COGECO INC.: STRONG GROWTH IN CABLE SECTOR, MEDIA SECTOR HEADE IN THE RIGHT DIRECTION.
Press release
For immediate release
COGECO Inc.: strong growth in cable sector,
media sector headed in the right direction
Montréal, April 10, 2006 – Today, COGECO Inc. (TSX: CGO.SV) announced its financial results
for the second quarter of fiscal 2006 ended February 28.
Improved results
COGECO Inc. continues to improve its performance. The cable sector sales are up as a result of
increased number of customers in all major service categories. “Our number of customers is
increasing, thanks to our telephony offering that drives the demand for more products. Our
customers like our offering, which is in line with their needs. In the media sector, results are
encouraging. With our new reality show, Loft Story II, we are in a good position to recapture
market share and our radio operations continue to grow nicely”, said Mr. Audet, President and
Chief Executive Officer of COGECO.
Solid continued growth in the cable sector
Cogeco Cable reported solid customer growth in all major services. “The number of basic service
customers improved from a net loss of 751 to a net gain of 3,505 if we compare the second
quarters of 2005 and 2006. During the quarter, digital video and high-speed Internet (HSI) service
customers grew by about 24,500 and 17,500 customers respectively. Our digital telephony offering
is creating a snowball effect with more customers choosing the bundled offer of two or three
services. We are pleased to see more and more customers enjoying our services and we are
committed to bring the products and levels of service they deserve”, said Mr. Audet.
Improvement in the media sector
In the media sector, radio continues to grow both audiences and advertising revenue. As for
television, Loft Story II delivered a very good performance, driving up audience ratings for TQS.
“We are starting to see some results from the increase in programming commitments of the past
quarters”, concluded Mr. Audet.
Adjustment to our guidelines
Given the strong demand for basic, digital video and HSI services during the first six months and
various service enhancements offered recently, COGECO has revised its guidelines and that of
the cable sector to reflect the improved expectations of management
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FINANCIAL HIGHLIGHTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages
and per share data)
(unaudited)
(unaudited)
2006
2005
%
Change
2006
2005
%
Change
Revenue $ 177,359 $ 166,566 6.5 $ 357,837 $ 337,977 5.9
Operating income before
amortization
57,765 54,616 5.8 118,358 113,544 4.2
Net income (loss) 2,679 (28,524) ― 7,272 (25,407) ―
Cash flow from operations
(1)
41,644 40,962 1.7 88,486 85,465 3.5
Less:
Capital expenditures and
increase in deferred charges
40,316
31,193 29.2 74,359 56,231 32.2
Free cash flow
(1)
1,328 9,769 (86.4) 14,127 29,234 (51.7)
Per share data
Basic net income (loss) $ 0.16 $ (1.74) ― $ 0.44 $ (1.55) ―
(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.
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
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” 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 Annual Report.
Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.
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CORPORATE STRATEGIES AND OBJECTIVES
COGECO’s objectives are to maximise 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 of products and services as well as clientele,
effective management of capital and tight cost control. The media sector focuses on continuous
improvement of its program schedules 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 and revenue-generating units
*
(RGU) growth (cable
sector). Below are the second quarter achievements of the cable and media sectors in furtherance
of COGECO’s objectives.
Cable Sector
• Video services:
o Addition of Treehouse On Demand and KIDZ On Demand to Cogeco Cable’s
Ontario digital video offer, free of charge;
o Addition of the new cinépop channel to Cogeco Cable’s Québec digital video offer.
• Digital telephony service:
o The digital telephony service is now available to 38% of homes passed in Cogeco
Cable’s territories;
o Deployment of digital telephony service in Chatham, Georgetown, Waterdown and
Milton, Ontario, and in Rimouski, Matane, Sept-Îles, Port-Cartier and Baie-Comeau,
Québec.
• High-speed Internet service:
o Cogeco Cable more than doubled its download speed for its Lite product from 300
Kbps to 640 Kbps.
• Acquisition:
o In furtherance of its existing line of business and external growth strategy, the cable
subsidiary continues to investigate cable system acquisition opportunities, including
cable systems located outside Canada.
Media sector
• During the second quarter, TQS started to air “Loft Story II”, a unique reality show. The
success of this show had a positive impact on TQS total viewership.
• RYTHME FM is in the top position in the Montreal market and is gaining market share in its
stations across Québec. The station 93
3
continues to win new listeners within its target
audience.
RGU growth
In the cable sector, the number of RGUs increased by 8.6% during the first six months. The
Company had anticipated RGU growth between 8% and 10% for all of fiscal 2006. Higher than
anticipated HSI and digital video customer growth has allowed the cable subsidiary to exceed the
lower range of its objective in the first six months of the fiscal year. Therefore, management has
revised its guidelines and now believes it will reach RGU growth between 10% and 11%. Please
consult “Fiscal 2006 financial guidelines” section for further details.
*
See customer statistics of the cable sector section for detailed explanations.
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Operating income before amortization growth
The Company had originally anticipated stable operating income before amortization in fiscal 2006.
Although operating income before amortization grew by 4.2% during the first six months,
COGECO still expects the latter to remain relatively stable in fiscal 2006. Please consult “Fiscal
2006 financial guidelines” section for further details.
Free cash flow
In the first six months, COGECO generated free cash flow of $14.1 million. In light of stronger than
expected RGU growth in the first six months of fiscal 2006, capital expenditures and deferred
charges in the cable sector are expected to surpass the $140 million guideline and reach
$160 million. Therefore, COGECO’s free cash flow will be approximately $15 million less than the
set objective of $25 million to $30 million. Please consult “Fiscal 2006 financial guidelines” section
for further details.
ACCOUNTING POLICIES AND ESTIMATES
There has been no 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 second quarter and first six months of fiscal 2006, rose by $10.8 million, or 6.5%,
and by $19.9 million, or 5.9%, respectively, compared to the same periods last year. Cable
revenue, driven by an increased number of customers in basic, digital video, HSI and digital
telephony services as well as rate increases, went up by $9.4 million, or 6.8%, in the second
quarter and by $17 million, or 6.2%, in the first six months. Media revenue increased by
$1.4 million, or 5.1%, in the second quarter and by $2.9 million, or 4.5%, in the first six months,
due to higher radio advertising revenue.
Operating income before amortization grew by 5.8% and 4.2% in the second quarter and first six
months of fiscal 2006 respectively, compared to the same periods last year. The cable sector
contributed to an increase of $4.3 million and $8.4 million in the second quarter and first six
months. During the same periods, the media sector had a negative impact of $1.8 million and $4.2
million.
FIXED CHARGES
Quarters ended February 28, Six months ended February 28,
($000s, except percentages)
2006
2005 %
Change
2006
2005 %
Change
Amortization $ 30,217 $ 33,383 (9.5) $ 60,100 $ 66,999 (10.3)
Financial expense
$
14,231
$
14,237 ―
$
28,192
$
28,477 (1.0)
Amortization amounted to $30.2 million and $60.1 million during the second quarter and first six
months of fiscal 2006 compared to $33.4 million and $67 million for the same periods last year.
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Amortization declined during these periods since many cable modems and digital terminals in the
cable sector were fully amortized.
Financial expense was stable in the second quarter of 2006 and slightly decreased in the first six
months. This is due to the lower level of Indebtedness (defined as bank indebtedness and long-
term debt) during these periods offset by increases in the short-term interest rate on the Term
Facilities.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the second quarter of fiscal 2005, 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. 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 $24.6 million. The impact of the impairment of goodwill
and other intangible assets on net income was as follows:
($ 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
During the second quarter of fiscal 2006, income taxes stood at $5.7 million compared to a
recovery of $0.1 million in the same period in fiscal 2005. For the first six months of fiscal 2006,
income taxes stood at $12.3 million compared to $4.5 million for the same period last year. Income
taxes in the second quarter and first six months amounted to $5.7 million and $12.3 million
respectively, compared to $3.1 million and $7.7 million for the same periods last year, excluding a
non-cash income tax adjustment of $3.3 million for the impairment of goodwill and other intangible
assets of the television operations. The income tax increases were mainly attributable to the cable
sector’s growth in operating income before amortization combined with the decline in fixed charges
as discussed before.
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. During the second quarter and first six months of fiscal 2006, the
non-controlling interest stood at $4.8 million and $10.3 million compared to a negative
$16.9 million and a negative $13.7 million respectively for the same periods last year. The non-
controlling interest for the second quarter and first six months of fiscal 2005 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 second quarter of fiscal 2006 amounted to $2.7 million, or $0.16 per share,
compared to a net loss of $28.5 million, or $1.74 per share, for the same period last year. For the
first six months of fiscal 2006, net income stood at $7.3 million, or $0.44 per share compared to a
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net loss of $25.4 million, or $1.55 per share for the comparable period last year. Net income
increases in these periods were attributable to the $29.6 million impairment of goodwill and other
intangible assets incurred in the second quarter of fiscal 2005.
In the second quarter and first six months of fiscal 2006, net income excluding impairment of
goodwill and other intangible assets
*
grew respectively from $1.1 million to $2.7 million and from
$4.2 million to $7.3 million compared to the same periods last year. These increases are due to the
cable sector’s net income growth.
CASH FLOW AND LIQUIDITY
Quarters ended February 28,
Six months ended February 28,
($000s)
2006
2005
2006
2005
Operating Activities
Cash flow from operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
Changes in non-cash operating items
2,828
16,981
(49,085) (27,531)
44,472 57,943 39,401 57,934
Investing Activities
(1)
$ (59,092) $ (31,168) $ (93,135) $ (56,184)
Financing Activities
(1)
$ (6,063) $ (26,775) $ 53,734 $ (1,750)
Net change in cash and cash equivalents $ (20,683) $ ― $ ― $ ―
(1) Excludes assets acquired under capital leases.
During the second quarter of fiscal 2006, cash flow from operations reached $41.6 million or 1.7%
higher than the comparable period last year, due primarily to operating income before amortization
growth in the cable sector, partly offset by a decline in operating income before amortization
recorded in the media sector. Changes in non-cash operating items generated less cash inflow
than the same period last year mainly as a result of relatively stable accounts payable and accrued
liabilities compared to an increase for the same period in fiscal 2005.
During the first six months of fiscal 2006, cash flow from operation reached $88.5 million or 3.5%
higher than for the same period last year due primarily to operating income before amortization
growth in the cable sector, partially offset by a decline in operating income before amortization
recorded in the media sector. Changes in non-cash operating items generated greater cash
outflow than last year, mainly as a result of a larger decrease in accounts payable and accrued
liabilities caused by increased capital expenditures incurred late in fiscal 2005.
In the second quarter, investing activities rose by $27.9 million due to increases of $7.5 million in
capital expenditures, $0.1 million in deferred charges and $20.3 million in restricted cash. For the
first six months, the rise in investing activities is due to increases of $15.5 million in capital
expenditures, $1 million in deferred charges and $20.3 in restricted cash.
The second quarter and first six months increases in deferred charges are mainly attributable to
higher reconnect costs given the significant level of RGU increase, which includes the digital
telephony customer growth in the cable sector. The rise in restricted cash in the second quarter
and first six months is the result of a deposit in escrow. This deposit of €15 million was intended for
*
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.
- 7 -
a potential acquisition within the cable subsidiary’s business segment. The deposit is being
returned with accumulated interest thereon.
During the second quarter and first six months, the increase related to capital expenditures is
mainly due to the following factors of the cable sector:
¾ Customer premise equipment decreased by $1.2 million in the second quarter of fiscal
2006. This is explained by a decline in digital terminals and cable modems, partially offset
by more home terminal devices related to the digital telephony service. The cable
subsidiary utilized digital terminals and cable modems that were in inventory at the end of
the first quarter of fiscal 2006 to meet the strong demand of the second quarter. Fewer
digital terminals and cable modems were received from suppliers during the second quarter
of fiscal 2006 as the inventory level was tightly managed. For the first six months of fiscal
2006, customer premise equipment increased by $2.9 million resulting from a rise in the
number of digital terminals rented to customers and a greater ratio of digital terminals per
digital home.
¾ Scalable infrastructure rose by $4.1 million and $5.4 million in the second quarter and first
six months of fiscal 2006. This is mainly attributable to the support of the digital telephony
rollout.
¾ Expenditures associated with the network upgrade and rebuild program rose by
$3.7 million and $6.2 million in the second quarter and first six months 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 households with access to two-way service was also a factor. The
percentage of customers with access to two-way service rose from 87% as at February 28,
2005 to 91% as at February 28, 2006.
Free cash flow of $1.3 million and $14.1 million was generated during the second quarter and first
six months of fiscal 2006 respectively as a result of increased cash flow from operations in the
cable sector, partly offset by increased capital expenditures and deferred charges in that sector
and a decrease in cash flow from operations in the media sector. In the second quarter and first six
months of fiscal 2006, free cash flow declined compared to the same periods last year. This is
mainly attributable to increased capital expenditures and deferred charges to support digital
telephony service and better-than-expected RGU growth in the cable sector.
During the second quarter, the level of Indebtedness decreased by $5.5 million mainly due to
generated free cash flow of $1.3 million, a rise in non-cash operating items of $2.8 million and a
net decrease in cash and cash equivalents of $20.7 million, partly offset by an increase in
restricted cash of $20.3 million. For the same period last year, Indebtedness declined by
$26.3 million, essentially due to generated free cash flow of $9.8 million and an increase of
$17 million in non-cash operating items. In addition, a dividend of $0.0625 per share for
subordinate and multiple voting shares, totalling $1 million, was paid during the second quarter of
fiscal 2006 compared to a dividend of $0.0525 per share, totalling $0.9 million for the second
quarter of fiscal 2005.
During the first half of fiscal 2006, the level of Indebtedness increased by $56.3 million mainly due
to generated free cash flow of $14.1 million partly offset by a decline in non-cash operating items
of $49.1 million and an increase in restricted cash of $20.3 million. For the same period last year,
Indebtedness remained relatively stable since free cash flow was essentially offset by changes in
non-cash operating items. Dividends totalling $2.1 million were paid during the first six months of
fiscal 2006 compared to $1.7 million for the same period the year before.
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As at February 28, 2006, the Company had a working capital deficiency of $100.8 million
compared to $112.3 million as at August 31, 2005. This improvement is mainly attributable to an
increase in restricted cash and a reduction in the level of accounts payable and accrued liabilities,
as discussed in the Financial Position section, partially offset by an increase in the current portion
of Indebtedness. This increase is explained by a greater utilization of bank indebtedness and an
increase in the cable subsidiary’s current portion of long-term debt as Cogeco Cable’s Term
Facility matures in less than a year. COGECO maintains a working capital deficiency due to 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. Additionally, the cable subsidiary generally uses cash and cash
equivalents to reduce Indebtedness.
As at February 28, 2006, the cable subsidiary had utilized $30 million of its Term Facility and the
Company had drawn $22 million of its Term Facility. During the second quarter, the cable
subsidiary amended its Term Facility so that the committed amount, which should have been
reduced to $95 million on January 31, 2006, is maintained at its prior level of $270 million.
Moreover, the Company’s Term Facility has been extended for an additional year in January 2006.
Based on existing bank covenants, COGECO and Cogeco Cable had access to the entire
committed amounts. Going forward, COGECO and Cogeco Cable have sufficient capacity to
finance foreseeable growth and expect to continue to generate free cash flow to further reduce
their leverage ratios.
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 Cable may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2005, there have been major changes to the “Fixed assets”, “Accounts payable
and accrued liabilities,” “Restricted cash”, and “Indebtedness” items on the balance sheet. The
$18 million rise in fixed assets was mainly related to the cable sector’s increase in capital
expenditures as well as lower amortization expense. Accounts payable and accrued liabilities
declined by $42.3 million as the use of working capital was tightly managed at fiscal 2005 year-
end. Restricted cash and Indebtedness increased by $20.3 million and $57.8 million, respectively,
due to the factors previously discussed in the “Cash Flow and Liquidity” section.
A description of COGECO’s share data as of March 31, 2006 is presented in the table below:
Number of shares/
options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
1,849,900
14,688,356
12
117,429
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
329,976
329,976
In the normal course of business, COGECO has incurred financial obligations, primarily in the form
of long-term debt, operating and capital leases and guarantees. COGECO’s obligations have not
materially changed since August 31, 2005 and are described in the 2005 annual MD&A.
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DIVIDEND DECLARATION
At its April 7, 2006 meeting, the Board of Directors of COGECO declared a quarterly dividend of
$0.0625 per share for subordinate and multiple voting shares, payable on May 5, 2006, to
shareholders on record on April 21, 2006.
CABLE SECTOR
Customer Statistics
Net additions (losses) % of Penetration
(1)
Quarters ended
February 28,
Six months ended
February 28,
February 28,
February 28,
2006
2006 2005 2006 2005 2006 2005
Revenue-generating units (RGUs)
(2)
1,463,612 55,109 23,538 115,879 65,897
Basic service customers
835,841 3,505 (751) 14,408 6,992
HSI service customers
(3)
318,101 17,460 12,137 40,453 29,534 41.9 37.1
Digital video service customers
(4)
293,166 24,547 12,152 45,962 29,371 35.8 28.5
Digital telephony service customers 16,504 9,597 ― 15,056 ― 5.7 ―
Digital terminals
(5)
372,168 37,299 17,310 68,284 39,152 45.4 34.3
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, digital video service, HSI service and digital telephony service customers.
(3) The number of Internet customers in fiscal 2005 has been restated to reflect the number of customers based on the billing dates, which are
distributed throughout the month, instead of the number of customers as at the end of the quarter. This change resulted in a downward
adjustment of approximately 5,500 customers as at February 28, 2005. Customers subscribing only to Internet services amounted to 59,292 as
at February 28, 2006 compared to 57,051 as at November 30, 2005.
(4) In fiscal 2005, the number of digital video service customers has been restated to reflect changes brought about by our billing improvement
program, which has allowed us to identify digital video service customer accounts that were not cancelled when they became inactive. This
change resulted in a downward adjustment of approximately 6,400 customers as at February 28, 2005 and did not affect the number of digital
terminals.
(5) 58% of terminals as at February 28, 2006 were purchased compared to 74% one year earlier.
During the second quarter of fiscal 2006, RGU growth was higher than the same period last year
due to an increase in basic and digital telephony customers and higher growth in HSI and digital
video customers.
In the second quarter of 2006, the number of net additions of HSI service customers stood at
17,460 compared to 12,137 for the same period last year, an increase of 43.9%. Basic service
customers went from a net loss of 751 customers in the second quarter of 2005 to a net gain of
3,505 customers for the comparable period this year. These results are mainly attributable to
additional marketing initiatives such as outbound telemarketing and promotional activities as well
as digital telephony up-sell activities and the bundled offer of three services.
The increase in the number of digital video service customers stems from Cogeco Cable’s
attractive promotional offer and from the growing interest for this technology among customers.
On February 28, 2006, 18,783 customers were subscribing to the digital telephony service
including pending orders compared to 9,115 customers including pending orders as at November
30, 2005.
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Operating results
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue
$
147,757
$ 138,389 6.8 $ 291,170 $ 274,155 6.2
Operating costs
85,232 80,328 6.1 168,475 160,185 5.2
Management fees - COGECO Inc.
2,957 2,764
7.0 5,825 5,479 6.3
Operating income before
amortization
59,568
55,297
7.7
116,870
108,491
7.7
Operating margin
40.3% 40.0% 40.1% 39.6%
Revenue
Revenue for the second quarter and first six months of fiscal 2006 rose respectively by $9.4 million
or 6.8% and by $17 million or 6.2%, compared to the same periods last year. Revenue growth
during these periods is mainly attributable to an increased number of customers in basic, digital
video, HSI and digital telephony services as well as to 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, the August 2005
reduction in digital terminal rental rates was more than offset by a greater number of customers
renting digital terminals.
Operating Costs
For the second quarter and first six months of fiscal 2006, operating costs, excluding management
fees payable to COGECO Inc., rose by $4.9 million or 6.1% and by $8.3 million or 5.2%
respectively. Operating costs also include network fees. Network fees increased by 5.8% and
4.1% during the second quarter and first six months respectively, compared to the same periods
last year. These increases are mainly the result of the introduction of digital telephony service, the
Canadian Radio-television and Telecommunications Commission mandated APTN wholesale rate
increase and RGU growth, partly offset by IP transport costs that have declined despite HSI
customer growth. Other operating costs increased in order to serve additional RGUs, including
digital telephony.
Operating Income before Amortization
For the second quarter and first six months of fiscal 2006, operating income before amortization
rose by 7.7% for each period, compared to the same periods last year due to the increase in
revenue outpacing the rise in operating costs. Cogeco Cable had previously anticipated a
reduction in its operating margin due to the launch of digital telephony service. However, Cogeco
Cable increased its operating margin to 40.3% and 40.1% in the second quarter and first six
months of fiscal 2006 respectively compared to 40% and 39.6% for the same periods last year as
a result of better-than-expected net additions of basic and HSI service customers and of some
additional network maintenance costs deferred to the second half of fiscal 2006.
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Foreign exchange management
Cogeco Cable has entered into cross-currency swap agreements to fix 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$7.6 million at the end of the
second quarter 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 fully
offset by a variation in deferred credit described in Note 7 of the second quarter interim financial
statements. The $68.2 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
February 28,
Six months ended February 28,
($000s, except percentages)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 29,653 $ 28,222 5.1 $ 66,769 $ 63,912 4.5
Operating costs 32,545 29,334 10.9 67,212 60,190 11.7
Operating income (loss) before
amortization
(2,892)
(1,112)
―
(443)
3,722
―
Operating margin
(9.8)% (3.9)% (0.7)% 5.8%
Revenue
During the second quarter and first six months of fiscal 2006, revenue increased by $1.4 million
and $2.9 million respectively. All radio stations contributed to the increase in revenue.
Furthermore, revenue and operating expenses for the Sherbrooke and Trois-Rivières RYTHME
FM stations are no longer capitalized since August 31, 2005. Television revenue decreased by
1.9% and 3% in the second quarter and first six months, respectively, due to a decline in TQS’s
audience ratings and to the advertising market that remains difficult for conventional television in
the Francophone market.
Operating Income before Amortization
The operating income before amortization declined by $1.8 million and $4.2 million in the second
quarter and first six months of fiscal 2006. For the second quarter and first six months, TQS’s
operating income before amortization decreased as a result of greater investment in television
programming, combined with lower revenue growth. During the second quarter of fiscal 2006,
radio’s operating income before amortization improved due to revenue growth. For the first six
month, radio’s operating income before amortization improved due to revenue growth, which was
partially offset by additional royalty expenses following the Copyright Board October 14
th
decision
on SOCAN tariffs.
- 12 -
FISCAL 2006 FINANCIAL GUIDELINES
($ million, except customer data)
Revised Projections
April 10, 2006
Original Projections
October 24, 2005
Cable sector–
Financial Guidelines
Revenue 593 to 600 588 to 593
Operating income before amortization 236 to 240 234 to 236
Operating margin About 40% About 40%
Financial expense 56 56
Amortization 116 115
Capital expenditures and deferred charges 160 140
Free cash flow 20 to 25 35 to 40
Customer Addition Guidelines
Basic service 3,000 to 6,000 0 to 3,000
HSI service 47,000 to 49,000 32,000 to 37,000
Digital video service 59,000 to 62,000 47,000 to 52,000
Digital telephony service 32,000 to 37,000 32,000 to 37,000
Digital terminals 86,000 to 90,000 60,000 to 65,000
RGU 138,000 to 154,000 111,000 to 129,000
Media sector–
Financial Guidelines
Revenue 124 to 126 124 to 126
Operating loss before amortization 2 to 3 2 to 3
Amortization 7 7
Capital expenditures and deferred charges
5 to 6 5 to 6
Consolidated Financial Guidelines
Free Cash Flow 10 to 15 25 to 30
Operating income before amortization Relatively stable Stable
Net income 11 10
Cable Sector
Given the stronger than expected demand for basic, digital video and HSI services during the first
six months and various service enhancements offered recently, Cogeco Cable has revised upward
its 2006 guideline for basic, digital video and HSI customer additions. Subsequent to these
adjustments, projected revenue and operating income before amortization are being revised
upward. The operating margin should remains at about 40% as some additional network
maintenance expenses are expected to be spent during the second half of fiscal 2006.
As a result of increased customer additions, Cogeco Cable will have to purchase more digital
terminals, cable modems and equipment and is raising its capital expenditures and deferred
charges as well as amortization guidelines from $140 million to $160 million and $115 million to
$116 million respectively. The cable subsidiary should generate free cash flow of $20 million to
$25 million as a result of higher anticipated operating income before amortization offset by higher
capital expenditures and deferred charges.
Media Sector
Since economic and industry factors described in the 2005 annual MD&A remain unchanged,
management is maintaining its fiscal 2006 financial guidance.
- 13 -
Consolidated outlook
Based on the above-mentioned guidelines, net income of $11 million and free cash flow between
$10 million to $15 million should be generated.
RISK FACTORS AND UNCERTAINTIES
There has been no significant change in the risk factors and uncertainties facing COGECO as
described in the Company’s 2005 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by COGECO throughout this MD&A. It
also provides reconciliations between these Non-GAAP measures and the most comparable
GAAP financial measures. These financial measures do not have standard definitions prescribed
by Canadian GAAP and may not be comparable with similar measures presented by other
companies. These measures include ‘cash flow from operations’, ‘free cash flow’ and ‘net income
excluding impairment of goodwill and other intangible assets’.
Cash flow from operations
Cash flow from operations is used by COGECO’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Company to isolate the cash flow from operating activities from the impact of
cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure ‘free cash flow’. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended February 28, Six months ended February 28,
2006
2005
2006
2005
Cash flow from operating activities $ 44,472 $ 57,943 $ 39,401 $ 57,934
Changes in non-cash operating items (2,828) (16,981) 49,085 27,531
Cash flow from operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
Free cash flow
Free cash flow is utilized, 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 February 28, Six months ended February 28,
2006
2005
2006
2005
Cash flow from operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
Acquisition of fixed assets (34,994) (27,483) (65,322) (49,775)
Increase in deferred charges (3,784) (3,710) (7,499) (6,456)
Assets acquired under capital leases – as
per Note 9 b)
(1,538) ― (1,538) ―
Free cash flow $ 1,328 $ 9,769 $ 14,127 $ 29,234
- 14 -
Net income excluding impairment of goodwill and other intangible assets
Net income excluding 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 the 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 February 28,
Six months ended February 28,
2006
2005
2006
2005
Net income (loss) $
2,679 $ (28,524) $ 7,272 $ (25,407)
Impairment of goodwill and other intangible
assets
(1)
― 29,610 ― 29,610
Net income excluding impairment of
goodwill and other intangible assets
$
2,679
$
1,086
$
7,272
$
4,203
(1) For more details, please consult the Impairment of goodwill and other intangible assets section.
ADDITIONAL INFORMATION
This MD&A was prepared on April 7, 2006. Additional information relating to the Company,
including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary,
COGECO provides about 1,464,000 revenue-generating units to approximately 1,462,000
households in its service territory. Through its two-way broadband cable infrastructure, Cogeco
Cable provides its residential and commercial customers with analog and digital video and audio
services, high-speed Internet access as well as digital 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 RYTHME FM radio stations in
Montréal, Québec City, Trois-Rivières and Sherbrooke as well as 93
3
in Québec City. COGECO’s
subordinate voting shares are listed on the Toronto Stock Exchange (CGO.SV). The subordinate
voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (CCA.SV).
– 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 April 10, 2006, at 12:30 p.m. EDT
By Internet at www.cogeco.ca/investors
By telephone: 1 800 500-0311 (confirmation 4638890)
Media are invited to participate on a listen mode only.
Re-broadcast of the call available until April 18th: 1 888 203-1112
(confirmation 4638890)
- 15 -
Supplementary Quarterly Financial Information
Quarters ended February 28, November 30, August 31, May 31,
2006 2005 2005 2004 2005 2004 2005 2004
($000, except percentages and
per share data)
Revenue $ 177,359 $ 166,566 $ 180,478 $ 171,411 $ 164,210 $ 154,652 $ 173,418 $ 168,392
Operating income before
amortization
57,765
54,616
60,593
58,928
56,485
55,862
63,814
59,407
Operating margin 32.6% 32.8% 33.6% 34.4% 34.4% 36.1% 36.8% 35.3%
Amortization 30,217 33,383 29,883 33,616 30,769 33,758 32,783 33,323
Financial expense 14,231 14,237 13,961 14,240 14,366 14,305 14,441 14,813
Impairment losses ― 52,531 ― ― ― ― ― ―
Income taxes 5,706 (130) 6,611 4,582 5,052 1,472 5,869 5,046
Non-controlling interest 4,842 (16,940) 5,455 3,256 5,422 4,077 5,603 2,409
Net income (loss) 2,679 (28,524) 4,593 3,117 630 2,117 4,964 3,816
Cash flow from operations 41,644 40,962 46,842 44,503 43,215 43,010 48,699 44,127
Net income (loss) per share
Basic and diluted $ 0.16 $ (1.74) $ 0.28 $ 0.19 $ 0.04 $ 0.13 $ 0.30 $ 0.23
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 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. - 16 -
Cable Statistics
February 28, August 31,
2006 2005
Homes Passe
d
Ontario 993 819 986 401
Québec 467 895 462 332
1 461 714 1 448 733
Revenue Generating Units
Ontario 1 047 964 968 749
Québec 415 648 378 984
1 463 612 1 347 733
Basic Service Customer
s
Ontario 591 318 581 631
Québec 244 523 239 802
835 841 821 433
Discretionnary Service Customer
s
Ontario 466 998 461 038
Québec 189 421 183 320
656 419 644 358
Pay TV Service Customer
s
Ontario 84 187 80 817
Québec 39 240 35 407
123 427 116 224
High-Speed Internet Service Customers
Ontario 255 289 226 133
Québec 62 812 51 515
318 101 277 648
Digital Video Customers
Ontario 190 593 159 734
Québec 102 573 87 470
293 166 247 204
Digital Terminals
Ontario 260 268 209 662
Québec 111 900 94 222
372 168 303 884
Digital Telephony
Ontario 10 764 1 251
Québec 5 740 197
16 504 1 448
- 17 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended February 28, Six months ended February 28,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited) (unaudited)
(unaudited) (unaudited)
Revenue $ 177,359
$ 166,566
$ 357,837
$ 337,977
Operating costs
119,594
111,950
239,479
224,433
Operating income before amortization 57,765
54,616
118,358
113,544
Amortization (note 3)
30,217
33,383
60,100
66,999
Operating income 27,548
21,233
58,258
46,545
Financial expense (note 7)
14,231
14,237
28,192
28,477
Income before income taxes and following items 13,317
6,996
30,066
18,068
Impairment of goodwill and other intangible assets
-
52,531
-
52,531
Income taxes (note 4)
5,706
(130)
12,317
4,452
Non-controlling interest
4,842
(16,940)
10,297
(13,684)
Loss on dilution resulting from shares issued by a
subsidiary
-
17
-
92
Share in the loss of a general partnership
90
42
180
84
Net income (loss) $ 2,679
$ (28,524)
$ 7,272
$ (25,407)
Earnings (loss) per share (note 5)
Basic and diluted
$0.16
$ (1.74)
$0.44
$ (1.55)
- 18 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six months ended February 28,
(In thousands of dollars)
2006
2005
(unaudited)
(unaudited)
Balance at beginning $ 185,762
$ 209,188
Net income (loss)
7,272
(25,407)
Dividends on multiple voting shares
(231)
(194)
Dividends on subordinate voting shares
(1,831)
(1,527)
Balance at end $ 190,972
$ 182,060
- 19 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
February 28,
2006
August 31,
2005
(unaudited)
(audited)
Assets
Current
Restricted cash (note 6)
$ 20,322
$-
Accounts receivable
64,469
55,529
Income tax receivable
986
-
Prepaid expenses
5,244
4,704
Broadcasting rights
19,581
14,168
110,602
74,401
Broadcasting rights
18,457
16,076
Investments
539
539
Fixed assets
744,283
726,270
Deferred charges
37,552
41,797
Broadcasting licenses and customer base
1,017,892
1,017,892
$ 1,929,325
$ 1,876,975
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness
$ 28,226
$ 605
Accounts payable and accrued liabilities
109,707
151,985
Broadcasting rights payable
15,100
7,337
Income tax payable
-
299
Deferred and prepaid income
26,782
25,034
Current portion of long-term debt (note 7)
31,610
1,400
211,425
186,660
Long-term debt (note 7)
713,746
713,739
Share in the partner’s deficiency of a general partnership
828
648
Deferred and prepaid income
10,681
10,522
Broadcasting rights payable
6,194
4,112
Pension plans liabilities and accrued employee benefits
11,198
10,628
Future income tax liabilities
217,652
208,434
Non-controlling interest
448,162
439,643
1,619,886
1,574,386
Shareholders' equity
Capital stock (note 8)
117,441
116,167
Retained earnings
190,972
185,762
Contributed surplus - stock-based compensation
1,026
660
309,439
302,589
$ 1,929,325
$ 1,876,975
- 20 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended February 28, Six months ended February 28,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income (loss)
$ 2,679
$ (28,524)
$ 7,272
$ (25,407)
Items not affecting cash and cash equivalents
Amortization (note 3)
30,217
33,383
60,100
66,999
Amortization of deferred financing costs
240
306
481
619
Impairment of goodwill and other intangible assets
-
52,531
-
52,531
Future income taxes (note 4)
3,891
(841)
9,218
2,571
Non-controlling interest
4,842
(16,940)
10,297
(13,684)
Other
(225)
1,047
1,118
1,836
41,644
40,962
88,486
85,465
Changes in non-cash operating items (note 9a))
2,828
16,981
(49,085)
(27,531)
44,472
57,943
39,401
57,934
Cash flow from investing activities
Acquisition of fixed assets (note 9b))
(34,994)
(27,483)
(65,322)
(49,775)
Increase in deferred charges
(3,784)
(3,710)
(7,499)
(6,456)
Increase in restricted cash
(20,322)
-
(20,322)
-
Other
8
25
8
47
(59,092)
(31,168)
(93,135)
(56,184)
Cash flow from financing activities
Increase (decrease) in bank indebtedness
5,952
(16,931)
27,621
12,351
Increase in long-term debt
-
1,000
30,000
1,058
Repayment of long-term debt
(11,450)
(10,320)
(1,321)
(13,654)
Issue of subordinate voting shares
1,274
512
1,274
546
Dividends on multiple voting shares
(115)
(97)
(231)
(194)
Dividends on subordinate voting shares
(918)
(765)
(1,831)
(1,527)
Issue of subordinate voting shares by a subsidiary to
non-controlling interest
166
311
166
640
Dividends paid by a subsidiary to non-controlling
interest
(972)
(485)
(1,944)
(970)
(6,063)
(26,775)
53,734
(1,750)
Net change in cash and cash equivalents (20,683)
-
-
-
Cash and cash equivalents at beginning
20,683
-
-
-
Cash and cash equivalents at end $ -
$-
$ -
$-
See supplemental cash flow information in note 9.
- 21 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(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 February 28, 2006 and August 31, 2005 as well as its results of
operations and its cash flow for the three and six month periods ended February 28, 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 for the year ended August 31, 2005. These unaudited interim consolidated financial statements follow the
same accounting policies as the most recent annual consolidated financial statements.
The interim consolidated financial statements for the three and six month periods ended February 28, 2005 have not
been subject to a review by the Company’s external auditors.
2. Segmented Information
The Company’s activities are divided into two business segments: Cable and Media. The Cable segment is
comprised of all cable and high-speed Internet access and digital telephony services, and the Media segment is
comprised of radio and television operations.
The principal financial information per business segment is presented in the table below:
Head Office
Cable Media and elimination Consolidated
Three months ended February 28,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 147,757 $ 138,389 $ 29,653 $ 28,222 $ (51) $ (45) $ 177,359 $ 166,566
Operating costs 88,189 83,092 32,545 29,334 (1,140) (476) 119,594 111,950
Operating income (loss) before
amortization
59,568
55,297 (2,892) (1,112) 1,089
431
57,765 54,616
Amortization 28,656 31,988 1,522 1,337 39 58 30,217 33,383
Operating income (loss) 30,912 23,309 (4,414) (2,449) 1,050 373 27,548 21,233
Financial expense 13,776 13,840 208 154 247 243 14,231 14,237
Impairment of goodwill and other
intangible assets
-
- - 52,531 -
-
-
52,531
Income taxes 6,936 3,856 (1,690) (4,227) 460 241 5,706 (130)
Net assets employed
(1) (2)
$ 1,675,906 $ 1,630,222 $ 77,504 $ 78,920 $ 7,451 $ 7,162 $ 1,760,861 $ 1,716,304
Total assets
(2)
1,795,167 1,750,832 126,000 116,333 8,158 8,178 1,929,325 1,875,343
Acquisition of fixed assets 35,696 26,809 729 674 107 - 36,532 27,483
(1) Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2) As at February 28, 2006 and 2005.
- 22 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
2. Segmented Information (continued)
Head Office
Cable Media and elimination Consolidated
Six months ended February 28,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 291,170 $ 274,155 $ 66,769 $ 63,912 $ (102) $ (90) $ 357,837 $ 337,977
Operating costs 174,300 165,664 67,212 60,190 (2,033) (1,421) 239,479 224,433
Operating income (loss) before
amortization
116,870
108,491 (443) 3,722 1,931
1,331
118,358 113,544
Amortization 56,933 64,232 3,089 2,649 78 118 60,100 66,999
Operating income (loss) 59,937 44,259 (3,532) 1,073 1,853 1,213 58,258 46,545
Financial expense 27,358 27,734 322 255 512 488 28,192 28,477
Impairment of goodwill an other
intangible assets
-
- -
52,531
-
-
-
52,531
Income taxes 13,381 7,085 (1,727) (3,331) 663 698 12,317 4,452
Net assets employed
(1) (2)
$ 1,675,906 $ 1,630,222 $ 77,504 $ 78,920 $ 7,451 $ 7,162 $ 1,760,861 $ 1,716,304
Total assets
(2)
1,795,167 1,750,832 126,000 116,333 8,158 8,178 1,929,325 1,875,343
Acquisition of fixed assets 65,709 48,383 1,044 1,342 107 50 66,860 49,775
(1) Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2) As at February 28. 2006 and 2005.
3. Amortization
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 24,661 $ 27,697 $ 48,837 $ 55,216
Deferred charges 5,556 5,686 11,263 11,783
$ 30,217 $ 33,383 $ 60,100 $ 66,999
- 23 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
4. Income taxes
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 1,815 $ 711 $ 3,099 $ 1,881
Future 3,891 (841) 9,218 2,571
$ 5,706 $ (130) $ 12,317 $ 4,452
The following table provides the reconciliation between statutory federal and provincial income taxes and the
consolidated income tax expense:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Income tax at combined income tax rate of 34.84 %
(34.15 % in 2005)
$
4,608
$
(15,482)
$
10,412
$
(11,769)
Loss or income subject to lower or higher tax rates 266 1,636 266 1,730
Decrease in income taxes as a result of increases in
substantially enacted tax rates
-
-
(91)
-
Large corporation tax 807 385 1 644 1,010
Income taxes arising from non-deductible impairment of
goodwill and broadcasting licenses
-
10,570
-
10,570
Variation of the valuation allowance - 2,454 - 2,454
Other 25 307 86 457
Income tax at effective income tax rate $ 5,706 $ (130) $ 12,317 $ 4,452
- 24 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
5. Earnings (loss) per share
The following table provides reconciliation between basic and diluted earnings (loss) per share:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Weighted average number of multiple voting and subordinate
voting shares outstanding
16,497,105
16,404,732
16,473,425
16,388,660
Effect of dilutive stock options
(1)
111,718 - 135,205 -
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
16,608,823
16,404,732
16,608,630
16,388,660
Earnings (loss) per share
Basic and diluted $ 0.16 $ (1.74) $ 0.44 $ (1.55)
(1) For the three and six month periods ended February 28, 2006, 36,443 and 40,143 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 three and six month periods ended
February 28, 2005, the effect of 134,769 and 141,014 stock options was not included in diluted loss per share, as the effect of their inclusion was antidilutive.
6. Restricted cash
Restricted cash represents a deposit in escrow of €15,000,000 intended for a potential acquisition within the
Company’s subsidiary, Cogeco Cable Inc.’s, business segment. The deposit is being returned with accumulated
interest thereon.
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
7. Long-term debt
Maturity Interest rate
February 28,
2006
August 31,
2005
(unaudited) (audited)
Parent company
Term Facility 2009
(1)
5.91 %
(2)
$ 22,000 $ 22,500
Obligations under capital leases 2010 6.49 – 6.61 154 55
Subsidiaries
Term Facility
(3)
2007 4.72
(2)
30,000 -
Senior Secured Debentures Series 1 2009 6.75 150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(4)
170,490 178,065
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 - 68,160 60,585
Obligations under capital leases 2010 5.87 – 8.36 4,485 3,831
Other - - 67 103
745,356 715,139
Less current portion 31,610 1,400
$ 713,746 $ 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 of February 28, 2006, including stamping fees.
(3) In January 2006, the Company’s subsidiary, Cogeco Cable Inc., amended its Term Facility so that the committed amount, which should have been reduced to $95,000,000 on January 31, 2006, is
maintained at its prior level of $270,000,000.
(4) Cross-currency swap agreements have resulted in an effective interest rate of 7.254% on the Canadian dollar equivalent of the U.S. denominated debt.
(5) The deferred credit represents the amount which would have been payable as at February 28, 2006, and August 31, 2005 under cross-currency swaps entered into by the 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 six month periods ended February 28, 2006 amounted to $13,442,000
and $26,651,000 ($13,354,000 and $26,703,000 in 2005).
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, issuable 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 shares, 1 vote per share.
February 28,
2006
August 31,
2005
(unaudited) (audited)
Issued
1,849,900 multiple voting shares $ 12 $ 12
14,688,356 subordinate voting shares (14,600,104 as at August 31, 2005) 117,429 116,155
$ 117,441 $ 116,167
During the period, subordinate voting shares transactions were as follows:
Six months ended Twelve months ended
February 28, 2006 August 31, 2005
(unaudited) (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
88,252
1,274
77,648
546
Balance at end 14,688,356 $ 117,429 14,600,104 $ 116,155
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. 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 first two quarters, no stock options were granted to employees by COGECO Inc.
However, the Company’s subsidiary, Cogeco Cable Inc., granted 126,059 stock options (140,766 in 2005) with an
exercise price ranging from $25.12 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 $203,000 and $366,000 ($121,000 and $219,000 in
2005) was recorded for the three and six month periods ended February 28, 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 six month
periods ended February 28, 2006 and 2005 would have been reduced (increased) to the following pro forma amounts:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
As reported $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Pro forma 2,671 (28,604) 7,256 (25,567)
Basic and diluted earnings per share
As reported $ 0.16 $ (1.74) $ 0.44 $ (1.55)
Pro forma 0.16 (1.74) 0.44 (1.56)
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the six month period
ended February 28, 2006 was $9.44 ($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 February 28, 2006, the Company had outstanding stock options providing for the subscription of 329,976
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 first two quarters, no stock options (77,000 in 2005) were granted by TQS Inc. A
compensation expense of $124,000 and $154,000 ($40,000 and $81,000 in 2005) was recorded for the three and six
month periods ended February 28, 2006 related to this plan.
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
9. Statements of cash flow
a) Changes in non-cash operating items
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ 3,276 $ 4,673 $ (8,940) $ (6,825)
Income tax receivable (493) (647) (986) (469)
Prepaid expenses (1,181) (316) (540) (562)
Broadcasting rights (536) (195) (7,794) (2,039)
Accounts payable and accrued liabilities 280 13,112 (42,278) (24,437)
Broadcasting rights payable 1,758 287 9,845 3,280
Income tax payable - - (299) -
Deferred and prepaid income (276) 67 1,907 3,593
Other - - - (72)
$ 2,828 $ 16,981 $ (49,085) $ (27,531)
b) Other information
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets acquisitions through capital leases $ 1,538 $- $ 1,538 $ -
Interest paid 11,614 11,717 27,988 27,965
Income taxes paid 2,308 1,358 4,384 2,350
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
10. Employees 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 financial statements. The total expenses related to these plans are as follows:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 706 $ 576 $ 1,824 $ 1,015
Defined contribution pension plan and collective registered
retirement savings plans
461
390
948
793
$ 1,167 $ 966 $ 2,772 $ 1,808
11. Comparative figures
Certain comparative figures have been reclassified in order to conform to the presentation adopted in the current
period.