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Shaw Announces Third Quarter Financial and Operating Results(Market Wire Via Acquire Media NewsEdge) CALGARY, ALBERTA -- (MARKET WIRE) -- 06/30/10 -- Shaw Communications Inc. (TSX: SJR.B) (NYSE: SJR) announced results for the third quarter ended May 31, 2010. Consolidated service revenue for the quarter and year-to-date periods of $944 million and $2.78 billion, respectively, was up 10% over each of the comparable periods last year. Total service operating income before amortization(1) of $436 million and $1.34 billion, respectively, improved 10% and 17% over the same periods. Excluding a one-time CRTC Part II fee recovery the year-to-date increase in service operating income before amortization was 10%. Funds flow from operations(2) was $351 million and $1.05 billion for the three and nine month periods, respectively, compared to $356 million and $1.00 billion in the same periods last year. Digital customers increased 87,092 to 1,595,619, and Internet and Digital Phone lines grew by 25,661 to 1,796,973 and 66,123 to 1,044,410, respectively. Basic and DTH were up 2,322 and 1,856 customers, respectively. During the quarter Shaw achieved several significant milestones including a record quarterly gain in Digital Phone and surpassing 1,000,000 Digital Phone lines. Chief Executive Officer and Vice Chair Jim Shaw stated, "Today's financial and operational results continue to reinforce the strength of our core business. Through our focus on the delivery of a superior customer experience and our disciplined management approach, we excel in the marketplace and drive sustainable, profitable growth. We remain on track to deliver on our financial guidance for the consolidated Cable and Satellite segments, including free cash flow comparable to 2009." Free cash flow(1) for the three and nine month periods was $151 million and $446 million, respectively, compared to $155 million and $407 million for the same periods last year. The current quarter was comparable to the same period last year despite increased cash taxes and capital investment in the current period. The improvement on a year-to-date basis was primarily due to increased service operating income before amortization partially offset by cash taxes. Net income of $158 million or $0.37 per share for the quarter ended May 31, 2010 compared to $132 million or $0.31 per share for the same period last year. Net income for the first nine months of the year was $411 million or $0.95 per share compared to $412 million or $0.96 per share last year. All periods included non-operating items which are more fully detailed in Management's Discussions and Analysis (MD&A).(3) The current year-to-date period included debt retirement costs and amounts related to financial instruments of $82 million and $47 million, respectively. Excluding the non-operating items, net income for the current three and nine month periods ended May 31, 2010 would have been $162 million and $481 million, respectively, compared to $131 million and $382 million in the same periods last year. Service revenue in the Cable division was up 11% and 12% for the three and nine month periods, respectively, to $745 million and $2.19 billion. The improvement was primarily driven by customer growth and rate increases. Service operating income before amortization was up 12% for the quarter and 17% for the year-to-date period. Service revenue in the Satellite division was $198 million and $593 million for the quarter and year-to-date periods, up 4% over each of the comparable periods last year. Service operating income before amortization for the three and nine month periods was $72 million and $235 million compared to $70 million and $203 million for the same periods last year. "We continue to develop our Wireless business plan and during the quarter commenced initial activities investing over $9 million on this strategic initiative. We plan to invest up to $100 million through to the end of the fiscal year" said Jim Shaw. In May 2010 Shaw announced that it had entered into agreements to acquire 100% of the Broadcasting business of Canwest Global Communications Corp. ("Canwest") including all the equity interest in CW Investments Co. ("CW Media"), the company that owns the specialty channels acquired from Alliance Atlantis Communications Inc. in 2007 by Canwest and Goldman Sachs. The total consideration of approximately $2.0 billion includes approximately $815 million of net debt at CW Media. Certain portions of the acquisition were completed in May and Shaw funded $743 million, including transaction costs, with cash on hand. It is anticipated the outstanding portions of the acquisition will close early in fiscal 2011 upon receipt of all necessary approvals, including Canwest creditor, Court, CRTC, and the Competition Bureau. Mr. Shaw concluded, "As we look to the final quarter of fiscal 2010 we will remain focused on building a business that leverages our core competencies in this evolving entertainment, broadcasting and communication industry and continues to add shareholder value." Shaw Communications Inc. is a diversified communications company whose core business is providing broadband cable television, High-Speed Internet, Digital Phone, telecommunications services (through Shaw Business Solutions) and satellite direct-to-home services (through Shaw Direct). The Company serves 3.4 million customers, including 1.8 million Internet and over 1.0 million Digital Phone customers, through a reliable and extensive network, which comprises 625,000 kilometres of fibre. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (Symbol: TSX - SJR.B, NYSE - SJR). The accompanying Management's Discussion and Analysis forms part of this news release and the "Caution Concerning Forward Looking Statements" applies to all forward-looking statements made in this news release. 1. See definitions and discussion under Key Performance Drivers in MD&A. 2. Funds flow from operations is before changes in non-cash working capital balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows. 3. See reconciliation of Net Income in Consolidated Overview in MD&A MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 31, 2010 June 30, 2010 Certain statements in this report may constitute forward-looking statements. Included herein is a "Caution Concerning Forward-Looking Statements" section which should be read in conjunction with this report. The following should also be read in conjunction with Management's Discussion and Analysis included in the Company's August 31, 2009 Annual Report including the Consolidated Financial Statements and the Notes thereto and the unaudited interim Consolidated Financial Statements and the Notes thereto of the current quarter. CONSOLIDATED RESULTS OF OPERATIONS THIRD QUARTER ENDING MAY 31, 2010 Selected Financial Highlights Three months ended May 31, Nine months ended May 31, --------------------------------------------------------- Change Change 2010 2009 % 2010 2009 % ---------------------------------------------------------------------------- ($000's Cdn except per share amounts) Operations: Service revenue 943,632 861,382 9.5 2,778,708 2,517,994 10.4 Service operating income before amortization (1) (2) 435,822 395,547 10.2 1,335,599 1,145,709 16.6 Operating margin (1) (2) (3) 46.2% 45.9% 0.3 48.1% 45.5% 2.6 Funds flow from operations (4) 350,810 356,046 (1.5) 1,047,968 1,002,521 4.5 Net income (2) 158,216 132,151 19.7 411,157 412,210 (0.3) Per share data: Earnings per share - basic and diluted (2) $0.37 $0.31 $0.95 $0.96 Weighted average participating shares outstanding during period (000's) 432,323 429,877 432,595 428,828 ---------------------------------------------------------------------------- (1) See definition under Key Performance Drivers in Management's Discussion and Analysis. (2) The 2009 comparative periods have been restated as a result of the retrospective adoption of CICA Handbook Section 3064, "Goodwill and Intangible Assets". For the three months ended May 31, 2009, Service operating income before amortization and Net income have been restated from $395,270 and $131,945, respectively. For the nine months ended May 31, 2009, Service operating income before amortization, Operating margin, Net income, and Diluted earnings per share have been restated from $1,144,422, 45.4%, $411,251, and $0.95 respectively. See update to critical accounting policies and estimates on page 19. (3) Operating margin adjusted to exclude the one-time CRTC Part II recovery for the nine months ended May 31, 2010 would be 45.4%. (4) Funds flow from operations is before changes in non-cash working capital balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows. Subscriber Highlights Growth -------------------------------- Three months Nine months Total ended May 31, ended May 31, ------------------------------------------- May 31, 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Subscriber statistics: Basic cable customers 2,330,879 2,322 9,622 (149) 23,093 Digital customers 1,595,619 87,092 110,810 273,895 278,016 Internet customers (including pending installs) 1,796,973 25,661 24,625 88,638 81,907 Digital phone lines (including pending installs) 1,044,410 66,123 54,633 182,506 162,078 DTH customers 904,965 1,856 1,580 4,024 5,685 ---------------------------------------------------------------------------- Additional Highlights - Consolidated service revenue of $943.6 million and $2.78 billion for the three and nine month periods improved 9.5% and 10.4%, respectively, over each of the comparable periods last year. - Free cash flow(1) for the quarter and year-to-date periods was $150.9 million and $445.8 million, respectively, compared to $154.5 million and $406.9 million for the same periods last year. - During the quarter Shaw achieved several milestones including a record quarterly gain in Digital Phone and surpassing 1,000,000 Digital Phone lines. Shaw launched Digital Phone services in Calgary in February 2005 and since that time has expanded the footprint of Digital Phone to reach almost 95% of Basic customers. - In May 2010 Shaw announced that it had entered into agreements to acquire 100% of the Broadcasting business of Canwest including all of the equity interest in CW Investments Co. ("CW Media"), the company that owns the specialty channels acquired from Alliance Atlantis Communications Inc. in 2007 by Canwest and Goldman Sachs. The total consideration of approximately $2.0 billion includes approximately $815 million of net debt at CW Media. Certain portions of the acquisition were completed in May. - During the quarter the Company continued to develop its Wireless business plan and invested over $9 million on this strategic initiative. Consolidated Overview Consolidated service revenue of $943.6 million and $2.78 billion for the three and nine month periods, respectively, improved 9.5% and 10.4% over the same periods last year. The improvement was primarily due to customer growth, including from acquisitions, and rate increases. Consolidated service operating income before amortization for the three and nine month periods was up 10.2% and 16.6% over the comparable periods to $435.8 million and $1.34 billion. The current periods improved due to the revenue related growth, partially offset by higher employee related and other costs associated with the increased subscriber base including marketing and sales activities, as well as the impact of the new Local Programming Improvement Fund ("LPIF") fees. The current nine month period also benefitted from a one-time CRTC Part II fee recovery. Excluding this one-time recovery, the year-to-date improvement was 10.0%. Net income was $ 158.2 million and $411.2 million for the three and nine months ended May 31, 2010 compared to $132.2 million and $412.2 million for the same periods last year. Non-operating items affected net income in both periods including debt retirement and amounts related to financial instruments in the current year-to-date period of $81.6 million and $47.3 million, respectively. Outlined on the following page are further details on these and other operating and non-operating components of net income for each period. 1. See definitions and discussion under Key Performance Drivers in Management's Discussion and Analysis. Nine Nine months months ended ended (1) -------- ---------- Operating Operating May 31, net of Non- May 31, net of Non- ($000's Cdn) 2010 interest operating 2009 interest operating ---------------------------------------------------------------------------- Operating income 852,597 720,634 Amortization of financing costs - long-term debt (3,015) (2,918) Interest expense - debt (185,507) (174,647) ---------------------------------------------------------------------------- Operating income after interest 664,075 664,075 - 543,069 543,069 - Debt retirement costs (81,585) - (81,585) (8,255) - (8,255) Loss on financial instruments (47,280) - (47,280) - - - Other gains 8,342 - 8,342 18,816 - 18,816 ---------------------------------------------------------------------------- Income (loss) before income taxes 543,552 664,075 (120,523) 553,630 543,069 10,561 Current income tax expense (recovery) 127,332 157,005 (29,673) - - - Future income tax expense (recovery) 2,363 26,037 (23,674) 141,321 160,925 (19,604) ---------------------------------------------------------------------------- Income before following 413,857 481,033 (67,176) 412,309 382,144 30,165 Equity loss on investee (2,700) - (2,700) (99) - (99) ---------------------------------------------------------------------------- Net income (loss) 411,157 481,033 (69,876) 412,210 382,144 30,066 ---------------------------------------------------------------------------- Three Three months months ended ended (1) -------- ---------- Operating Operating May 31, net of Non- May 31, net of Non- ($000's Cdn) 2010 interest operating 2009 interest operating ---------------------------------------------------------------------------- Operating income 277,280 248,708 Amortization of financing costs - long-term debt (962) (1,026) Interest expense - debt (61,797) (61,083) ---------------------------------------------------------------------------- Operating income after interest 214,521 214,521 - 186,599 186,599 - Debt retirement costs - - - (8,255) - (8,255) Loss on financial instruments (1,131) - (1,131) - - - Other gains (losses) (1,013) - (1,013) 9,822 - 9,822 ---------------------------------------------------------------------------- Income (loss) before income taxes 212,377 214,521 (2,144) 188,166 186,599 1,567 Current income tax expense (recovery) 22,051 40,001 (17,950) - - - Future income tax expense 29,410 13,000 16,410 55,903 55,438 465 ---------------------------------------------------------------------------- Income (loss) before following 160,916 161,520 (604) 132,263 131,161 1,102 Equity loss on investee (2,700) - (2,700) (112) - (112) ---------------------------------------------------------------------------- Net income (loss) 158,216 161,520 (3,304) 132,151 131,161 990 ---------------------------------------------------------------------------- (1) Restated for the retrospective adoption of CICA Handbook Section 3064, "Goodwill and Intangible Assets". See update to critical accounting policies and estimates on page 19. The changes in net income are outlined in the table below. May 31, 2010 net income compared to: ------------------------------------------- Nine months Three months ended ended ------------------------------------------- February 28, May 31, May 31, 2010 2009 2009 ---------------------------------------------------------------------------- (000's Cdn) Increased service operating income before amortization 10,997 40,275 189,890 Decreased (increased) amortization 6,810 (11,639) (58,024) Increased interest expense (151) (714) (10,860) Change in net other costs and revenue (1) (3,978) (6,299) (133,685) Decreased income taxes 5,826 4,442 11,626 ---------------------------------------------------------------------------- 19,504 26,065 (1,053) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Net other costs and revenue includes debt retirement costs, loss on financial instruments, other gains (losses) and equity loss on investee as detailed in the unaudited interim Consolidated Statements of Income and Retained Earnings. Basic earnings per share were $0.37 and $0.95 for the quarter and nine months, respectively, compared to $0.31 and $0.96 in the same periods last year. The increase in the current three month period was primarily due to improved service operating income before amortization of $40.3 million partially offset by higher amortization of $11.6 million. The current nine month period benefitted from higher service operating income before amortization of $189.9 million which was offset by the change in net other costs and revenue of $133.7 million, increased amortization of $58.0 million and higher interest expense of $10.9 million. The change in net other costs and revenue was due to debt retirement costs and amounts related to financial instruments associated with the early redemption of the three series of US senior notes in the current period. The higher service operating income before amortization in the current nine month period included a one-time Part II fee recovery of $75.3 million. Net income in the current quarter increased $19.5 million compared to the second quarter of fiscal 2010 mainly due to increased service operating income before amortization of $11.0 million and reduced amortization of $6.8 million. Funds flow from operations was $350.8 million and $1.05 billion in the current three and nine month periods compared to $356.0 million and $1.00 billion last year. The increase over the comparative nine month period was primarily due to improved service operating income before amortization partially offset by current income taxes. Free cash flow for the quarter and year-to-date periods of $150.9 million and $445.8 million compared to $154.5 million and $406.9 million in the same periods last year. The current quarter improved service operating income of $40.3 million was more than offset by current period cash taxes of $40.0 million and higher capital investment of $10.8 million. On a year-to-date basis the increased current period service operating income before amortization of $189.9 million was partially offset by cash taxes of $157.0 million. The Cable division generated $113.6 million of free cash flow for the quarter compared to $109.3 million in the comparable period. The Satellite division achieved free cash flow of $37.3 million compared to $45.2 million last year. In May 2010 Shaw completed certain portions of the Canwest acquisition transaction, including purchasing an equity interest and an option for a further equity interest in CW Media for total consideration of $742.9 million, including transaction costs. Shaw funded the purchase price with cash on hand. It is expected the outstanding portions of the acquisition will close early in fiscal 2011 upon receipt of all necessary approvals, including Canwest creditor, Court, CRTC, and the Competition Bureau. It is currently anticipated that the balance of the purchase price, approximately $500 million after considering debt in the entities being acquired of approximately $815 million, will be funded through Shaw's existing credit facility and cash on hand. Key Performance Drivers The Company's continuous disclosure documents may provide discussion and analysis of non-GAAP financial measures. These financial measures do not have standard definitions prescribed by Canadian GAAP or US GAAP and therefore may not be comparable to similar measures disclosed by other companies. The Company utilizes these measures in making operating decisions and assessing its performance. Certain investors, analysts and others, utilize these measures in assessing the Company's operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. These non-GAAP financial measures have not been presented as an alternative to net income or any other measure of performance required by Canadian or US GAAP. The following contains a listing of non-GAAP financial measures used by the Company and provides a reconciliation to the nearest GAAP measurement or provides a reference to such reconciliation. Service operating income before amortization and operating margin Service operating income before amortization is calculated as service revenue less operating, general and administrative expenses and is presented as a sub-total line item in the Company's unaudited interim Consolidated Statements of Income and Retained Earnings. It is intended to indicate the Company's ability to service and/or incur debt, and therefore it is calculated before amortization (a non-cash expense) and interest. Service operating income before amortization is also one of the measures used by the investing community to value the business. Operating margin is calculated by dividing service operating income before amortization by service revenue. Free cash flow The Company utilizes this measurement as it measures the Company's ability to repay debt and return cash to shareholders. Free cash flow for cable and satellite is calculated as service operating income before amortization, less interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions) and equipment costs (net). Commencing in 2010, for the purpose of determining free cash flow, Shaw will exclude stock-based compensation expense, reflecting the fact that it is not a reduction in the Company's cash flow. This practice is also more in line with the Company's North American peers who report free cash flow. Free cash flow is calculated as follows: Three months ended Nine months ended ---------------------------------------- May 31, May 31, 2010 2009 (2) 2010 2009 (2) ---------------------------------------------------------------------------- ($000's Cdn) Cable free cash flow (1) 113,616 109,298 330,237 281,272 Combined satellite free cash flow (1) 37,254 45,229 115,581 125,653 ---------------------------------------------------------------------------- Free cash flow 150,870 154,527 445,818 406,925 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Reconciliations of free cash flow for both cable and satellite are provided under "Cable - Financial Highlights" and "Satellite - Financial Highlights". (2) Free cash flow for the comparative periods have not been restated to exclude stock based compensation. Cable free cash flow for the three and nine months ended May, 2009 has been restated from $109,021 and $279,985, respectively, for the retrospective adoption of CICA Handbook Section 3064, "Goodwill and Intangible Assets". See update to critical accounting policies and estimates on page 19. CABLE FINANCIAL HIGHLIGHTS Three months ended May 31, Nine months ended May 31, --------------------------------------------------------- Change Change 2010 2009 (3) % 2010 2009 (3) % --------------------------------------------------------- ($000's Cdn) Service revenue (third party) 745,211 669,606 11.3 2,185,972 1,948,519 12.2 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Service operating income before amortization (1) 363,939 325,637 11.8 1,100,361 942,900 16.7 Less: Interest expense 51,849 54,180 (4.3) 161,767 153,937 5.1 Cash taxes 31,001 - 100.0 119,005 - 100.0 ---------------------------------------------------------------------------- Cash flow before the following: 281,089 271,457 3.5 819,589 788,963 3.9 ---------------------------------------------------------------------------- Capital expenditures and equipment costs (net): New housing development 20,172 18,348 9.9 62,613 59,088 6.0 Success based 51,150 52,813 (3.1) 159,652 129,994 22.8 Upgrades and enhancement 59,034 66,576 (11.3) 184,018 220,095 (16.4) Replacement 15,838 12,726 24.5 42,148 38,524 9.4 Buildings/other 25,305 11,696 116.4 52,911 59,990 (11.8) ---------------------------------------------------------------------------- Total as per Note 2 to the unaudited interim Consolidated Financial Statements 171,499 162,159 5.8 501,342 507,691 (1.3) ---------------------------------------------------------------------------- Free cash flow before the following 109,590 109,298 0.3 318,247 281,272 13.1 Add back: Non-cash stock based compensation 4,026 - 100.0 11,990 - 100.0 ---------------------------------------------------------------------------- Free cash flow (1) 113,616 109,298 4.0 330,237 281,272 17.4 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating margin (2) 48.8% 48.6% 0.2 50.3% 48.4% 1.9 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) See definitions and discussion under Key Performance Drivers in Management's Discussion and Analysis. (2) Operating margin adjusted to exclude the one-time CRTC Part II fee recovery in the nine months ended May 31, 2010 would be 48.1%. (3) The 2009 comparative periods have been restated as a result of the retrospective adoption of CICA Handbook Section 3064, "Goodwill and Intangible Assets". For the three months ended May 31, 2009, Service operating income before amortization and Free cash flow have been restated from $325,360, $109,021, respectively. For the nine months ended May 31, 2009 Service operating income before amortization, Free cash flow, and Operating margin have been restated from $941,613, $279,985, and 48.3%, respectively. See update to critical accounting policies and estimates on page 19. Operating Highlights - Digital customers increased 87,092 during the quarter to 1,595,619. Shaw's Digital penetration of Basic is now 68.5%, up from 56.7% and 40.5% at August 31, 2009 and 2008, respectively. - Digital Phone lines increased 66,123 during the three month period to 1,044,410 lines and Internet was up 25,661 to total 1,796,973 as at May 31, 2010. During the quarter Basic cable subscribers were up 2,322. Cable service revenue improved 11.3% and 12.2% for the three and nine month periods, respectively, to $745.2 million and $2.19 billion over the comparable periods last year. Customer growth, including acquisitions, and rate increases accounted for the improvement. Service operating income before amortization of $363.9 million and $1.10 billion was up 11.8% and 16.7%, respectively, over the comparable quarter and year-to-date periods. The increase was mainly due to the revenue driven improvements, partially offset by higher employee related and other costs associated with growth including marketing and sales activities as well as the impact of the LPIF fees. The current nine month period also included a one-time Part II fee recovery of $48.7 million. Excluding the recovery, the year-to-date improvement was 11.5%. Service revenue was up $13.0 million over the second quarter of fiscal 2010 primarily due to customer growth. Service operating income before amortization improved $8.6 million over this same period primarily due to the revenue related growth partially offset by direct costs associated with the increased subscriber base. Total capital investment of $171.5 million for the quarter increased $9.3 million over the same period last year. Capital investment for the nine month period of $501.3 million was $6.3 million lower than the same period last year. Success-based capital increased $29.7 million over the comparable nine month period. Digital success-based capital was up primarily due to increased rental activity, mainly HD rentals. Investment in Upgrades and Enhancement declined $7.5 million and $36.1 million for the quarter and year-to-date periods, respectively, compared to the same periods last year. The prior year-to-date period included higher spending on internet speed upgrades and Digital Phone equipment to accommodate growth, the total of which was partially offset by investment in the current periods related to video-on-demand ("VOD") growth and internet capacity expansion. The current quarter included lower spending on video and internet capacity projects compared to the same quarter last year. Investment in Buildings and Other was up $13.6 million in the current three month period and decreased $7.1 million on a year-to-date basis. The quarterly increase was due to investment in IT related projects as well as various facilities projects. The IT related projects include new technology platforms for billing and provisioning to replace aging systems. The year-to-date decline was mainly due to lower spending on various facility and IT projects in the current period partially offset by the benefit of proceeds received in the prior period on the sale of certain redundant facilities. Subscriber Statistics May 31, 2010 -------------------------------- Three months Nine months ended ended -------------------------------- May 31, August 31, Change Change 2010 2009(1) Growth % Growth % ---------------------------------------------------------------------------- CABLE: Basic service: Actual 2,330,879 2,331,028 2,322 0.1 (149) - Penetration as % of homes passed 61.7% 62.9% Digital customers 1,595,619 1,321,724 87,092 5.8 273,895 20.7 ---------------------------------------------------------------------------- INTERNET: Connected and scheduled 1,796,973 1,708,335 25,661 1.4 88,638 5.2 Penetration as % of basic 77.1% 73.3% Standalone Internet not included in basic cable 244,445 238,710 DIGITAL PHONE: Number of lines (2) 1,044,410 861,904 66,123 6.8 182,506 21.2 ---------------------------------------------------------------------------- (1) August 31, 2009 figures are restated for comparative purposes as if the acquisition of the Hamilton cable system in Ontario had occurred on that date. (2) Represents primary and secondary lines on billing plus pending installs. During the current period Shaw achieved record quarterly Digital Phone growth and also surpassed a significant milestone of 1,000,000 Digital Phone lines. Shaw launched Digital Phone services in Calgary in February 2005 and since that time has expanded the footprint to reach almost 95% of Basic customers and penetration of Digital Phone now stands at 47% of Basic customers who have the service available to them. SATELLITE (DTH and Satellite Services) FINANCIAL HIGHLIGHTS Three months ended Nine months ended May 31, May 31, ------------------------------------------------- Change Change 2010 2009 % 2010 2009 % ---------------------------------------------------------------------------- ($000's Cdn) Service revenue (third party) DTH (Shaw Direct) 178,701 170,047 5.1 533,153 503,907 5.8 Satellite Services 19,720 21,729 (9.2) 59,583 65,568 (9.1) ---------------------------------------------------------------------------- 198,421 191,776 3.5 592,736 569,475 4.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Service operating income before amortization (1) DTH (Shaw Direct) 62,562 58,298 7.3 206,076 167,813 22.8 Satellite Services 9,411 11,612 (19.0) 29,252 34,996 (16.4) ---------------------------------------------------------------------------- 71,973 69,910 3.0 235,328 202,809 16.0 Less: Interest expense (2) 6,563 6,564 - 19,688 19,688 - Cash taxes on net income 9,000 - 100.0 38,000 - 100.0 ---------------------------------------------------------------------------- Cash flow before the following: 56,410 63,346 (10.9) 177,640 183,121 (3.0) ---------------------------------------------------------------------------- Capital expenditures and equipment costs (net): Success based (3) 16,989 15,835 7.3 57,372 52,703 8.9 Buildings and other 2,571 2,282 12.7 5,894 4,765 23.7 ---------------------------------------------------------------------------- Total as per Note 2 to the unaudited interim Consolidated Financial Statements 19,560 18,117 8.0 63,266 57,468 10.1 ---------------------------------------------------------------------------- Free cash flow before the following 36,850 45,229 (18.5) 114,374 125,653 (9.0) Add back: Non-cash stock option expense 404 - 100.0 1,207 - 100.0 ---------------------------------------------------------------------------- Free cash flow (1) 37,254 45,229 (17.6) 115,581 125,653 (8.0) ---------------------------------------------------------------------------- Operating Margin (4) 36.3% 36.5% (0.2) 39.7% 35.6% 4.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) See definitions and discussion under Key Performance Drivers in Management's Discussion and Analysis. (2) Interest is allocated to the Satellite division based on the actual cost of debt incurred by the Company to repay Satellite debt and to fund accumulated cash deficits of Shaw Satellite Services and Shaw Direct. (3) Net of the profit on the sale of satellite equipment as it is viewed as a recovery of expenditures on customer premise equipment. (4) Operating margin adjusted to exclude the one-time CRTC Part II fee recovery in the nine months ended May 31, 2010 would be 35.2%. Operating Highlights - During the quarter Shaw Direct added 1,856 customers and as at May 31, 2010 DTH customers now total 904,965. - Free cash flow of $37.3 million for the quarter compares to $45.2 million in the same period last year. - In March 2010 Shaw Direct entered into agreements with Telesat to acquire capacity on a new satellite expected to be available in late 2012. Service revenue of $198.4 million and $592.7 million for the three and nine month periods, respectively, was up 3.5% and 4.1% over the same periods last year. The improvement was primarily due to rate increases and customer growth partially offset by lower revenues in the Satellite services division related to various contract renegotiations. Service operating income before amortization improved 3.0% and 16.0% over the comparable three and nine month periods, respectively, to $72.0 million and $235.3 million. The improvement in both periods was due to revenue related growth partially offset by LPIF costs. The current nine month period also included a one-time Part II fee recovery of $26.6 million. Excluding the recovery, the year-to-date improvement was 2.9%. Service operating income before amortization increased $2.5 million over the second quarter primarily due to rate increases and subscriber growth. Total capital investment of $19.6 million for the quarter compared to $18.1 million in the same period last year. The year-to-date investment of $63.3 million increased over the prior year spend of $57.5 million. Success based capital was higher mainly due to increased activations as well as lower customer pricing. The increase in Buildings and Other was mainly due to the relocation and expansion of the Montreal call centre and upgrades to encoding technology to expand HD capacity. During the quarter Shaw Direct entered into agreements with Telesat to acquire capacity on a new satellite expected to be available in late 2012. The capacity will provide bandwidth for expanded customer choice, including new HD and other advanced services. Subscriber Statistics May 31, 2010 ------------------------------ Three months Nine months ended ended ------------------------------ May 31, August 31, Change Change 2010 2009 Growth % Growth % ---------------------------------------------------------------------------- DTH customers (1) 904,965 900,941 1,856 0.2 4,024 0.4 ---------------------------------------------------------------------------- (1) Including seasonal customers who temporarily suspend their service. OTHER INCOME AND EXPENSE ITEMS Amortization Three months ended May 31, Nine months ended May 31, ------------------------------------------------------- Change Change 2010 2009 % 2010 2009 % ---------------------------------------------------------------------------- ($000's Cdn) Amortization revenue (expense) Deferred IRU revenue 3,137 3,137 - 9,410 9,410 - Deferred equipment revenue 29,865 33,341 (10.4) 91,608 100,319 (8.7) Deferred equipment costs (56,497) (62,674) (9.9) (174,146) (186,065) (6.4) Deferred charges (256) (256) - (768) (768) - Property, plant and equipment (128,348) (114,492) 12.1 (384,728) (326,726) 17.8 Other intangibles (6,443) (5,895) 9.3 (24,378) (21,245) 14.7 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Amortization of deferred equipment revenue and deferred equipment costs fluctuated over the comparative periods due to the sales mix of equipment, changes in customer pricing on certain equipment and the impact of rental programs. Amortization of property, plant and equipment and other intangibles increased over the comparable periods as the amortization of capital expenditures exceeded the impact of assets that became fully depreciated. Amortization of financing costs and Interest expense Three months ended May 31, Nine months ended May 31, ------------------------------------------------------- Change Change 2010 2009 % 2010 2009 % ---------------------------------------------------------------------------- ($000's Cdn) Amortization of financing costs long-term debt 962 1,026 (6.2) 3,015 2,918 3.3 Interest expense - debt 61,797 61,083 1.2 185,507 174,647 6.2 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest expense increased over the comparative nine month period as a result of higher average debt levels partially offset by a lower average cost of borrowing resulting from changes in various components of long-term debt. Debt retirement costs During the first quarter, the Company redeemed all of its outstanding US $440 million 8.25% senior notes due April 11, 2010, US $225 million 7.25% senior notes due April 6, 2011 and US $300 million 7.20% senior notes due December 15, 2011. In connection with the early redemption, the Company incurred costs of $79.5 million and wrote-off the remaining discount and finance costs of $2.1 million. The Company used proceeds from its $1.25 billion senior notes issuance in early October 2009 to fund the cash requirements for the redemptions. The refinancing of the three series of US senior notes has reduced the Company's annual interest expense by approximately $35.0 million. Loss on financial instruments On redemption of the US senior notes, the Corporation unwound and settled a portion of the principal components of two of the associated cross-currency agreements and entered into offsetting currency swap transactions and amended agreements for the outstanding notional principal amounts. The associated interest component of the cross-currency interest rate exchange agreements remained outstanding. As these contracts no longer qualify as cash flow hedges, the related loss in accumulated other comprehensive loss of $50.1 million was reclassified to net income. Subsequent changes in the value of these agreements is recorded in net income. The total amount recorded for three and nine months ended May 31, 2010 was a loss of $1.1 million and $47.3 million, respectively. Other gains This category generally includes realized and unrealized foreign exchange gains and losses on US dollar denominated current assets and liabilities, gains and losses on disposal of property, plant and equipment and the Company's share of the operations of Burrard Landing Lot 2 Holdings Partnership ("the Partnership"). In addition, the nine month period of the prior year includes a gain of $10.8 million on cancellation of a bond forward contract. Income taxes Income taxes were comparable to the same periods last year. Both of the year-to-date periods benefitted from income tax recoveries mainly related to reductions in corporate income tax rates. Equity loss on investee During the current quarter, the Company recorded a loss of $2.7 million for its 49.9% equity interest in CW Media acquired on May 3, 2010. The loss was comprised of approximately $7.5 million of service operating income before amortization offset by interest expense of $2.7 million and other costs of $7.6 million. Other costs include the net impact of $6.1 million with respect to fair value adjustments on derivative instruments and foreign exchange losses on US denominated long-term debt. RISKS AND UNCERTAINTIES The significant risks and uncertainties affecting the Company and its business are discussed in the Company's August 31, 2009 Annual Report under the Introduction to the Business - Known Events, Trends, Risks and Uncertainties in Management's Discussion and Analysis. Developments of note since then are as follows: Impact of Regulation - Potential for New or Increased Fees On March 22, 2010 the CRTC introduced a new framework setting out a market-based solution to allow private local television stations to negotiate a fair value for the distribution of their programming with cable and satellite companies. The CRTC is uncertain as to its authority to implement this negotiation regime and is seeking clarification on its jurisdiction under the Broadcasting Act from the Federal Court of Appeal. As a result, depending on the decision of the Court, and impact of other interveners, it is possible that a monetary and/or non-monetary negotiated compensation regime could arise. FINANCIAL POSITION Total assets at May 31, 2010 were $9.9 billion compared to $8.9 billion at August 31, 2009. Following is a discussion of significant changes in the consolidated balance sheet since August 31, 2009. Current assets declined by $397.0 million primarily due to decreases in cash and cash equivalents and short-term securities of $453.2 million partially offset by the derivative instrument of $58.9 million and an increase in accounts receivable of $5.9 million. Cash and cash equivalents were used to purchase Mountain Cable and partially fund the US senior notes redemptions in October while short-term securities decreased as cash was used to partially fund an interest in CW Media in May. Accounts receivable were up due to rate increases, subscriber growth and timing of cash collections. The derivative instrument arose upon payment of $57.5 million to enter into an offsetting currency swap transaction for the outstanding notional principal amount (i.e. end of swap notional exchanges) under certain of the remaining cross-currency interest rate exchange agreements. Investments and other assets increased by $708.5 million due to the acquisition of an initial interest in CW Media of $742.9 million, including transaction costs, and the purchase of a Government of Canada bond for $159.0 million partially offset by reclassifying $190.9 million of spectrum license deposits to intangibles. Property, plant and equipment and other intangibles increased by $135.1 million and $17.4 million, respectively as current year capital investment and amounts acquired on the Mountain Cable acquisition exceeded amortization. Deferred charges declined by $17.1 million due to a decrease in deferred equipment costs of $18.9 million. Broadcast rights and goodwill increased $245.0 million and $81.0 million, respectively, due to the acquisition of Mountain Cable in Hamilton, Ontario. Spectrum licenses of $190.9 million arose in the first quarter as the Company received its ownership compliance decision from Industry Canada and was granted its AWS licenses. Current liabilities (excluding current portion of long-term debt and derivative instruments) were up $24.5 million due to a decrease in accounts payable of $96.8 million offset by increases in bank indebtedness of $5.3 million, income taxes payable of $106.5 million and unearned revenue of $9.5 million. Accounts payable and accrued liabilities declined due to the impact of the Part II fee recovery and a net decrease in trade and other payables. Income taxes payable were up due to the current year income tax expense and unearned revenue increased due to the acquisition of Mountain Cable, customer growth and rate increases. Total long-term debt increased $830.6 million as a result of $1.88 billion in net proceeds on the $1.25 billion and $650.0 million senior note issuances partially offset by the payment of $1.02 billion on the early redemption of US $440 million senior notes, US $225 million senior notes and US $300 million senior notes and a decrease of $40.5 million relating to the translation of these US denominated senior notes prior to the redemption dates. The current portion of long-term debt decreased due to the early redemption of US $440 million senior notes due in April 2010. Other long-term liabilities increased by $178.9 million due to the reclassification of $158.1 million from derivative instruments in respect to the liability for the principal components of the US $300,000 amended cross-currency interest exchange agreements and current year defined benefit pension plan expense. Derivative instruments (including current portion) decreased $368.2 million due to the payment of $146.1 million to unwind and settle a portion of the principal component of two of the cross-currency interest rate exchange agreements related to the US senior notes in October, the end of swap notional exchange relating to one of the remaining outstanding cross-currency interest rate agreements for which the Company had paid $88.4 million for an offsetting currency swap transaction and the aforementioned reclassification of $158.1 million, all of which were partially offset by the current year derivative loss, including $40.5 million in respect of the foreign exchange loss on the notional amounts of the derivatives relating to the hedged long-term debt prior to the redemption dates. Deferred credits declined $16.6 million due to amortization of deferred IRU revenue of $9.4 million and a decrease in deferred equipment revenue of $6.5 million. Future income taxes increased $88.5 million primarily due to the acquisition of Mountain Cable. Share capital increased $128.2 million primarily due to the issuance of 6,141,250 Class B Non-Voting Shares in connection with the acquisition of Mountain Cable for $120.0 million and the issuance of 2,393,048 Class B Non-Voting Shares under the Company's option plans for $41.3 million partially offset by the repurchase of 6,100,000 Class B Non-Voting Shares for $118.1 million of which $33.0 million reduced stated share capital and $85.1 million was charged against retained earnings. As of June 15, 2010, share capital is as reported at May 31, 2010 with the exception of the issuance of 129,050 Class B Non-Voting Shares upon exercise of options subsequent to the quarter end. Contributed surplus increased due to stock-based compensation expense recorded in the current year. Accumulated other comprehensive loss decreased primarily due to reclassifying the remaining losses on the cross-currency interest rate exchange agreements into income upon redemption of the underlying US denominated long-term debt. LIQUIDITY AND CAPITAL RESOURCES In the current year, the Company generated $445.8 million of free cash flow. Shaw used its free cash flow along with net proceeds of $1.88 billion from its two senior notes offerings, cash of $458.5 million, proceeds on issuance of Class B Non-Voting Shares of $39.3 million and other net items of $26.0 million to redeem the three series of US dollar denominated senior notes for $1.02 billion, pay $291.9 million on cross-currency interest rate swap agreements, pay $79.5 million in debt retirement costs, pay $741.7 million in respect of its initial investment in CW Media, purchase $118.1 million of Class B Non-Voting Shares for cancellation, pay common share dividends of $276.9 million, purchase the Hamilton cable system for $159.0 million, purchase a Government of Canada bond for $159.0 million and pay $9.2 million for Wireless capital expenditures. During the first quarter, the Company redeemed all of its outstanding US $440 million 8.25% senior notes due April 11, 2010 and US $225 million 7.25% due April 6, 2011 on October 13, 2009, and its US $300 million 7.20% senior notes due December 15, 2011 on October 20, 2009. The net proceeds from the $1.25 billion 5.65% senior note issuance due 2019 were used to fund the majority of the cash requirements for the redemptions including the make-whole premiums and payments in respect of the associated cross-currency interest rate exchange agreements. The Company also issued $650.0 million senior notes at a rate of 6.75% due 2039. The net proceeds from this offering were used for working capital and general corporate purposes while excess funds are held in a Government of Canada bond. On November 16, 2009, Shaw received the approval of the TSX to renew its normal course issuer bid to purchase its Class B Non-Voting Shares for a further one year period. The Company is authorized to acquire up to 35,000,000 Class B Non-Voting Shares during the period November 19, 2009 to November 18, 2010. During the current year, the Company repurchased 6,100,000 Class B Non-Voting Shares for $118.1 million. At May 31, 2010, Shaw had access to $1 billion of available credit facilities. Based on available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations during the remainder of the current fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt. CASH FLOW Operating Activities Three months ended May 31, Nine months ended May 31, ---------------------------------------------------------- Change Change 2010 2009 % 2010 2009 % ---------------------------------------------------------------------------- ($000's Cdn) Funds flow from operations 350,810 356,046 (1.5) 1,047,968 1,002,521 4.5 Net decrease (increase) in non-cash working capital balances related to greater operations (22,266) (27,955) 20.4 (6,277) 28,166 than 100 ---------------------------------------------------------------------------- 328,544 328,091 0.1 1,041,691 1,030,687 1.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Funds flow from operations increased over the comparative nine month period primarily due to growth in service operating income before amortization offset by current income tax expense. The net change in non-cash working capital balances over the comparable periods is mainly due to the reduction in accounts payable and accrued liabilities in the current year as a result of the reversal of the previously accrued Part II fees and timing of payment of various trade and other payables, an increase in current taxes payable as the Company became cash taxable in the fourth quarter of the prior year and timing of collection of accounts receivable. Investing Activities Three months ended May 31, Nine months ended May 31, ----------------------------------------------------------- 2010 2009 Increase 2010 2009 Increase ---------------------------------------------------------------------------- ($000's Cdn) Cash flow used in investing activities (922,163) (201,292) 720,871 (1,638,068) (788,927) 849,141 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The cash used in investing activities increased over the comparable periods primarily due the cash outlay of $741.7 million in respect of the Company's initial investment in CW Media. The nine month period was also impacted by the business acquisition of Mountain Cable in Hamilton, Ontario and investing certain excess funds from the $650.0 million senior notes issuance in a Government of Canada bond in the current year partially offset by the final cash outlay in the prior year in respect of deposits for the wireless spectrum licenses. Financing Activities The changes in financing activities during the comparative periods were as follows: Three months ended Nine months ended May 31, May 31, ---------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- (In $millions Cdn) Bank loans and bank indebtedness - net borrowings (repayments) 5.3 (128.9) 5.3 (99.2) Issuance of Cdn $1.25 billion 5.65% senior notes - - 1,246.0 - Issuance of Cdn $650 million 6.75% senior notes - - 645.6 - Issuance of Cdn $600 million 6.50% senior notes - 598.2 - 598.2 Senior notes issuance costs (0.2) (4.6) (10.1) (4.6) Redemption of US $440 million 8.25% senior notes - - (465.5) - Redemption of US $225 million 7.25% senior notes - - (238.1) - Redemption of US $300 million 7.20% senior notes - - (312.6) - Redemption of Videon CableSystems Inc. 8.15% Senior Debentures - (130.0) - (130.0) Payments on cross-currency agreements - - (291.9) - Debt retirement costs - (9.2) (79.5) (9.2) Dividends (95.1) (90.3) (276.9) (261.6) Repayment of Partnership debt (0.1) (0.1) (0.4) (0.4) Issue of Class B Non-Voting Shares 13.8 3.2 39.3 52.9 Purchase of Class B Non-Voting Shares for cancellation - - (118.1) (33.6) Proceeds on cancellation of bond forward contract - - - 10.8 ---------------------------------------------------------------------------- (76.3) 238.3 143.1 123.3 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION Service operating Funds flow Service income before Net Basic earnings from revenue amortization(1)(3) income(3) per share(3)(4) operations(2) ---------------------------------------------------------------------------- ($000's Cdn except per share amounts) 2010 Third 943,632 435,822 158,216 0.37 350,810 Second 929,142 424,825 138,712 0.32 358,206 First 905,934 474,952 114,229 0.26 338,952 2009 Fourth 872,919 394,900 124,265 0.29 321,319 Third 861,382 395,547 132,151 0.31 356,046 Second 839,144 381,832 156,585 0.37 334,508 First 817,468 368,330 123,474 0.29 311,967 2008 Fourth 805,700 370,406 133,032 0.31 321,276 ---------------------------------------------------------------------------- (1) See definition and discussion under Key Performance Drivers in Management's Discussion and Analysis. (2) Funds flow from operations is presented before changes in net non-cash working capital balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows. (3) 2009 and 2008 are restated for the retrospective adoption of CICA Handbook Section 3064, "Goodwill and Intangible Assets". See update to critical accounting policies and estimates on page 19. (4) Diluted earnings per share equals basic earnings per share except for the second quarter of 2009 where diluted earnings per share is $0.36. Generally, service revenue and service operating income before amortization have grown quarter-over-quarter mainly due to customer growth and rate increases. Net income has fluctuated quarter-over-quarter primarily as a result of the growth in service operating income before amortization described above, the impact of the net change in non-operating items such as debt retirement costs, loss on financial instruments, and the impact of corporate income tax rate reductions. Net income declined by $10.0 million in the first quarter of 2010 mainly due to debt retirement costs of $81.6 million in respect of the US senior note redemptions, the loss on financial instruments of $44.6 million, the total of which was partially offset by higher service operating income before amortization of $80.1 million (which includes the impact of the one-time Part II fee recovery of $75.3 million) and lower income taxes of $28.9 million. The lower income taxes were due to lower net income before taxes and an income tax recovery of $17.6 million related to reductions in corporate income tax rates in the first quarter of 2010. Net income increased by $24.5 million in the second quarter of 2010 due to the aforementioned items recorded in the previous quarter and the impact of customer growth, the Mountain Cable acquisition and lower costs including employee related and marketing expenses all of which were partially offset by increased taxes on higher net income before taxes. During the third quarter of 2010, net income increased by $19.5 million mainly due to higher service operating income before amortization and lower amortization. During the second quarter of 2009, the Company recorded a future tax recovery related to reduction in corporate income tax rates which contributed $22.6 million to net income. Net income declined by $24.4 million in the third quarter of 2009 primarily due to the tax recovery recorded in the immediately preceding quarter. The decline in net income in the first and fourth quarters of 2009 of $9.6 million and $7.9 million, respectively, is mainly due to an increase in amortization expense. As a result of the aforementioned changes in net income, basic and diluted earnings per share have trended accordingly. ACCOUNTING STANDARDS Update to critical accounting policies and estimates The Management's Discussion and Analysis ("MD&A") included in the Company's August 31, 2009 Annual Report outlined critical accounting policies including key estimates and assumptions that management has made under these policies and how they affect the amounts reported in the Consolidated Financial Statements. The MD&A also describes significant accounting policies where alternatives exist. Also described therein was a new accounting policy that the Company is required to adopt in fiscal 2010 as a result of changes in Canadian accounting pronouncements. The unaudited interim Consolidated Financial Statements follow the same accounting policies and methods of application as the most recent annual consolidated financial statements other than as set out below. Goodwill and intangible assets In 2010, the Company adopted CICA Handbook Section 3064, "Goodwill and Intangible Assets", which replaces Sections 3062, "Goodwill and Other Intangible Assets", and 3450, "Research and Development Costs". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. As a result, connection costs that had been previously deferred and amortized, no longer meet the recognition criteria for intangible assets. In addition, the new standard requires computer software, that is not an integral part of the related hardware, to be classified as an intangible asset. The provisions of Section 3064 were adopted retrospectively with restatement of prior periods. The impact on the Consolidated Balance Sheets as at May 31, 2010 and August 31, 2009 and on the Consolidated Statements of Income and Retained Earnings for the three and nine months ended May 31, 2010 and 2009 is as follows: Increase (decrease) ------------------------------- May 31, 2010 August 31, 2009 $ $ ---------------------------------------------------------------------------- Consolidated balance sheets: Property, plant and equipment (122,599) (105,180) Deferred charges (3,436) (3,383) Intangibles 122,599 105,180 Future income taxes (868) (863) Retained earnings (2,568) (2,520) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Decrease in retained earnings: Adjustment for change in accounting policy (2,520) (3,756) Increase (decrease) in net income (48) 1,236 ---------------------------------------------------------------------------- (2,568) (2,520) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended May 31, May 31, ---------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- $ $ $ $ Consolidated statements of income: Decrease (increase) in operating, general and administrative expenses (370) 277 (53) 1,287 Decrease in amortization of property, plant and equipment 6,443 5,895 24,378 21,245 Increase in amortization of other intangibles (6,443) (5,895) (24,378) (21,245) Decrease (increase) in income tax expense 94 (71) 5 (328) ---------------------------------------------------------------------------- Increase (decrease) in net income and comprehensive income (276) 206 (48) 959 ---------------------------------------------------------------------------- Increase (decrease) in earnings per share - - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Recent accounting pronouncements: International Financial Reporting Standards (IFRS) In February 2009, the CICA Accounting Standards Board (AScB) confirmed that Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), for fiscal periods beginning on or after January 1, 2011. These standards require the Company to begin reporting under IFRS in the first quarter of fiscal 2012 with comparative data for the prior year. The table below outlines the phases involved in the changeover to IFRS. ---------------------------------------------------------------------------- Phase Description and status ---------------------------------------------------------------------------- Impact assessment and This phase includes establishment of a project planning team and high-level review to determine potential significant differences under IFRS as compared to Canadian GAAP. This phase has been completed and as a result, the Company has developed a transition plan and a preliminary timeline to comply with the changeover date while recognizing that project activities and timelines may change as a result of unexpected developments. ---------------------------------------------------------------------------- Design and development This phase includes (i) an in-depth review to - key elements identify and assess accounting and reporting differences, (ii) evaluation and selection of accounting policies, (iii) assessment of impact on information systems, internal controls, and business activities, and (iv) training and communication with key stakeholders. During 2009, the Company completed its preliminary identification and assessment of accounting and reporting differences. In addition, training was provided to certain key employees involved in or directly impacted by the conversion process. During the current year, the assessment of the impact on information systems was completed and the design phase of system changes has commenced. The Company has completed further in-depth evaluations of those areas initially identified as being potential accounting and reporting differences, as well as the evaluation of IFRS 1 elections/exemptions and preliminary selection of elections for presentation to the Company's Audit Committee. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Phase Description and status ---------------------------------------------------------------------------- Implementation This phase includes integration of solutions into processes and financial systems that are required for the conversion to IFRS and parallel reporting during the year prior to transition including proforma financial statements and note disclosures. Process solutions will incorporate required revisions to internal controls during the changeover and on an on-going basis. ---------------------------------------------------------------------------- 2010 GUIDANCE The Company's preliminary view with respect to 2010 guidance was provided coincident with the release of its fourth quarter results on October 23, 2009. It called for consolidated service operating income before amortization to increase by 14% or more including the impact of a one-time CRTC Part II fee recovery, and free cash flow to be comparable to 2009 after considering the full year impact of cash taxes and continued capital investment. Excluding the impact of the Part II fee recovery and the expected contribution from Mountain Cable this represents an organic growth rate of approximately 8%. There are no revisions to the guidance at this time. This guidance is with respect to the consolidated Cable and Satellite segments. The investment associated with the Wireless build is being tracked and reported separately from the free cash flow generated from ongoing operations. The Company plans to invest up to $100 million through to the end of the fiscal year on its Wireless initiative. Certain important assumptions for 2010 guidance purposes include: customer growth continuing generally in line with historical trends; stable pricing environment for Shaw's products relative to today's rates; no significant market disruption or other significant changes in competition or regulation that would have a material impact; cash income taxes to be paid or payable in 2010; and a stable regulatory fee environment. While the Company does anticipate continued slower economic conditions in Western Canada, it does not see any material changes to its business at this time. See the section below entitled "Caution Concerning Forward-Looking Statements". CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Certain statements included and incorporated by reference herein may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used, the words "anticipate", "believe", "expect", "plan", "intend", "target", "guideline", "goal", and similar expressions generally identify forward-looking statements. These forward-looking statements include, but are not limited to, references to future capital expenditures (including the amount and nature thereof), financial guidance for future performance, business strategies and measures to implement strategies, competitive strengths, goals, expansion and growth of Shaw's business and operations, plans and references to the future success of Shaw. These forward-looking statements are based on certain assumptions, some of which are noted above, and analyses made by Shaw in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances as of the current date. These assumptions include but are not limited to general economic and industry growth rates, currency exchange rates, technology deployment, content and equipment costs, and industry structure and stability. Whether actual results and developments will conform with expectations and predictions of the Company is subject to a number of factors including, but not limited to, general economic, market or business conditions; the opportunities that may be available to Shaw; Shaw's ability to execute its strategic plans; changes in the competitive environment in the markets in which Shaw operates and from the development of new markets for emerging technologies; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it operates in both Canada and the United States; Shaw's status as a holding company with separate operating subsidiaries; changing conditions in the entertainment, information and communications industries; risks associated with the economic, political and regulatory policies of local governments and laws and policies of Canada and the United States; and other factors, many of which are beyond the control of Shaw. The foregoing is not an exhaustive list of all possible factors. Should one or more of these risks materialize or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those as described herein. Consequently, all of the forward-looking statements made in this report and the documents incorporated by reference herein are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Shaw will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. You should not place undue reliance on any such forward-looking statements. The Company utilizes forward-looking statements in assessing its performance. Certain investors, analysts and others, utilize the Company's financial guidance and other forward-looking information in order to assess the Company's expected operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The Company's financial guidance may not be appropriate for other purposes. Any forward-looking statement (and such risks, uncertainties and other factors) speaks only as of the date on which it was originally made and the Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this document to reflect any change in expectations with regard to those statements or any other change in events, conditions or circumstances on which any such statement is based, except as required by law. New factors affecting the Company emerge from time to time, and it is not possible for the Company to predict what factors will arise or when. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any particular factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands of Canadian dollars) May 31, 2010 August 31, 2009 ---------------------------------------------------------------------------- Restated - note 1 ASSETS Current Cash and cash equivalents - 253,862 Short-term securities - 199,375 Accounts receivable 200,353 194,483 Inventories 52,019 52,304 Prepaids and other 31,024 35,688 Derivative instrument (note 10) 58,894 - Future income taxes 18,410 21,957 ---------------------------------------------------------------------------- 360,700 757,669 Investments and other assets (notes 10 and 11) 903,380 194,854 Property, plant and equipment 2,851,500 2,716,364 Deferred charges 239,253 256,355 Intangibles Broadcast rights (note 3) 5,061,153 4,816,153 Spectrum licenses (note 1) 190,912 - Goodwill (note 3) 169,143 88,111 Other intangibles 122,598 105,180 ---------------------------------------------------------------------------- 9,898,639 8,934,686 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 5,262 - Accounts payable and accrued liabilities 466,322 563,110 Income taxes payable 131,828 25,320 Unearned revenue 143,308 133,798 Current portion of long-term debt (note 4) 548 481,739 Derivative instruments (note 10) 84,012 173,050 ---------------------------------------------------------------------------- 831,280 1,377,017 Long-term debt (note 4) 3,980,561 2,668,749 Other long-term liabilities (note 9) 283,885 104,964 Derivative instruments (note 10) 13,411 292,560 Deferred credits 642,496 659,073 Future income taxes 1,425,387 1,336,859 ---------------------------------------------------------------------------- 7,177,020 6,439,222 ---------------------------------------------------------------------------- Shareholders' equity Share capital (note 5) 2,242,031 2,113,849 Contributed surplus (note 5) 49,321 38,022 Retained earnings 431,380 382,227 Accumulated other comprehensive loss (note 7) (1,113) (38,634) ---------------------------------------------------------------------------- 2,721,619 2,495,464 ---------------------------------------------------------------------------- 9,898,639 8,934,686 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (unaudited) Three months ended Nine months ended May 31, May 31, ------------------------------------------ (thousands of Canadian dollars except per share amounts) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Restated Restated - note 1 - note 1 Service revenue (note 2) 943,632 861,382 2,778,708 2,517,994 Operating, general and administrative expenses 507,810 465,835 1,443,109 1,372,285 ---------------------------------------------------------------------------- Service operating income before amortization (note 2) 435,822 395,547 1,335,599 1,145,709 Amortization: Deferred IRU revenue 3,137 3,137 9,410 9,410 Deferred equipment revenue 29,865 33,341 91,608 100,319 Deferred equipment costs (56,497) (62,674) (174,146) (186,065) Deferred charges (256) (256) (768) (768) Property, plant and equipment (128,348) (114,492) (384,728) (326,726) Other intangibles (6,443) (5,895) (24,378) (21,245) ---------------------------------------------------------------------------- Operating income 277,280 248,708 852,597 720,634 Amortization of financing costs - long-term debt (962) (1,026) (3,015) (2,918) Interest expense - debt (note 2) (61,797) (61,083) (185,507) (174,647) ---------------------------------------------------------------------------- 214,521 186,599 664,075 543,069 Debt retirement costs - (8,255) (81,585) (8,255) Loss on financial instruments (note 10) (1,131) - (47,280) - Other gains (losses) (1,013) 9,822 8,342 18,816 ---------------------------------------------------------------------------- Income before income taxes 212,377 188,166 543,552 553,630 Current income tax expense (note 2) 22,051 - 127,332 - Future income tax expense 29,410 55,903 2,363 141,321 ---------------------------------------------------------------------------- Income before the following 160,916 132,263 413,857 412,309 Equity income loss on investee (note 11) (2,700) (112) (2,700) (99) ---------------------------------------------------------------------------- Net income 158,216 132,151 411,157 412,210 Retained earnings, beginning of period 368,264 309,384 384,747 226,408 Adjustment for adoption of new accounting policy (note 1) - (3,003) (2,520) (3,756) ---------------------------------------------------------------------------- Retained earnings, beginning of period restated 368,264 306,381 382,227 222,652 Reduction on Class B Non-Voting Shares purchased for cancellation (note 5) - - (85,143) (25,017) Dividends - Class A Shares and Class B Non-Voting Shares (95,100) (90,260) (276,861) (261,573) ---------------------------------------------------------------------------- Retained earnings, end of period 431,380 348,272 431,380 348,272 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per share (note 6) Basic and diluted 0.37 0.31 0.95 0.96 ---------------------------------------------------------------------------- (thousands of shares) Weighted average participating shares outstanding during period 432,323 429,877 432,595 428,828 Participating shares outstanding, end of period 432,672 429,985 432,672 429,985 ---------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS (unaudited) Three months ended Nine months ended May 31, May 31, ---------------------------------------- (thousands of Canadian dollars) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Restated Restated - note 1 - note 1 Net income 158,216 132,151 411,157 412,210 Other comprehensive income (loss) (note 7) Change in unrealized fair value of derivatives designated as cash flow hedges (589) (167,756) (52,222) 20,033 Realized gains on cancellation of forward purchase contracts - - - 9,314 Adjustment for hedged items recognized in the period 1,730 2,960 12,643 8,983 Reclassification of foreign exchange loss (gain) on hedging derivatives to income to offset foreign exchange adjustments on US denominated debt - 149,610 34,940 (24,603) Reclassification of remaining losses on hedging derivatives to income upon early redemption of hedged US denominated debt - - 42,658 - Unrealized loss on available-for-sale investment (786) - (496) - Unrealized foreign exchange gain (loss) on translation of a self sustaining foreign operation (1) (83) (2) 30 ---------------------------------------------------------------------------- 354 (15,269) 37,521 13,757 ---------------------------------------------------------------------------- Comprehensive income 158,570 116,882 448,678 425,967 Accumulated other comprehensive loss, beginning of period (1,467) (28,648) (38,634) (57,674) Other comprehensive income (loss) 354 (15,269) 37,521 13,757 ---------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period (1,113) (43,917) (1,113) (43,917) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended Nine months ended May 31, May 31, -------------------------------------------- (thousands of Canadian dollars) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Restated Restated - note 1 - note 1 OPERATING ACTIVITIES (note 8) Funds flow from operations 350,810 356,046 1,047,968 1,002,521 Net decrease (increase) in non-cash working capital balances related to operations (22,266) (27,955) (6,277) 28,166 ---------------------------------------------------------------------------- 328,544 328,091 1,041,691 1,030,687 ---------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to property, plant and equipment (note 2) (150,733) (164,029) (481,290) (474,190) Additions to equipment costs (net) (note 2) (20,733) (22,350) (72,221) (91,903) Additions to other intangibles (note 2) (11,079) (14,462) (25,859) (46,005) Proceeds on cancellation of US forward purchase contracts - - - 13,384 Net reduction (addition) to inventories 5,015 (708) 535 (13,259) Deposits on wireless spectrum licenses - - - (152,465) Cable business acquisition (note 3) (3,111) 66 (158,805) (46,300) Purchase of Government of Canada bond (note 10) - - (158,968) - Proceeds on disposal of property, plant and equipment (note 2) 150 191 261 21,811 Addition to investments and other assets (note 11) (741,672) - (741,721) - ---------------------------------------------------------------------------- (922,163) (201,292) (1,638,068) (788,927) ---------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in bank indebtedness 5,262 (13,827) 5,262 (44,201) Increase in long-term debt, net of discounts - 598,224 1,891,656 839,839 Senior notes issuance costs (159) (4,684) (10,077) (4,684) Long-term debt repayments (136) (245,128) (1,016,572) (426,993) Payments on cross-currency agreements (note 10) - - (291,920) - Debt retirement costs - (9,161) (79,488) (9,161) Proceeds on cancellation of bond forward contract - - - 10,757 Issue of Class B Non-Voting Shares, net of after-tax expenses (note 5) 13,803 3,158 39,291 52,853 Purchase of Class B Non-Voting Shares for cancellation (note 5) - - (118,150) (33,574) Dividends paid on Class A Shares and Class B Non-Voting Shares (95,100) (90,260) (276,861) (261,573) ---------------------------------------------------------------------------- (76,330) 238,322 143,141 123,263 ---------------------------------------------------------------------------- Effect of currency translation on cash balances and cash flows - (74) (1) 24 ---------------------------------------------------------------------------- Increase (decrease) in cash (669,949) 365,047 (453,237) 365,047 Cash, beginning of the period 669,949 - 453,237 - ---------------------------------------------------------------------------- Cash, end of the period - 365,047 - 365,047 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash includes cash, cash equivalents and short-term securities See accompanying notes NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) May 31, 2010 and 2009 (all amounts in thousands of Canadian dollars, except per share amounts) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The unaudited interim Consolidated Financial Statements include the accounts of Shaw Communications Inc. and its subsidiaries (collectively the "Company"). The notes presented in these unaudited interim Consolidated Financial Statements include only significant events and transactions occurring since the Company's last fiscal year end and are not fully inclusive of all matters required to be disclosed in the Company's annual audited consolidated financial statements. As a result, these unaudited interim Consolidated Financial Statements should be read in conjunction with the Company's consolidated financial statements for the year ended August 31, 2009. The unaudited interim Consolidated Financial Statements follow the same accounting policies and methods of application as the most recent annual consolidated financial statements except as noted below. Spectrum licenses During the first quarter, the Company received its ownership compliance decision from Industry Canada and was granted its Advanced Wireless Spectrum ("AWS") licenses. Accordingly, the deposits on spectrum licenses were then reclassified from Investments and other assets to Intangibles. AWS licenses have indefinite useful lives and are not amortized but will be subject to an annual review for impairment by comparing the estimated fair value to the carrying amount. Adoption of recent accounting pronouncements Goodwill and intangible assets Effective September 1, 2009, the Company adopted CICA Handbook Section 3064, "Goodwill and Intangible Assets", which replaces Sections 3062, "Goodwill and Other Intangible Assets", and 3450, "Research and Development Costs". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. As a result, connection costs that had been previously deferred and amortized, no longer meet the recognition criteria for intangible assets. In addition, the new standard requires computer software, that is not an integral part of the related hardware, to be classified as an intangible asset. The provisions of Section 3064 were adopted retrospectively with restatement of prior periods. The impact on the Consolidated Balance Sheets as at May 31, 2010 and August 31, 2009 and on the Consolidated Statements of Income and Retained Earnings for the three and nine months ended May 31, 2010 and 2009 is as follows: Increase (decrease) ------------------------------- May 31, 2010 August 31, 2009 ------------------------------- $ $ ---------------------------------------------------------------------------- Consolidated balance sheets: Property, plant and equipment (122,599) (105,180) Deferred charges (3,436) (3,383) Intangibles 122,599 105,180 Future income taxes (868) (863) Retained earnings (2,568) (2,520) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Decrease in retained earnings: Adjustment for change in accounting policy (2,520) (3,756) Increase (decrease) in net income (48) 1,236 ---------------------------------------------------------------------------- (2,568) (2,520) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Nine months ended May 31, May 31, --------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- $ $ $ $ Consolidated statements of income: Decrease (increase) in operating, general and administrative expenses (370) 277 (53) 1,287 Decrease in amortization of property, plant and equipment 6,443 5,985 24,378 21,245 Increase in amortization of other intangibles (6,443) (5,895) (24,378) (21,245) Decrease (increase) in income tax expense 94 (71) 5 (328) ---------------------------------------------------------------------------- Increase (decrease) in net income and comprehensive income (276) 206 (48) 959 ---------------------------------------------------------------------------- Increase (decrease) in earnings per share - - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The cash outflows for additions to other intangibles have been reclassified from property, plant and equipment and presented separately in the Consolidated Statements of Cash Flows for the three and nine months ended May 31, 2010 and 2009. Recent accounting pronouncements International Financial Reporting Standards (IFRS) In February 2009, the CICA Accounting Standards Board (AScB) confirmed that Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), for fiscal periods beginning on or after January 1, 2011. These standards require the Company to begin reporting under IFRS in the first quarter of fiscal 2012 with comparative data for the prior year. The Company has developed its plan and has completed the preliminary identification and assessment of the accounting and reporting differences under IFRS as compared to Canadian GAAP. Evaluation of accounting policies is in progress; however, at this time, the full impact of adopting IFRS is not reasonably estimable or determinable. 2. BUSINESS SEGMENT INFORMATION The Company provides cable television services, high-speed Internet access, Digital Phone and Internet infrastructure services ("Cable"); DTH satellite services (Shaw Direct); and, satellite distribution services ("Satellite Services"). During the current quarter, the Company commenced its initial wireless activities and began reporting this new business as a separate operating unit. All of these operations are substantially located in Canada. Information on operations by segment is as follows: Operating information Three months ended Nine months ended May 31, May 31, ------------------------------------------ 2010 2009 2010 2009 $ $ $ $ ---------------------------------------------------------------------------- Service revenue Cable 746,322 670,977 2,189,505 1,952,142 DTH 181,962 172,639 541,328 512,223 Satellite Services 20,595 22,604 62,208 68,193 ---------------------------------------------------------------------------- 948,879 866,220 2,793,041 2,532,558 ---------------------------------------------------------------------------- Inter segment - Cable (1,111) (1,371) (3,533) (3,623) DTH (3,261) (2,592) (8,175) (8,316) Satellite Services (875) (875) (2,625) (2,625) ---------------------------------------------------------------------------- 943,632 861,382 2,778,708 2,517,994 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Service operating income before amortization (2) Cable 363,939 325,637 1,100,361 942,900 DTH 62,562 58,298 206,076 167,813 Satellite Services 9,411 11,612 29,252 34,996 Wireless (90) - (90) - ---------------------------------------------------------------------------- 435,822 395,547 1,335,599 1,145,709 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest (1) Cable 51,849 54,180 161,767 153,937 DTH and Satellite Services 6,563 6,564 19,688 19,688 Wireless (3) 3,055 - 3,055 - Burrard Landing Lot 2 Holdings Partnership 330 339 997 1,022 ---------------------------------------------------------------------------- 61,797 61,083 185,507 174,647 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash taxes (1) Cable 31,001 - 119,005 - DTH and Satellite Services 9,000 - 38,000 - Other/non-operating (17,950) - (29,673) - ---------------------------------------------------------------------------- 22,051 - 127,332 - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) The Company reports interest and cash taxes on a segmented basis for Cable, Wireless and combined satellite only. It does not report interest or cash taxes on a segmented basis for DTH and Satellite Services. (2) The nine months ended May 31, 2010 includes the impact of a one-time CRTC Part II fee recovery of $48,662 for Cable and $26,570 for combined satellite. (3) Interest is allocated to the Wireless division based on the Company's average cost of borrowing to fund the capital expenditures and operating costs. Capital expenditures Three months ending Nine months ending May 31, May 31, ------------------------------------------ 2010 2009 2010 2009 $ $ $ $ ---------------------------------------------------------------------------- Capital expenditures accrual basis Cable 148,134 153,517 444,557 426,381 Corporate 20,307 6,877 43,906 53,735 ---------------------------------------------------------------------------- Sub-total Cable including corporate 168,441 160,394 488,463 480,116 Satellite (net of equipment profit) 1,885 1,547 3,924 2,508 Wireless 9,178 - 9,178 - ---------------------------------------------------------------------------- 179,504 161,941 501,565 482,624 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Equipment costs (net of revenue received) Cable 3,058 1,765 12,879 27,575 Satellite 17,675 16,570 59,342 54,960 ---------------------------------------------------------------------------- 20,733 18,335 72,221 82,535 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures and equipment costs (net) Cable 171,499 162,159 501,342 507,691 Satellite 19,560 18,117 63,266 57,468 Wireless 9,178 - 9,178 - ---------------------------------------------------------------------------- 200,237 180,276 573,786 565,159 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Reconciliation to Consolidated Statements of Cash Flows Additions to property, plant and equipment 150,733 164,029 481,290 474,190 Additions to equipment costs (net) 20,733 22,350 72,221 91,903 Additions to other intangibles 11,079 14,462 25,859 46,005 ---------------------------------------------------------------------------- Total of capital expenditures and equipment costs (net) per Consolidated Statements of Cash Flows 182,545 200,841 579,370 612,098 Increase (decrease) in working capital related to capital expenditures 18,620 (15,491) (3,095) (13,206) Less: Realized gains on cancellation of US dollar forward purchase contracts (1) - (4,015) - (9,368) Less: Proceeds on disposal of property, plant and equipment (150) (191) (261) (21,811) Less: Satellite equipment profit (2) (778) (868) (2,228) (2,554) ---------------------------------------------------------------------------- Total capital expenditures and equipment costs (net) reported by segments 200,237 180,276 573,786 565,159 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) During the first quarter of the prior year, the Company realized gains totaling $13,384 on cancellation of certain of its US dollar forward purchase contracts in respect of capital expenditures and equipment costs. The gains were included in other comprehensive income and reclassified to the initial carrying amount of capital assets or equipment costs when the assets were recognized. (2) The profit from the sale of satellite equipment is subtracted from the calculation of segmented capital expenditures and equipment costs (net) as the Company views the profit on sale as a recovery of expenditures on customer premise equipment. Assets May 31, 2010 -------------------------------------------------------- Satellite Cable DTH Services Wireless Total $ $ $ $ $ ---------------------------------------------------------------------------- Segment assets 7,059,126 842,946 486,879 200,090 8,589,041 ---------------------------------------------------------------- ---------------------------------------------------------------- Corporate assets 1,309,598 ----------- Total assets 9,898,639 ----------- August 31, 2009 -------------------------------------------------------- Satellite Cable DTH Services Wireless Total $ $ $ $ $ ---------------------------------------------------------------------------- Segment assets 6,599,120 855,283 498,720 190,912 8,144,035 ---------------------------------------------------------------- ---------------------------------------------------------------- Corporate assets 790,651 ----------- Total assets 8,934,686 ----------- 3. BUSINESS ACQUISITION May 31, 2010 -------------------------------------------- Issuance of Class B Total purchase Cash (1) Non-Voting Shares price $ $ $ ---------------------------------------------------------------------------- Cable system 163,875 120,000 283,875 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) The cash consideration paid, net of cash acquired of $5,070, was $158,805. A summary of net assets acquired on the Hamilton cable business acquisition, accounted for as a purchase, is as follows: $ ---------------------------------------------------------------------------- Net assets acquired at assigned fair values Investments 206 Property, plant and equipment 57,796 Broadcast rights 245,000 Goodwill, not deductible for tax 81,032 ---------------------------------------------------------------------------- 384,034 Working capital deficiency (27,397) Future income taxes (72,762) ---------------------------------------------------------------------------- 283,875 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Company closed the purchase of all of the outstanding shares of Mountain Cablevision in Hamilton, Ontario in late October 2009. The cable system serves approximately 41,000 basic subscribers and results of operations have been included commencing November 1, 2009. 4. LONG-TERM DEBT May 31, 2010 ---------------------------------------- Effective Long-term Long-term interest debt at Adjustment debt rates amortized for finance repayable at % cost (1) costs (1) maturity $ $ $ ---------------------------------------------------------------------------- Corporate Senior notes- Cdn $600,000 6.50% due June 2, 2014 6.56 594,653 5,347 600,000 Cdn $400,000 5.70% due March 2, 2017 5.72 396,004 3,996 400,000 Cdn $450,000 6.10% due November 16, 2012 6.11 447,520 2,480 450,000 Cdn $300,000 6.15% due May 9, 2016 6.34 292,731 7,269 300,000 Cdn $1,250,000 5.65% due October 1, 2019 (3) 5.69 1,240,500 9,500 1,250,000 Cdn $650,000 6.75% due November 9, 2039 (4) 6.80 641,675 8,325 650,000 US $440,000 8.25% due April 11, 2010 (2) 7.88 - - - US $225,000 7.25% due April 6, 2011 (2) 7.68 - - - US $300,000 7.20% due December 15, 2011 (2) 7.61 - - - Cdn $350,000 7.50% due November 20, 2013 7.50 346,942 3,058 350,000 ---------------------------------------------------------------------------- 3,960,025 39,975 4,000,000 ---------------------------------------------------------------------------- Other subsidiaries and entities Burrard Landing Lot 2 Holdings Partnership 6.31 21,084 88 21,172 ---------------------------------------------------------------------------- Total consolidated debt 3,981,109 40,063 4,021,172 Less current portion (5) 548 19 567 ---------------------------------------------------------------------------- 3,980,561 40,044 4,020,605 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- August 31, 2009 ---------------------------------------- Adjustment Translated for Long- Effective at year hedged term debt interest end debt and repayable rates exchange finance at % rate (1) costs (1)(2) maturity $ $ $ ---------------------------------------------------------------------------- Corporate Senior notes- Cdn $600,000 6.50% due June 2, 2014 6.56 593,824 6,176 600,000 Cdn $400,000 5.70% due March 2, 2017 5.72 395,646 4,354 400,000 Cdn $450,000 6.10% due November 16, 2012 6.11 446,836 3,164 450,000 Cdn $300,000 6.15% due May 9, 2016 6.34 291,987 8,013 300,000 Cdn $1,250,000 5.65% due October 1, 2019 (3) 5.69 - - - Cdn $650,000 6.75% due November 9, 2039 (4) 6.80 - - - US $440,000 8.25% due April 11, 2010 (2) 7.88 481,198 161,422 642,620 US $225,000 7.25% due April 6, 2011 (2) 7.68 245,632 110,206 355,838 US $300,000 7.20% due December 15, 2011 (2) 7.61 327,512 149,338 476,850 Cdn $350,000 7.50% due November 20, 2013 7.50 346,380 3,620 350,000 ---------------------------------------------------------------------------- 3,129,015 446,293 3,575,308 ---------------------------------------------------------------------------- Other subsidiaries and entities Burrard Landing Lot 2 Holdings Partnership 6.31 21,473 101 21,574 ---------------------------------------------------------------------------- Total consolidated debt 3,150,488 446,394 3,596,882 Less current portion (5) 481,739 161,422 643,161 ---------------------------------------------------------------------------- 2,668,749 284,972 2,953,721 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Long-term debt, excluding bank loans, is presented net of unamortized discounts, finance costs and bond forward proceeds of $40,063. (August 31, 2009 - $27,761). (2) Foreign denominated long-term debt was translated at the year-end foreign exchange rate of 1.095 Cdn. If the rate of translation had been adjusted to reflect the hedged rates of the Company's cross-currency interest rate agreements (which fixed the liability for interest and principal), long-term debt would have increased by $418,633. The US senior notes were redeemed in October 2009. (3) On October 1, 2009 the Company issued $1,250,000 of senior notes at a rate of 5.65%. The effective rate is 5.69% due to the discount on issuance. The senior notes are unsecured obligations that rank equally and ratably with all existing and future senior unsecured indebtedness. The notes are redeemable at the Company's option at any time in whole or in part, prior to maturity at 100% of the principal plus a make-whole premium. (4) On November 9, 2009, the Company issued $650,000 of senior notes at a rate of 6.75%. The effective rate is 6.80% due to the discount on issuance. The senior notes are unsecured obligations that rank equally and ratably with all existing and future senior unsecured indebtedness. The notes are redeemable at the Company's option at any time, in whole or in part, prior to maturity at 100% of the principal plus a make-whole premium. (5) Current portion of long-term debt at May 31, 2010 includes the amount due within one year on the Partnership's mortgage bonds. 5. SHARE CAPITAL Issued and outstanding Changes in Class A Share and Class B Non-Voting Share capital during the nine months ended May 31, 2010 are as follows: Class A Shares Class B Non-Voting Shares -------------------------------------------- Number $ Number $ ---------------------------------------------------------------------------- August 31, 2009 22,520,064 2,468 407,717,782 2,111,381 Issued upon stock option plan exercises - - 2,393,048 41,319 Issued in respect of an acquisition (note 3) - - 6,141,250 120,000 Share issue costs - - - (130) Purchase of shares for cancellation - - (6,100,000) (33,007) ---------------------------------------------------------------------------- May 31, 2010 22,520,064 2,468 410,152,080 2,239,563 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Purchase of shares for cancellation During the nine months ended May 31, 2010, the Company purchased 6,100,000 Class B Non-Voting Shares for cancellation for $118,150 of which $33,007 reduced the stated capital of the Class B Non-Voting Shares and $85,143 was charged against retained earnings. Stock option plan Under a stock option plan, directors, officers, employees and consultants of the Company are eligible to receive stock options to acquire Class B Non-Voting Shares with terms not to exceed 10 years from the date of grant. Options granted up to May 31, 2010 vest evenly on the anniversary dates from the original grant at either 25% per year over four years or 20% per year over five years. The options must be issued at not less than the fair market value of the Class B Non-Voting Shares at the date of grant. The maximum number of Class B Non-Voting Shares issuable under the plan may not exceed 52,000,000. To date 13,634,664 Class B Non-Voting Shares have been issued under the plan. During the nine months ended May 31, 2010, 2,393,048 options were exercised for $39,421. The changes in options for the nine months ended May 31, 2010 are as follows: Weighted average exercise price Number $ ---------------------------------------------------------------------------- Outstanding, beginning of period 23,714,667 20.21 Granted 961,000 19.69 Forfeited (666,548) 20.82 Exercised (2,393,048) 16.47 ---------------------------------------------------------------------------- Outstanding, end of period 21,616,071 20.58 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table summarizes information about the options outstanding at May 31, 2010: Number Weighted Number outstanding average Weighted exercisable Weighted Range at remaining average at average of May 31, contractual exercise May 31, exercise prices 2010 life price 2010 price ---------------------------------------------------------------------------- $8.69 20,000 3.39 $ 8.69 20,000 $ 8.69 $14.85 - $22.27 13,646,821 6.73 $18.34 6,707,215 $17.09 $22.28 - $26.20 7,949,250 7.26 $24.46 3,971,250 $24.46 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The weighted average estimated fair value at the date of the grant for common share options granted was $3.05 per option (2009 - $nil per option) and $3.12 per option (2009 - $3.78 per option) for the three and nine months ended, respectively. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: Three months ended Nine months ended May 31, May 31, ---------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Dividend yield 4.41% - 4.31% 3.73% Risk-free interest rate 2.31% - 2.37% 2.66% Expected life of options 5 years - 5 years 5 years Expected volatility factor of the future expected market price of Class B Non-Voting Shares 26.1% - 26.4% 25.7% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Contributed surplus The changes in contributed surplus are as follows: Nine months ended May 31, 2010 $ ---------------------------------------------------------------------------- Balance, beginning of period 38,022 Stock-based compensation 13,197 Stock options exercised (1,898) ---------------------------------------------------------------------------- Balance, end of period 49,321 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 6. EARNINGS PER SHARE Earnings per share calculations are as follows: Three months ending Nine months ending May 31, May 31, ----------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Numerator for basic and diluted earnings per share ($) Net income 158,216 132,151 411,157 412,210 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Denominator (thousands of shares) Weighted average number of Class A Shares and Class B Non-Voting Shares for basic earnings per share 432,323 429,877 432,595 428,828 Effect of dilutive securities 1,058 1,044 1,236 1,860 ---------------------------------------------------------------------------- Weighted average number of Class A Shares and Class B Non-Voting Shares for diluted earnings per share 433,381 430,921 433,831 430,688 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings per share ($) Basic 0.37 0.31 0.95 0.96 Diluted 0.37 0.31 0.95 0.96 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 7. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Components of other comprehensive income (loss) and the related income tax effects for the nine months ended May 31, 2010 are as follows: Amount Income taxes Net $ $ $ ---------------------------------------------------------------------------- Change in unrealized fair value of derivatives designated as cash flow hedges (63,086) 10,864 (52,222) Adjustment for hedged items recognized in the period 18,068 (5,425) 12,643 Reclassification of foreign exchange loss on hedging derivatives to income to offset foreign exchange gain on US denominated debt 40,505 (5,565) 34,940 Reclassification of remaining losses on hedging derivatives to income upon early redemption of hedged US denominated debt 50,121 (7,463) 42,658 Unrealized loss on available-for-sale investment (570) 74 (496) Unrealized foreign exchange loss on translation of a self-sustaining foreign operation (2) - (2) ---------------------------------------------------------------------------- 45,036 (7,515) 37,521 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Components of other comprehensive income (loss) and the related income tax effects for the three months ended May 31, 2010 are as follows: Amount Income taxes Net $ $ $ ---------------------------------------------------------------------------- Change in unrealized fair value of derivatives designated as cash flow hedges (966) 377 (589) Adjustment for hedged items recognized in the period 2,784 (1,054) 1,730 Unrealized loss on available-for-sale investment (903) 117 (786) Unrealized foreign exchange loss on translation of a self-sustaining foreign operation (1) - (1) ---------------------------------------------------------------------------- 914 (560) 354 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Components of other comprehensive income (loss) and the related income tax effects for the nine months ended May 31, 2009 are as follows: Amount Income taxes Net $ $ $ ---------------------------------------------------------------------------- Changes in unrealized fair value of derivatives designated as cash flow hedges 23,656 (3,623) 20,033 Proceeds on cancellation of forward purchase contracts 13,384 (4,070) 9,314 Adjustment for hedged items recognized in the period 8,765 218 8,983 Reclassification of foreign exchange gain on hedging derivatives to income to offset foreign exchange loss on US denominated debt (28,660) 4,057 (24,603) Unrealized foreign exchange gain on translation of a self-sustaining foreign operation 30 - 30 ---------------------------------------------------------------------------- 17,175 (3,418) 13,757 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Components of other comprehensive income (loss) and the related income tax effects for the three months ended May 31, 2009 are as follows: Amount Income taxes Net $ $ $ ---------------------------------------------------------------------------- Changes in unrealized fair value of derivatives designated as cash flow hedges (196,245) 28,489 (167,756) Adjustment for hedged items recognized in the period 2,688 272 2,960 Reclassification of foreign exchange loss on hedging derivatives to income to offset foreign exchange gain on US denominated debt 174,280 (24,670) 149,610 Unrealized foreign exchange loss on translation of a self-sustaining foreign operation (83) - (83) ---------------------------------------------------------------------------- (19,360) 4,091 (15,269) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated other comprehensive income (loss) is comprised of the following: May 31, 2010 August 31, 2009 $ $ ---------------------------------------------------------------------------- Unrealized foreign exchange gain on translation of a self-sustaining foreign operation 348 350 Unrealized loss on available-for-sale investment (496) - Fair value of derivatives (965) (38,984) ---------------------------------------------------------------------------- (1,113) (38,634) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 8. STATEMENTS OF CASH FLOWS Disclosures with respect to the Consolidated Statements of Cash Flows are as follows: (i) Funds flow from operations Three months ended Nine months ended --------------------------------------- May 31, May 31, 2010 2009 2010 2009 $ $ $ $ ---------------------------------------------------------------------------- Net income 158,216 132,151 411,157 412,210 Non-cash items: Amortization Deferred IRU revenue (3,137) (3,137) (9,410) (9,410) Deferred equipment revenue (29,865) (33,341) (91,608) (100,319) Deferred equipment costs 56,497 62,674 174,146 186,065 Deferred charges 256 256 768 768 Property, plant and equipment 128,348 114,492 384,728 326,726 Other intangibles 6,443 5,895 24,378 21,245 Financing costs - long-term debt 962 1,026 3,015 2,918 Future income tax expense 29,410 55,903 2,363 141,321 Equity loss on investee 2,700 112 2,700 99 Debt retirement costs - 8,255 81,585 8,255 Stock-based compensation 4,430 4,151 13,197 12,482 Defined benefit pension plan 6,969 6,513 20,906 19,539 Gain on cancellation of bond forward - - - (10,757) Adjustment for financial instruments (11,518) - 27,956 - Other 1,099 1,096 2,087 (8,621) ---------------------------------------------------------------------------- Funds flow from operations 350,810 356,046 1,047,968 1,002,521 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (ii) Changes in non-cash working capital balances related to operations include the following: Three months ended Nine months ended May 31, May 31, --------------------------------------- 2010 2009 2010 2009 $ $ $ $ ---------------------------------------------------------------------------- Accounts receivable 25,246 (421) (5,155) (11,715) Prepaids and other 2,964 1,463 2,356 (11,158) Accounts payable and accrued liabilities (73,579) (28,954) (122,966) 47,416 Income taxes payable 21,486 (53) 116,369 (405) Unearned revenue 1,617 10 3,119 4,028 ---------------------------------------------------------------------------- (22,266) (27,955) (6,277) 28,166 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (iii) Interest and income taxes paid and classified as operating activities are as follows: Three months ended Nine months ended --------------------------------------- May 31, May 31, 2010 2009 2010 2009 $ $ $ $ ---------------------------------------------------------------------------- Interest 103,873 91,684 218,393 205,889 Income taxes 860 85 4,189 401 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (iv) Non-cash transaction: The Consolidated Statements of Cash Flows exclude the following non-cash transaction: Nine months ended May 31, -------------------------- 2010 2009 $ $ ---------------------------------------------------------------------------- Issuance of Class B Non-Voting Shares on a cable system acquisition 120,000 - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 9. OTHER LONG-TERM LIABILITIES Other long-term liabilities include the long-term portion of the Company's defined benefit pension plan of $125,870 and the liability of $158,015 with respect to the principal components of the US $300,000 amended cross-currency interest rate agreements. The total benefit costs expensed under the Company's defined benefit pension were $7,331 (2009 - $6,875) and $21,992 (2009 - $20,625) for the three and nine months ended May 31, 2010, respectively. 10. FINANCIAL INSTRUMENTS During the first quarter, the Company redeemed all of its outstanding US $440,000 8.25% senior notes due April 11, 2010, US $225,000 7.25% senior notes due April 6, 2011 and US $300,000 7.20% senior notes due December 15, 2011. In conjunction with the redemption of the US $440,000 and US $225,000 senior notes, the Company paid $146,065 to unwind and settle a portion of the principal component of two of the associated cross-currency interest rate swaps and simultaneously entered into offsetting currency swap transactions for the remaining outstanding notional principal amounts (i.e. the end of swap notional exchanges) and paid $145,855 in respect of these offsetting swap transactions. The derivatives have been classified as held for trading as they are not accounted for as hedging instruments. In addition, upon redemption of the US $300,000 senior notes, the Company entered into amended agreements with the counterparties of the cross-currency agreements to fix the settlement of the principal liability on December 15, 2011 at $162,150. As a result, there is no further foreign exchange rate exposure in respect of the principal component of the cross-currency interest rate exchange agreements. Upon redemption of the underlying hedged US denominated debt, the associated cross-currency interest rate exchange agreements no longer qualify as cash flow hedges and the remaining loss in accumulated other comprehensive loss of $50,121 was reclassified to the income statement. All subsequent changes in the value of the above noted agreements will be recorded in the income statement. The total amount recorded was a loss of $1,131 and $47,280 for the three and nine months ended May 31, 2010, respectively. The Government of Canada bond purchased during the first quarter has been classified as available-for-sale and is recorded at its estimated fair value. 11. INVESTMENTS On May 3, 2010 the Company announced that it had entered into agreements to acquire 100% of the Broadcasting business of Canwest Global Communications Corp. ("Canwest") including all the equity interest in CW Investments Co. ("CW Media"), the company that owns the specialty channels acquired from Alliance Atlantis Communications Inc. in 2007 by Canwest and Goldman Sachs. The total consideration of approximately $2,000,000 includes approximately $815,000 of net debt at CW Media. During the current quarter, the Company completed certain portions of the acquisition including acquiring a 49.9% equity interest, a 29.9% voting interest, and an option to acquire an additional 14.8% equity interest and 3.4% voting interest in CW Media for total consideration of $742,900, including acquisition costs. It is anticipated the outstanding portions of the acquisition will close early in fiscal 2011 upon receipt of all necessary approvals, including Canwest creditor, Court, CRTC, and the Competition Bureau. The Company exercises significant influence over CW Media with its 49.9% ownership interest and therefore accounts for this investment under the equity method whereby the investment is initially recorded at cost and adjusted thereafter to recognize the Company's proportionate share of CW Media's income or loss after the date of acquisition. The difference between the cost of the 49.9% equity investment in CW Media and the Company's share of the underlying net book value of CW Media's net assets on May 3, 2010 was approximately $150,000. As the transaction just recently closed, the Company is in the process of assessing the nature and accounting treatment of the components of this difference. Contacts: Shaw Communications Inc. Investor Relations [email protected] www.shaw.ca |