COGECO Inc.
TSX : CGO

COGECO Inc.

January 09, 2008 18:05 ET

The Cable Sector Drives COGECO's 2008 First Quarter Performance

MONTREAL, QUEBEC--(Marketwire - Jan. 9, 2008) - Today, COGECO Inc. (TSX:CGO) announced its financial results for the first quarter 2008 ended November 30, 2007.

First quarter 2008 consolidated results show sustained growth:

- Revenue increased by 11.2% to $292.8 million;

- Operating income before amortization grew by 17.7% to $104 million;

- Free cash flow(1) reached $25.3 million.

Cable sector

- Revenue-generating units (RGUs)(2) reached 2,568,689 with 83,024 net additions;

- On September 5th, a new management structure was implemented that will enable Canadian operations to develop better synergies and therefore have a positive impact on the way Cogeco Cable delivers its services.

Media sector

Radio

- Fall BBM's reports that the Rythme FM network continues to lead in the Montreal and Trois-Rivieres markets while the 93.3 station in Quebec City and Rythme FM in Sherbrooke continue to expand their audience.

Television

- TQS's revenue decreased during the first quarter due to difficult conditions for the conventional television market. However, TQS maintained a tight cost control.

- TQS inc. ("TQS") announced on December 18, 2007, that it had obtained an order by Quebec Superior Court under the Companies' Creditors Arrangement Act ("CCAA"), issued for an initial period of 30 days, with a view to protecting itself, its subsidiaries and its parent 3947424 Canada Inc. (the "TQS Group") from claims by creditors and to allowing it to reorganize its operations.

"COGECO's first quarter financial result is very positive. In the cable sector, Cogeco Cable has continued on its growth trajectory and is in an excellent position to achieve superior growth in 2008. Our cable subsidiary continues to enhance the features of its services, to attract new customers and to sell additional services to existing customers, thanks to its versatile delivery system," said Louis Audet, President and CEO of COGECO. "With regards to the court order involving TQS, after careful thought, the time has come to end our participation in the general interest television sector. COGECO's portion of the impairment of assets amounts to approximately $18.5 million. In radio, we are well positioned to keep our leading position in key markets and gain market share in our other markets. We are looking forward to achieving a strong fiscal 2008," added Mr. Audet.

(1) Free cash flow does 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.

(2) Represent the sum of Basic Cable, high speed internet (HSI), Digital Television and Telephony service customers.



FINANCIAL HIGHLIGHTS

($000s, except percentages and Quarters ended November 30,
per share data) (unaudited)
%
2007 2006 Change
------------------------------------------------------------------------
Revenue $292,770 $263,292 11.2
Operating income
before amortization 104,010 88,367 17.7
Net Income (loss) (9,976) 6,751 -
Cash flow from operations (1) 83,858 66,035 27.0
Less:
Capital expenditures and increase
in deferred charges 58,549 74,615 (21.5)
------------------------------------------------------------------------
Free cash flow (1) 25,309 (8,580) -
Per share data
Basic net income (loss) $(0.60) $0.41 -

(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 2007 annual Management's Discussion and Analysis (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 2007 Annual Report. Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.

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, supported by tight cost control and business processes, are specific to each sector. For the cable sector, sustained corporate growth and continuous improvement of networks and equipment are the main strategies used. The media sector focusses on continuous improvement of its programming to increase its market share, and therefore, its profitability The Company measures its performance against these objectives with growth of operating income before amortization, free cash flow(1) and RGU(2) growth for the cable sector. Below are the recent achievements of the cable and media sectors in furtherance of COGECO's objectives.

Tight control over costs and business processes

- For the first quarter 2008, the Company's operating costs increased by 7.9% compared to a revenue growth of 11.2% during the period;

- The design of internal controls over financial reporting as per National Instrument 52-109 is still underway. As discussed in the 2007 annual MD&A, the Company had identified certain material weaknesses in the design of internal controls over financial reporting and there have been improvement in the design of internal controls on some significant processes during the quarter. The documentation and remediation of internal controls weaknesses are progressing normally.



Cable sector

Continuous improvement of the service offering and expansion of the
customer base

Canadian operations

- Digital Television services:

- September 4, launch of The Setanta International Sports Pak in
Ontario, a new premium digital service;

- October 2, launch of RDS HD in Quebec, a speciality channel
transmitting in High Definition ("HD") various sports events,
including all Montreal Canadians hockey games;

- October 11, launch of Leafs TV HD, a Canadian digital specialty
sports channel in HD transmitting all Toronto Maple Leafs hockey
team games;

- October 31, launch of Mpix On Demand in Ontario;

- December 5, launch of the Motorola DCT3080, a new digital video
recorder (DVR) model in Quebec.

- Telephony service:

- September 25, new International calling service with a supplier of
choice in Quebec and Ontario;

- HSI services:

- November 7, launch of Wi-Fi into Kingston and Windsor.

(1) See the "non-GAAP financial measures" section for explanations.

(2) See the "Customer statistics" section of the cable sector section for
detailed explanations.


Portuguese operations

- Cabovisao - Televisao por Cabo, S.A. (Cabovisao) continued its Digital Television service deployment;

- New image and communication concept: Cabovisao, infinite possibilities.

Continuous improvement of networks and equipment

- For the first quarter of 2008, Cogeco Cable has invested approximately $21.7 million in its infrastructure including headends and network upgrade / rebuild.

Media sector

- During the first quarter, TQS obtained an order by Quebec Superior Court under the Companies' Creditors Arrangement Act with a view to protecting TQS and its subsidiaries from claims by creditors and to allowing it to reorganize its operations.

- With the announcement of the Fall BBM survey, RYTHME FM was confirmed in top position in the Montreal and Trois-Rivieres markets. The 93.3 station in Quebec City and Rythme FM in Sherbrooke continue to expand their audience.

RGU growth

During the first quarter 2008, the consolidated number of RGUs, in the cable sector, increased by 3.3% to reach over 2.5 million units. Cogeco Cable is expecting an annual RGU growth of approximately 10% and is maintaining its guidelines.

Revenue and operating income before amortization growth

First quarter 2008 consolidated revenue increased by $29.5 million, or 11.2%, to reach $292.8 million while operating income before amortization grew by $15.6 million, or 17.7%, to reach $104 million. These increases were mainly due to stronger RGU growth combined to rate increases in the cable sector. Subsequent to the filing of TQS under CCAA, management has revised downwards its guidelines for revenue and now expects to achieve revenue of approximately $1,120 million and has revised upwards its guidelines for operating income before amortization to approximately $431 million. Please consult the "Fiscal 2008 financial guidelines" section for further details.

Free cash flow

In the first quarter of fiscal 2008, COGECO generated free cash flow of $25.3 million, compared to a negative free cash flow of $8.6 million for the same period last year. This increase resulted from the cable sector and was attributable to several factors: an increase in operating income before amortization, a decrease in capital expenditures and deferred charges and a reduction in financial expense. Cogeco Cable reduced its capital expenditures compared to last year by $16.5 million from $67.2 million to $50.7 million, mainly due to a $12 million expenditure in the first quarter of fiscal 2007 for the purchase of home terminal devices for the Canadian operations to build an inventory to sustain last year RGU growth. Subsequent to the decision of ceasing its activities in the television industry, the Company has revised upwards its initial guidelines for free cash flow from $65 million to approximately $73 million. Please consult the "Fiscal 2008 financial guidelines" section for further details.



OPERATING RESULTS - CONSOLIDATED OVERVIEW

Quarters ended November 30,
(unaudited)
($000s, except percentages) %
2007 2006 Change
------------------------------------------------------------------------

Revenue $292,770 $263,292 11.2

Operating costs 188,760 174,925 7.9

Operating income before amortization 104,010 88,367 17.7

Operating margin 35.5 % 33.6 %


Revenue

First quarter 2008 revenue rose by $29.5 million, or 11.2%, to reach $292.8 million. Cable revenue, driven by a strong RGU growth combined with rate increases, went up by $29.8 million, or 13.4% in the first quarter of 2008, while media revenue decreased slightly by $0.4 million, or 0.9%.

Operating income before amortization

Operating income before amortization grew by $15.6 million, or 17.7%, to reach $104 million in the first quarter of 2008 compared to the corresponding period of last year. The cable sector contributed to the growth by $14.7 million due to RGU growth and various rate increases outpacing operating cost increases and the media sector contributed $0.5 million as a result of costs reductions in television.



FIXED CHARGES
Quarters ended November 30,
(unaudited)
($000s, except percentages) %
2007 2006 Change
------------------------------------------------------------------------

Amortization $54,155 $45,839 18.1

Financial expense 17,606 21,759 (19.1)


First quarter 2008 amortization expense amounted to $54.2 million compared to $45.8 million for the same period the year before. The rise in amortization expense was due to the cable sector and attributable to the following factors: the completion in the fourth quarter of fiscal 2007 of the purchase price allocation of the Cabovisao acquisition, which included the valuation of tangible and intangible assets for an additional amortization expense of approximately $4.4 million and from additional capital expenditures arising from the required customer premise equipment to sustain RGU growth.

First quarter 2008 financial expense decreased over the same period last year by $4.2 million, or 19.1%, to reach $17.6 million. This decrease is due to the Company's cable subsidiary which reduced its level of Indebtedness (defined as bank indebtedness and long-term debt) from the net proceeds of subordinate voting shares issued during fiscal 2007.

IMPAIRMENT OF ASSETS OF A SUBSIDIARY

In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the last several months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio-television and Telecommunications Commission's (CRTC) refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada (SRC), which acts like a commercial player rather than a publicly-owned television broadcaster and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent 3947424 Canada Inc. ("the TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors arrangement plan.

As a result, the Company recorded an asset impairment loss of $30.3 million representing the net assets of the TQS Group as at November 30, 2007. The impact of this impairment loss on the Company's statement of income is as follows:



($ 000s)
Impairment of assets of a subsidiary 30,298
Non-controlling interest 11,798
------------------------------------------------------------------------
Impairment loss net of non-controlling interest 18,500
------------------------------------------------------------------------
------------------------------------------------------------------------


INCOME TAXES

First quarter 2008 income tax amounted to $9.3 million compared to $6.5 million for the same period last year. The increase was mainly due to higher operating income before amortization combined with the fixed charges decline.

On October 16, 2007, the Canadian federal government announced in its Economic Statement reduction in corporate income tax rates. According to the new legislation, corporate income tax rates will be further reduced from 20.5% to 19.5% effective January 1, 2008, from 20% to 19% effective January 1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to 16.5% effective January 1, 2011, and to 15% effective January 1, 2012. These corporate income tax rates were considered substantively enacted on December 14, 2007. The reduction of these corporate income tax rates will reduce future income tax expense by approximately $23 million in the second quarter of fiscal 2008.

NON-CONTROLLING INTEREST

The non-controlling interest represents an interest of approximately 67.6% in Cogeco Cable's results and a 40% interest in TQS. During the first quarter of 2008, the non-controlling interest amounted to $2.5 million mainly due to the cable sector strong results, partly offset by an adjustment of $11.8 million resulting from the impairment of assets in the television sector. The non-controlling interest for the comparable period of last year amounted to $7.6 million.

NET INCOME (LOSS)

First quarter 2008 net loss amounted to $10 million, or $0.60 per share. The net loss was essentially the result of the impairment of assets of a subsidiary in the media sector, partly offset by the growth in operating income before amortization exceeding those of the fixed charges in the cable sector. Excluding the effect of the impairment of assets of a subsidiary, net income would have amounted to $8.5 million, or $0.51 per share, compared to a net income of $6.8 million, or $0.41 per share, for the same period last year.



CASH FLOW AND LIQUIDITY

Quarters ended November 30,
(unaudited)
($000s) 2007 2006
------------------------------------------------------------------------

Operating Activities
Cash flow from operations $83,858 $66,035
Changes in non-cash operating items (42,997) (85,758)
------------------------------------------------------------------------
$40,861 $(19,723)
------------------------------------------------------------------------
------------------------------------------------------------------------

Investing Activities (1) $(58,414) $(74,297)
------------------------------------------------------------------------
------------------------------------------------------------------------

Financing Activities (1) $(29,714) $39,796
------------------------------------------------------------------------
------------------------------------------------------------------------
Net change in cash and cash equivalents $(47,267) $(54,224)
Effect of exchange rate changes on cash and
cash equivalents denominated in foreign
currencies (153) 1,616
Cash and cash equivalents at beginning 65,564 71,516
------------------------------------------------------------------------
Cash and cash equivalents at end $18,144 $18,908
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Excludes assets acquired under capital leases.


First quarter 2008 cash flow from operations reached $83.9 million, 27% higher than for the comparable period last year, primarily due to the increase in operating income before amortization and to a reduction in financial expense in the cable sector. Changes in non-cash operating items generated lower cash outflows compared to the same period last year, mainly as a result of certain non-recurring payments executed by the Portuguese cable subsidiary in accordance with the terms of the acquisition in the first quarter of fiscal 2007.

In the first quarter of fiscal 2008, investing activities stood at $58.4 million mainly due to capital expenditures of $51 million and from an increase of $7.4 million in deferred charges in the cable sector. The capital expenditures from the cable sector decreased compared to the same period last year mainly due to lower RGU growth and to the timing of customer premise equipment acquired in the first quarter of fiscal 2007 to build an inventory for the Canadian operations. The Portuguese operations' capital expenditures increased compared to the same period last year as a result of the Digital Television deployment and the network extensions to serve additional homes passed.

First quarter deferred charges remained essentially the same and are mainly attributable to reconnect costs in the cable sector.

First quarter 2008 free cash flow reached to $25.3 million compared to a deficit of $8.6 million for the same period in the preceding year. Free cash flow increased over the same period last year mainly in the cable sector and was attributable to several factors: a growth in operating income before amortization, a lower level of capital expenditures required to serve RGU growth and to support Telephony growth, a build-up of home terminal devices for an amount of $12 million during the first quarter of fiscal 2007 to serve RGU rapid growth and a reduction in financial expense.

First quarter 2008 debt repayment net of increase in bank indebtedness amounted to $27.9 million. This net repayment came from the generated free cash flow of $25.3 million and the reduction of $47.3 million in cash and cash equivalents partly used to offset the $43 million reduction in changes in non-cash operating items. These factors have been partly offset by a dividend payment of $1.2 million described below. For the same period last year, the increase in long-term debt and bank indebtedness amounted to $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 Cabovisao acquisition in the cable sector and by the free cash flow deficit of $8.6 million, partly offset by a $54.2 million decrease in cash and cash equivalents. In addition, a dividend of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, was paid during the first quarter of fiscal 2008 compared to a dividend of $0.0625 per share or $1 million for the first quarter of fiscal 2007.

As at November 30, 2007, the Company had a working capital deficiency of $390 million compared to $127.3 million as at August 31, 2007. The greater deficiency was mainly attributable to the US$150 million Senior Secured Notes Series A and the related derivative financial instruments due in October 2008 in the cable sector. 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, 2007, the cable subsidiary had used $432.9 million of its $900 million Term Facility and the Company had drawn $23.5 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, 2007, there have been major changes to "Fixed assets", "Cash and cash equivalents", "Accounts receivable", "Broadcasting rights", "Accounts payable and accrued liabilities", "Broadcasting rights payable", "Derivative financial instruments, "Non-controlling interest" and "Indebtedness".

The decrease of $1.1 million in fixed assets was the result of the following factors: an impairment of $10.7 million in television assets, an increase in capital expenditures to sustain RGU growth and the appreciation of the euro currency over the Canadian dollar in the cable sector. The $47.4 million and $36.6 million reductions in cash and cash equivalents and accounts payable and accrued liabilities respectively, were mainly due to the cable sector and related to suppliers' payments. The $8.5 million increase in accounts receivable is mostly due to the higher period of activity in the media sector. The decrease of $5.5 million in broadcasting rights was the result of the impairment in television assets. The broadcasting rights payable have increased by $8.3 million due to the media sector. The non-controlling interest rise of $4.8 million was the net effect of the improved results in the cable sector, partly offset by an adjustment of $ 11.8 million related to the impairment of television's assets. Finally, derivative financial instruments have increased by $91.3 million and Indebtedness has decreased by $113.1 million as a result of accounting changes and factors previously discussed in the "Cash Flow and Liquidity" section. Please consult "Accounting policies and estimates" section for further details.

A description of COGECO's share data as at December 31, 2007 is presented in the table below:



Number of shares/ Amount
options ($000s)
------------------------------------------------------------------------

Common Shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,830,086 119,075

Options to Purchase Subordinate Voting Shares
Outstanding options 191,258
Exercisable options 191,258


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, discussed in the 2007 annual MD&A, have not materially changed since August 31, 2007 except that on December 14, 2007, the Company concluded an amended and restated credit agreement with a group of four Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The annually renewable three-year amended credit agreement establishes a revolving credit of $50 million to which may be added a further credit of $25 million under certain conditions. The amended credit agreement maintains certain financial commitments with the same security by the Company, its subsidiary Cogeco Radio-Television Inc. and indirect subsidiary, Cogeco Diffusion Inc. The Company posted a guarantee for a maximum amount of $12 million in favour of CIBC, which is also TQS' banker, in the event of any default by TQS under the terms of its own credit agreement. TQS' credit agreement provides security over its assets, including its accounts receivable. If the guarantee were to be called in, the Company would be subrogated to the rights of CIBC and benefit from the same security. Furthermore, on January 8, 2008, Cogeco Cable and Solidarity Fund QFL entered into an agreement to issue senior unsecured debenture with par value of $100 million by way of private placement, subject to usual market conditions. The debenture which must be issued by no later than May 9, 2008, will bear interest at a fixed rate determined at the then prevailing rate of the ten-year Government of Canada bond plus a spread of 220 basis points, and will mature ten years after issuance. The debenture will be callable under certain conditions.

DIVIDEND DECLARATION

At its January 9, 2008 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 6, 2008, to shareholders of record on January 23, 2008.

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 U.S. 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 CAN$1.5910. Amounts due under the US$150 million Senior Secured Notes Series A decreased by CAN$8.4 million at the end of the first quarter compared to August 31, 2007 due to the Canadian dollar's appreciation. The fair value of cross-currency swaps increased by $7.8 million of which $8.4 million offset the foreign exchange gain on the $US debt. The difference of $0.6 million was recorded as a reduction of comprehensive income.

As noted in the MD&A of the 2007 Annual Report, Cogeco Cable's investment in the Portuguese subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the value of the Canadian dollar versus the euro. This risk is mitigated since the major part of the purchase price for Cabovisao was borrowed directly in euros. This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable realized a foreign exchange gain of CAN$4 million in the first quarter 2008, which is presented in other comprehensive income. The exchange rate used to convert the euro currency into Canadian dollars for the balance sheet accounts as at November 30, 2007 was $1.4630 per euro compared to $1.4390 per euro as at August 31, 2007. The average exchange rate prevailing during the first quarter 2008 used to convert the operating results of the Portuguese operations was $1.4119 per euro compared to $1.4363 per euro for the same period last year.

CABLE SECTOR

CUSTOMER STATISTICS



% of
Net additions (losses) Penetration
Quarters ended (1)(4)
November 30, November 30, November 30,
------------------------------------------------------------------------
2007 2007 2006 2007 2006
------------------------------------------------------------------------
RGUs(2) 2,568,689 83,024 114,279
Basic Cable
service customers 1,156,157 12,997 23,493
HSI service
customers(3) 604,959 29,100 37,012 54.8 48.3
Digital
Television
service
customers 396,132 16,253 21,224 47.3 42.0
Telephony
service
customers 411,441 24,674 32,550 42.5 34.6

(1) As a percentage of Basic Cable service customers in areas served.
(2) Represent the sum of Basic Cable, HSI, Digital Television and
Telephony service customers.
(3) Customers subscribing only to HSI or Telephony services totalled
83,267 as at November 30, 2007 compared to 61,336 as at November 30,
2006.
(4) An audit of homes passed in Ontario was completed during the first
quarter of fiscal 2007 and, as a result, the number of homes passed
was reduced by 42,386.


In Canada, first quarter 2008 RGUs' net additions were lower than for the same period last year and reflect early sign of maturation in most services. In Portugal, Cabovisao faced fierce competition and as a result all services generated lower customer growth. RGU's grew at a slower pace since competition offered deep discounts to attract customers during the first half of the quarter. Cabovisao did not match the competition high discounting offering. However, since then, pricing has become more rational. The performance of Cabovisao since its acquisition by Cogeco Cable has been well above management's original expectations and growth prospects for the future remain excellent.

The number of net additions in Basic Cable in the Canadian market stood at 8,064 customers compared to a growth of 16,240 customers for the same period last year due to the expiration of certain promotional offers. In Portugal, Basic Cable service grew by 4,933 customers compared to 7,253 customers.

In Canada, the number of net additions to HSI service stood at 25,294 customers compared to 28,935 customers for the same period last year. During the first quarter 2008, HSI customer net additions is mostly due to the enhancement of the product offering, the impact of the bundled offer of Television, HSI and Telephony services (Cogeco Complete Connection), and promotional activities. HSI service customers in Portugal increased by 3,806 customers compared to 8,077 customers in 2007.

Canadian net additions of Digital Television service stood at 16,253 customers compared to 21,224 customers for the same period last year. The decrease in net additions this quarter compared to the same quarter last year reflects greater maturity of the digital TV segment following a period of robust growth, especially in fiscal 2006. Since then, the Company also adjusted the service offering and price gap differential between Analogue Television services and Digital Television, which has also contributed to a moderation of the strong growth experienced in the past years. Nevertheless, customers continue to demonstrate strong interest in HD technology.

Telephony customers grew in both operating units. In Canada, net additions stood at 23,215 to reach 166,851 compared to a growth of 26,616 for the same period last year. This growth is mostly attributable to the launch of the service in new markets and increased penetration in areas where the service is already offered. Coverage of homes passed has now reached 78% compared to 72% last year. Telephony service in Portugal grew by 1,459 customers compared to 5,934 customers for the same period of the preceding year.



OPERATING RESULTS

Quarters ended November 30,
(unaudited)
($000s, except percentages) %
2007 2006 Change
------------------------------------------------------------------------

Revenue $251,833 $222,002 13.4
Operating costs 148,461 133,900 10.9
Management fees - COGECO Inc. 5,035 4,440 13.4
Operating income before
amortization 98,337 83,662 17.5
Operating margin 39.0 % 37.7 %


Revenue

First quarter 2008 consolidated revenue grew by $29.8 million, or 13.4%, to reach $251.8 million. Canadian operations revenue, driven by an increased number of RGU's combined to rate increases, went up by $28.3 million, or 16.9% . Portuguese operations revenue amounted to $55.6 million, an increase of $1.5 million, or 2.8% compared to the same period last year due to RGU growth and rate increases which was partly offset by the strength of the Canadian dollar against the euro.The average exchange rate prevailing during the first quarter 2008 used to convert the operating results of the Portuguese operations was $1.4119 per euro compared to $1.4363 per euro for the same period last year.

Operating costs

First quarter 2008 operating costs increased by $14.6 million, or 10.9%, to reach $148.5 million. The increase in operating costs was mainly attributable to servicing additional RGUs in Canada, including Telephony service increased penetration, and in Portugal, to the timing of certain marketing initiatives, including a major campaign to improve brand awareness, costs to better service additional RGU's and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109.

Operating income before amortization

First quarter 2008 operating income before amortization increased by $14.7 million, or 17.5%, to reach $98.3 million, due to RGU growth and various rate increases outpacing operating cost increases. As a result, first quarter 2008 operating margin reached 39% compared to 37.7% for the same period last year.



MEDIA SECTOR

OPERATING RESULTS

Quarters ended November 30,
(unaudited)
($000s, except percentages) %
2007 2006 Change
------------------------------------------------------------------------

Revenue $40,988 $41,341 (0.9)

Operating costs 37,436 38,287 (2.2)

Operating income before amortization 3,552 3,054 16.3

Operating margin 8.7 % 7.4 %


Revenue

First quarter 2008 revenue stood at $41 million, a decrease of $0.4 million, or 0.9%, compared to the same period last year. During this period, radio revenue increased by 6.4%, to reach $8.3 million, mainly due to improved audience ratings while television revenue decreased by 2.5%, or $0.9 million, to $32.7 million, due to difficult market conditions for conventional television.

Operating costs

First quarter 2008 operating costs decreased by $0.9 million, or 2.2%, to $37.4 million, compared to the same period last year. During this period, radio's operating costs increased by $0.7 million, to reach $6.9 million, due to higher programming costs compared to the same period last year while television's operating costs decreased by $2.2 million, to $29.9 million due to significant costs reductions.

Operating income before amortization

Operating income before amortization improved by $0.5 million in the first quarter 2008 compared to last year. For the first quarter, TQS's operating income before amortization increased by $1.4 million, to reach $2.8 million, as a result of significant cost reductions, partly offset by a decline in revenue. Radio's operating income before amortization decreased by $0.2 million, to $1.4 million, mainly due to an increase in programming costs outpacing the increase in revenue during the quarter.

FISCAL 2008 FINANCIAL GUIDELINES

The Company is maintaining its guidelines in the cable sector, except for the reduction of income tax rates announced by the Canadian federal government on October 16, 2007 that will have a favourable impact of approximately $7 million on net income in the second quarter of fiscal 2008. The Company has also revised its most recent guidelines of the media sector to take into consideration the impact of the impairment loss of assets of $18.5 million in the first quarter of 2008 and that the television business unit is no longer part of COGECO's consolidated activities since December 18, 2007.



----------------------------------------------------------------------
----------------------------------------------------------------------
($ million, except customer data) Revised Projections
Projections Fiscal 2008
Fiscal 2008
January 9, 2008
----------------------------------------------------------------------
Consolidated Financial Guidelines
Revenue 1,120 1,190
Operating income before amortization 431 425
Net income 22 30
Free cash flow 73 65
----------------------------------------------------------------------
Cable sector-
Financial Guidelines
Revenue 1,050 1,050
Operating income before amortization 425 425
Operating margin 40% to 41% 40% to 41%
Financial expense 72 72

Amortization 215 215
Capital expenditures and deferred charges 260 260
Free cash flow 65 65

Customer Addition Guidelines
Basic Cable service 30,000 30,000
HSI services 75,000 75,000
Digital Television service 54,000 54,000
Telephony service 100,000 100,000
RGUs 259,000 259,000
----------------------------------------------------------------------
Media sector-
Financial Guidelines
Revenue 70 140
Operating income before amortization 6 1 to 3
Amortization 3 7
Capital expenditures and deferred charges 1 7
----------------------------------------------------------------------
----------------------------------------------------------------------


UNCERTAINTIES AND MAIN RISK FACTORS

There have been no significant changes in the risk factors and uncertainties facing COGECO since August 31, 2007, except as described below.

On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting the TQS Group from claims by their creditors for an initial suspension period ending on January 17, 2008. While this initial suspension period may be further extended by the Court upon application, there is no assurance that an extension will actually be applied for or granted by the Court. There is also no assurance that a plan of arrangement or a transaction can be actually developed and approved within the initial suspension period or any extension thereof. Finally, there is no assurance that CIBC, the TQS Group's secured lender, will not eventually demand payment of TQS' operating loan, exercise its security over the TQS Group, which includes its accounts receivable, or demand payment under the guarantee provided by the Company to CIBC for an amount of 60% of the outstanding loan up to $12 million. Neither the Company nor any of its subsidiaries (excluding the TQS Group) have any other outstanding commitment to finance or support the continuation of the business activities of the TQS Group.

The CRTC collects two different types of fees from broadcast licensees. These are known as Part I and Part II fees. In 2003 and 2004, lawsuits were commenced in the Federal Court, alleging that the Part II licence fees are taxes rather than fees and that the regulations authorizing them are unlawful. On December 14, 2006, the Federal Court ruled that the CRTC did not have the jurisdiction to charge Part II fees. The Court ruled that licensees were not entitled to a refund of past fees paid. Both the Crown and the applicants have appealed this case to the Federal Court of Appeal. The applicants are seeking an order requiring a refund of past fees paid. The Crown is seeking to reverse the finding that Part II fees are unlawful. On October 1st, 2007, the CRTC sent a letter to all broadcast licensees. The letter stated that the CRTC will not collect Part II license fees due on November 30, 2007 and subsequent years unless the Federal Court of appeal or the Supreme Court of Canada (should the case be appealed to that level) reverses the Federal Court's decision. The Appeal hearing was held on December 4th and 5th in Ottawa. During the hearing, questions were raised by the hearing panel concerning the appropriateness of considering Part II Licence Fees as a tax rather than a fee under the relevant portion of the Broadcasting Act. The decision of the Federal Court of Appeal is not expected before several months. The Company believes that there is a reasonable likelihood that the Federal Court's decision will be reversed. The Company has accrued $9.7 million with respect to these fees for fiscal year 2007 and the first quarter of fiscal 2008. In the unlikely event that the Federal Court of Appeal or the Supreme Court of Canada, should this case be appealed to that level, maintains the decision from the Federal Court, this would have a beneficial impact on the future financial results of the Company.

ACCOUNTING POLICIES AND ESTIMATES

There has been no significant change in COGECO's accounting policies and estimates and future accounting pronouncements since August 31, 2007, except as described below. A description of the Company's policies and estimates can be found in the 2007 annual MD&A.

Financial instruments

Effective September 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861, Financial Instruments - Disclosure and Presentation and Section 3865, Hedges.

Statement of Comprehensive Income

A new statement entitled consolidated statements of comprehensive income was added to the Company's consolidated financial statements and includes net income as well as other comprehensive income. Other comprehensive income represents changes in shareholders' equity arising from transactions and events from non-owner sources, such as changes in foreign currency translation adjustments of net investments in self-sustaining foreign subsidiaries and long-term debt designated as hedge of net investments in self-sustaining foreign subsidiaries and changes in the fair value of effective cash flow hedging instruments.

Recognition and Measurement of Financial Instruments

Under these new standards, all financial assets, including derivatives, must be classified as available for sale, held for trading, held to maturity, or loans and receivables. All financial liabilities, including derivatives, must be classified as held for trading or other liabilities. All financial instruments classified as available for sale or held for trading are recognized at fair value on the consolidated balance sheet while financial instruments classified as loans and receivables or other liabilities will continue to be measured at amortized cost using the effective interest rate method. The standards allow the Company to designate certain financial instruments, on initial recognition, as held for trading.

All of the Company's financial assets are classified as held for trading or loans and receivables. The Company has classified its cash and cash equivalents as held for trading. Accounts receivable have been classified as loans and receivables. All of the Company financial liabilities were classified as other liabilities, except for the Company's subsidiary's cross-currency swaps which were classified as held for trading. Held for trading assets and liabilities are carried at fair value on the balance sheet, with changes in fair value recorded in the consolidated statements of income, except for the changes in fair value of the cross-currency swaps which are designated as cash flow hedges of the Senior Secured Notes Series A and are recorded in other comprehensive income. Loans and receivables and all financial liabilities are carried at amortized cost using the effective interest method. Upon adoption, the Company determined that none of its financial assets are classified as available for sale or held to maturity. Except for the treatment of transaction costs and derivative financial instruments mentioned below, the provisions of the new accounting standards had no impact on the consolidated financial statement on September 1, 2007 and November 30, 2007.

Transaction costs

Effective September 1, 2007, transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the revolving loan and the swingline facility which are presented as deferred charges. These costs are amortized over the term of the related financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility which are amortized over the term of the related financing on a straight-line basis. Previously, all transaction costs were capitalized and amortized on a straight-line basis over the term of the related financing, over a period not exceeding five years. The impact of these adjustments reduced deferred charges by $1.2 million, reduced long-term debt by $3.1 million, increased future income tax liabilities by $0.6 million, increased non-controlling interest by $0.9 million and increased retained earnings by $0.4 million.

Cash flow hedge

All derivatives are measured at fair value with changes in fair value recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the hedged asset or liability is recognized in the consolidated statements of income. Any hedge ineffectiveness is recognized in the consolidated statements of income immediately. Accordingly, the Company's subsidiary's cross-currency swaps must be measured at fair value in the consolidated financial statements. Since these cross-currency swaps are used to hedge cash flows on Senior Secured Notes Series A denominated in U.S. dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements on September 1, 2007, increased derivative financial instruments liabilities by $83.5 million, decreased deferred credit presented in long-term debt by $80.2 million, decreased future income tax liabilities by $1.1 million, decreased non-controlling interest by $1.5 million and decreased opening accumulated other comprehensive income by $0.7 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the three month period ended November 30, 2007 increased derivative financial instruments liabilities by $7.8 million, increased future income tax liabilities by $0.2 million, increased non-controlling interest by $0.3 million and increased accumulated other comprehensive income by $0.1 million.

Net investment hedge

Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at the balance sheet date for asset and liability items, and using the average exchange rates during the period for revenue and expenses. Adjustments arising from this translation are deferred and recorded as foreign currency translation adjustment in accumulated other comprehensive income and are included in income only when a reduction in the investment in these foreign subsidiaries is realized. Unrealized foreign exchange gains and losses on long-term debt denominated in foreign currency, that is designated as a hedge of net investments in self-sustaining foreign subsidiaries, are recorded as foreign currency translation adjustment in accumulated other comprehensive income, net of income taxes. As a result, an amount of $1.0 million was reclassified as at August 31, 2007 from the foreign currency translation adjustment to the accumulated other comprehensive income and the Company's comparative financial statements were restated in accordance with transition rules.

Embedded derivatives

All embedded derivatives that are not closely related to the host contracts, are measured at fair value, with changes in fair value recorded in the consolidated statements of income. On September 1, 2007 and at November 30, 2007, there are no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheet. In accordance with the new standards, the Company selected September 1, 2002, as its transition date for adopting the standard related to embedded derivatives.

Upcoming standards

In 2006, the CICA issued Handbook Section 3862, Financial Instruments -- Disclosures, and Section 3863, Financial Instruments -- Presentation. These Sections are to be applied to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.

Accounting changes

In July 2006, the CICA issued Section 1506, Accounting Changes, which modifies certain aspects of the previous standard. A reporting entity may not change its accounting method unless required by primary source of GAAP or to provide a more reliable and relevant presentation of the financial statements. In addition, changes in accounting methods must be applied retroactively and additional information must be disclosed. This section applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. During the first quarter, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements.

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 assets of a subsidiary".

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 November 30,
($ 000) (unaudited)
2007 2006
--------------------------------------------------------------------
Cash flow from operating activities $40,861 $(19,723)
Changes in non-cash operating items 42,997 85,758
--------------------------------------------------------------------
Cash flow from operations $83,858 $66,035
--------------------------------------------------------------------
--------------------------------------------------------------------


Free cash flow

Free cash flow is used by COGECO's management and investors to measure
COGECO's ability to repay debt, distribute capital to its shareholders and
finance its growth. Free cash flow is calculated as follows:


Quarters ended November 30,
($ 000) (unaudited)
2007 2006
--------------------------------------------------------------------
Cash flow from operations $83,858 $66,035
Acquisition of fixed assets (50,959) (67,198)
Increase in deferred charges (7,517) (7,212)
Assets acquired under capital
leases - as per Note 11 b) (73) (205)
--------------------------------------------------------------------
Free cash flow $25,309 $(8,580)
--------------------------------------------------------------------
--------------------------------------------------------------------


Net income excluding impairment of assets of a subsidiary

Net income excluding impairment of assets of a subsidiary is used by COGECO's management and investors in order to evaluate what would have been the net income excluding the impairment of assets of a subsidiary. This allows the Company to isolate the one time adjustments in order to evaluate the net income from ongoing activities.



Quarters ended November 30,
($ 000) (unaudited)
2007 2006
--------------------------------------------------------------------
Net income (loss) $(9,976) $6,751
Impairment of assets net of
non-controlling interest 18,500 -
--------------------------------------------------------------------
Net income excluding impairment of
assets of a subsidiary $8,524 $6,751
--------------------------------------------------------------------
--------------------------------------------------------------------


ADDITIONAL INFORMATION

This MD&A was prepared on January 9, 2008. 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 approximately 2,569,000 revenue-generating units (RGUs) to 2,365,000 homes passed in its Canadian and Portuguese service territories. Through its two-way broadband cable networks, Cogeco Cable provides its residential and commercial customers with Analogue and Digital Television, High Speed Internet as well as Telephony services. Through its Cogeco Radio-Television subsidiary, COGECO owns and operates the RYTHME FM radio stations in Montreal, Quebec City, Trois-Rivieres and Sherbrooke as well as the 93.3 station in Quebec City. COGECO's subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (TSX:CCA).



Analyst Conference Call: Thursday, January 10, 2008 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 dialing 5
minutes before the start of the conference:
Canada/USA Access Number: 1 866 321-8231
International Access Number: + 1 416 642-5213
Confirmation Code: 3458791
By Internet at www.cogeco.ca/investors

A rebroadcast of the conference call will be
available until January 16, by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 3458791




Supplementary Quarterly Financial Information
(unaudited)

Quarters ended November 30, August 31,
2007(1) 2006(1) 2007(1) 2006(1)
----------------------------------------------------------------------
($000, except percentages
and per share data)

Revenue $292,770 $263,292 $269,326 $199,351
Operating income before
amortization 104,010 88,367 98,180 68,645
Operating margin 35.5 % 33.6 % 36.5 % 34.4 %
Amortization 54,155 45,839 56,018 36,446
Financial expense 17,606 21,759 19,190 16,864
Impairment loss 30,298 - - -
Income taxes (recovery) 9,277 6,463 (368) (13,950)
Non-controlling interest 2,543 7,557 19,763 19,022
Gain (loss) on dilution (107) (7) 27,011 -
Net income (loss) (9,976) 6,751 30,384 10,300

Cash flow from
operations 83,858 66,035 75,035 51,729

Net income (loss) per
share $(0.60) $0.41 $1.82 $0.62



Supplementary Quarterly Financial Information
(unaudited)

Quarters ended Mai 31, February 28,
2007(1) 2006(1) 2007(1) 2006(1)
----------------------------------------------------------------------
($000, except percentages
and per share data)

Revenue $277,364 $189,718 $261,120 $177,359
Operating income
before amortization 95,495 66,111 83,669 57,765
Operating margin 34.4 % 34.8 % 32.0 % 32.6 %
Amortization 48,835 30,658 45,112 30,217
Financial expense 21,851 14,120 24,181 14,231
Impairment loss - - - -
Income taxes (recovery) 9,679 8,461 2,580 5,706
Non-controlling interest 12,007 7,293 8,240 4,842
Gain (loss) on dilution (64) - 30,990 -
Net income (loss) 3,059 5,529 34,546 2,679

Cash flow from operations 76,282 52,093 59,266 41,644

Net income (loss) per share $0.18 $0.33 $2.08 $0.16

(1) Include operating resu the date of acquisition of control on
August 1, 2006.


Cable sector operating results are generally not subject to material seasonal fluctuations. However, the loss of Basic Cable service customers is usually greater, and the addition of HSI service customers is generally lower in the fourth 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 Quebec. 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.

Customer Statistics

November 30, August 31,
2007 2007
-------------------------------------------------------------------

Homes Passed
Ontario (1) 1,002,971 997,498
Quebec 491,788 486,592
-------------------------------------------------------------------
Canada 1,494,759 1,484,090
Portugal 869,940 859,376
-------------------------------------------------------------------
Total 2,364,699 2,343,466
-------------------------------------------------------------------
-------------------------------------------------------------------

Revenue Generating Units
Ontario 1,306,163 1,256,244
Quebec 555,171 532,264
-------------------------------------------------------------------
Canada 1,861,334 1,788,508
Portugal 707,355 697,157
-------------------------------------------------------------------
Total 2,568,689 2,485,665
-------------------------------------------------------------------
-------------------------------------------------------------------

Basic Cable Service Customers
Ontario 599,733 594,889
Quebec 257,488 254,268
-------------------------------------------------------------------
Canada 857,221 849,157
Portugal 298,936 294,003
-------------------------------------------------------------------
Total 1,156,157 1,143,160
-------------------------------------------------------------------
-------------------------------------------------------------------

Discretionnary Service Customers
Ontario 484,611 468,764
Quebec 208,976 204,585
-------------------------------------------------------------------
Canada 693,587 673,349
Portugal - -
-------------------------------------------------------------------
Total 693,587 673,349
-------------------------------------------------------------------
-------------------------------------------------------------------

Pay TV Service Customers
Ontario 92,036 88,835
Quebec 44,355 42,180
-------------------------------------------------------------------
Canada 136,391 131,015
Portugal 55,867 54,723
-------------------------------------------------------------------
Total 192,258 185,738
-------------------------------------------------------------------
-------------------------------------------------------------------

High Speed Internet Service Customers
Ontario 335,152 316,363
Quebec 105,978 99,473
-------------------------------------------------------------------
Canada 441,130 415,836
Portugal 163,829 160,023
-------------------------------------------------------------------
Total 604,959 575,859
-------------------------------------------------------------------
-------------------------------------------------------------------

Digital Television Service Customers
Ontario 255,919 246,267
Quebec 140,213 133,612
-------------------------------------------------------------------
Canada 396,132 379,879
Portugal - -
-------------------------------------------------------------------
Total 396,132 379,879
-------------------------------------------------------------------
-------------------------------------------------------------------

Telephony Service Customers
Ontario 115,359 98,725
Quebec 51,492 44,911
-------------------------------------------------------------------
Canada 166,851 143,636
Portugal 244,590 243,131
-------------------------------------------------------------------
Total 411,441 386,767
-------------------------------------------------------------------
-------------------------------------------------------------------

(1) An audit of homes passed in Ontario was completed during the first
quarter of fiscal 2007 and, as a result, the number of homes passed
was reduced by 42,386



COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME

Three months ended November 30,
-----------------------------------------------------------------------
(In thousands of dollars, except
per share data) 2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Revenue $292,770 $263,292

Operating costs 188,760 174,925
-----------------------------------------------------------------------
Operating income before amortization 104,010 88,367

Amortization (note 3) 54,155 45,839
-----------------------------------------------------------------------

Operating income 49,855 42,528

Financial expense (note 4) 17,606 21,759

Impairment of assets of a
subsidiary (note 14 c)) 30,298 -
-----------------------------------------------------------------------

Income before income taxes and
following items 1,951 20,769

Income taxes (note 5) 9,277 6,463

Loss on dilution resulting from
shares issued by a subsidiary 107 7

Non-controlling interest 2,543 7,557

Share in the earnings of a general
partnership - 9
-----------------------------------------------------------------------

Net income (loss) $(9,976) $6,751
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Earnings (loss) per share (note 6)
Basic $(0.60) $0.41
Diluted (0.60) 0.41
-----------------------------------------------------------------------
-----------------------------------------------------------------------




COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended November 30,
-----------------------------------------------------------------------
(In thousands of dollars) 2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Net income (loss) $(9,976) $6,751

Other comprehensive income

Unrealized gains and losses on derivative
financial instruments designated as
cash flow hedges, net of income taxes of
$1,143,000 and non-controlling interest
of $4,500,000 (2,153) -

Reclassification of realized gains and
losses to net income on derivative
financial instruments designated as cash
flow hedges, net of income taxes of
$1,345,000 and non-controlling interest
of 4,792,000 2,293 -

Unrealized gain on translation of net
investments in self-sustaining foreign
subsidiaries, net of non-controlling
interest of $6,994,000 ($25,632,000 in 2006) 3,346 16,538

Unrealized loss on translation of
long-term debt designated as hedge of net
investments in self-sustaining foreign
subsidiaries, net of non-controlling
interest of $4,313,000 (net of income
taxes of $1,703,000 and non-controlling
interest of $18,453,000 in 2006) (2,063) (11,905)
-----------------------------------------------------------------------
1,423 4,633
-----------------------------------------------------------------------
Comprehensive income (loss) $(8,553) $11,384
-----------------------------------------------------------------------
-----------------------------------------------------------------------




COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three months ended November 30,
-----------------------------------------------------------------------
(In thousands of dollars) 2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Balance at beginning, as reported $274,946 $204,734

Changes in accounting policy (note 1) 424 -
-----------------------------------------------------------------------
Balance at beginning, as restated 275,370 204,734

Net income (loss) (9,976) 6,751

Dividends on multiple voting shares (129) (116)

Dividends on subordinate voting shares (1,038) (919)
-----------------------------------------------------------------------

Balance at end $264,227 $210,450
-----------------------------------------------------------------------
-----------------------------------------------------------------------




COGECO INC.
CONSOLIDATED BALANCE SHEETS

-----------------------------------------------------------------------
(In thousands of dollars) November 30, August 31,
2007 2007
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (audited)

Assets
Current
Cash and cash equivalents $18,144 $65,564
Accounts receivable 84,832 76,345
Income tax receivable 2,320 3,138
Prepaid expenses 6,895 9,117
Broadcasting rights 19,147 14,647
Future income tax assets 14,157 17,986
-----------------------------------------------------------------------
145,495 186,797
-----------------------------------------------------------------------

Income tax receivable 1,368 1,345
Broadcasting rights 7,484 17,456
Investments 739 739
Fixed assets 1,143,863 1,144,923
Deferred charges 55,788 55,450
Intangible assets (note 7) 1,082,367 1,086,750
Goodwill (note 7) 348,298 342,584
-----------------------------------------------------------------------
$2,785,402 $2,836,044
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness $14,210 $7,458
Accounts payable and accrued liabilities 212,709 249,343
Broadcasting rights payable 16,196 8,531
Income tax liabilities 3,552 1,350
Deferred and prepaid income 30,402 29,879
Derivative financial instruments 91,294 -
Current portion of long-term debt (note 8) 167,119 17,578
-----------------------------------------------------------------------
535,482 314,139
-----------------------------------------------------------------------

Long-term debt (note 8) 766,893 1,036,256
Share in the partner's deficiency of a
general partnership 1,036 1,036
Deferred and prepaid income 11,939 11,501
Broadcasting rights payable 5,006 4,408
Pension plans liabilities 8,984 8,822
Future income tax liabilities 269,143 267,646
Non-controlling interest 804,566 799,776
-----------------------------------------------------------------------
2,403,049 2,443,584
-----------------------------------------------------------------------

Shareholders' equity
Capital stock (note 9) 119,078 119,078
Treasury shares (note 9) (1,522) (1,054)
Contributed surplus - stock-based
compensation 880 499
Retained earnings 264,227 274,946
Accumulated other comprehensive
income (loss) (note 10) (310) (1,009)
-----------------------------------------------------------------------
382,353 392,460
-----------------------------------------------------------------------
$2,785,402 $2,836,044
-----------------------------------------------------------------------
-----------------------------------------------------------------------




COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW

Three months ended November 30,
-----------------------------------------------------------------------
(In thousands of dollars) 2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Cash flow from operating activities
Net income (loss) $(9,976) $6,751
Adjustments for:
Amortization (note 3) 54,155 45,839
Amortization of deferred financing
costs 722 646
Impairment of assets of a subsidiary
(note 14 c)) 30,298 -
Future income taxes (note 5) 5,178 3,879
Non-controlling interest 2,543 7,557
Loss on dilution resulting from
shares issued by a subsidiary 107 7
Stock-based compensation 388 967
Loss (gain) on disposal of fixed assets 281 (11)
Other 162 400
-----------------------------------------------------------------------
83,858 66,035
Changes in non-cash operating items
(note 11a)) (42,997) (85,758)
-----------------------------------------------------------------------
40,861 (19,723)
-----------------------------------------------------------------------

Cash flow from investing activities
Acquisition of fixed assets (note 11b)) (50,959) (67,198)
Increase in deferred charges (7,517) (7,212)
Decrease in restricted cash - 91
Other 62 22
-----------------------------------------------------------------------
(58,414) (74,297)
-----------------------------------------------------------------------

Cash flow from financing activities
Increase in bank indebtedness 6,752 39,725
Increase in long-term debt 50 10,000
Repayment of long-term debt (34,665) (8,270)
Issue of subordinate voting shares - 120
Acquisition of treasury shares (note 9) (468) -
Dividends on multiple voting shares (129) (116)
Dividends on subordinate voting shares (1,038) (919)
Issue of subordinate voting shares by a
subsidiary to non-controlling interest,
net of issue costs 3,056 228
Dividends paid by a subsidiary to
non-controlling interest (3,272) (972)
-----------------------------------------------------------------------
(29,714) 39,796
-----------------------------------------------------------------------

Net change in cash and cash equivalents (47,267) (54,224)
Effect of exchange rate changes on cash
and cash equivalents denominated in
foreign currencies (153) 1,616
Cash and cash equivalents at beginning 65,564 71,516
-----------------------------------------------------------------------
Cash and cash equivalents at end $18,144 $18,908
-----------------------------------------------------------------------
-----------------------------------------------------------------------

See supplemental cash flow information in note 11.


COGECO INC.
Notes to Consolidated Financial Statements November 30, 2007
(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 ("GAAP"), contain all adjustments necessary to present fairly the financial position of COGECO Inc. as at November 30, 2007 and August 31, 2007 as well as its results of operations and its cash flow for the three month periods ended November 30, 2007 and 2006.

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, 2007. These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except for the adoption of new accounting policy on financial instruments described below.

Financial instruments

Effective September 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments -- Recognition and Measurement, Section 3861, Financial Instruments -- Disclosure and Presentation and Section 3865, Hedges.

Statement of Comprehensive Income

A new statement entitled consolidated statements of comprehensive income was added to the Company's consolidated financial statements and includes net income as well as other comprehensive income. Other comprehensive income represents changes in shareholders' equity arising from transactions and events from non-owner sources, such as changes in foreign currency translation adjustments of net investments in self-sustaining foreign subsidiaries and long-term debt designated as hedge of net investments in self-sustaining foreign subsidiaries and changes in the fair value of effective cash flow hedging instruments.

Recognition and Measurement of Financial Instruments

Under these new standards, all financial assets, including derivatives, must be classified as available for sale, held for trading, held to maturity, or loans and receivables. All financial liabilities, including derivatives, must be classified as held for trading or other liabilities. All financial instruments classified as available for sale or held for trading are recognized at fair value on the consolidated balance sheet while financial instruments classified as loans and receivables or other liabilities will continue to be measured at amortized cost using the effective interest rate method. The standards allow the Company to designate certain financial instruments, on initial recognition, as held for trading.

All of the Company's financial assets are classified as held for trading or loans and receivables. The Company has classified its cash and cash equivalents as held for trading. Accounts receivable have been classified as loans and receivables. All of the Company financial liabilities were classified as other liabilities, except for the Company's subsidiary's cross-currency swaps which were classified as held for trading. Held for trading assets and liabilities are carried at fair value on the balance sheet, with changes in fair value recorded in the consolidated statements of income, except for the changes in fair value of the cross-currency swaps which are designated as cash flow hedges of the Senior Secured Notes Series A and are recorded in other comprehensive income. Loans and receivables and all financial liabilities are carried at amortized cost using the effective interest method. Upon adoption, the Company determined that none of its financial assets are classified as available for sale or held to maturity. Except for the treatment of transaction costs and derivative financial instruments mentioned below, the provisions of the new accounting standards had no impact on the consolidated financial statement on September 1, 2007 and November 30, 2007.

Transaction costs

Effective September 1, 2007, transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the revolving loan and the swingline facility which are presented as deferred charges. These costs are amortized over the term of the related financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility which are amortized over the term of the related financing on a straight-line basis. Previously, all transaction costs were capitalized and amortized on a straight-line basis over the term of the related financing, over a period not exceeding five years. The impact of these adjustments reduced deferred charges by $1.2 million, reduced long-term debt by $3.1 million, increased future income tax liabilities by $0.6 million, increased non-controlling interest by $0.9 million and increased retained earnings by $0.4 million.

Cash flow hedge

All derivatives are measured at fair value with changes in fair value recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the hedged asset or liability is recognized in the consolidated statements of income. Any hedge ineffectiveness is recognized in the consolidated statements of income immediately. Accordingly, the Company's subsidiary's cross-currency swaps must be measured at fair value in the consolidated financial statements. Since these cross-currency swaps are used to hedge cash flows on Senior Secured Notes Series A denominated in U.S. dollars, the changes in fair value are recorded in other comprehensive income. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements on September 1, 2007, increased derivative financial instruments liabilities by $83.5 million, decreased deferred credit presented in long-term debt by $80.2 million, decreased future income tax liabilities by $1.1 million, decreased non-controlling interest by $1.5 million and decreased opening accumulated other comprehensive income by $0.7 million. The impact of measuring the cross-currency swaps at fair value on the interim consolidated financial statements for the three month period ended November 30, 2007 increased derivative financial instruments liabilities by $7.8 million, increased future income tax liabilities by $0.2 million, increased non-controlling interest by $0.3 million and increased accumulated other comprehensive income by $0.1 million.

Net investment hedge

Financial statements of self-sustaining foreign subsidiaries are translated using the rate in effect at the balance sheet date for asset and liability items, and using the average exchange rates during the period for revenue and expenses. Adjustments arising from this translation are deferred and recorded as foreign currency translation adjustment in accumulated other comprehensive income and are included in income only when a reduction in the investment in these foreign subsidiaries is realized. Unrealized foreign exchange gains and losses on long-term debt denominated in foreign currency, that is designated as a hedge of net investments in a self-sustaining foreign subsidiaries are recorded as foreign currency translation adjustment in accumulated other comprehensive income, net of income taxes. As a result, an amount of $1.0 million was reclassified as at August 31, 2007 from the foreign currency translation adjustment to the accumulated other comprehensive income and the Company's comparative financial statements were restated in accordance with transition rules.

Embedded derivatives

All embedded derivatives that are not closely related to the host contracts, are measured at fair value, with changes in fair value recorded in the consolidated statements of income. On September 1, 2007 and at November 30, 2007, there are no significant embedded derivatives or non-financial derivatives that require separate fair value recognition on the consolidated balance sheet. In accordance with the new standards, the Company selected September 1, 2002, as its transition date for adopting the standard related to embedded derivatives.

Upcoming standards

In 2006, the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments -- Presentation. These Sections are to be applied to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of these new standards.

Accounting changes

In July 2006, the CICA issued Section 1506, Accounting Changes, which modifies certain aspects of the previous standard. A reporting entity may not change its accounting method unless required by primary source of GAAP or to provide a more reliable and relevant presentation of the financial statements. In addition, changes in accounting methods must be applied retroactively and additional information must be disclosed. This section applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. During the first quarter, the Company adopted this new standard and concluded that it had no significant impact on these consolidated financial statements.

2. Segmented Information

The Company's activities are divided into two business segments: Cable and Media. The Cable segment is comprised of Cable Television, High Speed Internet and Telephony services, and the Media segment is comprised of Radio and Television operations.

The principal financial information per business segment is presented in the tables below:



Cable Media
------------------------------------------------------------------------
Three months ended November 30, 2007 2006 2007 2006
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Revenue $251,833 $222,002 $40,988 $41,341

Operating costs 153,496 138,340 37,436 38,287

Operating income before
amortization 98,337 83,662 3,552 3,054

Amortization 52,687 44,309 1,423 1,485

Operating income 45,650 39,353 2,129 1,569

Financial expense 16,912 21,221 244 187

Impairment of assets of a
subsidiary - - 30,298 -

Income taxes 8,375 5,597 183 152
------------------------------------------------------------------------
Net assets employed (1)(2) $2,445,924 $2,398,297 $38,122 $60,076

Total assets (2) 2,677,884 2,714,339 96,976 109,548

Fixed assets (2) 1,130,081 1,119,498 13,339 24,937

Goodwill (2) 348,298 342,584 - -

Acquisition of fixed assets 50,727 67,171 305 232
------------------------------------------------------------------------
------------------------------------------------------------------------

Head Office
and elimination Consolidated
------------------------------------------------------------------------
Three months ended November 30, 2007 2006 2007 2006
(unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Revenue $(51) $(51) $292,770 $263,292

Operating costs (2,172) (1,702) 188,760 174,925

Operating income before
amortization 2,121 1,651 104,010 88,367

Amortization 45 45 54,155 45,839

Operating income 2,076 1,606 49,855 42,528

Financial expense 450 351 17,606 21,759

Impairment of assets of a
subsidiary - - 30,298 -

Income taxes 719 714 9,277 6,463
------------------------------------------------------------------------
Net assets employed (1)(2) $6,960 $8,445 $2,491,006 $2 466,818

Total assets (2) 10,542 12,157 2,785,402 2 836,044

Fixed assets (2) 443 488 1,143,863 1 144,923

Goodwill (2) - - 348,298 342,584

Acquisition of fixed assets - - 51,032 67,403
------------------------------------------------------------------------
------------------------------------------------------------------------

(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, 2007 and August 31, 2007.


The following tables sets out certain geographic market information based
on client's location:

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Revenue
Canada $237,178 $209,221
Europe 55,592 54,071
-----------------------------------------------------------------------
$292,770 $263,292
-----------------------------------------------------------------------
-----------------------------------------------------------------------

As at November 30, As at August 31,
-----------------------------------------------------------------------
2007 2007
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (audited)

Fixed assets
Canada $833,448 $837,407
Europe 310,415 307,516
-----------------------------------------------------------------------
$1,143,863 $1,144,923
-----------------------------------------------------------------------

Goodwill
Canada $- $-
Europe 348,298 342,584
-----------------------------------------------------------------------
$348,298 $342,584
-----------------------------------------------------------------------

-----------------------------------------------------------------------
-----------------------------------------------------------------------

3. Amortization

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Fixed assets $46,138 $40,495
Deferred charges 5,574 5,344
Intangible assets 2,443 -
-----------------------------------------------------------------------
$54,155 $45,839
-----------------------------------------------------------------------
-----------------------------------------------------------------------

4. Financial expense

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Interest on long-term debt $16,842 $20,451
Amortization of deferred financing costs 407 646
Other 357 662
-----------------------------------------------------------------------
$17,606 $21,759
-----------------------------------------------------------------------
-----------------------------------------------------------------------

5. Income Taxes

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Current $4,099 $2,584
Future 5,178 3,879
-----------------------------------------------------------------------
$9,277 $6,463
-----------------------------------------------------------------------
-----------------------------------------------------------------------

The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Income before income taxes $1,951 $20,769

Combined income tax rate 33.93% 34.74%

Income taxes at combined income
tax rate $662 $7,216

Loss or income subject to lower or
higher tax rates (385) (33)

Income taxes arising from
non-deductible expenses 123 -

Effect of foreign income tax rate
differences (1,164) (824)

Variation of the valuation allowance 10,280 -

Other (239) 104
-----------------------------------------------------------------------
Income taxes at effective income
tax rate $9,277 $6,463
-----------------------------------------------------------------------
-----------------------------------------------------------------------


6. Earnings per Share

The following table provides reconciliation between basic and diluted
earnings (loss) per share:

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Net income (loss) $(9,976) $6,751

Weighted average number of multiple
voting and subordinate voting shares
outstanding 16,672,652 16,556,333

Effect of dilutive stock options (1) - 96,624
-----------------------------------------------------------------------

Weighted average number of diluted
multiple voting and subordinate
voting shares outstanding 16,672,652 16,652,957
-----------------------------------------------------------------------

Earnings (loss) per share

Basic $(0.60) $0.41
Diluted (0.60) 0.41
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(1) The weighted average dilutive potential number of subordinate voting
shares, which were antidilutive for the three month period ended
November 30, 2007, amounted to 82,154. For the three month period ended
November 30, 2006, 36,443 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.

7. Goodwill and Other Intangible Assets

-----------------------------------------------------------------------
November 30, August 31,
2007 2007
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (audited)

Customer relationships $67,475 $68,858

Broadcasting licenses 25,120 28,120

Customer base 989,772 989,772
-----------------------------------------------------------------------
1,082,367 1,086,750

Goodwill 348,298 342,584
-----------------------------------------------------------------------
$1,430,665 $1,429,334
-----------------------------------------------------------------------
-----------------------------------------------------------------------

a) Intangible assets

During the first three months, intangible assets variations were as
follows:

-----------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses base Total
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Balance as at
August 31, 2007 $68,858 $28,120 $989,772 $1,086,750

Amortization (2,443) - - (2,443)

Impairment of
assets of a
subsidiary - (3,000) - (3,000)

Foreign currency
translation
adjustment 1,060 - - 1,060
-----------------------------------------------------------------------
Balance as at
November
30, 2007 $67,475 $25,120 $989,772 $1,082,367
-----------------------------------------------------------------------
-----------------------------------------------------------------------

b) Goodwill

During the first three months, goodwill variation was as follows:
-----------------------------------------------------------------------

-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited)

Balance as at August 31, 2007 $342,584

Foreign currency translation adjustment 5,714
-----------------------------------------------------------------------
Balance as at November 30, 2007 $348,298
-----------------------------------------------------------------------
-----------------------------------------------------------------------

8. Long-Term Debt

-------------------------------------------------------------------------
November 30, August 31,
Maturity Interest rate 2007 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited) (audited)
Parent company

Term Facility 2010 6.66%(1) $23,302 $25,538

Obligations under
capital leases 2010 6.49 - 6.61 101 108

Subsidiaries

Term Facility
Term loan -
EUR 104,551,500 2011 5.38 (1) 151,862 150,450

Term loan -
EUR 17,358,700 2011 5.25 (1) 25,190 24,979

Revolving loan -
EUR 174,000,000
(EUR 196,725,000 as
at August 31, 2007) 2011 5.38 (1) 254,562 283,087

Senior Secured
Debentures
Series 1 2009 6.75 149,636 150,000

Senior - Secured
Notes

Series A - US$150
million 2008 6.83 (2) 149,638 158,430

Series B 2011 7.73 174,203 175,000

Deferred credit (3) 2008 - - 80,220

Obligations under
capital leases 2011 6.42 - 8.30 5,210 5,760

Other - - 308 262
-------------------------------------------------------------------------
934,012 1,053,834
Less current portion 167,119 17,578
-------------------------------------------------------------------------
$766,893 $1,036,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(1) Average interest rate on debt as at November 30, 2007, 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.
denominated debt of the Company's subsidiary, Cogeco Cable Inc.

(3) The deferred credit represents the amount that was deferred for hedge
accounting purpose as at August 31, 2007 under cross-currency swaps
entered into by the Company's subsidiary, Cogeco Cable Inc., to hedge
Senior Secured Notes Series A denominated in U.S. dollars. In
accordance with the standards on financial instruments, the Company's
subsidiary's cross-currency swaps are now presented as derivative
financial instrument liabilities (see note 1).


9. 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, August 31,
2007 2007
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (audited)

Issued

1,842,860 multiple voting shares $12 $12

14,829,792 subordinate voting shares 119,066 119,066
-----------------------------------------------------------------------
$119,078 $119,078
-----------------------------------------------------------------------
-----------------------------------------------------------------------

During the period, subordinate voting share transactions were as follows:

-----------------------------------------------------------------------
Three months ended Twelve months ended
November 30, 2007 August 31, 2007
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (audited)
-----------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
-----------------------------------------------------------------------

Balance at
beginning 14,829,792 $119,066 14,702,556 $117,540

Shares issued for
cash under the
Employee Stock
Purchase Plan
and the Stock
Option Plan - - 120,196 1,526

Conversion of
multiple voting
shares into
subordinate
voting shares - - 7,040 -
-----------------------------------------------------------------------
Balance at end 14,829,792 $119,066 14,829,792 $119,066
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Stock-based plans

The Company offers, 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 97,214 stock options (197,407 in 2006) with an exercise price of $49.82 ($26.63 in 2006), of which 22,683 stock options (56,335 in 2006) were granted to COGECO Inc.'s employees. In 2006, 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 conditional options vest over a period of three years beginning one year after the day such options are 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, Cabovisao -- Televisao 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 $320,000 ($261,000 in 2006) was recorded for the three month period ended November 30, 2007.

The fair value of stock options granted by the Company's subsidiary, Cogeco Cable Inc., for the three month period ended November 30, 2007 was $12.88 ($7.37 in 2006) 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:



-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
Expected dividend yield 0.90% 1.27%
Expected volatility 27% 32%
Risk-free interest rate 4.25% 4.05%
Expected life in years 4.0 4.0
-----------------------------------------------------------------------


As at November 30, 2007, the Company had outstanding stock options providing for the subscription of 191,258 subordinate voting shares. These stock options can be exercised at various prices ranging from $14.00 to $37.50 and at various dates up to October 19, 2011.

TQS Inc., an indirect subsidiary of the Company, has also a stock option plan for certain executives and key employees which is described in the Company's annual consolidated financial statements. During the three months period ended November 30, 2007, no stock options (156,156 in 2006) was granted by TQS Inc. No compensation expense was recorded for the three month period ended November 30, 2007 and 2006 related to this plan.

The Company and its subsidiary, Cogeco Cable Inc., had also Performance Unit Plans for key employees which were terminated in June 2007. A compensation expense of $706,000 was recorded for the three months period ended November 30, 2006 related to these plans.

Effective October 13, 2006, the Company established a senior executives and designated employee incentive unit plan (the "Incentive Share Unit Plan") which is described in the Company's annual consolidated financial statements. During the first three months, the Company granted 12,852 Incentive Share Units (none in 2006). These shares were purchased for a cash consideration of $468,000 and are held in trust for participants until they are completely vested. The trust, considered as a variable interest entity, is consolidated in the Company's financial statements with the value of the acquired shares presented as treasury shares in reduction of capital stock. A compensation expense of $68,000 (none in 2006) was recorded for the three months period ended November 30, 2007 related to this plan.



10. Accumulated Other Comprehensive Income (Loss)

-----------------------------------------------------------------------
Translation of net
investments in self-
sustaining foreign
subsidiaries Cash flow hedges Total
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)

Balance as at
August 31, 2007 $(1,009) $- $(1,009)

Cumulative effect
of changes in
accounting
policy (note 1) - (724) (724)

Other comprehensive
income 1,283 140 1,423
-----------------------------------------------------------------------
Balance as at
November 30, 2007 $274 $(584) $(310)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


11. Statements of Cash Flow

a) Changes in non-cash operating items

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Accounts receivable $(12,153) $(18,649)

Income tax receivable 827 (1,672)

Prepaid expenses 2,036 (3,516)

Broadcasting rights (6,477) (396)

Accounts payable and accrued liabilities (38,689) (74,866)

Broadcasting rights payable 8,263 5,553

Income tax liabilities 2,231 3,867

Deferred and prepaid income 965 3,921
-----------------------------------------------------------------------
$(42,997) $(85,758)
-----------------------------------------------------------------------
-----------------------------------------------------------------------

b) Other information

Three months ended November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Fixed asset acquisitions through
capital leases $73 $205
Financial expenses paid 21,387 24,618
Income taxes paid (recovered) (24) 1,279
-----------------------------------------------------------------------
-----------------------------------------------------------------------


12. Employee Future Benefits

The Company and its Canadian 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 November 30,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited) (unaudited)

Contributory defined benefit
pension plans $807 $819

Defined contribution pension plan and
collective registered retirement
savings plans 900 621
-----------------------------------------------------------------------
$1,707 $1,440
-----------------------------------------------------------------------
-----------------------------------------------------------------------


13. Contingent liability

The Canadian Radio-television Telecommunications Commission ("CRTC") collects two different types of fees from broadcast licensees. These are known as Part I and Part II fees. In 2003 and 2004, lawsuits were commenced in the Federal Court, alleging that the Part II licence fees are taxes rather than fees and that the regulations authorizing them are unlawful. On December 14, 2006, the Federal Court ruled that the CRTC did not have the jurisdiction to charge Part II fees. The Court ruled that licensees were not entitled to a refund of past fees paid. Both the Crown and the applicants have appealed this case to the Federal Court of Appeal. The applicants are seeking an order requiring a refund of past fees paid. The Crown is seeking to reverse the finding that Part II fees are unlawful. On October 1st, 2007, the CRTC sent a letter to all broadcast licensees, including the Company's subsidiaries Cogeco Cable Inc and Cogeco Radio-Television Inc. The letter stated that the CRTC will not collect Part II license fees due on November 30, 2007 and subsequent years unless the Federal Court of appeal or the Supreme Court of Canada (should the case be appealed to that level) reverses the Federal Court's decision. The Appeal hearing was held on December 4th and 5th, 2007 in Ottawa. During the hearing, questions were raised by the hearing panel concerning the appropriateness of considering Part II Licence Fees as a tax rather than a fee under the relevant portion of the Broadcasting Act. The decision is not expected before several months. The Company believes that there is a reasonable likelihood that the Federal Court's decision will be reversed. The Company's subsidiaries had accrued $9.7 million with respect to these fees for fiscal year 2007 and the first quarter of fiscal 2008. In the unlikely event that the Federal Court of Appeal or the Supreme Court of Canada, should this case be appealed to that level, maintains the decision from the Federal Court, this would have a beneficial impact on the future financial results of the Company.

14. Subsequent events

a) Corporate income tax rates

On October 16, 2007, the Canadian federal government announced in its Economic Statement reduction in corporate income tax rates. According to the new legislation, corporate income tax rates will be further reduced from 20.5% to 19.5% effective January 1, 2008, from 20% to 19% effective January 1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to 16.5% effective January 1, 2011, and to 15% effective January 1, 2012. These corporate income tax rates were considered substantively enacted on December 14, 2007. The reduction of these corporate income tax rates will reduce future income tax expenses by approximately $23 million and increased non-controlling interest by approximately $16 million in the second quarter of fiscal 2008.

b) Amended and restated credit agreement

On December 14, 2007, the Company concluded an amended and restated credit agreement with a group of four Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The annually renewable three-year amended credit agreement establishes a revolving credit of $50 million to which may be added a further credit of $25 million under certain conditions. The amended credit agreement maintains certain financial commitments with the same security by the Company, its subsidiary Cogeco Radio-Television Inc. and indirect subsidiary, Cogeco Diffusion Inc. The Company posted a guarantee for a maximum amount of $12 million in favour of CIBC, which is also TQS' banker, in the event of any default by TQS under the terms of its own credit agreement. TQS' credit agreement provides security over its assets, including its accounts receivable. If the guarantee were to be called in, the Company would be subrogated to the rights of CIBC and benefit from the same security.

c) Order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent 3947424 Canada Inc. ("the TQS Group")

In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the last several months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio- television and Telecommunications Commission's ("CRTC") refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada ("SRC"), which acts like a commercial player rather than a publicly-owned television broadcaster and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent 3947424 Canada Inc. ("the TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors arrangement plan.

As a result, the Company recorded an asset impairment loss of $30.3 million representing the net assets of the TQS Group as at November 30, 2007. The impact of this impairment loss on the Company's consolidated statements of income is as follows:



-----------------------------------------------------------------------

-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited)

Impairment of assets of a subsidiary $30,298

Non-controlling interest (11,798)
-----------------------------------------------------------------------
$18,500
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Also, effective December 18, 2007, the Company will cease to consolidate the financial statements of the TQS Group. The Company's consolidated balance sheet as at November 30, 2007, includes the following assets and liabilities pertaining to the TQS Group:



-----------------------------------------------------------------------

-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited)

Accounts receivable $30,000

Prepaid expenses 243

Broadcasting rights 26,631

Fixed assets 10,000

Bank indebtedness (14,004)

Accounts payable and accrued liabilities (29,525)

Income tax liabilities (90)

Deferred and prepaid income (32)

Broadcasting rights payable (21,202)

Long-term debt (248)

Share in the partner's deficiency of a general partnership (518)

Pension plan liabilities (1,423)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


The results of the TQS Group included in the consolidated statements of
income for the three-month period ended November 30, 2007 were as follows:

-----------------------------------------------------------------------

-----------------------------------------------------------------------
-----------------------------------------------------------------------
(unaudited)

Revenue $32,758

Operating costs 29,957
-----------------------------------------------------------------------
Operating income before amortization 2,801

Amortization 1,116
-----------------------------------------------------------------------
Operating income 1,685

Financial expense 238
-----------------------------------------------------------------------
Income before income taxes and non-controlling interest 1,447

Income taxes -

Non-controlling interest 579
-----------------------------------------------------------------------
Net income $868
-----------------------------------------------------------------------
-----------------------------------------------------------------------


d) Senior unsecured debenture

On January 8, 2008, the Company's subsidiary, Cogeco Cable Inc., and the Solidarity Fund QFL entered into an agreement to issue senior unsecured debenture with par value of $100 million by way of private placement, subject to usual market conditions. The debenture which must be issued by no later than May 9, 2008, will bear interest at a fixed rate determined at the then prevailing rate of the ten-year Government of Canada bond plus a spread of 220 basis points. The debenture will be callable under certain conditions.

15. Comparative figures

Certain comparative figures have been reclassified in order to conform to the presentation adopted in 2007.

Contact Information

  • Source:
    COGECO Inc.
    Pierre Gagne
    Vice President, Finance and Chief Financial Officer
    514-874-2600
    or
    Information:
    Media
    Marie Carrier
    Director, Corporate Communications
    514-874-2600