Cogeco Communications

Press release details

CUSTOMER GROWTH DRIVES COGECO CABLE’S FINANCIAL RESULTS

PRESS RELEASE
For immediate release
Customer growth drives Cogeco Cable’s financial results
Montréal, October 16, 2006 Today, Cogeco Cable Inc. (TSX: CCA) announced its financial results
for the fourth quarter and fiscal year ended August 31, 2006.
Growth by business acquisition
With the acquisition of Cabovisão – Televisão por Cabo, S.A., (Cabovisão) as a contributing factor,
the number of revenue-generating units
1
(RGUs) jumped from about 1,348,000 at the beginning of
the fiscal year to approximately 2,185,000 at the end of August 2006. "The arrival of Cabovisão in our
Corporation, with about 629,000 RGUs, is very promising," said Mr. Louis Audet, President and CEO
of Cogeco Cable. “We are in a very good position to sustain growth, in Canada with more than
208,000 RGUs added to our base as a result of the positive impact of our Digital Telephony service
and, with the well-trained and enthusiastic people in Portugal, who are working to grow our position in
that market.”
Customer growth drives progress
During the fourth quarter, the Canadian operations reported strong RGU increases, adding more than
44,000 compared to about 10,000 for the same period last year and growing revenue by 12.7% while
operating income before amortization improved by 11.8%. On a consolidated basis, revenue
increased by 24.8%, operating income before amortization by 20% while net income more than
tripled to reach $34 million.
2007 projections
For the Canadian operations, management is maintaining its 2007 preliminary projections of last July.
In Portugal, we expect to add more than 75,000 RGUs, essentially equally divided between basic
cable, High Speed Internet (HSI), and telephony. Revenue generated from the Portuguese
operations should exceed $215 million and operating income before amortization should reach
approximately $70 million, an operating margin of 33%. Consequently, Cogeco Cable’s operating
margin should be approximately 38%.
“For fiscal 2007, all Cogeco Cable employees, here and abroad will aim to increase customer
satisfaction through improved customer service and enhanced product and service offerings. We will
maintain tight controls over the Corporation’s costs and we will work to continue to improve our
business processes. With regards to our new Portuguese subsidiary, the Cabovisão integration plan
is well advanced and we believe Cabovisão will contribute to the creation of value for Cogeco Cable’s
shareholders as early as this fiscal year”, concluded Mr. Audet.
1
Revenue-generating units represent the sum of basic service, Digital Television service, HSI service and Telephony service customers.
- 2 -
FINANCIAL HIGHLIGHTS
Fourth Quarters ended Augus t 31,
Years ended August 31,
($000s, except percentages and
(unaudited) (audited)
per share data)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 174,875 $
140,178 24.8 $
620,001 $ 554,404 11.8
Operating income before
amortization
72,864
60,720
20.0
252,978
227,521
11.2
Net income 33,987 11,036 208.0 65,556 28,721 128.3
Cash flow from operations
(1)
56,714 46,509 21.9 194,739 170,938 13.9
Less:
Capital expenditures and
increase in deferred charges
53,279
46,259 15.2 164,446 125,671 30.9
Free cash flow
(1)
3,435 250 —- 30,293 45,267 (33.1)
Per share data
Basic net income $ 0.85 $
0.28 203.6 $
1.64 $ 0.72 127.8
(1) Cash flow from operations and free cash flow 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
“Uncertainty and main risk factors” of the Corporation’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 qua rter.
This analysis should be read in conjunction with the Corporation’s financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Corporation’s 2005 Annual
Report. Throughout this discussion, all amounts are in Canadian dollars unle s s otherwise indicated.
- 3 -
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
Cogeco Cable’s objectives are to improve profitability and create shareholder value. The strategies
for reaching those objectives are constant corporate growth through the diversification and
improvement of products and services as well as clientele and territories, effective management of
capital and tight cost control. The Corporation measures its performance with regard to these
objectives with revenue growth, RGU
1
growth and free cash flow
2
. Below are the recent
achievements in furtherance of Cogeco Cable’s objectives.
Sustained corporate growth and diversification of clientele and territories
On August 1, 2006, the Corporation completed the acquisition of Cabovisão, the second
largest cable operator in Portugal in terms of the number of basic service cable customers
served. On August 31, 2006, Cabovisão had 826,369 homes passed, 629,041 RGUs and
269,694 basic service customers, offering analog television, HSI and telephony services. In
addition, only one-month of financial results is incorporated in those of the fourth quarter and
fiscal year 2006.
Diversification and improvement of products and services
Digital Television services:
o Launch of five new high definition (HD) channels, and two new standard definition
channels in most Ontario territories;
Digital Telephony service:
o Available to 66% of homes passed in Cogeco Cable’s territories, as at August 31,
2006;
o Since June 1, 2006, deployment of Digital Telephony service in Niagara Falls,
Pelham, Wallaceburg, Essex, Cornwall, Gananoque, North Bay, Peterborough,
Sarnia, Beamsville, Bright’s Grove, Corunna, Lindsay in Ontario, and Salaberry-de-
Valleyfield, Magog, St-Sauveur, Piedmont, Ste-Adèle, St-Jovite, Mont-Tremblant,
Alma, Roberval and Ste-Agathe in Québec.
HSI service:
o Download speed increase:
Standard HSI service went from a maximum speed of 7 Mbps to up to
10 Mbps.
Pro HSI service went from a maximum speed of 10 Mbps to up to 16 Mbps.
RGU Growth
During the year, the number of RGUs for the Canadian operations increased by 15.4%. In the third
quarter of 2006, the Corporation had anticipated RGU growth between 13% and 15% for all of fiscal
year 2006. Higher than anticipated HSI, Digital Television, Digital Telephony and basic customer
growth allowed Cogeco Cable to exceed the fiscal year objectives. With the acquisition of Cabovisão
on August 1, 2006, the Corporation added 629,041 RGUs for a total of 2,184,977.
Revenue Growth
During the year, revenue for the Canadian operations increased by 8.8% mainly due to stronger RGU
growth. In its third quarter 2006 revised guidelines, the Corporation had expected to achieve revenue
growth between 8% and 9%. The Portuguese subsidiary generated revenue of $16.9 million during
the fourth quarter and fiscal year 2006.
1
See « Customer statistics” section for detailed explanations
2 See “ Non-GAAP financial measures “ section for explanations
- 4 -
Free Cash Flow
For the fiscal year 2006, Cogeco Cable generated a higher than anticipated free cash flow of
$30.3 million of which its Canadian operations generated $29.3 million. Capital expenditures and
deferred charges amounted to $164.4 million of which $160.2 million was intended to support
Canadian operations and the remainder was earmarked for the Portuguese operations.
CUSTOMER STATISTICS
Canadian operations
Net additions (losses) % of Penetration
(1)
Fourth Quarters
Fiscal Years
August 31,
August 31,
2006 2006 2005 2006 2005 2006 2005
RGUs
(2)
1,555,936 44,243 9,559 208,203 81,834
Basic service customers
833,177 685 (5,891) 11,744 (2,422)
HSI service customers
(3)
343,080 12,601 2,775 65,432 38,040 44.3 37.7
Digital Television service customers 327,364 10,563 11,227 80,160 44,768 40.0 31.7
Digital Telephony service customers 52,315 20,394 1,448 50,867 1,448 10.4 0.2
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service, Digital Television service and Digital Telephony service customers.
(3) Customers subscribing only to Internet services totalled 61,208 as at August 31, 2006 compared to 55,057 as at August 31, 2005.
All services generated higher growth in the fourth quarter compared to the same period last year,
except for the Digital Television service. During fiscal year 2006, the growth in Digital Telephony is
mostly attributable to the launch of this service in new markets. Coverage of homes passed has now
reached 66% compared to 21% last year. For the first time in many years, the net additions of basic
service customers was positive in the fourth quarter and amounted to 685 compared to a loss of
5,891 for the same period last year. The number of net additions of HSI service stood at 12,601
compared to 2,775 for the same period last year. The growth of HSI and basic service customers
compared to the same period last year is mostly due to promotional activities, enhancement of the
product offering and the impact of the bundled offer of Television, HSI and Digital Telephony services
(triple play).
The net additions of Digital Television service customers stood at 10,563 compared to 11,227 for the
same period last year. For the fourth quarter of fiscal 2006, the increase in the number of customers
is essentially similar to the fourth quarter of fiscal 2005. Customers continue to show strong interest
in the high definition (HD) technology
Portuguese Operations
Net additions (losses) % of Penetration
(1)
Fourth Quarters
Fiscal Years
August 31,
August 31,
2006
2006
(3)
2005
2006
(3)
2005 2006 2005
RGUs
(2)
629,041 3,141
_____
3,141
_____ _____ _____
Basic service customers
269,694 1,117
_____
1,117
_____ _____ _____
HSI service customers
136,278 1,165
_____
1,165
_____ 50.5 _____
Telephony service customers 223,069 859 _____ 859 _____ 82.7 _____
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service and Telephony service customers.
(3) Customer additions are for the month of August 2006.
- 5 -
For the one-month operation period as a subsidiary, all services generated customer growth. Basic
service customers grew by 1,117; HSI by 1,165 customers and telephony by 859 customers.
ACCOUNTING POLICIES AND ESTIMATES
Foreign Currency Translation
Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at
the balance sheet date for assets and liabilities, and using the average exchange rates during the
year for revenues and expenses. Adjustments arising from this translation are deferred and recorded
in the foreign currency translation adjustment account and are included in income only when a
reduction in the investment in these foreign subsidiaries is realized.
Other assets and liabilities denominated in foreign currencies are translated in Canadian dollars at
the prevailing exchange rates at the balance sheet date for monetary items and at the transaction
date for non-monetary items. Revenues and expenses are translated at average rates prevailing
during the period except for transactions being hedged which were translated using the terms of the
hedges. Amounts payable or receivable on cross-currency swaps, all of which are used to hedge
foreign currency debt obligations are recorded concurrently with the unrealized gains and losses on
the obligations being hedged. Other foreign exchange gains and losses are included in net income,
except for unrealized foreign exchange gains and losses on long-term debt denominated in foreign
currencies, designated as a hedge of a net investment in a self-sustaining foreign subsidiary, which
are included in the foreign currency translation adjustment account.
Non-Monetary Transactions
In June 2005, the Canadian Institute of Chartered Accountants issued Handbook Section 3831, Non-
Monetary Transactions, which revised and replaced the current standards on non-monetary
transactions. Under the new section, the criterion for measuring non-monetary transactions at fair
value is modified to focus on the assessment of commercial substance instead of the culmination of
the earnings process. A non-monetary transaction has commercial substance when the entity’s future
cash flows are expected to change significantly as a result of the transaction. These standards are
effective for non-monetary transactions initiated in periods beginning on or after January 1, 2006.
During the third quarter, the Corporation 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 Cable’s accounting policies and estimates
since August 31, 2005. A description of these policies and estimates can be found in the
Corporation’s 2005 annual MD&A.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 39.2% of the Corporation’s equity
shares, representing 86.6% of the Corporation’s voting shares. Under a management agreement, the
Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue for
certain executive, administrative, legal, regulatory, strategic and financial planning, and additional
services. In 1997, management fees were capped at $7 million per year, subject to annual upward
adjustments based on increases in the Consumer Price Index in Canada. Accordingly, for fiscal year
2006, management fees have been set at a maximum of $8.4 million. Cogeco Cable granted 31,743
stock options to COGECO Inc.’s employees during fiscal year 2006, compared to 38,397 in the 2005
fiscal year. The Corporation did not grant any stock options to COGECO Inc.’s employees during the
fourth quarter of fiscal years 2006 and 2005. Further details regarding the management agreement
and stock options granted to COGECO Inc.’s employees are provided in the Corporation’s 2005
- 6 -
annual MD&A. There were no other material related party transactions during fiscal years 2006 and
2005.
OPERATING RESULTS
Quarters ended August 31,
Years ended August 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue $ 174,875 $
140,178 24.8 $
620,001 $ 554,404 11.8
Operating costs 102,011 79,458 28.4 358,631 318,704 12.5
Management fees -
COGECO Inc.
- -
-
8,392 8,179 2.6
Operating income before
amortization
72,864 60,720 20.0 252,978 227,521 11.2
Operating margin 41.7 %
43.3 %
40.8 % 41.0 %
Revenue
Consolidated revenue for the fourth quarter and fiscal year 2006 increased by $34.7 million and
$65.6 million, respectively.
For the fourth quarter and fiscal year 2006, revenue for the Canadian operations rose by
$17.8 million and $48.7 million or 12.7% and 8.8 % respectively compared to the same periods of
fiscal 2005. This growth is explained mainly by an increase in the number of HSI, Digital Telephony
and basic service customers as mentioned in the “Customer Statistics” section, together with rate
increases implemented in June and August of 2005. Monthly rate increases of at most $3 per
customer and averaging $0.50 per basic service customer took effect on June 15, 2005 in Ontario
and on August 1, 2005 in Québec. The monthly rate for certain bundled services has increased by
$1 in Ontario, and other limited rate increases for selective tier services were implemented in
Québec. Furthermore, an August 2005 reduction in digital terminal rental rates was more than offset
by a greater number of customers renting digital terminals. In addition, monthly rate increases of up
to $3 per customer, averaging $2 per basic service customer, took effect on June 15, 2006 in
Ontario, and in August 1, 2006 in Québec. The Portuguese subsidiary’s revenue amounted to
$16.9 million for the fourth quarter and for fiscal year 2006.
Operating Costs
Consolidated operating costs for the fourth quarter and the fiscal year 2006 increased by
$22.6 million and $39.9 million, respectively.
For the fourth quarter and fiscal year 2006, Canadian operations’ operating costs including network
fees but excluding management fees payable to COGECO Inc. rose by $10.7 million or 13.4%, and
by $28 million or 8.8%, respectively. During the fourth quarter and fiscal year 2006, network fees
increased by 18.8% and 9.3% respectively, compared to the same periods last year. Network fees
increase was mainly attributable to the introduction of Digital Telephony service, the wholesale rate
increase for APTN as mandated by the CRTC and RGU growth. These fees were partly offset by the
decline of IP transport costs even with the growth in the number of HSI customers. The increase in
other operating costs was related to servicing additional RGUs, including Digital Telephony. For the
fourth quarter and fiscal year 2006, Cabovisão’s operating costs amounted to $11.9 million.
- 7 -
Operating Income Before Amortization
Consolidated operating income before amortization for the fourth quarter and fiscal year 2006
increased by $ 12.1 million and $25.5 million, respectively. Cabovisão’s operating income before
amortization for the fourth quarter and fiscal year 2006 amounted to $5.0 million.
For the fourth quarter and fiscal year 2006, operating income before amortization for the Canadian
operations rose by 11.8% and 9.0% respectively, compared to the same periods last year as the
increase in revenue outpaced the rise in operating costs. Cogeco Cable’s operating margin for the
Canadian operations decreased slightly from 43.3% to 43% in the fourth quarter of fiscal year 2006,
as a result of the launch of the Digital Telephony service. For fiscal year 2006, the operating margin
increased slightly to 41.1% compared to 41%. The Portuguese operations generated an operating
margin of 29.5% for the fourth quarter and fiscal year 2006. As a result, Cogeco Cable’s fourth
quarter 2006 operating margin declined to 41.7% from 43.3% for the same period last year and in
fiscal year 2006 to 40.8% from 41% in fiscal year 2005.
FIXED CHARGES
Quarters ended August 31, Years ended August 31,
($000s, except
percentages)
2006 2005 %
Change
2006
2005 %
Change
Amortization $ 34,801 $
29,460 18.1 $
120,782 $ 125,088 (3.4)
Financial expense 16,374 14,004 16.9 57,366 $ 55,692 3.0
Amortization for the Canadian operations amounted to $30.4 million for the fourth quarter of fiscal
year 2006 compared to $29.5 million for the same period last year. Amortization increased during the
fourth quarter of fiscal year 2006 due to the higher level of capital expenditures arising from the
demand for customer premise equipment, scalable infrastructure, upgrade/rebuild, support capital
and deferred charges. Amortization for the one-month operation of the Portuguese operations
amounted to $4.4 million.
Amortization for the Corporation amounted to $120.8 million for fiscal year 2006 compared to
$125.1 million for the same period last year. In fiscal year 2006, amortization declined since many
cable modems and digital terminals were fully amortized.
During the fourth quarter and fiscal year 2006, financial expense increased compared to the same
periods last year. This is due to the higher level of Indebtedness (defined as bank indebtedness and
long-term debt) required to finance the acquisition of the Portuguese subsidiary Cabovisão.
INCOME TAXES
For the fourth quarter of fiscal year 2006, income taxes represented a recovery of $12.3 million
compared to an expense of $6.2 million in 2005 despite operating income growth. The income tax
decrease was mainly attributable to a change in the Canadian federal enacted income tax rate for the
Canadian operations. On May 2, 2006, the Federal government announced its intention to reduce the
corporate income tax rate progressively from 21% to 19% effective in January 2010 and to eliminate
the corporate surtax of 1.12% on January 1, 2008. These measures were considered substantially
enacted on June 6, 2006, and as a result an adjustment of $20 million was recorded in the fourth
- 8 -
quarter of fiscal year 2006 to reduce future income taxes. Income taxes for fiscal year 2006
amounted to $9.3 million compared to $18 million for the same period last year. The Portuguese
operations had no material impact on the income tax expense for the period.
NET INCOME
Net income for fourth quarter of fiscal year 2006 amounted to $34 million, or $0.85 per share,
compared to $11 million, or $0.28 per share, for the same period last year. Excluding the effect of the
income tax recovery of $20 million, net income would have stood at $14 million for the quarter or
$0.35 per share. For fiscal year 2006, net income amounted to $65.6 million, or $1.64 per share,
$45.6 million or $1.14 respectively excluding the impact of the income tax recovery, compared to
$28.7 million, or $0.72 per share for the same period in fiscal 2005. Net income has increased in
these periods due to the growth in operating income before amortization. The Portuguese subsidiary
had no significant impact on the net income.
CASH FLOW AND LIQUIDITY
Quarters ended August 31,
Years ended August 31,
($000s)
2006
2005
2006 2005
Operating Activities
Cash flow from operations $
56,714
$
46,509 $
194,739 $ 170,938
Changes in non-cash operating items 50,495
46,096 1,051 23,657
$
107,209
$
92,605 $
195,790 $ 194,595
Investing Activities
(1)
$
(630,523)
$
(45,895)
$
(739,022) $ (123,703)
Financing Activities
(1)
$
595,543
$
(46,649)
$
615,400 $ (70,831)
Net change in cash and cash equivalents
$
72,229
$
61 $
72,168
$
61
(1) Excludes assets acquired under capital leases.
During the fourth quarter of fiscal year 2006, cash flow from operations reached $56.7 million, 21.9%
higher than the comparable period last year, primarily due to the increase in operating income before
amortization. Changes in non-cash operating items generated greater cash inflows than the same
period last year, mainly as a result of an increase in accounts payable and accrued liabilities resulting
from an increase in capital expenditures.
During fiscal year 2006, cash flow from operations reached $194.7 million or 13.9% higher than the
same period last year, primarily due to the increase in operating income before amortization.
Changes in non-cash operating items generated lower cash inflows compared to last year mainly as
a result of lower increases in accounts payable and deferred and prepaid income.
On June 2, 2006, the Corporation entered into an agreement with Cable Satisfaction International
Inc. (“CSII”), Catalyst Fund Limited Partnership I and Cabovisão to purchase, for a total consideration
of €465.7 million, all the shares of the second largest cable operator in Portugal, an indirect wholly-
owned subsidiary of CSII. The price included the purchase of senior debt and reimbursement of
certain other Cabovisão liabilities. The acquisition was completed on August 1, 2006. The final
purchase price will be determined following the completion of a post-closing working capital
adjustment. The Corporation is assuming a €20 million working capital deficiency.
- 9 -
The acquisition was accounted for using the purchase method. The results of Cabovisão have been
consolidated as of the acquisition date.
The preliminary allocation of the purchase price of the acquisition is as follows:
(amounts are in thousands of dollars)
Consideration
Paid
Estimated share purchase price $304,188
Secured lenders debt and certain specified Cabovisão liabilities 274,761
Acquisition costs 4,193
583,142
Amounts outstanding
Preliminary working capital adjustment 2,432
585,574
Net assets acquired
Cash and cash equivalents 5,711
Restricted cash 489
Accounts receivable 16,570
Prepaid expenses 1,324
Fixed assets 287,652
Accounts payable and accrued liabilities assumed (65,282)
Other specified Cabovisão liabilities assumed (91,914)
154,550
Excess of consideration over net assets acquired $431,024
Preliminary allocation of excess of consideration over net assets acquired
Preliminary goodwill $431,024
Other investing activities, including capital expenditures segmented according to the National Cable
Television Association (NCTA) standard reporting categories, are as follows:
Quarters ended August 31,
Years ended August 31,
($000s)
2006
2005
2006
2005
Customer Premise Equipment
(1)
$ 16,011 $
12,901 $
59,441 $ 44,526
Scalable Infrastructure
10,195
10,397
25,298
19,363
Line Extensions
3,756
3,574
11,205
10,416
Upgrade / Rebuild
11,221
13,158
39,709
34,096
Support Capital
3,167
1,413
8,186
3,888
Total Capital Expenditures
(2)
$
44,350
$
41,443
$
143,839
$
112,289
Deferred charges and others
9,010
4,816
20,650
13,338
Total other investing activities
$
53,360
$
46,259
$
164,489
$
125,627
(1) Includes mainly new and replacement drops as well as home terminal devices.
(2) Includes capital leases, which are excluded from the statements of cash flow.
- 10 -
During the fourth quarter and fiscal year 2006, capital expenditures increased compared to last year
mainly as a result of the following factors:
¾ The increase in customer premise equipment for the fourth quarter of fiscal year 2006
resulted primarily from greater demand for HSI and Digital Telephony services. For fiscal year
2006, the increase in customer premise equipment resulted primarily from a rise in the
number of digital terminals rented to customers, a greater ratio of digital terminals per digital
home, and the increase in the number of Digital Telephony and HSI customers.
¾ For fiscal year 2006, the growth in scalable infrastructure was mainly attributable to the
support of the Digital Telephony rollout.
¾ For fiscal year 2006, 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 the two-way service was also a factor
and the percentage of customers with access to the two-way service rose from 89% as at
August 31, 2005 to 93% as at August 31, 2006.
Capital expenditures by the Portuguese operations amounted to $4.2 million during the fourth quarter
and fiscal year 2006.
The fourth quarter and fiscal year 2006 increases of deferred charges are explained by higher
reconnect costs attributable to the significant level of RGU increase.
Free cash flow for the fourth quarter of fiscal year 2006 recorded a surplus of $3.4 million compared
to $0.3 million the year before. For fiscal year 2006, free cash flow amounted to $30.3 million
compared to $45.3 million last year. The fourth quarter free cash flow increase over the same period
last year is due to growth in operating income before amortization, partly offset by a higher level of
capital expenditures and deferred charges generated by better-than-projected RGU growth and
support the Digital Telephony service roll-out.
For fiscal year 2006, free cash flow decrease over fiscal 2005, mainly as a result of increased capital
expenditures and deferred charges generated by overall RGU growth, including improved service
penetration as well as the launch of the Digital Telephony service.
During the fourth quarter, the level of Indebtedness increased by $607.2 million due to the Cabovisão
acquisition, the increase in cash and cash equivalents of $71.5 million and to the fees related to the
new Term Facility of $900,000,000, partly offset by an increase in non-cash operating items of $50.5
million. For the same period last year, Indebtedness declined by $45.1 million mainly due to non-cash
operating items of $46.1 million. In addition, a dividend of $0.04 per share for subordinate and
multiple voting shares, totalling $1.6 million, was paid during the fourth quarter of fiscal years 2006
and 2005.
In fiscal year 2006, the level of Indebtedness grew by $631.7 million due to the acquisition of
Cabovisão completed in the fourth quarter, the increase and cash and cash equivalents of
$71.5 million and to the fees related to the new Term Facility of $900,000,000, partly offset by
generated free cash flow of $30.3 million. For the same period last year, Indebtedness declined by
$67.6 million essentially due to generated free cash flow of $45.3 million and an increase in non-cash
operating items of $23.7 million. Dividends totalling $6.4 million were paid during fiscal year 2006
compared to $4 million the year before.
As at August 31, 2006, Cogeco Cable had a working capital deficiency of $315 million compared to
$121.5 million as at August 31, 2005. The greater deficiency is mainly attributable to the increase in
the current portion of long-term debt as the Corporation’s $125 million Second Secured Debentures
- 11 -
Series A matures in less than a year and the Cabovisão working capital deficiency of $93.2 million at
the end of fiscal year 2006. Cogeco Cable maintains a working capital deficiency due to a low level of
accounts receivable since the majority of the Corporation’s customers pay before their services are
rendered, unlike accounts payable and accrued liabilities, which are paid after products or services
are rendered. In addition, the Corporation generally uses cash and cash equivalents to reduce
Indebtedness.
As at August 31, 2006, the Corporation had used $623.3 million of its Term Facility. On July 28,
2006, the Term Facility and the operating line of credit of the Corporation were restructured by an
amended and restated credit agreement for credit facilities totalling $900,000,000. The Term Facility
is composed of four tranches: a first tranche, a revolving term facility for an amount of $700,000,000
available in Canadian, U.S. or euro currencies; a second tranche, a swingline of $25,000,000
available in Canadian or U.S. currencies; a third tranche of $150,000,000 fully drawn, and a fourth
tranche of 17,358,700 Euros fully drawn. The Term Facility is repayable on July 28, 2011, except for
the third tranche of $150,000,000 which is repayable as follows: $15,000,000 on July 28, 2008,
$22,500,000 on July 28, 2009, $37,500,000 on July 28, 2010 and the balance on July 28, 2011.
Earlier repayments can be made without penalty. The Term Facility requires commitment fees, and
interest rates are based, on bankers’ acceptance, LIBOR, EURIBOR, bank prime rate loan or U.S.
base rate loan plus stamping fees. The Term Facility is secured by a first fixed and floating charge on
the assets of the Corporation and certain of its subsidiaries except for permitted encumbrances,
including purchased money obligations, existing funded obligations and charges granted by any
subsidiary prior to the date when it becomes a subsidiary subject to a maximum amount.
FINANCIAL POSITION
As at August 31, 2006, the Corporation balance sheet included the assets and liabilities of the
recently acquired subsidiary, Cabovisão. Please refer to the ‘’Cash Flow and Liquidity’’ section for
details.
The $43.5 million rise in fixed assets for the Canadian operations was mainly related to increased
capital expenditures. Deferred charges increased by $9.1 million mostly due to fees related to the
new financing and RGUs growth and Indebtedness increased by $624.5 million, due to the factors
previously discussed in the “Cash Flow and Liquidity” section.
A description of Cogeco Cable’s share data as of September 30, 2006 is presented in the table
below:
Number of
shares/options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
15,691,100
24,308,112
98,346
532,112
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
715,571
433,855
In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the
form of long-term debt, operating and capital leases and guarantees. Except for the matters related
to the acquisition of Cabovisão and the new financing, Cogeco Cable’s obligations, discussed in the
2005 annual MD&A, have not materially changed since August 31, 2005.
- 12 -
DIVIDEND DECLARATION
At its October 13, 2006 meeting, the Board of Directors of Cogeco Cable declared a quarterly
dividend of $0.04 per share for subordinate and multiple voting shares, payable on November 10,
2006, to shareholders of record on October 27, 2006.
FOREIGN EXCHANGE MANAGEMENT
Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and
principal payments on its US$150 million Senior Secured Notes. These agreements have the effect
of converting the US interest coupon rate of 6.83% per annum to an average Canadian dollar xed
interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt
has been xed at CDN$1.5910. Amounts due under the US$150 million Senior Secured Notes Series
A decreased by CDN$12.3 million at the end of of fiscal year 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 9 of the fourth quarter interim
financial statements. The $72.9 million deferred credit represents the difference between the quarter-
end exchange rate and the exchange rate on the cross-currency swap agreements, which determine
the liability for interest and principal payments on the Senior Secured Notes Series A.
FISCAL 2007 FINANCIAL GUIDELINES
($ million, except customer data)
Revised Projections,
October 16, 2006
Fiscal 2007
Preliminary
Projections,
Fiscal 2007
Financial Guidelines
Revenue 880 to 885 660 to 670
Operating income before amortization 335 to 338 264 to 267
Operating margin About 38% About 40%
Financial expense 85 55
Amortization 182 128
Net income 45 53
Capital expenditures and deferred charges 225 to 230 180
Free cash flow 20 to 25 25 to 30
Customer Addition Guidelines
Basic service 25,000 to 30,000 3,000 to 6,000
HSI service 55,000 to 60,000 35,000 to 40,000
Digital Television service 55,000 to 60,000 55,000 to 60,000
Telephony service 67,000 to 72,000 45,000 to 50,000
RGU 202,000 to 222,000 138,000 to 156,000
The preliminary financial guidelines for fiscal 2007 exclude Cabovisão. In its revised projections,
management has maintained its preliminary financial guidelines for the Canadian operations and
added those of Cabovisão.
Canadian Operations
The revenue increase of approximately 10% to 12% should result mainly from expanded penetration
of HSI and Digital Telephony services as well as the full-year impact of the 2006 RGU additions. In
addition, rate increases of up to $3 per customer in Quebec and Ontario, thus averaging $2 per basic
service customer as well as improved penetration of Digital Television services will also contribute to
the revenue increase. Cogeco Cable plans to expand its basic service clientele through effective
marketing, competitive product offering and superior customer service. As the penetration of HSI
and Digital Television services increase, the demand for these products will likely slow down but
- 13 -
should be offset by increased demand for Digital Telephony service. As a result, the Canadian
operations operating income before amortization should increase by 6% to 8% to reach $264 million
to $267 million, for an operating margin of about 40%. Amortization of capital assets and deferred
charges are expected to increase by $11 million, as a result of capital expenditures and deferred
charges that will be incurred for the RGU growth of fiscal 2007 and the full-year impact of the 2006
RGU growth. Compared to fiscal year 2006, the rise in capital expenditures and deferred charges will
result primarily from an increase of approximately $6 million associated with the scalable
infrastructure related to the head end equipment to support HSI, Digital Television services and video
on demand (VOD), $7 million related to customer premise equipment and $4 million related to
support capital for the upgrade of business information systems.
Portuguese Operations
RGUs should increase by approximately 75,000 essentially equally divided between basic cable, HSI
and telephony customers. As a result, revenue should reach $215 million to $220 million, using a
conversion rate of $1.40 per euro, while operating income before amortization should amount to
between $69 million to $71 million for an operating margin of approximately 33%. Capital
expenditures to support the projected revenue growth including $4.4 million for the launch of the
Digital Television service should reach $45 million to $50 million, or approximately 22% of projected
revenue. Amortization of capital assets and deferred charges should amount to $54 million.
Consolidated Outlook
The revenue increase of approximately 41% to 42% should result primarily from the full-year impact
of Cabovisão operations and from the growth of between 202,000 to 222,000 RGUs. Cogeco Cable
expects to achieve an operating income before amortization of approximately $335 million to
$338 million generating an operating margin of about 38%.
Capital expenditures and deferred charges are expected to be at around $225 million to $230 million
due to the inclusion of Cabovisão’s operations and to RGU growth. Amortization should amount to
$182 million. Financial expense should increase by $30 million to reach $85 million as a result of the
additional indebtedness to finance the Cabovisão acquisition.
Management expects that cash flows generated by operations will finance capital expenditures and
deferred charges. The Corporation expects to generate free cash flow in the order of $20 million to
$25 million due to the expected launch of the Digital Television service in Portugal. Free cash flow
that is generated should be used primarily to reduce Indebtedness, thus improving the Corporation’s
leverage ratios. Net income of approximately $45 million should be achieved as a result of growth in
operating income before amortization exceeding the increase in fixed charges.
RISK FACTORS AND UNCERTAINTIES
This section outlines general as well as more specific risks faced by Cogeco Cable and its
subsidiaries that could significantly affect the financial condition, operating results or business of the
Corporation. It does not purport to cover all contingencies, or to describe all possible factors that
might have an influence on the Corporation or its activities at any point in time. Furthermore, the ri sks
and uncertainties outlined in this section may or may not materialize in the end, may evolve
differently than expected, or may have different consequences than those that are being currently
anticipated.
Cogeco Cable applies an on-going risk management process that includes a quarterly assessment of
risks for the Corporation and its subsidiaries, under the oversight of the Audit Committee. As part of
this process, the Corporation endeavours to identify risks that are liable to have a major impact on
the Corporation’s financial situation, revenue or activities, and to mitigate such risks proactively as
- 14 -
may be reasonable and appropriate under the circumstances. This section reflects current views on
uncertainties and main risk factors considered as a part of this process.
Risks Pertaining to Markets and Competition
Broadband telecommunications markets in Canada and Portugal are very dynamic and highly
competitive. They involve intense rivalry between a variety of terrestrial wireline and wireless, as well
as satellite, service providers over a widening suite of broadband services that include fixed and
mobile voice communications, Internet access, data communications, audio and video content
delivery, electronic programming guides and navigation, security and other related or incidental
services. While cable broadband telecommunications providers have entered into the voice and data
communications markets traditionally dominated by incumbent telephone companies, the telephone
companies are increasingly involved in audio and video content delivery, as part of a global
phenomenon known as convergence. A number of new competitors have also entered various
telecommunications markets through the use of the Internet and access to the facilities of telephone
and cable telecommunications companies.
In this converged environment, competition increasingly unfolds over bundles of services offered at
attractive package rates, as competitors strive to meet all the communications needs of residential
and business customers and thus obtain maximum share of their overall communications budget.
Rivalry extends over the composition of service bundles, bundle prices and perceived value,
promotional or introductory offers, term of commitment by the customer, terminal devices and
customer service. The substantial cost of broadband facilities and broadband customer acquisition,
combined with the significant annual growth rates of revenue generating units achieved by
competitors generally tend to make outright price wars on individual services and service bundles
less appealing as a competitive strategy. As markets mature and penetration gains for high speed
Internet access, digital video and digital telephony services abate, retail pricing strategies may
become more aggressive, with resulting downward pressure on operating margins of both individual
services and service bundles.
Cogeco Cable provides “double-play” and “triple-play” service bundles in its various geographic
markets, with various combinations of voice, Internet and video distribution services being offered at
attractive bundle prices. “Quadruple-play” service bundles that include mobile communications have
appeared in these markets, but so far they have had limited effect in the marketplace. Cogeco Cable
continues to focus at this time on its existing lines of service with a view to capturing the remaining
growth opportunities for HSI, Digital Television and Digital Telephony services in its footprint, making
the most efficient use of its own hybrid fibre-coaxial (HFC) plant. Mobile telephone operators are now
offering audio and video content distribution directly to their mobile telephone customers, but this new
form of content distribution has so far had no measurable impact on the use of wireline and satellite
content distribution. As markets evolve and mobility becomes a more cost-effective substitute to
wireline communications, Cogeco Cable and its subsidiaries may need to add mobility components to
its service bundles, through suitable mobile virtual network arrangements with existing mobile
operators.
In Canada, Cogeco Cable faces competition in its service areas mainly from two national direct-to-
home satellite distribution services, Star Choice and Bell ExpressVu (the latter controlled by BCE
Inc., the largest and most widely integrated Canadian telecommunications company), and from
incumbent telephone companies Telus, Bell Canada (controlled by BCE Inc.) and Bell Nordiq (also
controlled by BCE Inc.). Star Choice and Bell ExpressVu both offer a wide range of competitive audio
and video services on a fully digital basis. Telus, Bell Canada and Bell Nordiq all offer a wide range
of business and residential Internet access, voice and data telecommunications services. Rogers,
Telus and Bell Canada respectively operate mobile telecommunications services in Ontario and
Quebec. In addition, Telus now offers audio and video distribution services in the Lower St. Lawrence
area in direct competition with Cogeco Cable. Telus and Bell Canada have recently announced that
they will become income trusts. However, Cogeco Cable and Telus cooperate in other parts of
- 15 -
Cogeco Cable’s footprint to offer Cogeco Cable’s Digital Telephony service. Bell Canada offers a
new digital telephone service in Ontario and Québec and is expected to launch some time in 2007 a
new digital video distribution service over its wireline network, starting with larger urban centres in
Ontario and Québec, some of which are included in Cogeco Cable’s cable network footprint. Cogeco
Cable also competes with other telecommunications service providers, including Vonage, Primus and
Rogers Home Phone (formerly known as Sprint), and with alternative service providers who use
resale or third-party access arrangements in effect. Although spectrum has been allocated for
broadband wireless distribution alternatives for quite some time, this form of wireless competition has
been slow to develop in Cogeco Cable’s footprint. It may however become a more significant
competitive factor in coming years.
In Portugal, Cogeco Cable’s subsidiary Cabovisão faces competition in its service areas mainly from
incumbent telecommunications carrier Portugal Telecom, SGPS, S.A. (PT) and its subsidiaries, from
diversified Portuguese conglomerate Sonae, SGPS, S.A. (Sonae) and its subsidiaries, and from
telecommunications operator ONI, whose main shareholder is Energias do Portugal (EDP), the
incumbent electricity service provider in Portugal. In addition to the national telephone network
operator PT Communicações, PT owns TV Cabo, the largest cable broadband operator in Portugal,
which also offers a direct-to-home satellite television distribution service to the Portuguese market.
Sonae owns and operates the Clix and Novis services, which provide voice, data, and high speed
Internet services respectively to the residential and business markets. PT and Sonae, provide mobile
telecommunications services in Portugal, through their respective subsidiaries TMN and OPTIMUS,
as well as Vodaphone. Other competitors include AR Telecom (formerly known as Jazztel), Tele 2
and Redvo Telecom, a recently launched broadband microwave distribution service using WiMax
technology. Until recently, Cabovisão has been the only provider of full “triple-play” service bundles
in its footprint, but Clix has recently launched a digital video distribution service over telephone lines,
and its competitive “triple-play” service bundles are expected to extend progressively to
approximately 60% of Cabovisão’s footprint. TV Cabo has started offering telephone services on
Session Initiation Protocol (SIP) as well as a digital video service, and is thus also in a position to
offer competitive “triple-play” service bundles to approximately 60% of Cabovisão’s footprint.
Cabovisão’s video distribution services are analog only, and do not include true video-on-demand at
this time, but Cabovisão is actively considering the opportunity and timing for the roll-out of its own
digital services, as its HFC plant has the capacity to accommodate digital services in addition to all its
existing analog services.
The broadband telecommunications competitive landscape in Portugal differs from that prevailing in
Canada mainly in the following respects: the density of urban dwelling units within the Corporation’s
footprint in Portugal is approximately double that of its footprint in Canada, there is overlapping
competitive cable plant over approximately 60% of Cabovisão’s footprint and this competitive cable
plant is presently controlled by the incumbent telephone company, but there is only one Portuguese
direct-to-home satellite competitor, and direct-to-home satellite service penetration is very limited in
urban areas.
The level of piracy of video signals and the actual penetration of illicit reception of video distribution
services in households within the Corporation’s service areas may also have a significant effect on
the Corporation’s business and the competitiveness of its service bundles.
Technological Risks
The evolution of telecommunications technologies is very rapid, fuelled by a highly competitive global
market for digital content, consumer electronics and broadband products and services. The
Corporation monitors the development of technologies used for the transmission, distribution,
reception and storage of data and their deployment by various existing or potential competitors in the
broadband telecommunications markets.
- 16 -
There are now several terrestrial and satellite transmission technologies available to deliver a range
of electronic communications services to the home with varying degrees of flexibility and efficiency,
and they compete with cable broadband telecommunications. While the broadband over power line
(BPL) alternative has made little headway to date, the competitive threat posed by other alternatives
such as 3G and Wi-Max broadband wireless technologies, advanced digital subscriber line
technologies such as VDSL+, and the deployment of fibre to the premises (FTTP) or close to the
premises (FTTN) by incumbent telephone companies is growing with each passing year.
On the other hand, cable telecommunications also continue to benefit from rapid improvements,
particularly in the areas of modulation, digital compression, fractioning of optoelectronic links,
multiplexing, HD distribution and switched video distribution. Management of the Corporation remains
of the view that broadband wireline distribution over fibre and coaxial cable will continue to be an
efficient, reliable, economical and competitive platform for the distribution of a full range of electronic
communications products and services for the foreseeable future. The competitiveness of the cable
broadband telecommunications platform will however continue to require additional capital
investment on a timely basis in an increasingly competitive and uncertain market environment.
The growth in penetration of broadband connections of all types, the rapid increase in transmission
speeds offered by competitors in the market, and the emergence of the more powerful MPEG-4 video
standard promote the increased distribution and consumption of video content directly over the
Internet. Video content, which is bandwidth-intensive, already accounts for over 50% of total peer-to-
peer data traffic on the Internet. This may lead eventually to fragmentation of the retail market for
existing analog and digital video distribution services provided by the Corporation, and gradual
disintermediation as between video content suppliers and the Corporation’s customers. In this
context, revenue and margins derived from the Corporation’s high speed Internet access services
may not entirely compensate for the loss of revenue or margin derived from the Corporation’s video
distribution services in the future. Alternative voice and data communications services are
proliferating as well over the Internet, with the resulting risk that fragmentation and disintermediation
may also occur in the future with respect to the Corporation’s digital telephone service.
Electronic communications increasingly rely on advanced security technology and devices to ensure
conditional access and service integrity. Security technology is provided worldwide by a small pool of
global suppliers on a proprietary basis. Like other providers of electronic communications, the
Corporation depends on the effectiveness of security technology for many of its services and the
ability of security technology providers to offer cost-effective and timely solutions as, if and when
existing levels of security are compromised.
Regulatory Risks
In Canada, broadband telecommunications facilities and services are subject to regulatory
requirements depending mainly on the type of facilities involved, the incumbent status of service
providers and their relative market power, the technology used and whether the activities are
categorized as telecommunications or broadcasting. Canadian cable broadband telecommunications
facilities and services are subject to various requirements mainly under federal legislation governing
broadcasting, radiocommunication, telecommunications, copyright, and privacy, and under provincial
legislation governing consumer protection and access to certain property and power utilities support
structures. Licences are still required for the operation of larger (Class 1 and 2) cable systems, while
smaller (Class 3) cable systems are now mostly licence-exempt. Various licence and licence
exemption conditions continue to apply in Canada. Canadian cable operators are also subject to
Canadian ownership and control requirements.
A recently published report by the Telecommunications Policy Review Panel (TPRP) contains a
broad set of recommendations that include a timely transition to deregulation of all
telecommunications services, the creation of a specialized telecommunications competition tribunal,
a review of the Telecommunications Act (Canada), and the removal of ownership restrictions for
- 17 -
telecommunications carriers, subject to certain conditions. The report also considers that the
traditional separation of broadcasting distribution and telecommunications activities for regulatory
purposes is no longer appropriate in a converged market environment. The federal government is
expected to table a new bill on telecommunications in the near future. The federal government has
also requested that the CRTC report back by the end of 2006 and provide answers to a broad range
of questions on the future of the Canadian broadcasting system, which includes the distribution of
broadcasting services.
While this overall policy review process is unfolding, two key telecommunications decisions of the
CRTC concerning respectively the regulatory status of voice-over-IP (VOIP) local access telephone
services of incumbent telephone companies and forbearance from regulation of local access
telecommunications services still regulated by the CRTC have been challenged by incumbent
telephone companies. The CRTC confirmed on September 1, 2006 its decision to continue regulating
VOIP local access telephone services of incumbent telephone companies until certain conditions are
met, but has agreed to reconsider the required threshold of 25% loss of market share by incumbent
telephone companies in the relevant markets in order for deregulation to occur. This decision may be
further challenged by incumbent telephone companies. It is not known at this time whether the
federal government will require the reconsideration of, or will set aside, the decision of the CRTC
respecting regulatory forbearance for local access telephone services generally. The ultimate
outcome and timing of the policy review process and challenges to these key telecommunications
decisions may have a significant impact on the development of the Corporation’s new digital
telephone service line of business, and incidentally on the marketing strategies for service bundles
that include digital telephone service.
The CRTC has recently initiated a policy review proceeding for over-the-air television in Canada that
raises the possible establishment of fees for carriage of conventional over-the-air television signals
by broadcasting distributors, including cable, telephone and satellite distributors. The World
Intellectual Property Organization (WIPO) is also considering the issue of fees for carriage as part of
its proceedings leading to the drafting of a new multilateral treaty concerning the protection of
broadcasting signals. At present, Canadian broadcasting distributors pay carriage fees to pay and
specialty programming services, but not to conventional over-the-air television services. Next year,
the CRTC is also expected to launch a review of its broadcasting distribution policies. The ultimate
outcome and timing of these policy initiatives may have a significant impact on the Corporation’s cost
of sales for its analog and digital services and the penetration of its various tiers of video distribution
services.
In Portugal, a broad reform of national legislation respecting electronic communications has already
occurred with the publication of Law 5/2004 (Electronic Communications Law, known as REGICOM)
on February 10, 2004, in line with the basic requirements of applicable European Commission
directives. Under this new national legislation, the Autoridade Nacional das Comunicações
(ANACOM), has implemented a general authorization regime which no longer involves the issuance
of licences for wireline telecommunications activities. The telecommunications markets in Portugal
are fully open to competition since January 1, 2000, and there are no foreign ownership restrictions
applying to electronic communications service providers or the ownership of broadband
telecommunications facilities in Portugal. Much of ANACOM’s regulatory oversight is focused at
present on the analysis of the competitive state of relevant telecommunications markets and the
adoption of selected measures where significant market power by a competitor is found to exist in a
relevant market. ANACOM has analyzed 16 of the 18 relevant retail and wholesale markets
identified by the European Commission and found that PT has significant market power in most of
these markets. As a result, various specific regulatory requirements apply to the provision of certain
services by PT companies. In addition, pursuant to Directive 2002/77/EC of the European
Commission (Competition Directive), the cable television and telecommunications network operations
of incumbent telephone companies in EU member states must be kept separate, and conducted
through separate entities. TV Cabo, Cabovisão’s direct cable competitor for video distribution and
HSI services, is operated through PT Multimedia, an entity separate from PT Comunicações, which
- 18 -
operates PT’s telecommunications network (telephony and ADSL HSI services), and services
provided by each of these entities are billed separately. The ownership and operating conditions of
various entities of PT, including PT Multimedia, may however change in the foreseeable future as a
result of the pending takeover bid by Sonae, alternative bids by other interested parties, or ownership
or restructuring proposals put forward by PT itself. There is a possible scenario of having two full
triple play companies, PT Comunicações and PT Multimedia, owned by separate groups, with the
conclusion of the pending takeover bid by Sonae, with each significant market power and possible
new regulatory requirements as a result.
On June 29, 2006, the European Commission launched a broad policy review initiative on electronic
communications with a view to boosting competition among telecommunications operators of EU
member states and building a single market for services that use radio spectrum. The ultimate
outcome and timing of these legislative proposals, and their transposition into Portuguese domestic
law and policies, may eventually have an impact on the future on Cabovisão’s electronic
communications activities and on the future state of competition for the provision of electronic
communications in Portugal.
Risks Pertaining to Operating Costs
Cogeco Cable applies itself on to keeping its cost of goods sold in check so as to secure continued
operating margin growth. The two largest drivers of cost of goods sold are network fees paid to audio
and video service suppliers, and data transport and connectivity charges, mostly for Internet traffic.
The market for audio and video programming services in Canada is already characterized by high
levels of supplier integration, structural rigidities imposed by the CRTC’s regulatory framework for
broadcasting distribution, and the resulting strong bargaining position of program suppliers. The
recently announced takeover of CHUM Limited by Bell Globemedia Inc., if approved by the CRTC
and the Commissioner of Competition, would significantly increase the level of concentration of
Canadian conventional over-the-air, specialty and pay television programming services in the
Canadian marketplace generally, and significantly would increase the market power of Bell
Globemedia Inc. The renewal of Cogeco Cable’s affiliation agreements for CHUM and Bell
Globemedia specialty services are currently under negotiation.
As the markets for data transport and connectivity remain very competitive in Canada and Portugal,
Cogeco Cable and Cabovisão have negotiated cost effective arrangements in the past for voice and
data traffic. However, as overall traffic increases and capacity on existing broadband
telecommunications facilities becomes more widely used, the Corporation may not be able to secure
further cost efficiencies in the future.
In Portugal, the offering of new digital audio and video services by Cabovisão will require the
negotiation of suitable arrangements with existing or new program suppliers,. Although affiliation
arrangements and program service bundling and retailing are less constrained by regulations in
Portugal than in Canada, the negotiation of such new arrangements has not yet taken place.
Risks Pertaining to Information Systems
Flexible, reliable and cost-effective information systems are an essential requirement for the handling
of sophisticated service options, customer account management, internal controls, provisioning,
billing and the roll-out of new services. The Corporation uses different customer relations
management tools and databases for its operation respectively in Ontario, Québec and Portugal. The
agreement with the main third-party supplier of information systems in Ontario will expire in 2008,
and the terms that would apply for the continued use of the relevant information systems in Ontario
are under negotiation.
- 19 -
Risks Pertaining to Disasters
The Corporation has a disaster recovery plan for dealing with the occurrence of natural disasters,
quarantine, power failures, terrorist acts, intrusions, computer hacking or data corruption, but the
operations and facilities of Cabovisão are not yet integrated into this plan, given the fact that
Cabovisão became a subsidiary of Cogeco Cable only on August 1, 2006. Cabovisão’s insurance
coverage has been integrated in Cogeco Cable’s insurance coverage. The emergency plans and
procedures that are in place cannot provide the assurance that the effect of any disaster can and will
be mitigated as planned. Cogeco Cable is not insured against the loss of data and relies on data
protection and recovery systems that it has put in place with third-party service providers in Canada.
Risks Pertaining to the Financing of the Cabovisão Acquisition
The acquisition of Cabovisão has been financed through corporate credit facilities of Cogeco Cable.
The major part of the purchase price for Cabovisão (approximately €465.7 million) was borrowed
directly in Euros, and €104 million was borrowed in Canadian dollars and subsequently converted
into Euros. The remainder of the purchase price is assumed liabilities. There are no financial hedging
arrangements in effect at this time for interest fluctuation risks on interest payments resulting from
these borrowings, but there is a natural hedging effect between the borrowings in Euros and the
inter-corporate debt interest payments and cash distributions in Euros originating from the European
subsidiaries. Also, for the purposes of this acquisition, Cogeco Cable has set up a structure involving
one of its operating Canadian subsidiaries and intermediate holding and financing entities located in
Luxembourg with a view to maximizing returns. The Corporation is presently considering financial
arrangements to extend the term with alternate sources of financing and to set the interest rate of the
Term Facilty.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by Cogeco Cable 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” and “free cash flow”.
Cash Flow from Operations
Cash flow from operations is used by Cogeco Cable’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 Corporation 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 August 31, Years ended August 31,
2006
2005
2006
2005
Cash flow from operating activities $ 107,209 $ 92,605 $ 195,790 $ 194,595
Changes in non-cash operating items (50,495)
(46,096)
(1,051) (23,657)
Cash flow from operations $ 56,714 $ 46,509 $ 194,739 $ 170,938
- 20 -
Free Cash Flow
Free cash flow is used, by Cogeco Cable’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth. Free cash flow is calculated as
follows:
($ 000) Quarters ended August 31, Years ended August 31,
2006 2005 2006 2005
Cash flow from operations $ 56,714 $ 46,509 $ 194,739 $ 170,938
Acquisition of fixed assets (44,082)
(41,079)
(140,941) (110,365)
Increase in deferred charges (8,929)
(4,816)
(20,607) (13,382)
Assets acquired under capital leases – as
per Note 12 b) (268)
(364) (2,898) (1,924)
Free cash flow $ 3,435 $ 250 $ 30,293 $ 45,267
ADDITIONAL INFORMATION
This MD&A was prepared on October 16, 2006. Additional information relating to the Corporation,
including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca), a telecommunications company offering a diverse range of services
to its customers in Canada and in Portugal, is the second largest cable operator in Ontario, Québec
and Portugal, in terms of the number of basic cable service customers served. The Corporation
invests in state-of-the-art broadband network facilities, delivers a wide range of services over these
facilities with great speed and reliability at attractive prices, and strives to provide both superior
customer care and growing profitability to satisfy its customers’ varied electronic communication
needs. Through its two-way broadband cable networks, Cogeco Cable provides its residential and
commercial customers with analog and digital video and audio services, high speed Internet access
as well as telephony services. The Corporation provides about 1,556,000 revenue-generating units
(RGUs) to approximately 1,477,000 homes passed in its Canadian service territory and 629,000
RGUs to approximately 826,000 homes passed in its Portuguese service territory. Cogeco Cable’s
subordinate voting shares are listed on the Toronto Stock Exchange (CCA).
– 30 –
Source: Cogeco Cable 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
- 21 -
Analyst Conference Call: Monday October 16
th
at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the
conference call by dialing 10 minutes before the start of the
conference:
Canada/USA Access Number: 1 800 967-7134
International Access Number: +1 719 457-2625
Confirmation Code: 1255847
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
October 23 by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code: 1255847
- 22 -
Supplementary Quarterly Financial Information
Quarters ended Fiscal 2006 Fiscal 2005
Nov.30 Feb. 28 May 31 Aug.31 Nov.30 Feb. 28 May 31 Aug. 31
($000, except percentages
and per share data)
Revenue $ 143,413 $ 147,757 $ 153,956 $
174,875 $
135,766 $
138,389 $ 140,071 $
140,178
Operating income
before amortization
57,302
59,568 63,244 72,864
53,194
55,297 58,310
60,720
Operating margin 40.0% 40.3% 41.1% 41.7% 39.2% 40.0% 41.6% 43.3%
Amortization 28,277 28,656 29,048 34,801 32,244 31,988 31,396 29,460
Financial expense 13,582 13,776 13,634 16,374 13,894 13,840 13,954 14,004
Income taxes 6,445 6,936 8,191 (12,298) 3,229 3,856 4,715 6,220
Net income 8,998 10,200 12,371 33,987 3,827 5,613 8,245 11,036
Cash flow from
operations
43,389 44,940 49,696 56,714 39,192 41,675 43,562 46,509
Net income per share $ 0.23 $ 0.26 $ 0.31 $
0.85 $
0.10 $
0.14 $ 0.21 $
0.28
Cogeco Cable’s operating results are not generally subject to material seasonal uctuations.
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. Cogeco Cable offers its services in several university and college towns such as Kingston,
Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski. Furthermore, the
fourth quarter’s operating margin is usually higher as no management fees are paid to COGECO Inc.
Under a Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue su bject
to a maximum amount. Since the maximum amount was reached during the third quarter of fiscal
years 2006 and 2005, Cogeco Cable paid no management fees during fiscal year 2006 and 2005
fourth quarters.
COGECO CABLE INC. - 23 -
Customer Statistics
A
ugust 31, August 31,
2006 2005
Homes Passe
d
Ontario 1 002 187 986 401
Québec 474 717 462 332
Canada 1 476 90
4
1 448 733
Portugal 826 369 -
Total 2 303 273 1 448 733
Revenue Generating Unit
s
Ontario 1 104 157 968 749
Québec 451 779 378 984
Canada 1 555 936 1 347 733
Portugal 629 041 -
Total 2 184 977 1 347 733
Basic Service Customer
s
Ontario 587 289 581 631
Québec 245 888 239 802
Canada 833 177 821 433
Portugal 269 694 -
Total 1 102 871 821 433
Discretionnary Service Customer
s
Ontario 463 783 461 038
Québec 192 895 183 320
Canada 656 678 644 358
Portugal - -
Total 656 678 644 358
Pay TV Service Customer
s
Ontario 84 425 80 817
Québec 38 455 35 407
Canada 122 880 116 224
Portugal 100 079 -
Total 222 959 116 224
High Speed Internet Service Customer
s
Ontario 269 328 226 133
Québec 73 752 51 515
Canada 343 080 277 648
Portugal 136 278 -
Total 479 358 277 648
Digital Video Service Customers
Ontario 213 556 159 734
Québec 113 808 87 470
Canada 327 364 247 204
Portugal - -
Total 327 364 247 204
Telephony Service Customer
s
Ontario 33 984 1 251
Québec 18 331 197
Canada 52 315 1 448
Portugal 223 069 -
Total 275 384 1 448
- 24 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended August 31, Twelve months ended August 31,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited)
(unaudited)
(audited)
(audited)
Revenue
Service
$ 174,494
$ 139,064
$ 617,806
$ 550,711
Equipment
381
1,114
2,195
3,693
174,875
140,178
620,001
554,404
Operating costs
102,011
79,458
358,631
318,704
Management fees – COGECO Inc.
-
-
8,392
8,179
Operating income before amo rtizatio n 72,864
60,720
252,978
227,521
Amortization (note 5)
34,801
29,460
120,782
125,088
Operating income 38,063
31,260
132,196
102,433
Financial expense (note 9)
16,374
14,004
57,366
55,692
Income before income taxes 21,689
17,256
74,830
46,741
Income taxes (note 6)
(12,298)
6,220
9,274
18,020
Net income $ 33,987
$ 11,036
$ 65,556
$ 28,721
Earnings per share (no t e 7)
Basic
$0.85
$0.28
$1.64
$0.72
Diluted
0.85
0.27
1.63
0.72
- 25 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Twelve months ended August 31,
(In thousands of dollars)
2006
2005
(audited)
(audited)
Balance at beginning $ 58,604
$ 33,880
Net income
65,556
28,721
Dividends on multiple voting shares
(2,512)
(1,569)
Dividends on subordinate voting shares
(3,888)
(2,428)
Balance at end $ 117,760
$ 58,604
- 26 -
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
August 31,
2006
August 31,
2005
(audited)
(audited)
Assets
Current
Cash and cash equivalents
$ 71,516
$61
Restricted cash
569
-
Accounts receivable
43,728
26,485
Prepaid expenses
6,265
3,946
122,078
30,492
Fixed assets
1,021,538
697,526
Deferred charges
47,327
38,226
Customer base (note 8)
989,552
989,552
Goodwill (note 8)
422,108
-
$ 2,602,603
$ 1,755,796
Liabilities and Shareholders’ equity
Liabilities
Current
Accounts payable and accrued li abilities
$ 283,087
$ 125,090
Income tax liabilities
444
678
Deferred and prepaid income
26,652
24,907
Current portion of long-term debt (note 9)
126,851
1,322
437,034
151,997
Long-term debt (note 9)
1,190,126
691,159
Deferred and prepaid income
10,525
10,522
Pension plans liabiliti es and accrued employees be nefits
2,091
1,903
Future income tax liabilities
217,636
210,731
1,857,412
1,066,312
Shareholders’ equity
Capital stock (note 10)
630,458
630,220
Contributed surplus – stock-based compensation
1,425
660
Retained earnings
117,760
58,604
Foreign currency translation adjustment (note 11)
(4,452)
-
745,191
689,484
$ 2,602,603
$ 1,755,796
- 27 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended August 31, Twelve months ended August 31,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(audited)
(audited)
Cash flow from operating activities
Net income
$ 33,987
$ 11,036
$ 65,556
$ 28,721
Items not affecting cash and cash equivalents
Amortization (note 5)
34,801
29,460
120,782
125,088
Amortization of deferred financing costs
416
241
1,140
958
Future income taxes (note 6)
(13,398)
5,804
5,200
15,208
Stock-based compensation
85
220
636
681
Loss on disposal of fixed assets
957
-
1,129
82
Other
(134)
(252)
296
200
56,714
46,509
194,739
170,938
Changes in non-cash oper ating items (note 12a))
50,495
46,096
1,051
23,657
107,209
92,605
195,790
194,595
Cash flow from investing activities
Acquisition of fixed assets (not e 12b))
(44,082)
(41,079)
(140,941)
(110,365)
Increase in deferred charges
(8,929)
(4,816)
(20,607)
(13,382)
Business acquisition, net of cash and cash equivalents
acquired (note 3)
(577,431)
-
(577,431)
-
Increase in restricted cash
(91)
-
(91)
-
Other
10
-
48
44
(630,523)
(45,895)
(739,022)
(123,703)
Cash flow from financing activities
Decrease in bank indebtednes s
(7,693)
(16,812)
-
(5,410)
Increase in long-term debt
633,402
-
633,402
-
Repayment of long-term debt
(18,518)
(28,258)
(1,720)
(62,166)
Increase in deferred financing costs
(10,110)
-
(10,110)
-
Issue of subordinate voting shares
62
20
228
742
Dividends on multiple voting shares
(628)
(627)
(2,512)
(1,569)
Dividends on subordinate voting shares
(972)
(972)
(3,888)
(2,428)
595,543
(46,649)
615,400
(70,831)
Net change in cash and cas h equivalents 72,229
61
72,168
61
Effect of exchange rate changes on cash and cash
equivalents denominated i n foreign currencies
(713)
-
(713)
-
Cash and cash equivalents at beginning
-
-
61
-
Cash and cash equivalents at end $ 71,516
$61
$ 71,516
$61
- 28 -
See supplemental cash flow information in note 12.
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present
fairly the financial position of Cogeco Cable Inc. as at August 31, 2006 and 2005 as well as its results of operations
and its cash flow for the three and twelve month periods ended August 31, 2006 and 2005.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with Cogeco Cable Inc.’s annual consolidated financial
statements. These unaudited interim consolidated financial statements follow the same accounting policies as the
most recent annual consolidated financial statements, except as m entioned in note 2.
The interim consolidated financial statements for the three month period ended August 31, 2005 have not been
subject to a review by the Corporation’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 Corporation adopted these new standards and concluded that they had
no significant impact on these consolidated financial statements.
3. Business acquisition
Acquisition of Cabovisão – Televi são por Cabo, S.A.
On June 2, 2006, the Corporation entered into an agreement with Cable Satisfaction International Inc. (“CSII”),
Catalyst Fund Limited Partnership I and Cabovisão – Televisão por Cabo, S.A. (“Cabovisão”), to purchase, for a total
consideration of €465.7 million, all the shares of the second largest cable operator in Portugal, an indirect wholly-
owned subsidiary of CSII. The price includes the purchase of senior debt and reimbursement of certain other
Cabovisão liabilities. The acquisition was completed on August 1, 2006. The final purchase price will be determined
following completion of a post-closing working capital adjustment. The Corporation is assuming a €20 million working
capital deficiency of Cabovisão.
The acquisition was accounted for using the purchase method. The results of Cabovisão have been consolidated as
of the acquisition date.
- 29 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
3. Business acquisition (continued)
The preliminary allocation of the purchase price of the acquisition is as follows:
Consideration
Paid
Estimated share purchase price $
304,188
Secured lenders debt and certain specified Cabovisão liabilities
274,761
Acquisition costs
4,193
583,142
Amounts outstanding
Preliminary working capital adjustment
2,432
585,574
Net assets acquired
Cash and cash equivalents
5,711
Restricted cash
489
Accounts receivable
16,570
Prepaid expenses
1,324
Fixed assets
287,652
Accounts payable and ac c rued lia bilities assume d
(65,282)
Other specified Cabovisão liabilities assumed
(91,914)
154,550
Excess of consideration over net assets acquired $
431,024
Preliminary allocation of excess of consideration over net assets acquired
Preliminary goodwill $
431,024
In order to finance the cash component of the transaction, the Term Facility and the operating line of credit of the
Corporation were restructured by an amended and restated credit agreement (see note 9).
Management is currently carrying out a more specific analysis and changes will be made to the allocation of the
excess of consideration over net assets acquired as the information becomes available. For example, since the
measurement of the fair value of fixed assets had not yet been completed at the time of the preliminary allocation,
fixed assets have been presented at cost. The measurement of indefinite and finite-lived intangible assets is also
under way. Furthermore, in accordance with the Portuguese Companies Income Tax Code, accumulated tax losses
can not be deducted if the ownership of at least 50% of the social capital changes from the moment when the tax
losses were generated, unless an authorization is granted before such change in the ownership takes place. To this
effect, a request for preservation of tax losses was fil ed by Cabovisão on July 28, 2006. These losses have not been
included in the preliminary purchase price allocation. Finally, the Corporation did not complete the assessment of
possible costs related to the restructuring and integration of the activities of Cabovisão potentially giving rise to the
recognition of a liability in the allocation of the purchase price. As a result, the actual amounts allocated to the
identifiable assets acquired and liabilities assumed and the related operating results will vary according to the
amounts initially recorded, and such differences could be significant.
- 30 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information
The Corporation’s activities are comprised of all cable, high-speed Internet access and telephony services. The
Corporation considers its cable distribution, high-speed Internet access and telephony activities as a single operating
segment. The Corporation’s activities are carried out in Canada and in Portugal.
The Portugal segment include s operating results since the date of the acquisition of control on August 1, 2006.
The principal financi al information per business segment is pre sente d in the tables below:
Canada Portugal
Consolidated
Three months ended August 31,
(unaudited)
2006 2005 2006 2005 2006 2005
Revenue $ 158,009 $ 140,178 $ 16,866 $- $ 174,875 $ 140,178
Operating costs 90,116 79,458 11,895 - 102,011 79,458
Management fees - - - - - -
Operating income before amortization 67,893 60,720 4,971 - 72,864 60,720
Amortization 30,373 29,460 4,428 - 34,801 29,460
Operating income 37,520 31,260 543 - 38,063 31,260
Financial expense 16,103 14,004 271 - 16,374 14,004
Income taxe s (12,612) 6,220 314 - (12,298) 6,220
Net income (loss) 34,029 11,036 (42) - 33,987 11,036
Net assets employed
(1) (2)
$ 1,649,631 $ 1,595,216 $ 561,192 $- $ 2,210,823 $ 1,595,216
Total assets
(2)
1,842,312 1,755,796 760,291 - 2,602,603 1,755,796
Fixed assets
(2)
741,024 697,526 280,514 - 1,021,538 697,526
Goodwill
(2)
- - 422,108 - 422,108 -
Acquisition of fixed assets 40,145 41,443 4,205 - 44,350 41,443
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
- 31 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
4. Segmented Information (continued)
Canada Portugal
Consolidated
Twelve months ended August 31,
(audited)
2006 2005 2006 2005 2006 2005
Revenue $ 603,135 $ 554,404 $ 16,866 $- $ 620,001 $ 554,404
Operating costs 346,736 318,704 11,895 - 358,631 318,704
Management fees 8,392 8,179 - - 8,392 8,179
Operating income before amortization 248,007 227,521 4,971 - 252,978 227,521
Amortization 116,354 125,088 4,428 - 120,782 125,088
Operating income 131,653 102,433 543 - 132,196 102,433
Financial expense 57,095 55,692 271 - 57,366 55,692
Income taxe s 8,960 18,020 314 - 9,274 18,020
Net income (loss) 65,598 28,721 (42) - 65,556 28,721
Net assets employed
(1) (2)
$ 1,649,631 $ 1,595,216 $ 561,192 $- $ 2,210,823 $ 1,595,216
Total assets
(2)
1,842,312 1,755,796 760,291 - 2,602,603 1,755,796
Fixed assets
(2)
741,024 697,526 280,514 - 1,021,538 697,526
Goodwill
(2)
- - 422,108 - 422,108 -
Acquisition of fixed assets 139,634 112,289 4,205 - 143,839 112,289
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at August 31, 2006 and 2005.
5. Amortization
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Fixed assets $ 29,872 $ 23,985 $ 100,306 $ 102,597
Deferred charges 4,929 5,475 20,476 22,491
$ 34,801 $ 29,460 $ 120,782 $ 125,088
- 32 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
6. Income taxes
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Current $ 1,100 $ 416 $ 4,074 $ 2,812
Future (13,398) 5,804 5,200 15,208
$ (12,298) $ 6,220 $ 9,274 $ 18,020
The following table provides the reconciliation between Canadian statutory federal and provincial income taxes and
the consolidated income tax expense:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Income taxes at combined income tax rate of 35.09 %
(34.96 % in 2005)
$
7,611
$
6,033
$
26,258
$
16,341
Loss or income subject to lower or higher tax rates (363) (204) (226) (218)
Decrease in income taxes as a result of decreases in
substantially enacted tax rates
(19,982)
-
(19,820)
-
Large corporation tax (1,815) 165 600 1,482
Income taxes arising from non-deductible expenses 1,430 - 1,430 -
Withholding taxes on interest of a foreign subsidiary 314 - 314 -
Other 507 226 718 415
Income taxes at effective income tax rate $ (12,298) $ 6,220 $ 9,274 $ 18,020
- 33 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
7. Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Net income $ 33,987 $ 11,036 $ 65,556 $ 28,721
Weighted average number of multiple voting and
subordinate voting shares outstanding
39,993,757
39,983,975
39,990,239
39,964,857
Effect of dilutive stock options
(1)
129,091 213,087 172,784 161,587
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
40,122,848
40,197,062
40,163,023
40,126,444
Earnings per share
Basic $ 0.85 $ 0.28 $ 1.64 $0.72
Diluted 0.85 0.27 1.63 0.72
(1)
For the three and twelve month periods ended August 31, 2006, 172,844 and 150,647 stock options (19,906 and 55,665 in 2005) 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.
8. Customer base and goodwill
Customer
Base
Goodwill
Total
(audited) (audited) (audited)
Balance, beginning of year $ 989,552 $ - $ 989,552
Business acquisition (note 3)
- 431,024 431,024
Foreign currency translation adjustment
- (8,916) (8,916)
$ 989,552 $ 422,108 $ 1,411,660
- 34 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
9. Long-term debt
Maturity Interest rate
August 31,
2006
August 31,
2005
(audited) (audited)
Parent company
Term Facility
(1)
Term loan 2011 5.71
(2)
$ 150,000 $-
Term loan - €17,358,700 2011 4.50
(2)
24,573 -
Revolving loan – €317,000,000 2011 4.50
(2)
448,745 -
Senior Secured Debentures Series 1 2009 6.75
150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(3)
165,795 178,065
Series B 2011 7.73
175,000 175,000
Second Secured Debentures Series A 2007 8.44
125,000 125,000
Deferred credit
(4)
2008
72,855 60,585
Subsidiaries
Obligations under capital leases 2010 6.42 – 8.36
5,009 3,831
1,316,977 692,481
Less current portion
126,851 1,322
$ 1,190,126 $ 691,159
(1)
On July 28, 2006, the Term Facility and the operating line of credit of the Corporation were restructured by an amended and restated credit
agreement for credit facilities totalling $900,000,000. The Term Facility is composed of four tranches: a first tranche, a revolving Term
Facility for an amount of $700,000,000 available in Canadian , U.S. or Euro currencies; a second tranche, a swingline of $25,000,000
available in Canadian or U.S. currencies; a third tranche of $150,000,000 fully draw n, and a fourth tranche of €17,358,700 fully drawn . The
Term Facility is repayable on July 28, 2011, except for t he third tra n che of $150 ,000, 000 which is repa yable as follows: $15,000, 000 on Jul y
28, 2008, $22,500,000 on July 28, 2009, $37 ,500,000 on July 28, 2010 and t he balance on Jul y 28, 2011. Earlier repa yments can be made
without penalty. The Term Facility requires commitment fees, and interest rates are based, on bankers’ acceptance, LIBOR, EURIBOR,
bank prime rate loan or U.S. base rate loan plus stamping fees. The Term Facility is secured by a first fixed and floating charge on the
assets of the Corporation and certain of its subsidiaries except for permitted encumbrances, including purchased money obligations,
existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary subject to a maximum
amount. The provisions under these facilities provide for restrictions on the operations and activities of the Corporation. Gen erally, the most
significant restrictions relate to permitted investments, dividends on multiple and subordinate voting shares and reimbursement of long-term
debt as well as incurrence and maintenance of certain financial ra tios primarily linked to the operating income before amortization, fina ncial
expense and total indebtedness.
(2)
Average interest rate on debt as at August 31, 2006, including stamping fees.
(3)
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.
(4)
The deferred credit represents the amount which would have been payable as at August 31, 2006 and August 31, 2005 under cross-
currency swaps entered into by the Corporation to hedge Senior Secured Notes Series A denominated in US dollars.
Interest on long-term debt for the three and twelve month periods ended August 31, 2006 amounted to $15,675,000
and $55,240,000 ($13,17 4,000 and $52,868,00 0 in 2005).
- 35 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
10. Capital Stock
Authorized, an unlimited number
Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the
holder at any time at a price of $1 per share, carrying a cumulative preferential cash dividend at a rate of 11% of the
redemption price per year.
Class B Preference shares, without voting rights, could be issued in series.
Multiple voting shares, 10 votes per share.
Subordinate voting shares, 1 vote per share.
August 31,
2006
August 31,
2005
(audited) (audited)
Issued
15,691,100 multiple voting shares $ 98,346 $ 98,346
24,308,112 subordinate voting shares (24,293,486 as at August 31, 2005) 532,112 531,874
$ 630,458 $ 630,220
During the period, subordin ate voting share transactions were as follows:
Twelve months ended Twelve months ended
August 31, 2006 August 31, 2005
(audited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 24,293,486 $ 531,874 24,232,815 $ 531,070
Shares issued for cash under the Employee Stock Purchase Plan
and the Stock Option Plan
14,626
228
60,671
742
Compensation expense previously recorded in contributed
surplus for options exercised
-
10
-
62
Balance at end 24,308,112 $ 532,112 24,293,486 $ 531,874
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COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
10. Capital Stock (continued)
Stock-based plans
The Corporation 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 Corporation’s annual
consolidated financial statements. During the year, the Corporation granted 136,059 stock options (140,766 in 2005)
with an exercise price ranging from $24.15 to $29.05 ($21.50 in 2005) of which 31,743 stock options (38,397 in 2005)
were granted to COGECO Inc.’s employees. The Corporation records compensation expense for options granted on
or after September 1, 2003. As a result, a compensation expense of $202,000 and $775,000 ($132,000 and
$484,000 in 2005) was recorded for the three and twelve month periods ended August 31, 2006. If compensation
expense had been recognized using the fair value-based method at the grant date for options granted between
September 1, 2001 and August 31, 2003, the Corporation’s net income and earnings per share for the three and
twelve month periods ended August 31, 2006 and 2005 would have been reduced to the following pro forma amount s:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Net income
As reported $ 33,987 $ 11,036 $ 65,556 $ 28,721
Pro forma 33,967 10,940 65,475 28,337
Basic earnings per share
As reported $ 0.85 $ 0.28 $ 1.64 $ 0.72
Pro forma 0.85 0.27 1.64 0.71
Diluted earnings per share
As reported $ 0.85 $ 0.27 $ 1.63 $ 0.72
Pro forma 0.85 0.27 1.63 0.71
The fair value of each option granted was estimated on the grant date for purposes of determining stock-based
compensation expense us ing 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
The fair value of stock options granted for the twelve month period ended August 31, 2006 was $9.32 ($7.46 in 2005)
per option.
As at August 31, 2006, the Corporation had outstanding stock options providing for the subscription of 715,571
subordinate voting shares. These stock options can be exercised at various prices ranging from $7.05 to $40.75 and
at various dates up to July 31, 2016.
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COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
11. Foreign Currency Translation Adjustment
The change in the foreign currency translation adjustment included in shareholders’ equity is the result of the
fluctuation in the exchange rates on translation of net investments in self-sustaining foreign operations and foreign
exchange gains or losses related to long-term debt denominated in foreign currency used to hedge net investments.
The net change in foreign currency translation adjustment for 2006 is as follows:
(audited)
Effect of exchange rate variation on translation of net investments in self-sustaining foreign subsidiaries $ (12,412)
Effect of exchange rate variation on translation of long-term debt designated as hedge of a net investments
in self-sustaining subsidiaries, net of income taxes of $1,703,000
7,960
$ (4,452)
12. Statements of cas h flow
a) Changes in non-cash operating items
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Accounts receivable $ 1,023 $ 1,159 $ (1,131) $ 4,554
Income tax receivable 178 - - -
Prepaid expenses 244 (1,177) (1,020) 589
Accounts payable and accrued liabilities 48,788 46,846 1,681 15,688
Income tax liabilities 450 (501) (228) (166)
Deferred and prepaid income (188) (231) 1,749 2,992
$ 50,495 $ 46,096 $ 1,051 $ 23,657
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COGECO CABLE INC.
Notes to Consolidated Financial Statements
August 31, 20 06
(amounts in tables are in thousands of dollars, except per share data)
12. Statements of cas h flow (continued)
b) Other information
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Fixed asset acquisitions through capital leases $ 268 $ 364 $ 2,898 $ 1,924
Interest paid 11,805 11,055 54,892 54,438
Income taxes paid 478 917 4,308 2,978
13. Employee future benefits
The Corporation and its subsidiaries offer their employees contributory defined benefit pension plans, a defined
contribution pension plan or a collective registered retirement savings plan which are described in the Corporation’s
annual consolidated financi al statements. The total expenses related to these pla ns are as follows:
Three months ended August 31, Twelve months ended August 31,
2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Contributory defined benefit pension plans $ 426 $ 205 $ 1,044 $ 657
Defined contribution pension plan and collective
registered retirement savings plan
407
307
1,522
1,239
$ 833 $ 512 $ 2,566 $ 1,896
14. Comparative figures
Certain comparative figures have been reclassified in order to conform to the presentation adopted in the current
period.