MONTREAL, April 10 /CNW Telbec/ - Today, COGECO Inc. (TSX: CGO.SV)
announced its financial results for the second quarter of fiscal 2006 ended
February 28.
Improved results
----------------
COGECO Inc. continues to improve its performance. The cable sector sales
are up as a result of increased number of customers in all major service
categories. "Our number of customers is increasing, thanks to our telephony
offering that drives the demand for more products. Our customers like our
offering, which is in line with their needs. In the media sector, results are
encouraging. With our new reality show, Loft Story II, we are in a good
position to recapture market share and our radio operations continue to grow
nicely", said Mr. Audet, President and Chief Executive Officer of COGECO.
Solid continued growth in the cable sector
------------------------------------------
Cogeco Cable reported solid customer growth in all major services. "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 the products and levels of
service they deserve", said Mr. Audet.
Improvement in the media sector
-------------------------------
In the media sector, radio continues to grow both audiences and
advertising revenue. As for television, Loft Story II delivered a very good
performance, driving up audience ratings for TQS. "We are starting to see some
results from the increase in programming commitments of the past quarters",
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
has revised its guidelines and that of the cable sector to reflect the
improved expectations of management
<<
FINANCIAL HIGHLIGHTS
Quarters ended Six months ended
February 28, February 28,
($000s, except (unaudited) (unaudited)
percentages
and per share data)
% %
2006 2005 Change 2006 2005 Change
--------- --------- ------- --------- --------- -------
Revenue $ 177,359 $ 166,566 6.5 $ 357,837 $ 337,977 5.9
Operating
income
before
amortization 57,765 54,616 5.8 118,358 113,544 4.2
Net income
(loss) 2,679 (28,524) - 7,272 (25,407) -
Cash flow from
operations(1) 41,644 40,962 1.7 88,486 85,465 3.5
Less:
Capital
expenditures
and increase
in deferred
charges 40,316 31,193 29.2 74,359 56,231 32.2
--------- --------- --------- ---------
Free cash
flow(1) 1,328 9,769 (86.4) 14,127 29,234 (51.7)
Per share data
Basic net
income
(loss) $ 0.16 $ (1.74) - $ 0.44 $ (1.55) -
(1) Cash flow from operations, free cash flow and net income excluding
impairment of goodwill and other intangible assets do not have
standard definitions prescribed by Canadian Generally Accepted
Accounting Principles (GAAP) and should be treated accordingly. For
more details, please consult the Non-GAAP financial measures section.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
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 the section
"Uncertainty and main risk factors" of the Company's 2005 annual MD&A) that
could cause actual results to differ materially from what we currently expect.
These factors include technological changes, changes in market and
competition, governmental or regulatory developments, general economic
conditions, the development of new products and services, the enhancement of
existing products and services, and the introduction of competing products
having technological or other advantages, many of which are beyond our
control. Therefore, future events and results may vary significantly from what
we currently foresee. You should not place undue importance on forward-looking
information and should not rely upon this information as of any other date.
While we may elect to, we are under no obligation (and expressly disclaim any
such obligation) and do not undertake to update or alter this information
before next quarter.
This analysis should be read in conjunction with the Company's financial
statements and the notes thereto prepared in accordance with Canadian GAAP and
the MD&A included in the Company's Annual Report. Throughout this discussion,
all amounts are in Canadian dollars unless otherwise indicated.
CORPORATE STRATEGIES AND OBJECTIVES
COGECO's objectives are to maximise shareholder value by increasing
profitability and by ensuring continued growth. The strategies for reaching
those objectives are, for the cable sector, constant corporate growth through
the diversification of products and services as well as clientele, effective
management of capital and tight cost control. The media sector focuses on
continuous improvement of its program schedules to increase its market share
and therefore its profitability. The Company measures its performance with
regard to these objectives with operating income before amortization growth,
free cash flow and revenue-generating units(x) (RGU) growth (cable sector).
Below are the second quarter achievements of the cable and media sectors in
furtherance of COGECO's objectives.
Cable Sector
- Video services:
- Addition of Treehouse On Demand and KIDZ On Demand to Cogeco Cable's
Ontario digital video offer, free of charge;
- Addition of the new cinDepop channel to Cogeco Cable's QuDebec digital
video offer.
- Digital telephony service:
- The digital telephony service is now available to 38% of homes
passed in Cogeco Cable's territories;
- Deployment of digital telephony service in Chatham, Georgetown,
Waterdown and Milton, Ontario, and in Rimouski, Matane, Sept-Iles,
Port-Cartier and Baie-Comeau, QuDebec.
- High-speed Internet service:
- Cogeco Cable more than doubled its download speed for its Lite
product from 300 Kbps to 640 Kbps.
- Acquisition:
- In furtherance of its existing line of business and external growth
strategy, the cable subsidiary continues to investigate cable system
acquisition opportunities, including cable systems located outside
Canada.
Media sector
- During the second quarter, TQS started to air "Loft Story II", a
unique reality show. The success of this show had a positive impact
on TQS total viewership.
- RYTHME FM is in the top position in the Montreal market and is gaining
market share in its stations across QuDebec. The station 933
continues to win new listeners within its target audience.
RGU growth
In the cable sector, the number of RGUs increased by 8.6% during the
first six months. The Company had anticipated RGU growth between 8% and 10%
for all of fiscal 2006. Higher than anticipated HSI and digital video customer
growth has allowed the cable subsidiary 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.
Operating income before amortization growth
The Company had originally anticipated stable operating income before
amortization in fiscal 2006. Although operating income before amortization
grew by 4.2% during the first six months, COGECO still expects the latter to
remain relatively stable in fiscal 2006. Please consult "Fiscal 2006 financial
guidelines" section for further details.
Free cash flow
In the first six months, COGECO generated free cash flow of $14.1
million. In light of stronger than expected RGU growth in the first six months
of fiscal 2006, capital expenditures and deferred charges in the cable sector
are expected to surpass the $140 million guideline and reach $160 million.
Therefore, COGECO's free cash flow will be approximately $15 million less than
the set objective of $25 million to $30 million. Please consult "Fiscal 2006
financial guidelines" section for further details.
----------------------------
(x) See customer statistics of the cable sector section for detailed
explanations
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies and
estimates since August 31, 2005. A description of these policies and estimates
can be found in the Company's 2005 annual MD&A.
OPERATING RESULTS
Revenue, for the second quarter and first six months of fiscal 2006, rose
by $10.8 million, or 6.5%, and by $19.9 million, or 5.9%, respectively,
compared to the same periods last year. Cable revenue, driven by an increased
number of customers in basic, digital video, HSI and digital telephony
services as well as rate increases, went up by $9.4 million, or 6.8%, in the
second quarter and by $17 million, or 6.2%, in the first six months. Media
revenue increased by $1.4 million, or 5.1%, in the second quarter and by $2.9
million, or 4.5%, in the first six months, due to higher radio advertising
revenue.
Operating income before amortization grew by 5.8% and 4.2% in the second
quarter and first six months of fiscal 2006 respectively, compared to the same
periods last year. The cable sector contributed to an increase of $4.3 million
and $8.4 million in the second quarter and first six months. During the same
periods, the media sector had a negative impact of $1.8 million and $4.2
million.
FIXED CHARGES
Quarters ended Six months ended
($000s, except February 28, February 28,
percentages)
% %
2006 2005 Change 2006 2005 Change
--------- --------- ------- --------- --------- -------
Amortization $ 30,217 $ 33,383 (9.5) $ 60,100 $ 66,999 (10.3)
Financial
expense $ 14,231 $ 14,237 - $ 28,192 $ 28,477 (1.0)
Amortization amounted to $30.2 million and $60.1 million during the
second quarter and first six months of fiscal 2006 compared to $33.4 million
and $67 million for the same periods last year. Amortization declined during
these periods since many cable modems and digital terminals in the cable
sector were fully amortized.
Financial expense was stable in the second quarter of 2006 and slightly
decreased in the first six months. This is due to the lower level of
Indebtedness (defined as bank indebtedness and long-term debt) during these
periods offset by increases in the short-term interest rate on the Term
Facilities.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the second quarter of fiscal 2005, subsequent to a viewership
market share loss in conventional television combined with a shift in
conventional television advertising towards specialty channels, impairment
tests of goodwill and other intangible assets related to the television
operation of the media business unit were performed. The Company concluded
that an impairment existed and consequently wrote-off the $27.9 million of
goodwill and reduced the value of its television broadcasting licenses by
$24.6 million. The impact of the impairment of goodwill and other intangible
assets on net income was as follows:
($ 000s)
Impairment of goodwill and other intangible assets 52,531
Income taxes 3,270
----------
Impairment losses net of income taxes 49,261
Non-controlling interest 19,651
----------
Impairment losses net of income taxes and
non-controlling interest 29,610
----------
----------
INCOME TAXES
During the second quarter of fiscal 2006, income taxes stood at $5.7
million compared to a recovery of $0.1 million in the same period in fiscal
2005. For the first six months of fiscal 2006, income taxes stood at $12.3
million compared to $4.5 million for the same period last year. Income taxes
in the second quarter and first six months amounted to $5.7 million and $12.3
million respectively, compared to $3.1 million and $7.7 million for the same
periods last year, excluding a non-cash income tax adjustment of $3.3 million
for the impairment of goodwill and other intangible assets of the television
operations. The income tax increases were mainly attributable to the cable
sector's growth in operating income before amortization combined with the
decline in fixed charges as discussed before.
NON-CONTROLLING INTEREST
The non-controlling interest represents an interest of approximately 61%
in Cogeco Cable's results and a 40% interest in TQS Inc. During the second
quarter and first six months of fiscal 2006, the non-controlling interest
stood at $4.8 million and $10.3 million compared to a negative $16.9 million
and a negative $13.7 million respectively for the same periods last year. The
non-controlling interest for the second quarter and first six months of fiscal
2005 included an adjustment of $19.7 million for the television's impairment
of goodwill and other intangible assets.
NET INCOME (LOSS)
Net income for the second quarter of fiscal 2006 amounted to $2.7
million, or $0.16 per share, compared to a net loss of $28.5 million, or $1.74
per share, for the same period last year. For the first six months of fiscal
2006, net income stood at $7.3 million, or $0.44 per share compared to a net
loss of $25.4 million, or $1.55 per share for the comparable period last year.
Net income increases in these periods were attributable to the $29.6 million
impairment of goodwill and other intangible assets incurred in the second
quarter of fiscal 2005.
In the second quarter and first six months of fiscal 2006, net income
excluding impairment of goodwill and other intangible assets(x) grew
respectively from $1.1 million to $2.7 million and from $4.2 million to $7.3
million compared to the same periods last year. These increases are due to the
cable sector's net income growth.
CASH FLOW AND LIQUIDITY
Quarters ended Six months ended
February 28, February 28,
($000s) 2006 2005 2006 2005
------------- ------------- ------------- -------------
Operating
Activities
Cash flow from
operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
Changes in
non-cash
operating
items 2,828 16,981 (49,085) (27,531)
------------- ------------- ------------- -------------
44,472 57,943 39,401 57,934
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Investing
Activities(1) $ (59,092) $ (31,168) $ (93,135) $ (56,184)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Financing
Activities(1) $ (6,063) $ (26,775) $ 53,734 $ (1,750)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net change in
cash and cash
equivalents $ (20,683) $ - $ - $ -
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
(1) Excludes assets acquired under capital leases.
During the second quarter of fiscal 2006, cash flow from operations
reached $41.6 million or 1.7% higher than the comparable period last year, due
primarily to operating income before amortization growth in the cable sector,
partly offset by a decline in operating income before amortization recorded in
the media sector. Changes in non-cash operating items generated less cash
inflow than 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 operation
reached $88.5 million or 3.5% higher than for the same period last year due
primarily to operating income before amortization growth in the cable sector,
partially offset by a decline in operating income before amortization recorded
in the media sector. Changes in non-cash operating items generated greater
cash outflow than last year, mainly as a result of a larger decrease in
accounts payable and accrued liabilities caused by increased capital
expenditures incurred late in fiscal 2005.
In the second quarter, investing activities rose by $27.9 million due to
increases of $7.5 million in capital expenditures, $0.1 million in deferred
charges and $20.3 million in restricted cash. For the first six months, the
rise in investing activities is due to increases of $15.5 million in capital
expenditures, $1 million in deferred charges and $20.3 in restricted cash.
The second quarter and first six months increases in deferred charges are
mainly attributable to higher reconnect costs given the significant level of
RGU increase, which includes the digital telephony customer growth in the
cable sector. The rise in restricted cash in the second quarter and first six
months is the result of a deposit in escrow. This deposit of 15 million euros
was intended for a potential acquisition within the cable subsidiary's
business segment. The deposit is being returned with accumulated interest
thereon.
During the second quarter and first six months, the increase related to
capital expenditures is mainly due to the following factors of the cable
sector:
- Customer premise equipment decreased by $1.2 million in the second
quarter of fiscal 2006. This is explained by a decline in digital
terminals and cable modems, partially offset by more home terminal
devices related to the digital telephony service. The cable
subsidiary 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, customer premise equipment increased
by $2.9 million resulting from a rise in the number of digital
terminals rented to customers and a greater ratio of digital
terminals per digital home.
- Scalable infrastructure rose by $4.1 million and $5.4 million in the
second quarter and first six months of fiscal 2006. This is mainly
attributable to the support of the digital telephony rollout.
- Expenditures associated with the network upgrade and rebuild program
rose by $3.7 million and $6.2 million in the second quarter and first
six months due to the acceleration of the program to expand the
bandwidth to 750 MHz and 550 MHz for the Ontario and QuDebec 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.
Free cash flow of $1.3 million and $14.1 million was generated during the
second quarter and first six months of fiscal 2006 respectively as a result of
increased cash flow from operations in the cable sector, partly offset by
increased capital expenditures and deferred charges in that sector and a
decrease in cash flow from operations in the media sector. In the second
quarter and first six months of fiscal 2006, free cash flow declined compared
to the same periods last year. This is mainly attributable to increased
capital expenditures and deferred charges to support digital telephony service
and better-than-expected RGU growth in the cable sector.
During the second quarter, the level of Indebtedness decreased by $5.5
million mainly due to generated free cash flow of $1.3 million, a rise in non-
cash operating items of $2.8 million and a net decrease in cash and cash
equivalents of $20.7 million, partly offset by an increase in restricted cash
of $20.3 million. For the same period last year, Indebtedness declined by
$26.3 million, essentially due to generated free cash flow of $9.8 million and
an increase of $17 million in non-cash operating items. In addition, a
dividend of $0.0625 per share for subordinate and multiple voting shares,
totalling $1 million, was paid during the second quarter of fiscal 2006
compared to a dividend of $0.0525 per share, totalling $0.9 million for the
second quarter of fiscal 2005.
During the first half of fiscal 2006, the level of Indebtedness increased
by $56.3 million mainly due to generated free cash flow of $14.1 million
partly offset by a decline in non-cash operating items of $49.1 million and an
increase in restricted cash of $20.3 million. For the same period last year,
Indebtedness remained relatively stable since free cash flow was essentially
offset by changes in non-cash operating items. Dividends totalling $2.1
million were paid during the first six months of fiscal 2006 compared to $1.7
million for the same period the year before.
As at February 28, 2006, the Company had a working capital deficiency of
$100.8 million compared to $112.3 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 cable
subsidiary's current portion of long-term debt as Cogeco Cable's Term Facility
matures in less than a year. COGECO maintains a working capital deficiency due
to low accounts receivable since the majority of the cable subsidiary's
customers pay before their services are rendered, unlike accounts payable and
accrued liabilities, which are paid after products or services are rendered.
Additionally, the cable subsidiary generally uses cash and cash equivalents to
reduce Indebtedness.
As at February 28, 2006, the cable subsidiary had utilized $30 million of
its Term Facility and the Company had drawn $22 million of its Term Facility.
During the second quarter, the cable subsidiary 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. Moreover,
the Company's Term Facility has been extended for an additional year in
January 2006. Based on existing bank covenants, COGECO and Cogeco Cable had
access to the entire committed amounts. Going forward, COGECO and Cogeco Cable
have sufficient capacity to finance foreseeable growth and expect to continue
to generate free cash flow to further reduce their leverage ratios.
Transfers of funds from non-wholly owned subsidiaries to COGECO are
subject to approval by the subsidiaries' Board of Directors and may also be
restricted under the terms and conditions of certain debt instruments. In
accordance with applicable corporate and securities laws, significant
transfers of funds from Cogeco Cable may be subject to approval by minority
shareholders.
----------------------------
(x) Cash flow from operations, free cash flow and net income excluding
impairment of goodwill and other intangible assets do not have
standard definitions prescribed by Canadian Generally Accepted
Accounting Principles (GAAP) and should be treated accordingly. For
more details, please consult the Non-GAAP financial measures section.
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 $18 million rise in fixed
assets was mainly related to the cable sector's increase in capital
expenditures as well as lower amortization expense. Accounts payable and
accrued liabilities declined by $42.3 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 $57.8 million, respectively, due to the factors
previously discussed in the "Cash Flow and Liquidity" section.
A description of COGECO's share data as of March 31, 2006 is presented in
the table below:
Number of shares/ Amount
options ($000s)
---------------- -------------
Common Shares
Multiple voting shares 1,849,900 12
Subordinate voting shares 14,688,356 117,429
Options to Purchase Subordinate Voting Shares
Outstanding options 329,976
Exercisable options 329,976
In the normal course of business, COGECO has incurred financial
obligations, primarily in the form of long-term debt, operating and capital
leases and guarantees. COGECO's obligations have not materially changed since
August 31, 2005 and are described in the 2005 annual MD&A.
DIVIDEND DECLARATION
At its April 7, 2006 meeting, the Board of Directors of COGECO declared a
quarterly dividend of $0.0625 per share for subordinate and multiple voting
shares, payable on May 5, 2006, to shareholders on record on April 21, 2006.
CABLE SECTOR
------------
Customer Statistics
Net additions (losses)
Quarters ended Six months ended
February 28, February 28,
-------------------- ---------------------
February 28,
2006 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
Digital video
service
customers(4) 293,166 24,547 12,152 45,962 29,371
Digital telephony
service customers 16,504 9,597 - 15,056 -
Digital
terminals(5) 372,168 37,299 17,310 68,284 39,152
% of Penetration(1)
February 28,
---------------------
2006 2005
--------- ----------
Revenue-generating
units (RGUs)(2)
Basic
service customers
HSI service
customers(3) 41.9 37.1
Digital video
service
customers(4) 35.8 28.5
Digital telephony
service customers 5.7 -
Digital
terminals(5) 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 of fiscal 2006, 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.
In the second quarter of 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 offer 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.
Operating results
Quarters ended Six months ended
($000s, except February 28, February 28,
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
respectively by $9.4 million or 6.8% and by $17 million or 6.2%, 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 QuDebec. 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 QuDebec. 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.
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,
Cogeco Cable 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.
Foreign exchange management
Cogeco Cable has entered into cross-currency swap agreements to ?x the
liability for interest and principal payments on its US$150 million Senior
Secured Notes. These agreements have the effect of converting the US interest
coupon rate of 6.83% per annum to an average Canadian dollar ?xed interest
rate of 7.254% per annum. The exchange rate applicable to the principal
portion of the debt has been ?xed at CDN$1.5910. Amounts due under the US$150
million Senior Secured Notes Series A decreased by CDN$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 7 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.
MEDIA SECTOR
------------
Operating results
Quarters ended Six months ended
($000s, except February 28, February 28,
percentages)
% %
2006 2005 Change 2006 2005 Change
--------- --------- ------- --------- --------- -------
Revenue $ 29,653 $ 28,222 5.1 $ 66,769 $ 63,912 4.5
Operating
costs 32,545 29,334 10.9 67,212 60,190 11.7
Operating income
(loss) before
amortization (2,892) (1,112) - (443) 3,722 -
Operating
margin (9.8)% (3.9)% (0.7)% 5.8%
Revenue
During the second quarter and first six months of fiscal 2006, revenue
increased by $1.4 million and $2.9 million respectively. All radio stations
contributed to the increase in revenue. Furthermore, revenue and operating
expenses for the Sherbrooke and Trois-RiviGeres RYTHME FM stations are no
longer capitalized since August 31, 2005. Television revenue decreased by 1.9%
and 3% in the second quarter and first six months, respectively, due to a
decline in TQS's audience ratings and to the advertising market that remains
difficult for conventional television in the Francophone market.
Operating Income before Amortization
The operating income before amortization declined by $1.8 million and
$4.2 million in the second quarter and first six months of fiscal 2006. For
the second quarter and first six months, TQS's operating income before
amortization decreased as a result of greater investment in television
programming, combined with lower revenue growth. During the second quarter of
fiscal 2006, radio's operating income before amortization improved due to
revenue growth. For the first six month, radio's operating income before
amortization improved due to revenue growth, which was partially offset by
additional royalty expenses following the Copyright Board October 14th
decision on SOCAN tariffs.
FISCAL 2006 FINANCIAL GUIDELINES
Revised Original
Projections Projections
($ million, except customer data) April 10, 2006 October 24, 2005
------------------ -------------------
Cable sector-
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
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
Media sector-
Financial Guidelines
Revenue 124 to 126 124 to 126
Operating loss
before amortization 2 to 3 2 to 3
Amortization 7 7
Capital expenditures
and deferred charges 5 to 6 5 to 6
Consolidated Financial Guidelines
Free Cash Flow 10 to 15 25 to 30
Operating income before
amortization Relatively
stable Stable
Net income 11 10
Cable Sector
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 remains 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 cable subsidiary 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.
Media Sector
Since economic and industry factors described in the 2005 annual MD&A
remain unchanged, management is maintaining its fiscal 2006 financial
guidance.
Consolidated outlook
Based on the above-mentioned guidelines, net income of $11 million and
free cash flow between $10 million to $15 million should be generated.
RISK FACTORS AND UNCERTAINTIES
There has been no significant change in the risk factors and
uncertainties facing COGECO as described in the Company's 2005 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by COGECO
throughout this MD&A. It also provides reconciliations between these Non-GAAP
measures and the most comparable GAAP financial measures. These financial
measures do not have standard definitions prescribed by Canadian GAAP and may
not be comparable with similar measures presented by other companies. These
measures include 'cash flow from operations', 'free cash flow' and 'net income
excluding impairment of goodwill and other intangible assets'.
Cash flow from operations
Cash flow from operations is used by COGECO's management and investors to
evaluate cash flow generated by operating activities excluding the impact of
changes in non-cash operating items. This allows the Company to isolate the
cash flow from operating activities from the impact of cash management
decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure 'free cash flow'. Cash flow from operations is calculated as
follows:
Quarters ended Six months ended
($000s) February 28, February 28,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Cash flow from
operating
activities $ 44,472 $ 57,943 $ 39,401 $ 57,934
Changes in
non-cash
operating items (2,828) (16,981) 49,085 27,531
------------- ------------- ------------- -------------
Cash flow from
operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Free cash flow
Free cash flow is utilized, by COGECO's management and investors, to
measure its ability to repay debt, distribute capital to its shareholders and
finance its growth. Free cash flow is calculated as follows:
Quarters ended Six months ended
($000s) February 28, February 28,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Cash flow from
operations $ 41,644 $ 40,962 $ 88,486 $ 85,465
Acquisition of
fixed assets (34,994) (27,483) (65,322) (49,775)
Increase in
deferred charges (3,784) (3,710) (7,499) (6,456)
Assets acquired
under capital
leases - as
per Note 9 b) (1,538) - (1,538) -
------------- ------------- ------------- -------------
Free cash flow $ 1,328 $ 9,769 $ 14,127 $ 29,234
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income excluding impairment of goodwill and other intangible assets
Net income excluding impairment of goodwill and other intangible assets
is used by COGECO and its investors in order to evaluate what would have been
the net income excluding the impairment of goodwill and other intangible
assets. This allows the Company to isolate the one time adjustment in order to
evaluate the net income from ongoing activities.
Quarters ended Six months ended
($000s) February 28, February 28,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net income (loss) $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Impairment of
goodwill and
other intangible
assets(1) - 29,610 - 29,610
------------- ------------- ------------- -------------
Net income
excluding
impairment of
goodwill and
other intangible
assets $ 2,679 $ 1,086 $ 7,272 $ 4,203
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
(1) For more details, please consult the Impairment of goodwill and other
intangible assets section.
ADDITIONAL INFORMATION
This MD&A was prepared on April 7, 2006. Additional information relating
to the Company, including its Annual Information Form, is available on the
SEDAR Web site at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable
subsidiary, COGECO provides about 1,464,000 revenue-generating units to
approximately 1,462,000 households in its service territory. Through its two-
way broadband cable infrastructure, Cogeco Cable provides its residential and
commercial customers with analog and digital video and audio services, high-
speed Internet access as well as digital telephony services. Through its
Cogeco Radio-Television subsidiary, COGECO holds a 60% interest and operates
the TQS network, six TQS television stations, and three French CBC-affiliated
television stations in partnership with CTV Television. Cogeco Radio-
Television also wholly owns and operates RYTHME FM radio stations in MontrDeal,
QuDebec City, Trois-RiviGeres and Sherbrooke as well as 933 in QuDebec City.
COGECO's subordinate voting shares are listed on the Toronto Stock Exchange
(CGO.SV). The subordinate voting shares of Cogeco Cable are also listed on the
Toronto Stock Exchange (CCA.SV).
Analyst Conference Call: Monday April 10, 2006, at 12:30 p.m. EDT
By 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)
Supplementary Quarterly Financial Information
Quarters ended February 28, November 30,
--------------------------- ---------------------------
2006 2005 2005 2004
($000, except
percentages
and per share
data)
Revenue $ 177,359 $ 166,566 $ 180,478 $ 171,411
Operating income
before
amortization 57,765 54,616 60,593 58,928
Operating margin 32.6% 32.8% 33.6% 34.4%
Amortization 30,217 33,383 29,883 33,616
Financial expense 14,231 14,237 13,961 14,240
Impairment losses - 52,531 - -
Income taxes 5,706 (130) 6,611 4,582
Non-controlling
interest 4,842 (16,940) 5,455 3,256
Net income (loss) 2,679 (28,524) 4,593 3,117
Cash flow
from operations 41,644 40,962 46,842 44,503
Net income (loss)
per share
Basic and
diluted $ 0.16 $ (1.74) $ 0.28 $ 0.19
Quarters ended August 31, May 31,
--------------------------- ---------------------------
2005 2004 2005 2004
($000, except
percentages
and per share
data)
Revenue $ 164,210 $ 154,652 $ 173,418 $ 168,392
Operating income
before
amortization 56,485 55,862 63,814 59,407
Operating margin 34.4% 36.1% 36.8% 35.3%
Amortization 30,769 33,758 32,783 33,323
Financial expense 14,366 14,305 14,441 14,813
Impairment losses - - - -
Income taxes 5,052 1,472 5,869 5,046
Non-controlling
interest 5,422 4,077 5,603 2,409
Net income (loss) 630 2,117 4,964 3,816
Cash flow
from operations 43,215 43,010 48,699 44,127
Net income (loss)
per share
Basic and
diluted $ 0.04 $ 0.13 $ 0.30 $ 0.23
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 QuDebec. Advertising sales, mainly national advertising, are
normally weaker in the second and fourth quarters and, as a result, the
operating margin before amortization is generally lower.
The large net loss of COGECO in the second quarter of fiscal 2005 was
attributable to COGECO's 60% share of the television sector's impairment of
goodwill and other intangible assets amounting to $29.6 million. This loss is
discussed in the "Impairment of goodwill and other intangible assets" section.
COGECO INC.
Cable Statistics
February 28, August 31,
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Homes Passed
Ontario 993,819 986,401
QuDebec 467,895 462,332
-------------------------------------------------------------------------
1,461,714 1,448,733
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue Generating Units
Ontario 1,047,964 968,749
QuDebec 415,648 378,984
-------------------------------------------------------------------------
1,463,612 1,347,733
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic Service Customers
Ontario 591,318 581,631
QuDebec 244,523 239,802
-------------------------------------------------------------------------
835,841 821,433
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discretionnary Service Customers
Ontario 466,998 461,038
QuDebec 189,421 183,320
-------------------------------------------------------------------------
656,419 644,358
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pay TV Service Customers
Ontario 84,187 80,817
QuDebec 39,240 35,407
-------------------------------------------------------------------------
123,427 116,224
-------------------------------------------------------------------------
-------------------------------------------------------------------------
High-Speed Internet Service Customers
Ontario 255,289 226,133
QuDebec 62,812 51,515
-------------------------------------------------------------------------
318,101 277,648
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Digital Video Customers
Ontario 190,593 159,734
QuDebec 102,573 87,470
-------------------------------------------------------------------------
293,166 247,204
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Digital Terminals
Ontario 260,268 209,662
QuDebec 111,900 94,222
-------------------------------------------------------------------------
372,168 303,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Digital Telephony
Ontario 10,764 1,251
QuDebec 5,740 197
-------------------------------------------------------------------------
16,504 1,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months Six months
ended February 28, ended February 28,
-------------------------------------------------------------------------
(In thousands of
dollars, except
per share data) 2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 177,359 $ 166,566 $ 357,837 $ 337,977
Operating costs 119,594 111,950 239,479 224,433
-------------------------------------------------------------------------
Operating income
before
amortization 57,765 54,616 118,358 113,544
Amortization
(note 3) 30,217 33,383 60,100 66,999
-------------------------------------------------------------------------
Operating income 27,548 21,233 58,258 46,545
Financial expense
(note 7) 14,231 14,237 28,192 28,477
-------------------------------------------------------------------------
Income before
income taxes and
following items 13,317 6,996 30,066 18,068
Impairment of
goodwill and other
intangible assets - 52,531 - 52,531
Income taxes
(note 4) 5,706 (130) 12,317 4,452
Non-controlling
interest 4,842 (16,940) 10,297 (13,684)
Loss on dilution
resulting from
shares issued
by a subsidiary - 17 - 92
Share in the loss
of a general
partnership 90 42 180 84
-------------------------------------------------------------------------
Net income (loss) $ 2,679 $ (28,524) $ 7,272 $ (25,407)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per share
(note 5)
Basic and
diluted $ 0.16 $ (1.74) $ 0.44 $ (1.55)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six months ended February 28,
-------------------------------------------------------------------------
(In thousands of dollars) 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited)
Balance at beginning $ 185,762 $ 209,188
Net income (loss) 7,272 (25,407)
Dividends on multiple voting shares (231) (194)
Dividends on subordinate voting shares (1,831) (1,527)
-------------------------------------------------------------------------
Balance at end $ 190,972 $ 182,060
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(In thousands of dollars) February 28, August 31,
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
Assets
Current
Restricted cash (note 6) $ 20,322 $ -
Accounts receivable 64,469 55,529
Income tax receivable 986 -
Prepaid expenses 5,244 4,704
Broadcasting rights 19,581 14,168
-------------------------------------------------------------------------
110,602 74,401
-------------------------------------------------------------------------
Broadcasting rights 18,457 16,076
Investments 539 539
Fixed assets 744,283 726,270
Deferred charges 37,552 41,797
Broadcasting licenses and customer base 1,017,892 1,017,892
-------------------------------------------------------------------------
$ 1,929,325 $ 1,876,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness $ 28,226 $ 605
Accounts payable and accrued liabilities 109,707 151,985
Broadcasting rights payable 15,100 7,337
Income tax payable - 299
Deferred and prepaid income 26,782 25,034
Current portion of long-term debt (note 7) 31,610 1,400
-------------------------------------------------------------------------
211,425 186,660
-------------------------------------------------------------------------
Long-term debt (note 7) 713,746 713,739
Share in the partner's deficiency
of a general partnership 828 648
Deferred and prepaid income 10,681 10,522
Broadcasting rights payable 6,194 4,112
Pension plans liabilities and
accrued employee benefits 11,198 10,628
Future income tax liabilities 217,652 208,434
Non-controlling interest 448,162 439,643
-------------------------------------------------------------------------
1,619,886 1,574,386
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 8) 117,441 116,167
Retained earnings 190,972 185,762
Contributed surplus - stock-based compensation 1,026 660
-------------------------------------------------------------------------
309,439 302,589
-------------------------------------------------------------------------
$ 1,929,325 $ 1,876,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
(In thousands
of dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating
activities
Net income (loss) $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Items not
affecting
cash and cash
equivalents
Amortization
(note 3) 30,217 33,383 60,100 66,999
Amortization of
deferred
financing costs 240 306 481 619
Impairment of
goodwill and
other intangible
assets - 52,531 - 52,531
Future income
taxes (note 4) 3,891 (841) 9,218 2,571
Non-controlling
interest 4,842 (16,940) 10,297 (13,684)
Other (225) 1,047 1,118 1,836
-------------------------------------------------------------------------
41,644 40,962 88,486 85,465
Changes in
non-cash operating
items (note 9a)) 2,828 16,981 (49,085) (27,531)
-------------------------------------------------------------------------
44,472 57,943 39,401 57,934
-------------------------------------------------------------------------
Cash flow from
investing
activities
Acquisition of
fixed assets
(note 9b)) (34,994) (27,483) (65,322) (49,775)
Increase in
deferred charges (3,784) (3,710) (7,499) (6,456)
Increase in
restricted cash (20,322) - (20,322) -
Other 8 25 8 47
-------------------------------------------------------------------------
(59,092) (31,168) (93,135) (56,184)
-------------------------------------------------------------------------
Cash flow from
financing
activities
Increase
(decrease) in bank
indebtedness 5,952 (16,931) 27,621 12,351
Increase in
long-term debt - 1,000 30,000 1,058
Repayment of
long-term debt (11,450) (10,320) (1,321) (13,654)
Issue of subordinate
voting shares 1,274 512 1,274 546
Dividends on
multiple voting
shares (115) (97) (231) (194)
Dividends on
subordinate
voting shares (918) (765) (1,831) (1,527)
Issue of subordinate
voting shares by a
subsidiary to
non-controlling
interest 166 311 166 640
Dividends paid by
a subsidiary to
non-controlling
interest (972) (485) (1,944) (970)
-------------------------------------------------------------------------
(6,063) (26,775) 53,734 (1,750)
-------------------------------------------------------------------------
Net change in
cash and cash
equivalents (20,683) - - -
Cash and cash
equivalents at
beginning 20,683 - - -
-------------------------------------------------------------------------
Cash and cash
equivalents
at end $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See supplemental cash flow information in note 9.
COGECO 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 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 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
Company's external auditors.
2. Segmented Information
The Company's activities are divided into two business segments: Cable
and Media. The Cable segment is comprised of all cable and high-speed Internet
access and digital telephony services, and the Media segment is comprised of
radio and television operations.
The principal financial information per business segment is presented in
the table below:
Cable Media
-------------------------------------------------------------------------
Three months
ended
February 28,
(unaudited) 2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 147,757 $ 138,389 $ 29,653 $ 28,222
Operating costs 88,189 83,092 32,545 29,334
Operating income
(loss) before
amortization 59,568 55,297 (2,892) (1,112)
Amortization 28,656 31,988 1,522 1,337
Operating income
(loss) 30,912 23,309 (4,414) (2,449)
Financial expense 13,776 13,840 208 154
Impairment of
goodwill and
other intangible
assets - - - 52,531
Income taxes 6,936 3,856 (1,690) (4,227)
-------------------------------------------------------------------------
Net assets
employed(1)(2) $ 1,675,906 $ 1,630,222 $ 77,504 $ 78,920
Total assets(2) 1,795,167 1,750,832 126,000 116,333
Acquisition of
fixed assets 35,696 26,809 729 674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Head Office
and elimination Consolidated
-------------------------------------------- ---------------------------
Three months
ended
February 28,
(unaudited) 2006 2005 2006 2005
-------------------------------------------- ---------------------------
-------------------------------------------- ---------------------------
Revenue $ (51) $ (45) $ 177,359 $ 166,566
Operating costs (1,140) (476) 119,594 111,950
Operating income
(loss) before
amortization 1,089 431 57,765 54,616
Amortization 39 58 30,217 33,383
Operating income
(loss) 1,050 373 27,548 21,233
Financial expense 247 243 14,231 14,237
Impairment of
goodwill and
other intangible
assets - - - 52,531
Income taxes 460 241 5,706 (130)
-------------------------------------------- ---------------------------
Net assets
employed(1)(2) $ 7,451 $ 7,162 $ 1,760,861 $ 1,716,304
Total assets(2) 8,158 8,178 1,929,325 1,875,343
Acquisition of
fixed assets 107 - 36,532 27,483
-------------------------------------------- ---------------------------
-------------------------------------------- ---------------------------
(1) Total assets less cash and cash equivalents, accounts payable and
accrued liabilities, broadcasting rights payable and deferred and
prepaid income.
(2) As at February 28, 2006 and 2005.
Cable Media
-------------------------------------------------------------------------
Six months
ended
February 28,
(unaudited) 2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 291,170 $ 274,155 $ 66,769 $ 63,912
Operating costs 174,300 165,664 67,212 60,190
Operating income
(loss) before
amortization 116,870 108,491 (443) 3,722
Amortization 56,933 64,232 3,089 2,649
Operating income
(loss) 59,937 44,259 (3,532) 1,073
Financial expense 27,358 27,734 322 255
Impairment of
goodwill an other
intangible assets - - - 52,531
Income taxes 13,381 7,085 (1,727) (3,331)
-------------------------------------------------------------------------
Net assets
employed(1)(2) $ 1,675,906 $ 1,630,222 $ 77,504 $ 78,920
Total assets(2) 1,795,167 1,750,832 126,000 116,333
Acquisition of
fixed assets 65,709 48,383 1,044 1,342
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Head Office
and elimination Consolidated
-------------------------------------------- ---------------------------
Six months
ended
February 28,
(unaudited) 2006 2005 2006 2005
-------------------------------------------- ---------------------------
-------------------------------------------- ---------------------------
Revenue $ (102) $ (90) $ 357,837 $ 337,977
Operating costs (2,033) (1,421) 239,479 224,433
Operating income
(loss) before
amortization 1,931 1,331 118,358 113,544
Amortization 78 118 60,100 66,999
Operating income
(loss) 1,853 1,213 58,258 46,545
Financial expense 512 488 28,192 28,477
Impairment of
goodwill an other
intangible assets - - - 52,531
Income taxes 663 698 12,317 4,452
-------------------------------------------- ---------------------------
Net assets
employed(1)(2) $ 7,451 $ 7,162 $ 1,760,861 $ 1,716,304
Total assets(2) 8,158 8,178 1,929,325 1,875,343
Acquisition of
fixed assets 107 50 66,860 49,775
-------------------------------------------- ---------------------------
-------------------------------------------- ---------------------------
(1) Total assets less cash and cash equivalents, accounts payable and
accrued liabilities, broadcasting rights payable and deferred and
prepaid income.
(2) As at February 28. 2006 and 2005.
3. Amortization
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 24,661 $ 27,697 $ 48,837 $ 55,216
Deferred charges 5,556 5,686 11,263 11,783
-------------------------------------------------------------------------
$ 30,217 $ 33,383 $ 60,100 $ 66,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Income taxes
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 1,815 $ 711 $ 3,099 $ 1,881
Future 3,891 (841) 9,218 2,571
-------------------------------------------------------------------------
$ 5,706 $ (130) $ 12,317 $ 4,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table provides the reconciliation between statutory federal
and provincial income taxes and the consolidated income tax expense:
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Income tax at
combined income
tax rate of
34.84% (34.15%
in 2005) $ 4,608 $ (15,482) $ 10,412 $ (11,769)
Loss or income
subject to lower
or higher tax
rates 266 1,636 266 1,730
Decrease in income
taxes as a result
of increases in
substantially
enacted tax rates - - (91) -
Large corporation
tax 807 385 1,644 1,010
Income taxes
arising from
non-deductible
impairment of
goodwill and
broadcasting
licenses - 10,570 - 10,570
Variation of the
valuation
allowance - 2,454 - 2,454
Other 25 307 86 457
-------------------------------------------------------------------------
Income tax at
effective income
tax rate $ 5,706 $ (130) $ 12,317 $ 4,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Earnings (loss) per share
The following table provides reconciliation between basic and diluted
earnings (loss) per share:
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Weighted average
number of
multiple voting
and subordinate
voting shares
outstanding 16,497,105 16,404,732 16,473,425 16,388,660
Effect of
dilutive stock
options(1) 111,718 - 135,205 -
-------------------------------------------------------------------------
Weighted average
number of
diluted multiple
voting and
subordinate
voting shares
outstanding 16,608,823 16,404,732 16,608,630 16,388,660
-------------------------------------------------------------------------
Earnings (loss)
per share
Basic and
diluted $ 0.16 $ (1.74) $ 0.44 $ (1.55)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and six month periods ended February 28, 2006, 36,443
and 40,143 stock options were excluded from the calculation of
diluted earnings per share since the exercise price of the options
was greater than the average share price of the subordinate voting
shares. Also, for the three and six month periods ended February 28,
2005, the effect of 134,769 and 141,014 stock options was not
included in diluted loss per share, as the effect of their inclusion
was antidilutive.
6. Restricted cash
Restricted cash represents a deposit in escrow of 15,000,000 euros
intended for a potential acquisition within the Company's subsidiary, Cogeco
Cable Inc.'s, business segment. The deposit is being returned with accumulated
interest thereon.
7. Long-term debt
-------------------------------------------------------------------------
Maturity Interest February 28, August 31,
rate 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
Parent company
Term Facility 2009(1) 5.91%(2) $ 22,000 $ 22,500
Obligations
under capital
leases 2010 6.49 - 6.61 154 55
Subsidiaries
Term Facility(3) 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(4) 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(5) 2008 - 68,160 60,585
Obligations under
capital leases 2010 5.87 - 8.36 4,485 3,831
Other - - 67 103
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745,356 715,139
Less current portion 31,610 1,400
-------------------------------------------------------------------------
$ 713,746 $ 713,739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) COGECO Inc.'s Term Facility has been extended for an additional year
in January 2006.
(2) Average interest rate on debt as of February 28, 2006, including
stamping fees.
(3) In January 2006, the Company's subsidiary, Cogeco Cable Inc., amended
its Term Facility so that the committed amount, which should have
been reduced to $95,000,000 on January 31, 2006, is maintained at its
prior level of $270,000,000.
(4) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the U.S.
denominated debt.
(5) The deferred credit represents the amount which would have been
payable as at February 28, 2006, and August 31, 2005 under
cross-currency swaps entered into by the Company's subsidiary, Cogeco
Cable Inc., to hedge Senior Secured Notes Series A denominated in
US dollars.
Interest on long-term debt for the three and six month periods ended
February 28, 2006 amounted to $13,442,000 and $26,651,000 ($13,354,000 and
$26,703,000 in 2005).
8. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, issuable in series and non-
voting, except when specified in the Articles of Incorporation of the Company
or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting shares, 1 vote per share.
-------------------------------------------------------------------------
February 28, August 31,
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
Issued
1,849,900 multiple voting shares $ 12 $ 12
14,688,356 subordinate voting shares
(14,600,104 as at August 31, 2005) 117,429 116,155
-------------------------------------------------------------------------
$ 117,441 $ 116,167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the period, subordinate voting shares transactions were as
follows:
Six months ended Twelve months ended
February 28, 2006 August 31, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
-------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
-------------------------------------------------------------------------
Balance at
beginning 14,600,104 $ 116,155 14,522,456 $ 115,609
Shares issued for
cash under the
Employee Stock
Purchase Plan
and the Stock
Option Plan 88,252 1,274 77,648 546
-------------------------------------------------------------------------
Balance at end 14,688,356 $ 117,429 14,600,104 $ 116,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 two quarters, no stock options were
granted to employees by COGECO Inc. However, the Company's subsidiary, Cogeco
Cable Inc., granted 126,059 stock options (140,766 in 2005) with an exercise
price ranging from $25.12 to $29.05 ($21.50 in 2005), of which 31,743 stock
options (38,397 in 2005) were granted to COGECO Inc.'s employees. The Company
records compensation expense for options granted on or after September 1,
2003. As a result, a compensation expense of $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 Company's net income (loss) and earnings (loss)
per share for the three and six month periods ended February 28, 2006 and 2005
would have been reduced (increased) to the following pro forma amounts:
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
As reported $ 2,679 $ (28,524) $ 7,272 $ (25,407)
Pro forma 2,671 (28,604) 7,256 (25,567)
Basic and diluted
earnings
per share
As reported $ 0.16 $ (1.74) $ 0.44 $ (1.55)
Pro forma 0.16 (1.74) 0.44 (1.56)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of stock options granted by the Company's subsidiary,
Cogeco Cable Inc., for the six month period ended February 28, 2006 was $9.44
($7.46 in 2005) per option. The fair value was estimated on the grant date for
purposes of determining stock-based compensation expense using the Binomial
option pricing model based on the following assumptions:
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Expected dividend yield 1.27% 1.27%
Expected volatility 39% 43%
Risk-free interest rate 3.70% 3.70%
Expected life in years 4.0 4.0
-------------------------------------------------------------------------
As at February 28, 2006, the Company had outstanding stock options
providing for the subscription of 329,976 subordinate voting shares. These
stock options can be exercised at various prices ranging from $6.60 to $37.50
and at various dates up to October 19, 2011.
TQS Inc., an indirect subsidiary of the Company, also adopted a stock
option plan for certain executives and key employees. During the first two
quarters, no stock options (77,000 in 2005) were granted by TQS Inc. A
compensation expense of $124,000 and $154,000 ($40,000 and $81,000 in 2005)
was recorded for the three and six month periods ended February 28, 2006
related to this plan.
9. Statements of cash flow
a) Changes in non-cash operating items
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts
receivable $ 3,276 $ 4,673 $ (8,940) $ (6,825)
Income tax
receivable (493) (647) (986) (469)
Prepaid expenses (1,181) (316) (540) (562)
Broadcasting rights (536) (195) (7,794) (2,039)
Accounts payable
and accrued
liabilities 280 13,112 (42,278) (24,437)
Broadcasting
rights payable 1,758 287 9,845 3,280
Income tax payable - - (299) -
Deferred and
prepaid income (276) 67 1,907 3,593
Other - - - (72)
-------------------------------------------------------------------------
$ 2,828 $ 16,981 $ (49,085) $ (27,531)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Other information
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets
acquisitions
through capital
leases $ 1,538 $ - $ 1,538 $ -
Interest paid 11,614 11,717 27,988 27,965
Income taxes paid 2,308 1,358 4,384 2,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Employees future benefits
The Company and its subsidiaries offer their employees contributory
defined benefit pension plans, a defined contribution pension plan or
collective registered retirement savings plans which are described in the
Company's annual consolidated financial statements. The total expenses related
to these plans are as follows:
Three months ended Six months ended
February 28, February 28,
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory
defined benefit
pension plans $ 706 $ 576 $ 1,824 $ 1,015
Defined
contribution
pension plan
and collective
registered
retirement
savings plans 461 390 948 793
-------------------------------------------------------------------------
$ 1,167 $ 966 $ 2,772 $ 1,808
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
11. Comparative figures
Certain comparative figures have been reclassified in order to conform to
the presentation adopted in the current period.
