20-F 1 d314472d20f.htm FORM 20-F Form 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

 

     ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

 

     ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

     ¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                      to                     

Commission file number: 333-13792

QUEBECOR MEDIA INC.

(Exact name of Registrant as specified in its charter)

Province of Québec, Canada

(Jurisdiction of incorporation or organization)

612 St-Jacques Street

Montréal, Québec, Canada H3C 4M8

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class         Name of each exchange on which registered
None       None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

7 3/4% Senior Notes due March 2016 (issued January 17, 2006)

7 3/4% Senior Notes due March 2016 (issued October 5, 2007)

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

123,602,807 Common Shares

1,630,000 Cumulative First Preferred Shares, Series G

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨ Yes  x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.   ¨ Item 17  ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes  x No

 

 

 


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TABLE OF CONTENTS

 

    Page  

Explanatory Notes

    ii   

Industry and Market Data

    ii   

Presentation of Financial Information

    ii   

Exchange Rate Information

    iii   

Cautionary Statement Regarding Forward-Looking Statements

    iv   

PART I

    1   

ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

    1   

ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE

    1   

ITEM 3 — KEY INFORMATION

    1   

ITEM 4 — INFORMATION ON THE COMPANY

    21   

ITEM 4A — UNRESOLVED STAFF COMMENTS

    65   

ITEM 5 — OPERATING AND FINANCIAL REVIEW AND PROSPECTS

    66   

ITEM 6 — DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

    109   

ITEM 7 — MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

    119   

ITEM 8 — FINANCIAL INFORMATION

    121   

ITEM 9 — THE OFFER AND LISTING

    122   

ITEM 10 — ADDITIONAL INFORMATION

    123   

ITEM 11 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    146   

ITEM 12 — DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

    147   

PART II

    148   

ITEM 13 — DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

    148   

ITEM 14 — MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

    148   

ITEM 15 — CONTROLS AND PROCEDURES

    148   

ITEM 16 — [RESERVED]

    149   

ITEM 16A — AUDIT COMMITTEE FINANCIAL EXPERT

    149   

ITEM 16B — CODE OF ETHICS

    149   

ITEM 16C — PRINCIPAL ACCOUNTANT FEES AND SERVICES

    149   

ITEM 16D — EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

    150   

ITEM 16E — PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

    150   

ITEM 16F — CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

    150   

ITEM 16G — CORPORATE GOVERNANCE

    150   

PART III

    151   

ITEM 17 — FINANCIAL STATEMENTS

    151   

ITEM 18 — FINANCIAL STATEMENTS

    151   

ITEM 19 — EXHIBITS

    151   

Signature

    161   

Index to Consolidated Financial Statements

    F-1   


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EXPLANATORY NOTES

In this annual report, unless otherwise specified, the terms “we,” “our,” “us,” the “Company” and “Quebecor Media” refer to Quebecor Media Inc., a corporation under the Business Corporations Act (Québec) and its consolidated subsidiaries, collectively. All references in this annual report to “Videotron” are references to our wholly-owned subsidiary Videotron Ltd. and its subsidiaries; all references in this annual report to “Sun Media” are references to our indirect wholly-owned subsidiary Sun Media Corporation and its subsidiary; all references in this annual report to “Le SuperClub Vidéotron” are references to our indirect wholly-owned subsidiary Le SuperClub Vidéotron ltée; all references in this annual report to “TVA Group” are references to our public subsidiary TVA Group Inc. and its subsidiaries; all references in this annual report to “Archambault Group” are references to our wholly-owned subsidiary Archambault Group Inc. and its subsidiaries; all references in this annual report to “Nurun” are references to our wholly-owned subsidiary Nurun Inc. and its subsidiaries; all references to “Quebecor Media Printing” are references to our wholly-owned subsidiary Quebecor Media Printing Inc.; and all references to “Quebecor Media Network” are references to our wholly-owned subsidiary Quebecor Media Network Inc. All references in this annual report to “Quebecor” or “our parent company” are references to Quebecor Inc., and all references to “Capital CDPQ” are refererences to CDP Capital d’Amérique Investissements inc.

In this annual report, all references to the “CRTC” are references to the Canadian Radio-television and Telecommunications Commission.

In this annual report, all references to our “Senior Notes” are references to, collectively, our 7 3/4% Senior Notes due 2016 originally issued on January 17, 2006, our 7 3/4% Senior Notes due 2016 originally issued on October 5, 2007, and our 7 3/8% Senior Notes due January 15, 2021 originally issued on January 5, 2011.

INDUSTRY AND MARKET DATA

Industry statistics and market data used throughout this annual report were obtained from internal surveys, market research, publicly available information and industry publications, including the CRTC, A.C. Nielsen Media Research, SNL Kagan, Newspapers Canada, the Audit Bureau of Circulations, NADbank Inc. and ComScore Media Metrix. Industry publications generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of this information is not guaranteed.

Information contained in this document concerning the media industry, our general expectations concerning this industry and our market positions and market shares may also be based on estimates and assumptions made by us based on our knowledge of the industry and which we believe to be reliable. We believe, however, that this data is inherently imprecise, although generally indicative of relative market positions and market shares. Industry and company data is approximate and may reflect rounding in certain cases.

PRESENTATION OF FINANCIAL INFORMATION

On January 1, 2011, accounting principles generally accepted in Canada (“Canadian GAAP”), as used by publicly accountable enterprises, were replaced by, and fully converged to, International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Accordingly, our audited consolidated financial statements for the years ended December 31, 2011 and 2010 have been prepared in accordance with IFRS and in particular, they were prepared in accordance with IFRS 1, First-Time Adoption of International Financial Reporting Standards. Prior to the adoption of IFRS, for all periods up to and including the year ended December 31, 2010, our audited consolidated financial statements were prepared in accordance with Canadian GAAP. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences related to recognition, measurement and disclosures.

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

The significant accounting policies under IFRS are disclosed in Note 1 to our audited consolidated financial statements for the years ended December 31, 2011 and 2010, which are included in “Item 18. Financial Statements” of

 

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this annual report (beginning on page F-1), while Note 29 to our audited consolidated financial statements for the years ended December 31, 2011 and 2010 explains adjustments made in preparing our IFRS opening consolidated balance sheet as of January 1, 2010 and in restating our Canadian GAAP consolidated statements for the year ended December 31, 2010. Note 29 also provides details on exemption choices we made with respect to the general principle of retrospective application of IFRS.

We prepare our financial statements in Canadian dollars. In this annual report, references to Canadian dollars, Cdn$ or $ are to the currency of Canada, and references to U.S. dollars or US$ are to the currency of the United States.

We use certain financial measures that are not calculated in accordance with IFRS to assess our financial performance. We use these non-IFRS financial measures, such as operating income, cash flows from segment operations, free cash flows from continuing operating activities and average monthly revenue per user (“ARPU”), because we believe that they are meaningful measures of our performance. Our method of calculating these non-IFRS financial measures may differ from the methods used by other companies and, as a result, the non-IFRS financial measures presented in this annual report may not be comparable to other similarly titled measures disclosed by other companies. We provide a definition of operating income, cash flows from segment operations, free cash flows from continuing operating activities and ARPU under “Item 5. Operating and Financial Review and Prospects – Non-IFRS Financial Measures”. We also provide a definition of operating income, and a reconciliation of operating income to the most directly comparable financial measure under IFRS and Canadian GAAP in footnote 2 to the tables under “Item 3. Key Information – A. Selected Financial Data”. When we discuss cash flow from segment operations in this annual report, we provide the detailed calculation of the measure in the same section. When we discuss free cash flow from continuing operations in this annual report, we provide a reconciliation to the most directly comparable IFRS financial measure in “Item 5. Operating and Financial Review and Prospects”.

Unless otherwise indicated, information provided in this annual report, including all operating data presented, is as of December 31, 2011.

EXCHANGE RATE INFORMATION

The following table sets forth, for the periods indicated, the average, high, low and end of period noon rates published by the Bank of Canada. Such rates are set forth as U.S. dollars per Cdn$1.00 and are the rates published by the Bank of Canada for Canadian dollars per US$1.00. On March 19, 2012, the noon rate was Cdn$1.00 equals US$1.0121. We do not make any representation that Canadian dollars could have been converted into U.S. dollars at the rates shown or at any other rate. You should note that the rates set forth below may differ from the actual rates used in our accounting processes and in the preparation of our consolidated financial statements.

 

Year Ended:

   Average (1)      High      Low      Period End  

December 31, 2011

     1.0117         1.0583         0.9430         0.9833   

December 31, 2010

     0.9709         1.0054         0.9278         1.0054   

December 31, 2009

     0.8757         0.9716         0.7692         0.9555   

December 31, 2008

     0.9381         1.0289         0.7711         0.8166   

December 31, 2007

     0.9304         1.0905         0.8437         1.0120   

 

Month Ended:

   Average (2)      High      Low      Period End  

March 2012 (through March 19, 2012)

     1.0079         1.0153         0.9985         1.0121   

February 29, 2012

     1.0035         1.0136         0.9984         1.0136   

January 31, 2012

     0.9869         1.0014         0.9735         0.9948   

December 31, 2011

     0.9768         0.9896         0.9610         0.9833   

November 30, 2011

     0.9748         0.9876         0.9536         0.9807   

October 31, 2011

     0.9806         1.0065         0.9430         1.0065   

September 30, 2011

     0.9974         1.0254         0.9626         0.9626   

 

(1) The average of the daily noon rates for each day during the applicable year.
(2) The average of the daily noon rates for each day during the applicable month.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements with respect to our financial condition, results of operations, business and certain of our plans and objectives. These forward-looking statements are made pursuant to the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate as well as beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, prospects, financial position and business strategies. Words such as “may,” “will,” “expect,” “continue,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “seek” or the negatives of these terms or variations of them or similar terminology are intended to identify such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; anticipated trends in our business; and our ability to continue to control costs. We can give no assurance that these estimates and expectations will prove to have been correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, but are not limited to:

 

   

our ability to successfully continue developing our 4G network and facilities-based mobile offering;

 

   

general economic, financial or market conditions and variations in the businesses of our local, regional or national newspapers and broadcasting advertisers;

 

   

the intensity of competitive activity in the industries in which we operate;

 

   

fragmentation of the media landscape;

 

   

new technologies that would change consumer behaviour towards our product suite;

 

   

unanticipated higher capital spending required to deploy our 4G network or to address continued development of competitive alternative technologies, or the inability to obtain additional capital to continue the development of our business;

 

   

our ability to implement successfully our business and operating strategies and manage our growth and expansion;

 

   

our ability to successfully restructure our newspaper operations to optimize their efficiency in the context of the changing newspaper industry;

 

   

disruptions to the network through which we provide our digital television, Internet access and telephony services, and our ability to protect such services from piracy;

 

   

labour disputes or strikes;

 

   

changes in our ability to obtain services and equipment critical to our operations;

 

   

changes in laws and regulations, or in their interpretations, which could result, among other things, in the loss (or reduction in value) of our licenses or markets or in an increase in competition, compliance costs or capital expenditures;

 

   

our substantial indebtedness, the tightening of credit markets, and the restrictions on our business imposed by the terms of our debt; and

 

   

interest rate fluctuations that affect a portion of our interest payment requirements on long-term debt.

We caution you that the above list of cautionary statements is not exhaustive. These and other factors are discussed in further detail elsewhere in this annual report, including under “Item 3. Key Information – Risk Factors” of this annual report. Each of these forward-looking statements speaks only as of the date of this annual report. We disclaim any obligation to update these statements unless applicable securities laws require us to do so. We advise you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission (“SEC”), as described under “Item 10. Additional Information – Documents on Display”.

 

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PART I

ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3 — KEY INFORMATION

 

A - Selected Financial Data

The following tables present summary consolidated financial information for our business presented in accordance with IFRS for each of the years ended December 31, 2011 and 2010. We derived this summary consolidated financial information from our audited consolidated financial statements, which are comprised of consolidated balance sheets as at December 31, 2011 and 2010 and as at January 1, 2010 and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the years in the two-year period ended December 31, 2011. The summary consolidated financial information presented below should be read in conjunction with the information contained in “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements as at December 31, 2011 and 2010 and as at January 1, 2010 and for the years ended December 31, 2011 and 2010 and notes thereto contained in “Item 18. Financial Statements” of this annual report (beginning on page F-1). Our consolidated financial statements as at December 31, 2011 and 2010 and as at January 1, 2010 and for the years ended December 31, 2011 and 2010 have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s report on these consolidated financial statements is included in this annual report.

In separate tables below, we also present summary consolidated financial information presented in accordance with Canadian GAAP for each of the years 2010, 2009, 2008 and 2007. We derived this Canadian GAAP summary consolidated financial information from our consolidated financial statements comprised of consolidated balance sheets as at December 31, 2010, 2009, 2008 and 2007 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years ended December 31, 2010, 2009, 2008 and 2007, which are not included in this annual report. Our consolidated financial statements as at December 31, 2010, 2009 and 2008 and for the years ended December 31, 2010, 2009 and 2008 prepared in accordance with Canadian GAAP have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s report on those consolidated financial statements prepared in accordance with Canadian GAAP is not included in this annual report. Our consolidated financial statements as at December 31, 2007 and for the year ended December 31, 2007 prepared in accordance with Canadian GAAP have been audited by KPMG LLP, an independent registered public accounting firm (such audit before the effects of the adjustments to retrospectively apply the change in accounting described in Note 1(b) and Note 26(ix) to the audited financial statements included in Quebecor Media’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009). KPMG LLP’s report is not included in this annual report.

We caution you that the separate tables below include financial information based on IFRS and Canadian GAAP, and that the information based on IFRS is not comparable to information prepared in accordance with Canadian GAAP.


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IFRS DATA

 

     Year Ended
December 31,
 
     2011     2010(1)  
     (in millions, except ratio)  

STATEMENT OF INCOME DATA:

    

Revenues

    

Telecommunications

   $ 2,430.7      $ 2,228.8   

News Media

     1,018.4        1,015.0   

Broadcasting

     445.5        448.2   

Leisure and Entertainment

     312.9        302.5   

Interactive Technologies and Communications

     120.9        98.0   

Inter-segment

     (121.8     (92.4
  

 

 

   

 

 

 
     4,206.6        4,000.1   

Cost of sales, selling and administrative expenses

     (2,870.4     (2,648.2

Amortization

     (509.3     (396.7

Financial expenses

     (311.5     (300.7

Gain on valuation and translation of financial instruments

     54.6        46.1   

Restructuring of operations, impairment of assets and other special items

     (30.2     (37.1

Loss on debt refinancing

     (6.6     (12.3

Income taxes

     (146.4     (162.6
  

 

 

   

 

 

 

Net income

   $ 386.8      $ 488.6   
  

 

 

   

 

 

 

Net income attributable to:

    

Shareholders

     374.0        470.3   

Non-controlling interests

     12.8        18.3   

OTHER FINANCIAL DATA AND RATIO:

    

Operating income (2) (unaudited)

   $ 1,336.2      $ 1,351.9   

Additions to property, plant, equipment and intangible assets

     872.3        784.2   

Comprehensive income

     310.5        484.8   

Comprehensive income attributable to:

    

Equity shareholders

     305.9        469.0   

Non-controlling interests

     4.6        15.8   

Ratio of earnings to fixed charges or coverage deficiency (3) (unaudited)

     2.6x        3.0x   

 

     At December 31,  
     2011      2010  
     (in millions)  

BALANCE SHEET DATA:

     

Cash and cash equivalents

   $ 146.4       $ 242.7   

Total assets

     8,998.7         8,558.3   

Total debt (current and long-term portions)

     3,697.9         3,513.4   

Capital stock

     1,752.4         1,752.4   

Equity attributable to shareholders

     2,889.3         2,683.4   

Dividends

     100.0         87.5   

Number of common shares outstanding

     123.6         123.6   

 

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CANADIAN GAAP DATA

 

     Year Ended December 31,  
     2010(1)     2009(1)     2008(1)     2007(1)  
     (in millions, except ratio)  

STATEMENT OF INCOME DATA:

        

Revenues

        

Telecommunications

   $ 2,228.8      $ 2,020.4      $ 1,827.2      $ 1,575.5   

News Media

     1,015.0        1,035.7        1,187.7        1,075.7   

Broadcasting

     448.2        439.0        436.7        415.5   

Leisure and Entertainment

     302.5        307.8        301.9        329.8   

Interactive Technologies and Communications

     98.0        91.0        89.6        82.0   

Inter-segment

     (92.4     (87.5     (83.7     (87.9
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,000.1        3,806.4        3,759.4        3,390.6   

Cost of sales, selling and administrative expenses

     (2,652.3     (2,521.7     (2,639.8     (2,427.2

Amortization

     (399.7     (341.5     (316.7     (287.7

Financial expenses

     (265.4     (238.2     (276.0     (230.1

Gain (loss) on valuation and translation of financial instruments

     46.1        61.5        (3.7     (9.9

Restructuring of operations, impairment of assets and other special items

     (50.3     (29.6     (54.6     (11.2

Loss on debt refinancing

     (12.3     —          —          (1.0

Impairment of goodwill and intangible assets

     —          (13.6     (671.2     (5.4

Income taxes

     (166.7     (177.3     (155.2     (75.7

Non-controlling interest

     (18.8     (23.8     (23.2     (19.3

Income from discontinued operations

     —          2.9        2.3        5.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 480.7      $ 525.1      $ (378.7   $ 328.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER FINANCIAL DATA AND RATIO:

        

Operating income (2) (unaudited)

   $ 1,347.8      $ 1,284.7      $ 1,119.6      $ 963.4   

Additions to property, plant, equipment and intangible assets

     819.5        602.6        1,103.2        468.7   

Comprehensive income (loss)

     524.0        555.2        (438.3     374.3   

Ratio of earnings to fixed charges or coverage deficiency (4)(5) (unaudited)

     3.0x        3.3x      $ 212.4        2.7x   

 

     At December 31,  
     2010      2009      2008      2007  
     (in millions)  

BALANCE SHEET DATA:

           

Cash and cash equivalents

   $ 242.7       $ 300.0       $ 22.5       $ 26.1   

Total assets

     8,731.1         8,293.0         7,994.4         7,557.2   

Total debt (current and long-term portions)

     3,513.4         3,761.2         4,335.8         3,027.5   

Capital stock

     1,752.4         1,752.4         1,752.4         1,752.4   

Shareholders’ equity

     2,868.2         2,430.8         1,942.0         2,448.0   

Dividends

     87.5         75.0         65.0         110.0   

Number of common shares outstanding

     123.6         123.6         123.6         123.6   

 

(1) During the second quarter of 2011, certain specialized Internet sites were transferred from the News Media segment to the Telecommunications segment. Accordingly, prior period figures in the Company’s segmented financial information were reclassified to reflect this change.

 

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(2) Operating income and ratios based on this measure are not required by or recognized under IFRS or Canadian GAAP. We define operating income, as reconciled to net income under IFRS, as net income before amortization, financial expenses, gain on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing and income taxes. We defined operating income, as reconciled to net income under Canadian GAAP, as net income before amortization, financial expenses, gain or loss on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing, impairment of goodwill and intangible assets, income taxes, non-controlling interests and income from discontinued operations. Operating income, and ratios using this measure, are not intended to be regarded as alternatives to other financial operating performance measures or to the consolidated statement of cash flows as a measure of liquidity and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS or Canadian GAAP. Our parent company, Quebecor, considers the media segment as a whole and uses operating income in order to assess the performance of its investment in Quebecor Media. Our management and Board of Directors use this measure in evaluating our consolidated results as well as results of our operating segments. As such, this measure eliminates the significant level of non-cash depreciation of tangible assets and amortization of certain intangible assets, and it is unaffected by the capital structure or investment activities of Quebecor Media and of its affiliates. Operating income is also relevant because it is a significant component of our annual incentive compensation programs. A limitation of this measure, however, is that it does not reflect the periodic costs of capitalized tangible and intangible assets used in generating revenues in our segments. We use other measures that do reflect such costs, such as cash flows from segment operations and free cash flows from continuing operating activities. In addition, measures like operating income are commonly used by the investment community to analyze and compare the performance of companies in the industries in which we are engaged. Our definition of operating income may not be the same as similarly titled measures reported by other companies therefore limiting its usefulness as a comparative measure. See “Presentation of Financial Information — Non IFRS Measures — Operating Income”. Our operating income is calculated from and reconciled to net income under IFRS for the years ended December 31, 2011 and 2010 in the table below:

 

     Year Ended December 31,  
     2011     2010(1)  
     (in millions)  

Reconciliation of operating income to net income (IFRS)

    

Operating Income

    

Telecommunications

   $ 1,098.8      $ 1,047.3   

News Media

     150.1        191.4   

Broadcasting

     50.5        74.9   

Leisure and Entertainment

     26.6        27.6   

Interactive Technologies and Communications

     7.9        6.0   

Head office

     2.3        4.7   
  

 

 

   

 

 

 
     1,336.2        1,351.9   

Amortization

     (509.3     (396.7

Financial expenses

     (311.5     (300.7

Gain on valuation and translation of financial instruments

     54.6        46.1   

Restructuring of operations, impairment of assets and other special items

     (30.2     (37.1

Loss on debt refinancing

     (6.6     (12.3

Income taxes

     (146.4     (162.6
  

 

 

   

 

 

 

Net income

   $ 386.8      $ 488.6   
  

 

 

   

 

 

 

 

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The following table provides a reconciliation under Canadian GAAP of operating income to net income (loss) as presented in our consolidated financial statements:

 

     Year Ended December 31,  
     2010(1)     2009(1)     2008(1)     2007(1)  
     (in millions)  

Reconciliation of operating income to net income (loss) (Canadian GAAP)

        

Operating Income

        

Telecommunications

   $ 1,047.0      $ 981.9      $ 808.7      $ 653.0   

News Media

     189.2        190.5        216.3        222.1   

Broadcasting

     76.2        80.0        66.0        59.4   

Leisure and Entertainment

     27.5        25.9        20.2        26.9   

Interactive Technologies and Communications

     6.0        4.1        5.1        2.8   

Head office

     1.9        2.3        3.3        (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,347.8        1,284.7        1,119.6        963.4   

Amortization

     (399.7     (341.5     (316.7     (287.7

Financial expenses

     (265.4     (238.2     (276.0     (230.1

Gain (loss) on valuation and translation of financial instruments

     46.1        61.5        (3.7     (9.9

Restructuring of operations, impairment of assets and other special items

     (50.3     (29.6     (54.6     (11.2

Loss on debt refinancing

     (12.3     —          —          (1.0

Impairment of goodwill and intangible assets

     —          (13.6     (671.2     (5.4

Income taxes

     (166.7     (177.3     (155.2     (75.7

Non-controlling interest

     (18.8     (23.8     (23.2     (19.3

Income from discontinued operations

     —          2.9        2.3        5.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 480.7      $ 525.1      $ (378.7   $ 328.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(3) For the purpose of calculating the ratio of earnings to fixed charges under IFRS, (i) earnings consist of net income, plus income taxes, fixed charges, amortized capitalized interest, less interest capitalized and (ii) fixed charges consist of interest expensed and capitalized, plus premiums and discounts amortization, financing fees amortization and an estimate of the interest within rental expense.
(4) For the purpose of calculating the ratio of earnings to fixed charges under Canadian GAAP, (i) earnings consist of net income (loss), plus non-controlling interest, income taxes, fixed charges, amortized capitalized interest, less interest capitalized and (ii) fixed charges consist of interest expensed and capitalized, plus premiums and discounts amortization, financing fees amortization and an estimate of the interest within rental expense.
(5) Coverage deficiencies are expressed in millions of Canadian dollars. Our 2008 coverage deficiency was significant due to the non-cash charge related to an impairment of goodwill and intangible assets in the amount of $671.2 million pursuant to Canadian GAAP.

 

B - Capitalization and Indebtedness

Not applicable.

 

C - Reasons for the Offer and Use of Proceeds

Not applicable.

 

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D- Risk Factors

This section describes some of the risks that could materially affect our business, revenues, results of operations and financial condition, as well as the market value of our issued and outstanding Senior Notes. The factors below should be considered in connection with any forward-looking statements in this document and with the cautionary statements contained in the section “Cautionary Statement Regarding Forward-Looking Statements” at the forepart of this annual report. The risks below are not the only ones that we face. Some risks may not yet be known to us and some that we do not currently believe to be material could later turn out to be material.

Risks Relating to Our Business

Our cable and telecommunications businesses operate in highly competitive industries that are experiencing rapid technological developments, and our inability to compete successfully could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations.

In our cable operations, we compete against providers of direct broadcast satellite (or “DBS”, which in Canada are also referred to as “DTH”, for “direct-to-home” satellite providers), multichannel multipoint distribution systems (or “MDS”), and satellite master antenna television systems. In addition, we compete against incumbent local exchange carriers (or “ILECs”), which have secured licenses to launch video distribution services using video digital subscriber line (or “VDSL”) technology (also known as internet protocol television or “IPTV”). The main ILEC in our market holds a regional license to provide terrestrial broadcasting distribution in Montréal and several other communities in the Province of Québec. The same ILEC is also a cable operator in our main service area and recently launched its own IPTV service in Montréal, which is expected to be launched in Québec City in the coming months and with a full rollout throughout the Province of Québec expected in the years to come. The direct access to some broadcasters’ web sites that provide in high definition streaming video-on-demand content is also available for some of the same channels we offer in our television programming. In addition, third-party Internet access providers (or “TPIAs”) could launch IP video services in our footprint using ILEC DSL networks.

We also face competition from illegal providers of cable television services and illegal access to non-Canadian DBS (also called grey market piracy), as well as from signal theft of DBS that enables customers to access programming services from U.S. and Canadian DBS without paying any fees (also called black market piracy). Competitors in the video business also include the video store industry (rental & sale) as well as other emerging content delivery platforms.

Due to ongoing technological developments, the distinction between traditional platforms (broadcasting, Internet and telephony) is fading rapidly. For instance, the Internet, as well as distribution over mobile devices, are becoming important broadcasting and distribution platforms. In addition, mobile operators, with the development of their respective 4G and Long Term Evolution and Advanced (also known as “LTE”) networks, are now offering wireless and fixed wireless Internet services. In addition, our VoIP telephony service also competes with Internet-based solutions.

In our Internet access business, we compete against other Internet service providers (or “ISP”), and TPIA offering residential and commercial Internet access services as well as open Wi-Fi networks in some cities. The CRTC also requires us to offer access to our high-speed Internet system to ISP competitors, and third-party ISPs to access our network, for the purpose of providing telephony and networking applications, in addition to retail Internet access services.

Our VoIP service has numerous competitors, including ILECs, competitive local exchange carriers (or “CLECs”), mobile telephony service operators and other providers of telephony, VoIP and Internet communications, including competitors that are not facilities-based and therefore have a much lower infrastructure cost. In addition, internet protocol-based (“IP-based”) products and services are generally subject to downward pricing pressure, lower margins and technological evolution, all of which could have an adverse effect on our business, prospects and results of operation.

In our mobile High-Speed Packet Access (“HSPA+”) telephony business, we compete against a mix of market participants, some of them being active in some or all the products we offer, with others offering only mobile telephony services in our market. In addition, users of mobile voice and data systems may find their communications needs satisfied by other current or developing adjunct technologies, such as Wi-Fi, WiMax, “hotspots” or trunk radio systems, which

 

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have the technical capability to handle mobile data communication and mobile telephone calls. There can be no assurance that current or future competitors will not provide network capacity and/or services comparable or superior to those we provide or may in the future provide, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, or introduce competing services. For instance, since 2008 some providers of mobile telephony services (including most of the incumbent carriers as well as at least one other new entrant) have launched lower-cost mobile telephony services in order to acquire additional market share and increase their respective mobile telephony penetration rates in our market. Also, the Canadian incumbents have started rolling out their LTE 4G networks, and this technology is expected to become an industry standard. The cost of implementing, modifying our existing network or competing against future technological innovations may be prohibitive to us, and we may lose customers if we fail to keep pace with these changes or fail to keep pace with surging network capacity demand. Any of these factors could adversely affect our ability to operate our mobile business successfully and profitably. Moreover, we may not be able to compete successfully in the future against existing or potential competitors, and increased competition could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations. See also the risk factor “— Videotron is using a new technology for which only a limited offer of handsets is available, which could increase our customer acquisition costs and reduce our competitiveness” below.

Finally, a few of our competitors are offering special discounts to customers who subscribe to two or more of their services (cable television or IPTV, internet, residential phone and mobile telephony services). As a result, should we fail to keep our existing customers and lose them to such competitors, we may end up losing up to one subscriber for each of our services. This could have an adverse effect on our business, prospects, revenues, financial condition and results of operation.

We have entered into roaming agreements with other mobile operators in order to provide worldwide coverage to our mobile telephony customers. Our inability to renew, or substitute for, these agreements at their respective terms and on acceptable terms may place us at a competitive disadvantage, which could adversely affect our ability to operate our mobile business successfully and profitably.

We have entered into roaming agreements with multiple carriers around the world (including Canada, the United States and Europe), and have established worldwide coverage. Our inability to renew, or substitute for, these agreements at their respective terms and on acceptable terms may place us at a competitive disadvantage, which could adversely affect our ability to operate our mobile business successfully and profitably.

In addition, various aspects of mobile communications operations, including the ability of mobile providers to enter into interconnection agreements with traditional landline telephone companies and the ability of mobile providers to manage data traffic on their networks, are subject to regulation by the CRTC. The government agencies having jurisdiction over any mobile business that we may develop could adopt regulations or take other actions that could adversely affect our mobile business and operations, including actions that could increase competition or that could increase our costs.

Our reputation may be negatively impacted, which could have a material adverse effect on our business, financial condition and results of operations.

We have generally enjoyed a good reputation among the public. Our ability to maintain our existing customer relationships and to attract new customers depends to a large extent on our reputation. While we have put in place certain mechanisms to mitigate the risk that our reputation may be tarnished, including good governance practices and a code of ethics, we cannot be assured that we will continue to enjoy a good reputation nor can we be assured that events that are beyond our control will not cause our reputation to be negatively impacted. The loss or tarnishing of our reputation could have a material adverse effect on our business, prospects, financial condition and results of operations.

Videotron is using a new technology for which only a limited offer of handsets is available, which could increase our customer acquisition costs and reduce our competitiveness.

Advanced wireless services (“AWS”) in the 2GHz range is a spectrum that has not been broadly used until recently for mobile telephony. While certain mobile device suppliers offer hardware for AWS technology, there are still only a limited number of AWS handsets on the market, which could reduce our ability to compete with our competitors that offer a broader range of handsets. As a result, the handset portfolio for AWS we are currently offering does not

 

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include certain more popular devices and is not as broad as those of certain other providers. Moreover, most handset manufacturers have reduced the number of stock keeping units in their portfolio. In addition, the handsets available to us are sometimes subject to an exclusivity period which varies in length when they are released to market. If manufacturers continue to offer exclusivity on future products in Canada, this could potentially reduce the number of handsets available to us in the AWS band. We could potentially incur higher customer acquisition costs due to a smaller market for this type of technology and could potentially have a reduced offer of handsets to offer to our customers, which could slow the growth of our customer base and adversely affect our ability to operate our mobile business successfully and competitively.

We are regularly required to make capital expenditures to remain technologically and economically competitive. We may not be able to obtain additional capital to implement our business strategies and make certain capital expenditures.

Our strategy of maintaining a leadership position in the suite of products and services we offer and launching new products and services requires capital investments in our network and infrastructure to support growth in our customer base and demands for increased bandwidth capacity and other services. In this regard, we have in the past required substantial capital for the upgrade, expansion and maintenance of our network and the launch and expansion of new or additional services. We expect that additional capital expenditures will be required in the short and medium term in order to expand and maintain our systems and services, including expenditures relating to advancements in Internet access and high definition television (“HDTV”), as well as the cost of our mobile services infrastructure deployment.

The demand for wireless data services has been growing at unprecedented rates and it is projected that this demand will further accelerate, driven by increasing levels of broadband penetration, increasing need for personal connectivity and networking, increasing affordability of smartphones and Internet-only devices (e.g., high-usage data devices such as mobile Internet keys, tablets and electronic book readers), increasingly multimedia-rich services and applications, increasing wireless competition, and possibly unlimited data plans. The anticipated levels of data traffic will represent a growing challenge to the current mobile network’s ability to serve this traffic. We may have to acquire additional spectrum, if available, in order to address this increased demand. The ability to acquire additional spectrum (if needed) is dependent on the timing and the rules established by Industry Canada.

There can be no assurance that we will be able to obtain the funds necessary to finance our capital improvement programs, new strategies and services or other capital expenditure requirements, whether through cash from operations, additional borrowings or other sources. If we are unable to generate sufficient funds or obtain additional financing on acceptable terms, we may not be able to implement our business strategies or proceed with the capital expenditures and investments required to maintain our leadership position, and our business, financial condition, results of operations, reputation and prospects could be materially adversely affected. Even if we are able to obtain adequate funding, the period of time required to upgrade our network could have a material adverse effect on our ability to successfully compete in the future. Moreover, additional funds that we invest in our business may not translate into incremental revenues.

See also the risk factors “— Our cable and telecommunications businesses operate in highly competitive industries that are experiencing rapid technological developments, and our inability to compete successfully could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations”, “— We compete, and will continue to compete, with alternative technologies, and we may be required to invest a significant amount of capital to address continuing technological evolution and development” and “— We may require from time to time to refinance certain of our indebtedness. Our inability to do so on favorable terms, or at all, could have a material adverse effect on us”.

We may need to support increasing costs in securing access to support structures needed for our cable network.

We require access to the support structures of hydro electric and telephone utilities and to municipal rights of way to deploy our cable network. Where access to the structures of telephone utilities cannot be secured, we may apply to the CRTC to obtain a right of access under the Telecommunications Act (Canada) (the “Telecommunications Act”). We have entered into comprehensive support structure access agreements with all of the major hydro electric companies and all of the major telecommunications companies in our service territory. Our agreement with Hydro-Québec, by far the largest of the hydro electric companies, expires in December 2012. Rates are currently adjusted annually based on the Consumer Price Index (CPI). An increase in rates charged by Hydro-Québec could have a significant impact on Videotron’s cost structure.

 

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We may not successfully implement our business and operating strategies.

Our business strategies are based on leveraging an integrated platform of media assets. Our strategies include offering multi-platform advertising solutions, generating and distributing content across a spectrum of media properties and assets, launching and deploying additional value-added products and services, pursuing cross-promotional opportunities, maintaining our advanced broadband network, pursuing enhanced content development to reduce costs, further integrating the operations of our subsidiaries, leveraging geographic clustering and maximizing customer satisfaction. We may not be able to fully implement these strategies or realize their anticipated results without incurring significant costs or at all. In addition, our ability to successfully implement these strategies could be adversely affected by a number of factors beyond our control, including operating difficulties, increased ongoing operating costs, regulatory developments, general or local economic conditions, increased competition, technological changes and the other factors described in this “Risk Factors” section. While the centralization of certain business operations and processes has the advantage of standardizing our practices, thereby reducing costs and increasing our effectiveness, it also represents a risk in itself should a business solution implemented by a centralized office throughout the organization fail to produce the intended results. We may also be required to make capital expenditures or other investments, which may affect our ability to implement our business strategies to the extent we are unable to secure additional financing on acceptable terms or generate sufficient funds internally to cover these requirements. Any material failure to implement our strategies could have a material adverse effect on our reputation, business, financial condition, prospects and results of operations and on our ability to meet our obligations, including our ability to service our indebtedness.

We could be adversely impacted by consumers’ switch from landline telephony to mobile telephony.

The recent trend toward mobile substitution or “cord-cutting” (when users cancel their landline telephony services and opt for mobile telephony services only) is largely the result of the increasing mobile penetration rate in Canada and the various unlimited offers launched by mobile operators. We may not be successful in converting our existing cable telephony subscriber base to our mobile telephony services, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

We compete, and will continue to compete, with alternative technologies and we may be required to invest a significant amount of capital to address continuing technological evolution and development.

The media industry is experiencing rapid and significant technological change, which has resulted in alternative means of program and content transmission. The continued growth of the Internet has presented alternative content distribution options that compete with traditional media. Furthermore, in each of our broadcasting markets, industry regulators have authorized DTH, microwave services and VDSL services and may authorize other alternative methods of transmitting television and other content with improved speed and quality. We may not be able to successfully compete with existing or newly developed alternative technologies, such as IPTV, or we may be required to acquire, develop or integrate new technologies. The cost of the acquisition, development or implementation of new technologies could be significant and our ability to fund such implementation may be limited and could have a material adverse effect on our ability to successfully compete in the future. Any such difficulty or inability to compete could have a material adverse effect on our business, reputation, prospects, financial condition or results of operations.

The continuous technological improvement of the Internet, combined with higher download speeds and cost reductions for customers, may divert a portion of our existing television subscriber base from our video-on-demand services to new video-over-the-Internet model. While having a positive impact on the demand for our Internet services, video-over-the-Internet could adversely impact the demand for our video-on-demand services.

We have grown rapidly and are seeking to continue our growth. If we do not effectively manage our growth, our business, results of operations and financial condition could be adversely affected.

We have experienced substantial growth in our business and have significantly expanded our operations in recent years. We have sought in the past, and may in the future seek, to make opportunistic or strategic acquisitions and further expand the types of businesses in which we participate, as was the case for our expansion into facilities-based mobile telephony operations, under appropriate conditions. We can provide no assurance that we will be successful in either developing or fulfilling the objectives of any such acquisition or business expansion.

 

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In addition, our expansion and acquisitions may require us to incur significant costs or divert significant resources, and may limit our ability to pursue other strategic and business initiatives, which could have an adverse effect on our business, financial condition, prospects or results of operations. Furthermore, if we are not successful in managing and integrating any acquired businesses, or if we are required to incur significant or unforeseen costs, our business, results of operations and financial condition could be adversely affected.

We depend on key personnel.

Our success depends to a large extent upon the continued services of our senior management and our ability to retain skilled employees. There is intense competition for qualified management and skilled employees, and our failure to recruit, train and retain such employees could have a material adverse effect on our business, financial condition or operating results. In addition, to implement and manage our businesses and operating strategies effectively, we must maintain a high level of efficiency, performance and content quality, continue to enhance our operational and management systems, and continue to effectively attract, train, motivate and manage our employees. We currently anticipate a near-term need to attract and train a substantial number of new employees, including many skilled employees. If we are not successful in these efforts, it may have a material adverse effect on our business, prospects, results of operations and financial condition.

Our News Media and Broadcasting businesses face substantial competition for advertising. In addition, advertising spend is being affected by continuing soft economic conditions as well as the continuing fragmentation of the media landscape.

Advertising revenue is the primary source of revenue for our News Media business and our Broadcasting business. Our revenues and operating results in these businesses depend on the relative strength of the economy in our principal News Media and television markets, as well as the strength or weakness of local, regional and national economic factors. These economic factors affect the levels of retail, national and classified News Media advertising revenue, as well as television advertising revenue. Since a significant portion of our advertising revenue is derived from retail and automotive sector advertisers, weakness in these sectors and in the real estate industry has had, and may continue to have, an adverse impact on the revenues and results of operations of our News Media and Broadcasting businesses. Continuing or deepening softness in the Canadian or U.S. economy could further adversely affect key national advertising revenue.

In addition to the impact of economic cycles, the newspaper industry is experiencing structural changes, including the growing availability of free access to media, shifting readership habits, digital transferability, the advent of real-time information and secular changes in the advertising industry. As a result, competition for advertising spend comes not only from other newspapers (including other national, metropolitan (both paid and free) and suburban newspapers), magazines and more traditional media platforms, such as broadcasters, cable systems and networks, satellite television and radio, direct marketing and solo and shared mail programs, but also from digital media technologies, which have introduced a wide variety of media distribution platforms (including, most significantly, the Internet and distribution over wireless devices and e-readers) to consumers and advertisers. While we continue to pursue initiatives to offer value-added advertising solutions to our advertisers, such as newspaper websites and the publication of e-editions of a number of our newspapers, we may not be successful in retaining our historical share of advertising revenues. The ability of our News Media business to grow and succeed over the long-term depends on various factors, including our ability to attract advertisers to our online sites, which depends partly on our ability to generate online traffic and partly on the rate at which users click through on advertisements. We may be adversely affected by the development of new technologies to block the display of our advertisements and there can be no assurance that we will be successful in attracting online traffic or advertisers to our Internet sites.

In broadcasting, the proliferation of cable and satellite channels, advances in mobile and wireless technology, the migration of television audiences to the Internet and the viewing public’s increased control over the manner, content and timing of their media consumption through personal video recording devices, have all contributed to the fragmentation of the television viewing audience and a more challenging advertising sales environment. For example, the increased availability of personal video recording devices and video programming on the Internet, as well as increased access to various media through mobile devices, have the potential to reduce the viewing of our content through traditional

 

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distribution outlets. Some of these new technologies also give consumers greater flexibility to watch programming on a time-delayed or on-demand basis or to fast-forward or skip advertisements within our programming, which may adversely impact the advertising revenues we receive. Delayed viewing and advertising skipping have the potential to become more common as the penetration of personal video recording devices increases and content becomes increasingly available via Internet sources.

These factors could have a material adverse effect on our revenues, results of operations, financial condition, business and prospects. See also the risk factor “– Our News Media and Broadcasting businesses face substantial competition for readership and audience share, respectively. Our newspaper circulation levels and broadcasting audience share may continue to decline as consumers migrate to other media alternatives, which could have a material adverse effect on our revenues, results of operations, financial condition, business and prospects”, as well as “Item 4. Information on the Company – Regulation – Canadian Broadcast Programming (Off the Air and Thematic Television) – Advertising.”

Our News Media and Broadcasting businesses face substantial competition for readership and audience share, respectively. Our newspaper circulation levels and broadcasting audience share may continue to decline as consumers migrate to other media alternatives, which could have a material adverse effect on our revenues, results of operations, financial condition, business and prospects.

Revenue generation in our News Media business depends in large part on advertising revenues, which are in turn driven by readership and circulation levels, as well as market demographics, price, service and advertiser results. Readership and circulation levels tend to be based upon the content of the newspaper, service, availability and price. For several years, we, along with the newspaper industry as a whole, have experienced challenges in maintaining circulation volume and revenues because of, among other things, competition from other newspapers and other media platforms (often free to the user), such as the Internet and wireless devices, as well as the declining frequency of regular newspaper buying, particularly among young people, who increasingly rely on non-traditional media as a source for news. A prolonged decline in readership and circulation levels in our newspaper business would have a material effect on the rate and volume of our newspaper advertising revenues (as rates reflect circulation and readership, among other factors), and it could also affect our ability to institute circulation price increases for our print products, all of which could have a material adverse effect on our results of operations, financial condition, business and prospects. To maintain our circulation base and online traffic, we may incur additional costs, and we can provide no assurance that we will be able to recover these costs through increased circulation and advertising revenues. Lack of audience acceptance for our content or fragmented readership could also limit our ability to generate advertising and circulation revenues.

In our Broadcasting business, audience share and ratings information, as well as audience demographics and price, are the principal drivers in the competition for television advertising. As with the newspaper industry, the conventional television audience has grown increasingly fragmented, due in large part to the proliferation and growth in popularity of cable and satellite channels and the migration to alternative content delivery sources, such as the Internet and wireless devices, which are increasingly being used for distribution of (and access to) news, entertainment and other content. If the broadcasting market continues to fragment, our audience share levels and our advertising revenues, results of operations, financial condition, business and prospects could be materially adversely affected.

Our financial performance could be materially adversely affected if we cannot continue to distribute a wide range of television programming on commercially reasonable terms.

The financial performance of our cable and mobile services businesses depends in large part on our ability to distribute a wide range of appealing, conveniently-scheduled television programming at reasonable rates. We obtain television programming from suppliers pursuant to programming contracts. These suppliers have become, in recent years, vertically integrated and are now more limited in number. The quality and amount of television programming we offer affect the attractiveness of our services to customers and, accordingly, the rates we can charge for these services. We may be unable to maintain key programming contracts at commercially reasonable rates for television programming. Loss of programming contracts, our inability to obtain programming at reasonable rates or our inability to pass-through rate increases to our customers could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, our ability to attract and retain cable customers depends, to a certain extent, upon our capacity to offer quality content, high definition programming, an appealing variety of programming choices and packages, as well as

 

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multiplatform distribution and on-demand content, at competitive prices. If the number of specialty channels being offered does not increase at the level and the pace comparable to our competitors, if the content offered on such channels does not receive audience acceptance, or if we are unable to offer multiplatform availability, high definition programming and on-demand content, it may have a significant negative impact on revenues from our cable operations.

We may be adversely affected by variations in our costs, quality and variety of our television programming.

The most significant cost in our Broadcasting business is television programming. Our Broadcasting operations may be exposed to volatile or increased television programming costs which may adversely affect our operating results.

Developments in cable, satellite, Internet, wireless and other forms of content distribution could also affect both the availability and the cost of programming and increase competition for advertising revenue. The production and distribution costs of television and other forms of entertainment may also increase in the future. Moreover, programs may be purchased for broadcasting two to three years in advance, making it difficult to predict how such programs will perform. In some instances, programs must be replaced before their costs have been fully amortized, resulting in accounting adjustments that would accelerate the recognition of expenses.

We may be adversely affected by variations in the cost of newsprint. In addition, our newspaper operations are labour-intensive, resulting in a relatively high fixed-cost structure.

Newsprint, which is the basic raw material used to publish newspapers, has historically been and may continue to be subject to significant price volatility. During 2011, the total newsprint consumption of our newspaper operations was approximately 146,600 metric tonnes. Newsprint represents our single largest raw material expense and one of our most significant operating costs. Newsprint expense represented approximately 10.9% ($83.5 million) of our News Media segment’s operating expenses for the year ended December 31, 2011. Changes in the price of newsprint could significantly affect our income and volatile or increased newsprint costs have had, and may in the future have, a material adverse effect on our results of operations.

In order to obtain more favourable pricing, we source substantially all of our newsprint from a single newsprint producer (our “Newsprint Supplier”). Pursuant to the terms of our agreement with our Newsprint Supplier, we obtain newsprint at a discount to market prices, receive additional volume rebates for purchases above certain thresholds and benefit from a ceiling on the unit cost of newsprint. Our agreement with our Newsprint Supplier is a 3-year agreement and there can be no assurance that we will be able to renew this agreement or that our Newsprint Supplier will continue to supply newsprint to us on favourable terms or at all after the expiry of our agreement. If we are unable to continue to source newsprint from our Newsprint Supplier on favourable terms, or if we are unable to otherwise source sufficient newsprint on terms acceptable to us, our costs could increase materially, which could materially adversely affect the profitability of our newspaper business and our results of operations. We also rely on our Newsprint Supplier for deliveries of newsprint. The availability of our newsprint supply, and therefore our operations, may be adversely affected by various factors, including labor disruptions affecting our Newsprint Supplier or the cessation of operations of our Newsprint Supplier.

In addition, since newspaper publishing is labour intensive and our operations are located across Canada, our newspaper business has a relatively high fixed-cost structure. During periods of economic contraction, our revenue may decrease while certain costs remain fixed, resulting in decreased earnings.

We provide our digital television, Internet access and cable telephony services through a single clustered network, which may be more vulnerable to widespread disruption.

We provide our digital television, Internet access and cable telephony services through a primary headend and our analog television services through twelve additional regional headends in our single clustered network. Despite available emergency backup or replacement sites, a failure in our primary headend could prevent us from delivering some of our products and services throughout our network until we have resolved the failure, which may result in significant customer dissatisfaction, loss of revenues and potential civil litigation.

 

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We are dependent upon our information technology systems and those of certain third-parties. The inability to enhance our systems, or to protect them from a security breach or disaster, could have an adverse impact on our financial results and operations.

The day-to-day operation of our business is highly dependent on information technology systems, including those of certain third-party suppliers. An inability to maintain and enhance our existing information technology systems or obtain new systems to accommodate additional customer growth or to support new products and services could have an adverse impact on our ability to acquire new subscribers, retain existing customers, produce accurate and timely billing, generate revenue growth and manage operating expenses, all of which could adversely impact our financial results and position. In addition, although we use industry standard networks and established information technology security and survivability/disaster recovery practices, a security breach or disaster could have a material adverse effect on our reputation, business, prospects, financial condition and results of operations.

We may not be able to protect our services from piracy, which may have an adverse effect on our customer base and lead to a possible decline in revenues.

In our cable, Internet access and telephony operations, we may not be able to protect our services from piracy. We may be unable to prevent unauthorized access to our analog and digital programming, as well as our Internet access services. We use encryption technology to protect our cable signals from unauthorized access and to control programming access based on subscription packages. We may not be able to develop or acquire adequate technology to prevent unauthorized access to our services, which may have an adverse effect on our customer base and lead to a possible decline in our revenues.

Malicious and abusive Internet practices could impair our cable data services.

Our cable data customers utilize our network to access the Internet and, as a consequence, we or they may become victim of common malicious and abusive Internet activities, such as unsolicited mass advertising (or spam) and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including deterioration of service, excessive call volume to call centers and damage to our customers’ equipment and data or ours. Significant incidents could lead to customer dissatisfaction and, ultimately, to loss of customers or revenue, in addition to increased costs to service our customers and protect our network. Any significant loss of cable data, customers or revenue or a significant increase in costs of serving those customers could adversely affect our reputation, growth, business, prospects, financial condition and results of operations.

We depend on third-party suppliers and providers for services, information and other items critical to our operations.

We depend on third-party suppliers and providers for certain services, hardware and equipment that are critical to our operations. These materials and services include set-top boxes, cable and telephony modems, servers and routers, fibre-optic cable, telephony switches, inter-city links, support structures, software, the “backbone” telecommunications network for our Internet access and telephony services, and construction services for expansion and upgrades of our cable and mobile networks. These services and equipment are available from a limited number of suppliers. If no supplier can provide us with the equipments or services that we require or that comply with evolving Internet and telecommunications standards or that are compatible with our other equipment and software, our business, financial condition and results of operations could be materially adversely affected. In addition, if we are unable to obtain critical equipment, software, services or other items on a timely basis and at an acceptable cost, our ability to offer our products and services and roll out our advanced services may be delayed, and our business, financial condition and results of operations could be materially adversely affected. See also the risk factor “— Videotron is using a technology for which only a limited offer of handsets is available, which could increase customer acquisition costs and reduce our competitiveness”.

In addition, we obtain significant information through licensing arrangements with content providers. Some providers may seek to increase fees for providing their proprietary content. If we are unable to renegotiate commercially acceptable arrangements with these content providers or find alternative sources of equivalent content, our News Media operations may be adversely affected.

 

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We may be adversely affected by strikes and other labour protests.

At December 31, 2011, approximately 41% of our employees were represented by collective bargaining agreements. Through our subsidiaries, we are currently party to 101 collective bargaining agreements:

 

   

Videotron is party to five collective bargaining agreements representing approximately 3,700 unionized employees. The two most important collective bargaining agreements, covering unionized employees in the Montréal and Québec City regions, have terms extending to December 31, 2013. There are also two collective bargaining agreements covering unionized employees in the Saguenay and Gatineau regions, with terms running through December 31, 2014 and August 31, 2015, respectively, and one other collective bargaining agreement, covering approximately 50 employees of our SETTE inc. subsidiary, which will expire on December 31, 2012.

 

   

Sun Media is party to 73 collective bargaining agreements, representing approximately 1,510 unionized employees. 11 collective bargaining agreements have expired, representing approximately 100 unionized employees, or 6% of its unionized workforce. Negotiations regarding these collective bargaining agreements are either in progress or will be undertaken in 2012. Of the other collective bargaining agreements, 38 will expire in 2012, representing approximately 475 employees or 31% of its unionized workforce, and the others to expire on various dates through December 2019.

 

   

TVA Group is party to 13 collective bargaining agreements, representing approximately 1,230 unionized employees. Of this number, eight collective bargaining agreements, representing approximately 200 unionized employees or 19% of its unionized workforce, have expired. Negotiations regarding these collective bargaining agreements are in progress. The other collective bargaining agreements will expire between March 31, 2012 and December 31, 2013.

 

   

Of the other 10 collective bargaining agreements, representing approximately 580 unionized employees, two collective bargaining agreement representing approximately 200 unionized employees or 35% of its unionized workforce are expired. Negotiations regarding these collective bargaining agreements are in progress. The other collective bargaining agreements will expire between December 2012 and December 2017.

We cannot predict the outcome of any current or future negotiations relating to labour disputes, union representation or the renewal of our collective bargaining agreements, nor can we assure you that we will not experience work stoppages, strikes property damage or other forms of labour protests pending the outcome of any current or future negotiations. If our unionized workers engage in a strike or any other form of work stoppage, we could experience a significant disruption to our operations, damage to our property and/or interruption to our services, which could adversely affect our business, assets, financial position, results of operations and reputation. Even if we do not experience strikes or other forms of labour protests, the outcome of labour negotiations could adversely affect our business and results of operations. Such could be the case if current or future labour negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations. In addition, our ability to make short-term adjustments to control compensation and benefits costs is limited by the terms of our collective bargaining agreements.

We could be impacted by increased pension plan liabilities.

The economic cycle could have a negative impact on the funding of our defined benefit pension plans and the related expenditures. There is no guarantee that the expenditures and contributions required to fund these pension plans will not increase in the future and therefore negatively impact our operating results and financial position. Risks related to the funding of defined benefit plans may materialize if total obligations with respect to a pension plan exceed the total value of its trust fund. Shortfalls may arise due to lower-than-expected returns on investments, changes in the discount rate used to assess the pension plan’s obligations, and actuarial losses. This risk is mitigated by policies and procedures instituted by us and our pension committees to monitor investment risk and pension plan funding. It is also mitigated by the fact that some of the Company’s defined benefit pension plans are no longer offered to new employees.

 

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We may be adversely affected by litigation and other claims.

In the normal course, we are involved in various legal proceedings and other claims relating to the conduct of our business. Although, in the opinion of our management, the outcome of current pending claims and other litigation is not expected to have a material adverse effect on our reputation, results of operations, liquidity or financial position, a negative outcome in respect of any such claim or litigation could have such an adverse effect. Moreover, the cost of defending against lawsuits and diversion of management’s attention could be significant. See also “Item 8. Financial Information – Legal Proceedings” in this annual report.

We may be adversely affected by exchange rate fluctuations.

Most of our revenues and expenses are denominated in Canadian dollars. However, certain expenditures, such as the purchase of set-top boxes and cable modems, mobile devices (handsets) and certain capital expenditures, including certain costs related to the development and maintenance of our mobile network, are paid in U.S. dollars. Also, a substantial portion of our debt is denominated in U.S. dollars, and interest, principal and premium, if any, thereon is payable in U.S. dollars. For the purposes of financial reporting, any change in the value of the Canadian dollar against the U.S. dollar during a given financial reporting period would result in a foreign exchange gain or loss on the translation of any unhedged U.S. dollar-denominated debt into Canadian dollars. Consequently, our reported earnings and debt could fluctuate materially as a result of foreign-exchange gains or losses. Although we have entered into transactions to hedge the exchange rate risk with respect to 100% of our U.S. dollar-denominated debt outstanding at December 31, 2011, and we intend in the future to enter into such transactions for new U.S. dollar-denominated debt, these hedging transactions could, in certain circumstances, prove economically ineffective and may not be successful in protecting us against exchange rate fluctuations, or we may in the future be required to provide cash and other collateral to secure our obligations with respect to such hedging transactions, or we may in the future be unable to enter into such transactions on favorable terms or at all.

In addition, certain cross-currency interest rate swaps entered into by the Company and its subsidiaries include an option that allows each party to unwind the transaction on a specific date at the then-fair value.

The fair value of the derivative financial instruments we are party to is estimated using period-end market rates and reflects the amount we would receive or pay if the instruments were terminated and settled at those dates, as adjusted for counterparties’ non-performance risk. At December 31, 2011, the net aggregate fair value of our cross-currency interest rate swaps and foreign-exchange forward contracts was in a net liability position of $280.5 million. See also “Item 11. Quantitative and Qualitative Disclosures About Market Risk” of this annual report.

Certain of the commodities we consume in our daily operations are traded on commodities exchanges or are negotiated on their respective markets in U.S. dollars and, therefore, although we pay our suppliers in Canadian dollars, the prices we pay for such commodities may be affected by fluctuations in the exchange rate. We have entered into and may in the future enter into transactions to hedge the exchange rate risk related to the prices of some of those commodities. However, fluctuations of the exchange rate for the portion of our commodities purchases that are not hedged could affect the prices we pay for such commodities and could have an adverse effect on our results of operations.

The volatility and disruptions in the capital and credit markets could adversely affect our business, including the cost of new capital, our ability to refinance our scheduled debt maturities and meet our other obligations as they become due.

The capital and credit markets have experienced significant volatility and disruption over the last several years, resulting in periods of extreme upward pressure on the cost of new debt capital and severe restrictions in credit availability for many companies. The disruptions in the capital and credit markets have also resulted in higher interest rates or greater credit spreads on issuance of debt securities and increased costs under credit facilities. Continuation of these disruptions could increase our interest expense, thereby adversely affecting our results of operations and financial position.

Our access to funds under our existing credit facilities is dependent on the ability of the financial institutions that are parties to those facilities to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our credit facilities are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.

 

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Longer-term volatility and continued disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives or failures of significant financial institutions could adversely affect our access to the liquidity needed for our businesses in the longer term. Such disruptions could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Continued market disruptions and broader economic challenges may lead to lower demand for certain of our products and increased incidences of customers’ inability to pay or timely pay for the services or products that we provide. Events such as these could adversely impact our results of operations, cash flows, financial position and prospects.

Risks Relating to Our Industries

We are subject to extensive government regulation and policy-making. Changes in government regulation or policies could adversely affect our business, financial condition, prospects and results of operations.

Our operations are subject to extensive government regulation and policy-making in Canada. Laws and regulations govern the issuance, amendment, renewal, transfer, suspension, revocation and ownership of broadcast programming and distribution licenses. With respect to distribution, regulations govern, among other things, the distribution of Canadian and non-Canadian programming services and the maximum fees to be charged to the public in certain circumstances. For the time being, there are significant restrictions on the ability of non-Canadian entities to own or control broadcasting licenses and telecommunications carriers in Canada, although the federal government is currently reviewing whether to relax the foreign ownership restrictions. Our broadcasting distribution and telecommunications operations (including Internet access service) are regulated respectively by the Broadcasting Act (Canada) (the “Broadcasting Act”) and the Telecommunications Act and regulations thereunder. The CRTC, which administers the Broadcasting Act and the Telecommunications Act, has the power to grant, amend, suspend, revoke and renew broadcasting licenses, approve certain changes in corporate ownership and control, and make regulations and policies in accordance with the Broadcasting Act and the Telecommunications Act, subject to certain directions from the federal cabinet. Our wireless and cable operations are also subject to technical requirements, license conditions and performance standards under the Radiocommunication Act (Canada) (the “Radiocommunication Act”), which is administered by Industry Canada.

In addition, laws relating to communications, data protection, e-commerce, direct marketing and digital advertising and the use of public records have become more prevalent in recent years. Existing and proposed legislation and regulations, including changes in the manner in which such legislation and regulations are interpreted by courts in Canada, the United States and other jurisdictions may impose limits on our collection and use of certain kinds of information. For a more extensive description of the regulatory environment affecting our business, see “Item 4. Information on the Company – Regulation”.

Changes to the laws, regulations and policies governing our operations, the introduction of new laws, regulations, policies or terms of license, the issuance of new licenses, including additional spectrum licenses to our competitors or changes in the treatment of the tax deductibility of advertising expenditures could have a material adverse effect on our business (including how we provide products and services), financial condition, prospects and results of operations. In addition, we may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. It is difficult to predict in what form laws and regulations will be adopted or how they will be construed by the relevant courts, or the extent to which any changes might adversely affect us.

The CRTC may not renew our existing distribution licenses or grant us new licenses on acceptable terms, or at all.

Our CRTC broadcasting and distribution licenses must be renewed from time to time, typically every seven years, and cannot be transferred without regulatory approval. While CRTC regulations and policies do not require CRTC approval before a broadcaster purchases an unregulated media entity, such as a newspaper, the CRTC may consider the issue of our cross-media ownership at license renewal proceedings, and may also consider this issue in deciding whether to grant new licenses. The CRTC further has the power to prevent or address the emergence of undue competitive advantage on behalf of one licensee where it is found to exist.

 

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The CRTC may require us to take measures which could have a material adverse effect on the integration of our assets, our employees and our ability to realize certain of the anticipated benefits of our acquisitions. Our inability to renew any of our licenses or acquire new interests or licenses on acceptable terms, or at all, could have a material adverse effect on our business, financial condition or results of operations.

Industry Canada may not renew Videotron’s AWS licenses on acceptable terms, or at all.

Videotron’s AWS licenses were issued in December 2008 for a term of ten years. At least two years before the end of this term, and any subsequent term, Videotron may apply for a renewed license for a term of up to ten years. AWS license renewal, including whether license fees should apply for a subsequent license term, will be subject to a public consultation process initiated in year eight of the license.

We are required to provide third-party ISPs with access to our cable systems, which may result in increased competition.

The largest cable operators in Canada, including Videotron, have been required by the CRTC to provide third-party ISPs with access to their cable systems at mandated cost-based rates. Several third-party ISPs are interconnected to our cable network and are thereby providing retail Internet access services.

The CRTC also requires large cable carriers, such as us, to allow third party ISPs to provide telephony and networking (LAN/VPN) applications in addition to retail Internet access services. As a result of these requirements, we may experience increased competition for retail cable Internet and residential telephony customers. In addition, because our third-party Internet access rates are regulated by the CRTC, we could be limited in our ability to recover our costs associated with providing this access.

We are subject to a variety of environmental laws and regulations.

We are subject to a variety of environmental laws and regulations. Certain of our facilities are subject to federal, provincial, state and municipal laws and regulations concerning, among other things, emissions to the air, water and sewer discharge, the handling and disposal of hazardous materials and waste, recycling, the soil remediation of contaminated sites, or otherwise relating to the protection of the environment. In addition, laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances in the workplace, also govern our operations. Failure to comply with present or future laws or regulations could result in substantial liability to us. Environmental laws and regulations and their interpretation have changed rapidly in recent years and may continue to do so in the future. Our properties, as well as areas surrounding those properties, particularly those in areas of long-term industrial use, may have had historic uses, or may have current uses, in the case of surrounding properties, which may affect our properties and require further study or remedial measures. We cannot provide assurance that all environmental liabilities have been determined, that any prior owner of our properties did not create a material environmental condition not known to us, that a material environmental condition does not otherwise exist as to any of our properties, or that expenditure will not be required to deal with known or unknown contamination.

Concerns about alleged health risks relating to radiofrequency emissions may adversely affect our business.

Some studies have alleged links between radiofrequency emissions from certain wireless devices and cell sites and various health problems or possible interference with electronic medical devices, including hearing aids and pacemakers. All our cell sites comply with applicable laws and we rely on our suppliers to ensure that the network equipment and customer equipment supplied to us meets all applicable safety requirements. While there is no definitive evidence of harmful effects from exposure to radiofrequency emissions when the limits imposed by applicable laws and regulations are complied with, additional studies of radiofrequency emissions are ongoing and we cannot be sure that the results of any such future studies will not demonstrate a link between radiofrequency emissions and health problems.

The current concerns over radiofrequency emissions or perceived health risks of exposure to radiofrequency emissions could lead to additional governmental regulation, diminished use of wireless services, including Videotron’s, or expose us to potential litigation. Any of these could have a material adverse effect on our business, prospects, revenues, financial condition and results of operations.

 

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Risks Relating to our Senior Notes and our Capital Structure

Our indebtedness and significant interest payment requirements could adversely affect our financial condition and therefore make it more difficult for us to fulfill our obligations, including our obligations under our Senior Notes.

We currently have a substantial amount of debt and significant interest payment requirements. As at December 31, 2011, we had $3.7 billion of consolidated long-term debt. Our indebtedness could have significant consequences, including the following:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to making interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt or greater financial resources; and

 

   

limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds on commercially reasonable terms, if at all.

Although we have significant indebtedness, as at December 31, 2011, we had approximately $827.0 million available for additional borrowings under our existing credit facilities on a consolidated basis, and indentures governing our outstanding Senior Notes permit us to incur substantial additional indebtedness in the future. If we or our subsidiaries incur additional debt, the risks we now face as a result of our leverage could intensify. For more information regarding our long-term debt and its maturities, as well as our latest financing transactions, refer to our audited consolidated financial statements for the year ended December 31, 2011 included under “Item 18. Financial Statements” of this annual report. See also the risk factor “— Restrictive covenants in our outstanding debt instruments may reduce our operating and financial flexibility, which may prevent us from capitalizing on certain business opportunities”.

Restrictive covenants in our outstanding debt instruments may reduce our operating and financial flexibility, which may prevent us from capitalizing on certain business opportunities.

Our Senior Secured Credit Facilities and the respective indentures governing our outstanding Senior Notes contain a number of operating and financial covenants restricting our ability to, among other things:

 

   

incur indebtedness;

 

   

create liens;

 

   

pay dividends on or redeem or repurchase our stock;

 

   

make certain types of investments;

 

   

restrict dividends or other payments from restricted subsidiaries;

 

   

enter into transactions with affiliates

 

   

issue guarantees of debt; and

 

   

sell assets or merge with other companies.

 

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If we are unable to comply with these covenants and are unable to obtain waivers from our creditors, we would be unable to make additional borrowings under our credit facilities, our indebtedness under these agreements would be in default and could, if not cured or waived, result in an acceleration of such indebtedness and cause cross-defaults under our other debt, including our Senior Notes. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it, and any such prepayment or refinancing could adversely affect our financial condition. In addition, if we incur additional debt in the future or refinance existing debt, we may be subject to additional covenants, which may be more restrictive than those to which we are currently subject. Even if we are able to comply with all applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us.

We are a holding company and depend on our subsidiaries to generate sufficient cash flow to meet our debt service obligations, including payments on our Senior Notes.

We are a holding company and a substantial portion of our assets are the capital stock of our subsidiaries. As a holding company, we conduct substantially all of our business through our subsidiaries, which generate substantially all of our revenues. Consequently, our cash flow and ability to service our debt obligations, including our outstanding Senior Notes, are dependent upon the cash flow of our subsidiaries and the distribution of this cash flow to us, or upon loans, advances or other payments made by these entities to us. The ability of these entities to pay dividends or make loans, advances or payments to us will depend upon their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their debt. Videotron has outstanding several series of debt securities and each of Videotron and TVA Group has credit facilities that limit the ability of each to distribute cash to us.

The ability of our subsidiaries to generate sufficient cash flow from operations to allow us to make scheduled payments on our debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors as well as structural changes, many of which are outside of our or their control. We can provide no assurance that the cash flow and earnings of our operating subsidiaries and the amount that they are able to distribute to us, as dividends or otherwise, will be sufficient for us to satisfy our debt obligations. If we are unable to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We can provide no assurance that any such alternative refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance these obligations on commercially reasonable terms, could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be required from time to time to refinance certain of our indebtedness. Our inability to do so on favorable terms, or at all, could have a material adverse effect on us.

We may be required from time to time to refinance certain of our existing debt instruments at or prior to their maturity. Our ability to obtain additional financing to repay such existing debt at maturity will depend upon a number of factors, including prevailing market conditions and our operating performance. The tightening of credit availability and the challenges affecting global capital markets could also limit our or our subsidiaries’ ability to refinance existing maturities. There can be no assurance that any such financing will be available to us on favourable terms or at all. See also the risk factor “— The volatility and disruptions in the capital and credit markets could adversely affect our business, including the cost of new capital, our ability to refinance our scheduled debt maturities and meet our other obligations as they become due”.

There is no public market for our Senior Notes.

There is currently no established trading market for our issued and outstanding Senior Notes and we do not intend to apply for listing of any of our Senior Notes on any securities exchange or to arrange for any quotation on any automated dealer quotation systems. No assurance can be given as to the prices or liquidity of, or trading markets for, any series of our Senior Notes. The liquidity of any market for our Senior Notes will depend upon the number of holders of our Senior Notes, the interest of securities dealers in making a market in our Senior Notes, prevailing interest rates, the

 

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market for similar securities and other factors, including general economic conditions, our financial condition and performance and our prospects. The absence of an active market for our Senior Notes could adversely affect their market price and liquidity.

In addition, the market for non-investment grade debt has historically, including recently, been subject to disruptions that have caused volatility in prices of securities. It is possible that the market for our Senior Notes will be subject to such disruptions. Any such disruptions may have a negative effect on a holder’s ability to sell our Senior Notes, regardless of our prospects and financial performance.

Non-U.S. holders of our Senior Notes are subject to restrictions on the transfer or resale of our notes.

Although we have registered certain series of our Senior Notes under the Securities Act, we did not, and we do not intend to, qualify our notes by prospectus in Canada, and, accordingly, the notes remain subject to restrictions on resale and transfer in Canada. In addition, non-U.S. holders remain subject to restrictions imposed by the jurisdiction in which the holder is resident.

We may not be able to finance an offer to purchase our Senior Notes in the event of a change of control as required by the respective indentures governing our Senior Notes because we may not have sufficient funds at the time of the change of control or our Senior Secured Credit Facilities may not allow the repurchases.

If we experience a change of control, as that term is defined in the indenture governing our Senior Notes, or if we or our subsidiaries dispose of significant assets under specified circumstances, we may be required to make an offer to repurchase all of our Senior Notes prior to maturity. We can provide no assurance that we will have sufficient funds or be able to arrange for additional financing to repurchase our Senior Notes following such change of control or asset sale. There is no sinking fund with respect to our outstanding Senior Notes.

In addition, a change of control would be an event of default under our Senior Secured Credit Facilities. Any future credit agreement or other agreement relating to our senior indebtedness to which we become a party may contain similar provisions. Our failure to offer to repurchase our Senior Notes upon a change of control would, pursuant to the terms of the respective indentures governing our outstanding Senior Notes, constitute an event of default under such indentures. Any such default could, in turn, constitute an event of default under future senior indebtedness, any of which may cause the related debt to be accelerated after the expiry of any applicable notice or grace periods. If debt were to be accelerated, we may not have sufficient funds to repurchase our Senior Notes and repay the debt.

Canadian bankruptcy and insolvency laws may impair the trustees’ ability to enforce remedies under the indentures governing our Senior Notes or the Senior Notes themselves.

The rights of the trustees, who represent the holders of our Senior Notes, to enforce remedies could be delayed by the restructuring provisions of applicable Canadian federal bankruptcy, insolvency and other restructuring legislation if the benefit of such legislation is sought with respect to us. For example, both the Bankruptcy and Insolvency Act (Canada) and the Companies’ Creditors Arrangement Act (Canada) contain provisions enabling an insolvent person to obtain a stay of proceedings against its creditors and to file a proposal to be voted on by the various classes of its affected creditors. A restructuring proposal, if accepted by the requisite majorities of each affected class of creditors, and if approved by the relevant Canadian court, would be binding on all creditors within each affected class, including those creditors that did not vote to accept the proposal. Moreover, this legislation, in certain instances, permits the insolvent debtor to retain possession and administration of its property, subject to court oversight, even though it may be in default under the applicable debt instrument, during the period that the stay against proceedings remains in place. In addition, it may be possible in certain circumstances to restructure certain debt obligations under the corporate governing statute applicable to the debtor.

The powers of the court under the Bankruptcy and Insolvency Act (Canada) and particularly under the CCAA have been interpreted and exercised broadly so as to protect a restructuring entity from actions taken by creditors and other parties. Accordingly, we cannot predict whether payments under our outstanding Senior Notes would be made during any proceedings in bankruptcy, insolvency or other restructuring, whether or when the trustees could exercise their respective rights under the respective indentures governing our Senior Notes or whether and to what extent holders of our Senior Notes would be compensated for any delays in payment, if any, of principal, interest and costs, including the fees and disbursements of the respective trustees.

 

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U.S. investors in our Senior Notes may have difficulties enforcing civil liabilities.

We are incorporated under the laws of the Province of Québec. Substantially all of our directors, controlling persons and officers are residents of Canada or other jurisdictions outside the United States, and all or a substantial portion of their assets and substantially all of our assets are located outside the United States. We have agreed, under the terms of the respective indentures governing our 7 3/4% Senior Notes due March 2016 and our 7 3/4% Senior Notes due March 2016, to accept service of process in any suit, action or proceeding with respect to the indentures or such notes brought in any federal or state court located in New York City by an agent designated for such purpose, and to submit to the jurisdiction of such courts in connection with such suits, actions or proceedings. Nevertheless, it may be difficult for holders of our Senior Notes to effect service of process within the United States upon directors, controlling persons, officers and experts who are not residents of the United States or to enforce against us or them in the United States, judgments of courts of the United States predicated upon the civil liability provisions of the U.S. federal or state securities laws or other laws of the United States. In addition, there is doubt as to the enforceability in Canada of liabilities predicated solely upon U.S. federal or state securities law against us or against our directors, controlling persons and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States.

ITEM 4 — INFORMATION ON THE COMPANY

 

A - History and Development of Quebecor Media

Our legal and commercial name is Quebecor Media Inc. Our registered office is located at 612 St-Jacques Street, Montréal, Québec, Canada H3C 4M8, and our telephone number is (514) 380-1999. Our corporate website may be accessed through the URL http://www.quebecor.com. The information found on our corporate website or any other website to which we refer in this annual report does not, however, form part of this annual report and is not incorporated herein by reference. In respect of our issued and outstanding notes (other than our 7 3/8% Senior Notes due 2021, which were issued on January 5, 2011), our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011.

Quebecor Media was incorporated in Canada on August 8, 2000 under Part 1A of the Companies Act (Québec) (since February 14, 2011, the Business Corporations Act (Québec)). In connection with our formation, our parent company, Quebecor, transferred all the shares of its wholly-owned subsidiary Quebecor Communications Inc. (“QCI”), to us, which made QCI our wholly-owned subsidiary. The assets of QCI, as of the date of the transfer in October 2000, included a 70% interest in Sun Media (which was subsequently increased to 100%); a 57.3% interest in Nurun (which was subsequently increased to 100%); all the assets of the Canoe Network; and all the assets of our Leisure and Entertainment segment. In addition, Quebecor and Capital CDPQ contributed $0.9 billion and $2.8 billion, respectively, in cash in exchange for common shares of the capital stock of Quebecor Media. On December 31, 2001, QCI was liquidated into Quebecor Media.

On October 23, 2000, we acquired all of the outstanding shares of Groupe Videotron for $5.3 billion. At the time of the acquisition, the assets of Groupe Videotron included all of the shares of Videotron, a 99.9% voting interest in TVA Group, all of the shares of Le SuperClub Vidéotron, a 66.7% voting interest in Videotron Telecom Ltd. (which was merged with Videotron on January 1, 2006), a 54.0% voting interest (which was subsequently increased to 100%) in Netgraphe Inc. (which changed its name, effective December 31, 2004, to Canoe), and other assets.

Since December 31, 2008, we have completed several business acquisitions, combinations, divestitures and business development projects and financing transactions through our direct and indirect subsidiaries, including, among others, the following:

 

   

On March 14, 2012, Videotron issued US$800 million aggregate principal amount of its 5% Senior Notes due 2022 for net proceeds of $787.6 million (net of financing expenses). On February 29, Videotron has simultaneously launched a cash tender offer and issued a notice of redemption for the entire outstanding principal amount of its 6 7/8% senior notes due January 15, 2014. Videotron will use the proceeds to

 

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repurchase and retire all US$395 million aggregate principal amount of its outstanding 6 7/8% Senior Notes due 2014, to fully repay the borrowings under its revolving credit facility to pay related fees and expenses and use the remainder for general corporate purposes.

 

   

On February 24, 2012, TVA Group amended its bank credit facilities to extend the maturity of its $100.0 million revolving credit facility from December 2012 to February 2017.

 

   

Effective on February 3, 2012, Sun Media Corporation repaid all outstanding loans under its syndicated credit agreement dated February 7, 2003 with Bank of America, N.A. acting as administrative agent (as amended, the “Sun Media Credit Agreement”) and as of such date the Sun Media Credit Agreement was terminated.

 

   

On February 3, 2012, Sun Media Corporation repaid the $37.6 million balance on its term loan credit facility and terminated all its credit facilities. Sun Media Corporation’s liabilities no longer include any long-term debt.

 

   

On February 2, 2012, we struck an alliance with Saguenay-area entrepreneurs to create BlooBuzz Studios L.P., a new Québec video game developer. BlooBuzz will focus on products for occasional gamers, a market that is experiencing strong growth, particularly on mobile devices.

 

   

On January 25, 2012, we amended our bank credit facilities to extend the maturity of our $100.0 million revolving credit facility from January 2013 to January 2016 and added a new $200.0 million revolving credit facility “C,” also maturing in January 2016.

 

   

In 2011, we actively pursued the roll-out of Videotron’s 4G network. As of December 31, 2011, Videotron’s mobile telephony service was available to close to 7 million people across the Province of Québec and in Eastern Ontario. During 2011, we activated 154,467 net new lines on our new advanced mobile network at a pace of approximately 12,900 net new lines per month, bringing our total mobile customer base to 290,578 activated lines.

 

   

In the third quarter of 2011, Nurun completed the acquisition of Odopod, a digital agency in San Francisco, California, that has expertise in brand promotion and interactive product development.

 

   

On September 12, 2011, TVA Group launched the TVA Sports channel that broadcasts Ottawa Senators, Toronto Blue Jays, Montréal Impact, Interbox, Ultimate Fighting Championship, Québec Major Junior Hockey League (“QMJHL”) and Canadian Hockey League events, among others.

 

   

On August 31, 2011, our subsidiary, Quebecor Media Network Inc. (“Quebecor Media Network”), launched Le Sac Plus. In addition to distributing all Quebecor Media community newspapers in the Province of Québec, Le Sac Plus door-knob bag contains advertising materials, such as flyers, leaflets, product samples and other value-added promotions every week.

 

   

On June 22, 2011, we announced the acquisition of a QMJHL franchise. Our new team, L’Armada de Blainville-Boisbriand, played its first regular game in September 2011.

 

   

On July 20, 2011, Videotron amended its $575.0 million revolving credit facility to extend the expiry date from April 2012 to July 2016 and to modify certain other terms and conditions thereof.

 

   

On July 5, 2011, Videotron issued $300.0 million aggregate principal amount of its 6 7/8% Senior Notes due 2021 for net proceeds of $294.8 million (net of fees payable to the underwriters and the expenses of the offering). Videotron used the net proceeds to redeem and retire US$255.0 million in aggregate principal amount of Videotron’s issued and outstanding 6 7/8% senior notes due 2014.

 

   

On April 18, 2011, we launched Sun News an English-language news and opinion specialty channel.

 

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In March 2011, Quebecor Media completed another step in its development plan by reaching an agreement with Québec City granting Quebecor Media management and naming rights for a 25-year period to the new multipurpose amphitheater to be built in Québec City. These rights represent a major asset to Quebecor Media that will allow the Company to pursue initiatives to leverage growth and convergence opportunities and to cross-promote its brands, programs and other content. Pursuant to agreements entered into with Québec City in early September 2011, we will implement our business plan for the management of this multipurpose arena.

 

   

On February 3, 2011, Quebecor Media expanded its distribution network in the Province of Québec and its stable of community newspapers with the acquisition of Les Hebdos Montérégiens’ 15 newspapers.

 

   

On January 5, 2011, Quebecor Media issued $325.0 million aggregate principal amount of its 7 3/8% Senior Notes due 2021 for net proceeds of $319.9 million (net of fees payable to the underwriters and the expenses of the offering) in private placements exempt from the registration requirement of the Securities Act and prospectus requirements of applicable Canadian securities laws. Quebecor Media used the net proceeds to effect a contribution (the “QMI Contribution”) to Sun Media and for general corporate purposes. On February 15, 2011, Sun Media used the $288.0 million proceeds of the QMI Contribution to redeem all of its outstanding 7 5/8% Senior Notes due 2013 in the aggregate principal amount of US$205.0 million, and to finance the settlement and termination of related hedging contracts.

 

   

On January 1, 2011, as part of a corporate reorganization of the News Media segment, Osprey Media Publishing Inc. was wound up and its operations were integrated into Sun Media.

 

   

On November 10, 2010, Quebecor Media announced the creation of a national sales office in the Province of Québec. Like the QMI National Sales Office in Toronto for the English-language market, this office offers the French-language market the new integrated approach to marketing solutions. Quebecor Media is pooling the expertise of its various teams to provide its customers a one-stop shop in the Province of Québec, where sales representatives offer solutions that meet each customer’s specific needs.

 

   

On September 9, 2010, Videotron launched its HSPA+ mobile communication network.

 

   

In September 2010, Videotron launched its illico mobile, a service delivered over its 4G network that provides customers with mobile telephone access to several television and Galaxy Music channels, and to the illico mobile store.

 

   

In June 2010, Videotron launched illico web (illicoweb.tv), an Internet television service offering an exceptional variety of content to our digital television and Internet customers, at no additional cost. Customers can access from a computer thousands of French and English movies, series and music from several different television channels.

 

   

In May 2010, Osprey Media Publishing Inc. paid down the $114.8 million balance on its term credit facility. On June 30, 2010, all Osprey Media Publishing Inc.’s credit facilities were cancelled.

 

   

On January 14, 2010, Quebecor Media made a US$170.0 million early payment on drawings on its term loan “B” and settled a corresponding portion of its hedge agreements for $30.9 million, for a total cash disbursement of $206.7 million. On January 14, 2010, Quebecor Media also obtained from its credit agreement lenders the extension of the maturity date of its $100 million revolving credit facility from January 2011 to January 2013 and certain other favourable amendments to the covenants contained in its credit facilities.

 

   

In January 2010, Videotron issued $300.0 million aggregate principal amount of its 7 1/8% Senior Notes due 2020 for net proceeds of $293.9 million (net of financing expenses). Videotron used the proceeds to repay the drawings under its Senior Secured Credit Facilities and for general corporate purposes.

 

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On November 13, 2009, Videotron amended its Senior Secured Credit Facilities to create a separate $75.0 million secured term facility having a maturity date expiring in June 2018 (“Export Financing Facility”). In addition, on November 13, 2009, Videotron entered into a separate credit agreement with a group of lenders and HSBC Bank plc acting as agent for the lenders, providing for an unsecured term credit facility (“Facility B”) in a maximum amount equal to the difference between US$100 million and the aggregate of the US dollar equivalent of each drawing made under the Export Financing Facility. The Facility B has never been used and was cancelled as of August 2011. The proceeds of the Export Financing Facility may be used, among other things, for payments and/or reimbursement of payments for export equipment and local services in relation to the contract for wireless infrastructure equipment entered into by Videotron with an affiliate of Nokia Corporation.

 

   

On March 5, 2009, Videotron issued US$260.0 million aggregate principal amount of its 9 1/8% Senior Notes due 2018 for net proceeds of $332.4 million (including accrued interest and net of financing expenses). Videotron used the proceeds to repay drawings on its Senior Secured Credit Facilities and for general corporate purposes.

 

B - Business Overview

Overview

Quebecor Media is one of Canada’s leading media companies, with activities in cable distribution, telecommunications, newspaper publishing, production and distribution of printing products, television broadcasting, book, magazine and video retailing, publishing and distribution, music recording, production and distribution, and new media services. Through its operating subsidiaries, Quebecor Media holds leading positions in the creation, promotion and distribution of news, entertainment and Internet-related services that are designed to appeal to audiences in every demographic category. Quebecor Media continues to pursue a convergence strategy to capture synergies within its portfolio of media properties.

We operate in the following industry segments: Telecommunications, News Media, Broadcasting, Leisure and Entertainment, and Interactive Technologies and Communications.

Competitive Strengths

Leading Market Positions

In our Telecommunications segment, we are the largest cable operator in the Province of Québec and the third largest in Canada, in each case based on the number of cable customers. We believe that our strong market position has enabled us to launch and deploy new products and services more effectively. For example, since the introduction of our cable Internet access service, we estimate that we have become the largest provider of such service in the areas we serve. In addition, we are the franchisor of the largest chain of video stores in the Province of Québec through our Le SuperClub Vidéotron subsidiary. Our extensive proprietary and third-party retail distribution network of stores and points of sale, including both the Le SuperClub Vidéotron stores and our Videotron branded stores and kiosks, assist us in marketing and distributing our advanced services, such as cable Internet access, digital television and mobile telephony, on a large scale basis. Sun Media is the largest newspaper publisher in Canada based on total paid and unpaid circulation (according to management estimates) and is Canada’s second largest newspaper publisher in terms of weekly paid average circulation according to statistics published in Newpapers Canada’s “Daily Circulation Report 2010” (the “Newspapers Canada Circulation Data”). In our Broadcasting segment, we are the largest private-sector broadcaster of French-language entertainment, information and public affairs programs in North America in terms of market share.

Diverse Media Platform

Our diverse media platform allows us to extend our market reach and cross-promote our brands, programs and other content. In addition, we can provide advertisers with an integrated solution for local, regional and national multi-platform advertising. We can leverage our content, management, sales and marketing and production resources to provide superior information and entertainment services to our customers.

 

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Differentiated Bundled Services

Through our technologically advanced fixed and mobile network, we offer a differentiated, bundled suite of entertainment, information and communication services and products, including digital television, cable Internet access, video-on-demand and other interactive television services, as well as residential and commercial cable telephony services using VoIP technology, and mobile telephony services. In addition, we deliver high-quality services and products, including, for example, our standard cable Internet access service that enables our customers to download data at a higher speed than currently offered by standard digital subscriber line, or DSL, technology. We also offer the widest range of French-language programming in Canada including content from our illico on demand service available on our illico Digital TV, illico web and illico mobile platforms. Customers can interrupt and resume programming at will on any of these three illico platforms.

Advanced Broadband Network

We are able to leverage our advanced broadband network, 99.6% of which is bi-directional, to offer a wide range of advanced services on the same media, such as digital television, video-on-demand, cable Internet access and cable telephony services. We are committed to maintaining and upgrading our network capacity and, to that end, we currently anticipate that future capital expenditures over the next five years will be required to accommodate the evolution of our products and services and to meet the demand for increased capacity.

Focused and Highly Reliable Network Cluster

Our single hybrid fibre coaxial clustered network covers approximately 78% of the Province of Québec’s total addressable market and nine of the province’s top ten urban areas. We believe that our single cluster and network architecture provides many benefits, including a higher quality and more reliable network, the ability to launch and deploy new products and services, and a lower cost structure through reduced maintenance and technical support costs.

Strong, Market-Focused Management Team

We have a strong, market-focused management team that has extensive experience and expertise in a range of areas, including marketing, finance, telecommunications, publishing and technology. Under the leadership of our senior management team, we have, among other things, improved penetration of our high-speed Internet access offering our VoIP telephony services, our cable products and our mobile telephony services, including through the successful built-out and launch of our mobile telephony network.

Our Strategy

Our objective is to increase our revenues and profitability by leveraging the integration and growth opportunities presented by our portfolio of leading media assets. We attribute our strong historical results and positive outlook for growth and profitability to an ability to develop and execute forward looking business strategies. The key elements of our strategy include:

 

   

Leverage growth opportunities and convergence of content and platforms. We are the largest private sector French language programming broadcaster in North America, a leading producer of French language programming, the largest newspaper publisher in Canada based on total paid and unpaid circulation (according to management estimates), and a leading English and French language Internet news and information portal in Canada. As a result, we are able to generate and distribute content across a spectrum of media properties and platforms. In addition, these multi-platform media assets enable us to provide advertisers with integrated advertising solutions. We are able to provide flexible, bundled advertising packages that allow advertisers to reach local, regional and national markets, as well as special interest and specific demographic groups. We continue to explore and implement initiatives to leverage growth and convergence opportunities, including efforts to accelerate the migration of content generated by our various publications and broadcasters to our other media platforms, the launch of Sun News (which occurred in April 2011) which is an addition to Sun Media’s English-language news media and website offering, the transfer of the printing of several of our publications to two state-of-the-art facilities owned by Quebecor Media Printing, the creation of Quebecor Media Network and the launch of Le Sac Plus, the sharing of editorial

 

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content between our News Media business and QMI News Agency, the acquisition of our QMJHL franchise and the broadcast of its games on our recently launched TVA Sports channel, and the integration of advertising assets with the creation of our national sales services (“QMI National Sales”) aimed at developing global, integrated and multi-platform advertising and marketing solutions.

 

   

Build on our position as a telecommunications leader with our 4G mobile services. We provide an offering of advanced mobile telecommunications services to consumers and small and medium businesses that are based on effective, reliable technology, diverse and convergent content and unambiguous business policies. Our recently launched mobile service is the cornerstone of a corporate business strategy geared toward harnessing all of our creative resources and providing consumers with access to technology, services and information.

 

   

Introduce new and enhanced products and services. We expect a significant portion of the revenue growth in our Telecommunications segment to be driven by the introduction of new products and services (such as Wideband Internet technology and products and services leveraging our new mobile network) and by the continuing penetration of our existing suite of products and services such as digital cable services, cable Internet access, cable and mobile telephony services, as well as high-definition television, video-on-demand and interactive television content of our digital television, Internet and mobile platforms. We believe that the continued increase in the penetration rate of our digital television, cable Internet access, telephony and mobile voice and data services will result in increased ARPU, and we are focusing sales and marketing efforts on the bundling of these value-added products and services.

 

   

Cross-promote brands, programs and other content. The geographic overlap of our cable, television, newspaper and magazine publishing, music and video store chains, and Internet platforms enables us to cost effectively promote and co-brand media properties. We will continue to promote initiatives to advance these cross-promotional activities, including the cross-promotion of various businesses, cross-divisional advertising and shared infrastructures. Our efforts to obtain a National Hockey League franchise for Québec City is an example of such initiatives.

 

   

Leverage geographic clustering. Our Videotron subsidiary holds cable licenses that cover approximately 78% of the Province of Québec’s estimated 3 million residential and commercial premises. Geographic clusters facilitate bundled service offerings and, in addition, allow us to tailor our offerings to certain demographic markets. We aim to leverage the highly clustered nature of our systems to enable us to use marketing dollars more efficiently and to enhance customer awareness, increase use of products and services and build brand loyalty.

 

   

Maximize customer satisfaction and build customer loyalty. Across our media platform, we believe that maintaining a high level of customer satisfaction is critical to future growth and profitability. An important factor in our historical growth and profitability has been our ability to attract and satisfy customers with high quality products and services. We will continue our efforts to maximize customer satisfaction and build customer loyalty.

 

   

Manage expenses through success driven capital spending and technology improvements. In our Telecommunications segment, we support the growth in our customer base and bandwidth requirements through strategic success driven modernizations of our network and increases in network capacity. In our News Media segment, we have undertaken restructurings of certain printing facilities and news production operations, and invested in certain technology improvements with a view to modernizing our operations and improving our cost structure. In addition, we continuously seek to manage our salaries and benefits expenses, which comprise a significant portion of our costs.

Telecommunications

Through Videotron we are the largest cable operator in the Province of Québec and the third largest in Canada, in each case based on the number of cable customers, as well as being a major internet service provider (“ISP”) and a provider of cable and mobile telephony services in the Province of Québec. Our cable network covers approximately 78% of the Province of Québec’s approximately 3 million residential and commercial premises.

 

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Our mobile network, which was launched in September 2010, is the cornerstone of a corporate business strategy geared toward harnessing all of our creative resources and providing consumers with access to technology, services and information anytime, anywhere. The deployment of our 4G network and our enhanced offering of mobile communication services for residential and business customers allow us to consolidate our position as a provider of integrated telecommunication services.

In addition, through our Le SuperClub Vidéotron subsidiary, we are also the franchisor of the largest chain of video and video game rental stores in the Province of Québec and among the largest of such chains in Canada. We had a total of 211 retail locations as of December 31, 2011.

Videotron Business Solutions is a premier full-service business telecommunications provider serving businesses of small, medium and large size. In recent years, we have significantly grown our customer base and have become an important player in the business telecommunication segment in the Province of Québec. Products and services include Internet, television, cable and mobile telephony services, hosting, private network connectivity and audio and video transmission.

We own a 100% voting and 100% equity interest in Videotron.

For the year ended December 31, 2011, our Telecommunications operations generated revenues of $2.43 billion and operating income of $1.10 billion. For the year ended December 31, 2010, our Telecommunications operations generated revenues of $2.23 billion and operating income of $1.05 billion.

Products and Services

Videotron currently offers its customers cable services, mobile telephony services, business telecommunications services and video and video games rental services (as franchisor). In addition, all activities and websites associated with the businesses of Jobboom and Réseau Contact were transferred to Videotron in the second quarter of 2011.

Cable Services

Advanced Cable-Based Products and Services

Cable’s large bandwidth is a key factor in the successful delivery of advanced products and services. Several emerging technologies and increasing Internet usage by our customers have presented us with significant opportunities to expand our sources of revenue. We currently offer a variety of advanced products and services, including cable Internet access, digital television, cable telephony and selected interactive services. We intend to continue to develop and deploy additional added-value services to further broaden our service offering.

 

   

Cable Internet Access. Leveraging our advanced cable infrastructure, we offer cable Internet access to our residential customers primarily via cable modems attached to personal computers. We generally provide this service at download speeds of up to 60 Mbps. In some portions of the network, we offer download speeds of up to 120 Mbps. As of December 31, 2011, we had 1,332,551 cable Internet access customers, representing 71.6% of our basic customers and 50.1% of our total homes passed. Based on internal estimates, we are the largest provider of Internet access services in the areas we serve with an estimated market share of 56.3% as of December 31, 2011.

 

   

Digital Television. We have installed headend equipment capable of delivering digitally encoded transmissions to a two-way digital capable set-top box in the customer’s home. This digital connection provides significant advantages. In particular, it increases channel capacity, which allows us to increase both programming and service offerings while providing increased flexibility in packaging our services. Our basic digital package includes 29 television channels, 45 audio services providing CD-quality music, 19 AM/FM radio channels, an interactive programming guide as well as television based e-mail capability. Our extended digital basic television offering, branded as “sur mesure” (on-demand), offers customers the ability to select from more than 300 additional channels of their choice, including U.S. super-stations and other special entertainment programs, allowing them to customize their choices. This also offers customers significant programming flexibility including the option of French-language only,

 

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English-language only or a combination of French and English language programming, as well as many foreign-language channels. We also offer pre-packaged themed service tiers in the areas of news, sports and discovery. Customers who purchase basic service and one customized package can also purchase channels on an à la carte basis at a specified cost per channel per month. As part of our digital service offering, customers can also purchase near-video-on-demand services on a per-event basis. As of December 31, 2011, we had 1,400,814 customers for our digital television service, representing 75.3% of our total basic customers and 52.7% of our total homes passed. Our customers currently have the option to purchase or lease the digital set-top boxes required for digital service.

 

   

Cable Telephony. Since January 2005, we have been offering cable telephony service using VoIP technology in the Province of Québec. We offer discounts to our customers who subscribe to more than one of our services. We also offer discounts for a second telephone line subscription. In addition, we offer a Softphone service, a computer-based service providing users with more flexibility when traveling, the ability to make local calls anywhere in the world, and new communications management capabilities. As of December 31, 2011, we had 1,205,272 subscribers to our cable telephony service, representing a penetration rate of 64.7% of our basic cable subscribers and 45.4% of our homes passed.

 

   

Video-On-Demand. Video-on-demand service enables digital cable customers to rent content from a library of movies, documentaries and other programming through their digital set-top box, Internet access or mobile phone through illico web and illico mobile. Our digital cable customers are able to rent their video-on-demand selections for a period of 24 hours, which they are then able to watch at their convenience with full stop, rewind, fast forward, pause and replay functionality during that period. In addition, customers can now resume viewing on-demand programming that was paused on either the television, illico web or illico mobile device. We sometimes group movies, events or TV programs available on video-on-demand and offer them on a weekly basis. We also offer a substantial amount of video-on-demand content free of charge to our digital cable customers, comprised predominantly of previously aired television programs and youth-oriented programming. In addition, we offer pay television channels on a subscription basis that permits our customers to access and watch most of the movies available on the linear pay TV channels these clients subscribe to.

 

   

Pay-Per-View (Canal Indigo). Canal Indigo is a group of pay-per-view channels that allow our digital customers to order live events and movies based on a pre-determined schedule.

Traditional Cable Television Services

Customers subscribing to our traditional analog “basic” and analog “extended basic” services generally receive a line-up of 42 channels of television programming, depending on the bandwidth capacity of their local cable system. We also feature an expanding offering of optional channels as well as customized selection of channels or channel packages tailored to satisfy the specific needs of the different customer segments we serve.

Our analog cable television service offerings include the following:

 

   

Basic Service. Our basic service customers generally receive 25-channels on basic cable, consisting of local broadcast television stations, the four U.S. commercial networks and PBS, selected Canadian specialty programming services, and local and regional community programming.

 

   

Extended Basic Service. This expanded programming level of services, which is generally comprised of approximately 17 channels, includes a package of French-and-English-language specialty television programming and U.S. cable channels in addition to the basic service channel line-up described above. Branded as “Telemax”, this service was introduced in almost all of our markets largely to satisfy customer demand for greater flexibility and choice.

As of December 31, 2011, we had 460,663 customers for our analog television service, representing 24.7% of our total basic customers.

 

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Mobile Services

On September 9, 2010, we launched our HSPA+ mobile communication network (4G). As of December 31, 2011, most of our cable footprint had access to our advanced mobile services. Prior to launching our HSPA+ mobile communication network (4G), we have been offering mobile wireless telephony services as a Mobile Virtual Network Operator (“MVNO”) since 2006.

In August 2011, Videotron upgraded its wireless network to HSPA+ Dual Carrier Technology allowing speed of up to 42Mbps. Bundling its cable broadband Internet access with its mobile Internet access was a first in the industry and is a unique offering of “everywhere Internet”.

In partnership with Industry Canada, Videotron launched a fixed wireless Internet access in selected rural areas of the Province of Québec on December 14, 2011. Powered by its HSPA+ network, this service allows thousands of households and businesses that had no access to high speed Internet to benefit from a reliable and professionally installed high speed Internet. As a result, we extended our residential and business Internet footprint to dozens of underserved municipalities across the Province of Québec.

Our strategy in the coming years is to build on our position as a telecommunications leader with our 4G mobile services. With this service, we provide an offering of advanced mobile telecommunications services to consumers and small and medium-sized businesses that are based on effective, reliable technology, diverse and convergent content and unambiguous business policies. Our mobile service is the cornerstone of a corporate business strategy geared toward harnessing all of our creative resources and providing consumers with access to technology, services and information anytime, anywhere.

As of December 31, 2011, we had 290,578 activated lines to our mobile telephony services.

Business Telecommunications Services

Videotron Business Solutions is a premier full-service business telecommunications provider. We serve three customer segments: small and medium-sized businesses, large businesses, and telecommunications carriers. In recent years, we have significantly grown our customer base and have become an important player in the business telecommunications segment in the Province of Québec. Products and services for small and medium-sized businesses are supported by our coaxial technology and our solid expertise in business services. Customized solutions designed to meet customers’ needs incorporating tools such as fibre-optic landlines, High Speed Internet access, television, telephony services, website hosting, private network connectivity and audio and video transmission, all based on state-of-the-art technology, are also offered to large businesses and carriers. Videotron also offers mobile communications services, telephony services using our multiple label switching (“MPLS”) network and 120Mbps high speed Internet access targeted at small and medium sized businesses using our Hybrid fibre coaxial (“HFC”) network.

Video Rental Services

Through Le SuperClub Vidéotron, we are the franchisor of the largest chain of video and video game rental stores in the Province of Québec and among the largest of such chains in Canada. We have a total of 211 retail locations. With 171 of these retail locations offering our suite of telecommunication services and products, Le SuperClub Vidéotron is both a showcase and a valuable and cost-effective distribution network for Videotron’s growing array of advanced products and services, such as cable Internet access, digital television and cable and mobile telephony.

Jobboom and Réseau Contact

Jobboom.com is a unique web-based employment site with over 2.5 million members as of December 31, 2011. The activities of Jobboom also include Les Éditions Jobboom (a careers book editor) and Jobboom Formation (an internet directory of continuing education services).

RéseauContact.com is the largest French-language dating and friendship website in the Province of Québec.

 

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Customer Statistics Summary

The following table summarizes our customer statistics for our analog and digital cable and advanced products and services:

 

     As of December 31,  
     2011     2010     2009     2008     2007  

Homes passed(1)

     2,657,315        2,612,406        2,575,315        2,542,859        2,497,403   

Cable

          

Basic customers(2)

     1,861,477        1,811,570        1,777,025        1,715,616        1,638,097   

Penetration(3)

     70.1     69.3     69.0     67.5     65.6

Digital customers

     1,400,814        1,219,599        1,084,100        927,322        768,211   

Penetration(4)

     75.3     67.3     61.0     54.1     46.9

Dial-up Internet Access

          

Dial-up customers

     2,986        3,851        4,988        6,533        9,052   

Mobile High Speed Internet

          

Mobile High Speed Internet

     6,086        2,319        —          —          —     

Cable Internet Access

          

Cable modem customers

     1,332,551        1,252,104        1,170,570        1,063,847        932,989   

Penetration(3)

     50.1     47.9     45.5     41.8     37.4

Telephony Services

          

Cable telephony customers

     1,205,272        1,114,294        1,014,038        851,987        636,352   

Penetration(3)

     45.4     42.7     39.4     33.5     25.5

Mobile telephony lines(5)

     290,578        136,111        82,813        63,402        45,077   

 

(1) “Homes passed” means the number of residential premises, such as single dwelling units or multiple dwelling units, and commercial premises passed by the cable television distribution network in a given cable system service area in which the programming services are offered.
(2) Basic customers are customers who receive basic cable service in either the analog or digital mode.
(3) Represents customers as a percentage of total homes passed.
(4) Represents customers for the digital service as a percentage of basic cable customers.
(5) Prior to September 9, 2010, represents only lines under our MVNO service offering.

In the year ended December 31, 2011, we recorded a net increase of 49,907 basic cable customers. During the same period, we also recorded net additions of 80,447 subscribers to our cable Internet access service, 181,215 customers to our digital television service (which includes customers who have upgraded from our analog cable service), and 90,978 customers to our cable telephony services. In 2011, we added 154,467 net lines on our mobile wireless telephony services.

Industry Overview

Cable Television Industry

Industry Data

Cable television has been available in Canada for more than 50 years and is a well developed market. As of August 31, 2010, the most recent date for which data is available, there were approximately 8.3 million cable television customers in Canada. For the twelve months ended August 31, 2010 (the most recent data available), total industry revenue was estimated to be over $10.1 billion and is expected to grow in the future based on the fact that Canadian cable operators have aggressively upgraded their networks and have begun launching and deploying new products and services, such as cable Internet access, digital television services and telephony services. The following table summarizes the most recent available annual key statistics for the Canadian and U.S. cable television industries.

 

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     Twelve Months Ended August 31,  
      2010      2009      2008      2007      2006      CAGR(1)  
     (US Dollars in billions and basic cable customers in millions)  

Canada

                 

Industry Revenue(2)

     10.1       $ 9.2       $ 8.2       $ 7.1       $ 6.1         13.5

Basic Cable Customers(2)

     8.3         8.1         7.9         7.7         7.5         2.5

 

     Twelve Months Ended December 31,  
     2010     2009     2008     2007     2006     CAGR(1)  
     (Dollars in billions, homes passed and basic cable customers in millions)  

U.S.

            

Industry Revenue

   US$ 93.7      US$ 90.2      US$ 86.3      US$ 78.8      US$ 71.9        5.44

Homes Passed(3)

     129.3        125.7        124.2        123.0        111.6        2.99

Basic Cable Customers

     59.8        62.6        63.7        64.9        65.4        -1.77

Basic Penetration

     45.5     49.8     51.3     52.8     58.6     -4.93

 

Source of Canadian data: CRTC.

Source of U.S. data: NCTA, A.C. Nielsen Media Research and SNL Kagan.

 

(1) Compounded annual growth rate from 2006 through 2010.
(2) Including IPTV since 2008.
(3) “Homes passed” means the number of residential premises, such as single dwelling units or multiple dwelling units, and commercial premises passed by the cable television distribution network in a given cable system service area in which the programming services are offered.

Expansion of Digital Distribution and Programming

In recent years, digital technology has significantly expanded the range of services that may be offered to our customers. We now offer 395 channels on our digital platform, including 176 English-language channels, 60 French-language channels, 64 HDTV channels, 10 time-shifting channels, 63 radio/music channels and 22 others.

Many programming services have converted to high-definition format and HDTV programming is steadily increasing. We believe that the availability of HDTV programming will continue to increase significantly in the coming years and will result in a higher penetration level of digital distribution.

Our strategy, in the coming years, will be to continue the expansion in our offering and maintain the quality of our programming. Our cable television service depends in large part on our ability to distribute a wide range of appealing, conveniently-scheduled television programming at reasonable rates and will be an important factor in our success to maintain the attractiveness of our services to customers. In addition, we will continue working on the expansion of our added-value products, such as video-on-demand and digital television interactive content. In late 2010, we also started offering sporting events, movies and documentaries using new 3D technologies.

Mobile Telephony Industry

In terms of wireless penetration rate (i.e. the number of active SIM cards and/or connected lines versus total population, expressed as a percentage), the Canadian mobile telephony market is relatively under-developed. Based on The Netsize Guide 2011: Truly mobile, Canada occupies the fortieth position out of forty-one countries in terms of wireless penetration, with a penetration rate of 72.4% in the fourth quarter of 2011. We estimate that, as of December 31, 2011, the Province of Québec had a penetration rate under the Canadian average. Comparatively, according to Global mobile statistics, the United States had a penetration rate of 94.1% as of November 30, 2011, while Europe’s overall penetration rate reached 120%.

The wireless spectrum auction completed in July 2008 has brought new players onto the market, which led to lower prices for customers. To respond to this new offer, traditional incumbents launched or have operated for some time, low-price subsidiaries. As of December 31, 2011, incumbents were still dominant in the Industry with market share exceeding 90% in the Province of Québec.

 

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With an increasing number of regional operators competing on price, coverage, handset offers and technological reliability, the Canadian wireless industry is highly competitive. With the deployment of Advanced Wireless Networks throughout the country and the increasing penetration rate among younger customers, the demand for technologically advanced bandwidth-hungry devices (smartphones, tablets, etc.) is increasing rapidly. As of September 30, 2011, there were 25.5 million subscribers in Canada.

Pricing of our Products and Services

Our revenues are derived from the monthly fees our customers pay for cable Internet and telephony and mobile services. The rates we charge vary based on the market served and the level of service selected. Rates are usually adjusted annually. We also offer discounts to our customers who subscribe to more than one of our services, when compared to the sum of the prices of the individual services provided to these customers. As of December 31, 2011, the average monthly invoice on recurring subscription fees per customer was $96.49 and approximately 76% of our customers were bundling two services or more. A one-time installation fee, which may be waived in part during certain promotional periods, is charged to new customers. Monthly fees for rented equipment, such as set-top boxes, are also charged to customers.

Although our service offerings vary by market, because of differences in the bandwidth capacity of the cable systems in each of our markets and other factors, our services are typically offered at monthly price ranges, which reflect discounts for bundled service offerings, as follows:

 

Service

  

Price Range

Basic analog cable

   $15.07 – $32.88

Extended basic analog cable

   $31.50 – $45.19

Basic digital cable

   $14.99 – $19.98

Extended basic digital cable

   $31.98 – $80.98

Pay-television

   $3.99 – $29.99

Pay-per-view (per movie or event)

   $4.49 – $69.99

Video-on-demand (per movie or event)

   $0.99 – $59.99

Dial-up Internet access

   $9.95 – $15.95

Cable Internet access

   $27.95– $159.95

Mobile High Speed Internet

   $29.95 – $44.95

Cable telephony

   $17.35 – $23.35

Mobile telephony

   $19.95– $104.45

Our Network Technology

Cable

As of December 31, 2011, our cable systems consisted of 29,517 km of fibre optic cable and 44,641 km of coaxial cable, passing approximately 2.657 million homes and serving approximately 2.1 million customers. Our network is the largest broadband network in the Province of Québec covering approximately 78% of households and, according to our estimates, more than 75% of the businesses located in the major metropolitan areas of the Province of Québec. Our extensive network supports direct connectivity with networks in Ontario, the Maritimes and the United States.

The following table summarizes the current technological state of our systems, based on the percentage of our customers who have access to the bandwidths listed below and two-way (or “bi-directional”) capability:

 

      450 MHz and
Under
  480 to 625
MHz
  750 to 1000
MHz
  Two-Way
Capability

December 31, 2007

       1%   2%      97%      99%

December 31, 2008

       1%   0%      99%      99%

December 31, 2009

       1%   0%      99%      99%

December 31, 2010

       1%   0%      99%      99%

December 31, 2011

    0.4%   0%   99.6%   99.6%

 

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Our cable television networks are comprised of four distinct parts including signal acquisition networks, main headends, distribution networks and subscriber drops. The signal acquisition network picks up a wide variety of television, radio and multimedia signals. These signals and services originate from either a local source or content provider or are picked up from distant sites chosen for satellite or over-the-air reception quality and transmitted to the main headends by way of over-the-air links, coaxial links or fibre optic relay systems. Each main headend processes, modulates, scrambles and combines the signals in order to distribute them throughout the network. Each main headend is connected to the primary headend in order to receive the digital MPEG2 signals and the IP backbone for the Internet services. The first stage of this distribution consists of a fibre optic link which distributes the signals to distribution or secondary headends. After that, the signal uses the hybrid fibre coaxial cable network made of wide-band optical nodes, amplifiers and coaxial cables capable of serving up to 30 km in radius from the distribution or secondary headends to the subscriber drops. The subscriber drop brings the signal into the customer’s television set directly or, depending on the area or the services selected, through various types of customer equipment including set-top boxes and cable modems.

We have adopted the hybrid fibre coaxial (“HFC”) network architecture as the standard for our ongoing system upgrades. HFC network architecture combines the use of fibre optic cable with coaxial cable. Fibre optic cable has excellent broadband frequency characteristics, noise immunity and physical durability and can carry hundreds of video and data channels over extended distances. Coaxial cable is less expensive and requires greater signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we deliver our signals via fibre optic cable from the headend to a group of optical nodes and then via coax to the homes passed served by the nodes. Traditionally, our system design provided for cells of approximately 500 homes each to be served by fibre-optic cable. To allow for this configuration, secondary headends were put into operation in the Greater Montréal Area and in the Greater Québec City Area. Remote secondary headends must also be connected with fibre optic links. From the secondary headends to the homes, the customer services are provided through the transmission of a radiofrequency (“RF”) signal which contains both downstream and upstream information (two-way). The loop structure of the two-way HFC networks brings reliability through redundancy, the cell size improves flexibility and capacity, while the reduced number of amplifiers separating the home from the headend improves signal quality and reliability. The HFC network design provided us with significant flexibility to offer customized programming to individual cells of approximately 500 homes, which is critical to our advanced services, such as video-on-demand, Switched Digital Video Broadcast and the continued expansion of our interactive services. Starting in 2008, we began an extensive network modernization effort in the Greater Montréal Area in order to meet the ever expanding service needs of the customer in terms of video, telephony and Internet services. This ongoing modernization implies an extension of the upper limit of the RF spectrum available for service offerings and a deep fibre deployment, which significantly extends the fibre portion in the HFC network (thereby reducing the coax portion). Additional optical nodes were systematically deployed to increase the segmentation of customer cells, both for upstream and downstream traffic. This modernization initiative results in (i) a network architecture where the segmentation for the upstream traffic is for 125 homes while that for the downstream traffic is set to 250 (which can evolve to 125 homes), and (ii) the availability of a 1 GHz spectrum for service offerings. The robustness of the network is greatly enhanced (much less active equipment in the network such as RF amplifiers for the coax portion), the service offering potential and customization to the customer base is significantly improved (through the extension of the spectrum to 1 GHz and the increased segmentation) and allows much greater speeds of transmission for Internet services which are presently unrivalled. The overall architecture employs Division Wavelength Multiplexing (“DWM”), which allows us to limit the amount of fibre required, while providing an effective customization potential. As such, in addition to the broadcast information, up to 24 wavelengths can be combined on a transport fibre from the secondary headend to a 3,000 home aggregation point. Each of these wavelengths is dedicated to the specific requirements of 125 homes. The RF spectrum is set with analog content (to be phased out eventually) and digital information using quadrature amplitude modulation. MPEG video compression techniques and the Data over Cable Service Interface Specification (“DOCSIS”) protocol allow us to provide a great service offering of standard definition and high definition video, as well as complete voice and Internet services. This modernization project gives us flexibility to meet customer needs and future network evolution requirements. The modernization of the Greater-Montréal network is scheduled to be completed by 2015.

 

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Our strategy of maintaining a leadership position in respect of the suite of products and services that we offer and launching new products and services requires investments in our network to support growth in our customer base and increases in bandwidth requirements. Approximately 99.6% of our network in the Province of Québec has been upgraded to a bandwidth of 750 MHz or greater. Also, in light of the greater availability of HDTV programming, the ever increasing speed of Internet access and increasing demand for our cable telephony service, further investment in the network will be required.

Mobile Telephony

During 2011, we continued our HSPA + network expansion and densification plan throughout the Province of Québec and over the Greater Ottawa Area. As of December 31, 2011, our network reached approximately 78.5% of the population of the Province of Québec and most of our cable homes passed, allowing the vast majority of our potential clients to have access to advanced mobile services from Videotron. The majority of our towers and antennas are linked through our fibre optic network using MPLS protocol, and our network was built and designed to support important customer growth in coming years.

With the introduction of a new technology called the Dual-Carrier technology in August of this year, our HSPA+ mobile communication network (4G) allows data transmission speeds up to 42 Mbps.

Our strategy in the coming years is to build on our position as a telecommunication leader with our 4G mobile services and to keep the technology at the cutting edge as it continues to evolve rapidly and new market standards, such as Long Term Evolution-Advanced (“LTE 4G”), are appearing. We will also continue to expand our offer of handset devices in 2012.

Marketing and Customer Care

Our long term marketing objective is to increase our cash flow through deeper market penetration of our services, development of new services and continued growth in revenue per customer. We believe that customers will come to view their cable connection as the best distribution channel to the home for a multitude of services. To achieve this objective, we are pursuing the following strategies:

 

   

develop attractive bundle offers to encourage our customers to subscribe to two or more products, which increases ARPU and customer retention as well as increasing our operating margin;

 

   

continue to rapidly deploy advanced products and services such as cable Internet access, digital television, cable telephony and mobile wireless telephony services;

 

   

encourage our clients to migrate from analog to digital television using attractive incentives;

 

   

design product offerings that provide greater opportunity for customer entertainment and information choices;

 

   

target marketing opportunities based on demographic data and past purchasing behaviour;

 

   

develop targeted marketing programs to attract former customers, households that have never subscribed to our services and customers of alternative or competitive services;

 

   

enhance the relationship between customer service representatives and our customers by training and motivating customer service representatives to promote advanced products and services;

 

   

leverage the retail presence of Le SuperClub Vidéotron, Videotron’s branded stores and kiosks, Archambault stores and third-party commercial retailers;

 

   

cross-promote the wide variety of content and services offered within the Quebecor Media group (including, for example, the content of TVA Group productions and the 1-900 service for audience voting during reality television shows popular in the Province of Québec) in order to distribute our cable, data transmission, cable telephony and mobile telephony services to our existing and future customers;

 

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introduce new value-added packages of products and services, which we believe increases ARPU and improves customer retention; and

 

   

leverage our business market, using our network and expertise with our commercial customer base, which should enable us to offer additional bundled services to our customers and may result in new business opportunities.

We continue to invest time, effort and financial resources in marketing new and existing services. To increase both customer penetration and the number of services used by our customers, we use coordinated marketing techniques, including door-to-door solicitation, telemarketing, media advertising, e-marketing and direct mail solicitation.

Maximizing customer satisfaction is a key element of our business strategy. In support of our commitment to customer satisfaction, we provide a 24-hour customer service hotline seven days a week for nearly all of our systems, in addition to our web-based customer service capabilities. All of our customer service representatives and technical support staff are trained to assist our customers with respect to all products and services we offer, which in turn allows our customers to be served more efficiently and seamlessly. Our customer care representatives continue to receive extensive training to develop customer contact skills and product knowledge, which are key contributors to high rates of customer retention as well as to selling additional products and services and higher levels of service to our customers. To assist us in our marketing efforts, we utilize surveys, focus groups and other research tools as part of our efforts to determine and proactively respond to customer needs.

Programming

We believe that offering a wide variety of conveniently scheduled programming is an important factor in influencing a customer’s decision to subscribe to and retain our cable services. We devote resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential customers. We rely on extensive market research, customer demographics and local programming preferences to determine our channel and package offerings. The CRTC currently regulates the distribution of foreign content in Canada and, as a result, we are limited in our ability to provide such programming to our customers. We obtain basic and premium programming from a number of suppliers, including TVA Group.

Our programming contracts generally provide for a fixed term of up to seven years, and are subject to negotiated renewal. Programming tends to be made available to us for a flat fee per customer. Our overall programming costs have increased in recent years and may continue to increase due to factors including, but not limited to, additional programming being provided to customers as a result of system rebuilds that increase channel capacity, increased costs to produce or purchase specialty programming, inflationary or negotiated annual increases, and the concentration of broadcasters following recent acquisions in the market.

Competition

We operate in a competitive business environment in the areas of price, product and service offerings and service reliability. We compete with other providers of television signals and other sources of home entertainment. Due to ongoing technological developments, the distinctions among the traditional platforms (broadcasting, Internet, and telecommunications) is fading rapidly. The Internet as well as mobile devices are becoming important broadcasting and distribution platforms. In addition, mobile operators, with the development of their respective 4G networks, are now offering wireless and fixed wireless Internet services and our VoIP telephony service is also competing with Internet-based solutions.

 

   

Providers of Other Entertainment. Cable systems face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theatres and home video products, including digital recorders, DVD players and video games. The extent to which a cable television service is competitive depends in significant part upon the cable system’s ability to provide a greater variety of programming, superior technical performance and superior customer service than are available through competitive alternative delivery sources.

 

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Direct Broadcast Satellite. DBS is a significant competitor to cable systems. DBS delivers programming via signals sent directly to receiving dishes from medium and high-powered satellites, as opposed to cable delivery transmissions. This form of distribution generally provides more channels than some of our television systems and is fully digital. DBS service can be received virtually anywhere in Canada through the installation of a small rooftop or side-mounted antenna. Like digital cable distribution, DBS systems use video compression technology to increase channel capacity and digital technology to improve the quality of the signals transmitted to their customers.

 

   

DSL. The deployment of DSL technology provides customers with Internet access at data transmission speeds greater than that available over conventional telephone lines. DSL service is comparable to cable-modem Internet access over cable systems. We also face competition from other providers of DSL service.

 

   

Internet Video Streaming. The continuous technology improvement of the Internet combined with higher download speeds contributes to the emergence of alternative technologies such as IPTV digital content (movies, television shows and other video programming) offered on various Internet streaming platforms. While having a positive impact on the demand for our Internet services, this model could adversely impact the demand for our video-on-demand services.

 

   

VDSL. VDSL technology increases the available capacity of DSL lines, thereby allowing the distribution of digital video. Multi-system operators are now facing competition from ILECs, which have been granted licenses to launch video distribution services using this technology, which operates over copper phone lines. The transmission capabilities of VDSL will be significantly boosted with the deployment of technologies such as vectoring (the reduction or elimination of the effects of far-end crosstalk) and twisted pair bonding (use of additional twisted pairs to increase data carriage capacity). Certain ILECs have already started replacing many of their main feeds with fibre optic cable and positioning VDSL transceivers, a VDSL gateway, in larger multiple-dwelling units, in order to overcome the initial distance limitations of VDSL. With this added capacity, along with the evolution of compression technology, VDSL-2 will offer significant opportunities for services and increase its competitive threat against other multi-system operators.

 

   

Mobile telephony services. With our mobile telephony 4G network, we compete against a mix of market participants, some of them being active in some or all the products we offer, while others only offer mobile wireless telephony services in our market. In addition, users of mobile voice and data systems may find their communication needs satisfied by other current or developing adjunct technologies, such as Wi-Fi, WiMax, “hotspots” or trunk radio systems, which have the technical capability to handle mobile data communication and mobile telephone calls. Also, the Canadian incumbents have recently started the deployment of LTE 4G networks and this technology is deemed to become an industry standard. These LTE 4G technologies are being developed in anticipation of the additional network capacity that may be required to address the surging demand for wireless data. Such technologies evolved in the past year but will not offer voice over LTE until 2013.

 

   

Private Cable. Additional competition is posed by satellite master antenna television systems known as “SMATV systems” serving multi dwelling units, such as condominiums, apartment complexes, and private residential communities.

 

   

Other Cable Distribution. Currently, a cable operator offering television distribution and providing cable-modem Internet access service is serving the Greater Montréal Area. This cable operator is owned by the regional ILEC.

 

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Wireless Distribution. Cable television systems also compete with wireless program distribution services such as multi channel MDS. This technology uses microwave links to transmit signals from multiple transmission sites to line-of-sight antennas located within the customer’s premises.

 

   

Grey and Black Market DBS Providers. Cable and other distributors of television signals continue to face competition from the use of access codes and equipment that enable the unauthorized decoding of encrypted satellite signals, from unauthorized access to our analog and digital cable signals (black market) and from the reception of foreign signals through subscriptions to foreign satellite television providers that are not lawful distributors in Canada (grey market).

 

   

Telephony Service. Our cable telephony service competes against other telephone companies, including both the incumbent telephone service provider in the Province of Québec, which used to control a significant portion of the telephony market in the Province of Québec, as well as other VoIP telephony service providers and mobile wireless telephone service providers.

 

   

Other ISPs. In the Internet access business, cable operators compete against other ISPs offering residential and commercial Internet access services. The CRTC requires the large Canadian incumbent cable operators to offer access to their high speed Internet system to competitive ISPs at mandated rates.

News Media

Our newspaper publishing operations, which we conduct through our Sun Media operating subsidiary (Osprey Media Publishing Inc., which was an operating subsidiary in our newspaper publishing operations until December 31, 2010, was wound-up and its operations integrated into Sun Media on January 1, 2011), are the largest newspaper publisher in Canada based on total paid and unpaid circulation, according to management estimates. With a 23.6% average market share, our newspaper publishing operations are the second largest newspaper publisher in Canada in terms of weekly paid circulation, according to the Newspapers Canada Circulation Data. As of December 31, 2011, our News Media segment published 36 paid-circulation dailies, six free commuter dailies and 236 community weekly newspapers, magazines, buyers guides, farm publications and other specialty publications. Our publications have an established presence on the Internet and offer classified and local advertising, as well as other services for local advertisers and readers. As of December 31, 2011, the combined weekly circulation of our News Media segment’s paid and unpaid newspapers was approximately 15.7 million copies, according to internal statistics.

In the second quarter of 2011, all of the internet portals that were formally owned by Canoe Inc. were transferred to Sun Media (other than Réseau Contact and Jobboom which were transferred to Videotron), including the Canoe Network, which logs over 9.3 million unique visitors per month in Canada, including 5.0 million in the Province of Québec, and ranks as the number one general news destination in Canada (according to ComScore Media Metrix figures for December 2011). In 2011, Sun Media acquired Stealthedeal.com, an online couponing business to further expand our business in the digital market.

Our News Media segment is also engaged in the distribution of newspapers, magazines, inserts and flyers; commercial printing and related services to third-parties through its national network of printing and production facilities.

Quebecor Media continues the development of its News Media segment in order to increase its revenue streams. In this regard, the QMI news agency (the “QMI News Agency”) established two newsrooms in Montréal and Toronto, creating multiplatform teams for event coverage, and centralizing photo coverage across Canada. Since July 1, 2010, the QMI News Agency has been the main supplier of general Canadian news content to our media properties. In addition, we continue to leverage our printing capacities and distribution services with Quebecor Media Network which offers flyer printing and distributing across Canada.

Quebecor Media owns 100% of the voting and equity interests of Sun Media.

For the year ended December 31, 2011, our News Media operations generated revenues of $1.02 billion and operating income of $150.1 million, with 72.7% of these revenues derived from advertising, 16.9% from circulation, and 10.4% from commercial printing and other revenues. For the year ended December 31, 2010, our News Media operations generated revenues of $1.01 billion and operating income of $191.4 million, with 73.0% of these revenues from advertising, 17.9% from circulation, and 9.1% from commercial printing and other revenues.

 

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Canadian Newspaper Publishing Industry Overview

Newspaper publishing is the oldest segment of the advertising based media industry in Canada. The industry is mature and is dominated by a small number of major newspaper publishers largely segmented in different markets and geographic areas. As of December 31, 2011, our News Media Segment’s combined average weekly circulation (paid and unpaid) was approximately 15.7 million copies, according to internal statistics. According to the Newspapers Canada Circulation Data, Sun Media’s 23.6% market share of paid weekly circulation for Canadian daily newspapers makes our newspaper publishing operations the second largest newspaper publisher in Canada in terms of weekly paid average circulation.

According to the Newspapers Canada Circulation Data, there are approximately 96 paid circulation daily newspapers, numerous paid non-daily publications and free-distribution daily and non-daily publications. Of the 96 paid circulation daily newspapers, 22 have average weekday circulation in excess of 50,000 copies. These include 16 English-language metropolitan newspapers, four French language daily newspapers and two national daily newspapers. In addition to daily newspapers, both paid and unpaid non-daily newspapers are distributed nationally and locally across Canada. Newspaper publishers may also produce and distribute niche publications that target specific readers with customized editorial content and advertising. The newspaper market consists primarily of two segments, broadsheet and tabloid newspapers, which vary in format. With the exception of the broadsheet the London Free Press, all of Sun Media’s urban paid daily newspapers are tabloids.

Newspaper publishers derive revenue primarily from the sale of retail, classified, national and insert advertising, and to a lesser extent through paid subscriptions and single copy sales of newspapers. The mature nature of the Canadian newspaper industry has resulted in limited growth, if any, for traditional newspaper publishers, for many years, and the newspaper industry is now undergoing fundamental changes, including the growing availability of free access to media, shifting readership habits, digital transferability, the advent of real-time information and secular changes in the advertising market. As a result of these changes in the market, competition in the newspaper industry now comes not only from other newspapers (including other national, metropolitan (both paid and free) and suburban newspapers), magazines and more traditional media platforms, such as broadcasters, cable systems and networks, satellite television and radio, direct marketing and solo and shared mail programs, but also from digital media technologies, which have introduced a wide variety of media distribution platforms (including, most significantly, the Internet and distribution over wireless devices) to consumers and advertisers. As a result, the newspaper industry is facing challenges to retain its revenues and circulation/readership, as advertisers and readers become increasingly fragmented in the increasingly populated media landscape.

Advertising and Circulation

Advertising revenue is the largest source of revenue for our newspaper operations, representing 72.7% of our newspaper operations’ total revenues in 2011. Advertising rates are based upon the size of the market in which each newspaper operates, circulation, readership, demographic composition of the market and the availability of alternative advertising media. Our strategy is to maximize advertising revenue by providing advertisers with a range of pricing and marketing alternatives to better enable them to reach their target audience. Our newspapers offer a variety of advertising alternatives, including full-run advertisements in regular sections of the newspaper targeted to different readers (including automotive, real estate and travel), geographically targeted inserts, special interest pullout sections and advertising supplements.

The principal categories of advertising revenues in our newspaper operations are classified, retail and national advertising. Classified advertising is made up of four principal sectors: automotive, private party, recruitment and real estate. Retail advertising is display advertising principally placed by local businesses and organizations. Most of our retail advertisers are department stores, electronics stores and furniture stores. National advertising is display advertising primarily from advertisers promoting products or services on a national basis. Our national advertisers are principally in the retail automotive sector.

 

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In the smaller community papers, substantially all of the advertising revenues are derived from local retailers and classified advertisers. These newspapers publish advertising supplements with specialized themes such as agriculture, tourism, home improvement and gardening to encourage advertisers to purchase additional lineage in these special editions.

We believe our advertising revenues are diversified not only by category (classified, retail and national), but also by customer and geography. For the year ended December 31, 2011, our top ten national advertisers accounted for approximately 7.5% of the total advertising revenue and approximately 5.4% of the total revenue of our News Media segment. In addition, because we sell advertising in numerous regional markets in Canada, the impact of a decline in any one market can be offset by strength in other markets.

Circulation sales are our newspaper operations’ second-largest source of revenue and represented 16.9% of total revenues of our News Media segment in 2011. In the large urban markets, newspapers are available through newspaper boxes and retail outlets Monday through Sunday, except London Free Press, which does not publish a Sunday edition. We offer daily home delivery in each of our newspaper markets. We derive our circulation revenues from single copy sales and subscription sales. Our strategy is to increase circulation revenue by adding newspaper boxes and point-of-sale locations, as well as expanding home delivery. In order to increase readership, we are targeting editorial content to identified groups through the introduction of niche products, and in recent years we have launched e-editions of a number of our newspapers.

In order to respond to the ongoing transformation of the newspaper industry, which has affected advertising revenues and circulation levels in recent years, and to make adjustments in respect of the deterioration of economic conditions that have affected many of our advertisers, we are undertaking initiatives to leverage synergies and convergence among our subsidiaries, including those which are part of our newspaper operations. These initiatives include the launch of e-editions of a number of Sun Media’s newspapers. This initiative provides our advertisers with added-value and exposure on the Internet platform, which we hope will allow us to retain and secure certain advertising revenues. Furthermore, we have transferred the printing of several of our publications to two state-of-the-art facilities owned by Quebecor Media Printing (our wholly-owned subsidiary), we have created Quebecor Media Network which offers advertisers the full range of services from printing to the distribution of advertising materials, including Le Sac Plus, and our News Media business is sharing editorial content with QMI News Agency. Finally, with the creation of QMI National Sales, we have integrated our advertising assets to offer our clients global, integrated and multiplatform advertising and marketing solutions. We have also expanded our reach in the Montérégie region in the Province of Québec through the acquisition of Hebdos Montérégiens’15 newspapers and launched three new Québec weekly newspapers in 2011 in order to maximize the benefits of synergies among our operations.

Newspaper Operations

We operate our newspaper business through our Sun Media subsidiary in urban and community markets principally through two groups of products:

 

   

the Urban Daily Group; and

 

   

the Community Newspaper Group.

A majority of Sun Media’s newspapers in the Community Newspaper Group are clustered around our eight paid urban dailies in the Urban Daily Group. Sun Media has strategically established its community newspapers near regional printing facilities in suburban and rural markets across Canada. This geographic clustering enables us to realize operating efficiencies and economic synergies through sharing of management, production, printing, and distribution functions.

Through our wholly-owned subsidiary Quebecor Media Printing, we operate two printing state-of-the-art facilities located in Islington, Ontario, and Mirabel, Québec. 24 Hours in Toronto, the Toronto Sun, and a number of Ontario community publications are printed in Islington, Ontario. The Journal de Montréal and 24 Heures (Montréal), as well as a number of our Québec community publications are printed in Mirabel, Québec.

 

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The Urban Daily Group

Sun Media’s Urban Daily Group is comprised of eight paid daily newspapers, six free daily commuter publications and two free weekly publications.

Paid daily newspapers

Sun Media’s paid daily newspapers are published seven days a week and are all tabloids with the exception of the broadsheet the London Free Press which is also not published on Sundays. These are mass circulation newspapers that provide succinct and complete news coverage with an emphasis on local news, sports and entertainment. The tabloid format makes extensive use of color, photographs and graphics. Each newspaper contains inserts that feature subjects of interest such as fashion, lifestyle and special sections.

As of December 31, 2011, on a combined weekly basis, the eight paid daily newspapers in Sun Media’s Urban Daily Group had a circulation of approximately 5.2 million copies, according to internal statistics. These newspapers hold either the number one or number two position in each of their respective markets in terms of weekly readership.

Paid circulation is defined as average sales of a newspaper per issue. Readership (as opposed to paid circulation) is an estimate of the number of people who read or looked into an average issue of a newspaper and is measured by an independent survey conducted by NADbank Inc. According to the 2010 NADbank study (the “NADbank Study”), the most recent available survey, readership estimates are based upon the number of people responding to the Newspaper Audience Databank survey circulated by NADbank Inc. who report having read or looked into one or more issues of a given newspaper during a given period equal to the publication interval of the newspaper.

The following table lists Sun Media’s paid daily newspapers and their respective readership in 2010 as well as their market position by weekly readership during that period, based on information provided in the NADbank Study:

 

      2010 AVERAGE READERSHIP      MARKET
POSITION

BY  READERSHIP(1)

NEWSPAPER

   SATURDAY      SUNDAY      MON-FRI     

Journal de Montréal

     668,900         430,500         621,100       1st

Journal de Québec

     204,700         130,400         175,700       1st

Toronto Sun

     522,900         679,000         628,200       2nd

London Free Press

     148,500         n/a         145,800       1st

Ottawa Sun

     111,800         96,900         138,400       2nd

Winnipeg Sun

     78,600         72,400         110,100       2nd

Edmonton Sun

     132,000         151,300         166,300       2nd

Calgary Sun

     133,900         150,900         149,000       2nd
  

 

 

    

 

 

    

 

 

    

Total Average Readership

     2,001,300         1,711,400         2,134,600      
  

 

 

    

 

 

    

 

 

    

 

(1) Based on paid weekly readership data published by the NADbank Study.

Journal de Montréal. The Journal de Montréal is published seven days a week and is distributed by Quebecor Media Network. According to the Newspapers Canada Circulation Data, the Journal de Montréal ranks second in paid circulation among non-national dailies in Canada and first among French-language dailies in North America. The Journal de Montréal is the number one newspaper in its market in terms of weekly readership according to the NADbank Study. The main competitors of the Journal de Montréal are La Presse and The Montréal Gazette. Its website is accessible at www.journaldemontreal.com.

 

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The following table presents the average daily paid circulation of the Journal de Montréal for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Journal de Montréal

        

Saturday

     256,400         271,600         274,700   

Sunday

     232,500         236,900         247,900   

Monday to Friday

     234,000         242,200         250,300   

 

Source: Internal Statistics

Journal de Québec. The Journal de Québec is published seven days a week and is distributed by Quebecor Media Network. The Journal de Québec is the number one newspaper in its market in terms of weekly readership according to the NADbank Study. The main competitor of the Journal de Québec is Le Soleil. Its website is accessible at www.lejournaldequebec.com.

The following table presents the average daily paid circulation of the Journal de Québec for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Journal de Québec

        

Saturday

     116,800         113,000         111,500   

Sunday

     103,400         98,800         98,200   

Monday to Friday

     100,800         96,300         97,200   

 

Source: Internal Statistics

Toronto Sun. The Toronto Sun is published seven days a week throughout the greater metropolitan Toronto area. The Toronto Sun is the number two non-national daily newspaper in its market in terms of weekly readership according to the NADbank Study.

The Toronto newspaper market is very competitive. The Toronto Sun competes with Canada’s largest newspaper, the Toronto Star and to a lesser extent with the Globe & Mail and the National Post, which are national newspapers. As a tabloid newspaper, the Toronto Sun has a unique format compared to these broadsheet competitors. The competitiveness of the Toronto newspaper market is further increased by several free publications and niche publications relating to, for example, entertainment and television. Its website is accessible at www.torontosun.com.

The following table presents the average daily paid circulation of the Toronto Sun for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Toronto Sun

        

Saturday

     141,400         149,100         145,700   

Sunday

     193,800         247,200         266,400   

Monday to Friday

     166,300         180,200         171,400   

 

Source: Internal Statistics

London Free Press. The London Free Press, one of Canada’s oldest daily newspapers, emphasizes national and local news, sports and entertainment and is distributed throughout the London area. It is the only local daily newspaper in its market and is published six days a week, Monday through Saturday. Its website is accessible at www.lfpress.com.

 

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The following table reflects the average daily paid circulation of the London Free Press for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

London Free Press

        

Saturday

     77,600         81,400         87,000   

Monday to Friday

     70,600         73,000         74,900   

 

Source: Internal Statistics

Ottawa Sun. The Ottawa Sun is published seven days a week and is distributed throughout the Ottawa region. The Ottawa Sun is the number two newspaper in its market in terms of weekly readership according to the NADbank Study. It competes daily with the English-language broadsheet, the Ottawa Citizen, and also with the French language paper, Le Droit. Its website is accessible at www.ottawasun.com.

The following table reflects the average daily paid circulation of the Ottawa Sun for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Ottawa Sun

        

Saturday

     34,800         37,900         39,000   

Sunday

     37,200         40,800         42,900   

Monday to Friday

     43,700         44,700         46,600   

 

Source: Internal Statistics

The Ottawa Sun also publishes the Ottawa Pennysaver, a free weekly community shopping guide with circulation of approximately 168,700 as of December 31, 2011, according to internal statistics.

Winnipeg Sun. The Winnipeg Sun is published seven days a week and serves the metropolitan Winnipeg area. The Winnipeg Sun is the number two newspaper in its market in terms of weekly readership according to the NADbank Study, and it competes with the Winnipeg Free Press. Its website is accessible at www.winnipegsun.com.

The following table reflects the average daily paid circulation of the Winnipeg Sun for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Winnipeg Sun

        

Saturday

     28,400         34,000         48,500   

Sunday

     30,100         33,500         45,500   

Monday to Friday

     28,200         34,800         50,000   

 

Source: Internal Statistics

Edmonton Sun. The Edmonton Sun is published seven days a week and is distributed throughout Edmonton. The Edmonton Sun is the number two newspaper in its market in terms of weekly readership according to the NADbank Study, and it competes with Edmonton’s broadsheet daily, the Edmonton Journal. Its website is accessible at www.edmontonsun.com.

 

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The following table presents the average daily paid circulation of the Edmonton Sun for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Edmonton Sun

        

Saturday

     43,100         49,200         50,500   

Sunday

     53,500         58,800         67,300   

Monday to Friday

     45,800         51,400         56,200   

 

Source: Internal Statistics

Calgary Sun. The Calgary Sun is published seven days a week and is distributed throughout Calgary. The Calgary Sun is the number two newspaper in its market in terms of weekly readership according to the NADbank Study, and it competes with Calgary’s broadsheet daily, the Calgary Herald. Its website is accessible at www.calgarysun.com.

The following table presents the average daily circulation of the Calgary Sun for the periods indicated:

 

     YEAR ENDED DECEMBER 31  
     2011      2010      2009  

Calgary Sun

        

Saturday

     47,100         46,800         48,300   

Sunday

     56,600         60,900         67,900   

Monday to Friday

     45,700         45,700         47,300   

 

Source: Internal Statistics

Free daily newspapers

Sun Media publishes free daily commuter publications in six urban markets including Toronto, Montréal, Vancouver, Ottawa, Calgary, and Edmonton. The editorial content of these free daily commuter publications concentrates on the greater metropolitan area of each of these cities, respectively.

The following table reflects the average weekday circulation of our free daily commuter publications:

 

     Year ended December 31,  

FREE DAILY COMMUTER PUBLICATIONS

   2011      2010      2009  

24 Hours - Toronto

     238,600         246,300         256,800   

24 Heures - Montréal

     153,200         151,500         148,600   

24 Hours - Vancouver

     123,100         123,000         120,700   

24 Hours - Calgary

     37,000         36,000         40,300   

24 Hours - Edmonton

     35,900         35,800         36,100   

24 Hours - Ottawa

     35,200         34,600         32,800   

 

Source: Internal Statistics

Competition

The newspaper industry is seeing secular changes, including the growing availability of free access to media, shifting readership habits, digital transferability, the advent of real-time information and secular changes in the advertising market, all of which affect the nature of competition in the newspaper industry. Competition increasingly comes not only from other newspapers (including other national, metropolitan (both paid and free) and suburban newspapers), magazines and more traditional media platforms, such as broadcasters, cable systems and networks, satellite television and radio, direct marketing and solo and shared mail programs, but also from digital media technologies, which have introduced a wide variety of media distribution platforms (including, most significantly, the Internet, digital readers (e-readers) and distribution over wireless devices) to consumers and advertisers.

 

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The rate of development of opportunities in, and competition from, these digital media services, including those related to the Internet, is increasing. Through internal development programs, joint initiatives among Quebecor Media and its subsidiaries, and acquisitions, our efforts to explore new opportunities in news, information and communications businesses have expanded and will continue to do so. For instance, in order to leverage synergies and convergence among our subsidiaries, we have launched e-editions of a number of Sun Media’s newspapers, we have transferred the printing of several of our publications to two state-of-the-art facilities owned by Quebecor Media Printing (our wholly-owned subsidiary), we have created Quebecor Media Network which offers advertisers the full range of services from printing to the distribution of advertising materials, including Le Sac Plus, and our News Media business is sharing editorial content with QMI News Agency. In addition, with the creation of QMI National Sales, we have integrated our advertising assets to offer our clients global, integrated and multiplatform advertising and marketing solutions.

We believe that the high cost associated with starting a major daily newspaper operation represents a barrier to entry to potential new competitors of Sun Media’s Urban Daily Group.

The Community Newspaper Group

Sun Media’s Community Newspaper Group consists of 28 paid daily community newspapers, 205 community weekly newspapers and shopping guides, and 29 agricultural and other specialty publications. The total average weekly circulation of the publications in Sun Media’s Community Newspaper Group for the year ended December 31, 2011 was approximately 4.7 million free copies and approximately 2.4 million paid copies, according to internal statistics. The table below sets forth the average daily paid circulation and geographic location of the daily newspapers published by Sun Media’s Community Newspaper Group for the year ended December 31, 2011:

 

NEWSPAPER (1)

  

LOCATION

   AVERAGE DAILY PAID
CIRCULATION
The Kingston Whig-Standard    Kingston, Ontario    21,700
The Standard    St. Catharines, Ontario    19,200
The Expositor    Brantford, Ontario    15,900
The Sudbury Star    Sudbury, Ontario    14,100
The Sault Star    Sault Ste Marie, Ontario    13,500
The Peterborough Examiner    Peterborough, Ontario    13,100
The Observer    Sarnia, Ontario    12,300
The Sun Times    Owen Sound, Ontario    12,000
North Bay Nuggett    North Bay, Ontario    11,500
Niagara Falls Review    Niagara Falls, Ontario    10,600
Cornwall Standard Freeholder    Cornwall, Ontario    10,400
The Tribune    Welland, Ontario    9,900
The Intelligencer    Belleville, Ontario    9,400
The Recorder & Times    Brockville, Ontario    8,500
The Chatham Daily News    Chatham, Ontario    7,900
Beacon Herald    Stratford, Ontario    7,600
The Daily Press    Timmins, Ontario    6,400
Simcoe Reformer    Simcoe, Ontario    5,800
The Barrie Examiner    Barrie, Ontario    5,300
Packet & Times    Orillia, Ontario    5,200
Daily Herald Tribune    Grande Prairie, Alberta    5,000
Sentinel-Review    Woodstock, Ontario    4,800
The Daily Observer    Pembroke, Ontario    4,300
Northumberland Today    Northumberland, Ontario    4,100
St. Thomas Time-Journal    St. Thomas, Ontario    4,000
Kenora Daily Miner & News    Kenora, Ontario    2,300
Fort McMurray Today    Fort McMurray, Alberta    2,000
Portage Daily Graphic    Portage La Prairie, Manitoba    1,800
     

 

Total Average Daily Paid Circulation

   248,600

 

Source: Internal Statistics

 

(1) The listed newspapers are published at least five days per week, except for the Simcoe Reformer, Kenora Daily Miner & News, and Portage Daily Graphic, which are published four days per week.

 

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The number of community publications (comprised principally of non-daily newspapers and shopping guides) presented on a regional basis is as follows:

 

Province

   Number of
Publications
 

Ontario

     130   

Québec

     74   

Alberta

     40   

Manitoba

     13   

Saskatchewan

     4   

New Brunswick

     1   
  

 

 

 

Total Publications

     262   

 

Source: Internal Statistics

Our community newspaper publications generally offer news, sports and special features, with an emphasis on local information. We believe that these newspapers cultivate reader loyalty and create franchise value by emphasizing local news, thereby differentiating themselves from national newspapers.

Competition

Several of the Community Newspaper Group’s publications maintain the number one position in the markets that they serve. Our community publications are generally located in small towns and are typically the only daily or weekly newspapers of general circulation published in their respective communities, although some face competition from daily or weekly publications published in nearby locations and circulated in the markets where we publish our daily or weekly publications. Historically, the Community Newspaper Group’s publications have been a consistent source of cash flow, derived primarily from advertising revenue.

Other Operations

Commercial Printing

Our national network of production and printing facilities enables us to provide printing services for web press (coldset and heatset) and sheetfed products, and graphic design for print and electronic media. Web presses utilize rolls of newsprint, whereas sheetfed presses use individual sheets of paper. Heatset web presses, which involve a more complex process than coldset web presses, are generally associated with printing on glossy paper. These operations provide commercial printing services for both Sun Media’s internal printing needs and for third parties. Sun Media’s printing facilities include 13 printing facilities for its urban and community daily publications and eight other printing facilities operated by the Sun Media’s Community Newspaper Group in five provinces. Through our wholly-owned subsidiary Quebecor Media Printing, we operate two printing state-of-the-art facilities located in Islington, Ontario, and Mirabel, Québec.

We also offer third party commercial printing services, which provides us with an additional revenue source that leverages existing equipment with excess capacity. In our third party commercial printing operations, we compete with other newspaper publishing companies as well as with commercial printers. Our competitive strengths in this area include our modern equipment, our status in some of our markets as the only local provider of commercial printing services and our ability to price projects on a variable cost basis, as our core newspaper business covers overhead expenses.

 

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Distribution Network

Quebecor Media Network distributes dailies, weeklies, magazines and other electronic and print media and reaches approximately 200,000 households and 14,000 retail outlets through its operations in the Province of Québec. Moreover, we continue to leverage our printing capacities and distribution services with Quebecor Media Network which offers flyer printing and distributing across Canada. In addition to distributing all Quebecor Media community newspapers in the Province of Québec, Le Sac Plus door-knob bag contains advertising materials, such as flyers, leaflets, product samples and other value-added promotions every week.

Television

Sun News was launched in April 2011 and offers comprehensive coverage of the events that impact Canadian society and the country’s political and economic life. Sun News General Partnership is a partnership owned by TVA Group (51%) and Sun Media (49%). For additional information see “— Broadcasting” below.

Internet/Portals

In the second quarter of 2011, all of the internet portals that were formally owned by Canoe Inc. (other than Réseau Contact and Jobboom which were transferred to Videotron) were transferred to Sun Media, including the Canoe Network, which logs over 9.3 million unique visitors per month in Canada, including more than 5.0 million in the Province of Québec, and ranks as the number one general news destination in Canada (according to ComScore Media Metrix figures for December 2011). In 2011, Sun Media acquired Stealthedeal.com, an online couponing business to further expand our business in the digital market.

The Canoe Network includes information and service sites for the general public. As such, it is one of the most popular Internet destinations in Canada, in both the English and French speaking markets, and a key vehicle for Internet users and advertisers alike. Advertising revenues constitute a large portion of the Canoe Network’s annual revenues.

Media Properties

The News Media segment operates the following portals and destination sites:

 

   

Canoe (canoe.ca), a bilingual portal with more than 95 million page views in December 2011, according to internal statistics;

 

   

Sun Media dedicated websites for its corresponding weekly and daily newspapers (such as www.torontosun.com, www.edmontonsun.com, www.journaldequebec.com and www.journaldemontreal.com), which provide local and national news;

 

   

Canoe.tv, the first Canadian web broadcaster with unique content commissioned by Canoe.tv in addition to video content from traditional sources including Quebecor Media, the Sun Media network of newspapers and various external partners;

 

   

StealTheDeal.com, a website dedicated to daily deals in more than 120 Sun Media markets in English Canada, which was acquired by Sun Media in April 2011; and

 

   

LeSacPlus.ca, a website that gives access to deals, promotional offers and discounts on a wide range of products, services and activities for Québec’s residents.

E-commerce Properties

The following e-commerce properties are included under the Canoe Network umbrella:

 

   

Autonet.ca, one of Canada’s leading Internet sites devoted entirely to automobiles;

 

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Canoeclassifieds.ca and Vitevitevite.ca (formerly canoeclassees.ca), classified ad sites through which visitors can view more than 157,000 classified ads, reaching potential purchasers across the country by integrating more than 250 dailies and community newspapers;

 

   

YourLifeMoments.ca, Sun Media’s premier site for announcing, celebrating, sharing all of life’s special moments. YourLifeMoments.ca publishes an average of 10,000 announcements every week from over 250 dailies and community newspapers and is the leader in Canada in this niche market; and

 

   

Micasa.ca, one of the leading real-estate listing sites in the Province of Québec, providing comprehensive property listing services available to all real estate brokers as well as individual homeowners.

Seasonality and Cyclicality

Canadian newspaper publishing company operating results tend to follow a recurring seasonal pattern with higher advertising revenue in the spring and in the fall. Accordingly, the second and fourth fiscal quarters are typically our strongest quarters, with the fourth quarter generally being the strongest. Due to the seasonal retail decline and generally poor weather, the first quarter has historically been our weakest quarter.

Our newspaper business is cyclical in nature. Our operating results are sensitive to prevailing local, regional and national economic conditions because of our dependence on advertising sales for a substantial portion of our revenue. Expenditures by advertisers tend to be cyclical reflecting overall economic conditions, as well as budgeting and buying patterns and priorities. In addition, a substantial portion of our advertising revenue is derived from retail and automotive advertisers, who have historically been sensitive to general economic cycles, and our operating results have in the past been materially adversely affected by extended downturns in the Canadian retail and automotive sectors. Similarly, since a substantial portion of our advertising revenue is derived from local advertisers, our operating results in individual markets could be adversely affected by local or regional economic downturns.

Raw Materials

Newsprint, which is the basic raw material used to publish newspapers, has historically been and may continue to be subject to significant price volatility. During 2011, the total newsprint consumption of our newspaper operations was approximately 146,600 metric tonnes. Newsprint represents our single largest raw material expense and one of our most significant operating costs. Newsprint expense represented approximately 10.9% ($83.5 million) of our News Media segment’s operating expenses for the year ended December 31, 2011. Changes in the price of newsprint could significantly affect our earnings, and volatile or increased newsprint costs have had, and may in the future have, a material adverse effect on our results of operations and our financial condition. We manage the effects of newsprint price increases through a combination of, among other things, waste management, technology improvements, web width reduction, inventory management, and by controlling the mix of editorial versus advertising content.

In order to obtain more favourable pricing, we source substantially all of our newsprint from a single newsprint producer (our “Newsprint Supplier”). Pursuant to the terms of our agreement with our Newsprint Supplier, we obtain newsprint at a discount to market prices, receive additional volume rebates for purchases above certain thresholds, and benefit from a ceiling on the unit cost of newsprint.

Broadcasting

Through TVA Group, we operate the largest private French-language television network in North America as well as 11 specialty services. According to data published by the BBM People Meters (which is based on a measurement methodology using audimetry), we had a 31.8% market share of French-speaking viewers in the Province of Québec in 2011 and according to the Canadian TVB Report for the period from January 1, 2011 through October 31, 2011, our share of the Province of Québec’s French-language broadcast television advertising market was 40.6%.

In 2011, we aired seven of the ten most popular TV programs in the Province of Québec, including On connaît la chanson, Occupation Double au Portugal and Le Gala Artis. In addition, in 2011, the Réseau TVA (“TVA Network”) had 19 of the top 30 French-language prime time television shows in the Province of Québec, according to BBM People Meter data. Since May 1999, the TVA Network, which consists of ten stations, has been included in the basic channel line-up of most cable and satellite providers across Canada, enabling us to reach a significant portion of the French-speaking population of Canada outside the Province of Québec.

 

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Through various subsidiaries, we control or participate in the following 13 specialty services: LCN, a Category C French-language all news service, Évasion, a Category A French-language travel and tourism service, Télé achats, a French-language infomercial and tele-shopping channel, Argent, a Category A French-language economic, business and personal finance news service, mysteryTV, a national English-language Category A specialty television service devoted to mystery and suspense programming, addikTV, a national French-language Category A specialty television service devoted to mystery and suspense programming, Prise 2, a French-language Category B specialty television service devoted to the Province of Québec and American television classics, Mlle, a French-language Category B specialty television service dedicated to style, beauty and the well-being of Québec women, The Cave, a national English-language Category A specialty television service dedicated to the Canadian man’s lifestyle, CASA, a French-language Category B specialty television service devoted to home-improvements, do-it-yourself and cooking, YOOPA, a French-language Category B specialty television service aimed exclusively at preschoolers, TVA Sports, a French-language Category C specialty television service devoted to sports, and Sun News, a national English-language Category C specialty television service focused on news and opinion. On December 22, 2011, TVA Group announced it had reached an agreement through which TVA Group will sell its 50% interest in the mysteryTV specialty channel and its 51% interest in The Cave specialty channel to Shaw Television GP Inc. Each of TVA Group’s specialty channels has its own dedicated website.

TVA Group publishes more than 75 magazines including regular, special and seasonal issues. Its principal magazines focus on five market niches: entertainment, fashion and beauty, decoration, teenagers and services. It is also active in the custom publishing activities, pre-media services and operates websites in order to broadcast its trademarks on different digital platforms.

As at December 31, 2011, we own 51.4% of the equity and control 99.9% of the voting power in TVA Group.

For the year ended December 31, 2011, our Broadcasting operations generated revenues of $445.5 million and operating income of $50.5 million. For the year ended December 31, 2010, our Broadcasting operations generated revenues of $448.2 million and operating income of $74.9 million.

Canadian Television Industry Overview

Canada has a well-developed television market that provides viewers with a range of viewing alternatives.

There are three main French language broadcast networks in the Province of Québec: Société Radio-Canada, “V” and TVA Network. In addition to French language programming, there are three English-language national broadcast networks in the Province of Québec: the Global Television Network, CTV and the Canadian Broadcasting Corporation, known as CBC. Global Television Network, V and CTV are privately held and are commercial networks. CBC and Société Radio-Canada are government owned and financed by a combination of federal government grants and advertising revenue. French language viewers in the Province of Québec also have access to certain U.S. networks.

Drama and comedy programming are the most popular genres with French speaking viewers, followed by news and other information programming. Viewing trends by French speaking viewers are predominantly to French Canadian programs in all genres, with the exception of drama and comedy programs where the viewing has remained evenly split between Canadian and foreign programs.

The following table sets forth the market share of French speaking viewers in the Province of Québec in 2011:

 

Network

   Share of Province
of Québec Television
 

TVA Network

     24.2

Société Radio-Canada

     13.0

V

     8.1

TVA Group’s French language specialty TV

     7.6

Various French language specialty and pay cable TV

     39.4

Others

     7.7

 

Source: BBM People Meters 2011 for the period between January 1, 2011 and December 31, 2011.

 

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Television Broadcasting

Broadcast Network

Our French language network of ten stations, which consists of six owned and four affiliated stations, is available to a significant portion of the French speaking population in Canada.

Our owned and operated stations include: CFTM-TV in Montréal, CFCM-TV in Québec City, CHLT-TV in Sherbrooke, CHEM-TV in Trois-Rivières, CFER-TV in Rimouski Matane-Sept-Iles and CJPM-TV in Saguenay/Lac-St-Jean. Our four affiliated stations are CFEM-TV in Rouyn, CHOT-TV in Gatineau, CHAU-TV in Carleton and CIMT-TV in Rivière-du-Loup. We own a 45% interest of the latter two. A substantial portion of our network’s broadcast schedule is originated from our main station in Montréal. Our signal is transmitted from transmission and retransmission sites authorized by Industry Canada and licensed by the CRTC and is also retransmitted by satellite elsewhere in Canada as a distant signal by various modes of authorized distribution: cable, direct-to-home satellite distribution and multi channel MDS.

TVA Group’s website is accessible at groupetva.ca

Specialty Broadcasting

TVA Group controls or participates in 13 specialty services, including the following:

 

Type of Service

   Language      Voting Interest  

Category A Digital Specialty Services:

     

Ÿ The Cave

     English         51.0 %* 

Ÿ mysteryTV

     English         50.0 %* 

Ÿ addikTV

     French         100.0

Ÿ Argent (LCN - Affaires)

     French         100.0

Ÿ Évasion

     French         8.3

Category B Digital Specialty Services:

     

Ÿ Prise 2

     French         100.0

Ÿ CASA

     French         100.0

Ÿ YOOPA

     French         100.0

Ÿ Mlle

     French         100.0

Category C Digital Specialty Services:

     

Ÿ LCN – Le Canal Nouvelles

     French         100.0

Ÿ TVA Sports

     French         100.0

Ÿ Sun News

     English         51.0

Exempted Programming Service:

     

Ÿ Télé achats

     French         100.0

 

* On December 22, 2011, TVA Group announced it had reached an agreement through which TVA Group will sell its 50% interest in the mysteryTV specialty channel and its 51% interest in The Cave specialty channel to Shaw Television GP Inc.

 

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Advertising Sales and Revenue

We derive a majority of our revenues from the sale of air-time to national, regional and local advertisers. For the twelve-month period ended December 31, 2011, we derived approximately 76% of our advertising revenues from national advertisers and 24% from regional and local advertisers.

Programming

We produce a variety of French language programming, including a broad selection of entertainment, news and public affairs programming. We actively promote our programming and seek to develop viewer loyalty by offering a consistent programming schedule.

A majority of our programming is produced by our wholly-owned subsidiary, TVA Productions Inc. Through TVA Productions Inc. (and its affiliate TVA Productions II inc.), we produced approximately 1683 hours of original programming from January 2011 through December 2011, consisting primarily of soap operas, morning and general interest shows, variety shows and quiz shows.

The remainder of our programming is comprised of foreign and Canadian independently produced programming.

Magazine Publishing

TVA Publications Inc. (“TVA Publications”) publishes more than 75 magazines (which include its regular publications, special issues and seasonal publications). Its principal magazines focus on five main market niches: entertainment, fashion and beauty, decoration, teenagers and services. According to the Audit Bureau of Circulations, TVA Publications represented approximately 72% of newsstand sales of French language magazines in the Province of Québec as of December 31, 2011. TVA Publications is the leading magazine publisher in the Province of Québec and we expect to leverage its focus on entertainment across our television and Internet programming.

Leisure and Entertainment

Our activities in the Leisure and Entertainment segment consist primarily of retailing CDs, books, DVDs, Blu-ray discs, musical instruments, games and toys, video games, gifts and magazines through the Archambault chain of stores and the archambault.ca e-commerce site, online sales of downloadable music and ebooks through the archambault.ca e-commerce site, distribution of CDs, DVDs and Blu-ray discs (through Select, a division of Archambault Group), online music distribution by way of file transfer (through Select Digital, a division of Archambault Group), music recording and video production (through Musicor, a division of Archambault Group), the recording of live concerts, the production of live-event video shows and television advertising (through Les Productions Select TV, a subsidiary of Archambault Group) and the production of music shows and concerts (through Musicor Spectacles, a division of Archambault Group). Through its production capacity made possible with Musicor Spectacles and Les Productions Select TV, Archambault Group is now fully integrated in Canada’s music industry, as a producer of a wider offering of media solutions, and a growing participant in the live-event production industry.

We are also involved in book publishing and distribution through academic publisher CEC Publishing Inc. (“CEC Publishing”), 16 general literature publishers under the Groupe Sogides Inc. (“Sogides Group”) umbrella, and Messageries A.D.P. Inc. (“Messageries A.D.P.”), the exclusive distributor for approximately 165 Québec and European French-language publishers.

For the year ended December 31, 2011, the revenues of our Leisure and Entertainment segment totalled $312.9 million and operating income totalled $26.6 million. For the year ended December 31, 2010, the revenues of our Leisure and Entertainment segment totalled $302.5 million and operating income totalled $27.6 million.

Cultural Products Production, Distribution and Retailing

Archambault Group is one of the largest chains of music and book stores in the Province of Québec with 16 retail locations, consisting of 15 Archambault megastores and one Paragraphe bookstore. Archambault Group also offers a variety of games, toys and other gift ideas. Archambault Group’s products are also distributed through its website archambault.ca. Archambault Group also operates music and books downloading services with per-item fees.

 

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Archambault Group, through Select, is also one of the largest independent music distributors in Canada with 24% of the Province of Québec market and 67% of the Province of Québec French market. Select has a catalogue of over 6,743 different CDs, LPs or other audio formats and 1,054 DVDs, VHS or other video formats, a large number of which are from French speaking artists. In addition, Archambault Group, through Select Digital, is a digital aggregator of downloadable products with a selection of approximately 103,384 songs available through 192 retailers worldwide.

Book Publishing and Distribution

Through Sogides Group (which is comprised of 16 publishing houses: six in Groupe Librex inc., namely Éditions Libre Expression, Éditions Internationales Alain Stanké, Éditions Logiques, Éditions du Trécarré, Éditions Quebecor and Publistar, six in Groupe l’Homme, namely Les Éditions de l’Homme, Le Jour, Utilis, Les Presses Libres, le Petit Homme and La Griffe and four in Groupe Ville-Marie Littérature inc., namely L’Hexagone, VLB Éditeur, Typo and De la Bagnole) and the academic publisher CEC Publishing, we are involved in French-language book publishing and we form one of the Province of Québec’s largest book publishing groups. In 2011, we published or reissued a total of 678 titles in paper format and 394 titles in digital format.

Through Messageries ADP, our book distribution company, we are the exclusive distributor for 165 Province of Québec and European French-language publishers. We distribute French-language books to approximately 2,850 retail outlets in Canada. In addition, Messageries ADP distributes 3,310 digital books.

Ownership

We own 100% of the issued and outstanding capital stock of Archambault Group, CEC Publishing and Groupe Sogides.

Interactive Technologies and Communications

Through our Nurun subsidiary, we provide interactive communication and technology services in North America, Europe and China. Nurun helps companies and other organizations develop innovative interactive products, including interface design, technical platform implementation, online marketing programs, client relationships and social media strategy. Nurun’s clients include organizations and multinational corporations such as L’Oréal, Groupe Danone, BRP, Tag Heuer, SEAT, Videotron, Home Depot, Google, Sony, McDonald’s, Sears Canada, Pirelli and the Government of Québec.

In the third quarter of 2011, Nurun completed the acquisition of Odopod, a digital agency in San Francisco, California, that has expertise in brand promotion and interactive product development.

For the year ended December 31, 2011, our Interactive Technologies and Communications segment generated revenues of $120.9 million and operating income of $7.9 million. For the year ended December 31, 2010, our Interactive Technologies and Communications segment generated revenues of $98.0 million and operating income of $6.0 million.

Ownership

We own 100% of the equity and voting interest in Nurun.

Intellectual Property

We use a number of trademarks for our products and services. Many of these trademarks are registered by us in the appropriate jurisdictions. In addition, we have legal rights in the unregistered marks arising from their use. We have taken affirmative legal steps to protect our trademarks and we believe our trademarks are adequately protected.

Television programming and motion pictures are granted legal protection under the copyright laws of the countries in which we operate, and there are substantial civil and criminal sanctions for unauthorized duplication and exhibition. The content of our newspapers and websites is similarly protected by copyright. We own copyright in each of

 

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our publications as a whole, and in all individual content items created by our employees in the course of their employment, subject to very limited exceptions. We have entered into licensing agreements with wire services, freelancers and other content suppliers on terms that we believe are sufficient to meet the needs of our publishing operations. We believe we have taken appropriate and reasonable measures to secure, protect and maintain our rights or obtain agreements from licensees to secure, protect and maintain copyright protection of content produced or distributed by us.

We have registered a number of domain names under which we operate websites associated with our television, publishing and Internet operations. As every Internet domain name is unique, our domain names cannot be registered by other entities as long as our registrations are valid.

Insurance

Quebecor Media is exposed to a variety of operational risks in the normal course of business, the most significant of which are transferred to third parties by way of insurance agreements. Quebecor Media has a policy of self-insurance when the foreseeable losses from self-insurance are low relative to the cost of purchasing third-party insurance. Quebecor Media maintains insurance coverage through third parties for property and casualty losses. Quebecor Media believes that it has a combination of third-party insurance and self-insurance sufficient to provide adequate protection against unexpected losses, while minimizing costs.

Environment

Some of our operations are subject to Canadian, provincial and municipal laws and regulations concerning, among other things, emissions to the air, water and sewer discharge, handling and disposal of hazardous materials, the recycling of waste, the soil remediation of contaminated sites, or otherwise relating to the protection of the environment. Laws and regulations relating to workplace safety and worker health, which among other things, regulate employee exposure to hazardous substances in the workplace, also govern our operations.

Compliance with these laws has not had, and management does not expect it to have, a material effect upon our capital expenditures, net income or competitive position. Environmental laws and regulations and the interpretation of such laws and regulations, however, have changed rapidly in recent years and may continue to do so in the future. We have monitored the changes closely and have modified our practices where necessary or appropriate. For example, Québec’s regulation on the recovery and reclamation of products by enterprises officially came into force on July 13, 2011. This regulation will require certain subsidiaries of Quebecor Media, specifically Videotron, to implement a recycling program or to become member of a program from an organization accredited by Recyc-Québec. Recovery rates are stipulated for different category of products commercialized by companies to which this regulation applies and penalties will be imposed if such recovery rates are not reached by 2015. Penalties and fines will vary depending upon the amount of products commercialized and the actual recovery rate of the company which failed to reach the targets set forth in the regulation, with potential penalties reaching up to $600,000 annually and with fines for non compliance ranging between $5,000 and $250,000.

Our properties, as well as areas surrounding those properties, particularly those in areas of long-term industrial use, may have had historic uses, or may have current uses, in the case of surrounding properties, which may affect our properties and require further study or remedial measures. We are not currently conducting or planning any material study or remedial measure. Furthermore, we cannot provide assurance that all environmental liabilities have been determined, that any prior owner of our properties did not create a material environmental condition not known to us, that a material environmental condition does not otherwise exist as to any such property, or that expenditure will not be required to deal with known or unknown contamination.

 

C - Organizational Structure

The following chart illustrates the relationship among Quebecor Media and its significant operating subsidiaries and holdings as of December 31, 2011 and indicates the jurisdiction of incorporation of each entity. In each case, unless otherwise indicated, Quebecor Media owns a 100% equity and voting interest in its subsidiaries (where applicable, the number on the top indicates the percentage of equity owned directly and indirectly by Quebecor Media and the number on the bottom indicates the percentage of voting rights held).

 

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LOGO

Quebecor, a communications holding company, owns 54.72% of Quebecor Media and CDP Capital, a wholly-owned subsidiary of the Caisse de dépôt et placement du Québec, owns the other 45.28% of Quebecor Media. Quebecor’s primary asset is its interest in Quebecor Media. The Caisse de dépôt et placement du Québec is one of Canada’s largest pension fund managers.

 

D - Property, Plants and Equipment

Our corporate offices are located in leased space at 612 St-Jacques Street, Montréal, Québec, Canada H3C 4M8.

Telecommunications

Videotron’s corporate offices are located in leased space at 612 St-Jacques Street, Montréal, Québec, Canada H3C 4M8, in the same building as Quebecor Media’s head office. Videotron also owns several buildings in Montréal, the largest building of which is located at 2155 Pie IX Street in Montréal (approximately 128,000 square feet). Videotron also owns a building located at 150 Beaubien Street in Montréal (approximately 72,000 square feet). Videotron leases approximately 52,000 square feet of office space in a building located at 800 de la Gauchetière Street in Montréal to accommodate staffing growth. Videotron also leases approximately 54,000 square feet in a building located at 4545 Frontenac Street in Montréal and 47,000 square feet in a building located at 888 De Maisonneuve Street in Montréal. In Québec City, Videotron owns a building of approximately 40,000 square feet where its regional headend for the Québec City region is located. Videotron also owns or leases a significant number of smaller locations for signal reception sites and customer service and business offices.

 

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News Media

Sun Media’s principal business offices are located at 333 King Street East, Toronto, Ontario, Canada M5A 3X5.

The following table presents the addresses, the square footage and primary use of the main facilities and other buildings of our newspaper operations. No other single property currently used in our News Media segment exceeds 50,000 square feet. Unless stated otherwise, we own all of the properties listed below.

 

Address    Use of Property    Floor Space Occupied
(sq. ft.)

Islington, Ontario

2250 Islington Avenue (1)

  

Operations building,

including printing plant —

Toronto Sun

24 Hours (Toronto)

   546,900

Mirabel, Québec

12800 Brault Street (2)

  

Operations building,

including printing plant —

Journal de Montréal

24 Heures (Montréal)

   235,000

London, Ontario

369 York Street

  

Operations building,

including printing plant —

London Free Press

   147,600

Calgary, Alberta

2615-12 Street NE

  

Operations building,

including printing plant —

Calgary Sun

   90,000

Vanier, Québec

450 Bechard Avenue

  

Operations building,

including printing plant —

Journal de Québec

   74,000

Toronto, Ontario

333 King Street East

  

Operations building —

Toronto Sun and Head Office
(leased until 2020)

   71,700

Montréal, Québec

4545 Frontenac Street (2)

  

Operations building —

Journal de Montréal

   102,200

Winnipeg, Manitoba

1700 Church Avenue

  

Operations building,

including printing plant —

Winnipeg Sun

   63,000

St. Catharines, Ontario

17 Queen Street

  

Operations building —

St. Catharines Standard

   56,300

Edmonton, Alberta

9300-47 Street

  

Printing plant —

Edmonton Sun

   50,700

 

(1) In 2008, printing of the Toronto Sun was fully transferred to Quebecor Media Printing’s facility in Islington, Ontario.
(2) In 2008, printing of the Journal de Montréal was fully transferred to Quebecor Media Printing’s facility in Mirabel, Québec.

 

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Television Broadcasting

Our television broadcasting operations are mainly carried out in Montréal at 1600 De Maisonneuve Boulevard in a complex of four buildings owned by us which represent a total of approximately 574,000 square feet. We also own buildings in Québec City, Chicoutimi, Trois-Rivières, Rimouski, Sherbrooke and Toronto for local broadcasting and lease space in Montréal for TVA Publications.

Leisure and Entertainment segment and Interactive Technologies and Communications segment

We generally lease space for the business offices, retail outlets and warehousing activities for the operation of our Leisure and Entertainment segment. Business offices for our Interactive Technologies and Communications operations are also primarily leased.

Liens and charges

Borrowings under our Senior Secured Credit Facilities and under eligible derivative instruments are secured by a first-ranking hypothec and security agreement (subject to certain permitted encumbrances) on all of our movable property (chattels). Our subsidiaries’ credit facilities are generally secured by first-ranking charges over all of their respective assets.

 

E - Regulation

Foreign Ownership Restrictions Applicable under the Telecommunications Act (Canada) and the Broadcasting Act (Canada)

In the March 2010 Throne Speech, the Government of Canada stated its intention to loosen restrictions on foreign investment in the telecommunications industry. Consultations on this subject, including references to the related subject of foreign investment in the broadcasting industry, were held in June and July 2010. A consultation document issued by the Government at that time listed three options for loosening restrictions: (1) increase the direct limit for foreign ownership of broadcasting and telecommunication companies to 49 percent; (2) permit unrestricted foreign investment in start-up telecommunications companies as well as existing small industry players, defined as those with less than 10 percent of total telecommunications revenues in Canada; and (3) remove the telecommunications restrictions completely. Public statements by the Minister of Industry have since indicated that the Government seeks to enact its chosen option in time for the next wireless spectrum auction, which is expected to be held in late 2012 or early 2013.

Ownership and Control of Canadian Broadcast Undertakings

The Governor in Council, through an Order-in-Council referred to as the Direction to the CRTC (Ineligibility of Non-Canadians), has directed the CRTC not to issue, amend or renew a broadcasting license to an applicant that is a non-Canadian. Canadian, a defined term in the Direction, means, among other things, a citizen or a permanent resident of Canada, a qualified corporation, a Canadian government, a non-share capital corporation of which a majority of the directors are appointed or designated by statute, regulation or specified governmental authorities, or a qualified mutual insurance company, qualified pension fund society or qualified cooperative of which not less than 80% of the directors or members are Canadian. A qualified corporation is one incorporated or continued in Canada, of which the chief executive officer (or if there is no chief executive officer, the person performing functions similar to those performed by a chief executive officer) and not less than 80% of the directors are Canadian, and not less than 80% of the issued and outstanding voting shares and not less than 80% of the votes are beneficially owned and controlled, directly or indirectly, by Canadians. In addition to the above requirements, Canadians must beneficially own and control, directly or indirectly, not less than 66.6% of the issued and outstanding voting shares and not less than 66.6% of the votes of the parent company that controls the subsidiary, and neither the parent company nor its directors may exercise control or influence over any programming decisions of the subsidiary if Canadians beneficially own and control less than 80% of the issued and outstanding shares and votes of the parent corporation, if the chief executive officer of the parent corporation is a non-Canadian or if less than 80% of the parent corporation’s directors are Canadian. There are no specific restrictions on the number of non-voting shares which may be owned by non-Canadians. Finally, an applicant seeking to acquire, amend or renew a broadcasting license must not otherwise be controlled in fact by non-Canadians, a question of fact which may be determined by the CRTC in its discretion. Control is defined broadly in the Direction to mean control in any manner that

 

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results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of a corporation or otherwise. Videotron, TVA Group and Sun Media are qualified Canadian corporations.

Regulations made under the Broadcasting Act require the prior approval of the CRTC for any transaction that directly or indirectly results in (i) a change in effective control of the licensee of a broadcasting distribution undertaking or a television programming undertaking (such as a conventional television station, network or pay or specialty undertaking service), (ii) a person or a person and its associates acquiring control of 30% or more of the voting interests of a licensee or of a person who has, directly or indirectly, effective control of a licensee, or (iii) a person or a person and its associates acquiring 50% or more of the issued common shares of the licensee or of a person who has direct or indirect effective control of a licensee. In addition, if any act, agreement or transaction results in a person or a person and its associates acquiring control of at least 20% but less than 30% of the voting interests of a licensee, or of a person who has, directly or indirectly, effective control of the licensee, the CRTC must be notified of the transaction. Similarly, if any act, agreement or transaction results in a person or a person and its associates acquiring control of 40% or more but less than 50% of the voting interests of a licensee, or a person who has directly or indirectly effective control of the licensee, the CRTC must be notified.

“Diversity of Voices”

On January 15, 2008, the CRTC issued its determination in Broadcasting Public Notice CRTC 2008-4, entitled “Diversity of Voices”. In this public notice, the CRTC introduced new policies with respect to cross-media ownership; the common ownership of television services, including pay and specialty services; and the common ownership of broadcasting distribution undertakings (“BDUs”). The CRTC’s existing policies with respect to the common ownership of over-the-air (“OTA”) television and radio undertakings remain in effect. The CRTC will generally permit ownership by one person of no more than one conventional television station in one language in a given market. The CRTC, as a general rule, will not approve applications for a change in the effective control of broadcasting undertakings that would result in the ownership or control, by one person, of a local radio station, a local television station and a local newspaper serving the same market. Where a person that controls a local radio station and a local television station acquires a local newspaper serving the same market, the CRTC will, at the earliest opportunity, require the licensee to explain why, in light of this policy, its radio or television license(s) should be renewed. The CRTC, as a general rule, will not approve applications for a change in effective control that would result in the control, by one person, of a dominant position in the delivery of television services to Canadians that would impact on the diversity of programming available to television audiences. In terms of BDUs, the CRTC, as a general rule, will not approve applications for a change in the effective control of BDUs in a market that would result in one person being in a position to effectively control the delivery of programming services in that market. The CRTC is not prepared to allow one person to control all BDUs in any given market.

Jurisdiction Over Canadian Broadcast Undertakings

Videotron’s cable distribution undertakings and TVA Group’s programming activities are subject to the Broadcasting Act and regulations made under the Broadcasting Act that empower the CRTC, subject to directions from the Governor in Council, to regulate and supervise all aspects of the Canadian broadcasting system in order to implement the policy set out in the Broadcasting Act. Certain of Videotron’s and TVA Group’s undertakings are also subject to the Radiocommunication Act, which empowers Industry Canada to establish and administer the technical standards that networks and transmission must comply with, namely, maintaining the technical quality of signals.

The CRTC has, among other things, the power under the Broadcasting Act and regulations promulgated thereunder to issue, subject to appropriate conditions, amend, renew, suspend and revoke broadcasting licenses, approve certain changes in corporate ownership and control, and establish and oversee compliance with regulations and policies concerning broadcasting, including various programming and distribution requirements, subject to certain directions from the Federal Cabinet.

 

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Canadian Broadcasting Distribution (Cable Television)

Licensing of Canadian Broadcasting Distribution Undertakings

A cable distribution undertaking distributes broadcasting services to customers predominantly over closed transmission paths. A license to operate a cable distribution undertaking gives the cable television operator the right to distribute television programming services in its licensed service area. Broadcasting licenses may be issued for periods not exceeding seven years and are usually renewed, except in particular circumstances or in cases of a serious breach of the conditions attached to the license or the regulations of the CRTC. The CRTC is required to hold a public hearing in connection with the issuance, suspension or revocation of a license. Videotron operates 52 cable systems pursuant either to the issuance of a license or of an order that exempts certain network operations from the obligation to hold a license.

Cable systems with 20,000 customers or fewer and operating their own local headend are exempted from the obligation to hold a license pursuant to exemption orders issued by the CRTC on February 15, 2010 (Broadcasting Order CRTC 2009-544). These cable systems are required to comply with a number of programming carriage requirements set out in the exemption order and comply with the Canadian ownership and control requirements in the Direction to the CRTC. Pursuant to Decision CRTC 2010-87, Videotron remains with only 8 cable system licences.

In order to conduct our business, we must maintain our broadcasting distribution undertaking licenses in good standing. Failure to meet the terms of our licenses may result in their short-term renewal, suspension, revocation or non-renewal. We have never failed to obtain a license renewal for any cable systems.

Distribution of Canadian Content

The Broadcasting Distribution Regulations issued by the CRTC pursuant to the Broadcasting Act mandate the types of Canadian and non-Canadian programming services that may be distributed by BDUs, including cable television systems. For example, Canadian television broadcasters are subject to “must carry” rules which require terrestrial distributors, like cable and MDS systems, to carry the signals of local television stations and, in some instances, regional television stations as part of their basic service. The guaranteed carriage enjoyed by local television broadcasters under the “must carry” rules is designed to ensure that the signals of local broadcasters reach cable households and enjoy advantageous channel placement. Furthermore, cable operators, DBS operators and MDS operators must offer their customers more Canadian programming than non-Canadian programming services. In summary, each cable television system is required to distribute all of the Canadian programming services that the CRTC has determined are appropriate for the market it serves, which includes local and regional television stations, certain specialty channels and pay television channels, and a pay-per-view service, but does not include Category B and C digital services.

Broadcasting Distribution Regulations

The Broadcasting Distribution Regulations which came into force in 1998 (the “1998 Regulations”), apply to broadcasting distribution undertakings in Canada. The 1998 Regulations promote competition between broadcasting distribution undertakings and the development of new technologies for the distribution of such services while ensuring that quality Canadian programs are exhibited. The 1998 Regulations introduced important new rules, including the following:

 

   

Competition and Carriage Rules. The 1998 Regulations provide equitable opportunities for all distributors of broadcasting services. Similar to the signal carriage and substitution requirements that are imposed on existing cable television systems, under the 1998 Regulations, new broadcasting distribution undertakings are also subject to carriage and substitution requirements. The 1998 Regulations prohibit a distributor from giving an undue preference to any person, including itself, or subjecting any person to an undue disadvantage. This gives the CRTC the ability to address complaints of anti-competitive behaviour on the part of certain distributors.

 

   

Signal Substitution. A significant aspect of television broadcasting in Canada is simultaneous program substitution, or simulcasting, a regulatory requirement under which Canadian distribution undertakings, such as cable television systems with over 2,000 customers and DTH satellite operators, are required to substitute the foreign programming service, with local Canadian signal, including Canadian commercials,

 

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for broadcasts of identical programs by a U.S. station when both programs are exhibited at the same time. These requirements are designed to protect the program rights that Canadian broadcasters acquire for their respective local markets.

 

   

Canadian Programming and Community Expression Financing Rules. All distributors, except systems with fewer than 2,000 customers, are required to contribute at least 5% of their gross annual broadcast revenues to the creation and presentation of Canadian programming including community programming. However, the allocation of these contributions between broadcast and community programming can vary depending on the type and size of the distribution system involved. In Broadcasting Regulatory Policy 2009-406 issued on July 6, 2009 with respect to the Local Production Improvement Fund (“LPIF”), a fund created to help finance local television stations, the CRTC determined that for the upcoming broadcast year the appropriate contribution level by BDUs to the LPIF should be 1.5% of their respective gross revenues. Broadcasting Regulatory Policy 2010-167 identified further procedural requirements with respect to the LPIF, and maintained the contribution level of 1.5% of the prior broadcast year’s gross revenues derived from broadcasting activities. In Broadcasting Notice of Consultation CRTC 2011-788, the Commission announces that a public hearing will be held to review its policies and regulations relating to the Local Programming Improvement Fund, commencing on April 16, 2012.

 

   

Inside Wiring Rules. The CRTC determined that the inside wiring portion of cable networks creates a bottleneck facility that could affect competition if open access is not provided to other distributors. Incumbent cable companies may retain the ownership of the inside wiring but must allow usage by competitive undertakings to which the cable company may charge a just and reasonable fee for the use of the inside wire. On September 3, 2002, the CRTC established a fee of $0.52 per customer per month for the use of cable inside wire in multiple-dwelling units. In Broadcasting Regulatory Policy CRTC 2011-774, the Commission found that it was appropriate to amend the Broadcasting Distribution Regulations to permit access by subscribers and competing broadcasting distribution undertakings to inside wire in commercial and institutional properties.

Rates

Our revenue related to cable television is derived mainly from (a) monthly subscription fees for basic cable service; (b) fees for premium services such as specialty services, pay-television, pay-per-view television and video-on-demand; and (c) installation and additional outlets charges.

The CRTC does not regulate the fees charged by non-cable broadcast distribution undertakings and does not regulate the fees charged by cable providers.

Other recent changes to regulations which have been announced

In December 2011, a public hearing was held by the CRTC in order to renew the licences of TVA. TVA requested mainly to:

 

   

Replace the condition of licence regarding Canadian priority programming and the commitment towards independent production with the obligation to devote at least 75% of its programming expenses to Canadian programs;

 

   

Amend the condition of licence of CFCM-TV (Québec) regarding the obligation to broadcast programming that must focus exclusively on the local Québec market; and

 

   

Reduce Addik TV Canadian programming expenditures obligation from 40% to 35% of the previous broadcast year’s gross advertising, infomercial and subscription revenues.

The decision of the CRTC on the renewal of the licences should be rendered in spring 2012.

In September 2011, the CRTC released Broadcasting Regulatory Policy CRTC 2011-601 (the “Policy”) setting out its decisions on the regulatory framework for vertical integration. Vertical integration refers to the ownership or

 

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control by one entity of both programming services, such as conventional television stations or pay and specialty services, as well as distribution services, such as cable systems or DTH satellite services. The Policy: (i) prohibits companies from offering television programs on an exclusive basis to their mobile or Internet subscribers. Any program broadcast on television, including hockey games and other live events, must be made available to competitors under fair and reasonable terms; (ii) allows companies to offer exclusive programming to their Internet or mobile customers provided that it is produced specifically for an Internet portal or a mobile device; and (iii) adopts a code of conduct to prevent anti-competitive behaviour and ensure all distributors, broadcasters and online programming services negotiate in good faith (to protect Canadians from losing a television service during negotiations, broadcasters must continue to provide the service in question and distributors must continue to offer it to their subscribers.)

On September 1st, 2011, the Commission adopted important amendments to the Broadcasting Distribution Regulations to implement determinations that it has made in various policy proceedings.

On September 1st, 2011, the transition to digital television broadcasting occurred in major markets of Canada. Consequently, a majority of analog transmitters were shut down approximately on the same date.

In Broadcasting Regulatory Policy CRTC 2011-59, the CRTC established standard conditions of license to video-on-demand (“VOD”) undertakings pursuant to which exclusive programming rights were prohibited.

On January 26, 2011, in Decision CRTC 2011-48, the CRTC set out its findings on complaints filed by TELUS and Bell concerning exclusive TVA content on Videotron’s illico on Demand service. The CRTC found that TVA and/or Videotron had contravened applicable regulations that prohibit them from giving an undue preference or subjecting any person to an undue disadvantage. To remedy the violations, the CRTC set out requirements including that TVA programs distributed on VOD must be provided without delay to TELUS and to Bell and that, within thirty days following the date of the decision, the parties negotiate an agreement for the provision of TVA programming by VOD services or agree on a process for determining a reasonable fee and reasonable terms and conditions for the provision of TVA programming by VOD services. On February 25, 2011, TVA and Videotron filed with the CRTC two separate reports on the progress of negotiations with TELUS and Bell. The Federal Court of Appeal and the Supreme Court of Canada both denied Videotron/TVA application for leave to appeal the CRTC’s decision. In November 2011, Bell and TVA agreed on the terms and conditions whereby TVA programs will be made available, thus ending Bell’s complaint. TVA is now negotiating with Telus.

On July 28, 2009, in Broadcasting Regulatory Policy CRTC 2009-329 entitled “Review of Broadcasting in New Media”, the CRTC set out its determinations in its proceeding on Canadian broadcasting in new media. However, the CRTC did not determine the legal issue as to whether Internet access providers carry on, in whole or in part, “broadcasting undertakings” pursuant to the Broadcasting Act when they provide access to broadcasting through the Internet. Instead, the CRTC stated that it would refer the matter to the Federal Court of Appeal. Hence, the CRTC referred this question to the Federal Court of Appeal for hearing and determination in its Broadcasting Order CRTC 2009-452. On July 6, 2010, the Federal Court of Appeal determined that ISPs play a “content-neutral role” in the transmission of data and do not carry on broadcasting activities. The case is now before the Supreme Court of Canada. On October 22, 2009, the CRTC amended the Exemption Order applying to new media broadcasting undertakings (Appendix A to the Public Notice CRTC 1999-197). As such, the description of a “new media broadcasting undertaking” was amended to encompass all Internet-based and mobile point-to-point broadcasting services, to introduce an undue preference provision for new media broadcasting undertakings, and to introduce a reporting requirement for such undertakings (Broadcasting Order CRTC 2009-660).

Copyright Board Proceedings

Certain copyrights in radio, television, Internet and pay audio content are administered collectively and tariff rates are established by the Copyright Board of Canada (the “Copyright Board”). Tariffs set by the Copyright Board are generally applicable until a public process is held and a decision of the Copyright Board is rendered for a renewed tariff. Renewed tariffs are often applicable retroactively.

 

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Royalties for the Retransmission of Distant Signals

Following the implementation in 1989 of the Canada-U.S. Free Trade Agreement, the Copyright Act (Canada) was amended to require retransmitters, including Canadian cable television operators, to pay royalties in respect of the retransmission of distant television and radio signals.

Since this legislative amendment, the Copyright Act (Canada) empowers the Copyright Board to quantify the amount of royalties payable to retransmit these signals and to allocate them among collective societies representing the holders of copyright in the works thus retransmitted. Regulated cable television operators cannot automatically recover such paid retransmission royalties from their customers, although such charges might be a component of an application for a basic cable service rate increase based on economic need.

For the period 2009-2013, the royalties have been set to between $0.48 and $0.98 per customer per month depending on the number of customers receiving the signal. The new tariff has been homologated after negotiation between the industry and collectives.

Royalties for the Transmission of Pay and Specialty Services

In 1989, the Copyright Act (Canada) was amended, in particular, to define copyright as including the exclusive right to “communicate protected works to the public by telecommunication.” Prior to the amendment, it was generally believed that copyright holders did not have an exclusive right to authorize the transmission of works carried on radio and television station signals when these signals were not broadcast but rather transmitted originally by cable television operators to their customers. In 1996, at the request of the Society of Composers, Authors and Music Publishers of Canada (SOCAN), the Copyright Board approved Tariff 17A, which required the payment of royalties by broadcasting distribution undertakings, including cable television operators, that transmit musical works to their customers in the course of transmitting television services on a subscription basis. Through a series of industry agreements, this liability was shared with the pay and specialty programming services.

In March 2004, the Copyright Board changed the name of this tariff from Tariff 17A to Tariff 17 and rendered its decision setting Tariff 17 royalty rates for 2001 through 2004. The Copyright Board changed the structure of Tariff 17 to calculate the royalties based on the revenues of the pay and specialty programming services (affiliation payments only in the case of foreign and pay services, and all revenues in the case of Canadian specialty services) and set a basic royalty rate of 1.78% for 2001 and 1.9% for 2002 through 2004. The basic royalty rate is subject to reductions in certain cases, although there is no Francophone market discount. SOCAN has agreed, by filing proposed tariffs, that the 2005 to 2012 tariffs will continue on the same basis as in 2004, the royalty rate remaining at 1.9%.

Royalties for Commercial Television

SOCAN’s Tariff 2.A requires the payment of royalties by commercial television stations to SOCAN in compensation for the right to communicate to the public by telecommunication, in Canada, musical or dramatico musical works forming part of its repertoire. The tariff has been set at a percentage of a television station’s revenues since 1959. In January 1998, the Copyright Board reduced the then applicable rate from 2.1% to 1.8% and set up a “modified blanket license,” allowing television stations to “opt out” of the traditional blanket license for certain programs.

In March 2004, the Copyright Board certified SOCAN’s Tariff 2.A. for the years 1998 to 2004. According to the certified tariff, a commercial television station pays, for the standard blanket license in 1998, 1999, 2000 and 2001, 1.8% of the station’s gross income for the second month before the month for which the license is issued. For the year 2002 and thereafter, this rate is increased to 1.9%.

SOCAN filed new proposed tariffs with the Copyright Board for the years 2008 through 2012. SOCAN is not seeking any increase or modifications to the current tariff. The royalties are likely to be maintained at 1.9% for the years 2008 through 2012, and a station still has the option to opt out of the traditional blanket license, but on a monthly basis. This election is allowed only twice in each calendar year.

SOCAN’s proposed Tariff 22.D would require television stations, including TVA, to pay for communications of musical works as part of audiovisual works from Internet sites. Pursuant to the proposed Tariff 22.D, the royalty would be the greater of 15% of Internet gross revenues or 15% of Internet gross operating expenses, with a minimum monthly fee of $200. The proposed tariff has been contested by the industry.

 

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Royalties for Pay Audio Services

The royalties payable by distribution undertakings for the communication to the public by telecommunication of musical works in SOCAN’s repertoire in connection with the transmission of a pay audio signal other than retransmitted signals are as follows: a monthly fee of 12.35% of the affiliation payments payable by a distribution undertaking for the transmission for private or domestic use of a pay audio signal, or an annual fee of 6.175% of the affiliation payments payable where the distribution undertaking is a small cable transmission system, an unscrambled low power or very low power television station or an equivalent small transmission system. SOCAN has filed a proposed Pay Audio Tariff for the years 2008 through 2012 that proposes to maintain those rates.

For its part, Re:Sound filed a proposed Pay Audio Tariff for the period 2007-2011 asking for a monthly fee of 15% of the affiliation payments payable by a distribution undertaking for the transmission for private or domestic use of a pay audio signal, or an annual fee of 7.5% of the affiliation payments payable where the distribution undertaking is a small cable transmission system, an unscrambled low power or very low power television station or an equivalent small transmission system.

Royalties by Online Music Services

Archambault Group operates an online music downloading service, known as archambault.ca, with per-track fees. In 2007, the Copyright Board rendered two decisions on the tariffs proposed by, on one hand, CMRRA-SODRAC Inc. (CSI), an umbrella organization formed by the Canadian Musical Reproduction Rights Agency (CMRRA) and the Société du droit de reproduction des auteurs, compositeurs et éditeurs du Canada Inc. (SODRAC), for the royalties to be paid by online music services for the reproduction of musical works in CSI’s repertoire (CSI Tariff) and, on the other hand, SOCAN for the royalties to be paid for the public performance of musical works in SOCAN’s repertoire (SOCAN Tariff) for the purposes of communicating and transmitting the musical works in a file to consumers in Canada via the Internet and authorizing consumers in Canada to further reproduce the musical work for their own private use.

The certified tariffs, which resulted from those two decisions, cover a number of years (2005 to 2006 for the CSI Tariff and 1996 to 2007 for the SOCAN Tariff) and establish different formulae for the calculation of royalties payable by online music services that only offer on-demand streams or limited downloads with or without on-demand streams. With respect to services that offer permanent downloads, the combined royalty payable is 11% of the amount paid by the consumer for the download, subject to a minimum of 5.6¢ per permanent download within a bundle of 13 or more files and a minimum of 7.4¢ per permanent download in all other cases. In June 2009, CSI and SOCAN filed proposed tariffs which would double the royalty. The new tariffs have been contested by the industry.

Royalties for Online Music

It is expected that copyright collectives will try to certify tariffs for online music not part of an online music downloading service. This could result in higher costs for operating websites containing online music content.

Royalties for Ringtones

Since 2006, Videotron sells ringtones directly to cellular phone users. After negotiating a proposed increase, SOCAN and the industry, including Videotron, came to an agreement on a new Tariff 24 for the period July 1, 2006 to and including the year 2013, the rate is 6% with a minimum royalty of six cents for the period 2006 to 2009, and 5% with a minimum royalty of five cents for the period 2009 to and including 2013.

ISP Liability

In 1996, SOCAN proposed a tariff to be applied against ISPs, in respect of composers’/publishers’ rights in musical works communicated over the Internet to ISPs’ customers. SOCAN’s proposed tariff was challenged by a number of industry groups and companies. In 1999, the Copyright Board decided that ISPs should not be liable for the communication of musical works by their customers, although they might be liable if they themselves operated a musical

 

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website. In June 2004, the Supreme Court of Canada upheld this portion of the decision of the Copyright Board and determined that ISPs do not incur liability for copyright content when they engage in normal intermediary activities, including web hosting for third parties and caching. As a consequence, ISPs may, however, be found liable if their conduct leads to the inference that they have authorized a copyright violation.

Canadian Broadcast Programming (Off the Air and Thematic Television)

Programming of Canadian Content

CRTC regulations require licensees of television stations to maintain a specified percentage of Canadian content in their programming. Specialty or thematic television channels also have to maintain a specified percentage of Canadian content in their programming generally set forth in the conditions of their license. A licensee is required to devote not less than 55% of the broadcast year, and not less than 50% of the evening broadcast period (6:00 p.m. to midnight) to the broadcast of Canadian programs.

Broadcasting License Fees

Broadcasting licensees are subject to annual license fees payable to the CRTC. The license fees consist of two separate fees. One fee allocates the CRTC’s regulatory costs for the year to licensees based on a licensee’s proportion of the gross revenue derived during the year from the licensed activities of all licensees whose gross revenues exceed specific exemption levels. The other fee, also called the Part II license fee, for broadcasting undertakings that licensed activity exceeds $1,500,000. The total annual amount to be assessed by the Commission is the lower of: a) $100,000,000; and b) 1.365% multiplied by the aggregate fee revenues for the return year terminating during the previous calendar year of all licensees whose fee revenues exceed the applicable exemption levels, less the aggregate exemption level for all those licensees for that return year.

In a call for comments regarding certain aspects of the regulatory framework for over-the-air television, we had asked the regulator to consider leaving off-the-air TV networks like TVA to negotiate a fee with broadcast distributors for the carriage of the signal. On March 22, 2010, in Broadcasting Regulatory Policy CRTC 2010-167, the CRTC referred the question of its jurisdiction on a proposed regime for value for signal to the Federal Court of Appeal. On February 28, 2011, the Federal Court of Appeal rendered its decision determining that the CRTC has the power to establish a system to enable private local television stations to choose to negotiate with broadcasting distribution undertakings a fair value in exchange for the distribution of the programming services broadcast by those stations. An appeal was filed to the Supreme Court of Canada.

Canadian Telecommunications Services

Jurisdiction

The provision of telecommunications services in Canada is regulated by the CRTC pursuant to the Telecommunications Act. The Telecommunications Act provides for the regulation of facilities-based telecommunications common carriers under federal jurisdiction. With certain exceptions, companies that own or operate transmission facilities in Canada that are used to offer telecommunications services to the public for compensation are deemed “telecommunications common carriers” under the Telecommunications Act administered by the CRTC and are subject to regulation. Cable operators offering telecommunications services are deemed “Broadcast Carriers.”

In the Canadian telecommunications market, Videotron operates as a CLEC and a Broadcast Carrier. Videotron also operates its own 4G mobile wireless network and offers services over this network as a Wireless Service Provider (“WSP”).

The issuance of licenses for the use of radiofrequency spectrum in Canada is administered by Industry Canada under the Radiocommunication Act. Use of spectrum is governed by conditions of license which address such matters as license term, transferability and divisibility, technical compliance, lawful interception, research and development requirements, and requirements related to antenna site sharing and mandatory roaming.

 

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Our AWS licenses were issued on December 23, 2008, for a term of ten years. At a minimum of two years before the end of this term, and any subsequent terms, we may apply for license renewal for an additional license term of up to ten years. AWS license renewal, including whether license fees should apply for a subsequent license term, will be subject to a public consultation process initiated in year eight.

Application of Canadian Telecommunications Regulation

In a series of decisions, the CRTC has determined that the carriage of “non-programming” services by a cable company results in that company being regulated as a carrier under the Telecommunications Act. This applies to a company serving its own customers, or allowing a third party to use its distribution network to provide non-programming services to customers, such as providing access to cable Internet services.

In addition, the CRTC regulates the provision of telephony services in Canada.

Elements of the CRTC’s local telecommunications regulatory framework to which Videotron is subject include: interconnection standards and inter-carrier compensation arrangements; the mandatory provision of equal access (i.e. customer choice of long distance provider); standards for the provision of 911 service, message relay service and certain privacy features; the obligation not to prevent other local exchange carriers from accessing end-users on a timely basis under reasonable terms and conditions in multi dwelling units where Videotron provides service; and the payment of contribution on VoIP revenues for the purposes of the revenue-based contribution regime established by the CRTC to subsidize residential telephone services in rural and remote parts of Canada.

As a CLEC, Videotron is not subject to retail price regulation. ILECs remain subject to retail price regulation in those geographic areas where facilities-based competition is insufficient to protect the interests of consumers. Videotron’s ILEC competitors have requested and been granted forbearance from regulation of local exchange services in the vast majority of residential markets in which Videotron competes, as well as in a large number of business markets, including all of the largest metropolitan markets in the Province of Québec.

Right to Access to Telecommunications and Support Structures

The CRTC has concluded that some provisions of the Telecommunications Act may be characterized as encouraging joint use of existing support structures of telephone utilities to facilitate efficient deployment of cable distribution undertakings by Canadian carriers. We access these support structures in exchange for a tariff that is regulated by the CRTC. If it were not possible to agree on the use or conditions of access with a support structure owner, we could apply to the CRTC for a right of access to a supporting structure of a telephone utility. The Supreme Court of Canada, however, held on May 16, 2003 that the CRTC does not have jurisdiction under the Telecommunications Act to establish the terms and conditions of access to the support structure of hydro-electricity utilities. Terms of access to the support structures of hydro-electricity utilities must therefore be negotiated with those utilities.

Videotron has entered into comprehensive support structure access agreements with all of the major hydro-electric companies and all of the major telecommunications companies in its service territory. Videotron’s agreement with Hydro-Québec, by far the largest of the hydro-electric companies, was recently extended for two years and will expire in December 2012.

On December 2, 2010, the CRTC issued a decision revising the large ILECs’ support structure service rates. Significant increases in rates, retroactive to mid-2009, were approved for some categories of support structures in Videotron’s operating territory. However, radical changes in rating methodology were rejected. A follow-on proceeding is considering further rating adjustments that may lead to further rate increases. We do not expect these changes to have a material impact on Videotron’s network cost structure.

Access by Third Parties to Cable Networks

In Canada, access to the Internet is a telecommunications service. While Internet access services are not regulated on a retail (price and terms of service) basis, Internet access for third-party ISPs is mandated and tariffed according to conditions approved by the CRTC for cable operators.

 

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The largest cable operators in Canada, including Videotron, have been required by the CRTC to provide third-party ISPs with access to their cable systems at mandated cost-based rates. In a decision issued on August 30, 2010, the CRTC reaffirmed the network model underlying the cable operators’ third-party Internet access (or “TPIA”) services, and also reaffirmed its directive that, at the same time we offer any new retail Internet service speed, we file proposed revisions to our TPIA tariff to include this new speed offering. TPIA tariff items have been filed and approved for all Videotron Internet service speeds. Several third party ISPs are interconnected to our cable network and are thereby providing retail Internet access services.

The CRTC also requires the large cable carriers, such as us, to allow third party ISPs to provide telephony and networking (LAS/VPN) applications services in addition to retail Internet access services. In addition, in follow-up proceedings to its decision of August 30, 2010, the CRTC is assessing whether large cable carriers should be required to provide static IP addresses under TPIA.

In a decision dated November 15, 2011, the CRTC made substantial changes to the practices that may be employed by incumbent telephone companies and cable operators to bill third parties for the access to and use of their underlying networks. The objective of these changes is to grant third parties greater flexibility to bring pricing discipline, innovation and consumer choice to the retail Internet service market. The new rules, which enter into force on February 1, 2012, require Videotron to replace its former end-user usage-based billing model by a new aggregate capacity-based billing model, for the vast majority of Videotron’s third party customers. As a result of these changes, we may experience increased competition for retail cable Internet and telephony customers. In addition, because our third-party Internet access rates are regulated by the CRTC, we could be limited in our ability to recover our costs associated with providing this access.

Telemarketing

On September 30, 2008, a comprehensive reform of the CRTC’s telemarketing rules came into force, including the establishment of a new National Do Not Call List (DNCL). In accordance with new legislative powers granted under Bill C-37, which came into force on June 30, 2006, the CRTC has the authority to fine violators of its telemarketing rules up to $1,500 per violation in the case of an individual and $15,000 per violation in the case of a corporation. Videotron has established internal controls to minimize the risk of breaching these rules and to provide any required investigative assistance in relation to alleged third party violations.

Internet Traffic Management Practices

On October 21, 2009, the CRTC issued a regulatory policy regarding the Internet traffic management practices (ITMPs) of ISPs. The policy attempts to balance the freedom of Canadians to use the Internet for various purposes with the legitimate interests of ISPs to manage the traffic thus generated on their networks, consistent with legislation, including privacy legislation. Among other things, the policy sets rules for ensuring transparency in the use of economic and technical ITMPs, and establishes an ITMP framework that provides a structured approach to evaluating whether existing and future ITMPs are in compliance with the prohibition on unjust discrimination (e.g. as against specific applications or content) found in the Telecommunications Act. Specific rules are also established to ensure that wholesale customers are not subjected to unjust discrimination.

On June 30, 2010, the CRTC determined that the policy framework regarding ITMPs applies to the use of mobile wireless data services to provide Internet access.

While we consider Videotron’s current ITMPs to be fully compliant with the policy, we note that the policy may limit the range of ITMPs Videotron could choose in the future, thereby potentially constraining our ability to recover our costs associated with providing access to our network.

Regulatory Framework for Mobile Wireless Services

On March 14, 2012, the Government of Canada announced its policy framework for the auction of spectrum in the 700 MHz and 2500 MHz bands, both of which are considered attractive candidates for the deployment of LTE 4G mobile wireless technology. The policy framework includes several measures intended to sustain competition and robust investment in wireless telecommunications and promote the timely availability of advanced services, including:

 

   

Foreign investment restrictions will be lifted for companies that have less than a 10 percent share of the Canadian telecommunications market.

 

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Spectrum caps will be employed in both the 700 MHz and the 2500 MHz auctions to ensure that in each region of Canada no fewer than four operators gain access to prime spectrum.

 

   

Tower sharing and roaming policies will be improved and extended.

 

   

Obligations will be imposed on 700 MHz licence holders to ensure advanced wireless services are quickly delivered to rural Canadians.

The government plans to hold the 700 MHz auction in the first half of 2013, to be followed by the 2500 MHz auction in early 2014. A consultation on the detailed auction design, rules and attributes for the 700 MHz auction will be initiated soon.

Quebecor Media has expressed its support for the pro-competitive measures included in the government’s policy framework, and has indicated that it intends to participate actively in the upcoming consultation on the 700 MHz auction design, rules and attributes.

On March 14, 2012, coincident with the release of the government’s broader policy framework, Industry Canada also initiated a consultation on proposed revisions to existing measures related to mandatory roaming and antenna tower and site sharing. These existing measures were put in place subsequent to the 2008 AWS auction in order to facilitate competitive entry into the wireless sector, among other objectives. Among the revisions proposed in the current consultation are: an indefinite extension of the obligation to offer both in-territory and out-of-territory roaming services on commercial terms; measures to improve transparency and information exchange related to tower sharing; and measures to streamline the arbitration process in the event of disputes. Comments on Industry Canada’s proposals are due in May 2012, with a decision expected prior to the 700 MHz auction.

The CRTC also regulates mobile wireless services under the Telecommunications Act. On August 12, 1994, the CRTC released a decision forbearing from the exercise of most of its powers under the Telecommunications Act as they relate to mobile wireless service. However, the CRTC did maintain its ability to require conditions governing customer confidential information and to place other general conditions on the provision of mobile wireless service. Since 1994, the CRTC has exercised this power, for example, to mandate wireless number portability, and to require all WSPs to upgrade their networks to more precisely determine the location of a person using a mobile phone to call 911.

Canadian Publishing

General

Federal and provincial laws do not directly regulate the publication of newspapers in Canada. There are, however, indirect restrictions on the foreign ownership of Canadian newspapers by virtue of certain provisions of the Income Tax Act (Canada), which limits the deductibility by Canadian taxpayers of advertising expenditures which are made in a newspaper other than, subject to limited exceptions, a “Canadian issue” of a “Canadian newspaper”. For any given publication to qualify as a Canadian issue of a Canadian newspaper, the entity that publishes it, if publicly traded on a prescribed stock exchange in Canada, must ultimately be controlled, in law and in fact, by Canadian citizens and, if a private company, must be at least 75% owned, in vote and in value, and controlled in fact by Canadians. In addition, the publication must be printed and published in Canada and edited in Canada by individuals resident in Canada. All of our newspapers qualify as “Canadian issues” of “Canadian newspapers” (or otherwise fall outside of the limitation on deductibility of advertising expenses) and, as a result, our commercial advertisers generally have the right to deduct their advertising expenditures with us for Canadian tax purposes.

ITEM 4A —UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following Management Discussion and Analysis provides information concerning operating results and financial condition of Quebecor Media Inc. (“Quebecor Media” or the “Corporation”). This discussion should be read in conjunction with our consolidated financial statements and accompanying notes. As explained under the section “Transition to IFRS” below, Canadian Generally Accepted Accounting Principles (“GAAP”), which were previously used in preparing the consolidated financial statements, were replaced on the adoption of International Financial Reporting Standards (“IFRS”) on January 1, 2011. The Corporation’s consolidated financial statements for financial year ended December 31, 2011 have therefore been prepared in accordance with IFRS. Comparative figures for 2010 have also been restated.

In recent years, the United States Securities and Exchange Commission (the “Commission”) has also adopted rules and regulations that permit foreign private issuers to include, in their filings with the Commission, financial statements prepared in accordance with IFRS without reconciliation to generally accepted accounting principles as used in the United States, and, in this regard, such reconciliation is no longer included in the Corporation’s consolidated financial statements.

All amounts are in Canadian dollars (“CAD dollars”), unless otherwise indicated. This discussion contains forward-looking statements, which are subject to a variety of factors that could cause actual results to differ materially from those contemplated by these statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under “Cautionary Statement Regarding Forward-Looking Statements” and in “Item 3. Key Information – Risk Factors”.

During the second quarter of 2011, some of the special-interest portals were transferred from the News Media segment to the Telecommunications segment. The Corporation’s segmented financial data for prior years have therefore been restated to reflect the change.

OVERVIEW

Quebecor Media is one of Canada’s leading media companies, with activities in cable distribution, telecommunications, newspaper publishing, production and distribution of printing products, television broadcasting, book, magazine and video retailing, publishing and distribution, music recording, production and distribution, new media services, video game development and Québec junior hockey. Through its operating subsidiaries, Quebecor Media holds leading positions in the creation, promotion and distribution of news, entertainment and Internet-related services that are designed to appeal to audiences in every demographic category. Quebecor Media continues to pursue a convergence strategy to capture synergies within its portfolio of media properties.

Quebecor Media’s operating subsidiaries’ primary sources of revenues include: subscriptions for cable television, Internet access and cable and mobile telephony services; newspaper advertising, circulation and Internet/portal services; television broadcasting, advertising, distribution and subscription; book and magazine publishing and distribution; retailing, distribution (traditional distribution and digital download) and production of video games and music products (CDs, DVDs and Blu-ray discs, musical instruments, music recording and live event promotion and production); and rental and sale of videos and games.

Quebecor Media’s principal direct costs consist of television programming costs, including royalties, Internet bandwidth and transportation costs, newsprint and publishing costs, and set-top box, handset and modem costs. Major components of its operating expenses include employee costs, royalties, rights and creation costs, cost of retail products, marketing, circulation and distribution expenses and service and printing contracts.

 

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TREND INFORMATION

Some of Quebecor Media’s lines of business are cyclical in nature. They are dependent on advertising and, in the News Media segment in particular, circulation sales. Operating results are therefore sensitive to prevailing economic conditions, especially in Québec, Ontario and Alberta.

In the News Media segment, circulation, measured in terms of copies sold, has been generally declining in the industry over the past several years. Also, the traditional run of press advertising for major multimarket retailers has been declining over the past few years due to consolidation in the retail industry, combined with a shift in marketing strategy toward other media. In order to respond to such competition, the News Media operations continue to expand their Internet presence through branded websites, including French- and English-language portals and specialized sites.

Changes in the price of newsprint can have a significant effect on the News Media segment’s operating results as newsprint is its principal expense besides wages and benefits, representing approximately 10.9% ($83.5 million) of the News Media segment’s operating expenses for the year ended December 31, 2011. Newsprint prices have historically experienced significant volatility. The Corporation currently anticipate that the market price of newsprint will increase in 2012, based on recent announcements from its supplier, citing higher manufacturing costs.

Competition also continues to be intense in the cable and alternative multichannel broadcast distribution industry and in the mobile telephony market. Moreover, the significant subscriber growth recorded in the Telecommunications sector throughout past years is not necessarily representative of future growth, due to the penetration rates currently reached.

The Telecommunications segment has in the past required substantial capital for the upgrade, expansion and maintenance of its network and the launch and expansion of new or additional services to support growth in its customer base and demands for increased bandwidth capacity and other services. The Corporation expects that additional capital expenditures will be required in the short and medium term in order to expand and maintain the Telecommunications segment’s systems and services, including expenditures relating to advancements in Internet access and high definition (“HD”) television, as well as the cost of its mobile services infrastructure deployment and upgrade.

The broadcasting industry is undergoing a period of significant change. Television audiences are fragmenting as viewing habits shift not only toward specialty channels, but also toward content delivery platforms that allow users greater control over content and timing, such as the Internet, video-on-demand and mobile devices. Audience fragmentation has prompted many advertisers to review their strategies. The Broadcasting segment is taking steps to adjust to the profound changes occurring in its industry so as to maintain its leadership position and offer audiences and advertisers alike the best available content, when they want it and on the media they want.

QUEBECOR MEDIA’S SEGMENTS

Quebecor Media’s subsidiaries operate in the following business segments: Telecommunications, News Media, Broadcasting, Leisure and Entertainment, and Interactive Technologies and Communications.

 

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QUEBECOR MEDIA’S INTEREST IN SUBSIDIARIES

Table 1 shows Quebecor Media’s equity interest in its main subsidiaries as of December 31, 2011.

Table 1

Quebecor Media’s interest (direct and indirect) in its main subsidiaries

December 31, 2011

 

     Percentage
of equity
  Percentage
of vote

Videotron Ltd.

       100.0%       100.0%

Sun Media Corporation

   100.0   100.0

Quebecor Media Printing Inc.

   100.0   100.0

TVA Group Inc.

     51.4     99.9

Archambault Group Inc.

   100.0   100.0

Sogides Group Inc.

   100.0   100.0

CEC Publishing Inc.

   100.0   100.0

Nurun Inc.

   100.0   100.0

Quebecor Media’s interest in its subsidiaries has not varied significantly over the past three years.

On May 1, 2011, Canoe Inc. (“Canoe”) was wound up and its operations integrated into Sun Media Corporation, with the exception of those related to the specialty sites jobboom.com and reseaucontact.com, which were integrated into Videotron Ltd. (“Videotron”).

On January 1, 2011, Osprey Media Publishing Inc. (“Osprey Media”) was wound up and its operations integrated into Sun Media Corporation.

HIGHLIGHTS SINCE END OF 2010

 

 

Quebecor Media’s sales increased $206.5 million (5.2%) to $4.21 billion in 2011, resulting from sustained growth in the Telecommunications segment.

 

 

Quebecor Media’s operating income totalled $1.34 billion, a decrease of $15.7 million (-1.2%) compared with 2010.

Telecommunications

 

 

Net increase of 375,800 revenue generating units1 in 2011, 39.3% more than the 269,700-unit increase in 2010 and the largest annual increase since 2008. It was due, among other things, to the effective strategy of marketing bundled services, including mobile telephony service, as over-the-air analog television broadcasting was ending.

 

   

Net increase of 49,900 cable television customers (34,600 in 2010), including a 181,200-subscriber increase for the digital service (135,500 in 2010), the strongest annual growth for the digital service since its launch in 1999. Total revenues from cable television services passed the $1 billion mark.

 

   

Net increase of 80,400 customers for the cable Internet access service (81,500 in 2010).

 

   

Net increase of 91,000 customers for the cable telephony service (100,300 in 2010).

 

   

Net increase of 154,500 subscriber connections for the mobile telephony service. At December 31, 2011, Videotron’s 4G network was available to nearly seven million people in Québec and eastern Ontario.

 

 

The Telecommunications segment’s operating income increased by $51.5 million (4.9%) in 2011, despite additional operating costs generated by the new mobile telephony service launched in September 2010.

 

1 

The sum of cable television, Internet access and cable telephony service subscriptions, plus subscriber connections to the mobile telephony service.

 

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News Media

 

 

In accordance with Sun Media Corporation’s innovative Internet approach, already implemented at other dailies, the new Le Journal de Montréal and Le Journal de Québec websites launched in February 2012 offer an exceptional user experience. The new sites reflect the tone and style that have made the print versions of the newspapers successful, but they offer more videos and photos, as well as increased opportunities for interaction with columnists, leveraging Quebecor Media’s full potential for convergence.

 

 

During 2011, the Corporation continued implementing its investment plan in the News Media segment in order to increase its revenue streams. Capitalizing on the strength of their well-known brands and leveraging all forms of media creativity, the national sales offices in Ontario and Québec now offer advertisers one-stop shopping for nation-wide advertising and an integrated approach to advertising and marketing solutions based on optimal media platform convergence.

 

 

The launch of Le Sac Plus door-knob bag in Québec in August 2011 illustrates this unique capacity to interact with consumers. In addition to distributing all Quebecor Media community newspapers, the Le Sac Plus contains advertising materials such as flyers, leaflets, product samples and other value-added promotions every week. The contracts to print The Jean Coutu Group (PJC) Inc. pharmacy chain’s flyers and distribute them in Le Sac Plus demonstrate the complementary fit of the News Media segment’s multiproduct offerings.

 

 

The QMI National Sales Offices signed a number of contracts to develop, produce and implement full, innovative, integrated advertising and marketing plans across all of Quebecor Media’s platforms.

 

 

Sun Media Corporation launched new restructuring and cost-containment initiatives during the fourth quarter of 2011. Headcount will be reduced by 400 employees, or 8% of the workforce. Annual savings are expected to be in excess of $20.0 million.

 

 

According to the NADbank 2010/11 survey for the September 2010 to June 2011 period, Le Journal de Montréal has a weekly readership of 1,194,400, which is 371,600 more than its closest competitor. Readership of the Journal increased 16% in the 18-24 age group. Meanwhile, the free daily 24 heures added 45,000 readers, an 8.1% increase from the previous survey.

 

 

The labour dispute at Le Journal de Montréal ended at the beginning of the second quarter of 2011. The mediator’s recommendations, as accepted by the parties, called for, among other things, greater flexibility with respect to the workforce and the sharing of editorial content with the Corporation’s other media outlets.

 

 

In 2011, Quebecor Media acquired Les Hebdos Montérégiens’ 15 community newspapers and launched 3 new community newspapers. Quebecor Media’s distribution network has the capacity to reach more than 3.3 million Québec households (92.0%) of the total.

Broadcasting

 

 

On March 1, 2012, TVA Group Inc. (“TVA Group”) announced an agreement with Rogers Communications Inc. for carriage of the Sun News Network (“Sun News”), the TVA Sports channel, and TVA Network content on this major Canadian broadcasting distribution undertaking's video-on-demand, mobile telephony and Internet platforms. On November 22, 2011, TVA Group announced an agreement with Bell for carriage of four specialty channels: TVA Sports, Mlle, YOOPA and Sun News. Given the other agreements reached during the year, TVA Group has now secured carriage of all its specialty channels by Canada’s major broadcast distribution undertakings.

 

 

On December 22, 2011, TVA Group announced an agreement to sell its 50% and 51% interests in the specialty channels mysteryTV and The Cave respectively to Shaw Media Global Inc.

 

 

On September 12, 2011, TVA Group launched the TVA Sports channel, which carries diverse programming with strong appeal for consumers and advertisers. Its sportscasts and coverage of major sports events are delivered by a roster of sportscasters and columnists fans can relate to.

 

 

On May 2, 2011, TVA Group’s new digital channel Mlle, a multiplatform brand targeted at women, began broadcasting.

 

 

On April 18, 2011, Sun News, an English-language news and opinion specialty channel, went live. Its mission is to offer comprehensive coverage of events that impact Canada’s political and economic life.

 

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Other highlights

 

 

The final terms of the initial 25-year agreement on usage and naming rights to the future arena in Québec City were ratified by the parties on September 1, 2011. Quebecor Media now has all the tools it needs to pursue its goals, which are to manage a world-class multipurpose arena and to bring a National Hockey League (“NHL”) team to Québec City.

 

 

On February 2, 2012, Quebecor Media struck an alliance with Saguenay-area entrepreneurs to create BlooBuzz Studios L.P. (“BlooBuzz”), a new Québec video game developer. BlooBuzz will focus on products for occasional gamers, a market that is experiencing explosive growth, particularly on mobile devices.

 

 

On September 12, 2011, Nurun Inc. (“Nurun”) announced the acquisition of a digital agency located in San Francisco, U.S.A., that has extensive expertise in brand promotion and interactive product development. Its customer list includes companies such as Google, Electronic Arts, Tesla Motors and Sony Electronics.

 

 

On June 22, 2011, Quebecor Media announced the acquisition of the assets of the Montreal Junior Hockey Club (reincarnated as the Armada de Blainville-Boisbriand), which will be moved to a northern suburb of Montréal. Quebecor Media’s interest in the Quebec Major Junior Hockey League (“QMJHL”) team will make it possible to add quality content to the Corporation’s broadcast programming, particularly in view of the upcoming launch of the TVA Sports channel.

Financing

 

 

On March 14, 2012, Quebecor Media issued a notice of redemption to purchase US$100.0 million in aggregate principal amount of its 7.75% Senior Notes due March 15, 2016. The redemption price is 102.583% of the principal amount of the notes redeemed, plus accrued and unpaid interest, and the date of redemption will be April 13, 2012.

 

 

On March 14, 2012, Videotron issued US$800.0 million aggregate principal amount of Senior Notes bearing interest at 5.0%, for a net proceeds of approximately $787.6 million, net of estimated financing fees of $11.9 million.

 

 

On February 29, 2012, Quebecor Media announced the initiation of a cash tender offer to purchase up to US$260.0 million in aggregate principal amount of its 7.75% Senior Notes due March 15, 2016. The total consideration for each US$1,000.0 principal amount of Senior Notes tendered and purchased is US$1,028.33 for Senior Notes tendered at or prior to March 14, 2012, or US$1,025.83 for Senior Notes tendered after that date but prior to March 28, 2012, plus accrued and unpaid interest.

 

 

On February 29, 2012, Videotron issued a notice of redemption for any and all of its outstanding 6.825% Senior Notes due January 15, 2014. The redemption price is 100.0% of the principal amount of the notes redeemed, plus accrued and unpaid interest, and the redemption date will be March 30, 2012. The purchase will be carried out on Senior Notes that have not been tendered and purchased under the Videotron cash tender offer announced on February 29, 2012.

 

 

On February 29, 2012, Videotron announced the initiation of a cash tender offer to purchase any and all of its outstanding 6.825% Senior Notes due January 15, 2014. The total consideration for each US$1,000.0 principal amount of Senior Notes tendered and purchased is US$1,001.25 for Senior Notes tendered at or prior to March 13, 2012, or US$1,000.00 for Senior Notes tendered after that date but prior to March 28, 2012, plus accrued and unpaid interest.

 

 

On February 24, 2012, TVA Group amended its bank credit facilities to extend the maturity of its $100.0 million revolving credit facility from December 2012 to February 2017.

 

 

On February 3, 2012, Sun Media Corporation repaid the $37.6 million balance on its term loan credit facility and terminated all its credit facilities. Sun Media Corporation’s liabilities no longer include any long-term debt.

 

 

On January 25, 2012, the Corporation amended its bank credit facilities to extend the maturity of its $100.0 million revolving credit facility from January 2013 to January 2016 and added a new $200.0 million revolving credit facility “C,” also maturing in January 2016.

 

 

On July 20, 2011, Videotron amended its $575.0 million revolving credit facility to extend the expiry date from April 2012 to July 2016 and to amend some of the terms and conditions.

 

 

On July 5, 2011, Videotron issued 6 7/8% Senior Notes maturing in 2021 in the aggregate principal amount of $300.0 million, for a net principal amount of $294.8 million. The net proceeds were used to finance the early repayment and withdrawal of US$255.0 million in the principal amount of Videotron’s 6 7/8% Senior Notes maturing in 2014, and to settle the related hedges.

 

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On January 5, 2011, Quebecor Media completed an issuance of Senior Notes in the aggregate principal amount of $325.0 million, for net proceeds of $319.9 million. The Notes bear interest at a rate of 7 3/8% and mature in 2021. Quebecor Media used the net proceeds from the placement primarily to finance the early repayment and withdrawal, on February 15, 2011, of all of Sun Media Corporation’s outstanding 7 5/8% Senior Notes maturing in 2013, in the aggregate principal amount of US$205.0 million, and to finance the settlement and cancellation of related hedges.

TRANSITION TO IFRS

On January 1, 2011, Canadian GAAP, as used by publicly accountable enterprises, were fully converged into IFRS. Prior to the adoption of IFRS, for all periods up to and including the year ended December 31, 2010, the Corporation’s consolidated financial statements were prepared in accordance with Canadian GAAP. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences related to recognition, measurement and disclosures.

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

The significant accounting policies under IFRS are disclosed in Note 1 to the consolidated financial statements for the year ended December 31, 2011. Note 29 describes the adjustments made by the Corporation in preparing its IFRS opening consolidated balance sheet as of January 1, 2010 and in restating its previously published Canadian GAAP consolidated financial statements for the year ended December 31, 2010. Note 29 also provides details on exemption choices made by the Corporation with respect to the general principle of retrospective application of IFRS.

NON-IFRS FINANCIAL MEASURES

The non-IFRS financial measures used by the Corporation to assess its financial performance, such as operating income, cash flows from segment operations, free cash flows from continuing operating activities and average monthly revenue per user (“ARPU”), are not calculated in accordance with or recognized by IFRS. The Corporation’s method of calculating these non-IFRS financial measures may differ from the methods used by other companies and, as a result, the non-IFRS financial measures presented in this document may not be comparable to other similarly titled measures disclosed by other companies.

Operating Income

The Corporation defines operating income, as reconciled to net income under IFRS, as net income before amortization, financial expenses, gain (loss) on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing and income taxes. Operating income as defined above is not a measure of results that is recognized under IFRS. It is not intended to be regarded as an alternative to other financial operating performance measures or to the consolidated statement of cash flows as a measure of liquidity and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The Corporation’s parent company, Quebecor Inc. (“Quebecor”), considers the media segment as a whole and uses operating income in order to assess the performance of its investment in Quebecor Media. The Corporation’s management and Board of Directors use this measure in evaluating its consolidated results as well as the results of its operating segments. As such, this measure eliminates the effect of significant levels of non-cash charges related to depreciation of tangible assets and amortization of certain intangible assets, and it is unaffected by the capital structure or investment activities of Quebecor Media and its segments. Operating income is also relevant because it is a significant component of its annual incentive compensation programs. A limitation of this measure, however, is that it does not reflect the periodic costs of capitalized tangible and intangible assets used in generating revenues in the Corporation’s segments. Quebecor Media uses other measures that do reflect such costs, such as cash flows from segment operations and free cash flows from continuing operating activities. In addition, measures like operating income are commonly used by the investment community to analyze and compare the performance of companies in the industries in which we are engaged. Quebecor Media’s definition of operating income may not be the same as similarly titled measures reported by other companies.

 

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Table 2 below presents a reconciliation of operating income to net income as presented in Quebecor Media consolidated financial statements. The consolidated income statement data for the three-month periods ended December 31, 2011 and 2010 presented in Table 2 below is derived from our unaudited consolidated financial statements for such periods not included in this annual report.

Table 2

Reconciliation of the operating income measure used in this report to the net income measure used in the consolidated financial statements

(in millions of Canadian dollars)

 

     Year ended
December 31
    Three months ended
December 31
 
     2011     2010     2011     2010  

Operating income:

        

Telecommunications

   $ 1,098.8      $ 1,047.3      $ 294.7      $ 263.2   

News Media

     150.1        191.4        47.0        57.8   

Broadcasting

     50.5        74.9        20.6        29.2   

Leisure and Entertainment

     26.6        27.6        7.6        11.3   

Interactive Technologies and Communications

     7.9        6.0        2.5        2.5   

Head Office

     2.3        4.7        (0.8     2.4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,336.2        1,351.9        371.6        366.4   

Amortization

     (509.3     (396.7     (137.3     (119.4

Financial expenses

     (311.5     (300.7     (76.0     (74.4

Gain (loss) on valuation and translation of financial instruments

     54.6        46.1        82.5        (23.6

Restructuring of operations, impairment of assets and other special items

     (30.2     (37.1     (11.2     (23.4

Loss on debt refinancing

     (6.6     (12.3     –          –     

Income taxes

     (146.4     (162.6     (61.4     (23.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 386.8      $ 488.6      $ 168.2      $ 101.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Segment Operations

Cash flows from segment operations represents operating income, less additions to property, plant and equipment and acquisitions of intangible assets (excluding disbursements for licence acquisitions and renewals), plus proceeds from disposal of assets. The Corporation uses cash flows from segment operations as a measure of the liquidity generated by its segments. Cash flows from segment operations represents funds available for interest and income tax payments, expenditures related to restructuring programs, business acquisitions, the payment of dividends and the repayment of long-term debt. Cash flows from segment operations is not a measure of liquidity that is consistent with IFRS. It is not intended to be regarded as an alternative to other financial operating performance measures or to the statement of cash flows as a measure of liquidity. Cash flows from segment operations is used by the Corporation’s management and Board of Directors to evaluate cash flows generated by its segments’ operations. When cash flows from segment operations is reported, a reconciliation to operating income is provided in the same section of the report.

Free Cash Flows from Continuing Operating Activities

Free cash flows from continuing operating activities consists of cash flows from segment operations (see ”Cash Flows from Segment Operations” above), minus cash interest payments and cash charges for restructuring of operations, impairment of assets and other special items, plus or minus current income tax expenses, other receipts (disbursements), and the net change in non-cash balances related to operations. The Corporation uses free cash flows from continuing operating activities as a measure of total liquidity generated on a consolidated basis. Free cash flows from continuing operating activities represents funds available for business acquisitions, the payment of dividends and the repayment of long-term debt. Free cash flows from continuing operating activities is not a measure of liquidity that is consistent with IFRS. It is not intended to be regarded as an alternative to other financial operating performance measures or to the statement of cash flows as a measure of liquidity. The Corporation’s definition of free cash flows from continuing operating activities may not be identical to similarly titled measures reported by other companies.

 

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Table 3 provides a reconciliation of free cash flows from continuing operating activities of the Corporation to cash flows provided by its operating activities reported in the consolidated financial statements.

Table 3

Reconciliation of free cash flows from continuing operating activities to cash flows provided by operating activities reported in the consolidated financial statements

(in millions of Canadian dollars)

 

     2011     2010  

Free cash flows from continuing operating activities (Table 4)

   $ 21.9      $ 103.6   

Additions to property, plant and equipment

     780.7        689.0   

Additions to intangible assets

     91.6        95.2   

Proceeds from disposal of assets1

     (12.0     (53.0
  

 

 

   

 

 

 

Cash flows provided by operating activities

   $ 882.2      $ 834.8   
  

 

 

   

 

 

 
1 

2010 figures include the sale of certain tangible assets in the News Media segment.

Average Monthly Revenue per User

ARPU is an industry metric that the Corporation uses to measure its monthly cable television, Internet access, cable telephony and mobile telephony revenues per average basic cable customer. ARPU is not a measurement that is consistent with IFRS and the Corporation’s definition and calculation of ARPU may not be the same as identically titled measurements reported by other companies. The Corporation calculates ARPU by dividing its combined cable television, Internet access, cable telephony and mobile telephony revenues by the average number of basic customers during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

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2011/2010 FINANCIAL YEAR COMPARISON

The 2011 financial year contained an additional week in the News Media, Broadcasting, Leisure and Entertainment and Interactive Technologies and Communications segments.

Analysis of consolidated results of Quebecor Media

Revenue: $4.21 billion, an increase of $206.5 million (5.2%).

 

 

Revenues increased in Telecommunications ($201.9 million or 9.1% of segment revenues), Interactive Technologies and Communications ($22.9 million or 23.4%), Leisure and Entertainment ($10.4 million or 3.4%), and News Media ($3.4 million or 0.3%).

 

 

Revenues decreased in Broadcasting ($2.7 million or -0.6%).

 

 

Inter-segment revenues also show an unfavorable variance of $29.4 million due to new activities in 2011.

Operating income: $1.34 billion, a decrease of $15.7 million (-1.2%).

 

 

Operating income decreased in News Media ($41.3 million or -21.6% of segment operating income), Broadcasting ($24.4 million or -32.6%), and Leisure and Entertainment ($1.0 million or -3.6%).

 

 

Operating income increased in Telecommunications ($51.5 million or 4.9%) and in Interactive Technologies and Communications ($1.9 million or 31.7%).

 

 

The change in the fair value of Quebecor Media stock options resulted in a $12.8 million favourable variance in the stock-based compensation charge in 2011 compared with 2010. The fair value of the options decreased in 2011, whereas it increased in 2010. The change in the fair value of Quebecor stock options resulted in a $6.6 million favourable variance in the Corporation’s stock-based compensation charge in 2011.

 

 

Excluding the impact of the consolidated stock-based compensation charge, and if the figures for prior periods were restated to retroactively reflect the reversal in the fourth quarter of 2009 of the accumulated Canadian Radio-television and Telecommunications Commission (“CRTC”) Part II licence fee provision, operating income would have decreased 2.6% in 2011, compared with a 9.0% increase in 2010.

Net income attributable to shareholders: $374.0 million in 2011, compared with $470.3 million in 2010, a decrease of $96.3 million.

 

 

The decrease was mainly due to:

 

   

$112.6 million increase in amortization charge;

 

   

$15.7 million in decrease in operating income;

 

   

$10.8 million increase in financial expenses.

Partially offset by:

 

   

$8.5 million favourable variance in gain on valuation and translation of financial instruments;

 

   

$6.9 million decrease in charge for restructuring of operations, impairment of assets and other special items;

 

   

$5.7 million decrease in losses on debt refinancing.

Amortization charge: $509.3 million, a $112.6 million increase due mainly to significant capital expenditures in 2010 and 2011 in the Telecommunications segment, including commencement of amortization of 4G network equipment and licences following the network launch in September 2010, and the impact of the emphasis on equipment leasing in its promotional strategy.

Financial expenses: $311.5 million, an increase of $10.8 million.

 

 

The increase was due mainly to:

 

   

higher base interest rates and the impact of the rebalancing of fixed- and floating-rate debt on the average interest rate on the debt.

 

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Partially offset by:

 

   

$6.3 million favourable variance in other financial expenses, reflecting a reduction in interest following the settlement of a dispute, among other things.

Gain on valuation and translation of financial instruments: $54.6 million in 2011 compared with $46.1 million in 2010, a favourable variance of $8.5 million.

 

 

The variance was due to a favourable change in the fair value of early settlement options due to interest rate and credit premium fluctuations, and to fluctuations in the ineffective portion of derivative financial instruments.

Charge for restructuring of operations, impairment of assets and other special items: $30.2 million in 2011 compared with $37.1 million in 2010, a favourable variance of $6.9 million.

 

 

In connection with the startup of its 4G network in the third quarter of 2010, the Telecommunications segment recorded a $14.8 million charge for migration costs in 2011, compared with $13.9 million in 2010. In addition, a $0.6 million charge for restructuring of other operations was recorded in 2011, the same as in 2010. A $3.3 million gain on disposal of assets and a $0.2 million charge for impairment of assets were also recorded in the Telecommunications segment in 2010.

 

 

An $11.0 million charge for restructuring of operations was recorded in the News Media segment in 2011 in connection with staff-reduction programs, compared with a $17.9 million charge in 2010. As a result of these initiatives, a $0.8 million non-cash impairment charge on certain assets was recorded in 2011, compared with $3.5 million in 2010. In addition, some segment assets were sold in 2010, resulting in a $4.9 million net gain.

 

 

In 2010, the Broadcasting segment decided to terminate the programming of its Sun TV conventional television station on the launch of the new Sun News specialty channel. In connection with this repositioning, the Broadcasting segment recognized an $8.2 million asset impairment charge on equipment and broadcast rights in 2010, compared with a $0.7 million asset impairment charge in 2011. In addition, a $0.8 million restructuring charge was recorded in 2011, primarily in connection with staff reductions, compared with $1.4 million in 2010. Finally, the Broadcasting segment recorded a $0.2 million charge for other special items in 2011, compared with a $0.5 million gain on disposal of assets in 2010.

 

 

A $0.2 million net charge for restructuring of operations and other items was recorded in 2011, compared with $0.9 million in 2010 in other segments. A $1.1 million charge for other special items was recorded in 2011, compared with a $0.8 million gain in 2010.

Loss on debt refinancing: $6.6 million in 2011 compared with $12.3 million in 2010.

 

 

On July 18, 2011, Videotron redeemed US$255.0 million in the principal amount of its issued and outstanding 6 7/8% Senior Notes maturing in 2014 and settled the related hedges for a total cash consideration of $303.1 million. The transaction generated a $2.7 million gain on debt refinancing.

 

 

On February 15, 2011, Sun Media Corporation redeemed and withdrew the entirety of its 7 5/8% Senior Notes in the aggregate principal amount of US$205.0 million and settled the related hedges for a total cash consideration of $308.2 million. The transaction generated a $9.3 million loss on debt refinancing.

 

 

On January 14, 2010, Quebecor Media made a US$170.0 million early payment on drawings on its term loan “B” and settled a corresponding portion of the related hedge agreements for a total cash disbursement of $206.7 million. As a result of this transaction, a $10.4 million loss on debt refinancing was charged to income.

 

 

In May 2010, Osprey Media paid down the balance of its term credit facility and settled related hedge agreements for a total cash consideration of $116.3 million. As a result of this transaction, a $1.9 million loss on debt refinancing was charged to income.

Income tax expense: $146.4 million (effective tax rate of 27.5%) in 2011, compared with $162.6 million (effective tax rate of 25.0%) in 2010.

 

 

The $16.2 million favourable variance was due to reduced income before income taxes, partially offset by the impact of a decrease in deferred income tax liabilities recorded in 2010 in light of developments in tax audits, jurisprudence and tax legislation.

 

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Free cash flows from continuing operating activities: $21.9 million in 2011, compared with $103.6 million in 2010 (Table 4).

 

 

The $81.7 million decrease was essentially due to:

 

   

$91.7 million increase in additions to property, plant and equipment, mainly due to the emphasis on equipment leasing in the Telecommunications segment’s promotional strategy;

 

   

$41.0 million unfavourable variance in proceeds from disposal of assets, essentially due to the sale of certain tangible assets in the News Media segment in 2010;

 

   

$15.7 million decrease in operating income;

 

   

$10.5 million increase in cash interest expense.

Partially offset by:

 

   

$74.2 million decrease in current income taxes.

Table 4

Free cash flows from continuing operating activities

(in millions of Canadian dollars)

 

     2011     2010  

Cash flows from segment operations:

    

Telecommunications

   $ 306.5      $ 331.7   

News Media

     131.2        212.5   

Broadcasting

     14.2        51.3   

Leisure and Entertainment

     18.6        18.0   

Interactive Technologies and Communications

     3.6        3.4   

Head Office and other

     1.8        3.8   
  

 

 

   

 

 

 
     475.9        620.7   

Cash interest expense1

     (298.7     (288.2

Cash portion of charge for restructuring of operations and other special items

     (28.7     (33.9

Current income taxes

     17.7        (56.5

Other

     (2.1     0.8   

Net change in non-cash balances related to operations

     (142.2     (139.3
  

 

 

   

 

 

 

Free cash flows from continuing operating activities

   $ 21.9      $ 103.6   
  

 

 

   

 

 

 

 

1 

Interest on long-term debt, foreign currency translation of short-term monetary items and other interest expenses (see Note 4 to consolidated financial statements).

Table 5

Reconciliation of cash flows from segment operations to operating income

(in millions of Canadian dollars)

 

     2011     2010  

Operating income

   $ 1,336.2      $ 1,351.9   

Additions to property, plant and equipment

     (780.7     (689.0

Acquisitions of intangible assets

     (91.6     (95.2

Proceeds from disposal of assets1

     12.0        53.0   
  

 

 

   

 

 

 

Cash flows from segment operations

   $ 475.9      $ 620.7   
  

 

 

   

 

 

 

 

1 

2010 figures include the sale of certain tangible assets in the News Media segment.

 

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SEGMENTED ANALYSIS

Telecommunications

In Quebecor Media’s Telecommunications segment, Videotron is the largest cable operator in Québec and the third-largest in Canada by customer base. Its state-of-the-art network passes 2,657,300 homes. As of December 31, 2011, the total number of revenue-generating units stood at 4,689,900. At December 31, 2011, Videotron had 1,861,500 cable television customers, including 1,400,800 subscribers to its illico Digital TV service. Videotron is also an Internet Service Provider and telephony service provider, with 1,332,500 subscribers to its cable Internet access services and 1,205,300 subscribers to its cable telephony service. In September 2010, Videotron also launched a 4G network to deliver advanced mobile telephony services, including high-speed Internet access, mobile television and many other functionalities supported by smartphones. As of December 31, 2011, there were 290,600 subscriber connections to Videotron’s mobile service. Videotron also includes Videotron Business Solutions, a full-service business telecommunications provider that offers telephony, high-speed data transmission, Internet access, hosting, and cable television services, and Le SuperClub Vidéotron ltée (“Le SuperClub Vidéotron”) and its network of franchises, which sell and rent DVDs, Blu-ray discs and console games. The Telecommunications segment also includes the activities of two specialty websites, the employment and training site jobboom.com and the dating site reseaucontact.com.

2011 operating results

Revenues: $2.43 billion in 2011, an increase of $201.9 million (9.1%).

 

 

Combined revenues from all cable television services topped $1 billion for the first time, increasing by $62.0 million (6.5%) to $1.01 billion, mainly because of the higher ARPU generated by increases in some rates and the success of HD packages, the increase in pay TV orders, and the impact of customer base growth.

 

 

Revenues from Internet access services increased $54.0 million (8.4%) to $698.2 million. The improvement was mainly due to customer growth, increases in some rates and customer migration to upgraded service plans.

 

 

Revenues from cable telephony service increased $26.8 million (6.5%) to $436.7 million, primarily as a result of customer base growth and more lines per customer.

 

 

Revenues from mobile telephony service increased $59.6 million (112.1%) to $112.7 million, essentially due to customer growth resulting largely from the launch of the new 4G network in September 2010.

 

 

Revenues of Videotron Business Solutions increased $3.2 million (5.4%) to $63.0 million, mainly because of higher revenues from network solutions.

 

 

Revenues from customer equipment sales decreased $4.0 million (-6.7%) to $55.9 million, mainly because of campaigns promoting cable equipment leasing, partially offset by increased sales of mobile telephony equipment.

 

 

Revenues of Le SuperClub Vidéotron ltée (“Le SuperClub Vidéotron”) decreased $1.6 million (-6.9%) to $21.6 million, mainly as a result of store closures in 2011, partially offset by higher franchise royalty revenues.

 

 

Other revenues increased $1.9 million (6.8%) to $29.9 million.

ARPU: $103.28 in 2011 compared with $95.73 in 2010, an increase of $7.55 (7.9%).

Customer statistics

Revenue generating units – As of December 31, 2011, the total number of revenue generating units stood at 4,689,900, an increase of 375,800 (8.7%) from the end of 2010 (Table 6). The net increase in revenue generating units in 2011 was 39.3% higher than in 2010 and constituted the largest annual increase, in absolute terms, in three years. This excellent performance was due to the effective strategy of marketing bundled services, including mobile telephony service, at a time of technological change in television broadcasting. The number of revenue generating units increased by 269,700 in 2010. Revenue generating units are the sum of cable television, Internet access and cable telephony service subscriptions, and subscriber connections to the mobile telephony service.

Cable television – The combined customer base for all of Videotron’s cable television services increased by 49,900 (2.8%) in 2011 (Table 6), compared with an increase of 34,600 in 2010. As of December 31, 2011, Videotron had 1,861,500 customers for its cable television services, a household penetration rate of 70.1% (number of subscribers as a proportion of total homes passed by Videotron’s network, i.e., 2,657,300 homes, as of the end of December 2011), compared with 69.3% a year earlier.

 

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The customer base for the Digital TV service stood at 1,400,800 at December 31, 2011, an increase of 181,200 (14.9%) during the year, compared with a 135,500 increase in 2010. It was the largest annual customer growth for Digital TV since the service was launched in 1999. As of December 31, 2011, illico Digital TV had a household penetration rate of 52.7% versus 46.7% a year earlier.

 

 

Migration from analog to digital service was the main reason for the 131,300 (-22.2%) decrease in the customer base for analog cable television services in 2011. By comparison, the number of subscribers to analog cable services decreased by 100,900 in 2010.

Cable Internet access – The number of subscribers to cable Internet access services stood at 1,332,500 at December 31, 2011, an increase of 80,400 (6.4%) from year-end 2010, compared with an increase of 81,500 in 2010 (Table 6). At December 31, 2011, Videotron’s cable Internet access services had a household penetration rate of 50.1%, compared with 47.9% a year earlier.

Cable telephony service – The number of subscribers to cable telephony service stood at 1,205,300 at the end of December 2011, an increase of 91,000 (8.2%) from year-end 2010, compared with an increase of 100,300 in 2010 (Table 6). At December 31, 2011, the IP telephony service had a household penetration rate of 45.4%, compared with 42.7% a year earlier.

Mobile telephony service – As of December 31, 2011, the number of subscriber connections to the mobile telephony service stood at 290,600, an increase of 154,500 (113.5%) from year-end 2010, compared with an increase of 53,300 connections in 2010 (Table 6). At December 31, 2011, there were 3,100 connections to the MVNO network (Mobile Virtual Network Operator).

Table 6

Telecommunications segment year-end customer numbers (2007-2011)

(in thousands of customers)

 

     2011      2010      2009      2008      2007  

Cable television:

              

Analog

     460.7         592.0         692.9         788.3         869.9   

Digital

     1,400.8         1,219.6         1,084.1         927.3         768.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,861.5         1,811.6         1,777.0         1,715.6         1,638.1   

Cable Internet

     1,332.5         1,252.1         1,170.6         1,063.8         933.0   

Cable telephony

     1,205.3         1,114.3         1,014.0         852.0         636.4   

Mobile telephony1

     290.6         136.1         82.8         63.4         45.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (revenue generating units)

     4,689.9         4,314.1         4,044.4         3,694.8         3,252.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

In thousands of connections

Operating income: $1.10 billion, an increase of $51.5 million (4.9%).

 

 

The increase in operating income was mainly due to:

 

   

impact of higher revenues;

 

   

$10.6 million reduction in the stock-based compensation charge.

Partially offset by:

 

   

increases in operating expenses, among them costs related to the roll-out of the 4G network, including acquisition costs of approximately $489 per subscriber addition (direct costs, including selling, advertising and marketing expenses and equipment subsidies) and site overhead costs;

 

   

capitalization of some operating expenses during the build-out of the new mobile network, which also explains the unfavourable variance in operating expenses in 2011 compared with 2010.

 

 

Excluding the variance in the stock-based compensation charge, and if the figures for prior periods were restated to retroactively reflect the CRTC Part II licence fee adjustment in the fourth quarter of 2009, the increase in the segment’s operating income in 2011 would have been 3.9% compared with 9.7% in 2010.

 

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Cost/revenue ratio: Operating costs for all Telecommunications segment operations, expressed as a percentage of revenues, were 54.8% in 2011, compared with 53.0% in 2010.

 

 

The increase was mainly due to operating expense increases related to the roll-out of the 4G network, partially offset by the impact of increases in some rates.

Cash flows from operations

Cash flows from segment operations: $306.5 million in 2011, compared with $331.7 million in 2010, a decrease of $25.2 million (Table 7).

 

 

The $51.5 million increase in operating income was offset by a $73.9 million increase in additions to property, plant and equipment, mainly reflecting the impact of the emphasis on equipment leasing in its promotional strategy.

Table 7: Telecommunications

Cash flows from operations

(in millions of Canadian dollars)

 

     2011     2010  

Operating income

   $ 1,098.8      $ 1,047.3   

Additions to property, plant and equipment

     (725.3     (651.4

Acquisitions of intangible assets

     (73.2     (71.9

Proceeds from disposal of assets

     6.2        7.7   
  

 

 

   

 

 

 

Cash flows from segment operations

   $ 306.5      $ 331.7   
  

 

 

   

 

 

 

News Media

In Quebecor Media’s News Media segment, Sun Media Corporation operates Canada’s largest newspaper chain, counting both paid and free circulation, according to corporate figures. As of December 31, 2011, Sun Media Corporation was publishing 36 paid-circulation dailies and 6 free dailies, including newspapers in 9 of the 10 largest urban markets in the country. It also publishes 236 community weeklies, magazines, weekly buyers’ guides, farm publications, and other specialty publications. According to corporate figures, the aggregate circulation of the News Media segment’s paid and free newspapers was approximately 15.7 million copies per week as of December 31, 2011. Sun Media Corporation holds a 49% interest in the English-language news and opinion specialty channel Sun News, launched in April 2011 in partnership with TVA Group, which holds 51%.

Sun Media Corporation’s newspapers disseminate information in traditional print form as well as through 8 urban daily news portals (journaldemontreal.com, journaldequebec.com, ottawasun.com, torontosun.com, lfpress.com, winnipegsun.com, edmontonsun.com and calgarysun.com) and 223 community newspapers, free dailies, magazines and specialities information portals. The Canoe network also operates a number of sites, including canoe.ca, canoe.tv and lesacplus.ca, as well as the e-commerce sites micasa.ca (real estate), autonet.ca (automobiles), space.canoe.ca and espace.canoe.ca (social networking), classifiedExtra.ca (classified ads), and canoeklix.com (cost-per-click advertising solutions). In 2011, Sun Media Corporation acquired stealthedeal.com, an online discount coupon site. The News Media portals log over 9.3 million unique visitors per month in Canada, including 5.0 million in Québec (according to comScore Media Metrix figures for December 2011).

As well, the News Media segment is engaged in the distribution of newspapers, magazines, inserts and flyers through, among others, Quebecor Media Network Inc. (“Quebecor Media Network”). The segment also includes QMI Agency, a news agency that provides content to all Quebecor Media properties and external customers. In addition, the News Media segment offers commercial printing and related services to other publishers through its national printing and production platform. Through Quebecor MediaPages, it conducts an online directory publishing operation.

 

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2011 operating results

Revenues: $1.02 billion, an increase of $3.4 million (0.3%).

 

 

Combined revenues from commercial printing and other sources increased 14.2%, advertising revenues were flat, and circulation revenues decreased 5.1%.

 

 

Revenues decreased 3.6% at the urban dailies and increased 3.5% at the community newspapers. Excluding business acquisitions, revenues of the community newspapers decreased 2.3%.

 

 

Portal revenues decreased 5.2%, essentially because of lower revenues at the specialty sites, due primarily to the transfer of intercompany website development activities to the Nurun subsidiary and a decrease in advertising revenues.

Operating income: $150.1 million, a decrease of $41.3 million (-21.6%).

 

 

The decrease was due primarily to:

 

   

unfavourable variance related to investments in Quebecor Media Network and Quebecor MediaPages;

 

   

impact of revenue decreases at the urban dailies and the community newspapers (on a same-store basis);

 

   

increases in some operating expenses, including community newspaper startup costs in Québec;

 

   

$4.7 million increase in newsprint costs.

Partially offset by:

 

   

$5.8 million favourable impact of rationalization of postretirement benefits;

 

   

$3.9 million favourable variance related to the stock-based compensation plan;

 

   

$2.4 million favourable impact related to restructuring initiatives announced in November 2011;

 

   

$2.4 million favourable variance in multimedia employment tax credits;

 

   

contribution from acquired businesses.

 

 

Excluding the impact of the stock-based compensation charge and investments in Quebecor Media Network and Quebecor MediaPages, operating income would have decreased by 12.7% in 2011 compared with a 4.7% increase in 2010.

The restructuring measures introduced since late 2008 in the News Media segment have included staff cuts, consolidation of prepress, shipping and press room operations, centralization of administrative processes, consolidation of distribution networks, and other resource centralization and optimization efforts across the segment’s operations in all regions. While the restructuring proceeds, development of new revenue streams continues, including those related to the development of integrated, convergent solutions for customers, such as marketing initiatives by the QMI National Sales Offices and Quebecor Media Network’s integrated offerings of products and services, and those related to the marketing of content produced by QMI Agency.

Cost/revenue ratio: Operating costs for all News Media segment operations, expressed as a percentage of revenues, were 85.3% in 2011, compared with 81.1% in 2010.

 

 

The increase was due mainly to:

 

   

spending on community newspaper launches in Québec, as well as on Quebecor Media Network and Quebecor MediaPages;

 

   

unfavourable impact of the fixed component of operating costs (which does not fluctuate in proportion to revenue decreases);

 

   

impact of higher newsprint costs.

Partially offset by:

 

   

cost reductions related to postretirement benefits, compensation plans and employment tax credits.

 

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Cash flows from operations

Cash flows from segment operations: $131.2 million in 2011, compared with $212.5 million in 2010 (Table 8).

 

 

The $81.3 million decrease was due primarily to a $41.3 million decrease in operating income and a $38.9 million unfavourable variance in proceeds from disposal of assets, resulting primarily from the sale of certain tangible assets in 2010.

Table 8: News Media

Cash flows from operations

(in millions of Canadian dollars)

 

     2011     2010  

Operating income

   $ 150.1      $ 191.4   

Additions to property, plant and equipment

     (13.7     (11.4

Acquisitions of intangible assets

     (10.8     (12.0

Proceeds from disposal of assets1

     5.6        44.5   
  

 

 

   

 

 

 

Cash flows from segment operations

   $ 131.2      $ 212.5