CABLE AND RADIO DRIVE COGECO’S GROWTH.
Press release
For immediate release
Cable and radio drive COGECO’s growth
Montréal, October 16, 2006 – Today, COGECO Inc. (TSX: CGO) announced its financial results
for the fourth quarter and fiscal year ended August 31, 2006.
COGECO‘s sustained growth is mainly attributable to the cable sector, which, through internal and
external expansion, drives the Company’s performance. For the fourth quarter, revenue was up
21.4%, operating income before amortization by 21.5% and net income jumped to reach
$10.3 million.
C
ABLE SECTOR:
Growth by business acquisition and by internal customer growth
With the acquisition of Cabovisão – Televisão por Cabo S.A. (Cabovisão), as a contributing factor,
the number of revenue-generating units
1
(RGUs) jumped from about 1,348,000 at the beginning of
the fiscal year to approximately 2,185,000 at the end of August 2006. “The arrival of Cabovisão in
our cable sector, with about 629,000 RGUs, is very promising,” said Mr. Louis Audet, President
and CEO of COGECO. “We are in a very good position to sustain growth, in Canada with more
than 208,000 RGUs added to our base as a result of the positive impact of our Digital Telephony
service and, with the well-trained and enthusiastic people in Portugal, who are working to grow our
position in that market.”
During the fourth quarter, the Canadian operations reported strong RGU increases, adding more
than 44,000 compared to about 10,000 for the same period last year and growing revenue by
12.7%, while operating income before amortization improved by 11.8%. On a consolidated basis,
revenue increased by 24.8%, operating income before amortization by 20% while net income more
than tripled to reach $34 million.
M
EDIA SECTOR:
Revenue increased slightly compared to those of the fourth quarter of fiscal year 2005.
TQS: strong fall schedule
During the fourth quarter, TQS developed a new logo and imagery and prepared the fall season,
which coincided with the 20
th
anniversary of the station. “The 20
th
anniversary of TQS is testimony
to the vitality of a generalist television network, that is different in terms of style and content. We
continue to take all the necessary measures to improve our programming with new shows that will
please our advertisers and our audience”, declared Mr. Audet.
1
Revenue-generating units represent the sum of basic service, Digital Television service, High Speed Internet service and Telephony service
customers.
- 2 -
Radio: maintaining its position
On the radio side, RYTHME FM maintained its leading position in the Montreal French market.
“The competition is fierce but we continuously strive to maintain that position. This is why in
August, we launched a new morning show and revisited our lunchtime and afternoon shows with
new hosts,” stated Mr. Audet. All of its other stations are strenghtening their position in their
respective markets.
2007
PROJECTIONS
Consolidated outlook
For fiscal 2007, COGECO expects to improve operating income before amortization by 33% to
35%, and consequently generate a net income of approximately $15 million. The expected free
cash flow should stand between $15 million and $20 million as announced in the third quarter.
Cable Sector
For the Canadian operations, management is maintaining its 2007 preliminary projections of last
July. In Portugal, we expect to add more than 75,000 RGUs essentially equally divided between
basic cable, High Speed Internet (HSI), and Telephony services. Revenue generated from the
Portuguese operations should exceed $215 million and operating income before amortization
should reach approximately $70 million, an operating margin of 33%. Consequently, on a
consolidated basis, an operating margin of approximately 38% should be achieved.
“For fiscal 2007, all Cogeco Cable employees, here and abroad will aim to increase customer
satisfaction through improved customer service and enhanced product and service offerings. We
will maintain tight controls over the cable subsidiary’s costs and we will work to continue to
improve our business processes. With regards to our new Portuguese subsidiary, the Cabovisão
integration plan is well advanced and we believe Cabovisão will contribute to the creation of value
for COGECO’s shareholders as early as this fiscal year”, concluded Mr. Audet.
Media Sector
New shows, new hosts and standard favourites will drive TQS performance. Since it began, Loft
Story III enjoyed large audiences every night. Loft Story III and other original shows will help
sustain TQS’s viewership. On the radio side, management will focus on maintaining leadership in
the key Montreal market while continuing to improve performance in all regional markets.
- 3 -
FINANCIAL HIGHLIGHTS
Quarters ended August 31,
Years ended August 31,
($000s, except percentages and
per share data)
(unaudited)
(audited)
2006
2005
%
Change
2006
2005
%
Change
Revenue $ 199,351 $
164,210 21.4 $
746,906 $ 675,605 10.6
Operating income before
amortization
68,645 56,485 21.5 253,114 233,843 8.2
Net income (loss) 10,300 630 ― 23,101 (19,813)
-
Cash flow from operations
(1)
51,729 43,215 19.7
192,308 177,379 8.4
Less:
Capital expenditures and
increase in deferred charges
55,309
49,361 12.0 168,131 132,649 26.7
Free cash flow
(1)
(3,580) (6,146) (41.8)
24,177 44,730 (45.9)
Per share data
Basic net income (loss) $ 0.62 $
0.04
― $
1.40 $ (1.21)
―
(1) Cash flow from operations, free cash flow and net income excluding impairment of goodwill and other intangible assets do not have
standard definitions prescribed by Canadian generally accepted accounting principles (GAAP) and should be treated accordingly. For
more details, please consult the Non-GAAP financial measures section.
FORWARD-LOOKING STATEMENT
Certain statements in this press release may constitute forward-looking information within the meaning of
securities laws. Forward-looking information may relate to our future outlook and anticipated events, our
business, our operations, our financial performance, our financial condition or our results and, in some
cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate";
"believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; “foresee”, “ensure” or other similar
expressions concerning matters that are not historical facts. In particular, statements regarding our future
operating results and economic performance and our objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions including expected growth,
results of operations, performance and business prospects and opportunities, which we believe are
reasonable as of the current date. While we consider these assumptions to be reasonable based on
information currently available to us, they may prove to be incorrect. Forward-looking information is also
subject to certain factors, including risks and uncertainties (described in the section “Uncertainty and main
risk factors” of the Company’s 2005 annual MD&A) that could cause actual results to differ materially from
what we currently expect. These factors include technological changes, changes in market and competition,
governmental or regulatory developments, general economic conditions, the development of new products
and services, the enhancement of existing products and services, and the introduction of competing
products having technological or other advantages, many of which are beyond our control. Therefore, future
events and results may vary significantly from what we currently foresee. You should not place undue
importance on forward-looking information and should not rely upon this information as of any other date.
While we may elect to, we are under no obligation (and expressly disclaim any such obligation) and do not
undertake to update or alter this information before next quarter.
This analysis should be read in conjunction with the Company’s financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Company’s 2005 Annual
Report. Throughout this discussio n, all amounts are in Canadian dollars unless otherwise indicated.
- 4 -
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO’s objectives are to maximize shareholder value by increasing profitability and by
ensuring continued growth. The strategies for reaching those objectives are, for the cable sector,
constant corporate growth through the diversification and improvement of products and services as
well as clientele and territories, effective management of capital and tight cost control. The media
sector focuses on continuous improvement of its programming to increase its market share, and
therefore, its profitability. The Company measures its performance with regard to these objectives
with operating income before amortization growth, free cash flow
1
and RGU
2
growth for the cable
sector. Below are the fourth quarter achievements of the cable and media sectors in furtherance of
COGECO’s objectives.
Cable Sector
Sustained corporate growth and diversification of clientele and territories
• On August 1, 2006, Cogeco Cable completed the acquisition of Cabovisão, the second
largest cable operator in Portugal in terms of the number of basic service cable customers
served. On August 31, 2006, Cabovisão had 826,369 homes passed, 629,041 RGUs and
269,694 basic cable service customers, offering analog television, HSI and Telephony
services. In addition, only one month of financial results was incorporated in those of the
fourth quarter and fiscal year 2006.
Diversification and improvement of products and services
• Digital Television services:
o Launch of five new high definition (HD) channels, and two new standard definition
(SD) channels in most Ontario territories;
• Digital Telephony service:
o Available to 66% of homes passed in Cogeco Cable’s territories, as at August 31,
2006;
o Since June 1, 2006, deployment of Digital Telephony service in Niagara Falls,
Pelham, Wallaceburg, Essex, St.Catharines, Cornwall, Gananoque, North Bay,
Peterborough, Sarnia, Beamsville, Bright’s Grove, Corunna, Lindsay in Ontario, and
Salaberry-de-Valleyfield, Magog, St-Sauveur, Piedmont, Ste-Adèle, St-Jovite, Mont-
Tremblant, Alma, Roberval and Ste-Agathe in Québec.
• HSI service:
o Download speed increase:
Standard HSI service’s maximum speed went from 7 Mbps to up to
10 Mbps;
Pro HSI service’s maximum speed went from 10 Mbps to up to 16 Mbps.
Media Sector
• During the fourth quarter, TQS announced that it would air “Loft Story III” in the fall of 2006.
Increased programming commitments should sustain growth in viewership and advertising
revenue for fiscal 2007;
• RYTHME FM is committed to keeping its leadership position in the Montreal market. It has
renewed its morning show and brought in new hosts. Across Québec, other RYTHME FM
stations are consolidating their position. In addition, station 93
3
continues to gain new
listeners within its target audience.
1
See “Non-GAAP financial” section for explanations.
2
See “Customer statistics” section of the cable sector section for detailed explanations.
- 5 -
RGU Growth
During the year, the number of RGUs for the Canadian operations increased by 15.4%. In the third
quarter of 2006, Cogeco Cable had anticipated RGU growth between 13% and 15% for all of fiscal
year 2006. Higher than anticipated HSI, Digital Television, Digital Telephony and basic customer
growth allowed the cable subsidiary to exceed the fiscal year objectives. With the acquisition of
Cabovisão on August 1, 2006, Cogeco Cable added 629,041 RGUs for a total of 2,184,977.
Operating Income Before Amortization Growth
During the year, consolidated revenue increased by 10.6% mainly due to stronger RGU growth
and the acquisition of Cabovisão on August 1, 2006 in the cable sector. Operating income before
amortization grew by 8.2% while, the Company had expected a 4.3% increase in its third-quarter
revised guidelines.
Free Cash Flow
For the fiscal year 2006, COGECO generated a higher than anticipated free cash flow of
$24.2 million mainly due to stronger RGU growth in the cable sector. Capital expenditures and
deferred charges amounted to $168.1 million, which is in line with the Company’s third quarter
revised guidelines.
ACCOUNTING POLICIES AND ESTIMATES
Foreign Currency Translation
Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at
the balance sheet date for assets and liabilities, and using the average exchange rates during the
year for revenues and expenses. Adjustments arising from this translation are deferred and
recorded in the foreign currency translation adjustment account and are included in income only
when a reduction in the investment in these foreign subsidiaries is realized.
Other assets and liabilities denominated in foreign currencies are translated in Canadian dollars at
the prevailing exchange rates at the balance sheet date for monetary items and at the transaction
date for non-monetary items. Revenues and expenses are translated at average rates prevailing
during the period except for transactions being hedged which were translated using the terms of
the hedges. Amounts payable or receivable on cross-currency swaps, all of which are used to
hedge foreign currency debt obligations are recorded concurrently with the unrealized gains and
losses on the obligations being hedged. Other foreign exchange gains and losses are included in
net income, except for unrealized foreign exchange gains and losses on long-term debt
denominated in foreign currencies, designated as a hedge of a net investment in a self-sustaining
foreign subsidiary, which are included in the foreign currency translation adjustment account.
Non-Monetary Transactions
In June 2005, the Canadian Institute of Chartered Accountants issued Handbook Section 3831,
Non-Monetary Transactions, which revised and replaced the current standards on non-monetary
transactions. Under the new section, the criterion for measuring non-monetary transactions at fair
value is modified to focus on the assessment of commercial substance instead of the culmination
of the earnings process. A non-monetary transaction has commercial substance when the entity’s
future cash flows are expected to change significantly as a result of the transaction. These
standards are effective for non-monetary transactions initiated in periods beginning on or after
January 1, 2006. During the third quarter, the Company adopted these new standards and
concluded that they had no significant impact on its consolidated financial statements.
- 6 -
There has been no other significant change in COGECO’s accounting policies and estimates since
August 31, 2005. A description of these policies and estimates can be found in the Company’s
2005 annual MD&A.
OPERATING RESULTS
Revenue, for the fourth quarter and fiscal year 2006 rose by $35.1 million, or 21.4% and by $71.3
million, or 10.6% respectively, compared to the same periods last year. Cable revenue, driven by
an increased number of customers in Digital Television, HSI and Telephony services together with
rate increases and the Cabovisão acquisition, went up by $34.7 million, or 24.8%, in the fourth
quarter and by $65.6 million, or 11.8%, for fiscal year 2006. Media revenue increased by
$0.4 million, or 1.8%, in the fourth quarter 2006 and by $5.7 million, or 4.7%, in the fiscal year
2006, due to higher radio advertising revenue.
Operating income before amortization grew by 21.5% to reach $68.6 million in the fourth quarter
2006, compared to $56.5 million for the same period last year. The cable sector contributed to an
increase of $12.1 million while that of the media sector had a negative impact of $1.1 million.
FIXED CHARGES
Quarters ended August 31,
Years ended August 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005 %
Change
Amortization $ 36,446 $ 30,769 18.5 $ 127,204 $ 130,551 (2.6)
Financial expense
16,864
14,366 17.4
59,176
57,284 3.3
Amortization amounted to $36.4 million for the fourth quarter and to $127.2 million for fiscal year
2006 compared to $30.8 million and $130.6 million for the same periods last year, respectively.
Amortization increased during the fourth quarter mainly as a result of Cabovisão acquisition and
declined for fiscal year 2006 since many cable modems and digital terminals in the cable sector
were fully amortized.
During the fourth quarter and fiscal year 2006, financial expense increased compared to the same
periods last year. These increases were attributable to a higher level of Indebtedness (defined as
bank indebtedness and long-term debt) required to finance the acquisition of the Portuguese
subsidiary, Cabovisão.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
Subsequent to a viewership market share loss in conventional television combined with a shift in
conventional television advertising towards specialty channels, impairment tests of goodwill and
other intangible assets related to the television operation of the media business unit were
performed at the end of the second quarter of fiscal 2005. The Company concluded that an
impairment existed and consequently wrote-off the $27.9 million of goodwill and reduced the value
of its television broadcasting licenses by $24.6 million. The impact of the impairment of goodwill
and other intangible assets on the net income of fiscal 2005 was as follows:
- 7 -
($ 000s)
Impairment of goodwill and other intangible assets 52,531
Income taxes 3,270
Impairment losses net of income taxes 49,261
Non-controlling interest 19,651
Impairment losses net of income taxes and non-controlling interest 29,610
INCOME TAXES
For the fourth quarter of fiscal year 2006, income taxes represented a recovery of $14 million
compared to an expense of $5.1 million in 2005 despite operating income growth. The income tax
decrease was mainly attributable to a change in the Canadian federal enacted income tax rate for
the Canadian operations. On May 2, 2006, the Federal government announced its intention to
reduce the corporate income tax rate progressively from 21% to 19% effective in January 2010
and to eliminate the corporate surtax of 1.12% on January 1, 2008. These measures were
considered substantially enacted on June 6, 2006, and as a result an adjustment of $19.8 million
was recorded in the fourth quarter of fiscal year 2006 to reduce future income taxes. Income taxes
for fiscal year 2006 amounted to $6.8 million compared to $15.4 million for the same period last
year.
NON-CONTROLLING INTEREST
The non-controlling interest represents an interest of approximately 61% in Cogeco Cable’s results
and a 40% interest in TQS Inc. Fourth quarter 2006 non controlling interest amounted to
$19 million compared to $5.4 million for the same period last year. During fiscal year 2006, the
non-controlling interest stood at $36.6 million compared to a reduction of $2.7 million for the same
period last year. During fiscal 2005 the non-controlling interest included an adjustment of
$19.7 million for the television’s impairment of goodwill and other intangible assets.
NET INCOME (LOSS)
Net income for the fourth quarter of fiscal year 2006 amounted to $10.3 million, or $0.62 per share,
compared to $0.6 million, or $0.04 per share, for the same period last year. Excluding the net
effect of the income tax recovery after non-controlling interest of $7.9 million, net income would
have stood at $2.4 million for the quarter or $0.15 per share. For fiscal year 2006, net income
amounted to $23.1 million, or $1.40 per share, $15.2 million or $0.92 per share excluding the
impact of the income tax recovery, compared to a net loss of $19.8 mi llion, or $1.21 per share for
the same period in fiscal 2005. Excluding the impact of the impairment of goodwill and other
intangible assets in fiscal 2005, net income would have been at $9.8 million. Net income has
increased in these periods, due to the growth in operating income before amortization.
- 8 -
CASH FLOW AND LIQUIDITY
Quarters ended August 31,
Years ended August 31,
($000s)
2006
2005
2006
2005
Operating Activities
Cash flow from operations $
51,729 $
43,215 $
192,308 $ 177,379
Changes in non-cash operating items
57,288
49,951
3,645 23,680
109,017 93,166 195,953 201,059
Investing Activities
(1)
$
(632,547)
$
(48,942)
$
(742,594) $ (130,585)
Financing Activities
(1)
$
595,759
$
(44,224)
$
618,870 $ (70,474)
Net change in cash and cash equivalents $
72,229 $
- $
72,229 $ -
(1) Excludes assets acquired under capital leases.
For the fourth quarter of fiscal year 2006, cash flow from operations reached $51.7 million, 19.7%
higher than the result achieved for the comparable period last year, primarily due to the increase in
operating income before amortization. Changes in non-cash operating items generated greater
cash inflows than for the same period last year, mainly as a result of an increase in accounts
payable and accrued liabilities resulting from an increase in capital expenditures.
During fiscal year 2006, cash flow from operations reached $192.3 million, 8.4% higher than the
result achieved for the same period last year, primarily due to the increase in operating income
before amortization. Changes in non-cash operating items generated lower cash inflows than last
year mainly as a result of lower increases in accounts payable and deferred and prepaid income.
On June 2, 2006, the Company’s subsidiary Cogeco Cable Inc. entered into an agreement with
Cable Satisfaction International Inc. (“CSII”), Catalyst Fund Limited Partnership I and Cabovisão to
purchase, for a total consideration of €465.7 million, all the shares of the second largest cable
operator in Portugal, an indirect wholly-owned subsidiary of CSII. The price included the purchase
of senior debt and reimbursement of certain other Cabovisão liabilities. The acquisition was
completed on August 1, 2006. The final purchase price will be determined following the completion
of a post-closing working capital adjustment. Cogeco Cable is assuming a €20 million working
capital deficiency.
The acquisition was accounted for using the purchase method. The results of Cabovisão have
been consolidated as of the acquisition date.
- 9 -
The preliminary allocation of the purchase price of the acquisition is as follows:
(amounts are in thousands of dollars)
Consideration
Paid
Estimated share purchase price $304,188
Secured lenders debt and certain specified Cabovisão liabilities 274,761
Acquisition costs 4,193
583,142
Amounts outstanding
Preliminary working capital adjustment 2,432
585,574
Net assets acquired
Cash and cash equivalents 5,711
Restricted cash 489
Accounts receivable 16,570
Prepaid expenses 1,324
Fixed assets 287,652
Accounts payable and accrued liabilities assumed
(
65,282
)
Other specified Cabovisão liabilities assumed
(
91,914
)
154,550
Excess of consideration over net assets acquired $431,024
Preliminary allocation of excess of consideration over net assets acquired
Preliminary goodwill $431,024
Other investing activities related to capital expenditures and the increase in deferred charges,
including assets acquired under capital leases reached $55.3 million and $168.1 million during the
fourth quarter and fiscal year 2006, respectively.
During the fourth quarter and fiscal year 2006, capital expenditures increased compared to last
year mainly as a result of the following factors:
¾ The increase in customer premise equipment for the fourth quarter of fiscal year 2006
resulted primarily from greater demand for HSI and Digital Telephony services. For fiscal
year 2006, the increase in customer premise equipment resulted primarily from a rise in the
number of digital terminals rented to customers, a greater ratio of digital terminals per
digital home, and the increase in the number of Digital Telephony and HSI customers.
¾ The growth in scalable infrastructure was mainly attributable to the support of the Digital
Telephony rollout.
¾ Expenditures associated with the network upgrade and rebuild program rose due to the
acceleration of the program to expand the bandwidth to 750 MHz and 550 MHz for the
Ontario and Québec networks, respectively, and to improve network reliability. An increase
in the number of homes passed with access to the two-way service was also a factor and
the percentage of customers with access to the two-way service rose from 89% as at
August 31, 2005 to 93% as at August 31, 2006.
- 10 -
The fourth quarter and fiscal year 2006 increases in deferred charges are explained by higher
reconnect costs attributable to the significant level of RGU increase in the cable sector.
Free cash flow for the fourth quarter of 2006 recorded a deficit of $3.6 million compared to a deficit
of $6.1 million the year before. For fiscal year 2006, free cash flow amounted to $24.2 million
compared to $44.7 million last year, as a result of increased capital expenditures and deferred
charges in the cable sector generated by better-than-projected RGU growth, including improved
service penetration, as well as the launch of the Digital Telephony service. This increase was
partly offset by increased operating income before amortization in that sector and a decrease in
cash flow from operations in the media sector. In fiscal year 2006, free cash flow decreased
compared to 2005, mainly as a result of increase capital expenditures and deferred charges to
support the better-than-expected RGU growth, as well as the launch of the digital telephony
service.
During the fourth quarter, the level of Indebtedness increased by $607.7 million, mainly due to the
Cabovisão acquisition, an increase in cash and cash equivalents of $71.5 million and to the fees
related to the new Cogeco Cable’s Term Facility of $900,000,000, partly offset by an increase in
non-cash operating items of $57.3 million. For the same period last year, Indebtedness declined
by $42.2 million mainly due to non-cash operating items of $50 million. In addition, a dividend of
$0.0625 per share for subordinate and multiple voting shares, totalling $1 million, was paid during
the fourth quarter of fiscal years 2006 and 2005.
In fiscal year 2006, the level of Indebtedness grew by $635.4 million mainly due to the acquisition
of Cabovisão completed in the fourth quarter, the increase in cash and cash equivalents of
$71.5 million and to the fees related to the new Cogeco Cable’s Term Facility of $900,000,000,
partly offset by generated free cash flow of $24.2 million. For the same period last year,
Indebtedness declined by $65.7 million essentially due to generated free cash flow of $44.7 million
and an increase in non-cash operating items of $23.7 million. Dividends totalling $4.1 million were
paid during fiscal year 2006 compared to $3.6 million the year before.
As at August 31, 2006, COGECO had a working capital deficiency of $315.8 million compared to
$112.3 million the year before. The greater deficiency was mainly attributable to the increase in the
current portion of long-term debt as Cogeco Cable’s $125 million Second Secured Debentures
Series A matures in less than a year and to Cabovisão’s working capital deficiency of
$93.2 million. COGECO maintains a working capital deficiency due to a low accounts receivable
since the majority of the cable subsidiary’s customers pay before their services are rendered,
unlike accounts payable and accrued liabilities, which are paid after products or services are
rendered. In addition, the cable subsidiary generally uses cash and cash equivalents to reduce
Indebtedness.
As at August 31, 2006, the cable subsidiary had used $623.3 million of its Term Facility and the
Company had drawn $19 million of its Term Facility. On July 28, 2006, the Term Facility and the
operating line of credit of the Company’s subsidiary, Cogeco Cable, were restructured by an
amended and restated credit agreement for credit facilities totalling $900,000,000. The Term
Facility is composed of four tranches: a first tranche, a revolving Term Facility for an amount of
$700,000,000 available in Canadian, U.S. or euro currencies; a second tranche, a swingline of
$25,000,000 available in Canadian or U.S. currencies; a third tranche of $150,000,000 fully drawn,
and a fourth tranche of 17,358,700 Euros fully drawn. The Term Facility is repayable on July 28,
2011, except for the third tranche of $150,000,000 which is repayable as follows: $15,000,000 on
July 28, 2008, $22,500,000 on July 28, 2009, $37,500,000 on July 28, 2010 and the balance on
July 28, 2011. Earlier repayments can be made without penalty. The Term Facility requires
commitment fees, and interest rates are based, on bankers’ acceptance, LIBOR, EURIBOR, bank
prime rate loan or U.S. base rate loan plus stamping fees. The Term Facility is secured by a first
fixed and floating charge on the assets of Cogeco Cable and certain of its subsidiaries except for
permitted encumbrances, including purchased money obligations, existing funded obligations and
- 11 -
charges granted by any subsidiary prior to the date when it becomes a subsidiary subject to a
maximum amount.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the
subsidiaries’ Board of Directors and may also be restricted under the terms and conditions of
certain debt instruments. In accordance with applicable corporate and securities laws, significant
transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
As at August 31, 2006, there have been major changes on the balance sheet. The Company
balance sheet included the assets and liabilities of the recently acquired subsidiary in the cable
sector, Cabovisão. Please refer to section ’’Cash Flow and Liquidity’’ for details.
Except for the changes noted above, fixed assets for fiscal year 2006 have increased by $42.2
million mainly related to the cable sector RGU growth and Digital Telephony launch. Deferred
charges have increased by $7.6 million mainly due to the fees related to the new financing in the
cable sector and Indebtedness increased by $628.3 million, due to the factors previously
discussed in the “Cash Flow and Liquidity” section.
A description of COGECO’s share data as of September 30, 2006 is presented in the table below:
Number of shares/
options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
1,849,900
14,702,556
12
117,540
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
315,776
315,776
In the normal course of business, COGECO incurred financial obligations, primarily in the form of
long-term debt, operating and capital leases and guarantees. Except for the matters related to the
acquisition of Cabovisão and the new financing of its subsidiary Cogeco Cable, COGECO’s
obligations, described in the MD&A of the 2005 annual report, have not materially changed since
August 31, 2005.
DIVIDEND DECLARATION
At its October 13, 2006 meeting, the Board of Directors of COGECO declared a quarterly divide nd
of $0.0625 per share for subordinate and multiple voting shares, payable on November 10, 2006,
to shareholders of record on October 27, 2006.
- 12 -
CABLE SECTOR
CUSTOMER STATISTICS
Canadian operations
Net additions (losses) % of Penetration
(1)
Fourth Quarters
Fiscal years
August 31,
August 31,
2006 2006 2005 2006 2005 2006 2005
RGUs
(2)
1,555,936 44,243 9,559 208,203 81,834
Basic service customers
833,177 685 (5,891) 11,744 (2,422)
HSI service customers
(3)
343,080 12,601 2,775 65,432 38,040 44.3 37.7
Digital Television service customers 327,364 10,563 11,227 80,160 44,768 40.0 31.7
Digital Telephony service customers 52,315 20,394 1,448 50,867 1,448 10.4 0.2
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service, Digital Television service and Digital Telephony service customers.
(3) Customers subscribing only to Internet services totalled 61,208 as at August 31, 2006 compared to 55,057 as at August 31, 2005.
All services generated higher growth in the fourth quarter compared to the same period last year,
except for Digital Television service. During fiscal year 2006, the growth in Digital Telephony is
mostly attributable to the launch of this service in new markets. Coverage of homes passed has
now reached 66% compared to 21% last year. For the first time in many years, the net additions
of basic service customers were positive in the fourth quarter and amounted to 685 compared to a
loss of 5,891 for the same period last year. The number of net additions of HSI service stood at
12,601 compared to 2,775 for the same period last year. The growth of HSI and basic service
customers compared to the same period last year is mostly due to promotional activities,
enhancement of the product offering and the impact of the bundled offer of Television, HSI and
Digital Telephony services (triple play).
The net additions of Digital Television service customers stood at 10,563 compared to 11,227 for
the same period last year. For the fourth quarter of fiscal 2006, the increase in the number of
customers is essentially similar to the fourth quarter of fiscal 2005. Customers are still showing
strong interest for the HD technology.
Portuguese operations
Net additions (losses) % of Penetration
(1)
Fourth Quarters
Fiscal years
August 31,
August 31,
2006
2006
(3)
2005
2006
(3)
2005 2006 2005
RGUs
(2)
629,041 3,141
_____
3,141
_____ _____ _____
Basic service customers
269,694 1,117
_____
1,117
_____ _____ _____
HSI service customers
136,278 1,165
_____
1,165
_____ 50.5 _____
Telephony service customers 223,069 859 _____ 859 _____ 82.7 _____
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service and Telephony service customers.
(3) Customer additions are for the month of August 2006.
For the one-month operation period as a subsidiary, all services generated customer growth. Basic
service customers grew by 1,117; HSI by 1,165 customers and telephony by 859 customers.
- 13 -
OPERATING RESULTS
Quarters ended August 31,
Years ended August 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue $ 174,875 $
140,178 24.8 $
620,001 $ 554,404 11.8
Operating costs 102,011 79,458 28.4 358,631 318,704 12.5
Management fees -
COGECO Inc.
- -
8,392 8,179 2.6
Operating income before
amortization
72,864 60,720 20.0 252,978 227,521 11.2
Operating margin 41.7 %
43.3 %
40.8 % 41.0
%
Revenue
Consolidated revenue for the fourth quarter and fiscal year 2006 increased by $34.7 million and
$65.6 million, respectively.
For the fourth quarter and fiscal year 2006, revenue for the Canadian operations rose by
$17.8 million and $48.7 million or 12.7% and 8.8% respectively compared to same periods of fiscal
year 2005. This growth is explained by an increase in the number of HSI, Digital Telephony and
basic service customers as mentioned in the “Customer Statistics” section, together with rate
increases implemented in June and August of 2005. Monthly rate increases of at most $3 per
customer and averaging $0.50 per basic service customer took effect on June 15, 2005 in Ontario
and on August 1, 2005 in Québec. The monthly rate for certain bundled services has increased by
$1 in Ontario, and other limited rate increases for selective tier services were implemented in
Québec. Furthermore, an August 2005 reduction in digital terminal rental rates was more than
offset by a greater number of customers renting digital terminals. In addition, monthly rate
increases of up to $3 per customer averaging $2 per basic service customer, took effect on June
15, 2006 in Ontario, and in August 1, 2006 in Québec. The Portuguese subsidiary’s revenue
amounted to $16.9 million for the fourth quarter and the fiscal year 2006.
Operating Costs
Consolidated operating costs for the fourth quarter and the fiscal year 2006 increased by
$22.6 million and $39.9 million, respectively.
For the fourth quarter and fiscal year 2006, Canadian operations’ operating costs, including
network fees but excluding management fees payable to COGECO Inc., rose by $10.7 million or
13.4% and by $28 million or 8.8% respectively. During the fourth quarter and the fiscal year 2006,
network fees increased by 18.8% and 9.3% respectively, compared to the same periods last year.
The network fee increase was mainly attributable to the introduction of Digital Telephony service,
the wholesale rate increase for APTN as mandated by the Canadian Radio-television and
Telecommunications Commission (CRTC) and RGU growth. These fees were partly offset by the
decline of IP transport costs even with the growth in the number of HSI customers. The increase in
other operating costs was related to servicing additional RGUs, including Digital Telephony. For
the fourth quarter and fiscal year 2006, Cabovisão’s operating costs amounted to $11.9 million.
- 14 -
Operating Income before Amortization
Consolidated operating income before amortization for the fourth quarter and fiscal year 2006
increased by $12.1 million and $25.5 million, respectively. Cabovisão’s operating income before
amortization for the fourth quarter and fiscal year 2006 amounted to $5.0 million.
For the fourth quarter and fiscal year 2006, operating income before amortization for the Canadian
operations rose by 11.8% and 9.0% respectively, compared to the same periods last year as the
increase in revenue outpaced the rise in operating costs. Cogeco Cable’s operating margin for the
Canadian operations decreased slightly from 43.3% to 43% in the fourth quarter of fiscal 2006 and
for fiscal year 2006, the operating margin. For fiscal 2006, the operating margin increased slightly
to 41.1% compared to 41% last year. The Portuguese operations generated an operating margin
of 29.5% for the fourth quarter and fiscal 2006. As a result, Cogeco Cable’s fourth quarter 2006
operating margin declined to 41.7% from 43.3% and to 40.8% in fiscal year 2006 from 41% in
fiscal year 2005.
Foreign exchange management
Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and
principal payments on its US$150 million Senior Secured Notes. These agreements have the
effect of converting the US interest coupon rate of 6.83% per annum to an average Canadian
dollar fixed interest rate of 7.254% per annum. The exchange rate applicable to the principal
portion of the debt has been fixed at CDN$1.5910. Amounts due under the
US$150 million Senior Secured Notes Series A decreased by CDN$ 12.3 million at the end of
fiscal 2006 compared to August 31, 2005 due to the Canadian dollar’s appreciation. Since the
Senior Secured Notes Series A are fully hedged, the fluctuation is offset by a variation in deferred
credit described in Note 10 of the fourth quarter 2006 financial statements. The $72.9 million
deferred credit represents the difference between the quarter-end exchange rate and the
exchange rate on the cross-currency swap agreements, which determine the liability for interest
and principal payments on the Senior Secured Notes Series A.
MEDIA SECTOR
OPERATING RESULTS
Quarters ended August 31,
Years ended August 31,
($000s, except percentages)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 24,527 $
24,082 1.8 $
127,109 $ 121,386 4.7
Operating costs 27,315 25,770 6.0 127,730 114,587 11.5
Operating income before
amortization
(2,788)
(1,688)
―
(621) 6,799 ―
Operating margin
(11.4)
%
(7.0)
%
― %
5.6 %
Revenue
During the fourth quarter and fiscal year 2006, revenue increased by $0.4 million and $5.7 million
respectively. All radio stations contributed to the increase in revenue. Furthermore, since August
31, 2005, revenue and operating expenses for the Sherbrooke and Trois-Rivières RYTHME FM
- 15 -
stations have no longer been capitalized. Television revenue decreased by 6.8% and 2.6% in the
fourth quarter and fiscal year 2006 compared to the same periods last year, respectively, due to a
difficult advertising market for conventional television in the Francophone market.
Operating Income Before Amortization
Operating income before amortization declined in the fourth quarter and for fiscal year 2006 by
$1.1 million and $7.4 million respectively. For the fourth quarter and fiscal year 2006, TQS
operating income before amortization decreased as a result of greater investment in television
programming, combined with a slight decrease in revenue. During the fourth quarter and fiscal
year 2006, radio’s operating income before amortization improved due to revenue growth.
FISCAL 2007 FINANCIAL GUIDELINES
($ million, except customer data)
Revised Projections
October 16, 2006
Fiscal 2007
Preliminary
Projections,
Fiscal 2007
Cable sector–
Financial Guidelines
Revenue 880 to 885 660 to 670
Operating income before amortization 335 to 338 264 to 267
Operating margin About 38% About 40%
Financial expense 85 55
Amortization 182 128
Capital expenditures and deferred charges 225 to 230 180
Free cash flow 20 to 25 25 to 30
Customer Addition Guidelines
Basic service 25,000 to 30,000 3,000 to 6,000
HSI service 55,000 to 60,000 35,000 to 40,000
Digital Television service 55,000 to 60,000 55,000 to 60,000
Telephony services 67,000 to 72,000 45,000 to 50,000
RGU 202,000 to 222,000 138,000 to 156,000
Media sector–
Financial Guidelines
Revenue
131 to 135 131 to 135
Operating income before amortization
1 to 3 1 to 3
Amortization
7 7
Capital expenditures and deferred charges
7 7
Consolidated Financial Guideli nes
Revenue
1,010 to 1,020 790 to 805
Operating income before amortization
336 to 341 265 to 270
Net income
15 19
Free Cash Flow 15 to 20 20 to 25
Cable Sector
The preliminary financial guidelines for fiscal 2007 exclude Cabovisão. In its revised projections,
management has maintained its preliminary financial guidelines for the Canadian operations and
added those of Cabovisão.
- 16 -
Canadian Operations
The revenue increase of approximately 10% to 12% should result mainly from expanded
penetration of HSI and Digital Telephony services in fiscal 2007 as well as the full-year impact of
the 2006 RGU additions. In addition rate increases of up to $3 per customer in Quebec and
Ontario, thus averaging $2 per basic service customer, as well as improved penetration of Digital
Television services will also contribute to the revenue increase. Cogeco Cable plans to expand its
basic service clientele through effective marketing, competitive product offering and superior
customer service. As the penetration of HSI and Digital Television services increase, the demand
for these products will likely slow down but should be offset by increased demand for Digital
Telephony service. As a result, the Canadian operations operating income before amortization
should increase by 6% to 8% to reach $264 million to $267 million, for an operating margin of
about 40%. Amortization of capital assets and deferred charges are expected to increase by
$11 million, as a result of capital expenditures and deferred charges that will be incurred for the
RGU growth of fiscal 2007 and the full-year impact of the 2006 RGU growth. Compared to fiscal
year 2006, the rise in capital expenditures and deferred charges will result primarily from an
increase of approximately $6 million associated with the scalable infrastructure related to the head
end equipment to support HSI, Digital Television services and video on demand (VOD), $7 million
related to customer premise equipment and $4 million related to support capital for the upgrade of
business information systems.
Portuguese Operations
RGUs should increase by approximately 75,000 essentially equally divided between basic cable,
HSI and telephony customers. As a result, revenue should reach $215 million to $220 million,
using a conversion rate of $1.40 per euro, while operating income before amortization should
amount to between $69 million to $71 million for an operating margin of approximately 33%.
Capital expenditures to support the projected revenue growth, including $4.4 million for the launch
of the Digital Television service, should reach $45 million to $50 million, or approximately 22% of
projected revenue. Amortization of capital assets and deferred charges should amount to $54
million.
Media Sector
Media sector revenue should grow by 5% to 7% compared to fiscal year 2006. In fiscal year 2007,
revenue from radio should improve by 15% to 17%, while TQS revenue should increase by 2% to
3%.
Consolidated outlook
For fiscal 2007, COGECO expects to improve its operating income before amortization by 33% to
35%. Free cash flow should generate between $15 million and $20 million and net income of
approximately $15 million should be earned as a result of growth in operating income before
amortization.
RISK FACTORS AND UNCERTAINTIES
This section outlines general as well as more specific risks faced by COGECO and its subsidiaries
that could significantly affect the financial condition, operating results or business of the Company.
It does not purport to cover all contingencies, or to describe all possible factors that might have an
influence on the Company or its activities at any point in time. Furthermore, the risks and
uncertainties outlined in this section may or may not materialize in the end, may evolve differently
than expected, or may have different consequences than those that are being currently
anticipated.
- 17 -
COGECO applies an on-going risk management process that includes a quarterly assessment of
risks for the Company and its subsidiaries, under the oversight of the Audit Committee. As part of
this process, the Company endeavours to identify risks that are liable to have a major impact on
the Company’s financial situation, revenue or activities, and to mitigate such risks proactively as
may be reasonable and appropriate under the circumstances. This section reflects current views
on uncertainties and main risk factors considered as a part of this process.
Risks Pertaining to Markets and Competition
Cable Sector
Broadband telecommunications markets in Canada and Portugal are very dynamic and highly
competitive. They involve intense rivalry between a variety of terrestrial wireline and wireless, as
well as satellite, service providers over a widening suite of broadband services that include fixed
and mobile voice communications, Internet access, data communications, audio and video content
delivery, electronic programming guides and navigation, security and other related or incidental
services. While cable broadband telecommunications providers have entered into the voice and
data communications markets traditionally dominated by incumbent telephone companies, the
telephone companies are increasingly involved in audio and video content delivery, as part of a
global phenomenon known as convergence. A number of new competitors have also entered
various telecommunications markets through the use of the Internet and access to the facilities of
telephone and cable telecommunications companies.
In this converged environment, competition for the Cable Sector increasingly unfolds over bundles
of services offered at attractive package rates, as competitors strive to meet all the
communications needs of residential and business customers and thus obtain maximum share of
their overall communications budget. Rivalry extends over the composition of service bundles,
bundle prices and perceived value, promotional or introductory offers, term of commitment by the
customer, terminal devices and customer service. The substantial cost of broadband facilities and
broadband customer acquisition, combined with the significant annual growth rates of revenue
generating units achieved by competitors generally tend to make outright price wars on individual
services and service bundles less appealing as a competitive strategy. As markets mature and
penetration gains for high speed Internet access, digital video and digital telephony services abate,
retail pricing strategies may become more aggressive, with resulting downward pressure on
operating margins of both individual services and service bundles for the Cable Sector.
Cogeco Cable provides “double-play” and “triple-play” service bundles in its various geographic
markets, with various combinations of voice, Internet and video distribution services being offered
at attractive bundle prices. “Quadruple-play” service bundles that include mobile communications
have appeared in these markets, but so far they have had limited effect in the marketplace.
Cogeco Cable continues to focus at this time on its existing lines of service with a view to capturing
the remaining growth opportunities for HSI, Digital Television and Digital Telephony services in its
footprint, making the most efficient use of its own hybrid fibre-coaxial (HFC) plant. Mobile
telephone operators are now offering audio and video content distribution directly to their mobile
telephone customers, but this new form of content distribution has so far had no measurable
impact on the use of wireline and satellite content distribution. As markets evolve and mobility
becomes a more cost-effective substitute to wireline communications, Cogeco Cable and its
subsidiaries may need to add mobility components to its service bundles, through suitable mobile
virtual network arrangements with existing mobile operators.
In Canada, Cogeco Cable faces competition in its service areas mainly from two national direct-to-
home satellite distribution services, Star Choice and Bell ExpressVu (the latter controlled by BCE
Inc., the largest and most widely integrated Canadian telecommunications company), and from
incumbent telephone companies Telus, Bell Canada (controlled by BCE Inc.) and Bell Nordiq (also
controlled by BCE Inc.). Star Choice and Bell ExpressVu both offer a wide range of competitive
- 18 -
audio and video services on a fully digital basis. Telus, Bell Canada and Bell Nordiq all offer a
wide range of business and residential Internet access, voice and data telecommunications
services. Rogers, Telus and Bell Canada respectively operate mobile telecommunications services
in Ontario and Quebec. In addition, Telus now offers audio and video distribution services in the
Lower St. Lawrence area in direct competition with Cogeco Cable. Telus and Bell Canada have
recently announced that they will become income trusts. However, Cogeco Cable and Telus
cooperate in other parts of Cogeco Cable’s footprint to offer Cogeco Cable’s Digital Telephony
service. Bell Canada offers a new digital telephone service in Ontario and Québec and is expected
to launch some time in 2007 a new digital video distribution service over its wireline network,
starting with larger urban centres in Ontario and Québec, some of which are included in Cogeco
Cable’s cable network footprint. Cogeco Cable also competes with other telecommunications
service providers, including Vonage, Primus and Rogers Home Phone (formerly known as Sprin t),
and with alternative service providers who use resale or third-party access arrangements in effect.
Although spectrum has been allocated for broadband wireless distribution alternatives for quite
some time, this form of wireless competition has been slow to develop in Cogeco Cable’s footprint.
It may however become a more significant competitive factor in coming years.
In Portugal, Cogeco Cable’s subsidiary Cabovisão faces competition in its service areas mainly
from incumbent telecommunications carrier Portugal Telecom, SGPS, S.A. (PT) and its
subsidiaries, from diversified Portuguese conglomerate Sonae, SGPS, S.A. (Sonae) and its
subsidiaries, and from telecommunications operator ONI,
whose main shareholder is Energias do
Portugal (EDP), the incumbent electricity service provider in Portugal
. In addition to the national
telephone network operator PT Communicações, PT owns TV Cabo, the largest cable broadband
operator in Portugal, which also offers a direct-to-home satellite television distribution service to
the Portuguese market. Sonae owns and operates the Clix and Novis services, which provide
voice, data, and high-speed Internet services respectively to the residential and business markets.
PT and Sonae, provide mobile telecommunications services in Portugal, through their respective
subsidiaries TMN and OPTIMUS, as well as Vodaphone. Other competitors include AR Telecom
(formerly known as Jazztel), Tele 2 and Redvo Telecom, a recently launched broadband
microwave distribution service using WiMax technology. Until recently, Cabovisão has been the
only provider of full “triple-play” service bundles in its footprint, but Clix has recently launched a
digital video distribution service over telephone lines, and its competitive “triple-play” service
bundles are expected to extend progressively to approximately 60% of Cabovisão’s footprint. TV
Cabo has started offering telephone services on Session Initiation Protocol (SIP) as well as a
digital video service, and is thus also in a position to offer competitive “triple-play” service bundles
to approximately 60% of Cabovisão’s footprint. Cabovisão’s video distribution services are analog
only, and do not include true video-on-demand at this time, but Cabovisão is actively considering
the opportunity and timing for the roll-out of its own digital services, as its HFC plant has the
capacity to accommodate digital services in addition to all its existing analog services.
The broadband telecommunications competitive landscape in Portugal differs from that prevailing
in Canada mainly in the following respects: the density of urban dwelling units within the
Company ’s footprint in Portugal is approximately double that of its footprint in Canada; there is
overlapping competitive cable plant over approximately 60% of Cabovisão’s footprint; and this
competitive cable plant is presently controlled by the incumbent telephone company; but there is
only one Portuguese direct-to-home satellite competitor and direct-to-home satellite service
penetration is very limited in urban areas.
The level of piracy of video signals and the actual penetration of illicit reception of video distribution
services in households within the Company ’s service areas may also have a significant effect on
the Company ’s business and the competitiveness of its service bundles.
Media Sector
COGECO’s media subsidiary CRTI conducts all its commercial radio and television activities in the
Francophone market of the Province of Québec. TQS Inc. (TQS) competes head-to-head for
- 19 -
audience, advertising revenue and programming content acquisition with three other French-
language conventional television networks operated respectively by Quebecor Media Inc. (TVA),
the Canadian Broadcasting Corporation, a federal public sector corporation (SRC) and the Société
de télédiffusion du Québec, a provincial public sector corporation (Télé-Québec). TQS also
competes with a variety of French-language specialty and pay television services, most of which
are controlled by Astral Communications Inc. and Quebecor Media Inc. and are widely distributed
by broadcasting distributors throughout the Province of Québec. In the Montreal market, where a
substantial part of the overall audience is bilingual, TQS competes as well with a variety of
English-language conventional, specialty and pay television services. In the regional markets of
Jonquière, Sherbrooke and Trois-Rivières, TQS operates a combination of local stations affiliated
respectively to the TQS network and to the SRC network. TQS has experienced slight audience
share erosion to the two market leaders TVA and SRC, but more importantly, all conventional
television networks are experiencing gradual audience and revenue erosion from specialty
television services. As specialty television services benefit both from advertising and subscription
revenue, the establishment of fees for carriage payable by broadcasting distributors to
conventional television networks, now under discussion before the CRTC, would provide TQS with
a new source of revenue and assist with the production and acquisition of more competitive
programming.
CRTI operates the Rythme FM radio service, with stations broadcasting in the Montreal, Québec,
Sherbrooke and Trois-Rivières markets, and the 93
3
station broadcasting in Québec. CRTI’s radio
stations compete head-to-head with stations controlled respectively by Astral Communications
Inc., Corus Entertainment Inc. and Radio Nord Communications Inc. While Rythme FM now enj oys
a leading position in the Montreal market, competitors enjoy the leading position in the other local
markets served by CRTI. The CRTC has recently authorized three additional commercial radio
stations to serve the Québec market, which will bring even more competition in that local market.
Technological Risks
Cable Sector
The evolution of broadcasting and telecommunications technologies is very rapid, fuelled by a
highly competitive global market for digital content, consumer electronics and broadband products
and services. The Company monitors the development of technologies used for the transmission,
distribution, reception and storage of data and their deployment by various existing or potential
competitors in the broadband telecommunications markets.
There are now several terrestrial and satellite transmission technologies available to deliver a
range of electronic communications services to the home with varying degrees of flexibility and
efficiency, and they compete with cable broadband telecommunications. While the broadband over
power line (BPL) alternative has made little headway to date, the competitive threat posed by other
alternatives such as 3G and Wi-Max broadband wireless technologies, advanced digital subscriber
line technologies such as VDSL+, and the deployment of fibre to the premises (FTTP) or close to
the premises (FTTN) by incumbent telephone companies is growing with each passing year.
On the other hand, cable telecommunications also continue to benefit from rapid improvements,
particularly in the areas of modulation, digital compression, fractioning of optoelectronic links,
multiplexing, HD distribution and switched video distribution. Management of Cogeco Cable
remains of the view that broadband wireline distribution over fibre and coaxial cable will continue to
be an efficient, reliable, economical and competitive platform for the distribution of a full range of
electronic communications products and services for the foreseeable future. The competitiveness
of the cable broadband telecommunications platform will however continue to require additional
capital investment on a timely basis in an increasingly competitive and uncertain market
environment.
- 20 -
The growth in penetration of broadband connections of all types, the rapid increase in transmission
speeds offered by competitors in the market, and the emergence of the more powerful MPEG-4
video standard promote the increased distribution and consumption of video content directly over
the Internet. Video content, which is bandwidth-intensive, already accounts for over 50% of total
peer-to-peer data traffic on the Internet. This may lead eventually to fragmentation of the retail
market for existing analog and digital video distribution services provided by Cogeco Cable, and
gradual disintermediation as between video content suppliers and Cogeco Cable’s customers. In
this context, revenue and margins derived from Cogeco Cable’s HSI services may not entirely
compensate for the loss of revenue or margin derived from Cogeco Cable’s video distribution
services in the future. Alternative voice and data communications services are proliferating as well
over the Internet, with the resulting risk that fragmentation and disintermediation may also occur in
the future with respect to Cogeco Cable’s digital telephone service.
Electronic communications increasingly rely on advanced security technology and devices to
ensure conditional access and service integrity. Security technology is provided worldwide by a
small pool of global suppliers on a proprietary basis. Like other providers of electronic
communications, Cogeco Cable depends on the effectiveness of security technology for many of
its services and the ability of security technology providers to offer cost-effective and timely
solutions as, if and when existing levels of security are compromised.
Media Sector
Digital satellite multi-channel radio services are now being offered throughout Canada, but the
transmission facilities of most local commercial radio stations and their reception has not yet made
a transition to digital. While SRC has already started to broadcast HD digital programming over-
the-air, and TVA plans to so in the near future, TQS has not announced when it plans to start
broadcasting in HD.
Regulatory Risks
Cable Sector
In Canada, broadband telecommunications facilities and services are subject to regulatory
requirements depending mainly on the type of facilities involved, the incumbent status of service
providers and their relative market power, the technology used and whether the activities are
categorized as telecommunications or broadcasting. Canadian cable broadband
telecommunications facilities and services are subject to various requirements mainly under
federal legislation governing broadcasting, radiocommunication, telecommunications, copyright,
and privacy, and under provincial legislation governing consumer protection and access to certain
property and power utilities support structures. Licences are still required for the operation of larger
(Class 1 and 2) cable systems, while smaller (Class 3) cable systems are now mostly licence-
exempt. Various licence and licence exemption conditions continue to apply in Canada. Canadian
cable operators are also subject to Canadian ownership and control requirements.
A recently published report by the Telecommunications Policy Review Panel (TPRP) contains a
broad set of recommendations that include a timely transition to deregulation of all
telecommunications services, the creation of a specialized telecommunications competition
tribunal, a review of the Telecommunications Act (Canada), and the removal of ownership
restrictions for telecommunications carriers, subject to certain conditions. The report also
considers that the traditional separation of broadcasting distribution and telecommunications
activities for regulatory purposes is no longer appropriate in a converged market environment. The
federal government is expected to table a new bill on telecommunications in the near future. The
federal government has also requested that the CRTC report back by the end of 2006 and provide
answers to a broad range of questions on the future of the Canadian broadcasting system, which
includes the distribution of broadcasting services.
- 21 -
While this overall policy review process is unfolding, two key telecommunications decisions of the
Canadian Radio-television and Telecommunications Commission (CRTC) concerning respectively,
the regulatory status of voice-over-IP (VOIP) local access telephone services of incumbent
telephone companies and forbearance from regulation of local access telecommunications
services still regulated by the CRTC have been challenged by incumbent telephone companies.
The CRTC confirmed on September 1, 2006 its decision to continue regulating VOIP local access
telephone services of incumbent telephone companies until certain conditions are met, but has
agreed to reconsider the required threshold of 25% loss of market share by incumbent telephone
companies in the relevant markets in order for deregulation to occur. This decision may be further
challenged by incumbent telephone companies. It is not known at this time whether the federal
government will require the reconsideration of, or will set aside, the decision of the CRTC
respecting regulatory forbearance for local access telephone services generally. The ultimate
outcome and timing of the policy review process and challenges to these key telecommunications
decisions may have a significant impact on the development of Cogeco Cable’s new digital
telephone service line of business, and incidentally on the marketing strategies for service bundles
that include digital telephone service.
In Portugal, a broad reform of national legislation respecting electronic communications has
already occurred with the publication of Law 5/2004 (Electronic Communications Law, known as
REGICOM) on February 10, 2004, in line with the basic requirements of applicable European
Commission directives. Under this new national legislation, the Autoridade Nacional das
Comunicações (ANACOM), has implemented a general authorization regime which no longer
involves the issuance of licences for wireline telecommunications activities. The
telecommunications markets in Portugal are fully open to competition since January 1, 2000, and
there are no foreign ownership restrictions applying to electronic communications service providers
or the ownership of broadband telecommunications facilities in Portugal. Much of ANACOM’s
regulatory oversight is focused at present on the analysis of the competitive state of relevant
telecommunications markets and the adoption of selected measures where significant market
power by a competitor is found to exist in a relevant market. ANACOM has analyzed 16 of the 18
relevant retail and wholesale markets identified by the European Commission and found that PT
has significant market power in most of these markets. As a result, various specific regulatory
requirements apply to the provision of certain services by PT companies. In addition, pursuant to
Directive 2002/77/EC of the European Commission (Competition Directive), the cable television
and telecommunications network operations of incumbent telephone companies in EU member
states must be kept separate, and conducted through separate entities. TV Cabo, Cabovisão’s
direct cable competitor for video distribution and HSI services, is operated through PT Multimedia,
an entity separate from PT Comunicacões, which operates PT’s telecommunications network
(telephony and ADSL HSI services), and services provided by each of these entities are billed
separately. The ownership and operating conditions of various entities of PT, including PT
Multimedia, may however change in the foreseeable future as a result of the pending takeover bid
by Sonae, alternative bids by other interested parties, or ownership or restructuring proposals put
forward by PT itself. There is a possible scenario of having two full triple play companies, PT
Comunicações and PT Multimedia, owned by separate groups, with the conclusion of the pending
takeover bid by Sonae, with each significant market power and possible new regulatory
requirements as a result.
On June 29, 2006, the European Commission launched a broad policy review initiative on
electronic communications with a view to boosting competition among telecommunications
operators of EU member states and building a single market for services that use radio spectrum.
The ultimate outcome and timing of these legislative proposals, and their transposition into
Portuguese domestic law and policies, may eventually have an impact on the future on
Cabovisão’s electronic communications activities and on the future state of competition for the
provision of electronic communications in Portugal.
- 22 -
Media Sector
The CRTC has recently initiated a policy review proceeding for over-the-air television in Canada
that raises the possible establishment of fees for carriage of conventional over-the-air television
signals by broadcasting distributors, including cable, telephone and satellite distributors. The World
Intellectual Property Organization (WIPO) is also considering the issue of fees for carriage as part
of its proceedings leading to the drafting of a new multilateral treaty concerning the protection of
broadcasting signals. At present, Canadian broadcasting distributors pay carriage fees to pay and
specialty programming services, but not to conventional over-the-air television services. Next year,
the CRTC is also expected to launch a review of its broadcasting distribution policies. The ultimate
outcome and timing of these policy initiatives may have a significant impact on Cogeco Cable’s
cost of sales for its analog and digital services and the penetration of its various tiers of video
distribution services. On the other hand, fees for carriage would improve the financial prospects of
TQS. The over-the-air television policy review n ow underway raises several other issues that may
have a significant impact on the operations and future business prospects of TQS. TQS is also
facing a licence renewal process next year. The CRTC has now completed a broad review of its
commercial radio policy, but has yet to issue its revised policy, which may have business and
competitive implications for CRTI’s commercial radio activities.
Risks Pertaining to Operating Costs
Cable Sector
Cogeco Cable applies itself on to keeping its cost of goods sold in check so as to secure continued
operating margin growth. The two largest drivers of cost of goods sold are network fees paid to
audio and video service suppliers, and data transport and connectivity charges, mostly for Internet
traffic. The market for audio and video programming services in Canada is already characterized
by high levels of supplier integration, structural rigidities imposed by the CRTC’s regulatory
framework for broadcasting distribution, and the resulting strong bargaining position of program
suppliers. The recently announced takeover of CHUM Limited by Bell Globemedia Inc., if approved
by the CRTC and the Commissioner of Competition, would significantly increase the level of
concentration of Canadian conventional over-the-air, specialty and pay television programming
services in the Canadian marketplace generally, and significantly would increase the market power
of Bell Globemedia Inc. The renewal of Cogeco Cable’s affiliation agreements for CHUM and Bell
Globemedia specialty services are currently under negotiation.
As the markets for data transport and connectivity remain very competitive in Canada and
Portugal, Cogeco Cable and Cabovisão have negotiated cost effective arrangements in the past
for voice and data traffic. However, as overall traffic increases and capacity on existing broadband
telecommunications facilities becomes more widely used, Cogeco Cable may not be able to
secure further cost efficiencies in the future.
In Portugal, the offering of new digital audio and video services by Cabovisão will require the
negotiation of suitable arrangements with existing and new program suppliers. Although affiliation
arrangements and program service bundling and retailing are less constrained by regulations in
Portugal than in Canada, the negotiation of such new arrangements has not yet taken place.
Media Sector
On the media side, television program production and acquisition costs continue to rise year over
year, and the compounded annual growth rate in these costs could exceed the growth rate in
television advertising revenue in the coming years unless current trends are reversed.
Programming costs at CRTI are also rising as result of efforts to improve the position of RYTHME
FM in the morning and the overall position of the 93
3
station in Québec.
- 23 -
Risks Pertaining to Information Systems
Flexible, reliable and cost-effective information systems are an essential requirement for the
handling of sophisticated service options, customer account management, internal controls,
provisioning, billing and the roll-out of new services in the Cable Sector, and traffic and billing in
the Media Sector. TQS plans to implement a new traffic management system this year. Cogeco
Cable uses different customer relations management tools and databases for its operation
respectively in Ontario, Québec and Portugal. The agreement with the main third-party supplier of
information systems in Ontario will expire in 2008, and the terms that would apply for the continued
use of the relevant information systems in Ontario are under negotiation.
Risks Pertaining to Disasters
The Company has a disaster recovery plan for dealing with the occurrence of natural disasters,
quarantine, power failures, terrorist acts, intrusions, computer hacking or data corruption, but the
operations and facilities of Cabovisão are not yet integrated into this plan, given the fact that
Cabovisão became a subsidiary of Cogeco Cable only on August 1, 2006. Cabovisão’s insurance
coverage has been integrated in Cogeco Cable’s insurance coverage. The emergency plans and
procedures that are in place cannot provide the assurance that the effect of any disaster can and
will be mitigated as planned. Cogeco Cable is not insured against the loss of data and relies on
data protection and recovery systems that it has put in place with third-party service providers.
CRTI has disaster recovery procedures in place but has not adopted as yet a full disaster recovery
plan for its broadcasting operations in Canada.
Risks Pertaining to the Financing of the Cabovisão Acquisition
The acquisition of Cabovisão has been financed through corporate credit facilities of Cogeco
Cable. The major part of the purchase price for Cabovisão (approximately €465.7 million) was
borrowed directly in Euros and €104 million was borrowed in Canadian dollars and subsequently
converted into Euros. The remainder of the purchase price is assumed liabilities. There are no
financial hedging arrangements in effect at this time for interest fluctuation risks on interest
payments resulting from these borrowings, but there is a natural hedging effect between the
borrowings in Euros and the inter-corporate debt interest payments and cash distributions in Euros
originating from the European subsidiaries. Also, for the purposes of this acquisition, Cogeco
Cable has set up an acquisition structure involving one of its operating Canadian subsidiaries and
intermediate holding and financing entities located in Luxembourg with a view to maximizing
returns. Cogeco Cable is presently considering alternative financial arrangements to extend the
term with alternate sources of financing and to set the interest rate of the Term Facility.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by COGECO throughout this MD&A. It
also provides reconciliations between these Non-GAAP measures and the most comparable
GAAP financial measures. These financial measures do not have standard definitions prescribed
by Canadian GAAP and may not be comparable with similar measures presented by other
companies. These measures include “cash flow from operations’” “free cash flow” and ”net income
excluding income tax rate adjustment and impairment of goodwill and other intangible assets”.
Cash flow from operations
Cash flow from operations is used by COGECO’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Company to isolate the cash flow from operating activities from the impact of
- 24 -
cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure “free cash flow”. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended August 31,
Years ended August 31,
2006
2005
2006
2005
Cash flow from operating activities $ 109,017 $ 93,166 $ 195,953 $ 201,059
Changes in non-cash operating items (57,288)
(49,951)
(3,645) (23,680)
Cash flow from operations $ 51,729 $ 43,215 $ 192,308 $ 177,379
Free cash flow
Free cash flow is used, by COGECO’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth. Free cash flow is calculated as
follows:
($ 000)
Quarters ended August 31,
Years ended August 31,
2006
2005
2006
2005
Cash flow from operations $ 51,729 $ 43,215 $ 192,308 $ 177,379
Acquisition of fixed assets (46,112) (43,725) (144,469) (115,354)
Increase in deferred charges (8,929) (5,217) (20,657) (15,316)
Assets acquired under capital leases
– as per Note 13 b) (268) (419) (3,005) (1,979)
Free cash flow $ (3,580) $ (6,146) $ 24,177 $ (44,730)
Net income excluding income tax rate adjustment and impairment of goodwill and other
intangible assets
Net income excluding income tax rate adjustment and impairment of goodwill and other intangible
assets is used by COGECO and its investors in order to evaluate what would have been the net
income excluding income tax rate adjustment and impairment of goodwill and other intangible
assets. This allows the Company to isolate the one time adjustment in order to evaluate the net
income from ongoing activities.
($ 000)
Quarters ended August 31,
Years ended August 31,
2006
2005
2006
2005
Net income (loss) $
10,300 $
630
$
23,101 $ (19,813)
Adjustments:
Income tax rate adjustment net of
non-controlling interest
(7,866)
(7,866)
Impairment of goodwill and other intangible
assets
(1)
29,610
Net income excluding above adjustments
$
2,434
$
630
$
15,235
$
9,797
(1) For more details, please consult the Impairment of goodwill and other intangible assets section.
ADDITIONAL INFORMATION
This MD&A was prepared on October 16, 2006. Additional information relating to the Company,
including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.
- 25 -
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary,
COGECO provides about 1,556,000 revenue-generating units (RGU) to approximately 1,477,000
homes passed in its Canadian service territory and 629,000 RGUs to approximately 826,000
homes passed in its Portuguese service territory. Through its two-way broadband cable networks,
Cogeco Cable provides its residential and commercial customers with analog and Digital
Television and services, High Speed Internet access as well as Telephony services. Through its
Cogeco Radio-Television subsidiary, COGECO holds a 60% interest and operates the TQS
network, six TQS television stations, and three French CBC-affiliated television stations in
partnership with CTV Television. Cogeco Radio-Television also wholly owns and operates the
RYTHME FM radio stations in Montréal, Québec City, Trois-Rivières and Sherbrooke as well as
the 93
3
station in Québec City. COGECO’s subordinate voting shares are listed on the Toronto
Stock Exchange (CGO). The subordinate voting shares of Cogeco Cable are also listed on the
Toronto Stock Exchange (CCA).
– 30 –
Source: COGECO Inc.
Pierre Gagné
Vice President, Finance and Chief Financial Officer
Tel.: (514) 874-2600
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: (514) 874-2600
Analyst Conference Call: Monday October 16
th
at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only
Please use the following dial-in number to have access to the
conference call by dialing 10 minutes before the start of the
conference:
Canada/USA Access Number: 1 800 967-7134
International Access Number: +1 719 457-2625
Confirmation Code: 1255847
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
October 23 by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code: 1255847
- 26 -
Supplementary Quarterly Financial Information
Quarters ended Fiscal 2006 Fiscal 2005
Nov.30 Feb. 28 May 31 Aug.31 Nov.30 Feb. 28 May 31 Aug. 31
($000, except percentages
and per share data)
Revenue $ 180,478 $ 177,359 $ 189,718 $
199,351 $
171,411 $
166,566 $ 173,418 $
164,210
Operating income before
amortization
60,593
57,765
66,111
68,645
58,928
54,616
63,814
56,485
Operating margin 33.6% 32.6% 34.8% 34.4% 34.4% 32.8% 36.8% 34.4%
Amortization 29,883 30,217 30,658 36,446 33,616 33,383 32,783 30,769
Financial expense 13,961 14,231 14,120 16,864 14,240 14,237 14,441 14,366
Impairment losses ― ― ― ― ― 52,531 ― ―
Income taxes 6,611 5,706 8,461 (13,950) 4,582 (130) 5,869 5,052
Non-controlling interest 5,455 4,842 7,293 19,022 3,256 (16,940) 5,603 5,422
Net income (loss) 4,593 2,679 5,529 10,300 3,117 (28,524) 4,964 630
Cash flow from
operations
46,842 41,644 52,093 51,729 44,503 40,962 48,699 43,215
Net income (loss) per
share
$ 0.28 $ 0.16 $ 0.33 $
0.62 $
0.19 $
(1.74) $ 0.30 $
0.04
Cable sector operating results are generally not subject to material seasonal fluctuations.
However, the loss of basic service customers is usually greater, and the addition of HSI customers
is generally lower in the third quarter, mainly due to students leaving campuses at the end of the
school year. However, the media sector’s operating results may be subject to significant seasonal
variations. The revenue depends on audience ratings and the market for conventional radio and
television advertising expenditures in the Province of Québec. Advertising sales, mainly national
advertising, are normally weaker in the second and fourth quarters and, as a result, the operating
margin before amortization is generally lower.
The large net loss of COGECO in the second quarter of fiscal year 2005 was attributable to
COGECO’s 60% share of the television sector’s impairment of goodwill and other intangible assets
amounting to $29.6 million. This loss is discussed in the “Impairment of goodwill and other
intangible assets” section.
COGECO INC. - 27 -
Customer Statistics
A
ugust 31, August 31,
2006 2005
Homes Passe
d
Ontario 1 002 187 986 401
Québec 474 717 462 332
Canada 1 476 90
4
1 448 733
Portugal 826 369 -
Total 2 303 273 1 448 733
Revenue Generating Unit
s
Ontario 1 104 157 968 749
Québec 451 779 378 984
Canada 1 555 936 1 347 733
Portugal 629 041 -
Total 2 184 977 1 347 733
Basic Service Customer
s
Ontario 587 289 581 631
Québec 245 888 239 802
Canada 833 177 821 433
Portugal 269 694 -
Total 1 102 871 821 433
Discretionnary Service Customer
s
Ontario 463 783 461 038
Québec 192 895 183 320
Canada 656 678 644 358
Portugal - -
Total 656 678 644 358
Pay TV Service Customer
s
Ontario 84 425 80 817
Québec 38 455 35 407
Canada 122 880 116 224
Portugal 100 079 -
Total 222 959 116 224
High Speed Internet Service Customer
s
Ontario 269 328 226 133
Québec 73 752 51 515
Canada 343 080 277 648
Portugal 136 278 -
Total 479 358 277 648
Digital Video Service Customers
Ontario 213 556 159 734
Québec 113 808 87 470
Canada 327 364 247 204
Portugal - -
Total 327 364 247 204
Telephony Service Customer
s
Ontario 33 984 1 251
Québec 18 331 197
Canada 52 315 1 448
Portugal 223 069 -
Total 275 384 1 448
- 28 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended August 31, Twelve months ended August 31,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited) (unaudited)
(audited) (audited)
Revenue $ 199,351
$ 164,210
$ 746,906
$ 675,605
Operating costs
130,706
107,725
493,792
441,762
Operating income before amo rtizatio n 68,645
56,485
253,114
233,843
Amortization (note 5)
36,446
30,769
127,204
130,551
Operating income 32,199
25,716
125,910
103,292
Financial expense (note 10)
16,864
14,366
59,176
57,284
Income before income taxes and following items 15,335
11,350
66,734
46,008
Impairment of goodwill and ot her intangible
assets (note 8)
-
-
-
52,531
Income taxes (note 6)
(13,950)
5,052
6,828
15,373
Non-controlling interest
19,022
5,422
36,612
(2,659)
Loss on dilution resulting from shares issued by a
subsidiary
-
-
-
108
Share in the earnings (loss) of a general partnership
37
(246)
(193)
(468)
Net income (loss) $ 10,300
$ 630
$ 23,101
$ (19,813)
Earnings (loss) per share (no t e 7)
Basic
$0.62
$0.04
$1.40
$ (1.21)
Diluted
0.62
0.04
1.39
(1.21)
- 29 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Twelve months ended August 31,
(In thousands of dollars)
2006
2005
(audited)
(audited)
Balance at beginning $ 185,762
$ 209,188
Net income (loss)
23,101
(19,813)
Dividends on multiple voting shares
(462)
(407)
Dividends on subordinate voting shares
(3,667)
(3,206)
Balance at end $ 204,734
$ 185,762
- 30 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
August 31,
2006
August 31,
2005
(audited)
(audited)
Assets
Current
Cash and cash equivalents
$ 71,516
$-
Restricted cash
569
-
Accounts receivable
71,989
55,529
Prepaid expenses
7,204
4,704
Broadcasting rights
15,632
14,168
166,910
74,401
Broadcasting rights
18,083
16,076
Investments
539
539
Fixed assets
1,048,998
726,270
Deferred charges
49,433
41,797
Broadcasting licenses and customer base (note 8)
1,017,892
1,017,892
Goodwill (note 8)
422,108
-
$ 2,723,963
$ 1,876,975
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness (note 9)
$ 7,891
$ 605
Accounts payable and accrued liab ilities
312,837
151,985
Broadcasting rights payable
7,721
7,337
Income tax liabilities
666
299
Deferred and prepaid income
26,737
25,034
Current portion of long-term debt (note 10)
126,904
1,400
482,756
186,660
Long-term debt (note 10)
1,209,254
713,739
Share in the partner’s deficiency of a general partnership
841
648
Deferred and prepaid income
10,525
10,522
Broadcasting rights payable
5,777
4,112
Pension plans liabilities and accrued emplo y ee benefits
11,098
10,628
Future income tax liabilities
211,848
208,434
Non-controlling interest
472,605
439,643
2,404,704
1,574,386
Shareholders' equity
Capital stock (note 11)
117,552
116,167
Contributed surplus - stock-based compen sation
1,425
660
Retained earnings
204,734
185,762
Foreign currency translation adjustment (note 12)
(4,452)
-
319,259
302,589
$ 2,723,963
$ 1,876,975
- 31 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended August 31, Twelve months ended August 31,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(audited)
(audited)
Cash flow from operating activities
Net income (loss)
$ 10,300
$ 630
$ 23,101
$ (19,813)
Items not affecting cash and cash equivalents
Amortization (note 5)
36,446
30,769
127,204
130,551
Amortization of deferred financing costs
416
241
1,140
1,102
Impairment of goodwill and other intangible assets
-
-
-
52,531
Future income taxes (note 6)
(14,900)
5,419
1,709
12,055
Non-controlling interest
19,022
5,422
36,612
(2,659)
Stock-based compensation
(534)
743
356
2,087
Loss on disposal of fixed assets
963
-
1,135
56
Other
16
(9)
1,051
1,469
51,729
43,215
192,308
177,379
Changes in non-cash oper ating items (note 13a))
57,288
49,951
3,645
23,680
109,017
93,166
195,953
201,059
Cash flow from investing activities
Acquisition of fixed assets (not e 13b))
(46,112)
(43,725)
(144,469)
(115,354)
Increase in deferred charges
(8,929)
(5,217)
(20,657)
(15,316)
Increase in restricted cash
(91)
-
(91)
-
Business acquisition, net of cash and cash equivalents
acquired (note 3)
(577,431)
-
(577,431)
-
Other
16
-
54
85
(632,547)
(48,942)
(742,594)
(130,585)
Cash flow from financing activities
Increase (decrease) in bank i ndebtedness
(6,165)
(14,966)
7,286
(3,946)
Increase in long-term debt
633,402
1,000
633,402
557
Repayment of long-term debt
(19,536)
(28,278)
(5,304)
(62,332)
Increase in deferred financing costs
(10,110)
-
(10,110)
-
Issue of subordinate voting shares
111
-
1,385
546
Dividends on multiple voting shares
(115)
(116)
(462)
(407)
Dividends on subordinate voting shares
(918)
(912)
(3,667)
(3,206)
Issue of subordinate voting shares by a subsidiary to
non-controlling interest
62
20
228
742
Dividends paid by a subsidiary to non-controlling
interest
(972)
(972)
(3,888)
(2,428)
595,759
(44,224)
618,870
(70,474)
Net change in cash and cas h equivalents 72,229
-
72,229
-
Effect of exchange rate changes on cash and cash
equivalents denominated i n foreign currencies
(713)
-
(713)
-
Cash and cash equivalents at end $ 71,516
$-
$ 71,516
$-
- 32 -
See supplemental cash flow information in note 13.
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present
fairly the financial position of COGECO Inc. as at August 31, 2006 and 2005 as well as its results of operations and its
cash flow for the three and twelve month periods ended August 31, 2006 and 2005.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with COGECO Inc.’s annual consolidated financial
statements. These unaudited interim consolidated financial statements follow the same accounting policies as the
most recent annual consolidated financial statements, except as mentioned in note 2.
The interim consolidated financial statements for the three month period ended August 31, 2005 have not been
subject to a review by the Company’s external auditors.
2. Recent accounting pronouncements
Non-Monetary Transactions
In June 2005, the Canadian Institute of Chartered Accountants issued Handbook section 3831, Non-Monetary
Transactions, which revised and replaced the current standards on non-monetary transactions. Under the new
section, the criterion for measuring non-monetary transactions at fair value is modified to focus on the assessment of
commercial substance instead of the culmination of the earnings process. A non-monetary transaction has
commercial substance when the entity’s future cash flows are expected to change significantly as a result of the
transaction. These standards are effective for non-monetary transactions initiated in periods beginning on or after
January 1, 2006. During the third quarter, the Company adopted these new standards and concluded that they had
no significant impact on these consolidated financial statements.
3. Business acquisition
Acquisition of Cabovisão – Televi são por Cabo, S.A.
On June 2, 2006, the Company’s subsidiary, Cogeco Cable Inc., entered into an agreement with Cable Satisfaction
International Inc. (“CSII”), Catalyst Fund Limited Partnership I and Cabovisão – Televisão por Cabo, S.A.
(“Cabovisão”), to purchase, for a total consideration of €465.7 million, all the shares of the second largest cable
operator in Portugal, an indirect wholly-owned subsidiary of CSII. The price includes the purchase of senior debt and
reimbursement of certain other Cabovisão liabilities. The acquisition was completed on August 1, 2006. The final
purchase price will be determined following completion of a post-closing working capital adjustment. The Company’s
subsidiary is assuming a €20 million working capital d eficien cy of Cabovisão.
The acquisition was accounted for using the purchase method. The results of Cabovisão have been consolidated as
of the acquisition date.
- 33 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
3. Business acquisition (continued)
The preliminary allocation of the purchase price of the acquisition is as follows:
Consideration
Paid
Estimated share purchase price $
304,188
Secured lenders debt and certain specified Cabovisão liabilities
274,761
Acquisition costs
4,193
583,142
Amounts outstanding
Preliminary working capital adjustment
2,432
585,574
Net assets acquired
Cash and cash equivalents
5,711
Restricted cash
489
Accounts receivable
16,570
Prepaid expenses
1,324
Fixed assets
287,652
Accounts payable and ac c rued lia bilities assume d
(65,282)
Other specified Cabovisão liabilities assumed
(91,914)
154,550
Excess of consideration over net assets acquired $
431,024
Preliminary allocation of excess of consideration over net assets acquired
Preliminary goodwill $
431,024
In order to finance the cash component of the transaction, the Term Facility and the operating line of credit of the
Company’s subsidiary, Cogeco Cable Inc., were restructured by an amended and restated credit agreement (see
note 10).
Management is currently carrying out a more specific analysis and changes will be made to the allocation of the
excess of consideration over net assets acquired as the information becomes available. For example, since the
measurement of the fair value of fixed assets had not yet been completed at the time of the preliminary allocation,
fixed assets have been presented at cost. The measurement of indefinite and finite-lived intangible assets is also
under way. Furthermore, in accordance with the Portuguese Companies Income Tax Code, accumulated tax losses
can not be deducted if the ownership of at least 50% of the social capital changes from the moment when the tax
losses were generated, unless an authorization is granted before such change in the ownership takes place. To this
effect, a request for preservation of tax losses was fil ed by Cabovisão on July 28, 2006. These losses have not been
included in the preliminary purchase price allocation. Finally, the Company’s subsidiary did not complete the
assessment of possible costs related to the restructuring and integration of the activities of Cabovisão potentially
giving rise to the recognition of a liability in the allocation of the purchase price. As a result, the actual amounts
allocated to the identifiable assets acquired and liabilities assumed and the related operating results will vary
according to the amounts initially recorded, and such differences could be significant.
- 34 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information
The Company’s activities are divided into two business segments: Cable and Media. The Cable segment is
comprised of all cable, high-speed Internet access and telephony services, and the Media segment is comprised of
radio and television operations.
The principal financi al information per business segment is presente d in the tables below:
Head Office
Cable Media and elimination Consolidated
Three months ended August 31,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 174,875 $ 140,178 $ 24,527 $ 24,082 $ (51) $ (50) $ 199,351 $ 164,210
Operating costs 102,011 79,458 27,315 25,770 1,380 2,497 130,706 107,725
Operating income (loss) before
amortization
72,864
60,720 (2,788) (1,688) (1,431)
(2,547)
68,645 56,485
Amortization 34,801 29,460 1,600 1,329 45 (20) 36,446 30,769
Operating income (loss) 38,063 31,260 (4,388) (3,017) (1,476) (2,527) 32,199 25,716
Financial expense 16,374 14,004 156 133 334 229 16,864 14,366
Income taxe s (12,298) 6,220 (1,224) (367) (428) (801) (13,950) 5,052
Net assets employed
(1) (2)
$ 2,210,823 $ 1,595,216 $ 70,550 $ 75,561 $ 7,477 $ 7,208 $ 2,288,850 $ 1,677,985
Total assets
(2)
2,602,603 1,755,796 112,609 114,393 8,751 6,786 2,723,963 1,876,975
Fixed assets
(2)
1,021,538 697,526 26,794 28,014 666 730 1,048,998 726,270
Goodwill
(2)
422,108 - - - - - 422,108 -
Acquisition of fixed assets 44,350 41,443 2,030 2,647 - 54 46,380 44,144
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
- 35 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information (continued)
Head Office
Cable Media and elimination Consolidated
Twelve months ended August 31,
(audited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 620,001 $ 554,404 $ 127,109 $ 121,386 $ (204) $ (185) $ 746,906 $ 675,605
Operating costs 367,023 326,883 127,730 114,587 (961) 292 493,792 441,762
Operating income (loss) before
amortization
252,978
227,521 (621) 6,799 757
(477)
253,114 233,843
Amortization 120,782 125,088 6,251 5,306 171 157 127,204 130,551
Operating income (loss) 132,196 102,433 (6,872) 1,493 586 (634) 125,910 103,292
Financial expense 57,366 55,692 678 528 1,132 1,064 59,176 57,284
Impairment of goodwill and other
intangible assets
-
- - 52,531 -
-
- 52,531
Income taxe s 9,274 18,020 (2,962) (2,899) 516 252 6,828 15,373
Net assets employed
(1) (2)
$ 2,210,823 $ 1,595,216 $ 70,550 $ 75,561 $ 7,477 $ 7,208 $ 2,288,850 $ 1,677,985
Total assets
(2)
2,602,603 1,755,796 112,609 114,393 8,751 6,786 2,723,963 1,876,975
Fixed assets
(2)
1,021,538 697,526 26,794 28,014 666 730 1,048,998 726,270
Goodwill
(2)
422,108 - - - - - 422,108 -
Acquisition of fixed assets 143,839 112,289 3,528 4,940 107 104 147,474 117,333
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
- 36 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information (continued)
The Company’s Cable subsidiary, Cogeco Cable Inc., considers its cable distribution, high-speed Internet access and
telephony activities as a single operating segment. The Cable segment activities are carried out in Canada and in
Portugal.
The Portugal segment include s operating results since the date of the acquisition of control on August 1, 2006.
The principal financi al information per business segment is presente d in the tables below:
Canada Portugal Consolidated
Three months ended August 31,
(unaudited)
2006 2005 2006 2005 2006 2005
Revenue $ 158,009 $ 140,178 $ 16,866 $- $ 174,875 $ 140,178
Operating costs 90,116 79,458 11,895 - 102,011 79,458
Management fees - - - - - -
Operating income before amortization 67,893 60,720 4,971 - 72,864 60,720
Amortization 30,373 29,460 4,428 - 34,801 29,460
Operating income 37,520 31,260 543 - 38,063 31,260
Financial expense 16,103 14,004 271 - 16,374 14,004
Income taxe s (12,612) 6,220 314 - (12,298) 6,220
Net income (loss) 34,029 11,036 (42) - 33,987 11,036
Net assets employed
(1) (2)
$ 1,649,631 $ 1,595,216 $ 561,192 $- $ 2,210,823 $ 1,595,216
Total assets
(2)
1,842,312 1,755,796 760,291 - 2,602,603 1,755,796
Fixed assets
(2)
741,024 697,526 280,514 - 1,021,538 697,526
Goodwill
(2)
- - 422,108 - 422,108 -
Acquisition of fixed assets 40,145 41,443 4,205 - 44,350 41,443
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
- 37 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information (continued)
Canada Portugal Consolidated
Twelve months ended August 31,
(audited)
2006 2005 2006 2005 2006 2005
Revenue $ 603,135 $ 554,404 $ 16,866 $- $ 620,001 $ 554,404
Operating costs 346,736 318,704 11,895 - 358,631 318,704
Management fees 8,392 8,179 - - 8,392 8,179
Operating income before amortization 248,007 227,521 4,971 - 252,978 227,521
Amortization 116,354 125,088 4,428 - 120,782 125,088
Operating income 131,653 102,433 543 - 132,196 102,433
Financial expense 57,095 55,692 271 - 57,366 55,692
Income taxe s 8,960 18,020 314 - 9,274 18,020
Net income (loss) 65,598 28,721 (42) - 65,556 28,721
Net assets employed
(1) (2)
$ 1,649,631 $ 1,595,216 $ 561,192 $- $ 2,210,823 $ 1,595,216
Total assets
(2)
1,842,312 1,755,796 760,291 - 2,602,603 1,755,796
Fixed assets
(2)
741,024 697,526 280,514 - 1,021,538 697,526
Goodwill
(2)
- - 422,108 - 422,108 -
Acquisition of fixed assets 139,634 112,289 4,205 - 143,839 112,289
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
5. Amortization
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Fixed assets $ 31,139 $ 25,112 $ 105,213 $ 107,366
Deferred charges 5,307 5,657 21,991 23,185
$ 36,446 $ 30,769 $ 127,204 $ 130,551
- 38 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
6. Income taxes
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Current $ 950 $ (367) $ 5,119 $ 3,318
Future (14,900) 5,419 1,709 12,055
$ (13,950) $ 5,052 $ 6,828 $ 15,373
The following table provides the reconciliation between Canadian statutory federal and provincial income taxes and
the consolidated income tax expense:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Income taxes at combined income tax rate of
35.51 % (34.15 % in 2005)
$
5,804
$
3,717
$
23,631
$
(2,387)
Loss or income subject to lower or higher tax rates (567) 339 (226) 2,060
Decrease in income taxes as a result of decreases in
substantially enacted tax rates
(19,831)
-
(19,922)
-
Large corporation tax (1,837) 127 614 1,534
Income taxes arising from non-deductible impairment of
goodwill and broadcasting licenses
-
-
-
10,570
Income taxes arising from non-deductible expenses 1,593 - 1,593 -
Withholding taxes on interest of a foreign subsidiary 314 - 314 -
Variation of the valuation allowance (34) 1,624 (34) 4,078
Other 608 (755) 858 (482)
Income taxes at effective income tax rate $ (13,950) $ 5,052 $ 6,828 $ 15,373
- 39 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
7. Earnings (loss) per share
The following table provides reconciliation between basic and diluted earnings (loss) per share:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Net income (loss) $ 10,300 $ 630 $ 23,101 $ (19,813)
Weighted average number of multiple voting and subordinate
voting shares outstanding
16,544,443
16,450,004
16,507,666
16,419,584
Effect of dilutive stock options
(1)
84,820 171,548 121,692 -
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
16,629,263
16,621,552
16,629,358
16,419,584
Earnings (loss) per share
Basic $ 0.62 $ 0.04 $ 1.40 $ (1.21)
Diluted 0.62 0.04 1.39 (1.21)
(1)
For the three and twelve month periods ended August 31, 2006, 36,443 and 38,293 (43,843 for the three month period ended August 31, 2005) stock options were
excluded from the calculation of diluted earnings per share since the exercise price of the options was greater than the average share price of the subordinate
voting shares. Also, for the twelve month periods ended August 31, 2005, the effect of 366,400 stock options was not included in diluted loss per share, as the
effect of their inclusion was antidilutive.
8. Goodwill and other intangible assets
Customer
base
Broadcasting
licenses
Goodwill
Total
(audited) (audited) (audited) (audited)
Balance as at August 31, 2004 $ 989,772 $ 52,726 $ 27,925 $ 1,070,423
Impairment - (24,606) (27,925) (52,531)
Balance as at August 31, 2005 989,772 28,120 - 1,017,892
Business acquisition (note 3) - - 431,024 431,024
Foreign currency translation adjustment - - (8,916) (8,916)
Balance as at August 31, 2006 $ 989,772 $ 28,120 $ 422,108 $ 1,440,000
9. Bank indebtedness
In April 2006, the operating line of credit available to the indirect subsidiary of the Company, TQS Inc., has been
increased from $10,000,000 to $20,000,000. This line of credit, in the form of term credit provided by a financial
institution, is secured by a first-ranking fixed and floating charges for an amount of $20,000,000 on the assets of
TQS Inc. and its subsidiaries.
- 40 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
10. Long-term debt
Maturity Interest rate
August 31,
2006
August 31,
2005
(audited) (audited)
Parent company
Term Facility 2009
(1)
6.27 %
(2)
$ 19,000 $ 22,500
Obligations under capital leases 2010 6.49 – 6.61 138 55
Subsidiaries
Term Facility
(3)
Term loan 2011 5.71
(2)
150,000 -
Term loan – € 17,358,700 2011 4.50
(2)
24,573 -
Revolving loan – € 317,000,000 2011 4.50
(2)
448,745 -
Senior Secured Debentures Series 1 2009 6.75 150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(4)
165,795 178,065
Series B 2011 7.73 175,000 175,000
Second Secured Debentures Series A 2007 8.44 125,000 125,000
Deferred credit
(5)
2008 – 72,855 60,585
Obligations under capital leases 2010 6.42 – 8.36 5,009 3,831
Other – – 43 103
1,336,158 715,139
Less current portion 126,904 1,400
$ 1,209,254 $ 713,739
(1)
COGECO Inc.’s Term Facility has been extended for an additional year in January 2006.
(2)
Average interest rate on debt as at August 31, 2006, including stamping fees.
(3)
On July 28, 2006, the Term Facilit y and the o perat ing li ne of credi t of t he Company’s subsidi ary, Cogeco Cable I nc., were restr uctured by an amended and restat ed cr edit agreement for cre dit facilit ies
totalling $900,000,000. The Term Facility is composed of four tranches: a first tranche, a revolving Term Facility for an amount of $700,000,000 available in Canadian, U.S. or Euro currencies; a
second tranche, a swingline of $25,000,000 availabl e in Canadian or U. S. currencies; a third t ranche of $150,000,00 0 fully drawn, and a fou rth tr anche of €17,358, 700 fully drawn. The Term Facilit y is
repayable on July 28, 2011, except for the third tranche of $150,000,000 which is repayable as follows: $15,00 0,000 on July 28, 2008, $22,500,000 on July 28, 2009, $37,500,000 on July 28, 2010 and
the balance on July 28, 2011. Earlier repayments can be made wi thout penalty. The Term Facility requires commitm ent fees, and int erest rates are based, on bankers’ acceptance, LIBOR, EURIBOR,
bank prime rate loan or U.S. base rate loan plus stamping fees. The Term Facility is secured by a first f ixed and floating charge on the assets of t he Company’s subsidiary and certain of its subsidiarie s
except for permitted encumbrances, including purchased money obligations, exist ing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary subject t o
a maximum amount. The provisions under these facilities provide for restrictions on the operations and activities of the Company’s subsidiary. Generally, the most significant restrictions relate to
permitted investments, dividends on multiple and subordinate voting shares and reimbursement of long-term debt as well as incurrence and maintenance of certain financial ratios primarily linked to the
operating income before amortization, financial expense and total indebtedness.
(4)
Cross-currency swap agreements have resulted in an effective interest rate of 7.254% on the Canadian dollar equ ivalent of the U.S. denominated debt of the Company’s subsidiary, Cogeco Cable Inc.
(5)
The deferred credit represents the amount which would have been payable as at August 31, 2006, and August 31, 2005 under cross- currency swaps entered into by t he Company’s subsidiary, Cogeco
Cable Inc., to hedge Senior Secured Notes Series A denominated in US dollars.
Interest on long-term debt for the three and twelve month periods ended August 31, 2006 amounted to $15,892,000
and $56,020,000 ($13,32 5,000 and $53,475,000 in 2005).
- 41 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
11. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and non-voting, except when specified in the
Articles of Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
August 31,
2006
August 31,
2005
(audited) (audited)
Issued
1,849,900 multiple voting shares $ 12 $ 12
14,702,556 subordinate voting shares (14,600,104 as at August 31, 2005) 117,540 116,155
$ 117,552 $ 116,167
During the period, subordinate voting share transactions were as follows:
Twelve months ended Twelve months ended
August 31, 2006 August 31, 2005
(audited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 14,600,104 $ 116,155 14,522,456 $ 115,609
Shares issued for cash under the Employee Stock Purchase Plan
and the Stock Option Plan
102,452
1,385
77,648
546
Balance at end 14,702,556 $ 117,540 14,600,104 $ 116,155
- 42 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
11. Capital Stock (continued)
Stock-based plans
The Company established, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase
Plan and a Stock Option Plan for certain executives which are described in the Company’s annual consolidated
financial statements. During the year, no stock options were granted to employees by COGECO Inc. However, the
Company’s subsidiary, Cogeco Cable Inc., granted 136,059 stock options (140,766 in 2005) with an exercise price
ranging from $24.15 to $29.05 ($21.50 in 2005), of which 31,743 stock options (38,397 in 2005) were granted to
COGECO Inc.’s employees. The Company records compensation expense for options granted on or after
September 1, 2003. As a result, a compensation expense of $202,000 and $775,000 ($132,000 and $484,000
in 2005) was recorded for the three and twelve month periods ended August 31, 2006. If compensation expense had
been recognized using the fair value-based method at the grant date for options granted between September 1, 2001
and August 31, 2003, the Company’s net income (loss) and earnings (loss) per share for the three and twelve month
periods ended August 31, 2006 and 2005 would have been reduced (increased) to the following pro forma amounts:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Net income (loss)
As reported $ 10,300 $ 630 $ 23,101 $ (19,813)
Pro forma 10,292 550 23,069 (20,133)
Basic earnings (loss) per share
As reported $ 0.62 $ 0.04 $ 1.40 $ (1.21)
Pro forma 0.62 0.03 1.40 (1.23)
Diluted earnings (loss) per share
As reported $ 0.62 $ 0.04 $ 1.39 $ (1.21)
Pro forma 0.62 0.03 1.39 (1.23)
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the twelve month period
ended August 31, 2006 was $9.32 ($7.46 in 2005) per option. The fair value was estimated on the grant date for
purposes of determining stock-based compensation expense using the Binomial option pricing model based on the
following assumptions:
2006 2005
Expected dividend yield
1.27 % 1.27 %
Expected volatility
39 % 43 %
Risk-free interest rate
3.70 % 3.70 %
Expected life in years
4.0 4.0
As at August 31, 2006, the Company had outstanding stock options providing for the subscription of 315,776
subordinate voting shares. These stock options can be exercised at various prices ranging from $6.60 to $37.50 and
at various dates up to October 19, 2011.
TQS Inc., an indirect subsidiary of the Company, also adopted a stock option plan for certain executives and key
employees. During the twelve month period ended August 31, 2006, 206,341 stock options (77,000 in 2005) were
granted by TQS Inc. No compensation expense ($41,000 in 2005) was recorded during the three month period ended
August 31, 2006, and a compensation expense of $154,000 ($162,000 in 2005) was recorded for the twelve month
period ended August 31, 2006 related to this plan.
- 43 -
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
12. Foreign Currency Translation Adjus tment
The change in the foreign currency translation adjustment included in shareholders’ equity is the result of the
fluctuation in the exchange rates on translation of net investments in self-sustaining foreign operations and foreign
exchange gains or losses related to long-term debt denominated in foreign currency used to hedge net investments.
The net change in foreign currency translation a djustment for 2006 is as follows:
(audited)
Effect of exchange rate variation on translation of net investments in self-sustaining foreign subsidiaries $ (12,412)
Effect of exchange rate variation on translation of long-term debt designated as hedge of a net investments
in self-sustaining subsidiaries, net of income taxes of $1,703,000
7,960
$ (4,452)
13. Statements of cash flow
a) Change s in non-cash operating items
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Accounts receivable $ 9,283 $ 5,843 $ (348) $ 1,681
Income tax receivable 245 - - 304
Prepaid expenses 227 891 (1,201) 825
Broadcasting rights 1,807 (2,265) (3,471) (1,816)
Accounts payable and accrued liabilities 48,369 46,018 4,536 17,381
Broadcasting rights payable (3,116) 138 2,049 2,057
Income tax liabilities 672 (850) 373 299
Deferred and prepaid income (199) (242) 1,707 2,949
Other - 418 - -
$ 57,288 $ 49,951 $ 3,645 $ 23,680
b) Other information
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Fixed asset acquisitions through capital leases $ 268 $ 419 $ 3,005 $ 1,979
Interest paid 12,242 11,701 56,429 55,817
- 44 -
Income taxes paid 39 483 4,752 2,715
COGECO INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
14. Employee future benefits
The Company and its subsidiaries offer their employees contributory defined benefit pension plans, a defined
contribution pension plan or collective registered retirement savings plans which are described in the Company’s
annual consolidated financi al statements. The total expenses related to these plans are as follows:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Contributory defined benefit pension plans $ 783 $ 703 $ 3,334 $ 2,285
Defined contribution pension plan and collective registered
retirement savings plans
502 388 1,914 1,593
$ 1,285 $ 1,091 $ 5,248 $ 3,878
15. Contingencies
Second Put and Call Options of TQS Inc.
On February 15, 2002, the shareholders of 3947424 Canada Inc. (‘’TQS Holdco’’), Cogeco Radio-Télévision Inc.
(‘’CRTI’’) and Bell Globemedia Inc. (‘’BGM’’), entered into a shareholders agreement following the acquisition of TQS
Inc. (the ‘’Shareholders Agreement’’). On October 31, 2002, BGM transferred its shares in TQS Holdco to CTV
Television Inc. (‘’CTV’’), a subsidiary of BGM. The Shareholders Agreement provides the right for CTV to notify CRTI,
during a 180 day period starting from February 15, 2007, of its offer to sell all its shares in TQS Holdco to CRTI for an
all-cash consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by
CTV to total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.15. CRTI may elect to
acquire CTV’s shares within 90 days following receipt of the put notice by delivering a put exercise notice to CTV. If
CRTI elects not to exercise or fails to exercise its put option, CTV may within 90 days following such election or failure
to exercise by CRTI, deliver a call notice to CRTI to purchase all the shares of CRTI in TQS Holdco for an all-cash
consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by CRTI to
total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.30. Unless the parties decide to
modify the Shareholders Agreement, in the event that CTV notifies CRTI of its offer to sell all its shares in TQS Holdco
to CRTI, CRTI does not buy them and CTV does not buy CRTI’s shares, CRTI and CTV have agreed to put up all
TQS Holdco shares for sale to a third party purchaser, subject to requisite governmental authorizations, with a view to
obtaining the highest possible price and maximizing shareholder value.
On August 31, 2006, BGM announced that it had closed off on its new ownership structure whereby BCE sold 48% of
its voting interest in BGM to The Woodbridge Company Limited and affiliates, the Ontario Teachers’ Pension Plan and
Torstar Corporation. This transaction constitutes a change of control under the Shareholders Agreement and,
accordingly, triggers certain purchase rights under the Agreement in favour of CRTI to purchase all, but not less than
all, of the shares owned by CTV.
16. Comparative figures
Certain comparative figures have been reclassified in order to conform to the presentation adopted in the current
period.