COGECO CABLE REPORTS SUBSTANTIAL GROWTH AND EXPECTS SUSTAINED IMPROVEMENTS FOR FISCAL 2007
PRESS RELEASE
For immediate release
Cogeco Cable reports substantial growth
and expects sustained improvements for fiscal 2007
Montréal, July 10, 2006 – Today, Cogeco Cable Inc. (TSX: CCA) announced its financial results for
the third quarter of fiscal 2006, ended May 31.
Major customer growth
Cogeco Cable reported strong increases in its revenue-generating units
1
(RGU), adding more than
48,000 RGUs, compared to 6,400 for the same period last year, driving a revenue increase of 9.9%.
Operating income before amortization has improved by 8.5% while net income jumped by 50% to
stand at $12.4 million.
Revised 2006 guidelines
“Our operations continue to improve, exceeding most of our projections. Therefore, we have revised
our 2006 guidelines, setting our revenue expectations to about $600 million, operating income before
amortization to approximately $245 million and free cash flow
2
should remain between $20 million
and $25 million”, said Mr. Louis Audet, President and Chief Executive Officer of Cogeco Cable.
Growth by business acquisition
On June 2, Cogeco Cable entered into an agreement with Cable Satisfaction International Inc. (CSII),
Catalyst Fund Limited Partnership I (Catalyst) and Cabovisão -Televisão por Cabo, S.A.
("Cabovisão"), to purchase, at a cost of €464.9 million, all the shares of the second largest cable
operator in Portugal, an indirect wholly-owned subsidiary of CSII. This agreement and its execution
by the monitor and interim receiver RSM Richter Inc. on behalf of CSII was approved by the Superior
Court of Québec on July 4, 2006, thus fulfilling one of the conditions precedent to the sale and
purchase of the Cabovisão shares. Cogeco Cable is pleased with Cabovisão’s growth potential and
expects to make attractive additions to the services already provided to its customers. “This
acquisition is consistent with Cogeco Cable’s strategy to pursue external growth opportunities and
Cabovisão is well positioned in the high-growth cable telecommunications market in Portugal”, stated
Mr. Audet.
2007 projections - Canada
For fiscal 2007, Cogeco Cable expects continued increases in high-speed Internet (HSI), digital video
and digital telephony services. Revenue from the Canadian operations should consequently improve
by between 10% and 12%. An operating margin of approximately 40% should be achieved despite
the launch of digital telephony in most of the Corporation’s networks. Growth in revenue and
sustained cost control should help achieve an increase in operating income before amortization of
approximately 9%.
“For the future, we are confident that the number of Canadian customers will continue to grow,
thanks to our strong offering, which is in line with customer demand. As for Cabovisão, we are
dedicated to the successful integration of our newest and promising asset to ensure the creation of
value for Cogeco Cable’s shareholders”, concluded Mr. Audet.
1
Revenue-generating units represent the sum of basic service, digital video service, HSI service and digital telephony service customers.
2
See “Non-GAAP financial measures” section for explanations.
- 2 -
FINANCIAL HIGHLIGHTS
Quarters ended May 31,
Nine months ended May 31,
($000s, except percentages and
(unaudited) (unaudited)
per share data)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 153,956 $ 140,071 9.9 $ 445,126 $ 414,226 7.5
Operating income before
amortization
63,244
58,310
8.5
180,114
166,801
8.0
Net income 12,371 8,245 50.0 31,569 17,685 78.5
Cash flow from operations
(1)
49,696 43,562 14.1 138,025 124,429 10.9
Less:
Capital expenditures and
increase in deferred charges
38,009
25,692 47.9 111,167 79,412 40.0
Free cash flow
(1)
11,687 17,870 (34.6) 26,858 45,017 (40.3)
Per share data
Basic net income $ 0.31 $ 0.21 47.6 $ 0.79 $ 0.44 79.5
(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 quarter.
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 Annual Report.
Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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
*
growth and free cash flow. Below are the recent achievements
in furtherance of Cogeco Cable’s objectives.
Diversification and improvement of products and services
• Digital video services:
o Addition of WWE 24/7 to Cogeco Cable’s digital video offer;
• Digital telephony service:
o Now available to 50% of homes passed in Cogeco Cable’s territories;
o Deployment of digital telephony service in Grimsby, Stoney Creek, Welland, Port
Colborne, Dundas, Milton, Georgetown, Ancaster, Fort Erie, Pelham, Wallaceburg,
Niagara Falls and Essex, Ontario, and in Shawinigan, Grand-Mère, Louiseville and St-
Georges-de-Beauce, Québec.
• High-speed Internet service:
o Download speed increase of Cogeco Cable’s Standard HSI service to a maximum of
7 Mbps and its combined upload and download bit cap for each HSI service: from
30 Gb to 100 Gb for the Pro service, from 15 Gb to 60 Gb for the Standard service
and from 2 Gb to 10 Gb for the Lite service. In the last few weeks, Cogeco Cable has
completed the improvement of its Pro HSI service by increasing its speed from up to
10 Mbps to up to 16 Mbps. As for the Standard HSI service, its speed will be
increased from up to 7 Mbps to up to 10 Mbps before the end of July 2006;
o Significant upgrade of the free security suite, which provides pop up blockers, anti-
spyware and protection with the introduction of F-Secure Pex 6 in all our territories.
Sustained corporate growth and diversification of clientele and territories
• Acquisition:
o On June 2, 2006, Cogeco Cable entered into an agreement with Cable Satisfaction
International Inc. (CSII), Catalyst Fund Limited Partnership I (Catalyst) and
Cabovisão-Televisão por Cabo, S.A., to purchase, at a cost of €464.9 million, all the
shares of the second largest cable operator in Portugal, an indirect wholly-owned
subsidiary of CSII. The price includes the purchase of senior debt and reimbursement
of certain other Cabovisão liabilities. The final purchase price will be determined
following completion of a post-closing working capital adjustment. Cogeco Cable is
assuming a €20 million working capital deficiency. The transaction, which was
approved by the Superior Court of Québec on July 4, 2006, is still subject to the
fulfilment of certain conditions of closing, including the implementation of the plan of
arrangement previously approved by the court in March 2004, as amended.
Cogeco Cable will finance the acquisition of Cabovisão through an underwritten credit
facility of $900 million over five years committed by a major Canadian Chartered Bank.
*
See “Customer statistics” section for detailed explanations.
- 4 -
RGU growth
During the first nine months, the number of RGUs increased by 12.2%. The Corporation had
anticipated RGU growth between 10% and 11% for all of fiscal 2006. Higher than anticipated HSI,
digital video and digital telephony customer growth allowed Cogeco Cable to exceed its objective in
the first nine months of the fiscal year. Therefore, management revised its guidelines in the third
quarter and now believes it will reach RGU growth between 13% and 15% by August 31, 2006.
Please consult the “Fiscal 2006 and 2007 financial guidelines” section for further details.
Revenue growth
During the first nine months, revenue increased by 7.5% mainly due to stronger RGU growth. The
Corporation had expected to reach revenue growth between 7% and 8% in its second quarter-
revised guideline for 2006, and maintains this guideline. Please consult the “Fiscal 2006 and 2007
financial guidelines” section for further details.
Free cash flow
In the first nine months, Cogeco Cable generated free cash flow of $26.9 million. In light of the
stronger than expected RGU growth in the first nine months of fiscal 2006, capital expenditures and
deferred charges are expected to surpass the $160 million guideline and reach between $163 million
and $168 million. In fiscal 2006, free cash flow will remain at the revised level set in the previous
quarter of $20 million to $25 million. Please consult the “Fiscal 2006 and 2007 financial guidelines”
section for further details.
CUSTOMER STATISTICS
Net additions (losses) % of Penetration
(1)
Quarters ended
May 31,
Nine months ended
May 31,
May 31,
May 31,
2006 2006 2005 2006 2005 2006 2005
RGUs
(2)
1,511,693 48,081 6,378 163,960 72,275
Basic service customers
832,492 (3,349) (3,523) 11,059 3,469
HSI service customers
(3)
330,479 12,378 5,731 52,831 35,265 43.1 37.6
Digital video service customers
(4)
316,801 23,635 4,170 69,597 33,541 38.8 30.0
Digital telephony service customers
31,921 15,417
−
30,473
−
7.6
−
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, HSI service, digital video service and digital telephony service customers.
(3) Customers subscribing only to Internet services totaled 60,786 as at May 31, 2006 compared to 59,292 as at February 28, 2006.
(4) In fiscal 2005, the number of digital video service customers was restated to reflect changes brought about by our billing improvement program,
which has allowed us to identify digital video service customer accounts that were not cancelled when they became inactive. This change resulted
in a downward adjustment of approximately 7,800 customers as at May 31, 2005.
Except for basic service customers, all services generated higher growth in the third quarter
compared to the same period last year. The number of net additions of HSI service and digital video
service customers stood at 12,378 and 23,635 compared to 5,731 and 4,170 for the same period last
year. The number of net additions of HSI service customers was higher than the comparable period
last year, due to promotional activities, enhancement of the product offering and the impact of the
bundled offer of three services. The increase in the number of digital video service customers stems
from the growing interest in this technology and the growing demand for the high-definition (HD)
format among customers, as well as attractive promotional offers, and the snowball effect of the
telephony offering.
- 5 -
For the third quarter of fiscal 2006, basic service customer numbers declined by 3,349 compared to a
reduction of 3,523 for the same period last year. These losses are mainly attributable to students
leaving their campuses at the end of the school year. Cogeco Cable offers its services in several
cities, with universities and colleges, such as Kingston, Windsor, Hamilton, St. Catharines,
Peterborough, Trois-Rivières and Rimouski.
On May 31, 2006, 38,204 customers were subscribing to the digital telephony service including
pending orders compared to 18,783 customers including pending orders as at February 28, 2006.
ACCOUNTING POLICIES AND ESTIMATES
Non-Monetary Transactions
In June 2005, the Canadian Institute of Chartered Accountants issued Handbook section 3831, Non-
Monetary Transactions, which revised and replaced the current standards on non-monetary
transactions. Under the new section, the criterion for measuring non-monetary transactions at fair
value is modified to focus on the assessment of commercial substance instead of the culmination of
the earnings process. A non-monetary transaction has commercial substance when the entity’s future
cash flows are expected to change significantly as a result of the transaction. These standards are
effective for non-monetary transactions initiated in periods beginning on or after January 1, 2006.
During the third quarter, the 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. 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 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 the first quarter of
fiscal 2006, compared to 38,397 in the first quarter of fiscal 2005. The Corporation did not grant any
stock options to COGECO Inc.’s employees during second and third quarters of fiscal 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 annual MD&A. There were no other material
related party transactions during the third quarters and first nine months of fiscal 2006 and 2005.
- 6 -
OPERATING RESULTS
Quarters ended May 31,
Nine months ended May 31,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue $ 153,956 $ 140,071 9.9 $ 445,126 $ 414,226 7.5
Operating costs 88,145 79,054 11.5 256,620 239,239 7.3
Management fees -
COGECO Inc.
2,567 2,707
(5.2) 8,392 8,186 2.5
Operating income before
amortization
63,244 58,310 8.5 180,114 166,801 8.0
Operating margin 41.1% 41.6% 40.5% 40.3%
Revenue
For the third quarter and first nine months of fiscal 2006, revenue rose by $13.9 million or 9.9% and
by $30.9 million or 7.5% respectively, compared to the same periods last year. Revenue growth
during these periods is mainly attributable to an increased number of customers of digital video, HSI
and digital telephony services as mentioned in the “Customer Statistics” section, as well as to rate
increases implemented in June and August of 2005. Monthly rate increases of at most $3 per
customer and averaging $0.50 per basic service customer took effect on June 15, 2005 in Ontario
and on August 1, 2005 in Québec. The monthly rate for certain bundled services has increased by $1
in Ontario, and other limited rate increases for selective tier services were implemented in Québec.
Furthermore, an August 2005 reduction in digital terminal rental rates was more than offset by a
greater number of customers renting digital terminals.
Operating Costs
For the third quarter and first nine months of fiscal 2006, operating costs, excluding management
fees payable to COGECO Inc., rose by $9.1 million or 11.5% and by $17.4 million or 7.3%
respectively. Operating costs also include network fees. Network fees increased by 11.2% and 6.5%
during the third quarter and first nine months respectively, compared to the same periods last year.
These increases are mainly the result of the introduction of digital telephony service, the Canadian
Radio-television and Telecommunications Commission mandated APTN wholesale rate increase and
RGU growth, partly offset by IP transport costs that have declined despite HSI customer growth.
Other operating costs increased in order to serve additional RGUs, including digital telephony.
Operating Income before Amortization
For the third quarter and first nine months of fiscal 2006, operating income before amortization rose
by 8.5% and 8.0% respectively, compared to the same periods last year as the increase in revenue
outpaced the rise in operating costs. Cogeco Cable’s operating margin decreased from 41.6% to
41.1% in the third quarter of fiscal 2006, due to the launch of digital telephony service. For the first
nine months of fiscal 2006, the operating margin stood at 40.5% compared to 40.3% for the same
period last year.
- 7 -
FIXED CHARGES
Quarters ended May 31, Nine months ended May 31,
($000s, except
percentages)
2006 2005 %
Change
2006 2005 %
Change
Amortization $ 29,048 $ 31,396 (7.5) $ 85,981 $ 95,628 (10.1)
Financial expense $ 13,634 $ 13,954 (2.3) $ 40,992 $ 41,688 (1.7)
During the third quarter and first nine months of fiscal 2006, amortization amounted to $29 million
and $86 million compared to $31.4 million and $95.6 million for the same periods last year.
Amortization declined during these periods since many cable modems and digital terminals were fully
amortized.
For the third quarter and first nine months of fiscal 2006, financial expense decreased slightly
compared to the same periods last year. This is due to the lower level of Indebtedness (defined as
bank indebtedness and long-term debt) during these periods, partially offset by increases in the
short-term interest rate on the Term Facility.
INCOME TAXES
In the third quarter and first nine months of fiscal 2006, income taxes amounted to $8.2 million and
$21.6 million respectively, compared to $4.7 million and $11.8 million for the same periods last year.
The income tax increases were mainly attributable to the growth in operating income before
amortization combined with a decline in fixed charges.
On May 2, 2006, the Federal government announced its intention to reduce the corporate income tax
rate progressively from 21% to 19% effective in January 2010 and to eliminate the corporate surtax
of 1.12% by January 1, 2008. These measures were considered substantially enacted on June 6,
2006, and therefore will reduce future income taxes by approximately $18 million for the next quarter
ending August 31, 2006.
NET INCOME
Net income for the third quarter amounted to $12.4 million, or $0.31 per share, compared to
$8.2 million, or $0.21 per share, for the same period last year. For the first nine months of fiscal 2006,
net income amounted to $31.6 million, or $0.79 per share compared to $17.7 million, or $0.44 per
share for the same period in fiscal 2005. Net income increases in these periods were attributable to
the growth in operating income before amortization combined with a decline in fixed charges.
- 8 -
CASH FLOW AND LIQUIDITY
Quarters ended May 31,
Nine months ended May 31,
($000s)
2006 2005 2006 2005
Operating Activities
Cash flow from operations $ 49,696 $ 43,562 $ 138,025 $ 124,429
Changes in non-cash operating items (4,132) 15 (49,444) (22,439)
$ 45,564 $ 43,577 $ 88,581 $ 101,990
Investing Activities
(1)
$ (16,458) $ (24,115) $ (108,499) $ (77,808)
Financing Activities
(1)
$ (29,106) $ (19,462) $ 19,857 $ (24,182)
Net change in cash and cash equivalents
$ ― $ ― $
(61)
$
―
(1) Excludes assets acquired under capital leases.
During the third quarter of fiscal 2006, cash flow from operations reached $49.7 million, or 14.1%
higher than for the comparable period last year, due primarily to the increase in operating income
before amortization. Changes in non-cash operating items generated greater cash outflow than for
the same period last year, mainly as a result of relatively stable accounts receivable compared to a
decrease for the same period in fiscal 2005.
During the first nine months of fiscal 2006, cash flow from operations reached $138 million, or 10.9%
higher than for the same period last year, due primarily to the increase in operating income before
amortization. Changes in non-cash operating items generated greater cash outflow than last year
mainly as a result of a larger decrease in accounts payable and accrued liabilities caused by
increased capital expenditures incurred in late fiscal 2005.
Investing activities, including capital expenditures segmented according to the National Cable
Television Association (NCTA) standard reporting categories, are as follows:
Quarters ended May 31,
Nine months ended May 31,
($000s)
2006
2005
2006
2005
Customer Premise Equipment
(1)
$ 13,824 $ 4,935 $ 43,430 $ 31,625
Scalable Infrastructure
4,488
3,760
15,103
8,966
Line Extensions
2,606
2,074
7,449
6,842
Upgrade / Rebuild
11,882
10,554
28,488
20,938
Support Capital
980
1,140
5,019
2,475
Total Capital Expenditures
(2)
$
33,780
$
22,463
$
99,489
$
70,846
Deferred charges and others
4,199
3,212
11,640
8,522
Decrease in restricted cash
(20,322)
―
―
―
Total investing activities
$
17,657
$
25,675
$
111,129
$
79,368
(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.
- 9 -
During the third quarter and first nine months of fiscal 2006, the increase related to capital
expenditures is mainly due to the following factors:
¾ The increase in customer premise equipment in the third quarter of fiscal 2006 results
primarily from an increase in digital terminals, cable modems and more home terminal
devices related to the digital telephony service. For the first nine months of fiscal 2006, the
increase in customer premise equipment results primarily from a rise in the number of digital
terminals rented to customers, a greater ratio of digital terminals per digital home and the
increase in the number of digital telephony customers.
¾ The growth in scalable infrastructure is mainly attributable to the support of the digital
telephony rollout.
¾ Expenditures associated with the network upgrade and rebuild program rose due to the
acceleration of the program to expand the bandwidth to 750 MHz and 550 MHz for the
Ontario and Québec networks, respectively, and to improve network reliability. An increase in
the number of households with access to two-way service was also a factor and the
percentage of customers with access to two-way service rose from 88% as at May 31, 2005
to 92% as at May 31, 2006.
The third quarter and first nine months increases in deferred charges are explained by higher
reconnect costs attributable to the significant level of RGU increase, which includes the digital
telephony customer growth. During the third quarter, the $20.3 million decrease in restricted cash
was the result of a reimbursement of a deposit in escrow. This deposit of €15 million was intended for
the business acquisition described in the “Corporate Strategies and Objectives” section and was
reimbursed with accumulated interest thereon.
Free cash flow of $11.7 million and $26.9 million were generated during the third quarter and first
nine months of fiscal 2006 respectively as a result of increased cash flow from operations partly
offset by increased capital expenditures and deferred charges. In the third quarter and first nine
months of fiscal 2006, free cash flow declined compared to the same periods last year. This is
attributable to increased capital expenditures and deferred charges that support digital telephony
service and better-than-expected RGU growth.
During the third quarter, the level of Indebtedness decreased by $27.5 million mainly due to
generated free cash flow of $11.7 million and a net decrease in restricted cash of $20.3 million, partly
offset by a decline in non-cash operating items of $4.1 million. For the same period last year,
Indebtedness declined by $18.7 million mainly due to generated free cash flow of $17.9 million. In
addition, a dividend of $0.04 per share for subordinate and multiple voting shares, totalling
$1.6 million, was paid during the third quarter of fiscal 2006 compared to a dividend of $0.02 per
share or $0.8 million for the third quarter of fiscal 2005.
During the first nine months of fiscal 2006, the level of Indebtedness grew by $24.5 million mainly
due to a decline in non-cash operating items of $49.4 million partly offset by generated free cash flow
of $26.9 million. For the same period last year, Indebtedness declined by $22.5 million essentially
due to generated free cash flow of $45 million partly offset by a decline in non-cash operating items
of $22.4 million. Dividends totalling $4.8 million were paid during the first nine months of fiscal 2006
compared to $2.4 million for the same period the year before.
- 10 -
As at May 31, 2006, Cogeco Cable had a working capital deficiency of $98.3 million compared to
$121.5 million as at August 31, 2005. This improvement is mainly attributable to a reduction in the
level of accounts payable and accrued liabilities, as discussed in the “Financial Position” section,
partly offset by an increase in the current portion of Indebtedness. This increase is explained by a
greater utilization of bank indebtedness and an increase in the current portion of long-term debt as
the Corporation’s Term Facility matures in less than a year. Cogeco Cable maintains a working
capital deficiency due to low 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. Additionally, the Corporation generally uses cash and
cash equivalents to reduce Indebtedness.
As at May 31, 2006, the Corporation had utilized $18 million of its Term Facility. During the second
quarter, Cogeco Cable amended its Term Facility so that the committed amount, which should have
been reduced to $95 million on January 31, 2006, was maintained at its prior level of
$270 million. Based on existing bank covenants, Cogeco Cable could have used the entire
committed amount under the Term Facility. Going forward, Cogeco Cable expects to generate free
cash flow and thus further reduce its leverage ratio net of cash and cash equivalents.
FINANCIAL POSITION
Since August 31, 2005, there have been major changes to the “Fixed assets,” “Accounts payable and
accrued liabilities,” and “Indebtedness” items on the balance sheet. The $28.8 million rise in fixed
assets was mainly related to increased capital expenditures as well as lower amortization expense.
Accounts payable and accrued liabilities declined by $47.1 million as the use of working capital was
tightly managed at fiscal 2005 year-end. Indebtedness increased by $27.1 million, due to the factors
previously discussed in the “Cash Flow and Liquidity” section.
A description of Cogeco Cable’s share data as of June 30, 2006 is presented in the table below:
Number of
shares/options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
15,691,100
24,301,634
98,346
532,040
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
716,148
452,443
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. Cogeco Cable’s obligations
have not materially changed since August 31, 2005 and are described in the 2005 annual MD&A.
DIVIDEND DECLARATION
At its July 7, 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 August 3, 2006, to
shareholders of record on July 21, 2006.
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FOREIGN EXCHANGE MANAGEMENT
Cogeco Cable has entered into cross-currency swap agreements to fix the liability for interest and
principal payments on its US$150 million Senior Secured Notes. These agreements have the effect
of converting the US interest coupon rate of 6.83% per annum to an average Canadian dollar fixed
interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt
has been fixed at CDN$1.5910. Amounts due under the
US$150 million Senior Secured Notes Series A decreased by CDN$12.8 million at the end of the
third quarter of fiscal 2006 compared to August 31, 2005 due to the Canadian dollar’s appreciation.
Since the Senior Secured Notes Series A are fully hedged, the fluctuation is offset by a variation in
deferred credit described in Note 6 of the third quarter interim financial statements. The $73.4 million
deferred credit represents the difference between the quarter-end exchange rate and the exchange
rate on the cross-currency swap agreements, which determine the liability for interest and principal
payments on the Senior Secured Notes Series A.
FISCAL 2006 AND FISCAL 2007 FINANCIAL GUIDELINES
($ million, except customer data)
Preliminary Projections,
Fiscal 2007
Revised Projections,
July 10, 2006
Revised Projections,
April 10, 2006
Financial Guidelines
Revenue 660 to 670 599 to 602 593 to 600
Operating income before amortization 264 to 267 242 to 245 236 to 240
Operating margin About 40% 40.5% About 40%
Financial expense 55 55 56
Amortization 128 117 116
Net income 53 45 40
Capital expenditures and deferred charges 180 163 to 168 160
Free cash flow 30 20 to 25 20 to 25
Customer Addition Guidelines
Basic service 3,000 to 6,000 3,000 to 6,000 3,000 to 6,000
HSI service 35,000 to 40,000 55,000 to 60,000 47,000 to 49,000
Digital video service 55,000 to 60,000 75,000 to 80,000 59,000 to 62,000
Digital telephony service 45,000 to 50,000 45,000 to 50,000 32,000 to 37,000
RGU 138,000 to 156,000 178,000 to 196,000 138,000 to 154,000
Fiscal 2006 Financial Guidelines
Given the stronger-than-expected demand for digital video, HSI and digital telephony services during
the first nine months and various service enhancements offered recently, Cogeco Cable has revised
upward its 2006 guideline for digital video, HSI and digital telephony customer additions. Subsequent
to these adjustments, projected revenue and operating income before amortization were revised
upward. The operating margin should also increase to about 40.5% even if some additional network
maintenance expenses are expected to occur during the last quarter of fiscal 2006.
As a result of increased customer additions, Cogeco Cable will have to purchase more digital
terminals, cable modems and equipment and is raising its capital expenditures and deferred charges
as well as amortization guidelines from $160 million to between $163 million and $168 million and to
$117 million, respectively. The Corporation should generate free cash flow of $20 million to $25
million, which remains unchanged from last quarter’s projection, as a result of higher anticipated
operating income before amortization offset by higher capital expenditures and deferred charges.
Projected net income should be at about $45 million.
- 12 -
Fiscal 2007 Preliminary Financial Outlook
The fiscal 2007 financial guidelines exclude Cabovisão, which will be presented when the transaction
is completed and 2006 year-end results will be published. The increase of approximately 10% to 12%
in revenue should result mainly from expanded penetration of HSI service in fiscal 2006 and 2007,
and from rate increases implemented in Québec, in June 2006 and in Ontario, in August 2006; of at
most $3 per customer and averaging $1 per basic service customer. Improved penetration of digital
video services and continued deployment of digital telephony will also contribute to revenue increase.
Cogeco Cable plans to expand its basic service clientele through consistently effective marketing,
competitive product offers and superior customer service. As the penetration of HSI and digital video
services increase, the demand for these products will likely slow down but should be offset by
increased demand for digital telephony services.
Cogeco Cable expects to achieve an operating margin of approximately 40%, despite the launch of
digital telephony in most of its networks. Growth in revenue and sustained cost control should help
achieve an increase in operating income before amortization of approximately 9%.
Cogeco Cable expects the amortization of capital assets and deferred charges to increase by
$11 million, mainly due to capital expenditures and deferred charges for RGU additions in fiscal 2006
and 2007. Management expects that cash flows generated by operations will finance capital
expenditures and deferred charges, expected to amount to $180 million. The Corporation expects to
generate free cash flow in the order of $30 million, i.e. an increase of approximately $5 to $10 million
compared to the 2006 forecasts. An increase in free cash flow is expected despite the continued
deployment of digital telephony. Free cash flow that is generated should be used primarily to reduce
Indebtedness, thus improving the Corporation’s leverage ratios. Given the anticipated decrease in
Indebtedness, financial expense will slightly decline. Net income of approximately $53 million should
be achieved as a result of growth in operating income before amortization exceeding the increase in
fixed charges.
Compared to fiscal year 2006, the rise in capital expenditures and deferred charges will result
primarily from an increase of approximately $6 million associated with the scalable infrastructure
related to the head end equipment to support HSI, digital video services and video on demand, $7
million related to customer premise equipments and $4 million related to support capital with respect
to upgrade of business information systems.
RISK FACTORS AND UNCERTAINTIES
There have been no significant changes in the risk factors and uncertainties facing Cogeco Cable as
described in the Corporation’s 2005 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by Cogeco Cable throughout this MD&A.
It also provides reconciliations between these Non-GAAP measures and the most comparable GAAP
financial measures. These financial measures do not have standard definitions prescribed by
Canadian GAAP and may not be comparable with similar measures presented by other companies.
These measures include “cash flow from operations” and “free cash flow”.
- 13 -
Cash flow from operations
Cash flow from operations is used by Cogeco Cable’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating items.
This allows the Corporation to isolate the cash flow from operating activities from the impact of cash
management decisions. Cash flow from operations is subsequently used in calculating the Non-
GAAP measure, “free cash flow”’. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended May 31, Nine months ended May 31,
2006
2005
2006
2005
Cash flow from operating activities $ 45,564 $ 43,577 $ 88,581 $ 101,990
Changes in non-cash operating items 4,132 (15) 49,444 22,439
Cash flow from operations $ 49,696 $ 43,562 $ 138,025 $ 124,429
Free cash flow
Free cash flow is utilized, 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 May 31, Nine months ended May 31,
2006 2005 2006 2005
Cash flow from operations $ 49,696 $ 43,562 $ 138,025 $ 124,429
Acquisition of fixed assets (32,581) (20,903) (96,859) (69,286)
Increase in deferred charges (4,229) (3,229) (11,678) (8,566)
Assets acquired under capital leases – as
per Note 8 b) (1,199) (1,560) (2,630) (1,560)
Free cash flow $ 11,687 $ 17,870 $ 26,858 $ 45,017
ADDITIONAL INFORMATION
This MD&A was prepared on July 7, 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) is the second largest cable operator in both Ontario and Québec,
and ranks fourth in Canada in terms of the number of basic cable service customers served. Cogeco
Cable 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 infrastructure, Cogeco Cable provides its residential
and commercial customers with analog and digital video and audio services, high-speed Internet
access as well as digital telephony service. The Corporation provides about 1,512,000 revenue-
generating units to approximately 1,469,000 households in its service territory. Cogeco Cable’s
subordinate voting shares are listed on the Toronto Stock Exchange (CCA).
– 30 –
- 14 -
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
Analyst Conference Call: Monday July 10
th
at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the
conference call by dialing 10 minutes before the start of the
conference:
Canada/USA Access Number: 1 800 500-0177
International Access Number: +1 719 457-2679
Confirmation Code: 5307043
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
July 17 by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code: 5307043
- 15 -
Supplementary Quarterly Financial Information
Quarters ended May 31, February 28, November 30, August 31,
2006 2005 2006 2005 2005 2004 2005 2004
($000, except percentages
and per share data)
Revenue $ 153,956 $ 140,071 $ 147,757 $ 138,389 $ 143,413 $ 135,766 $ 140,178 $ 133,053
Operating income
before amortization
63,244
58,310
59,568
55,297
57,302
53,194
60,720
54,290
Operating margin 41.1% 41.6% 40.3% 40.0% 40.0% 39.2% 43.3 % 40.8%
Amortization 29,048 31,396 28,656 31,988 28,277 32,244 29,460 32,476
Financial expense 13,634 13,954 13,776 13,840 13,582 13,894 14,004 13,871
Income taxes 8,191 4,715 6,936 3,856 6,445 3,229 6,220 1,474
Net income 12,371 8,245 10,200 5,613 8,998 3,827 11,036 6,469
Cash flow from
operations
49,696 43,562 44,940 41,675 43,389 39,192 46,509 41,025
Net income per share $ 0.31 $ 0.21 $ 0.26 $ 0.14 $ 0.23 $ 0.10 $ 0.28 $ 0.16
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations.
However, the loss of basic service customers is usually greater, and the addition of HSI customers is
generally lower in the third quarter, mainly due to students leaving campuses at the end of the school
year. 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 subject
to a maximum amount. Since the maximum amount was reached at the end of the third quarter of
fiscal 2006 and 2005, Cogeco Cable paid no management fees during fiscal 2006 and 2005 fourth
quarters.
COGECO CABLE INC. - 16 -
Customer Statistics
May 31, August 31,
2006 2005
Homes Passe
d
Ontario 997 881 986 401
Québec 471 128 462 332
1 469 009 1 448 733
Revenue Generating Units
Ontario 1 081 998 968 749
Québec 429 695 378 984
1 511 693 1 347 733
Basic Service Customer
s
Ontario 588 397 581 631
Québec 244 095 239 802
832 492 821 433
Discretionnary Service Customer
s
Ontario 466 947 461 038
Québec 190 049 183 320
656 996 644 358
Pay TV Service Customer
s
Ontario 85 739 80 817
Québec 37 927 35 407
123 666 116 224
High Speed Internet Service Customers
Ontario 262 888 226 133
Québec 67 591 51 515
330 479 277 648
Digital Video Customers
Ontario 209 871 159 734
Québec 106 930 87 470
316 801 247 204
Digital Telephony
Ontario 20 842 1 251
Québec 11 079 197
31 921 1 448
- 17 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Revenue
Service
$ 153,381
$ 139,522
$ 443,312
$ 411,647
Equipment
575
549
1,814
2,579
153,956
140,071
445,126
414,226
Operating costs
88,145
79,054
256,620
239,239
Management fees – COGECO Inc.
2,567
2,707
8,392
8,186
Operating income before amortization 63,244
58,310
180,114
166,801
Amortization (note 3)
29,048
31,396
85,981
95,628
Operating income 34,196
26,914
94,133
71,173
Financial expense (note 6)
13,634
13,954
40,992
41,688
Income before income taxes 20,562
12,960
53,141
29,485
Income taxes (note 4)
8,191
4,715
21,572
11,800
Net income $ 12,371
$ 8,245
$ 31,569
$ 17,685
Earnings per share (note 5)
Basic and diluted
$0.31
$0.21
$0.79
$0.44
- 18 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine months ended May 31,
(In thousands of dollars)
2006
2005
(unaudited)
(unaudited)
Balance at beginning $ 58,604
$ 33,880
Net income
31,569
17,685
Dividends on multiple voting shares
(1,884)
(942)
Dividends on subordinate voting shares
(2,916)
(1,456)
Balance at end $ 85,373
$ 49,167
- 19 -
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
May 31,
2006
August 31,
2005
(unaudited)
(audited)
Assets
Current
Cash and cash equivalents
$-
$61
Accounts receivable
28,639
26,485
Income tax receivable
178
-
Prepaid expenses
5,210
3,946
34,027
30,492
Fixed assets
726,371
697,526
Deferred charges
33,633
38,226
Customer base
989,552
989,552
$ 1,783,583
$ 1,755,796
Liabilities and Shareholders’ equity
Liabilities
Current
Bank indebtedness
$ 7,693
$-
Accounts payable and accrued liabilities
77,983
125,090
Income tax liabilities
-
678
Deferred and prepaid income
26,784
24,907
Current portion of long-term debt (note 6)
19,827
1,322
132,287
151,997
Long-term debt (note 6)
692,082
691,159
Deferred and prepaid income
10,582
10,522
Pension plans liabilities and accrued employee benefits
2,311
1,903
Future income tax liabilities
229,329
210,731
1,066,591
1,066,312
Shareholders’ equity
Capital stock (note 7)
630,386
630,220
Retained earnings
85,373
58,604
Contributed surplus - stock-based compensation
1,233
660
716,992
689,484
$ 1,783,583
$ 1,755,796
- 20 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income
$ 12,371
$ 8,245
$ 31,569
$ 17,685
Items not affecting cash and cash equivalents
Amortization (note 3)
29,048
31,396
85,981
95,628
Amortization of deferred financing costs
243
242
724
717
Future income taxes (note 4)
7,455
3,269
18,598
9,404
Other
579
410
1,153
995
49,696
43,562
138,025
124,429
Changes in non-cash operating items (note 8a))
(4,132)
15
(49,444)
(22,439)
45,564
43,577
88,581
101,990
Cash flow from investing activities
Acquisition of fixed assets (note 8b))
(32,581)
(20,903)
(96,859)
(69,286)
Increase in deferred charges
(4,229)
(3,229)
(11,678)
(8,566)
Decrease in restricted cash
20,322
-
-
-
Other
30
17
38
44
(16,458)
(24,115)
(108,499)
(77,808)
Cash flow from financing activities
Increase (decrease) in bank indebtedness
(15,081)
1,627
7,693
11,402
Increase in long-term debt
-
-
18,000
-
Repayment of long-term debt
(12,425)
(20,371)
(1,202)
(33,908)
Issue of subordinate voting shares
-
82
166
722
Dividends on multiple voting shares
(628)
(314)
(1,884)
(942)
Dividends on subordinate voting shares
(972)
(486)
(2,916)
(1,456)
(29,106)
(19,462)
19,857
(24,182)
Net change in cash and cash equivalents -
-
(61)
-
Cash and cash equivalents at beginning
-
-
61
-
Cash and cash equivalents at end $ -
$-
$ -
$-
See supplemental cash flow information in note 8.
- 21 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present
fairly the financial position of Cogeco Cable Inc. as at May 31, 2006 and August 31, 2005 as well as its results of
operations and its cash flow for the three and nine month periods ended May 31, 2006 and 2005.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with Cogeco Cable Inc.’s annual consolidated financial
statements for the year ended August 31, 2005. These unaudited interim consolidated financial statements follow the
same accounting policies as the most recent annual consolidated financial statements.
The interim consolidated financial statements for the three and nine month periods ended May 31, 2005 have not
been subject to a review by the 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. Amortization
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 24,006 $ 25,824 $ 70,434 $ 78,612
Deferred charges 5,042 5,572 15,547 17,016
$ 29,048 $ 31,396 $ 85,981 $ 95,628
4. Income taxes
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 736 $ 1,446 $ 2,974 $ 2,396
Future 7,455 3,269 18,598 9,404
$ 8,191 $ 4,715 $ 21,572 $ 11,800
- 22 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
4. Income taxes (continued)
The following table provides the reconciliation between statutory federal and provincial income taxes and the
consolidated income tax expense:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Income tax at combined income tax rate of 35.09 %
(34.96 % in 2005)
$
7,215
$
4,531
$
18,647
$
10,308
Loss or income subject to lower or higher tax rates 45 (279) 137 (14)
Increase in income taxes as a result of increases in
substantially enacted tax rates
-
-
162
-
Large corporation tax 795 367 2,415 1,317
Other 136 96 211 189
Income tax at effective income tax rate $ 8,191 $ 4,715 $ 21,572 $ 11,800
On May 2, 2006, the Federal government announced its intention to reduce the corporate income tax rate
progressively from 21% to 19% in January 2010 and to eliminate the corporate surtax of 1.12% by January 1, 2008.
These measures were considered substantially enacted on June 6, 2006, and therefore will reduce future income
taxes by approximately $18 million for the next three month period ending August 31, 2006.
5. Earnings per share
The following table provides reconciliation between basic and diluted earnings per share:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $ 12,371 $ 8,245 $ 31,569 $ 17,685
Weighted average number of multiple voting and
subordinate voting shares outstanding
39,992,734
39,976,292
39,989,053
39,958,414
Effect of dilutive stock options
(1)
204,512 158,430 187,348 144,420
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
40,197,246
40,134,722
40,176,401
40,102,834
Earnings per share
Basic and diluted $ 0.31 $ 0.21 $ 0.79 $0.44
(1) For the three and nine month periods ended May 31, 2006, 143,248 stock options (19,906 and 67,585 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.
- 23 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
6. Long-term debt
Maturity Interest rate
May 31,
2006
August 31,
2005
(unaudited) (audited)
Parent company
Term Facility
(1)
2007 4.97
(2)
$ 18,000 $-
Senior Secured Debentures Series 1 2009 6.75
150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(3)
165,225 178,065
Series B 2011 7.73
175,000 175,000
Second Secured Debentures Series A 2007 8.44
125,000 125,000
Deferred credit
(4)
2008 -
73,425 60,585
Subsidiaries
Obligations under capital leases 2010 6.42 – 8.36
5,259 3,831
711,909 692,481
Less current portion
19,827 1,322
$ 692,082 $ 691,159
(1) In January 2006, the Corporation amended its Term Facility so that the committed amount, which should have been reduced to
$95,000,000 on January 31, 2006, was maintained at its prior level of $270,000,000.
(2) Average interest rate on debt as of May 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 May 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 nine month periods ended May 31, 2006 amounted to $13,264,000 and
$39,565,000 ($13,228,000 and $39,694,000 in 2005).
- 24 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
7. 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, issuable in series.
Multiple voting shares, 10 votes per share.
Subordinate voting shares, 1 vote per share.
May 31,
2006
August 31,
2005
(unaudited) (audited)
Issued
15,691,100 multiple voting shares $ 98,346 $ 98,346
24,301,634 subordinate voting shares (24,293,486 as at August 31, 2005) 532,040 531,874
$ 630,386 $ 630,220
During the period, subordinate voting share transactions were as follows:
Nine months ended Twelve months ended
May 31, 2006 August 31, 2005
(unaudited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 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
8,148
166
60,671
742
Compensation expense previously recorded in contributed
surplus for options exercised
-
-
-
62
Balance at end 24,301,634 $ 532,040 24,293,486 $ 531,874
- 25 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
7. 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 first nine months, the Corporation granted 126,059 stock options
(140,766 in 2005) with an exercise price ranging from $25.12 to $29.05 ($21.50 in 2005) of which 31,743 stock
options (38,397 in 2005) were granted to COGECO Inc.’s employees. The Corporation records compensation
expense for options granted on or after September 1, 2003. As a result, a compensation expense of $207,000 and
$573,000 ($133,000 and $352,000 in 2005) was recorded for the three and nine month periods ended May 31, 2006.
If compensation expense had been recognized using the fair value-based method at the grant date for options granted
between September 1, 2001 and August 31, 2003, the Corporation’s net income and earnings per share for the three
and nine month periods ended May 31, 2006 and 2005 would have been reduced to the following pro forma amounts:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income
As reported $ 12,371 $ 8,245 $ 31,569 $ 17,685
Pro forma 12,350 8,149 31,508 17,397
Basic earnings per share
As reported $ 0.31 $ 0.21 $ 0.79 $ 0.44
Pro forma 0.31 0.20 0.79 0.44
Diluted earnings per share
As reported $ 0.31 $ 0.21 $ 0.79 $ 0.44
Pro forma 0.31 0.20 0.78 0.43
The fair value of each option granted was estimated on the grant date for purposes of determining stock-based
compensation expense using the Binomial option pricing model based on the following assumptions:
2006 2005
Expected dividend yield
1.27 % 1.27 %
Expected volatility
39 % 43 %
Risk-free interest rate
3.70 % 3.70 %
Expected life in years
4.0 4.0
The fair value of stock options granted for the nine month period ended May 31, 2006 was $9.44 ($7.46 in 2005) per
option.
As at May 31, 2006, the Corporation had outstanding stock options providing for the subscription of 716,148
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 January 11, 2016.
- 26 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. Statements of cash flow
a) Changes in non-cash operating items
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ 146 $ 4,530 $ (2,154) $ 3,395
Income tax receivable 329 - (178) -
Prepaid expenses (695) 1,071 (1,264) 1,766
Accounts payable and accrued liabilities (3,924) (6,506) (47,107) (31,158)
Income tax liabilities - 1,120 (678) 335
Deferred and prepaid income 12 (200) 1,937 3,223
$ (4,132) $ 15 $ (49,444) $ (22,439)
b) Other information
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed asset acquisitions through capital leases $ 1,199 $ 1,560 $ 2,630 $ 1,560
Interest paid 15,822 16,026 43,087 43,383
Income taxes paid 407 326 3,830 2,061
9. 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 financial statements. The total expenses related to these plans are as follows:
Three months ended May 31, Nine months ended May 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 222 $ 156 $ 618 $ 452
Defined contribution pension plan and collective
registered retirement savings plan
356 270 1,115 932
$ 578 $ 426 $ 1,733 $ 1,384
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COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2006
(amounts in tables are in thousands of dollars, except per share data)
10. Subsequent event
Acquisition of Cabovisão – Televisão 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 (“Catalyst”) and Cabovisão – Televisão por Cabo, S.A. (“Cabovisão”), to
purchase, at a cost of €464.9 million, all the shares of the second largest cable operator in Portugal, an indirect
wholly-owned subsidiary of CSII. The price includes the purchase of senior debt and reimbursement of certain other
Cabovisão liabilities. The final purchase price will be determined following completion of a post-closing working capital
adjustment. The Corporation is assuming a €20 million working capital deficiency. The transaction, which was
approved by the Superior Court of Quebec on July 4, 2006, is still subject to the fulfilment of certain conditions of
closing, including the implementation of the plan of arrangement previously approved by the court in March 2004, as
amended. The Corporation will finance the acquisition of Cabovisão through an underwritten credit facility of
$900 million over five years committed by a major Canadian Chartered Bank.