Newfoundland Capital Corporation Limited - First Quarter 2010 - Period Ended<br>March 31 (unaudited)
DARTMOUTH, NS, May 5 /CNW/ - Newfoundland Capital Corporation Limited ("Company") today announces its financial results for the first quarter ending March 31, 2010.
Highlights
Double digit revenue growth propelled the Company to one of its best first quarter's ever.
- Revenue of $25.7 million was $3.0 million, or 13% higher than last
year. This increase was almost entirely attributable to organic
(same-station) revenue growth.
- Earnings before interest, taxes, depreciation and amortization
("EBITDA"(1)) of $4.4 million in the quarter were $2.3 million, or
115% higher than last year, primarily attributable to improved revenue.
- Net income of $1.2 million was $0.7 million, or 124% better than the
same quarter last year primarily due to increased revenue.
Significant events
- The Company launched four repeater stations in Prince Edward Island.
- Approval was received to convert the Westlock, Alberta station from
AM to FM.
- Subsequent to quarter end, approval was received to convert the AM
station in Brooks, Alberta to FM.
"Local revenue has continued to drive our success and we are very pleased to see a rebound in national advertising. Both local and national advertising revenue grew over 2009 by 14% which is significantly higher than industry results", commented Rob Steele, President and Chief Executive Officer. "Our realigned strategy to narrow our focus on maximizing existing operations and paying down debt has solidified our financial position and we are well positioned for future growth."
Financial Highlights - First Quarter
(thousands of dollars except share information) 2010 2009
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Revenue $ 25,706 22,660
EBITDA(1) 4,392 2,044
Net income 1,237 552
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Earnings per share - basic and diluted 0.04 0.02
Share price, NCC.A (closing) 6.90 6.33
Weighted average number of shares outstanding
(in thousands) 32,972 32,972
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Total assets 228,701 232,327
Long-term debt (classified as current in 2010) 56,000 71,840
Shareholders' equity 105,349 89,675
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(1) Refer to page 16 for the reconciliation of EBITDA to net income.
Management's Discussion and Analysis
The purpose of the Management's Discussion and Analysis ("MD&A"), dated May 5, 2010, is to provide readers with additional complementary information regarding the financial condition and results of operations for Newfoundland Capital Corporation Limited (the "Company") and should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the periods ended March 31, 2010 and 2009 as well as the annual audited consolidated financial statements and related notes and the MD&A contained in the Company's 2009 Annual Report. These documents along with the Company's Annual Information Form and other public information are filed electronically with various securities commissions in Canada through the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed at www.sedar.com. All amounts are stated in Canadian dollars. Certain of the comparative figures have been reclassified to conform to the financial statement presentation adopted in Fiscal 2010.
Management's Discussion and Analysis of financial condition and results of operations contains forward-looking statements. These forward-looking statements are based on current expectations. The use of terminology such as "expect", "intend", "anticipate", "believe", "may", "will", and other similar terminology relate to, but are not limited to, our objectives, goals, plans, strategies, intentions, outlook and estimates. By their very nature, these statements involve inherent risks and uncertainties, many of which are beyond the Company's control, which could cause actual results to differ materially from those expressed in such forward-looking statements. Readers are cautioned not to place undue reliance on these statements. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
CORPORATE PROFILE
Newfoundland Capital Corporation Limited (the "Company") is Canada's largest pure-play radio company, employing approximately 800 of the best radio professionals across the country. The Company's portfolio of radio assets includes 60 FM and 19 AM licences which can be heard throughout Canada. The Company reaches millions of listeners each week through a variety of formats and is a recognized industry leader in radio programming, sales and networking.
STRATEGY AND OBJECTIVES
The Company's long-term strategy is to maximize returns on existing operations, convert AM stations to FM, and add new licences through business and licence acquisitions and through the Canadian Radio-television and Telecommunications Commission ("CRTC") licence application process.
As stated in the 2009 Annual Report, this year the Company will continue to grow its existing operations by increasing advertising revenue and remaining focused on controlling discretionary costs to drive EBITDA margins. It will launch recently awarded AM to FM conversions - four in Alberta and two in Newfoundland and Labrador. Management continues to explore acquisition and expansion opportunities that fit the Company's acquisition objectives and it will make applications to the CRTC for new licences and additional AM to FM conversions. The Company's commitment to its talented employees, its customers, its listeners and to the communities it serves remains critical to its success.
CORPORATE DEVELOPMENTS
The following is a review of the key corporate developments which should be considered when reviewing the "Consolidated Financial Review" section. The results of the acquired or launched stations have been included in the consolidated financial statements since the respective acquisition and launch dates.
2010 Developments:
- February - launched the four repeater signals in Prince Edward Island.
- February - CFCB in Corner Brook, Newfoundland and Labrador celebrated
its 50th anniversary.
- February - received CRTC approval to convert the AM station in
Westlock, Alberta to FM.
- March - CFRQ-FM, otherwise known as Q104, serving Halifax, Nova Scotia
was named mid-market station of the year during Canada Music Week.
- April - received CRTC approval to convert the AM station in Brooks,
Alberta to FM.
2009 Developments:
- January - Launched the new FM station in Pincher Creek, Alberta playing
country music.
- April - CRTC approved two AM to FM conversions for stations in St. Paul
and High Prairie, Alberta. Planning for the conversions is underway.
- June - CRTC approved the Company's applications to convert AM stations
to FM in Wabush and Goose Bay, Newfoundland and Labrador. Anticipated
on-air dates are mid 2010.
- June - Re-branded CFUL in Calgary, Alberta as a Contemporary Hits Radio
format, branded as AMP Radio. This format is similar to the very
popular Ottawa station, Hot 89.9, which was named the 2008 Contemporary
Hits Radio station of the year.
- July - Completed the previously announced exchange of assets with
Rogers Broadcasting Limited. The Company's Halifax AM licence was
exchanged for Rogers' AM licence in Sudbury, Ontario plus $5.0 million.
- August - Launched Hot 93.5, the newly acquired Sudbury, Ontario radio
station which was converted to FM. Its format is Top 40 and has been
met with a very positive response from both listeners and clients.
- August - Launched the converted FM radio station in Athabasca, Alberta.
94.1 FM The River plays Classic Hits.
- November - The Company's stock was split on a three-for-one basis.
- December - Completed the previously announced sale of the broadcasting
assets related to the two FM stations in Thunder Bay, Ontario for $4.5
million.
CONSOLIDATED FINANCIAL REVIEW
Consolidated Financial Results of Operation
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(thousands of dollars, except March 31, March 31, %
percentages) 2010 2009 Change
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Revenue $ 25,706 22,660 13%
Operating expenses 21,314 20,616 3%
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EBITDA(1) 4,392 2,044 115%
Depreciation and amortization 876 901 (3%)
Interest expense 764 1,008 (24%)
Accretion of other liabilities 190 227 (16%)
Other expense (income) 545 (1,007) -
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Earnings from continuing operations 2,017 915 120%
Provision for income taxes 780 332 135%
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Net income from continuing operations 1,237 583 112%
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Loss from discontinued operations - 31 (100%)
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Net income 1,237 552 124%
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(1) EBITDA - Earnings before interest, taxes, depreciation and
amortization - refer to page 16 for reconciliation to net income
Revenue
In the quarter, consolidated revenue of $25.7 million was $3.0 million or 13% higher than last year; this improvement came exclusively from the broadcasting segment.
Operating expenses
Consolidated operating expenses of $21.3 million were $0.7 million or 3% higher than the first quarter last year. The increase was primarily due to higher variable costs in the Broadcasting segment.
EBITDA
Consolidated EBITDA in the quarter of $4.4 million was $2.3 million or 115% higher than last year. The improved EBITDA was due to growth in the broadcasting segment.
A more detailed discussion on revenue, operating expenses and EBITDA are described in the section entitled "Financial Review by Segment".
Depreciation and amortization
In the quarter, depreciation and amortization expense was just slightly lower than 2009.
Interest expense
Interest expense in the first quarter was less than the prior year due to the lower debt balance.
Accretion of other liabilities
Accretion of other liabilities arises from discounting Canadian Content Development ("CCD") commitments to reflect the fair value of the obligations. The expense decreases as CCD obligations are drawn down.
Other expense (income)
Other expense (income) generally consists of gains and losses, realized and unrealized, on the Company's marketable securities. During the first quarter of 2010, the Company has had minimal activity in its holdings. Other expense (income) was a net expense this year partially due to a small realized loss while in 2009 unrealized mark-to-market gains were $1.0 million.
Discontinued operations
In 2009, the Company disposed of its net assets associated with the two FM radio stations in Thunder Bay, Ontario and therefore, the 2009 comparative financial results of operations from this component were treated as discontinued operations.
Provision for income taxes
The provision for income taxes is higher than 2009 due to improved pre-tax earnings. The effective income tax rate was 39% which is higher than the statutory rate of 34% primarily due to the non-taxable portion of realized capital losses.
Net income
First quarter net income of $1.2 million was $0.7 million or 124% higher than last year. The increase was all due to improved financial results in the broadcasting segment.
Other comprehensive income ("OCI")
OCI consists of the net change in the fair value of the Company's cash flow hedges. These include interest rate swaps and an equity total return swap. The net change in the fair value of the interest rate swaps recorded in OCI in the quarter was after-tax income of $0.3 million (2009 - $0.1 million). The net change in the fair value of the equity total return swap recorded in OCI was an after-tax expense of $0.1 million (2009 - $0.4 million after-tax income).
FINANCIAL REVIEW BY SEGMENT
Consolidated financial figures include the results of operation of the Company's two separately reported segments - Broadcasting and Corporate and Other. The Company provides information about segment revenue, segment EBITDA and operating income because these financial measures are used by its key decision makers in making operating decisions and evaluating performance. For additional information about the Company's segmented information, see note 10 of the Company's unaudited interim consolidated financial statements.
Broadcasting Segment
The broadcasting segment derives its revenue from the sale of broadcast advertising from its licences across the country. Advertising revenue can vary based on market and economic conditions, the audience share of a radio station, the quality of programming and the effectiveness of a company's team of sales professionals.
Reporting units within the broadcasting segment are managed and evaluated based on their revenue and EBITDA. Here are the key operating results of the broadcasting segment.
Broadcasting Financial Results of Operation
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(thousands of dollars, except March 31, March 31, %
percentages) 2010 2009 Change
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Revenue $ 24,896 21,797 14%
Operating expenses 18,833 18,368 3%
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EBITDA 6,063 3,429 77%
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EBITDA margin 24% 16% 8%
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Revenue
Broadcasting revenue in the quarter of $24.9 million was $3.1 million or 14% better than last year. The increase came almost entirely from organic (same-station) revenue growth.
The Company achieved increases over the same period last year of 8% in its Western Canadian properties, a 38% increase in Central Canada and a 16% improvement in Atlantic Canada. These rates have exceeded industry growth. Local advertising revenue contributed significantly to the double digit growth. The Company also saw a solid rebound in national ad revenue contributing to the overall increase.
The Company enjoyed some of its best ratings results in late 2009 and the effect of these results has contributed to revenue growth and is expected to continue to impact revenue bookings in 2010. The improved outlook in the Canadian economy has also had a positive impact on revenue.
Operating expenses
For the quarter, broadcasting operating expenses were $18.8 million, up $0.5 million or 3% over last year. The increase in operating expenses was all due to higher variable costs. Fixed costs were 5% lower than 2009 due to management's efforts at reducing discretionary costs.
EBITDA
One of the Company's main objectives is to improve organic EBITDA margins. While variable costs have fluctuated with increased revenue, discretionary spending was closely monitored which led to a 77% or $2.6 million increase in EBITDA. Margins of 24% were also greatly improved compared to 16% for the same period last year.
Corporate and Other Segment
The Corporate and Other segment derives its revenue from hotel operations. Corporate and other expenses are related to head office functions and hotel operations.
Corporate and Other Financial Results of Operation
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(thousands of dollars, except March 31, March 31, %
percentages) 2010 2009 Change
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Revenue $ 810 863 (6%)
Operating expenses 2,481 2,248 10%
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EBITDA (1,671) (1,385) (21%)
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Revenue
Revenue in the first quarter of $0.8 million was $0.1 million or 6% lower than last year, due to decreased hotel revenue.
Operating expenses
Corporate and Other operating expenses of $2.5 million were $0.2 million higher than 2009 due to a slight increase in corporate costs for head office.
EBITDA
EBITDA was $0.3 million lower than the same period last year because of the higher operating expenses.
SELECTED QUARTERLY FINANCIAL INFORMATION
The Company's revenue and operating results vary depending on the quarter. The first quarter is generally a period of lower retail spending and as a result, advertising revenue is generally lower. The fourth quarter tends to be a period of higher retail spending. In 2009, a gain on the disposal of a broadcasting licence positively impacted net income by $5.6 million in the third quarter. In 2008, the unrealized changes in the value of marketable securities affected net income in the quarters as follows: positive variance of $4.8 million in the second quarter and negative fluctuations of $8.8 million and $4.6 million in the third and fourth quarters, respectively.
As a result of the requirement to adopt new accounting standards related to start-up operations, the 2008 comparative figures were restated to include pre-operating costs that had been previously capitalized and amortized. The earnings per share information was restated to reflect the three-for-one stock split that occurred during the fourth quarter in 2009. Discontinued operations, as described in note 3 of the Company's unaudited interim consolidated financial statements, also impacted the comparative figures presented below.
(thousands
of
dollars
except
per 2010 2009 2008 (restated)
share --------- -------------------------------- -----------------------
data) 1st 4th 3rd 2nd 1st 4th 3rd 2nd
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Reve-
nue $ 25,706 30,458 25,408 26,772 22,660 29,306 26,069 26,798
Net
income
(loss) 1,237 5,461 6,209 3,144 552 (3,796) (7,580) 6,157
Earnings
per
share
- Basic 0.04 0.17 0.19 0.10 0.02 (0.12) (0.23) 0.19
- Dilu-
ted 0.04 0.16 0.18 0.09 0.02 (0.12) (0.23) 0.18
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Selected cash flow information - three months ended March 31, 2010
Cash from operating activities were $3.6 million. During the quarter, the Company paid dividends of $3.3 million, purchased $0.5 million of capital assets and paid $0.4 million toward CCD commitments.
Selected cash flow information - three months ended March 31, 2009
Cash from operating activities of $4.0 million was used to repay $2.4 million in total debt, to purchase $0.6 million of capital assets and to pay $0.5 million toward CCD commitments.
Capital expenditures and capital budget
The capital expenditures for 2010 are expected to be approximately $6.0 million. The major planned expenditures include launching recently awarded AM to FM conversions as well as general improvements and upgrades. The Company continuously upgrades its broadcast equipment to improve operating efficiencies.
FINANCIAL CONDITION
Total assets
Assets of $228.7 million were $4.2 million lower than those reported at December 31, 2009. This was largely due to a decrease in trade receivables.
Liabilities, shareholders' equity and capital structure
As at March 31, 2010 the Company had $1.7 million of current bank indebtedness outstanding and $56.0 million of long-term debt which was classified as current because the debt's maturity date is within the next twelve months. (Further information on long-term debt and its accounting reclassification can be found in the paragraph below under the heading "Credit Facility and Covenants".) The capital structure consisted of 46% equity ($105.3 million) and 54% debt ($123.4 million) at quarter end.
LIQUIDITY
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or can do so only at excessive cost. The Company's growth is financed through a combination of the cash flows from operations and borrowings under the existing credit facility. One of management's primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows. Management deems its liquidity risk to be low and this is explained in the paragraphs that follow.
Credit facility and covenants
The Company's syndicated credit facility of $76.5 million is a revolving credit facility. The Company chooses this type of credit facility because it provides flexibility with no scheduled repayment terms. The maturity date is June 2010. As described in the section below, the Company is in the process of finalizing the details of a renewed credit facility which will be completed prior to the maturity date; however, because the new facility is not yet finalized, the Company's debt is required to be classified as a current liability as at March 31, 2010.
The Company is subject to covenants on its credit facility. The Company's bank covenants include certain maximum or minimum ratios such as total debt to EBITDA ratio, interest coverage and fixed charge coverage ratio. Other covenants include dividend payment restrictions, seeking prior approval for capital expenditures over a certain dollar limit, acquisitions in excess of a quantitative threshold and limits on the number of shares that can be repurchased in any given year. The Company was in compliance with the covenants throughout the quarter and at quarter end.
Funding sources and future financing
Cash flow from operations and funds available from the Company's $76.5 million credit facility have been the primary funding sources of working capital, capital expenditures, Canadian Content Development payments, dividend payments, debt repayments, and other contractually required payments through the past several years. As at March 31, 2010, the Company's cash generated from operating activities was $3.6 million and its long-term debt balance was $56.0 million which left $20.5 million available to be drawn upon from the credit facility.
The Company and its lenders have agreed in principal on the terms and conditions of the new facility which will be finalized prior to the maturity of the Company's existing facility. The Company's debt to EBITDA ratio was 2.5 to 1.0 as at March 31, 2010 which is significantly below the required covenant level and puts the Company in solid financial position to renew its facility. Management did not renew the credit facility early in order to delay the increased interest costs which will begin once it is renewed. The increased cost of borrowing under the new facility is expected to be approximately 2% higher as the new facility will reflect current market rates.
Positive cash balances
The Company does not maintain any significant positive cash balances; instead it uses the vast majority of its positive cash balances to reduce debt and minimize interest expense. As a result, the Company nets its deposits in banks with bank indebtedness. The fact that the Company does not have positive cash positions on its balance sheet does not pose an increase to its liquidity risk because the Company generates cash from operations and, as part of its $76.5 million credit facility, it has a $5.0 million current operating credit line to fund any current obligations and it can also access any unused capacity in its credit facility to fund obligations.
Working capital requirements
As at March 31, 2010, the Company's working capital balance, excluding the long-term debt classified as a current liability, was $4.5 million. The cash from current receivables will be sufficient to cover the Company's current obligations to its suppliers and employees and in combination with ongoing cash from operations and the availability of cash from its debt facility, the Company will be able to meet all other current cash requirements as they arise. If cash inflows from customers are not sufficient to cover current obligations, because of timing issues, the Company has access to a $5.0 million operating credit line.
Future cash requirements
Other than for operations, the Company's cash requirements are mostly for interest payments, repayment of debt, capital expenditures, Canadian Content Development payments, dividends and other contractual obligations. Management anticipates that its cash flows from operations will provide sufficient funds to meet its cash requirements, with the exception of the long-term debt which is in the process of being refinanced.
Based on the above discussion and internal analysis, management deems its liquidity risk to be low.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
There has been no substantial change in the Company's commitments and contractual obligations since the publication of the 2009 Annual Report.
SHARE CAPITAL
Stock split
Effective on November 25, 2009, the Class A Subordinate Voting Shares and Class B Common Shares were split on a three-for-one basis. Accordingly, the comparative number of shares and per share amounts have been retroactively adjusted to reflect the three-for-one split.
Outstanding share data
The weighted average number of shares outstanding at March 31, 2010 was 32,972,220 (2009 - 32,972,220). As of this date, there are 29,199,567 Class A Subordinate Voting Shares and 3,772,653 Class B Common Shares outstanding.
Dividends
Dividends of $0.10 per share were declared in December to all shareholders of record as of December 31, 2009. The dividends were paid January 29, 2010.
Share repurchases
The Company has approval under a Normal Course Issuer Bid to repurchase up to 583,991 Class A Subordinate Voting Shares ("Class A shares") and 75,453 Class B Common Shares. This bid expires February 8, 2011. The Company did not repurchase any of its outstanding Class A shares during the first quarter in 2010 and 2009.
EXECUTIVE COMPENSATION
Executive stock option plan
Compensation expense related to executive stock options for the three months ended March 31, 2010 was $0.1 million (2009 - less than $0.1 million). Refer to note 4 of the unaudited interim consolidated financial statements for further details relating to the executive stock option plan.
Stock appreciation rights plan
For the quarter ended March 31, 2010, the compensation expense related to stock appreciation rights ("SARs") was less than $0.1 million (2009 - $0.2 million) and the total obligation was $1.5 million (2009 - $0.3 million). Refer to note 6 of the unaudited interim consolidated financial statements for further details relating to SARs.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
For more detailed disclosures about derivative financial instruments and financial risk management, refer to note 8 of the unaudited interim consolidated financial statements.
Interest rate risk management
To hedge its exposure to fluctuating interest rates on its long-term debt, the Company has entered into interest rate swap agreements with Canadian chartered banks. The swap agreements expire in 2013 and involve the exchange of the three-month bankers' acceptance floating interest rate for a fixed interest rate. The difference between the fixed and floating rates is settled quarterly with the bank and recorded as an increase or decrease to interest expense. The aggregate notional amount of the swap agreements was $55.0 million (2009 - $60.0 million). The Company formally assesses effectiveness of the swaps at inception and on a regular basis and has concluded that the swaps are effective in offsetting changes in interest rates. The aggregate fair value of the swap agreements, which represents the amount that would be payable by the Company if the agreements were terminated at March 31, 2010 was $3.1 million (2009 - $6.9 million). After-tax, the unrealized non-cash income recognized in OCI for the quarter was $0.3 million (2009 - $0.1 million).
Share price volatility management
In July 2006, the Company entered into an agreement to hedge its obligations under the stock appreciation rights plan using an equity total return swap agreement to reduce the volatility in cash flow and earnings due to possible future increases in the Company's share price. Gains or losses realized on the quarterly settlement dates are recognized in income in the same period as the SARs compensation expense. Unrealized gains and losses, to the extent that the hedge is effective, are deferred and included in OCI until such time as the hedged item affects net income. If at any time, the hedge is deemed to be ineffective or the hedge is terminated or de-designated, gains or losses, including those previously recognized in OCI, will be recorded in net income immediately.
The Company has concluded that this cash flow hedge is effective. The estimated fair value of the equity total return swap receivable at March 31, 2010 was $1.3 million (2009 - $0.6 million). After-tax the unrealized non-cash loss recognized in OCI for the quarter was $0.1 million (2009 - after-tax income of $0.4 million).
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The fair value of the Company's marketable securities is affected by changes in the quoted share prices in active markets. Such prices can fluctuate and are affected by numerous factors beyond the Company's control. In order to minimize the risk associated with changes in the share price of any one particular investment, the Company diversifies its portfolio by investing in various stocks in varying industries. It also conducts regular financial reviews of publicly available information related to its investments to determine if any identified risks are within tolerable risk levels. As at March 31, 2010, a 10% change in the share prices of each marketable security would result in a $0.4 million after-tax change in net income.
Credit risk management
Credit risk is the exposure that the Company faces with respect to amounts receivable from other parties. Credit exposure is managed through credit approval and monitoring procedures.
The Company is subject to normal credit risk with respect to its receivables. A large customer base and geographic dispersion minimize credit risk. The Company reviews its receivables for possible indicators of impairment on a regular basis and as such, it maintains a provision for potential credit losses.
At March 31, 2010, the Company's credit exposure as it related to its receivables continued to be slightly higher than in the past due to the recent Canadian economic conditions. The Company sells advertising airtime primarily to retail customers and since their results may also be impacted by the current economy, it is difficult to predict the impact this could have on the Company's receivables' balance. The Company believes its provision for potential credit losses to be adequate at this time given the current circumstances.
With regard to the Company's derivative instruments, the counterparty risk is managed by only dealing with Canadian Chartered Banks having high credit ratings.
Capital Management
The Company defines its capital as shareholders' equity. The Company's objective when managing capital is to pursue its strategy of growth through acquisitions and through organic operations so that that it can continue to provide adequate returns for shareholders. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new shares or repurchase shares. The Directors and senior management of the Company are of the opinion that from time to time the purchase of its shares at the prevailing market price would be a worthwhile investment and in the best interests of the Company and its shareholders. Material transactions and those considered to be outside the ordinary course of business, such as acquisitions and other major investments or disposals, are reviewed and approved by the Board of Directors.
FUTURE ACCOUNTING POLICIES
Section 1582 Business Combinations
During 2009, the CICA issued Handbook Section 1582 Business Combinations which replaces Section 1581 bearing the same name. This Section is effective for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted, and the changes align the standard with the guidance in International Financial Reporting Standards ("IFRS"). Of the amendments in the Section, the one that will represent the most significant change in how the Company accounts for business combinations is the determination of the cost of the purchase. The cost that is allocated to the fair value of the net assets acquired is the direct cost of the business combination; indirect costs such as legal or restructuring are expensed. The Company intends to early adopt this standard if any business combinations should occur in 2010. The impact the changes will have on its consolidated results will continue to be monitored.
Section 1601 Consolidated Financial Statements and Section 1602 Non-controlling Interests
These Sections were issued and together replace Section 1600 Consolidated Financial Statements. These too are applicable for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted. The new sections establish standards for the preparation of consolidated financial statements and for the accounting of a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company will continue to evaluate the impact of the amendments.
International Financial Reporting Standards
On February 13, 2008, the Accounting Standards Board confirmed that International Financial Reporting Standards will be required for publicly accountable profit-oriented enterprises for fiscal years beginning on or after January 1, 2011. After that date, IFRS will replace Canadian GAAP for those enterprises. The Company will apply IFRS beginning January 1, 2011 and will present 2010 comparative figures using IFRS, starting in the first quarter of 2011.
The Company has committed adequate internal resources to oversee the IFRS project and external consultants have been engaged throughout the process. The Audit and Governance Committee is regularly updated on the status of the project. Management has satisfied itself that it has sufficient resources, systems and applications in place to meet its financial reporting requirements.
IFRS-1 First-time Adoption of International Financial Reporting Standards provides guidance for transition which generally requires an entity to apply all IFRS standards retrospectively, with prior period restatements, on adoption of the new standards. However, IFRS-1 also includes mandatory exceptions and certain exemptions which enable an entity to apply certain areas of the standards prospectively. Management has analysed the exceptions and exemptions available under IFRS-1 and is considering applying the exemptions listed in the table below. A brief description of the impact of applying these exemptions is discussed as well.
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Exemption Impact
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Business combinations The Company will elect to not restate any prior
business combinations on adoption, to the extent
the assets and liabilities meet the recognition
criteria under the relevant IFRS standards.
(If any business combinations occur during fiscal
2010, the Company will early adopt the new rules
under Canadian GAAP Section 1582 Business
Combinations, described earlier, as they are
consistent with IFRS.)
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Fair value or The Company may elect to revalue some of its
revaluation as property and equipment on transition date to its
deemed cost fair value.
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Employee benefits The Company has elected to charge to equity any
unamortized actuarial gains/losses arising from
the defined benefit pension plans. The financial
impact of this election, along with other pension
restatement entries, approximates $2.0 million.
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Share-based payment The Company will elect not to retrospectively
transactions apply the IFRS-2 Share-Based Payments standards
for any executive stock options granted prior to
November 2002 and for any options that have fully
vested or have been exercised prior to transition
date.
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Management has identified the differences between Canadian GAAP and IFRS and has devoted considerable time and resources on those areas that will most significantly impact the Company. The following table sets forth the accounting standards that will most likely impact the Company's consolidated financial statements; however, the actual impact has not been fully measured and conclusions may differ as management continues its analysis. Some of the standards are in the process of being reviewed and/or modified and the impact of those changes could pose differences for the Company's consolidated financial statements as well. Management is monitoring these standards closely.
The following list shows the areas that management believes will present the most significant differences in accounting treatment based on the standards in effect as at March 31, 2010. It is not a complete and exhaustive list of all the Canadian GAAP and IFRS differences. Quantification of the impact is ongoing and will continue to be communicated as the transition date nears.
The following are the key accounting areas management believes will impact the Company's consolidated financial statements with a brief description of the likely impact.
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Key accounting areas Impact
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IAS - 1 Presentation Additional financial statement note disclosures
of Financial will be required.
Statements
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IAS - 12 Income Taxes Future income tax assets/liabilities will be
referred to as deferred income tax
assets/liabilities and no current classification
will be permitted.
The criteria to recognize and measure deferred
income taxes may result in differences compared to
existing future income tax calculations.
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IAS - 16 Property and Entities are required to split traditional asset
Equipment categories into components based on varying useful
lives which may result in changes to the amount of
annual depreciation expense.
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IAS - 19 Employee An accounting policy choice is available for
Benefits actuarial gains or losses after adoption;
- an entity may elect to amortize the
gains/losses using the corridor approach;
- it may elect to recognize the gains/losses in
net income annually; or
- it may elect to recognize gains/losses in OCI
annually.
Under IFRS, there are differences in how defined
benefit plan assets are valued and how an entity
measures its plan asset valuation allowance, if
any. This particular standard is under review by
standard setters and any modification to it may
dictate the accounting treatment the Company will
adopt as it relates to actuarial gains and losses.
-------------------------------------------------------------------------
IAS - 36 Impairment Impairment calculations under IFRS are done at
of Assets the cash-generating unit ("CGU") which is defined
as a unit that has independent cash inflows (as
opposed to independent net cash flows under
Canadian GAAP).
Calculations are done using a discounted cash flow
method under a one-step approach (as opposed to a
two-step approach under Canadian GAAP).
Goodwill is allocated and tested in conjunction
with its related CGU or group of CGU's that
benefit from collective synergies. Any impairment
of intangible assets that occurs after the
adoption of IFRS, other than goodwill, may be
reversed.
-------------------------------------------------------------------------
IAS - 38 Intangible Potential change in how the Company measures the
Assets amount capitalized to its broadcast licences under
certain circumstances, which is currently being
reviewed and analysed by management.
-------------------------------------------------------------------------
IAS - 39 Financial This standard will effectively be replaced by new
Instruments: IFRS-9 Financial Instruments effective January 1,
Recognition and 2013 and may pose differences in how the Company
Measurement classifies, recognizes and measures its financial
instruments, including how it accounts for hedges.
Earlier adoption may be permitted and the Company
will monitor these standards closely.
-------------------------------------------------------------------------
IFRS - 2 Share-based The Company anticipates a change in how it
Payments measures executive compensation for its stock
appreciation rights' plan because of differences
related to pricing models, vesting periods and how
to account for forfeiture.
-------------------------------------------------------------------------
IFRS - 3 Business This standard explicitly excludes acquisition-
Combinations related and/or restructuring-type costs; these are
to be expensed as incurred. Other significant
commitments that arise on business combinations
are also expensed which potentially may pose
differences in how the Company has treated certain
items in its past acquisitions and in future
transactions.
Contingent consideration is measured on the
transaction date at its fair value; however
subsequent changes to the contingent consideration
are treated as an expense.
-------------------------------------------------------------------------
At this time, management is on track with the conversion project; however it is not in a position to quantify the impact of all of the differences that will arise upon the adoption of IFRS. The Company will disclose more detailed information during its 2010 interim periods as it proceeds with its analyses and conclusions. Certain analyses that will enable full disclosure are still being researched and their conclusions are important to the Company and its consolidated financial results.
CRITICAL ACCOUNTING ESTIMATES
There has been no substantial change in the Company's critical accounting estimates since the publication of the 2009 Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements consist of operating leases. Other than these, which are considered in the ordinary course of business, the Company does not have any other off-balance sheet arrangements and does not expect to enter into any other such arrangement other than in the ordinary course of business.
RISKS AND OPPORTUNITIES
There has been no substantial change in the Company's risks and opportunities since the publication of the 2009 Annual Report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in the Company's internal controls over financial reporting that occurred in the three months ending March 31, 2010 that have materially affected, or are likely to materially affect, the Company's internal controls over financial reporting.
OUTLOOK
During the first quarter of 2010, the Company posted double digit revenue growth in its core operating segment. Management is optimistic that positive growth will be sustainable throughout the rest of the year given the current economic climate.
Management has continued to monitor discretionary costs. This combined with improved revenue has increased EBITDA and EBITDA margins in the first quarter. Improving margins is one of the Company's main objectives for 2010.
The Company will continue to focus on its successful operating strategy and its current objectives for 2010 are:
- Continue to maximize operating margins from the existing stations by:
- Managing costs to achieve the highest possible EBITDA margins
without compromising the quality of the product;
- Increasing revenues by providing creative solutions to advertisers,
particularly with regard to local revenue where management has the
most ability to influence buying decisions;
- Augmenting audience share by providing locally-focused programming
that delivers the music, news and information that local
communities want.
- Plan and prepare to launch the six AM to FM conversions; four of which
are in Alberta and the other two in Newfoundland and Labrador.
- Review all acquisition opportunities that are cash accretive in the
near term and that would complement the Company's strategy;
- Apply for licences in new communities, thereby expanding the number of
licences held; and
- Seek approval from the CRTC to convert additional AM stations to FM
which generates immediate top line growth.
The Company has experienced an impressive first quarter which sets the tone for the remainder of 2010. Local revenue continues to thrive and management is encouraged to see a rebound in national ad spending.
Non-GAAP Measure
(1) EBITDA is defined as net income from continuing operations excluding depreciation and amortization expense, interest expense, accretion of other liabilities, other expense (income) and provision for income taxes. A calculation of this measure is as follows:
Three months ended
March 31
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income from continuing operations $ 1,237 583
Provision for income taxes 780 332
Other expense (income) 545 (1,007)
Accretion of other liabilities 190 227
Interest expense 764 1,008
Depreciation and amortization expense 876 901
-----------------------
EBITDA $ 4,392 2,044
-------------------------------------------------------------------------
-------------------------------------------------------------------------
This measure is not defined by Generally Accepted Accounting Principles and is not standardized for public issuers. This measure may not be comparable to similar measures presented by other public enterprises. The Company has included this measure because the Company's key decision makers believe certain investors use it as a measure of the Company's financial performance and for valuation purposes. The Company also uses this measure internally to evaluate the performance of management. Beginning in 2010 other expense (income), which is primarily the results from investment holdings, was excluded from the determination of EBITDA. Consolidated EBITDA for 2009 has been adjusted to reflect this reclassification.
Newfoundland Capital Corporation Limited
Notice of Disclosure of Non-Auditor Review of Interim Financial Statements for the three months ended March 31, 2010 and 2009
Pursuant to National Instrument 51-102, Part 4, subsection 4.3(3)(a) issued by the Canadian Securities Administrators, the interim financial statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor if an auditor has not performed a review of the interim financial statements.
The accompanying unaudited interim consolidated financial statements of the Company for the three months ended March 31, 2010 and 2009 have been prepared in accordance with Canadian generally accepted accounting principles and are the responsibility of the Company's management.
The Company's independent auditors, Ernst & Young LLP, have not performed a review of these interim consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
Dated this 5th day of May, 2010
Interim Consolidated Balance Sheets
(unaudited)
March 31 December 31
(thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ASSETS
Current assets
Marketable securities (note 8 (a)) $ 4,387 4,923
Receivables 20,567 23,831
Prepaid expenses 919 778
Other assets (note 8 (c)) 1,339 1,810
Future income tax assets 1,288 1,173
-----------------------
Total current assets 28,500 32,515
Property and equipment 36,888 37,248
Other assets 4,371 4,216
Broadcast licences 149,641 149,641
Goodwill 7,045 7,045
Future income tax assets 2,256 2,188
-----------------------
$ 228,701 232,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 1,672 99
Accounts payable and accrued liabilities 15,023 17,118
Dividends payable - 3,297
Income taxes payable 7,336 6,836
Current portion of long-term debt (note 8) 56,000 57,100
-----------------------
Total current liabilities 80,031 84,450
Long-term debt (note 8) - -
Other liabilities 17,311 18,946
Future income tax liabilities 26,010 25,668
Shareholders' equity 105,349 103,789
-----------------------
$ 228,701 232,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Income
(unaudited)
Three months ended
March 31
(thousands of Canadian dollars
except per share data) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 25,706 22,660
Operating expenses 21,314 20,616
Depreciation and amortization 876 901
-----------------------
Operating income 3,516 1,143
Interest expense 764 1,008
Accretion of other liabilities 190 227
Other expense (income) 545 (1,007)
-----------------------
Earnings from continuing operations
before income taxes 2,017 915
Provision for income taxes 780 332
-----------------------
Net income from continuing operations 1,237 583
Loss from discontinued operations (note 3) - 31
-----------------------
Net income $ 1,237 552
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share from continuing operations
(notes 4 and 9)
- basic and diluted $ 0.04 0.02
Earnings per share (notes 4 and 9)
- basic and diluted $ 0.04 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Shareholders' Equity
(unaudited)
Three months ended
March 31
(thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 60,616 48,547
Net income 1,237 552
-----------------------
Retained earnings, end of period 61,853 49,099
Capital stock 42,913 42,913
Contributed surplus (note 5) 2,262 1,992
Accumulated other comprehensive loss (1,679) (4,329)
-----------------------
Total shareholders' equity $ 105,349 89,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended
March 31
(thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $ 1,237 552
-----------------------
Other comprehensive income:
Change in fair values of cash flow hedges
Interest rate swaps (note 8(b)):
Increase (decrease) in fair value, net
of $328 settlement and tax expense of
$122 (2009 - $nil) 333 (58)
Reclassification to net income of interest
(recovery) expense, net of tax recovery of
$9 (2009 - $nil) (24) 111
Credit risk adjustment, net of tax recovery
of $7 (2009 - $nil) (18) -
-----------------------
291 53
-----------------------
Total equity return swap (note 8(c)):
Increase (decrease) in fair value, net of
tax recovery of $43 (2009 - tax expense
of $243) (84) 607
Reclassification to net income of realized
loss (gains), net of tax expense of $6
(2009 - tax recovery of $91) 11 (227)
-----------------------
(73) 380
-----------------------
Other comprehensive income 218 433
-----------------------
Comprehensive income $ 1,455 985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statement of Accumulated Other Comprehensive Loss
(unaudited)
Three months ended
March 31
(thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of period $ (1,897) (4,762)
Other comprehensive income for the period 218 433
-----------------------
Accumulated other comprehensive loss, end
of period $ (1,679) (4,329)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Cash Flows
(unaudited)
Three months ended
March 31
(thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
Net income from continuing operations $ 1,237 583
Items not involving cash
Depreciation and amortization 876 901
Future income taxes 90 223
Executive stock-based compensation
plans (notes 4 and 6) 76 231
Accretion of other liabilities 190 227
Unrealized gains on marketable
securities (note 8 (a)) (185) (992)
Other (31) (368)
-----------------------
2,253 805
Change in non-cash working capital relating to
operating activities from continuing operations 1,306 3,149
-----------------------
Cash flow from continuing operating activities 3,559 3,954
Cash flow from discontinued operations - 48
-----------------------
3,559 4,002
-------------------------------------------------------------------------
Financing Activities
Change in bank indebtedness 1,573 (421)
Long-term debt repayments (1,100) (2,005)
Dividends paid (3,297) -
-----------------------
(2,824) (2,426)
-------------------------------------------------------------------------
Investing Activities
Property and equipment additions (504) (596)
Canadian Content Development commitment
payments (441) (518)
Other 210 (462)
-----------------------
(735) (1,576)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash, beginning and end of period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 920 423
Income taxes paid 191 70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Notes to the Interim Consolidated Financial Statements - March 31, 2010
and 2009 (unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. ACCOUNTING PRESENTATIONS AND DISCLOSURES
The interim financial statements presented herein were prepared by the
Company and follow the same accounting policies and their methods of
application as the 2009 annual financial statements. These financial
statements are prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") for interim financial statements. They do
not include all of the information and disclosures required by GAAP for
annual financial statements. Accordingly, these financial statements
should be read in conjunction with the Company's audited consolidated
financial statements and the accompanying notes contained in the
Company's 2009 Annual Report.
The Company's revenue is derived primarily from the sale of advertising
airtime which is subject to seasonal fluctuations. The first quarter of
the year is generally a period of lower retail spending. Because of this,
revenue and net income are generally lower than the other quarters.
Certain of the comparative figures have been reclassified to conform to
the financial statement presentation adopted in the current year.
2. FUTURE ACCOUNTING POLICIES
Section 1582 Business Combinations
During 2009, the CICA issued Handbook Section 1582 Business Combinations
which replaces Section 1581 bearing the same name. This Section is
effective for fiscal years beginning on or after January 1, 2011, with
earlier adoption permitted, and the changes align the standard with the
guidance in International Financial Reporting Standards ("IFRS"). Of the
amendments in the Section, the one that will represent the most
significant change in how the Company accounts for business combinations
is the determination of the cost of the purchase. The cost that is
allocated to the fair value of the net assets acquired is the direct cost
of the business combination; indirect costs such as legal or
restructuring are expensed. The Company intends to early adopt this
standard if any business combinations should occur in 2010. The impact
the changes will have on its consolidated results will continue to be
monitored.
Section 1601 Consolidated Financial Statements and Section 1602 Non-
controlling Interests
These Sections were issued and together replace Section 1600 Consolidated
Financial Statements. These too are applicable for fiscal years beginning
on or after January 1, 2011, with earlier adoption permitted. The new
sections establish standards for the preparation of consolidated
financial statements and for the accounting of a non-controlling interest
in a subsidiary in consolidated financial statements subsequent to a
business combination. The Company will continue to evaluate the impact of
the amendments.
3. DISCONTINUED OPERATIONS
The Company disposed of its net assets associated with the two FM radio
stations located in Thunder Bay, Ontario in 2009. The financial results
of operations from this component have been treated as discontinued
operations in the consolidated statements of income and cash flows for
2009. The results of this component were also excluded from the
comparative figures from the Broadcasting segment results in segmented
information presented in note 10.
Selected financial information for the reporting unit included in
discontinued operations is presented below:
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss from operations from discontinued component $ - 47
Income tax recovery - (16)
-----------------------
Loss from discontinued operations $ - 31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. CAPITAL STOCK
Stock split
Effective on November 25, 2009, the Class A Subordinate Voting Shares and
Class B Common Shares were split on a three-for-one basis. Accordingly,
the comparative number of shares and per share amounts have been
retroactively adjusted to reflect the three-for-one split.
Share repurchases
The Company has approval under a Normal Course Issuer Bid to repurchase
up to 583,991 Class A Subordinate Voting Shares ("Class A shares") and
75,453 Class B Common Shares. This bid expires February 8, 2011. The
Company did not repurchase any of its outstanding Class A shares during
the first quarter in 2010 and 2009.
Executive stock option plan
Pursuant to the executive stock option plan, 60,000 options (2009 -
90,000) were granted at a weighted average exercise price of $6.77
(2009 - $5.83) in the first quarter. The options vest at a rate of
twenty-five percent on the date of grant and twenty-five percent on each
of the three succeeding anniversary dates and the options expire March 4,
2015. No options were exercised in the first quarter (2009 - nil).
Compensation expense related to stock options for the three months ended
March 31, 2010 was $105,000 (2009 - $47,000).
5. CONTRIBUTED SURPLUS
(thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, January 1, 2009 $ 1,945
Executive stock option plan compensation expense 47
-----------
Balance, March 31, 2009 1,992
Executive stock option plan compensation expense 270
-----------
Balance, March 31, 2010 $ 2,262
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. STOCK APPRECIATION RIGHTS
A total of 1,745,000 stock appreciation rights ("SARS" or "rights") have
been granted since 2006 at a weighted-average reference price of $5.75.
The SARS' expiry dates range from March 2011 to February 2015. As at
March 31, 2010, 270,000 rights had expired and 60,000 rights had been
exercised. The rights vest at a rate of 50% at the end of year three, 25%
at the end of year four and 25% at the end of year five and are
exercisable as they vest. At the date of exercise, cash payments are made
to the holders based on the difference between the market value of the
Company's Class A shares and the reference price. All rights granted
under this plan expire on the 60th day following the 5th anniversary of
the grant date. For the quarter ended March 31, 2010, 30,000 SARS (2009 -
nil) were exercised for cash proceeds of $37,000 (2009 - $nil).
Compensation expense in the first quarter was $8,000 (2009 - $184,000).
The total obligation for SARS compensation was $1,516,000, of which
$1,430,000 was current and classified as accounts payable and accrued
liabilities (2009 - compensation payable was $251,000, of which $150,000
was current).
7. EMPLOYEE BENEFIT PLANS
Three months ended
March 31
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Defined contribution plan expense $ 357 340
Defined benefit plan expense 119 125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Estimated fair value of financial instruments
Current assets and current liabilities' carrying values are
representative of their fair values due to the relatively short period to
maturity. The fair value of long-term debt approximates the carrying
value because the interest charges under the terms of the long-term debt
are based on the 3-month Canadian banker's acceptance rates. The fair
values of Canadian Content Development commitments approximated their
carrying values as they were recorded at the net present values of their
future cash flows, using discount rates ranging from 8.0% to 14.3%.
The following table outlines the hierarchy of inputs used in the
calculation of fair value for each financial instrument:
Level 1 Level 2 Level 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted
prices
in active Signifi- Signifi-
markets cant cant
for other unobser-
(thousands of dollars) identical observable vable
Description Total assets inputs inputs
-------------------------------------------------------------------------
Cash and bank
indebtedness $ (1,672) (1,672) - -
Marketable securities 4,387 4,387 - -
Accounts receivable 20,567 - 20,567 -
Equity total return
swap receivable 1,339 - 1,339 -
Accounts payable and
accrued liabilities (15,023) - (15,023) -
Long-term debt (56,000) - (56,000) -
CCD commitments (8,261) - (8,261) -
Interest rate swap
payable (3,066) - (3,066) -
-------------------------------------------------------------------------
The Company uses the following hierarchy for determining and disclosing
the fair value of financial instruments by valuation techniques:
Level 1: quoted (unadjusted) prices in active markets for identical
assets and liabilities
Level 2: other techniques for which all inputs that have a significant
effect on the recorded value are observable, either directly or
indirectly
Level 3: techniques which use inputs that have a significant effect on
the recorded fair value that are not based on observable market
data
The following sections discuss the Company's risk management objectives
and procedures as they relate to credit risk, market risk, liquidity risk
and capital risk.
Credit risk
Credit exposure on financial instruments arises from the possibility that
a counterparty to an instrument in which the Company is entitled to
receive payment fails to perform. The maximum credit exposure
approximated $22,000,000 as at March 31, 2010, which included accounts
receivable and the equity total return swap receivable.
The Company is subject to normal credit risk with respect to its
receivables. A large customer base and geographic dispersion minimize the
concentration of credit risk. Credit exposure is managed through credit
approval and monitoring procedures. The Company does not require
collateral or other security from clients for trade receivables; however
the Company does perform credit checks on customers prior to extending
credit. Based on the results of credit checks, the Company may require
upfront deposits or full payments on account prior to providing service.
The Company reviews its receivables for possible indicators of impairment
on a regular basis and as such, it maintains a provision for potential
credit losses which totaled $1,160,000 as at March 31, 2010. The Company
is of the opinion that the provision for potential losses adequately
reflects the credit risk associated with its receivables. Approximately
85% of trade receivables are outstanding for less than 90 days. Amounts
would be written off directly against accounts receivable and against the
allowance only if and when it was clear the amount would not be collected
due to customer insolvency. Historically, the significance and incidence
of amounts written off directly against receivables have been low. The
total amount written off in the first quarter was $177,000 which
represents a very small portion of accounts receivable and revenue.
As at March 31, 2010, the Company's credit exposure related to its
receivables continued to be slightly higher than in the past due to the
recent Canadian economic conditions. The Company sells advertising
airtime primarily to retail customers and since their results may also be
affected by the current economy, it is difficult to predict the impact
this could have on the Company's receivables' balance. The Company
believes its provision for potential credit losses is adequate at this
time given the current economic circumstances.
With regard to the Company's derivative instruments, the counterparty
risk is managed by only dealing with Canadian Chartered Banks having high
credit ratings.
Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices,
which includes quoted share prices in active markets, interest rates and
the Company's quoted share price as it relates to the stock appreciation
rights plan.
a) Managing risk associated with fluctuations in quoted share prices of
marketable securities
The fair value of the Company's marketable securities is affected by
changes in the quoted share prices in active markets. Such prices can
fluctuate and are affected by numerous factors beyond the Company's
control. In order to minimize the risk associated with changes in the
share price of any one particular investment, the Company diversifies
its portfolio by investing in various stocks in varying industries. It
also conducts regular financial reviews of publicly available
information related to its investments to determine if any identified
risks are within tolerable risk levels. As at March 31, 2010, a 10%
change in the share prices of each marketable security would result in
a $360,000 after-tax change in net income.
For the quarter ended March 31, 2010, the change in fair value of
marketable securities, recorded in other expense, was an unrealized
gain of $185,000 (2009 - $992,000).
b) Interest rate risk management
To hedge its exposure to fluctuating interest rates on its long-term
debt, the Company has entered into interest rate swap agreements with
Canadian Chartered Banks. The swap agreements involve the exchange of
the three-month bankers' acceptance floating interest rate for a fixed
interest rate. The difference between the fixed and floating rates is
settled quarterly with the bank and recorded as an increase or
decrease to interest expense. The Company elected to apply hedge
accounting and as such formally assesses effectiveness of the swaps at
inception and on a regular basis and has concluded that the swaps are
effective in offsetting changes in interest rates.
Interest rate fluctuations would have an impact on the Company's
results. A 0.5% change in the floating interest rates would have
impacted OCI due to changes in fair value of the interest rate swaps
by approximately $630,000, after-tax. There would have been no impact
to net income.
The Company has two interest rate swap agreements; one has a notional
value of $10,000,000 and expires in June 2013, and the other has a
notional amount of $45,000,000 and expires in May 2013. In 2008, the
Company early terminated interest rate swap agreements resulting in a
fair value payable of $349,000 which was blended into the interest
rate of the $45,000,000 swap. This fair value payable is being
transferred from OCI to net income (as interest expense) over the
remaining term of the original swap agreements which expired between
2009 and 2011. The before-tax amount related to the $349,000 fair
value payable transferred to net income from OCI for the quarter was
$17,000 (2009 - $53,000).
Total before-tax interest transferred for the quarter from OCI to net
income was interest recovered of $33,000 (2009 - interest expense of
$111,000). As at March 31, 2010, the Company settled $5,000,000 of the
$15,000,000 swap which resulted in a payout of $328,000. $5,000,000 of
the remaining $10,000,000 swap has been de-designated and therefore,
hedge accounting no longer applies on this portion. Of the amount of
pre-tax interest recovery transferred to net income from OCI, $48,000
related to the de-designated portion (2009 - $nil).
The Company has measured its own credit risk in relation to its
interest rate swaps and as a result has recognized a $25,000 loss in
OCI (2009 - $nil).
The aggregate fair value payable of the swap agreements was $3,066,000
(2009 - $6,854,000).
c) Share price volatility risk management
In July 2006, the Company entered into a cash-settled equity total
return swap agreement to manage its exposure to fluctuations in its
stock-based compensation costs related to the SAR plan. Compensation
costs associated with the SAR Plan fluctuate as a result of changes in
the market price of the Company's Class A shares. The Corporation
entered into this swap for a total of 1,275,000 notional Class A
shares with a hedged price of $5.85. The swap expires in July 2011.
The swap includes an interest and dividend component. Interest is
accrued and payable by the Company on quarterly settlement dates. Any
dividends paid on the Class A shares are reimbursed to the Company on
the quarterly settlement dates.
The Company elected to apply hedge accounting and in order to qualify
for hedge accounting, there must be reasonable assurance that the
instrument is and will continue to be an effective hedge. At the
inception of the hedge and on an ongoing basis, the Company formally
assesses and documents whether the hedging relationship is effective
in offsetting changes in cash flows of the hedged item. Gains or
losses realized on the quarterly settlement dates are recognized in
net income in the same period as the SAR Plan compensation expense.
Unrealized gains and losses, to the extent that the hedge is
effective, are deferred and included in OCI until such time as the
hedged item affects net income. If at any time, the hedge is deemed to
be ineffective or the hedge is terminated or de-designated, gains or
losses, including those previously recognized in OCI, will be recorded
in net income immediately.
As at March 31, 2010, the Company de-designated 330,000 of the
1,275,000 notional Class A shares; therefore, hedge accounting no
longer applies on the de-designated portion. Of the $17,000 before-tax
losses transferred from OCI to net income, a $1,000 gain related to
the de-designated portion (2009 - $318,000 before tax gains
transferred from OCI to net income and $167,000 related to gains from
de-designated portion).
The estimated fair value of the equity total return swap receivable,
classified as current other assets, based on the Class A shares'
market price at March 31, 2010 was $1,339,000 (2009 - $616,000 of
which $121,000 was current).
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its
financial obligations as they become due or can do so only at excessive
cost. The Company's growth is financed through a combination of the cash
flows from operations and borrowings under the existing credit facility.
One of management's primary goals is to maintain an optimal level of
liquidity through the active management of the assets and liabilities as
well as the cash flows. Other than for operations, the Company's cash
requirements are mostly for interest payments, repayment of debt, capital
expenditures, Canadian Content Development payments, dividends and other
contractual obligations that are disclosed below.
In accordance with CICA 3210 "Long-term debt", long-term debt having a
maturity date within the next twelve months is required to be classified
as a current liability. As a result, the Company's long-term debt which
expires in June 2010 has been presented as current debt as at March 31,
2010. The Company was in full compliance with its bank covenants
throughout the quarter and at quarter end and continues to have access to
the available funds under the existing credit facilities. The Company
and its lenders have agreed in principal on the terms and conditions of
the new existing facility which will be finalized prior to the maturity
of the Company's existing facility. As a result, repayment of the debt
is not expected and the Company does not deem its liquidity risk to be
higher than previous years.
The Company's liabilities have contractual maturities which are
summarized below:
2011 -
Obligation (thousands of dollars) 12 months 2015 Thereafter
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long-term debt $ 56,000 - -
Bank indebtedness 1,672 - -
Accounts payable and accrued
liabilities 15,023 - -
Income taxes payable 7,336 - -
CCD commitments 2,474 7,628 106
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$ 82,505 7,628 106
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Capital risk
The Company defines its capital as shareholders' equity. The Company's
objective when managing capital is to pursue its strategy of growth
through acquisitions and through organic operations so that it can
continue to provide adequate returns for shareholders. The Company
manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure,
the Company may adjust the amount of dividends paid to shareholders,
issue new shares or repurchase shares. The Directors and senior
management of the Company are of the opinion that from time to time the
purchase of its shares at the prevailing market price would be a
worthwhile investment and in the best interests of the Company and its
shareholders. Material transactions and those considered to be outside
the ordinary course of business, such as acquisitions and other major
investments or disposals, are reviewed and approved by the Board of
Directors.
To comply with Federal Government directions, the Broadcasting Act and
regulations governing radio stations (the "Regulations"), the Company has
imposed restrictions respecting the issuance, transfer and, if
applicable, voting of the Company's shares. Restrictions include
limitations over foreign ownership of the issued and outstanding voting
shares. Pursuant to such restrictions, the Company can prohibit the
issuance of shares or refuse to register the transfer of shares or, if
applicable, prohibit the voting of shares in circumstances that would or
could adversely affect the ability of the Company, pursuant to the
provisions of the Regulations, to obtain, maintain, renew or amend any
licence required to carry on any business of the Company, including a
licence to carry on a broadcasting undertaking, or to comply with such
provisions or with those of any such licence.
The Company is subject to certain covenants on its credit facility. The
Company's debt covenants include certain maximum or minimum ratios such
as total debt ratio, interest coverage and fixed charge coverage ratio.
Other covenants include dividend payment restrictions, seeking prior
approval for capital expenditures over a certain dollar limit,
acquisitions in excess of a quantitative threshold and limits on the
number of shares that can be repurchased in any given year. The Company
was in compliance with the covenants throughout the quarter and at
quarter end.
Financial projections are updated and reviewed regularly to reasonably
ensure that financial debt covenants will not be breached in future
periods. The Company monitors the covenants and foreign ownership status
of the issued and outstanding voting shares and presents this information
to the Board of Directors quarterly. The Company was in compliance with
all the above as at March 31, 2010.
9. EARNINGS PER SHARE
Three months ended
March 31
(thousands) 2010 2009
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Weighted average common shares used
in calculation of basic earnings per share 32,972 32,972
Incremental common shares calculated in
accordance with the treasury stock method 1,098 888
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Weighted average common shares used in
calculation of diluted earnings per share 34,070 33,860
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10. SEGMENTED INFORMATION
The Company has two reportable segments - Broadcasting and Corporate and
Other. The Broadcasting segment consists of the operations of the
Company's radio and television licences. This segment derives its revenue
from the sale of broadcast advertising. This reportable segment is a
strategic business unit that offers different services and is managed
separately. The Company evaluates performance based on earnings before
interest, taxes, depreciation and amortization. Corporate and Other
consists of a hotel and the head office functions. Its revenue relates to
hotel operations. Details of segment operations are set out below.
Results from the Thunder Bay reporting unit have been excluded from 2009
figures as a result of accounting for discontinued operations as
described in note 3. Beginning in 2010 other expense (income), which is
primarily the results from investment holdings, was excluded from the
determination of operating income (loss). The comparative information for
2009 has been adjusted to reflect this reclassification.
Corporate
(thousands of dollars) Broadcasting and Other Total
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2010
Revenue $ 24,896 810 25,706
Operating expenses 18,833 2,481 21,314
Depreciation and amortization 806 70 876
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Operating income (loss) $ 5,257 (1,741) 3,516
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Assets employed $ 211,286 17,415 228,701
Broadcast licences 149,641 - 149,641
Goodwill 7,045 - 7,045
Capital expenditures 441 63 504
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2009
Revenue $ 21,797 863 22,660
Operating expenses 18,368 2,248 20,616
Depreciation and amortization 825 76 901
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Operating income (loss) $ 2,604 (1,461) 1,143
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Assets employed $ 213,196 19,131 232,327
Broadcast licences 151,773 - 151,773
Goodwill 7,045 - 7,045
Capital expenditures 572 24 596
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%SEDAR: 00002995E
For further information: REF: Robert G. Steele, President and Chief Executive Officer; Scott G.M. Weatherby, Chief Financial Officer and Corporate Secretary, Newfoundland Capital Corporation Limited, 745 Windmill Road, Dartmouth, Nova Scotia B3B 1C2, Tel: (902) 468-7557, Fax: (902) 468-7558, e-mail: [email protected], Web: www.ncc.ca
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