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Growth and Acquisitions in the Cable Sector Drive, COGECO's Fourth Quarter and 2008 Year-End Results MONTREAL, QUEBEC--(MARKET WIRE)--Oct 30, 2008 -- Today, COGECO Inc. (Toronto:CGO.TO - News) announced its financial results
for the fourth quarter and fiscal year 2008 ended August
31, 2008.
For the fourth quarter and fiscal year 2008: - Consolidated revenue increased by 16.5% to $292.9 million and by 14.4% to $1,108.9 million, respectively; - Consolidated operating income before amortization(1) grew by 20.4% to reach $121.1 million and by 20.9% to $448.9 million, respectively; - Consolidated net income amounted to $9.7 million and $25.1 million compared to $30.4 million and $74.8 million, respectively, a decrease for both periods compared to last year mainly due to gains on dilution recorded in fiscal 2007; - Free cash flow(1) reached $21 million in the fourth quarter compared to $9.1 million the year before. For the fiscal year, it amounted to $100.4 million compared to $29.4 million the prior year; - Operating margin(1) grew to 41.4% from 40% and to 40.5% from 38.3%, in the fourth quarter and the fiscal year, respectively; - In the cable sector, revenue-generating units ("RGU")(2) grew by 41,100 and 231,209 net additions, respectively, for a total of 2,716,874 RGU at August 31, 2008. External growth: - During the fourth quarter, the cable subsidiary, Cogeco Cable, announced its entry into the Greater Toronto Area market through the acquisition of all the shares of Toronto Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro Corporation, which now operates under the name of Cogeco Data Services Inc. ("CDS"). "Our fourth-quarter was marked by the entry of Cogeco Cable in the Greater Toronto Area market with the acquisition of Toronto Hydro Telecom. Our new subsidiary, Cogeco Data Services, gives us access to complementary markets and expertise that should contribute to our future commercial growth and development. This acquisition is perfectly aligned with our long-term external growth strategy. On the radio side, we are pleased to report that our RYTHME FM network continues to be the favorite choice of the 25-54 year old female audience in Montreal. As for our fiscal year-end results, we are very pleased to report continued growth with the generation of financial results above expectations. Our withdrawal from TQS was done in the best interests of our shareholders. As for fiscal 2009, we have reviewed our guidelines in light of the global economic climate, the competitive landscape in Portugal, and to include our projections for CDS," declared Louis Audet, President and CEO of COGECO.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(2) Represent the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.Fiscal 2009 Preliminary Financial Guidelines: The Company issued its 2009 financial guidelines, setting revenue outlook at about $1,243 million, an increase of $45 million compared to the 2009 preliminary financial projections issued in July 2008. Operating income before amortization should increase to approximately $513 million, an improvement of $13 million compared to our preliminary projections, and free cash flow should amount to approximately $95 million, a decrease of $15 million due to an increase in capital expenditures driven by the recent acquisitions in the cable sector. Please consult the fiscal 2009 projections in the "Fiscal 2009 Financial Guidelines" section for further details. FINANCIAL HIGHLIGHTS
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($000, except Quarters ended Years ended
percentages and August 31, August 31,
per share data) 2008 2007(1) Change 2008 2007(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 292,873 251,300 16.5 1,108,900 969,335 14.4
Operating
income from
continuing
operations
before
amortization(2) 121,135 100,595 20.4 448,894 371,235 20.9
Income from
continuing
operations 9,656 37,097 (74.0) 43,165 85,623 (49.6)
Loss from
discontinued
operations - (6,713) - (18,057) (10,883) 65.9
Net income 9,656 30,384 (68.2) 25,108 74,740 (66.4)
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Cash flow from
operations(2) 99,969 78,153 27.9 362,788 283,565 27.9
Less:
Capital
expenditures
and increase
in deferred
charges 78,988 69,022 14.4 262,352 254,141 3.2
Free cash
flow(2) 20,981 9,131 - 100,436 29,424 -
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Earnings
(loss) per
share
Basic
Income from
continuing
operations 0.58 2.23 (74.0) 2.59 5.16 (49.8)
Loss from
discontinued
operations - (0.40) - (1.08) (0.66) 63.6
Net income 0.58 1.83 (68.3) 1.50 4.50 (66.7)
Diluted
Income from
continuing
operations 0.58 2.21 (73.8) 2.58 5.13 (49.7)
Loss from
discontinued
operations - (0.40) - (1.08) (0.65) 66.2
Net income 0.58 1.81 (68.0) 1.50 4.48 (66.5)
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(1) The comparative figures reflect the reclassification of discontinued
operations. Please refer to note 15 of the consolidated financial
statements for further details.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.FORWARD-LOOKING STATEMENTS Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to COGECO's future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding the Company's future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Company, they may prove to be incorrect. 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 COGECO currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Company's control. Therefore, future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Company is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter. This analysis should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 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 Inc.'s ("COGECO" or the "Company") objectives are to maximize shareholder value by increasing profitability and ensuring continued growth. The strategies employed to reach these objectives, supported by tight cost control and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous improvement of networks and equipment are the main strategies used. The radio activities focus on continuous improvement of programming in order to increase market share, and, thereby, profitability. COGECO uses growth of operating income before amortization(1), free cash flow(1) and revenue-generating units ("RGU")(2) growth in order to measure its performance against these objectives for the cable sector. Below are the Company's recent achievements in furthering the corporate objectives.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section
(2) Represent the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.Tight control over costs and business processes - For the fourth quarter of 2008, the Company's operating costs increased over last year by 12.2% compared to a revenue growth of 16.5%; - The design of internal controls over financial reporting as per National Instrument 52-109 is still ongoing. As discussed in the 2007 annual MD&A, the Company identified certain material weaknesses in the design of internal controls over financial reporting have been working to improve in design of internal controls on some significant processes during the quarter. The documentation and remediation of internal controls weaknesses are progressing normally.
Cable sector
Sustained corporate growth
Canadian operations
- Acquisitions:
- July 31, conclusion of the acquisition of all the shares of Toronto
Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro
Corporation (City of Toronto's energy company), in order to further
develop Cogeco Cable's business telecommunications activities by
entering the Greater Toronto Area market. The new subsidiary now
operates under the name of Cogeco Data Services ("CDS");
- June 30, conclusion of the acquisition of all assets of FibreWired
Burlington Hydro Communications, Burlington Hydro Electric's
telecommunications division (City of Burlington's energy company) to
expand Cogeco Business Solutions' commercial broadband service offering
in Burlington, Ontario.
- Digital Television services:
- October 9, launch of CBS College Sports on Digital Television services
in Ontario;
- October 2, launch of TSN2 and TSN HD on Digital and HD Television
services in Quebec;
- September 3, launch of TSN2, TSN2 HD and Super Channel HD on Digital
and HD Television services in Ontario.
- Telephony service:
- October 8, launch of Telephony service in Vineland, Stevensville and
Port Robinson, Ontario;
- October 3, launch of Telephony service in Bromptonville, Richmond and
Windsor, Quebec;
- September 10, launch of Telephony service in Tecumseh and LaSalle,
Ontario;
- During the fourth quarter, the Telephony service was launched in the
following cities:
- Gentilly, St-Leonard-d'Aston, St-Gregoire-de-Nicolet, Ste-Angele-de-
Laval, Becancour, Maskinonge, Yamachiche, Champlain, St-Boniface-de-
Shawinigan, Delisle, Wickham, Morin-Heights, Shawbridge,
St-Cyrille-de-Wendover, St-Germain-de-Grantham, and St-Prosper-de-
Dorchester in Quebec;
- Maitland, Prescott, Tillbury, Odessa, Bath and Millgrove in Ontario.
- HSI service:
- Expanded Wi-Fi services to non-customers in Ontario;
- Phased launch of Wi-Fi service for Cogeco Cable customers and non-
customers in Quebec.
European operations
- Digital Television services:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") continued its
Digital Television service deployment.
- HSI services:
- Increased uploading and downloading capacity for all services;
- Launch of free security services for all HSI customers.
Continuous improvement of networks and equipment
- During fiscal 2008, the Company has invested approximately $103.9 million
in its cable infrastructure including head-ends and upgrades and rebuilds.
Other
- RYTHME FM network and the 93,3 station in Quebec City continue to grow
advertising revenue.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 previous 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, its subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed. Under the order, RSM Richter Inc. was 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's Board of Director's decision to accept the offer made by Remstar Corporation Inc. ("Remstar") to acquire all shares of the TQS Group held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS. On May 22, 2008, the plan of arrangement proposed by Remstar was approved by the creditors of the TQS Group and subsequently approved by the Superior Court of Quebec on June 4, 2008. On June 26, 2008, the CRTC approved the proposed transfer of ownership and control of TQS to Remstar and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed. This new transaction allows a new ownership group to pursue the broadcasting activities of TQS. Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the 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 twelve-month periods ended August 31, 2007 have been reclassified as discontinued operations. The Company has no investment in the TQS Group as at August 31, 2008. The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
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($000) $
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(audited)
Accounts receivable 23,611
Prepaid expenses 442
Broadcasting rights 14,647
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Current assets 38,700
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Broadcasting rights 17,456
Fixed assets 21,653
Broadcasting licenses 3,000
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Non-current assets 42,109
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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
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Current liabilities 46,031
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Share in the partners' deficiency of a general partnership 518
Broadcasting rights payable 4,408
Pension plan liabilities 1,444
Non-controlling interest 11,219
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Long-term liabilities 17,589
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The results of the discontinued operations were as follows:
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Revenue - 18,071 38,499 102,972
Operating costs - 20,486 35,822 108,496
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Operating income (loss)
before amortization - (2,415) 2,677 (5,524)
Amortization - 1,295 1,364 4,583
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Operating income (loss) - (3,710) 1,313 (10,107)
Financial expense - 266 291 925
Impairment of assets - - 30,298 -
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Loss before income taxes
and the following items - (3,976) (29,276) (11,032)
Income taxes - 7,112 - 7,011
Non-controlling interest - (4,477) (11,219) (7,257)
Share in the earnings of
a general partnership - 102 - 97
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Loss from discontinued
Operations - (6,713) (18,057) (10,883)
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The cash flows of the discontinued operations were as follows:
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Cash flows from operating
activities (703) 7,585 (4,676) (469)
Cash flows from investing
activities - (1,671) (133) (2,926)
Cash flows from financing
activities - (6,754) 4,106 2,555
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Cash flows from discontinued
Operations (703) (840) (703) (840)
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--------------------------------------------------------------------------Continuing Operations RGU growth in the cable sector During the year ended August 31, 2008, the consolidated number of RGU increased by 231,209, or 9.3% to reach 2,716,874 RGU, surpassing Cogeco Cable's revised RGU growth projections of 225,000 RGU issued on April 10, 2008, which represents growth of approximately 9%, for the fiscal year ended August 31, 2008. Revenue and operating income from continuing operations before amortization growth For the fourth quarter of fiscal 2008, revenue increased by $41.6 million, or 16.5%, to reach $292.9 million while operating income before amortization grew by $20.5 million, or 20.4%, to reach $121.1 million. For fiscal 2008, revenue increased by $139.6 million, or 14.4%, to reach $1,108.9 million, while operating income before amortization grew by $77.7 million, or 20.9%, to reach $448.9 million. For fiscal 2008, the Company exceeded revised projections of revenue and operating income before amortization expected to reach $1,090 million and $445 million, respectively. Free cash flow In the fourth quarter of fiscal 2008, COGECO generated free cash flow of $21 million, compared to $9.1 million for the same period last year. For the year ended August 31, 2008, the Company generated free cash flow of $100.4 million compared to $29.4 million 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 $10 million and $8.2 million respectively when compared to the corresponding periods of the prior year. OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 292,873 251,300 16.5 1,108,900 969,335 14.4
Operating costs 171,738 150,705 14.0 660,006 598,100 10.4
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Operating income
from continuing
operations before
amortization 121,135 100,595 20.4 448,894 371,235 20.9
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Operating margin(1) 41.4% 40.0% - 40.5% 38.3% -
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(1) Operating margin does not have a standardized definition prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section.Revenue Fiscal 2008 fourth-quarter revenue improved, mainly by its cable segment, by $41.6 million, or 16.5%, to reach $292.9 million, and for fiscal 2008, by $139.6 million, or 14.4%, to reach $1,108.9 million. Cable revenue, driven by an increased number of RGU combined with rate increases and the acquisitions of Cogeco Data Services, FibreWired Burlington Hydro Communications and MaXess Networx® (the "recent acquisitions"), went up by $40.6 million, or 16.6%, and by $137.9 million, or 14.7%, respectively, in the fourth quarter and for the 2008 fiscal year. Operating costs For the fourth quarter and fiscal 2008, operating costs increased by $21 million or 14%, and $61.9 million or 10.4% compared to the prior year, to reach $171.7 million and $660 million, respectively. The increase in operating costs for the fourth quarter and 2008 year was mainly attributable to the cable sector in servicing additional RGU in Canada and Portugal, the impact of the recent acquisitions on Canadian operating costs as well as the impact of the appreciation of the Euro over the Canadian dollar on European operating costs. In addition, for fiscal 2008, operating costs in the cable sector were impacted by the timing of certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109. Operating income from continuing operations before amortization Operating income before amortization grew, essentially by its cable segment, by $20.5 million, or 20.4%, to reach $121.1 million in the fourth quarter of fiscal 2008 and by $77.7 million or 20.9%, to reach $448.9 million in fiscal 2008 compared to the corresponding periods of the prior year. The cable sector contributed to the growth by $18.7 million and $74.7 million during the fourth quarter and fiscal 2008, respectively. FIXED CHARGES
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Amortization 61,775 54,723 12.9 229,724 191,221 20.1
Financial expense 18,182 18,924 (3.9) 70,669 86,056 (17.9)
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--------------------------------------------------------------------------2008 fourth-quarter and fiscal year amortization amounted to $61.8 million and $229.7 million compared to $54.7 million and $191.1 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 $18.7 million for the fiscal year, 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. The impact of recent acquisitions in the cable sector has also contributed to the increase in the amortization expense for the 2008 fiscal year. Fourth-quarter and 2008 fiscal year financial expense decreased by $0.7 million and $15.4 million, respectively, compared to the same periods in fiscal 2007. During the year, the Company's cable subsidiary reduced its level of Indebtedness (defined as bank indebtedness, financial derivative instruments and long-term debt) from the net proceeds of subordinate voting shares issued during fiscal 2007 as well as free cash flow generated during those periods, net of the impact of increases in long-term debt in the second half of fiscal 2008 to finance recent acquisitions in the cable sector. During 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 fourth quarter income tax expense amounted to $9.8 million compared to a recovery of $7.5 million in fiscal 2007. The increase is mainly due to the increase in operating income before amortization surpassing that of the fixed charges in the cable sector. In addition, fiscal 2007 income tax expense was reduced by $14.3 million, in the cable sector, due to the recognition of benefits stemming from prior years' income tax losses and minimum income tax paid, and a reduction of Canadian federal enacted income tax rates to take effect in 2011. For fiscal 2008, income tax expense amounted to $15 million compared to $11.3 million in 2007. Included in the 2008 expense is a recovery of $24.1 million, mainly from the cable sector, related 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 income tax reductions also resulted from the amortization impact of the revaluation of tangible and intangible assets upon the completion of the Cabovisao purchase price allocation in the fourth quarter of fiscal 2007 in the cable sector. In addition, the 2007 expense in the cable sector was reduced by a non-cash adjustment of $16.2 million due to the recognition of benefits stemming from prior years' income tax losses and minimum income tax paid, and a reduction of Canadian federal enacted income tax rates to take effect in 2011. Excluding these adjustments, income taxes for the fourth quarter and fiscal 2008 would have amounted to $9.8 million and $39.1 million, respectively, compared to $6.8 million and $27.5 million for the corresponding periods of the prior year. The increase in income taxes is mainly due to the increase in operating income before amortization exceeding the increase in fixed charges. LOSS (GAIN) ON DILUTION RESULTING FROM SHARES ISSUED BY A SUBSIDIARY During fiscal 2008, the Company's subsidiary, Cogeco Cable Inc. issued 5,543 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 157,481 subordinate voting shares pursuant to its Employee Stock Option Plan for cash consideration of $221,000 and $3,429,000, respectively. In addition, during fiscal 2007, Cogeco Cable completed two public offerings totalling 8,000,000 subordinate voting shares for gross proceeds of $346 million. The offerings resulted in net proceeds to Cogeco Cable of approximately $331.1 million, which were used to reduce long-term indebtedness and working capital deficiency. Cogeco Cable also issued 7,344 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 348,131 subordinate voting shares pursuant to its Employee Stock Option Plan for cash consideration of $198,000 and $6,816,000, respectively. As a result of these share issuances in 2008 and 2007, COGECO's interest in Cogeco Cable decreased from 39.2% to 32.3% and a loss on dilution of $0.1 million was recorded in fiscal 2008 compared to gains on dilution of $27 million and $57.9 million, respectively, in the fourth quarter and fiscal 2007. NON-CONTROLLING INTEREST The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the fourth quarter and 2008 year, the non-controlling interest amounted to $21.6 million and $90.2 million, respectively, due to the cable sector's strong results. The non-controlling interest for the comparable periods of last year amounted to $24.2 million and $54.8 million, respectively. NET INCOME Fiscal 2008 fourth-quarter net income amounted to $9.7 million, or $0.58 per share, compared to $30.4 million, or $1.83 per share, for the same period last year. Net income decreased due to the following factors: a gain on dilution of $27 million resulting from shares issued by Cogeco Cable and a reduction of $4.8 million in income taxes, net of non-controlling interest, were recorded in fiscal 2007; partly offset by the loss of $6.7 million from discontinued operations in the fourth quarter of fiscal 2007 and the increase in operating income before amortization in the fourth quarter of fiscal 2008 in the cable sector. Fiscal 2008 net income amounted to $25.1 million, or $1.50 per share, compared to $74.7 million, or $4.50 per share for the same period last year. Net income decreased due to the following factors: a gain on dilution amounting to $57.9 million was recorded in fiscal 2007, a loss from discontinued operations of $18.1 million was recorded in fiscal 2008 compared to a loss from discontinued operations of $10.9 million in 2007, partially offset by positive income tax adjustments from the cable sector, net of non-controlling interest, of $7.9 million in fiscal 2008 compared to $5.3 million in fiscal 2007. Excluding the effect of the adjustments described above, net income for the fourth quarter of fiscal 2008 would have amounted to $9.7 million, or $0.58 per share, compared to $5.3 million, or $0.32 per share, for the same period in 2007, improvements of 82.2% and 81.3%, respectively. For fiscal 2008, net income excluding the adjustments described above would have amounted to $35.4 million, or $2.12 per share, compared to $22.4 million, or $1.35 per share, in 2007, an increase of 57.6% and 57%, respectively. The increase in net income, excluding all adjustments described above, is mainly due to the growth in operating income before amortization exceeding those of the fixed charges in the cable sector. Please consult the "Non-GAAP financial measures" section for further details.
CASH FLOW AND LIQUIDITY
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating activities
Cash flow from
operations(1) 99,969 78,153 362,788 283,565
Changes in non-cash
operating items 46,083 29,002 35,703 (73,003)
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146,052 107,155 398,491 210,562
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Investing activities(2) (289,619) (69,029) (487,106) (248,904)
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Financing activities(2) 99,055 6,559 59,240 32,702
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Effect of exchange rate
changes on cash and cash
equivalents denominated
in foreign currencies 6 (243) 1,271 1,243
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Net change in cash and
cash equivalents from
continuing operations (44,506) 44,442 (28,104) (4,397)
Net change in cash and
cash equivalents from
discontinued operations (703) (840) (703) (840)
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Cash and cash equivalents,
beginning of period 82,681 22,677 66,279 71,516
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Cash and cash equivalents,
end of period 37,472 66,279 37,472 66,279
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(1) Cash flow from operations does not have a standardized definition
prescribed by Canadian Generally Accepted Accounting Principles
("GAAP") and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
(2) Excludes assets acquired under capital leases.Fiscal 2008 fourth quarter cash flow from operations reached $100 million, 27.9% higher than the comparable period last year, primarily due to the increase in operating income before amortization in the cable sector. Changes in non-cash operating items generated higher cash inflows compared to the same period last year, mainly as a result of an increase in accounts payable and accrued liabilities and in income tax liabilities, net of increases in accounts receivable and prepaid expenses. Fiscal 2008 cash flow from operations reached $362.8 million, an increase of 27.9% 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 partly offset by the growth in current income taxes in the cable sector. Changes in non-cash operating items generated cash inflows of $35.7 million compared to cash outflows of $73 million for the same period last year, due to the cable sector, mainly as a result of increases in accounts payable and accrued liabilities and in income tax liabilities, partly offset by increases in accounts receivable and prepaid expenses. In fiscal 2007, the reduction in accounts payable and accrued liabilities was due to non-recurring payments made by the Portuguese cable subsidiary in accordance with the terms of the acquisition. Business acquisitions On March 31, 2008, the Company's subsidiary, Cogeco Cable, completed the acquisition of all the assets of MaXess Networx®, ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company) for a total consideration of $15.6 million. MaXess Networx® 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, HSI access, e-business applications, video conferencing and other advanced communications. On June 30, 2008, Cogeco Cable completed the acquisition of all the assets of FibreWired Burlington Hydro Communications, Burlington Hydro Electric's telecommunications division (City of Burlington's energy company) for a total consideration of $12.6 million. FibreWired Burlington Hydro Communications operates a broadband network equipped with next generation ATM and Ethernet technology, provides Burlington's organizations with the broadband capacity required for data networking, HSI access, hosting services, e-business applications, video conferencing and other advanced communications. On July 31, 2008, Cogeco Cable completed the acquisition of all of the shares of Toronto Hydro Telecom Inc, the telecommunications subsidiary of Toronto Hydro Corporation (City of Toronto's energy company) for a total consideration of $200 million. In addition, Cogeco Cable assumed a working capital deficiency and certain liabilities of approximately $4 million. Toronto Hydro Telecom Inc., which now operates under the name of Cogeco Data Services Inc., offers data communications and other telecommunications services such as Ethernet, private line, Voice-over-Internet protocol ("VoIP"), HSI access, dark fibre, data storage, data security and co-location to a wide range of business customers and organizations throughout the Greater Toronto Area ("GTA"). This acquisition allows Cogeco Cable to further the development of its business telecommunications activities. These acquisitions were accounted for using the purchase method. The results have been consolidated as of the acquisition dates.
The allocation of the purchase price of the acquisitions was as follows:
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Cogeco Data
Services Inc.(1) Other Total
($000) $ $ $
--------------------------------------------------------------------------
(audited) (audited) (audited)
Consideration paid
Purchase price of shares or
assets 200,000 28,113 228,113
Acquisition costs 1,988 852 2,840
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201,988 28,965 230,953
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Net assets acquired
Cash and cash equivalents 1,230 - 1,230
Accounts receivable 4,575 968 5,543
Prepaid expenses 535 612 1,147
Fixed assets 57,098 19,102 76,200
Deferred charges - 24 24
Customer relationships 33,983 4,220 38,203
Goodwill 112,228 4,662 116,890
Future income tax assets 2,335 - 2,335
Accounts payable and accrued
liabilities assumed (4,380) (361) (4,741)
Deferred and prepaid income and other
liabilities assumed (4,958) (262) (5,220)
Pension plan liabilities and accrued
employee benefits (356) - (356)
Future income tax liabilities (302) - (302)
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201,988 28,965 230,953
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(1) The purchase price allocation of Cogeco Data Services Inc. is
preliminary and will be finalized during the 2009 fiscal year.In the fourth quarter of fiscal 2008, investing activities, other than for business acquisitions, stood at $76 million mainly due to capital expenditures of $68.9 million and from an increase of $7 million in deferred charges in the cable sector. The capital expenditures stem essentially from the cable sector and increased compared to the same period last year due to the following factors: - An increase in customer premise equipment capital spending resulting from higher RGU growth fuelled in part by increased interest for HD technology for the Canadian operations combined with the deployment of Digital Television in Portugal, partly offset by a decline in RGU in Portugal; - An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and the head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services; - An increase in support capital due to the acquisition of vehicles and to leasehold improvements in the Company's head office. The appreciation of the Euro over the Canadian dollar also had an impact on the total capital expenditures in the fourth quarter of 2008. In the 2008 year, investing activities, other than for business acquisitions, stood at $257.8 million mainly due to capital expenditures of $233.9 million and an increase of $27.7 million in deferred charges in the cable sector. The capital expenditures stem mainly from the cable sector and increased compared to the same period last year due to the following factors: - An increase in customer premise equipment capital spending in Portugal to support RGU growth and the continued deployment of the Digital Television service in the second half of fiscal 2008; - An increase in support capital due to the improvement in information systems to sustain the business operations, to the acquisition of vehicles, and to leasehold improvements in the Company's head office; - An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services. Deferred charges and others are mainly attributable to reconnect costs in the cable sector. Fourth quarter and fiscal 2008 increases in deferred charges amounted to $7 million and $27.5 million compared to $10.8 million and $29.6 million for the same periods the year before. Lower RGU growth in the cable sector explained the lower increases recorded in 2008. In the fourth quarter and for the 2008 year, the Company generated free cash flow amounting to $21 million and $100.4 million, respectively, compared to $9.1 million and $29.4 million for the same periods of the preceding year. The free cash flow improvements over the same periods last year are mainly due to the cable sector and attributable to an increase in operating income before amortization and a reduction in financial expense net of increases in capital expenditures. The aggregate amount of total capital expenditures and deferred charges increased by $10 million in the 2008 fourth-quarter and by $8.2 million for the 2008 year compared to the corresponding periods of last year due to the factors explained above. In the fourth quarter of 2008, Indebtedness affecting cash increased by $102.6 million. This increase is primarily due to the increase, in the cable sector, in long-term debt to finance the acquisitions completed in the quarter, for an aggregate amount of $214.8 million and the increase in bank indebtedness, partly offset by the cash inflows of $46.1 million from the changes in non-cash operating items, the free cash flow of $21 million, and the use of $45.2 million of cash and cash equivalents. During the fourth quarter of fiscal 2007, the level of Indebtedness affecting cash decreased by $138.1 million and was essentially due to the repayment of Term Facility in the amount of $146.5 million using the public offering net proceeds of $146.9 million in the cable sector. In addition, dividends of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, were paid by the Company during the fourth quarters of fiscal 2008 and fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $3.3 million during the fourth quarter of fiscal 2008, for consolidated dividend payments of $4.5 million. During fiscal 2008, the level of Indebtedness affecting cash increased by $72.9 million mainly due to the cable sector and attributable to the recent acquisitions, for an aggregate amount of $231 million offset by the free cash flow of $100.4 million, a reduction of $28.8 million in cash and cash equivalents and from and increase of $35.7 million in non-cash operating items. In addition, on March 5, 2008, Cogeco Cable issued a $100 million Senior Unsecured Debenture by way of a private placement, the proceeds of which were primarily used to finance the recent acquisitions. The debenture bears interest at a fixed rate of 5.936%, is redeemable at the 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 and will mature on March 5, 2018. For fiscal 2007, the level of Indebtedness decreased by $294.8 million, mainly due to the completion by Cogeco Cable, of two public offerings totalling 8,000,000 subordinate voting shares for net proceeds of approximately $331.1 million that were used to reimburse the Second Secured Debentures Series A and a portion of the Term Facility, the free cash flow of $29.4 million and a reduction of $4.4 million in cash and cash equivalents, partly offset by a decline of $73 million in non-cash operating items. In addition, quarterly dividends of $0.07 per share were paid to the holders of subordinate and multiple voting shares totalling $4.7 million during 2008 compared to quarterly dividends of $0.0625 per share in the first quarter and $0.07 per share in the last three quarters totalling $4.5 million in fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $13.1 million during fiscal 2008, bringing the consolidated dividend payments to $17.8 million. As at August 31, 2008, the Company had a working capital deficiency of $611.8 million compared to $127.3 million as at August 31, 2007. The increased deficiency is mainly attributable to the cable sector and is due to the following factors: the expiry of Cogeco Cable's US$150 million Senior Secured Notes, Series A and the related derivative financial instruments of $79.8 million on October 31, 2008, the increase in the current portion of long-term debt relating to the $150 million Senior Secured Debentures, Series 1, due on June 4, 2009 and to the EUR 15.7 million ($24.4 million) repayment of the third tranche of the term facility due on July 28, 2009 for an aggregate amount of $413.1 million due within the next fiscal year. As part of the usual conduct of its cable business, 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, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling Cogeco Cable to use cash and cash equivalents to reduce Indebtedness. During fiscal 2008, the cable subsidiary repaid Euro 10.5 million, representing 10% of the amount drawn, on the third tranche of its $900 million Term Facility, which was reduced to $885 million accordingly. As at August 31, 2008, Cogeco Cable had used $467.6 million of its $885 million Term Facility for a remaining availability of $417.4 million and the Company had drawn $19 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, Future income tax assets, Future income tax liabilities, Accounts receivable, Goodwill, Customer relationships, Accumulated other comprehensive income (loss), Non-controlling interest, Derivative financial instruments and Indebtedness. The $138.3 million increase in fixed assets is mainly related to the cable sector and attributable to increased capital expenditures to sustain RGU growth, the fixed assets acquired through recent acquisitions and to the appreciation of the Euro over the Canadian dollar. The $28.8 million decrease in cash and cash equivalents is mainly due to the reduction of Indebtedness in the cable sector. The $38.6 million increase in accounts payable and accrued liabilities is related to the timing of payments made to suppliers and the impact of the recent acquisitions in the cable sector. The $19.6 million increase in income tax liabilities and the $2.1 million net reduction in future income tax assets are mainly due to the utilization of most of Cogeco Cable's Canadian tax loss carry forwards before fiscal 2008, partly offset by the impact of the recent acquisitions. The $11.3 million future income tax liabilities reduction, also attributable to the cable sector, is mainly due to the corporate income tax rate reductions announced by the Canadian federal government and considered substantively enacted on December 14, 2007. The $12.2 million accounts receivable increase is essentially due to the cable sector and attributable to the revenue growth and its related level of receivables, the recent acquisitions and the appreciation of the Euro over the Canadian dollar. The increases of $145.2 million in Goodwill and $32.6 million in Customer relationships are due to the recent acquisitions as well as the appreciation of the Euro over the Canadian dollar in the cable sector. The $6 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 $95.4 million increase in non-controlling interest is mainly due to the improved results in the cable sector. Indebtedness has increased by $110.4 million as a result of the unfavourable impact of the appreciation of the Euro over the Canadian dollar in addition to the accounting changes and factors previously discussed in the "Cash Flow and Liquidity" section. Please consult "Accounting policies and estimates" section for further details. A description of COGECO's share data as at September 30, 2008 is presented in the table below:
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Number of shares Amount
/options ($000)
--------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,897,586 120,037
Options to purchase Subordinate voting shares
Outstanding options 123,758
Exercisable options 123,758
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--------------------------------------------------------------------------In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. COGECO's obligations, discussed in the 2007 annual MD&A, have not materially changed since August 31, 2007, except as follows: The Term Facility and the operating line of credit of the Parent company are secured by a first fixed and floating charge on certain assets of the Company and certain of its subsidiaries except for permitted encumbrances, including funded obligations subject to a maximum amount. The provisions under these facilities provide for restrictions on the operations and activities of the Company. Generally, the most significant restrictions are related to permitted investments, dividends on multiple and subordinate voting shares and reimbursement of long-term debt as well as incurrence and maintenance of certain financial ratios primarily linked to financial expense, total indebtedness and shareholders' equity. On December 14, 2007, the Company concluded an amended and restated credit agreement with a group of Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The Term Facility of $50 million, including a swingline limit of $5 million, is renewable on an annual basis, subject to lenders' approval, and if not renewed it matures three years after its issuance or the last renewal, as the case may be. The Term Facility is secured by all assets of COGECO Inc. and its subsidiaries, excluding the capital stock of Cogeco Cable Inc. and guaranteed by its subsidiaries Cogeco Radio-Television Inc. and Cogeco Diffusion Inc. ("CDI"). Under the terms and conditions of the amended and restated credit agreement, the Company must comply with certain restrictive covenants, including the requirement to maintain certain financial ratios. The Term Facility bears interest rates based, at the Company's option, on bankers' acceptance, Libor, Euribor, bank prime rate or U.S. base rate plus fees, and commitment fees are payable on the unused portion. Prior to December 14, 2007, the Company benefited from a Term Facility of $40 million, provided by a syndicate of financial institutions. The Term Facility could be extended for an additional year at each anniversary date of the facility, subject to the lenders' approval. On October 1, 2008, Cogeco Cable completed, pursuant to a private placement, the issue of US$190 million Senior Secured Notes Series A maturing October 1, 2015, and $55 million Senior Secured Notes Series B maturing October 1, 2018. The Senior Secured Notes Series B bear interest at the coupon rate of 7.60% per annum, payable semi-annually. In addition, the cable subsidiary entered into cross-currency swap agreements to fix the liability for interest and principal payments on US$190 million of its Senior Secured Notes Series A, which bear interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate of the Senior Secured Notes Series A is 7.24% and the exchange rate applicable to the principal portion of the US dollar-denominated debt has been fixed at $1.0625. DIVIDEND DECLARATION At its October 29, 2008 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.08 per share for subordinate and multiple voting shares, payable on November 26, 2008, to shareholders of record on November 12, 2008. Continued improvement of the financial results in the cable sector explains the dividend increase of 14% to $0.08 per share from $0.07 per share. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Company based upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no assurance that dividends will be declared, and if declared, their amount and timing may vary. 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 $1.5910. Amounts due under the US$150 million Senior Secured Notes, Series A increased by $0.9 million at August 31, 2008 compared to August 31, 2007 due to the Canadian dollar's appreciation. The fair value of cross-currency swap agreements decreased by a net amount of $3.7 million, of which $0.9 million offset the foreign exchange gain on the US$ debt. The difference of $2.8 million was recorded as an increase of other comprehensive income, net of income taxes of $0.9 million and non-controlling interest of $1.3 million. Cogeco Cable has also entered into cross-currency swap agreements to set the liability for interest and principal on its new US$190 million financing closed on October 1, 2008 as previously discussed. 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 $18.8 million in 2008, which is presented net of non-controlling interest of $12.7 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts as at August 31, 2008 was $1.5580 per Euro compared to $1.4390 per Euro as at August 31, 2007. The average exchange rates prevailing during the fourth quarter and 2008 fiscal year used to convert the operating results of the European operations were $1.5837 and $1.5098 per Euro, respectively, compared to $1.4374 and $1.4803 per Euro, respectively, for the same periods last year. CABLE SECTOR CUSTOMER STATISTICS
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Net additions (losses) % of
Penetration(1)
Quarters ended Years ended
August 31, August 31, August 31,
2008 2008 2007 2008 2007 2008 2007
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RGU 2,716,874 41,100 49,576 231,209 300,688 - -
Basic Cable
service
customers 1,153,229 (5,932) 2,129 10,069 40,289 - -
HSI service
customers(2) 632,768 3,790 15,299 56,909 96,501 56.7 52.8
Digital
Television
service
customers 466,198 26,132 8,747 86,319 52,515 40.9 33.8
Telephony
service
customers(3) 464,679 17,110 23,401 77,912 111,383 45.7 40.4
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing only to HSI services totalled 83,609 as at August
31, 2008 compared to 75,955 at August 31, 2007.
(3) Customers subscribing only to Telephony services totalled 11,512 as at
August 31, 2008 compared to 8,901 at August 31, 2007In Canada, fourth-quarter 2008 RGU net additions were higher than for the same period last year but the slower growth rate reflects an early sign of maturation in some services. The net loss of customers for Basic Cable in the Canadian market stood at 1,476 customers compared to 2,627 customers for the same period last year. Fourth-quarter Basic Cable service customer losses reflect traditional seasonality and are due to the end of the school year for college and university students. In addition, 2007 fourth-quarter net losses were unusually high due to an attractive promotional offer that ended in the third quarter of fiscal 2007 which resulted in a higher than normal number of customer disconnections for the fourth quarter of fiscal 2007. The number of net additions to HSI service stood at 8,799 customers compared to 12,363 customers for the same period last year. During the fourth quarter of 2008, HSI customer net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. Telephony customers grew in Canada, with net additions of 19,436 to reach 219,601 compared to a growth of 21,173 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 84% compared to 78% last year. Canadian net additions of Digital Television service stood at 16,150 customers compared to 8,747 customers for the same period last year due to targeted marketing initiatives in 2008 to improve the penetration rate and the continuing strong interest for HD technology. In Portugal, 2008 fourth-quarter and fiscal year were marked by an unfavourable economic climate in the Iberian Peninsula, aggressive advertising campaigns from competitors and from the emergence of multiple triple-play providers in the Portuguese market. Cabovisao chose not to match the competition's intensive advertising programs due to the difficult economic environment. These factors were the main contributors to net customer losses in the Basic Cable, HSI and Telephony services compared to the same period last year. The Digital Television service was launched in the third quarter of 2008, with net additions of 9,982 customers in the fourth quarter, for a total of 24,452 net additions since the launch, surpassing management expectations. Fiscal 2008 fourth-quarter Basic Cable service decreased by 4,456 customers compared to a growth of 4,756 in 2007, HSI service decreased by 5,009 customers compared to an increase of 2,936 in 2007, and Telephony service decreased by 2,326 customers compared to a growth of 2,228 for the same period of the preceding year. Management considers the current adverse market conditions in Portugal to be transitory. However, management anticipates that the difficult economic and competitive environment will continue throughout the next fiscal year and is currently aligning its marketing strategy to respond to the current market conditions prevailing in Portugal.
OPERATING RESULTS
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 284,908 244,314 16.6 1,076,787 938,880 14.7
Operating
costs 163,792 141,888 15.4 622,649 559,559 11.3
Management
fees -
COGECO Inc. - - - 8,714 8,568 1.7
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Operating
income from
continuing
operations
before
amorti-
zation 121,116 102,426 18.2 445,424 370,753 20.1
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Operating
margin 42.5% 41.9% 41.4% 39.5%
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--------------------------------------------------------------------------Revenue Fiscal 2008 fourth-quarter consolidated revenue improved by $40.6 million, or 16.6%, to reach $284.9 million, and for the year, by $137.9 million or 14.7% to reach $1,076.8 million. Driven by an increased number of RGU combined with rate increases and the recent acquisitions, 2008 fourth-quarter Canadian operations revenue went up by $32.3 million, or 17.1%, and for the year by $119 million, or 16.7%. Fiscal 2008 fourth-quarter European operations revenue increased by $8.3 million, or 14.8%, to reach $64.1 million and fiscal 2008 by $18.9 million, or 8.4%, to reach $243.7 million compared to the same periods last year. European operations implemented rate increases, and generated RGU growth for the year despite a decline in RGU in the fourth quarter. Furthermore the strength of the Euro against the Canadian dollar compared with the prior year had a positive impact on revenue when translated to Canadian dollars. Operating costs For the fourth quarter and the 2008 year, operating costs, excluding management fees payable to COGECO Inc., increased by $21.9 million or 15.4%, and $63.1 million or 11.3% compared to last year, to reach $163.8 million and $622.7 million, respectively. The increase in operating costs for the fourth quarter and fiscal 2008 was mainly attributable to servicing additional RGU in Canada and Portugal as well as to the impact of recent acquisitions. In addition, for the fiscal year, operating costs were impacted by the additional investment into certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109. Operating income from continuing operations before amortization Fourth-quarter and 2008 fiscal year operating income before amortization increased by $18.7 million, or 18.2%, to reach $121.1 million and by $74.7 million, or 20.1%, to reach $445.4 million, respectively, as a result of various rate increases, the recent acquisitions, and RGU growth generating additional revenue which outpaced operating cost increases as well as the impact of the recent acquisitions. Cogeco Cable's 2008 fourth-quarter operating margin increased to 42.5% from 41.9% for the fourth quarter of fiscal 2007. The operating margin in Canada increased slightly for the fourth-quarter of 2008 to 43.6% compared to 43.3% and in Europe improved to 38.8% from 37.3% in the same period of the prior year. For fiscal 2008, the operating margin improved to 41.4% from 39.5% due to the reasons described above with the Canadian operating margin improving to 42.8% from 41% and the European operating margin to 36.3% from 34.6% when compared to the same period the year before. FISCAL 2009 FINANCIAL GUIDELINES Consolidated The Company has revised its preliminary consolidated projections to take into consideration its revised projections in the cable sector described below. As a result, the Company now expects revenue to increase by $45 million to reach $1,243 million, operating income before amortization should increase by $13 million to reach $513 million and net income and free cash flow should stand at $35 million and $95 million, respectively. Cable sector Cogeco Cable has revised its preliminary consolidated projections to take into consideration the acquisition of CDS on July 31, 2008 and the slowdown in the global economy and the current competitive dynamics in the Portuguese market. For its Canadian operations, management has revised its preliminary projections to reflect the acquisition of CDS and the lower than initially projected RGU growth. For its European operations, management has revised downwards its preliminary projections to reflect a decline in RGU marked by the global economic slowdown that is occurring and should continue in fiscal 2009, by the current adverse market conditions and by the emergence of multiple triple-play providers in the Portuguese market. Taking into account these adjustments, projected revenue should increase by $45 million to reach $1,210 million, operating income before amortization should increase to $508 million from $495 million and operating margin should reduce to approximately 42%. Management is also raising its guidance for capital expenditures and deferred charges from $275 million to $300 million essentially due to the acquisition of CDS. Amortization and financial expenses are expected to increase, respectively, from $250 million to $275 million and from $65 million to $70 million mainly due to the acquisition of CDS. As a result of the revised projections, free cash flow is now expected to reach $90 million, a decrease of $15 million from the preliminary projections. Consolidated
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($ million, except customer data Preliminary
and operating margin) Projections Projections
October 29, 2008 July 9, 2008
Fiscal 2009 Fiscal 2009
$ $
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Consolidated Financial Guidelines
Revenue 1,243 1,198
Operating income before amortization 513 500
Net income 35 42
Free cash flow 95 110
Cable sector-
Financial Guidelines
Revenue 1,210 1,165
Operating income before amortization 508 495
Operating margin 42% 42.5%
Financial expense 70 65
Amortization 275 250
Net income 107 125
Capital expenditures and deferred charges 300 275
Free cash flow 90 105
Customer Addition Guidelines
RGU 100,000 175,000
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--------------------------------------------------------------------------UNCERTAINTIES AND MAIN RISK FACTORS This section outlines general and specific risks faced by COGECO and its subsidiaries which could significantly affect the financial condition, operating results or business of the Company. It does not purport to cover all contingencies, or to describe all possible factors that might have an influence on the Company or its activities at any point in time. Furthermore, the risks and uncertainties outlined in this section may or may not materialize in the end, may evolve differently than expected or may have different consequences than those that are being presently anticipated. COGECO applies an on-going risk management process that includes a quarterly assessment of risks for the Company and its subsidiaries, under the oversight of the Audit Committee. As part of this process, the Company endeavours to identify risks that are liable to have a major impact on the Company's financial situation, revenue or activities, and to mitigate such risks proactively as may be reasonable and appropriate in the circumstances. This section reflects management's current views on uncertainties and main risk factors. Risks pertaining to markets and competition Cable sector Electronic communications markets continue to evolve rapidly and are increasingly competitive in both Canada and Portugal. Competitors offer video distribution, broadband Internet access, fixed telephone, mobile telephone and data services through various means of telecommunications facilities including terrestrial wireline and wireless networks as well as satellite. Rivalry extends over several elements, including the features of individual services, the composition of service bundles, prices and perceived value, promotional or introductory offers, duration of the commitment by the customer, terminal devices and customer service. Service bundles offered by competitors include double, triple or even quadruple-play offers combining video, broadband, fixed and/or mobile telecommunications to residential and commercial customers. Cogeco Cable provides "double-play" and "triple-play" service bundles both in Canada and in Portugal, with various combinations of Telephony, HSI and television distribution services being offered at attractive bundle prices, but does not offer "quadruple-play" service bundles that include mobile communications. Cogeco Cable continues to focus on its existing lines of service with a view to capturing the remaining growth opportunities for HSI, Digital Television and Telephony services in its footprint, making the most efficient use of its own hybrid fibre-coaxial ("HFC") plant. As markets evolve and mobility becomes a more cost-effective substitute to wireline communications, Cogeco Cable may need to add mobility components to its service bundles, through suitable mobile virtual network ("MVNO") arrangements with existing or future mobile operators, or otherwise through new wireless alternatives. The capital and operating expenditures eventually required to offer quadruple-play service bundles may not be offset by the incremental revenue that such new bundles would generate, thus resulting in downward pressure on operating margins. In Canada, Cogeco Cable faces competition in its service areas mainly from a few large integrated telecommunications service providers. The largest, BCE Inc., offers through its various subsidiaries, income trusts and partnerships a full range of competitive voice, data and video services to residential, as well as to business customers in the Provinces of Ontario and Quebec through a combination of fixed wireline (Bell Canada, Telebec), mobile wireless (Bell Mobility) and satellite (Bell TV) platforms. BCE Inc. is in the process of being acquired by a group of institutional investors led by the Ontario Teachers' Pension Plan, with closing of the transaction expected to take place by the end of December 2008. It is not known at this time to what extent the changes in the ownership and management of this major competitor will affect market dynamics in the two Provinces, notably with respect to the anticipated rollout of IPTV services over its fixed wireline platform. Telus Communications Company competes with all of Cogeco Cable's services in the Lower St. Lawrence area of the Province of Quebec through the use of its wireline network, and throughout Cogeco Cable's Canadian footprint through the use of its mobile telecommunications network. However, Cogeco Cable's Telephony service is provided with the assistance of certain Telus carrier services through a multi-year contractual arrangement. Star Choice Television Network Incorporated, an indirect subsidiary of Shaw Communications Inc., competes for video and audio distribution services throughout Cogeco Cable's Canadian footprint. Rogers Wireless Communications Inc., a subsidiary of Rogers Communications Inc., operates a mobile telecommunications network in Ontario and Quebec and is the owner of the Inukshuk broadband wireless network in partnership with Bell Mobility. Rogers Cablesystems Inc., the cable subsidiary of Rogers Communications Inc., is now licensed to extend its services in the Burlington, Oakville and Milton areas, which are part of Cogeco Cable's footprint in Ontario, although there has not been any significant cable overwiring to date. Videotron Ltd., an indirect subsidiary of Quebecor Inc., offers competitive mobile telecommunications services in Cogeco Cable's Quebec footprint. Cogeco Cable also competes with other telecommunications service providers, including Vonage, Primus and Rogers Home Phone (formerly known as Sprint), with alternative service providers that use resale or third-party access arrangements in effect, and with smaller facilities-based competitors such as Maskatel in certain local markets within its network footprint. It is anticipated that, as a result of the advanced wireless spectrum ("AWS") auction completed earlier this year, there will be several new entrants entering the wireless telecommunications markets in Canada on a national, regional or local basis with advanced wireless voice, internet, data and video services, and that incumbent wireless carriers will use the new spectrum to provide such advanced wireless services in competition with the new entrants, thus resulting in increased competition for the fixed Telephony, HSI, data and television services of Cogeco Cable. In Portugal, Cogeco Cable's indirect subsidiary Cabovisao faces tough competition for all its lines of business mainly from incumbent telecommunications carrier Portugal Telecom, SGPS, S.A. ("PT"), Zon Multimedia, SGPS, S.A. ("Zon"), as well as from Sonaecom, SGPS, S.A. ("Sonaecom"), a subsidiary of diversified Portuguese conglomerate Sonae, SGPS, S.A. Zon owns TV Cabo, the largest cable telecommunications operator in Portugal, and also offers a direct-to-home satellite distribution service to the Portuguese market. Zon's cable plant overlaps the major part of Cabovisao's footprint in Portugal. Zon will be adding mobile voice and data services as well as VOD and HD to its service offering starting in the fall of 2008. PT's national telephone network, PT Communicacoes, which offers a full range of fixed wireline and mobile wireless telecommunications services throughout Portugal, is aggressively pursuing the rollout of Meo, its competitive IPTV service over its telephone plant, and is offering its own direct-to-home satellite service launched earlier this year. In addition, PT has been selected by Portuguese regulatory authorities to offer a new digital terrestrial television service throughout Portugal which may have an adverse effect on subscriptions to basic and pay services of cable operators, likely beginning in 2009. Sonaecom owns and operates the Clix (Residential Fixed Telephony, HSI and IPTV), Novis (Business Telephony Solutions) and Optimus (Wireless Telephony and Wireless HSI) services, which provide voice, data, HSI, video and mobile services to the residential and business markets. Cabovisao, Zon, PT and Sonaecom all have competitive triple-play offers available in the Portuguese market. Cabovisao is pursuing the rollout of a Digital Television service in order to improve signal security and quality, provide an expanded choice of programming, make better use of the distribution capacity of its network and better compete with the digital video service offerings of its competitors, but this new digital service is less penetrated than that of its main competitors. The competitive video service offerings are all digital. The level of piracy of video signals and the actual penetration of illicit reception of video distribution services in households within Cogeco Cable's service areas may also have a significant effect on Cogeco Cable's business and the competitiveness of its service offerings. Other sector CDI conducts all its commercial radio activities in the francophone market of the Province of Quebec. CDI's radio stations compete for audience and advertising revenue with networks and stations controlled respectively by broadcasting groups Astral Media Inc., Corus Entertainment Inc. and Groupe Radio Nord Inc., and with other local radio stations. CDI also competes for audience with the networks and radio stations of the SRC and with satellite radio. The method used for audience measurements in the Montreal radio market will change with the use of portable people meters ("PPM"), starting with the fall 2008 survey; this change may cause a significant variation in the measured audience share of stations broadcasting in the Montreal market. The CRTC issued on October 3, 2008 a call for applications for a new commercial FM station in the Quebec City market; this may result in the licensing of yet another commercial radio station in that market, with a possible competitive impact starting in fiscal year 2010. Technological risks Cable sector The evolution of telecommunications technologies unfolds at breathtaking speed, fuelled by a highly competitive global market for digital content, consumer electronics and broadband products and services. Cogeco Cable continues to monitor the development of technologies used for the transmission, distribution, reception and storage of data and their deployment by various existing or potential competitors in the broadband telecommunications markets. There are now several terrestrial and satellite transmission technologies available to deliver a range of electronic communications services to homes and to commercial establishments with varying degrees of flexibility and efficiencies, and thus compete with cable telecommunications. On the other hand, cable telecommunications also continue to benefit from rapid improvements, particularly in the areas of modulation, digital compression, fractioning of optoelectronic links, multiplexing, HD distribution and switched digital video. Cogeco Cable's management remains of the view that broadband wireline distribution over fibre and coaxial cable will continue to be an efficient, reliable, economical and competitive platform for the distribution of a full range of electronic communications products and services for the foreseeable future. The competitiveness of the cable broadband telecommunications platform will however continue to require additional capital investments on a timely basis in an increasingly competitive and uncertain market environment. The growth in penetration of broadband connections of all types, the rapid increase in transmission speeds offered by competitors in the market and the deployment of the more powerful and efficient MPEG-4 video compression standard and of other similar compression technologies promote the increased distribution and consumption of video content directly over the Internet. This may eventually lead to fragmentation of the retail market for existing Analogue and Digital Television distribution services provided by Cogeco Cable and gradual disintermediation through direct transactions between video content suppliers and Cogeco Cable's customers. In this context, revenue and margins derived from Cogeco Cable's HSI access services may not entirely compensate for the loss of revenue or margin derived from Cogeco Cable's television services in the future. Alternative voice and data communications services are proliferating over the Internet, resulting in the risk that fragmentation and disintermediation may also occur in the future with respect to Cogeco Cable's Telephony service. Electronic communications increasingly rely on advanced security technology, devices, control systems and software to ensure conditional access, appropriate billing and service integrity. Security and business systems technology is provided worldwide by a small pool of global suppliers on a proprietary basis. As other providers of electronic communications, Cogeco Cable depends on the effectiveness of such technology for many of its services and the ability of technological solutions providers to offer cost-effective and timely solutions to deal with security breaches or new developments required in the marketplace. Regulatory risks Cable sector In Canada, electronic communications facilities and services are subject to regulatory requirements depending mainly on the type of facilities involved, the incumbent status of service providers and their relative market power, the technology used and whether the activities are categorized as telecommunications or broadcasting. Canadian cable telecommunications facilities and services are subject to various requirements mainly under federal legislation governing broadcasting, radiocommunication, telecommunications, copyright and privacy, and under provincial legislation governing consumer protection and access to certain municipal property and municipally-owned support structures. Licenses and broadcasting certificates are still required for the operation of larger (Class 1 and 2) cable systems, while smaller (Class 3) cable systems are now mostly license-exempt. Various license and license exemption conditions continue to apply in Canada. Canadian cable telecommunications operators are also subject to Canadian ownership and control requirements. Changes in the regulatory framework or licenses, which are subject to periodic renewal, may affect Cogeco Cable's existing business activities or future prospects. Following a comprehensive review of the regulatory framework for broadcasting distribution and for pay and specialty television in Canada conducted earlier this year, the CRTC is expected to publish its conclusions on October 31, 2008. The issues to be canvassed in the new policy statement include the possibility of imposing new fees for the carriage of the over-the-air television signals of Canadian conventional television stations on satellite and cable broadcasting distribution undertakings. The CRTC has forborne from regulating the residential and business local access telephone services of the incumbent telephone companies in most of the geographic markets served by Cogeco Cable in Ontario and Quebec. As a result, Bell Canada and Telus are now free to price and bundle their residential and business local access telephone services and to extend general or specific promotional offers without prior regulatory approval in the forborne local exchange areas within Cogeco Cable's footprint. The telecommunications markets in Portugal have been fully open to competition since January 1, 2000, and there are no foreign ownership restrictions applying to electronic communications service providers or the ownership of broadband telecommunications facilities in Portugal. Competitors are essentially free to bundle and price services based on competitive market considerations. However, situations have arisen where either PT or Zon have been able to use their market power to respectively constrain access to certain support structures and to a premium content service, Sport TV HD. These situations have been addressed through complaints to the Autoridade da Concorrencia ("AdC") under applicable competition law, but the proceedings are still pending and the final outcomes are not known at this time. The European Commission launched, on June 29, 2006, a broad policy review initiative on electronic communications with a view to boosting competition among telecommunications operators of European Union ("EU") member states and building a single market for services that use radio spectrum. New EU telecommunications policy initiatives may eventually have an impact in the medium- to long-term on Cabovisao's electronic communications activities and the future state of competition for the provision of electronic communications in Portugal. Risks pertaining to operating costs Cable sector Cogeco Cable applies itself to keeping its cost of goods sold in check so as to secure continued operating margin growth. The two largest drivers of cost of goods sold are network fees paid to audio and video service suppliers as well as data transport and connectivity charges, mostly for Telephony and HSI traffic. The market for audio and video programming services in Canada is already characterized by high levels of supplier integration and structural rigidities imposed by the CRTC's regulatory framework for broadcasting distribution, which is presently under review. While Cogeco Cable has been able to conclude satisfactory distribution agreements with Canadian and foreign programming service suppliers to date, there is no assurance that network fees will not increase by larger increments in future years. There is also no assurance that programming service suppliers will not change other material terms of distribution agreements or extend preferences for the distribution of their content to competing distributors, or push for the distribution of their content over the Internet in the future. In Portugal, the offering of new Digital audio and television services by Cabovisao requires the conclusion of suitable arrangements with program suppliers. The negotiation of these arrangements is under way, but is not concluded as yet. Since the markets for data transport and connectivity remain very competitive in Canada and Portugal, Cogeco Cable and Cabovisao have negotiated cost effective arrangements in the past for voice and data traffic. However, as overall traffic increases and capacity on existing broadband telecommunications facilities becomes more widely used, Cogeco Cable may not be able to secure further cost efficiencies in the future. Furthermore, the Part II Licence Fees payable to the CRTC are currently under litigation. On December 14, 2006, the Federal Court of Canada ruled that the Part II Licence Fees payable to the CRTC are an unlawful tax. Both the Plaintiffs (the members of the Canadian Association of Broadcasters, Videotron Ltee and CF Cable TV Inc.) and the Defendant (the Crown) have appealed this decision to the Federal Court of Appeal. The Defendant was seeking to reverse the Court decision that Part II Licence Fees are unlawful and the Plaintiffs were seeking a Court order requiring a refund of past fees paid. The Appeal hearing was held on December 4 and 5, 2007 in Ottawa and a decision was rendered on April 28, 2008 in favour of the Crown, to the effect that the fees are valid regulatory charges. On June 26 and 27, 2008, the Plaintiffs filed applications for leave to appeal to the Supreme Court of Canada. The Respondent filed its response on September 29, 2008 and the matter is currently pending. COGECO has accrued the full amount with respect to these fees for fiscal years 2007 and 2008. Risks pertaining to information systems Flexible, reliable and cost-effective information systems are an essential requirement for the handling of sophisticated service options, customer account management, internal controls, provisioning, billing and the rollout of new services. Cogeco Cable uses different customer relations management tools and databases for its operation respectively in Ontario, Quebec and Portugal. The agreement with Amdocs, the main third-party supplier of customer information systems in Ontario, and the agreement with Concurrent, the third-party supplier of the VOD information system in Canada, were both renewed in 2008. There is however no assurance that these or other information systems will be able to meet adequately future business or competitive requirements. Risks pertaining to disasters and other contingencies Cogeco Cable has a disaster recovery plan for dealing with the occurrence of natural disasters, quarantine, power failures, terrorist acts, intrusions, computer hacking or data corruption, but the operations and facilities of Cabovisao are not yet integrated into this plan. Cabovisao's insurance coverage has been integrated into Cogeco Cable's insurance coverage. The emergency plans and procedures that are in place cannot provide the assurance that the effect of any disaster can and will be mitigated as planned. Cogeco Cable is not insured against the loss of data, hacking or malicious interference with its electronic communications and systems, or against losses resulting from natural disasters. In Canada, it relies on data protection and recovery systems that it has put in place with third-party service providers. In Portugal, similar arrangements with third parties have not been implemented as yet. Financial risks Cable telecommunications is a very capital-intensive business that requires substantial and recurring investment in property, plant, equipment and customer acquisition. Cogeco Cable depends on capital markets for the availability of additional capital that it must deploy to support its internal and external growth. There is no assurance that future capital requirements will be met when needed, or that the cost to secure such needed incremental capital will not increase Cogeco Cable's weighted average cost of capital. Through its recent issuance of new Senior Secured Notes on October 1, 2008, Cogeco Cable will be able to repay debt instruments maturing in 2008 and 2009. Cogeco Cable also entered into cross-currency swap agreements to fix the liability for interest and principal payments on its US-denominated Senior Secured Notes Series A. However, the global financial markets crisis and the ensuing global economic slowdown may extend further and constrain Cogeco Cable's ability to meet its future financing requirements, both internal and external, increase its weighted average cost of capital and cause other cost increases from counterparties also faced with liquidity problems and higher cost of capital. Cogeco Cable's debt financing structure involves the borrowing of money from third parties by Cogeco Cable and the subsequent investment of equity and debt by Cogeco Cable into its direct and indirect subsidiaries. This financing structure requires that Cogeco Cable be able to receive upstream flows of funds from its subsidiaries through capital repayments, interest payments, dividend payments, management fees or other distributions that are sufficient to meet its corporate debt obligations. Future changes to corporate tax, currency exchange and other legal requirements applicable to Cogeco Cable, or to its direct or indirect subsidiaries could adversely affect such upstream flows of funds or the effectiveness of Cogeco Cable's existing debt financing structure. Cogeco Cable's leverage and corporate risk profile is liable to vary from time to time as a result of new developments in its business activities and the investments required to support internal growth as well as external growth through acquisitions. More particularly, leverage may fluctuate as Cogeco Cable completes further business acquisitions domestically or abroad, and the risk profile may differ from one acquisition to the other depending on the characteristics of the acquired business and its relevant market. The development of new services or additional lines of business, and the acquisition of new business properties, may not necessarily generate the anticipated results or benefits. There is no assurance that Cogeco Cable will be able to maintain or increase distributions to shareholders by way of dividends or otherwise. The acquisition of Cabovisao has been financed through corporate credit facilities of Cogeco Cable. The major part of the purchase price for the shares of Cabovisao (approximately EUR 461.8 million) was borrowed directly in Euros and a second tranche of $150 million was initially borrowed in Canadian dollars and subsequently drawn in Euros (EUR 104.6 million). The remainder of the purchase price is assumed liabilities. There are no financial hedging arrangements in effect at this time for currency fluctuation risk on interest payments resulting from these borrowings, but there is a natural hedging effect between the borrowings in Euros and the inter-corporate debt interest payments and cash distributions in Euros originating from the European subsidiaries. Also, for the purposes of this acquisition, Cogeco Cable has set up an acquisition structure involving one of its operating Canadian subsidiaries and intermediate holding and financing entities located in Luxembourg with a view to maximizing returns. Cogeco Cable is still considering various options to extend the term loan with alternate sources of Euro-denominated financing. Human resources COGECO maintains appropriate labour relations both in Canada and in Portugal, but there is no assurance that requisite collective agreements will be established or renewed without conflict or disruption to the provision of its services. COGECO maintains, as well, appropriate relations with its key personnel. COGECO's success depends to a significant extent on its ability to attract and retain its managers and skilled employees in an increasingly competitive market. COGECO's inability or failure to recruit, retain or adequately train its human resources may have a materially adverse effect on COGECO's business and future prospects. Controlling shareholder and holding structure Cogeco Cable is controlled by COGECO Inc. through the holding of multiple voting shares of Cogeco Cable, and COGECO Inc. is in turn controlled by Gestion Audem Inc., a company controlled by Mr. Henri Audet and members of his family (the Audet Family), through the holding of multiple and subordinate voting shares of COGECO Inc. Both Cogeco Cable and COGECO Inc. are reporting issuers with subordinate voting shares listed on the Toronto Stock Exchange. Pursuant to the Conflicts Agreement in effect between Cogeco Cable and COGECO Inc., all cable properties must be owned or controlled by Cogeco Cable. COGECO Inc. is otherwise free to own and operate any other business or invest as it deems appropriate. It is possible that situations could arise where the respective interests of the controlling shareholder COGECO Inc. and other shareholders of Cogeco Cable, or the respective interests of the Audet Family and other shareholders of COGECO Inc., could differ. 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, Section 3865, Hedges and Section 3251, Equity. Statements 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, 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 the option 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 swap agreements, 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 swap agreements, 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 rate 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 August 31, 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, 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 swap agreements must be measured at fair value in the consolidated financial statements. Since these cross-currency swap agreements 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 swap agreements at fair value 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 swap agreements at fair value on the interim consolidated financial statements for the fourth quarter decreased derivative financial instruments liabilities by $11.5 million, increased future income tax liabilities by $0.4 million, increased non-controlling interest by $0.5 million and increased accumulated other comprehensive income by $0.3 million. The impact of measuring the cross-currency swap agreements at fair value on the consolidated financial statements for the year ended August 31, 2008 decreased derivative financial instruments liabilities by $3.7 million, increased future income tax liabilities by $0.9 million, increased non-controlling interest by $1.3 million and increased accumulated other comprehensive income by $0.6 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 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 $1.4 million was reclassified as at September 1, 2006 from the foreign currency translation adjustment to 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 August 31, 2008, there were no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheets. In accordance with the new standards, the Company selected September 1, 2002 as its transition date for adopting the standard related to embedded derivatives. 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 a 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 of fiscal 2008, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements. Future accounting pronouncements Financial instruments In December 2006, the CICA issued Section 3862, Financial Instruments - Disclosures, Section 3863, Financial Instruments - Presentation, and Section 1535, Capital Disclosures. All three Sections will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2007. Accordingly, the Company will adopt the new standards for its fiscal year beginning September 1, 2008. Section 3862 on financial instruments disclosures requires the disclosure of information about the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 on the presentation of financial instruments is unchanged from the presentation requirements included in Section 3861. Section 1535 on capital disclosures requires the disclosure of information about an entity's objectives, policies and processes for managing capital. 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. Harmonization of Canadian and International accounting standards In March 2006, the Accounting Standards Board of the CICA released its new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the International Financial Reporting Standards ("IFRS"). In April 2008, the CICA published an exposure draft as guidance which requires the transition to IFRS to replace Canadian GAAP as currently employed by Canadian publicly accountable enterprises. The changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Company expects that its first interim consolidated financial statements presented in accordance with IFRS will be for the three-month period ended November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for the year ended August 31, 2012. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. As a result, the Company is developing a plan to convert its consolidated financial statements to IFRS. The plan highlights the need to identify key accounting policy changes as the first step in the conversion process. Once these changes have been identified, other elements of the plan will be addressed. The Company has selected an external advisor to assist with the project and is currently in the process of assessing the differences between IFRS and the Company's current accounting policies. As implications of the conversion are identified, information technology and data system impacts will be assessed. Similarly, impacts on business activities will be assessed as differences are identified between the Company's current accounting policies and IFRS. Changes in accounting policies are likely. These changes may materially impact the Company's 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", "operating income before amortization", "operating margin" and "net income, excluding loss (gain) on dilution, loss from discontinued operations and income tax adjustments net of non-controlling interest". Cash flow from operations and free cash flow Cash flow from operations is used by COGECO's management and investors to evaluate cash flows generated by operating activities excluding the impact of changes in non-cash operating items. This allows the Company to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating the non-GAAP measure "free cash flow". Free cash flow is used by COGECO's management and investors to measure COGECO's ability to repay debt, distribute capital to its shareholders and finance its growth. The most comparable Canadian GAAP financial measure is cash flow from operating activities. Cash flow from operations is calculated as follows:
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Quarters ended August 31, Years ended August 31,
($000) 2008 2007 2008 2007
$ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Cash flow from
operating activities 146,052 398,491 107,155 210,562
Changes in non-cash
operating items (46,083) (35,703) (29,002) 73,003
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Cash flow from
operations 99,969 362,788 78,153 283,565
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Free cash flow is calculated as follows:
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--------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
($000) 2008 2007 2008 2007
$ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Cash flow from
operations 99,969 78,153 362,788 283,565
Acquisition of fixed
assets (68,895) (57,948) (229,181) (221,015)
Increase in deferred
charges (7,035) (10,784) (27,696) (30,042)
Assets acquired under
capital leases - as
per Note 13b) (3,058) (290) (5,475) (3,084)
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Free cash flow 20,981 9,131 100,436 29,424
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--------------------------------------------------------------------------Operating income from continuing operations before amortization and operating margin Operating income before amortization is used by COGECO's management and investors to assess the Company's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before amortization is a proxy for cash flows generated from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of the Company's revenue which is left over, before taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income before amortization by revenue. The most comparable Canadian GAAP financial measure is operating income. Operating income from continuing operations before amortization and operating margin are calculated as follows:
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--------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
($000, except
percentages) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating income from
continuing operations 59,360 45,872 219,170 180,014
Amortization 61,775 54,723 229,724 191,221
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Operating income from
continuing operations
before
amortization 121,135 100,595 448,894 371,235
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Revenue 292,873 251,300 1,108,900 969,335
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Operatin Margin 41.4% 40.0% 40.5% 38.3%
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--------------------------------------------------------------------------Net income excluding loss (gain) on dilution, loss from discontinued operations and income tax adjustments net of non-controlling interest Net income excluding loss (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 loss (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. The most comparable Canadian GAAP financial measure is net income. Net income excluding loss (gain) on dilution, loss from discontinued operations and income tax adjustments net of non-controlling interest is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Net income 9,656 30,384 25,108 74,740
Adjustments:
Loss (gain) on dilution 19 (27,011) 104 (57,930)
Loss from discontinued
operations - 6,713 18,057 10,883
Income tax adjustments
net of non-controlling
interest - (4,777) (7,909) (5,256)
--------------------------------------------------------------------------
Net income excluding
above adjustments 9,675 5,309 35,360 22,437
--------------------------------------------------------------------------
--------------------------------------------------------------------------ADDITIONAL INFORMATION This MD&A was prepared on October 29, 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 2,717,000 revenue-generating units (RGU) to 2,428,000 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, HSI, 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 933 station in Quebec City. COGECO's subordinate voting shares are listed on the Toronto Stock Exchange (Toronto:CGO.TO - News). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (Toronto:CCA.TO - News).
Analyst Conference Call: Thursday, October 30, 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 in 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: 6502493
By Internet at http://www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until November 6, by dialing:
Canada and USA access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 6502493
Supplementary Quarterly Financial Information
(unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarters ended August 31, May 31,
($000, except percentages and 2008 2007(1) 2008 2007(1)
per share data) $ $ $ $
---------------------------------------------------------------------
Revenue 292,873 251,300 283,878 249,424
Operating income from
continuing operations before
amortization(2) 121,135 100,595 117,204 95,791
Operating margin(2) 41.4% 40.0% 41.3% 38.4%
Amortization 61,775 54,723 58,564 47,725
Financial expense 18,182 18,924 17,746 21,603
Income taxes 9,849 (7,480) 10,285 8,055
Loss (gain) on dilution 19 (27,011) 3 64
Non-controlling interest 21,559 24,240 21,068 13,318
Income from continuing
operations 9,656 37,097 9,538 5,025
Loss from discontinued
operations - (6,713) - (1,966)
Net income (loss) 9,656 30,384 9,538 3,059
Cash flow from operations(2) 99,969 78,153 96,068 76,862
Earnings (loss) per share
Basic
Income from continuing
operations 0.58 2.23 0.57 0.30
Loss from discontinued
operations - (0.40) - (0.12)
Net income (loss) 0.58 1.82 0.57 0.18
Diluted
Income from continuing
operations 0.58 2.21 0.57 0.30
Loss from discontinued
operations - (0.40) - (0.12)
Net income (loss) 0.58 1.81 0.57 0.18
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarters ended February 29 / 28, November 30,
($000, except percentages and 2008 2007(1) 2007(1) 2006(1)
per share data) $ $ $ $
--------------------------------------------------------------------
Revenue 271,894 238,378 260,255 230,233
Operating income from
continuing operations before
amortization(2) 109,346 87,478 101,209 87,371
Operating margin(2) 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(2) 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 (loss) 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 (loss) 0.95 2.07 (0.60) 0.41
--------------------------------------------------------------------
--------------------------------------------------------------------
(1) The results for the first quarter of fiscal 2008 and all comparative
figures reflect the reclassification of discontinued operations. Please
refer to note 15 of the consolidated financial statements for further
details.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.The cable sector's operating results are not generally subject to material seasonal fluctuations. However, the loss in Basic Cable service customers is usually greater, and the addition of HSI service customers is generally lower in the third quarter, mainly because students leave their campus at the end of the school year. Cogeco Cable offers its services in several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivieres and Rimouski in Canada, and Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. The other sector's operating results may be subject to significant seasonal variations. Advertising revenue depends on audience ratings and the market for radio advertising expenditures in the Province of Quebec. Audience ratings may vary due to a number of factors, including on-air personalities, programming content and promotional activities. Advertising level may also vary due to many factors, including general economic and consumer retail market conditions and cycles. Advertising sales, mainly for national advertising, are normally weaker in the second and fourth quarters and, accordingly, the operating margin is generally lower in those quarters.
COGECO INC.
Customer Statistics
August 31, August 31,
2008 2007
----------------------------------------------------------------
----------------------------------------------------------------
Homes Passed
Ontario(1) 1,029,121 997,498
Quebec 502,490 486,592
----------------------------------------------------------------
Canada 1,531,611 1,484,090
Portugal 895,923 859,376
----------------------------------------------------------------
Total 2,427,534 2,343,466
----------------------------------------------------------------
----------------------------------------------------------------
Revenue Generating Units
Ontario 1,387,054 1,256,244
Quebec 604,854 532,264
----------------------------------------------------------------
Canada 1,991,908 1,788,508
Portugal 724,966 697,157
----------------------------------------------------------------
Total 2,716,874 2,485,665
----------------------------------------------------------------
----------------------------------------------------------------
Basic Cable Service Customers
Ontario 596,229 594,889
Quebec 260,865 254,268
----------------------------------------------------------------
Canada 857,094 849,157
Portugal 296,135 294,003
----------------------------------------------------------------
Total 1,153,229 1,143,160
----------------------------------------------------------------
----------------------------------------------------------------
Discretionnary Service Customers
Ontario 493,858 468,764
Quebec 215,820 204,585
----------------------------------------------------------------
Canada 709,678 673,349
Portugal - -
----------------------------------------------------------------
Total 709,678 673,349
----------------------------------------------------------------
----------------------------------------------------------------
Pay TV Service Customers
Ontario 97,753 88,835
Quebec 47,075 42,180
----------------------------------------------------------------
Canada 144,828 131,015
Portugal 57,715 54,723
----------------------------------------------------------------
Total 202,543 185,738
----------------------------------------------------------------
----------------------------------------------------------------
High Speed Internet Service Customers
Ontario 352,553 316,363
Quebec 120,914 99,473
----------------------------------------------------------------
Canada 473,467 415,836
Portugal 159,301 160,023
----------------------------------------------------------------
Total 632,768 575,859
----------------------------------------------------------------
----------------------------------------------------------------
Digital Television Service Customers
Ontario 288,345 246,267
Quebec 153,401 133,612
----------------------------------------------------------------
Canada 441,746 379,879
Portugal 24,452 -
----------------------------------------------------------------
Total 466,198 379,879
----------------------------------------------------------------
----------------------------------------------------------------
Telephony Service Customers
Ontario 149,927 98,725
Quebec 69,674 44,911
----------------------------------------------------------------
Canada 219,601 143,636
Portugal 245,078 243,131
----------------------------------------------------------------
Total 464,679 386,767
----------------------------------------------------------------
----------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
(In thousands of dollars,
except per share data) 2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 292,873 251,300 1,108,900 969,335
Operating costs 171,738 150,705 660,006 598,100
-------------------------------------------------------------------------
Operating income from
continuing operations
before amortization 121,135 100,595 448,894 371,235
Amortization (note 4) 61,775 54,723 229,724 191,221
-------------------------------------------------------------------------
Operating income from
continuing operations 59,360 45,872 219,170 180,014
Financial expense (note 5) 18,182 18,924 70,669 86,056
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and the following
items 41,178 26,948 148,501 93,958
Income taxes (note 6) 9,849 (7,480) 14,985 11,343
Loss (gain) on dilution
resulting from shares
issued by a subsidiary
(note 7) 19 (27,011) 104 (57,930)
Non-controlling interest 21,559 24,240 90,152 54,824
Share in the loss of a
general partnership 95 102 95 98
-------------------------------------------------------------------------
Income from continuing
operations 9,656 37,097 43,165 85,623
Loss from discontinued
operations (note 15) - (6,713) (18,057) (10,883)
-------------------------------------------------------------------------
Net income 9,656 30,384 25,108 74,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
(note 8)
Basic
Income from continuing
operations 0.58 2.23 2.59 5.16
Loss from discontinued
operations - (0.40) (1.08) (0.66)
Net income 0.58 1.83 1.50 4.50
Diluted
Income from continuing
operations 0.58 2.21 2.58 5.13
Loss from discontinued
operations - (0.40) (1.08) (0.65)
Net income 0.58 1.81 1.50 4.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
(In thousands of dollars) 2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Net income 9,656 30,384 25,108 74,740
-------------------------------------------------------------------------
Other comprehensive income
Unrealized gains on
derivative financial
instruments designated as
cash flow hedges, net of
income taxes expense of
$1,953,000 and $1,045,000
and non-controlling
interest of $6,453,000
and $1,800,000 3,087 - 861 -
Reclassification of
realized gains to net
income on derivative
financial instruments
designated as cash flow
hedges, net of income
taxes recovery of
$1,599,000 and $134,000
and non-controlling
interest of $5,920,000
and $499,000 (2,831) - (237) -
Unrealized gains (losses)
on translation of net
investments in self-
sustaining foreign
subsidiaries, net of
non-controlling interest
of $ 3,891,000 and
$35,978,000 ($462,000
and $6,012,000 in 2007) 1,861 (222) 17,206 2,888
Unrealized gains (losses)
on translation of long-
term debts designated as
hedges of net investments
in self-sustaining foreign
subsidiaries, net of
non-controlling interest
of $2,119,000 and
$23,281,000 (net of income
taxes expenses of $18,000
and income taxes recovery
of $1,685,000, and non-
controlling interest of
$540,000 and $5,106,000
in 2007) (1,013) 259 (11,133) (2,452)
-------------------------------------------------------------------------
1,104 37 6,697 436
-------------------------------------------------------------------------
Comprehensive income 10,760 30,421 31,805 75,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve months ended August 31,
(In thousands of dollars) 2008 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
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 25,108 74,740
Dividends on multiple voting shares (516) (503)
Dividends on subordinate voting shares (4,154) (4,025)
-------------------------------------------------------------------------
Balance at end 295,808 274,946
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In thousands of dollars) August 31, 2008 August 31, 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
Assets
Current
Cash and cash equivalents 37,472 66,279
Accounts receivable 64,910 52,734
Income taxes receivable 3,569 3,138
Prepaid expenses 13,271 8,675
Future income tax assets 8,661 17,986
Current assets related to
discontinued operations (note 15) - 38,700
-------------------------------------------------------------------------
127,883 187,512
-------------------------------------------------------------------------
Income taxes receivable - 1,345
Investments 739 739
Fixed assets 1,261,610 1,123,270
Deferred charges 57,841 55,450
Intangible assets (note 9) 1,116,382 1,083,750
Goodwill (note 9) 487,805 342,584
Future income tax assets 7,221 -
Non-current assets related to
discontinued operations (note 15) - 42,109
-------------------------------------------------------------------------
3,059,481 2,836,759
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 10,302 -
Accounts payable and accrued liabilities 259,038 220,450
Income tax liabilities 20,793 1,209
Deferred and prepaid income 32,859 29,837
Derivative financial instruments 79,791 -
Current portion of long-term debt (note 10) 336,858 17,327
Current liabilities related to discontinued
operations (note 15) - 46,031
-------------------------------------------------------------------------
739,641 314,854
-------------------------------------------------------------------------
Long-term debt (note 10) 737,055 1,036,256
Share in the partners' deficiency of a
general partnership - 518
Deferred and prepaid income and other
liabilities 11,859 11,501
Pension plan liabilities and accrued
employees benefits 9,645 7,378
Future income tax liabilities 256,307 267,646
Non-controlling interest 883,948 788,557
Long-term liabilities related to
discontinued operations (note 15) - 17,589
-------------------------------------------------------------------------
2,638,455 2,444,299
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 11) 120,049 119,078
Treasury shares (note 11) (1,522) (1,054)
Contributed surplus 1,727 499
Retained earnings 295,808 274,946
Accumulated other comprehensive income (loss)
(note 12) 4,964 (1,009)
-------------------------------------------------------------------------
421,026 392,460
-------------------------------------------------------------------------
3,059,481 2,836,759
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
(In thousands of dollars) 2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Cash flow from operating
activities
Income from continuing
operations 9,656 37,097 43,165 85,623
Adjustments for:
Amortization (note 4) 61,775 54,723 229,724 191,221
Amortization of deferred
transaction costs 1,095 513 3,310 2,226
Future income taxes (note 6) 3,599 (4,597) (9,451) 7,945
Non-controlling interest 21,559 24,240 90,152 54,824
Loss (gain) on dilution
resulting from shares
issued by a subsidiary
(note 7) 19 (27,011) 104 (57,930)
Stock-based compensation 709 (7,066) 2,801 (988)
Loss on disposal of fixed
assets 936 389 1,324 220
Other 621 (135) 1,659 424
-------------------------------------------------------------------------
99,969 78,153 362,788 283,565
Changes in non-cash operating
items (note 13 a)) 46,083 29,002 35,703 (73,003)
-------------------------------------------------------------------------
146,052 107,155 398,491 210,562
-------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed assets
(note 13 b)) (68,895) (57,948) (229,181) (221,015)
Increase in deferred charges (7,035) (10,784) (27,696) (30,042)
Business acquisitions and
related adjustments, net of
cash and cash equivalent
acquired (note 2) (213,618) (629) (229,723) 1,265
Decrease in restricted cash - 503 - 591
Other (71) (171) (506) 297
-------------------------------------------------------------------------
(289,619) (69,029) (487,106) (248,904)
-------------------------------------------------------------------------
Cash flow from financing
activities
Increase (decrease) in bank
indebtedness 8,212 (612) 10,302 (1,724)
Increase in long-term debt,
net of issue costs 95,087 9,038 194,897 6,538
Repayment of long-term debt (734) (146,481) (132,327) (299,598)
Issue of subordinate voting
shares 644 95 971 1,526
Acquisition of treasury shares - - (468) (1,054)
Dividends on multiple voting
shares (129) (129) (516) (503)
Dividends on subordinate voting
shares (1,040) (1,038) (4,154) (4,025)
Issue of shares by a subsidiary
to non-controlling interest,
net of issue costs 296 148,058 3,650 338,124
Dividends paid by a subsidiary
to non-controlling interest (3,281) (2,372) (13,115) (6,582)
-------------------------------------------------------------------------
99,055 6,559 59,240 32,702
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents denominated in
foreign currencies 6 (243) 1,271 1,243
-------------------------------------------------------------------------
Cash flow from continuing
operations (44,506) 44,442 (28,104) (4,397)
Cash flow from discontinued
operations (note 15) (703) (840) (703) (840)
-------------------------------------------------------------------------
Net change in cash and cash
equivalents (45,209) 43,602 (28,807) (5,237)
Cash and cash equivalents
at beginning 82,681 22,677 66,279 71,516
-------------------------------------------------------------------------
Cash and cash equivalents
at end 37,472 66,279 37,472 66,279
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See supplemental cash flow information in note 13.COGECO INC. Notes to Consolidated Financial Statements August 31, 2008 (unaudited) (amounts in tables are in thousands of dollars, except number of shares and per share data) 1. Basis of Presentation In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present fairly the financial position of COGECO Inc. ("the Company") as at August 31, 2008 and 2007 as well as its results of operations and its cash flows for the three and twelve month periods ended August 31, 2008 and 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 15). 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, Section 3865, Hedges, and Section 3251, Equity. Statements 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, 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 the option 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 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 rate 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 August 31, 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, 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 US dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value 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-month period ended August 31, 2008 decreased derivative financial instruments liabilities by $11.5 million, increased future income tax liabilities by $0.4 million, increased non-controlling interest by $0.5 million and increased accumulated other comprehensive income by $0.3 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the twelve month period ended August 31, 2008 decreased derivative financial instruments liabilities by $3.7 million, increased future income tax liabilities by $0.9 million, increased non-controlling interest by $1.3 million and increased accumulated other comprehensive income by $0.6 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 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 $1.4 million was reclassified as at September 1, 2006 from the foreign currency translation adjustment to 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 August 31, 2008, there were no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheets. In accordance with the new standards, the Company selected September 1, 2002, as its transition date for adopting the standard related to embedded derivatives. 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 a primary source of GAAP or to provide a reliable and more 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 of fiscal 2008, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements. Future accounting pronouncements Financial instruments In December 2006, the CICA issued Section 3862, Financial Instruments - Disclosures, Section 3863, Financial Instruments - Presentation, and Section 1535, Capital Disclosures. All three Sections will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2007. Accordingly, the Company will adopt the new standards for its fiscal year beginning September 1, 2008. Section 3862 on financial instruments disclosures requires the disclosure of information about the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 on the presentation of financial instruments is unchanged from the presentation requirements included in Section 3861. Section 1535 on capital disclosures requires the disclosure of information about an entity's objectives, policies and processes for managing capital. 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. Harmonization of Canadian and International Standards In March 2006, the Accounting Standards Board of the CICA released its new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the International Financial Reporting Standards ("IFRS"). In April 2008, the CICA published an exposure draft as guidance which requires the transition to IFRS to replace Canadian GAAP as currently employed by Canadian publicly accountable enterprises. The changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Company expects that its first interim consolidated financial statements presented in accordance with IFRS will be for the three-month period ended November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for twelve-month period ended August 31, 2012. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. As a result, the Company is developing a plan to convert its consolidated financial statements to IFRS. The plan highlights the need to identify key accounting policy changes as the first step in the conversion process. Once these changes have been identified, other elements of the plan will be addressed. The Company has selected an external advisor to assist with the project and is currently in the process of assessing the differences between IFRS and the Company's current accounting policies. As implications of the conversion are identified, information technology and data system impacts will be assessed. Similarly, impacts on business activities will be assessed as differences are identified between the Company's current accounting policies and IFRS. Changes in accounting policies are likely. These changes may materially impact the Company's consolidated financial statements. 2. Business acquisitions On March 31, 2008, the Company's subsidiary, Cogeco Cable Inc., completed the acquisition of all the assets of MaXess Networx®, ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company) for a total consideration of $15.6 million. MaXess Networx® 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. On June 30, 2008, the Company's subsidiary, Cogeco Cable Inc., completed the acquisition of all the assets of FibreWired Burlington Hydro Communications, Burlington Hydro Electric's telecommunications division (City of Burlington's energy company) for a total consideration of $12.6 million. FibreWired Burlington Hydro Communications operates a broadband network equipped with next generation ATM and Ethernet technology, provides Burlington's organizations with the broadband capacity required for data networking, High Speed Internet access, hosting services, e-business applications, video conferencing and other advanced communications. On July 31, 2008 the Company's subsidiary, Cogeco Cable Inc., completed the acquisition of all of the shares of Toronto Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro Corporation (City of Toronto's energy company) for a total consideration of $200 million. In addition, the Company's subsidiary assumed a working capital deficiency and liabilities of approximately $4 million. Toronto Hydro Telecom Inc., which now operates under the name Cogeco Data Services Inc., offers data communications and other telecommunications services such as Ethernet, private line, Voice-over-Internet protocol ("VoIP"), High Speed Internet access, dark fibre, data storage, data security and co-location to a wide range of business customers and organizations throughout the Greater Toronto Area ("GTA"). These acquisitions were accounted for using the purchase method. The results have been consolidated as of the acquisition dates. The allocation of the purchase price of the acquisitions is as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cogeco Data
Services Inc.(1) Other Total
$ $ $
-------------------------------------------------------------------------
(audited) (audited) (audited)
Consideration paid
Purchase price of shares or
assets 200,000 28,113 228,113
Acquisition costs 1,988 852 2,840
-------------------------------------------------------------------------
201,988 28,965 230,953
-------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 1,230 - 1,230
Accounts receivable 4,575 968 5,543
Prepaid expenses 535 612 1,147
Fixed assets 57,098 19,102 76,200
Deferred charges - 24 24
Customer relationships 33,983 4,220 38,203
Goodwill 112,228 4,662 116,890
Future income tax assets 2,335 - 2,335
Accounts payable and accrued
liabilities assumed (4,380) (361) (4,741)
Deferred and prepaid income and
other liabilities assumed (4,958) (262) (5,220)
Pension plan liabilities and
accrued employee benefits (356) - (356)
Future income tax liabilities (302) - (302)
-------------------------------------------------------------------------
201,988 28,965 230,953
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The purchase price allocation of Cogeco Data Services Inc. is
preliminary and will be finalized during the 2009 fiscal year.
3. Segmented Information
The principal financial information per business segment is presented in
the tables below:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Cable Other (1) Consolidated
ended August 31, --------------------------------------------------------
(unaudited) 2008 2007 2008 2007 2008 2007
$ $ $ $ $ $
--------------------------------------------------------------------------
Revenue 284,908 244,314 7,965 6,986 292,873 251,300
Operating
costs 163,792 141,888 7,946 8,817 171,738 150,705
Operating
income from
continuing
operations
before
amortization 121,116 102,426 19 (1,831) 121,135 100,595
Amortization 61,414 54,164 361 559 61,775 54,723
Operating
income from
continuing
operations 59,702 48,262 (342) (2,390) 59,360 45,872
Financial
expense 17,868 18,524 314 400 18,182 18,924
Income taxes 9,968 (6,630) (119) (850) 9,849 (7,480)
Loss (gain)
on dilution
resulting
from shares
issued by a
subsidiary - - 19 (27,011) 19 (27,011)
Non-controlling
interest - - 21,559 24,240 21,559 24,240
Share in the
loss of a
general
partnership - - 95 102 95 102
Income (loss)
from continuing
operations 31,866 36,368 (22,210) 729 9,656 37,097
Loss from
Discontinued
operations - - - (6,713) - (6,713)
--------------------------------------------------------------------------
Total assets 3,019,155 2,714,339 40,326 122,420 3,059,481 2,836,759
Total assets
related to
discontinued
operations - - - 80,809 - 80,809
Fixed assets 1,257,965 1,119,498 3,645 3,772 1,261,610 1,123,270
Intangible
assets 1,091,042 1,058,410 25,340 25,340 1,116,382 1,083,750
Goodwill 487,805 342,584 - - 487,805 342,584
Acquisition
of fixed
assets (2) 71,437 58,180 516 59 71,953 58,239
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Includes radio operations, head office activities and eliminations.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Twelve months Cable Other(1) Consolidated
ended August 31, --------------------------------------------------------
(unaudited) 2008 2007 2008 2007 2008 2007
$ $ $ $ $ $
--------------------------------------------------------------------------
Revenue 1,076,787 938,880 32,113 30,455 1,108,900 969,335
Operating
costs 631,363 568,127 28,643 29,973 660,006 598,100
Operating
income from
continuing
operations
before
amortization 445,424 370,753 3,470 482 448,894 371,235
Amortization 228,299 189,323 1,425 1,898 229,724 191,221
Operating
income from
continuing
operations 217,125 181,430 2,045 (1,416) 219,170 180,014
Financial
expense 69,111 84,569 1,558 1,487 70,669 86,056
Income taxes 14,732 12,170 253 (827) 14,985 11,343
Loss (gain)
on dilution
resulting
from shares
issues by a
subsidiary - - 104 (57,930) 104 (57,930)
Non-controlling
interest - - 90,152 54,824 90,152 54,824
Share in the
loss of a
general
partnership - - 95 98 95 98
Income (loss)
from
continuing
operations 133,282 84,691 (90,117) 932 43,165 85,623
Loss from
Discontinued
operations - - (18,057) (10,883) (18,057) (10,883)
--------------------------------------------------------------------------
Total assets 3,019,155 2,714,339 40,326 122,420 3,059,481 2,836,759
Total assets
related to
discontinued
operations - - - 80,809 - 80,809
Fixed assets 1,257,965 1,119,498 3,645 3,772 1,261,610 1,123,270
Intangible
assets 1,091,042 1,058,410 25,340 25,340 1,116,382 1,083,750
Goodwill 487,805 342,584 - - 487,805 342,584
Acquisition
of fixed
assets (2) 233,916 223,966 740 133 234,656 224,099
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Includes radio operations, head office activities and eliminations.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
The following tables set out certain geographic market information based on
client location:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
$ $ $ $
-------------------------------------------------------------------------
Revenue
Canada 228,725 195,436 865,210 744,525
Europe 64,148 55,864 243,690 224,810
-------------------------------------------------------------------------
292,873 251,300 1,108,900 969,335
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
Fixed assets
Canada 944,328 815,754
Europe 317,282 307,516
-------------------------------------------------------------------------
1,261,610 1,123,270
-------------------------------------------------------------------------
Intangible assets
Canada 1,052,608 1,014,892
Europe 63,774 68,858
-------------------------------------------------------------------------
1,116,382 1,083,750
-------------------------------------------------------------------------
Goodwill
Canada 116,890 -
Europe 370,915 342,584
-------------------------------------------------------------------------
487,805 342,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Amortization
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Fixed assets 53,098 46,424 196,197 166,895
Deferred charges 5,511 5,738 22,595 21,765
Intangible assets 3,166 2,561 10,932 2,561
-------------------------------------------------------------------------
61,775 54,723 229,724 191,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Financial expense
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Interest on long-term debt 18,055 18,258 69,675 79,667
Amortization of deferred
transaction costs 407 513 1,629 2,226
Other (280) 153 (635) 4,163
-------------------------------------------------------------------------
18,182 18,924 70,669 86,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Income Taxes
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Current 6,250 (2,883) 24,436 3,398
Future 3,599 (4,597) (9,451) 7,945
-------------------------------------------------------------------------
9,849 (7,480) 14,985 11,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Income before income taxes 41,083 26,846 148,406 93,860
Combined income tax rate 33.38% 34.80% 33.39% 34.80%
Income taxes at combined
income tax rate 13,713 9,342 49,553 32,663
Adjustments for losses or
income subject to lower
or higher tax rates (946) (787) (2,240) (1,035)
Decrease in future income
taxes as a result of
decreases in substantively
enacted tax rates - (6,318) (24,146) (6,318)
Income taxes arising form
non-deductible expenses 223 219 825 757
Effect of foreign income
tax rate differences (2,995) (2,066) (9,193) (5,103)
Benefits related to prior
years' minimum income taxes
paid and non-capital loss
carryforwards - (8,403) - (9,878)
Other (146) 533 186 257
-------------------------------------------------------------------------
Income taxes at effective
income tax rate 9,849 (7,480) 14,985 11,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------7. Loss (gain) on dilution resulting from shares issued by a subsidiary During fiscal 2008, The Company's subsidiary, Cogeco Cable Inc. issued 5,543 subordinate voting shares (7,344 shares in 2007) pursuant to its Employee Stock Purchase Plan and 157,481 subordinate voting shares (348,131 shares in 2007) pursuant to its Employee Stock Option Plan for cash consideration of $221,000 ($198,000 in 2007) and $3,429,000 ($6,816,000 in 2007), respectively. In addition, during fiscal 2007, the Company's subsidiary, Cogeco Cable Inc., completed two public offerings totalling 8,000,000 subordinate voting shares. The offerings resulted in gross proceeds of $345,950,000 and net proceeds of $331,110,000. As a result, the Company's interest in Cogeco Cable Inc. decrease from 32.5% to 32.3% (39.2% to 32.5% in 2007) and a losses on dilution of $19,000 and $104,000 (gain on dilution of $27,011,000 and $57,930,000 in 2007) were recorded for the three and twelve month periods ended August 31, 2008, respectively. 8. Earnings (Loss) per Share The following table provides a reconciliation between basic and diluted earnings (loss) per share:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Income from continuing
operations 9,656 37,097 43,165 85,623
Loss from discontinued
Operations - (6,713) (18,057) (10,883)
-------------------------------------------------------------------------
Net income 9,656 30,384 25,108 74,740
-------------------------------------------------------------------------
Weighted average number
of multiple voting and
subordinate voting
shares outstanding 16,709,946 16,671,043 16,684,809 16,605,828
Effect of dilutive
stock options (1) 30,427 88,392 60,299 97,168
-------------------------------------------------------------------------
Weighted average number
of diluted multiple
voting and subordinate
voting shares outstanding 16,740,373 16,759,435 16,745,108 16,702,996
-------------------------------------------------------------------------
Earnings (loss) per share
Basic
Income from continuing
operations 0.58 2.23 2.59 5.16
Loss from discontinued
operations - (0.40) (1.08) (0.66)
Net income 0.58 1.83 1.50 4.50
Diluted
Income from continuing
operations 0.58 2.21 2.58 5.13
Loss from discontinued
operations - (0.40) (1.08) (0.65)
Net income 0.58 1.81 1.50 4.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and twelve month periods ended August 31, 2008, 33,182
stock options (none and 18,222 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.
9. Goodwill and Other Intangible Assets
-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
Customer relationships 101,490 68,858
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
-------------------------------------------------------------------------
1,116,382 1,083,750
Goodwill 487,805 342,584
-------------------------------------------------------------------------
1,604,187 1,426,334
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a) Intangible assets
During fiscal years 2008, intangible asset variations were as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses Base Total
$ $ $ $
-------------------------------------------------------------------------
(audited) (audited) (audited) (audited)
Balance at beginning 68,858 25,120 989,772 1,083,530
Business acquisitions
(note 2) 38,203 - - 38,203
Amortization (10,932) - - (10,932)
Foreign currency
translation adjustment 5,361 - - 5,361
-------------------------------------------------------------------------
Balance at end 101,490 25,120 989,772 1,116,382
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At August 31, 2008 and 2007 the Company and its subsidiaries tested the
value of broadcasting licenses and customer base for impairment and
concluded that no impairment existed.
b) Goodwill
During fiscal years 2008 and 2007, goodwill variation was as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
Balance at beginning 342,584 422,108
Business acquisitions (note 2) 116,890 -
Adjustment to the allocation of the
purchase price - (87,020)
Foreign currency translation adjustment 28,331 7,496
-------------------------------------------------------------------------
Balance at end 487,805 342,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At August 31, 2008 and 2007 the Company's subsidiary, Cogeco Cable Inc.,
tested the value of goodwill for impairment and concluded that no
impairment existed.
10. Long-Term Debt
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maturity Interest August 31, August 31,
rate 2008 2007
% $ $
-------------------------------------------------------------------------
(audited) (audited)
Parent company
Term Facility 2011 (1) 4.93 (2) 18,748 25,538
Obligations under
capital leases 2010 6.49 - 6.61 77 108
Subsidiaries
Term Facility
Term loan -
EUR94,096,350
(EUR104,551,500 as
at August 31, 2007) 2011 5.31 (2) 145,832 150,450
Term loan -
EUR17,358,700 2011 5.25 (2) 26,881 24,979
Revolving loan -
EUR126,000,000
(EUR196,725,000 as
at August 31, 2007) 2011 5.25 (2) 196,308 283,087
Revolving loan 2011 3.99 (2) 94,375 -
Senior Secured
Debentures Series 1 2009 6.75 149,814 150,000
Senior Secured Notes
Series A - US$150
million 2008 6.83 (3) 159,233 158,430
Series B 2011 7.73 174,338 175,000
Senior Unsecured
Debenture (4) 2018 5.94 99,768 -
Deferred credit (5) 2008 - - 80,220
Obligations under
capital leases 2013 6.42 - 8.30 8,492 5,760
Other - - 47 11
-------------------------------------------------------------------------
1,073,913 1,053,583
Less current portion 336,858 17,327
-------------------------------------------------------------------------
737,055 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.
(2) Average interest rate on debt as at August 31, 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 US denominated
debt of the Company's subsidiary, Cogeco Cable Inc.
(4) On March 5, 2008, the Company's subsidiary, Cogeco Cable Inc., issued a
$100 million Senior Unsecured Debenture by way of a private placement,
subject to usual market conditions. The debenture bears interest at a
fixed rate of 5.936%, per annum, payable semi-annually. The debenture
matures on March 5, 2018 and is redeemable at the Company's option at
any time, in whole or in part, prior to maturity, at 100% of the
principal amount plus a make-whole premium.
(5) 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 US 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).11. 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.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
-------------------------------------------------------------------------
(audited) (audited)
Issued
1,842,860 multiple voting shares 12 12
14,897,586 subordinate voting shares
(14,829,792 as at August 31, 2007) 120,037 119,066
-------------------------------------------------------------------------
120,049 119,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the period, subordinate voting share transactions were as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve months ended Twelve months ended
August 31, 2008 August 31, 2007
-------------------------------------------------------------------------
Number of Amount Number of Amount
shares $ shares $
-------------------------------------------------------------------------
(audited) (audited) (audited) (audited)
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 67,794 971 120,196 1,526
Conversion of multiple
voting shares into
subordinate voting
shares - - 7,040 -
-------------------------------------------------------------------------
Balance at end 14,897,586 120,037 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 year, no stock options were granted to employees by COGECO Inc. However, the Company's subsidiary, Cogeco Cable Inc., granted 113,084 stock options (201,587 in 2007) with an exercise price of $41.45 to $49.82 ($26.63 to $44.54 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 $599,000 and $2,101,000 ($538,000 and $1,977,000 in 2007) was recorded for the three and twelve month periods ended August 31, 2008. The fair value of stock options granted by the Company's subsidiary, Cogeco Cable Inc., for the year ended August 31, 2008 was $12.59 ($7.39 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
% %
-------------------------------------------------------------------------
(audited) (audited)
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 August 31, 2008, the Company had outstanding stock options providing for the subscription of 123,758 subordinate voting shares. These stock options can be exercised at various prices ranging from $20.95 to $37.50 and at various dates up to October 19, 2011. The Company and its subsidiary, Cogeco Cable Inc., also had Performance Unit Plans for key employees which were terminated in June 2007. A compensation expense of $70,000 and $4,659,000 was recorded for the three and twelve month periods ended August 31, 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 year, the Company granted 12,852 Incentive Share Units (25,895 in 2007). These shares were purchased for a cash consideration of $468,000 ($1,054,000 in 2007) 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 $96,000 and $354,000 ($53,000 and $181,000 in 2007) was recorded for the three and twelve month periods ended August 31, 2008 related to this plan. In April 2007, the Company and its subsidiary, Cogeco Cable Inc., established deferred share unit plans ("DSU Plans") which are described in the Company's annual consolidated financial statements. During the year, 5,891 and 3,559 deferred share units were awarded to the participants in connection with the DSU Plans by the Company and its subsidiary, respectively. Compensation expense of $9,000 and $153,000 was recorded for the three and twelve month periods ended August 31, 2008 related to these plans. 12. Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Translation
of net
investments
in self-
sustaining
foreign Cash flow
subsidiaries hedges Total
$ $ $
-------------------------------------------------------------------------
(audited) (audited) (audited)
Balance at beginning (1,009) - (1,009)
Cumulative effect of changes in
accounting policies (note 1) - (724) (724)
Other comprehensive income 6,073 624 6,697
-------------------------------------------------------------------------
Balance at end 5,064 (100) 4,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Statements of Cash Flow
a) Changes in non-cash operating items
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Accounts receivable (250) 1,770 (6,398) (3,203)
Income taxes receivable (284) (1,851) 1,122 (4,554)
Prepaid expenses (6,091) 12 (3,673) (1,968)
Accounts payable and accrued
liabilities 47,971 28,012 26,976 (68,130)
Income tax liabilities 5,729 (96) 19,562 663
Deferred and prepaid income
and other liabilities (992) 1,155 (1,886) 4,189
-------------------------------------------------------------------------
46,083 29,002 35,703 (73,003)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Other information
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Fixed asset acquisitions
through capital leases 3,058 291 5,475 3,084
Financial expense paid 12,545 13,947 65,608 84,154
Income taxes paid (received) 690 (726) 3,585 6,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------14. 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 Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Contributory defined
benefit
pension plans 684 864 2,657 2,685
Defined contribution
pension plan and
collective registered
retirement savings plans 827 774 3,110 2,393
-------------------------------------------------------------------------
1,511 1,638 5,767 5,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------15. 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 previous 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, its subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed. Under the order, RSM Richter Inc. was 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's Board of Director's decision to accept the offer made by Remstar Corporation Inc. ("Remstar") to acquire all shares of the TQS Group held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS. On May 22, 2008, the plan of arrangement proposed by Remstar was approved by the creditors of the TQS Group and subsequently approved by the Superior Court of Quebec on June 4, 2008. On June 26, 2008, the CRTC approved the proposed transfer of ownership and control of TQS to Remstar and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed. This new transaction allows a new ownership group to pursue the broadcasting activities of TQS. Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the 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 twelve month periods ended August 31, 2007, have been reclassified as discontinued operations. The Company has no investment in the TQS Group as at August 31, 2008. The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$
-------------------------------------------------------------------------
(audited)
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 Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue - 18 071 38,499 102,972
Operating costs - 20 486 35,822 108,496
-------------------------------------------------------------------------
Operating income (loss)
before amortization - (2 415) 2,677 (5,524)
Amortization - 1 295 1,364 4,583
-------------------------------------------------------------------------
Operating income (loss) - (3,710) 1,313 (10,107)
Financial expense - 266 291 925
Impairment of assets - - 30,298 -
-------------------------------------------------------------------------
Loss before income taxes
and the following items - (3,976) (29,276) (11,032)
Income taxes - 7,112 - 7,011
Non-controlling interest - (4,477) (11,219) (7,257)
Shares in the earnings
of a general partnership - 102 - 97
-------------------------------------------------------------------------
Loss from discontinued
operations - (6,713) (18,057) (10,883)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cash flow of the discontinued operations were as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Twelve months ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Cash flow from operating
activities (703) 7,585 (4,676) (469)
Cash flow from investing
activities - (1,671) (133) (2,926)
Cash flow from financing
activities - (6,754) 4,106 2,555
-------------------------------------------------------------------------
Cash flow from discontinued
operations (703) (840) (703) (840)
-------------------------------------------------------------------------
-------------------------------------------------------------------------16. Guarantees During fiscal 2008, the Company's subsidiary, Cogeco Cable Inc., guaranteed the payment by Cabovisao of stamp taxes for the 2000 through 2002 years amounting to EUR 1.7 million and withholding taxes for the 2004 year amounting to EUR 2 million assessed by the Portuguese tax authorities, which are currently being challenged by Cabovisao. Even though the principal amounts in dispute are fully recorded in the books of its subsidiary, Cabovisao, the Company's subsidiary may be required to pay the amounts following final judgements, up to a maximum aggregate amount of EUR 3.7 million ($5.7 million), should Cabovisao fail to pay such required amounts. 17. Subsequent event On October 1, 2008, the Company's subsidiary, Cogeco Cable Inc., completed, pursuant to a private placement, the issue of US$190 million Senior Secured Notes Series A maturing October 1, 2015, and $55 million Senior Secured Notes Series B maturing October 1, 2018. The Senior Secured Notes Series B bear interest at the coupon rate of 7.60% per annum, payable semi-annually. In addition, the cable subsidiary entered into cross-currency swap agreements to fix the liability for interest and principal payments on US$190 million of its Senior Secured Notes Series A, which bear interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate of the Senior Secured Notes Series A is 7.24% and the exchange rate applicable to the principal portion of the US dollar-denominated debt has been fixed at $1.0625. 18. 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 15). Contact: Contacts:
Source:
COGECO Inc.
Pierre Gagne
Vice President, Finance and Chief Financial Officer
514-764-4700
Information:
Media
Marie Carrier
Director, Corporate Communications
514-764-4700
Source: COGECO Inc.
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