruments were
settled. The Company has determined the fair value of its financial instruments
as follows:
a) The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximates fair value because of the
short-term nature of these instruments.
b) Interest rates under the terms of the Company's Term Revolving Facilities are
based on bankers' acceptance, LIBOR, EURIBOR, bank prime rate loan or US base
rate loan plus applicable margin. Therefore, the carrying value is considered to
represent fair value for the Term Revolving Facilities.
c) The fair value of the Senior Secured Debentures Series 1 and 2, Senior
Secured Notes Series A and B and Senior Unsecured Debenture are based upon
current trading values for similar financial instruments.
d) The fair values of obligations under capital leases are not significantly
different from their carrying amounts.
The carrying value of all the Company's financial instruments approximates fair
value, except as otherwise noted in the following table:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, 2010 August 31, 2010
Carrying Carrying
value Fair value value Fair value
$ $ $ $
--------------------------------------------------------------------------
Long-term debt 1,130,545 1,213,214 955,070 1,050,783
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In accordance with CICA Handbook Section 3862, Financial instruments -
disclosures, all financial instruments recognized at fair value on the
consolidated balance sheet must be classified based on the three fair value
hierarchy levels, which are as follows:
- Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities;
- Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e., as prices) or
indirectly (i.e., derived from prices); and
- Level 3: inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
The Company considers that its derivative financial instruments are classified
as Level 2 under the fair value hierarchy. The fair value of derivative
financial instruments are estimated using valuation models that reflect
projected future cash flows over contractual terms of the derivative financial
instruments and observable market data, such as interest and currency exchange
rate curves.
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 Revolving 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 November 30, 2010, and August 31,
2010, 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:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2010 2010
--------------------------------------------------------------------------
Net indebtedness(1) / shareholders' equity 2.4 2.4
Net indebtedness(1) / operating income before
amortization(2) 1.8 1.8
Operating income before amortization(2) /
financial expense(2) 8.0 7.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 twelve-month periods ended November 30, 2010 and
August 31, 2010.
14. Subsequent event
Acquisition of Corus Entertainment Inc.'s Quebec radio stations
On April 30, 2010, The Company concluded an agreement with Corus Entertainment
Inc. ("Corus") to acquire its Quebec radio stations for $80 million in cash,
subject to customary closing adjustments and conditions, including approval by
the Canadian Radio-television and Telecommunications Commission (the "CRTC"). On
June 30, 2010, the Company submitted its transfer application for approval to
the CRTC. On December 17, 2010, the CRTC approved the transaction essentially as
proposed. On January 11, 2011, the Company was served with an application by
Astral Media Radio Inc. ("Astral") to the Federal Court of Appeal ("Court") for
leave to appeal the CRTC decision approving the transaction, and a related
application by Astral for a stay of execution of that decision until final
judgement of the Court. Management believes the applications filed by Astral are
without merit and the Company will vigorously challenge them with a view to
having them dismissed by the Court. Management still plans to close the
transaction with Corus on February 1st, 2011.
Pacific Imperial Mines (TSXV:PPM)
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Pacific Imperial Mines (TSXV:PPM)
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