Press release
For immediate release
COGECO achieves strong performance
Montréal, January 11, 2007 – Today, COGECO Inc. (TSX: CGO) announced its financial results
for the first quarter ended November 30, 2006.
In the first quarter of fiscal year 2007, COGECO’s results showed substantial growth. On a
consolidated basis, revenue increased by 45.9% and operating income before amortization
increased by 45.8% compared to the same period last year. These increases are mainly
attributable to the cable sector. Indeed, Cogeco Cable achieved one of the best revenue
generating units (RGUs
1
) growth of its Canadian operations history and acquired a Portuguese
affiliate, Cabovisão – Televisão por Cabo, S.A. (Cabovisão). The media sector contributed to these
results with better radio advertising revenue and TQS’s success with its new programming during
the fall season. Net income increased by 47% compared to the same period last year as a result of
substantial growth in all sectors.
Cable sector
The newly acquired Portuguese operations, Cabovisão, is on its way to achieving its 2007 financial
projections supported by the increase of about 21,300 RGUs. The Portuguese operations
generated revenue of $54.1 million while operating income before amortization amounted to $18.3
million for an operating margin of 33.9%.
During the first quarter, the Canadian operations reported very strong RGU increases, with more
than 93,000 net additions compared to about 61,000 for the same period last year. First quarter
revenue grew by 17.1% compared to the same period last year, reaching $167.9 million while
operating income before amortization improved by 14%, reaching $65.3 million.
For the cable sector, revenue increased by 54.8% and operating income before amortization by
46% compared to the same period last year. The Corporation’s first quarter operating margin was
37.7% compared to 40% last year due to Cabovisão’s lower but rising operating margin. “We are
very pleased with our cable results. The Portuguese and the Canadian operations should continue
to perform well and we have revised our guidance to better reflect our expectations,” stated Mr.
Louis Audet, President and CEO of COGECO Inc.
Media Sector
Revenue and operating income before amortization are up in the media sector. “RYTHME FM
revenue echoes our position in the markets, especially in Montreal where we continue to keep our
leading position. As for TQS, “Loft Story III” and our fall programming attracted greater audiences,
thus increasing our television revenue,” added Mr. Audet.
1
Revenue generating units (RGUs) represent the sum of basic service, High Speed Internet (HSI) service, Digital Television service and Telephony
service customers.
- 2 -
Consolidated 2007 financial projections
The first quarter’s higher than expected results in the cable sector lead the Company to revise
most of its projections upwards for fiscal 2007. Management expects to improve revenue from
between $1,010 million to $1,020 million to between $1,050 million to $1,060 million. Operating
income before amortization should reach approximately $356 million to $358 million from the
$336 million to $341 million last quarter’s revised projections. Free cash flow should be revised to
$5 million to $10 million from the previous projections of $15 million to $20 million due to the
increase in capital expenditures to sustain RGU growth in the cable sector.
Cable sector
For fiscal 2007, Cogeco Cable expects to add between 287,000 and 305,000 RGUs, consolidated
revenue should reach $925 million, operating income before amortization should reach
approximately $355 million, while the operating margin should remain at about 38%.
Media sector
The media sector is performing as expected and management maintains its initial projections for
fiscal 2007, thus revenue should grow by 5% to 7% compared to fiscal 2006 and the operating
income before amortization should reach $1 million to $3 million.
- 3 -
FINANCIAL HIGHLIGHTS
Quarters ended November 30,
($000s, except percentages and per share data)
(unaudited)
2006 2005 % Change
Revenue $
$
$
263,292 $ 180,478 45.9
Operating income before amortization 88,367 60,593 45.8
Net income 6,751 4,593 47.0
Cash flow from operations
(1)
66,035 46,842 41.0
Less:
Capital expenditures and increase in deferred charges 74,615
34,043 -
Free cash flow
(1)
(8,580) 12,799 -
Per share data
Basic net income $
$
$
0.41 $ 0.28 46.4
(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 the section “Uncertainties and main
risk factors” of the Company’s 2006 annual MD&A) that could cause actual results to differ materially from
what we currently expect. These factors include technological changes, changes in market and competition,
governmental or regulatory developments, general economic conditions, the development of new products
and services, the enhancement of existing products and services, and the introduction of competing
products having technological or other advantages, many of which are beyond our control. Therefore, future
events and results may vary significantly from what we currently foresee. You should not place undue
importance on forward-looking information and should not rely upon this information as of any other date.
While we may elect to, we are under no obligation (and expressly disclaim any such obligation) and do not
undertake to update or alter this information before next quarter.
This analysis should be read in conjunction with the Company’s financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Company’s 2006 Annual
Report. Throughout this discussio n, all amounts are in Canadian dollars unless otherwise indicated.
- 4 -
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO’s objectives are to maximize shareholder value by increasing profitability and by
ensuring continued growth. The strategies for reaching those objectives are, for the cable sector,
constant corporate growth through the diversification and improvement of products and services as
well as clientele and territories, effective management of capital and tight cost control. The media
sector focuses on continuous improvement of its programming to increase its market share, and
therefore, its profitability. The Company measures its performance with regard to these objectives
with operating income before amortization growth, free cash flow
1
and RGU
2
growth for the cable
sector. Below are the first quarter achievements of the cable and media sectors in furtherance of
COGECO’s objectives.
Tight control over costs and business processes
During the first quarter of fiscal 2007, the Company’s operating costs have grown by 45.9% over
the same period last year, mainly as a result of the acquisition of the cable subsidiary, Cabovisão
and in line with the revenue growth
The design of internal controls over financial reporting as per National Instrument 52-109 is still
underway. As discussed in the MD&A of the 2006 annual report, the Company had identified
certain material weaknesses in the design of internal controls over financial reporting. During the
first quarter of fiscal 2007, the employees of the media sector have received the corporate Code of
Ethics. Other than this remediation during the quarter, there have been no changes to the
identified material weaknesses since August 31, 2006.
Cable Sector
Sustained corporate growth
Canadian operations
• Digital Television services:
o Significant upgrade of Cogeco Cable’s High Definition (HD) Television offering in
Québec, now with 11 HD channels;
o Addition of two new HD channels (A&E HD and HDNet) to the Ontario Digital
Television line-up;
o Addition of Anime Network On Demand, a new subscription Video on Demand
(VOD) service;
o Addition to Cogeco On Demand of “Lance et compte I, II et III” in Québec and
“Survivor: Cook Islands” in all territories served by Cogeco Cable.
• Digital Telephony service:
o Available to 72% of homes passed in Cogeco Cable’s territories, as at November
30, 2006;
o Since September 1, 2006, deployment of the Digital Telephony service in Corunna,
Bright’s Grove, Lindsay, Niagara-on-the-Lake and St. Catharines, in Ontario, as well
as St-Sauveur, Piedmont, Ste-Adèle, St-Jovite, Mont-Tremblant, Alma, Roberval,
Ste-Agathe, Thetford Mines and Montmagny in Québec.
Portuguese operations and their integration
• Cabovisão is in the process of completing its plan to launch its Digital Television offering for
the deployment during fiscal 2007.
1
See “Non-GAAP financial” section for explanations.
2
See “Customer statistics” section of the cable sector section for detailed explanations.
- 5 -
• The integration process advances according to plan. Customer service ia a key activity on
which the Integration Committee is focusing.
Continuous improvement of networks and equipment
• During the first quarter of fiscal 2007, Cogeco Cable has invested in its infrastructure
including head-ends and upgrade/rebuild for an amount approximating $23 million.
Media Sector
• During the first quarter, TQS aired “Loft Story III” which brought over 1 million daily
viewership. Increased programming commitments should continue to sustain growth in
viewership and advertising revenue for fiscal 2007;
• RYTHME FM is committed to keeping its leadership position in the Montreal market. Across
Québec, other RYTHME FM stations are consolidating their position. In addition, station
933 continues to gain new listeners within its target audience.
RGU Growth
As at November 30, 2006, the consolidated number of RGUs has increased by 5.2% to reach
nearly 2.3 million units. As at August 31, 2006, Cogeco Cable had anticipated RGU growth of
between 9% and 10% for the full year, as compared to a year earlier. Following higher than
anticipated HSI, Digital Television, Digital Telephony and basic cable service customer growth
during the first quarter of fiscal 2007, the cable subsidiary has revised its guidelines to 13% to 14%
RGU growth by August 31, 2007. Please consult the ‘’Fiscal 2007 financial guidelines’’ section for
further details.
Revenue and Operating Income Before Amortization Growth
During the first quarter, consolidated revenue increased by 45.9% mainly due to stronger RGU
growth and the acquisition of Cabovisão on August 1, 2006 in the cable sector. Operating income
before amortization grew by 45.8% while the Company had expected a 33% to 35% increase in its
last-quarter revised projections for fiscal 2007.
Free Cash Flow
For the first quarter, COGECO generated a negative free cash flow of $8.6 million compared to a
positive free cash flow of $12.8 million for the same period last year, mainly due to higher capital
expenditures necessary to sustain RGU growth in the cable sector, including the acquisition of
customer premise equipment amounting to approximately $12 million to serve expected RGU
growth in the coming months. Capital expenditures and deferred charges amounted to $74.6
million. In light of the stronger than expected RGU growth in the cable sector for the first quarter of
fiscal 2007, capital expenditures and deferred charges are expected to reach $262 million. Fiscal
2007 revised free cash flow should be between $5 million to $10 million. Please consult the ‘’Fiscal
2007 financial guidelines’’ section for further details.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO’s accounting policies and estimates since
August 31, 2006. A description of these policies and estimates can be found in the Company’s
2006 annual MD&A.
- 6 -
OPERATING RESULTS
Revenue, for the first quarter of 2007 rose by $82.8 million, or 45.9%, to reach $263.3 million
compared to $180.5 million for the same period last year. Cable revenue, driven by an increased
number of customers in basic cable, Digital Television, HSI and Telephony services together with
rate increases and the Cabovisão acquisition, went up by $78.6 million, or 54.8%, in the first
quarter. Media revenue increased by $4.2 million, or 11.4%, in the first quarter, due to higher
television and radio advertising revenue.
Operating income before amortization grew by 45.8% to reach $88.4 million in the first quarter,
compared to $60.6 million for the same period last year. The cable sector contributed to an
increase of $26.4 million while the media sector had a positive impact of $0.6 million.
FIXED CHARGES
Quarters ended August 31,
Quarters ended November 30,
($000s, except percentages)
2006 2005 % Change
Amortization $ $ $ 45,839 $ 29,883 53.4
Financial expense
21,759
13,961 55.9
For the first quarter, amortization amounted to $45.8 million compared to $29.9 million for the
same period last year. Amortization increased mainly as a result of Cabovisão acquisition and to
the higher level of capital expenditures arising from the demand for customer premise equipment,
scalable infrastructure, upgrade/rebuild, support capital and deferred charges in the cable sector.
During the first quarter, financial expense increased by $7.8 million compared to the same period
last year. This is due to the higher level of Indebtedness (defined as bank indebtedness and long-
term debt) required to finance the acquisition of the Portuguese subsidiary Cabovisão in the cable
sector.
INCOME TAXES
For the first quarter of fiscal2007, income taxes amounted $6.5 million compared to $6.6 million in
fiscal 2006. Income taxes for the cable sector amounted to $5.6 million for the first quarter of fiscal
2007 compared to $6.4 million for the same period last year despite the growth in operating
income before amortization. The income tax decrease for the cable sector was mainly attributable
to the elimination of Canadian federal capital tax on January 1, 2006. Income taxes for media
sector have increased during the first quarter due to the increase in operating income before
amortization.
NON-CONTROLLING INTEREST
The non-controlling interest represents an interest of approximately 61% in Cogeco Cable’s results
and a 40% interest in TQS Inc. First quarter 2007 non controlling interest amounted to $7.6 million
compared to $5.5 million for the same period last year and is mainly due to the cable sector
results.
- 7 -
NET INCOME
Net income for the first quarter of fiscal 2007 amounted to $6.8 million, or $0.41 per share,
compared to $4.6 million, or $0.28 per share, for the same period last year. Net income has
increased since the rise in operating income before amortization outpaced fixed charges growth.
CASH FLOW AND LIQUIDITY
Quarters ended November 30,
($000s)
2006
2005
Operating Activities
Cash flow from operations $
$
66,035 $ 46,842
Changes in non-cash operating items
(85,758) (51,913)
$
(19,723) $ (5,071)
Investing Activities
(1)
$
$
(74,297) $ (34,043)
Financing Activities
(1)
$
$
39,796 $ 59,797
Net change in cash and cash equivalents
$
$
(54,224) $ 20,683
Effect of exchange rate changes on cash and cash equivalents
denominated in foreign currencies
1,616
-
Cash and cash equivalents at beginning 71,516 -
Cash and cash equivalents at end $
18,908 $ 20,683
(1) Excludes assets acquired under capital leases.
For the first quarter of fiscal 2007, cash flow from operations reached $66 million, 41% higher than
the result achieved for the comparable period last year, primarily due to the increase in operating
income before amortization net of financial expense. Changes in non-cash operating items
generated greater cash outflows than the same period last year, mainly as a result of a decrease
in accounts payable and accrued liabilities resulting from non recurring payments made by the
cable subsidiary, following the terms of the acquisition of Cabovisão.
Investing activities related to capital expenditures and the increase in deferred charges, including
assets acquired under capital leases reached $74.6 million during the first quarter.
During the first quarter, cable sector capital expenditures increased compared to last year mainly
as a result of the following factors:
¾ An increase in customer premise equipment expenditures due to a greater demand for HSI
and Digital Telephony services, from a rise in the number of digital terminals rented to
customers and from a greater ratio of digital terminals per digital home. Furthermore,
customer premise equipment representing approximately $12 million was acquired by
Cogeco Cable at the end of the quarter to serve expected RGU growth in the coming
months.
¾ The growth in capital expenditures for scalable infrastructure mainly attributable to the
support of the Digital Telephony rollout for the Canadian operations.
¾ The increase in capital expenditures associated with the network upgrade and rebuild
program for the Canadian operations 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
- 8 -
the two-way service was also a factor and the percentage of customers with access to the
two-way service rose from 90% as at November 30, 2005 to 93% as at November 30,
2006.
Capital expenditures by the Portuguese operations amounted to $9.6 million during the first
quarter, essentially to support RGU growth.
The first quarter increase in deferred charges is explained by higher reconnect costs attributable to
the significant level of RGU increase in the cable sector.
The Company incurred a deficit in free cash flow in the first quarter of fiscal 2007 in the amount of
$8.6 million compared to a surplus of $12.8 million the preceding year. The first quarter free cash
flow decrease over the same period last year is due to increased capital expenditures and deferred
charges in the cable sector generated by better-than-projected RGU growth (including the
acquisition of customer premise equipment amounting to approximately $12 million at the end of
the quarter to support expected growth), as well as the launch of the Digital Telephony service.
This increase was partly offset by increased operating income before amortization in the cable
sector.
During the first quarter, the level of Indebtedness increased by $41.5 million due to a decrease of
$85.8 million in non-cash operating items explained by the repayment of certain suppliers
subsequent to the Cabovisão acquisition in the cable sector, and by a free cash flow deficit of
$8.6 million, partly offset by a $54.2 million decrease in cash and cash equivalents. For the same
period last year, Indebtedness increased by $61.8 million mainly due to a decline in non-cash
operating items of $51.9 million and a net change in cash and cash equivalents of $20.7 million,
partly offset by generated free cash flow of $12.8 million. In addition, a dividend of $0.0625 per
share for subordinate and multiple voting shares, totalling $1 million, was paid during the first
quarter of fiscal years 2007 and 2006.
As at November 30, 2006, COGECO had a working capital deficiency of $331.9 million compared
to $315.8 million as at August 31, 2006. The greater deficiency is mainly attributable to negative
free cash flow generated and the depreciation of the Canadian dollar over the euro currency.
COGECO maintains a working capital deficiency due to a low level of accounts receivable since
the majority of the cable subsidiary’s customers pay before their services are rendered, contrary to
accounts payable and accrued liabilities, which are paid after products or services are rendered. In
addition, the cable subsidiary generally uses cash and cash equivalents to reduce Indebtedness.
As at November 30, 2006, the cable subsidiary had used $658 million of its $900 million Term
Facility and the Company had drawn $19 million of its Term Facility.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the
subsidiaries’ Board of Directors and may also be restricted under the terms and conditions of
certain debt instruments. In accordance with applicable corporate and securities laws, significant
transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2006, there have been major changes to ‘’Fixed Assets’’, ‘’Preliminary Goodwill’’,
‘’Accounts Payable and accrued liabilities’’, ‘’ Accounts receivable’’, ‘’Indebtedness’’, ‘’Cash and
cash equivalents’’ and ‘’Foreign currency translation adjustment’’.
The $46.2 million rise in fixed assets is mainly related to increased capital expenditures to sustain
RGU growth in the cable sector during the quarter as well as the anticipated growth in the following
months. The increase of $28.9 million in preliminary goodwill and $11.8 million in foreign currency
- 9 -
translation adjustment is the result of the appreciation of the euro currency over the Canadian
dollar. The increase of $19.8 million in accounts receivable is mostly due to the media sector. The
$66.1 million and $52.6 million reduction in accounts payable and accrued liabilities and cash and
cash equivalents respectively are related to payments made with regards to the acquisition of
Cabovisão by Cogeco Cable. Indebtedness increased by $73.9 million as a result of the
depreciation of the Canadian dollar over the Euro currency and the factors previously discussed in
the “Cash Flow and Liquidity” section.
A description of COGECO’s share data as at December 31, 2006 is presented in the table below:
Number of shares/
options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
1,849,900
14,714,731
12
117,664
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
303,779
303,779
In the normal course of business, COGECO incurred financial obligations, primarily in the form of
long-term debt, operating and capital leases and guarantees. COGECO’s obligations, described in
the MD&A of the 2006 annual report, have not materially changed since August 31, 2006.
DIVIDEND DECLARATION
At its January 10, 2007 meeting, the Board of Directors of COGECO declared a quarterly eligible
dividend of $0.07 per share for subordinate and multiple voting shares, payable on February 7,
2007, to shareholders of record on January 24, 2007. Continued improvement of the financial
results by the cable sector explains the dividend increase by 12% from $0.0625 to $0.07 per
share.
CABLE SECTOR
CUSTOMER STATISTICS
Canadian operations
Net additions % of Penetration
(1) (4)
Quarters ended
November 30,
November 30,
November 30,
2006 2006 2005 2006 2005
RGUs
(2)
1,648,951 93,015 60,770
Basic service customers
849,417 16,240 10,903
HSI service customers
(3)
372,015 28,935 22,993 47.0 39.9
Digital Television service customers 348,588 21,224 21,415 42.0 32.9
Digital Telephony service customers 78,931 26,616 5,459 12.9 2.7
(1)
As a percentage of basic service customers in areas served.
(2)
Represent the sum of basic service, HSI service, Digital Television service and Digital Telephony service customers.
(3)
Customers subscribing only to Internet services totalled 61,336 as at November 30, 2006 compared to 61,208 as at August 31, 2006.
(4)
An audit of homes pas sed in Ontario has been c ompleted durin g the first quarter of fiscal 2 007 and, as a result, t he number of homes passed
has been reduced by 42,386.
- 10 -
All services generated higher growth in the first quarter compared to the same period last year,
except for the Digital Television service. During the first quarter, the growth in Digital Telephony is
mostly attributable to the launch of this service in new markets. Coverage of homes passed has
now reached 72% compared to 21% last year. The net additions of basic service customers in the
first quarter reached 16,240, which represents the highest growth in many years, compared to a
gain of 10,903 for the same period last year. The number of net additions of HSI service stood at
28,935 compared to 22,993 for the same period last year, which is also a new high. The growth of
HSI and basic service customers compared to the same period last year is mostly due to the
enhancement of the product offering, the impact of the bundled offer of Television, HSI and Digital
Telephony services (Cogeco Complete Connexion), and promotional activities.
The net additions of Digital Television service customers stood at 21,224 essentially equal to the
growth generated during the same period last year. Customers continue to demonstrate strong
interest in the HD technology.
Portuguese Operations
Net additions % of Penetration
(1)
November 30,
2006
Quarter ended
November 30, 2006
November 30, 2006
RGUs
(2)
650,305
21,264
_____
Basic service customers
276,947
7,253
_____
HSI service customers
144,355
8,077
52.1
Telephony service customers 229,003 5,934 82.7
(1)
As a percentage of basic service customers in areas served.
(2)
Represent the sum of basic service, HSI service and Telephony service customers.
For the first quarter, all services generated customer growth, in line with the Cogeco Cable’s
guidelines. Basic service grew by 7,253 customers, HSI by 8,077 customers and Telephony by
5,934 customers. .
OPERATING RESULTS
31,
Quarters ended November 30,
($000s, except percentages)
2006
2005
% Change
Revenue $
$
222,002 $
143,413 54.8
Operating costs 133,900 83,243 60.9
Management fees - COGECO Inc.
4,440 2,868 54.8
Operating income before amortization
83,662 57,302 46.0
Operating margin 37.7 %
40.0 %
Revenue
Consolidated revenue for the first quarter increased by $78.6 million to reach $222 million.
For the first quarter, revenue for the Canadian operations rose by $24.5 million or 17.1%
compared to the same period in fiscal 2006. This growth is explained mainly by an increase in the
number of HSI, Digital Telephony, Digital Television and basic service customers as mentioned in
the “Customer Statistics” section, together with rate increases implemented in June and August of
2006. Monthly rate increases of at most $3 per customer and averaging $2 per basic service
customer took effect on June 15, 2006 in Ontario and on August 1, 2006 in Québec.
- 11 -
The Portuguese subsidiary’s revenue amounted to $54.1 mil lion for the first quarter of fiscal 2007.
Monthly rate increases of at most $3 (€2) per HSI and Telephony customer thus av eraging $1 per
basic customer took effect on November 1, 2006.
Operating Costs
For the first quarter of fiscal 2007, consolidated operating costs increased by $50.7 million to reach
$133.9 million.
For the first quarter, Canadian operations’ operating costs, including network fees but excluding
management fees payable to COGECO Inc., rose by $14.9 million or 17.9%. During the first
quarter, network fees increased by 16.2% compared to the same period the year before. Network
fees increase was mainly attributable to the introduction of Digital Telephony service and RGU
growth. The increase in other operating costs was related to servicing additional RGUs, including
Digital Telephony. For the first quarter, Cabovisão’s operating costs amounted to $35.7 million.
Operating Income Before Amortization
For the first quarter of fiscal 2007, consolidated operating income before amortization increased by
$26.4 million to reach $83.7 million. Cabovisão’s operating income before amortization for the first
quarter amounted to $18.3 million.
For the first quarter, operating income before amortization for the Canadian operations rose by
14%, compared to the same period last year as the increase in revenue outpaced the rise in
operating costs. Cogeco Cable’s operating margin for the Canadian operations decreased slightly
from 40% to 38.9% in the first quarter of fiscal 2007, as a result of the launch of the Digital
Telephony service. The Portuguese operations generated an operating margin of 33.9% for the
first quarter. As a result, Cogeco Cable’s first quarter 2007 operating margin declined to 37.7%
from 40% for the same period last year, as expected.
Foreign Exchange Management
Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and
principal payments on its US$150 million Senior Secured Notes. These agreements have the
effect of converting the US interest coupon rate of 6.83% per annum to an average Canadian
dollar 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 increased by CDN$5.5 million during the first quarter compared to August
31, 2006 due to the Canadian dollar’s depreciation. Since the Senior Secured Notes Series A are
fully hedged, the fluctuation is offset by a variation in deferred credit described in Note 7 of the first
quarter 2007 interim financial statements. The $67.3 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.
As noted in the 2006 MD&A of the annual report, the cable subsidiary’s investment in Cabovisão,
is exposed to market risk attributable to fluctuations in foreign currency exchange rate, primarily
changes in the values of the Canadian dollar versus the euro. This risk is mitigated since the major
part of the purchase price for Cabovisão was borrowed directly in euros. This debt is designated
as a hedge of net investments in self-sustaining subsidiaries and accordingly, Cogeco Cable
realized a foreign exchange gain of $11.8 million in the first quarter of fiscal 2007 which is deferred
and recorded in the foreign currency translation adjustment.
- 12 -
MEDIA SECTOR
OPERATING RESULTS
Quarters ended November 30,
($000s, except percentages)
2006
2005
% Change
Revenue $ $
$
41,341 $ 37,116 11.4
Operating costs 38,287 34,667 10.4
Operating income before amortization
3,054 2,449 24.7
Operating margin
%
7.4 %
6.6 %
-
Revenue
During the first quarter, revenue increased by $4.2 million or 11.4% to reach $41.3 million. Radio
revenue has increased by 17.8% and television revenue by 10% mainly due to improved audience
ratings. Furthermore, TQS is the only conventional television network in the Francophone market
to have improved its audience ratings in the fall of 2006.
Operating Income Before Amortization
Operating income before amortization increased in the first quarter by $0.6 million to reach
$3.1 million, a growth of 24.7%. TQS operating income before amortization slightly decreased as a
result of greater investment in television programming. Radio operating income before
amortization improved due to revenue growth.
FISCAL 2007 FINANCIAL GUIDELINES
In the cable sector, first quarter 2007 stronger than expected RGU growth in Canada resulted in
the revision of the financial guidelines. In addition, financial guidelines for the Portuguese
operations were revised only to reflect the improvement of the euro currency compared to the
Canadian dollar. As a result, for guideline purposes the euro is converted at an average rate of
$1.45 while Cogeco Cable was using an average rate of $1.40 last October. In furtherance of its
existing line of business and external growth strategy, Cogeco Cable ma y investigate further cable
system acquisition opportunities, including cable systems located outside Canada over time.
The media sector financial guidelines remain unchanged.
- 13 -
($ million, except customer data)
Revised Projections
January 10, 2007
Fiscal 2007
Projections
October 16, 2006
Fiscal 2007
Cable sector–
Financial Guidelines
Revenue 925 880 to 885
Operating income before amortization 355 335 to 338
Operating margin About 38% About 38%
Financial expense 87 85
Amortization 192 182
Capital expenditures and deferred charges 255 225 to 230
Free cash flow 10 to 15 20 to 25
Customer Addition Guidelines
Basic service 37,000 to 40,000 25,000 to 30,000
HSI service 85,000 to 90,000 55,000 to 60,000
Digital Television service 60,000 to 65,000 55,000 to 60,000
Telephony services 105,000 to 110,000 67,000 to 72,000
RGU 287,000 to 305,000 202,000 to 222,000
Media sector–
Financial Guidelines
Revenue
131 to 135 131 to 135
Operating income before amortization 1 to 3 1 to 3
Amortization
7 7
Capital expenditures and deferred charges
7 7
Consolidated Financial Guideli nes
Revenue
1,050 to 1,060 1,010 to 1,020
Operating income before amortization
356 to 358 336 to 341
Net income
15 15
Free Cash Flow 5 to 10 15 to 20
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the risk factors and uncertainties facing COGECO as
described in the Company’s MD&A of the 2006 annual report.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by COGECO throughout this MD&A. It
also provides reconciliations between these Non-GAAP measures and the most comparable
GAAP financial measures. These financial measures do not have standard definitions prescribed
by Canadian GAAP and may not be comparable with similar measures presented by other
companies. These measures include “cash flow from operations’” and “free cash flow”.
- 14 -
Cash Flow from Operations
Cash flow from operations is used by COGECO’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Company to isolate the cash flow from operating activities from the impact of
cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure “free cash flow”. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended August 31,
Quar ters ended November 30,
2006
2005
Cash flow from operating activities $ $ $ (19,723) $ (5,071)
Changes in non-cash operating items
85,758 51,913
Cash flow from operations $ $ $ 66,035 $ 46,842
Free Cash Flow
Free cash flow is used, by COGECO’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth. Free cash flow is calculated as
follows:
($ 000)
Quarters ended November 30,
2006
2005
Cash flow from operations $ 66,035 $ 46,842
Acquisition of fixed assets (67,198) (30,328)
Increase in deferred charges (7,212) (3,715)
Assets acquired under capital leases – as per Note 10 b) (205) -
Free cash flow $
$
$ (8,580) $ 12,799
ADDITIONAL INFORMATION
This MD&A was prepared on January 10, 2007. Additional information relating to the Company,
including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary,
COGECO provides about 1,649,000 revenue-generating units (RGU) to approximately 1,439,000
homes passed in its Canadian service territory and 650,000 RGUs to approximately 829,000
homes passed in its Portuguese service territory. Through its two-way broadband cable networks,
Cogeco Cable provides its residential and commercial customers with analog and Digital
Television and services, High Speed Internet access as well as Telephony services. Through its
Cogeco Radio-Television subsidiary, COGECO holds a 60% interest and operates the TQS
network, six TQS television stations, and three French CBC-affiliated television stations in
partnership with CTV Television. Cogeco Radio-Television also wholly owns and operates the
RYTHME FM radio stations in Montréal, Québec City, Trois-Rivières and Sherbrooke as well as
the 93
3
station in Québec City. COGECO’s subordinate voting shares are listed on the Toronto
Stock Exchange (CGO). The subordinate voting shares of Cogeco Cable are also listed on the
Toronto Stock Exchange (CCA).
– 30 –
- 15 -
Source: COGECO Inc.
Pierre Gagné
Vice President, Finance and Chief Financial Officer
Tel.: (514) 874-2600
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: (514) 874-2600
Analyst Conference Call: Thursday January 11
th
, 2007 at 11:00 a.m. (EST)
Media representatives may attend as listeners only
Please use the following dial-in number to have access to the
conference call by dialling 10 minutes before the start of the
conference:
Canada/USA Access Number: 1 800 967-7134
International Access Number: +1 719 457-2625
Confirmation Code: 8541008
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
January 16
th
, 2007 by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code: 8541008
- 16 -
Supplementary Quarterly Financial Information
Quarters ended November 30, August 31, May 31, February 28,
2006 2005 2006 2005 2006 2005 2006 2005
($000, except percentages
and per share data)
Revenue $ 263,292 $ 180,478 $ 199,351 $
164,210 $
189,718 $
173,418 $ 177,359 $
166,566
Operating income before
amortization
88,367
60,593
68,645
56,485
66,111
63,814
57,765
54,616
Operating margin 33.6% 33.6% 34.4% 34.4% 34.8% 36.8% 32.6% 32.8%
Amortization 45,839 29,883 36,446 30,769 30,658 32,783 30,217 33,383
Financial expense 21,759 13,961 16,864 14,366 14,120 14,441 14,231 14,237
Impairment losses - - - - - - - 52,531
Income taxes (recovery) 6,463 6,611 (13,950)
5,052 8,461 5,869 5,706 (130)
Non-controlling interest 7,557 5,455 19,022 5,422 7,293 5,603 4,842 (16,940)
Net income (loss) 6,751 4,593 10,300 630 5,529 4,964 2,679 (28,524)
Cash flow from
operations
66,035 46,842 51,729 43,215 52,093 48,699 41,644 40,962
Net income (loss) per
share
$ 0.41 $ 0.28 $ 0.62 $
0.04 $
0.33 $
0.30 $ 0.16 $
(1.74)
Cable sector operating results are generally not subject to material seasonal fluctuations.
However, the loss of basic service customers is usually greater, and the addition of HSI customers
is generally lower in the third quarter, mainly due to students leaving campuses at the end of the
school year. However, the media sector’s operating results may be subject to significant seasonal
variations. The revenue depends on audience ratings and the market for conventional radio and
television advertising expenditures in the Province of Québec. Advertising sales, mainly national
advertising, are normally weaker in the second and fourth quarters and, as a result, the operating
margin is generally lower in those quarters.
COGECO INC. - 17 -
Customer Statistics
November 30, August 31,
2006 2006
Homes Passed
Ontario (1) 961,976 1,002,187
Québec 477,132 474,717
Canada 1,439,108 1,476,904
Portugal 829,152 826,369
Total 2,268,260 2,303,273
Revenue Generating Units
Ontario 1,170,287 1,104,157
Québec 478,664 451,779
Canada 1,648,951 1,555,936
Portugal 650,305 629,041
Total 2,299,256 2,184,977
Basic Service Customers
Ontario 599,376 587,289
Québec 250,041 245,888
Canada 849,417 833,177
Portugal 276,947 269,694
Total 1,126,364 1,102,871
Discretionnary Service Customers
Ontario 469,976 463,783
Québec 197,669 192,895
Canada 667,645 656,678
Portugal - -
Total 667,645 656,678
Pay TV Service Customers
Ontario 85,884 84,425
Québec 40,815 38,455
Canada 126,699 122,880
Portugal 55,689 54,089
Total 182,388 176,969
High Speed Internet Service Customers
Ontario 290,018 269,328
Québec 81,997 73,752
Canada 372,015 343,080
Portugal 144,355 136,278
Total 516,370 479,358
Digital Video Service Customers
Ontario 227,314 213,556
Québec 121,274 113,808
Canada 348,588 327,364
Portugal - -
Total 348,588 327,364
Telephony Service Customers
Ontario 53,579 33,984
Québec 25,352 18,331
Canada 78,931 52,315
Portugal 229,003 223,069
Total 307,934 275,384
(1) An audit of homes passed in Ontario has been completed during the first quarter of fiscal 2007 and, as a result,
the number of homes passed has been reduced by 42,386
- 18 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended August 31, Three months ended November 30,
(In thousands of dollars, except per share data)
2006
2005
2006
2005
(unaudited) (unaudited)
Revenue $ 199,351
$ 164,210
$ 263,292
$ 180,478
Operating costs
130,706
107,725
174,925
119,885
Operating income before amortization 68,645
56,485
88,367
60,593
Amortization (note 3)
36,446
30,769
45,839
29,883
Operating income 32,199
25,716
42,528
30,710
Financial expense (note 7)
16,864
14,366
21,759
13,961
Income before income taxes an d following items 15,335
11,350
20,769
16,749
Income taxes (note 4)
(13,950)
5,052
6,463
6,611
Non-controlling interest
19,022
5,422
7,557
5,455
Loss on dilution resulting from shares issued by a subsidiary
7
-
Share in the earnings of a general partnership
37
(246)
9
(90)
Net income $ 10,300
$ 630
$ 6,751
$ 4,593
Earnings per share (no t e 5)
Basic and diluted
$0.62
$0.04
$ 0.41
$0.28
- 19 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three months ended November 30,
(In thousands of dollars)
2006
2005
(unaudited)
(unaudited)
Balance at beginning $ 204,734
$ 185,762
Net income
6,751
4,593
Dividends on multiple voting shares
(116)
(116)
Dividends on subordinate voting shares
(919)
(913)
Balance at end $ 210,450
$ 189,326
- 20 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
November 30,
2006
August 31,
2006
(unaudited)
(audited)
Assets
Current
Cash and cash equivalents
$ 18,908
$ 71,516
Restricted cash
512
569
Accounts receivable
91,764
71,989
Income tax receivable
866
-
Prepaid expenses
7,685
7,204
Broadcasting rights
17,325
15,632
137,060
166,910
Income tax receivable
892
-
Broadcasting rights
19,906
18,083
Investments
539
539
Fixed assets
1,095,152
1,048,998
Deferred charges
50,655
49,433
Broadcasting licenses and customer base (note 6)
1,017,892
1,017,892
Preliminary goodwill (note 6)
451,040
422,108
$ 2,773,136
$ 2,723,963
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness
$ 47,616
$ 7,891
Accounts payable and accrued liab ilities
246,753
312,837
Broadcasting rights payable
13,190
7,721
Income tax liabilities
4,717
666
Deferred and prepaid income
29,728
26,737
Current portion of long-term debt (note 7)
126,911
126,904
468,915
482,756
Long-term debt (note 7)
1,243,383
1,209,254
Share in the partner’s deficiency of a general partnership
832
841
Deferred and prepaid income
11,458
10,525
Broadcasting rights payable
5,861
5,777
Pension plans liabilities and accrued employee benefits
12,073
11,098
Future income tax liabilities
214,021
211,848
Non-controlling interest
479,428
472,605
2,435,971
2,404,704
Shareholders' equity
Capital stock (note 8)
117,672
117,552
Contributed surplus - stock-based compen sation
1,683
1,425
Retained earnings
210,450
204,734
Foreign currency translation adjustment (note 9)
7,360
(4,452)
337,165
319,259
$ 2,773,136
$ 2,723,963
- 21 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended August 31, Three months ended November 30,
(In thousands of dollars)
2006
2005
2006
2005
(unaudited)
(unaudited)
Cash flow from operating activities
Net income
$
$
$ 6,751
$ 4,593
Items not affecting cash and cash equivalents
Amortization (note 3)
45,839
29,883
Amortization of deferred financing costs
646
241
Future income taxes (note 4)
3,879
5,327
Non-controlling interest
7,557
5,455
Other
1,363
1,343
66,035
46,842
Changes in non-cash oper ating items (note 10a))
(85,758)
(51,913)
(19,723)
(5,071)
Cash flow from investing activities
Acquisition of fixed assets (not e 10b))
(67,198)
(30,328)
Increase in deferred charges
(7,212)
(3,715)
Decrease in restricted cash
91
-
Other
22
-
(74,297)
(34,043)
Cash flow from financing activities
Increase in bank indebtednes s
39,725
21,669
Increase in long-term debt
10,000
40,500
Repayment of long-term debt
(8,270)
(371)
Issue of subordinate voting shares
120
-
Dividends on multiple voting shares
(116)
(116)
Dividends on subordinate voting shares
(919)
(913)
Issue of subordinate voting shares by a subsidiary to non-controlling interest
228
-
Dividends paid by a subsidiary to non-controlling inter est
(972)
(972)
39,796
59,797
Net change in cash and cas h equivalents (54,224)
20,683
Effect of exchange rate changes on cash and cash equ ivalents denominated in foreign
currencies
1,616
-
Cash and cash equivalents at beginning
71,516
-
Cash and cash equivalents at end $
$
$ 18,908
$ 20,683
See supplemental cash flow information in note 10.
- 22 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in
accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present
fairly the financial position of COGECO Inc. as at November 30, 2006 and August 31, 2006 as well as its results of
operations and its cash flow for the three month periods ended November 30, 2006 and 2005.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated
financial statements and notes should be read in conjunction with COGECO Inc.’s annual consolidated financial
statements. These unaudited interim consolidated financial statements follow the same accounting policies as the
most recent annual consoli dated financial statements.
2. Segmented Information
The Company’s activities are divided into two business segments: Cable and Media. The Cable segment is
comprised of all cable, high-speed Internet access and telephony services, and the Media segment is comprised of
radio and television operations.
The principal financi al information per business segment is presente d in the tables below:
Head Office
Cable Media and elimination Consolidated
Three months ended November 30,
(unaudited)
2006 2005 2006 2005 2006 2005 2006 2005
Revenue $ 222,002 $ 143,413 $ 41,341 $ 37,116 $ (51) $ (51) $ 263,292 $ 180,478
Operating costs 138,340 86,111 38,287 34,667 (1,702) (893) 174,925 119,885
Operating income before
amortization
83,662
57,302 3,054 2,449 1,651
842
88,367 60,593
Amortization 44,309 28,277 1,485 1,567 45 39 45,839 29,883
Operating income 39,353 29,025 1,569 882 1,606 803 42,528 30,710
Financial expense 21,221 13,582 187 114 351 265 21,759 13,961
Income taxe s 5,597 6,445 152 (37) 714 203 6,463 6,611
Net assets employed
(1) (2)
$ 2,356,084 $ 1,642,485 $ 80,853 $ 85,282 $ 10,301 $ 5,751 $ 2,447,238 $ 1,733,518
Total assets
(2)
2,634,058 1,782,332 130,357 131,772 8,721 6,799 2,773,136 1,920,903
Fixed assets
(2)
1,068,703 704,590 25,828 27,141 621 691 1,095,152 732,422
Preliminary goodwill
(2)
451,040 - - - - - 451,040 -
Acquisition of fixed assets 67,171 30,013 232 315 - - 67,403 30,328
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2)
As at November 30, 2006 and 2005.
- 23 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
2. Segmented Information (continued)
The following tables sets out certain geo graphic market information based on client’s location:
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Revenue
Canada $ $ $ 209,221 $ 180,478
Portugal 54,071 -
$ $ $ 263,292 $ 180,478
Three months ended August 31, As at November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Fixed assets
Canada $ $ $ 798,403 $ 732,422
Portugal 296,749 -
Total $ 1,095,152 $ 732,422
Preliminary goodwill
Canada $- $-
Portugal 451,040 -
Total $ 451,040 $-
- 24 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
3. Amortization
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Fixed assets $ $ $ 40,495 $ 24,176
Deferred charges 5,344 5,707
$ $ $ 45,839 $ 29,883
4. Income Taxes
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Current $ $ $ 2,584 $ 1,284
Future 3,879 5,327
$ $ $ 6,463 $ 6,611
The following table provides the reconciliation between Canadian statutory federal and provincial income taxes and
the consolidated income tax expense:
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Income taxes at combined income tax rate of 34.74 % (34.84 % in 2005) $ 7,216 $ 5,804
Loss or income subject to lower or higher tax rates (567) 339 (33) -
Decrease in income taxes as a result of decreases in substantially enacted tax rates - (91)
Large corporation tax (1,837) 127 - 837
Effect of foreign income tax rate differences 1,593 - (824) -
Other 608 (755) 104 61
Income taxes at effective income tax rate $ (13,950) $ 5,052 $ 6,463 $ 6,611
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
5. Earnings per Share
The following table provides reconciliation between basic and diluted earnings per share:
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Net income $ $ $ 6,751 $ 4,593
Weighted average number of multiple voting and subordinate voting shares
outstanding
16,556,333
16,450,004
Effect of dilutive stock options
(1)
96,624 158,692
Weighted average number of diluted multiple voting and subordinate voting shares
outstanding
16,652,957
16,608,696
Earnings per share
Basic and diluted $ 0.41 $ 0.28
(1)
For the three month period ended November 30, 2006, 36,443 (43,843 in 2005) stock options were excluded from the calculation of diluted earnings per share
since the exercise price of the options was greater than the average share price of the subordinate voting shares.
6. Preliminary Goodwill and Other Inta ngible Assets
Customer
base
Broadcasting
licenses
Total other
intangible
assets
Preliminary
goodwill
(unaudited) (unaudited) (unaudited) (unaudited)
Balance as at August 31, 2006 $ 989,772 $ 28,120 $ 1,017,892 $ 422,108
Foreign currency translation adjustment - - - 28,932
Balance as at November 30, 2006 $ 989,772 $ 28,120 $ 1,017,892 $ 451,040
As mentioned in the Company’s 2006 annual consolidated financial statements, management of the Company’s
subsidiary, Cogeco Cable Inc., is currently carrying out a more specific analysis and changes will be made to the
allocation of the excess of consideration over net assets acquired as the information becomes available. For example,
since the measurement of the fair value of fixed assets had not yet been completed at the time of the preliminary
allocation, fixed assets have been presented at cost. The measurement of indefinite and finite-lived intangible assets
is also under way. Furthermore, in accordance with the Portuguese Companies Income Tax Code, accumulated tax
losses can not be deducted if the ownership of at least 50% of the social capital changes from the moment when the
tax losses were generated, unless an authorization is granted before such change in the ownership takes place. To
this effect, a request for preservation of tax losses was filed by Cabovisão on July 28, 2006. These losses have not
been included in the preliminary purchase price allocation. Finally, the Company’s subsidiary did not complete the
assessment of possible costs related to the restructuring and integration of the activities of Cabovisão potentially
giving rise to the recognition of a liability in the allocation of the purchase price. As a result, the actual amounts
allocated to the identifiable assets acquired and liabilities assumed and the related operating results will vary
according to the amounts initially recorded, and such differences could be significant.
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
7. Long-Term Debt
Maturity Interest rate
November 30,
2006
August 31,
2006
(unaudited) (audited)
Parent company
Term Facility 2009 6.63 %
(1)
$ 19,000 $ 19,000
Obligations under capital leases 2010 6.49 – 6.61 131 138
Subsidiaries
Term Facility
Term loan 2011 5.42
(1)
150,000 150,000
Term loan – € 17,358,700 2011 4.69
(1)
26,274 24,573
Revolving loan
Canadian currency 2011 5.46
(1)
10,000 -
Euro currency – €311,500,000 (€317,000,000 as at
August 31, 2006)
2011
4.69
(1)
471,486
448,745
Senior Secured Debentures Series 1 2009 6.75 150,000 150,000
Senior – Secured Notes
Series A – US $150 million 2008 6.83
(2)
171,330 165,795
Series B 2011 7.73 175,000 175,000
Second Secured Debentures Series A 2007 8.44 125,000 125,000
Deferred credit
(3)
2008 – 67,320 72,855
Obligations under capital leases 2010 6.42 – 8.36 4,718 5,009
Other – – 35 43
1,370,294 1,336,158
Less: current portion 126,911 126,904
$ 1,243,383 $ 1,209,254
(1)
Average interest rate on debt as at November 30, 2006, including stamping fees.
(2)
Cross-currency swap agreements have resulted in an effective interest rate of 7.254% on the Canadian dollar equivalent of the U.S. denominat ed debt of the Company’s subsidiary, Cogeco Cable Inc.
(3)
The deferred credit represents the amount which would have been payable as at November 30, 2006 and August 31, 2006 under cross-currency swaps entered into by the Company’s subsidiary,
Cogeco Cable Inc., to hedge Senior Secured Notes Series A denominated in US dollars.
Interest on long-term debt for the three month period ended November 30, 2006 amounted to $20,451,000
($13,209,000 in 2005).
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and non-voting, except when specified in the
Articles of Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
November 30,
2006
August 31,
2006
(unaudited) (audited)
Issued
1,849,900 multiple voting shares $ 12 $ 12
14,714,553 subordinate voting shares (14,702,556 as at August 31, 2006) 117,660 117,540
$ 117,672 $ 117,552
During the period, subordinate voting share transactions were as follows:
Three months ended Twelve months ended
November 30, 2006 August 31, 2006
(unaudited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 14,702,556 $ 117,540 14,600,104 $ 116,155
Shares issued for cash under the Employee Stock Purchase Plan
and the Stock Option Plan
11,997
120
102,452
1,385
Balance at end 14,714,553 $ 117,660 14,702,556 $ 117,540
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock (continued)
Stock-based plans
The Company established, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase
Plan and a Stock Option Plan for certain executives which are described in the Company’s annual consolidated
financial statements. During the first quarter, no stock options were granted to employees by COGECO Inc.
However, the Company’s subsidiary, Cogeco Cable Inc., granted 197,407 stock options (123,342 in 2005) with an
exercise price of $26.63 ($29.05 in 2005), of which 56,335 stock options (31,743 in 2005) were granted to COGECO
Inc.’s employees. The Company’s subsidiary also granted 376,000 conditional stock options with an exercise price of
$26.63 of which 262,400 stock options were granted to COGECO Inc.’s employees. These options vest over a period
of three years beginning one year after the day such options were granted and are exercisable over ten years. The
vesting of these options is conditional to the achievement of certain yearly financial objectives by the Portuguese
subsidiary, Cabovisão-Televisão por Cabo, S.A., over a period of three years. The Company records compensation
expense for options granted on or after September 1, 2003. As a result, a compensation expense of $ 261,000
($163,000 in 2005) was recorded for the three month period ended November 30, 2006. If compensation expense
had been recognized using the fair value-based method at the grant date for options granted between
September 1, 2001 and August 31, 2003, the Company’s net income and earnings per share for the three month
period ended November 30, 2005 would have been reduced to the following pro forma amounts:
Three months ended August 31, Three months ended November 30,
2006
2005
2005
(unaudited)
Net income
As reported $ $ $ 4,593
Pro forma 4,585
Basic and diluted earnings per share
As reported $ $ $ 0.28
Pro forma 0.28
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the three month period
ended November 30, 2006 was $7.37 ($9.46 in 2005) per option. The fair value was estimated on the grant date for
purposes of determining stock-based compensation expense using the Binomial option pricing model based on the
following assumptions:
2006 2005
Expected dividend yield
1.27 % 1.27 %
Expected volatility
32 % 39 %
Risk-free interest rate
4.05 % 3.70 %
Expected life in years
4.0 4.0
As at November 30, 2006, the Company had outstanding stock options providing for the subscription of 303,779
subordinate voting shares. These stock options can be exercised at various prices ranging from $10.00 to $37.50 and
at various dates up to October 19, 2011.
TQS Inc., an indirect subsidiary of the Company, also adopted a stock option plan for certain executives and key
employees. During the first quarter, 17 0,269 stock options (no stock options granted in 2005 ) were granted by TQS
Inc. No compensation expense ($30,000 in 2005) was recorded during the three month period ended November 30,
2006 related to this plan.
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
9. Foreign Currency Translation Adjustment
The change in the foreign currency translation adjustment included in shareholders’ equity is the result of the
fluctuation in the exchange rates on translation of net investments in self-sustaining foreign operations and foreign
exchange gains or losses related to long-term debt denominated in foreign currency used to hedge net investments.
The net change in foreign currency translation adjustment is as follows:
Three months ended Twelve months ended
November 30, 2006 August 31, 2006
(unaudited) (audited)
Effect of exchange rate variation on translation of net investments in self-sustaining foreign
subsidiaries
$
29,758
$
(12,412)
Effect of exchange rate variation on translation of long-term debt designated as hedge of
net investments in self-sustaining subsidiaries (net of income taxes of $1,703,000 for the
twelve month period ended August 31, 2006)
(22,398)
7,960
$ 7,360 $ (4,452)
10. Statements of Cash Flo w
a) Changes in non-cash operating items
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Accounts receivable $ $ $ (18,649) $ (12,216)
Income tax receivable (1,672) (493)
Prepaid expenses (3,516) 641
Broadcasting rights (396) (7,258)
Accounts payable and accrued liabilities (74,866) (42,558)
Broadcasting rights payable 5,553 8,087
Income tax liabilities 3,867 (299)
Deferred and prepaid income 3,921 2,183
$ $ $ (85,758) $ (51,913)
b) Other information
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Fixed asset acquisitions through capital leases $ $ $ 205 $-
Interest paid 24,618 16,374
Income taxes paid 1,279 2,076
- 30 -
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2006
(amounts in tables are in thousands of dollars, except per share data)
11. Employee Future Benefits
The Company and its subsidiaries offer their employees contributory defined benefit pension plans, a defined
contribution pension plan or collective registered retirement savings plans which are described in the Company’s
annual consolidated financi al statements. The total expenses related to these plans are as follows:
Three months ended August 31, Three months ended November 30,
2006 2005 2006 2005
(unaudited) (unaudited)
Contributory defined benefit pension plans $ 819 $ 1,118
Defined contribution pension plan and collective registered retirement savings plans 621 487
$ $ $ 1,440 $ 1,605
12. Contingencies
Second Put and Call Options of TQS Inc.
On February 15, 2002, the shareholders of 3947424 Canada Inc. (‘’TQS Holdco’’), Cogeco Radio-Télévision Inc.
(‘’CRTI’’) and Bell Globemedia Inc. (‘’BGM’’), entered into a shareholders agreement following the acquisition of TQS
Inc. (the ‘’Shareholders Agreement’’). On October 31, 2002, BGM transferred its shares in TQS Holdco to CTV
Television Inc. (‘’CTV’’), a subsidiary of BGM. The Shareholders Agreement provides the right for CTV to notify CRTI,
during a 180 day period starting from February 15, 2007, of its offer to sell all its shares in TQS Holdco to CRTI for an
all-cash consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by
CTV to total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.15. CRTI may elect to
acquire CTV’s shares within 90 days following receipt of the put notice by delivering a put exercise notice to CTV. If
CRTI elects not to exercise or fails to exercise its put option, CTV may within 90 days following such election or failure
to exercise by CRTI, deliver a call notice to CRTI to purchase all the shares of CRTI in TQS Holdco for an all-cash
consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by CRTI to
total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.30. Unless the parties decide to
modify the Shareholders Agreement, in the event that CTV notifies CRTI of its offer to sell all its shares in TQS Holdco
to CRTI, CRTI does not buy them and CTV does not buy CRTI’s shares, CRTI and CTV have agreed to put up all
TQS Holdco shares for sale to a third party purchaser, subject to requisite governmental authorizations, with a view to
obtaining the highest possible price and maximizing shareholder value.
On August 31, 2006, BGM announced that it had closed off on its new ownership structure whereby BCE sold 48% of
its voting interest in BGM to The Woodbridge Company Limited and affiliates, the Ontario Teachers’ Pension Plan and
Torstar Corporation. This transaction constitutes a change of control under the Shareholders Agreement and,
accordingly, triggers certain purchase rights under the Agreement in favour of CRTI to purchase all, but not less than
all, of the shares owned by CTV.
On November 30, 2006, COGECO Inc. has confirmed that CRTI will not exercise its right to purchase the 40%
interest that CTV holds in TQS Holdco, following the change of control of BGM on August 31, 2006 that triggered the
right for CRTI to acquire all the shares of CTV in TQS Holdco.
Furthermore, CRTI, CTV and TQS Holdco have amended the Shareholder’s Agreement to postpone the beginning of
the Second Put Option Period provided in the Agreem ent from February 15, 2007 to January 1, 2009.