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Cogeco Cable's Continued Organic Growth and Acquisitions Contribute Positively to the Fourth Quarter and 2008 Year End Results
By: Marketwire .
Oct. 30, 2008 07:30 AM
MONTREAL, QUEBEC -- (Marketwire) -- 10/30/08 -- Today, Cogeco Cable Inc. (TSX: CCA) (the "Corporation") announced its financial results for the fourth quarter and fiscal year ended August 31, 2008. For the fourth quarter and fiscal 2008: - Consolidated revenue increased by 16.6% to $284.9 million and by 14.7% to $1,076.8 million, respectively; - Consolidated operating income before amortization(1) grew by 18.2% to reach $121.1 million and by 20.1% to reach $445.4 million, respectively; - Quarterly consolidated net income amounted to $31.9 million, compared to $36.4 million for the same period of the prior year. For the 2008 year, consolidated net income grew by 57.4% to reach $133.3 million, up by $48.6 million compared to the prior year; - Free cash flow(1) reached $21.1 million for the quarter, 41.8% higher compared to the year before. For the fiscal year, free cash flow amounted to $98.9 million compared to $30.6 million the prior year; - Operating margin(1) improved to reach 42.5% from 41.9% and to 41.4% from 39.5%, in the fourth quarter and fiscal year, respectively; - 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, 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"). - The Corporation also completed the acquisition of all the assets of FibreWired Burlington Hydro Communications, Burlington Hydro Electric's telecommunications division. "The fourth-quarter was marked by our entry 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. As for our fiscal year-end results, we are very pleased to report continued growth and the generation of financial results above expectations. Cogeco Cable completed a private placement issuance of Senior Secured Notes for gross proceeds of $257 million which will permit the Corporation to repay maturing debt and reduce bank indebtedness. This financing was completed despite a difficult financial market, and denotes the financial market's confidence in Cogeco Cable. As for fiscal 2009, we have reviewed our guidelines in light of the global economic slowdown and the competitive landscape in Portugal and to include our projections for CDS", declared Louis Audet, President and CEO of Cogeco Cable.
(1) The indicated terms do not have standard definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented
by other companies. For more details, please consult the "Non-GAAP
financial measures" section of the Management's discussion and
analysis.
(2) Represent the sum of Basic Cable, High Speed Internet ("HSI"),
Digital Television and Telephony service customers.
Fiscal 2009 Financial Guidelines: The Corporation issued its 2009 financial guidelines, setting revenue outlook at about $1,210 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 $508 million, an improvement of $13 million compared to our preliminary projections, and free cash flow should amount to approximately $90 million, a decrease of $15 million due to an increase in capital expenditures driven by the recent acquisitions. 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 Change 2008 2007 Change
$ $ % $ $ %
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 284,908 244,314 16.6 1,076,787 938,880 14.7
Operating
income before
amortization(1) 121,116 102,426 18.2 445,424 370,753 20.1
Net income 31,866 36,368 (12.4) 133,282 84,691 57.4
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Cash flow
from
operations(1) 99,547 83,825 18.8 360,402 284,565 26.7
Less:
Capital
expenditures
and increase
in deferred
charges 78,472 68,964 13.8 261,512 254,008 3.0
Free cash flow(1) 21,075 14,861 41.8 98,890 30,557 -
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Earnings
per share
Basic 0.66 0.79 (16.5) 2.75 1.96 40.3
Diluted 0.65 0.78 (16.7) 2.73 1.94 40.7
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(1) The indicated terms do not have standardized definitions prescribed
by Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the "Non-GAAP
financial measures" section of the Management's discussion and
analysis.
FORWARD-LOOKING STATEMENTS Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to Cogeco Cable's future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding the Corporation's future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which Cogeco Cable believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the "Uncertainties and main risk factors" section of the Corporation's 2007 annual Management's Discussion and Analysis (MD&A) that could cause actual results to differ materially from what Cogeco Cable currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Corporation's control. Therefore, future events and results may vary significantly from what management currently foresee. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Corporation is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter. This analysis should be read in conjunction with the Corporation's consolidated financial statements, and the notes thereto, prepared in accordance with Canadian Generally Accepted Accounting Principles and the MD&A included in the Corporation's 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 Cable's (the "Corporation") objectives are to improve profitability and create shareholder value. The strategies for reaching those objectives are sustained growth through the diversification and the improvement of products, services, clientele and territories, as well as the continuous improvement of networks and equipment and tight cost control over business processes. The Corporation measures its performance, with regard to these objectives by monitoring revenue growth, revenue-generating units ("RGU")(1) growth and free cash flow(2). Below are the recent achievements in furthering Cogeco Cable's objectives.
(1) Represent the sum of Basic Cable, High Speed Internet ("HSI"),
Digital Television and Telephony service customers.
(2) Free cash flow 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.
Continuous improvement of the service offering and expansion of the
customer base
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 Inc. ("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 et
St-Prosper-de-Dorchester in Quebec;
- Maitland, Prescott, Tillbury, Odessa, Bath and
Millgrove in Ontario.
- HSI Services:
- 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 Corporation has invested approximately
$103.9 million in its infrastructure including head-ends and
upgrades and rebuilds.
Tight cost control over business processes
- For the fourth quarter of 2008, consolidated operating costs
increased by 15.4% while revenue grew by 16.6%;
- The Portuguese cable subsidiary maintained tight cost control
and continued to improve its business processes;
- 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 Corporation had identified certain
material weaknesses in the design of internal controls over
financial reporting and there have been improvements in the
design of internal controls on some significant processes during
the quarter. The documentation and remediation of internal
controls weaknesses are progressing normally.
Effective management of capital
- October 1, the Corporation completed, pursuant to a private
placement, the issue of 7.00% Series A Senior Secured Notes
for US$190 million maturing October 1, 2015, and 7.60% Series
B Senior Secured Notes for $55 million maturing October 1, 2018.
The Corporation also entered into cross-currency swap agreements
to fix the liability for interest and principal payments on
US$190 million of its Senior Secured Notes Series A. Interest
on the Notes is payable semi-annually in arrears on April 1
and October 1 of each year commencing April 1, 2009. The
aggregate gross proceeds from the issuance of these Notes
amounts to approximately $257 million. Net proceeds of
approximately $255 million, after underwriters' fees and
other expenses, will be applied to repay Cogeco Cable's
maturing debt and reduce bank indebtedness.
RGU growth 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 the Corporation's revised RGU growth projections of 225,000 RGU issued on April 10, 2008, which represents approximately 9%, for the fiscal year ending August 31, 2008. Revenue growth Fiscal 2008 fourth-quarter revenue increased by $40.6 million, or 16.6%, to reach $284.9 million. During fiscal 2008, revenue increased by $137.9 million, or 14.7%, to reach $1,076.8 million, exceeding the revised projection of $1,060 million issued on April 10, 2008. Free cash flow In the fourth quarter of fiscal 2008, Cogeco Cable generated free cash flow of $21.1 million, compared to $14.9 million for the same period last year. For the year ended August 31, 2008, the Corporation generated free cash flow of $98.9 million compared to $30.6 million the year before. The free cash flow generated surpassed by $28.9 million or 41.3% the Corporation's revised projection of $70 million for the year ended August 31, 2008. The free cash flow improvements resulted mainly from an increase in operating income before amortization(1) and a reduction in financial expense. Capital expenditures and deferred charges for the fourth quarter and year ended August 31, 2008 increased by $9.5 million and $7.5 million respectively when compared to the corresponding periods of the prior year. OPERATING RESULTS - CONSOLIDATED OVERVIEW
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-------------------------------------------------------------------------
($000, except Quarters ended Years ended
percentages) August 31, August 31,
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
-------------------------------------------------------------------------
Operating income
before
amortization 121,116 102,426 18.2 445,424 370,753 20.1
-------------------------------------------------------------------------
Operating
margin(1) 42.5% 41.9% 41.4% 39.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
Revenue Fiscal 2008 fourth-quarter consolidated revenue improved by $40.6 million, or 16.6%, to reach $284.9 million, and, for fiscal 2008, 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 acquisitions of MaXess Networx®, FibreWired Burlington Hydro Communications, and Cogeco Data Services (the "recent acquisitions"), fourth-quarter 2008 Canadian operations revenue went up by $32.3 million, or 17.1%, and for fiscal 2008 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 for 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 fiscal 2008, 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 the prior 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, the impact of 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 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.
(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.
Operating income 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, recent acquisitions, and RGU growth generating additional revenues which outpaced operating cost increases. 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. Excluding the results of the recent acquisitions, financial results exceeded the Corporation's revised projections of operating income before amortization of $440 million and were in line with the Corporation's projected operating margin between 41% and 42% for fiscal 2008. RELATED PARTY TRANSACTIONS Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.3% of the Corporation's equity shares, representing 82.7% of the votes attached to the Corporation's voting shares. Under a management agreement, the Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue for certain executive, administrative, legal, regulatory, strategic and financial planning and additional services. In 1997, management fees were capped at $7 million per year, subject to annual upwards adjustments based on increases in the Consumer Price Index in Canada. Accordingly, for fiscal 2008, management fees have been set at a maximum of $8.7 million, which was reached in the second quarter, and therefore, no management fees were paid in the second half of the year. For fiscal 2007, management fees were set at a maximum of $8.6 million, and were fully paid in the first six months of the year. Furthermore, Cogeco Cable granted 22,683 stock options to COGECO's employees during fiscal 2008, compared to 319,647 for the same period last year. Of these 319,647 stock options granted in fiscal 2007, 262,400 were conditional on the achievement of certain yearly financial objectives by the Portuguese subsidiary over a period of three years. During the fourth quarter and fiscal 2008, Cogeco Cable charged COGECO Inc. an amount of $0.1 million and $0.4 million, respectively, with regards to Cogeco Cable's options granted to COGECO's employees. Details regarding the management agreement and stock options granted to COGECO Inc.'s employees are provided in the MD&A of the Corporation's 2007 Annual Report. There were no other material related party transactions during the 2008 year. FIXED CHARGES
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-------------------------------------------------------------------------
($000, except Quarters ended Years ended
percentages) August 31, August 31,
2008 2007 Change 2008 2007 Change
$ $ % $ $ %
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited)(audited)
Amortization 61,414 54,164 13.4 228,299 189,323 20.6
Financial expense 17,868 18,524 (3.5) 69,111 84,569 (18.3)
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2008 fourth-quarter amortization amounted to $61.4 million compared to $54.2 million for the same period the year before. The increase is mainly due to additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth, to support the deployment of the Digital Television service in Portugal, and to the recent acquisitions. Amortization for fiscal 2008 amounted to $228.3 million compared to $189.3 million for fiscal 2007. Amortization expense increased due to the following factors: 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 the recent acquisitions has also contributed to the increase in the amortization expense for the 2008 fiscal year. Fourth-quarter and fiscal 2008 financial expense decreased by $0.7 million and $15.5 million, respectively, compared to the same periods in 2007 due to the reduction of the level of Indebtedness (defined as bank indebtedness, derivative financial 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 third and fourth quarters of fiscal 2008 to finance the recent acquisitions. In addition, during fiscal 2007, the Corporation recorded a one-time charge of $2.6 million related to the early repayment of the Second Secured Debentures, Series A. INCOME TAXES Fiscal 2008 fourth quarter income tax expense amounted to $10 million compared to a recovery of $6.6 million in fiscal 2007, mainly due to the increase in operating income before amortization surpassing that of the fixed charges. In addition, the 2007 income tax expense was reduced by $14.7 million due to the recognition of benefits stemming from prior years' income tax losses, minimum income tax paid and a reduction of Canadian federal enacted income tax rates to take effect in January 2011. For fiscal 2008, income tax expense amounted to $14.7 million compared to $12.2 million in 2007. Included in the 2008 expense is a recovery of $24 million 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 revaluation of tangible and intangible assets upon the completion of the Cabovisao purchase price allocation in the fourth quarter of fiscal 2007. In addition, the 2007 expense was reduced by a non-cash adjustment of $16.2 million due to the recognition of benefits stemming from prior years' income tax losses, minimum income tax paid and a reduction of Canadian federal enacted income tax rates to take effect in January 2011. Excluding these adjustments, income taxes for the fourth quarter and fiscal 2008 would have amounted to $10 million and $38.7 million, respectively, compared to $8.1 million and $28.4 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. NET INCOME Fiscal 2008 fourth quarter net income amounted to $31.9 million, or $0.66 per share, compared to $36.4 million, or $0.79 per share, for the same period in 2007, a decrease of 12.4% and 16.5%. The decrease is mainly due to favourable income tax adjustments of $14.7 million in 2007. Excluding the effect of these adjustments, net income would have been $21.6 million, or $0.47 per share in fiscal 2007. Fiscal 2008 net income amounted to $133.3 million, or $2.75 per share compared to $84.7 million, or $1.96 per share in fiscal 2007. Excluding the effect of income tax rate reductions of $24 million in 2008 and of $16.2 million in 2007, net income for fiscal 2008 would have amounted to $109.3 million, or $2.25 per share, compared to $68.5 million, or $1.58 per share in 2007, an increase of 59.6% and 42.4%, respectively. Net income progression, excluding the effect of the income tax rate reductions, has resulted mainly from the growth in operating income before amortization exceeding that of fixed charges. CASH FLOW AND LIQUIDITY
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-----------------------------------------------------------------------
($000) Quarters ended Years ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
----------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating
activities
Cash flow from
operations(1) 99,547 83,825 360,402 284,565
Changes in non-
cash operating
items 44,201 28,790 32,481 (72,755)
----------------------------------------------------------------------
143,748 112,615 392,883 211,810
----------------------------------------------------------------------
----------------------------------------------------------------------
Investing
activities(2) (289,008) (68,778) (485,663) (248,579)
----------------------------------------------------------------------
----------------------------------------------------------------------
Financing
activities(2) 100,138 (2,042) 63,672 28,218
----------------------------------------------------------------------
----------------------------------------------------------------------
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies 6 (243) 1,271 1,243
----------------------------------------------------------------------
----------------------------------------------------------------------
Net change in cash
and cash
equivalents (45,116) 41,552 (27,837) (7,308)
Cash and cash
equivalents,
beginning of period 81,487 22,656 64,208 71,516
----------------------------------------------------------------------
----------------------------------------------------------------------
Cash and cash
equivalents,
end of period 36,371 64,208 36,371 64,208
----------------------------------------------------------------------
----------------------------------------------------------------------
(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 $99.5 million, 18.8% higher than the comparable period last year, primarily due to the increase in operating income before amortization. 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 $360.4 million, an increase of 26.7% compared to the year before, primarily due to the growth in operating income before amortization and to the reduction in financial expense partly offset by the growth in current income taxes. Changes in non-cash operating items generated cash inflows of $32.5 million for fiscal 2008 compared to cash outflows of $72.8 million in the previous year, mainly as a result of increases in accounts payable and accrued liabilities and in income tax liabilities. In fiscal 2007, the reduction in accounts payable and accrued liabilities was due to non-recurring payments made by the Portuguese subsidiary in accordance with the terms of the acquisition. On March 31, 2008, the Corporation 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, the Corporation 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, the Corporation 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 Corporation 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 the Corporation 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
--------------------------------------------------------------------
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.
Investing activities, including capital expenditures segmented according to the National Cable Television Association (NCTA) standard reporting categories, are as follows:
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-----------------------------------------------------------------------
($000) Quarters ended Years ended
August 31, August 31,
2008 2007 2008 2007
$ $ $ $
----------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Customer premise
equipment(1) 25,849 22,004 96,326 98,192
Scalable
infrastructure 16,280 11,692 47,006 43,392
Line extensions 6,191 3,366 13,929 11,164
Upgrade / Rebuild 15,767 16,673 56,873 58,640
Support capital 7,350 4,445 19,782 12,578
----------------------------------------------------------------------
Total capital
expenditures (2) 71,437 58,180 233,916 223,966
----------------------------------------------------------------------
Deferred charges
and others 7,011 10,763 27,499 29,553
----------------------------------------------------------------------
Business acquisitions
and related
adjustments 213,618 629 229,723 (1,265)
----------------------------------------------------------------------
Decrease in
restricted cash - (503) - (591)
----------------------------------------------------------------------
Total investing
activities(2) 292,066 69,069 491,138 251,663
----------------------------------------------------------------------
----------------------------------------------------------------------
(1) Includes mainly new and replacement drops as well as home
terminal devices.
(2) Includes capital leases, which are excluded from the statements
of cash flows.
Fiscal 2008 fourth quarter total capital expenditures amounted to $71.4 million, an increase of 22.8% when compared to the corresponding last year period, 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 decrease in RGU in Portugal; - 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; - An increase in support capital due to the acquisition of vehicles and to leasehold improvements in the Corporation'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. Fiscal 2008 total capital expenditures increased to $233.9 million from $224 million for the prior year due to the following factors: - 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 Corporation'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. 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 Canadian operations explained the lower increases recorded in 2008. In the fourth quarter and for the 2008 year, the Corporation generated free cash flow amounting to $21.1 million and $98.9 million, respectively, compared to $14.9 million and $30.6 million for the same periods of the preceding year. The free cash flow improvements over last year's same periods are mainly due 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 $9.5 million in the 2008 fourth-quarter and by $7.8 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 $104.7 million, due to the increase in long-term debt to finance the recent 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 $44.2 million from the changes in non-cash operating items, the free cash flow of $21.1 million, and the use of cash and cash equivalents for an amount of $45.1 million. During the fourth quarter of fiscal 2007, the level of Indebtedness affecting cash decreased by $146.5 million and was essentially due to the repayment of Term Facility using the public offering net proceeds of $146.9 million. In addition, during the fourth quarter of fiscal 2008, a dividend of $0.10 per share was paid to the holders of subordinate and multiple voting shares, totalling $4.9 million, compared to a dividend of $0.08 per share, or $3.6 million, for the fourth quarter of fiscal 2007. During fiscal 2008, the level of Indebtedness affecting cash increased by $79.4 million mainly due to the recent acquisitions, for an aggregate amount of $228.1 million offset by the free cash flow of $98.9 million, a reduction of $27.8 million in cash and cash equivalents and from an increase of $32.5 million in non-cash operating items. In addition, on March 5, 2008, the Corporation 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 Corporation's option at any time, in whole or in part, prior to maturity, at 100% of the principal amount plus a make-whole premium and will mature on March 5, 2018. For fiscal 2007, the level of Indebtedness affecting cash decreased by $299.6 million, mainly due to the completion 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 $30.6 million and a reduction of $7.3 million in cash and cash equivalents, partly offset by a decline of $72.8 million in non-cash operating items. In addition, quarterly dividends of $0.10 per share were paid to the holders of subordinate and multiple voting shares totalling $19.4 million during 2008 compared to quarterly dividends of $0.04 per share in the first quarter, $0.06 per share in the second and third quarters, and $0.08 per share in the fourth quarter totalling $10.3 million for the year before. As at August 31, 2008, the Corporation had a working capital deficiency of $607.8 million compared to $120.7 million as at August 31, 2007. The increased deficiency is mainly attributable to the following factors: the expiry of the 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 the 15.7 million EUR ($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 business, Cogeco Cable maintains a working capital deficiency due to a low level of accounts receivable as the majority of the Corporation's customers pay before their services are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling the Corporation to use cash and cash equivalents to reduce Indebtedness. During fiscal 2008, the Corporation repaid 10.5 million EUR, 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, the Corporation had used $467.6 million of its $885 million Term Facility for a remaining availability of $417.4 million. On October 1, 2008, the Corporation 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 Corporation has also 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. FINANCIAL POSITION Since August 31, 2007, there have been major changes to the balance of Fixed assets, Cash and cash equivalents, Accounts payable and accrued liabilities, Income tax liabilities, Accounts receivable, Future income tax assets, Future income tax liabilities, Goodwill, Customer relationships, Accumulated other comprehensive income (loss) and Indebtedness. The $138.5 million increase in fixed assets is mainly related to increased capital expenditures to sustain RGU growth, the fixed assets acquired through the recent acquisitions, and to the appreciation of the Euro over the Canadian dollar. The $27.8 million decrease in cash and cash equivalents is mainly due to the reduction of Indebtedness. The $37.1 million increase in accounts payable and accrued liabilities is related to the timing of payments made to suppliers and to the impact of the recent acquisitions. The $19.3 million increase in income tax liabilities and the $4.5 million net reduction in future income tax assets are mainly due to the utilization of most of the Corporation's Canadian tax loss carry forwards before fiscal 2008, partly offset by the impact of the recent acquisitions. The $12.8 million future income tax liabilities reduction 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 $12.6 million accounts receivable increase is essentially due to 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 of $32.6 million in Customer relationships are due to the recent acquisitions as well as the appreciation of the Euro over the Canadian dollar. The $18.5 million increase in accumulated other comprehensive income (loss) is mainly the result of the appreciation of the Euro over the Canadian dollar, partly offset by the changes in accounting policies related to financial instruments. Indebtedness has increased by $117.2 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. For changes in accounting policies, please consult "Accounting policies and estimates" section for further details. A description of Cogeco Cable's share data as of September 30, 2008 is presented in the table below:
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Number of Amount
shares/options ($000)
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Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 32,832,828 890,742
Options to purchase
Subordinate voting shares
Outstanding options 832,295
Exercisable options 314,334
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In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. Cogeco Cable's obligations, as discussed in the 2007 annual MD&A, have not materially changed since August 31, 2007, with the exception of the new financing discussed in the "Cash Flow and Liquidity" section. DIVIDEND DECLARATION At its October 29, 2008 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.12 per share for subordinate and multiple voting shares, payable on November 26, 2008, to shareholders of record on November 12, 2008. Continued improvement of the Corporation's financial results explains the dividend increase of 20% to $0.12 per share from $0.10 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 Corporation based upon the Corporation's financial condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no assurance that dividends will be declared, and if declared, their amount and timing may vary. FOREIGN EXCHANGE MANAGEMENT Cogeco Cable had entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$150 million Senior Secured Notes maturing in October 2008. 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 ?xed 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 depreciation. The fair value of cross-currency swaps decreased by a net amount of $3.7 million, of which $0.9 million offsets the foreign exchange loss 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. As noted in the MD&A of the 2007 Annual Report, the Corporation's investment in the Portuguese subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisao was borrowed directly in Euros. This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and accordingly, the Corporation realized a foreign exchange gain of $18.8 million in fiscal 2008 which is presented in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts at August 31, 2008 was $1.5580 per Euro compared to $1.4390 per Euro at August 31, 2007. The average exchange rates prevailing during the fourth quarter and the 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. CANADIAN OPERATIONS CUSTOMER STATISTICS
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Net additions (losses) % of
Penetration(1)
Quarters ended Years ended
August 31, August 31, August 31, August 31,
2008 2008 2007 2008 2007 2008 2007
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RGU 1,991,908 42,909 39,656 203,400 232,572 - -
Basic
Cable
service
customers 857,094 (1,476) (2,627) 7,937 15,980 - -
HSI service
customers(2) 473,467 8,799 12,363 57,631 72,756 57.7 52.2
Digital
Television
service
customers 441,746 16,150 8,747 61,867 52,515 52.4 45.8
Telephony
service
customers(3) 219,601 19,436 21,173 75,965 91,321 30.5 21.7
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing only to HSI services totalled 75,433 as at
August 31, 2008 compared to 70,402 at August 31, 2007.
(3) Customers subscribing only to Telephony services totalled 1,311 as
at August 31, 2008 compared to 782 at August 31, 2007.
Fiscal 2008 fourth-quarter 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 number of net losses for Basic Cable 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. Telephony customers grew by 19,436 to reach 219,601 compared to 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. 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, the growth in HSI customer net additions continues to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. The Digital Television service net additions stood at 16,150 customers compared to 8,747 customers for the same period in the prior year due to targeted marketing initiatives in 2008 to improve the penetration rate and the continuing strong interest for HD technology. OPERATING RESULTS
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($000, except Quarters ended Years ended
percentages) August 31, August 31,
2008 2007 Change 2008 2007 Change
$ $ % $ $ %
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(unaudited)(unaudited) (audited)(audited)
Revenue 220,760 188,450 17.1 833,097 714,070 16.7
Operating costs 124,505 106,869 16.5 467,454 412,602 13.3
Management fees
- COGECO Inc. - - - 8,714 8,568 1.7
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Operating income
before
amortization 96,255 81,581 18.0 356,929 292,900 21.9
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Operating margin 43.6% 43.3% 42.8% 41.0%
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Revenue Fourth-quarter and fiscal 2008 revenue rose by $32.3 million, or 17.1%, and $119 million, or 16.7%, to reach $220.8 million and $833.1 million, respectively. This growth is explained mainly by an increase in the number of Telephony, Digital Television and HSI service customers as mentioned in the "Customer Statistics" section, combined with the impact of the recent acquisitions as well as the following rate increases implemented by the Corporation:
- In the second half of fiscal 2007:
- In March 2007; a monthly rate increase of $3 per Digital
Television service customer in Ontario;
- In April 2007; a monthly rate increase of $3 per Digital
Television service customer in Quebec and a rate increase
of $1.50 per Analogue Value Pak service customer in Ontario.
These rate increases represent an average increase of approximately
$1.25 per Basic Cable service customer.
- In the first quarter of fiscal 2008:
- In October 2007 in Quebec; a rate increase of between $1
and $2 per Analogue Basic Cable service customer without a
bundle, a rate increase of $0.50 per Basic Cable and tier
service customer without a bundle, and rate increases from
$2 to $5 per HSI Lite service customer and $5 per HSI
Standard stand-alone service customer;
- In November 2007 in Ontario; a rate increase of between $1
and $2 per Analogue Basic Cable service customer without
a bundle, and rate increases from $2 to $5 per HSI Lite
service customer and $5 per HSI Standard stand-alone service
customer;
- Finally, a rebate of $5 per Telephony service customer with
two bundled service offers was also introduced in fiscal
2008 in Ontario and in Quebec.
- In the fourth quarter of fiscal 2008:
- In July 2008 in Ontario; a rate increase of $2 for all
digital TV packages, slightly offset by targets reductions
in HD access fees in certain markets and monthly equipment
rental fees of selected digital receivers; a $2 rate
increase to HSI Standard service in a bundle and a $5
rate increase to HSI Pro service in a bundle.
- In July 2008 in Quebec; a reduction of $4 for the monthly
equipment rental fee of the standard definition digital
video recorded ("DVR") receiver.
These rate adjustments implemented in fiscal 2008 represent an
average increase of approximately $1.60 per Basic Cable service
customer.
Operating costs 2008 fourth-quarter and fiscal year operating costs, excluding management fees payable to COGECO Inc., increased by $17.6 million, or 16.5%, and $54.9 million, or 13.3%, to reach $124.5 million and $467.5 million, respectively. The increase in operating costs is mainly attributable to servicing additional RGU and the impact of recent acquisitions. Operating income before amortization Fourth-quarter and fiscal 2008 operating income before amortization rose by $14.7 million, or 18%, to reach $96.3 million and by $64 million, or 21.9%, to reach $356.9 million, respectively. The operating income before amortization has risen due to the increased revenue outpacing the operating costs growth as well as the impact of the recent acquisitions. Cogeco Cable's Canadian operations fourth-quarter operating margin increased slightly to 43.6% compared to 43.3% for the same period in the prior year, and for the fiscal year increased to 42.8% from 41%, mainly as a result of RGU growth, recent acquisitions and implemented rate increases.
EUROPEAN OPERATIONS
CUSTOMER STATISTICS
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Net additions (losses) % of
Penetration(1)
Quarters ended Years ended
August 31, August 31, August 31, August 31,
2008 2008 2007 2008 2007 2008 2007
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RGU 724,966 (1,809) 9,920 27,809 68,116 - -
Basic Cable
service
customers 296,135 (4,456) 4,756 2,132 24,309 - -
HSI service
customers(2) 159,301 (5,009) 2,936 (722) 23,745 53.8 54.4
Digital
Television
service
customers(3) 24,452 9,982 - 24,452 - 8.3 -
Telephony
service
customers(4) 245,078 (2,326) 2,228 1,947 20,062 82.8 82.7
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing only to HSI services totalled 8,176 as at
August 31, 2008 compared to 8,370 at August 31, 2007.
(3) The Digital Television service was launched in the third quarter
of 2008.
(4) Customers subscribing only to Telephony services totalled 10,201
as at August 31, 2008 compared to 8,119 at August 31, 2007.
2008 fourth-quarter and fiscal year were marked by an unfavourable economic environment 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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($000, except Quarters ended Years ended
percentages) August 31, August 31,
2008 2007 Change 2008 2007 Change
$ $ % $ $ %
-------------------------------------------------------------------------
(unaudited)(unaudited) (audited)(audited)
Revenue 64,148 55,864 14.8 243,690 224,810 8.4
Operating costs 39,287 35,019 12.2 155,195 146,957 5.6
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Operating income
before
amortization 24,861 20,845 19.3 88,495 77,853 13.7
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Operating margin 38.8% 37.3% 36.3% 34.6%
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Revenue 2008 fourth-quarter and fiscal year revenue increased by $8.3 million and $18.9 million to reach $64.1 million and $243.7 million, respectively, an increase of 14.8% and 8.4%, compared to fiscal 2007. This growth for the fourth quarter is mainly due to the following monthly rate increases implemented by Cabovisao: an increase of $1 (0.65 EUR) per Basic Cable service customer effective in March 2007, an increase averaging $1.50 (1 EUR) per Basic Cable customer and an increase averaging $0.90 (0.60 EUR) per HSI customer effective in January 2008, and the launch of Digital Television services. The growth for fiscal 2008 is mainly due to the monthly rate increases described above, the increase in the number of Basic Cable and Telephony service customers, as well as the launch of Digital Television services. Revenue from the European operations in the local currency for the fourth quarter and fiscal 2008 amounted to 40.5 million EUR and 161.3 million EUR, an increase of 1.7 million EUR, or 4.3%, and 9.5 million EUR, or 6.2%, respectively. Operating costs For the fourth quarter and fiscal 2008, operating costs increased by $4.3 million and $8.2 million to reach $39.3 million and $155.2 million, respectively, an increase of 12.2% and 5.6% compared to last year. The increase in operating costs for the fourth quarter of 2008 is mainly attributable to RGU growth including the impact of the launch of Digital Television services. The operating costs increase for the fiscal year is due to servicing additional RGU, timing of certain marketing initiatives, 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 costs from the European operations in the local currency for the fourth quarter and fiscal year amounted to 24.8 million EUR and 102.5 million EUR, an increase of 0.4 million EUR or 1.7%, and an increase of 3.3 million EUR or 3.3%, respectively. Operating income before amortization Fourth-quarter and fiscal 2008 operating income before amortization increased to $24.9 million from $20.8 million, an increase of 19.3% and to $88.5 million from $77.9 million, an increase of 13.7%, respectively. The operating income before amortization increased due to revenue growth outpacing the rise in operating costs. Fiscal 2008 fourth-quarter European operations operating margin increased to 38.8% from 37.3%. For the 2008 year, the operating margin increased to 36.3% from 34.6%. Operating income before amortization from the European operations in the local currency for the fourth quarter and fiscal 2008 amounted to 15.7 million EUR and 58.8 million EUR, an increase of 1.2 million EUR or 8.6%, and 6.2 million EUR or 11.8%, respectively. FISCAL 2009 FINANCIAL PROJECTIONS The Corporation 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. Subsequent to 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%. Net income should stand at $107 million. 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 Projections Preliminary Projections
customer data and October 29, 2008 July 9, 2008
operating margin) Fiscal 2009 Fiscal 2009
$ $
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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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The exchange rate used for the fiscal 2009 projections is $1.50 per Euro compared to $1.44 per Euro for the July 2008 preliminary projections. UNCERTAINTIES AND MAIN RISK FACTORS This section outlines general as well as more specific risks faced by Cogeco Cable and its subsidiaries that could significantly affect the financial condition, operating results or business of the Corporation. It does not purport to cover all contingencies, or to describe all possible factors that might have an influence on the Corporation 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 Cable applies an on-going risk management process that includes an annual assessment of risks for the Corporation and its subsidiaries, under the oversight of the Audit Committee. As part of this process, the Corporation endeavours to identify risks that are liable to have a major impact on the Corporation'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 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"), and 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 the Corporation's service areas may also have a significant effect on the Corporation's business and the competitiveness of its service offerings. TECHNOLOGICAL RISKS 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. The Corporation 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 inexibility 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. Management of the Corporation 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 the Corporation and gradual disintermediation through direct transactions between video content suppliers and the Corporation's customers. In this context, revenue and margins derived from the Corporation's HSI access services may not entirely compensate for the loss of revenue or margin derived from the Corporation'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 the Corporation'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, the Corporation 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 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 the Corporation'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 Canadian Radio-Television and Telecommunications Commission ("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 the Corporation 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 the Corporation'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 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, the Corporation 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 Defendant filed its response on September 29, 2008 and the matter is currently pending. Cogeco Cable has accrued the full amount with respect to these fees for fiscal years 2007 and 2008. RISK 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. The Corporation 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 The Corporation 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 the Corporation'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. The Corporation 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 the Corporation'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 the Corporation into its direct and indirect subsidiaries. This financing structure requires that Cogeco Cable be able to receive upstream inows 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 the Corporation, or to its direct or indirect subsidiaries could adversely affect such upstream inows of funds or the effectiveness of the Corporation's existing debt financing structure. The Corporation'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 the Corporation 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). There are no financial hedging arrangements in effect at this time for currency inuctuation risk on interest payments resulting from these borrowings, however there is a partially offsetting relationship 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. The Corporation is still considering various options to extend the term loan with alternate sources of Euro-denominated financing. HUMAN RESOURCES Cogeco Cable 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 coninict or disruption to the provision of its services. Cogeco Cable maintains, as well, appropriate relations with its key personnel. The Corporation's success depends to a significant extent on its ability to attract and retain its managers and skilled employees in an increasingly competitive market. The Corporation's inability or failure to recruit, retain or adequately train its human resources may have a materially adverse effect on the Corporation'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 Coninicts 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 Cable's accounting policies, estimates and future accounting pronouncements since August 31, 2007, except as described below. A description of the Corporation's policies and estimates can be found in the 2007 annual MD&A. Financial instruments Effective September 1, 2007, the Corporation 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 Corporation'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 Corporation the option to designate certain financial instruments, on initial recognition, as held-for-trading. All of the Corporation's financial assets are classified as held-for-trading or loans and receivables. The Corporation has classified its cash and cash equivalents as held-for-trading. Accounts receivable have been classified as loans and receivables. All of the Corporation's financial liabilities were classified as other liabilities, except for the cross-currency swaps, which were classified as held-for-trading. Held-for-trading assets and liabilities are carried at fair value on the balance sheet, with changes in fair value recorded in the consolidated statement of income, except for the changes in fair value of the cross-currency swaps, which are designated as cash flow hedges of the Senior Secured Notes, Series A and are recorded in other comprehensive income. Loans and receivables and all financial liabilities are carried at amortized cost using the effective interest method. Upon adoption, the Corporation 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, over a period not exceeding five years. The impact of these adjustments reduced deferred charges by $1.2 million, reduced long-term debt by $3.1 million, increased future income tax liabilities by $0.6 million and increased retained earnings by $1.3 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 statement of income immediately. Accordingly, the Corporation's cross-currency swaps must be measured at fair value in the consolidated financial statements. Since these cross-currency swaps are used to hedge cash flows on Senior Secured Notes, Series A denominated in U.S. dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value on September 1, 2007, increased derivative financial instrument 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 and decreased opening accumulated other comprehensive income by $2.2 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 instrument liabilities by $11.5 million, increased future income tax liabilities by $0.4 million and increased accumulated other comprehensive income by $0.8 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the year ended August 31, 2008 decreased derivative financial instrument liabilities by $3.7 million, increased future income tax liabilities by $0.9 million and increased accumulated other comprehensive income by $1.9 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 currencies 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. As a result, an amount of $3.1 million was reclassified as at August 31, 2007 from the foreign currency translation adjustment to the accumulated other comprehensive income and the Corporation'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 statement of income. On September 1, 2007, and 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation has selected an external advisor to assist with the project and is currently in the process of assessing the differences between IFRS and the Corporation'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 Corporation's current accounting policies and IFRS. Changes in accounting policies are likely. These changes may materially impact the Corporation's consolidated financial statements. NON-GAAP FINANCIAL MEASURES This section describes non-GAAP financial measures used by Cogeco Cable throughout this MD&A. It also provides reconciliations between these non-GAAP measures and the most comparable GAAP financial measures. These financial measures do not have standard definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented by other companies. These measures include "cash flow from operations", "free cash flow", "operating income before amortization", and "operating margin". Cash flow from operations and free cash flow Cash flow from operations is used by Cogeco Cable's management and investors to evaluate cash flows generated by operating activities, excluding the impact of changes in non-cash operating items. This allows the Corporation to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating the non-GAAP measure, "free cash flow". Free cash flow is used, by Cogeco Cable's management and investors, to measure its ability to repay debt, distribute capital to its shareholders and finance its growth. Cash flow from operations is calculated as follows:
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Quarters ended Years ended
August 31, August 31,
2008 2007 2008 2007
($000) $ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Cash flow from operating
activities 143,748 112,615 392,883 211,810
Changes in non-cash
operating items (44,201) (28,790) (32,481) 72,755
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Cash flow from operations 99,547 83,825 360,402 284,565
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Free cash flow is calculated as follows:
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Quarters ended Years ended
August 31, August 31,
2008 2007 2008 2007
($000) $ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Cash flow from operations 99,547 83,825 360,402 284,565
Acquisition of fixed assets (68,379) (57,889) (228,441) (220,882)
Increase in deferred charges (7,035) (10,784) (27,596) (30,042)
Assets acquired under capital
leases - as per Note 12b) (3,058) (291) (5,475) (3,084)
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Free cash flow 21,075 14,861 98,890 30,557
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Operating income before amortization and operating margin Operating income before amortization is used by Cogeco Cable's management and investors to assess the Corporation's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before amortization is a proxy for cash flows 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 Corporation'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 before amortization and operating margin are calculated as follows:
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Quarters ended Years ended
August 31, August 31,
($000, except percentages) 2008 2007 2008 2007
$ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Operating income 59,702 48,262 217,125 181,430
Amortization 61,414 54,164 228,299 189,323
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Operating income
before amortization 121,116 102,426 445,424 370,753
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Revenue 284,908 244,314 1,076,787 938,880
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Operatin Margin 42.5% 41.9% 41.4% 39.5%
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ADDITIONAL INFORMATION This MD&A was prepared on October 29, 2008. Additional information relating to the Corporation, including its Annual Information Form, is available on the SEDAR website at www.sedar.com. ABOUT COGECO CABLE Cogeco Cable (www.cogeco.ca), a telecommunications company offering a diverse range of services to its customers in Canada and Portugal, is the second largest cable operator in Ontario, Quebec and Portugal, in terms of the number of Basic Cable service customers served. Through its two-way broadband cable networks, Cogeco Cable provides its residential and commercial customers with Analogue and Digital Television, HSI and Telephony services. The Corporation provides approximately 2,717,000 revenue generating units (RGU) to 2,428,000 homes passed in its Canadian and Portuguese service territories. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock Exchange (TSX: CCA).
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
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 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)
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Quarters ended August 31, May 31,
2008 2007 2008 2007
($000, except percentages
and per share data) $ $ $ $
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Revenue 284,908 244,314 274,944 240,612
Operating income before
amortization(1) 121,116 102,426 117,490 97,874
Operating margin(1) 42.5% 41.9% 42.7% 40.7%
Amortization 61,414 54,164 58,209 47,278
Financial expense 17,868 18,524 17,372 21,273
Income taxes 9,968 (6,630) 10,767 8,942
Net income 31,866 36,368 31,142 20,381
Cash flow from operations(1) 99,547 83,825 95,829 76,416
Earnings per share
Basic 0.66 0.79 0.64 0.45
Diluted 0.65 0.78 0.64 0.45
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Quarters ended February 29 / 28, November 30,
2008 2007 2007 2006
($000, except percentages
and per share data) $ $ $ $
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Revenue 265,102 231,952 251,833 222,002
Operating income before
amortization(1) 108,481 86,791 98,337 83,662
Operating margin(1) 40.9% 37.4% 39.0% 37.7%
Amortization 55,989 43,572 52,687 44,309
Financial expense 16,959 23,551 16,912 21,221
Income taxes (14,378) 4,261 8,375 5,597
Net income 49,911 15,407 20,363 12,535
Cash flow from operations(1) 85,273 62,264 79,753 62,060
Earnings per share
Basic 1.03 0.37 0.42 0.31
Diluted 1.02 0.37 0.42 0.31
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(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
Cogeco Cable's operating results are not generally subject to material seasonal inuctuations. However, the loss of Basic Service customers is usually greater, and the addition of HSI service customers is generally lower, in the third quarter, mainly due to students leaving campuses at the end of the school year. Cogeco Cable offers its services in several university and college towns, such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivieres and Rimouski in Canada, and Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarters' operating margin is usually higher as lower or no management fees are paid to COGECO Inc. Under a Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a maximum amount. For more details, please refer to the "Related Party Transactions" section.
COGECO CABLE 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 CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
(In thousands of dollars, ended August 31, ended August 31,
except per share data) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Revenue
Service 283,856 243,544 1,070,676 935,390
Equipment 1,052 770 6,111 3,490
--------------------------------------------------------------------------
284,908 244,314 1,076,787 938,880
Operating costs 163,792 141,888 622,649 559,559
Management fees - COGECO Inc. - - 8,714 8,568
--------------------------------------------------------------------------
Operating income
before amortization 121,116 102,426 445,424 370,753
Amortization (note 4) 61,414 54,164 228,299 189,323
--------------------------------------------------------------------------
Operating income 59,702 48,262 217,125 181,430
Financial expense (note 5) 17,868 18,524 69,111 84,569
--------------------------------------------------------------------------
Income before income taxes 41,834 29,738 148,014 96,861
Income taxes (note 6) 9,968 (6,630) 14,732 12,170
--------------------------------------------------------------------------
Net income 31,866 36,368 133,282 84,691
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share (note 7)
Basic 0.66 0.79 2.75 1.96
Diluted 0.65 0.78 2.73 1.94
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
(In thousands of dollars) ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Net income 31,866 36,368 133,282 84,691
--------------------------------------------------------------------------
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 9,540 - 2,661 -
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 (8,751) - (736) -
Unrealized gains (losses)
on translation of net
investments in self-
sustaining foreign
subsidiaries 5,752 (684) 53,184 8,900
Unrealized gains (losses)
on translation of long-term
debts designated as hedges
of net investments in self-
sustaining foreign
subsidiaries (net of income
taxes expenses of $18,000 and
income taxes recovery of
$1,685,000 in 2007) (3,132) 799 (34,414) (7,558)
--------------------------------------------------------------------------
3,409 115 20,695 1,342
--------------------------------------------------------------------------
Comprehensive income 35,275 36,483 153,977 86,033
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Twelve months ended August 31,
(In thousands of dollars) 2008 2007
$ $
--------------------------------------------------------------------------
(audited) (audited)
Balance at beginning, as reported 181,952 117,760
Changes in accounting policies (note 1) 1,307 -
--------------------------------------------------------------------------
Balance at beginning, as restated 183,259 117,760
Net income 133,282 84,691
Subordinate voting shares issue costs (net
of income taxes of $4,689,000 in 2007) - (10,151)
Dividends on multiple voting shares (6,276) (3,766)
Dividends on subordinate voting shares (13,115) (6,582)
--------------------------------------------------------------------------
Balance at end 297,150 181,952
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(In thousands of dollars) August 31, 2008 August 31, 2007
$ $
--------------------------------------------------------------------------
(audited) (audited)
Assets
Current
Cash and cash equivalents 36,371 64,208
Accounts receivable 59,582 46,945
Income taxes receivable 2,267 1,112
Prepaid expenses 12,892 7,606
Future income tax assets 8,661 17,986
--------------------------------------------------------------------------
119,773 137,857
--------------------------------------------------------------------------
Income taxes receivable - 1,345
Fixed assets 1,257,965 1,119,498
Deferred charges 57,751 54,645
Intangible assets (note 8) 1,091,042 1,058,410
Goodwill (note 8) 487,805 342,584
Future income tax assets 4,819 -
--------------------------------------------------------------------------
3,019,155 2,714,339
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 10,302 -
Accounts payable and accrued liabilities 247,638 210,496
Income tax liabilities 20,212 953
Deferred and prepaid income 32,859 29,837
Derivative financial instruments 79,791 -
Current portion of long-term debt (note 9) 336,807 17,292
--------------------------------------------------------------------------
727,609 258,578
--------------------------------------------------------------------------
Long-term debt (note 9) 718,234 1,010,634
Deferred and prepaid income and
other liabilities 11,859 11,501
Pension plan liabilities and accrued
employees benefits 3,139 1,918
Future income tax liabilities 253,235 266,042
--------------------------------------------------------------------------
1,714,076 1,548,673
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 10) 988,889 984,405
Contributed surplus 3,686 2,419
Retained earnings 297,150 181,952
Accumulated other comprehensive
income (loss) (note 11) 15,354 (3,110)
--------------------------------------------------------------------------
1,305,079 1,165,666
--------------------------------------------------------------------------
3,019,155 2,714,339
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
(In thousands of dollars) ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Cash flow from
operating activities
Net income 31,866 36,368 133,282 84,691
Adjustments for:
Amortization (note 4) 61,414 54,164 228,299 189,323
Amortization of deferred
transaction costs 1,035 513 3,218 2,226
Future income taxes (note 6) 3,725 (6,024) (8,755) 7,511
Stock-based compensation 608 (891) 2,569 1,145
Loss on disposal of fixed assets 686 389 1,077 220
Other 213 (694) 712 (551)
--------------------------------------------------------------------------
99,547 83,825 360,402 284,565
Changes in non-cash operating
items (note 12 a)) 44,201 28,790 32,481 (72,755)
--------------------------------------------------------------------------
143,748 112,615 392,883 211,810
--------------------------------------------------------------------------
Cash flow from
investing activities
Acquisition of fixed assets
(note 12 b)) (68,379) (57,889) (228,441) (220,882)
Increase in deferred charges (7,035) (10,784) (27,596) (30,042)
Business acquisitions and
related adjustments, net of
cash and cash equivalents
acquired (note 2) (213,618) (629) (229,723) 1,265
Decrease in restricted cash - 503 - 591
Other 24 21 97 489
--------------------------------------------------------------------------
(289,008) (68,778) (485,663) (248,579)
--------------------------------------------------------------------------
Cash flow from
financing activities
Increase in bank indebtedness 10,302 - 10,302 -
Increase in long-term debt,
net of issue costs 95,087 - 194,846 -
Repayment of long-term debt (697) (146,472) (125,735) (299,558)
Issue of subordinate
voting shares 296 154,609 3,650 352,964
Subordinate voting shares
issue costs - (6,551) - (14,840)
Dividends on multiple
voting shares (1,569) (1,256) (6,276) (3,766)
Dividends on subordinate
voting shares (3,281) (2,372) (13,115) (6,582)
--------------------------------------------------------------------------
100,138 (2,042) 63,672 28,218
--------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents denominated
in foreign currencies 6 (243) 1,271 1,243
--------------------------------------------------------------------------
Net change in cash and
cash equivalents (45,116) 41,552 (27,837) (7,308)
Cash and cash equivalents
at beginning 81,487 22,656 64,208 71,516
--------------------------------------------------------------------------
Cash and cash
equivalents at end 36,371 64,208 36,371 64,208
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See supplemental cash flow information in note 12.
COGECO CABLE 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 ("GAAP"), contain all adjustments necessary to present fairly the financial position of Cogeco Cable Inc. ("the Corporation") as at August 31, 2008 and August 31, 2007 as well as its results of operations and its cash flow 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 Cable 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. Financial instruments Effective September 1, 2007, the Corporation 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 Corporation'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 Corporation the option to designate certain financial instruments, on initial recognition, as held-for-trading. All of the Corporation's financial assets are classified as held-for-trading or loans and receivables. The Corporation has classified its cash and cash equivalents as held-for-trading. Accounts receivable have been classified as loans and receivables. All of the Corporation's financial liabilities were classified as other liabilities, except for the 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 statements 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 Corporation 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 and increased retained earnings by $1.3 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 Corporation'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 US 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 instrument 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 and decreased opening accumulated other comprehensive income by $2.2 million. The impact of measuring the cross-currency swap agreements at fair value on the interim consolidated financial statements for the three-month period ended August 31, 2008 decreased derivative financial instrument liabilities by $11.5 million, increased future income tax liabilities by $0.4 million and increased accumulated other comprehensive income by $0.8 million. The impact of measuring the cross-currency swap agreements at fair value on the interim consolidated financial statements for the year ended August 31, 2008 decreased derivative financial instrument liabilities by $3.7 million, increased future income tax liabilities by $0.9 million and increased accumulated other comprehensive income by $1.9 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. As a result, an amount of $4.5 million was reclassified as at September 1, 2006 from the foreign currency translation adjustment to accumulated other comprehensive income and the Corporation'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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 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 Corporation 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 Corporation has selected an external advisor to assist with the project and is currently in the process of assessing the differences between IFRS and the Corporation'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 Corporation's current accounting policies and IFRS. Changes in accounting policies are likely. These changes may materially impact the Corporation's consolidated financial statements. 2. Business acquisitions On March 31, 2008, the Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation's activities are comprised of Cable Television, High Speed Internet and Telephony services. The Corporation considers its Cable Television, High Speed Internet and Telephony activities as a single operating segment. The Corporation's activities are carried out in Canada and Europe. The principal financial information per business segment is presented in the tables below:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months Canada Europe Consolidated
ended August 31, 2008 2007 2008 2007 2008 2007
(unaudited) $ $ $ $ $ $
-------------------------------------------------------------------------
Revenue 220,760 188,450 64,148 55,864 284,908 244,314
Operating
costs 124,505 106,869 39,287 35,019 163,792 141,888
Operating
income
before
amortization 96,255 81,581 24,861 20,845 121,116 102,426
Amortization 40,379 34,992 21,035 19,172 61,414 54,164
Operating
income 55,876 46,589 3,826 1,673 59,702 48,262
Financial
expense
(revenue) 17,941 18,458 (73) 66 17,868 18,524
Income taxes 11,657 (4,036) (1,689) (2,594) 9,968 (6,630)
Net income 26,278 32,167 5,588 4,201 31,866 36,368
-------------------------------------------------------------------------
Total
assets 2,214,840 1,955,218 804,315 759,121 3,019,155 2,714,339
Fixed assets 940,683 811,982 317,282 307,516 1,257,965 1,119,498
Intangible
assets 1,027,268 989,552 63,774 68,858 1,091,042 1,058,410
Goodwill 116,890 - 370,915 342,584 487,805 342,584
Acquisition
of fixed
assets (1) 57,677 45,559 13,760 12,621 71,437 58,180
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes capital leases that are excluded from the statements of
cash flows.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve months Canada Europe Consolidated
ended August 31, 2008 2007 2008 2007 2008 2007
(audited) $ $ $ $ $ $
-------------------------------------------------------------------------
Revenue 833,097 714,070 243,690 224,810 1,076,787 938,880
Operating
costs 467,454 412,602 155,195 146,957 622,649 559,559
Management
fees -
COGECO Inc. 8,714 8,568 - - 8,714 8,568
Operating
income
before
amortization 356,929 292,900 88,495 77,853 445,424 370,753
Amortization 151,369 131,383 76,930 57,940 228,299 189,323
Operating
income 205,560 161,517 11,565 19,913 217,125 181,430
Financial
expense
(revenue) 69,268 82,714 (157) 1,855 69,111 84,569
Income taxes 19,998 12,050 (5,266) 120 14,732 12,170
Net income 116,294 66,753 16,988 17,938 133,282 84,691
-------------------------------------------------------------------------
Total
assets 2,214,840 1,955,218 804,315 759,121 3,019,155 2,714,339
Fixed assets 940,683 811,982 317,282 307,516 1,257,965 1,119,498
Intangible
assets 1,027,268 989,552 63,774 68,858 1,091,042 1,058,410
Goodwill 116,890 - 370,915 342,584 487,805 342,584
Acquisition
of fixed
assets (1) 182,719 182,374 51,197 41,592 233,916 223,966
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes capital leases that are excluded from the statements of
cash flows.
4. Amortization
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Fixed assets 52,941 46,272 195,587 166,298
Deferred charges 5,307 5,331 21,780 20,464
Intangible assets 3,166 2,561 10,932 2,561
--------------------------------------------------------------------------
61,414 54,164 228,299 189,323
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Financial expense
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Interest on long-term debt 17,770 18,163 68,304 80,066
Amortization of deferred
transaction costs 407 513 1,629 2,226
Other (309) (152) (822) 2,277
--------------------------------------------------------------------------
17,868 18,524 69,111 84,569
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Income Taxes
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Current 6,243 (606) 23,487 4,659
Future 3,725 (6,024) (8,755) 7,511
--------------------------------------------------------------------------
9,968 (6,630) 14,732 12,170
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides the reconciliation between Canadian
statutory federal and provincial income taxes and the consolidated
income tax expense:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Income before income taxes 41,834 29,738 148,014 96,861
Combined income tax rate 33.48% 34.99% 33.50% 34.97%
Income taxes at combined
income tax rate 14,004 10,406 49,585 33,872
Adjustment for losses or income
subject to lower or
higher tax rates (993) (812) (2,681) (1,285)
Decrease in future income taxes
as a result of decreases
in substantively enacted
tax rates - (6,318) (24,002) (6,318)
Income taxes arising from
non-deductible expenses 218 636 803 636
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 (266) (73) 220 246
--------------------------------------------------------------------------
Income taxes at effective
income tax rate 9,968 (6,630) 14,732 12,170
--------------------------------------------------------------------------
--------------------------------------------------------------------------
7. Earnings per Share The following table provides the reconciliation between basic and diluted earnings per share:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Net income 31,866 36,368 133,282 84,691
Weighted average number
of multiple voting
and subordinate voting
shares outstanding 48,506,369 46,080,398 48,472,364 43,246,025
Effect of dilutive
stock options (1) 265,925 427,920 287,694 349,854
--------------------------------------------------------------------------
Weighted average number of
diluted multiple voting
and subordinate voting
shares outstanding 48,772,294 46,508,318 48,760,058 43,595,879
--------------------------------------------------------------------------
Earnings per share
Basic 0.66 0.79 2.75 1.96
Diluted 0.65 0.78 2.73 1.94
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) For the three and twelve month periods ended August 31, 2008, 112,505
and 106,099 stock options (none and 35,884 in 2007) were excluded
from the calculation of diluted earnings per share since the exercise
price of the options was greater than the average share price of the
subordinate voting shares.
8. Goodwill and Other Intangible Assets
--------------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
--------------------------------------------------------------------------
(audited) (audited)
Customer relationships 101,490 68,858
Customer base 989,552 989,552
--------------------------------------------------------------------------
1,091,042 1,058,410
Goodwill 487,805 342,584
--------------------------------------------------------------------------
1,578,847 1,400,994
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a) Intangible assets
During fiscal years 2008 and 2007, intangible assets variations were
as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2008 2007
Customer Customer
relation Customer relation Customer
-ships base Total -ships base Total
$ $ $ $ $ $
--------------------------------------------------------------------------
(audited) (audited) (audited) (audited) (audited) (audited)
Balance at
beginning 68,858 989,552 1,058,410 - 989,552 989,552
Business
acquisitions
and related
adjustments
(note 2) 38,203 - 38,203 71,684 - 71,684
Amortization (10,932) - (10,932) (2,561) - (2,561)
Foreign
currency
translation
adjustment 5,361 - 5,361 (265) - (265)
--------------------------------------------------------------------------
Balance
at end 101,490 989,552 1,091,042 68,858 989,552 1,058,410
--------------------------------------------------------------------------
--------------------------------------------------------------------------
At August 31, 2008 and 2007 the Corporation tested the value of
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 Corporation tested the value of
goodwill for impairment and concluded that no impairment existed.
9. Long-Term Debt
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maturity Interest August 31, August 31,
rate 2008 2007
% $ $
-------------------------------------------------------------------------
(audited) (audited)
Parent company
Term Facility
Term loan -
EUR 94,096,350
(EUR 104,551,500
as at August 31,
2007) 2011 5.31 (1) 145,832 150,450
Term loan -
EUR 17,358,700 2011 5.25 (1) 26,881 24,979
Revolving loan -
EUR 126,000,000
(EUR 196,725,000
as at August 31,
2007) 2011 5.25 (1) 196,308 283,087
Revolving loan 2011 3.99 (1) 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 (2) 159,233 158,430
Series B 2011 7.73 174,338 175,000
Senior Unsecured
Debenture (3) 2018 5.94 99,768 -
Deferred credit (4) 2008 - - 80,220
Subsidiaries
Obligations under
capital leases 2013 6.42 - 8.30 8,492 5,760
-------------------------------------------------------------------------
1,055,041 1,027,926
Less current portion 336,807 17,292
-------------------------------------------------------------------------
718,234 1,010,634
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Average interest rate on debt as at August 31, 2008, including
stamping fees.
(2) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the US
denominated debt.
(3) On March 5, 2008, the Corporation 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 Corporation's option at any
time, in whole or in part, prior to maturity, at 100% of the
principal amount plus a make-whole premium.
(4) The deferred credit represents the amount that was deferred for hedge
accounting purposes as at August 31, 2007 under cross-currency swap
agreements entered into by the Corporation to hedge Senior Secured
Notes Series A denominated in US dollars. In accordance with the
standards on financial instruments, the Corporation's cross-currency
swap agreements are now presented as derivative financial instrument
liabilities (see note 1).
10. Capital Stock Authorized, an unlimited number Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the holder at any time at a price of $1 per share, carrying a cumulative preferential cash dividend at a rate of 11% of the redemption price per year. Class B Preference shares, without voting rights, could be issued in series. Multiple voting shares, 10 votes per share. Subordinate voting shares, 1 vote per share.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
August 31, 2008 August 31, 2007
$ $
-----------------------------------------------------------------------
(audited) (audited)
Issued
15,691,100 multiple voting shares 98,346 98,346
32,826,611 subordinate voting shares
(32,663,587 as at August 31, 2007) 890,543 886,059
-----------------------------------------------------------------------
988,889 984,405
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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 32,663,587 886,059 24,308,112 532,112
Shares issued for
cash consideration - - 8,000,000 345,950
Shares issued for
cash under the
Employee Stock
Purchase Plan and
the Stock Option Plan 163,024 3,650 355,475 7,014
Compensation expense
previously recorded
in contributed
surplus for options
exercised - 834 - 983
-----------------------------------------------------------------------
Balance at end 32,826,611 890,543 32,663,587 886,059
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Stock-based plans The Corporation offers, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for certain executives, which are described in the Corporation's annual consolidated financial statements. During the year, the Corporation 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 Corporation 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 are 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. During the three and twelve month periods ended August 31, 2008, the Corporation charged an amount of $100,000 and $380,000 ($315,000 in 2007) with regards to the Corporation's options granted to Cogeco Inc.'s employees. The Corporation records compensation expense for options granted on or after September 1, 2003. As a result, a compensation expense of $499,000 and $1,721,000 ($223,000 and $1,662,000 in 2007) was recorded for the three and twelve month periods ended August 31, 2008. The fair value of stock options granted for the year ended August 31, 2008 was $12.59 ($7.39 in 2007) per option. The fair value of each option granted 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 Corporation had outstanding stock options providing for the subscription of 844,724 subordinate voting shares. These stock options, which include 250,667 conditional stock options, can be exercised at various prices ranging from $7.05 to $49.82 and at various dates up to May 17, 2018. The Corporation also had a Performance Unit Plan for key employees, which was terminated in June 2007. A compensation expense of $11,000 and $608,000 was recorded for the three and twelve month periods ended August 31, 2007 related to this plan. In April 2007, the Corporation established a deferred share unit plan ("DSU Plan") which is described in the Corporation's annual consolidated financial statements. During the year, the Corporation awarded 3,559 deferred share units to the participants in connection with the DSU Plan. A compensation expense of $9,000 and $153,000 was recorded for the three and twelve month periods ended August 31, 2008 related to this plan. 11. Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Translation of net
investments in self-
sustaining foreign Cash flow
subsidiaries hedges Total
$ $ $
-------------------------------------------------------------------------
(audited) (audited) (audited)
Balance at beginning (3,110) - (3,110)
Cumulative effect of changes
in accounting policies (note 1) - (2,231) (2,231)
Other comprehensive income 18,770 1,925 20,695
-------------------------------------------------------------------------
Balance at end 15,660 (306) 15,354
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Statements of Cash Flow
a) Changes in non-cash operating items
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Accounts receivable (2,513) 582 (7,107) (3,792)
Income taxes receivable 394 58 398 (2,528)
Prepaid expenses (5,805) (738) (4,027) (1,324)
Accounts payable and
accrued liabilities 48,232 27,575 25,866 (69,807)
Income tax liabilities 4,885 158 19,237 507
Deferred and prepaid income
and other liabilities (992) 1,155 (1,886) 4,189
--------------------------------------------------------------------------
44,201 28,790 32,481 (72,755)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Other information
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Fixed asset acquisitions
through capital leases 3,058 291 5,475 3,084
Financial expenses paid 12,335 13,705 64,434 82,787
Income taxes paid (received) 849 (728) 3,846 6,255
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Employee Future Benefits The Corporation and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, a defined contribution pension plan or a collective registered retirement savings plan, which are described in the Corporation's annual consolidated financial statements. The total expenses related to these plans are as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months Twelve months
ended August 31, ended August 31,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Contributory defined
benefit pension plans 282 413 1,129 1,103
Defined contribution pension
plan and collective
registered retirement
savings plan 794 604 3,000 2,307
--------------------------------------------------------------------------
1,076 1,017 4,129 3,410
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Guarantees During fiscal 2008, the Corporation guaranteed the payment by Cabovisao-Televisao por Cabo, S.A. ("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 Corporation 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. 15. Subsequent event On October 1, 2008, the Corporation 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 Corporation has also 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. 16. Comparative figures Certain comparative figures have been reclassified to conform to the current year's presentation. Contacts:
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