Cogeco Communications

Press release details

COGECO CABLE’S THIRD QUARTER FINANCIAL RESULTS EXCEED EXPECTATIONS; 2007 GUIDANCE REVISED UPWARD

PRESS RELEASE
For immediate release
Cogeco Cable’s third quarter financial results exceed expectations;
2007 guidance revised upward
Montréal, July 6, 2007 Today, Cogeco Cable Inc. (TSX: CCA) announced its financial results for
the third quarter ended May 31, 2007.
Results ahead of expectations
During the third quarter, Cogeco Cable continued to exceed its last financial projections. On a
consolidated basis, revenue was up 56.3% reaching $240.6 million, operating income before
amortization improved by 54.8%, standing at $97.9 million while net income stood at $20.4 million, an
increase of 64.7%
“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 offering tailored to their needs,” said Mr. Louis Audet, President and CEO of Cogeco
Cable.
Improved 2007 projections and preliminary guidelines for 2008
Management has revised upwards its projections for the fiscal year 2007 to better reflect the
Corporation’s improved performance for the first nine months of fiscal 2007. Therefore, consolidated
revenue should reach $940 million, operating income before amortization $368 million and net
income should stand at $68 million. “The outstanding features of our triple-play offer of Television,
Internet and Telephony continues to receive strong consumer endorsement and is the source of
continued growth in Canada and Portugal,” said Mr. Louis Audet.
In addition, the Corporation announced its 2008 preliminary guidelines, setting revenue outlook to
about $1,050 million, operating income before amortization to approximately $425 million and free
cash flow
1
to approximately $60 million”.
1
See the “Non-GAAP financial measures” section for explanations.
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FINANCIAL HIGHLIGHTS
Quarters ended May 31,
(unaudited)
Nine months ended May 31,
(unaudited)
($000s, except percentages and per share data)
2007 2006 % Change
2007 2006 % Change
Revenue $ 240,612 $
153,956 56.3 $
694,566 $ 445,126 56.0
Operating income before amortization
97,874 63,244 54.8 268,327 180,114 49.0
Net income 20,381 12,371 64.7 48,323 31,569 53.1
Cash flow from operations
(1)
76,416 49,696 53.8 200,740 138,025 45.4
Less:
Capital expenditures and increase in
deferred charges
57,817 38,009 52.1 185,044 111,167 66.5
Free cash flow
(1)
18,599 11,687 59.1 15,696 26,858 (41.6)
Per share data
Basic net income $ 0.45 $
0.31 45.2 $
1.14 $ 0.79 44.3
(1)
Cash flow from op erations and free cash flow do not have standard def initions prescribed by Canadian generally accepte d 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
“Uncertainties and main risk factors” of the Corporation’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 qua rter.
This analysis should be read in conjunction with the Corporation’s financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Corporation’s 2006 Annual
Report. Throughout this discussion, all amounts are in Canadian dollars unle s s otherwise indicated.
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MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
Cogeco Cable’s objectives are to improve profitability and create shareholder value. The strategies
for reaching those objectives are constant corporate growth through the diversification and the
improvement of products and services as well as clientele and territories; effective management of
capital; and tight cost control and business processes. The Corporation measures its performance
with regard to these objectives with revenue growth, RGU
1
growth and free cash flow
2
. Below are the
recent achievements in furtherance of Cogeco Cable’s objectives.
Continuous improvement of the service offering and a larger customer base
Canadian operations
Digital Television services:
o On March 26, 2007, signature of an agreement with Twentieth Century Fox Film
Corporation for the Video On Demand (VOD) offering;
o Addition of three High Definition (HD) channels to the HD offering in Ontario, on March
27, 2007;
o On June 5, 2007, addition of six HD channels to the HD offering in Québec.
Digital Telephony service:
o Available to 77% of homes passed in Cogeco Cable’s territories, as at May 31, 2007;
o 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
Québec.
High Speed Internet services (HSI):
o On March 9, 2007, access to Wi-Fi connections for Cogeco Cable Ontario customers
in Burlington, Oakville and Hamilton.
Portuguese operations and its integration
Cabovisão
- Televisão por Cabo, S.A. (Cabovisão) 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, the Corporation has invested approximately
$74 million in its infrastructure including head-ends and upgrade/rebuild.
Effective management of capital
The Corporation redeemed the remaining $35.7 million of its $125 million 8.44% Second
Secured Debentures due July 31, 2007.
Tight control over costs, business processes
The first nine months of fiscal 2007 of the Canadian operating costs, excluding management
fees, increased by 19.1% essentially in line with revenue growth of 18.1% during this period;
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 Corporation had identified certain
material weaknesses in the design of internal controls over financial reporting and there have
been no changes to most of the identified material weaknesses since August 31, 2006,
except for the implementation of the Corporation’s Code of Ethics at Cabovisão in Portugal.
1
See the « Customer statistics” section for detailed explanations.
2
See the “ Non-GAAP financial measures “ section for explanations.
- 4 -
The documentation and remediation of internal controls weaknesses are progressing
normally.
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 the Corporation’s revised
projections of 13% to 14% for this fiscal year.
Revenue growth
During the first nine months, revenue increased by $249.4 million to reach $694.6 million. For fiscal
2007, the appreciation of the Canadian dollar over the euro currency during the last quarter brought
the Corporation to slightly revise its projections from $945 million to the $940 million. Please consult
the ‘’Fiscal 2007 financial guidelines’’ section for further details.
Free cash flow
In the third quarter of fiscal 2007, Cogeco Cable generated free cash flow of $18.6 million, compared
to $11.7 million for the same period last year, as a result of an increase in operating income before
amortization. For the nine month period ended May 31, 2007, the Corporation invested more in
capital expenditures in order to sustain RGU growth and build inventory to sustain growth for the
forthcoming period thus resulting in a free cash flow of $15.7 million compared to $26.9 million for the
same period the year before. Capital expenditures and deferred charges amounted to $185 million
for the nine month period ended May 31, 2007, of which $156.1 million was intended to support
Canadian operations and the remainder was earmarked for the Portuguese operations. The revised
free cash flow for fiscal 2007 should be approximately $20 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 $ 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
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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 Cabovisão
and to servicing additional RGUs, 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 the
Corporation 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.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 34.6% of the Corporation’s equity
shares, representing 84.1% of the Corporation’s voting shares. Under a management agreement, the
Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue for
certain executive, administrative, legal, regulatory, strategic and financial planning, and additional
services. In 1997, management fees were capped at $7 million per year, subject to annual upward
adjustments based on increases in the Consumer Price Index in Canada. Accordingly, for fiscal
2007, management fees have been set at a maximum of $8.6 million, which has been reached in the
second quarter, and therefore, no management fees were paid in this fiscal third quarter. For fiscal
2006, management fees were set a maximum of $8.4 million fully paid during the first nine month
period and from which $2.6 million were paid in the third quarter. Furthermore, Cogeco Cable granted
319,647 stock options to COGECO Inc.’s employees during the first nine months of fiscal 2007,
compared to 31,743 for the same period last year. Of these 319,647 stock options, 262,400 are
conditional on the achievement of certain yearly financial objectives by the Portuguese subsidiary,
Cabovisão, over a period of three years. Details regarding the management agreement and stock
options granted to COGECO Inc.’s employees are provided in the MD&A of the Corporation’s 2006
annual report. There were no other material related party transactions during the three and nine
month periods ended May 31, 2007 and 2006.
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FIXED CHARGES
Quarters ended May 31, Nine months ended May 31,
($000s, except percentages)
2007 2006 % Change 2007
2006 % Change
Amortization $ 47,278 $ 29,048 62.8 $ 135,159 $ 85,981 57.2
Financial expense 21,273 13,634 56.0 66,045 40,992 61.1
For the third quarter and first nine months of fiscal 2007, amortization amounted to $47.3 million and
$135.2 million respectively, compared to $29 million and $86 million for the same periods last year.
The increase in amortization expense for both periods of fiscal 2007 compared to fiscal 2006 is due
to the consolidation of the financial results of the Portuguese operations 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 for the
Canadian operations.
During the third quarter and first nine months of fiscal 2007, financial expense increased by
$7.6 million and $25.1 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, Cabovisão 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 $8.9 million compared to $8.2 million
in fiscal 2006. The increase is mainly due to higher operating income before amortization net of fixed
charges. For the first nine months of fiscal 2007, income taxes amounted to $18.8 million compared
to $21.6 million for the same period last year. The decrease in income taxes for fiscal 2007 is mainly
due to the Canadian operations and is attributable 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.
NET INCOME
Net income for the third quarter amounted to $20.4 million, or $0.45 per share, compared to
$12.4 million, or $0.31 per share, for the same period last year. For the nine month period of fiscal
2007, net income amounted to $48.3 million, or $1.14 per share compared to $31.6 million or $0.79
per share for the same period in fiscal 2006. Net income increases in these periods were attributable
to the growth in operating income before amortization partly outpacing the fixed charges increases.
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CASH FLOW AND LIQUIDITY
Quarters ended May 31,
Nine months ended May 31,
($000s)
2007 2006
2007 2006
Operating Activities
Cash flow from operations $
76,416 $
49,696 $
200,740 $
138,025
Changes in non-cash operating items (23,029)
(4,132)
(101,545)
(49,444)
$
53,387 $
45,564 $
99,195 $
88,581
Investing Activities
(1)
$
(53,548) $
(16,458) $
(179,801) $
(108,499)
Financing Activities
(1)
$
(14,920) $
(29,106) $
30,260 $
19,857
Net change in cash and cash equivalents $
(15,081) $
- $
(50,346) $
(61)
Effect of exchange rate changes on cash and cash
equivalents denominated in foreign currencies
(1,774)
-
1,486
-
Cash and cash equivalents at beginning
39,511 - 71,516
61
Cash and cash equivalents at end
$
22,656 $
-
$
22,656 $
-
(1)
Excludes assets acquired under capital leases.
During the third quarter of fiscal 2007, cash flow from operations reached $76.4 million, 53.8% higher
than for the comparable period last year, primarily due to the increase in operating income before
amortization partly offset by the increase in financial expense. 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 payables and accrued liabilities from non recurring payments made by the Portuguese
subsidiary in accordance with the terms of the acquisition. This decrease was partly offset by
decreases in accounts and income tax receivables.
During the first nine months of fiscal year 2007, cash flow from operations reached $200.7 million, an
increase of 45.4% compared to the same period the year before, primarily due to the growth in
operating income before amortization partly offset by the increase in financial expense. 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 Portuguese subsidiary in accordance with the terms of the acquisition.
On March 9, 2007, the Corporation 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 the Corporation during the third quarter
of fiscal 2007.
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Investing activities, including capital expenditures segmented according to the National Cable
Television Association (NCTA) standard reporting categories, are as follows:
Quarters ended May 31,
Nine months ended May 31,
($000s)
2007
2006 2007
2006
Customer Premise Equipment
(1)
$ 18,985 $
13,824 $ 76,188 $ 43,430
Scalable Infrastructure
10,940
4,488
31,700
15,103
Line Extensions
2,598
2,606
7,798
7,449
Upgrade / Rebuild
13,936
11,882
41,967
28,488
Support Capital
5,358
980
8,133
5,019
Total Capital Expenditures
(2)
$
51,817
$
33,780
$
165,786
$
99,489
Deferred charges and others
5,571
4,199
18,790
11,640
Adjustments related to business
acquisition
(3,279)
-
(1,894) -
Decrease in restricted cash
- (20,322)
(88) -
Total investing activities
$
54,109
$
17,657
$
182,594
$
111,129
(1)
Includes mainly new and replacement drops as well as home terminal devices.
(2)
Includes capital leases, which are excluded from the statements of cash flow.
Capital expenditures increased during the quarter and first nine months of fiscal 2007 compared to
last year mainly as a result of the following factors:
¾ The capital expenditures from the Portuguese operations amounted to $8.6 million and
$29 million for the third quarter and first nine months of fiscal 2007, respectively, essentially to
support RGU growth.
¾ 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 the Corporation during the first nine
months to serve expected RGU growth.
¾ The growth in capital expenditures for scalable infrastructure was mainly attributable to the
support of the Digital Telephony roll-out for the Canadian operations.
¾ 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 Québec networks, respectively,
and to improve network reliability. An increase in the number of households with access to
two-way service was also a factor 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 Corporation generated free cash flow in the amount of
$18.6 million compared to $11.7 million the preceding year. For the first nine months of fiscal 2007,
the Corporation generated free cash flow in the amount of $15.7 million compared to $26.9 million for
the same period the year before. The third quarter free cash flow increase over the same peri od last
year is 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 of fiscal 2007, free cash flow
decrease compared to the same period in 2006 is due to several factors: a higher level of capital
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expenditures (including the acquisition of customer premise equipment amounting to approximately
$8 million to serve expected RGU growth), deferred charges generated by RGU growth and 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 fiscal 2007, the level of Indebtedness decreased by $13.6 million. The
decrease in the level of Indebtedness is due to the generated free cash flow of $18.6 million and the
net change of $16.9 million in cash and cash equivalents partly offset by a decline of $23 million in
non-cash operating items. For the same period last year, Indebtedness decreased by $27.5 million
mainly due to free cash flow of $11.7 million and a net decrease in restricted cash of $20.3 million
partly offset by a decline in non-cash operating items of $4.1 million. In addition, a dividend of $0.06
per share for subordinate and multiple voting shares, totalling $2.7 million, was paid during the third
quarter of fiscal 2007 compared to a dividend of $0.04 per share or $1.6 million for the third quarter of
fiscal 2006.
During the first nine month period of fiscal 2007, the level of Indebtedness decreased by
$153.1 million. The decrease in the level of Indebtedness is due to the completion of a public offering
of 5,000,000 subordinate voting shares for a net proceeds of approximately $184.2 million, the
generated free cash flow of $15.7 million and the net change of $48.9 million in cash and cash
equivalents, partly offset by a decline of $101.5 million in non-cash operating items. For the same
period last year, Indebtedness grew by $24.5 million mainly due to a decline in non-cash operating
items of $49.4 million partly offset by generated free cash flow of $26.9 million. In addition, dividends
totalling $6.7 million were paid during the first nine months of fiscal 2007 compared to $4.8 million for
the same period the year before.
As at May 31, 2007, the working capital deficiency was reduced by an amount of $175 million
compared to August 31, 2006, mainly as a result of the $184.2 million net proceeds of the share
issuance being used to reimburse the Senior Secured debentures Series A and to the repayment of
certain suppliers subsequent to the Cabovisão acquisition. Cogeco Cable maintains a working capital
deficiency due to a low level of accounts receivable since the majority of the Corporation’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 Corporation generally uses cash and
cash equivalents to reduce Indebtedness.
As at May 31, 2007, the Corporation had used $606 million of its $900 million Term Facility.
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’’, “Capital Stock”, ‘’Foreign currency translation adjustment’’ and ‘’Future income tax
liabilities’’.
The $51.6 million rise in fixed assets is mainly related to increased capital expenditures to sustain
RGU growth 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 adjustments 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 Cabovisão. The $4.4 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. The $95.7 million and $48.9 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 Cabovisão. The $1.2 million increase in foreign currency
translation adjustment is the result of the appreciation of the euro currency over the Canadian dollar.
- 10 -
The $9.3 million increase in Future income tax liabilities is mainly due to the utilization of income tax
losses. Indebtedness decreased by $141.2 million as a result of the factors previously discussed in
the “Cash Flow and Liquidity” section. Finally, capital stock increased by $199.2 million mostly due to
the completion of a public offering of 5,000,000 subordinate voting shares for gross proceeds of
$192.5
million.
A description of Cogeco Cable’s share data as of June 30, 2007 is presented in the table below:
Number of
shares/options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
15,691,100
29,621,029
98,346
731,344
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
985,272
286,551
The number of outstanding options has increased significantly during the first nine months of fiscal
2007. With regards to the acquisition of Cabovisão, the Corporation granted 376,000 conditional
stock options with an exercise price of $26.63. These options vest over a period of three years
beginning one year after the day such options are granted and are exercisable over ten years. The
vesting of these options is conditional to the achievement of certain yearly financial objectives by the
Portuguese subsidiary over a period of three years
.
In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the
form of long-term debt, operating and capital leases and guarantees. Cogeco Cable’s obligations,
discussed in the 2006 annual MD&A, 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
approximately $26.4 million of the $900 million Term Facility discussed in the “Cash Flow and
Liquidity” section. Furthermore, during the second quarter of fiscal 2007, the Corporation has
guaranteed the payment by Cabovisão of certain taxes for municipal rights of way assessed by the
Municipality of Seixal in Portugal for the years 2004 and 2005 totalling €5.7 million (the «Tax
Amounts»), which are currently being challenged by Cabovisão. Trustworthy financial guarantees
were required under applicable Portuguese law in order for Cabovisão 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 Corporation 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 €5.7 million, should Cabovisão fail to pay such required
amounts.
DIVIDEND DECLARATION
At its July 6, 2007 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible
dividend of $0.08 per share for subordinate and multiple voting shares, payable on August 3, 2007, to
shareholders of record on July 20, 2007. Continued improvement of the Corporation’s financial
results explains the 33% increase of the dividend from $0.06 to $0.08 per share.
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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 Corporation’s investment in the Portuguese
subsidiary, Cabovisão, is exposed to market risk attributable to fluctuations in foreign currency
exchange rate, primarily changes in the values of the Canadian dollar versus the euro. This risk is
mitigated since the major part of the purchase price for Cabovisão was borrowed directly in euros.
This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and
accordingly the Corporation 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 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 the 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.
CANADIAN OPERATIONS
CUSTOMER STATISTICS
Net additions (losses) % of Penetration
(1) (4)
Quarters ended
May 31,
Nine months 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 HSI 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.
RGU’s generated lower growth in the third quarter of 2007 compared to the same period last year
mainly due to slower growth of 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 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 -
12,378 for the same period last year. The growth in HSI customers during the quarter 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, the Corporation adjusted the service offering and price gap
differential between analogue 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.
OPERATING RESULTS
Quarters ended May 31,
Nine months ended May 31,
($000s, except percentages)
2007 2006
%
Change
2007 2006
%
Change
Revenue $ 182,763 $
153,956 18.7 $
525,620 $ 445,126 18.1
Operating costs 103,778 88,145 17.7 305,733 256,620 19.1
Management fees - COGECO Inc.
- 2,567 - 8,568 8,392 2.1
Operating income before amortization
78,985 63,244 24.9 211,319 180,114 17.3
Operating margin 43.2 %
41.1 %
40.2 % 40.5 %
Revenue
For the third quarter and the first nine months, revenue rose by $28.8 million and $80.5
million to
reach $182.8 million and $525.6 million respectively, an increase of 18.7 % and 18.1% compared to
fiscal 2006. This growth is explained mainly by an increase in the number of HSI, Digital Telephony
and Digital Television service customers as mentioned in the “Customer Statistics” section, together
with rate increases implemented in June and August of 2006 as well as in March and April of 2007.
Monthly rate increases of at most $3 per customer and averaging $2 per basic service customer took
effect on June 15, 2006 in Ontario and on August 1, 2006 in Québec. During fiscal 2007, monthly
rate increases of $3 per Digital Television customer were effective in March 2007 in Ontario and in
April 2007 in Quebec. In Ontario Analogue Value Pak rate was also increased by $1.50 per customer
effective in April 2007. The rate increases implemented in fiscal 2007 represent approximately an
average of $1.25 per basic service customer.
Operating costs
For the third quarter and the first nine months, operating costs, excluding management fees payable
to COGECO Inc., increased by $15.6 million and $49.1 million to reach $103.8 million and
$305.7
million respectively, an increase of 17.7% and 19.1% compared to last year. The increase in
operating costs is mainly attributable to the increased penetration of Digital Telephony service and to
servicing additional RGUs.
- 13 -
Operating income before amortization
For the third quarter and the first nine months of fiscal 2007, operating income before amortization
rose from $63.2 million to $79 million and from $180.1 million to $211.3 million respectively,
representing increases of 24.9% and 17.3%, compared to the same periods last year. The rise in
operating income before amortization is the result of increased revenue outpacing the rise in
operating costs. In addition, Cogeco Cable’s operating margin for the Canadian operations increased
from 41.1% to 43.2% in the third quarter of fiscal 2007 due to new rate increases implemented during
the quarter and to management fees that were fully paid at the end of the second quarter of fiscal
2007. For the first nine months of fiscal 2007, operating margin slightly decreased from 40.5% to
40.2% mainly as a result of the deployment of the Digital Telephony service.
PORTUGUESE OPERATIONS
CUSTOMER STATISTICS
Net additions % of Penetration
(1)
May 31, 2007
Quarter ended
May 31,
2007
Nine months
ended May 31,
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 as anticipated from the Corporation’s
guidelines. Basic service grew by 5,694 customers, HSI by 5,424 customers and Telephony by 5,548
customers.
OPERATING RESULTS
Quarter ended May 31,
Nine months ended May 31,
($000s, except percentages)
2007
2007
Revenue $
57,849 $ 168,946
Operating costs 38,960 111,938
Operating income before amortization 18,889 57,008
Operating margin 32.7 %
33.7 %
Revenue
Revenue for the third quarter and the first nine months of fiscal 2007 amounted to $57.8 million and
$168.9 million respectively. The average exchange rate prevailing during the third quarter of fiscal
2007 used to convert the operating results of the foreign subsidiaries was $1.5202 per euro and
$1.4946 per euro for the first nine month period compared to $1.50 per euro as per management’s
revised projections last April. Monthly rate increases of at most $3 (€2) per HSI and Telephony
- 14 -
customer, averaging $1 per basic customer, took effect on November 1, 2006 and of $1 (€0.65) per
basic service customer was effective in March 2007.
Operating costs
For the third quarter and the first nine months, operating costs amounted to $39 million and to
$111.9 million, which meet management’s guidelines.
Operating income before amortization
For the third quarter and the first nine months of fiscal 2007, operating income before amortization
stood at $18.9 million and $57 million respectively, which meet management’s objectives. The
operating margin for the Portuguese operations stood at 32.7% in the third quarter of fiscal 2007 and
at 33.7% for the first nine month period of fiscal 2007.
FISCAL 2007 AND FISCAL 2008 FINANCIAL GUIDELINES
Fiscal 2007 financial guidelines
Given the performance of the Corporation 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 the Corporation 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.
The Corporation 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 $185 million.
In furtherance of its existing line of business and external growth strategy, the Corporation may
investigate further cable system acquisition opportunities, including cable systems located outside
Canada over time.
- 15 -
Consolidated
($ million, except customer data)
Revised
Projections
July 6, 2007
Fiscal 2007
Revised
Projections
April 11, 2007
Fiscal 2007
Financial Guidelines
Revenue 940 945
Operating income before amortization 368 365
Operating margin About 39% About 39%
Financial expense 85 85
Amortization 185 192
Net income 68 60
Capital expenditures and deferred charges 260 260
Free cash flow 20 15
Customer Addition Guidelines
Basic service 39,000 37,000 to 40,000
HSI service 93,000 85,000 to 90,000
Digital Television service 52,000 60,000 to 65,000
Telephony service 113,000 105,000 to 110,000
RGUs 297,000 287,000 to 305,000
Canadian operations
($ million, except customer data)
Revised
Projections
July 6, 2007
Fiscal 2007
Revised
Projections
April 11, 2007
Fiscal 2007
Financial Guidelines
Revenue 715 713
Operating income before amortization 292 286
Operating margin About 41% About 40%
Capital expenditures and deferred charges 215 215
Customer Addition Guidelines
Basic service 14,000 12,000 to 15,000
HSI service 68,000 60,000 to 65,000
Digital Television service 52,000 60,000 to 65,000
Telephony service 88,000 80,000 to 85,000
RGUs 222,000 212,000 to 230,000
Portuguese operations
(€ and $ million, except customer data)
Revised
Projections
July 6, 2007
Fiscal 2007
(€)
Revised
Projections
July 6, 2007
Fiscal 2007
(Canadian $)
Revised
Projections
April 11, 2007
Fiscal 2007
(€)
Revised
Projections
April 11, 2007
Fiscal 2007
(Canadian $)
Financial Guidelines
Revenue 152 225 155 232
Operating income before amortization 52 76 53 79
Operating margin About 34% About 34% About 34% About 34%
Capital expenditures and deferred charges 30 45 30 45
Customer Addition Guidelines
Basic service 25,000 25,000
HSI service 25,000 25,000
Telephony service 25,000 25,000
RGUs 75,000 75,000
The exchange rate used for July 2007 projections is $1.4250 per euro for the last quarter of fiscal
2007 compared to $1.50 per euro for the April 2007 projections.
- 16 -
Fiscal 2008 preliminary outlook
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 service 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 Analogue 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 should be offset by increased demand for Digital Telephony service. Revenue
from the Portuguese operations should increase by approximately 11% from €152 million to
€168 million mainly from rate increases of approximately €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 service in late Fiscal
2007. However, the Portuguese operations should contribute to approximately 7% in revenue growth
due to the effect of foreign exchange translation. For fiscal 2007, the expected Canadian dollar value
of the euro should be approximately $1.48 while for fiscal 2008, the euro should be converted at a
rate of $1.4250.
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 Corporation 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 the Corporation’s leverage ratios.
Given the anticipated decrease in Indebtedness, financial expense will slightly decline. Net income of
approximately $90 million should be achieved as a result of growth in operating income before
amortization exceeding the increase in fixed charges.
- 17 -
Consolidated
($ million, except customer data)
Preliminary
Projections
Fiscal 2008
Financial Guidelines
Revenue 1,050
Operating income before amortization 425
Operating margin 40% to 41%
Financial expense 80
Amortization 215
Net income 90
Capital expenditures and deferred charges 260
Free cash flow 60
Customer Addition Guidelines
Basic service 30,000
HSI service 75,000
Digital Television service 54,000
Telephony service 100,000
RGUs 259,000
Canadian operations
($ million, except customer data)
Preliminary
Projections
Fiscal 2008
Financial Guidelines
Revenue 810
Operating income before amortization 338
Operating margin About 41%
Capital expenditures and deferred charges 215
Customer Addition Guidelines
Basic service 10,000
HSI service 55,000
Digital Television service 45,000
Telephony service 80,000
RGUs 190,000
Portuguese operations
(€ and $ million, except customer data)
Preliminary
Projections
Fiscal 2008
(€)
Preliminary
Projections
Fiscal 2008
(Canadian $)
Financial Guidelines
Revenue 168 240
Operating income before amortization 61 87
Operating margin About 36% About 36%
Capital expenditures and deferred charges 32 45
Customer Addition Guidelines
Basic service 20,000
HSI service 20,000
Digital Television service 9,000
Telephony service 20,000
RGUs 69,000
The exchange rate used for Fiscal 2008 preliminary projections is $1.4250 per euro.
- 18 -
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the risk factors and uncertainties facing Cogeco Cable as
described in the Corporation’s MD&A of the 2006 annual report.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable’s accounting policies and estimates and
future accounting pronouncements since August 31, 2006. A description of these policies and
estimates can be found in the Corporation’s 2006 annual MD&A.
NON-GAAP FINANCIAL MEASURES
This section describes Non-GAAP financial measures used by Cogeco Cable throughout this MD&A.
It also provides reconciliations between these Non-GAAP measures and the most comparable GAAP
financial measures. These financial measures do not have standard definitions prescribed by
Canadian GAAP and may not be comparable with similar measures presented by other companies.
These measures include “cash flow from operations” and “free cash flow”.
Cash flow from operations
Cash flow from operations is used by Cogeco Cable’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating items.
This allows the Corporation to isolate the cash flow from operating activities from the impact of cash
management decisions. Cash flow from operations is subsequently used in calculating the Non-
GAAP measure, “free cash flow”. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended May 31, Nine months ended May 31,
2007
2006
2007
2006
Cash flow from operating activities $ 53,387 $ 45,564 $ 99,195 $ 88,581
Changes in non-cash operating items
23,029
4,132
101,545 49,444
Cash flow from operations $ 76,416 $ 49,696 $ 200,740 $ 138,025
Free cash flow
Free cash flow is used, by Cogeco Cable’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth. Free cash flow is calculated as
follows:
($ 000) Quarters ended May 31, Nine months ended May 31,
2007 2006 2007 2006
Cash flow from operations
$
76,416 $
49,696 $
200,740 $ 138,025
Acquisition of fixed assets
(51,256)
(32,581)
(162,993) (96,859)
Increase in deferred charges
(6,000)
(4,229)
(19,258) (11,678)
Assets acquired under capital leases – as per
Note 10 b) (561)
(1,199)
(2,793) (2,630)
Free cash flow
$
18,599 $
11,687 $
15,696 $ 26,858
- 19 -
ADDITIONAL INFORMATION
This MD&A was prepared on July 6, 2007. Additional information relating to the Corporation,
including its Annual Information Form, is available on the SEDAR Web site at www.sedar.com.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca), a telecommunications company offering a diverse range of services
to its customers in Canada and in Portugal, is the second largest cable operator in Ontario, Québec
and Portugal, in terms of the number of basic cable service customers served. The Corporation
invests in state-of-the-art broadband network facilities, delivers a wide range of services over these
facilities with great speed and reliability at attractive prices, and strives to provide both superior
customer care and growing profitability to satisfy its customers’ varied electronic communication
needs. Through its two-way broadband cable networks, Cogeco Cable provides its residential and
commercial customers with analogue and digital video and audio services, high speed Internet
access as well as telephony services. The Corporation 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. Cogeco
Cable’s subordinate voting shares are listed on the Toronto Stock Exchange (CCA).
– 30 –
Source: Cogeco Cable Inc.
Pierre Gagné
Vice President, Finance and Chief Financial Officer
Tel.: (514) 874-2600
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: (514) 874-2600
Analyst Conference Call: Monda y, Jul y 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 16, by
dialing:
Canada and US access number: 1- 888 203-1112
International access number: + 1- 719 457-0820
Confirmation code: 8913434
- 20 -
Supplementary Quarterly Financial Information
Quarters ended May 31, February 28, November 30, August 31,
2007
(1)
2006 2007
(1)
2006 2006
(1)
2005 2006
(1)
2005
($000, except percentages
and per share data)
Revenue $ 240,612 $ 153,956 $ 231,952 $
147,757 $ 222,002 $ 143,413 $ 174,875 $ 140,178
Operating income before
amortization
97,874
63,244 86,791 59,568 83,662 57,302 72,864 60,720
Operating margin 40.7 %
41.1 %
37.4 %
40.3 %
37.7 %
40.0 % 41.7 %
43.3 %
Amortization 47,278 29,048 43,572 28,656 44,309 28,277 34,801 29,460
Financial expense 21,273 13,634 23,551 13,776 21,221 13,582 16,374 14,004
Income taxes 8,942 8,191 4,261 6,936 5,597 6,445 (12,298)
6,220
Net income 20,381 12,371 15,407 10,200 12,535 8,998 33,987 11,036
Cash flow from operations 76,416 49,696 62,264 44,940 62,060 43,389 56,714 46,509
Net income per share $ 0.45 $ 0.31 $ 0.37 $
0.26 $ 0.31 $ 0.23 $ 0.85 $ 0.28
(1) Include operating results of Cabovisão since the date of acquisition of control on August 1, 2006.
Cogeco Cable’s operating results are not generally 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. Cogeco Cable offers its services in several university and college towns such as Kingston,
Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski. Furthermore, the third
and fourth quarters’ operating margin is usually higher as lower or no management fees are paid to
COGECO Inc. Under a Management Agreement, Cogeco Cable pays a fee equal to 2% of its total
revenue subject to a maximum amount. For more details, please refer to the ‘’Related Party
Transactions’’ section.
COGECO CABLE INC. - 21 -
Customer Statistics
May 31, August 31,
2007 2006
Homes Passe
d
Ontario (1) 986 49
4
1 002 187
Québec 482 851 474 717
Canada 1 469 34
5
1 476 904
Portugal 848 17
5
826 369
Total 2 317 520 2 303 273
Revenue Generating Unit
s
Ontario 1 236 229 1 104 157
Québec 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 Customer
s
Ontario 600 192 587 289
Québec 251 592 245 888
Canada 851 78
4
833 177
Portugal 289 247 269 694
Total 1 141 031 1 102 871
Discretionnary Service Customer
s
Ontario 472 003 463 783
Québec 201 42
4
192 895
Canada 673 427 656 678
Portugal - -
Total 673 427 656 678
Pay TV Service Customer
s
Ontario 90 765 84 425
Québec 41 229 38 455
Canada 131 99
4
122 880
Portugal 54 042 54 089
Total 186 036 176 969
High Speed Internet Service Customer
s
Ontario 309 85
4
269 328
Québec 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
Québec 129 331 113 808
Canada 371 132 327 364
Portugal - -
Total 371 132 327 364
Telephony Service Customer
s
Ontario 84 382 33 984
Québec 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
- 22 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars, except per share data)
2007
2006
2007
2006
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Revenue
Service
$ 239,862
$ 153,381
$ 691,846
$ 443,312
Equipment
750
575
2,720
1,814
240,612
153,956
694,566
445,126
Operating costs
142,738
88,145
417,671
256,620
Management fees – COGECO Inc.
-
2,567
8,568
8,392
Operating income before amo rtizatio n 97,874
63,244
268,327
180,114
Amortization (note 3)
47,278
29,048
135,159
85,981
Operating income 50,596
34,196
133,168
94,133
Financial expense (note 7)
21,273
13,634
66,045
40,992
Income before income taxes 29,323
20,562
67,123
53,141
Income taxes (note 4)
8,942
8,191
18,800
21,572
Net income $ 20,381
$ 12,371
$ 48,323
$ 31,569
Earnings per share (no t e 5)
Basic
$0.45
$0.31
$ 1.14
$0.79
Diluted
0.45
0.31
1.13
0.79
- 23 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine months ended May 31,
(In thousands of dollars)
2007
2006
(unaudited)
(unaudited)
Balance at beginning $ 117,760
$ 58,604
Net income
48,323
31,569
Subordinate voting shares issue costs, net of related income taxes of $2,560
(5,729)
-
Dividends on multiple voting shares
(2,510)
(1,884)
Dividends on subordinate voting shares
(4,210)
(2,916)
Balance at end $ 153,634
$ 85,373
- 24 -
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
May 31,
2007
August 31,
2006
(unaudited)
(audited)
Assets
Current
Cash and cash equivalents
$ 22,656
$ 71,516
Restricted cash
491
569
Accounts receivable
48,155
43,728
Income tax receivable
1,177
-
Prepaid expenses
6,853
6,265
79,332
122,078
Income tax receivable
1,313
-
Fixed assets
1,073,119
1,021,538
Deferred charges
49,739
47,327
Customer base (note 6)
989,552
989,552
Preliminary goodwill (note 6)
423,152
422,108
$ 2,616,207
$ 2,602,603
Liabilities and Shareholders’ equity
Liabilities
Current
Accounts payable and accrued li abilities
$ 187,413
$ 283,087
Income tax liabilities
797
444
Deferred and prepaid income
28,606
26,652
Current portion of long-term debt (note 7)
2,354
126,851
219,170
437,034
Long-term debt (note 7)
1,173,407
1,190,126
Deferred and prepaid income
11,593
10,525
Pension plan liabilities and accrued employees benefits
3,052
2,091
Future income tax liabilities
226,899
217,636
1,634,121
1,857,412
Shareholders’ equity
Capital stock (note 8)
829,690
630,458
Contributed surplus – stock-based compensation
1,987
1,425
Retained earnings
153,634
117,760
Foreign currency translation adjustment (note 9)
(3,225)
(4,452)
982,086
745,191
$ 2,616,207
$ 2,602,603
- 25 -
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended May 31, Nine months ended May 31,
(In thousands of dollars)
2007
2006
2007
2006
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income
$ 20,381
$ 12,371
$ 48,323
$ 31,569
Items not affecting cash and cash equivalents
Amortization (note 3)
47,278
29,048
135,159
85,981
Amortization of deferred financing costs
532
243
1,713
724
Future income taxes (note 4)
7,861
7,455
13,535
18,598
Stock-based compensation
803
263
2,036
551
Other
(439)
316
(26)
602
76,416
49,696
200,740
138,025
Changes in non-cash oper ating items (note 10a))
(23,029)
(4,132)
(101,545)
(49,444)
53,387
45,564
99,195
88,581
Cash flow from investing activities
Acquisition of fixed assets (not e 10b))
(51,256)
(32,581)
(162,993)
(96,859)
Increase in deferred charges
(6,000)
(4,229)
(19,258)
(11,678)
Decrease in restricted cash
-
20,322
88
-
Adjustments related to business acquisition
3,279
-
1,894
-
Other
429
30
468
38
(53,548)
(16,458)
(179,801)
(108,499)
Cash flow from financing activities
Increase (decrease) in bank i ndebtedness
-
(15,081)
-
7,693
Increase in long-term debt
22,861
-
22,861
18,000
Repayment of long-term debt
(36,475)
(12,425)
(175,947)
(1,202)
Issue of subordinate voting shares
1,434
-
198,355
166
Subordinate voting shares issue costs
(23)
-
(8,289)
-
Dividends on multiple voting shares
(941)
(628)
(2,510)
(1,884)
Dividends on subordinate voting shares
(1,776)
(972)
(4,210)
(2,916)
(14,920)
(29,106)
30,260
19,857
Net change in cash and cas h equivalents (15,081)
-
(50,346)
(61)
Effect of exchange rate changes on cash and cash
equivalents denominated i n foreign currencies
(1,774)
-
1,486
-
Cash and cash equivalents at beginning
39,511
-
71,516
61
Cash and cash equivalents at end $ 22,656
$-
$ 22,656
$-
See supplemental cash flow information in note 10.
- 26 -
COGECO CABLE 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 Cable 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 the nine month periods ended May 31, 2007 an d 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 Cable 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 Corporation’s activities are comprised of cable, high-speed Internet access and telephony services. The
Corporation considers its cable distribution, high-speed Internet access and telephony activities as a single operating
segment. The Corporation’s activities are carried out in Canada an d in Europe.
The Europe segment includes operating results since the date of the acquisition of control on August 1, 20 06.
The principal financi al information per business segment is pre sente d in the tables below:
Canada Europe Consolidated
Three months ended May 31,
(unaudited)
2007 2006 2007 2006 2007 2006
Revenue $ 182,763 $ 153,956 $ 57,849 $- $ 240,612 $ 153,956
Operating costs 103,778 88,145 38,960 - 142,738 88,145
Management fees -2,567 - - -2,567
Operating income before amortization 78,985 63,244 18,889 - 97,874 63,244
Amortization 33,624 29,048 13,654 - 47,278 29,048
Operating income 45,361 34,196 5,235 - 50,596 34,196
Financial expense 19,191 13,634 2,082 - 21,273 13,634
Income taxes 8,629 8,191 313 - 8,942 8,191
Net income 17,541 12,371 2,840 - 20,381 12,371
Net assets employed
(1) (2)
$ 1,752,858 $ 1,649,631 $ 613,081 $ 561,192 $ 2,365,939 $ 2,210,823
Total assets
(2)
1,889,514 1,842,312 726,693 760,291 2,616,207 2,602,603
Fixed assets
(2)
796,282 741,024 276,837 280,514 1,073,119 1,021,538
Preliminary goodwill
(2)
- - 423,152 422,108 423,152 422,108
Acquisition of fixed assets 43,237 33,780 8,580 - 51,817 33,780
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at May 31, 2007 and August 31, 2006.
- 27 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
2. Segmented Information (continued)
Canada Europe Consolidated
Nine months ended May 31,
(unaudited)
2007 2006 2007 2006 2007 2006
Revenue $ 525,620 $ 445,126 $ 168,946 $- $ 694,566 $ 445,126
Operating costs 305,733 256,620 111,938 - 417,671 256,620
Management fees 8,568 8,392 - - 8,568 8,392
Operating income before amortization 211,319 180,114 57,008 - 268,327 180,114
Amortization 96,391 85,981 38,768 - 135,159 85,981
Operating income 114,928 94,133 18,240 - 133,168 94,133
Financial expense 64,256 40,992 1,789 - 66,045 40,992
Income taxes 16,086 21,572 2,714 - 18,800 21,572
Net income 34,586 31,569 13,737 - 48,323 31,569
Net assets employed
(1) (2)
$ 1,752,858 $ 1,649,631 $ 613,081 $ 561,192 $ 2,365,939 $ 2,210,823
Total assets
(2)
1,889,514 1,842,312 726,693 760,291 2,616,207 2,602,603
Fixed assets
(2)
796,282 741,024 276,837 280,514 1,073,119 1,021,538
Preliminary goodwill
(2)
- - 423,152 422,108 423,152 422,108
Acquisition of fixed assets 136,815 99,489 28,971 - 165,786 99,489
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, and deferred and prepaid income.
(2)
As at May 31, 2007 and August 31, 2006.
3. Amortization
Three months ended May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 42,268 $ 24,006 $ 120,026 $ 70,434
Deferred charges 5,010 5,042 15,133 15,547
$ 47,278 $ 29,048 $ 135,159 $ 85,981
- 28 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
4. Income Taxes
Three months ended May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 1,081 $ 736 $ 5,265 $ 2,974
Future 7,861 7,455 13,535 18,598
$ 8,942 $ 8,191 $ 18,800 $ 21,572
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 $ 29,323 $ 20,562 $ 67,123 $ 53,141
Combined income tax rate 34.96 % 35.09 % 34.96 % 35.09 %
Income taxes at combined income tax rate $ 10,251 $ 7,215 $ 23,466 $ 18,647
Loss or income subject to lower or higher tax rates (707) 45 (473) 137
Increase in income taxes as a result of increase in
substantially enacted tax rates
-
-
-
162
Large corporation tax - 795 - 2,415
Effect of foreign income tax rate differences (788) - (3,037) -
Benefit related to prior years’ minimum income tax paid - - (1,475) -
Other 186 136 319 211
Income taxes at effective income tax rate $ 8,942 $ 8,191 $ 18,800 $ 21,572
- 29 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
5. Earnings per Share
The following table provides a recon ciliation between basic and dilu ted earnings per share:
Three months ended May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $ 20,381 $ 12,371 $ 48,323 $ 31,569
Weighted average number of multiple voting and
subordinate voting shares outstanding
45,254,307
39,992,734
42,290,852
39,989,053
Effect of dilutive stock options
(1)
405,175 204,512 323,832 187,348
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
45,659,482
40,197,246
42,614,684
40,176,401
Earnings per share
Basic $ 0.45 $ 0.31 $ 1.14 $0.79
Diluted 0.45 0.31 1.13 0.79
(1)
For the three and nine month periods ended May 31, 2007, 713 and 47,845 stock options (143,248 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.
- 30 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
6. Customer Base and Preliminary Goodwill
Customer
base
Preliminary
goodwill
(unaudited) (unaudited)
Balance as at August 31, 2006 $ 989,552 $ 422,108
Adjustment to the purchase price
- (6,205)
Foreign currency translation adjustment
- 7,249
Balance as at May 31, 2007 $ 989,552 $ 423,152
On March 9, 2007, the Corporation 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 Corporation has recorded an account receivable of an amount of €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 Cabovisão–Televisão
por Cabo, S.A. (“Cabovisão”).
In addition, as mentioned in the Corporation’s 2006 annual consolidated financial statements, management 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 Cabovisão 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.
- 31 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
7. Long-Term Debt
Maturity Interest rate
May 31,
2007
August 31,
2006
(unaudited) (audited)
Parent company
Term Facility
Term loan 2011 5.33%
(1)
$ 150,000 $ 150,000
Term loan – €17,358,700 2011 5.00
(1)
24,983 24,573
Revolving loan
Euro currency – €299,500,000 (€317,000,000 as at
August 31, 2006)
2011
5.00
(1)
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
(2)
160,440 165,795
Series B 2011 7.73
175,000 175,000
Second Secured Debentures Series A 2007
(3)
- 125,000
Deferred credit
(4)
2008
78,210 72,855
Subsidiaries
Obligations under capital leases 2010 6.42 – 8.18
6,088 5,009
1,175,761 1,316,977
Less: current portion
2,354 126,851
$ 1,173,407 $ 1,190,126
(1)
Average interest rate on debt as at May 31, 2007, including stamping fees.
(2)
Cross-currency swap agreements have resulted in an effective interest rate of 7.254% on the Canadian dollar equivalent of the U.S.
denominated debt.
(3)
On Februar y 2, 2007, the Corpora tion gave a notice of r edemption to purchase o n 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 Corporation also made an offer to purchase for
cancellation on February 12, 2007, all of the validly issued and hel d 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.
(4)
The deferred credit represents the amount which would have been payable as at May 31, 2007 and August 31, 2006 under cross-currenc y
swaps entered into by the Corporation to hedge Senior Secured Notes Series A denominated in US dollars.
Interest on long-term debt for the three and nine month periods ended May 31, 2007 amounted to $17,944,000 and
$60,523,000 ($13,264,000 and $39,565,000 in 2006).
- 32 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock
Authorized, an unlimited number
Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the
holder at any time at a price of $1 per share, carrying a cumulative preferential cash dividend at a rate of 11% of the
redemption price per year.
Class B Preference shares, without voting rights, could be issued in series.
Multiple voting shares, 10 votes per share.
Subordinate voting shares, 1 vote per share.
May 31,
2007
August 31,
2006
(unaudited) (audited)
Issued
15,691,100 multiple voting shares $ 98,346 $ 98,346
29,621,029 subordinate voting shares (24,308,112 as at August 31, 2006) 731,344 532,112
$ 829,690 $ 630,458
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
shares
Amount
Number of
shares
Amount
Balance at beginning 24,308,112 $ 532,112 24,293,486 $ 531,874
Shares issued for cash consideration 5,000,000 192,500 - -
Shares issued for cash under the Employee Stock Purchase Plan
and the Stock Option Plan
312,917
5,855
14,626
228
Compensation expense previously recorded in contributed
surplus for options exercised
-
877
-
10
Balance at end 29,621,029 $ 731,344 24,308,112 $ 532,112
On February 2, 2007, the Corporation issued 5,000,000 subordinate voting shares for a total consideration of
$192,500,000. Proceeds of this offering, net of issue costs, amounted to $184,211,000.
- 33 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock (continued)
Stock-based plans
The Corporation established for the benefit of its employees and those of its subsidiaries, an Employee Stock
Purchase Plan and a Stock Option Plan for certain executives which are described in the Corporation’s annual
consolidated financial statements. During the first nine months, the Corporation 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 Corporation also granted 376,000 conditional
stock options with an exercise price of $26.63 of which 262,400 stock options were granted to COGECO Inc.’s
employees. These conditional options vest over a period of three years beginning one year after the day such options
are granted and are exercisable over ten years. The vesting of these options is conditional to the achievement of
certain yearly financial objectives by the Portuguese subsidiary, Cabovisão-Televisão por Cabo, S.A., over a period of
three years. The Corporation 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
Corporation’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 $ 12,371 $ 31,569
Pro forma 12,350 31,508
Basic earnings per share
As reported $ 0.31 $ 0.79
Pro forma 0.31 0.79
Diluted earnings per share
As reported $ 0.31 $ 0.79
Pro forma 0.31 0.78
The fair value of stock options granted for the nine month period ended May 31, 2007 was $7.39 ($9.44 in 2006) per
option. The fair value of each option granted was estimated at the grant date for purposes of determining stock-based
compensation expense u s ing 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
- 34 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock (continued)
As at May 31, 2007, the Corporation had outstanding stock options providing for the subscription of 985,272
subordinate voting shares. These stock options, which include 376,000 conditional stock options, can be exercised at
various prices ranging from $7.05 to $4 4.54 and at various dates up to April 11, 2017.
The Corporation has also adopted a Performance Unit Plan for key employees which is described in the Corporation’s
annual consolidated financial statements and which has been terminated. A compensation expense of $265,000 and
$597,000 ($117,000 and $140,000 as a reduction of expense in 2006) was recorded for the three and nine months
periods ended May 31, 2007 related to this pla n.
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 ended Twelve months 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 May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ 4,665 $ 146 $ (4,374) $ (2,154)
Income tax receivable 1,679 329 (2,586) (178)
Prepaid expenses (993) (695) (586) (1,264)
Accounts payable and accrued liabilities (28,876) (3,924) (97,382) (47,107)
Income tax liabilities 2 - 349 (678)
Deferred and prepaid income 494 12 3,034 1,937
$ (23,029) $ (4,132) $ (101,545) $ (49,444)
- 35 -
COGECO CABLE INC.
Notes to Consolidated Financial Statements
May 31, 2007
(amounts in tables are in thousands of dollars, except per share data)
10. Statements of Cash Flow (continued)
b) Other information
Three months ended May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed asset acquisitions through capital leases $ 561 $ 1,199 $ 2,793 $ 2,630
Interest paid 25,098 15,822 69,082 43,087
Income taxes paid (received) (681) 407 6,983 3,830
11. Employee Future Benefits
The Corporation and its subsidiaries offer their employees contributory defined benefit pension plans, a defined
contribution pension plan or a collective registered retirement savings plan which are described in the Corporation’s
annual consolidated financi al statements. The total expenses related to these pla ns are as follows:
Three months ended May 31, Nine months ended May 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 230 $ 222 $ 690 $ 618
Defined contribution pension plan and collective
registered retirement savings plan
678 356 1,703 1,115
$ 908 $ 578 $ 2,393 $ 1,733
12. Guarantees
During the second quarter, the Corporation has guaranteed the payment by Cabovisão of certain taxes for municipal
rights of way assessed by the Municipality of Seixal in Portugal for the years 2004 and 2005 totalling €5.7 million (the
“Tax Amounts”), which are currently being challenged by Cabovisão. Trustworthy financial guarantees were required
under applicable Portuguese law in order for Cabovisão 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 Corporation 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 €5.7 million ($8.3 million), should
Cabovisão fail to pay such required amounts.