CUSTOMER GROWTH FUELS NEAR DOUBLING OF NET INCOME
PRESS RELEASE
For immediate release
Customer growth fuels near doubling of net income
Montréal, April 10, 2006 – Today, Cogeco Cable Inc. (TSX: CCA.SV) announced its financial
results for the second quarter of fiscal 2006, ended February 28.
Superior results
Cogeco Cable’s results continue to improve as demonstrated by an increased number of
customers in all major service categories. “We are pleased with the trend of these results. We
have improved our revenue by 6.8%, operating income before amortization by 7.7% and net
income by 81.7%,” declared Mr. Louis Audet, President and Chief Executive Officer of Cogeco
Cable.
Continued growth in all major service categories
Cogeco Cable reported solid customer growth in all major service categories. “The number of
basic service customers improved from a net loss of 751 to a net gain of 3,505 if we compare the
second quarters of 2005 and 2006. During the quarter, digital video and high-speed Internet (HSI)
service customers grew by about 24,500 and 17,500 customers respectively. Our digital telephony
offering is creating a snowball effect with more customers choosing the bundled offer of two or
three services. We are pleased to see more and more customers enjoying our services and we are
committed to bring them the products and levels of service they deserve”, concluded Mr. Audet.
Adjustment to our guidelines
Given the strong demand for basic, digital video and HSI services during the first six months and
various service enhancements offered recently, Cogeco Cable has revised its guidelines to reflect
the improved expectations of management.
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FINANCIAL HIGHLIGHTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages and (unaudited) (unaudited)
per share data)
2006 2005 %
Change
2006 2005 %
Change
Revenue $ 147,757 $ 138,389 6.8 $ 291,170 $ 274,155 6.2
Operating income before
amortization
59,568
55,297
7.7
116,870
108,491
7.7
Net income 10,200 5,613 81.7 19,198 9,440 103.4
Cash flow from operations
(1)
44,940 41,675 7.8 88,329 80,867 9.2
Less:
Capital expenditures and
increase in deferred charges
39,480
29,941 31.9 73,158 53,720 36.2
Free cash flow
(1)
5,460 11,734 (53.5) 15,171 27,147 (44.1)
Per share data
Basic net income $ 0.26 $ 0.14 85.7 $ 0.48 $ 0.24 100.0
(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.
.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Certain statements in this press release may constitute forward-looking information within the meaning of
securities laws. Forward-looking information may relate to our future outlook and anticipated events, our
business, our operations, our financial performance, our financial condition or our results and, in some
cases, can be identified by terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "intend," "estimate," "predict," "potential," "continue," “foresee” or other similar expressions
concerning matters that are not historical facts. In particular, statements regarding our future operating
results and economic performance and our objectives and strategies are forward-looking statements. These
statements are based on certain factors and assumptions, including expected growth, results of operations,
performance and business prospects and opportunities, which we believe are reasonable as of the current
date. While we consider these assumptions to be reasonable based on information currently available to us,
they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks
and uncertainties (described in “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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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 of products
and services as well as clientele, effective management of capital and tight cost control. The
Corporation measures its performance with regard to these objectives with revenue growth, free
cash flow and revenue-generating unit
*
(RGU) growth. Below are the recent achievements in
furtherance of Cogeco Cable’s objectives.
• Digital video services:
o Addition of Treehouse On Demand and KIDZ On Demand to Cogeco Cable’s
Ontario digital video offer, free of charge;
o Addition of the new cinépop channel to Cogeco Cable’s Québec digital video offer.
• Digital telephony service:
o The digital telephony service is now available to 38% of homes passed in Cogeco
Cable’s territories;
o Deployment of digital telephony service in Chatham, Georgetown, Waterdown and
Milton, Ontario, and in Rimouski, Matane, Sept-Îles, Port-Cartier and Baie-Comeau,
Québec.
• High-speed Internet service:
o Cogeco Cable more than doubled its download speed for its Lite product from 300
Kbps to 640 Kbps.
• Acquisition:
o In furtherance of its existing line of business and external growth strategy, the
Corporation continues to investigate cable system acquisition opportunities,
including cable systems located outside Canada.
RGU growth
During the first six months, the number of RGUs increased by 8.6%. The Corporation had
anticipated RGU growth between 8% and 10% for all of fiscal 2006. Higher than anticipated HSI
and digital video customer growth has allowed Cogeco Cable to exceed the lower range of its
objective in the first six months of the fiscal year. Therefore, management has revised its
guidelines and now believes it will reach RGU growth between 10% and 11%. Please consult
“Fiscal 2006 financial guidelines” section for further details.
Revenue growth
During the first six months, revenue increased by 6.2%. The Corporation had expected to reach
revenue growth between 6% and 7% in fiscal 2006, and now anticipates revenue growth between
7% and 8%. Please consult “Fiscal 2006 financial guidelines” section for further details.
Free cash flow
In the first six months, Cogeco Cable generated free cash flow of $15.2 million. In light of the
stronger than expected RGU growth in the first six months of fiscal 2006, capital expenditures and
deferred charges are expected to surpass the $140 million guideline and reach $160 million.
Therefore free cash flow will be approximately $15 million less than the set objective of $35 million
to $40 million. Please consult “Fiscal 2006 financial guidelines” section for further details.
*
See customer statistics section for detailed explanations.
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CUSTOMER STATISTICS
Net additions (losses) % of Penetration
(1)
Quarters ended
February 28,
Six months ended
February 28,
February 28,
February 28,
2006 2006 2005 2006 2005 2006 2005
Revenue-generating units (RGUs)
(2)
1,463,612 55,109 23,538 115,879 65,897
Basic service customers
835,841 3,505 (751) 14,408 6,992
HSI service customers
(3)
318,101 17,460 12,137 40,453 29,534 41.9 37.1
Digital video service customers
(4)
293,166 24,547 12,152 45,962 29,371 35.8 28.5
Digital telephony service customers 16,504 9,597 ― 15,056 ― 5.7 ―
Digital terminals
(5)
372,168 37,299 17,310 68,284 39,152 45.4 34.3
(1) As a percentage of basic service customers in areas served.
(2) Represent the sum of basic service, digital video service, HSI service and digital telephony service customers.
(3) The number of Internet customers in fiscal 2005 has been restated to reflect the number of customers based on the billing dates, which are
distributed throughout the month, instead of the number of customers as at the end of the quarter. This change resulted in a downward
adjustment of approximately 5,500 customers as at February 28, 2005. Customers subscribing only to Internet services amounted to 59,292 as
at February 28, 2006 compared to 57,051 as at November 30, 2005.
(4) In fiscal 2005, the number of digital video service customers has been restated to reflect changes brought about by our billing improvement
program, which has allowed us to identify digital video service customer accounts that were not cancelled when they became inactive. This
change resulted in a downward adjustment of approximately 6,400 customers as at February 28, 2005 and did not affect the number of digital
terminals.
(5) 58% of terminals as at February 28, 2006 were purchased compared to 74% one year earlier.
During the second quarter, RGU growth was higher than the same period last year due to an
increase in basic and digital telephony customers and higher growth in HSI and digital video
customers.
During the second quarter of fiscal 2006, the number of net additions of HSI service customers
stood at 17,460 compared to 12,137 for the same period last year, an increase of 43.9%. Basic
service customers went from a net loss of 751 customers in the second quarter of 2005 to a net
gain of 3,505 customers for the comparable period this year. These results are mainly attributable
to additional marketing initiatives such as outbound telemarketing and promotional activities as
well as digital telephony up-sell activities and the bundled offer of three services.
The increase in the number of digital video service customers stems from Cogeco Cable’s
attractive promotional offers and from the growing interest for this technology among customers.
On February 28, 2006, 18,783 customers were subscribing to the digital telephony service
including pending orders compared to 9,115 customers including pending orders as at November
30, 2005.
ACCOUNTING POLICIES AND ESTIMATES
There has been no 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
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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 the
second quarter 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 second quarters and
first six months of fiscal 2006 and 2005.
OPERATING RESULTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2006
2005 %
Change
2006
2005
%
Change
Revenue $ 147,757 $ 138,389 6.8 $ 291,170 $ 274,155 6.2
Operating costs 85,232 80,328 6.1 168,475 160,185 5.2
Management fees -
COGECO Inc.
2,957 2,764
7.0 5,825 5,479 6.3
Operating income before
amortization
59,568 55,297 7.7 116,870 108,491 7.7
Operating margin 40.3% 40.0% 40.1% 39.6%
Revenue
Revenue for the second quarter and first six months of fiscal 2006 rose by $9.4 million or 6.8% and
by $17 million or 6.2% respectively, compared to the same periods last year. Revenue growth
during these periods is mainly attributable to an increased number of customers in basic, digital
video, HSI and digital telephony services as well as to rate increases implemented in June and
August of 2005. Monthly rate increases of at most $3 per customer and averaging $0.50 per basic
service customer took effect on June 15, 2005 in Ontario and on August 1, 2005 in Québec. The
monthly rate for certain bundled services has increased by $1 in Ontario, and other limited rate
increases for selective tier services were implemented in Québec. Furthermore, the August 2005
reduction in digital terminal rental rates was more than offset by a greater number of customers
renting digital terminals.
Operating Costs
For the second quarter and first six months of fiscal 2006, operating costs, excluding management
fees payable to COGECO Inc., rose by $4.9 million or 6.1% and by $8.3 million or 5.2%
respectively. Operating costs also include network fees. Network fees increased by 5.8% and 4.1%
during the second quarter and first six months respectively, compared to the same periods last
year. These increases are mainly the result of the introduction of digital telephony service, the
Canadian Radio-television and Telecommunications Commission mandated APTN wholesale rate
increase and RGU growth, partly offset by IP transport costs that have declined despite HSI
customer growth. Other operating costs increased in order to serve additional RGUs, including
digital telephony.
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Operating Income before Amortization
For the second quarter and first six months of fiscal 2006, operating income before amortization
rose by 7.7% for each period, compared to the same periods last year due to the increase in
revenue outpacing the rise in operating costs. Cogeco Cable had previously anticipated a
reduction in its operating margin due to the launch of digital telephony service. However, the
Corporation increased its operating margin to 40.3% and 40.1% in the second quarter and first six
months of fiscal 2006 respectively compared to 40% and 39.6% for the same periods last year as
a result of better-than-expected net additions of basic and HSI service customers and of some
additional network maintenance costs deferred to the second half of fiscal 2006.
FIXED CHARGES
Quarters ended February 28, Six months ended February 28,
($000s, except
percentages)
2006 2005 %
Change
2006 2005 %
Change
Amortization $ 28,656 $ 31,988 (10.4) $ 56,933 $ 64,232 (11.4)
Financial expense $ 13,776 $ 13,840 (0.5) $ 27,358 $ 27,734 (1.4)
During the second quarter and first six months of fiscal 2006, amortization amounted to $28.7
million and $ 56.9 million compared to $32 million and $64.2 million for the same periods last year.
Amortization declined during these periods since many cable modems and digital terminals were
fully amortized.
For the second quarter and first six 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 second quarter and first six months of fiscal 2006, income taxes amounted to $6.9 million
and $13.4 million respectively, compared to $3.9 million and $7.1 million for the same periods last
year. The income tax increases were mainly attributable to the growth in operating income before
amortization combined with the decline in fixed charges.
NET INCOME
Net income for the second quarter amounted to $10.2 million, or $0.26 per share, compared to
$5.6 million, or $0.14 per share, for the same period last year. For the first half of fiscal 2006, net
income amounted to $19.2 million, or $0.48 per share compared to $9.4 million, or $0.24 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 the decline in fixed charges.
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CASH FLOW AND LIQUIDITY
Quarters ended February 28,
Six months ended February 28,
($000s)
2006 2005 2006 2005
Operating Activities
Cash flow from operations $ 44,940 $ 41,675 $ 88,329 $ 80,867
Changes in non-cash operating items (2,525) 10,552 (45,312) (22,454)
$ 42,415 $ 52,227 $ 43,017 $ 58,413
Investing Activities
(1)
$ (58,363) $ (29,916) $ (92,041) $ (53,693)
Financing Activities
(1)
$ (4,735) $ (22,311) $ 48,963 $ (4,720)
Net change in cash and cash equivalents
$ (20,683) $ ― $
(61)
$
―
(1) Excludes assets acquired under capital leases.
During the second quarter of fiscal 2006, cash flow from operations reached $44.9 million or 7.8%
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 payable and accrued
liabilities compared to an increase for the same period in fiscal 2005.
During the first six months of fiscal 2006, cash flow from operations reached $88.3 million or 9.2%
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 February 28,
Six months ended February 28,
($000s)
2006
2005
2006
2005
Customer Premise Equipment
(1)
$ 14,183 $ 15,386 $ 29,606 $ 26,690
Scalable Infrastructure
6,943
2,801
10,615
5,206
Line Extensions
2,291
1,991
4,843
4,768
Upgrade / Rebuild
9,632
5,938
16,606
10,384
Support Capital
2,647
693
4,039
1,335
Total Capital Expenditures
(2)
$
35,696
$
26,809
$
65,709
$
48,383
Deferred charges and others
3,776
3,107
7,441
5,310
Increase in restricted cash
20,322
―
20,322
―
Total investing activities
$
59,794
$
29,916
$
93,472
$
53,693
(1) Includes mainly new and replacement drops but also home terminal devices.
(2) Includes capital leases, which are excluded from the statement of cash flow.
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During the second quarter and first six months of fiscal 2006, the increase related to capital
expenditures is mainly due to the following factors:
¾ The decrease in customer premise equipment in the second quarter of fiscal 2006 results
primarily from a decrease in digital terminals and cable modems partially offset by more
home terminal devices related to the digital telephony service. Cogeco Cable utilized digital
terminals and cable modems that were in inventory at the end of the first quarter of fiscal
2006 to meet the strong demand of the second quarter. Fewer digital terminals and cable
modems were received from suppliers during the second quarter of fiscal 2006 as the
inventory level was tightly managed. For the first six months of fiscal 2006, the increase in
customer premise equipment results primarily from a rise in the number of digital terminals
rented to customers and a greater ratio of digital terminals per digital home.
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. The
percentage of customers with access to two-way service rose from 87% as at February 28,
2005 to 91% as at February 28, 2006.
The second quarter and first six 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 second quarter and first six months, the $20.3 million
increase in restricted cash is the result of a deposit in escrow. This deposit of €15 million was
intended for a potential acquisition within the Corporation’s business segment. The deposit is being
returned with accumulated interest thereon.
Free cash flow of $5.5 million and $15.2 million were generated during the second quarter and first
six 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 second quarter and first six
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 to support digital telephony
service and better-than-expected RGU growth.
During the second quarter, the level of Indebtedness decreased by $3.3 million mainly due to
generated free cash flow of $5.5 million, a net decrease in cash and cash equivalents of
$20.7 million, partly offset by a decline in non-cash operating items of $2.5 million and an increase
in restricted cash of $20.3 million. For the same period last year, Indebtedness declined by
$21.8 million essentially due to generated free cash flow of $11.7 million and an increase of
$10.6 million in non-cash operating items. In addition, a dividend of $0.04 per share for
subordinate and multiple voting shares, totalling $1.6 million, was paid during the second quarter of
fiscal 2006 compared to a dividend of $0.02 per share or $0.8 million for the second quarter of
fiscal 2005.
During the first half of fiscal 2006, the level of Indebtedness grew by $52 million mainly due to
generated free cash flow of $15.2 million partly offset by a decline in non-cash operating items of
$45.3 million and an increase in restricted cash of $20.3 million. For the same period last year,
Indebtedness declined by $3.8 million essentially due to generated free cash flow of $27.1 million
partly offset by a decline in non-cash operating items of $22.5 million. Dividends totalling
$3.2 million were paid during the first six months of fiscal 2006 compared to $1.6 million for the
same period the year before.
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As at February 28, 2006, Cogeco Cable had a working capital deficiency of $108.8 million
compared to $121.5 million as at August 31, 2005. This improvement is mainly attributable to an
increase in restricted cash and a reduction in the level of accounts payable and accrued liabilities,
as discussed in the Financial Position section, partially offset by an increase in the current portion
of Indebtedness. This increase is explained by a greater utilization of bank indebtedness and an
increase in the 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 February 28, 2006, the Corporation had utilized $30 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, is 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,” “Restricted cash”, and “Indebtedness” items on the balance sheet. The
$19.3 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 $43.2 million as
the use of working capital was tightly managed at fiscal 2005 year-end. Restricted cash and
Indebtedness increased by $20.3 million and $53.4 million, respectively, due to the factors
previously discussed in the “Cash Flow and Liquidity” section.
A description of Cogeco Cable’s share data as of March 31, 2006 is presented in the table below:
Number of
shares/options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
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 April 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 May 5, 2006, to
shareholders on record on April 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$7.6 million at the end of the
second quarter of fiscal 2006 compared to August 31, 2005 due to the Canadian dollar’s
appreciation. Since the Senior Secured Notes Series A are fully hedged, the fluctuation is fully
offset by a variation in deferred credit described in Note 6 of the second quarter interim financial
statements. The $68.2 million deferred credit represents the difference between the quarter-end
exchange rate and the exchange rate on the cross-currency swap agreements, which determine
the liability for interest and principal payments on the Senior Secured Notes Series A.
FISCAL 2006 FINANCIAL GUIDELINES
($ million, except customer data)
Revised Projections,
April 10, 2006
Original Projections,
October 24, 2005
Financial Guidelines
Revenue 593 to 600 588 to 593
Operating income before amortization 236 to 240 234 to 236
Operating margin About 40% About 40%
Financial expense 56 56
Amortization 116 115
Net income 40 39
Capital expenditures and deferred charges 160 140
Free cash flow 20 to 25 35 to 40
Customer Addition Guidelines
Basic service 3,000 to 6,000 0 to 3,000
HSI service 47,000 to 49,000 32,000 to 37,000
Digital video service 59,000 to 62,000 47,000 to 52,000
Digital telephony service 32,000 to 37,000 32,000 to 37,000
Digital terminals 86,000 to 90,000 60,000 to 65,000
RGU 138,000 to 154,000 111,000 to 129,000
Given the stronger than expected demand for basic, digital video and HSI services during the first
six months and various service enhancements offered recently, Cogeco Cable has revised upward
its 2006 guideline for basic, digital video and HSI customer additions. Subsequent to these
adjustments, projected revenue and operating income before amortization are being revised
upward. The operating margin should remain at about 40% as some additional network
maintenance expenses are expected to be spent during the second half of fiscal 2006.
As a result of increased customer additions, Cogeco Cable will have to purchase more digital
terminals, cable modems and equipment and is raising its capital expenditures and deferred
charges as well as amortization guidelines from $140 million to $160 million and $115 million to
$116 million respectively. The Corporation should generate free cash flow of $20 million to $25
million as a result of higher anticipated operating income before amortization offset by higher
capital expenditures and deferred charges. Projected net income should be at about $40 million.
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RISK FACTORS AND UNCERTAINTIES
There have been no significant changes in the risk factors and uncertainties facing Cogeco Cable
as described in the Corporation’s 2005 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by Cogeco Cable throughout this
MD&A. It also provides reconciliations between these Non-GAAP measures and the most
comparable GAAP financial measures. These financial measures do not have standard definitions
prescribed by Canadian GAAP and may not be comparable with similar measures presented by
other companies. These measures include ‘cash flow from operations’ and ‘free cash flow’.
Cash flow from operations
Cash flow from operations is used by Cogeco Cable’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Corporation to isolate the cash flow from operating activities from the impact
of cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure ‘free cash flow’. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended February 28, Six months ended February 28,
2006
2005
2006
2005
Cash flow from operating activities $ 42,415 $ 52,227 $ 43,017 $ 58,413
Changes in non-cash operating items 2,525 (10,552) 45,312 22,454
Cash flow from operations $ 44,940 $ 41,675 $ 88,329 $ 80,867
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 February 28, Six months ended February 28,
2006 2005 2006 2005
Cash flow from operations $ 44,940 $ 41,675 $ 88,329 $ 80,867
Acquisition of fixed assets (34,265) (26,809) (64,278) (48,383)
Increase in deferred charges (3,784) (3,132) (7,449) (5,337)
Assets acquired under capital leases – as
per Note 8 b) (1,431) ― (1,431) ―
Free cash flow $ 5,460 $ 11,734 $ 15,171 $ 27,147
ADDITIONAL INFORMATION
This MD&A was prepared on April 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
- 12 -
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 1,464,000 revenue-generating units to approximately 1,462,000 households in its service
territory. Cogeco Cable’s subordinate voting shares are listed on the Toronto Stock Exchange
(CCA.SV).
- 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
Analyst Conference Call: Monday April 10, 2006, at 12:30 p.m. EDT
By the Internet at www.cogeco.ca/investors
By telephone: 1 800 500-0311 (confirmation 4638890)
Media are invited to participate on a listen mode only.
Re-broadcast of the call available until April 18th: 1 888 203-1112
(confirmation 4638890)
- 13 -
Supplementary Quarterly Financial Information
Quarters ended February 28, November 30, August 31, May 31,
2006 2005 2005 2004 2005 2004 2005 2004
($000, except percentages
and per share data)
Revenue $ 147,757 $ 138,389 $ 143,413 $ 135,766 $ 140,178 $ 133,053 $ 140,071 $ 132,364
Operating income
before amortization
59,568
55,297
57,302
53,194
60,720
54,290
58,310
51,329
Operating margin 40.3% 40.0% 40.0% 39.2% 43.3 % 40.8% 41.6 % 38.8%
Amortization 28,656 31,988 28,277 32,244 29,460 32,476 31,396 32,070
Financial expense 13,776 13,840 13,582 13,894 14,004 13,871 13,954 14,414
Income taxes 6,936 3,856 6,445 3,229 6,220 1,474 4,715 2,993
Net income 10,200 5,613 8,998 3,827 11,036 6,469 8,245 1,852
Cash flow from
operations
44,940 41,675 43,389 39,192 46,509 41,025 43,562 36,593
Net income per share $ 0.26 $ 0.14 $ 0.23 $ 0.10 $ 0.28 $ 0.16 $ 0.21 $ 0.05
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 lower or 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
early in the fourth quarter of fiscal 2004 and at the end of the third quarter of fiscal 2005, Cogeco
Cable paid lower or no management fees during these quarters.
COGECO CABLE INC. - 14 -
Customer Statistics
February 28, August 31,
2006 2005
Homes Passe
d
Ontario 993 819 986 401
Québec 467 895 462 332
1 461 714 1 448 733
Revenue Generating Units
Ontario 1 047 964 968 749
Québec 415 648 378 984
1 463 612 1 347 733
Basic Service Customer
s
Ontario 591 318 581 631
Québec 244 523 239 802
835 841 821 433
Discretionnary Service Customer
s
Ontario 466 998 461 038
Québec 189 421 183 320
656 419 644 358
Pay TV Service Customer
s
Ontario 84 187 80 817
Québec 39 240 35 407
123 427 116 224
High Speed Internet Service Customers
Ontario 255 289 226 133
Québec 62 812 51 515
318 101 277 648
Digital Video Customers
Ontario 190 593 159 734
Québec 102 573 87 470
293 166 247 204
Digital Terminals
Ontario 260 268 209 662
Québec 111 900 94 222
372 168 303 884
Digital Telephony
Ontario 10 764 1 251
Québec 5 740 197
16 504 1 448
- 15 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended February 28, Six months ended February 28,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited) (unaudited)
(unaudited) (unaudited)
Revenue
Service
$ 147,172
$ 137,415
$ 289,931
$ 272,125
Equipment
585
974
1,239
2,030
147,757
138,389
291,170
274,155
Operating costs
85,232
80,328
168,475
160,185
Management fees – COGECO Inc.
2,957
2,764
5,825
5,479
Operating income before amortization 59,568
55,297
116,870
108,491
Amortization (note 2)
28,656
31,988
56,933
64,232
Operating income 30,912
23,309
59,937
44,259
Financial expense (note 6)
13,776
13,840
27,358
27,734
Income before income taxes 17,136
9,469
32,579
16,525
Income taxes (note 3)
6,936
3,856
13,381
7,085
Net income $ 10,200
$ 5,613
$ 19,198
$ 9,440
Earnings per share (note 4)
Basic
$0.26
$0.14
$0.48
$0.24
Diluted
0.25
0.14
0.48
0.24
- 16 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six months ended February 28,
(In thousands of dollars)
2006
2005
(unaudited)
(unaudited)
Balance at beginning $ 58,604
$ 33,880
Net income
19,198
9,440
Dividends on multiple voting shares
(1,256)
(628)
Dividends on subordinate voting shares
(1,944)
(970)
Balance at end $ 74,602
$ 41,722
- 17 -
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
February 28,
2006
August 31,
2005
(unaudited)
(audited)
Assets
Current
Cash and cash equivalents
$-
$61
Restricted cash (note 5)
20,322
-
Accounts receivable
28,785
26,485
Income tax receivable
507
-
Prepaid expenses
4,515
3,946
54,129
30,492
Fixed assets
716,797
697,526
Deferred charges
34,689
38,226
Customer base
989,552
989,552
$ 1,795,167
$ 1,755,796
Liabilities and Shareholders’ equity
Liabilities
Current
Bank indebtedness
$ 22,774
$-
Accounts payable and accrued liabilities
81,907
125,090
Income tax liabilities
-
678
Deferred and prepaid income
26,673
24,907
Current portion of long-term debt (note 6)
31,543
1,322
162,897
151,997
Long-term debt (note 6)
691,592
691,159
Deferred and prepaid income
10,681
10,522
Pension plans liabilities and accrued employee benefits
2,109
1,903
Future income tax liabilities
221,874
210,731
1,089,153
1,066,312
Shareholders’ equity
Capital stock (note 7)
630,386
630,220
Retained earnings
74,602
58,604
Contributed surplus - stock-based compensation
1,026
660
706,014
689,484
$ 1,795,167
$ 1,755,796
- 18 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended February 28, Six months ended February 28,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income
$ 10,200
$ 5,613
$ 19,198
$ 9,440
Items not affecting cash and cash equivalents
Amortization (note 2)
28,656
31,988
56,933
64,232
Amortization of deferred financing costs
240
241
481
475
Future income taxes (note 3)
5,523
3,531
11,143
6,135
Other
321
302
574
585
44,940
41,675
88,329
80,867
Changes in non-cash operating items (note 8a))
(2,525)
10,552
(45,312)
(22,454)
42,415
52,227
43,017
58,413
Cash flow from investing activities
Acquisition of fixed assets (note 8b))
(34,265)
(26,809)
(64,278)
(48,383)
Increase in deferred charges
(3,784)
(3,132)
(7,449)
(5,337)
Increase in restricted cash
(20,322)
-
(20,322)
-
Other
8
25
8
27
(58,363)
(29,916)
(92,041)
(53,693)
Cash flow from financing activities
Increase (decrease) in bank indebtedness
7,128
(11,553)
22,774
9,775
Increase in long-term debt
-
-
30,000
-
Repayment of long-term debt
(10,429)
(10,270)
(777)
(13,537)
Issue of subordinate voting shares
166
311
166
640
Dividends on multiple voting shares
(628)
(314)
(1,256)
(628)
Dividends on subordinate voting shares
(972)
(485)
(1,944)
(970)
(4,735)
(22,311)
48,963
(4,720)
Net change in cash and cash equivalents (20,683)
-
(61)
-
Cash and cash equivalents at beginning
20,683
-
61
-
Cash and cash equivalents at end $ -
$-
$ -
$-
See supplemental cash flow information in note 8.
- 19 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present
fairly the financial position of Cogeco Cable Inc. as at February 28, 2006 and August 31, 2005 as well as its results of
operations and its cash flow for the three and six month periods ended February 28, 2006 and 2005.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with Cogeco 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 six month periods ended February 28, 2005 have not
been subject to a review by the Corporation’s external auditors.
2. Amortization
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 23,479 $ 26,484 $ 46,428 $ 52,788
Deferred charges 5,177 5,504 10,505 11,444
$ 28,656 $ 31,988 $ 56,933 $ 64,232
3. Income taxes
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 1,413 $ 325 $ 2,238 $ 950
Future 5,523 3,531 11,143 6,135
$ 6,936 $ 3,856 $ 13,381 $ 7,085
- 20 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
3. 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 February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Income tax at combined income tax rate of 35.09 %
(34.96 % in 2005)
$
6,013
$
3,310
$
11,432
$
5,777
Loss or income subject to lower or higher tax rates 100 171 92 265
Increase in income taxes as a result of increases in
substantially enacted tax rates
-
-
162
-
Large corporation tax 795 325 1,620 950
Other 28 50 75 93
Income tax at effective income tax rate $ 6,936 $ 3,856 $ 13,381 $ 7,085
4. Earnings per share
The following table provides reconciliation between basic and diluted earnings per share:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $ 10,200 $ 5,613 $ 19,198 $9,440
Weighted average number of multiple voting and
subordinate voting shares outstanding
39,989,807
39,963,076
39,987,182
39,949,327
Effect of dilutive stock options
(1)
162,319 160,067 178,767 137,415
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
40,152,126
40,123,143
40,165,949
40,086,742
Earnings per share
Basic $ 0.26 $ 0.14 $ 0.48 $0.24
Diluted 0.25 0.14 0.48 0.24
(1) For the three and six month periods ended February, 2006, 143,248 stock options (19,906 and 91,424 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.
- 21 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 2006
(amounts in tables are in thousands of dollars, except per share data)
5. Restricted cash
Restricted cash represents a deposit in escrow of €15,000,000 intended for a potential acquisition within the
Corporation’s business segment. The deposit is being returned with accumulated interest thereon.
6. Long-term debt
Maturity Interest rate
February 28,
2006
August 31,
2005
(unaudited) (audited)
Parent company
Term Facility
(1)
2007 4.72
(2)
$ 30,000 $-
Senior Secured Debentures Series 1 2009 6.75
150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(3)
170,490 178,065
Series B 2011 7.73
175,000 175,000
Second Secured Debentures Series A 2007 8.44
125,000 125,000
Deferred credit
(4)
2008 -
68,160 60,585
Subsidiaries
Obligations under capital leases 2010 5.87 – 8.36
4,485 3,831
723,135 692,481
Less current portion
31,543 1,322
$ 691,592 $ 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, is maintained at its prior level of $270,000,000.
(2) Average interest rate on debt as of February 28, 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 February 28, 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 six month periods ended February 28, 2006 amounted to $13,253,000 and
$26,301,000 ($13,222,000 and $26,466,000 in 2005).
- 22 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 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.
February 28,
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 shares transactions were as follows:
Six months ended Twelve months ended
February 28, 2006 August 31, 2005
(unaudited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 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
- 23 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 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 two quarters, 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 $203,000 and
$366,000 ($121,000 and $219,000 in 2005) was recorded for the three and six month periods ended
February 28, 2006. If compensation expense had been recognized using the fair value-based method at the grant
date for options granted between September 1, 2001 and August 31, 2003, the Corporation’s net income and
earnings per share for the three and six month periods ended February 28, 2006 and 2005 would have been reduced
to the following pro forma amounts:
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Net income
As reported $ 10,200 $ 5,613 $ 19,198 $ 9,440
Pro forma 10,180 5,517 19,158 9,248
Basic earnings per share
As reported $ 0.26 $ 0.14 $ 0.48 $ 0.24
Pro forma 0.25 0.14 0.48 0.23
Diluted earnings per share
As reported $ 0.25 $ 0.14 $ 0.48 $ 0.24
Pro forma 0.25 0.14 0.48 0.23
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 six month period ended February 28, 2006 was $9.44 ($7.46 in 2005)
per option.
As at February 28, 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.
- 24 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
February 28, 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 February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ (1,264) $ (464) $ (2,300) $ (1,135)
Income tax receivable (221) - (507) -
Prepaid expenses (1,137) 92 (569) 695
Accounts payable and accrued liabilities 365 11,759 (43,183) (24,652)
Income tax liabilities - (721) (678) (785)
Deferred and prepaid income (268) (114) 1,925 3,423
$ (2,525) $ 10,552 $ (45,312) $ (22,454)
b) Other information
Three months ended February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets acquisitions through capital leases $ 1,431 $- $ 1,431 $-
Interest paid 11,308 11,237 27,265 27,357
Income taxes paid 1,634 1,046 3,423 1,735
9. Employees 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 February 28, Six months ended February 28,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 222 $ 204 $ 396 $ 296
Defined contribution pension plan and collective
registered retirement savings plan
376 322 759 662
$ 598 $ 526 $ 1,155 $ 958