Cogeco Cable Inc.
TSX : CCA

Cogeco Cable Inc.

January 26, 2012 07:30 ET

Cogeco Cable's First Quarter Results on the Rise

MONTRÉAL, QUÉBEC--(Marketwire - Jan. 26, 2012) - Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation") announced its financial results for the first quarter of fiscal 2012, ended November 30, 2011, in accordance with the newly adopted International Financial Reporting Standards ("IFRS").

For the first quarter of fiscal 2012:

  • Revenue increased by 8% to reach $356.9 million;
  • Operating income before depreciation and amortization(1) increased by 5.5% to $136.6 million when compared to the first quarter of fiscal 2011;
  • Operating margin(1) decreased to 38.3% from 39.2% in the first quarter when compared to the same period of the prior year, mainly as a consequence of the expenditures incurred to migrate Television service customers from analog to digital distribution;
  • Profit for the period increased by 24.2% to reach $43 million when compared to $34.6 million for the same period of the previous fiscal year;
  • In the first quarter of the year, a positive free cash flow(1) of $21 million was generated compared to a negative free cash flow of $30 million for the same period of the prior year. This variance is mostly attributable to the difference in the recognition of current income tax expense for both periods combined with the improvement of operating income before depreciation and amortization, partly offset by the increase in acquisition of property, plant and equipment;
  • A quarterly dividend of $0.25 per share was paid to the holders of subordinate and multiple voting shares, an increase of $0.08 per share, or 47.1%, when compared to a dividend paid of $0.17 per share in the first quarter of fiscal 2011;
  • Primary service units ("PSU")(2) grew by 45,129 net additions in the quarter, for a total of 2,609,683 PSU at November 30, 2011.

"Cogeco Cable's results for the first quarter of fiscal 2012 improved and most of our performance indicators were positive. Our sales and marketing strategies for attracting new customers were particularly successful. Despite fierce competition, we recorded an overall increase of 45,129 PSU for the first quarter. Although these results improved compared to last year, we must remain vigilant and disciplined with our operating metrics, given ongoing worldwide economic uncertainty. We continue to invest in preserving the long term superiority of our networks and the competitiveness of our offerings. More than ever, our growth will be driven by our ability to maintain focus on our clients' priorities and to efficiently meet their ever-increasing needs", declared Louis Audet, President and CEO of Cogeco Cable.

(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section.

(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.

ABOUT COGECO CABLE

Cogeco Cable (www.cogeco.ca) is a telecommunications corporation and is the second largest hybrid fibre coaxial cable operator in Ontario, Québec and Portugal. Through its two-way broadband cable networks, Cogeco Cable provides its residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services. Cogeco Cable also provides to its commercial customers, through its subsidiary Cogeco Data Services, data networking, e-business applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, data storage, data security, co-location services, managed IT services, cloud services and other advanced communication solutions. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CCA).

Analyst Conference Call: Thursday, January 26, 2012 at 9:30 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 dialling five minutes before the start of the conference:
Canada/USA Access Number: 1 888 820-0231
International Access Number: + 1 416 640-5926
Confirmation Code: 8378457
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until April 26, 2012, by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 8378457

SHAREHOLDERS' REPORT

First quarter ended November 30, 2011

FINANCIAL HIGHLIGHTS

Quarters ended November 30,
2011 2010 Change
($000, except percentages and per share data) $ $ %
(unaudited) (unaudited)
Operations
Revenue 356,939 330,467 8.0
Operating income before depreciation and amortization(1) 136,571 129,507 5.5
Operating margin(1) 38.3 % 39.2 % -
Operating income 70,459 67,676 4.1
Profit for the period 42,966 34,590 24.2
Cash Flow
Cash flow from operating activities 19,939 55,046 (63.8 )
Cash flow from operations(1) 101,701 36,486 -
Acquisitions of property, plant and equipment and intangible assets 80,717 66,490 21.4
Free cash flow(1) 20,984 (30,004 ) -
Financial Condition(2)
Property, plant and equipment 1,268,721 1,254,217 0.1
Total assets 2,671,900 2,712,679 (0.2 )
Indebtedness(3) 1,021,620 981,214 4.1
Shareholders' equity 1,061,823 1,033,252 2.8
Primary service units(4) growth 45,129 49,220 (8.3 )
Per Share Data(5)
Earnings per share
Basic 0.88 0.71 23.9
Diluted 0.88 0.71 23.9
(1) The indicated terms do not have standardized definitions prescribed by International Financial Reporting Standards ("IFRS") and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's discussion and analysis.
(2) At November 30, 2011 and August 31, 2011.
(3) Indebtedness is defined as the total of bank indebtedness, principal on long-term debt, balance due on a business acquisition and obligations under derivative financial instruments.
(4) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
(5) Per multiple and subordinate voting share.

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)

First quarter ended November 30, 2011

TRANSITION TO IFRS

On January 1, 2011, the Canadian generally accepted accounting principles ("GAAP"), as used by publicly accountable enterprises, were fully converged to International Financial Reporting Standards ("IFRS"). Accordingly, the Corporation has prepared its first condensed interim consolidated financial statements for the three-month period ended November 30, 2011 in accordance with IFRS. Prior to the adoption of IFRS, for all periods up to and including the year ended August 31, 2011, the Corporation's consolidated financial statements were prepared in accordance with Canadian GAAP. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences related to recognition, measurement and disclosures.

The date of the opening balance sheet under IFRS and the date of transition to IFRS are September 1, 2010. The financial data for fiscal 2011 have therefore been restated. The Corporation is also required to apply IFRS accounting policies retrospectively to determine its opening statement of financial position, subject to certain exemptions. However, the Corporation is not required to restate figures for periods prior to September 1, 2010 that were previously prepared in accordance with Canadian GAAP.

The new significant accounting policies under IFRS are disclosed in Note 2 to the condensed interim consolidated financial statements for the three-month period ended November 30, 2011, while Note 15 explains adjustments made by the Corporation in preparing its IFRS opening consolidated balance sheet as of September 1, 2010 and in restating its previously published Canadian GAAP condensed interim consolidated financial statements for the three-month period ended November 30, 2010 and the year ended August 31, 2011. Note 15 also provides details on exemption choices made by the Corporation with respect to the general principle of retrospective application of IFRS. The changes to critical accounting policies as a result of IFRS, and their impacts on accounting estimates, are described under "Changes in critical accounting policies and estimates" below.

FORWARD-LOOKING STATEMENTS

Certain statements in this Management's Discussion and Analysis ("MD&A") may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to Cogeco Cable's future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding the Corporation's future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which Cogeco Cable believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they may prove to be incorrect. The Corporation cautions the reader that the economic downturn experienced over the past few years makes forward-looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results may significantly differ from the Corporation's expectations. It is impossible for Cogeco Cable to predict with certainty the impact that the current economic uncertainties may have on future results. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the "Uncertainties and main risk factors" section of the Corporation's 2011 annual MD&A) that could cause actual results to differ materially from what Cogeco Cable currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Corporation's control. Therefore, future events and results may vary significantly from what management currently foresee. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Corporation is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.

All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation's consolidated financial statements and MD&A for the fiscal year ended August 31, 2011 included in the Corporation's 2011 Annual Report. It should also be read in conjunction with the information on the adjustments to the fiscal 2011 financial figures upon adoption of IFRS, explained in Note 15 of the condensed interim consolidated financial statements for the three-month period ended November 30, 2011.

Corporate strategies and objectives

Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to improve profitability and create shareholder value. The strategies for reaching those objectives are sustained growth through the diversification and the improvement of products, services, clientele and territories, as well as the continuous improvement of networks and equipment and tight controls over costs and business processes. The Corporation measures its performance, with regard to these objectives by monitoring operating income before depreciation and amortization((1), operating margin(1), primary service units ("PSU")((2) growth and free cash flow(1).

During the first three months of fiscal 2012, the Corporation invested approximately $33 million in its network infrastructure and equipment to upgrade its capacity, improve its robustness and extend its territories in order to better serve and increase its service offerings for new and existing clientele.

PSU growth and penetration of service offerings

During the first quarter ended November 30, 2011, the number of PSU increased by 45,129, or 1.8%, to reach 2,609,683 PSU, mainly as a result of targeted marketing initiatives in the Canadian operations and of the continuing interest for high definition ("HD") television service which offset the loss in the European operations resulting primarily from a decreased demand for services. As of fiscal 2012, Cogeco Cable has modified its key performance indicator for growth to a PSUconcept instead of a revenue-generating units ("RGU") concept. Cogeco Cable expects a PSU growth of 90,000 net additions for the fiscal 2012 year which amounts in terms of RGU to 225,000 net additions for fiscal 2012 year as presented in the Fiscal 2012 financial guidelines of the 2011 Annual Report.

Operating income before depreciation and amortization and operating margin

First-quarter operating income before depreciation and amortization increased by 5.5% when compared to the first quarter of fiscal 2011 to reach $136.6 million and operating margin decreased to 38.3% from 39.2%.

Free cash flow

For the three-month period ended November 30, 2011, Cogeco Cable reports positive free cash flow of $21 million, compared to negative free cash flow of $30 million for the first quarter of the previous fiscal year, representing an increase of $51 million. This variance is mostly attributable to the difference in the recognition of current income tax expense for both periods combined with the improvement of operating income before depreciation and amortization, partly offset by the increase in acquisition of property, plant and equipment.

OPERATING RESULTS - CONSOLIDATED OVERVIEW

Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Revenue 356,939 330,467 8.0
Operating costs(1) 213,226 194,316 9.7
Management fees - COGECO Inc. 7,142 6,644 7.5
Operating income before depreciation and amortization 136,571 129,507 5.5
Operating margin 38.3 % 39.2 %
1. Represents the sum of salaries, employee benefits and outsourced services as well as other external purchases included in the Interim Consolidated Statements of Profit or Loss.

Revenue

Fiscal 2012 first-quarter revenue rose by $26.5 million, or 8%, to reach $356.9 million, when compared to the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

Operating costs

For the first quarter of fiscal 2012, operating costs, excluding management fees payable to COGECO Inc., increased by $18.9 million, to reach $213.2 million, an increase of 9.7% compared to the first quarter of the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

Operating income before depreciation and amortization and operating margin

Fiscal 2012 first-quarter operating income before depreciation and amortization increased by 5.5% to reach $136.6 million. Cogeco Cable's first-quarter operating margin decreased to 38.3% from 39.2% in the comparable period of the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.

(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section.

(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.

RELATED PARTY TRANSACTIONS

Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.1% of the Corporation's equity shares, representing 82.6% of the votes attached to the Corporation's voting shares. Under a management agreement, the Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue, capped annually and subject to an adjustment based on the increase in the Consumer Price Index in Canada, for certain executive, administrative, legal, regulatory, strategic and financial planning and additional services to the Corporation and its subsidiaries. Accordingly, for fiscal 2012, management fees have been set at a maximum of $9.5 million, which is expected to be paid within the first six months of the fiscal year. For fiscal 2011, management fees were capped at $9.2 million, and were fully paid in the first half of the year.

Cogeco Cable granted 46,400 stock options to COGECO Inc.'s employees during the first three months of fiscal 2012, compared to 35,800 for the same period last year. During the first quarter, Cogeco Cable charged COGECO Inc. an amount of $74,000 with regards to Cogeco Cable's options granted to COGECO Inc.'s employees, compared to $49,000 in the first quarter of the prior year.

Cogeco Cable also granted 10,700 incentive share units to COGECO Inc.'s employees during the first three months of fiscal 2012, compared to 10,000 incentive share units in the first three months of fiscal 2011. During the first quarter, the Corporation charged COGECO Inc. an amount of $76,000 with respect to these incentive share units, compared to $39,000 in the comparable period of the previous fiscal year.

Details regarding the management agreement and stock options and incentive share units granted to COGECO Inc.'s employees are provided in the Corporation's 2011 Annual Report.

There were no other material related party transactions during the periods covered.

FIXED CHARGES

Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Depreciation and amortization 66,112 61,831 6.9
Financial expense 16,718 16,657 0.4

First-quarter 2012 depreciation and amortization amounted to $66.1 million, compared to $61.8 million for the same period of the prior year. The increase is mainly due to additional acquisitions of property, plant and equipment in the Canadian operations arising mainly from customer premise equipment acquisitions to support PSU growth as well as reduction of the depreciation period for some home terminal devices in Canada, partly offset by the write-down of property, plant and equipment in Portugal in the third quarter of 2011.

For the first quarter 2012, financial expense was essentially the same at $16.7 million when compared to the prior year.

INCOME TAXES

Fiscal 2012 first-quarter income tax expense amounted to $10.8 million, compared to $16.4 million in the prior year. Fiscal 2012 first quarter income tax expense decrease is mainly due to the implementation of certain tax measures of the 2011 federal budget limiting the tax deferrals for corporations with a significant interest in a partnership. Under the transitional relief measures, some income will be taxed over a period of five years rather than being taxed all in fiscal 2012 and, with the effect of the decrease in income tax rates over the next five years, resulted in a tax expense reduction of $3.5 million in the first quarter of fiscal 2012.

The changes limiting the tax deferrals described above will have an additional cash outflow impact of approximately $13 million for the Corporation during the fiscal 2012, none of which have been disgorged during the quarter.

PROFIT FOR THE PERIOD

Fiscal 2012 first quarter profit for the period amounted to $43 million, or $0.88 per share, compared to $34.6 million, or $0.71 per share, for the same period in fiscal 2011. Profit progression for the period has resulted mainly from the operating income before depreciation and amortization growth and the decrease in income tax expense in the first three months of the 2012 fiscal year.

CASH FLOW AND LIQUIDITY

Quarters ended November 30,
2011 2010
($000) $ $
(unaudited) (unaudited)
Operating activities
Cash flow from operations 101,701 36,486
Changes in non-cash operating activities (63,323 ) (57,712 )
Amortization of deferred transaction costs and discounts on long-term debt (675 ) (731 )
Income taxes received (paid) (34,225 ) 2,647
Current income tax expense 19,662 78,056
Financial expense paid (19,919 ) (20,357 )
Financial expense 16,718 16,657
19,939 55,046
Investing activities (80,512 ) (66,490 )
Financing activities 25,399 173,484
Effect of exchange rate changes on cash and cash equivalents denominated in a foreign currency (338 ) (229 )
Net change in cash and cash equivalents (35,512 ) 161,811
Cash and cash equivalents, beginning of period 55,447 35,842
Cash and cash equivalents, end of period 19,935 197,653

Fiscal 2012 first-quarter cash flow from operations reached $101.7 million compared to $36.5 million for the same period last year. This increase of $65.2 million is primarily due to the reduction in current income tax recovery, partly offset by the increase in operating income before depreciation and amortization. Changes in non-cash operating activities generated cash outflows of $63.3 million compared to $57.7 million for the same period in fiscal 2011, mainly as a result of a decrease in trade and other payables for both periods.

Investing activities, including acquisitions of property, plant and equipment segmented according to the National Cable Television Association ("NCTA") standard reporting categories, are as follows:

Quarters ended November 30,
2011 2010
($000) $ $
(unaudited) (unaudited)
Customer premise equipment(1) 34,969 26,946
Scalable infrastructure 20,126 16,004
Line extensions 6,347 3,890
Upgrade / Rebuild 6,526 10,229
Support capital 8,805 6,183
Acquisition of property, plant and equipment 76,773 63,252
Acquisition of intangible assets and others 3,739 3,238
Total investing activities 80,512 66,490
1. Includes mainly home terminal devices as well as new and replacement drops.

Fiscal 2012 first quarter acquisition of property, plant and equipment amounted to $76.8 million, an increase of 21.4% when compared to $63.3 million in the first quarter of the prior year due to the following factors:

  • An increase in customer premise equipment spending mainly due to the timing of equipment purchases to support PSU and Digital Television growth in the Canadian operations and conversion from analog to digital distribution. This increase was partly offset by the decrease in customer premise equipment spending reflecting PSU loss in the European operations;
  • An increase in scalable infrastructure in the Canadian operations to improve network capacity in existing areas served;
  • An increase in support capital spending stemming from the construction and acquisition of new facilities in the Canadian operations.

Acquisition of intangible assets and others are mainly attributable to reconnect and additional service activation costs as well as other customer acquisition costs. For the first quarter, the acquisition of intangible assets and others amounted to $3.7 million, slightly higher when compared to $3.2 million for the first quarter of the 2011 fiscal year.

In the first quarter, positive free cash flow amounted to $21 million, compared to negative free cash flow of $30 million in the comparable period of fiscal 2011, representing an increase of $51 million. The growth in free cash flow over the prior year is due to the increase in operating income before depreciation and amortization combined with the current income tax expense reduction, partly offset by the increase in property, plant and equipment acquisitions.

In the first three months of fiscal 2012, Indebtedness affecting cash increased by $40.4 million mainly due to the cash outflows of $63.3 million from the changes in non-cash operating activities, to $14.6 million and $3.2 million of income tax and financial expense payments made during the quarter but recorded in 2011 fiscal year and dividend payment of $12.2 million, partly offset by the positive free cash flow of $21 million and the decrease in cash and cash equivalents of $35.5 million. In the first three months of fiscal 2011, Indebtedness affecting cash increased by $183.7 million mainly due the cash outflows of $57.7 million from the changes in non-cash operating activities, the increase in cash and cash equivalents of $161.8 million, negative free cash flow of $30 million and the dividend payment of $8.2 million, partly offset by $78.1 million of income tax expense recorded in the first quarter of fiscal 2011 but not paid due to modifications made to the corporate structure. Indebtedness mainly increased in 2011 through the issuance of $200 million Senior Secured Debentures Series 2, partly offset by a net repayment of $13.8 million on the Corporation's Term Revolving Facility.

During the first quarter of fiscal 2012, a dividend of $0.25 per share was paid to the holders of subordinate and multiple voting shares, totalling $12.2 million, compared to a dividend of $0.17 per share, or $8.2 million the year before.

As at November 30, 2011, the Corporation had a working capital deficiency of $151.4 million compared to $ 178.2 million at August 31, 2011. The decrease in the deficiency is mainly attributable to a decrease in trade and other payables and income tax liabilities, partly offset by decreases in cash and cash equivalents and in income taxes receivable and by an increase in bank indebtedness. As part of the usual conduct of its business, Cogeco Cable maintains a working capital deficiency due to a low level of accounts receivable as a large portion of the Corporation's customers pay before their services are rendered, unlike trade and other payables, which are paid after products are delivered or services are rendered, thus enabling the Corporation to use cash and cash equivalents to reduce Indebtedness.

At November 30, 2011, the Corporation had used $151.2 million of its $750 million Term Revolving Facility for a remaining availability of $598.8 million.

FINANCIAL POSITION

Since August 31, 2011, there have been significant changes to the balances of, "trade and other payables", "property, plant and equipment", "income taxes receivable", "income tax liabilities", "future income tax liabilities", "long-term debt", "derivative financial instruments", "cash and cash equivalents" and "bank indebtedness".

The $68.3 million decrease in trade and other payables is related to the timing of payments made to suppliers. The $14.5 million increase in property, plant and equipment reflects the acquisitions discussed in the "Cash flow and Liquidity" section net from the depreciation expense. The decrease of $25.2 million in income taxes receivable, of $39.7 million in income tax liabilities and of $7.9 million in future income tax liabilities primarily reflect the timing of the recognition of income tax liabilities as a result of modifications made to the corporate structure combined with the increase in operating income before depreciation and amortization. The increase of $21 million in bank indebtedness, of $27.8 million in long-term debt and the decrease of $35.5 million in cash and cash equivalents are due to the factors previously discussed in the "Cash Flow and Liquidity" section. The $7 million decrease in derivative financial instruments is due to the factors discussed in the "Financial management" section.

A description of Cogeco Cable's share data as of December 31, 2011 is presented in the table below:

Number of shares/options Amount
($000)
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 33,117,508 899,997
Options to purchase Subordinate voting shares
Outstanding options 607,925
Exercisable options 406,565

In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the form of long-term debt, operating and finance leases and guarantees. Cogeco Cable's obligations, as discussed in the 2011 Annual Report, have not materially changed since August 31, 2011, except as mentioned below.

On November 22, 2011, Cogeco Cable renewed its credit agreement for a $750 million credit facility, with an option to increase to a total amount of up to $1 billion, subject to lenders' participation, in the form of a five year Term Revolving Facility. The renewed Term Revolving Facility was arranged by a group of financial institutions led by Canadian Imperial Bank of Commerce and Bank of Montreal. The renewed Term Revolving Facility will mature on November 22, 2016, but may be extended by additional one-year periods on an annual basis, subject to lenders' approval. The Term Revolving Facility is indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries, and provides for certain permitted encumbrances, including purchased money obligations, existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary, subject to a maximum amount.

DIVIDEND DECLARATION

At its January 25, 2012 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.25 per share for multiple voting and subordinate voting shares, payable on February 22, 2012, to shareholders of record on February 8, 2012. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Corporation based upon the Corporation's financial condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no assurance that dividends will be declared, and if declared, the amount and frequency may vary.

FINANCIAL MANAGEMENT

The Corporation has 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 on 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 fixed at $1.0625 per US dollar. During the first three months of fiscal 2012, amounts due under the US$190 million Senior Secured Notes Series A increased by $7.8 million due to the US dollar's appreciation relative to the Canadian dollar. The fair value of cross-currency swaps increased by a net amount of $7 million, of which an increase of $7.8 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $0.7 million was recorded as a decrease of other comprehensive income, net of income taxes. In the first quarter of fiscal 2011, amounts due under the US$190 million Senior Secured Notes Series A decreased by $7.6 million due to the US dollar's depreciation over the Canadian dollar. The fair value of cross-currency swaps decreased by a net amount of $6.3 million, of which $7.6 million offsets the foreign exchange gain on the debt denominated in US dollars. The difference of $1.2 million was recorded as an increase of other comprehensive income, net of income taxes.

Furthermore, the Corporation's net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. The Corporation recorded a foreign exchange loss of $0.3 million in the first quarter, compared to a foreign exchange loss of $1.9 million in the comparable period of the prior year, which was deferred and recorded in the interim consolidated statement of comprehensive income, net of income taxes. The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts as at November 30, 2011 was $1.3706 per Euro compared to $1.4071 per Euro as at August 31, 2011. The average exchange rate prevailing during the first quarter of fiscal 2012 used to convert the operating results of the European operations was $1.3891 per Euro compared to $1.3833 per Euro in the first quarter of fiscal 2011. Since the Corporation's condensed interim consolidated financial statements are expressed in Canadian dollars but a portion of its business is conducted in the Euro currency, exchange rate fluctuations can increase or decrease revenue, operating income before depreciation and amortization, profit for the period and the carrying value of assets and liabilities.

The following table shows the Canadian dollar impact of a 10% fluctuation in the average exchange rate of the Euro currency into Canadian dollars on European operating results for the three month period ended November 30, 2011:

Three months ended November 30, 2011 As reported Exchange rate impact
($000) $ $
(unaudited) (unaudited)
Revenue 41,515 4,152
Operating income before depreciation and amortization 4,748 475
Profit for the period 3,399 340

The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian dollar with regards to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in US dollars. Please consult the "Foreign Exchange Risk" section in Note 14 of the Condensed interim consolidated financial statements for further details.

CANADIAN OPERATIONS

CUSTOMER STATISTICS

Net additions % of Penetration(1)
Quarters ended November 30, November 30,
November 30, 2011 2011 2010 2011 2010
PSU 1,943,648 46,179 41,776
Television service customers (2) 882,437 4,452 7,038 54.2 55.1
HSI service customers 618,499 17,285 16,872 38.0 36.0
Telephony service customers 442,712 24,442 17,866 27.2 23.5
(1) As a percentage of Homes Passed.
(2) The number of Television service customers includes 727,219 Digital Television service customers.

Fiscal 2012 first-quarter PSU net additions were higher than in the comparable period of the prior year, and the Canadian operations continue to generate PSU growth despite higher penetration rates, category maturity and aggressive competition. The net customer additions for Television service customers stood at 4,452 for the first quarter, compared to 7,038 for the same period of the prior year. Television service customers net additions in fiscal 2012 is mainly due to the back to school period for college and university students, to network expansions and the bundling effect of continued growth in HSI and Telephony services. In the quarter, Telephony service customers grew by 24,442 compared to 17,866 for the same period last year, and the number of net additions to the HSI service stood at 17,285 customers compared to 16,872 customers in the first quarter of the prior year. HSI and Telephony net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. For the three month period ended November 30, 2011, additions to the Digital Television service which are included in the Television service customers, stood at 48,893 compared to 28,914 for the comparable period of the prior year. Digital Television service net additions are due to targeted marketing initiatives to improve penetration, the launch of new HD channels, the continuing interest for HD television service and the deployment of Digital Terminal Adapters technology to migrate customer from analog to digital services.

OPERATING RESULTS

Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Revenue 315,424 287,204 9.8
Operating costs(1) 176,459 155,324 13.6
Management fees - COGECO Inc. 7,142 6,644 7.5
Operating income before depreciation and amortization 131,823 125,236 5.3
Operating margin 41.8 % 43,6 %
1. Represents the sum of salaries, employee benefits and outsourced services as well as other external purchases included in the Interim Consolidated Statements of Profit or Loss.

Revenue

Revenue for the first quarter of fiscal 2012 rose by $28.2 million, or 9.8%, to reach $315.4 million. The increase in revenue was driven by PSU growth, rate increases implemented in October 2011 and April 2011 combined with the acquisitions of MTO Telecom Inc. ("MTO") and Quiettouch Inc. ("QTI").

Operating costs

For the three months ended November 30, 2011, operating costs increased by $21.1 million, or 13.6%, at $176.5 million. The increase in operating costs is mainly attributable to servicing additional PSU, the launch of new HD channels, additional programming costs, deployment and support costs related to the migration of Television service customers from analog to digital and the acquisitions of MTO and QTI.

Operating income before depreciation and amortization

Operating income before depreciation and amortization rose by $6.6 million, or 5.3%, to reach $131.8 million in the first quarter, mainly due to the increased revenue exceeding the increase in operating costs. Cogeco Cable's Canadian operations' operating margin decreased to 41.8% in the first quarter compared to 43.6% for the same period of the prior year mainly due to the incremental deployment and support costs for the migration of Television service customers from analog to digital.

EUROPEAN OPERATIONS

CUSTOMER STATISTICS

Net additions (losses) % of Penetration(1)
Quarters ended November 30, November 30,
November 30, 2011 2011 2010 2011 2010
PSU 666,035 (1,050 ) 7,444
Television service customers (2) 254,782 (995 ) 588 28.1 28.8
HSI service customers 162,224 (212 ) 3,592 17.9 18.4
Telephony service customers 249,029 157 3,264 27.5 27.5
1. As a percentage of Homes Passed.
2. The number of Television service customers includes 159,642 Digital Television service customers.

The economic environment in Portugal continued to decline and the government has implemented financial reforms which include increases in sales and income taxes combined with reductions in government spending on social programs, thus reducing consumer disposable income. These measures have generated consumer spending constraints while the intensity of the competitive environment remained. The rate of growth for our services has diminished in this environment, with net customer losses in Television and HSI service customers. The number of Television service customers decreased by 995 during the first quarter of fiscal 2012, compared to a growth of 588 for the comparable period of the prior year. HSI service customers decreased by 212 during the quarter compared to an increase of 3,592 in the first quarter of fiscal 2011. The number of Telephony service customers increased by 157 in the first quarter of fiscal 2012, compared to 3,264 for the same period in 2011.

OPERATING RESULTS

Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
(unaudited) (unaudited)
Revenue 41,515 43,263 (4.0 )
Operating costs(1) 36,767 38,992 (5.7 )
Operating income before depreciation and amortization 4,748 4,271 11.2
Operating margin 11.4 % 9.9 %
1. Represents the sum of salaries, employee benefits and outsourced services as well as other external purchases included in the Interim Consolidated Statements of Profit or Loss.

Revenue

In the first quarter of fiscal 2012 revenue decreased by $1.7 million, or 4%, at $41.5 million as a result of a decreased demand for services, partly offset by a higher value of the Euro over the Canadian dollar when compared to prior year. Revenue from the European operations in the local currency for the 2012 first quarter amounted to €29.9 million, a decrease of €1.4 million, or 4.4%, when compared to the same period of the prior year.

Operating costs

Fiscal 2012 first-quarter operating costs decreased by $2.2 million, or 5.7%, at $36.8 million, mainly due to the PSU losses and timing of marketing initiatives partly offset by a higher value of the Euro over the Canadian dollar when compared to prior year. Operating costs of the European operations for the first quarter in the local currency amounted to €26.5 million, a decrease of €1.7 million, or 6.1% when compared to the corresponding period of the prior year.

Operating income before depreciation and amortization

Operating income before depreciation and amortization increased to $4.7 million in the first quarter from $4.3 million for the same period of the prior year, representing an increase of $0.5 million, or 11.2%, mainly due to decreases in operating costs which outpaced the decreases in revenue. European operations' operating margin increased to 11.4% from 9.9% in the first quarter of fiscal 2012. Operating income before depreciation and amortization in the local currency amounted to €3.4 million compared to €3.1 million in the first quarter of the prior year, representing an increase of 10.7%.

CONTROLS AND PROCEDURES

The President and Chief Executive Officer ("CEO") and the Senior Vice President and Chief Financial Officer ("CFO"), together with Management, are responsible for establishing and maintaining adequate disclosure controls and procedures and internal controls over financial reporting, as defined in NI 52-109. Cogeco Cable's internal control framework is based on the criteria published in the report "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

The CEO and CFO, supported by Management, evaluated the design of the Corporation's disclosure controls and procedures and internal controls over financial reporting as at November 30, 2011, and have concluded that they were adequate. Furthermore, no significant changes to the internal controls over financial reporting occurred during the quarter ended November 30, 2011.

UNCERTAINTIES AND MAIN RISK FACTORS

There has been no significant change in the uncertainties and main risk factors faced by the Corporation since August 31, 2011. A detailed description of the uncertainties and main risk factors faced by Cogeco Cable can be found in the 2011 Annual Report.

CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Corporation adopted the IFRS conceptual framework for its accounting policies on September 1, 2011 (see "Transition to IFRS" above"). Accordingly, the following paragraphs provide an analysis of accounting policies considered to be critical for which changes required under the adoption of IFRS were determined to be material. This "Changes in critical accounting policies and estimates" section should be read in conjunction with the Corporation's annual MD&A for the 2011 year, which provides a description of other accounting policies considered to be critical but for which the adoption of IFRS did not have a significant impact.

A. IMPAIRMENT OF NON FINANCIAL ASSETS

At the end of each reporting period, the Corporation reviews the carrying value of its property, plant and equipment and intangible assets with finite useful lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

For the purpose of impairment testing, assets that cannot be tested on an individual basis are grouped together into the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets ("cash-generating unit" or "CGU"). Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU, or otherwise they are allocated to the smallest group of CGU for which a reasonable and consistent allocation basis can be identified.

An impairment loss is recognized when the carrying amount of an asset or a CGU exceeds its recoverable amount for the amount of this excess. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. The impairment loss is recognized immediately in profit or loss in the period in which the loss is incurred.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in profit or loss.

For the purpose of impairment testing, goodwill is allocated to each of the Corporation's CGUs that are expected to benefit from the synergies of the related business combination. An impairment loss recognized for goodwill cannot be reversed.

B. PROVISIONS

Provisions represent liabilities of the Corporation for which the amount or timing is uncertain. A provision is recorded when the Corporation has a legal or constructive present obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized represents management's best estimate of the amount required to settle the obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When the effect of the time value of money is material, the amount of a provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as financial expense.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

C. EMPLOYEE BENEFITS

DEFINED BENEFIT PENSION PLANS

Pension costs for defined benefit pension plans are determined using the projected unit credit method, (sometimes known as the accrued benefit method pro-rated on service) with actuarial valuations being carried out at the end of each reporting period and are funded through contributions determined in accordance with this method. The Corporation's net obligation in respect of defined benefit pension plans is calculated separately for each plan.

Pension expense is charged to salaries, employee benefits and outsourced services and includes:

  • The cost of pension benefits provided in exchange for employees' services rendered during the period;
  • Vested past service costs which are recognized immediately;
  • Unvested past service costs which are amortized on a straight-line basis over the vesting period; and
  • The interest cost of pension obligations less the expected return on pension fund assets. The Corporation uses the fair value of plan assets to evaluate plan assets for the purpose of calculating the expected return on plan assets.

The retirement benefit obligation recognized in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognized past service cost, and as reduced by the fair value of plan assets.

The Corporation recognizes actuarial gains or losses in other comprehensive income in the period in which they arise.

FUTURE ACCOUNTING DEVELOPMENTS IN CANADA

A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board ("IASB") that are mandatory but not yet effective for the period ended November 30, 2011 or year ended August 31,2012, and have not been applied in preparing these condensed interim consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Corporation:

Effective for annual periods
starting on or after
IFRS 9 Financial Instruments January 1, 2015 Early adoption permitted
IFRS 10 Consolidated Financial Statements January 1, 2013 Early adoption permitted
IFRS 12 Disclosure of Interests in Other Entities January 1, 2013 Early adoption permitted
IFRS 13 Fair Value Measurement January 1, 2013 Early adoption permitted
Amendments to IAS 1 Presentation of Financial Statements January 1, 2013 Early adoption permitted
Amendment to IAS 19 Employee Benefits January 1, 2013 Early adoption permitted

IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets and financial liabilities. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. This is the first phase of that project.

IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. It provides a single model to be applied in the control analysis for all investees.

IFRS 12 establishes disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structures entities.

IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. The standard clarifies the definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements.

The amendments to IAS 1 require that an entity present separately the items of other comprehensive income ("OCI") that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss.

The amendments to IAS 19 requires the recognition of actuarial gains and losses immediately in other comprehensive income, full recognition of past service costs immediately in profit or loss, recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation and additional disclosures explaining the characteristics of the Corporation's defined benefit pension plans.

The Corporation is in the process of determining the extent of the impact of these standards on its consolidated financial statements.

NON-IFRS FINANCIAL MEASURES

This section describes non-IFRS financial measures used by Cogeco Cable throughout this MD&A. It also provides reconciliations between these non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. These measures include "cash flow from operations", "free cash flow", "operating income before depreciation and amortization" and "operating margin".

Cash flow from operations and free cash flow

Cash flow from operations is used by Cogeco Cable's management and investors to evaluate cash flows generated by operating activities, excluding the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt, income taxes paid or received, current income tax expense, financial expense paid and financial expense. This allows the Corporation to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by Cogeco Cable's management and investors, to measure its ability to repay debt, distribute capital to its shareholders and finance its growth.

The most comparable IFRS measure is cash flow from operating activities. Cash flow from operations is calculated as follows:

Quarters ended November 30,
2011 2010
($000) $ $
(unaudited) (unaudited)
Cash flow from operating activities 19,939 55,046
Changes in non-cash operating activities 63,323 57,712
Amortization of deferred transaction costs and discounts on long-term debt 675 731
Income taxes paid (received) 34,225 (2,647 )
Current income tax expense (19,662 ) (78,056 )
Financial expense paid 19,919 20,357
Financial expense (16,718 ) (16,657 )
Cash flow from operations 101,701 36,486

Free cash flow is calculated as follows:

Quarters ended November 30,
2011 2010
($000) $ $
(unaudited) (unaudited)
Cash flow from operations 101,701 36,486
Acquisition of property, plant and equipment (76,773 ) (63,252 )
Acquisition of intangible assets (3,944 ) (3,238 )
Free cash flow 20,984 (30,004 )

Operating income before depreciation and amortization and operating margin

Operating income before depreciation and amortization is used by Cogeco Cable's management and investors to assess the Corporation's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before depreciation and amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of the Corporation's revenue which is available, before income taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income before depreciation and amortization by revenue.

The most comparable IFRS financial measure is operating income. Operating income before depreciation and amortization and operating margin are calculated as follows:

Quarters ended November 30,
2011 2010
($000, except percentages) $ $
(unaudited) (unaudited)
Operating income 70,459 67,676
Depreciation and amortization 66,112 61,831
Operating income before depreciation and amortization 136,571 129,507
Revenue 356,939 330,467
Operating margin 38.3 % 39.2 %

SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

Quarters ended November 30, August 31, May 31, February 28,
($000, except percentages and per share data) 2011 2010 2011 2010(1) 2011 2010(1) 2011 2010(1)
$ $ $ $ $ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Revenue 356,939 330,467 349,117 324,323 341,858 319,291 335,518 320,397
Operating income before depreciation and amortization 136,571 129,507 155,843 138,177 144,157 126,700 134,545 122,613
Operating margin 38.3 % 39.2 % 44.6 % 42.6 % 42.2 % 39.7 % 40.1 % 38.3 %
Operating income 70,459 67,676 104,182 74,481 79,365 62,929 70,456 56,774
Impairment of goodwill and property, plant and equipment - - - - 225,873 - - -
Income taxes 10,775 16,429 20,724 17,772 18,824 15,060 14,312 11,952
Profit (loss) for the period 42,966 34,590 68,964 39,663 (181,221 ) 31,185 32,096 29,789
Adjusted profit for the period(2) 42,966 34,590 71,154 39,663 44,652 31,185 32,096 29,789
Cash flow from operating activities 19,939 55,046 217,452 194,414 148,301 112,451 92,740 114,037
Cash flow from operations 101,701 36,486 151,309 127,024 131,911 119,243 118,903 118,318
Acquisitions of property, plant and equipment and intangible assets 80,717 66,490 129,182 107,799 70,716 69,283 70,745 74,379
Free cash flow 20,984 (30,004 ) 22,127 19,225 61,195 49,960 48,158 43,939
Earnings (loss) per share(3)
Basic 0.88 0.71 1.42 0.82 (3.73 ) 0.64 0.66 0.61
Diluted 0.88 0.71 1.41 0.81 (3.73 ) 0.64 0.66 0.61
Adjusted earnings per share(2)(3)
Basic 0.88 0.71 1.46 0.82 0.92 0.64 0.66 0.61
Diluted 0.88 0.71 1.45 0.81 0.91 0.64 0.66 0.61
1. The numbers relating to fiscal year 2010 have not been restated to comply with the adoption of IFRS since the transition date for the Corporation is September 1, 2010.
2. In addition to the adjustments described in the "Non-IFRS financial measures" section, profit for the period for the fourth quarter of fiscal 2011 has been adjusted to remove the integration, restructuring and acquisition costs, net of related income taxes, of $2.2 million. Loss for the period for the third quarter of fiscal 2011 has been adjusted to remove the impairment of goodwill and property, plant and equipment, net of related income taxes, of $29.3 million and $196.5 million respectively.
3. Per multiple and subordinate voting share.

SEASONAL VARIATIONS

Cogeco Cable's operating results are not generally subject to material seasonal fluctuations except as follows. The customer growth in the Television service customers and HSI service are generally lower in the second half of the fiscal year as a result of a decrease in economic activity due to the beginning of the vacation period, the end of the television seasons, and students leaving their campuses at the end of the school year. Cogeco Cable offers its services in several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski in Canada, and Aveiro, Covilhã, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarter's operating margin is usually higher as no management fees are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a maximum amount. As the maximum amount is expected to be reached in the second quarter of fiscal 2012, Cogeco Cable does not expect to pay management fees in the second half of fiscal 2012. Similarly, as the maximum amount was paid in the first six months of fiscal 2011, Cogeco Cable paid no management fees in the second half of the previous fiscal year.

ADDITIONAL INFORMATION

This MD&A was prepared on January 25, 2012. Additional information relating to the Corporation, including its Annual Information Form, is available on the SEDAR website at www.sedar.com.

/s/ Jan Peeters /s/ Louis Audet
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
Cogeco Cable Inc.
Montréal, Québec
January 26, 2012

COGECO CABLE INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

First quarter ended November 30, 2011

INTERIM CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

(unaudited)

Three months ended November 30,
2011 2010
(In thousands of Canadian dollars, except per share data) $ $
Revenue 356,939 330,467
Salaries, employee benefits and outsourced services 59,374 51,675
Other external purchases 153,852 142,641
Management fees - COGECO Inc. 7,142 6,644
Depreciation and amortization (note 5) 66,112 61,831
Operating income 70,459 67,676
Financial expense (note 6) 16,718 16,657
Profit before income taxes 53,741 51,019
Income taxes (note 7) 10,775 16,429
Profit for the period 42,966 34,590
Earnings per share (note 8)
Basic 0.88 0.71
Diluted 0.88 0.71

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three months ended November 30,
2011 2010
(In thousands of Canadian dollars) $ $
Profit for the period 42,966 34,590
Other comprehensive (loss)
Cash flow hedging adjustments
Net change in fair value of hedging derivative financial instruments 7,044 (5,833 )
Net change in fair value of hedging derivative financial instruments reclassified to financial expense (7,771 ) 7,581
Income tax recovery (expense) on cash flow hedging adjustments (245 ) 49
(972 ) 1,797
Foreign currency translation adjustments
Net foreign currency translation differences on translation of a net investment in foreign operations (272 ) (3,143 )
Net change in unrealized gains on translation of long-term debts designated as hedges of a net investment in foreign operations - 1,227
(272 ) (1,916 )
Other comprehensive loss for the period (1,244 ) (119 )
Comprehensive income for the period 41,722 34,471

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

(In thousands of Canadian dollars) Share capital Contributed surplus - share-based compensation Accumulated
other comprehensive income
Retained earnings Total share-
holders' equity
(note 10) (note 11)
Balance at September 1, 2010 988,830 7,470 20,137 92,016 1,108,453
Profit for the period - - - 34,590 34,590
Other comprehensive loss for the period - - (119 ) - (119 )
Total comprehensive income (loss) for the period - - (119 ) 34,590 34,471
Issuance of subordinate voting shares under the employee Stock Option Plan 290 - - - 290
Share-based compensation - 384 - - 384
Share-based compensation previously recorded in contributed surplus for options exercised 86 (86 ) - - -
Dividends on multiple voting shares - - - (2,667 ) (2,667 )
Dividends on subordinate voting shares - - - (5,582 ) (5,582 )
Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan (2,258 ) - - - (2,258 )
Total contributions by and distributions to shareholders (1,882 ) 298 - (8,249 ) (9,833 )
Balance at November 30, 2010 986,948 7,768 20,018 118,357 1,133,091
Loss for the period - - - (80,161 ) (80,161 )
Other comprehensive income for the period - - 568 - 568
Total comprehensive income (loss) for the period - - 568 (80,161 ) (79,593 )
Issuance of subordinate voting shares under the employee Stock Option Plan 4,450 - - - 4,450
Share-based compensation - 1,659 - - 1,659
Share-based compensation previously recorded in contributed surplus for options exercised 1,169 (1,169 ) - - -
Dividends on multiple voting shares - - - (8,472 ) (8,472 )
Dividends on subordinate voting shares - - - (17,773 ) (17,773 )
Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan (110 ) - - - (110 )
Distribution to employees of subordinate voting shares held in trust under the Incentive Share Unit Plan 465 (476 ) - 11 -
Total contributions by and distributions to shareholders 5,974 14 - (26,234 ) (20,246 )
Balance at August 31, 2011 992,922 7,782 20,586 11,962 1,033,252
Profit for the period - - - 42,966 42,966
Other comprehensive loss for the period - - (1,244 ) - (1,244 )
Total comprehensive income (loss) for the period - - (1,244 ) 42,966 41,722
Issuance of subordinate voting shares under the employee Stock Option Plan 1,295 - - - 1,295
Share-based compensation - 576 - - 576
Share-based compensation previously recorded in contributed surplus for options exercised 375 (375 ) - - -
Dividends on multiple voting shares - - - (3,923 ) (3,923 )
Dividends on subordinate voting shares - - - (8,244 ) (8,244 )
Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan (2,855 ) - - - (2,855 )
Total contributions by and distributions to shareholders (1,185 ) 201 - (12,167 ) (13,151 )
Balance at November 30, 2011 991,737 7,983 19,342 42,761 1,061,823

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

November 30, 2011 August 31,
2011
September 1,
2010
(In thousands of Canadian dollars) $ $ $
Assets
Current
Cash and cash equivalents (note 12 b)) 19,935 55,447 35,842
Trade and other receivables (note 14) 80,194 74,685 66,952
Income taxes receivable 13,191 38,360 44,800
Prepaid expenses and other 12,267 12,856 13,669
125,587 181,348 161,263
Non-current
Other assets 6,557 5,676 6,700
Property, plant and equipment 1,268,721 1,254,217 1,319,372
Intangible assets 1,044,551 1,045,601 1,015,919
Goodwill 208,993 208,796 144,695
Derivative financial instruments - - 5,085
Deferred tax assets 17,491 17,041 23,115
2,671,900 2,712,679 2,676,149
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 21,012 - -
Trade and other payables 171,358 239,706 222,392
Provisions 19,912 15,308 12,695
Income tax liabilities 19,642 59,356 558
Deferred and prepaid revenue 43,295 43,128 45,602
Derivative financial instrument - - 1,189
Current portion of long-term debt (note 9) 1,768 2,094 2,296
276,987 359,592 284,732
Non-current
Long-term debt (note 9) 974,550 946,783 952,687
Balance due on a business acquisition, bank prime rate plus 1% and payable in February 2013 11,400 11,400 -
Derivative financial instruments 7,364 14,408 -
Deferred and prepaid revenue and other liabilities 14,734 14,576 12,234
Pension plan liabilities and accrued employees benefits 11,432 11,154 8,061
Deferred tax liabilities 313,610 321,514 309,982
1,610,077 1,679,427 1,567,696
Shareholders' equity
Share capital (note 10) 991,737 992,922 988,830
Contributed surplus 7,983 7,782 7,470
Accumulated other comprehensive income (note 11) 19,342 20,586 20,137
Retained earnings 42,761 11,962 92,016
1,061,823 1,033,252 1,108,453
2,671,900 2,712,679 2,676,149

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three months ended November 30,
2011 2010
(In thousands of Canadian dollars) $ $
Cash flow from operating activities
Profit for the period 42,966 34,590
Adjustments for:
Depreciation and amortization (note 5) 66,112 61,831
Income taxes 10,775 16,429
Financial expense (note 6) 16,718 16,657
Share-based compensation (note 10) 626 420
Loss (gain) on disposals and write-offs of property, plant and equipment (19 ) 320
Other 228 221
137,406 130,468
Changes in non-cash operating activities (note 12 a)) (63,323 ) (57,712 )
Income taxes received (paid) (34,225 ) 2,647
Financial expense paid (19,919 ) (20,357 )
19,939 55,046
Cash flow from investing activities
Acquisition of property, plant and equipment (76,773 ) (63,252 )
Acquisition of intangible assets (3,944 ) (3,238 )
Other 205 -
(80,512 ) (66,490 )
Cash flow from financing activities
Increase in bank indebtedness 21,012 -
Net increases (repayments) under the Term Revolving Facility 20,000 (13,800 )
Issuance of long-term debt, net of discounts and transaction costs - 198,320
Repayments of long-term debt (606 ) (819 )
Increase in deferred transaction costs (1,280 ) -
Issuance of subordinate voting shares (note 10) 1,295 290
Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan (note 10) (2,855 ) (2,258 )
Dividends paid on multiple voting shares (3,923 ) (2,667 )
Dividends paid on subordinate voting shares (8,244 ) (5,582 )
25,399 173,484
Effect of exchange rate changes on cash and cash equivalents denominated in a foreign currency (338 ) (229 )
Net change in cash and cash equivalents (35,512 ) 161,811
Cash and cash equivalents, beginning of the period 55,447 35,842
Cash and cash equivalents, end of the period 19,935 197,653

COGECO CABLE INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2011
(unaudited)
(amounts in tables are in thousands of Canadian dollars, except number of shares and per share data)

NATURE OF OPERATIONS

Cogeco Cable Inc. (the "Corporation" or the "Parent Corporation") is a Canadian public corporation whose shares are listed on the Toronto Stock Exchange ("TSX"). The Corporation's core business is providing Cable Television, High Speed Internet ("HSI"), Telephony, managed information technology and infrastructure, and other telecommunications services to its residential and commercial customers in Canada and in Portugal.

The Corporation is a subsidiary of COGECO Inc., which holds 32.1% of the Corporation's equity shares, representing 82.6% of the votes attached to the Corporation's voting shares.

The Corporation's registered office is located at 5 Place Ville Marie, Suite 1700, Montréal, Québec, H3B 0B3.

  1. BASIS OF PREPARATION

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standards ("IAS") 34 Interim Financial Reporting and do not include all of the information required for full annual financial statements. Certain information and footnote disclosure normally included in annual financial statements were omitted or condensed where such information is not considered material to the understanding of the Corporation's interim financial information. As such, these condensed interim consolidated financial statements should be read in conjunction with the Corporation's 2011 annual financial statements.

These are the Corporation's first condensed interim consolidated financial statements prepared in conformity with IAS 34 and International financial reporting standards ("IFRS") 1 First-time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation is provided in note 15.

The condensed interim consolidated financial statements have been prepared on a going concern basis using historical cost except for derivative financial instruments and cash-settled share-based payment arrangements, which are measured at fair value.

Financial information is presented in Canadian dollars, which is the functional currency of Cogeco Cable Inc.

The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. The Corporation does not expect seasonality to be a material factor in quarterly results except that the customer growth in the Cable Television and HSI service are generally lower in the second half of the fiscal year as a result of a decrease in economic activity due to the beginning of the vacation period, the end of the television seasons, and students leaving their campuses at the end of the school year. Furthermore, the third and fourth quarter's operating margin is usually higher as no management fees are paid to COGECO Inc. Under the Management Agreement, the Corporation pays a fee equal to 2% of its total revenue subject to a maximum amount. As the maximum amount is expected to be reached in the second quarter of fiscal 2012, the Corporation does not expect to pay management fees in the second half of fiscal 2012.

The condensed interim consolidated financial statements were approved by the Board of Directors of Cogeco Cable Inc. at its meeting held on January 25, 2012.

  1. SIGNIFICANT ACCOUNTING POLICIES

These condensed interim consolidated financial statements have been prepared with the accounting policies the Corporation expects to adopt in its annual August 31, 2012 consolidated financial statements.

The accounting policies set out below have been applied consistently to all periods presented in the condensed interim consolidated financial statements and in preparing the opening consolidated statement of financial position as at September 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.

  1. BASIS OF CONSOLIDATION

These condensed interim consolidated financial statements include the accounts of the Corporation and its subsidiaries.

Subsidiaries are entities controlled by the Corporation. Control is achieved where the Corporation has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Corporation.

The Corporation has established a special purpose entity ("SPE") for the purpose of mitigating the impact of stock price fluctuations in connection with its Incentive Share Unit Plan. A SPE is consolidated if, based on an evaluation of the substance of its relationship with the Corporation and the SPE's risks and rewards, the Corporation concludes that it controls the SPE. A SPE controlled by the Corporation was established under terms that impose strict limitations on the decision-making powers of the SPE's management, resulting in the Corporation receiving the majority of the benefits related to the SPE's operations and net assets, being exposed to the majority of risks incident to the SPE's activities, and retaining the majority of the residual or ownership risks related to the SPE or its assets.

All inter-company transactions and balances and any unrealized revenue and expenses are eliminated in preparing the interim condensed consolidated financial statements.

  1. BUSINESS COMBINATIONS

Acquisitions on or after September 1, 2010

Business acquisitions are accounted for using the acquisition method. Goodwill is measured as the excess of the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree over the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date.

The consideration transferred is measured as the sum of the fair values of assets transferred, liabilities incurred, and equity instruments issued by the Corporation at the acquisition date, including any asset or liability resulting from a contingent consideration arrangement, in exchange for control of the acquiree.

An obligation to pay contingent consideration is classified as an asset or a liability or as equity. Contingent consideration classified as equity is not re-measured. Contingent consideration classified as an asset or a liability is measured either as a financial instrument or as a provision. Changes in fair values that qualify as measurement period adjustments for preliminary purchase price allocations are adjusted in the current period against the cost of acquisition and such changes are applied on a retroactive basis.

Transaction costs, other than those associated with the issue of debt or equity securities, and integration and restructuring costs that the Corporation incurs in connection with a business acquisition are recognized in profit or loss as incurred.

Acquisitions prior to September 1, 2010

As part of its transition to IFRS, the Corporation elected not to restate those business combinations that occurred prior to September 1, 2010. In respect of acquisitions prior to that date, assets and liabilities are included in the statement of financial position on the basis of their deemed cost at the date of acquisition, which represents the amounts recognized under previous Canadian Generally Accepted Accounting Principles ("GAAP") immediately after the date of acquisition.

  1. REVENUE RECOGNITION

Revenue is measured at the fair value of the consideration received or receivable, net of returns and discounts. The Corporation recognizes revenue from the sale of products or the rendering of services when the following conditions are met:

  • The amount of revenue and related costs can be measured reliably;
  • The significant risks and rewards of ownership have been transferred to customers and there is no continuing management involvement with the goods; and
  • The recovery of the consideration is probable.

More specifically, the Corporation's principal sources of revenue are recognized as follows:

  • Monthly subscription revenue received for Cable Television, HSI and Telephony services and rental of equipment are recognized as the services are provided;
  • Revenue from data services, long-distance and other pay-per-use services are recorded as the services are provided;
  • Revenue generated from the sale of home terminal devices or other equipment are recorded when the equipment is delivered and accepted by the customers.

MULTIPLE-ELEMENT ARRANGEMENTS

The Corporation offers certain products and services as part of multiple deliverable arrangements. The Corporation evaluates each deliverable in an arrangement to determine whether such deliverable would represent a separate component. Components are accounted separately when:

  • The delivered elements have stand-alone value to the customers; and
  • There is objective and reliable evidence of fair value of any undelivered elements.

Consideration is measured and allocated amongst the components based upon their relative fair values and the relevant revenue recognition policy is applied to them.

The Corporation considers that installation and activation fees are not separate components because they have no stand-alone value. Accordingly, they are deferred and amortized into revenue at the same pace as the related telecommunications services are earned, which is the average life of a customer's subscription for residential customers and the term of the agreement for commercial customers.

Unearned revenue, such as payments for goods and services received in advance of delivery, are recorded as deferred and prepaid revenue until the service is provided or the product is delivered to the customer.

  1. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost, less accumulated depreciation and accumulated impairment losses.

During construction of new assets, direct costs plus a portion of direct overhead costs directly attributable to the asset are capitalized. Borrowing costs directly attributable to the acquisition or construction of qualifying assets, which require a substantial amount of time to get ready for their intended use or sale, are capitalized until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recorded as financial expense in the period in which they are incurred.

Depreciation is recognized from the date the asset is ready for its intended use so as to write off the cost of assets, other than freehold land and properties under construction, less their residual values over their useful lives, using the straight-line method. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The depreciation periods are as follows:

BUILDINGS10 TO 40 YEARS
CABLE SYSTEMS5 TO 20 YEARS
EQUIPMENT, PROGRAMMING EQUIPMENT, FURNITURE AND FIXTURES3 TO 10 YEARS
HOME TERMINAL DEVICES3 TO 5 YEARS
ROLLING STOCK AND EQUIPMENT5 YEARS
OTHER EQUIPMENT5 TO 8 YEARS
LEASEHOLD IMPROVEMENTSLEASE TERM

When significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in profit or loss.

The Corporation does not record decommissioning obligations in connection with its cable distribution network. The Corporation expects to renew all of its agreements with utility companies to access their support structures in the future, thus the resulting present value of the obligation is not significant.

  1. INTANGIBLE ASSETS

Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses.

The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite useful lives are amortized over their useful life. The estimated useful lives are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with finite useful lives are amortized as follows:

  • Customer relationships are amortized on a straight-line basis over the estimated useful life, defined as the average life of a commercial customer's subscription, not exceeding eight years;
  • Reconnect and additional service activation costs are capitalized up to a maximum amount not exceeding the revenue generated by the reconnect activity and are amortized over the average life of a customer's subscription, not exceeding four years; and
  • Direct and incremental costs associated with the acquisition of commercial customers are capitalized and amortized over the term of the agreement.

Intangible assets with indefinite useful lives are those for which there is no foreseeable limit to their useful economic life as they arise from contractual or other legal rights that can be renewed without significant cost. They comprised Cable Distribution Undertaking Broadcasting Licences ("Cable Distribution Licences"). Cable Distribution Licences are comprised of broadcast authorities licenses and exemptions from licensing that allow access to homes and subscribers in a specific area. The Corporation has concluded that the Cable Distribution Licences have indefinite useful lives since there are no legal, regulatory, contractual, economic or other factors that would prevent their renewals or limit the period over which they will contribute to the Corporation's cash flows. The Corporation reviews at the end of each reporting period whether event and circumstances continue to support indefinite useful life assessment for these licences. Intangible assets with indefinite useful lives are not amortized, but tested for impairment at least annually, or more frequently if there is any indication of impairment.

Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. It is not amortized but tested for impairment at least annually, or whenever there is an indication of possible impairment.

  1. IMPAIRMENT OF NON FINANCIAL ASSETS

At the end of each reporting period, the Corporation reviews the carrying value of its property, plant and equipment and intangible assets with finite useful lives to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, or whenever there is an indication that the asset may be impaired.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

For the purpose of impairment testing, assets that cannot be tested on an individual basis are grouped together into the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets ("cash-generating unit" or "CGU"). When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU, or otherwise they are allocated to the smallest group of CGU for which a reasonable and consistent allocation basis can be identified.

An impairment loss is recognized when the carrying amount of an asset or a CGU exceeds its recoverable amount for the amount of this excess. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU on a pro rata basis. The impairment loss is recognized immediately in profit or loss in the period in which the loss is incurred.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in profit or loss.

For the purpose of impairment testing, goodwill is allocated to each of the Corporation's CGUs that are expected to benefit from the synergies of the related business combination. An impairment loss recognized for goodwill cannot be reversed.

  1. LEASES

LESSEE

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the asset to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognized as assets of the Corporation at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments as determined at the inception of the lease. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. The corresponding liability is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between financial expense and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Financial expense and depreciation of the assets are recognized in profit or loss in the period they occur.

Rentals payable under operating leases are charged to the profit or loss statement on a straight line basis over the term of the relevant lease.

LESSOR

The Corporation leases certain telecommunication equipment, primarily home terminal devices, to its customers. These leases are classified as operating leases and rental revenue is recognized on a straight-line basis over the term of the relevant lease.

  1. INCOME TAXES

Income tax expense represents the sum of the tax currently payable and deferred. Current and deferred taxes are recognized in profit or loss, except when they relate to a business combination or to items that are recognized in other comprehensive income or directly in equity.

CURRENT TAX

The tax currently payable is based on taxable profit for the year. The Corporation's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period.

DEFERRED TAX

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill or assets or liabilities in a transaction that is not a business combination and that affects neither the taxable profit nor the accounting profit or is related to investments in subsidiaries to the extent that the Corporation is able to control the reversal and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are generally recognized for unused tax losses and deductible temporary differences to the extent that it is probable that taxable profits will be available against which, those deductible temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates that have been enacted or substantively enacted at the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Corporation expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority on the same taxable entity, or on different tax entities, but the Corporation intends to settle its current tax assets and liabilities on a net basis.

  1. PROVISIONS

Provisions represent liabilities of the Corporation for which the amount or timing is uncertain. A provision is recorded when the Corporation has a legal or constructive present obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized represents management's best estimate of the amount required to settle the obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When the effect of the time value of money is material, the amount of a provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as financial expense.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

  1. SHARE-BASED PAYMENTS

EQUITY SETTLED AWARDS

The Corporation measures stock options granted to employees that vest rateably over the service period based on the fair value of each tranche on grant date by using the Black-Scholes pricing model and a compensation expense is recognized on a straight-line basis over the vesting period applicable to the tranche, with a corresponding increase in contributed surplus. Granted options vest equally over a period of five years beginning one year after the day such options are granted. At the end of each reporting period, the Corporation revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment in contributed surplus. When the stock options are exercised, share capital is credited by the sum of the consideration paid and the related portion previously recorded in contributed surplus.

The Corporation measures incentive share units ("ISUs") granted to employees based on the fair value of the Corporation's subordinate voting shares at the date of grant and a compensation expense is recognized over the vesting period, with a corresponding increase in contributed surplus. The total vesting period of each grant is three years less one day.

CASH SETTLED AWARDS

The fair value of the amount payable to Board directors in respect of share appreciation rights under the Deferred Share Unit Plan of the Corporation, which are settled in cash, is recognized as a compensation expense with a corresponding increase in pension plan liabilities and accrued employee benefits as of the date units are awarded to Board directors. The accrued liability is re-measured at the end of each reporting period, until settlement, using the average closing price of the subordinate voting shares on the Toronto Stock Exchange for the twenty consecutive trading days immediately preceding by one day the closing date of the reporting period. Any changes in the fair value of the liability are recognized in profit or loss.

  1. EMPLOYEE BENEFITS

SHORT-TERM EMPLOYEE BENEFITS

Short-term employee benefits include wages, salaries, compensated absences, profit-sharing and bonuses. They are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

DEFINED CONTRIBUTION PENSION PLANS

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an expense in the periods during which services are rendered by employees.

DEFINED BENEFIT PENSION PLANS

Pension costs for defined benefit pension plans are determined using the projected unit credit method (sometimes known as the accrued benefit method pro-rated on service), with actuarial valuations being carried out at the end of each reporting period, when necessary, and are funded through contributions determined in accordance with this method. The Corporation's net obligation in respect of defined benefit pension plans is calculated separately for each plan.

Pension expense is charged to salaries, employee benefits and outsourced services and includes:

  • The cost of pension benefits provided in exchange for employees' services rendered during the period;
  • Vested past service costs which are recognized immediately;
  • Unvested past service costs which are amortized on a straight-line basis over the vesting period; and
  • The interest cost of pension obligations less the expected return on pension fund assets. The Corporation uses the fair value of plan assets to evaluate plan assets for the purpose of calculating the expected return on plan assets.

The retirement benefit obligation recognized in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognized past service costs and as reduced by the fair value of plan assets.

The Corporation recognizes actuarial gains or losses in other comprehensive income in the period in which they arise.

  1. FOREIGN CURRENCY TRANSLATION

FOREIGN CURRENCY TRANSACTIONS

For the purpose of the consolidated financial statements, the profit or loss and financial position of each group entity are expressed in Canadian dollars, which is the functional and presentation currency of the Corporation for the consolidated financial statements.

Transactions in foreign currencies are translated to the respective functional currency of the Corporation's entities at the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Foreign currency differences arising on translation are recognized as financial expense in profit or loss, except for those arising on the translation of financial instruments designated as a hedge of a net investment in foreign operations, and financial instruments designated and effective as hedging items in a cash-flow hedge, which are recognized in other comprehensive income until the instruments are settled. Non-monetary items that are measured in terms of historical cost are translated at historical rates at the date of the transaction.

FOREIGN OPERATIONS

The assets and liabilities of foreign operations, including goodwill and fair value adjustment arising on acquisition, are translated to Canadian dollars using exchange rates prevailing at the end of the reporting period. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate prevailing at the end of the reporting period.

Revenue and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly or significant transactions occurred during that period, in which case the exchange rates at the date of the transactions are used. Exchange differences arising, if any, are recognized as foreign currency translation adjustment in other comprehensive income and accumulated in equity.

The Corporation applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and the parent entity's functional currency (Canadian dollars). Foreign currency differences arising on the translation of the long-term debt designated as a hedge of a net investment in foreign operations are recognized in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the foreign currency translation adjustment balance. To the extent that the hedge is ineffective, such differences are recognized in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the cumulative amount of foreign currency translation adjustment is transferred to profit or loss as part of the profit or loss on disposal.

  1. FINANCIAL INSTRUMENTS

CLASSIFICATION AND MEASUREMENT

All financial instruments, including derivatives, are included in the statement of financial position initially at fair value when the Corporation becomes a party to the contractual obligations of the instrument.

Subsequent to initial recognition, non-derivative financial instruments are measured in accordance with their classification as described below:

  • Loans and receivables are financial assets with fixed or determinable payments that are not quoted on an open market. Cash and cash equivalents and trade and other receivables are classified as loans and receivables. They are measured at amortized cost using the effective interest method, less any impairment loss;
  • Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss; and
  • Trade and other payables and loans and borrowings are classified as other liabilities. They are measured at amortized cost using the effective interest method. Directly attributable transaction costs are added to the initial fair value of financial instruments except for those incurred in respect of the Term Revolving Facility, which are amortized over the term of the related financing on a straight-line basis.

Financial assets are derecognized only when the Corporation no longer holds the contractual rights to the cash flows of the asset or when the Corporation transfers substantially all the risks and rewards of ownership of the financial asset to another entity. Financial liabilities are derecognized only when the Corporation's obligations are discharged, cancelled or expire.

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

DERIVATIVE FINANCIAL INSTRUMENTS, INCLUDING HEDGE ACCOUNTING

The Corporation uses cross-currency swaps as derivative financial instruments to manage foreign exchange risk related to its foreign denominated long-term debt. The Corporation does not hold or use any derivative financial instruments for speculative trading purposes.

Derivatives are recognized initially at fair value and related transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Net receipts or payments arising from derivative agreements are recognized as financial expense.

On initial designation of the hedge, the Corporation formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Corporation makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be "highly effective" in offsetting the changes in the cash flows of the respective hedged items during the period for which the hedge is designated and whether the actual results of each hedge are within a range of 80-125 percent. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported profit or loss.

Cash flow hedge accounting

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in accumulated other comprehensive income and presented in unrealized gains or losses on cash flow hedges in equity. The amount recognized in other accumulated comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss and in the same line item as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires, is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in accumulated other comprehensive income and presented in unrealized gains or losses on cash flow hedges in equity, remains there until the forecasted hedged item affects profit or loss. If the forecasted hedged item is no longer expected to occur, then the balance in accumulated other comprehensive income is recognized immediately in profit or loss.

In other cases the amount recognized in accumulated other comprehensive income is transferred to profit or loss in the same period in which, the hedged item affects profit or loss.

EMBEDDED DERIVATIVES

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. At November 30, 2011 and 2010, August 31, 2011 and September 1, 2010, there were no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated statements of financial position.

IMPAIRMENT OF FINANCIAL ASSETS

Trade and other receivables ("receivables") are assessed at each reporting date to determine whether there is objective evidence that they are impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that receivables are impaired can include default or delinquency by a debtor or indications that a debtor will enter bankruptcy.

The Corporation considers evidence of impairment for receivables at both a specific asset and aggregate basis. All individually significant receivables are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are assessed on an aggregate basis for impairment by grouping together receivables with similar risk characteristics.

An impairment loss in respect of receivables is calculated as the difference between its carrying amount and the present value of the estimated future cash flows. Losses are recognized in profit or loss and reflected in an allowance account presented in reduction of receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

  1. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and highly liquid investments that have an original maturity of three months or less.

  1. EARNINGS PER SHARE

The Corporation presents basic and diluted earnings per share data for its multiple and subordinate voting shares. Basic earnings per share is calculated by dividing the profit or loss attributable to shareholders of the Corporation by the weighted average number of multiple and subordinate voting shares outstanding during the period, adjusted for subordinate voting shares held in trust under the ISU Plan. Diluted earnings per share is determined by adjusting the weighted average number of multiple and subordinate voting shares outstanding for the effects of all dilutive potential subordinate voting shares, which comprise stock options and ISUs granted to employees.

  1. SEGMENT REPORTING

An operating segment is a component of the Corporation that engages in business activities from which it may earn revenue and incur expenses, including revenue and expenses that relate to transaction with any of the Corporation's other components. All operating segments' operating results are reviewed regularly by the Corporation's Chief Operating Decision Maker ("CODM") to make decision about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available. Segment results that are directly reported to the CODM include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

  1. ACCOUNTING JUDGEMENT AND USE OF ESTIMATES

The preparation of condensed interim consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses.

Significant areas requiring the use of management judgements and estimates relate to the following items:

  • Allowance for doubtful accounts is established based on specific credit risk of the Corporation's 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;
  • Fair value of assets acquired and liabilities assumed in a business combination is estimated based on information available at date of acquisition and involves considerable judgement in determining the fair values assigned to the property, plant and equipment and intangible assets acquired and liabilities assumed on acquisition. Among other things, the determination of these fair values involves the use of discounted cash flow analyses, estimated future margins and estimated future customer counts;
  • Measurement of property, plant and equipment and intangible assets with finite useful lives requires estimates for determining the asset's expected useful lives and residual values. Management judgement is required to determine the components and the depreciation method used;
  • Management judgement is used to determine the timing of expected cash outflows related to decommissioning provisions;
  • The fair value of derivative financial instruments is estimated using valuation techniques based on several inputs such as interest rates and volatilities and foreign exchange rates;
  • The defined benefit pension plans liability is determined using actuarial calculations that are based on several assumptions. The actuarial valuation uses the Corporation's assumptions for the discount rate, expected long-term rate of return on plan assets, rate of compensation increase and expected average remaining years of service of employees;
  • The impairment of non-financial assets requires the use of management judgement to identify the existence of indicators of impairment and the determination of CGUs. Furthermore, when determining the recoverable amount of a CGU, the Corporation uses significant estimates such as the estimation of future cash flows and discount rates applicable; and
  • Deferred tax assets and liabilities require estimates about the nature and timing of future permanent and temporary differences, the expected timing of reversals of those temporary differences and the future tax rates that will apply to those differences. Judgment is also required in determining the tax basis of indefinite life intangible assets and the resulting tax rate used to measure deferred taxes.

Such judgments and estimates are based on the facts and information available to the management of the Corporation. Changes in facts and circumstances may require the revision of previous estimates, and actual results could differ from these estimates.

  1. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE

A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board ("IASB") that are mandatory but not yet effective for the period ended November 30, 2011 or year ended August 31, 2012, and have not been applied in preparing these condensed interim consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Corporation:


Effective for annual periods starting on or after
IFRS 9 Financial InstrumentsJanuary 1, 2015Early adoption permitted
IFRS 10 Consolidated Financial StatementsJanuary 1, 2013Early adoption permitted
IFRS 12 Disclosure of Interests in Other EntitiesJanuary 1, 2013Early adoption permitted
IFRS 13 Fair Value MeasurementJanuary 1, 2013Early adoption permitted
Amendments to IAS 1 Presentation of Financial StatementsJanuary 1, 2013Early adoption permitted
Amendment to IAS 19 Employee BenefitsJanuary 1, 2013Early adoption permitted

IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets and financial liabilities. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. This is the first phase of that project.

IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. It provides a single model to be applied in the control analysis for all investees.

IFRS 12 establishes disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structures entities.

IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. The standard clarifies the definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements.

The amendments to IAS 1 require that an entity present separately the items of other comprehensive income ("OCI") that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss.

The amendments to IAS 19 requires the recognition of actuarial gains and losses immediately in other comprehensive income, full recognition of past service costs immediately in profit or loss, recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation and additional disclosures explaining the characteristics of the Corporation's defined benefit pension plans.

The Corporation is in the process of determining the extent of the impact of these standards on its consolidated financial statements.

  1. OPERATING SEGMENTS

The Corporation's activities are comprised of Cable Television, HSI, Telephony, managed information technology and infrastructure and other telecommunications services. The Corporation considers its Cable Television, HSI, Telephony, managed information technology and infrastructure and other telecommunications activities as a single operating segment. The Corporation's activities are carried out in Canada and in Europe.

The principal financial information per operating segment is presented in the table below:

CanadaEuropeConsolidated
Three months ended November 30,201120102011 2010 20112010
$$$ $ $$
Revenue315,424287,20441,515 43,263 356,939330,467
Salaries, employee benefits and outsourced services50,74143,2928,633 8,383 59,37451,675
Other external purchases125,718112,03228,134 30,609 153,852142,641
Management fees - COGECO Inc.7,1426,644- - 7,1426,644
Depreciation and amortization64,82449,5191,288 12,312 66,11261,831
Operating income (loss)66,99975,7173,460 (8,041)70,45967,676
Financial expense (revenue)16,82916,683(111)(26)16,71816,657
Income taxes10,60316,285172 144 10,77516,429
Profit (loss) for the period39,56742,7493,399 (8,159)42,96634,590
Total assets(1)2,611,5562,653,05760,344 59,622 2,671,9002,712,679
Property, plant and equipment(1)1,232,8831,219,62335,838 34,594 1,268,7211,254,217
Intangible assets(1)1,044,5511,045,601- - 1,044,5511,045,601
Goodwill(1)208,993208,796- - 208,993208,796
Acquisition of property, plant and equipment73,33954,7793,434 8,473 76,77363,252
(1) At November 30, 2011 and August 31, 2011.
  1. DEPRECIATION AND AMORTIZATION
Three months ended November 30,
20112010
$$
Property, plant and equipment61,11857,952
Intangible assets4,9943,879
66,11261,831
  1. FINANCIAL EXPENSE
Three months ended November 30,
2011 2010
$ $
Interest on long-term debt14,247 15,889
Net foreign exchange losses (gains)1,458 (332)
Amortization of deferred transaction costs399 442
Capitalized borrowing costs(372)(43)
Other986 701
16,718 16,657
  1. INCOME TAXES
Three months ended November 30,
2011 2010
$ $
Current19,662 78,056
Deferred(8,887)(61,627)
10,775 16,429

The following table provides the reconciliation between income tax expense at the Canadian statutory federal and provincial income tax rates and the consolidated income tax expense:

Three months ended November 30,
2011 2010
$ $
Profit before income taxes53,741 51,019
Combined income tax rate27.05%28.91%
Income tax expense at combined income tax rate14,537 14,750
Adjustment for losses or profit subject to lower or higher tax rates267 (919)
Decrease in income taxes from changes in tax legislation on partnership income(3,450)-
Income taxes arising from non-deductible expenses56 165
Effect of foreign income tax rate differences- 2,461
Other(635)(28)
Income tax expense at effective income tax rate10,775 16,429
  1. EARNINGS PER SHARE

The following table provides the reconciliation between basic and diluted earnings per share:

Three months ended November 30,
20112010
$$
Profit for the period attributable to shareholders42,96634,590
Weighted average number of multiple voting and subordinate voting shares outstanding48,656,31548,513,441
Effect of dilutive stock options(1)182,521171,502
Effect of dilutive incentive share units127,98766,838
Weighted average number of diluted multiple voting and subordinate voting shares outstanding48,966,82348,751,781
Earnings per share
Basic0.880.71
Diluted0.880.71
(1) For the three-month period ended November 30, 2011, 154,126 stock options (331,781 in 2010) were excluded from the calculation of diluted earnings per share as the exercise price of the options was greater than the average share price of the subordinate voting shares.
  1. LONG-TERM DEBT
Maturity Interest rate November 30,
2011
August 31,
2011
% $$
Parent Corporation
Term Revolving Facility
Revolving loansNovember 2016(1)3.50(2)130,000110,000
Senior Secured Notes
Series A - US$190,000,000October 2015 7.00(3)192,876185,049
Series BOctober 2018 7.60 54,65554,646
Senior Secured Debentures Series 1June 2014 5.95 298,186298,016
Senior Secured Debentures Series 2November 2020 5.15 198,435198,400
Senior Unsecured DebentureMarch 2018 5.94 99,83399,827
Subsidiaries
Finance leasesOctober 2013 6.73 - 9.93 2,3332,939
976,318948,877
Less current portion 1,7682,094
974,550946,783
(1) On November 22, 2011, the Corporation renewed its credit agreement for a $750 million credit facility, with an option to increase to a total amount of up to $1 billion, subject to lenders' participation, in the form of a five year Term Revolving Facility. The renewed Term Revolving Facility was arranged by a group of financial institutions led by Canadian Imperial Bank of Commerce and Bank of Montreal. The renewed Term Revolving Facility will mature on November 22, 2016, but may be extended by additional one-year periods on an annual basis, subject to lenders' approval. The Term Revolving Facility is indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries, and provides for certain permitted encumbrances, including purchased money obligations, existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary, subject to a maximum amount.
(2) Interest rate on debt at November 30, 2011, including applicable margin.
(3) Cross-currency swap agreements have resulted in an effective interest rate of 7.24% on the Canadian dollar equivalent of the US denominated debt.
  1. SHARE CAPITAL

Authorized

Unlimited number of:

Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the holder at any time at a price of $1 per share, carrying a cumulative preferential cash dividend at a rate of 11% of the redemption price per year.

Class B Preference shares, without voting rights, could be issued in series.

Multiple voting shares, 10 votes per share.

Subordinate voting shares, 1 vote per share.

Issued

November 30, 2011 August 31, 2011
$ $
15,691,100 multiple voting shares98,346 98,346
33,117,508 subordinate voting shares (33,073,656 at August 31, 2011)899,997 898,327
998,343 996,673
161,549 subordinate voting shares held in trust under the Incentive Share Unit Plan (103,728 at August 31, 2011)(6,606)(3,751)
991,737 992,922

During the first three months, subordinate voting share transactions were as follows:

Number of sharesAmount
$
Balance at August 31, 201133,073,656898,327
Shares issued for cash under the employee Stock Option Plan43,8521,295
Compensation expense previously recorded in contributed surplus for options exercised-375
Balance at November 30, 201133,117,508899,997

During the first three months, subordinate voting shares held in trust under the ISU Plan transactions were as follows:

Number of sharesAmount
$
Balance at August 31, 2011103,7283,751
Subordinate voting shares acquired57,8212,855
Balance at November 30, 2011161,5496,606

Dividends

For the three-month period ended November 30, 2011, a dividend of $0.25 per share was paid to the holders of multiple and subordinate voting shares, totalling $12.2 million, compared to a dividend of $0.17 per share, or $8.2 million the year before.

Share-based payment plans

The Corporation offers, for certain executives a Stock Option Plan, which is described in the Corporation's annual consolidated financial statements. For the three-month period ended November 30, 2011, the Corporation granted 87,400 stock options (66,700 in 2010) with an exercise price of $48.02 ($39.00 in 2010) of which 46,400 stock options (35,800 in 2010) were granted to COGECO Inc.'s employees. These options vest equally over a period of five years beginning one year after the day such options are granted and are exercisable over ten years. During the three-month period ended November 30, 2011, the Corporation charged COGECO Inc. an amount of $74,000 ($49,000 in 2010) with respect to the Corporation's options granted to COGECO Inc.'s employees. As a result, a compensation expense of $88,000 ($118,000 in 2010) was recorded for the three-month period ended November 30, 2011.

The weighted average fair value of stock options granted for the three-month period ended November 30, 2011 was $11.34 ($10.62 in 2010) per option. The weighted average fair value of each option granted was estimated at the grant date for purposes of determining stock-based compensation expense using the Black-Sholes option pricing model based on the following assumptions:

20112010
%%
Expected dividend yield1.651.44
Expected volatility26.8429
Risk-free interest rate1.762.25
Expected life in years6.16.2

Under the Stock Option Plan, the following options were granted by the Corporation and are outstanding at November 30, 2011:




Options
Weighted
average
exercise
price
Outstanding at August 31, 2011564,377 32.30
Granted87,400 48.02
Exercised(1)(43,852)29.52
Outstanding at November 30, 2011607,925 34.76
Exercisable at November 30, 2011406,191 31.61
(1) The weighted average share price for options exercised during the period was $49.48.

The Corporation also offers a senior executive and designated employee Incentive Share Unit Plan ("ISU Plan"), which is described in the Corporation's annual consolidated financial statements. For the three-month period ended November 30, 2011, the Corporation granted 57,943 (58,088 in 2010) ISUs of which 10,700 (10,000 in 2010) ISUs were granted to COGECO Inc.'s employees. The Corporation establishes the value of the compensation related to the ISUs granted based on the fair value of the Corporation's subordinate voting shares at the date of grant and a compensation expense is recognized over the vesting period, which is three years less one day. A trust was created for the purpose of purchasing these shares on the stock market in order to protect against stock price fluctuation. The Corporation instructed the trustee to purchase 57,821 (57,203 in 2010) subordinate voting shares of the Corporation on the stock market. These shares were purchased for cash consideration aggregating $2,855,000 ($2,258,000 in 2010) and are held in trust for the participants until they are fully vested. The trust, considered as a special purpose entity, is consolidated in the Corporation's financial statements with the value of the acquired shares presented as subordinate voting shares held in trust under the ISU Plan in reduction of share capital. A compensation expense of $338,000 ($178,000 in 2010) was recorded for the three-month period ended November 30, 2011 related to this plan. During the three-month period ended November 30, 2011, the Corporation charged COGECO Inc. an amount of $76,000 ($39,000 in 2010) with respect to the Corporation's ISUs granted to COGECO Inc.'s employees. Under the ISU Plan, the following ISUs were granted by the Corporation and are outstanding at November 30, 2011:

Outstanding at August 31, 2011105,064
Granted57,943
Outstanding at November 30, 2011163,007

The Corporation also offers a Deferred Share Unit Plan ("DSU Plan") for members of the Board of directors which is described in the Corporation's annual consolidated financial statements. For the three-month periods ended November 30, 2011 and 2010, the Corporation did not issue any deferred share units ("DSUs") to the participants in connection with the DSU Plan. A compensation expense of $50,000 ($36,000 in 2010) was recorded for the three-month period ended November 30, 2011 for the liability related to this plan. Under the DSU Plan, the following DSUs were issued by the Corporation and are outstanding at November 30, 2011:

Outstanding at August 31, 201115,608
Dividend equivalents80
Outstanding at November 30, 201115,688
  1. ACCUMULATED OTHER COMPREHENSIVE INCOME
Cash flow hedges Foreign currency translation Defined benefit pension plans Total
$ $ $ $
Balance at September 1, 20102,920 17,217 - 20,137
Other comprehensive income (loss)1,797 (1,916)- (119)
Balance at November 30, 20104,717 15,301 - 20,018
Other comprehensive income (loss)(2,725)5,261 (1,968)568
Balance at August 31, 20111,992 20,562 (1,968)20,586
Other comprehensive loss(972)(272)- (1,244)
Balance at November 30, 20111,020 20,290 (1,968)19,342
  1. STATEMENTS OF CASH FLOWS
  1. Changes in non-cash operating activities
Three months ended November 30,
2011 2010
$ $
Trade and other receivables(5,712)(3,182)
Prepaid expenses and other532 3,161
Trade and other payables(63,072)(57,104)
Provisions4,604 (649)
Deferred and prepaid revenue and other liabilities325 62
(63,323)(57,712)
  1. Cash and cash equivalents
November 30, 2011August 31, 2011
$$
Cash15,82351,226
Cash equivalents(1)4,1124,221
19,93555,447
(1) At November 30, 2011, term deposit of €3,000,000, bearing interest at 2%, maturing on December 27, 2011.
  1. EMPLOYEE BENEFITS

The Corporation and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, defined contribution pension plans or a collective registered retirement savings plan, which are described in the Corporation's annual consolidated financial statements. The total expense related to these plans is as follows:

Three months ended November 30,
20112010
$$
Contributory defined benefit pension plans449352
Defined contribution pension plans and collective registered retirement savings plan1,3781,235
1,8271,587
  1. FINANCIAL INSTRUMENTS
  1. Financial risk management

Management's objectives are to protect Cogeco Cable Inc. and its subsidiaries against material economic exposures and variability of results, and against certain financial risks including credit, liquidity, interest rate and foreign exchange risk.

Credit risk

Credit risk represents the risk of financial loss for the Corporation if a customer or counterparty to a financial asset fails to meet its contractual obligations. The Corporation is exposed to credit risk arising from the derivative financial instruments, cash and cash equivalents and trade accounts receivable, the maximum exposure of which is represented by the carrying amounts reported on the statement of financial position.

Credit risk from derivative financial instruments arises from the possibility that counterparties to the cross-currency swaps may default on their obligations in instances where these agreements have positive fair values for the Corporation. The Corporation reduces this risk by completing transactions with financial institutions that carry a credit rating equal to or superior to its own credit rating. The Corporation assesses the creditworthiness of the counterparties in order to minimize the risk of counterparties default under the agreements. At November 30, 2011, management believes that the credit risk relating to its derivative financial instruments is minimal, since the lowest credit rating of the counterparties to the agreements is "A".

Cash and cash equivalents consist mainly of highly liquid investments, such as term deposits. The Corporation has deposited the cash and cash equivalents with reputable financial institutions, for which management believes the risk of loss to be remote.

The Corporation is also exposed to credit risk in relation to its trade accounts receivable. In the current global economic environment, particularly in Portugal, the Corporation's credit exposure is higher than usual but it is difficult to predict the impact this could have on the Corporation's account receivable balances. To mitigate such risk, the Corporation continuously monitors the financial condition of its customers and reviews the credit history or worthiness of each new large customer. At November 30, 2011 and August 31, 2011, no customer balance represented a significant portion of the Corporation's consolidated trade accounts receivable. The Corporation establishes an allowance for doubtful accounts based on specific credit risk of its customers by examining such factors as the number of overdue days of the customer's balance outstanding as well as the customer's collection history. The Corporation believes that its allowance for doubtful accounts is sufficient to cover the related credit risk. The Corporation has credit policies in place and has established various credit controls, including credit checks, deposits on accounts and advance billing, and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated existing payment terms. Since the Corporation has a large and diversified clientele dispersed throughout its market areas in Canada and in Portugal, there is no significant concentration of credit risk. The following table provides further details on the Corporation's accounts receivable balances:

November 30, 2011 August 31, 2011
$ $
Trade accounts receivable80,206 74,429
Allowance for doubtful accounts(7,649)(7,242)
72,557 67,187
Other accounts receivable7,637 7,498
80,194 74,685

The following table provides further details on trade accounts receivable, net of allowance for doubtful accounts. Trade accounts receivable past due is defined as amount outstanding beyond normal credit terms and conditions for the respective customers. A large portion of the Corporation's customers are billed in advance and are required to pay before their services are rendered. The Corporation considers amount outstanding at the due date as trade accounts receivable past due.

November 30, 2011August 31, 2011
$$
Net trade accounts receivable not past due53,34850,133
Net trade accounts receivable past due19,20917,054
72,55767,187

Liquidity risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation manages liquidity risk through the management of its capital structure and access to different capital markets. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure sufficient liquidity to meet its obligations when due. At November 30, 2011, the available amount of the Corporation's Term Revolving Facility was $598.8 million. Management believes that the committed Term Revolving Facility will, until its maturity in November 2016, 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 amounts:

Contractual cash flows
Carrying amount
$
2012
$
2013
$
2014
$
2015
$
2016
$
Thereafter
$
Total
$
Bank indebtedness21,01221,012-----21,012
Trade and other payables(1)157,917157,917-----157,917
Provisions19,91219,912-----19,912
Long-term debt(2)973,985--300,000-193,857485,000978,857
Balance due on a business acquisition11,400-11,400----11,400
Derivatives financial instruments7,364----8,018-8,018
Finance leases(3)2,3331,5958647---2,466
1,193,923200,43612,264300,007-201,875485,0001,199,582
(1) Excluding accrued interest.
(2) Principal excluding finance leases.
(3) Including interest.

The following table is a summary of interest payable on long-term debt (excluding interest on finance leases) that is due for each of the next five years and thereafter, based on the principal amount and interest rate prevailing on the outstanding debt at November 30, 2011 and their respective maturities:

2012 2013 2014 2015 2016 ThereafterTotal
$ $ $ $ $ $$
Interest payments on long-term debt38,255 56,386 56,386 38,536 31,751 69,810291,124
Interest payments on derivative financial instruments7,307 14,614 14,614 14,614 7,307 -58,456
Interest receipts on derivative financial instruments(6,785)(13,570)(13,570)(13,570)(6,785)-(54,280)
38,777 57,430 57,430 39,580 32,273 69,810295,300

Interest rate risk

The Corporation is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments. At November 30, 2011, all of the Corporation's long-term debt was at fixed rate, except for the Corporation's Term Revolving Facility. The sensitivity of the Corporation's annual financial expense to a variation of 1% in the interest rate applicable to the Term Revolving Facility is approximately $1.3 million based on the current debt at November 30, 2011.

Foreign exchange risk

The Corporation is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to mitigate this risk, the Corporation has established guidelines whereby currency swap agreements can be used to fix the exchange rates applicable to its US dollar denominated long-term debt. All such agreements are exclusively used for hedging purposes. Accordingly, on October 2, 2008, the Corporation entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million Senior Secured Notes Series A issued on October 1, 2008. These agreements have the effect of converting the US interest coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at $1.0625. The Corporation elected to apply cash flow hedge accounting on these derivative financial instruments.

The Corporation is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and trade and other payables denominated in US dollars or Euros. The Corporation's exposure to foreign currency risk is as follows:

November 30, 2011 August 31, 2011
US
$
Euro
$
US
$
Euro
$
Cash and cash equivalents821514 8,649497
Trade and other payables16,432- 30,309-
17,253514 38,958497

Due to their short-term nature, the risk arising from fluctuations in foreign exchange rates is usually not significant. The impact of a 10% fluctuation in the foreign exchange rates (US dollar and Euro) would change financial expense by approximately $1.5 million.

Furthermore, the Corporation's net investment in a foreign operation 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. At November 30, 2011, the net investment amounted to €8.6 million (€6.1 million at August 31, 2011). The exchange rate used to convert the Euro currency into Canadian dollars for the statement of financial position accounts at November 30, 2011 was $1.3706 per Euro compared to $1.4071 per Euro at August 31, 2011. The impact of a 10% fluctuation in the exchange rate of the Euro into Canadian dollars would change other comprehensive income by approximately $1.2 million.

  1. Fair value of financial instruments

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 Corporation has determined the fair value of its financial instruments as follows:

  1. The carrying amount of cash and cash equivalents, trade and other receivables, trade and other payables, provisions and balance due on a business acquisition approximates fair value because of the short-term nature of these instruments.
  1. Interest rates under the terms of the Corporation's Term Revolving Facility are based on bankers' acceptance, LIBOR, EURIBOR, bank prime rate loan or US base rate loan plus applicable margin. Therefore, the carrying value approximates fair value for the Term Revolving Facility, since the Term Revolving Facility has conditions similar to those currently available to the Corporation.
  1. The fair value of the Senior Secured Debentures Series 1 and 2, Senior Secured Notes Series A and B and Senior Unsecured Debenture are based upon current trading values for similar financial instruments.
  1. The fair values of finance leases are not significantly different from their carrying amounts.

The carrying value of all the Corporation's financial instruments approximates fair value, except as otherwise noted in the following table:

November 30, 2011August 31, 2011
Carrying valueFair valueCarrying valueFair value
$$$$
Long-term debt976,3181,058,236948,8771,027,082

All financial instruments recognized at fair value on the consolidated statement of financial position must be measured based on the three fair value hierarchy levels, which are as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
  • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The Corporation considers that its derivative financial instruments are classified as Level 2 under the fair value hierarchy. The fair value of derivative financial instruments are estimated using valuation models that reflect projected future cash flows over contractual terms of the derivative financial instruments and observable market data, such as interest and currency exchange rate curves.

  1. Capital management

The Corporation's objectives in managing capital are to ensure sufficient liquidity to support the capital requirements of its various businesses, including growth opportunities. The Corporation manages its capital structure and makes adjustments in light of general economic conditions, the risk characteristics of the underlying assets and the Corporation's working capital requirements. Management of the capital structure involves the issuance of new debt, the repayment of existing debts using cash generated by operations and the level of distribution to shareholders.

The capital structure of the Corporation is composed of shareholders' equity, cash and cash equivalents, bank indebtedness, long-term debt, balance due on a business acquisition and assets or liabilities related to derivative financial instruments.

The provisions of the Term Revolving Facility provide for restrictions on the operations and activities of the Corporation. Generally, the most significant restrictions relate to permitted investments and dividends on multiple and subordinate voting shares, as well as the maintenance of certain financial ratios primarily linked to the operating income before depreciation and amortization, financial expense and total indebtedness. At November 30, 2011 and 2010, August 31, 2011 and September 1, 2010, the Corporation was in compliance with all of its debt covenants and was not subject to any other externally imposed capital requirements.

The following table summarizes certain of the key ratios used to monitor and manage the Corporation's capital structure:

November 30, 2011August 31, 2011
Net senior indebtedness(1) / operating income before depreciation and amortization(2)1.51.4
Net indebtedness(3) / operating income before depreciation and amortization(2)1.71.6
Operating income before depreciation and amortization(2) / financial expense(2)8.07.9
(1) Net senior indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments, less cash and cash equivalents and principal on Senior Unsecured Debenture.
(2) Calculation based on operating income before depreciation and amortization and financial expense for the twelve-month period ended November 30, 2011 and August 31, 2011.
(3) Net indebtedness is defined as the total of bank indebtedness, principal on long-term debt, balance due on a business acquisition and obligations under derivative financial instruments, less cash and cash equivalents.
  1. TRANSITION TO IFRS

As mentioned in note 1, these are the first condensed interim consolidated financial statements prepared in accordance with IFRS.

The significant accounting policies set out in note 2 have been applied in preparing the condensed interim consolidated financial statements for the three months ended November 30, 2011, the comparative information presented in the three months ended November 30, 2010 and in the preparation of the opening IFRS statement of financial position as at September 1, 2010 (the Corporation's transition date).

IFRS 1 elective exemptions and mandatory exceptions

IFRS 1 permits some exemption from full retrospective application of IFRS at the transition date. The Corporation elected the following elective exemptions in preparing its opening IFRS Statement of financial position:

  1. Business combinations

A first-time adopter may elect not to apply IFRS 3, Business combinations, retrospectively to business acquisitions completed before the transition date. The retrospective basis would require restatement of all business combinations that occurred prior to the transition date. The Corporation has elected not to retrospectively apply IFRS 3 to business combinations completed prior to its transition date and such business combinations have not been restated. Any assets or liabilities arising on business combinations completed before the transition date have not been adjusted from the carrying value previously determined under Canadian GAAP as a result of applying this exemption.

  1. Employee benefits

The Corporation has elected to recognize all cumulative actuarial gains and losses that existed at its transition date in opening retained earnings for all of its employee defined benefit pension plans. The Corporation also elected to prospectively disclose required defined benefit pension plans amounts under IAS 19 Employee Benefits as the amounts are determined for each accounting period from the date of transition instead of the current annual period and previous four annual periods.

  1. Share-based payments

The Corporation has elected to apply the requirements of IFRS 2, Share-based payments, only to equity instruments granted after November 7, 2002 and which vested after the date of transition to IFRS.

  1. Borrowing costs

The Corporation has elected to apply the requirements of IAS 23 Borrowing Costs only to borrowing costs relating to assets for which the commencement date for capitalization was on or after the date of transition. Borrowing costs incurred before the date of transition were expensed.

  1. Financial assets and financial liabilities

At the date of transition, the Corporation has elected to reclassify cash and cash equivalents from held-for-trading to loans and receivables.

The Corporation applied the following mandatory exceptions in preparing its opening IFRS financial statements:

  1. Hedge accounting

Hedge accounting can only be applied prospectively from the transition date to transactions that satisfy the hedge accounting criteria in IAS 39 at that date. Hedging relationships cannot be designated retrospectively and the supporting documentation cannot be created retrospectively. As a result, only hedging relationships that satisfied the hedge accounting criteria as of its transition date are reflected as hedges in the Corporation's results under IFRS.

  1. Estimates

Hindsight is not used to create or revise estimates. The estimates previously made by the Corporation under Canadian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies.

The Corporation has adjusted amounts reported previously in financial statements prepared in accordance with previous Canadian GAAP. An explanation of how transition from previous Canadian GAAP to IFRS has affected the Corporation's financial position and financial performance is set out in the following tables and the notes that accompany the tables.

Reconciliation of statement of financial position at September 1, 2010:

NotesCanadian
GAAP
IFRS
adjust-
ments
IFRS
reclassi-
fications
IFRS
Assets
Current
Cash and cash equivalents 35,842- - 35,842
Trade and other receivables267,064427 (539)66,952
Income taxes receivable 44,800- - 44,800
Prepaid expenses and other 13,669- - 13,669
Deferred tax assets 6,133- (6,133)-
167,508427 (6,672)161,263
Non-current
Property, plant and equipment31,325,077(5,705)- 1,319,372
Deferred charges 26,974- (26,974)-
Other assets -- 6,700 6,700
Intangible assets1, 41,017,658(22,552)20,813 1,015,919
Goodwill 144,695- - 144,695
Derivative financial instruments 5,085- - 5,085
Deferred tax assets515,8221,160 6,133 23,115
2,702,819(26,670)- 2,676,149
Liabilities and Shareholders' equity
Liabilities
Current
Trade and other payables 235,087- (12,695)222,392
Provisions -- 12,695 12,695
Income tax liabilities 558- - 558
Deferred and prepaid revenue 45,602- - 45,602
Derivative financial instrument 1,189- - 1,189
Current portion of long-term debt 2,296- - 2,296
Deferred tax liabilities 78,267- (78,267)-
362,999- (78,267)284,732
Non-current
Long-term debt 952,687- - 952,687
Deferred and prepaid revenue and other liabilities 12,234- - 12,234
Pension plan liabilities and accrued employees benefits53,6244,437 - 8,061
Deferred tax liabilities1,3, 4, 7234,974(3,259)78,267 309,982
1,566,5181,178 - 1,567,696
Shareholders' equity
Share capital 988,830- 988,830
Contributed surplus26,0871,383 - 7,470
Accumulated other comprehensive income 18,3591,778 - 20,137
Retained earnings1,2,3,4,5,7123,025(31,009)- 92,016
1,136,301(27,848)- 1,108,453
2,702,819(26,670)- 2,676,149

Reconciliation of statement of financial position at November 30, 2010:

NotesCanadian GAAPIFRS
adjust-
ments
IFRS
reclassi-
fications
IFRS
Assets
Current
Cash and cash equivalents 197,653- - 197,653
Trade and other receivables270,098437 (539)69,996
Income taxes receivable 42,983- - 42,983
Prepaid expenses and other 10,481- - 10,481
Deferred tax assets 4,799- (4,799)-
326,014437 (5,338)321,113
Non-current
Property, plant and equipment3,61,326,099(4,503)- 1,321,596
Deferred charges 27,084- (27,084)-
Other assets -- 6,258 6,258
Intangible assets1,41,016,465(22,552)21,365 1,015,278
Goodwill 144,297- - 144,297
Deferred tax assets57,2511,142 4,799 13,192
2,847,210(25,476)- 2,821,734
Liabilities and Shareholders' equity
Liabilities
Current
Trade and other payables 172,189- (12,046)160,143
Provisions -- 12,046 12,046
Income tax liabilities 79,471- - 79,471
Deferred and prepaid revenue 45,361- - 45,361
Derivative financial instrument 674- - 674
Current portion of long-term debt 177,307- - 177,307
Deferred tax liabilities 15,257- (15,257)-
490,259- (15,257)475,002
Non-current
Long-term debt 953,158- - 953,158
Derivative financial instruments 1,263- - 1,263
Deferred and prepaid revenue and other liabilities 12,532- - 12,532
Pension plan liabilities and accrued employees benefits53,9514,367 - 8,318
Deferred tax liabilities1,3,4,6,7226,062(2,949)15,257 238,370
1,687,2251,418 - 1,688,643
Shareholders' equity
Share capital 986,948- - 986,948
Contributed surplus26,3841,384 - 7,768
Accumulated other comprehensive income 18,2401,778 - 20,018
Retained earnings1,2,3,4,5,6,7148,413(30,056)- 118,357
1,159,985(26,894)- 1,133,091
2,847,210(25,476)- 2,821,734

Reconciliation of statement of financial position at August 31, 2011:

NotesCanadian GAAPIFRS
adjust-
ments
IFRS
reclassi-
fications
IFRS
Assets
Current
Cash and cash equivalents 55,447- - 55,447
Trade and other receivables274,754470 (539)74,685
Income taxes receivable 38,360- - 38,360
Prepaid expenses and other 12,856- - 12,856
Deferred tax assets 4,168- (4,168)-
185,585470 (4,707)181,348
Non-current
Property, plant and equipment3,61,254,576(359)- 1,254,217
Deferred charges 26,101- (26,101)-
Other assets -- 5,676 5,676
Intangible assets1,41,047,189(22,552)20,964 1,045,601
Goodwill1210,986(2,190)- 208,796
Deferred tax assets511,0631,810 4,168 17,041
2,735,500(22,821)- 2,712,679
Liabilities and Shareholders' equity
Liabilities
Current
Trade and other payables 255,014- (15,308)239,706
Provisions -- 15,308 15,308
Income tax liabilities 59,356- - 59,356
Deferred and prepaid revenue 43,128- - 43,128
Current portion of long-term debt 2,094- - 2,094
Deferred tax liabilities 85,201- (85,201)-
444,793- (85,201)359,592
Non-current
Long-term debt 946,783- - 946,783
Balance due on a business acquisition 11,400- - 11,400
Derivative financial instruments 14,408- - 14,408
Deferred and prepaid revenue and other liabilities 14,576- - 14,576
Pension plan liabilities and accrued employees benefits54,3026,852 - 11,154
Deferred tax liabilities1,3,4,6,7238,193(1,880)85,201 321,514
1,674,4554,972 - 1,679,427
Shareholders' equity
Share capital 992,922- - 992,922
Contributed surplus26,4711,311 - 7,782
Accumulated other comprehensive income520,776(190)- 20,586
Retained earnings1,2,3,4,5,6,740,876(28,914)- 11,962
1,061,045(27,793)- 1,033,252
2,735,500(22,821)- 2,712,679

Reconciliation of profit or loss for the three months ended November 30, 2010:

NotesCanadian GAAPIFRS adjustments IFRS
Revenue 331,519(1,052)330,467
Salaries, employee benefits and outsourced services(1) 51,675- 51,675
Other external purchases(1)2,5143,772(1,131)142,641
Management fees - COGECO Inc. 6,644- 6,644
Depreciation and amortization362,990(1,159)61,831
Operating income 66,4381,238 67,676
Financial expense616,700(43)16,657
Profit before income taxes 49,7381,281 51,019
Income taxes5,616,101328 16,429
Profit for the period 33,637953 34,590
Earnings per share
Basic 0.690.02 0.71
Diluted 0.690.02 0.71
(1) Previously reported as operating costs under previous Canadian GAAP.

Reconciliation of comprehensive income for the three months ended November 30, 2010:

NotesCanadian
GAAP
IFRS
adjustments
IFRS
reclassi-
fications
IFRS
Profit for the period 33,637 953- 34,590
Other comprehensive loss
Cash flow hedging adjustments
Net change in fair value of hedging derivative financial instruments (4,867)-(966)(5,833)
Net change in fair value of hedging derivative financial instruments reclassified to financial expense 6,664 -917 7,581
Income tax recovery on cash flow hedging adjustments - -49 49
1,797 -- 1,797
Foreign currency translation adjustments
Net foreign currency translation differences on translation of a net investment in foreign operations (3,143)-- (3,143)
Net change in unrealized gains on translation of long-term debts designated as hedges of a net investment in foreign operations 1,227 -- 1,227
(1,916)-- (1,916)
Other comprehensive loss for the period (119)-- (119)
Comprehensive income for the period 33,518 953- 34,471

Reconciliation of profit or loss for the year ended August 31, 2011:

(In thousands of dollars, except per share data)NotesCanadian
GAAP
IFRS
adjustments
IFRS
Revenue 1,361,166 (4,206)1,356,960
Salaries, employee benefits and outsourced services(1) 218,769 - 218,769
Integration, restructuring and acquisition costs(1)1- 2,324 2,324
Other external purchases(1)2,5567,242 (4,599)562,643
Management fees - COGECO Inc. 9,172 - 9,172
Depreciation and amortization3247,178 (4,805)242,373
Operating income 318,805 2,874 321,679
Financial expense671,629 (541)71,088
Impairment of goodwill and property, plant and equipment 225,873 - 225,873
Profit before income taxes 21,303 3,415 24,718
Income taxes1,5,668,969 1,320 70,289
Loss for the year (47,666)2,095 (45,571)
Loss per share
Basic (0.98)0.04 (0.94)
Diluted (0.98)0.04 (0.94)
(1) Previously reported as operating costs under previous Canadian GAAP.

Reconciliation of comprehensive loss for the year ended August 31, 2011:

NotesCanadian
GAAP
IFRS
adjustments
IFRS reclassi-
fications
IFRS
Loss for the year (47,666)2,095 - (45,571)
Other comprehensive income
Cash flow hedging adjustments
Net change in fair value of hedging derivative financial instruments (15,353)- (2,953)(18,306)
Net change in fair value of hedging derivative financial instruments reclassified to financial expense 14,425 - 2,124 16,549
Income tax recovery on cash flow hedging adjustments - - 829 829
(928)- - (928)
Foreign currency translation adjustments
Net foreign currency translation differences on translation of a net investment in foreign operations 7,248 - - 7,248
Net change in unrealized losses on translation of long-term debts designated as hedges of a net investment in foreign operations (3,903)- - (3,903)
3,345 - - 3,345
-
Defined benefit plans actuarial gains (losses) adjustments -
Net change in defined benefit plans actuarial losses - (2,694)- (2,694)
Income tax recovery on defined benefit plans actuarial losses adjustments - 726 - 726
(1,968)- (1,968)
Other comprehensive income for the year 2,417 (1,968)- 449
Comprehensive loss for the year (45,249)127 - (45,122)

Reconciliation of the Statements of Cash Flows

In addition to the adjustments described above resulting from the accounting policy differences on adoption of IFRS, financial expense paid and income taxes paid have been moved into the body of the consolidated statements of cash flows while they were disclosed as supplementary information under Canadian GAAP. There were no other material changes to the statements of cash flows on adoption of IFRS.

NOTES TO THE RECONCILIATIONS

  1. BUSINESS COMBINATIONS

As described above, the Corporation has elected not to restate business combinations completed prior to the date of transition.

The requirements of IFRS 3 were applied prospectively to business combinations completed after the date of transition. As part of the application of those requirements to business combinations completed in 2011, integration, restructuring and acquisition costs were expensed when incurred in accordance with IFRS, while they were capitalized under Canadian GAAP.

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010September 1, 2010
Goodwill(2,190)--
Retained earnings(2,190)--
Consolidated statements of profit or loss
Increase (decrease)
August 31, 2011 November 30, 2010
Integration, restructuring and acquisition costs2,324 -
Deferred tax expense(134)-
Profit or loss for the period(2,190)-

Also as a result of the IFRS 1 election on business combinations described above, any assets or liabilities arising on business combinations completed before the transition date have not been adjusted from the carrying value previously determined at the date of the business acquisitions under previous Canadian GAAP. As a result, the amount of intangible assets stemming from the recognition of deferred income taxes upon application of CICA Handbook section 3465, Income taxes, which occurred after the date of the business combinations, has been reversed.

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Intangible assets(73,333)(73,333)(73,333)
Deferred tax liabilities(61,804)(61,804)(61,804)
Retained earnings(11,529)(11,529)(11,529)
  1. SHARE-BASED COMPENSATION

The Corporation's share options granted vest in tranches over a specified vesting period. Under IFRS, when the only vesting condition is service from the grant date to the vesting date of each tranche granted, then each tranche should be accounted for as a separate share-based payment arrangement (i.e. graded vesting method). Canadian GAAP permitted an accounting policy choice with respect to graded vesting awards. As such, the Corporation treated arrangement as a single award and the share-based payment was amortized on a straight-line basis over the vesting period. This difference resulted in an accelerated recognition of the expense for the Corporation.

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Trade and other receivables470 437 427
Contributed surplus - share-based compensation1,311 1,384 1,383
Retained earnings(841)(947)(956)
Consolidated statements of profit or loss
Increase (decrease)
August 31, 2011 November 30, 2010
Salaries, employee benefits and outsourced services(115)(9)
Profit or loss for the period115 9
  1. PROPERTY, PLANT AND EQUIPMENT

IAS 16 Property, Plant and Equipment requires that each significant component of an asset be depreciated separately over their respective useful lives which resulted in a more detailed approach to determining the useful lives for certain asset components under IFRS than those that were used under previous Canadian GAAP. The impact of the retroactive application of IAS 16 is as follows:

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Property, plant and equipment(900)(4,546)(5,705)
Deferred tax liabilities(229)(1,171)(1,470)
Retained earnings(671)(3,375)(4,235)
Consolidated statements of profit or loss
Increase (decrease)
August 31, 2011 November 30, 2010
Depreciation and amortization(4,805)(1,159)
Deferred tax expense1,241 299
Profit or loss for the period3,564 860
  1. INTANGIBLE ASSETS

Under IFRS, intangible assets with indefinite useful lives are not amortized but tested at least annually for impairment. IAS 38, Intangible assets, requires retrospective application of those requirements. Under Canadian GAAP, those assets were amortized until September 1, 2001 and transitional provisions did not require the reversal of amortization previously recorded. Therefore, on the date of transition, the Corporation reversed all amortization recorded in respect of intangible assets with indefinite lives. The impact of the change is as follows:

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Intangible assets50,781 50,781 50,781
Deferred tax liabilities7,552 7,552 7,552
Retained earnings43,229 43,229 43,229
  1. EMPLOYEE BENEFITS

IAS 19 Employee Benefits permits an accounting policy choice with respect to the recognition of actuarial gains and losses. The Corporation has elected to recognize all actuarial gains and losses immediately in other comprehensive income while under Canadian GAAP they were accounted for using the corridor method. At the date of transition, all previously unrecognized actual gains and losses, including the unamortized transitional obligation, were recognized in retained earnings. Also, the unrecognized actuarial gains and losses exceeding the corridor that were recognized for the three-month period ended November 30, 2010 under Canadian GAAP were reversed.

In addition, under IFRS, all unrecognized past service costs that were vested were recognized in retained earnings at the date of transition whereas under Canadian GAAP past service costs were deferred and amortized on a straight-line basis over the remaining service period of active employees at the date of employee benefit plan amendments. At the date of transition, all previously unrecognized past service costs were fully vested and therefore were recognized in retained earnings.

The impact from those changes is summarised as follows:

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Deferred tax assets1,810 1,142 1,160
Pension plan liabilities and accrued employee benefits6,852 4,367 4,437
Accumulated other comprehensive income(1,968)- -
Retained earnings(3,074)(3,225)(3,277)
Consolidated statements of profit or loss
Increase (decrease)
August 31, 2011 November 30, 2010
Salaries, employee benefits and outsource services(278)(70)
Deferred tax expense75 18
Profit or loss for the period203 52
  1. BORROWING COSTS

IFRS requires that borrowing costs be capitalized on qualifying assets whereas Canadian GAAP permitted an accounting policy choice to capitalize or expense these costs, which the Corporation elected to expense.

As described above, the Corporation has elected to apply those requirements only to borrowing costs relating to assets for which the commencement date for capitalization is on or after the date of transition. Therefore, there is no impact at the date of transition since those costs were already expensed. The impact of that change in respect of assets which commencement date for capitalization is after the date of transition is as follows:

Consolidated statements of financial position
Increase (decrease)
August 31, 2011November 30, 2010September 1, 2010
Property, plant and equipment54143-
Deferred tax liabilities13811-
Retained earnings40332-
Consolidated statements of profit or loss
Increase (decrease)
August 31, 2011 November 30, 2010
Financial expense(541)(43)
Deferred tax expense138 11
Profit or loss for the period403 32
  1. INCOME TAXES

The expected manner of recovery of intangible assets with indefinite useful lives for purposes of calculating deferred taxes is different under IFRS than under Canadian GAAP. The impact of applying IAS 12 on a retroactive basis is as follows:

Consolidated statements of financial position
Increase (decrease)
August 31, 2011 November 30, 2010 September 1, 2010
Deferred tax liabilities52,463 52,463 52,463
Retained earnings(52,463)(52,463)(52,463)

In addition, IFRS also requires that temporary differences relating to current assets and current liabilities be presented as non-current liabilities and non-current assets.

  1. ADDITIONAL ANNUAL DISCLOSURE UNDER IFRS

As these interim condensed consolidated financial statements are the first financial statements prepared using IFRS, certain additional annual disclosures required under IFRS have been provided below for the year ended August 31, 2011, having taken into consideration the adjustments made from Canadian GAAP to reconcile with IFRS as discussed above. Certain disclosures normally included in a set of annual financial statements have been intentionally omitted or condensed as the Corporation does not consider such information material to the understanding of the impact of IFRS on the consolidated financial statements.

  1. GOODWILL AND OTHER INTANGIBLE ASSETS
August 31, 2011September 1, 2010
Intangible assets with finite useful lives
Reconnect and additional service activation costs20,96420,813
Customer relationships57,63728,106
Intangible assets with indefinite useful lives
Cable Distribution Licences967,000967,000
1,045,6011,015,919
Goodwill208,796144,695
1,254,3971,160,614

At September 1, 2010 and August 31, 2011, the Corporation tested the value of goodwill and intangible assets with indefinite useful lives for impairment. The recoverable amount of each CGU is based on value in use calculations. The value in use was determined using cash flow projections derived from financial budgets covering a five year period submitted to the Board of directors. They reflect management's expectation of revenue growth, expenses and margin for each CGU based on past experience. Cash flows beyond the five year period have been extrapolated using an estimated terminal growth rate determined with regard to projected growth rates for the specific markets in which the CGUs participate and are not considered to exceed the long-term average growth rates for those markets. Discount rates applied to the cash flow forecasts are derived from the Corporation's pre-tax weighted average cost of capital, adjusted for the different risk profile of the individual CGUs. The recoverable amount of each CGU was determined to be higher than its carrying amount and no impairment loss has been recognized at the transition date and at August 31, 2011.

  1. OTHER ASSETS
August 31, 2011September 1, 2010
Transaction costs4,5226,161
Other1,154539
5,6766,700
  1. PROVISIONS
August 31, 2011September 1, 2010
Withholding and stamp taxes7,3837,494
Programming costs7,4281,671
Other4973,530
15,30812,695

The provisions for withholding and stamp taxes relate to contingent liabilities for withholding and stamp taxes relating to fiscal years prior to the acquisition of the Portuguese subsidiary by the Corporation.

The provisions for programming costs include provision for rate increases as well as additional royalties or content costs as a result of periodical audits from service providers.

The other provisions include provisions for contractual obligations, renewal of the collective bargaining agreements and other legal obligations.

  1. DEFERRED TAXES
August 31, 2011 September 1, 2010
Property, plant and equipment(87,555)(85,929)
Intangible assets(142,822)(134,278)
Deferred and prepaid revenue5,646 5,659
Share issuance costs- 858
Partnerships income(86,801)(78,258)
Non-capital loss and other tax credit carryforwards, net of valuation allowance3,987 2,833
Other3,072 2,248
Net deferred tax liabilities(304,473)(286,867)
Financial statement presentation
Deferred tax assets17,041 23,115
Deferred tax liabilities(321,514)(309,982)
Net deferred tax liabilities(304,473)(286,867)
  1. EMPLOYEE BENEFITS

The following table presents a reconciliation of the net defined benefit liability recognized in the consolidated statement of financial position at the transition date and August 31, 2011:

August 31, 2011September 1, 2010
$$
Defined benefit obligations22,81118,504
Plan assets at fair value12,50411,332
Net defined benefit liability10,3077,172

The following table presents a reconciliation of the net benefit cost components recognized in the consolidated statement of profit or loss at August 31, 2011:

$
Net benefit costs
Current service cost1,310
Past service cost99
Interest cost1,101
Expected return on plan assets(746)
Net benefit costs1,764

Customer Statistics

(unaudited)

November 30, 2011August 31, 2011
Primary service units(1)
Canada1,943,6481,897,469
Portugal666,035667,085
Total2,609,6832,564,554
Digital Television service customers
Canada727,219678,326
Portugal159,642164,580
Total886,861842,906
Analog Television service customers
Canada155,218199,659
Portugal95,14091,197
Total250,358290,856
Total Television service customers
Canada882,437877,985
Portugal254,782255,777
Total1,137,2191,133,762
High Speed Internet service customers
Canada618,499601,214
Portugal162,224162,436
Total780,723763,650
Telephony service customers
Canada442,712418,270
Portugal249,029248,872
Total691,741667,142

(1) Represents the sum of Television, HSI and Telephony service customers.

Contact Information

  • Source:
    Cogeco Cable Inc.
    Pierre Gagne
    Senior Vice President and Chief Financial Officer
    514-764-4700

    Information:
    Media
    Rene Guimond
    Vice President, Public Affairs and Communications
    514-764-4746