COGECO Inc.
TSX : CGO

COGECO Inc.

July 06, 2007 19:06 ET

Cable and Radio: COGECO Growth Main Drivers

MONTREAL, QUEBEC--(Marketwire - July 6, 2007) - Today, COGECO Inc. (TSX:CGO) announced its financial results for the third quarter ended May 31, 2007.

For the third quarter of fiscal 2007, COGECO's improved results are mainly due to its cable subsidiary's performance. On a consolidated basis, revenue increased by 46.2% reaching $277.4 million and operating income before amortization improved by 44.4%, standing at $95.5 million. Net income decreased by $2.5 million, or 44.7% compared to the same period last year mainly due to a non recurring charge in the quarter. The cable subsidiary continued to exceed the last financial projections. Revenue generating units (RGUs) are up as well as overall financial results. The media sector improved its revenue mainly due to the performance of the radio and despite the highly competitive environment in the television market.

Cable sector

Cogeco Cable's results are still ahead of its last financial projections. Revenue was up 56.3% reaching $240.6 million and operating income before amortization improved by 54.8%, standing at $97.9 million.

"Our financial results exceed last April's guidance. Our Canadian and Portuguese subsidiaries are experiencing a steady progression thanks to a continuous improved penetration of our Digital Telephony service in Canada and improved penetration of all services in Portugal. Our customers appreciate our triple play of leading video, internet and voice services," said Mr. Louis Audet, President and CEO of COGECO.

Media sector

"In Radio, RYTHME FM maintains its first position in the Montreal market. Our Trois-Rivieres and Sherbrooke stations are progressing well and we are continuing to recapture market share with our two radio stations in Quebec City. In Television, TQS maintained the second position among all the other conventional television networks despite the fact that competition is fiercer than ever in this market," added Mr. Audet.

Revised 2007 projections and preliminary guidelines for 2008

To better reflect the improved performance of the cable sector for the first nine months of fiscal 2007 and to take into consideration a non-recurring charge of $ 2.5 million recorded in the third quarter of fiscal 2007, management has revised its projections for the fiscal year 2007. Therefore, consolidated revenue should reach approximately $1,075 million, operating income before amortization $363 million and net income should stand at $48 million.

In addition, the Company announced its 2008 preliminary guidelines, setting revenue outlook at about $1,190 million, operating income before amortization to approximately $425 million and free cash flow(1) to approximately $60 million.



FINANCIAL HIGHLIGHTS

Quarters ended May 31, Nine months ended May 31,
($000s, except
percentages
and per
share data) (unaudited) (unaudited)
% %
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenue $ 277,364 $ 189,718 46.2 $ 801,776 $ 547,555 46.4

Operating
income
before
amortization 95,495 66,111 44.4 267,531 184,469 45.0

Net income 3,059 5,529 (44.7) 44,356 12,801 -
Cash flow from
operations (1) 76,282 52,093 46.4 201,583 140,579 43.4
Less:
Capital
expenditures
and increase in
deferred charges 58,377 38,463 51.8 186,378 112,822 65.2
-------------------------------------------------------------------------
Free cash flow (1) 17,905 13,630 31.4 15,205 27,757 (45.2)
Per share data
Basic net income $ 0.18 $ 0.33 (45.5) $ 2.67 $ 0.78 -

(1) Cash flow from operations and free cash flow do not have standard
definitions prescribed by Canadian generally accepted accounting
principles (GAAP) and should be treated accordingly. For more details,
please consult the Non-GAAP financial measures section.


FORWARD-LOOKING STATEMENT

Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to our future outlook and anticipated events, our business, our operations, our financial performance, our financial condition or our results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding our future operating results and economic performance and our objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which we believe are reasonable as of the current date. While we consider these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the section "Uncertainties and main risk factors" of the Company's 2006 annual MD&A) that could cause actual results to differ materially from what we currently expect. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond our control. Therefore, future events and results may vary significantly from what we currently foresee. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation (and expressly disclaim any such obligation) and do not undertake to update or alter this information before next quarter.

This analysis should be read in conjunction with the Company's financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 2006 Annual Report. Throughout this 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 are, for the cable sector, constant corporate growth through the diversification and improvement of products and services as well as clientele and territories, effective management of capital and tight cost control. The media sector focuses on continuous improvement of its programming to increase its market share, and therefore, its profitability. The Company measures its performance with regard to these objectives with operating income before amortization growth, free cash flow(1) and RGU(2) growth for the cable sector. Below are the recent achievements of the cable and media sectors in furtherance of COGECO's objectives.

Tight control over costs, business processes

- During the third quarter and the first nine months of fiscal 2007, the Company's operating costs increased by 47.1% over the same period last year, essentially in line with revenue growth;

- The design of internal controls over financial reporting as per National Instrument 52-109 is still underway. As discussed in the 2006 annual MD&A, the Company had identified certain material weaknesses in the design of internal controls over financial reporting. During the first quarter of fiscal 2007 for the media sector and the third quarter of fiscal 2007 for the Portugal operations, the employees have received the corporate Code of Ethics. Other than these remediations, there have been no changes to the identified material weaknesses since August 31, 2006. The documentation and remediation of internal controls are progressing normally.



Cable sector

Sustained corporate growth
Canadian operations
- Digital Television services:
- On March 26, 2007, signature of an agreement with Twentieth Century Fox
Film Corporation for the Video On Demand (VOD) offering;
- Addition of three High Definition (HD) channels to the HD offering in
Ontario, on March 27, 2007;
- On June 5, 2007, addition of six HD channels to the HD offering in
Quebec.
- Digital Telephony service:
- Available to 77% of homes passed in Cogeco Cable's territories, as at
May 31, 2007;
- Since February 28, 2007, deployment of the Digital Telephony service in
Trenton, Belleville, Cannifton, Amherstburg and Belle River in Ontario,
as well as Plessisville in Quebec.
- High Speed Internet service (HSI):
- On March 9, 2007, access to Wi-Fi connections for Cogeco Cable Ontario
customers in Burlington, Oakville and Hamilton.


Portuguese operations and its integration
- Cabovisao - Televisao por Cabo, S.A. (Cabovisao) is in the process of
completing its plan to launch its Digital Television service during
fiscal 2007.

Continuous improvement of networks and equipment
- During the first nine months of fiscal 2007, Cogeco Cable has invested
approximately $74 million in its infrastructure including head-ends and
upgrade/rebuild.

Effective management of capital
- The cable subsidiary redeemed the remaining $35.7 million of its $125
million 8.44% Second Secured Debentures due July 31, 2007.

Media sector

- During the third quarter, TQS has continued its programming investment in
order to recapture market share. Management is confident that Fall
programming will enable TQS to progress.

- RYTHME FM was confirmed, with the announcement of the last BBM survey, to
be in top position in the Montreal market and is gaining market share in
its Trois-Rivieres and Sherbrooke stations. The 93,3 and RYTHME FM
stations in Quebec City continue to gain new listeners in a particularly
competitive market.

(1) See the "Non-GAAP financial" section for explanations.
(2) See the "Customer statistics" section of the cable sector section for
detailed explanations.


RGU growth

During the first nine months of fiscal 2007, the consolidated number of RGUs increased by 11.5% to reach almost 2.44 million units, en route towards the achievement of Cogeco Cable's 2007 revised projections of 13% to 14% for the fiscal year 2007.

Revenue and operating income before amortization growth

During the third quarter and first nine months, consolidated revenue increased respectively by 46.2% to reach $277.4 million and by 46.4% to reach $801.8 million. For the same periods, operating income before amortization grew by $29.4 million, or 44.4%, to reach $95.5 million and by $83.1 million, or 45%, to reach $267.5 million, mainly due to stronger RGU growth and to the consolidation of the financial results of Cabovisao acquired on August 1, 2006 in the cable sector. Considering the improved performance of the cable sector during the first nine months of fiscal 2007, management has revised its projections for the fiscal year 2007. Subsequent to these adjustments, revenue is now expected to reach between $1,070 million and $1,075 million while operating income before amortization should decrease to $363 million, mainly due to a non-recurring charge of approximately $2.5 million recorded in the third quarter of fiscal 2007 with regards to the termination of the Senior Management's Performance Unit Plan. Please consult the "Fiscal 2007 financial guidelines" section for further details.

Free cash flow

In the third quarter of fiscal 2007, COGECO generated free cash flow of $17.9 million, compared to $13.6 million for the same period last year, as a result of an increase in operating income before amortization in the cable sector. For the nine month period ended May 31, 2007, the Company generated a free cash flow of $15.2 million compared to $27.8 million for the same period the year before, mainly due to higher capital expenditures in order to sustain RGU growth in the cable sector. Capital expenditures and deferred charges amounted to $58.4 million and $186.4 million for the third quarter and first nine months of 2007. The increase in capital expenditures for the cable sector in the first nine months also includes the acquisition of customer premise equipment amounting to approximately $8 million to serve expected RGU growth.

The free cash flow for fiscal 2007 should remain between $10 million to $15 million. Please consult the "Fiscal 2007 financial guidelines" section for further details.



OPERATING RESULTS -- CONSOLIDATED OVERVIEW

Quarters ended May 31, Nine months ended May 31,
($000s, except
percentages) % %
2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenue $ 277,364 $ 189,718 46.2 $ 801,776 $ 547,555 46.4

Operating costs 181,869 123,607 47.1 534,245 363,086 47.1

Operating income
before amortization 95,495 66,111 44.4 267,531 184,469 45.0

Operating margin 34.4 % 34.8 % - 33.4 % 33.7 %


Revenue

Revenue, for the third quarter and the first nine months of 2007 rose by $87.6 million, or 46.2%, to reach $277.4 million and by $254.2 million, or 46.4%, to reach $801.8 million respectively, compared to the same periods last year. Cable revenue, driven by a strong RGU growth together with rate increases and the consolidation of the financial results of Cabovisao, went up by $86.7 million, or 56.3%, and $249.4 million, or 56%, respectively, in the third quarter and the first nine months of fiscal 2007. Media revenue increased by $1 million or 2.8% in the third quarter and by $4.8 million, or 4.7% in the first nine months essentially due to higher radio advertising revenue.

Operating income before amortization

Operating income before amortization grew by $29.4 million, or 44.4%, to reach $95.5 million in the third quarter of fiscal 2007, respectively, and by $83.1 million, or 45%, to reach $267.5 million in the first nine months of fiscal 2007 compared to the corresponding periods of last year. The cable sector contributed to the growth by $34.6 million and $88.2 million during the third quarter and the first nine months, partly reduced by $0.5 million in the third quarter and $0.3 million in the first nine months in the media sector.



FIXED CHARGES
Quarters ended May 31, Nine months ended May 31,
($000s, except % %
percentages) 2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------
Amortization $ 48,835 $ 30,658 59.3 $ 139,786 $ 90,758 54.0

Financial expense 21,851 14,120 54.8 67,791 42,312 60.2


Amortization amounted to $48.8 million and $139.8 million during the third quarter and the first nine months of fiscal 2007 compared to $30.7 million and $90.8 million for the same periods the year before. Amortization increased mainly as a result of the consolidation of the financial results of Cabovisao and to the increased capital expenditures arising from customer growth resulting in higher demand for customer premise equipment, scalable infrastructure, upgrade/rebuild, support capital and deferred charges in the cable sector.

During the third quarter and first nine months of fiscal 2007, financial expense increased by $7.7 million and $25.5 million respectively, compared to the same periods in fiscal 2006. This is due to the higher level of Indebtedness (defined as bank indebtedness and long-term debt) required to finance the acquisition of the Portuguese subsidiary, Cabovisao, and to a non recurring charge of $2 million during the quarter in connection with its financing.

INCOME TAXES

For the third quarter of fiscal 2007, income taxes amounted to $9.7 million compared to $8.5 million in fiscal 2006. The increase is mainly due to higher operating income before amortization net of fixed charges in the cable sector, partly offset by an adjustment of $2.2 million of income taxes in the media sector. For the first nine months of fiscal 2007, income taxes amounted to $18.7 million compared to $20.8 million for the same period last year. The income tax decrease was attributable to the cable sector's and mainly due to the elimination of Canadian federal capital tax on January 1, 2006 and to the recognition in the second quarter of benefits related to prior years' minimum income tax paid, partly offset by an increase in operating income before amortization surpassing the increase in fixed charges.

NON-CONTROLLING INTEREST

The non-controlling interest represents approximately a 65% interest in Cogeco Cable's results and a 40% interest in TQS Inc. During the third quarter and first nine months of fiscal 2007, the non-controlling interest amounted to $12 million and $27.8 million, mainly due to the cable sector results. The non-controlling interest for the comparable periods of last year amounted to $7.3 million and $17.6 million respectively.

NET INCOME

Net income for the third quarter of fiscal 2007 amounted to $3.1 million, or $0.18 per share, compared to $5.5 million, or $0.33 per share, for the same period last year. The decrease is mainly attributable to a non recurring charge of $2.5 million incurred during the quarter for the termination of the Company's Senior Management Performance Unit Plan and to an adjustment of $2.2 million of income taxes in the media sector. For the first nine months of fiscal 2007, net income stood at $44.4 million, or $2.67 per share, compared to $12.8 million, or $0.78 per share for the comparable period last year. Excluding a gain on dilution of $30.9 million attributable to the issuance of shares by Cogeco Cable during the first nine months of fiscal 2007, net income would have amounted to $13.4 million or $0.81 per share. The net income increase, excluding the gain on dilution, is the result of the rise in operating income before amortization outpacing fixed charges growth.



CASH FLOW AND LIQUIDITY

Quarters ended May 31, Nine months ended May 31,
($000s) 2007 2006 2007 2006
-----------------------------------------------------------------------
Operating Activities
Cash flow from
operations $ 76,282 $ 52,093 $ 201,583 $ 140,579
Changes in non-cash
operating items (24,800) (4,558) (106,230) (53,643)
-----------------------------------------------------------------------
$ 51,482 $ 47,535 $ 95,353 $ 86,936
-----------------------------------------------------------------------
Investing
Activities (1) $ (54,108) $ (16,912) $ (181,130) $ (110,047)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Financing
Activities (1) $ (14,501) $ (30,623) $ 35,452 $ 23,111
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net change in cash
and cash equivalents $ (17,127) $ - $ (50,325) $ -
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies (1,774) - 1,486 -
Cash and cash
equivalents at
beginning 41,578 - 71,516 -
-----------------------------------------------------------------------
Cash and cash
equivalents at end $ 22,677 $ - $ 22,677 $ -
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(1) Excludes assets acquired under capital leases.


During the third quarter of 2007, cash flow from operations reached $76.3 million, 46.4% higher than for the comparable period last year, primarily due to the increase in operating income before amortization partly offset by an increase in financial expense in the cable sector, and by a decline in the operating income before amortization in the media sector. Changes in non-cash operating items generated greater cash outflows than for the same period last year, mainly as a result of a decrease in accounts payable and accrued liabilities from non recurring payments made by the cable Portuguese subsidiary in accordance with the terms of the acquisition.

During the first nine months of fiscal 2007, cash flow from operations reached $201.6 million, an increase of 43.4% compared to the same period the year before, mostly due to the increase in operating income before amortization partly offset by an increase in financial expense in the cable sector. Changes in non-cash operating items generated greater cash outflows than the same period last year, mainly as a result of a decrease in accounts payable and accrued liabilities from non recurring payments made by the cable Portuguese subsidiary in accordance with the terms of the acquisition and by an increase in accounts and income tax receivables.

On March 9, 2007, Cogeco Cable and Cable Satisfaction International Inc. came to an agreement for a final adjustment of the working capital which was still outstanding since the date of acquisition, and consequently, an amount of $3.3 million was received by Cogeco Cable during the third quarter of fiscal 2007.

In the third quarter of fiscal 2007, investing activities stood at $54.7 million mainly due to capital expenditures of $51.8 million and an increase in deferred charges of $6 million, partly offset by the reimbursement of $3.3 million following the working capital final adjustment in the cable sector. For the first nine months, investing activities stood at $181.1 million due to capital expenditures of $164.3 million and an increase in deferred charges of $19.3 million.

During the third quarter and first nine months of fiscal 2007, the increases related to capital expenditures compared to the same periods last year are mainly due to the following factors in the cable sector:



- The Portuguese operations capital expenditures amounted to $8.6 million
and $29 million respectively for the third quarter and the first nine
months of fiscal 2007, essentially to support RGU growth.

- The increase in customer premise equipment expenditures resulted from a
greater demand for HSI and Digital Telephony services, from a rise in
the number of HD terminals and from a greater ratio of digital terminals
per digital home. Furthermore, customer premise equipment amounting to
approximately $8 million was acquired by Cogeco Cable during the first
nine months to serve expected RGU growth.

- The growth in capital expenditures for scalable infrastructure was
mainly attributable to the support of the Digital Telephony roll-out for
the Canadian operations.

- The increase in capital expenditures associated with the network upgrade
and rebuild program for the Canadian operations was due to the
acceleration of the program to expand the bandwidth to 750 MHz and 550
MHz for the Ontario and Quebec networks, and to improve network
reliability. An increase in the number of households with access to two-
way service was also a factor and the percentage of customers with
access to two-way service rose from 92% as at May 31, 2006 to 93% as at
May 31, 2007.


The third quarter and first nine months of fiscal 2007 increases in deferred charges are explained by higher reconnect costs attributable to the significant level of RGU growth.

In the third quarter of fiscal 2007, the Company generated free cash flow in the amount of $17.9 million compared to $13.6 million the preceding year. For the first nine months of fiscal 2007, the Company generated free cash flow in the amount of $15.2 million compared to $27.8 million for the same period the year before. The third quarter free cash flow increase over the same period last year is attributable to the cable sector and mainly due to growth in operating income before amortization, partly offset by higher level of capital expenditures and deferred charges to serve RGU growth and to support Digital Telephony service roll-out and by the increase in financial expense. The first nine months free cash flow decrease compared to the same period in 2006 is attributable to the cable sector and mainly due to several factors: a higher level of capital expenditures (including the acquisition of customer premise equipment amounting to approximately $8 million to serve expected RGU growth), deferred charges generated by RGU growth, to support the Digital Telephony service roll-out and by the increase in financial expense. These factors were partly offset by the growth in operating income before amortization.

During the third quarter of 2007, the level of Indebtedness decreased by $12.9 million. The decrease in the level of Indebtedness is mainly due to the free cash flow generated of $17.9 million and to the decrease of $18.9 million in cash and cash equivalents, partly offset by a decline of $24.8 million in non-cash operating items. For the same period last year, Indebtedness decreased by $28.6 million mainly due to free cash flow of $13.6 million, a decrease in restricted cash of $20.3 million partly offset by a decrease in non-cash operating items of $4.6 million. In addition, a dividend of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, was paid during the third quarter of fiscal 2007 compared to a dividend of $0.0625 per share or $1 million for the third quarter of fiscal 2006.

During the first nine months of 2007, the level of Indebtedness decreased by $147.4 million mainly due to the completion of a public offering of 5,000,000 subordinate shares for a net proceeds of $184.2 million, the generated free cash flow of $15.2 million and the decrease of $48.8 million in cash and cash equivalents, partly offset by a decline of $106.2 million in non-cash operating items. For the same period last year, Indebtedness grew by $27.7 million mainly due to a decline in non-cash operating items of $53.6 million partly offset by generated free cash flow of $27.8 million. In addition, dividends totalling $3.4 million were paid during the first nine months of fiscal 2007 compared to $3.1 million for the same period the year before.

As at May 31, 2007, the working capital deficiency was reduced by an amount of $168.2 million mainly as a result of Cogeco Cable's $184.2 million net proceeds of share issuance being used to reimburse the $125 million Senior Secured debentures Series A and to the repayment of certain suppliers subsequent to the Cabovisao acquisition. 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 May 31, 2007, the cable subsidiary had used $606 million of its $900 million Term Facility and the Company had drawn $16.5 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, 2006, there have been major changes to "Fixed Assets", "Preliminary Goodwill", "Accounts Payable and accrued liabilities", "Accounts receivable", "Indebtedness", "Cash and cash equivalents", "Non-controlling interest", "Foreign currency translation adjustment", "Pension plan liabilities and accrued employee benefits" and "Future income tax liabilities".

The $49.2 million rise in fixed assets is mainly related to increased capital expenditures to sustain RGU growth in the cable sector during the first nine months as well as anticipated growth in the coming months. The increase of $1 million in preliminary goodwill is mainly the result of the appreciation of the euro currency over the Canadian dollar partly offset by an adjustment of $6.2 million to the purchase price following the resolution of the working capital adjustments and the reevaluation of costs related to the acquisition of Cabovisao in the cable sector. The $15.1 million increase in accounts receivable is essentially due to an increase in the general level of receivables in line with the revenue growth and to the euro currency appreciation over the Canadian dollar in the cable sector. The $90.6 million and $48.8 million reductions in accounts payable and accrued liabilities and cash and cash equivalents respectively, are related to payments made with regards to the acquisition of Cabovisao. The $1.2 million increase in foreign currency translation adjustment is the result of the appreciation of the euro currency over the Canadian dollar. The $5.1 million increase in Pension plan liabilities and accrued employee benefits is mainly the result of an adjustment of reserve for the termination of the Senior Management Performance Unit Plan. The $8.3 million increase in Future income tax liabilities is mainly due to the utilization of income tax losses in the cable sector. The non-controlling interest rise of $186.2 million is mainly due to the impact of the share issuance and the increase in the results of Cogeco Cable. The decrease in Indebtedness by $135.6 million is the result of the factors previously discussed in the "Cash Flow and Liquidity" section.

A description of COGECO's share data as at June 30, 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 14,827,271 118,971

Options to Purchase Subordinate Voting Shares
Outstanding options 198,279
Exercisable options 198,279


In the normal course of business, COGECO incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. COGECO's obligations, described in the MD&A of the 2006 annual report, have not materially changed since August 31, 2006 except for the repayment of the $125 million Second Secured Debentures Series A and the partial repayment of $26.4 million of the $900 million Term Facility in the cable sector discussed in the "Cash Flow and Liquidity" section. Furthermore, during the second quarter, Cogeco Cable has guaranteed the payment by Cabovisao of certain taxes for municipal rights of way assessed by the Municipality of Seixal in Portugal for the years 2004 and 2005 totalling EUR 5.7 million (the "Tax Amounts"), which are currently being challenged by Cabovisao. Trustworthy financial guarantees were required under applicable Portuguese law in order for Cabovisao to challenge the Tax Amounts and withhold payment thereof until a final judgment, no longer subject to appeal, is rendered by the Portuguese courts having jurisdiction in this matter. As a result, Cogeco Cable may be required to pay, upon written demand by the Municipality of Seixal, the required amounts following final judgment up to a maximum aggregate amount of EUR 5.7 million, should Cabovisao fail to pay such required amounts.

The Company and its subsidiary, Cogeco Cable Inc., have also adopted Performance Units Plans for key employees which are described in the Company's annual consolidated financial statements and which have been terminated. The Company has created a new senior executive designated employee incentive unit plan. According to the new plan, senior executives and other key employees periodically receive a given number of units which entitled the participant to receive subordinate voting shares of the Company after three years less one day from the date of grant. During the first nine months, the Company granted 25,556 units. The Company establishes the value of the compensation related to the units granted based on the market value of the Company's subordinate voting shares at the date of grant and a compensation expense is recognized over the vesting period, which is three years. A trust was created for the purpose of purchasing these shares on the stock exchange in order to guard against stock price fluctuation. The Company instructed the trustee to purchase 25,556 subordinate voting shares of the Company on the stock market. These shares were purchased for a cash consideration of $1,054,000 and are held in trust for participant until they are completely vested. The trust, considered as a variable interest entity, is consolidated in the Company's financial statement with the value of the acquired shares presented as treasury shares in reduction of capital stock. The termination of the old plans had a non recurring negative impact of approximately $2.5 million during the third quarter.

DIVIDEND DECLARATION

At its July 6, 2007 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.07 per share for subordinate and multiple voting shares, payable on August 3 2007, to shareholders of record on July 20, 2007.

FOREIGN EXCHANGE MANAGEMENT

Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$150 million Senior Secured Notes. These agreements have the effect of converting the US interest coupon rate of 6.83% per annum to an average Canadian dollar ?xed interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt has been ?xed at CDN$1.5910. Amounts due under the US$150 million Senior Secured Notes Series A decreased by CDN$5.4 million at the end of the third quarter compared to August 31, 2006 due to the Canadian dollar's appreciation. Since the Senior Secured Notes Series A are fully hedged, the fluctuation is offset by a variation in deferred credit described in Note 7 of the third quarter 2007 interim financial statements. The CDN$78.2 million deferred credit represents the difference between the quarter-end exchange rate and the exchange rate on the cross-currency swap agreements, which determine the liability for interest and principal payments on the Senior Secured Notes Series A.

As noted in the MD&A of the 2006 annual report, the cable subsidiary's investment in the Portuguese subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rate, primarily changes in the values of the Canadian dollar versus the euro. This risk is mitigated since the major part of the purchase price for 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 CDN$1.2 million in the first nine months of fiscal 2007 which is deferred and recorded in the foreign currency translation adjustment. The exchange rate used by the cable subsidiary to convert the euro currency into Canadian dollar for the balance sheet accounts as at May 31, 2007 was $1.4392 per euro compared to $1.4156 per euro as at August 31, 2006. The average exchange rate prevailing during the third quarter and first nine months of fiscal 2007 used to convert the operating results of the Portuguese operations were $1.5202 per euro and $1.4946 per euro, respectively.




CABLE SECTOR

CUSTOMER STATISTICS

Canadian operations

Net additions (losses) % of
Penetration
Quarters Nine months (1)(4)
ended May 31, ended May 31, May 31,
------------------------------------------------------------------------
May 31,
2007 2007 2006 2007 2006 2007 2006
------------------------------------------------------------------------
RGUs(2) 1,748,852 35,768 48,081 192,916 163,960
Basic service
customers 851,784 (2,910) (3,349) 18,607 11,059
HSI service
customers(3) 403,473 11,030 12,378 60,393 52,831 50.7 43.1
Digital
Television
service
customers 371,132 8,583 23,635 43,768 69,597 44.5 38.8
Digital
Telephony
service
customers 122,463 19,065 15,417 70,148 30,473 18.5 7.6

(1) As a percentage of basic service customers in areas served.

(2) Represent the sum of basic service, HSI service, Digital Television
service and Digital Telephony service customers.

(3) Customers subscribing only to Internet or Digital Telephony services
totalled 66,072 as at May 31, 2007 compared to 60,786 as at May 31,
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.


RGUs generated lower growth in the third quarter of 2007 compared to the same period last year mainly due to Digital Television service. During the third quarter, Digital Telephony customers grew by 19,065 to reach 122,463 compared to a growth of 15,417 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 offered. Coverage of homes passed has now reached 77% compared to 50% last year. The net losses of basic service customers in the third quarter reached 2,910, compared to a loss of 3,349 for the same period last year mainly due to students leaving campuses at the end of the school year. The number of net additions to HSI service stood at 11,030 compared to 12,378 for the same period last year. The growth of HSI and the reduction of net losses for basic service customers compared to the same period last year is mostly due to the enhancement of the product offering, the impact of the bundled offer of Television, HSI and Digital Telephony services (Cogeco Complete Connection), and promotional activities.

The net additions of Digital Television service customers stood at 8,583 compared to 23,635 for the same period last year. The decrease in net additions this quarter compared to the same quarter last year reflects a maturing of the digital TV segment following a period of robust growth, especially in the second and third quarters of fiscal 2006. Nevertheless, customers continue to demonstrate strong interest in HD technology. Furthermore, Cogeco Cable adjusted the service offering and price gap differential between analog TV services and Digital Television services in the second half of fiscal 2006 which has also contributed to a moderation of the strong growth experienced in the first nine months of fiscal 2006.



Portuguese operations
Net additions % of
Quarter Nine Months Penetration
May 31, ended May 31, ended May 31, (1)
2007 2007 2007 May 31, 2007
-----------------------------------------------
RGUs(2) 687,237 16,666 58,196
Basic service
customers 289,247 5,694 19,553
HSI service customers 157,087 5,424 20,809 54.3
Telephony service
customers 240,903 5,548 17,834 83.3

(1) As a percentage of basic service customers in areas served.

(2) Represent the sum of basic service, HSI service and Telephony service
customers.


For the third quarter, all services generated customer growth in line with the Cogeco Cable's guidelines. Basic service grew by 5,694 customers, HSI by 5,424 customers and Telephony by 5,548 customers.




OPERATING RESULTS

Quarters ended May 31, Nine months ended May 31,
($000s, except % %
percentages) 2007 2006 Change 2007 2006 Change
--------------------------------------------------------------------------

Revenue $ 240,612 $ 153,956 56.3 $ 694,566 $ 445,126 56.0

Operating costs 142,738 88,145 61.9 417,671 256,620 62.8

Management fees -
COGECO Inc. - 2,567 - 8,568 8,392 2.1

Operating income
before amortization 97,874 63,244 54.8 268,327 180,114 49.0

Operating margin 40.7 % 41.1 % 38.6 % 40.5 %


Revenue

In the third quarter of fiscal 2007, consolidated revenue grew by $86.7 million, or 56.3%, to reach $240.6 million and by $249.4 million, or 56% to reach $694.6 million for the first nine months of 2007. These increases are mainly due to strong RGU growth, to the consolidation of the financial results of the Portuguese operations acquired on August 1, 2006 and to rate increases. Canadian operations revenue, driven by an increased number of customers in basic, HSI, Digital Telephony and Digital Television services as well as rate increases, went up by $28.8 million, or 18.7% in the third quarter and by $80.5 million, or 18.1%, in the first nine months of fiscal 2007. The Portuguese operations revenue amounted to $57.8 million for the third quarter of fiscal 2007 and to $168.9 million for the first nine months of fiscal 2007.

Operating costs

For the third quarter and the first nine months of fiscal 2007, operating costs excluding management fees payable to COGECO Inc. increased by $54.6 million and $161.1 million to reach $142.7 million and $417.7 million respectively, an increase of 61.9% and 62.8% compared to last year. The increase in operating costs is mainly attributable to the inclusion of the operating costs of Cabovisao and to servicing additional RGU in Canada, including the increased penetration of Digital Telephony service.

Operating income before amortization

For the third quarter and the first nine months of fiscal 2007, operating income before amortization increased by $34.6 million, or 54.8%, to reach $97.9 million and by $88.2 million, or 49%, to reach $268.3 million, respectively, as a result of RGU growth, the consolidation of the Portuguese operations and rate increases outpacing increases in operating costs. Cogeco Cable's third quarter and first nine months' operating margins declined from 41.1% to 40.7% and from 40.5% to 38.6% respectively as a result of the Digital Telephony deployment in Canada and the consolidation of the Portuguese operations lower operating margin. Considering the improved performance of Cogeco Cable during the first nine months of fiscal 2007, management has revised upwards its projections for the fiscal year 2007. Therefore, operating income before amortization should increase to $368 million. Please consult the "Fiscal 2007 financial guidelines" section for further details.



MEDIA SECTOR

OPERATING RESULTS

Quarters ended May 31, Nine months ended May 31,
($000s, except % %
percentages) 2007 2006 Change 2007 2006 Change
--------------------------------------------------------------------------

Revenue $ 36,803 $ 35,813 2.8 $ 107,363 $ 102,582 4.7

Operating costs 34,694 33,203 4.5 105,540 100,415 5.1

Operating income
before amortization 2,109 2,610 (19.2) 1,823 2,167 (15.9)

Operating margin 5.7 % 7.3 % 1.7 % 2.1 %


Revenue

During the third quarter of fiscal 2007, revenue stood at $36.8 million, an increase of $1 million, or 2.8%, compared to the same period last year. For the first nine month period of 2007, revenue increased by $4.8 million, or 4.7% to reach $107.4 million. During these periods, radio revenue has increased by 20% and 16.9% respectively, mainly due to improved audience ratings. Television revenue has remained relatively stable in the third quarter and increased by 1.8% for the first nine months of fiscal 2007 compared to last year even if the market conditions are difficult for generalist television services. During the first nine months of fiscal 2007, TQS is the conventional television network in the Francophone market that has limited its audience ratings decline.

Operating income before amortization

The operating income before amortization declined by $0.5 million and by $0.3 million in the third quarter and first nine months of fiscal 2007 compared to last year. For the third quarter and first nine months, TQS's operating income before amortization decreased as a result of greater investment in television programming, combined with lower revenue growth. Radio's operating income before amortization increased in the third quarter and first nine months due to revenue growth.



FISCAL 2007 AND 2008 FINANCIAL GUIDELINES

($ million, except Revised Revised
customer data) Preliminary Projections Projections
Projections July 6, 2007 April 11, 2007
Fiscal 2008 Fiscal 2007 Fiscal 2007
--------------------------------------------------------------------------
Consolidated Financial
Guidelines
Revenue 1,190 1,070 to 1,075 1,075 to 1,080
Operating income
before amortization 425 363 365
Net income 28 48 50
Free cash flow 60 10 to 15 10 to 15

Cable sector--
Financial Guidelines
Revenue 1,050 940 945
Operating income
before amortization 425 368 365
Operating margin 40% to 41% About 39% About 39%
Financial expense 80 85 85
Amortization 215 185 192
Capital expenditures
and deferred charges 260 260 260
Free cash flow 60 20 15

Customer Addition
Guidelines
Basic service 30,000 39,000 37,000 to 40,000
HSI service 75,000 93,000 85,000 to 90,000
Digital Television
service 54,000 52,000 60,000 to 65,000
Telephony services 100,000 113,000 105,000 to 110,000
RGU 259,000 297,000 287,000 to 305,000

Media sector--
Financial Guidelines
Revenue 140 131 to 135 131 to 135
Operating income
before amortization 1 to 3 1 to 3 1 to 3
Amortization 7 7 7
Capital expenditures
and deferred charges 7 7 7


FISCAL 2007 FINANCIAL GUIDELINES

Cable sector

Given the performance of Cogeco Cable during the first nine months of fiscal 2007, management has revised its guidelines for fiscal year 2007.

Subsequent to these adjustments, projected revenue is reduced while operating income before amortization and net income were revised upward. Operating margin should essentially remain the same. Revenue is reduced to reflect the improvement of the Canadian dollar compared to the euro currency and as a result, for guideline purposes, the euro is converted at an average rate of $1.4250 per euro while Cogeco Cable was using an average rate of $1.50 per euro last April. The operating income before amortization increases due to the reduction in operating costs.

Cogeco Cable should generate free cash flow of $20 million and projected net income should stand at about $68 million due to operating income before amortization improvement and reduction in the expected amortization expense from $192 million to $185 million.

In furtherance of its existing line of business and external growth strategy, the Cogeco Cable may investigate further cable system acquisition opportunities, including cable systems located outside Canada over time.

Media sector

Media sector is maintaining its 2007 original financial guidelines.

Consolidated outlook

For fiscal 2007, COGECO revised from its last April projections its operating income before amortization from $365 million to $363 million and net income from $50 million to $48 million to take into consideration a non recurring charge of $2.5 million recorded in the third quarter with regards to the termination of its old Senior Management Performance Unit Plan. Free cash flow should remain between $10 million to $15 million.

FISCAL 2008 PRELIMINARY FINANCIAL OUTLOOK

Cable sector

For fiscal 2008, Cogeco Cable expects strong revenue and operating income before amortization growth. The revenue increase of approximately 12% should come from the combined Canadian and Portuguese operations. The Canadian operations revenue should increase by approximately 13% from continued deployment of Digital Telephony service, by expanded penetration of HSI services in fiscal 2007 and 2008, as well as Digital Television services. In addition, rate increases implemented in March 2007 in Ontario and in April 2007 in Quebec, of at most $3 per customer and averaging $1 per basic service customer for both divisions and by $1.50 per Ontario Analog Value Pak customer implemented in April 2007. Cogeco Cable plans to expand its Canadian basic service clientele through consistently effective marketing, competitive product offering and superior customer service. As the penetration of HSI and Digital Television services increase, the demand for these products should slow down but be offset by increased demand for Digital Telephony service. Revenue from the Portuguese operations should increase by approximately 11% from EUR 152 million to EUR 168 million from rate increases of approximately EUR 0.65 (CDN$1) per basic service customer implemented in March 2007, by additional rate increases during fiscal 2008, by sustained RGU growth from fiscal 2007 and 2008, and from the launch of Digital Television in late Fiscal 2007. However, the Portuguese operations should also contribute by approximately 7% in revenue growth due to the effect of the foreign exchange transaction. For fiscal 2007, the expected Canadian dollar value of the euro should be approximately $1.48 per euro while for fiscal 2008, the euro should be converted at a rate of $1.4250 per euro.

Growth in revenue and sustained cost control should help achieve a significant increase in operating income before amortization by approximately 15%. Cogeco Cable expects to achieve an operating margin of approximately 40% to 41%.

Cogeco Cable expects the amortization of capital assets and deferred charges to increase by $30 million, mainly due to capital expenditures and deferred charges for RGU additions in fiscal 2007 and 2008. Management expects that cash flows generated by operations will finance capital expenditures and deferred charges, expected to amount to $260 million, essentially the same as for fiscal 2007. The cable subsidiary expects to generate free cash flow in the order of $60 million, an increase of approximately $40 million compared to fiscal 2007 projections. Generated free cash flow should be used primarily to reduce Indebtedness, thus improving Cogeco Cable's leverage ratios. Given the anticipated decrease in Indebtedness, financial expense will slightly decline

Media sector

Revenue should increase to approximately $140 million mainly due to improved audience ratings in radio. Operating income before amortization, capital expenditures and deferred charges as well as amortization should remain about the same as for fiscal 2007.

Consolidated outlook

For fiscal 2008, COGECO expects to improve operating income before amortization by approximately 17%. Free cash flow should generate approximately $60 million and net income of approximately $28 million should be earned as a result of growth in operating income before amortization outpacing fixed charges.

UNCERTAINTIES AND MAIN RISK FACTORS

There has been no significant change in the risk factors and uncertainties facing COGECO as described in the Company's MD&A of the 2006 annual report.

ACCOUNTING POLICIES AND ESTIMATES

There has been no significant change in COGECO's accounting policies and estimates and future accounting pronouncements since August 31, 2006. A description of these policies and estimates can be found in the Company's 2006 annual MD&A.

NON-GAAP FINANCIAL MEASURES

This section describes Non-GAAP financial measures used by COGECO throughout this MD&A. It also provides reconciliations between these Non-GAAP measures and the most comparable GAAP financial measures. These financial measures do not have standard definitions prescribed by Canadian GAAP and may not be comparable with similar measures presented by other companies. These measures include "cash flow from operations'" and "free cash flow".

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 May 31, Nine months ended May 31,
($ 000) 2007 2006 2007 2006
------------------------------------------------------------------------
Cash flow from
operating activities $ 51,482 $ 47,535 $ 95,353 $ 86,936
Changes in non-cash
operating items 24,800 4,558 106,230 53,643
------------------------------------------------------------------------
Cash flow from
operations $ 76,282 $ 52,093 $ 201,583 $ 140,579
------------------------------------------------------------------------


Free cash flow

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


Quarters ended May 31, Nine months ended May 31,
($ 000) 2007 2006 2007 2006
------------------------------------------------------------------------
Cash flow from
operations $ 76,282 $ 52,093 $ 201,583 $ 140,579
Acquisition of fixed
assets (51,816) (33,035) (164,327) (98,357)
Increase in deferred
charges (6,000) (4,229) (19,258) (11,728)
Assets acquired under
capital leases - as
per Note 10 b) (561) (1,199) (2,793) (2,737)
------------------------------------------------------------------------
Free cash flow $ 17,905 $ 13,630 $ 15,205 $ 27,757
------------------------------------------------------------------------


ADDITIONAL INFORMATION

This MD&A was prepared on July 6, 2007. Additional information relating to the Company, including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.

ABOUT COGECO

COGECO is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides about 1,749,000 revenue-generating units (RGUs) to approximately 1,470,000 homes passed in its Canadian service territory and about 688,000 RGUs to approximately 849,000 homes passed in its Portuguese service territory. Through its two-way broadband cable networks, Cogeco Cable provides its residential and commercial customers with analog and Digital Television and services, High Speed Internet access as well as Telephony services. Through its Cogeco Radio-Television subsidiary, COGECO holds a 60% interest and operates the TQS network, six TQS television stations, and three French CBC-affiliated television stations in partnership with CTV Television. Cogeco Radio-Television also wholly owns and operates the RYTHME FM radio stations in 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 (CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (CCA).



Analyst Conference Call: Monday, July 9, 2007 at 1:30 P.M.(EDT)
Media representatives may attend as listeners
only.

Please use the following dial-in number to
have access to the conference call by dialing
10 minutes before the start of the conference:

Canada/USA Access Number: 1-800 811-7286
International Access Number: + 1-913 981-4902
Confirmation Code: 8913434
By Internet at www.cogeco.ca/investors

A rebroadcast of the conference call will be
available until July 18, by dialing:
Canada and US access number: 1- 888 203-1112
International access number: + 1- 719 457-0820
Confirmation code: 8913434





Supplementary Quarterly Financial Information

Quarters ended May 31, February 28,
2007(1) 2006 2007(1) 2006
-------------------- --------------------
($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
Income taxes 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 3,059 5,529 34,546 2,679

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

Net income per share $ 0.18 $0.33 $2.08 $0.16

November 30, August 31,
2006(1) 2005 2006(1) 2005
-------------------- --------------------

Revenue $263,292 $180,478 $199,351 $164,210
Operating income before
amortization 88,367 60,593 68,645 56,485
Operating margin 33.6% 33.6% 34.4% 34.4%
Amortization 45,839 29,883 36,446 30,769
Financial expense 21,759 13,961 16,864 14,366
Income taxes 6,463 6,611 (13,950) 5,052
Non-controlling interest 7,557 5,455 19,022 5,422
Gain (loss) on dilution (7) - - -
Net income 6,751 4,593 10,300 630

Cash flow from
operations 66,035 46,842 51,729 43,215

Net income per share $0.41 $0.28 $0.62 $0.04

(1) Include operating results of the cable subsidiary, Cabovisao, since the
date of acquisition of control on August 1, 2006.


Cable sector operating results are generally not subject to material seasonal ?uctuations. However, the loss of basic service customers is usually greater, and the addition of HSI customers is generally lower in the third quarter, mainly due to students leaving campuses at the end of the school year. However, the media sector's operating results may be subject to significant seasonal variations. The revenue depends on audience ratings and the market for conventional radio and television advertising expenditures in the Province of Québec. Advertising sales, mainly national advertising, are normally weaker in the second and fourth quarters and, as a result, the operating margin is generally lower in those quarters.



COGECO INC.
Customer Statistics
May 31, August 31,
2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Homes Passed
Ontario (1) 986,494 1,002,187
Quebec 482,851 474,717
-------------------------
Canada 1,469,345 1,476,904
Portugal 848,175 826,369
-------------------------
Total 2,317,520 2,303,273
-------------------------
-------------------------

Revenue Generating Units
Ontario 1,236,229 1,104,157
Quebec 512,623 451,779
-------------------------
Canada 1,748,852 1,555,936
Portugal 687,237 629,041
-------------------------
Total 2,436,089 2,184,977
-------------------------
-------------------------

Basic Service Customers
Ontario 600,192 587,289
Quebec 251,592 245,888
-------------------------
Canada 851,784 833,177
Portugal 289,247 269,694
-------------------------
Total 1,141,031 1,102,871
-------------------------
-------------------------

Discretionnary Service Customers
Ontario 472,003 463,783
Quebec 201,424 192,895
-------------------------
Canada 673,427 656,678
Portugal - -
-------------------------
Total 673,427 656,678
-------------------------
-------------------------

Pay TV Service Customers
Ontario 90,765 84,425
Quebec 41,229 38,455
-------------------------
Canada 131,994 122,880
Portugal 54,042 54,089
-------------------------
Total 186,036 176,969
-------------------------
-------------------------

High Speed Internet Service Customers
Ontario 309,854 269,328
Quebec 93,619 73,752
-------------------------
Canada 403,473 343,080
Portugal 157,087 136,278
-------------------------
Total 560,560 479,358
-------------------------
-------------------------

Digital Video Service Customers
Ontario 241,801 213,556
Quebec 129,331 113,808
-------------------------
Canada 371,132 327,364
Portugal - -
-------------------------
Total 371,132 327,364
-------------------------
-------------------------

Telephony Service Customers
Ontario 84,382 33,984
Quebec 38,081 18,331
-------------------------
Canada 122,463 52,315
Portugal 240,903 223,069
-------------------------
Total 363,366 275,384
-------------------------
-------------------------

(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 Nine months ended
May 31, May 31,
--------------------------------------------------------------------------
(In thousands of
dollars, except per
share data) 2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue $277,364 $189,718 $801,776 $547,555

Operating costs 181,869 123,607 534,245 363,086
--------------------------------------------------------------------------

Operating income
before amortization 95,495 66,111 267,531 184,469

Amortization (note 3) 48, 835 30,658 139,786 90,758
--------------------------------------------------------------------------

Operating income 46,660 35,453 127,745 93,711

Financial expense
(note 7) 21,851 14,120 67,791 42,312
--------------------------------------------------------------------------

Income before income
taxes and the
following items 24,809 21,333 59,954 51,399

Income taxes (note 4) 9,679 8,461 18,722 20,778

Non-controlling
interest 12,007 7,293 27,804 17,590

Loss (gain) on
dilution resulting
from shares issued
by a subsidiary 64 - (30,919) -

Share in the earnings
(loss) of a general
partnership - (50) 9 (230)
--------------------------------------------------------------------------

Net income $3,059 $5,529 $44,356 $12,801
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Earnings per share
(note 5)
Basic $0.18 $0.33 $2.67 $0.78
Diluted 0.18 0.33 2.66 0.77
--------------------------------------------------------------------------
--------------------------------------------------------------------------



COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine months ended May 31,
--------------------------------------------------------------------------
(In thousands of dollars) 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (unaudited)

Balance at beginning $204,734 $185,762
Net income 44,356 12,801
Dividends on multiple voting shares (374) (347)
Dividends on subordinate voting shares (2,987) (2,749)
--------------------------------------------------------------------------
Balance at end $245,729 $195,467
--------------------------------------------------------------------------
--------------------------------------------------------------------------



COGECO INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------
(In thousands of dollars) May 31, August 31,
2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (audited)

Assets
Current
Cash and cash equivalents $22,677 $71,516
Restricted cash 491 569
Accounts receivable 87,113 71,989
Income tax receivable 1,480 -
Prepaid expenses 9,222 7,204
Broadcasting rights 12,839 15,632
--------------------------------------------------------------------------
133,822 166,910
--------------------------------------------------------------------------

Income tax receivable 1,313 -
Broadcasting rights 20,750 18,083
Investments 539 539
Fixed assets 1,098,169 1,048,998
Deferred charges 50,951 49,433
Broadcasting licenses and customer base (note 6) 1,017,892 1,017,892
Preliminary goodwill (note 6) 423,152 422,108
--------------------------------------------------------------------------
$2,746,588 $2,723,963
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness $16,097 $7,891
Accounts payable and accrued liabilities 222,193 312,837
Broadcasting rights payable 10,803 7,721
Income tax liabilities 1,307 666
Deferred and prepaid income 28,659 26,737
Current portion of long-term debt (note 7) 2,400 126,904
--------------------------------------------------------------------------
281,459 482,756
--------------------------------------------------------------------------

Long-term debt (note 7) 1,190,002 1,209,254
Share in the partner's deficiency of a general
partnership 832 841
Deferred and prepaid income 11,593 10,525
Broadcasting rights payable 5,028 5,777
Pension plan liabilities and accrued
employee benefits 16,225 11,098
Future income tax liabilities 220,118 211,848
Non-controlling interest 658,783 472,605
--------------------------------------------------------------------------
2,384,040 2,404,704
--------------------------------------------------------------------------

Shareholders' equity
Capital stock (note 8) 118,983 117,552
Treasury shares (note 8) (1,054) -
Contributed surplus - stock-based compensation 2,115 1,425
Retained earnings 245,729 204,734
Foreign currency translation adjustment (note 9) (3,225) (4,452)
--------------------------------------------------------------------------
362,548 319,259
--------------------------------------------------------------------------
$2,746,588 $2,723,963
--------------------------------------------------------------------------
--------------------------------------------------------------------------



COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW

Three months ended Nine months ended
May 31, May 31,
--------------------------------------------------------------------------
(In thousands of
dollars) 2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Cash flow from
operating
activities
Net income $3,059 $5,529 $44,356 $12,801
Items not affecting
cash and cash
equivalents
Amortization (note 3) 48,835 30,658 139,786 90,758
Amortization of
deferred financing
costs 532 243 1,713 724
Future income
taxes (note 4) 9,163 7,391 12,542 16,609
Non-controlling
interest 12,007 7,293 27,804 17,590
Loss (gain) on
dilution resulting
from shares issued
by a subsidiary 64 - (30,919) -
Stock-based
compensation 2,990 720 6,078 890
Other (368) 259 223 1,207
--------------------------------------------------------------------------
76,282 52,093 201,583 140,579
Changes in non-cash
operating items
(note 10a)) (24,800) (4,558) (106,230) (53,643)
--------------------------------------------------------------------------
51,482 47,535 95,353 86,936
--------------------------------------------------------------------------

Cash flow from
investing
activities
Acquisition of
fixed assets
(note 10b)) (51,816) (33,035) (164,327) (98,357)
Increase in
deferred charges (6,000) (4,229) (19,258) (11,728)
Decrease in
restricted cash - 20,322 88 -
Adjustments related
to business
acquisition 3,279 - 1,894 -
Other 429 30 473 38
--------------------------------------------------------------------------
(54,108) (16,912) (181,130) (110,047)
--------------------------------------------------------------------------

Cash flow from
financing
activities
Increase (decrease)
in bank indebtedness 736 (14,170) 8,206 13,451
Increase in
long-term debt 22,861 - 22,861 18,000
Repayment of
long-term debt (36,487) (14,447) (178,487) (3,768)
Issue of
subordinate voting
shares 974 - 1,431 1,274
Acquisition of
treasury shares
(note 8) (1,054) - (1,054) -
Dividends on
multiple voting
shares (129) (116) (374) (347)
Dividends on
subordinate voting
shares (1,037) (918) (2,987) (2,749)
Issue of
subordinate voting
shares by a
subsidiary to
non-controlling
interest, net of
issue costs 1,411 - 190,066 166
Dividends paid by a
subsidiary to
non-controlling
interest (1,776) (972) (4,210) (2,916)
--------------------------------------------------------------------------
(14,501) (30,623) 35,452 23,111
--------------------------------------------------------------------------

Net change in cash
and cash
equivalents (17,127) - (50,325) -
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies (1,774) - 1,486 -
Cash and cash
equivalents at
beginning 41,578 - 71,516 -
--------------------------------------------------------------------------
Cash and cash
equivalents at end $ 22,677 $ - $ 22,677 $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------


See supplemental cash flow information in note 10.

COGECO INC.

Notes to Consolidated Financial Statements May 31, 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, contain all adjustments necessary to present fairly the financial position of COGECO Inc. as at May 31, 2007 and August 31, 2006 as well as its results of operations and its cash flow for the three and nine month periods ended May 31, 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, 2006. These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual 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, high-speed Internet access 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:



Head Office
and
Cable Media elimination
---------------------------------------------------------------------------
Three months
ended May 31, 2007 2006 2007 2006 2007 2006
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Revenue $240,612 $153,956 $36,803 $35,813 $(51) $(51)

Operating costs 142,738 90,712 34,694 33,203 4,437 (308)

Operating
income (loss)
before
amortization 97,874 63,244 2,109 2,610 (4,488) 257

Amortization 47,278 29,048 1,513 1,562 44 48

Operating
income (loss) 50,596 34,196 596 1,048 (4,532) 209

Financial expense 21,273 13,634 273 200 305 286

Income taxes 8,942 8,191 1,962 (11) (1,225) 281
---------------------------------------------------------------------------

Net assets
employed(1)(2) $2,365,939 $2,210,823 $71,817 $70,550 $7,879 $7,477

Total assets(2) 2,616,207 2,602,603 120,796 112,609 9,585 8,751

Fixed assets(2) 1,073,119 1,021,538 24,517 26,794 533 666

Preliminary
goodwill(2) 423,152 422,108 - - - -

Acquisition
of fixed assets 51,817 33,780 560 454 - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Consolidated
---------------------------------------------------------------------------
Three months ended May 31, 2007 2006
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Revenue $277,364 $189,718

Operating costs 181,869 123,607

Operating income (loss) before amortization 95,495 66,111

Amortization 48,835 30,658

Operating income (loss) 46,660 35,453

Financial expense 21,851 14,120

Income taxes 9,679 8,461
---------------------------------------------------------------------------

Net assets employed(1)(2) $2,445,635 $2,288,850

Total assets(2) 2,746,588 2,723,963

Fixed assets(2) 1,098,169 1,048,998

Preliminary goodwill(2) 423,152 422,108

Acquisition of fixed assets 52,377 34,234
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Total assets less cash and cash equivalents, accounts payable and
accrued liabilities, broadcasting rights payable and deferred and
prepaid income.
(2) As at May 31, 2007 and August 31, 2006.



Head Office
Cable Media and elimination
---------------------------------------------------------------------------
Nine months
ended May 31, 2007 2006 2007 2006 2007 2006
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Revenue $694,566 $445,126 $107,363 $102,582 $(153) $(153)

Operating costs 426,239 265,012 105,540 100,415 2,466 (2,341)

Operating
income
(loss)
before
amortization 268,327 180,114 1,823 2,167 (2,619) 2,188

Amortization 135,159 85,981 4,494 4,651 133 126

Operating
income (loss) 133,168 94,133 (2,671) (2,484) (2,752) 2,062

Financial
expense 66,045 40,992 752 522 994 798

Income taxes 18,800 21,572 242 (1,738) (320) 944
---------------------------------------------------------------------------

Net assets
employed
(1)(2) $2,365,939 $2,210,823 $71,817 $70,550 $7,879 $7,477

Total
assets(2) 2,616,207 2,602,603 120,796 112,609 9,585 8,751

Fixed
assets (2) 1,073,119 1,021,538 24,517 26,794 533 666

Preliminary
goodwill(2) 423,152 422,108 - - - -

Acquisition
of fixed
assets 165,786 99,489 1,334 1,498 - 107
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Consolidated
---------------------------------------------------------------------------
Nine months ended May 31, 2007 2006
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Revenue $801,776 $547,555

Operating costs 534,245 363,086

Operating income (loss) before amortization 267,531 184,469

Amortization 139,786 90,758

Operating income (loss) 127,745 93,711

Financial expense 67,791 42,312

Income taxes 18,722 20,778
---------------------------------------------------------------------------

Net assets employed (1)(2) $2,445,635 $2,288,850

Total assets (2) 2,746,588 2,723,963

Fixed assets (2) 1,098,169 1,048,998

Preliminary goodwill (2) 423,152 422,108

Acquisition of fixed assets 167,120 101,094
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Total assets less cash and cash equivalents, accounts payable and
accrued liabilities, broadcasting rights payable and deferred and
prepaid income.
(2) As at May 31, 2007 and August 31, 2006.


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


Three months ended May 31, Nine months ended May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Canada $219,515 $189,718 $632,830 $547,555
Europe 57,849 - 168,946 -
---------------------------------------------------------------------------
$277,364 $189,718 $801,776 $547,555
---------------------------------------------------------------------------
---------------------------------------------------------------------------



As at May 31, As at August 31,
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
(unaudited) (audited)

Fixed assets
Canada $821,332 $768,484
Europe 276,837 280,514
---------------------------------------------------------------------------
Total $1,098,169 $1,048,998
---------------------------------------------------------------------------

Preliminary goodwill
Canada $- $-
Europe 423,152 422,108
---------------------------------------------------------------------------
Total $423,152 $422,108
---------------------------------------------------------------------------
---------------------------------------------------------------------------



3. Amortization
Three months ended May 31, Nine months ended May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Fixed assets $43,527 $25,237 $123,759 $74,074
Deferred charges 5,308 5,421 16,027 16,684
---------------------------------------------------------------------------
$48,835 $30,658 $139,786 $90,758
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Income Taxes
Three months ended May 31, Nine months ended May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Current $516 $1,070 $6,180 $4,169
Future 9,163 7,391 12,542 16,609
------------------------------------------------------------------------
$9,679 $8,461 $18,722 $20,778
------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Three months ended May 31, Nine months ended May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Income before income
taxes $24,809 $21,283 $59,963 $51,169

Combined income tax
rate 34.47% 34.84% 34.43% 34.84%

Income taxes at
combined income
tax rate $8,552 $7,415 $20,645 $17,827

Loss or income
subject to lower or
higher tax rates (452) 75 72 341

Decrease in income
taxes as a result of
increase in
substantially
enacted tax rates - - - (91)

Large corporation tax - 807 - 2,451

Effect of foreign
income tax rate
differences (788) - (3,037) -

Benefit related to
prior years' minimum
income tax paid - - (1,475) -

Variation of the
valuation allowance 2,180 - 2,180 -

Other 187 164 337 250
---------------------------------------------------------------------------

Income taxes at
effective income
tax rate $9,679 $8,461 $18,722 $20,778
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. Earnings per Share

The following table provides a reconciliation between basic and diluted
earnings per share:

Three months ended May 31, Nine months ended May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Net income $3,059 $5,529 $44,356 $12,801

Weighted average
number of multiple
voting and
subordinate
voting shares
outstanding 16,625,479 16,538,256 16,583,850 16,495,273

Effect of dilutive
stock options (1) 87,434 131,538 100,094 133,983
---------------------------------------------------------------------------

Weighted average
number of diluted
multiple voting and
subordinate voting
shares outstanding 16,712,913 16,669,794 16,683,944 16,629,256
---------------------------------------------------------------------------

Earnings per share

Basic $0.18 $0.33 $2.67 $0.78

Diluted 0.18 0.33 2.66 0.77
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) For the three and nine month periods ended May 31, 2007, no stock
option and 24,295 stock options (36,443 and 38,910 in 2006) were
excluded from the calculation of diluted earnings per share since the
exercise price of the options was greater than the average share price
of the subordinate voting shares.


6. Preliminary Goodwill and Other Intangible Assets

---------------------------------------------------------------------------
Total other
Customer Broadcasting intangible Preliminary
base licenses assets goodwill
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Balance as at
August 31, 2006 $989,772 $28,120 $1,017,892 $422,108

Adjustment to
the purchase price - - - (6,205)

Foreign
currency
translation
adjustment - - - 7,249
--------------------------------------------------------------------------

Balance as at
May 31, 2007 $989,772 $28,120 $1,017,892 $423,152
--------------------------------------------------------------------------
--------------------------------------------------------------------------


On March 9, 2007, the Company's subsidiary, Cogeco Cable Inc., and Cable Satisfaction International Inc. came to an agreement for a final adjustment to the working capital which was outstanding since the date of acquisition. According to the agreement, the Company's subsidiary has recorded an account receivable of an amount of EUR 2,194,000 ($3,279,000) in the second quarter which was received on March 16, 2007 and as a result, the purchase price was reduced accordingly. The remaining adjustment to the purchase price is due to the reevaluation of costs related to the acquisition of Cabovisao - Televisao por Cabo, S.A. ("Cabovisao").

In addition, as mentioned in the Company's 2006 annual consolidated financial statements, management of the Company's subsidiary, Cogeco Cable Inc., is currently carrying out a more specific analysis and changes will be made to the allocation of the excess of consideration over net assets acquired as the information becomes available. For example, since the measurement of the fair value of fixed assets had not yet been completed at the time of the preliminary allocation, fixed assets have been presented at cost. The measurement of indefinite and finite-lived intangible assets is also under way. Furthermore, in accordance with the Portuguese Companies Income Tax Code, accumulated tax losses cannot be deducted if the ownership of at least 50% of the social capital changes from the moment when the tax losses were generated, unless an authorization is granted before such change in the ownership takes place. To this effect, a request for preservation of tax losses was filed by Cabovisao on July 28, 2006. These losses have not been included in the preliminary purchase price allocation. As a result, the actual amounts allocated to the identifiable assets acquired and liabilities assumed and the related operating results will vary according to the amounts initially recorded, and such differences could be significant.



7. Long-Term Debt
--------------------------------------------------------------------------
May 31, August 31,
Maturity Interest rate 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (audited)

Parent company
Term Facility 2010(1) 6.29%(2) $16,500 $19,000
Obligations under
capital leases 2010 6.49 - 6.61 116 138
Subsidiaries
Term Facility
Term loan 2011 5.33(2) 150,000 150,000
Term loan - EUR
17,358,700 2011 5.00(2) 24,983 24,573
Revolving loan
Euro currency -
EUR 299,500,000
(EUR 317,000,000
as at August 31,
2006) 2011 5.00(2) 431,040 448,745
Senior Secured
Debentures Series 1 2009 6.75 150,000 150,000
Senior - Secured Notes
Series A - US $150
million 2008 6.83(3) 160,440 165,795
Series B 2011 7.73 175,000 175,000
Second Secured
Debentures Series A 2007 (4) - - 125,000
Deferred credit (5) 2008 - 78,210 72,855
Obligations under
capital leases 2010 6.42 - 8.18 6,088 5,009
Other - - 25 43
--------------------------------------------------------------------------
1,192,402 1,336,158

Less: current portion 2,400 126,904
--------------------------------------------------------------------------
$1,190,002 $1,209,254
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(1) COGECO Inc.'s Term Facility has been extended for an additional year
in December 2006.

(2) Average interest rate on debt as at May 31, 2007, including stamping
fees.

(3) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the U.S.
denominated debt of the Company's subsidiary, Cogeco Cable Inc.

(4) On February 2, 2007, the Company's subsidiary, Cogeco Cable Inc.,
gave a notice of redemption to purchase on March 5, 2007 all of its
8.44% Second Secured Debentures Series A ("the Notes") in the aggregate
principal amount of $125,000,000. Concurrently, the Company's
subsidiary also made an offer to purchase for cancellation on February
12, 2007, all of the validly issued and held Notes upon receipt by the
Trustee of a written notice of acceptance by the holders of Notes. As a
result, a total of $89,257,000 of Notes were redeemed on February 12,
2007, for a total cash consideration of $91,038,000. The remaining
Notes of $35,743,000 were redeemed on March 5, 2007, for a total cash
consideration of $36,550,000. The excess of the redemption price over
the aggregate principal amount was recorded as financial expense.

(5) The deferred credit represents the amount which would have been payable
as at May 31, 2007 and August 31, 2006 under cross-currency swaps
entered into by the Company's subsidiary, Cogeco Cable Inc., to hedge
Senior Secured Notes Series A denominated in US dollars.


Interest on long-term debt for the three and nine month periods ended May 31, 2007 amounted to $18,126,000 and $61,109,000 ($13,477,000 and $40,128,000 in 2006).


8. Capital Stock

Authorized, an unlimited number

Preferred shares of first and second rank, could be issued in series and non-voting, except when specified in the Articles of Incorporation of the Company or in the Law.

Multiple voting shares, 20 votes per share.

Subordinate voting share, 1 vote per share.




May 31, August 31,

2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (audited)
Issued

1,842,860 multiple voting shares (1,849,900
as at August 31, 2006) (1) $12 $12

14,827,271 subordinate voting shares
(14,702,556 as at August 31, 2006) 118,971 117,540
--------------------------------------------------------------------------
$118,983 $117,552
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) During the third quarter of 2007, 7,040 multiple voting shares were
converted to subordinate voting shares.


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

Nine months ended Twelve months ended
--------------------------------------------------------------------------
May 31, 2007 August 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (audited)
--------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
--------------------------------------------------------------------------
Balance at beginning 14,702,556 $117,540 14,600,104 $116,155
Shares issued for cash
under the Employee Stock
Purchase Plan
and the Stock Option
Plan 117,675 1,431 102,452 1,385

Conversion of multiple
voting shares into
subordinate voting
shares 7,040 - - -
--------------------------------------------------------------------------
Balance at end 14,827,271 $118,971 14,702,556 $117,540
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Stock-based plans

The Company established, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for certain executives which are described in the Company's annual consolidated financial statements. During the first nine months, no stock options were granted to employees by COGECO Inc. However, the Company's subsidiary, Cogeco Cable Inc., granted 201,587 stock options (126,059 in 2006) with an exercise price of $26.63 to $44.54 ($25.12 to $29.05 in 2006), of which 57,247 stock options (31,743 in 2006) were granted to COGECO Inc.'s employees. The Company's subsidiary also granted 376,000 conditional stock options with an exercise price of $26.63 of which 262,400 stock options were granted to COGECO Inc.'s employees. These conditional options vest over a period of three years beginning one year after the day such options were granted and are exercisable over ten years. The vesting of these options is conditional to the achievement of certain yearly financial objectives by the Portuguese subsidiary, 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 $538,000 and $1,439,000 ($207,000 and $573,000 in 2006) was recorded for the three and nine month periods ended May 31, 2007. If compensation expense had been recognized using the fair value-based method at the grant date for options granted between September 1, 2001 and August 31, 2003, the Company's net income and earnings per share for the three and nine month periods ended May 31, 2006 would have been reduced to the following pro forma amounts:



Three months ended Nine months ended
--------------------------------------------------------------------------
May 31, 2006 May 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(unaudited) (unaudited)

Net income
As reported $5,529 $12,801
Pro forma 5,521 12,777

Basic earnings per share
As reported $0.33 $0.78
Pro forma 0.33 0.77

Diluted earnings per share
As reported $0.33 $0.77
Pro forma 0.33 0.77
--------------------------------------------------------------------------
--------------------------------------------------------------------------


The fair value of stock options granted by the Company's subsidiary, Cogeco Cable Inc., for the nine month period ended May 31, 2007 was $7.39 ($9.44 in 2006) per option. The fair value was estimated at 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 1.27 % 1.27 %
Expected volatility 32 % 39 %
Risk-free interest rate 4.05 % 3.70 %
Expected life in years 4.0 % 4.0 %
--------------------------------------------------------------------------


As at May 31, 2007, the Company had outstanding stock options providing for the subscription of 198,279 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 first nine months, 170,269 stock options (no stock options granted in 2006) were granted by TQS Inc. No compensation expense (none and $154,000 in 2006) was recorded for the three and nine month periods ended May 31, 2007 related to this plan.

The Company and its subsidiary, Cogeco Cable Inc., have also adopted Performance Units Plans for key employees which are described in the Company's annual consolidated financial statements and which have been terminated. The Company has created a new senior executive designated employee incentive unit plan. According to the new plan, senior executives and other key employees periodically receive a given number of units which entitled the participant to receive subordinate voting shares of the Company after three years less one day from the date of grant. During the first nine months, the Company granted 25,556 units. The Company establishes the value of the compensation related to the units granted based on the market value of the Company's subordinate voting shares at the date of grant and a compensation expense is recognized over the vesting period, which is three years. A trust was created for the purpose of purchasing these shares on the stock exchange in order to guard against stock price fluctuation. The Company instructed the trustee to purchase 25,556 subordinate voting shares of the Company on the stock market. These shares were purchased for a cash consideration of $1,054,000 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 statement with the value of the acquired shares presented as treasury shares in reduction of capital stock. A compensation expense of $2,453,000 and $4,717,000 ($521,000 and $326,000 in 2006) was recorded for the three and nine months periods ended May 31, 2007 related to these plans.

9. Foreign Currency Translation Adjustment

The change in the foreign currency translation adjustment included in shareholders' equity is the result of the fluctuation in the exchange rates on translation of net investments in self-sustaining foreign operations and foreign exchange gains or losses related to long-term debt denominated in foreign currency used to hedge net investments. The net change in foreign currency translation adjustment is as follows:



Nine months Twelve months
ended ended
---------------------------------------------------------------------------
May 31, 2007 August 31, 2006
---------------------------------------------------------------------------
(unaudited) (audited)

Effect of exchange rate variation on
translation of net investments in self
sustaining foreign subsidiaries $(2,828) $(12,412)

Effect of exchange rate variation on
translation of long-term debt designated
as hedge of net investments in
self-sustaining subsidiaries (net of income
taxes of $1,703,000 for the twelve month
period ended August 31, 2006) (397) 7,960
---------------------------------------------------------------------------
$(3,225) $(4,452)
---------------------------------------------------------------------------


10. Statements of Cash Flow

a) Changes in non-cash operating items

Three months ended Nine months ended
May 31, May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts
receivable $ 320 $ (691) $ (15,071) $ (9,631)

Income tax
receivable 1,630 741 (2,889) (245)

Prepaid expenses (2,640) (888) (2,016) (1,428)

Broadcasting rights 3,986 2,516 126 (5,278)

Accounts payable
and accrued
liabilities (24,868) (1,555) (92,352) (43,833)

Broadcasting
rights payable (3,097) (4,680) 2,333 5,165
Income tax
liabilities (614) - 637 (299)
Deferred and
prepaid income 483 (1) 3,002 1,906
---------------------------------------------------------------------------
$(24,800) $(4,558) $(106,230) $(53,643)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

b) Other information

Three months ended Nine months ended
May 31, May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Fixed asset
acquisitions
through capital
leases $561 $1,199 $2,793 $2,737

Interest paid 25,642 16,199 70,310 44,187

Income taxes paid
(received) (530) 329 7,966 4,713
---------------------------------------------------------------------------
---------------------------------------------------------------------------



11. Employee Future Benefits

The Company and its subsidiaries offer their employees contributory defined benefit pension plans, a defined contribution pension plan or collective registered retirement savings plans which are described in the Company's annual consolidated financial statements. The total expenses related to these plans are as follows:




Three months ended Nine months ended
May 31, May 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Contributory defined
benefit pension plans $776 $727 $2,402 $2,551

Defined contribution
pension plan and
collective registered
retirement savings plans 667 464 1,906 1,412
---------------------------------------------------------------------------
$1,443 $1,191 $4,308 $3,963
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. Contingencies and guarantees

Second Put and Call Options of TQS Inc.

On February 15, 2002, the shareholders of 3947424 Canada Inc. ("TQS Holdco"), Cogeco Radio-Television Inc. ("CRTI") and Bell Globemedia Inc. ("BGM"), entered into a shareholders agreement following the acquisition of TQS Inc. (the "Shareholders Agreement"). On October 31, 2002, BGM transferred its shares in TQS Holdco to CTV Television Inc. ("CTV"), a subsidiary of BGM. The Shareholders Agreement provides the right for CTV to notify CRTI, during a 180 day period starting from February 15, 2007, of its offer to sell all its shares in TQS Holdco to CRTI for an all-cash consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by CTV to total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.15. CRTI may elect to acquire CTV's shares within 90 days following receipt of the put notice by delivering a put exercise notice to CTV. If CRTI elects not to exercise or fails to exercise its put option, CTV may within 90 days following such election or failure to exercise by CRTI, deliver a call notice to CRTI to purchase all the shares of CRTI in TQS Holdco for an all-cash consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by CRTI to total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.30. Unless the parties decide to modify the Shareholders Agreement, in the event that CTV notifies CRTI of its offer to sell all its shares in TQS Holdco to CRTI, CRTI does not buy them and CTV does not buy CRTI's shares, CRTI and CTV have agreed to put up all TQS Holdco shares for sale to a third party purchaser, subject to requisite governmental authorizations, with a view to obtaining the highest possible price and maximizing shareholder value.

On August 31, 2006, BGM announced that it had closed off on its new ownership structure whereby BCE sold 48% of its voting interest in BGM to The Woodbridge Company Limited and affiliates, the Ontario Teachers' Pension Plan and Torstar Corporation. This transaction constitutes a change of control under the Shareholders Agreement and, accordingly, triggers certain purchase rights under the Agreement in favour of CRTI to purchase all, but not less than all, of the shares owned by CTV.

On November 30, 2006, COGECO Inc. has confirmed that CRTI will not exercise its right to purchase the 40% interest that CTV holds in TQS Holdco, following the change of control of BGM on August 31, 2006 that triggered the right for CRTI to acquire all the shares of CTV in TQS Holdco.

Furthermore, CRTI, CTV and TQS Holdco have amended the Shareholder's Agreement to postpone the beginning of the Second Put Option Period provided in the Agreement from February 15, 2007 to January 1, 2009.

Guarantees of payment to the Municipality of Seixal

During the second quarter, the Company's subsidiary, Cogeco Cable Inc., has guaranteed the payment by Cabovisao of certain taxes for municipal rights of way assessed by the Municipality of Seixal in Portugal for the years 2004 and 2005 totalling EUR 5.7 million (the "Tax Amounts"), which are currently being challenged by Cabovisao. Trustworthy financial guarantees were required under applicable Portuguese law in order for Cabovisao to challenge the Tax Amounts and withhold payment thereof until a final judgment no longer subject to appeal is rendered by the Portuguese courts having jurisdiction in this matter. As a result, the Company's subsidiary may be required to pay, upon written demand by the Municipality of Seixal, the required amounts following final judgment up to a maximum aggregate amount of EUR 5.7 million ($8.3 million), should Cabovisao fail to pay such required amounts.

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