MONTREAL, QUEBEC--(Marketwire - April 10, 2008) - Today, COGECO Inc. (TSX:CGO) announced its financial results for the second quarter and first six months of 2008, ended February 29, 2008.
Second quarter 2008 and first six months consolidated results show continuous growth:
- Revenue increased by 14.1% to $271.9 million in the second quarter and by 13.6% to $532.1 million for the first six months;
- Operating income from continuing operations before amortization grew by 25% to $109.3 million in the second quarter and by 20.4% to $210.6 million for the first six months;
- Free cash flow(1) reached $19.4 million in the second quarter and $42.3 million for the first six months.
Cable sector
- Revenue-generating units ("RGUs")(2) reached 2,624,885 with 56,196 and 139,220 net additions in the second quarter and first six months;
- On March 11, Cogeco Cable acquired all the assets of MaXess Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company) to strengthen Cogeco Business Solutions Data offering in Windsor, Ontario.
Other
- Radio revenue has improved in the second quarter. RYTHME FM network and the 93.3 station in Quebec City continue to propose radio programming appealing to their audiences.
- On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent, 3947424 Canada Inc., (the "TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed up to March 10. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors' arrangement plan. On March 10, the Quebec Superior Court agreed with TQS Inc. Board of Director decision to accept the offer of Remstar Corporation Inc. to acquire all shares held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS Inc.
"On a consolidated basis, COGECO's second quarter financial result is positive. In the cable sector, Cogeco Cable continued to grow. In Canada, in a rational competitive environment, Cogeco Cable is performing above expectations. Our Portuguese cable subsidiary evolved in a very competitive environment that is changing more recently into a disciplined market." said Louis Audet, President and CEO of COGECO. "In radio, we are well positioned to keep our leading position in key markets and gain market share in our other markets. We are confident to exceed our fiscal 2008 guidelines and, as a result, revising them upwards. With regards to TQS, the two shareholders, COGECO and CTV Television, agreed to sell all of their shares to Remstar Corporation Inc. This will allow a new ownership group to pursue the activities of TQS," added Mr. Audet.
(1) Free cash flow does not have standard definitions prescribed by
Canadian generally accepted accounting principles (GAAP) and should be
treated accordingly. For more details, please consult the "Non-GAAP
financial measures" section.
(2) Represent the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
$000, except
percentages and Quarters ended Years ended
per share data) (unaudited) (audited)
February February February February
29, 28, % 29, 28, %
2008 2007 Change 2008 2007 Change
--------------------------------------------------------------------------
Revenue $271,894 $238,378 14.1 $532,149 $468,611 13.6
Operating income
from continuing
operations before
amortization 109,346 87,478 25.0 210,555 174,849 20.4
Income from
continuing
operations 16,315 36,655 (55.5) 23,971 43,501 (44.9)
Loss from
discontinued
operations (425) (2,109) 79.8 (18,057) (2,204) -
Net income 15,890 34,546 (54.0) 5,914 41,297 (85.7)
Cash flow from
operations (1) 85,374 63,353 34.8 166,751 128,550 29.7
Less:
Capital
expenditures
and increase in
deferred charges 66,000 52,892 24.8 124,403 127,308 (2.3)
------- ------ ------- -------
Free cash flow (1) 19,374 10,461 85.2 42,348 1,242 -
Earnings (loss)
per share
Basic
Income from
continuing
operations $0.98 $2.21 - $1.44 $2.63 -
Loss from
discontinued
operations (0.03) (0.13) - (1.08) (0.13) -
Net income 0.95 2.08 - 0.35 2.49 -
Diluted
Income from
continuing
operations 0.97 2.20 - 1.43 2.61 -
Loss from
discontinued
operations (0.03) (0.13) - (1.08) (0.13) -
Net income 0.95 2.07 - 0.35 2.48 -
(1) Cash flow from operations and free cash flow do not have standard
definitions prescribed by Canadian generally accepted accounting
principles (GAAP) and should be treated accordingly. For more details,
please consult the "Non-GAAP financial measures" section.
FORWARD-LOOKING STATEMENT
Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to our future outlook and anticipated events, our business, our operations, our financial performance, our financial condition or our 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 our future operating results and economic performance and our 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 we believe are reasonable as of the current date. While we consider these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the "Uncertainties and main risk factors" section of the Company's 2007 annual Management's Discussion and Analysis (MD&A) that could cause actual results to differ materially from what we currently expect. 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 our control. Therefore, future events and results may vary significantly from what we currently foresee. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation (and expressly disclaim any such obligation), and do not undertake, to update or alter this information before next quarter.
This analysis should be read in conjunction with the Company's financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 2007 Annual Report. Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO's objectives are to maximize shareholder value by increasing profitability and by ensuring continued growth. The strategies for reaching those objectives, supported by tight cost control and business processes, are specific to each sector. For the cable sector, sustained growth and continuous improvement of networks and equipment are the main strategies used. The radio activities focus on continuous improvement of programming to increase market share, and, therefore, profitability. The Company measures its performance against these objectives with growth of operating income before amortization, free cash flow(1) and RGU(2) growth for the cable sector. Below are the recent achievements in furthering of COGECO's objectives.
(1) See the "Non-GAAP financial measures" section for explanations.
(2) See the "Customer statistics" section of the cable sector section for
detailed explanations.
Tight control over costs and business processes
- For the second quarter of 2008, the Company's operating costs increased over last year by 7.7% compared to a revenue growth of 14.1%;
- The design of internal controls over financial reporting as per National Instrument 52-109 is still underway. As discussed in the 2007 annual MD&A, the Company had identified certain material weaknesses in the design of internal controls over financial reporting and there has been improvement in the design of internal controls on some significant processes during the quarter. The documentation and remediation of internal controls weaknesses are progressing normally.
Cable sector
Continuous improvement of the service offering and expansion of the
customer base
Canadian operations
- Acquisition:
- March 11, acquisition of all the assets of MaXess Networx(R), ENWIN
Energy Ltd.'s telecommunications division (City of Windsor's energy
company) to strengthen Cogeco Business Solutions' Data offering in
Windsor, Ontario.
- Digital Television services:
- During the second quarter:
- Launch of Super Channel and Playhouse Disney in Ontario;
- Launch of Disney ABC International television on Cogeco On Demand;
- Launch of Les idees de ma maison in Quebec, a brand new digital
channel;
- March 4, 2008, launch of Family On Demand in Ontario, a new On Demand
service.
- Telephony service:
- During the second quarter:
- Launch of Telephony in Port Hope, Cobourg, Smiths Falls, Perth and
Parry Sound in Ontario;
- March 11, launch of Telephony in Huntsville, Bracebridge and
Gravenhurst, Ontario;
- March 19, launch of Telephony in Bic, Ste-Luce, Ste-Blandine,
St-Fabien, St-Gedeon and St-Martin-de-Beauce, Quebec.
- Customer service:
- Opening of three (3) new Cogeco stores located in Oakville and
Hamilton, Ontario and in St-Hyacinthe, Quebec.
European operations
- Cabovisao - Televisao por Cabo, S.A. (Cabovisao) continued its Digital
Television service deployment.
- Opening of four (4) new Cabovisao stores located in Alcobaca,
Portalegre, Sacavem and Sao Joao da Madeira.
Continuous improvement of networks and equipment
- During the first six months of fiscal 2008, Cogeco Cable has invested
approximately $47.7 million in its infrastructure including headends
and upgrade/rebuild.
Effective management of capital
- March 5, Cogeco Cable issued a $100 million senior unsecured debenture
bearing an interest rate of 5.936%, maturing in 2018, by way of a
private placement.
Other
- RYTHME FM network and the 93.3 station in Quebec City continue to
expand their audience and gain market share in their territories.
Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the last several months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio-television and Telecommunications Commission's ("CRTC") refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada ("SRC"), which acts like a commercial player rather than a publicly-owned television broadcaster, and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent, 3947424 Canada Inc., (the "TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed up to March 10, 2008. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors' arrangement plan. On March 10, the Quebec Superior Court agreed with TQS Inc. Board of Director decision to accept the offer of Remstar Corporation Inc. to acquire all shares held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS Inc.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the investment in the TQS Group as at August 31, 2007, as well as its results of operations and its cash flow for the period of September 1, 2007 to December 18, 2007 and for the three and six month periods ended February 28, 2007, have been reclassified as a discontinued operation. The Company has no investment in the TQS Group as at February 29, 2008. The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
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(unaudited)
Accounts receivable $23,611
Prepaid expenses 442
Broadcasting rights 14,647
--------------------------------------------------------------------------
Current assets $38,700
--------------------------------------------------------------------------
Broadcasting rights $17,456
Fixed assets 21,653
Broadcasting licenses 3,000
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Non-current assets $42,109
--------------------------------------------------------------------------
Bank indebtedness $8,173
Accounts payable and accrued liabilities 28,893
Broadcasting rights payable 8,531
Income tax liabilities 141
Deferred and prepaid income 42
Current portion of long-term debt 251
--------------------------------------------------------------------------
Current liabilities $46,031
--------------------------------------------------------------------------
Share in the partner's deficiency of a general partnership $518
Broadcasting rights payable 4,408
Pension plan liabilities 1,444
Non-controlling interest 11,219
--------------------------------------------------------------------------
Long-term liabilities $17,589
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The results of the discontinued operations were as follows:
Three months ended Six months ended
--------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $5,741 $23,068 $38,499 $56,572
Operating costs 5,865 26,877 35,822 59,385
--------------------------------------------------------------------------
Operating income
(loss) before
amortization (124) (3,809) 2,677 (2,813)
Amortization 248 1,094 1,364 2,178
--------------------------------------------------------------------------
Operating income (loss) (372) (4,903) 1,313 (4,991)
Financial expense 53 266 291 411
Impairment of assets - - 30,298 -
--------------------------------------------------------------------------
Loss before income taxes
and the following items (425) (5,169) (29,276) (5,402)
Income taxes - (1,653) - (1,725)
Non-controlling interest - (1,407) (11,219) (1,469)
Shares in the earnings of
a general partnership - - - (4)
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Loss from discontinued
operations $(425) $(2,109) $(18,057) $ (2,204)
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The cash flow of the discontinued operations was as follows:
Three months ended Six months ended
--------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
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(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating
activities $1,770 $2,110 $(3,973) $(7,867)
Cash flow from
investing
activities (48) (494) (133) (688)
Cash flow from
financing
activities (1,722) (1,616) 4,106 8,555
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Cash flow from
discontinued
operations $- $- $- $-
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--------------------------------------------------------------------------
Continuing Operations
RGU growth in the cable sector
During the first six months ended February 29, 2008, the consolidated number of RGUs increased by 5.6% to reach over 2.6 million units. In its initial projections, Cogeco Cable had expected fiscal year ending August 31, 2008 RGU growth to reach approximately 10% and has since revised downwards its guidelines to an increase of approximately 9%. Please consult the "Fiscal 2008 financial guidelines" section for further details.
Revenue and operating income before amortization growth
For the second quarter of fiscal 2008, revenue increased by $33.5 million, or 14.1%, to reach $271.9 million while operating income before amortization grew by $21.9 million, or 25%, to reach $109.3 million. For the first six months of 2008, revenue increased by $63.5 million, or 13.6%, to reach $532.1 million, while operating income before amortization grew by $35.7 million, or 20.4%, to reach $210.6 million. For fiscal 2008, the Company had expected revenue to reach $1,120 million and now anticipates revenue to reach $1,090 million, while operating income is expected to increase from $431 million to $445 million. Management has revised its guidelines in the cable sector to reflect better than projected average monthly service revenue per Basic cable service customer (ARPU) and price increases to occur in Canada and, in Portugal, to reflect a more competitive market and the better performance of the euro over the Canadian dollar compared to its original projection. Management also revised its guidelines to reflect the discontinuity of the TQS operations. Please consult the "Fiscal 2008 financial guidelines" section for further details.
Free cash flow
In the second quarter of fiscal 2008, COGECO generated free cash flow of $19.4 million, compared to $10.5 million for the same period last year. For the six-month period ended February 29, 2008, the Company generated free cash flow of $42.3 million compared to $1.2 million for the same period the year before. These increases result mainly from the cable sector and are attributable to an increase in operating income before amortization and a reduction in financial expense. Capital expenditures and deferred charges increased by $13.1 million in the second quarter compared to the corresponding period of last year. For the six-month period of 2008, capital expenditures and deferred charges decreased by $2.9 million compared to the same period of the previous year. Considering the improved performance of the cable subsidiary during the first six months of 2008, management has revised upwards its guidelines of free cash flow from $73 million to $75 million. Please consult the "Fiscal 2008 financial guidelines" section for further details.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
($000, except
percentages) Quarters ended Six months ended
--------------------------------------------------------------------------
February February February February
29, 28, % 29, 28, %
2008 2007 Change 2008 2007 Change
--------------------------------------------------------------------------
Revenue $271,894 $238,378 14.1 $532,149 $468,611 13.6
Operating costs 162,548 150,900 7.7 321,594 293,762 9.5
Operating income
before
amortization 109,346 87,478 25.0 210,555 174,849 20.4
Operating margin 40.2 % 36.7 % 39.6 % 37.3 %
Revenue
Fiscal 2008 second quarter revenue improved, essentially by its Cable segment, by $33.5 million, or 14.1%, to reach $271.9 million, and, for the first six-month period, by $63.5 million, or 13.6%, to reach $532.1 million. Cable revenue, driven by an increased number of RGU, combined with rate increases, went up by $33.2 million, or 14.3%, and by $63 million, or 13.9%, respectively, in the second quarter and first six months of fiscal 2008.
Operating income before amortization
Operating income before amortization grew, essentially by its Cable segment, by $21.9 million, or 25%, to reach $109.3 million in the second quarter of fiscal 2008 and by $35.7 million, or 20.4%, to reach $210.6 million in the first six months of fiscal 2008 compared to the corresponding periods of last year. The cable sector contributed to the growth by $21.7 million and $36.4 million during the second quarter and first six months of fiscal 2008, respectively.
FIXED CHARGES
($000, except
percentages) Quarters ended Six months ended
--------------------------------------------------------------------------
February February February February
29, 28, % 29, 28, %
2008 2007 Change 2008 2007 Change
--------------------------------------------------------------------------
Amortization $56,346 $44,018 28.0 $109,385 $88,773 23.2
Financial expense 17,373 23,915 (27.4) 34,741 45,529 (23.7)
Fiscal 2008 second quarter and first six-month period amortization amounted to $56.3 million and $109.4 million compared to $44 million and $88.8 million for the same periods the year before. Amortization expense increased for both periods mainly due to the following factors in the cable sector: the completion, in the fourth quarter of fiscal 2007, of the purchase price allocation of the Cabovisao acquisition, which includes the revaluation of tangible and intangible assets for an additional amortization expense of approximately $5.8 million and $10.2 million in the second quarter and first six months, respectively, and additional capital expenditures arising from the required customer premise equipment to sustain RGU growth and to support the deployment of the Digital Television service in Portugal.
Fiscal 2008 second quarter and first six-month period financial expense decreased by $6.5 million and $10.8 million, respectively, compared to the same periods in fiscal 2007. The Company's cable subsidiary reduced its level of Indebtedness (defined as bank indebtedness and long-term debt) from the net proceeds of subordinate voting shares issued during fiscal 2007. During the second quarter of fiscal 2007, Cogeco Cable also recorded a one-time charge of $2.6 million related to the early repayment of its Second Secured Debentures, Series A.
INCOME TAXES
Fiscal 2008 second quarter income taxes recovery amounted to $14.4 million compared to an expense of $4.2 million in fiscal 2007. For the first six months of fiscal 2008, income taxes recovery amounted to $5.1 million compared to an expense of $10.8 million in 2007. The decrease is essentially due to the reduction in corporate income tax rates announced on October 16, 2007 by the Canadian federal government in its Economic Statement. According to the new tax initiatives, corporate income tax rates have been further reduced from 20.5% to 19.5% effective January 1, 2008, from 20% to 19% effective January 1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to 16.5% effective January 1, 2011 and to 15% effective January 1, 2012. These corporate income tax rates were considered substantively enacted on December 14, 2007. The reduction of these corporate income tax rates reduced future income tax expense by $24.1 million in the second quarter and first six months of fiscal 2008. The second quarter and first six months of fiscal 2008 income tax reduction were partly offset by an increase in income taxes resulting from an increase in operating income before amortization and lower financial expense that have outpaced the increase in amortization expense in the cable sector. Excluding the effect of the tax rate reductions, income tax expense would have amounted to $9.7 million for the 2008 second quarter and $19 million for the 2008 first six-month period compared to $4.2 million and $10.8 million, respectively, for the same periods the year before.
GAIN ON DILUTION RESULTING FROM SHARES ISSUED BY A SUBSIDIARY
During the second quarter of 2007, the Company's subsidiary, Cogeco Cable Inc., completed a public offering totalling 5,000,000 subordinate voting shares. The offering resulted in gross proceeds of $192.5 million and net proceeds of $184.2 million. The Company's subsidiary has also issued, during the second quarter of fiscal 2007, 7,344 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 218,761 subordinate voting shares pursuant to its Employee Stock Option Plan for cash considerations of $0.2 million and $4 million, respectively. As a result, the Company's interest in Cogeco Cable Inc. decreased from 39.2% to 34.7% and a gain on dilution of $31 million was recorded for the three and six-month periods ended February 28, 2007.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.6% in Cogeco Cable's results. During the second quarter and first six months of 2008, the non-controlling interest amounted to $33.8 million and $47.5 million, respectively, due to the cable sector's strong results. The non-controlling interest for the comparable periods of last year amounted to $9.6 million and $17.3 million, respectively.
NET INCOME
Fiscal 2008 second quarter net income amounted to $15.9 million, or $0.95 per share, compared to $34.5 million, or $2.08 per share, for the same period last year. The net income decrease in the second quarter of fiscal 2008 was due to the following factors: a gain on dilution amounting to $31 million was recorded in the second quarter of fiscal 2007, partially offset by the growth in operating income before amortization exceeding those of the fixed charges and the effect of income tax rate reductions of $7.8 million, net of non-controlling interest, from the cable sector.
Fiscal 2008 first six-month period net income amounted to $5.9 million, or $0.35 per share, compared to $41.3 million, or $2.49 per share, for the same period in 2007. The net income decrease in the first six months of fiscal 2008 was due to the following factors: a gain on dilution amounting to $31 million was recorded in the second quarter of fiscal 2007, a loss from discontinued operations of $18.1 million recorded in the first six months of fiscal 2008, partially offset by the growth in operating income before amortization exceeding those of the fixed charges and the effect of income tax rate reductions of $7.8 million, net of non-controlling interest, from the cable sector.
Excluding the effect of the fiscal 2007 gain on dilution and the effect of the fiscal 2008 income tax rate reductions net of non-controlling interest and the loss from discontinued operations, net income for the second quarter of fiscal 2008 would have amounted to $8.4 million, or $0.50 per share, compared to $5.7 million, or $0.34 per share, for the same period in 2007, an improvement of 47.9% and 47.1%, respectively. For the 2008 six-month period, net income, excluding the adjustments discussed above, would have amounted to $16.1 million, or $0.97 per share, compared to $12.5 million, or $0.76 per share, in 2007, an increase of 29% and 27.6%, respectively. Please consult the "Non-GAAP financial measures" section for further details.
CASH FLOW AND LIQUIDITY
Quarters ended Six months ended
February 29, February 28, February 29, February 28,
($000) 2008 2007 2008 2007
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Operating Activities
Cash flow from
operations $85,374 $63,353 $166,751 $128,550
Changes in non-cash
operating items 7,568 (1,869) (27,205) (76,812)
$ 92,942 $61,484 $139,546 $51,738
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Investing
Activities(1) $(64,743) $(52,231) $(123,072) $(126,334)
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Financing
Activities (1) $(22,329) $11,773 $(58,586) $41,398
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Effect of exchange
rate changes on cash
and cash equivalents
denominated in
foreign currencies $355 $1,644 $202 $3,260
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Net change in cash and
cash equivalents $6,225 $22,670 $(41,910) $(29,938)
Cash and cash
equivalents at
beginning 18,144 18,908 66,279 71,516
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Cash and cash
equivalents at end $24,369 $41,578 $24,369 $41,578
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(1) Excludes assets acquired under capital leases.
Fiscal 2008 second quarter cash flow from operations reached $85.4 million, 34.8% higher than for the comparable period last year, primarily due to the increase in operating income before amortization and to a reduction in financial expense in the cable sector. Changes in non-cash operating items generated higher cash inflows compared to the same period last year, attributable to the cable sector and mainly as a result of an increase in income tax liabilities.
Fiscal 2008 first six-month period cash flow from operations reached $166.8 million, an increase of 29.7% compared to the same period the year before, primarily due to the growth in operating income before amortization and to a reduction in financial expense in the cable sector. Changes in non-cash operating items generated lower cash outflows than for the same period last year, attributable to the cable sector and mainly as a result of a smaller decrease in accounts payable and accrued liabilities, an increase in income tax liabilities and a smaller increase in accounts receivable. The larger reduction in accounts payable and accrued liabilities in the first six months of fiscal 2007 was due to non-recurring payments made by the Portuguese cable subsidiary in accordance with the terms of the acquisition.
In the second quarter of fiscal 2008, investing activities stood at $64.7 million mainly due to capital expenditures of $58.5 million and from an increase of $6.1 million in deferred charges in the cable sector. The capital expenditures from the cable sector increased compared to the same period last year due to the following factors:
- The increase in customer premise equipment resulted from the timing to acquire such equipment in the first quarter of fiscal 2007, to build an inventory for the Canadian operations and to the deployment of Digital Television service in Portugal, partly offset by lower RGU growth.
- The increase in scalable infrastructure is mainly due to the expansion and the improvement of headends, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services.
- The increase in support capital is due to the improvement in information systems to support the business requirements and to the acquisition of vehicles.
- The reduction in capital expenditures associated with the network upgrade and rebuild is due to the timing of expenses as an accelerated program was deployed in fiscal 2007 to accelerate the bandwidth expansion and the network reliability for the Canadian operations.
In the first six months of fiscal 2008, investing activities stood at $123.1 million mainly due to capital expenditures of $109.3 million and from an increase of $13.6 million in deferred charges in the cable sector. The capital expenditures from the cable sector decreased compared to the same period last year due to the following factors:
- The reduction in customer premise equipment resulted from lower RGU growth, partly offset by the deployment of Digital Television in Portugal.
- The reduction in capital expenditures associated with the network upgrade and rebuild is due to the timing of expenses as an accelerated program was deployed in fiscal 2007 to accelerate the bandwidth expansion and the network reliability for the Canadian operations.
- The increase in scalable infrastructure is mainly due to the expansion and the improvement of headends, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services.
- The increase in support capital is due to the improvement in information systems to support the business operations and to the acquisition of vehicles.
Fiscal 2008 second quarter and first six-month period deferred charges, which are mainly attributable to reconnect costs in the cable sector, were lower than for the same periods the year before mainly due to lower RGU growth.
In the second quarter and first six months of fiscal 2008, the Company generated free cash flow in the amount of $19.4 million and $42.3 million, respectively, compared to $10.5 million and $1.2 million for the same periods of the preceding year. The free cash flow increases over last year's same periods are attributable to the cable sector and are mainly due to an increase in operating income before amortization and to a reduction in financial expense. Capital expenditures and deferred charges increased by $13.1 million in the second quarter and decreased by $2.9 million for the first six-month period compared to the corresponding periods of last year due to the factors explained above.
Fiscal 2008 second quarter debt repayment amounted to $18.2 million. This repayment came from the generated free cash flow of $19.4 million, partly offset by a $1.2 million dividend payment described below. For the same period last year, indebtedness decreased by $174.4 million. This reduction was mainly attributable to the cable sector and due to the following factors: the partial early repayment by Cogeco Cable, in the amount of $89.3 million, of its 8.44% Second Secured Debentures, Series A, in the aggregate principal amount of $125 million due July 31, 2007 (the "Debentures"), to the repayment of a portion of the Term Facility, amounting to $51.4 million, and to the repayment of the bank indebtedness in the amount of $29.3 million. These repayments were made using the net proceeds of $184.2 million from the completion of a public offering of 5,000,000 subordinate voting shares on February 2, 2007. The Company also repaid $2.5 million of its own Term Facility. In addition, dividends of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, were paid during the second quarter of fiscal 2008 and fiscal 2007.
During the first half of fiscal 2008, the level of indebtedness decreased by $52.6 million mainly due to the following factors: the generated free cash flow of $42.3 million, the reduction of $41.9 million in cash and cash equivalents partly used to offset the $27.2 million reduction in non-cash operating items. These factors have been partly offset by a dividend payment of $2.3 million described below. For the same period last year, indebtedness decreased by $143.1 million mainly due to the repayment by Cogeco Cable of its Debentures for $89.3 million and to the repayment of its $49.1 million of Term Facility and to the $2.5 million repayment of the Company's Term Facility. In addition, quarterly dividends of $0.07 per share for subordinate and multiple voting shares, totalling $2.3 million, were paid during the first six months of fiscal 2008 compared to quarterly dividends of $0.0625 and $0.07 per share for subordinate and multiple voting shares, paid respectively for the first and the second quarter of fiscal 2007, totalling $2.2 million.
As at February 29, 2008, the Company had a working capital deficiency of $401.7 million compared to $127.3 million as at August 31, 2007. The greater deficiency is mainly attributable to Cogeco Cable's US$150 million Senior Secured Notes, Series A and its related derivative financial instruments for an amount of $240.2 million due within the next twelve months by October 31, 2008. COGECO maintains a working capital deficiency due to a low level of accounts receivable since the majority of the cable subsidiary's customers pay before their services are rendered, contrary to accounts payable and accrued liabilities, which are paid after products or services are rendered, thus enabling the cable subsidiary to use cash and cash equivalents to reduce indebtedness.
As at February 29, 2008, the cable subsidiary had used $409.3 million of its $900 million Term Facility and the Company had drawn $21 million of its $50 million Term Facility.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the subsidiaries' Board of Directors and may also be restricted under the terms and conditions of certain debt instruments. In accordance with applicable corporate and securities laws, significant transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2007, except for the changes in the presentation of assets and liabilities related to discontinued operations, there have been major changes to the balance of Fixed assets, Cash and cash equivalents, Accounts payable and accrued liabilities, Income tax liabilities, Accounts receivable, Future income tax assets, Future income tax liabilities, Goodwill, Accumulated other comprehensive income (loss), Non-controlling interest, Derivative financial instruments, and Indebtedness.
The $29.2 million fixed assets rise is mainly related to increased capital expenditures to sustain RGU growth and by the appreciation of the euro over the Canadian dollar in the cable sector. The $41.9 million and $28.4 million reductions in cash and cash equivalents and accounts payable and accrued liabilities, respectively, are related to suppliers' payments in the cable sector. The $8.6 million increase in income tax liabilities is due to the utilization of most of Cogeco Cable's tax losses carry forwards before fiscal 2008. The $4.9 million accounts receivable increase is essentially due to revenue growth and its related level of receivables in the cable sector. The $5.9 million and $22.7 million future income tax assets and future income tax liabilities reductions, respectively, are attributable to Cogeco Cable and mainly due to the corporate income tax rates reduction announced by the Canadian federal government and considered substantively enacted on December 14, 2007. The $13.2 million goodwill increase is due to the appreciation of the euro over the Canadian dollar in the cable sector. The $2.5 million increase in accumulated other comprehensive income (loss) is mainly the result of the appreciation of the euro over the Canadian dollar, partly offset by the changes in accounting policies related to financial instruments in the cable sector. The $50.9 million increase in non-controlling interest is mainly due to the improved results in the cable sector. Finally, the derivative financial instruments have increased by $92.8 million and indebtedness has decreased by $129.7 million as a result of accounting changes and factors previously discussed in the "Cash Flow and Liquidity" section. Please consult the "Accounting policies and estimates" section for further details.
A description of COGECO's share data as at March 31, 2008 is presented in the table below:
Number of shares/ Amount
options ($000)
--------------------------------------------------------------------------
Common Shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,832,586 119,127
Options to Purchase Subordinate Voting Shares
Outstanding options 188,758
Exercisable options 188,758
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. COGECO's obligations, discussed in the 2007 annual MD&A, have not materially changed since August 31, 2007, except that on December 14, 2007, the Company concluded an amended and restated credit agreement with a group of four Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The annually renewable three-year amended credit agreement establishes a revolving credit of $50 million to which may be added a further credit of $25 million under certain conditions. The amended credit agreement maintains certain financial commitments with the same security by the Company, its subsidiary Cogeco Radio-Television Inc., and indirect subsidiary, Cogeco Diffusion Inc. The Company posted a guarantee for a maximum amount of $12 million in favour of CIBC, which is also TQS' banker, in the event of any default by TQS under the terms of its own credit agreement. TQS' credit agreement provides security over its assets, including its accounts receivable. If the guarantee were to be called in, the Company would be subrogated to the rights of CIBC and benefit from the same security. In March 2008, the Company was unconditionally released from all of its obligations under the guarantee. Furthermore, on January 8, 2008, Cogeco Cable and the Solidarity Fund QFL entered into an agreement to issue a $100 million senior unsecured debenture by way of a private placement, subject to usual market conditions. The debenture was issued on March 5, 2008, bears interest at a fixed rate of 5.936% and will mature on March 5, 2018. The debenture is redeemable at Cogeco Cable's option at any time, in whole or in part, prior to maturity, at 100% of the principal amount plus a make-whole premium.
DIVIDEND DECLARATION
At its April 10, 2008 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.07 per share for subordinate and multiple voting shares, payable on May 8, 2008, to shareholders of record on April 24, 2008.
FOREIGN EXCHANGE MANAGEMENT
The Company's subsidiary, Cogeco Cable, has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$150 million Senior Secured Notes. These agreements have the effect of converting the U.S. interest coupon rate of 6.83% per annum to an average Canadian dollar fixed interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at CAN$1.5910. Amounts due under the US$150 million Senior Secured Notes, Series A decreased by CAN$10.8 million at the end of the second quarter compared to August 31, 2007 due to the Canadian dollar's appreciation. The fair value of cross-currency swaps increased by $9.3 million, of which $10.8 million offset the foreign exchange gain on the US$ debt. The difference of $1.4 million was recorded as an increase of other comprehensive income.
As noted in the MD&A of the 2007 Annual Report, Cogeco Cable's investment in the Portuguese subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the value of the Canadian dollar versus the euro. This risk is mitigated since the major part of the purchase price for Cabovisao was borrowed directly in euros. This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable realized a foreign exchange gain of CAN$9.1 million in the first six months of 2008, which is presented in other comprehensive income. The exchange rate used to convert the euro into Canadian dollars for the balance sheet accounts as at February 29, 2008 was $1.4944 per euro compared to $1.4390 per euro as at August 31, 2007. The average exchange rates prevailing during the second quarter and first six months of 2008 used to convert the operating results of the European operations were $1.4741 and $1.4430 per euro, respectively, compared to $1.5146 and $1.4818 per euro, respectively, for the same periods last year.
CABLE SECTOR
CUSTOMER STATISTICS
Net additions
Quarters ended Six months ended
--------------------------------------
February February February February February
29, 29, 28, 29, 28,
2008 2008 2007 2008 2007
-------------------------------------------------------------------------
RGUs(2) 2,624,885 56,196 84,399 139,220 198,678
Basic
Cable service
customers 1,160,750 4,593 11,883 17,590 35,376
HSI service
customers(3) 622,113 17,154 27,736 46,254 64,748
Digital Television
service customers 414,011 17,879 13,961 34,132 35,185
Telephony service
customers 428,011 16,570 30,819 41,244 63,369
% of
Penetration(1)
-------------------------------------------------------------------------
February February
29, 28,
2008 2007
-------------------------------------------------------------------------
RGUs(2)
Basic
Cable service
HSI service customers(3) 56.1 50.4
Digital Television service customers 49.1 43.3
Telephony service customers 43.1 36.8
(1) As a percentage of Basic Cable service customers in areas served.
(2) Represent the sum of Basic Cable, HSI, Digital Television and Telephony
service customers.
(3) Customers subscribing only to HSI or Telephony services totalled 86,204
as at February 29, 2008 compared to 68,966 as at February 28, 2007.
In Canada, second quarter 2008 RGUs' net additions were lower than for the same period last year and reflect an early sign of maturation in most services. In Portugal, Cabovisao faced intense competition and, as a result, all services generated lower customer growth. RGUs grew at a slower pace since competition offered deep discounts to attract customers during most of the first six-month period. Cabovisao did not match the competition's highly discounted offering. However, since then, the pricing environment has become more rational. Cabovisao's performance since its acquisition by Cogeco Cable has been well above management's original expectations and growth prospects for the future remain excellent in management's view.
The number of net additions for Basic Cable in the Canadian market stood at 1,869 customers compared to a growth of 5,277 customers for the same period last year due to the expiry of certain promotional offers. In Portugal, Basic Cable service grew by 2,724 customers compared to 6,606 customers.
In Canada, the number of net additions to HSI service stood at 15,058 customers compared to 20,428 customers for the same period last year. During the second quarter of 2008, HSI customer net additions were mostly due to the enhancement of the product offering, the impact of the bundled offer of Television, HSI and Telephony services (Cogeco Complete Connection) and promotional activities. HSI service customers in Portugal increased by 2,096 customers compared to 7,308 customers in 2007.
Canadian net additions of Digital Television service stood at 17,879 customers compared to 13,961 customers for the same period last year. The increase in net additions this quarter compared to the same quarter last year is due to targeted marketing initiatives in 2008 to improve the penetration rate. It also reflects the continuous strong interest for High Definition technology.
Telephony customers grew in both operating units. In Canada, net additions stood at 16,201 to reach 183,052 compared to a growth of 24,467 for the same period last 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, has now reached 80% compared to 74% last year. Telephony service in Portugal grew by 369 customers compared to 6,352 customers for the same period of the preceding year.
OPERATING RESULTS
($000, except
percentages) Quarters ended Six months ended
--------------------------------------------------------------------------
February February February February
29, 28, % 29, 28, %
2008 2007 Change 2008 2007 Change
--------------------------------------------------------------------------
Revenue $265,102 $231,952 14.3 $516,935 $453,954 13.9
Operating costs 152,942 141,033 8.4 301,403 274,933 9.6
Management fees -
COGECO Inc. 3,679 4,128 (10.9) 8,714 8,568 1.7
Operating income
before
amortization 108,481 86,791 25.0 206,818 170,453 21.3
Operating margin 40.9 % 37.4 % 40.0 % 37.5 %
Revenue
Fiscal 2008 second quarter consolidated revenue improved by $33.2 million, or 14.3%, to reach $265.1 million, and for the first six-month period, by $63 million, or 13.9%, to reach $516.9 million. Driven by an increased number of RGUs combined with rate increases, 2008 second quarter Canadian operations revenue went up by $30.2 million, or 17.3%, and 2008 first six-month period by $58.6 million, or 17.1%.
Fiscal 2008 second quarter European operations revenue increased by $2.9 million, or 5.1%, to reach $59.9 million and 2008 six-month period by $4.4 million, or 4%, to reach $115.5 million compared to the same periods last year. European operations have generated RGU growth and implemented rate increases. However, the strength of the Canadian dollar against the euro compared with last year has curtailed revenue growth when translated to Canadian dollars.
Operating costs
For the second quarter and the first six months of fiscal 2008, operating costs, excluding management fees payable to COGECO Inc., increased by $11.9 million and $26.5 million to reach $152.9 million and $301.4 million, respectively, an increase of 8.4% and 9.6% compared to last year. The increase in operating costs for the second quarter of 2008 was mainly attributable to servicing additional RGUs in Canada and Portugal. The increase in operating costs for the first six-month period was also attributable to servicing additional RGUs in Canada and Portugal, including the increased penetration of the Telephony service in Canada, the timing of certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and to costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109.
Operating income before amortization
Fiscal 2008 second quarter and first six-month period operating income before amortization increased by $21.7 million, or 25%, to reach $108.5 million and by $36.4 million, or 21.3%, to reach $206.8 million, respectively, as a result of RGU growth and various rate increases outpacing operating cost increases. Cogeco Cable's second quarter of 2008 operating margin increased to 40.9% from 37.4% due to rate increases implemented during the first quarter of fiscal 2008 and the third quarter of fiscal 2007. The operating margin in Canada improved from 38.3% to 42.2% and in Europe from 34.7% to 36.6% .
For the first six months of fiscal 2008, the operating margin improved to 40% from 37.5% due to the reasons described above with the Canadian operating margin improving and the European operating margin remaining essentially the same compared to the same period the year before.
FISCAL 2008 FINANCIAL GUIDELINES
Cable sector
Given the improved performance of the cable sector during the first six months of fiscal 2008, management has revised most of its guidelines for the 2008 fiscal year.
For its Canadian operations, management has revised upwards its guidelines to reflect better than projected ARPU and rate increases to occur. RGU growth should be lower than initially projected due to the lower than anticipated Telephony service customers' growth and the expiration of Basic Cable service promotions. For its European operations, management has revised downwards its guidelines for RGU growth and revenue to reflect the fierce competition that Cabovisao faced during the first six months of fiscal 2008, which is partially offset by rate increases, tight cost controls and the strengthening of the euro over the Canadian dollar.
Subsequent to these adjustments, projected revenue, operating income before amortization and net income were revised upwards. The increase in projected revenue from $1,050 million to $1,060 million should come from the Canadian operations. The operating income before amortization should increase to $440 million from $425 million and operating margin should increase from about 41% to 42%. Net income should stand at about $123 million.
Management is also raising its guidance for capital expenditures and deferred charges from $260 million to $275 million to increase the capacity of its infrastructure to sustain growth and to build additional homes passed. Amortization expense is expected to increase from $215 million to $225 million to reflect the increase in capital expenditures and deferred charges and the impact from the completion, in the fourth quarter of fiscal 2007, of the purchase price allocation of the Cabovisao acquisition, which included the revaluation of tangible and intangible assets. As a result of the revised projections, free cash flow is now expected to reach $70 million from the $65 million initially projected.
Consolidated
The Company is also revising its guidelines to reflect the discontinuity of the TQS operations. Subsequent to the above adjustments in the cable sector and in the television operations, revenue should stand at approximately $1,090 million, operating income before amortization should increase from $431 million to $445 million, free cash flow should increase from $73 million to $75 million and net income should remain essentially the same to approximately $22 million.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($ million, except Revised Revised
customer data) Projections Projections
Fiscal 2008 Fiscal 2008 Projections
April 10, 2008 January 9, 2008 Fiscal 2008
--------------------------------------------------------------------------
Consolidated Financial
Guidelines
Revenue 1,090 1,120 1,190
Operating income before
amortization 445 431 425
Net income 22 22 30
Free cash flow 75 73 65
---------------------------------------------------------------------------
Cable sector--
Financial Guidelines
Revenue 1,060 1,050 1,050
Operating income before
amortization 440 425 425
Operating margin 41% to 42% 40% to 41% 40% to 41%
Financial expense 72 72 72
Amortization 225 215 215
Net income 123 118 118
Capital expenditures and
deferred charges 275 260 260
Free cash flow 70 65 65
Customer Addition Guidelines
Basic Cable service 15,000 30,000 30,000
HSI services 75,000 75,000 75,000
Digital Television service 54,000 54,000 54,000
Telephony service 81,000 100,000 100,000
RGUs 225,000 259,000 259,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
UNCERTAINTIES AND MAIN RISK FACTORS
There have been no significant changes in the risk factors and uncertainties facing COGECO since August 31, 2007, except as described below.
The CRTC collects two different types of fees from broadcast licensees. These are known as Part I and Part II fees. In 2003 and 2004, lawsuits were commenced in the Federal Court, alleging that the Part II licence fees are taxes rather than fees and that the regulations authorizing them are unlawful. On December 14, 2006, the Federal Court ruled that the CRTC did not have the jurisdiction to charge Part II fees. The Court ruled that licensees were not entitled to a refund of past fees paid. Both the Crown and the applicants have appealed this case to the Federal Court of Appeal. The applicants are seeking an order requiring a refund of past fees paid. The Crown is seeking to reverse the finding that Part II fees are unlawful. On October 1, 2007, the CRTC sent a letter to all broadcast licensees. The letter stated that the CRTC will not collect Part II license fees due on November 30, 2007 and subsequent years unless the Federal Court of appeal or the Supreme Court of Canada (should the case be appealed to that level) reverses the Federal Court's decision. The Appeal hearing was held on December 4 and 5 in Ottawa. During the hearing, questions were raised by the hearing panel concerning the appropriateness of considering Part II Licence Fees as a tax rather than a fee under the relevant portion of the Broadcasting Act. The decision of the Federal Court of Appeal is not expected until later this year. The Company believes that there is a reasonable likelihood that the Federal Court's decision will be reversed. The Company has accrued $10.2 million with respect to these fees for fiscal year 2007 and the first six months of fiscal 2008. In the unlikely event that the Federal Court of Appeal or the Supreme Court of Canada, should this case be appealed to that level, maintains the decision from the Federal Court, this would have a beneficial impact on the future financial results of the Company.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies and estimates and future accounting pronouncements since August 31, 2007, except as described below. A description of the Company's policies and estimates can be found in the 2007 annual MD&A.
Financial instruments
Effective September 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861, Financial Instruments - Disclosure and Presentation, and Section 3865, Hedges.
Statement of Comprehensive Income
A new statement entitled consolidated statements of comprehensive income was added to the Company's consolidated financial statements and includes net income as well as other comprehensive income. Other comprehensive income represents changes in shareholders' equity arising from transactions and events from non-owner sources, such as changes in foreign currency translation adjustments of net investments in self-sustaining foreign subsidiaries and long-term debt designated as a hedge of net investments in self-sustaining foreign subsidiaries and changes in the fair value of effective cash flow hedging instruments.
Recognition and Measurement of Financial Instruments
Under these new standards, all financial assets, including derivatives, must be classified as available for sale, held for trading, held to maturity or loans and receivables. All financial liabilities, including derivatives, must be classified as held for trading or other liabilities. All financial instruments classified as available for sale or held for trading are recognized at fair value on the consolidated balance sheet while financial instruments classified as loans and receivables or other liabilities will continue to be measured at amortized cost using the effective interest rate method. The standards allow the Company to designate certain financial instruments, on initial recognition, as held for trading.
All of the Company's financial assets are classified as held for trading or loans and receivables. The Company has classified its cash and cash equivalents as held for trading. Accounts receivable have been classified as loans and receivables. All of the Company's financial liabilities were classified as other liabilities, except for the Company's subsidiary's cross-currency swaps, which were classified as held for trading. Held for trading assets and liabilities are carried at fair value on the consolidated balance sheet, with changes in fair value recorded in the consolidated statement of income, except for the changes in fair value of the cross-currency swaps, which are designated as cash flow hedges of the Senior Secured Notes, Series A and are recorded in other comprehensive income. Loans and receivables and all financial liabilities are carried at amortized cost using the effective interest method. Upon adoption, the Company determined that none of its financial assets are classified as available for sale or held to maturity. Except for the treatment of transaction costs and derivative financial instruments mentioned below, the provisions of the new accounting standards had no impact on the consolidated financial statements on September 1, 2007 and February 29, 2008.
Transaction costs
Effective September 1, 2007, transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the revolving loan and the swingline facility, which are presented as deferred charges. These costs are amortized over the term of the related financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility, which are amortized over the term of the related financing on a straight-line basis. Previously, all transaction costs were capitalized and amortized on a straight-line basis over the term of the related financing, over a period not exceeding five years. The impact of these adjustments reduced deferred charges by $1.2 million, reduced long-term debt by $3.1 million, increased future income tax liabilities by $0.6 million, increased non-controlling interest by $0.9 million and increased retained earnings by $0.4 million.
Cash flow hedge
All derivatives are measured at fair value with changes in fair value recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the hedged asset or liability is recognized in the consolidated statement of income. Any hedge ineffectiveness is recognized in the consolidated statement of income immediately. Accordingly, the Company's subsidiary's cross-currency swaps must be measured at fair value in the consolidated financial statements. Since these cross-currency swaps are used to hedge cash flows on Senior Secured Notes, Series A denominated in U.S. dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements on September 1, 2007, increased derivative financial instruments liabilities by $83.5 million, decreased deferred credit presented in long-term debt by $80.2 million, decreased future income tax liabilities by $1.1 million, decreased non-controlling interest by $1.5 million and decreased opening accumulated other comprehensive income by $0.7 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the second quarter and first six-month period ended February 29, 2008 increased derivative financial instruments liabilities by $1.5 million and $9.3 million, increased future income tax liabilities by $0.3 million and $0.5 million, increased non-controlling interest by $0.4 million and $0.6 million and increased accumulated other comprehensive income by $0.2 million and $0.3 million, respectively.
Net investment hedge
Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at the balance sheet date for asset and liability items, and using the average exchange rates during the period for revenue and expenses. Adjustments arising from this translation are deferred and recorded as foreign currency translation adjustments in accumulated other comprehensive income and are included in income only when a reduction in the investment in these foreign subsidiaries is realized. Unrealized foreign exchange gains and losses on long-term debt denominated in foreign currency, that is designated as a hedge of net investments in self-sustaining foreign subsidiaries, are recorded as foreign currency translation adjustments in accumulated other comprehensive income, net of income taxes and non-controlling interest. As a result, an amount of $1.0 million was reclassified as at August 31, 2007 from the foreign currency translation adjustment to the accumulated other comprehensive income and the Company's comparative financial statements were restated in accordance with transition rules.
Embedded derivatives
All embedded derivatives that are not closely related to the host contracts, are measured at fair value, and with changes in fair value recorded in the consolidated statement of income. On September 1, 2007 and as at February 29, 2008, there are no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheet. In accordance with the new standards, the Company selected September 1, 2002 as its transition date for adopting the standard related to embedded derivatives.
Upcoming standards
In 2006, the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation. These Sections are to be applied to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.
Accounting changes
In July 2006, the CICA issued Section 1506, Accounting Changes, which modifies certain aspects of the previous standard. A reporting entity may not change its accounting method unless required by primary source of GAAP or to provide a more reliable and relevant presentation of the financial statements. In addition, changes in accounting methods must be applied retroactively and additional information must be disclosed. This Section applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. During the first quarter, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout this MD&A. It also provides reconciliations between these non-GAAP measures and the most comparable GAAP financial measures. These financial measures do not have standard definitions prescribed by Canadian GAAP and may not be comparable with similar measures presented by other companies. These measures include cash flow from operations, free cash flow and net income, excluding gain on dilution, loss from discontinued operations and income tax adjustments, net of non-controlling interest.
Cash flow from operations
Cash flow from operations is used by COGECO's management and investors to evaluate cash flow generated by operating activities from continuing operations, excluding the impact of changes in non-cash operating items. This allows the Company to isolate the cash flow 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. Cash flow from operations is calculated as follows:
($000) Quarters ended Six months ended
--------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
--------------------------------------------------------------------------
Cash flow from
operating
activities $92,942 $61,484 $139,546 $51,738
Changes in non-cash
operating items (7,568) 1,869 27,205 76,812
--------------------------------------------------------------------------
Cash flow from
operations $85,374 $63,353 $166,751 $128,550
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Free cash flow
Free cash flow is used by COGECO's management and investors to measure
COGECO's ability to repay debt, distribute capital to its shareholders and
finance its growth. Free cash flow is calculated as follows:
($000) Quarters ended Six months ended
--------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
--------------------------------------------------------------------------
Cash flow from
operations $85,374 $63,353 $166,751 $128,550
Acquisition of fixed
assets (58,533) (44,819) (109,346) (111,818)
Increase in deferred
charges (6,094) (6,046) (13,611) (13,258)
Assets acquired under
capital leases - as per
Note 12 b) (1,373) (2,027) (1,446) (2,232)
--------------------------------------------------------------------------
Free cash flow $19,374 $10,461 $42,348 $1,242
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income excluding gain on dilution, loss from discontinued operations
and income tax adjustments net of non-controlling interest.
Net income excluding gain on dilution, loss from discontinued operations
and income tax adjustments, net of non-controlling interest, is used by
COGECO's management and investors in order to evaluate what would have been
the net income excluding gain on dilution, loss from discontinued
operations and income tax adjustments net of non-controlling interest. This
allows the Company to isolate the one time adjustments in order to evaluate
the net income from continuing operations.
($000) Quarters ended Six months ended
--------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
--------------------------------------------------------------------------
Net income $15,890 $34,546 $5,914 $41,297
Adjustments:
Loss (gain) on
dilution (25) (30,990) 82 (30,983)
Discontinued
operations 425 2,109 18,057 2,204
Income tax
adjustments net of
non-controlling
interest (7,909) - (7,909) -
--------------------------------------------------------------------------
Net income excluding
above adjustments $8,381 $5,665 $16,144 $12,518
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ADDITIONAL INFORMATION
This MD&A was prepared on April 10, 2008. Additional information relating to the Company, including its Annual Information Form, is available on the SEDAR website at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides approximately 2,625,000 revenue-generating units (RGUs) to 2,390,000 homes passed in its Canadian and Portuguese service territories. Through its two-way broadband cable networks, Cogeco Cable provides its residential and commercial customers with Analogue and Digital Television, High Speed Internet, as well as Telephony services. Through its Cogeco Radio-Television subsidiary, COGECO owns and operates the RYTHME FM radio stations in Montreal, Quebec City, Trois-Rivieres and Sherbrooke, as well as the 93(3) station in Quebec City. COGECO's subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (TSX:CCA).
Analyst Conference Call: Friday, April 11, 2008 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 dialing five
minutes before the start of the conference:
Canada/USA Access Number: 1-866-321-8231
International Access Number: + 1 416-642-5213
Confirmation Code: 7255545
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until April 19 by dialing:
Canada and USA access number: 1 888-203-1112
International access number: + 1 647 436-0148
Confirmation code: 7255545
Supplementary Quarterly Financial Information
(unaudited)
Quarters ended February 29 / 28, November 30,
2008(1) 2007(1) 2007(1) 2006(1)
--------------------------------------------------------------------------
($000, except
percentages and
per share data)
Revenue $271,894 $238,378 $260,255 $230,233
Operating income from
continuing operations
before amortization 109,346 87,478 101,209 87,371
Operating margin 40.2% 36.7% 38.9% 37.9%
Amortization 56,346 44,018 53,039 44,755
Financial expense 17,373 23,915 17,368 21,614
Income taxes (14,426) 4,233 9,277 6,535
Loss (gain) on dilution (25) (30,990) 107 7
Non-controlling interest 33,763 9,647 13,762 7,619
Income from continuing
operations 16,315 36,655 7,656 6,846
Loss from discontinued
operations (425) (2,109) (17,632) (95)
Net income (loss) 15,890 34,546 (9,976) 6,751
Cash flow from
operations 85,374 63,353 81,377 65,197
Earnings (loss) per share
Basic
Income from
continuing
operations $0.98 $2.21 $0.46 $0.41
Loss from
discontinued
operations (0.03) (0.13) (1.06) (0.01)
Net income 0.95 2.08 (0.60) 0.41
Diluted
Income from
continuing
operations 0.97 2.20 0.46 0.41
Loss from
discontinued
operations (0.03) (0.13) (1.06) (0.01)
Net income 0.95 2.07 (0.60) 0.41
Quarters ended August 31, May 31,
2007(1) 2006(1) 2007(1) 2006
------------------------------------------------------------------------
($000, except percentages
and per share data)
Revenue $251,300 $181,419 $249,424 $161,381
Operating income from
continuing operations
before amortization 100,595 73,000 95,791 65,648
Operating margin 40% 40.2% 38.4% 40.7%
Amortization 54,723 35,259 47,725 29,509
Financial expense 18,924 16,747 21,603 14,025
Income taxes (7,480) (12,389) 8,055 8,710
Loss (gain) on dilution (27,011) - 64 -
Non-controlling interest 24,240 20,652 13,318 7,517
Income from continuing
operations 37,097 12,749 5,025 5,862
Loss from discontinued
operations (6,713) (2,449) (1,966) (333)
Net income (loss) 30,384 10,300 3,059 5,529
Cash flow from
operations 78,153 56,759 76,862 51,474
Earnings (loss) per share
Basic
Income from
continuing
operations $2.23 $ $0.77 $0.30 $0.35
Loss from
discontinued
operations (0.40) (0.15) (0.12) (0.02)
Net income 1.82 0.62 0.18 0.33
Diluted
Income from
continuing
operations 2.21 0.77 0.30 0.35
Loss from
discontinued
operations (0.40) (0.15) (0.12) (0.02)
Net income 1.81 0.62 0.18 0.33
(1) Include operating results of the cable subsidiary, Cabovisao, since the
date of acquisition of control on August 1, 2006.
Cable sector operating results are generally not subject to material
seasonal fluctuations. However, the loss of Basic Cable service customers
is usually greater, and the addition of HSI service customers is generally
lower, in the fourth quarter, mainly due to students leaving campuses at
the end of the school year.
COGECO INC.
Customer Statistics
February 29, August 31,
2008 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Homes Passed
Ontario (1) 1,016,099 997,498
Quebec 494,919 486,592
--------------------------------------------------------------------------
Canada 1,511,018 1,484,090
Portugal 878,792 859,376
--------------------------------------------------------------------------
Total 2,389,810 2,343,466
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenue Generating Units
Ontario 1,341,643 1,256,244
Quebec 570,698 532,264
--------------------------------------------------------------------------
Canada 1,912,341 1,788,508
Portugal 712,544 697,157
--------------------------------------------------------------------------
Total 2,624,885 2,485,665
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic Cable Service Customers
Ontario 600,855 594,889
Quebec 258,235 254,268
--------------------------------------------------------------------------
Canada 859,090 849,157
Portugal 301,660 294,003
--------------------------------------------------------------------------
Total 1,160,750 1,143,160
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Discretionnary Service Customers
Ontario 494,385 468,764
Quebec 210,867 204,585
--------------------------------------------------------------------------
Canada 705,252 673,349
Portugal - -
--------------------------------------------------------------------------
Total 705,252 673,349
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Pay TV Service Customers
Ontario 97,500 88,835
Quebec 45,919 42,180
--------------------------------------------------------------------------
Canada 143,419 131,015
Portugal 56,679 54,723
--------------------------------------------------------------------------
Total 200,098 185,738
--------------------------------------------------------------------------
--------------------------------------------------------------------------
High Speed Internet Service Customers
Ontario 344,540 316,363
Quebec 111,648 99,473
--------------------------------------------------------------------------
Canada 456,188 415,836
Portugal 165,925 160,023
--------------------------------------------------------------------------
Total 622,113 575,859
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Digital Television Service Customers
Ontario 268,905 246,267
Quebec 145,106 133,612
--------------------------------------------------------------------------
Canada 414,011 379,879
Portugal - -
--------------------------------------------------------------------------
Total 414,011 379,879
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Telephony Service Customers
Ontario 127,343 98,725
Quebec 55,709 44,911
--------------------------------------------------------------------------
Canada 183,052 143,636
Portugal 244,959 243,131
--------------------------------------------------------------------------
Total 428,011 386,767
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) An audit of homes passed in Ontario was completed during the first
quarter of fiscal 2007 and, as a result, the number of homes passed was
reduced by 42,386
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In thousands
of dollars,
except per February 29, February 28, February 29, February 28,
share data) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $271,894 $238,378 $532,149 $468,611
Operating costs 162,548 150,900 321,594 293,762
-------------------------------------------------------------------------
Operating income
from continuing
operations before
amortization 109,346 87,478 210,555 174,849
Amortization
(note 3) 56,346 44,018 109,385 88,773
-------------------------------------------------------------------------
Operating income
from continuing
operations 53,000 43,460 101,170 86,076
Financial expense
(note 4) 17,373 23,915 34,741 45,529
-------------------------------------------------------------------------
Income from
continuing
operations before
income taxes and
the following
items 35,627 19,545 66,429 40,547
Income taxes
(note 5) (14,426) 4,233 (5,149) 10,768
Loss (gain) on
dilution resulting
from shares
issued by a
subsidiary (note 6) (25) (30,990) 82 (30,983)
Non-controlling
interest 33,763 9,647 47,525 17,266
Share in the
earnings of a
general
partnership - - - (5)
-------------------------------------------------------------------------
Income from
continuing
operations 16,315 36,655 23,971 43,501
Loss from
discontinued
operations (note 14) (425) (2,109) (18,057) (2,204)
-------------------------------------------------------------------------
Net income $15,890 $34,546 $5,914 $41,297
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per share (note 7)
Basic
Income from
continuing
operations $0.98 $2.21 $1.44 $2.63
Loss from
discontinued
operations (0.03) (0.13) (1.08) (0.13)
Net income 0.95 2.08 0.35 2.49
Diluted
Income from
continuing
operations 0.97 2.20 1.43 2.61
Loss from
discontinued
operations (0.03) (0.13) (1.08) (0.13)
Net income 0.95 2.07 0.35 2.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Six months ended
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In thousands February 29, February 28, February 29, February 28,
of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $15,890 $34,546 $5,914 $41,297
Other comprehensive
income
Unrealized gains and
losses on derivative
financial
instruments
designated as cash
flow hedges, net of
income taxes of
$44,000 and
$1,187,000 and
non-controlling
interest of
$1,013,000 and
$5,513,000 (485) - (2,638) -
Reclassification of
realized gains and
losses to net income
on derivative
financial instruments
designated as cash
flow hedges, net of
income taxes of
$319,000 and
$1,664,000 and
non-controlling
interest of 1,367,000
and $6,159,000 654 - 2,947 -
Unrealized gain on
translation of net
investments in
self-sustaining
foreign subsidiaries,
net of
non-controlling
interest of
$9,505,000 and
$16,499,000
($1,617,000 and
$27,249,000 in 2007) 4,545 859 7,891 17,397
Unrealized loss on
translation of
long-term debt
designated as hedge
of net investments
in self-sustaining
foreign subsidiaries,
net of
non-controlling
interest of
$6,012,000 and
$10,325,000 (net of
income taxes of
$1,703,000 and
non-controlling
interest of
$1,863,000 and
$20,316,000 in 2007) (2,875) (989) (4,938) (12,894)
-------------------------------------------------------------------------
1,839 (130) 3,262 4,503
-------------------------------------------------------------------------
Comprehensive income $17,729 $34,416 $9,176 $45,800
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six months ended
-------------------------------------------------------------------------
February 29, February 28,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Balance at beginning, as reported $274,946 $204,734
Changes in accounting policies (note 1) 424 -
-------------------------------------------------------------------------
Balance at beginning, as restated 275,370 204,734
Net income 5,914 41,297
Dividends on multiple voting shares (258) (245)
Dividends on subordinate voting shares (2,076) (1,950)
-------------------------------------------------------------------------
Balance at end $278,950 $243,836
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
February 29, August 31,
(In thousands of dollars) 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Assets
Current
Cash and cash equivalents $24,369 $66,279
Accounts receivable 57,646 52,734
Income taxes receivable 2,371 3,138
Prepaid expenses 7,203 8,675
Future income tax assets 12,094 17,986
Current assets related to discontinued
operations (note 14) - 38,700
-------------------------------------------------------------------------
103,683 187,512
-------------------------------------------------------------------------
Income taxes receivable 1,397 1,345
Investments 739 739
Fixed assets 1,152,477 1,123,270
Deferred charges 55,679 55,450
Intangible assets (note 8) 1,081,231 1,083,750
Goodwill (note 8) 355,773 342,584
Non-current assets related to discontinued
operations (note 14) - 42,109
-------------------------------------------------------------------------
$2,750,979 $2,836,759
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness $17,776 $-
Accounts payable and accrued liabilities 192,013 220,450
Income tax liabilities 9,796 1,209
Deferred and prepaid income 28,398 29,837
Derivative financial instruments 92,834 -
Current portion of long-term debt (note 9) 164,558 17,327
Current liabilities related to discontinued
operations (note 14) - 46,031
-------------------------------------------------------------------------
505,375 314,854
-------------------------------------------------------------------------
Long-term debt (note 9) 741,583 1,036,256
Share in the partners' deficiency of a general
partnership 368 518
Deferred and prepaid income 11,790 11,501
Pension plan liabilities 8,126 7,378
Future income tax liabilities 244,973 267,646
Non-controlling interest 839,505 788,557
Long-term liabilities related to discontinued
operations (note 14) - 17,589
-------------------------------------------------------------------------
2,351,720 2,444,299
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 10) 119,139 119,078
Treasury shares (note 10) (1,522) (1,054)
Contributed surplus - stock-based compensation 1,163 499
Retained earnings 278,950 274,946
Accumulated other comprehensive income (loss)
(note 11) 1,529 (1,009)
-------------------------------------------------------------------------
399,259 392,460
-------------------------------------------------------------------------
$2,750,979 $2,836,759
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended Six months ended
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In thousands February 29, February 28, February 29, February 28,
of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating
activities
Income from
continuing
operations $16,315 $36,655 $23,971 $43,501
Adjustments for:
Amortization
(note 4) 56,346 44,018 109,385 88,773
Amortization of
deferred
financing costs 751 535 1,473 1,181
Future income
taxes (note 5) (22,918) 1,108 (17,740) 5,022
Non-controlling
interest 33,763 9,647 47,525 17,266
Loss (gain) on
dilution
resulting from
shares issued
by a subsidiary
(note 6) (25) (30,990) 82 (30,983)
Stock-based
compensation 682 2,121 1,070 3,088
Loss (gain) on
disposal of
fixed assets (105) (22) 237 (39)
Other 565 281 748 741
-------------------------------------------------------------------------
85,374 63,353 166,751 128,550
Changes in non-cash
operating items
(note 12a)) 7,568 (1,869) (27,205) (76,812)
-------------------------------------------------------------------------
92,942 61,484 139,546 51,738
-------------------------------------------------------------------------
Cash flow from
investing activities
Acquisition of fixed
assets (note 12b)) (58,533) (44,819) (109,346) (111,818)
Increase in deferred
charges (6,094) (6,046) (13,611) (13,258)
Costs related to
business acquisition - (1,385) - (1,385)
Decrease (increase)
in restricted cash - (3) - 88
Other (116) 22 (115) 39
-------------------------------------------------------------------------
(64,743) (52,231) (123,072) (126,334)
-------------------------------------------------------------------------
Cash flow from
financing activities
Increase (decrease)
in bank indebtedness 17,570 (30,640) 17,776 (1,092)
Increase in long-term
debt - - 51 -
Repayment of
long-term debt (35,748) (143,729) (70,411) (141,993)
Issue of subordinate
voting shares 61 337 61 457
Acquisition of
treasury shares - - (468) -
Dividends on multiple
voting shares (129) (129) (258) (245)
Dividends on
subordinate voting
shares (1,038) (1,031) (2,076) (1,950)
Issue of shares by a
subsidiary to
non-controlling
interest, net of
issue costs 236 188,427 3,292 188,655
Dividends paid by
a subsidiary to
non-controlling
interest (3,281) (1,462) (6,553) (2,434)
-------------------------------------------------------------------------
(22,329) 11,773 (58,586) 41,398
-------------------------------------------------------------------------
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies 355 1,644 202 3,260
-------------------------------------------------------------------------
Cash flow from
continuing
operations 6,225 22,670 (41,910) (29,938)
Cash flow from
discontinued
operations (note 14) - - - -
-------------------------------------------------------------------------
Net change in cash
and cash equivalents 6,225 22,670 (41,910) (29,938)
Cash and cash
equivalents at
beginning 18,144 18,908 66,279 71,516
-------------------------------------------------------------------------
Cash and cash
equivalents at end $24,369 $41,578 $24,369 $41,578
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See supplemental cash flow information in note 12.
COGECO INC.
Notes to Consolidated Financial Statements
February 29, 2008
(amounts in tables are in thousands of dollars, except 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, contain all adjustments necessary to present fairly the financial position of COGECO Inc. as at February 29, 2008 and August 31, 2007 as well as its results of operations and its cash flow for the three and six month periods ended February 29, 2008 and February 28, 2007.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and notes should be read in conjunction with COGECO Inc.'s annual consolidated financial statements for the year ended August 31, 2007. 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 on financial instruments described below and the presentation of the investment in the discontinued operations (see note 14).
Financial instruments
Effective September 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861, Financial Instruments - Disclosure and Presentation and Section 3865, Hedges.
Statement of Comprehensive Income
A new statement, entitled consolidated statements of comprehensive income, was added to the Company's consolidated financial statements and includes net income as well as other comprehensive income. Other comprehensive income represents changes in shareholders' equity arising from transactions and events from non-owner sources, such as changes in foreign currency translation adjustments of net investments in self-sustaining foreign subsidiaries and long-term debt designated as a hedge of net investments in self-sustaining foreign subsidiaries and changes in the fair value of effective cash flow hedging instruments.
Recognition and Measurement of Financial Instruments
Under these new standards, all financial assets, including derivatives, must be classified as available for sale, held for trading, held to maturity, or loans and receivables. All financial liabilities, including derivatives, must be classified as held for trading or other liabilities. All financial instruments classified as available for sale or held for trading are recognized at fair value on the consolidated balance sheet while financial instruments classified as loans and receivables or other liabilities will continue to be measured at amortized cost using the effective interest rate method. The standards allow the Company to designate certain financial instruments, on initial recognition, as held for trading.
All of the Company's financial assets are classified as held for trading or loans and receivables. The Company has classified its cash and cash equivalents as held for trading. Accounts receivable has been classified as loans and receivables. All of the Company's financial liabilities were classified as other liabilities, except for the Company's subsidiary's cross-currency swaps, which were classified as held for trading. Held for trading assets and liabilities are carried at fair value on the consolidated balance sheet, with changes in fair value recorded in the consolidated statements of income, except for the changes in fair value of the cross-currency swaps, which are designated as cash flow hedges of the Senior Secured Notes Series A and are recorded in other comprehensive income. Loans and receivables and all financial liabilities are carried at amortized cost using the effective interest method. Upon adoption, the Company determined that none of its financial assets are classified as available for sale or held to maturity. Except for the treatment of transaction costs and derivative financial instruments mentioned below, the provisions of the new accounting standards had no impact on the consolidated financial statements on September 1, 2007 and February 29, 2008.
Transaction costs
Effective September 1, 2007, transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the revolving loan and the swingline facility, which are presented as deferred charges. These costs are amortized over the term of the related financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility, which are amortized over the term of the related financing on a straight-line basis. Previously, all transaction costs were capitalized and amortized on a straight-line basis over the term of the related financing, over a period not exceeding five years. The impact of these adjustments reduced deferred charges by $1.2 million, reduced long-term debt by $3.1 million, increased future income tax liabilities by $0.6 million, increased non-controlling interest by $0.9 million and increased retained earnings by $0.4 million.
Cash flow hedge
All derivatives are measured at fair value with changes in fair value recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the hedged asset or liability is recognized in the consolidated statements of income. Any hedge ineffectiveness is recognized in the consolidated statements of income immediately. Accordingly, the Company's subsidiary's cross-currency swaps must be measured at fair value in the consolidated financial statements. Since these cross-currency swaps are used to hedge cash flows on Senior Secured Notes Series A denominated in U.S. dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements on September 1, 2007, increased derivative financial instruments liabilities by $83.5 million, decreased deferred credit presented in long-term debt by $80.2 million, decreased future income tax liabilities by $1.1 million, decreased non-controlling interest by $1.5 million and decreased opening accumulated other comprehensive income by $0.7 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the three and six month periods ended February 29, 2008 increased derivative financial instruments liabilities by $1.5 million and $9.3 million, increased future income tax liabilities by $0.3 million and $0.5 million, increased non-controlling interest by $0.4 million and $0.6 million and increased accumulated other comprehensive income by $0.2 million and $0.3 million.
Net investment hedge
Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at the balance sheet date for asset and liability items, and using the average exchange rates during the period for revenue and expenses. Adjustments arising from this translation are deferred and recorded as foreign currency translation adjustment in accumulated other comprehensive income and are included in income only when a reduction in the investment in these foreign subsidiaries is realized. Unrealized foreign exchange gains and losses on long-term debt denominated in foreign currency, that is designated as a hedge of net investments in a self-sustaining foreign subsidiaries are recorded as foreign currency translation adjustments in accumulated other comprehensive income, net of income taxes and non-controlling interest. As a result, an amount of $1.0 million was reclassified as at August 31, 2007 from the foreign currency translation adjustment to the accumulated other comprehensive income and the Company's comparative financial statements were restated in accordance with transitional provisions.
Embedded derivatives
All embedded derivatives that are not closely related to the host contracts are measured at fair value, with changes in fair value recorded in the consolidated statements of income. On September 1, 2007 and as at February 29, 2008, there are no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheet. In accordance with the new standards, the Company selected September 1, 2002, as its transition date for adopting the standard related to embedded derivatives.
Upcoming standards
In 2006, the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation. These Sections are to be applied to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.
Accounting changes
In July 2006, the CICA issued Section 1506, Accounting Changes, which modifies certain aspects of the previous standard. A reporting entity may not change its accounting method unless required by primary source of GAAP or to provide a more reliable and relevant presentation of the financial statements. In addition, changes in accounting methods must be applied retroactively and additional information must be disclosed. This Section applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. During the first quarter, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements.
Future accounting pronouncements
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new Section will be applicable to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.
2. Segmented Information
The principal financial information per business segment is presented in
the tables below:
Cable Head office and other (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months
ended February 29, February 28, February 29, February 28,
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $265,102 $231,952 $6,792 $6,426
Operating costs 156,621 145,161 5,927 5,739
Operating income
from continuing
operations before
amortization 108,481 86,791 865 687
Amortization 55,989 43,572 357 446
Operating income
from continuing
operations 52,492 43,219 508 241
Financial expense 16,959 23,551 414 364
Income taxes (14,378) 4,261 (48) (28)
Loss (gain) on
dilution resulting
from shares issues
by a subsidiary - - (25) (30,990)
Non-controlling
interest - - 33,763 9,647
Income from
continuing
operations 49,911 15,407 (33,596) 21,248
Loss from
discontinued
operations - - (425) (2,109)
-------------------------------------------------------------------------
Net assets
employed (2)(3) $2,467,879 $2,398,297 $26,530 $29,586
Total assets (3) 2,712,807 2,714,339 38,172 122,420
Total assets
related to
discontinued
operations (3) - - - 80,809
Fixed assets (3) 1,148,823 1,119,498 3,654 3,772
Goodwill (3) 355,773 342,584 - -
Acquisition of
fixed assets 59,874 46,798 32 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended February 29, February 28,
(unaudited) 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $271,894 $238,378
Operating costs 162,548 150,900
Operating income from continuing operations
before amortization 109,346 87,478
Amortization 56,346 44,018
Operating income from continuing operations 53,000 43,460
Financial expense 17,373 23,915
Income taxes (14,426) 4,233
Loss (gain) on dilution resulting from shares
issues by a subsidiary (25) (30,990)
Non-controlling interest 33,763 9,647
Income from continuing operations 16,315 36,655
Loss from discontinued operations (425) (2,109)
-------------------------------------------------------------------------
Net assets employed (2)(3) $2,494,409 $2,427,883
Total assets (3) 2,750,979 2,836,759
Total assets related to discontinued
operations (3) - 80,809
Fixed assets (3) 1,152,477 1,123,270
Goodwill (3) 355,773 342,584
Acquisition of fixed assets 59,906 46,846
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Include radio operation and eliminations.
(2) Total assets from continuing operations less cash and cash equivalents,
accounts payable and accrued liabilities and deferred and prepaid
income.
(3) As at February 29, 2008 and August 31, 2007.
Cable Head office and other (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended February 29, February 28, February 29, February 28,
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $516,935 $453,954 $15,214 $14,657
Operating costs 310,117 283,501 11,477 10,261
Operating income
from continuing
operations before
amortization 206,818 170,453 3,737 4,396
Amortization 108,676 87,881 709 892
Operating income
from continuing
operations 98,142 82,572 3,028 3,504
Financial expense 33,871 44,772 870 757
Income taxes (6,003) 9,858 854 910
Loss (gain) on
dilution resulting
from shares issues
by a subsidiary - - 82 (30,983)
Non-controlling
interest - - 47,525 17,266
Income from
continuing
operations 70,274 27,942 (46,303) 15,559
Loss from
discontinued
operations - - (18,057) (2,204)
-------------------------------------------------------------------------
Net assets
employed (2)(3) $2,467,879 $2,398,297 $26,530 $29,586
Total assets (3) 2,712,807 2,714,339 38,172 122,420
Total assets
related to
discontinued
operations (3) - - - 80,809
Fixed assets (3) 1,148,823 1,119,498 3,654 3,772
Goodwill (3) 355,773 342,584 - -
Acquisition of
fixed assets 110,601 113,969 191 81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended February 29, February 28,
(unaudited) 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $532,149 $468,611
Operating costs 321,594 293,762
Operating income from continuing operations
before amortization 210,555 174,849
Amortization 109,385 88,773
Operating income from continuing operations 101,170 86,076
Financial expense 34,741 45,529
Income taxes (5,149) 10,768
Loss (gain) on dilution resulting from shares
issues by a subsidiary 82 (30,983)
Non-controlling interest 47,525 17,266
Income from continuing operations 23,971 43,501
Loss from discontinued operations (18,057) (2,204)
-------------------------------------------------------------------------
Net assets employed (2)(3) $2,494,409 $2,427,883
Total assets (3) 2,750,979 2,836,759
Total assets related to discontinued
operations (3) - 80,809
Fixed assets (3) 1,152,477 1,123,270
Goodwill (3) 355,773 342,584
Acquisition of fixed assets 110,792 114,050
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Include radio operation and eliminations.
(2) Total assets from continuing operations less cash and cash equivalents,
accounts payable and accrued liabilities and deferred and prepaid
income.
(3) As at February 29, 2008 and August 31, 2007.
The following tables sets out certain geographic market information based
on client's location:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Canada $211,960 $181,352 $416,623 $357,514
Europe 59,934 57,026 115,526 111,097
-------------------------------------------------------------------------
$271,894 $238,378 $532,149 $468,611
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
February 29, August 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Fixed assets
Canada $838,870 $815,754
Europe 313,607 307,516
-------------------------------------------------------------------------
$1,152,477 $1,123,270
-------------------------------------------------------------------------
Goodwill
Canada $- $-
Europe 355,773 342,584
-------------------------------------------------------------------------
$355,773 $342,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. Amortization
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $47,972 $38,643 $92,994 $78,054
Deferred charges 5,826 5,375 11,400 10,719
Intangible assets 2,548 - 4,991 -
-------------------------------------------------------------------------
$56,346 $44,018 $109,385 $88,773
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Financial expense
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest on
long-term debt $16,989 $22,642 $33,832 $43,188
Amortization of
deferred financing
costs 407 535 814 1,181
Other (23) 738 95 1,160
-------------------------------------------------------------------------
$17,373 $23,915 $34,741 $45,529
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Income Taxes
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Current $8,492 $3,125 $12,591 $5,746
Future (22,918) 1,108 (17,740) 5,022
-------------------------------------------------------------------------
$(14,426) $4,233 $(5,149) $10,768
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Income before
income taxes $35,627 $19,545 $66,429 $40,552
Combined income
tax rate 32.82% 34.77% 33.38% 34.78%
Income taxes at
combined income
tax rate $11,694 $6,796 $22,175 $14,103
Loss or income
subject to lower
or higher tax
rates 37 294 (350) 228
Decrease in future
income taxes as
a result of
decreases in
substantively
enacted tax rates (24,146) - (24,146) -
Income taxes
arising form
non-deductible
expenses 180 235 304 341
Effect of foreign
income tax rate
differences (2,213) (1,425) (3,377) (2,249)
Benefit related
to prior years'
minimum income
taxes paid - (1,475) - (1,475)
Other 22 (192) 245 (180)
-------------------------------------------------------------------------
Income taxes at
effective income
tax rate $(14,426) $4,233 $(5,149) $10,768
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Gain on dilution resulting from shares issued by a subsidiary
During the second quarter of 2007, the Company's subsidiary, Cogeco Cable Inc., completed a public offering totaling 5,000,000 subordinate voting shares. The offering resulted in gross proceeds of $192,500,000 and net proceeds of $184,234,000. The Company's subsidiary has also issued, during the second quarter of 2007, 7,344 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 218,761 subordinate voting shares pursuant to its Employee Stock Option Plan for cash considerations of $198,000 and $3,995,000, respectively. As a result, the Company's interest in Cogeco Cable Inc. decreased from 39.2% to 34.7% and gains on dilution of $30,990,000 and $30,983,000 were recorded for the three and six month periods ended February 28, 2007.
7. Earnings per Share
The following table provides a reconciliation between basic and diluted earnings per share:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Income from
continuing
operations $16,315 $36,655 $23,971 $43,501
Loss from
discontinued
operations (425) (2,109) (18,057) (2,204)
-------------------------------------------------------------------------
Net income $15,890 $34,546 $5,914 $41,297
-------------------------------------------------------------------------
Weighted average
number of
multiple
voting and
subordinate
voting shares
outstanding 16,673,921 16,569,120 16,673,286 16,562,691
Effect of dilutive
stock options (1) 74,013 116,223 78,084 106,424
-------------------------------------------------------------------------
Weighted average
number of diluted
multiple voting
and subordinate
voting shares
outstanding 16,747,934 16,685,343 16,751,370 16,669,115
-------------------------------------------------------------------------
Earnings (loss)
per share
Basic
Income from
continuing
operations $0.98 $2.21 $1.44 $2.63
Loss from
discontinued
operations (0.03) (0.13) (1.08) (0.13)
Net income 0.95 2.08 0.35 2.49
Diluted
Income from
continuing
operations 0.97 2.20 1.43 2.61
Loss from
discontinued
operations (0.03) (0.13) (1.08) (0.13)
Net income 0.95 2.07 0.35 2.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and six month periods ended February 29, 2008, 33,182 and
16,591 stock options (36,443 in 2007) were excluded from the
calculation of diluted earnings per share since the exercise price of
the options was greater than the average share price of the subordinate
voting shares.
8. Goodwill and Other Intangible Assets
-------------------------------------------------------------------------
February 29, August 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Customer relationships $66,339 $68,858
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
-------------------------------------------------------------------------
1,081,231 1,083,750
Goodwill 355,773 342,584
-------------------------------------------------------------------------
$1,437,004 $1,426,334
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a) Intangible assets
During the first six months, intangible assets variations were as follows:
-------------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses base Total
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Balance as at
August 31, 2007 $68,858 25,120 989,772 1,083,750
Amortization (4,991) - - (4,991)
Foreign currency
translation
adjustment 2,472 - - 2,472
-------------------------------------------------------------------------
Balance as at
February 29, 2008 $66,339 $25,120 $989,772 $1,081,231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Goodwill
During the first six months, goodwill variation was as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited)
Balance as at August 31, 2007 $342,584
Foreign currency translation adjustment 13,189
-------------------------------------------------------------------------
Balance as at February 29, 2008 $355,773
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Long-Term Debt
-------------------------------------------------------------------------
Interest February 29, August 31,
Maturity rate 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Parent company
Term Facility 2011(1) 6.06%(2) $20,553 $25,538
Obligations under
capital leases 2010 6.49-6.61 93 108
Subsidiaries
Term Facility
Term loan
- EUR104,551,500 2011 5.56(2) 155,253 150,450
Term loan
- EUR17,358,700 2011 5.00(2) 25,749 24,979
Revolving loan
- EUR152,000,000
(EUR196,725,000
as at August 31,
2007) 2011 4.94(2) 227,149 283,087
Senior Secured
Debentures Series 1 2009 6.75 149,695 150,000
Senior - Secured Notes
Series A
- US$150 million 2008 6.83(3) 147,395 158,430
Series B 2011 7.73 174,247 175,000
Deferred credit (4) 2008 - - 80,220
Obligations under
capital leases 2011 6.42-8.30 5,951 5,760
Other - - 56 11
-------------------------------------------------------------------------
906,141 1,053,583
Less current portion 164,558 17,327
-------------------------------------------------------------------------
$741,583 $1,036,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) On December 14, 2007, the Company concluded an amended and restated
credit agreement with a group of four Canadian banks led by the
Canadian Imperial Bank of Commerce ("CIBC"), which will now act as
agent for the banking syndicate. The annually renewable three-year
amended credit agreement establishes a revolving credit of $50 million
to which may be added a further credit of $25 million under certain
conditions. The amended credit agreement maintains certain financial
commitments with the same security by the Company, its subsidiary
Cogeco Radio-Television Inc. and indirect subsidiary, Cogeco Diffusion
Inc. The Company posted a guarantee for a maximum amount of $12 million
in favour of CIBC, which is also TQS' banker, in the event of any
default by TQS under the terms of its own credit agreement. TQS' credit
agreement provides security over its assets, including its accounts
receivable. If the guarantee were to be called in, the Company would be
subrogated to the rights of CIBC and benefit from the same security. In
March 2008, the Company was unconditionally released for all of its
obligations under the guarantee.
(2) Average interest rate on debt as at February 29, 2008, including
stamping fees.
(3) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the U.S.
denominated debt of the Company's subsidiary, Cogeco Cable Inc.
(4) The deferred credit represents the amount that was deferred for hedge
accounting purpose as at August 31, 2007 under cross-currency swaps
entered into by the Company's subsidiary, Cogeco Cable Inc., to hedge
Senior Secured Notes Series A denominated in U.S. dollars. In
accordance with the standards on financial instruments, the Company's
subsidiary's cross-currency swaps are now presented as derivative
financial instrument liabilities (see note 1).
On January 8, 2008, the Company's subsidiary, Cogeco Cable Inc., and the
Solidarity Fund QFL entered into an agreement to issue a $100 million
senior unsecured debenture by way of a private placement, subject to usual
market conditions. The debenture was issued on March 5, 2008, bears
interest at a fixed rate of 5.936% and will mature on March 5, 2018. The
debenture is redeemable at the Corporation's option at any time, in whole
or in part, prior to maturity, at 100% of the principal amount plus a make-
whole premium.
10. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and
non-voting, except when specified in the Articles of Incorporation of the
Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
-------------------------------------------------------------------------
February 29, August 31,
2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
Issued
1,842,860 multiple voting shares $12 $12
14,832,586 subordinate voting shares
(14,829,792 as at August 31, 2007) 119,127 119,066
-------------------------------------------------------------------------
$119,139 $119,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the period, subordinate voting share transactions were as follows:
Six months ended Twelve months ended
-------------------------------------------------------------------------
February 29, 2008 August 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
-------------------------------------------------------------------------
Balance at
beginning 14,829,792 $119,066 14,702,556 $117,540
Shares issued for
cash under the
Employee Stock
Purchase Plan
and the Stock
Option Plan 2,794 61 120,196 1,526
Conversion of
multiple voting
shares into
subordinate voting
shares - - 7,040 -
-------------------------------------------------------------------------
Balance at end 14,832,586 $119,127 14,829,792 $119,066
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock-based plans
The Company offers, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for certain executives, which are described in the Company's annual consolidated financial statements. During the first six months, no stock options were granted to employees by COGECO Inc. However, the Company's subsidiary, Cogeco Cable Inc., granted 99,084 stock options (200,874 in 2007) with an exercise price of $45.59 to $49.82 ($26.63 to $33.12 in 2007), of which 22,683 stock options (57,247 in 2007) were granted to COGECO Inc.'s employees. In 2007, the Company's subsidiary also granted 376,000 conditional stock options with an exercise price of $26.63, of which 262,400 stock options were granted to COGECO Inc.'s employees. These conditional options vest over a period of three years beginning one year after the day such options were granted and are exercisable over ten years. The vesting of these options is conditional to the achievement of certain yearly financial objectives by the Portuguese subsidiary, Cabovisao - Televisao por Cabo, S.A., over a period of three years. The Company records compensation expense for options granted on or after September 1, 2003. As a result, a compensation expense of $587,000 and $907,000 ($640,000 and $901,000 in 2007) was recorded for the three and six month periods ended February 29, 2008.
The fair value of stock options granted by the Company's subsidiary, Cogeco Cable Inc., for the six month period ended February 29, 2008 was $12.86 ($7.38 in 2007) per option. The fair value was estimated at the grant date for purposes of determining the stock-based compensation expense using the binomial option pricing model based on the following assumptions:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Expected dividend yield 0.90% 1.27%
Expected volatility 27% 32%
Risk-free interest rate 4.25% 4.05%
Expected life in years 4.0 4.0
-------------------------------------------------------------------------
As at February 29, 2008, the Company had outstanding stock options providing for the subscription of 188,758 subordinate voting shares. These stock options can be exercised at various prices ranging from $14.00 to $37.50 and at various dates up to October 19, 2011.
The Company and its subsidiary, Cogeco Cable Inc., also had Performance Unit Plans for key employees which were terminated in June 2007. A compensation expense of $1,558,000 and $2,264,000 was recorded for the three and six month periods ended February 28, 2007 related to these plans.
Effective October 13, 2006, the Company established a senior executives and designated employee incentive unit plan (the "Incentive Share Unit Plan") which is described in the Company's annual consolidated financial statements. During the first six months, the Company granted 12,852 Incentive Share Units (none in 2007). These shares were purchased for a cash consideration of $468,000 and are held in trust for participants until they are completely vested. The trust, considered as a variable interest entity, is consolidated in the Company's financial statements with the value of the acquired shares presented as treasury shares in reduction of capital stock. A compensation expense of $95,000 and $163,000 (none in 2007) was recorded for the three and six month periods ended February 29, 2008 related to this plan.
11. Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------------------------------
Translation of
net investments
in
self-sustaining
foreign Cash flow
subsidiaries hedges Total
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Balance as at August 31, 2007 $(1,009) $- $(1,009)
Cumulative effect of changes
in accounting policy (note 1) - (724) (724)
Other comprehensive income 2,953 309 3,262
-------------------------------------------------------------------------
Balance as at February 29, 2008 $1,944 $(415) $1,529
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Statements of Cash Flow
a) Changes in non-cash operating items
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $(2,380) $(4,249) $(4,279) $(8,265)
Income taxes
receivable 380 (2,562) 1,207 (4,155)
Prepaid expenses (640) 796 1,196 368
Accounts payable
and accrued
liabilities 6,428 8,416 (32,366) (68,589)
Income tax
liabilities 5,908 (2,826) 8,190 1,368
Deferred and prepaid
income (2,128) (1,444) (1,153) 2,461
-------------------------------------------------------------------------
$7,568 $(1,869) $(27,205) $(76,812)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Other information
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed asset
acquisitions
through capital
leases $1,373 $2,027 $1,446 $2,232
Financial expense
paid 11,550 19,996 32,744 44,586
Income taxes paid 2,662 7,975 3,140 8,200
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Employee Future Benefits
The Company and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, a defined contribution pension plan or collective registered retirement savings plans, which are described in the Company's annual consolidated financial statements. The total expenses related to these plans are as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory
defined benefit
pension plans $658 $608 $1,316 $1,214
Defined contribution
pension plan and
collective registered
retirement savings
plans 714 517 1,422 1,065
-------------------------------------------------------------------------
$1,372 $1,125 $2,738 $2,279
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the last several months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio-television and Telecommunications Commission's ("CRTC") refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada ("SRC"), which acts like a commercial player rather than a publicly-owned television broadcaster and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent 3947424 Canada Inc. ("the TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed up to March 10, 2008. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors arrangement plan. On March 10, 2008, the Quebec Superior Court agreed with TQS Inc.'s Board of Director decision to accept the offer made by Remstar Corporation Inc. to acquire all shares held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the investment in the TQS Group as at August 31, 2007, as well as its results of operations and its cash flow for the period of September 1, 2007 to December 18, 2007 and for the three and six month periods ended February 28, 2007, have been reclassified as a discontinued operation.
The Company has no investment in the TQS Group as at February 29, 2008. The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
-----------------------------------------------------------
-----------------------------------------------------------
(unaudited)
Accounts receivable $23,611
Prepaid expenses 442
Broadcasting rights 14,647
-----------------------------------------------------------
Current assets $38,700
-----------------------------------------------------------
Broadcasting rights $17,456
Fixed assets 21,653
Broadcasting licenses 3,000
-----------------------------------------------------------
Non-current assets $42,109
-----------------------------------------------------------
Bank indebtedness $8,173
Accounts payable and accrued liabilities 28,893
Broadcasting rights payable 8,531
Income tax liabilities 141
Deferred and prepaid income 42
Current portion of long-term debt 251
-----------------------------------------------------------
Current liabilities $46,031
-----------------------------------------------------------
Share in the partner's deficiency of a general
partnership $518
Broadcasting rights payable 4,408
Pension plan liabilities 1,444
Non-controlling interest 11,219
-----------------------------------------------------------
Long-term liabilities $17,589
-----------------------------------------------------------
-----------------------------------------------------------
The results of the discontinued operations were as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $5,741 $23,068 $38,499 $56,572
Operating costs 5,865 26,877 35,822 59,385
-------------------------------------------------------------------------
Operating income
(loss) before
amortization (124) (3,809) 2,677 (2,813)
Amortization 248 1,094 1,364 2,178
-------------------------------------------------------------------------
Operating income
(loss) (372) (4,903) 1,313 (4,991)
Financial expense 53 266 291 411
Impairment of assets - - 30,298 -
-------------------------------------------------------------------------
Loss before income
taxes and following
the items (425) (5,169) (29,276) (5,402)
Income taxes - (1,653) - (1,725)
Non-controlling
interest - (1,407) (11,219) (1,469)
Shares in the earnings
of a general
partnership - - - (4)
-------------------------------------------------------------------------
Loss from discontinued
operations $(425) $(2,109) $(18,057) $(2,204)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cash flow of the discontinued operations were as follows:
Three months ended Six months ended
-------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating activities $1,770 $2,110 $(3,973) $(7,867)
Cash flow from
investing activities (48) (494) (133) (688)
Cash flow from
financing activities (1,722) (1,616) 4,106 8,555
-------------------------------------------------------------------------
Cash flow from
discontinued
operations $- $- $- $-
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Contingent liability
The Canadian Radio-television Telecommunications Commission ("CRTC") collects two different types of fees from broadcast licensees. These are known as Part I and Part II fees. In 2003 and 2004, lawsuits were commenced in the Federal Court, alleging that the Part II licence fees are taxes rather than fees and that the regulations authorizing them are unlawful. On December 14, 2006, the Federal Court ruled that the CRTC did not have the jurisdiction to charge Part II fees. The Court ruled that licensees were not entitled to a refund of past fees paid. Both the Crown and the applicants have appealed this case to the Federal Court of Appeal. The applicants are seeking an order requiring a refund of past fees paid. The Crown is seeking to reverse the finding that Part II fees are unlawful. On October 1st, 2007, the CRTC sent a letter to all broadcast licensees, including the Company's subsidiaries Cogeco Cable Inc. and Cogeco Radio-Television Inc. The letter stated that the CRTC will not collect Part II license fees due on November 30, 2007 and subsequent years unless the Federal Court of appeal or the Supreme Court of Canada (should the case be appealed to that level) reverses the Federal Court's decision. The Appeal hearing was held on December 4th and 5th, 2007 in Ottawa. During the hearing, questions were raised by the hearing panel concerning the appropriateness of considering Part II Licence Fees as a tax rather than a fee under the relevant portion of the Broadcasting Act. The decision is not expected before several months. The Company believes that there is a reasonable likelihood that the Federal Court's decision will be reversed. The Company's subsidiaries had accrued $10.2 million with respect to these fees for fiscal year 2007 and the first six months of fiscal 2008. In the unlikely event that the Federal Court of Appeal or the Supreme Court of Canada, should this case be appealed to that level, maintains the decision from the Federal Court, this would have a beneficial impact on the future financial results of the Company.
16. Subsequent event
Acquisition of MaXess Networx(R)
On March 11, 2008, the Company's subsidiary, Cogeco Cable Inc., announced the acquisition of all the assets of MaXess Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company). MaXess Networx(R) operates a broadband network equipped with next generation ATM and Ethernet technology and provides organizations in south-western Ontario with the broadband capacity required for data networking, high-speed Internet access, e-business applications, video conferencing and other advanced communications. The acquisition was completed on March 31, 2008.
17. Comparative figures
Certain comparative figures have been reclassified to conform to the current year's presentation. Financial information for previous periods has been restated to reflect the termination of our investment in the TQS Group, which is no longer consolidated since December 18, 2007 (see note 14).
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
COGECO Inc.
Pierre Gagne
Vice President, Finance and Chief Financial Officer
514-874-2600
Information:
Media
Marie Carrier
Director, Corporate Communications
514-874-2600
