COGECO INC.: SUBSTANTIAL GROWTH IN THE THIRD QUARTER FOR THE CABLE SECTOR AND SUSTAINED PROGRESS IN THE MEDIA SECTOR.
Press release
For immediate release
COGECO Inc.: substantial growth in the third quarter for the cable sector
and sustained progress in the media sector
Montréal, July 10, 2006 – Today, COGECO Inc. (TSX: CGO) announced its financial results for
the third quarter of fiscal 2006, ended May 31.
Sustained improvements
COGECO continues to generate sustained improvements in its major performance indicators.
Revenue is up 9.4%, operating income before amortization by 3.6% and net income by 11.4%.
Following increased demand for digital telephony, high-speed Internet (HSI) and digital video
services, the cable sector experienced substantial growth. In the media sector, TQS is well
prepared for the new television season and the radio stations are gaining market share in
audiences and revenue in all markets.
Cable Sector:
Continued internal growth
Cogeco Cable reported strong increases in its revenue-generating units
1
(RGU), adding more than
48,000 RGUs, compared to 6,400 for the same period last year, driving a revenue increase of
9.9%. Operating income before amortization has improved by 8.5% while net income jumped by
50% to stand at $12.4 million. The digital telephony service keeps attracting new clients having
snowball effect on all other services. “Our new digital telephony clients are discovering the
advantages of cable, most of them enjoying more than one of Cogeco Cable’s services”, said Mr.
Louis Audet, President and Chief Executive Officer of COGECO.
Growth by business acquisition
On June 2, Cogeco Cable entered into an agreement with Cable Satisfaction International Inc.
(CSII), Catalyst Fund Limited Partnership I (Catalyst) and Cabovisão – Televisão por Cabo S.A.
(Cabovisão), to purchase, at a cost of €464.9 million, all the shares of the second largest cable
operator in Portugal, an indirect wholly-owned subsidiary of CSII. This agreement and its execution
by the monitor and interim receiver RSM Richter Inc. on behalf of CSII was approved by the
Superior Court of Québec on July 4, 2006, thus fulfilling one of the conditions precedent to the sale
and purchase of the Cabovisão shares. Cogeco Cable is pleased with Cabovisão’s growth
potential and expects to make attractive additions to the services it already provides to its
customers. “This acquisition is consistent with Cogeco Cable’s strategy to pursue external growth
opportunities and Cabovisão is well positioned in the high-growth cable telecommunications
market in Portugal”, stated Mr. Audet.
1
Revenue-generating units represent the sum of basic service, HSI service, digital video service and digital telephony service customers.
- 2 -
Media Sector:
TQS: ready for the fall season
Television revenue remained relatively stable in the third quarter compared to the same period last
year. TQS generated good audience ratings for Loft Story II over portions of the second and third
quarters. “Building on this success, Loft Story III and other programming improvements should
impact positively our advertising sales for the next season”, declared Mr. Audet.
Radio: popularity on the rise
On the radio side, RYTHME FM maintained its first position in the Montreal French market. All of
its other stations are gaining in popularity in their respective markets.
2007 projections - Canada
Consolidated outlook
For fiscal 2007, COGECO expects to improve operating income before amortization by 8% to
11%, and consequently generate a net income of approximately $19 million. The expected free
cash flow should stand between $20 million and $25 million.
Cable Sector
For fiscal 2007, the cable subsidiary expects continued growth in HSI, digital video and digital
telephony services. Revenue from the Canadian operations should consequently improve by
between 10% and 12%. An operating margin of approximately 40% should be achieved despite
the launch of digital telephony in most of the cable subsidiary’s networks. Growth in revenue and
sustained cost control should help achieve an increase in operating income before amortization of
approximately 9%.
“For the future, we are confident that the number of Canadian customers will continue to grow,
thanks to our strong offering, which is in line with customer demand. As for Cabovisão, we are
dedicated to the successful integration of our newest and promising asset to ensure the creation of
value for Cogeco Cable’s shareholders”, declared Mr. Audet.
Media Sector
At TQS, the renewed management team has steadied the course with new programs, new hosts
and standard favourites. 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 May 31,
Nine months ended May 31,
($000s, except percentages and
per share data)
(unaudited)
(unaudited)
2006
2005
%
Change
2006
2005
%
Change
Revenue $ 189,718 $ 173,418 9.4 $ 547,555 $ 511,395 7.1
Operating income before
amortization
66,111 63,814 3.6 184,469 177,358 4.0
Net income (loss) 5,529 4,964 11.4 12,801 (20,443) ―
Cash flow from operations
(1)
52,093 48,699 7.0 140,579 134,164 4.8
Less:
Capital expenditures and
increase in deferred charges
38,463
27,057 42.2 112,822 83,288 35.5
Free cash flow
(1)
13,630 21,642 (37.0) 27,757 50,876 (45.4)
Per share data
Basic net income (loss) $ 0.33 $ 0.30 10.0 $ 0.78 $ (1.25) ―
(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 Annual Report.
Throughout this discussion, 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 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
and territories, 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 for the cable sector. Below are the third quarter achievements of the cable and media
sectors in furtherance of COGECO’s objectives.
Cable Sector
Diversification and improvement of products and services
• Digital video services:
o Addition of WWE 24/7 to Cogeco Cable’s digital video offer;
• Digital telephony service:
o The digital telephony service is now available to 50% of homes passed in Cogeco
Cable’s territories;
o Deployment of digital telephony service in Grimsby, Stoney Creek, Welland, Port
Colborne, Dundas, Milton, Georgetown, Ancaster Fort Erie, Pelham, Wallaceburg
Niagara Falls and Essex, Ontario, and in Shawinigan, Grand-Mère, Louiseville and
St-Georges-de-Beauce, Québec;
• High-speed Internet service:
o Cogeco Cable increased the download speed of its Standard HSI service to a
maximum of 7 Mbps and its combined upload and download bit cap for each HSI
service: from 30 Gb to 100 Gb for the Pro service, from 15 Gb to 60 Gb for the
Standard service and from 2 Gb to 10 Gb for the Lite service. In the last few weeks,
Cogeco Cable has completed the improvement of its Pro HSI service by increasing
its speed from up to 10 Mbps to up to 16 Mbps. As for the Standard HSI service, its
speed will be increased from up to 7 Mbps to up to 10 Mbps before the end of July
2006;
o Significant upgrade of the free security suite, which provides pop up blockers, anti-
spyware and protection with the introduction of F-Secure Pex 6 in all our territories.
Sustained corporate growth and diversification of clientele and territories
• Acquisition:
o On June 2, 2006, Cogeco Cable entered into an agreement with Cable Satisfaction
International Inc. (CSII), Catalyst Fund Limited Partnership I (Catalyst) and
Cabovisão-Televisão por Cabo, S.A. ("Cabovisão"), to purchase, at a cost of €464.9
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 final purchase price will be
determined following completion of a post-closing working capital adjustment.
Cogeco Cable is assuming a €20 million working capital deficiency. The transaction,
which was approved by the Superior Court of Québec on July 4, 2006, is still
subject to the fulfilment of certain conditions of closing, including the implementation
*
See “Customer statistics” of the cable sector section for detailed explanations.
- 5 -
of the plan of arrangement previously approved by the court in March 2004, as
amended.
Cogeco Cable will finance the acquisition of Cabovisão through an underwritten
credit facility of $900 million over five years committed by a major Canadian
Chartered Bank.
Media Sector
• During the second and third quarter, TQS aired “Loft Story II”, which had a positive impact
on TQS’s total viewership. TQS has announced that it will air “Loft Story III” in the fall 2006.
Increased programming commitments should sustain growth in viewership and advertising
revenue;
• RYTHME FM was confirmed, with the announcement of the last BBM survey, to be in top
position in the Montreal market and is gaining market share in its other stations across
Québec. Station 93
3
continues to gain new listeners within its target audience.
RGU growth
During the first nine months, the number of RGUs in the cable sector increased by 12.2%. The
cable subsidiary had anticipated RGU growth between 10% and 11% for all of fiscal 2006. Higher
than anticipated HSI, digital video and digital telephony customer growth has allowed Cogeco
Cable to exceed its objective in the first nine months of the fiscal year. Therefore, management
has revised its guidelines during the third quarter and now believes it will reach RGU growth
between 13% and 15% by August 31, 2006. Please consult “Fiscal 2006 and 2007 financial
guidelines” section for further details.
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% during the first nine months, COGECO
still expects the latter to remain relatively stable in fiscal 2006. Please consult “Fiscal 2006 and
2007 financial guidelines” section for further details.
Free cash flow
In the first nine months, COGECO generated free cash flow of $27.8 million. In light of stronger
than expected RGU growth in the first nine months of fiscal 2006, capital expenditures and
deferred charges in the cable sector are expected to surpass the $160 million guideline and reach
between $163 and $168 million. Therefore, COGECO’s free cash flow will be approximately
$15 million to $20 milion, which is more than the revised objective of $10 million to $15 million.
Please consult “Fiscal 2006 and 2007 financial guidelines” section for further details.
- 6 -
ACCOUNTING POLICIES AND ESTIMATES
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.
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 third quarter and first nine months of fiscal 2006, rose by $16.3 million, or 9.4%,
and by $36.2 million, or 7.1%, respectively, compared to the same periods last year. Cable
revenue, driven by an increased number of customers in digital video, HSI and digital telephony
services as well as rate increases, went up by $13.9 million, or 9.9%, in the third quarter and by
$30.9 million, or 7.5%, in the first nine months. Media revenue increased by $2.4 million, or 7.3%,
in the third quarter and by $5.3 million, or 5.4%, in the first nine months, due to higher radio
advertising revenue.
Operating income before amortization grew by 3.6% and 4.0% in the third quarter and first nine
months of fiscal 2006 respectively, compared to the same periods last year. The cable sector
contributed to an increase of $4.9 million and $13.3 million in the third quarter and first nine
months. During the same periods, the media sector had a negative impact of $2.2 million and
$6.3 million.
FIXED CHARGES
Quarters ended May 31, Nine months ended May 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005 %
Change
Amortization $ 30,658 $ 32,783 (6.5) $ 90,758 $ 99,782 (9.0)
Financial expense
$
14,120
$
14,441 (2.2)
$
42,312
$
42,918 (1.4)
Amortization amounted to $30.7 million and $90.8 million during the third quarter and first nine
months of fiscal 2006 compared to $32.8 million and $99.8 million for the same periods last year.
Amortization declined during these periods since many cable modems and digital terminals in the
cable sector were fully amortized.
- 7 -
Financial expense slightly decreased in the third quarter and the first nine months of fiscal 2006,
compared to the same periods last year. 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
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 $24.6 million. The impact of the impairment of goodwill
and other intangible assets on net income of the first nine months of fiscal 2005 was as follows:
($ 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 third quarter of fiscal 2006, income taxes stood at $8.5 million compared to $5.9 million
in the same period in fiscal 2005. For the first nine months of fiscal 2006, income taxes stood at
$20.8 million compared to $13.6 million excluding a non-cash income tax adjustment of
$3.3 million for the impairment of goodwill and other intangible assets of the television operations
for the same period last year. The income tax increases were mainly attributable to the cable
sector’s growth in operating income before amortization combined with a decline in fixed charges
as discussed before.
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% by January 1, 2008. These measures were considered to be substantially enacted
on June 6, 2006, and therefore, will reduce future income taxes by approximately $18 million for
the next quarter ending August 31, 2006.
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 third quarter and first nine months of fiscal 2006, the
non-controlling interest stood at $7.3 million and $17.6 million compared to $5.6 million and
negative $8.1 million, respectively, for the same periods last year. The non-controlling interest for
the first nine months of fiscal 2005 included an adjustment of $19.7 million for the television’s
impairment of goodwill and other intangible assets.
- 8 -
NET INCOME (LOSS)
Net income for the third quarter of fiscal 2006 amounted to $5.5 million, or $0.33 per share,
compared to $5 million, or $0.30 per share, for the same period last year. For the first nine months
of fiscal 2006, net income stood at $12.8 million, or $0.78 per share compared to a net loss of
$20.4 million, or $1.25 per share for the comparable period last year. Compared to same period
last year, net income increase in the first nine months of fiscal 2006 is attributable to the solid
performance of the cable sector and to the fact that the Company made a $29.6 million impairment
of goodwill and other intangible assets in the second quarter of fiscal 2005.
In the first nine months of fiscal 2006, net income excluding impairment of goodwill and other
intangible assets
*
grew from $9.2 million to $12.8 million compared to the same periods last year.
This increase is due to the cable sector’s net income growth.
CASH FLOW AND LIQUIDITY
Quarters ended May 31,
Nine months ended May 31,
($000s)
2006
2005
2006
2005
Operating Activities
Cash flow from operations $ 52,093 $ 48,699 $ 140,579 $ 134,164
Changes in non-cash operating items
(4,558)
1,260
(53,643) (26,271)
47,535 49,959 86,936 107,893
Investing Activities
(1)
$ (16,912) $ (25,459) $ (110,047) $ (81,643)
Financing Activities
(1)
$ (30,623) $ (24,500) $ 23,111 $ (26,250)
Net change in cash and cash equivalents $ ― $ ― $ ― $ ―
(1) Excludes assets acquired under capital leases.
During the third quarter of fiscal 2006, cash flow from operations reached $52.1 million, or 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 greater cash
outflow than for the same period last year, mainly as a result of relatively stable accounts
receivable compared to a decrease for the same period in fiscal 2005
During the first nine months of fiscal 2006, cash flow from operations reached $140.6 million, or
4.8% higher than for the same 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
greater cash outflow than in the prior year mainly as a result of a larger decrease in accounts
payable and accrued liabilities caused by increased capital expenditures incurred in late fiscal
2005
*
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.
- 9 -
In the third quarter, investing activities decrease by $8.5 million due to increases of $11.2 million in
capital expenditures and $0.6 million in deferred charges, offset by a decrease of $20.3 million in
restricted cash. For the first nine months, the rise in investing activities was due to increases of
$26.7 million in capital expenditures and $1.6 million in deferred charges.
The third quarter and first nine months increases in deferred charges are explained by the cable
sector’s higher reconnect costs attributable to the significant level of RGU increase, which includes
the digital telephony customer growth. During the third quarter, the $20.3 million decrease in
restricted cash was the result of a reimbursement of a deposit in escrow. This deposit of €15
million was intended for the business acquisition described in the “Corporate Strategies and
Objectives” section and was reimbursed with accumulated interest thereon.
During the third quarter and first nine months, the increase related to capital expenditures is mainly
due to the following factors of the cable sector:
¾ The increase in customer premise equipment in the third quarter of fiscal 2006 results
primarily from an increase in digital terminals, cable modems and by more home terminal
devices related to the digital telephony service. For the first nine months of fiscal 2006, the
increase in customer premise equipment results 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 customers.
¾ The growth in scalable infrastructure is 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 households with access to two-way service was also a factor and the
percentage of customers with access to two-way service rose from 88% as at May 31,
2005 to 92% as at May 31, 2006.
Free cash flow of $13.6 million and $27.8 million was generated during the third quarter and first
nine 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 third quarter and first nine
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 that support digital
telephony service and better-than-expected RGU growth in the cable sector.
During the third quarter, the level of Indebtedness decrease by $28.6 million mainly due to
generated free cash flow of $13.6 million, a decrease in restricted cash of $20.3 million partly
offset by a decrease in non-cash operating items of $4.6 million. For the same period last year,
Indebtedness declined by $23.2 million, essentially due to generated free cash flow of
$21.6 million and an increase of $1.3 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 third quarter of fiscal 2006 compared to a dividend of $0.0525 per share, totalling $0.9 million
for the third quarter of fiscal 2005.
- 10 -
During the first nine months of fiscal 2006, the level of Indebtedness increased by $27.7 million
mainly due to a decline in non-cash operating items of $53.6 million partly offset by generated free
cash flow of $27.8 million. For the same period last year, Indebtedness increased by $23.5 million
mainly due to generated free cash flow of $50.9 million partly offset by a decline in non-cash
operating items of $26.3 million Dividends totalling $3.1 million were paid during the first nine
months of fiscal 2006 compared to $2.6 million for the same period the year before.
As at May 31, 2006, the Company had a working capital deficiency of $92.1 million compared to
$112.3 million as at August 31, 2005. This improvement is mainly attributable to a reduction in the
level of accounts payable and accrued liabilities, as discussed in the “Financial Position” section,
partly 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 May 31, 2006, the cable subsidiary had utilized $18 million of its Term Facility and the
Company had drawn $20 million of its Term Facility. 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”, and “Indebtedness” items on the balance sheet. The $26.8 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 $43.8 million as
the use of working capital was tightly managed at fiscal 2005 year-end. Indebtedness increased by
$30.4 million, respectively, due to the factors previously discussed in the “Cash Flow and Liquidity”
section.
A description of COGECO’s share data as of June 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
14,688,356
12
117,429
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
329,976
329,976
In the normal course of business, COGECO 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.
- 11 -
DIVIDEND DECLARATION
At its July 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 August 3, 2006, to
shareholders of record on July 21, 2006.
CABLE SECTOR
CUSTOMER STATISTICS
Net additions (losses) % of Penetration
(1)
Quarters ended
May 31,
Nine months ended
May 31,
May 31,
May 31,
2006
2006 2005 2006 2005 2006 2005
RGUs
(2)
1,511,693 48,081 6,378 163,960 72,275
Basic service customers
832,492 (3,349) (3,523) 11,059 3,469
HSI service customers
(3)
330,479 12,378 5,731 52,831 35,265 43.1 37.6
Digital video service customers
(4)
316,801 23,635 4,170 69,597 33,541 38.8 30.0
Digital telephony service customers 31,921 15,417 - 30,473 - 7.6 -
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service, digital video service and digital telephony service customers.
(3) Customers subscribing only to Internet services totaled 60,786 as at May 31, 2006 compared to 59,292 as at February 28, 2006.
(4) In fiscal 2005, the number of digital video service customers was 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 7,800 customers as at May 31, 2005.
Except for basic service customers, all services generated higher growth in the third quarter
compared to the same period last year. The number of net additions of HSI service and digital
video service customers stood at 12,378 and 23,635 compared to 5,731 and 4,170 for the same
period last year. The number of net additions of HSI service customers was higher than the
comparable period last year, due to promotional activities, enhancement of the product offering
and the impact of the bundled offer of three services. The increase in the number of digital video
service customers stems from the growing interest for this technology and the growing demand for
the high-definition (HD) format among customers as well as attractive promotional offers and the
snowball effect of the telephony offering.
For the third quarter of fiscal 2006, basic service customer numbers declined by 3,349 compared
to a reduction of 3,523 for the same period last year. These losses are mainly attributable to
students leaving their campuses at the end of the school year. Cogeco Cable offers its services in
several cities with universities and colleges such as Kingston, Windsor, Hamilton, St. Catharines,
Peterborough, Trois-Rivières and Rimouski.
On May 31, 2006, 38,204 customers were subscribing to the digital telephony service including
pending orders compared to 18,783 customers including pending orders as at February 28, 2006
- 12 -
OPERATING RESULTS
Quarters ended May 31,
Nine months ended May 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue $ 153,956 $ 140,071 9.9 $ 445,126 $ 414,226 7.5
Operating costs 88,145 79,054 11.5 256,620 239,239 7.3
Management fees -
COGECO Inc.
2,567 2,707
(5.2) 8,392 8,186 2.5
Operating income before
amortization
63,244 58,310 8.5 180,114 166,801 8.0
Operating margin 41.1% 41.6% 40.5% 40.3%
Revenue
Revenue for the third quarter and first nine months of fiscal 2006 rose by $13.9 million or 9.9% and
by $30.9 million or 7.5% respectively, compared to the same periods last year. Revenue growth
during these periods is mainly attributable to an increased number of customers subscribing to
digital video, HSI and digital telephony services as mentioned in the “Customer Statistics” section,
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, an 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 third quarter and first nine months of fiscal 2006, operating costs, excluding management
fees payable to COGECO Inc., rose by $9.1 million or 11.5% and by $17.4 million or 7.3%,
respectively. Operating costs also include network fees. Network fees increased by 11.2% and
6.5% during the third quarter and first nine 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 third quarter and first nine months of fiscal 2006, operating income before amortization
rose by 8.5% and 8%, respectively, compared to the same periods last year as the increase in
revenue outpaced the rise in operating costs. Cogeco Cable’s operating margin decreased from
41.6% to 41.1% in the third quarter of fiscal 2006, due to the launch of telephony service. For the
first nine months of fiscal 2006, the operating margin stood at 40.5% compared to 40.3% for the
same period last year.
- 13 -
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$12.8 million at the end of the
third 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 offset by a variation in
deferred credit described in Note 8 of the third quarter interim financial statements. The $73.4
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
May 31,
Nine months ended
May 31,
($000s, except percentages)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 35,813 $ 33,392 7.3 $ 102,582 $ 97,304 5.4
Operating costs 33,203 28,627 16.0 100,415 88,817 13.1
Operating income before
amortization
2,610
4,765
(45.2)
2,167
8,487
(74.5)
Operating margin
7.3% 14.3% 2.1% 8.7%
Revenue
During the third quarter and first nine months of fiscal 2006, revenue increased by $2.4 million and
$5.3 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 stations have no longer been capitalized. Television revenue remained relatively
stable in the third quarter and first nine months compared to the same periods last year due to
TQS’s good audience ratings for Loft Story II in the second and third quarters. The advertising
market remains difficult for conventional television in the Francophone market.
Operating Income before Amortization
The operating income before amortization declined in the third quarter and first nine months of
fiscal 2006 by $2.2 million and $6.3 million respectively. For the third quarter and first nine months,
TQS’s operating income before amortization decreased as a result of greater investment in
television programming, combined with small revenue growth. During the third quarter and the first
nine months of fiscal 2006, radio’s operating income before amortization improved due to revenue
growth.
- 14 -
FISCAL 2006 AND 2007 FINANCIAL GUIDELINES
($ million, except customer data)
Preliminary Projections,
Fiscal 2007
Revised Projections
July 10, 2006
Revised Projections
April 10, 2005
Cable sector–
Financial Guidelines
Revenue 660 to 670 599 to 602 593 to 600
Operating income before amortization 264 to 267 242 to 245 236 to 240
Operating margin About 40% 40.5% About 40%
Financial expense 55 55 56
Amortization 128 117 116
Capital expenditures and deferred charges 180 163 to 168 160
Free cash flow 30 20 to 25 20 to 25
Customer Addition Guidelines
Basic service 3,000 to 6,000 3,000 to 6,000 3,000 to 6,000
HSI service 35,000 to 40,000 55,000 to 60,000 47,000 to 49,000
Digital video service 55,000 to 60,000 75,000 to 80,000 59,000 to 62,000
Digital telephony service 45,000 to 50,000 45,000 to 50,000 32,000 to 37,000
RGU 138,000 to 156,000 178,000 to 196,000 138,000 to 154,000
Media sector–
Financial Guidelines
Revenue
131 to 135 127 124 to 126
Operating income (loss) before amortization 1 to 3 (1) (2) to (3)
Amortization
7 6.5 7
Capital expenditures and deferred charges
7 3.5 5 to 6
Consolidated Financial Guidelines
Free Cash Flow
20 to 25 15 to 20 10 to 15
Operating income before amortization
265 to 270 244 Relatively stable
Net income
19 15 11
FISCAL 2006 FINANCIAL GUIDELINES
Cable Sector
Given the stronger–than-expected demand for digital video, HSI and digital telephony services
during the first nine months and various service enhancements offered recently, Cogeco Cable
has revised upward its 2006 guideline for digital video, HSI and digital telephony customer
additions. Subsequent to these adjustments, projected revenue and operating income before
amortization are being revised upward. The operating margin should also increase to about 40.5%
even if some additional network maintenance expenses are expected to occur during the last
quarter 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 guidelines from $160 million to between $163 million and $168 million as well as its
amortization guidelines from $116 million to $117 million. The cable subsidiary should generate
free cash flow of $20 million to $25 million, which remains unchanged from last quarter’s
projection, as a result of higher anticipated operating income before amortization offset by higher
capital expenditures and deferred charges.
- 15 -
Media Sector
Since economic and industry factors described in the 2005 annual MD&A remain unchanged,
management is maintaining its fiscal 2006 financial guidance.
Consolidated outlook
Based on the above-mentioned guidelines, net income of $15 million and free cash flow between
$15 million to $20 million should be generated.
FISCAL 2007 PRELIMINARY FINANCIAL OUTLOOK
Cable Sector
The fiscal 2007 financial guidelines exclude Cabovisão, which will be presented when the
transaction is completed and 2006 year-end results will be published. The increase of
approximately 10% to 12% in revenue should result mainly from expanded penetration of HSI
service in fiscal 2006 and 2007, and from rate increases implemented in Québec, in June 2006
and in Ontario, in August 2006; of at most $3 per customer and averaging $1 per basic service
customer. Improved penetration of digital video services and continued deployment of digital
telephony will also contribute to revenue increase. Cogeco Cable plans to expand its basic service
clientele through consistently effective marketing, competitive product offers and superior
customer service. As the penetration of HSI service and digital video services increase, the
demand for these products will likely slow down but should be offset by increased demand for
digital telephony services.
Cogeco Cable expects to achieve an operating margin of approximately 40%, despite the launch
of digital telephony in most of its networks. Growth in revenue and sustained cost control should
help achieve an increase in operating income before amortization of approximately 9%.
Cogeco Cable expects the amortization of capital assets and deferred charges to increase by
$11 million, mainly due to capital expenditures and deferred charges for RGU additions in fiscal
2006 and 2007. Management expects that cash flows generated by operations will finance capital
expenditures and deferred charges, expected to amount to $180 million. The cable subsidiary
expects to generate free cash flow in the order of $30 million, i.e. an increase of approximately
$5 to $10 million compared to the 2006 forecasts. An increase in free cash flow is expected
despite the continued deployment of digital telephony. Free cash flow that is generated should be
used primarily to reduce Indebtedness, thus improving the cable subsidiary’s leverage ratios.
Given the anticipated decrease in Indebtedness, financial expense will slightly decline.
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 video services and video on demand, $7
million related to customer premise equipments and $4 million related to support capital with
respect to upgrade of business information systems.
Media Sector
Revenue should grow by 5% to 7% compared to fiscal 2006. In fiscal 2007, revenue from the radio
should improve by 15% to 17%, while TQS revenue should increase by 2% to 3%.
- 16 -
Consolidated outlook
For fiscal 2007, COGECO expects to improve operating income before amortization by 8% to
11%. Free cash flow should generate between $20 million and $25 million and net income of
approximately $19 million should be earned as a result of growth in operating income before
amortization.
RISK FACTORS AND UNCERTAINTIES
There has been no significant change in the risk factors and uncertainties facing COGECO as
described in the Company’s 2005 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by COGECO throughout this MD&A. It
also provides reconciliations between these Non-GAAP measures and the most comparable
GAAP financial measures. These financial measures do not have standard definitions prescribed
by Canadian GAAP and may not be comparable with similar measures presented by other
companies. These measures include ‘cash flow from operations’, ‘free cash flow’ and ‘net income
excluding impairment of goodwill and other intangible assets’.
Cash flow from operations
Cash flow from operations is used by COGECO’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Company to isolate the cash flow from operating activities from the impact of
cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure ‘free cash flow’. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended May 31, Nine months ended May 31,
2006
2005
2006
2005
Cash flow from operating activities $ 47,535 $ 49,959 $ 86,936 $ 107,893
Changes in non-cash operating items 4,558 (1,260) 53,643 26,271
Cash flow from operations $ 52,093 $ 48,699 $ 140,579 $ 134,164
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 May 31, Nine months ended May 31,
2006
2005
2006
2005
Cash flow from operations $ 52,093 $ 48,699 $ 140,579 $ 134,164
Acquisition of fixed assets (33,035) (21,854) (98,357) (71,629)
Increase in deferred charges (4,229) (3,643) (11,728) (10,099)
Assets acquired under capital leases – as
per Note 10 b) (1,199) (1,560) (2,737) (1,560)
Free cash flow $ 13,630 $ 21,642 $ 27,757 $ 50,876
- 17 -
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 May 31,
Nine months ended May 31,
2006
2005
2006
2005
Net income (loss) $
5,529 $ 4,964 $ 12,801 $ (20,443)
Impairment of goodwill and other intangible
assets
(1)
― ― ― 29,610
Net income excluding impairment of
goodwill and other intangible assets
$
5,529
$
4,964
$
12,801
$
9,167
(1) For more details, please consult the Impairment of goodwill and other intangible assets section.
ADDITIONAL INFORMATION
This MD&A was prepared on July 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 1,512,000 revenue-generating units to approximately 1,469,000
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). The subordinate
voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (CCA).
– 30 –
- 18 -
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 July 10
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: 1 800 500-0177
International Access Number: +1 719 457-2679
Confirmation Code: 5307043
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
July 17 by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code: 5307043
- 19 -
Supplementary Quarterly Financial Information
Quarters ended May 31, February 28, November 30, August 31,
2006 2005 2006 2005 2005 2004 2005 2004
($000, except percentages and
per share data)
Revenue $ 189,718 $ 173,418 $ 177,359 $ 166,566 $ 180,478 $ 171,411 $ 164,210 $ 154,652
Operating income before
amortization
66,111
63,814
57,765
54,616
60,593
58,928
56,485
55,862
Operating margin 34.8% 36.8% 32.6% 32.8% 33.6% 34.4% 34.4% 36.1%
Amortization 30,658 32,783 30,217 33,383 29,883 33,616 30,769 33,758
Financial expense 14,120 14,441 14,231 14,237 13,961 14,240 14,366 14,305
Impairment losses ― ― ― 52,531 ― ― ― ―
Income taxes 8,461 5,869 5,706 (130) 6,611 4,582 5,052 1,472
Non-controlling interest 7,293 5,603 4,842 (16,940) 5,455 3,256 5,422 4,077
Net income (loss) 5,529 4,964 2,679 (28,524) 4,593 3,117 630 2,117
Cash flow from operations 52,093 48,699 41,644 40,962 46,842 44,503 43,215 43,010
Net income (loss) per share
Basic and diluted $ 0.33 $ 0.30 $ 0.16 $ (1.74) $ 0.28 $ 0.19 $ 0.04 $ 0.13
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. - 20 -
Cable Statistics
May 31, August 31,
2006 2005
Homes Passe
d
Ontario 997 881 986 401
Québec 471 128 462 332
1 469 009 1 448 733
Revenue Generating Units
Ontario 1 081 998 968 749
Québec 429 695 378 984
1 511 693 1 347 733
Basic Service Customer
s
Ontario 588 397 581 631
Québec 244 095 239 802
832 492 821 433
Discretionnary Service Customer
s
Ontario 466 947 461 038
Québec 190 049 183 320
656 996 644 358
Pay TV Service Customer
s
Ontario 85 739 80 817
Québec 37 927 35 407
123 666 116 224
High-Speed Internet Service Customers
Ontario 262 888 226 133
Québec 67 591 51 515
330 479 277 648
Digital Video Customers
Ontario 209 871 159 734
Québec 106 930 87 470
316 801 247 204
Digital Telephony
Ontario 20 842 1 251
Québec 11 079 197
31 921 1 448
- 21 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited) (unaudited)
(unaudited) (unaudited)
Revenue $ 189,718
$ 173,418
$ 547,555
$ 511,395
Operating costs
123,607
109,604
363,086
334,037
Operating income before amortization 66,111
63,814
184,469
177,358
Amortization (note 4)
30,658
32,783
90,758
99,782
Operating income 35,453
31,031
93,711
77,576
Financial expense (note 8)
14,120
14,441
42,312
42,918
Income before income taxes and following items 21,333
16,590
51,399
34,658
Impairment of goodwill and other intangible assets
-
-
-
52,531
Income taxes (note 5)
8,461
5,869
20,778
10,321
Non-controlling interest
7,293
5,603
17,590
(8,081)
Loss on dilution resulting from shares issued by a
subsidiary
-
16
-
108
Share in the loss of a general partnership
50
138
230
222
Net income (loss) $ 5,529
$ 4,964
$ 12,801
$ (20,443)
Earnings (loss) per share (note 6)
Basic
$0.33
$0.30
$0.78
$ (1.25)
Diluted
0.33
0.30
0.77
(1.25)
- 22 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine months ended May 31,
(In thousands of dollars)
2006
2005
(unaudited)
(unaudited)
Balance at beginning $ 185,762
$ 209,188
Net income (loss)
12,801
(20,443)
Dividends on multiple voting shares
(347)
(291)
Dividends on subordinate voting shares
(2,749)
(2,294)
Balance at end $ 195,467
$ 186,160
- 23 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
May 31,
2006
August 31,
2005
(unaudited)
(audited)
Assets
Current
Accounts receivable
$ 65,160
$ 55,529
Income tax receivable
245
-
Prepaid expenses
6,132
4,704
Broadcasting rights
15,776
14,168
87,313
74,401
Broadcasting rights
19,746
16,076
Investments
539
539
Fixed assets
753,080
726,270
Deferred charges
36,117
41,797
Broadcasting licenses and customer base
1,017,892
1,017,892
$ 1,914,687
$ 1,876,975
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness (note 7)
$ 14,056
$ 605
Accounts payable and accrued liabilities
108,152
151,985
Broadcasting rights payable
10,483
7,337
Income tax liabilities
-
299
Deferred and prepaid income
26,880
25,034
Current portion of long-term debt (note 8)
19,886
1,400
179,457
186,660
Long-term debt (note 8)
712,222
713,739
Share in the partner’s deficiency of a general partnership
878
648
Deferred and prepaid income
10,582
10,522
Broadcasting rights payable
6,131
4,112
Pension plans liabilities and accrued employee benefits
11,750
10,628
Future income tax liabilities
225,043
208,434
Non-controlling interest
454,483
439,643
1,600,546
1,574,386
Shareholders' equity
Capital stock (note 9)
117,441
116,167
Retained earnings
195,467
185,762
Contributed surplus - stock-based compensation
1,233
660
314,141
302,589
$ 1,914,687
$ 1,876,975
- 24 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income (loss)
$ 5,529
$ 4,964
$ 12,801
$ (20,443)
Items not affecting cash and cash equivalents
Amortization (note 4)
30,658
32,783
90,758
99,782
Amortization of deferred financing costs
243
242
724
861
Impairment of goodwill and other intangible assets
-
-
-
52,531
Future income taxes (note 5)
7,391
4,065
16,609
6,636
Non-controlling interest
7,293
5,603
17,590
(8,081)
Other
979
1,042
2,097
2,878
52,093
48,699
140,579
134,164
Changes in non-cash operating items (note 10a))
(4,558)
1,260
(53,643)
(26,271)
47,535
49,959
86,936
107,893
Cash flow from investing activities
Acquisition of fixed assets (note 10b))
(33,035)
(21,854)
(98,357)
(71,629)
Increase in deferred charges
(4,229)
(3,643)
(11,728)
(10,099)
Decrease in restricted cash
20,322
-
-
-
Other
30
38
38
85
(16,912)
(25,459)
(110,047)
(81,643)
Cash flow from financing activities
Increase (decrease) in bank indebtedness
(14,170)
(1,331)
13,451
11,020
Increase in long-term debt
-
-
18,000
58
Repayment of long-term debt
(14,447)
(21,901)
(3,768)
(34,555)
Issue of subordinate voting shares
-
-
1,274
546
Dividends on multiple voting shares
(116)
(97)
(347)
(291)
Dividends on subordinate voting shares
(918)
(767)
(2,749)
(2,294)
Issue of subordinate voting shares by a subsidiary to
non-controlling interest
-
82
166
722
Dividends paid by a subsidiary to non-controlling
interest
(972)
(486)
(2,916)
(1,456)
(30,623)
(24,500)
23,111
(26,250)
Net change in cash and cash equivalents -
-
-
-
Cash and cash equivalents at beginning
-
-
-
-
Cash and cash equivalents at end $ -
$-
$ -
$-
See supplemental cash flow information in note 10.
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 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 May 31, 2006 and August 31, 2005 as well as its results of
operations and its cash flow for the three and nine month periods ended May 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 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 nine month periods ended May 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. 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 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 May 31,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 153,956 $ 140,071 $ 35,813 $ 33,392 $ (51) $ (45) $ 189,718 $ 173,418
Operating costs 90,712 81,761 33,203 28,627 (308) (784) 123,607 109,604
Operating income before
amortization
63,244
58,310 2,610 4,765 257
739
66,111 63,814
Amortization 29,048 31,396 1,562 1,328 48 59 30,658 32,783
Operating income 34,196 26,914 1,048 3,437 209 680 35,453 31,031
Financial expense 13,634 13,954 200 140 286 347 14,120 14,441
Income taxes 8,191 4,715 (11) 799 281 355 8,461 5,869
Net assets employed
(1) (2)
$ 1,668,234 $ 1,625,255 $ 77,861 $ 78,640 $ 6,364 $ 5,720 $ 1,752,459 $ 1,709,615
Total assets
(2)
1,783,583 1,739,159 123,459 116,381 7,645 7,151 1,914,687 1,862,691
Acquisition of fixed assets 33,780 22,463 454 951 - - 34,234 23,414
(1) Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2) As at May 31, 2006 and 2005.
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
3. Segmented Information (continued)
Head Office
Cable Media and elimination Consolidated
Nine months ended May 31,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 445,126 $ 414,226 $ 102,582 $ 97,304 $ (153) $ (135) $ 547,555 $ 511,395
Operating costs 265,012 247,425 100,415 88,817 (2,341) (2,205) 363,086 334,037
Operating income before
amortization
180,114
166,801 2,167 8,487 2,188
2,070
184,469 177,358
Amortization 85,981 95,628 4,651 3,977 126 177 90,758 99,782
Operating income (loss) 94,133 71,173 (2,484) 4,510 2,062 1,893 93,711 77,576
Financial expense 40,992 41,688 522 395 798 835 42,312 42,918
Impairment of goodwill an other
intangible assets
-
-
-
52,531
-
-
-
52,531
Income taxes 21,572 11,800 (1,738) (2,532) 944 1,053 20,778 10,321
Net assets employed
(1) (2)
$ 1,668,234 $ 1,625,255 $ 77,861 $ 78,640 $ 6,364 $ 5,720 $ 1,752,459 $ 1,709,615
Total assets
(2)
1,783,583 1,739,159 123,459 116,381 7,645 7,151 1,914,687 1,862,691
Acquisition of fixed assets 99,489 70,846 1,498 2,293 107 50 101,094 73,189
(1) Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2) As at May 31, 2006 and 2005.
4. Amortization
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 25,237 $ 27,038 $ 74,074 $ 82,254
Deferred charges 5,421 5,745 16,684 17,528
$ 30,658 $ 32,783 $ 90,758 $ 99,782
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
5. Income taxes
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 1,070 $ 1,804 $ 4,169 $ 3,685
Future 7,391 4,065 16,609 6,636
$ 8,461 $ 5,869 $ 20,778 $ 10,321
The following table provides the reconciliation between statutory federal and provincial income taxes and the
consolidated income tax expense:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Income tax at combined income tax rate of 34.84 %
(34.15 % in 2005)
$
7,415
$
5,665
$
17,827
$
(6,104)
Loss or income subject to lower or higher tax rates 75 (9) 341 1,721
Decrease in income taxes as a result of increases in
substantially enacted tax rates
-
-
(91)
-
Large corporation tax 807 397 2,451 1,407
Income taxes arising from non-deductible impairment of
goodwill and broadcasting licenses
-
-
-
10,570
Variation of the valuation allowance - - -
2,454
Other 164 (184) 250 273
Income tax at effective income tax rate $ 8,461 $ 5,869 $ 20,778 $ 10,321
On May 2, 2006, the Federal government announced its intention to reduce the corporate income tax rate
progressively from 21% to 19% in January 2010 and to eliminate the corporate surtax of 1.12% by January 1, 2008.
These measures were considered substantially enacted on June 6, 2006, and therefore will reduce future income
taxes by approximately $18 million for the next three month period ending August 31, 2006.
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
6. Earnings (loss) per share
The following table provides reconciliation between basic and diluted earnings (loss) per share:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) $ 5,529 $ 4,964 $ 12,801 $ (20,443)
Weighted average number of multiple voting and subordinate
voting shares outstanding
16,538,256
16,450,004
16,495,273
16,409,333
Effect of dilutive stock options
(1)
131,538 145,668 133,983 -
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
16,669,794
16,595,672
16,629,256
16,409,333
Earnings (loss) per share
Basic $ 0.33 $ 0.30 $ 0.78 $ (1.25)
Diluted 0.33 0.30 0.77 (1.25)
(1) For the three and nine month periods ended May 31, 2006, 36,443 and 38,910 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 nine month period ended May 31,
2005, the effect of 142,565 stock options was not included in diluted loss per share, as the effect of their inclusion was antidilutive.
7. Bank indebtedness
In April 2006, the operating line of credit available to the indirect subsidiary of the Company, TQS Inc., has been
increased form $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.
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. Long-term debt
Maturity Interest rate
May 31,
2006
August 31,
2005
(unaudited) (audited)
Parent company
Term Facility 2009
(1)
6.44 %
(2)
$ 20,000 $ 22,500
Obligations under capital leases 2010 6.49 – 6.61 145 55
Subsidiaries
Term Facility
(3)
2007 4.97
(2)
18,000 -
Senior Secured Debentures Series 1 2009 6.75 150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(4)
165,225 178,065
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 - 73,425 60,585
Obligations under capital leases 2010 6.42 – 8.36 5,259 3,831
Other - - 54 103
732,108 715,139
Less current portion 19,886 1,400
$ 712,222 $ 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 May 31, 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, was
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 May 31, 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 nine month periods ended May 31, 2006 amounted to $13,477,000 and
$40,128,000 ($13,447,000 and $40,150,000 in 2005).
- 30 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
9. 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 share, 1 vote per share.
May 31,
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 share transactions were as follows:
Nine months ended Twelve months ended
May 31, 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
- 31 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
9. 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 nine months, 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 $207,000 and $573,000 ($133,000 and $352,000
in 2005) was recorded for the three and nine month periods ended May 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 nine month periods
ended May 31, 2006 and 2005 would have been reduced (increased) to the following pro forma amounts:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
As reported $ 5,529 $ 4,964 $ 12,801 $ (20,443)
Pro forma 5,521 4,884 12,777 (20,683)
Basic earnings (loss) per share
As reported $ 0.33 $ 0.30 $ 0.78 $ (1.25)
Pro forma 0.33 0.30 0.77 (1.26)
Diluted earnings (loss) per share
As reported $ 0.33 $ 0.30 $ 0.77 $ (1.25)
Pro forma 0.33 0.29 0.77 (1.26)
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the nine month period
ended May 31, 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 May 31, 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 nine month period, no stock options (77,000 in 2005) were granted by TQS Inc.
No compensation expense ($40,000 in 2005) was recorded during the three month period ended May 31, 2006, and a
compensation expense of $154,000 ($121,000 in 2005) was recorded for the nine month period ended May 31, 2006
related to this plan.
- 32 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
10. Statements of cash flow
a) Changes in non-cash operating items
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ (691) $ 2,663 $ (9,631) $ (4,162)
Income tax receivable 741 773 (245) 304
Prepaid expenses (888) 496 (1,428) (66)
Broadcasting rights 2,516 2,488 (5,278) 449
Accounts payable and accrued liabilities (1,555) (4,200) (43,833) (28,637)
Broadcasting rights payable (4,680) (1,361) 5,165 1,919
Income tax liabilities - 1,149 (299) 1,149
Deferred and prepaid income (1) (402) 1,906 3,191
Other - (346) - (418)
$ (4,558) $ 1,260 $ (53,643) $ (26,271)
b) Other information
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed asset acquisitions through capital leases $ 1,199 $ 1,560 $ 2,737 $ 1,560
Interest paid 16,199 16,151 44,187 44,116
Income taxes paid (refunded) 329 (118) 4,713 2,232
- 33 -
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
11. 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 financial statements. The total expenses related to these plans are as follows:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 727 $ 567 $ 2,551 $ 1,582
Defined contribution pension plan and collective registered
retirement savings plans
464
412
1,412
1,205
$ 1,191 $ 979 $ 3,963 $ 2,787
12. Subsequent event
Acquisition of Cabovisão – Televisão 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 (“Catalyst”) and Cabovisão – Televisão por Cabo, S.A.
(“Cabovisão”), to purchase, at a cost of €464.9 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 final purchase price will be determined following completion of a post-closing
working capital adjustment. The Company is assuming a €20 million working capital deficiency. The transaction,
which was approved by the Superior Court of Quebec on July 4, 2006, is still subject to the fulfilment of certain
conditions of closing, including the implementation of the plan of arrangement previously approved by the court in
March 2004, as amended. The Company will finance the acquisition of Cabovisão through an underwritten credit
facility of $900 million over five years committed by a major Canadian Chartered Bank.
13. Comparative figures
Certain comparative figures have been reclassified in order to conform to the presentation adopted in the current
period.