Cogeco

Press release details

CONTINUED GROWTH FOR COGECO DESPITE THE DIFFICULT ECONOMIC CLIMATE

Press release
For immediate release
Continued growth for COGECO despite
the difficult economic climate
Montreal, January 14, 2009 Today, COGECO Inc. (TSX: CGO) (“COGECO” or the “Company”) announced its financial
results for the first quarter of 2009, ende d November 30, 2008.
For the first quarter of fiscal 2009:
Consolidated revenue incre ased by 18.5% to $308.4 million;
Consolidated operating income from continuing operations before amortization
(1)
grew by 24.5% to reach
$124.7 million;
Consolidated net income a mounted to $11.1 million compared to a net loss of $10 million;
Free cash flow
(1)
reached $21.8 million, a decrease of 5.2% compared to $23 million the year before;
Operating margin
(1)
grew to 40.4% from 38.5%, in the first quarter of fiscal 2009;
In the cable sector, revenue-generating units (“RGU”)
(2)
grew by 52,714 net additions, for a total of 2,769,588
RGU at November 30, 2008.
“Both the radio and the cable sector reported solid financial performance for the first quarter. All of COGECO’s key
performance indicators increased compared to the prior year with the exception of a decrease in free cash flow caused by
the increases in capital expenditures required in the cable sector to support the enhanced demand for the HD Television
service in Canada and the deployment of Digital Television in Portugal. Our Canadian cable operations are benefiting
from continued organic growth despite the early signs of maturation in some services. In the cable sector’s commercial
activities, Cogeco Data Services successfully bid on a long term contract to provide innovative and cost-efficient solutions
for the telecommunications needs of the Toronto District School Board. In our European cable operations, the continuing
unfavorable economic environment and highly competitive dynamics negatively impacted the RGU growth in all of our
services, with the exception of the Digital Television service which has contributed steady increases in subscriptions to the
service since its launch in the second half of fiscal 2008. We are pleased with our financial results to date and will
continue to strive to be the first choice for telecommunications services to the customers in all of our territories. On the
radio side, the fall BBM Canada survey conducted with the new Portable People Meter showed that the RYTHME FM
network continues to be the preferred choice of audiences in the adult and female categories in the Montréal market,”
declared Louis Audet, Pres ident and CEO of COGECO.
(1)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GA AP”) and ther efore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
(2)
Represents the sum of Basic Cable, High Speed Internet (HSI), Digital Television and Telephony service customers.
- 2 -
FINANCIAL HIGHLIGHTS
Quarters ended November 30,
($000, except percentages and per share data) 2008 2007
(1)
Change
$ $ %
(unaudited) (unaudited)
Revenue 308,375 260,255 18.5
Operating income from contin ui ng op erati ons befor e amortiz at io n
(2)
124,704 100,174 24.5
Operating income from contin ui ng op erati ons
60,641 47,135 28.7
Income from continuing operations
11,053 7,656 44.4
Loss from discontinued operations
(17,632)
Net income (l oss)
11,053 (9,976)
Cash flow from operating activities from continuing operations 30,470 46,604 (34.6)
Cash flow from operations from continuing operations
(2)
95,626 81,377 17.5
Capital expenditures and increase in deferred charges 73,855 58,403 26.5
Free cash flow
(2)
21,771 22,974 (5.2)
Earnings (loss) per share
Basic
Income from continuing operations
0.66 0.46 43.5
Loss from discontinued operations
(1.06)
Net income
0.66 (0.60)
Diluted
Income from continuing operations
0.66 0.46 43.5
Loss from discontinued operations
(1.06)
Net income
0.66 (0.60)
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement), and to reflect the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
(2)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GAAP ”) and therefo re, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to COGECO’s future outlook and anticipated events, business, operations,
financial performance, financial condition or results and, in so me cases, can be identified by terminology such as "may";
"will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee",
"ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding
the Company’s future operating results and economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions including expected growth, results of
operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the
current date. While management considers these assumptions to be reasonable based on information currently available
to the Company, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including
risks and uncertainties (described in the “Uncertainties and main risk factors” section of the Company’s 2008 annual
Management’s Discussion and Analysis (MD&A) that could cause actual results to differ materially from what COGECO
currently expects. These factors include technological changes, changes in market and competition, governmental or
regulatory developments, general economic conditions, the development of new products and services, the enhancement
of existing products and services, and the introduction of competing products having technological or other advantages,
many of which are beyond the Company’s control. Therefore, future events and results may vary significantly from what
management currently foresees. The reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may elect to, the Company is under no
obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before
the next quarter.
This analysis should be read in conjunction with the Companys consolidated financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Company’s 2008 Annual Report. Throughout
this discussion, all amounts are in Canadian dollars unless otherwise indicated.
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MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGI ES AND OBJECTIVES
COGECO Inc.’s (“COGECO” or the “Company”) objectives are to maximize shareholder value by increasing profitability
and ensuring continued growth. The strategies employed to reach these objectives, supported by tight controls over costs
and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous
improvement of networks and equipment are the main strategies used. The radio activities focus on continuous
improvement of programming in order to increase market share, and, thereby, profitability. COGECO uses growth of
operating income before amortization
(1)
, free cash flow
(1)
and revenue-generating units (“RGU”)
(2)
growth in order to
measure its performance against these objectives for the cable sector. Below are the Company’s recent achievements in
furthering the corporate obj ectives.
Tight control over costs and business processes
For the first quarter of 2009, the Company’s operating costs increased over last year by 14.7% compared to a
revenue growth of 18.5%;
The design of internal controls over financial reporting as per National Instrument 52-109 is still ongoing. As
discussed in the 2008 annual MD&A, the Company identified certain material weaknesses in the design of
internal controls over financial reporting and has been working to improve the design and efficiency of internal
controls on some significant processes during the quarter. The documentation and remediation of key internal
controls are progressi ng normally.
Cable sector
Sustained corporate growth
Canadian operations
Digital Television service:
o On December 4, launch of TSN2 HD, TELETOON Retro and Canal Indigo HD on the High Definition
(“HD”) Television service in Québec;
o During the first quarter, the following Di gital and HD Television services were launched:
TELETOON On Demand and TSN2 in Ontario and Québec;
TELETOON Jr. On Demand and TSN HD in Québec;
CBS College Sports, Speed HD, Raptors HD, TSN2 HD a nd Super Channel HD in Ontario.
Telephony service:
o During the first quarter, the Telephony servi ce was launched in the following cities:
Vineland, Stevensville, Port Robinson, Tecumseh and LaSalle, Ontario;
Bromptonville, Richmond and Windsor, Québec.
Customer service;
o On November 20, the Cogeco Cable Québec call centre won a Flèche d’or - Contact Centre of the Year,
Best Employer Award from the Québec Relation ship Marketing Association (RMA);
o On November 18, for a second consecutive year, Cogeco Cable’s call centres, located in Trois-Rivières,
Québec, and in Burlington, Ontario, received from the Service Quality Measurement Group (“SQM”) the
Highest Customer Satisfaction Award as well as the First Call resolution Merit Award which recognizes
the best improvement in first call resolution.
Cogeco Data Services
o On December 15, announcement of a 10-year, $39 million contract with the Toronto District School Board
(“TDSB”).
European operations
Digital Television service:
o Continued deployment of Cabovisão - Televisão por Cabo, S.A. (“Cabovisão”)‘s Digital Television service;
o Launch of Sony AXN, Disney and Benfica channel s;
o Launch of a new PVR box.
(1)
The indicated terms do not have standardized definitions prescribed by Canadian Generally Accepted Accounting Principles (“GAAP”) and therefore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section
(2)
Represents the sum of Basic Cable, High Speed Internet (HSI), Digital Television and Telephony service customers.
- 4 -
Continuous improv ement of networks and equipment
During the first quarter of fiscal 2009, the Company invested approximately $23 million in its cable infrastructure
including head-ends and upgrades and rebuilds.
Other
Fall’s BBM Canada survey conducted with the Portable People Meter (“PPM”) shows that RYTHME FM has
maintained its leadership position with audiences in the adult and female categories in the Montréal market. The
other RYTHME FM stations and the 93
3
station in the Québec City continue to expand their audiences.
Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to
advise on and assess strategic options for the TQS network in the face of financial difficulties. On December 18, 2007, the
Québec Superior Court issued an order under the Companies’ Creditors Arrangement Act (Canada) protecting TQS, its
subsidiaries and its parent 3947424 Canada Inc. (“TQS Group”) from claims by their creditors. On June 26, 2008, the
Canadian Radio-television and Telecommunications Commission (“CRTC”) approved the proposed transfer of ownership
and control of TQS to Remstar Corporation Inc. (“Remstar”) and on August 29, 2008, the transfer of ownership and
control of TQS to Remstar was completed, which allowed the new ownership group to pursue the broadcasting activities
of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group.
Accordingly, the results of operations and cash flow for the three month period ended November 30, 2007, has been
reclassified as discontinued operations.
The results of the discontinued operations were as follows:
Quarters ended November 30,
($000)
2008 2007
$ $
(unaudited)
(unaudited)
Revenue 32,758
Operating costs 29,957
Operating income before amort iz ati o n 2,801
Amortization 1,116
Operating income 1,685
Financial expens e 238
Impairment of assets 30,298
Loss before income taxes and the following items (28,851)
Income taxes
Non-controlling interest 11,219
Loss from discontinued operations (17,632)
- 5 -
The cash flows of the discontinued ope rations were as follows:
Quarters ended November 30,
($000)
2008 2007
$ $
(unaudited) (unaudited)
Cash flow from operating activities
(5,743)
Cash flow from investing activities (85)
Cash flow from financing activities 5,828
Cash flow from discontinued operations
Continuing Operations
RGU growth in the cable sector
During the quarter ended November 30, 2008, the consolidated number of RGU increased by 52,714, or 1.9% to reach
2,769,588 RGU, on target to attain the Company’s annual RGU growth projections of 100,000 net additions issued on
October 29, 2008, which represents approximately 3.7%, for the fiscal year ending August 31, 2009.
Revenue and operating income from continuing operations before amortization growth
For the first quarter of fiscal 2009, revenue increased by $48.1 million, or 18.5%, to reach $308.4 million while operating
income before amortizatio n grew by $24.5 million, or 24.5%, to reach $124.7 million.
Free cash flow
In the first quarter of fiscal 2009, COGECO generated free cash flow of $21.8 million compared to $23 million for the same
period last year. This decrease results mainly from the cable sector and is attributable to an increase in capital
expenditures and deferred charges to support HD and Digital Television services as well as to acquire a power generator
for the newly acquired Canadian data communications subsidiary, and by the impact of the rapid appreciation of the US
dollar over the Canadian dollar. This increase was partly offset by the increase in cash flow from operations resulting
primarily from the improvement of the Company’s operating income before amortization.
OPERATING RESULTS – CONSOLIDATED OVERVIEW
Quarters ended November 30,
($000, except percentages) 2008 2007
(1)
Change
$ $ %
(unaudited) (unaudited)
Revenue 308,375 260,255 18.5
Operating costs 183,671 160,081 14.7
Operating income from contin ui ng op erati ons befor e amortiz at io n 124,704 100,174 24.5
Operating margin
(2)
40.4% 38.5%
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement), and to reflect the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
(2)
Operating margin does not have a standardize d definition prescribed by Canadia n GAAP and therefore, may not be comparable to simi lar measures presented
by other companies. For more details, please consult the “Non-GAAP financial measures” section.
- 6 -
Revenue
Fiscal 2009 first-quarter revenue improved, mainly in its cable sector, by $48.1 million, or 18.5%, to reach $308.4 million.
Cable revenue, driven by an increased number of RGU combined with rate increases and the acquisition of MaXess
Networx®, FibreWired Burlington Hydro Communications and Cogeco Data Services (the “recent acquisitions”) in the
second half of fiscal 2008, went up by $47.6 million, or 18.9%, in the first quarter of the 2009 fiscal year.
Operating costs
For the first quarter, operating costs increased by $23.6 million, or 14.7%, compared to the prior year, to reach
$183.7 million. The increase in operating costs was mainly attributable to the cable sector in servicing additional RGU and
to the impact of the recent acquisitions in Can ada in the cable sector.
Operating income from continuing operation s before amortization
Operating income from continuing operations before amortization grew, essentially by its cable segment, by $24.5 million,
or 24.5%, to reach $124.7 million in the first quarter of fiscal 2009 compared to the corresponding period of the prior year.
The cable sector contributed to the growth by $22.4 million during the first quarter.
FIXED CHARGES
Quarters ended November 30,
($000, except percentages) 2008 2007
(1)
Change
$ $ %
(unaudited) (unaudited)
Amortization 64,063 53,039 20.8
Financial expens e 23,778 16,333 45.6
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement), and to reflect the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
For the quarter ended November 30, 2008, amortization amounted to $64.1 million compared to $53 million for the
corresponding period the year before. The increase in amortization expense was mainly due to the following factors in the
cable sector: additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth
in Canada and the deployment of the Digital Television service in Portugal, and to the rece nt acquisitions.
First-quarter financial expense increased by $7.4 million compared to the same period in fiscal 2008 due to the rapid
appreciation of the US dollar and the Euro over the Canadian dollar, the increase in the level of Indebtedness (defined as
bank indebtedness, derivative financial instruments and long-term debt) and by an increase in the average cost of
Indebtedness. More specifically, financial expense in the cable sector was adversely impacted by foreign exchange losses
amounting to $3.8 million in the first quarter of fiscal 2009 as the majority of customer premise equipment is purchased
and subsequently paid in US dollars. These losses were essentially due to the unusually high US dollar volatility, with the
Bank of Canada closing rate fluctuating from CA$1.0620 per US dollar at August 31, 2008 to CA$1.2370 per US dollar at
November 30, 2008, reaching a maximum of CA$1.2935 per US dollar on November 20, 2008. For the corresponding
period of the prior year, the cable subsidiary recorded a foreign exchange gain of $1 million.
INCOME TAXES
Fiscal 2009 first-quarter income tax expense amounted to $9.8 million compared to $9.3 million in fiscal 2008. The
increase is mainly due to the increase in operating income before amortization surpassing that of the fixed charges in the
cable sector.
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NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable’s results. During the first
quarter of fiscal 2009 the non-controlling interest amounted to $15.9 million due to the cable sector’s strong results. The
non-controlling interest for the comparable period of last year amounted to $13.8 million.
NET INCOME
Fiscal 2009 first-quarter net income amounted to $11.1 million, or $0.66 per share, compared to a net loss of $10 million,
or $0.60 per share, for the same period last year. The net loss in the prior year was due to a loss from discontinued
operations of $17.6 million, or $1.06 per share. Income from continuing operations for the first quarter of fiscal 2009
amounted to $11.1 million, or $0.66 per share, compared to $7.7 million, or $0.46 per share the year before. Income from
continuing operations increased due to the increase in operating in come before amortization in the cable sector.
CASH FLOW AND LIQUIDITY
Quarters ended November 30,
($000) 2008 2007
(1)
$ $
(unaudited) (unaudited)
Operating activities from continuing operations
Cash flow from operations
(2)
95,626 81,377
Changes in non-cash operating items (65,156) (34,773)
30,470 46,604
Investing activities from continuing operations
(3)
(72,900) (58,329)
Financing activities from continuing operations
(3)
38,776 (36,257)
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies 687 (153)
Net change in cash and cash equivalents from continuing operations (2,967) (48,135)
Net change in cash and cash equivalents from discontinued operations
Cash and cash equivalents, beginning of period 37,472 66,279
Cash and cash equivalents, end of period 34,505 18,144
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement).
(2)
Cash flow from operations does not have a standardized definition prescribed by Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the “Non-GAAP financial measures” section.
(3)
Excludes assets acquired under capital leases.
Fiscal 2009 first quarter cash flow from operations reached $95.6 million, 17.5% higher than the comparable period last
year, primarily due to the increase in operating income before amortization in the cable sector. Changes in non-cash
operating items generated greater cash outflows compared to the same period last year, mainly as a result of a decrease
in accounts payable and accrued liabilities and in income tax liabilities. The significant decrease in income tax liabilities is
due to payments made during the first quarter of 20 09 related to the 2008 fiscal year.
- 8 -
In the first quarter of fiscal 2009, investing activities from continuing operations including assets acquired under capital
leases stood at $73.8 million due to capital expenditures of $66.6 million and from an increase of $7.2 million in deferred
charges in the cable sector. The capital expenditures, stemming essentially from the cable sector, increased compared to
the same period last year due to the following factors:
An increase in customer premise equipment capital spending resulting from RGU growth fuelled in part by
increased interest for the HD Television service for the Canadian operations combined with the deployment of
Digital Television in Portugal;
An increase in support capital spending due to the acquisition of a power generator for the newly acquired
Canadian data communications subsidiary;
An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and head-end
improvements, system powering and equipment reliability to sustain increased customer demand for HSI and
Telephony services in Canada;
The appreciation of the US dollar and the Euro over the Canadian dollar also had a significant impact on the total
capital expenditures in the first quarter of 2009.
Deferred charges and others are mainly attributable to reconnect costs in the cable sector. The increase in deferred
charge for the first quarter amounted to $7.2 million compared to $7.5 million for the same period the year before. Slower
RGU growth explained the lower increase recorded in fiscal 2009.
In the first quarter, the Company generated free cash flow amounting to $21.8 million compared to $23 million for the
same period of the preceding year. The lower free cash flow is mainly due to the cable sector and attributable to an
increase in capital expenditures, partly offset by an increase in operating income before amortization net of financial
expense. The aggregate amount of total capital expenditures and deferred charges increased by $15.4 million for the
quarter ended November 30, 2008 compared to the corresponding perio d of last year due to the factors expl ained above.
In the first quarter of 2009, Indebtedness affecting cash increased by $43.8 million due to the reduction of non-cash
operating items of $65.2 million, partly offset by the free cash flow of $21.8 million. Indebtedness was increased through
the issuance on October 1, 2008, in the cable sector, of Senior Secured Notes, Series A and B, maturing October 1, 2015
and October 1, 2018, respectively, for net proceeds of approximately $255 million, net of the repayment of US$150 million
Senior Secured Notes Series A and the related derivative financial instrument of $88.7 million, both maturing on
October 31, 2008, for a total of $238.7 million, and by an increase of $23.5 million in bank indebtedness. For the same
period of the prior year, Indebtedness affecting cash decreased by $34.4 million due to the use of cash and cash
equivalents of $48.1 million and generated free cash flow of $23 million partly offset by the net disbursement of $34.8
million arising from changes in non-cash operating items. In addition, dividends of $0.08 per share for subordinate and
multiple voting shares, totalling $1.3 million, were paid by the Company during the first quarter of fiscal 2009, compared to
$0.07 per share, totalling $1.2 million in the first quarter of fiscal 2008. Dividends paid by a subsidiary to non-controlling
interests amounted to $3.9 million during the first quarter of fiscal 2009, for consolidated dividend payments of
$5.3 million.
As at November 30, 2008, the Company had a working capital deficiency of $337.2 million compared to $611.8 million as
at August 31, 2008. The decrease in the deficiency is mainly attributable to the cable sector and is due to the repayment
of the US$150 million Senior Secured Notes, Series A and the related derivative financial instrument for a total of
$238.7 million on October 31, 2008 using the proceeds of issuance of the Senior Secured Notes, Series A and B. As part
of the usual conduct of its cable business, COGECO maintains a working capital deficiency due to a low level of accounts
receivable as a large portion of the cable subsidiary’s customers pay before their services are rendered, unlike accounts
payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling
Cogeco Cable to use cash and cash e quivalents to reduce Indebtedness.
As at November 30, 2008, Cogeco Cable had used $513.7 million of its $885 million Term Facility for a remaining
availability of $371.3 million and the Company had drawn $16.4 million of its $50 million Term Facility, for a remaining
availability of $33.6 million.
Transfers of funds from non-wholly owned subs idiaries to COGECO are subject to approval by the subsidiaries’ Board of
Directors and may also be restricted under the terms and conditions of certain debt instruments. In accordance with
applicable corporate and securities laws, significant transfers of funds from COGECO may be subject to approval by
minority shareholders.
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FINANCIAL POSITION
Since August 31, 2008, there have been major changes to the balance of “fixed assets”, “accounts payable and accrued
liabilities”, “income tax liabilities”, “Indebtedness” and “non-controlling interest”.
The $14.5 million increase in fixed assets is mainly related to the cable sector and attributable to increased capital
expenditures to sustain RGU growth, to the recent acquisitions in Canada and to the appreciation of the Euro and the US
dollar over the Canadian dollar. The $43.9 million decrease in accounts payable and accrued liabilities is related to the
timing of payments made to suppliers net of the impact of the recent acquisitions in the cable sector. The $17 million
decrease in income tax liabilities is mainly due to income tax payments relating to fiscal 2008 that were made in the first
quarter of fiscal 2009. Indebtedness has increased by $51,9 million as a result of the unfavourable impact of the
appreciation of the US dollar and the Euro over the Canadian dollar and to the factors previously discussed in the “Cash
Flow and Liquidity” section, partly offset by the increase of $29.2 million in the fair value of the cross-currency swaps
related to the Senior Secured Notes Series A issued on October 1, 2008. The $12.5 million increase in non-controlling
interest is mainly due to the improved results in the ca ble sector.
A description of COGECO’s share data as at December 31, 2008 is pre se nted in the table below:
Number of shares/options Amount
($000)
Common shares
Multiple voting shares
Subordinate voting shares
1,842,860
14,898,762
12
120,058
Options to purchase subordinate voting shares
Outstanding options
Exercisable options
123,758
123,758
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt,
operating and capital leases and guarantees. COGECO’s obligations, discussed in the 2008 annual MD&A, have not
materially changed since August 31, 2008, except for the new financing in the cable sector discussed in the “Cash Flow
and Liquidity” section.
DIVIDEND DECLARATION
At its January 13, 2009 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.08 per
share for subordinate and multiple voting shares, payable on February 10, 2009, to shareholders of record on
January 27, 2009. The declaration, amount and date of any future dividend will continue to be considered and approved
by the Board of Directors of the Company based upon the Company’s financial condition, results of operations, capital
requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declar ed, and if declared, their amount and periodicity may vary.
FINANCIAL MANAGEME NT
The Company’s subsidiary, Cogeco Cable entered into cross-currency swap agreements to set the liability for interest and
principal payments on its US$190 million Senior Secured Notes, Series A maturing in October 1, 2015. These agreements
have the effect of converting the U.S. interest coupon rate of 7.00% per annum to an average Canadian dollar interest
rate of 7.24% per annum. The exchange rate applicable to the principal portion of the debt has been xed at CA$1.0625
per US dollar. Since the issuance on October 1, 2008, amounts due under the US$190 million Senior Secured Notes
Series A increased by $33.2 million due to the US dollar’s appreciation over the Canadian dollar. The fair value of cross-
currency swaps increased by a net amount of $29.2 million, which offsets the foreign exchange loss of $33.2 million on
the US dollar denominated debt. The difference of $4 million was recorded as a decrease of other comprehensive income,
net of income taxes of $1.1 million and non-controlling interest of $2 million.
Cogeco Cable’s net investment in the self-sustaining foreign subsidiary, Cabovisão, is exposed to market risk attributable
to fluctuations in foreign currency exchange rates, primarily changes in the value of the Canadian dollar versus the Euro.
This risk is mitigated since the major part of the purchase price for Cabovisão was borrowed directly in Euros. This debt is
designated as a hedge of net investments in self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable realized
a foreign exchange gain of $2.7 million in the first quarter of fiscal 2009, which is presented net of non-controlling interest
of $1.8 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the
balance sheet accounts as at November 30, 2008 was $1.5711 per Euro compared to $1.5580 per Euro as at
- 10 -
August 31, 2008. The average exchange rates prevailing during the first quarter used to convert the operating results of
the European operations was $1.5462 per Euro, compared to $1.4119 per Euro for the same period last year.
The following table shows the Canadian dollar impact of a 10% change in the average exchange rate of the Euro currency
into Canadian dollars on European operating results in the cable sector for the first quarter ended November 30, 2008:
Quarter ended November 30, 2008 As reported
Exchange rate
impact
($000) $ $
(unaudited) (unaudited)
Revenue 62,064 6,206
Operating income before amort iz ati o n 20,857 2,086
Net income 1,754 175
CABLE SECTOR
CUSTOMER STATISTICS
Net additions % of Penetration
(1)
November 30,
Quarters ended
November 30,
November 30,
2008 2008 2007 2008 2007
RGU 2,769,588 52,714 83,024
Basic Cable service customers
1,154,027 798 12,997
HSI service customers
(2)
647,068 14,300 29,100 58.1 54.8
Digital Television service customers 489,815 23,617 16,253 43.0 47.3
Telephony service customers
(3)
478,678 13,999 24,674 45.9 42.5
(1)
As a percentage of Basic Cable service customers in areas served.
(2)
Customers subscribing only to the HSI service totalled 84,730 as at November 30, 2008 compared to 79,499 at November 30, 2007.
(3)
Customers subscribing only to the Telephony service totalled 11,141 as at November 30, 2008 compared to 9,640 at November 30, 2007
In the cable sector, first-quarter RGU net additions were lower than for the same period last year and reflect an early sign
of maturation in some services. The number of net additions for Basic Cable stood at 798 customers compared to
12,997 customers for the same period last year. This decrease is primarily due to net customer losses in the European
operations reflecting a continuing unfavourable economic environment in the Iberian Peninsula, aggressive advertising
campaigns by competitors and the emergence of multiple triple-play service providers in the Portuguese market, net of
increases in Canadian operations stemming from continuous improvements to the service offering, targeted marketing
activities and an upswing in subscription activity in border markets due to the impending over-the-air digital conversion in
the United States. The number of net additions to HSI service stood at 14,300 customers compared to 29,100 customers
for the same period last year. The growth in HSI customer net additions continues to stem from the enhancement of the
product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony
services, and promotional activities in Canadian operations offset by net customer losses in European operations due to
the factors mentioned above. The Digital Television service net additions stood at 23,617 customers compared to 16,253
customers for the same period in the prior year due to targeted marketing initiatives in the second half of fiscal 2008 and
in 2009 to improve market penetration and to the continuing strong interest for the HD Television service in Canadian
operations, as well as the launch of the Digital Television service in Portugal in the third quarter of fiscal 2008. Telephony
customers grew by 13,999 to reach 478,678 compared to a growth of 24,674 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 in Canadian operations offset by net customer losses in European operations due
to the unfavourable economic environment. Telephony service coverage in Canada, as a percentage of homes passed,
has now reached 87% compared to 78% at November 30, 2007. The service is offered in all of the Company’s territories
in Portugal.
- 11 -
OPERATING RESULTS
Quarters ended November 30,
($000, except percentages) 2008 2007
(1)
Change
$ $ %
(unaudited) (unaudited)
Revenue 299,438 251,833 18.9
Operating costs 173,734 149,496 16.2
Management fees - COGECO Inc. 5,981 5,035 18.8
Operating income from contin ui ng op erati ons before amortization 119,723 97,302 23.0
Operating margin 40.0% 38.6%
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement), and to reflect the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
Revenue
Fiscal 2009 first-quarter consolidated revenue improved by $47.6 million, or 18.9%, to reach $299.4 million. Driven by an
increased number of RGU combined with rate increases and the recent acquisitions in the second half to fiscal 2008,
2009 first-quarter Canadian operatio ns revenue went up by $41.1 million, or 21%.
Fiscal 2009 first-quarter European operations revenue increased by $6.5 million, or 11.6%, to reach $62.1 million
compared to the same period last year. The increase is essentially due to the strength of the Euro against the Canadian
dollar. Rate increases also generated highe r revenue despite a RGU loss in the first quarter.
Operating costs
For the first quarter of fiscal 2009, operating costs, excluding management fees payable to COGECO Inc., increased by
$24.2 million, or 16.2% compared to the prior year, to reach $173.7 million. Operating costs increased due to the servicing
of additional RGU and the impact of the recent acqui sitions in Canada.
Operating income before amortization
Operating income before amortization increased by $22.4 million, or 23%, to reach $119.7 million in the first quarter of
fiscal 2009, as a result of various rate increases, recent acquisitions, and RGU growth generating additional revenues
which outpaced operating cost increases. Cogeco Cable’s 2009 first-quarter operating margin increased to 40% from
38.6% for the same period of fiscal 2008. The operating margin in Canada increased for the first quarter of 2009 to 41.6%
compared to 40.7% and in Europe improved to 33.6% from 31.3% in the same period of the prior year.
UNCERTAINTIES AND M AIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors faced by the Company since
August 31, 2008, except as described below. A detailed description of the uncertainties and main risk factors faced by
COGECO can be found in the 2008 annual MD&A.
Cogeco Cable’s footprint includes certain regions in Ontario (Burlington and Windsor) and in Portugal (Palmela) where the
automobile industry is a significant driver of economic activity. The sharp downturn experienced by the automobile
industry in recent months may have an adverse impact on the level of economic activity and consumer expenditures on
goods and services within those communities. In previous recessionary periods, demand for cable telecommunications
services has generally proved to be resilient. However, there is no assurance that demand will remain resilient in a
prolonged global recession.
Despite Cogeco Cable’s strong balance sheet and the proactive management of debt maturities, the present situation in
financial markets and the credit crisis may result in reduced availability of capital in both the debt and equity markets in
the coming years. As Cogeco Cable’s current credit facilities and other sources of financing reach their respective
maturities, the terms of bank and other debt facilities may be less favourable upon renewal.
The Company is exposed to interest rate risks for both fixed interest rate and oating interest rate instruments.
- 12 -
Fluctuations in interest rates will have an effect on the valuation and the collection or repayment of these instruments
which could result in a significant impact on the Comp any’s financial expense.
The current volatility of currency exchange and interest rates in the financial markets is unusually high and could lead to
an increase in the level of risk on hedging instruments to which Cogeco Cable is a party should one or more of the
counterparts to these instruments become financially distressed and unable to meet their obligations.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO’s accounting policies, estimates and future accounting
pronouncements since August 31, 2008, except as described below. A description of the Company’s policies and
estimates can be found in the 2008 annual MD&A.
Financial instruments
Effective September 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook
Section 1535, Capital Disclosures, Section 3862, Financial Instruments – Disclosures and Section 3863, Financial
Instruments – Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose information that enables users of its financial
statements to evaluate the entity’s objectives, policies and processes for managing capital, including disclosures of any
externally imposed capital requirements and the consequences for non-compliance. These new disclosures are included
in note 13 of the Company’s interim consolidated financial statements.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure of information about the significance of financial
instruments for the entity's financial position and performance and the nature and extent of risks arising from financial
instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages
those risks.
Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the
classification of financial instruments, fr om the perspective of the issuer, between liabilities and equities, the classification
of related interest, dividends, gains and losses, and circumstances in which financial assets and financial liabilities are
offset.
The adoption of these standards did not have any impact on the classification and measurements of the Company’s
financial instruments. The new disclosures pursuant to these new Sections are included in note 13 of the Company’s
interim consolidated financial statement s.
General standards of financial sta tement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of Financial Statement Presentation, to
include a requirement for management to make an assessment of the entity’s ability to continue as a going concern when
preparing financial statements. These changes, including the related disclosure requirements, were adopted by the
Company on September 1, 2008 and had no impact on the interim consolidated financial statements.
FUTURE ACCOUNTING PRO NOUN CEMENTS
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”) for
publicly accountable entities.
In April 2008, the CICA published an exposure draft as guidance which requires the transition to IFRS to replace
Canadian GAAP as currently employed by Canadian publicly accountable enterprises. The changeover will occur no later
than fiscal years beginning on or after January 1, 2011. Accordingly, the Company expects that its first interim
consolidated financial statements presented in accordance with IFRS will be for the three-month period ending
- 13 -
November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for
the year ending August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition,
measurement and disclosure requirements. As a result, the Company is developing a plan to convert its consolidated
financial statements to IFRS. The plan highlights the need to identify key accounting polic y changes as the first step in the
conversion process. Once these changes have been identified, other elements of the plan will be addressed. The
Company has selected an external advisor to assist with the project and is currently in the process of assessing the
differences between IFRS and the Company’s current accounting policies.
As implications of the conversion are identified, information technology and data system impacts as well as impacts on
business activities will be assessed. Changes in accounting policies are likely. These changes may materially impact the
Company’s consolidated financial statements. The conversion project is progressing according to the plan established by
management.
NON-GAAP FINANCI AL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout this MD&A. It also provides
reconciliations between these non-GAAP measures and the most comparable GAAP financial measures. These financial
measures do not have standard definitions prescribed by Canadian GAAP and may not be comparable with similar
measures presented by other companies. These measures include “cash flow from operations from continuing
operations”, “free cash flow”, “operating income from contin uing operations before amortization” and “opera ting margin”.
Cash flow from operations from continuing operations and free cash flow
Cash flow from operations from continuing operations is used by COGECO’s management and investors to evaluate cash
flows generated by operating activities excluding the impact of changes in non-cash operating items. This allows the
Company to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow
from operations from continuing operations is subsequently used in calculating the non-GAAP measure “free cash flow”.
Free cash flow is used by COGECO’s management and investors to measure COGECO’s ability to repay debt, distribute
capital to its shareholders and finance its growth.
The most comparable Canadian GAAP financial measure is cash flow from operating activities from continuing
operations. Cash flow from operations from continuing operations is calculated as follows:
Quarters ended November 30,
($000) 2008 2007
(1)
$ $
(unaudited) (unaudited)
Cash flow from operating activities from continuing operations 30,470 46,604
Changes in non-cash operating items 65,156 34,773
Cash flow from operations from continuing operations 95,626 81,377
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement).
- 14 -
Free cash flow is calculated as follows:
Quarters ended November 30,
($000) 2008 2007
(1)
$ $
(unaudited) (unaudited)
Cash flow from operations from continuing operations 95,626 81,377
Acquisition of fixed assets (65,709) (50,813)
Increase in deferred charges (7,207) (7,517)
Assets acquired under capital leases – as per note 11 b) (939) (73)
Free cash flow 21,771 22,974
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement).
Operating income from continuing operation s before amortization and operating margin
Operating income from continuing operations before amortization is used by COGECO’s management and investors to
assess the Company’s ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations
and to service its debt. Operating income from continuing operations before amortization is a proxy for cash flows from
operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial
community to value the business and its financial strength. Operating margin is a measure of the proportion of the
Company's revenue which is left over, before taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income fro m continuing operations before amortization by revenu e.
The most comparable Canadian GAAP financial measure is operating income from continuing operations. Operating
income from continuing operations before amortization and operating margin are calculated as follows:
Quarters ended November 30,
($000, except percentages) 2008 2007
(1)
$ $
(unaudited) (unaudited)
Operating income from continuing operations 60,641 47,135
Amortization 64,063 53,039
Operating income from continuing operations before amortization 124,704 100,174
Revenue 308,375 260,255
Operating margin 40.4% 38.5%
(1)
Certain comp arati ve figur es have b een rec lassifi ed t o c onform to t he cur rent y ear’s present ation. Fi nanc ial inf ormat ion for the previous year h as b een r estate d to
reflect the termina tion of our investm ent in the TQS Group, w hich is no longer c onsolidated s ince December 18, 2007 (see note 1 4 to the conso lidated financ ial
statement), and to reflect the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
ADDITIONAL INFORMATION
This MD&A was prepared on January 13, 2009. Additional information relating to the Company, including its Annual
Information Form, is available on the SEDAR website at www.sedar.com.
- 15 -
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides its
residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services using its two-
way broadband cable networks. Cogeco Cable also provides, to its commercial customers, data networking, e-business
applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, dark fibre, data storage, date
security and co-location services and other advanced communication solutions. Through its Cogeco Diffusion subsidiary,
COGECO owns and operates the RYTHME FM radio stations in Montréal, Québec City, Trois-Rivières and Sherbrooke,
as well as the 93
3
station in Québec City. COGECO’s subordinate voting shares are listed on the Toronto Stock Exchange
(TSX: CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (TSX: CCA).
– 30 –
Source: COGECO Inc.
Pierre Gagné
Vice President, Finance and Chief Financial Officer
Tel.: 514-764-4700
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: 514-764-4700
Analyst Conference Call: Wednesday, January 14, 2009 at 11:0 0 A.M. (EST)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the conference call by dialing
five minutes before the start of the conference:
Canada/USA Access Nu mber: 1 866-321-8231
International Access Number: + 1 416-642-5213
Confirmation Code: 4963066
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until January 19, by dialing:
Canada and USA access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 4963066
- 16 -
Supplementary Quarterly Financial Information
(unaudited)
Quarters ended November 30, August 31, May 31, February 29 / 28,
($000, except percentages and per
share data)
2008
$
2007
(1)
$
2008
(1)
$
2007
(1)
$
2008
(1)
$
2007
(1)
$
2008
(1)
$
2007
(1)
$
Revenue 308,375 260,255 292,873 251,300 283,878 249,424 271,894 238,378
Operating income from contin ui ng
operations before amortization
(2)
124,704 100,174 122,019 100,755 117,206 94,533 109,523 88,065
Operating margin
(2)
40.4% 38.5% 41.7% 40.1% 41.3% 37.9% 40.3% 36.9%
Amortization 64,063 53,039 61,775 54,723 58,564 47,725 56,346 44,018
Operating income from contin ui ng
operations 60,641 47,135 60,244 46,032 58,642 46,808 53,177 44,047
Financial expens e 23,778 16,333 19,066 19,084 17,748 20,345 17,550 24,502
Income taxes 9,848 9,277 9,849 (7,480)
10,285 8,055 (14,426) 4,233
Loss (gain) on dilution 26 107 19 (27,011)
3 64 (25) (30,990)
Non-controlling interest 15,936 13,762 21,559 24,240 21,068 13,318 33,763 9,647
Income from continuing operations 11,053 7,656 9,656 37,097 9,538 5,025 16,315 36,655
Loss from discontinued operations - (17,632)
– (6,713)
– (1,966) (425) (2,109)
Net income (l oss) 11,053 (9,976)
9,656 30,384 9,538 3,059 15,890 34,546
Cash flow from operations from
continuing operations
(2)
95,626 81,377 99,969 78,153 96,068 76,862 85,374 63,353
Cash flow from operating activities from
continuing operations 30,470 46,604 146,052 107,155 112,893 51,669 92,942 61,484
Free cash flow
(2)
21,771 22,974 20,981 9,131 37,107 19,052 19,374 10,461
Earnings (loss) per share
Basic
Income from continuing operations 0.66 0.46 0.58 2.23 0.57 0.30 0.98 2.21
Loss from discontinued operations (1.06)
– (0.40)
– (0.12) (0.03) (0.13)
Net income (l oss) 0.66 (0.60)
0.58 1.83 0.57 0.18 0.95 2.08
Diluted
Income from continuing operations 0.66 0.46 0.58 2.21 0.57 0.30 0.97 2.20
Loss from discontinued operations (1.06)
– (0.40)
– (0.12) (0.03) (0.13)
Net income (l oss) 0.66 (0.60)
0.58 1.81 0.57 0.18 0.95 2.07
(1)
Certain comparative figur es have been reclass ified to conform to th e current year’s pr esentation. F inancial informat ion for the fi rst quarter of fisca l 2008 and the
second through f ourth quarters of fiscal 2007 h as been restated to refle ct the termination of our investm ent in the TQS Group, which is no longer consolidated
since December 18, 2007 (see note 14 to the consolidated financial statement). Financial information for the four quarters of fiscal 2008 and second through
fourth quarters of fiscal 2007 reflects the presentation of foreign exchange gains or losses as financial expense instead of operating costs.
(2)
The indicated terms do not have standardiz ed def inition s prescr ibed by Canadia n Generally Acc epted Accounting Pri nciples (“GAAP ”) and therefo re, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s discussion and analysis.
The cable sector’s operating results are not generally subject to material seasonal uctuations. However, the loss in Basic
Cable service customers is usually greater, and the addition of HSI service customers is generally lower in the third
quarter, mainly because students leave their campus at the end of the school year. Cogeco Cable offers its services in
several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières
and Rimouski in Canada, and Aveiro, Covilhã, Evora, Guarda and Coimbra in Portugal.
The radio activities’ operating results may be subject to signicant seasonal variations. Advertising revenue depends on
audience ratings and the market for radio advertising expenditures in the Province of Québec. Audience ratings may vary
due to a number of factors, including on-air personalities, programming content and promotional activities. Advertising
level may also vary due to many factors, including general economic and consumer retail market conditions and cycles.
Advertising sales, mainly for national advertising, are normally weaker in the second and fourth quarters and, accordingly,
the operating margin is generally lower in those quarters.
COGECO INC. - 17 -
Customer Statistics
November 30, August 31,
2008 2008
Homes Passe
d
Ontario
1 033 452 1 029 121
Québec 506 850 502 490
Canada 1 540 302 1 531 611
Portugal 900 328 895 923
Total 2 440 630 2 427 534
Revenue Generating Unit
s
Ontario 1 428 230 1 387 054
Québec 629 141 604 854
Canada 2 057 371 1 991 908
Portugal 712 217 724 966
Total 2 769 588 2 716 874
Basic Cable Service Customer
s
Ontario 601 511 596 229
Québec 264 416 260 865
Canada 865 927 857 094
Portugal 288 100 296 135
Total 1 154 027 1 153 229
Discretionnary Service Customer
s
Ontario 493 642 493 858
Québec 220 916 215 820
Canada 714 558 709 678
Portugal - -
Total 714 558 709 678
Pay TV Service Customer
s
Ontario 103 74
5
97 753
Québec 50 009 47 075
Canada 153 75
4
144 828
Portugal 59 398 57 715
Total 213 152 202 543
High Speed Internet Service Customer
s
Ontario 365 810 352 553
Québec 127 166 120 914
Canada 492 976 473 467
Portugal 154 092 159 301
Total 647 068 632 768
Digital Television Service Customers
Ontario 299 887 288 345
Québec 160 079 153 401
Canada 459 966 441 746
Portugal 29 849 24 452
Total 489 81
5
466 198
Telephony Service Customer
s
Ontario 161 022 149 927
Québec 77 480 69 674
Canada 238 502 219 601
Portugal 240 176 245 078
Total 478 678 464 679
- 18 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended November 30,
(In thousands of dollars, except per share data)
2008
2007
$
$
Revenue
308,375
260,255
Operating costs
183,671
160,081
Operating income from continuing operations before amortization
124,704
100,174
Amortization (note 3)
64,063
53,039
Operating income from continuing operations
60,641
47,135
Financial expense (note 4)
23,778
16,333
Income from continuing operations before income taxes and the following items
36,863
30,802
Income taxes (note 5)
9,848
9,277
Loss on dilution resulting from shares issued by a subsidiary
26
107
Non-controlling interest
15,936
13,762
Income from continuing operations
11,053
7,656
Loss from discontinued operations (note 14)
(17,632)
Net income (loss)
11,053
(9,976)
Earnings (loss) per share (note 6)
Basic
Income from continuing operations
0.66
0.46
Loss from discontinued operations
(1.06)
Net income (loss)
0.66
(0.60)
Diluted
Income from continuing operations
0.66
0.46
Loss from discontinued operations
(1.06)
Net income (loss)
0.66
(0.60)
- 19 -
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three months ended November 30,
(In thousands of dollars)
2008
2007
$
$
Net income (loss)
11,053
(9,976)
Other comprehensive income
Unrealized gains (losses) on derivative financial instruments designated as cash flow hedges, net of
income taxes expense of $3,387,000 and non-controlling interest of $17,451,000 (income taxes
recovery of $1,143,000 and non-controlling interest of $4,500,000 in 2007)
8,338
(2,153)
Reclassification to net income of realized gains (losses) on derivative financial instruments
designated as cash flow hedges, net of income taxes expense of $4,323,000 and non-controlling
interest of $19,211,000 (income taxes recovery of $1,345,000 and non-controlling interest of
$4,792,000 in 2007)
(9,180)
2,293
Unrealized gains on translation of a net investment in self-sustaining foreign subsidiaries, net of non-
controlling interest of $4,114,000 ($6,994,000 in 2007)
1,966
3,346
Unrealized losses on translation of long-term debts designated as hedges of a net investment in self-
sustaining foreign subsidiaries, net of non-controlling interest of $2,273,000 ($4,313,000 in 2007)
(1,086)
(2,063)
38
1,423
Comprehensive income (loss)
11,091
(8,553)
- 20 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
Three months ended November 30,
(In thousands of dollars) 2008 2007
$ $
Balance at beginning, as reported 295,808 274,946
Changes in accounting policies 424
Balance at beginning, as restated 295,808 275,370
Net income (loss) 11,053 (9,976)
Dividends on multiple voting shares (147) (129)
Dividends on subordinate voting shares (1,192) (1,038)
Balance at end 305,522 264,227
- 21 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands of dollars) November 30, 2008 August 31, 2008
$ $
Assets
Current
Cash and cash equivalents 34,505 37,472
Accounts receivable 68,220 64,910
Income taxes receivable 6,479 3,569
Prepaid expenses 11,944 13,271
Future income tax assets 5,378 8,661
126,526 127,883
Investments 739 739
Fixed assets 1,276,137 1,261,610
Deferred charges 58,864 57,841
Intangible assets (note 7) 1,113,006 1,116,382
Goodwill (note 7) 490,923 487,805
Derivative financial instruments 29,176
Future income tax assets 6,089 7,221
3,101,460 3,059,481
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 33,761 10,302
Accounts payable and accrued liabilities 215,129 259,038
Income tax liabilities 3,797 20,793
Deferred and prepaid income 33,180 32,859
Derivative financial instruments 79,791
Current portion of long-term debt (note 8) 177,832 336,858
463,699 739,641
Long-term debt (note 8) 1,033,513 737,055
Deferred and prepaid income and other liabilities 12,767 11,859
Pension plan liabilities and accrued employees benefits 10,220 9,645
Future income tax liabilities 253,945 256,307
Non-controlling interest 896,428 883,948
2,670,572 2,638,455
Shareholders' equity
Capital stock (note 9) 120,049 120,049
Treasury shares (note 9) (1,522) (1,522)
Contributed surplus 1,837 1,727
Retained earnings 305,522 295,808
Accumulated other comprehensive income (note 10) 5,002 4,964
430,888 421,026
3,101,460 3,059,481
- 22 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended November 30,
(In thousands of dollars)
2008 2007
$ $
Cash flow from operating activities
Income from continuing operations 11,053 7,656
Adjustments for:
Amortization (note 3)
64,063 53,039
Amortization of deferred transaction costs
717 722
Future income taxes (note 5)
2,824 5,178
Non-controlling interest
15,936 13,762
Loss on dilution resulting from shares issued by a subsidiary
26 107
Stock-based compensation
89 388
Loss on disposal of fixed assets
223 342
Other
695 183
95,626 81,377
Changes in non-cash operating items (note 11 a)) (65,156) (34,773)
Cash flow from operating activities from continuing operations 30,470 46,604
Cash flow from operating activities from discontinued operations (note 14) (5,743)
30,470 40,861
Cash flow from investing activities
Acquisition of fixed assets (note 11 b)) (65,709) (50,813)
Increase in deferred charges (7,207) (7,517)
Other 16 1
Cash flow from investing activities from continuing operations (72,900) (58,329)
Cash flow from investing activities from discontinued operations (note 14) (85)
(72,900) (58,414)
Cash flow from financing activities
Increase in bank indebtedness 23,459 206
Increase in long-term debt, net of transaction costs 277,457 51
Repayment of long-term debt (257,139) (34,663)
Acquisition of treasury shares (468)
Dividends on multiple voting shares (147) (129)
Dividends on subordinate voting shares (1,192) (1,038)
Issue of shares by a subsidiary to non-controlling interest 278 3,056
Dividends paid by a subsidiary to non-controlling interest (3,940) (3,272)
Cash flow from financing activities from continuing operations 38,776 (36,257)
Cash flow from financing activities from discontinued operations (note 14) 5,828
38,776 (30,429)
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies 687 (153)
Net change in cash and cash equivalents (2,967) (48,135)
Cash and cash equivalents at beginning 37,472 66,279
Cash and cash equivalents at end 34,505 18,144
See supplemental cash flow information in note 11.
- 23 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 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, present fairly the financial position of
COGECO Inc. (“the Company”) as at November 30, 2008 and August 31, 2008 as well as its results of operations and
its cash flows for the three month periods ended November 30, 2008 and 2007.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with COGECO Inc.’s annual consolidated financial
statements for the year ended August 31, 2008. These unaudited interim consolidated financial statements follow the
same accounting policies as the most recent annual consolidated financial statements, except for the adoption of the
new accounting policies described below.
Financial instrume nts
Effective September 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”)
Handbook Section 1535, Capital Disclosures, Section 3862, Financial Instruments – Disclosures and Section 3863,
Financial Instruments – Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose information that enables users of its financial
statements to evaluate the entity’s objectives, policies and processes for managing capital, including disclosures of
any externally imposed capital requirements and the consequences for non-compliance. These new disclosures are
included in note 13.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure of information about the significance of
financial instruments for the entity's financial position and performance and the nature and extent of risks arising from
financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the
entity manages those risks.
Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals
with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the
classification of related interest, dividends, gains and losses, and circumstances in which financial assets and
financial liabilities are offset.
The adoption of these standards did not have any impact on the classification and measurements of the Company’s
financial instruments. The new disclosures pursuant to these new Sections are included in note 13.
General standards of financial statement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of Financial Statement Presentation, to
include a requirement for management to make an assessment of the entity’s ability to continue as a going concern
when preparing financial statements. These changes, including the related disclosure requirements, were adopted by
the Company on September 1, 200 8 and had no impact on the consolidated financial statements.
- 24 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
2. Segmented Information
The principal financi al information per business segment is pre se nted in the tables below:
Cable Other
(1)
Consolidated
Three months ended November 30, 2008
2007
2008
2007
2008
2007
$
$
$
$
$
$
Revenue 299,438
251,833
8,937
8,422
308,375
260,255
Operating costs 179,715
154,531
3,956
5,550
183,671
160,081
Operating income from continuing
operations before amortization
119,723
97,302
4,981
2,872
124,704
100,174
Amortization 63,922
52,687
141
352
64,063
53,039
Operating income from continuing
operations
55,801
44,615
4,840
2,520
60,641
47,135
Financial expense 23,394
15,877
384
456
23,778
16,333
Income taxes 8,856
8,375
992
902
9,848
9,277
Loss on dilution resulting from shares
issued by a subsidiary
26
107
26
107
Non-controlling interest
15,936
13,762
15,936
13,762
Income (loss) from continuing operations 23,551
20,363
(12,498)
(12,707)
11,053
7,656
Loss from discontinued operations
(17,632)
(17,632)
Total assets
(2)
3,059,451
3,019,155
42,009
40,326
3,101,460
3,059,481
Fixed assets
(2)
1,272,586
1,257,965
3,551
3,645
1,276,137
1,261,610
Intangible assets
(2)
1,087,666
1,091,042
25,340
25,340
1,113,006
1,116,382
Goodwill
(2)
490,923
487,805
490,923
487,805
Acquisition of fixed assets
(3)
66,606
50,727
42
159
66,648
50,886
(1)
Includes radio operations, head office activities and eliminations.
(2)
At November 30, 2008 and August 31, 2008.
(3)
Includes capital leases that are excluded from the consolidated statements of cash flows.
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
2. Segmented Information (continued)
The following tables set out certain geog raphic market information based on client location:
Three months ended November 30,
2008 2007
$ $
Revenue
Canada 246,311 204,663
Europe 62,064 55,592
308,375 260,255
November 30, 2008 August 31, 2008
$ $
Fixed assets
Canada 963,578 944,328
Europe 312,559 317,282
1,276,137 1,261,610
Intangible assets
Canada 1,051,414 1,052,608
Europe 61,592 63,774
1,113,006 1,116,382
Goodwill
Canada 116,890 116,890
Europe 374,033 370,915
490,923 487,805
3. Amortization
Three months ended November 30,
2008 2007
$ $
Fixed assets 54,406 45,022
Deferred charges 5,788 5,574
Intangible assets 3,869 2,443
64,063 53,039
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
4. Financial expense
Three months ended November 30,
2008 2007
$ $
Interest on long-term debt 20,270 16,843
Foreign exchange losses (gains) 3,784 (1,035)
Amortization of deferred transaction costs 407 407
Other (683) 118
23,778 16,333
5. Income Taxes
Three months ended November 30,
2008 2007
$ $
Current 7,024 4,099
Future 2,824 5,178
9,848 9,277
The following table provides a reconciliation between Canadian statutory federal and provincial income taxes and the
consolidated income tax expen se:
Three months ended November 30,
2008 2007
$ $
Income before income taxes 36,863 30,802
Combined income tax rate 32.46% 34.03 %
Income taxes at combined income tax rate 11,966 10,481
Adjustments for loss or income subject to lower or higher tax rates
(194) (387)
Income taxes arising from non-deductible expenses 117 124
Effect of foreign income tax rate differences (1,604) (1,164)
Other (437) 223
Income taxes at effective income tax rate 9,848 9,277
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
6. Earnings (Loss) per Share
The following table provides a reconciliation between basic and diluted earnings (loss) per share:
Three months ended November 30,
2008 2007
$ $
Income from continuing operations 11,053 7,656
Loss from discontinued operations (17,632)
Net income (loss) 11,053 (9,976)
Weighted average number of multiple voting and subordinate voting shares outstanding 16,740,446 16,672,652
Effect of dilutive stock options
(1)
20,386
Weighted average number of diluted multiple voting and subordinate voting shares outstanding 16,761,832 16,672,652
Earnings (loss) per share
Basic
Income from continuing operations 0.66 0.46
Loss from discontinued operations (1.06)
Net income (loss) 0.66 (0.60)
Diluted
Income from continuing operations 0.66 0.46
Loss from discontinued operations (1.06)
Net income (loss) 0.66 (0.60)
(1)
For the three month period ended November 30, 2008, 32,782 stock options (36,443 in 2007) were excluded from the calculation of diluted earnings per
share as the exercise price of the options was greater than the average share price of the subordinate voting shares. The weighted average dilutive number
of subordinate voting shares, which were anti-dilutive for the three month period ended November 30, 2007, amounted to 82,154.
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
7. Goodwill and Other Intangible Assets
November 30, 2008 August 31, 2008
$ $
Customer relationships 98,114 101,490
Broadcasting licenses
25,120 25,120
Customer base
989,772 989,772
1,113,006 1,116,382
Goodwill
490,923 487,805
1,603,929 1,604,187
a) Intangible assets
During the first three months, intangible assets variations were as follows:
Customer
relationships
Broadcasting
licenses
Customer
Base
Total
$ $ $ $
Balance as at August 31, 2008 101,490 25,120 989,772 1,116,382
Amortization (3,869) (3,869)
Foreign currency translation adjustment 493 493
Balance as at November 30, 2008 98,114 25,120 989,772 1,113,006
b) Goodwill
During the first three months, goodwill variation was as follows:
$
Balance as at August 31, 2008 487,805
Foreign currency translation adjustment 3,118
Balance as at November 30, 2008 490,923
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
8. Long-Term Debt
Maturity Interest rate November 30, 2008 August 31, 2008
% $ $
Parent company
Term Facility 2011
(1)
4.68
(2)
15,814 18,748
Obligations under capital leases 2010 6.49 6.61 69 77
Subsidiaries
Term Facility
Term loan – €94,096,350 2011 5.94
(2)
147,166 145,832
Term loan – €17,358,700 2011 5.94
(2)
27,108 26,881
Revolving loan – €117,000,000 (€126,000,000 as at August 31, 2008) 2011 5.81
(2)
183,819 196,308
Revolving loan 2011 3.62
(2)
116,980 94,375
Senior Secured Debentures Series 1 2009 6.75 149,873 149,814
Senior Secured Notes
Series A – US$150 million 2008 6.83
(3)
159,233
Series B 2011 7.73 174,386 174,338
Senior Secured Notes
(4)
Series A – US$190 million 2015 7.00 233,417
Series B 2018 7.60 54,552
Senior Unsecured Debenture 2018 5.94 99,772 99,768
Obligations under capital leases 2013 6.42 – 8.30 8,347 8,492
Other 42 47
1,211,345 1,073,913
Less current portion 177,832 336,858
1,033,513 737,055
(1)
In December 2008, the Term Facility has been extended for an additional year.
(2)
Average interest rate on debt as at November 30, 2008, including stamping fees.
(3)
Cross-currency swap agreements have resulted in an effective interest rate of 7.254% on the Canadian dollar equivalent of the US denominated debt of the
Company’s subsidiary, Cogeco Cable Inc.
(4)
On October 1, 2008, the Company’s subsidiary, Cogeco Cable Inc., issued US$190 million Senior Secured Notes Series A maturing October 1, 2015, and
$55 million Senior Secured Notes Series B maturing October 1, 2018, net of transaction costs of $2.1 million. The Senior Secured Notes Series B bear
interest at the coupon rate of 7.60% per annum, payable semi-annually. The Company’s subsidiary has entered into cross-currency swap agreements to fix
the liability for interest and principal payments on the Senior Secured Notes Series A in the amount of US$190 million, which bear interest at the coupon rate
of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate on the Senior Secured Notes Series A is 7.24%
and the exchange rate applicable to the principal portion of the US dollar-denominated debt has been fixed at $1.0625.
- 30 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
9. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, issuable in series and non-voting, except when specified in the Articles of
Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
November 30, 2008 August 31, 2008
$ $
Issued
1,842,860 multiple voting shares 12 12
14,897,586 subordinate voting shares 120,037 120,037
120,049 120,049
Stock-based plans
The Company offers, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan
and a Stock Option Plan for certain executives, which are described in the Company’s annual consolidated financial
statements. During the first quarter of 2009 and 2008, no stock options were granted to employees by COGECO Inc.
However, the Company’s subsidiary, Cogeco Cable Inc., granted 133,381 stock options (97,214 in 2007) with an
exercise price of $34.46 ($49.82 in 2007), of which 29,711 stock options (22,683 in 2007) were granted to COGECO
Inc.’s employees. The Company records compensation expense for options granted on or after September 1, 2003.
As a result, a compensation expense of $101,000 ($320,000 in 2007) was recorded for the three month period ended
November 30, 2008.
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the three months period
ended November 30, 2008 was $8.96 ($12.88 in 2007) per option. The fair value was estimated at the grant date for
purposes of determining the stock-based compensation expense using the binomial option pricing model based on
the following assumptions:
2008 2007
% %
Expected dividend yield
1.40 0.90
Expected volatility
29 27
Risk-free interest rate
4.22 4.25
Expected life in years
4.0 4.0
- 31 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
9. Capital Stock (continued)
At November 30, 2008, the Company had outstanding stock options providing for the subscription of 123,358
subordinate voting shares. These stock options can be exercised at various prices ranging from $20.95 to $37.50 and
at various dates up to October 1 9, 2011.
The Company also offers a senior executives and designated employee incentive unit plan (the “Incentive Share Unit
Plan”) which is described in the Company’s annual consolidated financial statements. During the first quarter, the
Company granted 17,702 Incentive Share Units (12,852 in 2007). These shares were purchased in December 2008
for a cash consideration of $326,000 ($468,000 in 2007) and are held in trust for participants until they are completely
vested. The trust, considered as a variable interest entity, is consolidated in the Company’s financial statements with
the value of the acquired shares presented as treasury shares in reduction of capital stock. A compensation expense
of $108,000 ($68,000 in 2007) was recorded for the three month period ended November 30, 2008 related to this
plan.
The Company and its subsidiary, Cogeco Cable Inc., offer deferred share unit plans (“DSU Plans”) which are
described in the Company’s annual consolidated financial statements. During the first quarter, the Company and its
subsidiary did not award any deferred share unit to the participants in connection with the DSU Plans. A reduction of
$120,000 was recorded for the three month period ended November 30, 2008 for the liabilities related to these plans.
10. Accumulated Other Comprehensive Income
Translation of a net
investment in self-
sustaining foreign
subsidiaries
Cash flow hedges
Total
$ $ $
Balance as at August 31, 2008 5,064 (100) 4,964
Other comprehensive income 880 (842) 38
Balance as at November 2008 5,944 (942) 5,002
- 32 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
11. Statements of Cash Flows
a) Changes in non-cash operating items
Three months ended November 30,
2008 2007
$ $
Accounts receivable (3,189) (1,899)
Income taxes receivable (2,885) 827
Prepaid expenses 1,337 1,836
Accounts payable and accrued liabilities (44,644) (38,794)
Income tax liabilities (17,001) 2,282
Deferred and prepaid income and other liabilities 1,226 975
(65,156) (34,773)
b) Other information
Three months ended November 30,
2008 2007
$ $
Fixed asset acquisitions through capital leases 939 73
Interest paid 21,751 21,194
Income taxes paid 26,916 478
12. Employees Future Benefits
The Company and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, a
defined contribution pension plan or collective registered retirement savings plans, which are described in the
Company’s annual con solidated financial statements. The total expenses related to these plans are as follows:
Three months ended November 30,
2008 2007
$ $
Contributory defined benefit pension plans 747 658
Defined contribution pension plan and collective registered retirement savings plans 923 708
1,670 1,366
- 33 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management
a) Financial management
Management’s objectives are to protect COGECO Inc. and its subsidiaries against material economic exposures and
variability of results and against certain financial risks including credit risk, liquidity risk, interest rate risk and foreign
exchange risk.
Credit risk
Credit risk represents the risk of financial loss for the Company if a customer or counterpart to a financial asset fails to
meet its contractual obligations. The Company is exposed to credit risk arising from the derivative financial
instruments, cash equivalents and trade accounts receivable, the maximum exposure of which is represented by the
carrying amounts reported on the balance sheet.
Credit risk from the derivative financial instruments arises from the possibility that counterparts to the cross-currency
swap agreements may default on their obligations in instances where these agreements have positive fair values for
the Company. The Company reduces this risk by completing transactions with financial institutions that carry a credit
rating equal to or superior to its own credit rating. The Company assesses the creditworthiness of the counterparts in
order to minimize the risk of counterparts default under the agreements. At November 30, 2008, management
believes that the credit risk relating to cross-currency swaps is minimal, since the lowest credit rating of the
counterparts to the agreements is A
.
Cash equivalents consist mainly of highly liquid investments, such as money market deposits. The Company has
deposited the cash equivalents with reputable financial institutions, from which management believes the risk of loss
to be remote.
The Company is also exposed to credit risk in relation to its trade accounts receivable. The Company continuously
monitors the financial condition of its customers and reviews the credit history or worthiness of each new major
customer. At November 30, 2008, no customer balance represents a significant portion of the Company’s
consolidated trade receivables. The Company establishes an allowance for doubtful accounts based on specific credit
risk of its customers by examining such factors as the number of overdue days of the customer’s balance outstanding
as well as the customer’s collection history. The Company believes that its allowance for doubtful accounts is
sufficient to cover the related credit risk. The Company has credit policies in place and has established various credit
controls, including credit checks, deposits on accounts and advance billing, and has also established procedures to
suspend the availability of services when customers have fully utilized approved credit limits or have violated existing
payment terms. Since the Company has a large and diversified clientele dispersed throughout Canada and Portugal,
there is no significant concentration of credit risk. The following table provides further details on the Company’s
accounts receivable balances:
November 30, 2008 August 31, 2008
$ $
Trade accounts receivable 77,185 73,160
Allowance for doubtful accounts
(15,144) (13,181)
62,041 59,979
Other accounts receivable
6,179 4,931
68,220 64,910
- 34 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
The following table provides further details on trade accounts receivable, net of allowance for doubtful accounts.
Trade accounts receivable past due is defined as amount outstanding beyond normal credit terms and conditions for
the respective customers. A large portion of Cogeco Cable Inc.’s customers are billed in advance and are required to
pay before their services are rendered. The Company considers amount outstanding at the due date as trade
accounts receivable past due.
November 30, 2008 August 31, 2008
$ $
Net trade accounts receivable not past due 43,997 43,659
Net trade accounts receivable past due
18,044 16,320
62,041 59,979
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The
Company manages liquidity risk through the management of its capital structure and access to different capital
markets. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure sufficient
liquidity to meet its obligations when due. At November 30, 2008, the available amount of the Company’s Term
Facilities was $404.9 million. Management believes that the committed Term Facilities will, until their maturities in July
2011 and December 2011, provide sufficient liquidity to manage its long-term debt maturities and support working
capital requirements.
The following table summarizes the contractual maturities of the financial liabilities and related capital amo unts:
2009 2010 2011 2012 2013 Thereafter Total
$ $ $ $ $ $ $
Bank indebtedness 33,761 33,761
Accounts payable and accrued liabilities 215,129 215,129
Long-term debt
(1)
174,657 41,089 410,221 191,000 390,030 1,206,997
Derivative financial instruments
Cash outflows (Canadian dollar) 201,875 201,875
Cash inflows (Canadian dollar
equivalent of US dollar)
(235,030) (235,030)
Obligations under capital leases
(2)
2,961 3,178 1,929 1,195 25 9,288
426,508 44,267 412,150 192,195 25 356,875 1,432,020
(1)
Principal excluding obligations under capital leases.
(2)
Including interest.
- 35 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
The following table is a summary of interest payable on long-term debt (excluding interest on capital leases) that are
due for each of the next five years and thereafter, based on the current debt at November 30, 2008 and their
respective maturities:
2009 2010 2011 2012 2013 Thereafter Total
$ $ $ $ $ $ $
Interest payments on long-term debt 54,559 64,492 60,472 29,040 26,568 82,236 317,367
Interest payments on derivative
financial instruments
10,960 14,614 14,614 14,614 14,614 30,445 99,861
Interest receipts on derivative financial
instruments
(12,339) (16,452) (16,452) (16,452) (16,452) (34,275) (112,422)
53,180 62,654 58,634 27,202 24,730 78,406 304,806
Interest rate risk
The Company is exposed to interest rate risks for both fixed interest rate and oating interest rate instruments.
Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments. At
November 30, 2008, all of the Company’s long-term debt was at fixed rate, except for the Company’s Term Facilities.
The sensitivity of the Company’s annual financial expense to a variation of 1% in the interest rate applicable to the
Term Facilities is approximately $4.9 million based on the cu rrent debt at November 30, 2008.
Foreign exchange risk
The Company is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to
mitigate this risk, the Company has established guidelines whereby currency swap agreemen ts can be used to fix the
exchange rates applicable to its US dollar denominated long-term debt. All such agreements are exclusively used for
hedging purposes. Accordingly, on October 2, 2008, the Company’s subsidiary, Cogeco Cable Inc., entered into
cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A issued on October 1, 2008. These agreements have the effect of converting the US interest
coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portio n of the debt has been fixed at $1.0625.
The Company is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and
accounts payable denominated in US dollars or Euros. At November 30, 2008, cash and cash equivalents
denominated in US dollars amounted to US$240,000 (bank indebtedness of US$286,000 as at August 31, 2008)
while accounts payable denominated in US dollars amounted to US$9,946,000 (US$16,121,000 as at August 31,
2008). At November 30, 2008, Euro-denominated cash and cash equivalents amounted to €670,000 (€219,000 as at
August 31, 2008) while accounts payable denominated in Euros amounted to €1,767,000 (€163,000 as at August 31,
2008). Due to their short-term nature, the risk arising from fluctuations in foreign exchange rates is usually not
significant, except for the unusual high volatility of the US dollar compared to the Canadian dollar during the first three
months of fiscal 2009. During the three month period ended November 30, 2008, the exchange rate increased from
$1.0620 at September 1, 2008, to $1.2370 at November 30, 2008, reaching a maximum of $1.2935 on November 20,
2008. The impact of a 10% change in the foreign exchange rates (US dollar and Euros) would change financial
expense by approximately $1.4 million.
- 36 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
Furthermore, the Company’s net investment in self-sustaining foreign subsidiaries is exposed to market risk
attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar
versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisão-Televisão por Cabo,
S.A. was borrowed directly in Euros. At November 30, 2008, the net investment amounted to €437,051,000
(€446,051,000 as at August 31, 2008) while long-term debt denominated in Euros amounted to €228,455,000
(€237,455,000 as at August 31, 2008). The exchange rate used to convert the Euro currency into Canadian dollars for
the balance sheet accounts at November 30, 2008 was $1.5711 per Euro compared to $1.5580 per Euro at August
31, 2008. The impact of a 10% change in the exchange rate of the Euro into Canadian dollars would change financial
expense by approximately $2.1 million and other comprehensive income by approximately $10.6 million.
Fair value
Fair value is the amount at which willing parties would accept to exchange a financial instrument based on the current
market for instruments with the same risk, principal and remaining maturity. Fair values are estimated at a specific
point in time, by discounting expected cash flows at rates for debts of the same remaining maturities and conditions.
These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and
therefore, cannot be determined with precision. In addition, income taxes and other expenses that would be incurred
on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not
necessarily the net amounts that would be realized if these instruments were settled. The carrying value of all of the
Company’s financial instru ments approximates fair value, except as otherwise noted in the following table.
November 30, 2008 August 31, 2008
Carrying value
Fair value Carrying value Fair value
Long-term debt 1,211,345 1,169,090 1,073,913 1,068,469
b) Capital management
The Company’s objectives in managing capital are to ensure su fficient liquidity to support the capital requirements of
its various businesses, including growth opportunities. The Company manages its capital structure and makes
adjustments in light of general economic conditions, the risk characteristics of the underlying assets and the
Company’s working capital requirements. Management of the capital structure involves the issuance of new debt, the
repayment of existing debts using cash g enerated by operations and the level of distribution to shareholders.
The capital structure of the Company is composed of shareholders’ equity, bank indebtedness, long-term debt and
assets or liabilities related to derivative financial instru ments.
The provisions under the Term Facilities provide for restrictions on the operations and activities of the Company.
Generally, the most significant restrictions relate to permitted investments and dividends on multiple and subordinate
voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to the operating
income before amortization, financial expense and total Indebtedness. At November 30, 2008, the Company was in
compliance with all debt covenants a nd was not subject to any other externally imposed capital requirements.
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COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
13. Financial and Capital Management (continued)
The following table summarizes certain of the key ratios used to monitor and manage the Company’s capital structure:
November 30, 2008 August 31, 2008
Net indebtedness
(1)
/ Shareholders’ equity 2.7 2.7
Net indebtedness
(1)
/ Operating income before amortization
(2)
2.5 2.5
Operating income before amortization / Financial expense
5.2 6.3
(1)
Net indebtedness is defined as the total of bank indebtedness, long-term debt and derivative financial instrument liability, less cash and cash equivalents and
assets related to derivative financial instruments.
(2)
Calculation based on operating income before amortization for the last twelve month period ended November 30, 2008.
14. Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets
to advise on and assess strategic options for the TQS network in the face of financial difficulties. On December 18,
2007, the Québec Superior Court issued an order under the Companies’ Creditors Arrangement Act (Canada)
protecting TQS, its subsidiaries and its parent 3947424 Canada Inc. (“TQS Gr oup”) from claims by their creditors. On
June 26, 2008, the Canadian Radio-television and Telecommunications Commission (“CRTC”) approved the
proposed transfer of ownership and control of TQS to Remstar Corporation Inc. (“Remstar”) and on August 29, 2008,
the transfer of ownership and control of TQS to Remstar was completed, which allowed the new ownership group to
pursue the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group.
Accordingly, the results of operations and cash flows for the three month period ended November 30, 2007, has been
reclassified as disco ntinued operations. The results of the discontin ued operations were as follows:
Three months ended November 30,
2008 2007
$ $
Revenue
32,758
Operating costs
29,957
Operating income before amortization
2,801
Amortization
1,116
Operating income
1,685
Financial expense
238
Impairment of assets
30,298
Loss before income taxes and the following items
(28,851)
Income taxes
Non-controlling interest
11,219
Loss from discontinued operations
(17,632)
- 38 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2008
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
15. Comparative figures
Certain comparative figures have been reclassified to conform to the current year’s presentation. Financial information
for the previous year has been restated to reflect the termination of our investment in the TQS Group, which is no
longer consolidated since December 18, 2007 (see note 14), and to reflect the reclassification of foreign exchange
gains or losses from operating co sts to financial expense.