Newfoundland Capital Corporation Limited - Second Quarter 2009 - Period Ended June 30 (unaudited)

Thu. July 30, 2009; Posted: 04:42 PM

DARTMOUTH, NS, Jul 30, 2009 (Canada NewsWire via COMTEX) -- NFCAF | Quote | Chart | News | PowerRating -- Newfoundland Capital Corporation Limited (the "Company"), one of Canada's leading radio broadcasters, today announces its financial results for the second quarter ended June 30, 2009.

<< Highlights - Revenue has continued to show growth for the first six months of fiscal 2009. Consolidated revenue was $26.8 million in the quarter, on par with 2008 and $49.4 million year-to-date, a 3% increase over last year. While advertising revenue slowed during the second quarter, the Company is outpacing industry which has experienced negative growth in recent months. - Earnings before interest, taxes, depreciation and amortization ("EBITDA"(1)) were $6.2 million in the quarter and $9.3 million year-to-date, $3.7 million and $3.5 million lower than the respective prior periods due to lower investment income. Excluding investment income, EBITDA was $5.2 million in the quarter, 23% higher than the prior year. - Net income in the quarter was $3.1 million and $3.7 million year-to-date, $3.0 million lower than the same periods last year primarily due to lower investment income. Significant events - The Company announced in July that it entered into an agreement to sell its two FM radio stations in Thunder Bay, Ontario for $4.5 million. This is subject to approval by the Canadian Radio-television and Telecommunications Commission ("CRTC"). - Subsequent to quarter end, the Company completed its agreement to divest of CFDR-AM in Halifax, Nova Scotia in exchange for an AM station in Sudbury, Ontario and proceeds of $5.0 million which were used to reduce debt. "We have maintained a positive growth rate for the first half of the year despite the fact that industry-wide, many companies are experiencing declining growth rates", commented Rob Steele, President and Chief Executive Officer. "Our short-term goals are to continue growing existing operations and reducing debt. Our research and continued focus on programming have gained us market share in key locations such as Edmonton and Calgary, Alberta. These gains position us well to maintain better than industry growth rates for the second half of the year." Financial Highlights - Second Quarter (restated)(2) (thousands of dollars except share information) 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue $ 26,772 26,798 EBITDA(1) 6,222 9,933 Net income 3,144 6,157 ------------------------------------------------------------------------- Earnings per share - basic 0.29 0.56 - diluted 0.28 0.54 Share price, NCC.A (closing) 22.00 19.00 Weighted average number of shares outstanding (in thousands) 10,991 10,991 ------------------------------------------------------------------------- Total assets 237,790 240,375 Long-term debt 71,840 66,500 Shareholders' equity 95,005 107,627 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to page 14 for the reconciliation of EBITDA to net income. (2) Refer to page 11 for additional information on restatement of comparative figures. Management's Discussion and Analysis The following interim discussion and analysis of financial condition and results of operations of Newfoundland Capital Corporation Limited (the "Company") has been prepared as of July 30, 2009. The purpose of the Management's Discussion and Analysis ("MD&A") is to provide readers with additional complementary information regarding the Company's financial condition and results of operations and should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the periods ended June 30, 2009 and 2008 as well as the annual audited consolidated financial statements and related notes and the MD&A contained in the Company's 2008 Annual Report. These documents along with the Company's Annual Information Form and other public information are filed electronically with various securities commissions in Canada through the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed at www.sedar.com. Management's Discussion and Analysis of financial condition and results of operations contains forward-looking statements. These forward-looking statements are based on current expectations. The use of terminology such as "expect", "intend", "anticipate", "believe", "may", "will", and other similar terminology relate to, but are not limited to, our objectives, goals, plans, strategies, intentions, outlook and estimates. By their very nature, these statements involve inherent risks and uncertainties, many of which are beyond the Company's control, which could cause actual results to differ materially from those expressed in such forward-looking statements. Readers are cautioned not to place undue reliance on these statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Corporate Profile The Company is one of Canada's leading radio broadcasters with 81 licences across Canada. The Company reaches millions of listeners each week through a variety of formats and is a recognized industry leader in radio programming, sales and networking. Strategy and Objectives The Company's long-term strategy has not changed since the publication of the Company's 2008 Annual Report. Maximizing returns on existing operations, converting AM stations to FM, and adding new licences through business and licence acquisitions and through the Canadian Radio-television and Telecommunications Commission ("CRTC") licence application process form the basis of the long-term plan. While management is committed to long-term growth, due to the uncertain economic climate its short-term goals have been re-aligned to focus on growth of existing operations and reducing debt. Acquisition opportunities that fit the Company's growth strategy will continue to be explored; however, management will not proceed with any transactions, projects or activities that are not cash accretive in the near term, pose unnecessary risks, or result in increasing debt to a level beyond management's tolerance. Decisions as to proceeding with new undertakings will be made in the best interest of the Company and its shareholders. The decision to divest of the two FM radio stations in Thunder Bay, Ontario was made because there was little opportunity to expand the presence of the Company and build on a cluster of stations in close proximity to Thunder Bay. The Company therefore decided to divest itself of these non-core properties and re-deploy the capital for other uses. Corporate Developments The following is a review of the key corporate developments which should be considered when reviewing the "Consolidated Financial Review" section. 2009 developments - January 2009 - Received CRTC approval for four new FM repeater licences. These will allow the Company to broadcast the two FM stations in Charlottetown, Prince Edward Island to two new communities in the same province. - March 2009 - Hot 89.9, located in Ottawa, Ontario, was named the 2008 Contemporary Hits Radio station of the year during Canada Music Week. - April 2009 - CRTC approved two AM to FM conversions for stations in St. Paul and High Prairie, Alberta. - June 2009 - CRTC approved the Company's applications to convert AM stations to FM in Wabush and Goose Bay, Newfoundland and Labrador. - June 2009 - Re-launched CFUL in Calgary, Alberta as a Contemporary Hits Radio format, branded as AMP Radio. This format is similar to Hot 89.9 in Ottawa, Ontario which has been a very successful station for the Company. - July 2009 - Announced it had entered into an agreement to divest of its two FM radio stations in Thunder Bay, Ontario for cash consideration of $4.5 million. The transaction is subject to CRTC approval. 2008 developments - March 2008 - Re-launched two stations in Alberta; CIQX-FM in Calgary as XL103-FM, and CKRA-FM in Edmonton as Capital-FM. Both feature Classic Hits from the 60's, 70's, and 80's and are outperforming their predecessors. - June 2008 - Launched three new FM stations in Fort McMurray, Alberta, and in Kentville and Sydney, Nova Scotia. The formats are Classic Rock for Fort McMurray and Kentville while the Sydney station plays Top 40 music. - July 2008 - Completed the purchase of the remaining 50% interest in Metro Radio Group Inc. for $8.5 million. Metro Radio Group Inc. operates CKUL-FM in Halifax, Nova Scotia. - July 2008 - Announced an agreement to exchange radio stations with Rogers Broadcasting Limited ("Rogers" - a Division of Rogers Communications Inc. RCI.A and RCI.B) subject to approval from the CRTC. The Company will exchange its AM broadcast licence in Halifax, Nova Scotia and receive in return Rogers' AM licence in Sudbury, Ontario and cash consideration of $5.0 million. Both simultaneously submitted applications for this transfer of assets along with applications requesting conversion of the AM licences to FM. In November 2008, the CRTC approved these applications. The new Sudbury FM will be launched in the third quarter. The transaction closed subsequent to quarter end and the proceeds were used to reduce debt. - July 2008 - CRTC approved the Company's application for a new FM repeating signal in Pincher Creek, Alberta. This was on-air in early January 2009. - December 2008 - CRTC approved the Company's application to convert an AM signal to FM in Athabasca, Alberta. The FM station will be launched in the third quarter. The results of the above acquired or launched stations have been included in the consolidated financial statements since the respective acquisition and launch dates. Consolidated Financial Review For full details explaining the variances in revenue, other income, operating expenses and EBITDA, please refer to the section entitled "Financial Review by Segment". Revenue In the quarter consolidated revenue of $26.8 million was on par with last year. Year-to-date consolidated revenue of $49.4 million was $1.4 million or 3% higher than the prior year. The improvement was derived from the Broadcasting segment. Other income Other income for the quarter of $1.0 million was lower than last year's $5.7 million. Year-to-date other income of $2.0 million was also lower than last year's $6.6 million. In the prior year the Company had significant unrealized gains. Operating expenses Consolidated operating expenses of $21.5 million were $1.0 million or 4% lower than the second quarter last year. For the six months ended June 30, 2009, consolidated operating expenses of $42.2 million were $0.3 million or 1% higher than 2008. Earnings before interest, taxes, depreciation and amortization ("EBITDA"(1)) Consolidated EBITDA in the quarter was $6.2 million, $3.7 million lower than last year while year-to-date EBITDA of $9.3 million was lower than 2008 by $3.5 million. These declines were due to higher Other income in 2008. Depreciation and amortization For the quarter and year-to-date, depreciation and amortization expense was slightly higher than last year due to a larger asset base. Interest expense Interest expense of $0.9 million was on par with the same quarter last year. Year-to-date, interest expense of $1.9 million was $0.1 million higher than the prior year due to higher average debt levels. Accretion of other liabilities Accretion of other liabilities arises from discounting Canadian Content Development ("CCD") commitments to reflect the fair value of the obligations. The expense in the quarter and for the six month period was on par with last year. Income taxes The effective income tax rate of 26% this quarter and 28% year-to-date was lower than the statutory rate of 36% mainly because investment income is taxed at one-half the normal tax rate. Net income Net income in the quarter was $3.1 million and $3.7 million year-to-date; $3.0 million lower than the respective periods in 2008. In 2008 the company had significant unrealized investment gains in income. Other comprehensive income ("OCI") OCI consists of the net change in the fair value of the Company's cash flow hedges. These include interest rate swaps and an equity total return swap. The after-tax income recorded in OCI for the interest rate swaps was $1.7 million in the quarter (2008 - $0.1 million) and year-to-date was $1.8 million (2008 - after-tax expense of $0.3 million). The after-tax gain related to the equity total return swap was $0.4 million for the quarter (2008 - $0.2 million after-tax loss). Year-to-date, the after-tax gain was $0.8 million (2008 - $0.3 million after-tax loss). Financial Review by Segment Consolidated financial figures include the results of operation of the Company's two separately reported segments - Broadcasting and Corporate and Other. The Company provides information about segment revenue, segment EBITDA and operating income because these financial measures are used by its key decision makers in making operating decisions and evaluating performance. For additional information about the Company's segmented information, see note 11 of the Company's unaudited interim consolidated financial statements. As a result of adopting a new accounting policy, as required by the Canadian Institute of Chartered Accountants (more fully described in note 2 of the Company's unaudited interim consolidated financial statements), the 2008 operating expenses were restated to include costs that were previously capitalized as pre-operating costs for comparative purposes only. Operating expenses were increased by $0.4 million in the quarter and by $0.8 million year-to-date. As more fully disclosed in note 4 of the Company's unaudited interim consolidated financial statements, the revenue, operating expenses and EBITDA from discontinued operations have been excluded from the Broadcasting segment results presented in the table below for 2009 and 2008. Financial Results by Segment (thousands of dollars, except percentages) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended June 30 Six months ended June 30 2009 2008 Growth 2009 2008 Growth ------------------------------------------------------------------------- Revenue Broadcasting $ 25,967 25,919 - 47,764 46,392 3% Corporate and Other 805 879 (8%) 1,668 1,615 3% ------------------------------------------------------------------------- Consolidated revenue 26,772 26,798 - 49,432 48,007 3% ------------------------------------------------------------------------- Other income Corporate and Other 998 5,688 - 2,005 6,605 - ------------------------------------------------------------------------- Consolidated revenue and Other income 27,770 32,486 (15%) 51,437 54,612 (6%) ------------------------------------------------------------------------- Operating expenses Broadcasting 18,847 19,478 (3%) 37,215 36,352 2% Corporate and Other 2,701 3,075 (12%) 4,949 5,472 (10%) ------------------------------------------------------------------------- Consolidated operating expenses 21,548 22,553 (4%) 42,164 41,824 1% ------------------------------------------------------------------------- EBITDA Broadcasting 7,120 6,441 11% 10,549 10,040 5% Corporate and Other (898) 3,492 - (1,276) 2,748 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated EBITDA $ 6,222 9,933 (37%) 9,273 12,788 (27%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA Margins 2009 2008 Growth 2009 2008 Growth ------------------------------------------------------------------------- ------------------------------------------------------------------------- Broadcasting 27% 25% 2% 22% 22% - Consolidated 22% 31% (9%) 18% 23% (5%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Broadcasting segment The Broadcasting segment derives its revenue from the sale of broadcast advertising from its 81 licences across the country. The performance of all reporting units within this segment is evaluated based on the same financial measure - EBITDA. Broadcasting revenue in the quarter of $26.0 million was on par with last year; however, on a year-to-date basis, Broadcasting revenue grew by 3% to $47.8 million. Industry-wide, advertising revenue has slowed; however, the Company has managed to outpace industry and achieve overall growth to-date. The increases were attributable to the new FM stations launched in summer 2008 and strong results posted in Atlantic Canada where same-station revenue has exceeded last year by 3%. Generally, revenue for the stations in Alberta and Ontario has continued to show some softening; however, management expects the Company to continue to outpace the industry. The Bureau of Broadcast Measurement ("BBM") released its spring ratings in May and important market share gains were realized in Calgary and Edmonton, Alberta. Looking at the split between national and local revenue, the Company continues to achieve very strong numbers locally but is being negatively affected by the overall lower spend by national advertisers. The relationships with local advertisers, customers and the communities in which the Company operates have been instrumental in maintaining positive growth overall. For the quarter, Broadcasting operating expenses were $18.8 million, a decrease of $0.6 million or 3% from last year. Year-to-date operating expenses of $37.2 million were $0.9 million or 2% higher than 2008. Last year a one-time $0.9 million charge for CRTC Part II Licence Fees was booked in the second quarter, of which $0.6 million related to a prior period and $0.1 million related to the 2008 first quarter. In addition, operating expenses in 2008 were restated for comparative purposes relating to pre-operating costs of $0.4 million in the quarter and $0.8 million year-to-date. Excluding these one-time amounts from the comparative figures, the 2009 operating costs were slightly higher because of incremental expenses related to the new FM stations launched last summer and increased marketing and programming costs to improve market share. Broadcasting EBITDA in the first quarter of $7.1 million was $0.7 million or 11% better than last year while the year-to-date amount of $10.5 million was $0.5 million or 5% better. Corporate and Other segment This segment's revenue is from hotel operations and Other income is investment income from the Company's marketable securities. This segment also includes expenses attributed to head office functions. This segment's revenue in the second quarter of $0.8 million was $0.1 million or 8% lower than last year, while the year-to-date amount of $1.7 million was $0.1 million or 3% higher. The variations were due to hotel revenue. Other income consists of realized and unrealized gains and losses related to marketable securities, interest, dividends and distributions from investments. Unrealized gains on the marketable securities were $1.0 million in the quarter and $2.0 million year-to-date, significantly lower than the respective comparative periods. Additionally, in 2008, realized gains on the disposition of certain marketable securities totaled $0.7 million in the quarter and $0.8 million for the six months ended June 30, 2008. To date in 2009, no dispositions have taken place. Second quarter operating expenses of $2.7 million were down from $3.1 million. Year-to-date, this segment's operating expenses were $4.9 million, down from last year's $5.5 million. The primary reason for these decreases was lower costs associated with executive compensation. The above-noted decreases in investment income were the primary reason for the lower Corporate and Other EBITDA results for 2009. Selected Quarterly Financial Information The Company's revenue is derived primarily from the sale of advertising airtime which is subject to seasonal fluctuations and as such the first quarter of the year is generally a period of lower retail spending. Other factors affecting the variability of net income in the quarters presented below are as follows. In 2008, the unrealized changes in the value of marketable securities affected net income in the quarters as follows: positive variance of $4.8 million in the second quarter and negative fluctuations of $8.8 million and $4.6 million in the third and fourth quarters, respectively. (thousands of dollars except per 2009 2008 (restated) 2007 (restated) share ---------------- ------------------------------ ---------------- data) 2nd 1st 4th 3rd 2nd 1st 4th 3rd ------------------------------------------------------------------------- ------------------------------------------------------------------------- Reve- nue $ 26,772 22,660 29,306 26,069 26,798 21,209 27,060 24,793 Net income (loss) 3,144 552 (3,796) (7,580) 6,157 574 5,613 1,179 Earnings per share - Basic 0.29 0.05 (0.34) (0.69) 0.56 0.05 0.51 0.11 - Dilu- ted 0.28 0.05 (0.34) (0.69) 0.54 0.05 0.49 0.11 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liquidity and capital resources Below is a summary of cash inflows and outflows for the quarters and the six month periods ended June 30, 2009 and 2008. Selected cash flow information - three months ended June 30, 2009 Cash from operating activities of $2.2 million was used primarily to finance property and equipment additions of $1.9 million. Selected cash flow information - three months ended June 30, 2008 Cash from operating activities of $3.9 million combined with net long-term debt borrowings of $2.0 million were used largely to finance property and equipment additions of $2.5 million and to repurchase capital stock for $1.8 million. Selected cash flow information - six months ended June 30, 2009 Cash from operating activities of $6.2 million was used to purchase property and equipment totalling $2.5 million, to repay $2.0 million of long-term debt and to contribute $1.4 million toward CCD. Selected cash flow information - six months ended June 30, 2008 Cash from operating activities of $3.3 million combined with net long-term debt proceeds of $5.5 million were used mainly to finance property and equipment additions of $4.1 million, to repurchase capital stock for $1.8 million and to pay CCD in the amount of $1.1 million. Capital Structure and Debt Financing As at June 30, 2009, the Company had $2.2 million of current bank indebtedness outstanding and $71.8 million of long-term debt. The working capital of $5.7 million was $0.5 million higher than the December 31, 2008 balance which was due to a decrease in current liabilities. The capital structure consisted of 40% equity ($95.0 million) and 60% debt ($142.8 million). Credit Facility and Future Financing The Company's syndicated credit facility of $80.0 million is a revolving credit facility. The maturity date is June 2010. Management views this facility as a long-term obligation since it is expected to be renewed prior to the maturity date and as a result, there will be no scheduled repayments within one year. Given the current credit markets, it is expected that interest costs and bank fees will increase upon renewal; however, the exact amount of these increases are difficult to predict at this time. The Company has chosen this type of credit facility because it provides flexibility with no scheduled repayment terms. The Company is subject to covenants on its credit facility. The Company's debt covenants include certain maximum or minimum ratios such as total debt ratio, interest coverage and fixed charge coverage ratio. Other covenants include dividend payment restrictions, seeking prior approval for capital expenditures over a certain dollar limit, acquisitions in excess of a quantitative threshold and limits on the number of shares that can be repurchased in any given year. The Company was in compliance with the covenants throughout the quarter and at quarter end. Capital Expenditures and Capital Budget The capital expenditures for 2009 are expected to be approximately $5.0 million. One-half of the $5.0 million has been incurred to-date and was financed by cash provided from operations. The major capital expenditures include launching recently awarded AM to FM conversions as well as general improvements and upgrades. The Company continuously upgrades its broadcast equipment to improve operating efficiencies. Future Cash Requirements and Liquidity Risk Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or can do so only at excessive cost. The Company's growth is financed through a combination of the cash flows from operations and borrowings under the existing credit facility. One of management's primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows. Other than for operations, the Company's cash requirements are mostly for interest payments, repayment of debt, capital expenditures, Canadian Content Development payments, dividends and other contractual obligations disclosed below. Cash generated from operations, the availability of the credit facility, along with the cash proceeds of $9.5 million resulting from two business transactions (notes 4 and 13 of the unaudited interim consolidated financial statements) will provide sufficient funds to meet the Company's cash requirements. Commitments and Contractual Obligations There has been no substantial change in the Company's commitments and contractual obligations since the publication of the 2008 Annual Report. Off-Balance Sheet Arrangements The Company's off-balance sheet arrangements consist of operating leases. Other than these, which are considered in the ordinary course of business, the Company does not have any other off-balance sheet arrangements and does not expect to enter into any other such arrangement other than in the ordinary course of business. Financial Condition Capital employed Assets at quarter end totalled $237.8 million, up from $235.8 million at December 31, 2008 due to increases in property and equipment and other non-current assets. Share repurchases The Company has approval under a Normal Course Issuer Bid to repurchase up to 486,659 Class A Subordinate Voting Shares ("Class A shares") and 62,877 Class B Common Shares. This bid expires February 8, 2010. The Company has not repurchased any of its outstanding Class A shares in 2009. During the second quarter in 2008, the Company repurchased 100,000 of its Class A shares for a total cost of $1.8 million. Outstanding share data The weighted average number of shares outstanding was 10,991,000 as compared to last year's 11,041,000; the reduction due to the repurchase of Class A shares in April 2008 pursuant to the Normal Course Issuer Bid. As at July 30, 2009, there are 9,733,189 Class A shares and 1,257,551 Class B Common Shares outstanding. Executive Compensation Executive stock option plan Compensation expense related to stock options for the three months ended June 30, 2009 was less than $0.1 million (2008 - less than $0.1 million) and year-to-date was $0.1 million (2008 - $0.1 million). Refer to note 5 of the unaudited interim consolidated financial statements for further details relating to the executive stock option plan. Stock appreciation rights plan For the three months ended June 30, 2009, the compensation expense related to stock appreciation rights ("SARs") was $0.7 million (2008 - recovery of $0.1 million). The year-to-date expense was $0.9 million (2008 - less than $0.1 million). Refer to note 7 of the unaudited interim consolidated financial statements for further details relating to SARs. Derivative Financial Instruments For more detailed disclosures about derivative financial instruments and financial risk management, refer to note 9 of the unaudited interim consolidated financial statements. Interest rate risk management To hedge its exposure to fluctuating interest rates on its long-term debt, the Company has entered into interest rate swap agreements with Canadian chartered banks. The aggregate notional amount of the swap agreements was $60.0 million (2008 - $60.0 million). The Company formally assesses effectiveness of the swaps at inception and on a regular basis and has concluded that the swaps are effective in offsetting changes in interest rates. The aggregate fair value of the swap agreements, which represents the amount that would be payable by the Company if the agreements were terminated at June 30, 2009 was $4.5 million (2008 - $0.5 million). After-tax, the unrealized income recognized in OCI for the quarter was $1.7 million (2008 - $0.1 million) and on a year-to-date basis was $1.8 million (2008 - unrealized expense of $0.3 million). Share price volatility management To hedge its obligations under the stock appreciation rights plan, the Company entered into an equity total return swap agreement to reduce the volatility in cash flow and earnings due to possible future increases in the Company's share price. The Company has concluded that this cash flow hedge is effective. The estimated fair value of the equity total return swap receivable at June 30, 2009 was $1.9 million (2008 - $0.6 million). After-tax the unrealized non-cash gain recognized in OCI for the quarter was $0.4 million (2008 - loss of $0.2 million) and year-to-date was $0.8 million (2008 - loss of $0.3 million). Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The fair value of the Company's marketable securities is affected by changes in the quoted share prices in active markets. Such prices can fluctuate and are affected by numerous factors beyond the Company's control. In order to minimize the risk associated with changes in the share price of any one particular investment, the Company diversifies its portfolio by investing in various stocks in varying industries. It also conducts regular financial reviews of publicly available information related to its investments to determine if any identified risks are within tolerable risk levels. Despite the Company's intent to minimize this risk, the current stock market volatility has caused significant fluctuations in all its marketable securities. While it is uncertain when this volatility will fully stabilize, there has been improvement in the markets recently. Since December 31, 2008, the market value of the securities has increased by $2.0 million. As at June 30, 2009, a 10% change in the share prices of each marketable security would result in a $0.5 million after-tax change in net income. Credit Risk Credit risk is the exposure that the Company faces with respect to amounts receivable from other parties. Credit exposure is managed through credit approval and monitoring procedures. The Company is subject to normal credit risk with respect to its receivables. A large customer base and geographic dispersion minimize credit risk. The Company reviews its receivables for possible indicators of impairment on a regular basis and as such, it maintains a provision for potential credit losses. At June 30, 2009, the Company's credit exposure as it related to its receivables was deemed higher than in the past due to the recent Canadian economic conditions. The Company sells advertising airtime primarily to retail customers and since their results may also be impacted by the current economy, it is difficult to predict the impact this could have on the Company's receivables' balance. The Company maintains a provision for potential credit losses and it believes the provision to be adequate at this time given the current circumstances. The provision approximated $1.2 million as at June 30, 2009. Approximately 87% of trade receivables are outstanding for less than 90 days. Credit exposure on financial instruments arises from the possibility that a counterparty to an instrument in which the Company is entitled to receive payment fails to perform. With regard to the interest rate swaps and the equity total return swap, the Company does not anticipate any counterparties that it currently transacts with will fail to meet their obligations as the counterparties are Canadian Chartered Banks. Capital Management The Company defines its capital as shareholders' equity. The Company's objective when managing capital is to pursue its strategy of growth through acquisitions and through organic operations so that it can continue to provide adequate returns for shareholders. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new shares or repurchase shares. The Directors and Senior Management of the Company are of the opinion that from time to time the purchase of its shares at the prevailing market price would be a worthwhile investment and in the best interests of the Company and its shareholders. Material transactions and those considered to be outside the ordinary course of business, such as acquisitions and other major investments or disposals, are reviewed and approved by the Board of Directors. The Board of Directors has deferred the determination of the amount of dividends to be declared in 2009 until its December Board meeting. Adoption of new accounting policies Effective January 1, 2009, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064 - Goodwill and Intangible Assets. This Section establishes the standard for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this Section resulted in a change in how the Company accounts for its pre-operating costs related to new station launches. Prior to adopting this policy, the Company capitalized pre-operating costs and amortized them over the initial term of the related broadcast licences. Capitalization of these costs is no longer permitted and therefore will be recorded in net income as incurred. For pre-operating balances that existed on January 1, 2009, they were accounted for retrospectively with restatement of comparative figures in accordance with Section 1506 Accounting Changes. As a result of adopting this accounting policy, the effects on the comparative unaudited interim consolidated statements of income are presented below: Three months Six months ended ended June 30 June 30 (thousands of dollars) 2008 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses increased by $ 425 760 Amortization expense decreased by (134) (268) Provision for income tax expense decreased by (77) (130) ------------------------------------------------------------------------- Net income decreased by $ (214) (362) ------------------------------------------------------------------------- Basic and diluted earnings per share decreased by $ (0.02) (0.03) ------------------------------------------------------------------------- The impact on the unaudited interim consolidated balance sheets was as follows: December 31 June 30 (thousands of dollars) 2008 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other assets reduced by $ (2,858) (2,975) Long-term future income tax liabilities reduced by (824) (855) ------------------------------------------------------------------------- Retained earnings reduced by (2,034) (2,120) ------------------------------------------------------------------------- In 2009, amendments were made to certain paragraphs in CICA Section 3862 Financial Instruments - Disclosures which aligns the standard more closely with International Financial Reporting Standards ("IFRS"). Specifically, it provides enhanced disclosure requirements around fair value measurement of financial instruments and disclosure of liquidity risk. The amended paragraphs are to be applied for fiscal years ending on or after September 30, 2009. Earlier adoption is permitted. The Company does not anticipate any significant impact from the adoption of these disclosure requirements. During 2009, the CICA issued EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities which requires an entity to consider its own credit risk and that of its counterparty to a financial instrument when determining the fair value of financial assets and liabilities. This applies to the Company's derivative instruments. The adoption of this EIC did not have a significant impact on the Company. Future Accounting Policy Changes Following is a brief description of accounting policies that will be adopted by the Company in future. During 2009, the CICA issued Handbook Section 1582 Business Combinations which replaces Section 1581 bearing the same name. This Section is effective for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted, and the changes align the standard with the guidance in IFRS. Of the amendments in the Section, the one that will represent the most significant change in how the Company accounts for business combinations is the determination of the cost of the purchase. The cost that is allocated to the fair value of the net assets acquired is the direct cost of the business combination; indirect costs such as legal or restructuring are expensed. The Company will continue to evaluate the impact of these amendments. Section 1601 Consolidated Financial Statements and Section 1602 Non-controlling Interests were also issued and together replace Section 1600 Consolidated Financial Statements. These too are applicable for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted. The new sections establish standards for the preparation of consolidated financial statements and for the accounting of a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. On February 13, 2008, the Accounting Standards Board confirmed that International Financial Reporting Standards will be required for publicly accountable profit-oriented enterprises for fiscal years beginning on or after January 1, 2011. After that date, IFRS will replace Canadian GAAP for those enterprises. The Company will apply IFRS beginning January 1, 2011. The Company is currently evaluating the impact of adopting IFRS. Specifically, management is in the process of identifying the IFRS standards that are most likely to impact the Company and those that will require the most resources for implementation. Management is also in the process of making decisions as it relates to adopting IFRS for the first time and considering the exceptions and exemptions permitted under IFRS-1 First-time Adoption of International Financial Reporting Standards. Management is in the process of quantifying the impact the changes will have on its consolidated results. Subsequent Events In July 2009, the Company announced it had entered into an agreement to dispose of its two FM radio stations in Thunder Bay, Ontario for $4.5 million. This transaction is subject to CRTC approval. Net assets related to this divestiture were presented as assets and liabilities held for disposal in the unaudited interim consolidated balance sheets and net income from these stations was accounted for as discontinued operations. More information is contained in note 4 of the unaudited interim consolidated financial statements. In July 2009, the Sudbury/Halifax licence exchange transaction with Rogers was finalized. The $5.0 million consideration received was used to repay debt. Critical Accounting Estimates There has been no substantial change in the Company's critical accounting estimates since the publication of the 2008 Annual Report. Risks and Opportunities There has been no substantial change in the Company's risks and opportunities since the publication of the 2008 Annual Report; however, presented below is an update on the status of CRTC Part II Licence Fees reported in the 2008 Annual Report. The Company continues to accrue for CRTC Part II Licence Fees subsequent to the April 2008 Federal Court of Appeal decision to reverse a prior decision that ruled that the fees were an unlawful tax. An appeal was launched by the Canadian Association of Broadcasters ("CAB") in December 2008 and the Supreme Court of Canada granted the CAB leave to appeal. The hearing is scheduled for October 2009. To date, the Company has $1.9 million accrued for Part II Fees. Changes in Internal Controls over Financial Reporting There were no changes in the Company's internal controls over financial reporting that occurred in the six months ending June 30, 2009 that have materially affected, or are likely to materially affect, the Company's internal controls over financial reporting. Outlook The Company posted revenue growth in its core operating segment for the first six months of the year. Given the current uncertain economic climate, it is difficult to predict if growth will be sustainable throughout the rest of the year; however, the economy has begun to show some signs of improvement. The Company will do its best to endeavour to outpace industry growth rates with its increased market share in some key locations. Management will continue its efforts to manage costs to achieve EBITDA targets in the Broadcasting segment. Free cash flow will be used to repay long-term debt. The status of the Company's current growth initiatives are as follows: - The new Sudbury, Ontario FM station is expected to be launched in the third quarter. This second station in Sudbury will allow the Company to operate with economies of scale and improve operating margins in that market; - The Athabasca, Alberta AM station is being converted to FM and is expected to be on-air in the third quarter; - Management is in the planning stages of launching four repeater licences in Prince Edward Island and will begin planning the AM to FM conversions in St. Paul and High Prairie, Alberta and in Wabush and Goose Bay, Newfoundland and Labrador; and - Management continues to be active in submitting applications to the CRTC for new licences and for AM to FM conversions. The Company has enjoyed recent gains in ratings, it has reduced costs without impacting product quality, and it has a very talented pool of employees. The economy has begun to show signs of improvement and the Company is positioned to benefit when the economy improves. Non-GAAP Measure (1) EBITDA is defined as net income from continuing operations excluding depreciation and amortization expense, interest expense, accretion of other liabilities and provision for income taxes. A calculation of this measure is as follows: Three months ended Six months ended June 30 June 30 (restated) (restated) (thousands of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income from continuing operations $ 3,081 6,118 3,665 6,711 Provision for income taxes 1,067 1,821 1,398 2,116 Accretion of other liabilities 227 242 454 484 Interest expense 935 922 1,943 1,850 Depreciation and amortization expense 912 830 1,813 1,627 -------------------- -------------------- EBITDA $ 6,222 9,933 9,273 12,788 ------------------------------------------------------------------------- ------------------------------------------------------------------------- This measure is not defined by Generally Accepted Accounting Principles and is not standardized for public issuers. This measure may not be comparable to similar measures presented by other public enterprises. The Company has included this measure because the Company's key decision makers believe certain investors use it as a measure of the Company's financial performance and for valuation purposes. The Company also uses this measure internally to evaluate the performance of management. Newfoundland Capital Corporation Limited Notice of Disclosure of Non-Auditor Review of Interim Financial Statements for the three months and six months ended June 30, 2009 and 2008 Pursuant to National Instrument 51-102, Part 4, subsection 4.3(3)(a) issued by the Canadian Securities Administrators, the interim financial statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor if an auditor has not performed a review of the interim financial statements. The accompanying unaudited interim consolidated financial statements of the Company for the interim periods ended June 30, 2009 and 2008 have been prepared in accordance with Canadian generally accepted accounting principles and are the responsibility of the Company's management. The Company's independent auditors, Ernst & Young LLP, have not performed a review of these interim consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor. Dated this 30th day of July, 2009 Interim Consolidated Balance Sheets (unaudited) (restated) June 30 December 31 (thousands of dollars) 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ASSETS Current assets Marketable securities (note 9) $ 6,170 4,196 Receivables 20,942 23,621 Prepaid expenses 1,323 965 Other assets (note 9(c)) 856 - Future income tax assets 3,656 4,156 Current assets held for disposal (note 4) 429 442 -------------------------- Total current assets 33,376 33,380 Property and equipment 37,481 36,807 Other assets 5,501 4,167 Broadcast licences (notes 3 and 4) 148,396 148,396 Goodwill 7,045 7,045 Future income tax assets 2,113 2,069 Non-current assets held for disposal (note 4) 3,878 3,912 -------------------------- $ 237,790 235,776 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Bank indebtedness $ 2,161 2,003 Accounts payable and accrued liabilities 17,424 17,446 Income taxes payable 8,056 8,719 Current portion of long-term debt - 5 -------------------------- Total current liabilities 27,641 28,173 Long-term debt (note 9) 71,840 73,840 Other liabilities 20,419 23,953 Future income tax liabilities 21,297 19,575 Non-current liabilities held for disposal (note 4) 1,588 1,592 Shareholders' equity 95,005 88,643 -------------------------- $ 237,790 235,776 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (notes 9 and 12) Subsequent events (notes 4 and 13) See accompanying notes to the interim consolidated financial statements Interim Consolidated Statements of Income (unaudited) Three months ended Six months ended June 30 June 30 (thousands of dollars except (restated) (restated) per share data) 2009 2008 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue $ 26,772 26,798 49,432 48,007 Other income 998 5,688 2,005 6,605 ----------------------------------------- 27,770 32,486 51,437 54,612 Operating expenses (notes 2 and 12) 21,548 22,553 42,164 41,824 Depreciation 899 818 1,788 1,603 Amortization of deferred charges (note 2) 13 12 25 24 ----------------------------------------- Operating income 5,310 9,103 7,460 11,161 Interest expense (note 9) 935 922 1,943 1,850 Accretion of other liabilities (note 9) 227 242 454 484 ----------------------------------------- 4,148 7,939 5,063 8,827 Provision for income taxes (note 2) 1,067 1,821 1,398 2,116 ----------------------------------------- Net income from continuing operations 3,081 6,118 3,665 6,711 Net income from discontinued operations (note 4) 63 39 31 20 ----------------------------------------- Net income $ 3,144 6,157 3,696 6,731 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share from continuing operations (note 10) - basic $ 0.28 0.56 0.33 0.61 - diluted 0.27 0.54 0.32 0.59 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 10) - basic $ 0.29 0.56 0.34 0.61 - diluted 0.28 0.54 0.33 0.59 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the interim consolidated financial statements Interim Consolidated Statements of Shareholders' Equity (unaudited) Six months ended June 30 (restated) (thousands of dollars) 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings, beginning of period, as originally stated $ 50,581 59,621 Retrospective application of change in accounting policy (note 2) (2,034) (1,758) -------------------------- Retained earnings, beginning of period, as restated 48,547 57,863 Net income 3,696 6,731 Repurchase of capital stock - (1,373) -------------------------- Retained earnings, end of period 52,243 63,221 Capital stock 42,913 42,913 Contributed surplus (note 6) 2,044 1,857 Accumulated other comprehensive loss (2,195) (364) -------------------------- Total shareholders' equity $ 95,005 107,627 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the interim consolidated financial statements Interim Consolidated Statements of Comprehensive Income (unaudited) Three months ended Six months ended June 30 June 30 (restated) (restated) (thousands of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income $ 3,144 6,157 3,696 6,731 ----------------------------------------- Other comprehensive income: Change in fair values of cash flow hedges Interest rate swaps (note 9(b)): Unrealized increase (decrease) in fair value 2,326 143 2,268 (466) Reclassification to net income of realized interest expense 39 40 150 71 Related income tax recovery (expense) (644) (45) (644) 118 ----------------------------------------- 1,721 138 1,774 (277) ----------------------------------------- Total equity return swap (note 9(c)): Unrealized increase (decrease) in fair value 1,275 (425) 2,125 (425) Reclassification to net income of realized losses (gains) (741) 122 (1,059) (23) Related income tax recovery (expense) (121) 103 (273) 153 ----------------------------------------- 413 (200) 793 (295) ----------------------------------------- Other comprehensive income (loss) 2,134 (62) 2,567 (572) ----------------------------------------- Comprehensive income $ 5,278 6,095 6,263 6,159 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the interim consolidated financial statements Interim Consolidated Statement of Accumulated Other Comprehensive Loss (unaudited) Six months ended June 30 (thousands of dollars) 2009 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated other comprehensive (loss) income, beginning of period $ (4,762) 208 Other comprehensive income (loss) for the period 2,567 (572) -------------------------- Accumulated other comprehensive loss, end of period $ (2,195) (364) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the interim consolidated financial statements Interim Consolidated Statements of Cash Flows (unaudited) Three months ended Six months ended June 30 June 30

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