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