Press release
For immediate release
Steadily increasing results at COGECO
Montréal, April 11, 2007 – Today, COGECO Inc. (TSX: CGO) announced its financial results for
the second quarter ended February 28, 2007.
In the second quarter of fiscal year 2007, COGECO’s results showed substantial growth, thanks to
the cable sector. On a consolidated basis, revenue increased by 47.2% standing at $261.1 million,
operating income before amortization increased by 44.8%, reaching $83.7 million, and net income,
excluding the gain on dilution attributable to the issuance of shares by the cable subsidiary,
increased by 32.7% compared to the same period last year. The cable subsidiary continued to add
revenue generating units (RGUs) and improved its overall financial results. The media sector is still
committed to gain market share and its results for the first six months were essentially stable.
Cable sector
Cogeco Cable has continued to exceed its last financial projections during the second quarter.
RGUs grew by 84,399, compared to 55,109 for the same period last year. For the Canadian
operations, RGUs increased by 64,133 compared to 55,109 for the same period last year, an
increase of 16%. For the Portuguese operations, with net additions of 20,266 RGUs, the total now
stands at 670,571.
Cogeco Cable’s revenue has increased by 57%, standing at $232 million and operating income
before amortization by 45.7%, reaching $86.8 million.
“We are exceeding our projections of last January. All our operating units are well positioned to
provide a premium customer service and a very competitive offering. We are very pleased with the
progression we are experiencing, thanks to our Portuguese subsidiary and the improvement in the
penetration of all of our services including our Digital Telephony in Canada,” said Mr. Louis Audet,
President and CEO of COGECO.
Media Sector
“RYTHME FM revenue echoes our position in the markets. TQS continues to invest in
programming to recapture market share and to counteract the difficult market conditions that
continue to prevail for generalist televisions. Furthermore the sector was impacted by the warm
weather of the first half of the second quarter which had an incidence on the advertising
enthusiasm in these markets,” added Mr. Audet.
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Improved 2007 financial projections
The second quarter results lead the Company to adjust upwardly its financial projections for fiscal
2007. Consolidated revenue should reach between $1,075 million and $1,080 million, operating
income before amortization should increase to $365 million and net income should increase to
approximately $50 million.
Cogeco Cable has recently implemented rate increases in Canada and in Portugal. In addition,
debt reduction from the issuance in early February of subordinate voting shares will diminish
financial expense. The combination of these factors will improve Cogeco Cable revenue, operating
income before amortization and net income. For fiscal 2007, Cogeco Cable’s consolidated revenue
should reach $945 million, operating income before amortization should reach approximately
$365 million, while the operating margin should increase to about 39%. For the media sector,
management maintains its initial 2007 financial projections.
”COGECO will exceed its original goals for fiscal 2007. Our cable subsidiary revised its guidelines
to reflect its ability to deliver good results and our media sector is maintaining its pace to fulfill its
objectives,” concluded Mr. Audet.
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FINANCIAL HIGHLIGHTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages and per share data)
(unaudited)
(unaudited)
2007 2006
%
Change
2007 2006
%
Change
Revenue $
261,120
$
177,359 47.2 $
524,412 $ 357,837 46.6
Operating income before amortization
83,669
57,765 44.8 172,036 118,358
45.4
Net income 34,546
2,679 -
41,297
7,272 -
Cash flow from operations
(1)
59,266
41,644 42.3 125,301 88,486 41.6
Less:
Capital expenditures and increase in deferred
charges
53,386
40,316 32.4 128,001 74,359
72.1
Free cash flow
(1)
5,880
1,328 - (2,700) 14,127 -
Per share data
Basic net income 2.08
0.16 - 2.49 0.44 -
(1)
Cash flow from operations and free cash flow do not have standard definitions prescribed by Canadian generally accepted accounting
principles (GAAP) and should be treated accordingly. For more details, please consult the Non-GAAP financial measures section.
FORWARD-LOOKING STATEMENT
Certain statements in this press release may constitute forward-looking information within the meaning of
securities laws. Forward-looking information may relate to our future outlook and anticipated events, our
business, our operations, our financial performance, our financial condition or our results and, in some
cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate";
"believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar
expressions concerning matters that are not historical facts. In particular, statements regarding our future
operating results and economic performance and our objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions including expected growth,
results of operations, performance and business prospects and opportunities, which we believe are
reasonable as of the current date. While we consider these assumptions to be reasonable based on
information currently available to us, they may prove to be incorrect. Forward-looking information is also
subject to certain factors, including risks and uncertainties (described in the section “Uncertainties and main
risk factors” of the Company’s 2006 annual MD&A) that could cause actual results to differ materially from
what we currently expect. These factors include technological changes, changes in market and competition,
governmental or regulatory developments, general economic conditions, the development of new products
and services, the enhancement of existing products and services, and the introduction of competing
products having technological or other advantages, many of which are beyond our control. Therefore, future
events and results may vary significantly from what we currently foresee. You should not place undue
importance on forward-looking information and should not rely upon this information as of any other date.
While we may elect to, we are under no obligation (and expressly disclaim any such obligation) and do not
undertake to update or alter this information before next quarter.
This analysis should be read in conjunction with the Company’s financial statements, and the notes thereto,
prepared in accordance with Canadian GAAP and the MD&A included in the Company’s 2006 Annual
Report. Throughout this discussio n, all amounts are in Canadian dollars unless otherwise indicated.
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MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO’s objectives are to maximize shareholder value by increasing profitability and by
ensuring continued growth. The strategies for reaching those objectives are, for the cable sector,
constant corporate growth through the diversification and improvement of products and services as
well as clientele and territories, effective management of capital and tight cost control. The media
sector focuses on continuous improvement of its programming to increase its market share, and
therefore, its profitability. The Company measures its performance with regard to these objectives
with operating income before amortization growth, free cash flow
1
and RGU
2
growth for the cable
sector. Below are the first semester achievements of the cable and media sectors in furtherance of
COGECO’s objectives.
Tight control over costs, business processes
• During the second quarter and the first six months of fiscal 2007, the Company’s operating
costs increased by 48.4% and 47.1 %, respectively, 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, the employees of the media sector have received the corporate
Code of Ethics. Other than this remediation, there have been no changes to the identified
material weaknesses since August 31, 2006. The documentation and remediation of
internal controls are progressing.
Cable sector
Sustained corporate growth
Canadian operations
• Digital Television services:
o Addition to Cogeco On Demand of “Académie de hockey McDonald” in Québec;
o Signature of an agreement with Twentieth Century Fox Film Corporation for the
VOD offering;
o Addition of three HD channels to the HD offering in Ontario
• Digital Telephony service:
o Available to 74% of homes passed in Cogeco Cable’s territories, as at February 28,
2007;
o Since January 11, 2007, deployment of the Digital Telephony service in
Leamington, Kingsville and Brockville in Ontario, as well as Asbestos in Québec.
• High Speed Internet service:
o Access to F-Secure security service to Cogeco Cable business customers, free of
charge;
o Access to Wi-Fi connection 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;
1
See “Non-GAAP financial” section for explanations.
2
See “Customer statistics” section of the cable sector section for detailed explanations.
- 5 -
• The integration process is essentially completed.
Continuous improvement of networks and equipment
• During the first six months of fiscal 2007, Cogeco Cable has invested in its infrastructure
including head-ends and upgrade/rebuild for an amount approximating $49 million.
Effective management of capital
• Cogeco Cable, the cable subsidiary, issued 5 million subordinate voting shares at a price of
$38.50 for total net proceeds of $184.2 million which was used to reduce long-term debt;
• Cogeco Cable reimbursed its $125 million 8.44% Second Secured Debentures due July 31,
2007, as well as a portion of its $900 million Term Facility including its bank indebtedness
from the proceeds of the subordinate voting shares issue.
Media sector
• During the second quarter, TQS has continued to invest in its programming in order to
recapture market share thus resulting in an improvement of the year to date audience
market share compared to last year.
• RYTHME FM is committed to keeping its leadership position in the Montreal market. Across
Québec, other RYTHME FM stations and station 93
3
in Québec City are consolidating their
position.
RGU growth
During the first six months of fiscal 2007, the consolidated number of RGUs increased by 9% to
reach almost 2.4 million units, en route towards the achievement of Cogeco Cable’s January 2007
revised projections of 13% to 14% for the fiscal year 2007.
Revenue and Operating income before amortization growth
During the second quarter and first six months, consolidated revenue increased respectively by
47.2% to reach $261.1 million and by 46.6% to reach $524.4 million. For the same periods,
operating income before amortization grew by $25.9 million, or 44.8%, to reach $83.7 million and
by $53.7 million, or 45.4%, to reach $172 million, mainly due to stronger RGU growth and to the
consolidation of the financial results of Cabovisão acquired on August 1, 2006 in the cable sector.
Considering the improved performance of the cable sector during the first six months of fiscal
2007, management has revised upwards its projections for the fiscal year 2007 to reflect rate
increases to occur in Canada and in Portugal and the strengthening of the euro currency over the
Canadian dollar. Subsequent to these adjustments, revenue is now expected to reach between
$1,075 million and $1,080 million while operating income before amortization should increase to
$365 million. Please consult the ‘’Fiscal 2007 financial guidelines’’ section for further details.
Free cash flow
In the second quarter of fiscal 2007, COGECO generated free cash flow of $5.9 million, compared
to $1.3 million for the same period last year. For the six month period ended February 28, 2007,
the Company generated a negative free cash flow of $2.7 million compared to a positive free cash
flow of $14.1 million for the same period the year before, mainly due to higher capital expenditures
necessary to sustain RGU growth in the cable sector. The increase in capital expenditures for the
cable sector in the semester also includes the acquisition of customer premise equipment
amounting to approximately $10 million to serve expected RGU growth in the coming months.
- 6 -
Capital expenditures and deferred charges amounted to $53.4 million and $128 million for the
second quarter and first six months of 2007. Considering the strong demand for HSI and Digital
Telephony services in Canada in the first six months of fiscal 2007 in the cable sector, Cogeco
Cable has revised the level of capital expenditures required in its infrastructure to increase its
capacity. Fiscal 2007 capital expenditures and deferred charges are now expected to reach
$267 million. The revised free cash flow for fiscal 2007 should be between $10 million to
$15 million. Please consult the ‘’Fiscal 2007 financial guidelines’’ section for further details.
OPERATING RESULTS – CONSOLIDATED OVERVIEW
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2007
2006
%
Change
2007 2006
%
Change
Revenue $ 261,120 $
177,359 47.2 $
524,412 $ 357,837 46.6
Operating costs 177,451 119,594 48.4 352,376 239,479 47.1
Operating income before amortization
83,669 57,765 44.8 172,036 118,358 45.4
Operating margin 32.0 %
32.6 %
32.8 % 33.1 %
Revenue
Revenue, for the second quarter and the first six months of 2007 rose by $83.8 million, or 47.2%,
to reach $261.1 million and by $166.6 million, or 46.6%, to reach $524.4 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 Cabovisão, went up by
$84.2 million, or 57%, and $162.8 million, or 55.9%, respectively, in the second quarter and the
first six months of fiscal 2007. Media revenue decreased by $0.4 million or 1.5% in the second
quarter essentially due to a decrease in television advertising revenue, and increased by
$3.8 million, or 5.7%, in the first six months due to higher television and radio advertising revenue.
Operating income before amortization
Operating income before amortization grew by $25.9 million, or 44.8%, to reach $83.7 million in
the second quarter of fiscal 2007 and by $53.7 million, or 45.4%, to reach $172 million in the first
six months of fiscal 2007 compared to the corresponding periods of last year. The cable sector
contributed to an increase of $27.2 million and $53.6 million during the second quarter and the first
six months. For the same periods, the media sector had a negative impact of $0.4 million in the
quarter and a positive impact of $0.2 million in the first six months.
FIXED CHARGES
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2007
2006 %
Change
2007 2006
%
Change
Amortization $ 45,112 $ 30,217 49.3 $ 90,951 $ 60,100 51.3
Financial expense
24,181
14,231 69.9
45,940
28,192 63.0
Amortization amounted to $45.1 million and $91 million during the second quarter and the first six
months of fiscal 2007 compared to $30.2 million and $60.1 million for the same periods the year
- 7 -
before. Amortization increased mainly as a result of the consolidation of the financial results of
Cabovisão and to the increased capital expenditures arising from the 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 second quarter and first six months of fiscal 2007, financial expense increased by
$10 million and $17.7 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, in the cable sector. In
addition, in the second quarter, there was a one-time charge of $2.6 million related to the early
repayment of the Second Secured Debentures Series A of Cogeco Cable. The cable subsidiary
has revised its guidelines to reflect the impact of the share issuance on the financial expense.
Please consult the ‘’Fiscal 2007 financial guidelines’’ section for further details.
INCOME TAXES
For the second quarter of fiscal 2007, income taxes amounted to $2.6 million compared to
$5.7 million in fiscal 2006. For the first six months of fiscal 2007, income taxes amounted to
$9 million compared to $12.3 million for the same period last year. The income tax decreases were
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 of benefits related to prior years’ minimum income tax
paid.
NON-CONTROLLING INTEREST
The non-controlling interest represents an interest of approximately 65% in Cogeco Cable’s results
and a 40% interest in TQS Inc. The non-controlling interest in Cogeco Cable’s results increased
from approximately 61% to approximately 65% during the second quarter following the completion
of a public offering of 5,000,000 subordinate voting shares on February 2, 2007 made by the cable
subsidiary, Cogeco Cable. During the second quarter and first six months of fiscal 2007, the non-
controlling interest amounted to $8.2 million and $15.8 million, mainly due to the cable sector
results. The non-controlling interest for the comparable periods of last year amounted to
$4.8 million and $10.3 million respectively.
NET INCOME
Net income for the second quarter of fiscal 2007 amounted to $34.5 million, or $2.08 per share,
compared to $2.7 million, or $0.16 per share, for the same period last year. For the first six months
of fiscal 2007, net income stood at $41.3 million, or $2.49 per share, compared to $7.3 million, or
$0.44 per share for the comparable period last year. Excluding a gain on dilution of $31 million
attributable to the issuance of shares by Cogeco Cable, net income for the second quarter would
have amounted to $3.6 million or $0.21 per share and to $10.3 million or $0.62 per share for the
first six months of 2007. The net income increase, excluding the gain on dilution, is the result of the
rise in operating income before amortization outpacing fixed charges growth.
- 8 -
CASH FLOW AND LIQUIDITY
Quarters ended February 28,
Six months ended February 28,
($000s)
2007
2006
2007
2006
Operating Activities
Cash flow from operations $
59,266
$
41,644
$
125,301
$
88,486
Changes in non-cash operating items
4,328
2,828
(81,430) (49,085)
$
63,594
$
44,472
$
43,871
$
39,401
Investing Activities
(1)
$
(52,725)
$
(59,092)
$
(127,022)
$
(93,135)
Financing Activities
(1)
$
10,157
$
(6,063)
$
49,953
$
53,734
Net change in cash and cash equivalents $
21,026
$
(20,683)
$
(33,198) $ -
Effect of exchange rate changes on cash and cash
equivalents denominated in currencies
1,644
-
3,260
-
Cash and cash equivalents at beginning
18,908
20,683
71,516
-
Cash and cash equivalents at end $
41,578
$
-
$
41,578
$
-
(1) Excludes assets acquired under capital leases.
During the second quarter of 2007, cash flow from operations reached $59.3 million, 42.3% 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 inflows than for the same period last year, mainly as a result of
increases in accounts payable and accrued liabilities and decreases in prepaid expenses, partly
offset by variations in income tax receivables and payables combined with an increase in
broadcasting rights.
During the first six months of fiscal 2007, cash flow from operations reached $125.3 million, an
increase of 41.6% 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 Portuguese subsidiary in accordance with the terms of the
acquisition, and by increases in accounts and income tax receivables, partly offset by a lower
increase in broadcast rights.
On March 9, 2007, Cogeco Cable and Cable Satisfaction International Inc. have come to an
agreement for a final adjustment of the working capital which was still outstanding since the date of
acquisition, and consequently, the preliminary goodwill has been reduced by $3.3 million. The
remaining adjustment to the purchase price is due to the re-evaluation of costs related to the
acquisition of Cabovisão.
In the second quarter of fiscal 2007, investing activities stood at $52.7 million mainly due to capital
expenditures of $45.3 million and an increase in deferred charges of $6 million. For the first six
months, investing activities stood at $127 million due capital expenditures of $112.5 million and an
increase in deferred charges of $13.3 million.
During the second quarter and first six months of fiscal 2007, the increases related to capital
expenditures compared to the same periods last year are mainly due to the integration of
Cabovisão and the following factors in the cable sector:
- 9 -
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 digital terminals rented
to customers and from a greater ratio of digital terminals per digital home. Furthermore,
customer premise equipment representing approximately $10 million was acquired by
Cogeco Cable during the first semester to serve expected RGU growth in the coming
months.
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, 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 91% as at February 28, 2006 to 93% as at February 28, 2007.
¾ The Portuguese operations capital expenditures amounted to $10.8 million and
$20.4 million respectively for the second quarter and the first six months of fiscal 2007,
essentially to support RGU growth.
The second quarter and first six months of fiscal 2007 increases in deferred charges are explained
by higher reconnect costs attributable to the significant level of RGU growth.
In the second quarter of fiscal 2007, the Company generated free cash flow in the amount of
$5.9 million compared to $1.3 million the preceding year. For the first six months of fiscal 2007, the
Company incurred a deficit in free cash flow in the amount of $2.7 million compared to a surplus of
$14.1 million for the same period the year before. The second 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 six months free cash flow decrease compared to the same period in
2006 is attributable to the cable sector and mainly due to a higher level of capital expenditures
(including the acquisition of customer premise equipment amounting to approximately $10 million
to serve RGU growth in the coming months), deferred charges generated by RGU growth, to
support the Digital Telephony service roll-out and by the increase in financial expense, partly offset
by the growth in operating income before amortization.
On February 2, 2007, the cable subsidiary, Cogeco Cable, announced the completion of a public
offering of 5,000,000 subordinate voting shares for gross proceeds of $192.5 million. The offering
resulted in net proceeds to Cogeco Cable of approximately $184.2 million which was used to
reduce long-term indebtedness and working capital deficiency.
During the second quarter of 2007, the level of Indebtedness decreased by $176 million. On
February 2, 2007, the cable subsidiary, Cogeco Cable, gave notice of redemption and offered to
purchase all of its 8.44% Second Secured Debentures, Series A, in the aggregate principal
amount of $125 million due July 31, 2007 (the ‘’Notes’’). As at February 28, 2007, $89.3 million of
the Notes have been repaid and the remainder was repaid on March 5, 2007. The decrease in
Indebtedness was also due to the repayment of a portion of Cogeco Cable’s Term Facility
amounting to $81.3 million including its bank indebtedness. For the same period last year,
Indebtedness decreased by $5.5 million mainly due to free cash flow of $1.3 million, a rise in non-
cash operating items of $2.8 million and a net decrease in cash and cash equivalents of
$20.7 million, partly offset by an increase in restricted cash of $20.3 million. In addition, a dividend
of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, was paid
- 10 -
during the second quarter of fiscal 2007 compared to a dividend of $0.0625 per share or $1 million
for the second quarter of fiscal 2006.
During the first half of fiscal 2007, the level of Indebtedness decreased by $134.5 million mainly
due to the repayment of the Notes for $89.3 million and the repayment of $49.1 million of Cogeco
Cable’s Term Facility. For the same period last year, Indebtedness grew by $56.3 million mainly
due to a decline in non-cash operating items of $49.1 million and an increase in restricted cash of
$20.3 million partly offset by generated free cash flow of $14.1 million. In addition, dividends
totalling $2.2 million were paid during the first six months of fiscal 2007 compared to $2.1 million
for the same period the year before.
As at February 28, 2007, the working capital deficiency was reduced by an amount of
$126.5 million mainly as a result of the $125 million portion of the net proceeds of the share
issuance being used to reimburse $89.3 million of the Senior Secured debentures Series A on
February 12, 2007 in the cable subsidiary. The remaining portion of $35.7 million, presented as
cash and cash equivalents as at February 28, 2007, was used to reimburse the remainder of these
debentures, on March 5, 2007. 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 February 28, 2007, the cable subsidiary had used $617.2 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’’ and ‘’Foreign currency translation adjustment’’.
The $61.7 million rise in fixed assets is mainly related to increased capital expenditures to sustain
RGU growth in the cable sector during the first six months as well as anticipated growth in the
coming months. The increase of $32.8 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 million to the purchase price following a resolution of the working capital adjustments and the
reevaluation of costs related to the acquisition of Cabovisão in the cable sector. The $20.5 million
increase in accounts receivable is essentially due to an increase in the general level of receivables
in line with the revenue growth, the resolution of the working capital adjustments and to the euro
currency appreciation over the Canadian dollar in the cable sector. The $57.5 million and
$29.9 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
$15.9 million increase in foreign currency translation adjustment is the result of the appreciation of
the euro currency over the Canadian dollar. The non-controlling interest rise of $174.2 million is
due to the impact of the share issuance of Cogeco Cable and the decrease in indebtedness by
$89.3 million is the result of the factors previously discussed in the “Cash Flow and Liquidity”
section.
- 11 -
A description of COGECO’s share data as at March 31, 2007 is presented in the table below:
Number of shares/
options
Amount
($000s)
Common Shares
Multiple voting shares
Subordinate voting shares
1,849,900
14,745,231
12
117,997
Options to Purchase Subordinate Voting Shares
Outstanding options
Exercisable options
273,279
273,279
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 $49.1 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 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 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 amoun t of €5.7 million, should Cabovisão fail
to pay such required amounts.
DIVIDEND DECLARATION
At its April 11, 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 May 9, 2007, to
shareholders of record on April 25, 2007.
- 12 -
CABLE SECTOR
CUSTOMER STATISTICS
Canadian operations
Net additions % of Penetration
(1) (4)
Quarters ended
February 28,
Six months ended
February 28,
February 28,
February 28,
2007 2007 2006 2007 2006 2007 2006
RGUs
(2)
1,713,084 64,133 55,109 157,148 115,879
Basic service customers
854,694 5,277 3,505 21,517 14,408
HSI service customers
(3)
392,443 20,428 17,460 49,363 40,453 49.3 41.9
Digital Television service customers
362,549 13,961 24,547 35,185 45,962 43.3 35.8
Digital Telephony service customers 103,398 24,467 9,597 51,083 15,056 16.2 5.7
(1)
As a percentage of basic service customers in areas served.
(2)
Represent the sum of basic service, HSI service, Digital Television service and Digital Telephony service customers.
(3)
Customers subscribing only to Internet services totalled 63,884 as at February 28, 2007 compared to 59,292 as at February 28, 2006.
(4)
An audit of homes pas sed in Ontario has been c ompleted durin g the first quarter of fiscal 2 007 and, as a result, t he number of homes passed
has been reduced by 42,386.
All services generated higher growth in the second quarter of 2007 compared to the same period
last year, except for the Digital Television service. During the second quarter, Digital Telephony
customers grew by 24,467 to reach 103,398 compared to a growth of 9,597 for the same period
last year. This growth is mostly attributable to the launch of the service in new markets. Coverage
of homes passed has now reached 74% compared to 34% last year. The net additions of basic
service customers in the second quarter reached 5,277, compared to 3,505 for the same period
last year. The number of net additions of HSI service stood at 20,428 compared to 17,460 for the
same period last year. The growth of HSI and basic service customers compared to the same
period last year is mostly due to the enhancement of the product offering, the impact of the
bundled offer of Television, HSI and Digital Telephony services (Cogeco Complete Connection),
and promotional activities.
The net additions of Digital Television service customers stood at 13,961 compared to 24,547 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 quarter of fiscal 2006. Nevertheless, customers continue to demonstrate
strong interest in HD technology. Secondly, 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
half of fiscal 2006.
Portuguese operations
Net additions % of Penetration
(1)
February 28,
2007
Quarter ended
February 28, 2007
Six months ended
February 28, 2007
February 28, 2007
RGUs
(2)
670,571 20,266
41,530
Basic service customers
283,553 6,606
13,859
HSI service customers
151,663 7,308
15,385
53.5
Telephony service customers 235,355 6,352 12,286 83.0
(1)
As a percentage of basic service customers in areas served.
(2)
Represent the sum of basic service, HSI service and Telephony service customers.
- 13 -
For the second quarter, all services generated customer growth in line with Cogeco Cable’s
guidelines. Basic service grew by 6,606 customers, HSI by 7,308 customers and Telephony by
6,352 customers.
OPERATING RESULTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2007
2006
%
Change
2007
2006 % Change
Revenue $ 231,952 $
147,757 57.0 $ 453,954 $ 291,170 55.9
Operating costs 141,033 85,232 65.5 274,933 168,475 63.2
Management fees - COGECO
Inc.
4,128 2,957 39.6 8,568 5,825 47.1
Operating income before
amortization
86,791 59,568 45.7 170,453 116,870 45.8
Operating margin 37.4 %
40.3 %
37.5 % 40.1 %
Revenue
In the second quarter of fiscal 2007, consolidated revenue grew by $84.2 million, or 57%, to reach
$232 million and by $162.8 million, or 55.9% to reach $454 million for the first six months of 2007,
mainly due to strong RGU growth, the consolidation of the financial results of the Portuguese
operations acquired on August 1, 2006 and 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 $27.2 million, or 18.4% in the second quarter and by
$51.7 million, or 17.8%, in the first six months. The Portuguese operations revenue amounted to
$57 million for the second quarter of fiscal 2007 and to $111.1 million for the first six month period
of fiscal 2007.
Operating costs
For the second quarter and the first six months, operating costs excluding management fees
payable to COGECO Inc. increased by $55.8 million and $106.5 million to reach $141 million and
$274.9 million respectively, an increase of 65.5% and 63.2% compared to last year. The increase
in operating costs is mainly attributable to the inclusion of the operating costs of Cabovisão, the
introduction of Digital Telephony service and to servicing additional RGU in Canada.
Operating income before amortization
Operating income before amortization, for the second quarter and the first six months, increased
by $27.2 million, or 45.7%, to reach $86.8 million and by $53.6 million, or 45.8% to reach
$170.5 million, as a result of RGU growth, Cabovisão acquisition and rate increases outpacing
operating costs. Cogeco Cable’s second quarter and first six months’ operating margin declined
respectively from 40.3% to 37.4% and from 40.1% to 37.5% respectively as a result of the Digital
Telephony deployment in Canada and the consolidation of the Portuguese operations lower
operating margin.
- 14 -
Foreign exchange management
Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and
principal payments on its US$150 million Senior Secured Notes. These agreements have the
effect of converting the US interest coupon rate of 6.83% per annum to an average Canadian
dollar fixed interest rate of 7.254% per annum. The exchange rate applicable to the principal
portion of the debt has been fixed at CDN$1.5910. Amounts due under the US$150 million Senior
Secured Notes Series A increased by CDN$9.7 million at the end of the second quarter compared
to August 31, 2006 due to the Canadian dollar’s depreciation. Since the Senior Secured Notes
Series A are fully hedged, the fluctuation is offset by a variation in deferred credit described in
Note 7 of the second quarter 2007 interim financial statements. The CDN$63.2 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, 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, Cogeco Cable realized a foreign exchange gain of CDN$15.9 million
in the first six 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 February 28, 2007 was
$1.5479 per euro compared to $1.4156 per euro as at August 31, 2006. The average exchange
rate used to convert the operating results of the Portuguese operations for the second quarter and
the first six months of fiscal 2007 were $1.5146 per euro and $1.4818 per euro, respectively.
MEDIA SECTOR
OPERATING RESULTS
Quarters ended February 28,
Six months ended February 28,
($000s, except percentages)
2007
2006
%
Change
2007 2006
%
Change
Revenue $ 29,219 $
29,653 (1.5) $ 70,560 $ 66,769 5.7
Operating costs 32,559 32,545 - 70,846 67,212 5.4
Operating income (loss)
before amortization
(3,340) (2,892) (15.5)
(286) (443) 35.4
Operating margin
(11.4) %
(9.8) % (0.4) %
(0.7) %
Revenue
During the second quarter of fiscal 2007, revenue stood at $29.2 million, a slight decrease of
$0.4 million, or 1.5%, compared to the same period last year. For the first six month period of
2007, revenue increased by $3.8 million, or 5.7% to reach $70.6 million. Radio revenue has
increased by 12% and 15.2% respectively, mainly due to improved audience ratings. Television
revenue has decreased by 4.5% in the second quarter mainly due to the warmer climate that
occurred in its first half, coupled with a difficult market for generalist television services. In addition,
as opposed to the same quarter in fiscal 2006, Loft Story wasn’t aired during the second quarter of
- 15 -
fiscal 2007, impacting slightly TQS advertising revenue. For the first six months, television revenue
has increased by 3.6% due to improved audience market share; TQS was the only conventional
television network in the Francophone market to have improved its audience ratings during the first
six month period of fiscal 2007.
Operating income before amortization
The operating income before amortization declined by $0.4 million in the second quarter of fiscal
2007 and slightly increased by $0.2 million in the first six months of fiscal 2007 compared to last
year. For the second quarter and first six months, TQS’s operating income before amortization
decreased as a result of greater investment in television programming, combined with lower
revenue growth. Radio’s operating income before amortization decreased in the second quarter
due to an increase in operating expenses and improved for the first six months due to revenue
growth.
FISCAL 2007 FINANCIAL GUIDELINES
Cable sector
Given the improved performance of the cable sector during the first six months of fiscal 2007,
management has revised upward its guidelines in that sector for the fiscal year 2007 to reflect rate
increases in Canada and in Portugal, the strengthening of the euro currency over the Canadian
dollar, the impact of the share issuance, the repayment of long-term debt and the reduction of
financial expense.
Subsequent to these adjustments, projected revenue and operating income before amortization
were revised upward, operating margin should increase at about 39% and financial expense
should decrease following the repayment of long-term debt. The increase in projected revenue
should come essentially from the Canadian operations mainly due to the strong RGU growth
during the first six months of fiscal 2007 as well as rate increases of $3 per Digital Television
customer, representing approximately $1 per basic service customer, effective in March 2007 in
Ontario and in April 2007 in Quebec. Furthermore, Analog Value Pack rates will also increase by
$1.50 per customer in April 2007 in Ontario. For the Portuguese operations, rate increases of
approximately €0.65 (CDN$1) per basic service customer were implemented effective in March
2007. These rate increases should generate approximately $6.8 million of additional revenue
during the current fiscal year. At last, the revised guidelines reflect the improvement of the euro
currency compared to the Canadian dollar and as a result, for guideline purposes, the euro is
converted at an average rate of $1.50 per euro while the Corporation was using an average rate of
$1.45 per euro last January.
Management is also raising its guidance for capital expenditures and deferred charges from
$255 million to $260 million to increase the capacity of its infrastructure to sustain growth. The
cable subsidiary should generate free cash flow of $15 million.
In furtherance of its existing line of business and external growth strategy, Cogeco Cable may
investigate further cable system acquisition opportunities, including cable systems located outside
Canada over time.
Media sector
Media sector is maintaining its 2007 original financial guidelines.
- 16 -
($ million, except customer data)
Revised Projections
April 11, 2007
Fiscal 2007
Revised Projections
January 10, 2007
Fiscal 2007
Consolidated Financial Guideli nes
Revenue 1,075 to 1,080 1,050 to 1,060
Operating income before amortization
365 356 to 358
Net income
50 15
Free Cash Flow
10 to 15 5 to 10
Cable sector–
Financial Guidelines
Revenue 945 925
Operating income before amortization 365 355
Operating margin About 39% About 38%
Financial expense 85 87
Amortization 192 192
Capital expenditures and deferred charges 260 255
Free cash flow 15 10 to 15
Customer Addition Guidelines
Basic service 37,000 to 40,000 37,000 to 40,000
HSI service 85,000 to 90,000 85,000 to 90,000
Digital Television service 60,000 to 65,000 60,000 to 65,000
Telephony services 105,000 to 110,000 105,000 to 110,000
RGU 287,000 to 305,000 287,000 to 305,000
Media sector–
Financial Guidelines
Revenue
131 to 135 131 to 135
Operating income before amortization
1 to 3 1 to 3
Amortization
7 7
Capital expenditures and deferred charges 7 7
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”.
- 17 -
Cash flow from operations
Cash flow from operations is used by COGECO’s management and investors to evaluate cash
flow generated by operating activities excluding the impact of changes in non-cash operating
items. This allows the Company to isolate the cash flow from operating activities from the impact of
cash management decisions. Cash flow from operations is subsequently used in calculating the
Non-GAAP measure “free cash flow”. Cash flow from operations is calculated as follows:
($ 000)
Quarters ended February 28,d
August 31,
Six months ended February 28,
2007
2006
2007
2006
Cash flow from operating activities $ 63,594 $ 44,472 $ 43,871 $ 39,401
Changes in non-cash operating items (4,328)
(2,828)
81,430 49,085
Cash flow from operations $ 59,266 $ 41,644 $ 125,301 $ 88,486
Free cash flow
Free cash flow is used, by COGECO’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth. Free cash flow is calculated as
follows:
($ 000)
Quarters ended February 28,
Six months ended February 28,
2007
2006
2007
2006
Cash flow from operations
$
59,266 $ 41,644 $
125,301 $
88,486
Acquisition of fixed assets
(45,313) (34,994) (112,511) (65,322)
Increase in deferred charges
(6,046) (3,784) (13,258) (7,499)
Assets acquired under capital leases – as per
Note 10 b) (2,027) (1,538) (2,232) (1,538)
Free cash flow
$
5,880 $ 1,328 $
(2,700) $
14,127
ADDITIONAL INFORMATION
This MD&A was prepared on April 11, 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 1,713,000 revenue-generating units (RGUs) to approximately 1,448,000
homes passed in its Canadian service territory and about 671,000 RGUs to approximately 835,000
homes passed in its Portuguese service territory. Through its two-way broadband cable networks,
Cogeco Cable provides its residential and commercial customers with analog and Digital
Television and services, High Speed Internet access as well as Telephony services. Through its
Cogeco Radio-Television subsidiary, COGECO holds a 60% interest and operates the TQS
network, six TQS television stations, and three French CBC-affiliated television stations in
partnership with CTV Television. Cogeco Radio-Television also wholly owns and operates the
RYTHME FM radio stations in Montréal, Québec City, Trois-Rivières and Sherbrooke as well as
the 93
3
station in Québec City. COGECO’s subordinate voting shares are listed on the Toronto
Stock Exchange (CGO). The subordinate voting shares of Cogeco Cable are also listed on the
Toronto Stock Exchange (CCA).
– 30 –
- 18 -
Source: COGECO Inc.
Pierre Gagné
Vice President, Finance and Chief Financial Officer
Tel.: (514) 874-2600
Information: Media
Marie Carrier
Director, Corporate Communications
Tel.: (514) 874-2600
Analyst Conference Call: Thursday, April 12, 2007 at 11:00 a.m. (EDT)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the
Conference call by dialling 10 minutes before the start of the
Conference:
Canada/USA Access Number:
1 877 704-5381
International Access Number: +
1 913 312-1295
Confirmation Code:
4397487
By Internet at: www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
April 26, 2007 by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 719 457-0820
Confirmation code:
4397487
- 19 -
Supplementary Quarterly Financial Information
Quarters ended February 28, November 30, August 31, May 31,
2007
(1)
2006 2006
(1)
2005 2006
(1)
2005 2006 2005
($000, except percentages
and per share data)
Revenue $ 261,120 $ 177,359 $ 263,292 $
180,478 $
199,351 $
164,210 $ 189,718 $
173,418
Operating income before
amortization
83,669
57,765 88,367
60,593
68,645
56,485
66,111
63,814
Operating margin 32.0% 32.6% 33.6% 33.6% 34.4% 34.4% 34.8% 36.8%
Amortization 45,112 30,217 45,839 29,883 36,446 30,769 30,658 32,783
Financial expense 24,181 14,231 21,759 13,961 16,864 14,366 14,120 14,441
Income taxes 2,580 5,706 6,463 6,611 (13,950)
5,052 8,461 5,869
Non-controlling interest 8,240 4,842 7,557 5,455 19,022 5,422 7,293 5,603
Gain (loss) on dilution 30,990 - (7)
- - - - 16
Net income 34,546 2,679 6,751 4,593 10,300 630 5,529 4,964
Cash flow from
operations
59,266 41,644 66,035 46,842 51,729 43,215 52,093 48,699
Net income per share $ 2.08 $ 0.16 $ 0.41 $
0.28 $
0.62 $
0.04 $ 0.33 $
0.30
(1) Include operating results of the cable subsidiary, Cabovisão, since the date of acquisition of control on August 1, 2006.
Cable sector operating results are generally not subject to material seasonal fluctuations.
However, the loss of basic 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. - 20 -
Customer Statistics
February 28, August 31,
2007 2006
Homes Passe
d
Ontario (1) 968 45
5
1 002 187
Québec 479 818 474 717
Canada 1 448 273 1 476 904
Portugal 835 461 826 369
Total 2 283 73
4
2 303 273
Revenue Generating Unit
s
Ontario 1 212 79
6
1 104 157
Québec 500 288 451 779
Canada 1 713 08
4
1 555 936
Portugal 670 571 629 041
Total 2 383 65
5
2 184 977
Basic Service Customer
s
Ontario 603 077 587 289
Québec 251 617 245 888
Canada 854 69
4
833 177
Portugal 283 553 269 694
Total 1 138 247 1 102 871
Discretionnary Service Customer
s
Ontario 473 010 463 783
Québec 200 537 192 895
Canada 673 547 656 678
Portugal - -
Total 673 547 656 678
Pay TV Service Customer
s
Ontario 88 756 84 425
Québec 42 241 38 455
Canada 130 997 122 880
Portugal 53 926 54 089
Total 184 923 176 969
High Speed Internet Service Customer
s
Ontario 303 471 269 328
Québec 88 972 73 752
Canada 392 443 343 080
Portugal 151 663 136 278
Total 544 106 479 358
Digital Video Service Customers
Ontario 235 424 213 556
Québec 127 125 113 808
Canada 362 549 327 364
Portugal - -
Total 362 549 327 364
Telephony Service Customer
s
Ontario 70 82
4
33 984
Québec 32 57
4
18 331
Canada 103 398 52 315
Portugal 235 35
5
223 069
Total 338 753 275 384
(1) An audit of homes passed in Ontario has been completed during the first quarter of fiscal 2007 and, as a result,
the number of homes passed has been reduced by 42,386
- 21 -
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended February 28, Six months ended Febr uary 28,
(In thousands of dollars, except per share data)
2007
2006
2007
2006
(unaudited) (unaudited) (unaudited)
(unaudited)
Revenue $ 261,120
$ 177,359
$ 524,412
$ 357,837
Operating costs
177,451
119,594
352,376
239,479
Operating income before amo rtizatio n 83,669
57,765
172,036
118,358
Amortization (note 3)
45,112
30,217
90,951
60,100
Operating income 38,557
27,548
81,085
58,258
Financial expense (note 7)
24,181
14,231
45,940
28,192
Income before income taxes and the following
items 14,376
13,317
35,145
30,066
Income taxes (note 4)
2,580
5,706
9,043
12,317
Non-controlling interest
8,240
4,842
15,797
10,297
Gain on dilution resulting from shares issue d b y a
subsidiary
(30,990)
-
(30,983)
-
Share in the earnings (loss) of a general partnership
-
(90)
9
(180)
Net income $ 34,546
$ 2,679
$ 41,297
$ 7,272
Earnings per share (no t e 5)
Basic
$2.08
$0.16
$2.49
$0.44
Diluted
2.07
0.16
2.48
0.44
- 22 -
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Six months ended February 28,
(In thousands of dollars)
2007
2006
(unaudited)
(unaudited)
Balance at beginning $ 204,734
$ 185,762
Net income
41,297
7,272
Dividends on multiple voting shares
(245)
(231)
Dividends on subordinate voting shares
(1,950)
(1,831)
Balance at end $ 243,836
$ 190,972
- 23 -
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
February 28,
2007
August 31,
2006
(unaudited)
(audited)
Assets
Current
Cash and cash equivalents
$ 41,578
$ 71,516
Restricted cash
526
569
Accounts receivable
92,443
71,989
Income tax receivable
3,346
-
Prepaid expenses
6,679
7,204
Broadcasting rights
18,711
15,632
163,283
166,910
Income tax receivable
1,277
-
Broadcasting rights
18,864
18,083
Investments
539
539
Fixed assets
1,110,667
1,048,998
Deferred charges
50,791
49,433
Broadcasting licenses and customer base (note 6)
1,017,892
1,017,892
Preliminary goodwill (note 6)
454,884
422,108
$ 2,818,197
$ 2,723,963
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness
$ 15,361
$ 7,891
Accounts payable and accrued liab ilities
255,347
312,837
Broadcasting rights payable
13,686
7,721
Income tax liabilities
1,976
666
Deferred and prepaid income
28,096
26,737
Current portion of long-term debt (note 7)
38,077
126,904
352,543
482,756
Long-term debt (note 7)
1,201,352
1,209,254
Share in the partner’s deficiency of a general partnership
832
841
Deferred and prepaid income
11,713
10,525
Broadcasting rights payable
5,242
5,777
Pension plan liabilities and accrued emplo yee benefits
13,752
11,098
Future income tax liabilities
210,963
211,848
Non-controlling interest
646,811
472,605
2,443,208
2,404,704
Shareholders' equity
Capital stock (note 8)
118,009
117,552
Contributed surplus - stock-based compen sation
1,708
1,425
Retained earnings
243,836
204,734
Foreign currency translation adjustment (note 9)
11,436
(4,452)
374,989
319,259
$ 2,818,197
$ 2,723,963
- 24 -
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended February 28, Six months ended February 28,
(In thousands of dollars)
2007
2006
2007
2006
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities
Net income
$ 34,546
$ 2,679
$ 41,297
$ 7,272
Items not affecting cash and cash equivalents
Amortization (note 3)
45,112
30,217
90,951
60,100
Amortization of deferred financing costs
535
240
1,181
481
Future income taxes (note 4)
(500)
3,891
3,379
9,218
Non-controlling interest
8,240
4,842
15,797
10,297
Gain on dilution resulting from shares issued b y a
subsidiary
(30,990)
-
(30,983)
-
Stock-based compensation
2,121
(258)
3,088
170
Other
202
33
591
948
59,266
41,644
125,301
88,486
Changes in non-cash oper ating items (note 10a))
4,328
2,828
(81,430)
(49,085)
63,594
44,472
43,871
39,401
Cash flow from investing activities
Acquisition of fixed assets (not e 10b))
(45,313)
(34,994)
(112,511)
(65,322)
Increase in deferred charges
(6,046)
(3,784)
(13,258)
(7,499)
Decrease (increase) in restricted cash
(3)
(20,322)
88
(20,322)
Costs related to business acquisition
(1,385)
-
(1,385)
-
Other
22
8
44
8
(52,725)
(59,092)
(127,022)
(93,135)
Cash flow from financing activities
Increase (decrease) in bank i ndebtedness
(32,255)
5,952
7,470
27,621
Increase in long-term debt
-
-
-
30,000
Repayment of long-term debt
(143,730)
(11,450)
(142,000)
(1,321)
Issue of subordinate voting shares
337
1,274
457
1,274
Dividends on multiple voting shares
(129)
(115)
(245)
(231)
Dividends on subordinate voting shares
(1,031)
(918)
(1,950)
(1,831)
Issue of subordinate voting shares by a subsidiary to
non-controlling interest, net of issue costs
188,427
166
188,655
166
Dividends paid by a subsidiary to non-controlling
interest
(1,462)
(972)
(2,434)
(1,944)
10,157
(6,063)
49,953
53,734
Net change in cash and cas h equivalents 21,026
(20,683)
(33,198)
-
Effect of exchange rate changes on cash and cash
equivalents denominated i n foreign currencies
1,644
-
3,260
-
Cash and cash equivalents at beginning
18,908
20,683
71,516
-
Cash and cash equivalents at end $ 41,578
$-
$ 41,578
$-
See supplemental cash flow information in note 10.
- 25 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 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 February 28, 2007 and August 31, 2006 as well as its results of
operations and its cash flow for the three and six month periods ended February 28, 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 financi al information per business segment is presented in the tables below:
Head Office
Cable Media and elimination Consolidated
Three months ended February 28,
(unaudited)
2007 2006 2007 2006 2007 2006 2007 2006
Revenue $ 231,952 $ 147,757 $ 29,219 $ 29,653 $ (51) $ (51) $ 261,120 $ 177,359
Operating costs 145,161 88,189 32,559 32,545 (269) (1,140) 177,451 119,594
Operating income (loss) before
amortization
86,791
59,568 (3,340) (2,892) 218
1,089
83,669 57,765
Amortization 43,572 28,656 1,496 1,522 44 39 45,112 30,217
Operating income (loss) 43,219 30,912 (4,836) (4,414) 174 1,050 38,557 27,548
Financial expense 23,551 13,776 292 208 338 247 24,181 14,231
Income taxe s 4,261 6,936 (1,872) (1,690) 191 460 2,580 5,706
Net assets employed
(1) (2)
$ 2,382,997 $ 2,210,823 $ 72,589 $ 70,550 $ 6,949 $ 7,477 $ 2,462,535 $ 2,288,850
Total assets
(2)
2,686,828 2,602,603 121,041 112,609 10,328 8,751 2,818,197 2,723,963
Fixed assets
(2)
1,084,918 1,021,538 25,172 26,794 577 666 1,110,667 1,048,998
Preliminary goodwill
(2)
454,884 422,108 - - - - 454,884 422,108
Acquisition of fixed assets 46,798 35,696 542 729 - 107 47,340 36,532
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2)
As at February 28, 2007 and August 31, 2006.
- 26 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
2. Segmented Information (continued)
Head Office
Cable Media and elimination Consolidated
Six months ended February 28,
(unaudited)
2007 2006 2007 2006 2007 2006 2007 2006
Revenue $ 453,954 $ 291,170 $ 70,560 $ 66,769 $ (102) $ (102) $ 524,412 $ 357,837
Operating costs 283,501 174,300 70,846 67,212 (1,971) (2,033) 352,376 239,479
Operating income (loss) before
amortization
170,453
116,870 (286) (443) 1,869
1,931
172,036 118,358
Amortization 87,881 56,933 2,981 3,089 89 78 90,951 60,100
Operating income (loss) 82,572 59,937 (3,267) (3,532) 1,780 1,853 81,085 58,258
Financial expense 44,772 27,358 479 322 689 512 45,940 28,192
Income taxe s 9,858 13,381 (1,720) (1,727) 905 663 9,043 12,317
Net assets employed
(1) (2)
$ 2,382,997 $ 2,210,823 $ 72,589 $ 70,550 $ 6,949 $ 7,477 $ 2,462,535 $ 2,288,850
Total assets
(2)
2,686,828 2,602,603 121,041 112,609 10,328 8,751 2,818,197 2,723,963
Fixed assets
(2)
1,084,918 1,021,538 25,172 26,794 577 666 1,110,667 1,048,998
Preliminary goodwill
(2)
454,884 422,108 - - - - 454,884 422,108
Acquisition of fixed assets 113,969 65,709 774 1,044 - 107 114,743 66,860
(1)
Total assets less cash and cash equivalents, accounts payable and accrued liabilities, broadcasting rights payable and deferred and prepaid income.
(2)
As at February 28, 2007 and August 31, 2006.
The following tables sets out certain geo graphic market information based on client’s location:
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Canada $ 204,094 $ 177,359 $ 413,315 $ 357,837
Portugal 57,026 - 111,097 -
$ 261,120 $ 177,359 $ 524,412 $ 357,837
- 27 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
2. Segmented Information (continued)
As at February 28, As at August 31,
2007 2006
(unaudited) (audited)
Fixed assets
Canada $ 807,707 $ 768,484
Portugal 302,960 280,514
Total $ 1,110,667 $ 1,048,998
Preliminary goodwill
Canada $- $-
Portugal 454,884 422,108
Total $ 454,884 $ 422,108
3. Amortization
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed assets $ 39,737 $ 24,661 $ 80,232 $ 48,837
Deferred charges 5,375 5,556 10,719 11,263
$ 45,112 $ 30,217 $ 90,951 $ 60,100
4. Income Taxes
Three months ended February 28, Six months ended Februa ry 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Current $ 3,080 $ 1,815 $ 5,664 $ 3,099
Future (500) 3,891 3,379 9,218
$ 2,580 $ 5,706 $ 9,043 $ 12,317
- 28 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
4. Income Taxes (continued)
The following table provides the reconciliation between Canadian statutory federal and provincial income taxes and
the consolidated income tax expense:
Three months ended February 28, Six months ended Februa ry 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Income before income taxes $ 14,376 $ 13,227 $ 35,154 $ 29,886
Combined income tax rate 33.93% 34.84% 34.40% 34.84%
Income taxes at combined income tax rate $ 4,877 $ 4,608 $ 12,093 $ 10,412
Loss or income subject to lower or higher tax rates 557 266 524 266
Decrease in income taxes as a result of increase in
substantially enacted tax rates
-
-
-
(91)
Large corporation tax - 807 - 1,644
Effect of foreign income tax rate differences (1,425) - (2,249) -
Benefit related to prior years’ minimum income tax paid (1,475) - (1,475) -
Other 46 25 150 86
Income taxes at effective income tax rate $ 2,580 $ 5,706 $ 9,043 $ 12,317
5. Earnings per Share
The following table provides a recon ciliation between basic and dilu ted earnings per share:
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $ 34,546 $ 2,679 $ 41,297 $ 7,272
Weighted average number of multiple voting and subordinate
voting shares outstanding
16,569,120
16,497,105
16,562,691
16,473,425
Effect of dilutive stock options
(1)
116,223 111,718 106,424 135,205
Weighted average number of diluted multiple voting and
subordinate voting shares outstanding
16,685,343
16,608,823
16,669,115
16,608,630
Earnings per share
Basic $ 2.08 $ 0.16 $ 2.49 $ 0.44
Diluted 2.07 0.16 2.48 0.44
(1)
For the three and six month periods ended February 28, 2007, 36,443 (36,443 and 40,143 in 2006) stock options were excluded from the
calculation of diluted earnings per share since the exercise price of the options was greater than the average share price of the subordinate
voting shares.
- 29 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
6. Preliminary Goodwill and Other Intangible Assets
Customer
base
Broadcasting
licenses
Total other
intangible
assets
Preliminary
goodwill
(unaudited) (unaudited) (unaudited) (unaudited)
Balance as at August 31, 2006 $ 989,772 $ 28,120 $ 1,017,892 $ 422,108
Adjustment to the purchase price - - - (5,955)
Foreign currency translation adjustment - - - 38,731
Balance as at February 28, 2007 $ 989,772 $ 28,120 $ 1,017,892 $ 454,884
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
€2,194,000 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 re lated to the acquisition of Cabovisão–
Televisão por Cabo, S.A. (“Cabovisão”).
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 ou t 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.
- 30 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
7. Long-Term Debt
Maturity Interest rate
February 28,
2007
August 31,
2006
(unaudited) (audited)
Parent company
Term Facility 2010
(1)
6.69 %
(2)
$ 16,500 $ 19,000
Obligations under capital leases 2010 6.49 – 6.61 123 138
Subsidiaries
Term Facility
Term loan 2011 5.46
(2)
150,000 150,000
Term loan – € 17,358,700 2011 4.94
(2)
26,869 24,573
Revolving loan
Euro currency – €284,500,000 (€317,000,000 as at
August 31, 2006)
2011
4.94
(2)
440,378
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)
175,470 165,795
Series B 2011 7.73 175,000 175,000
Second Secured Debentures Series A 2007
(4)
8.44 35,743 125,000
Deferred credit
(5)
2008 – 63,180 72,855
Obligations under capital leases 2010 6.32 – 8.18 6,136 5,009
Other – – 30 43
1,239,429 1,336,158
Less: current portion 38,077 126,904
$ 1,201,352 $ 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 February 28, 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 aggrega te 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 Fe bruary 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 February 28, 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 six month periods ended February 28, 2007 amounted to $22,532,000
and $42,983,000 ($13,44 2,000 and $26,651,00 0 in 2006).
- 31 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and non-voting, except when specified in the
Articles of Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
February 28,
2007
August 31,
2006
(unaudited) (audited)
Issued
1,849,900 multiple voting shares $ 12 $ 12
14,745,231 subordinate voting shares (14,702,556 as at August 31, 2006) 117,997 117,540
$ 118,009 $ 117,552
During the period, subordinate voting share transactions were as fo llows:
Six months ended Twelve months ended
February 28, 2007 August 31, 2006
(unaudited) (audited)
Number of
shares
Amount
Number of
shares
Amount
Balance at beginning 14,702,556 $ 117,540 14,600,104 $ 116,155
Shares issued for cash under the Employee Stock Purchase Plan
and the Stock Option Plan
42,675
457
102,452
1,385
Balance at end 14,745,231 $ 117,997 14,702,556 $ 117,540
- 32 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
8. Capital Stock (continued)
Stock-based plans
The Company established, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase
Plan and a Stock Option Plan for certain executives which are described in the Company’s annual consolidated
financial statements. During the first six months, no stock options were granted to employees by COGECO Inc.
However, the Company’s subsidiary, Cogeco Cable Inc., granted 200,874 stock options (126,059 in 2006) with an
exercise price of $26.63 to $33.12 ($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
options vest over a period of three years beginning one year after the day such options were granted and are
exercisable over ten years. The vesting of these options is conditional to the achievement of certain yearly financial
objectives by the Portuguese subsidiary, Cabovisão-Televisão por Cabo, S.A., over a period of three years. The
Company records compensation expense for options granted on or after September 1, 2003. As a result, a
compensation expense of $640,000 and $901,000 ($203,000 and $366,000 in 2006) was recorded for the three and
six month periods ended February 28, 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 six month periods ended February 28, 2006 would have been
reduced to the following pro forma amounts:
Three months ended Six months ended
February 28, 2006 February 28, 2006
(unaudited) (unaudited)
Net income
As reported $ 2,679 $ 7,272
Pro forma 2,671 7,256
Basic and diluted earnings per share
As reported $ 0.16 $ 0.44
Pro forma 0.16 0.44
The fair value of stock options granted by the Company’s subsidiary, Cogeco Cable Inc., for the six month period
ended February 28, 2007 was $7.38 ($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 February 28, 2007, the Company had outstanding stock options providing for the subscription of 273,279
subordinate voting shares. These stock options can b e exercise d at various prices ranging fro m $10.00 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 six
months, 170,269 stock options (no stock options granted in 2006) were granted by TQS Inc. No compensation
expense ($124,000 and $154,000 in 2006) was recorded for the three and six month periods ended February 28,
2007 related to this plan.
- 33 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
9. Foreign Currency Translation Adjustment
The change in the foreign currency translation adjustment included in shareholders’ equity is the result of the
fluctuation in the exchange rates on translation of net investments in self-sustaining foreign operations and foreign
exchange gains or losses related to long-term debt denominated in foreign currency used to hedge net investments.
The net change in foreign currency translation adjustment is as follows:
Six months ended Twelve months ended
February 28, 2007 August 31, 2006
(unaudited) (audited)
Effect of exchange rate variation on translation of net investments in self-
sustaining foreign subsidiaries
$
44,646
$
(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)
(33,210)
7,960
$ 11,436 $ (4,452)
10. Statements of Cash Flo w
a) Changes in non-cash operating items
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Accounts receivable $ 3,258 $ 3,276 $ (15,391) $ (8,940)
Income tax receivable (2,847) (493) (4,519) (986)
Prepaid expenses 4,140 (1,181) 624 (540)
Broadcasting rights (3,464) (536) (3,860) (7,794)
Accounts payable and accrued liabilities 7,382 280 (67,484) (42,278)
Broadcasting rights payable (123) 1,758 5,430 9,845
Income tax liabilities (2,616) - 1,251 (299)
Deferred and prepaid income (1,402) (276) 2,519 1,907
$ 4,328 $ 2,828 $ (81,430) $ (49,085)
b) Other information
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Fixed asset acquisitions through capital leases $ 2,027 $ 1,538 $ 2,232 $ 1,538
Interest paid 20,050 11,614 44,668 27,988
Income taxes paid 7,217 2,308 8,496 4,384
- 34 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
11. Employee Future Benefits
The Company and its subsidiaries offer their employees contributory defined benefit pension plans, a defined
contribution pension plan or collective registered retirement savings plans which are described in the Company’s
annual consolidated financi al statements. The total expenses related to these plans are as follows:
Three months ended February 28, Six months ended February 28,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
Contributory defined benefit pension plans $ 807 $ 706 $ 1,626 $ 1,824
Defined contribution pension plan and collective registered
retirement savings plans
618
461
1,239
948
$ 1,425 $ 1,167 $ 2,865 $ 2,772
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-Télévision Inc.
(“CRTI”) and Bell Globemedia Inc. (“BGM”), entered into a shareholders agreement following the acquisition of TQS
Inc. (the “Shareholders Agreement”). On October 31, 2002, BGM transferred its shares in TQS Holdco to CTV
Television Inc. (“CTV”), a subsidiary of BGM. The Shareholders Agreement provides the right for CTV to notify CRTI,
during a 180 day period starting from February 15, 2007, of its offer to sell all its shares in TQS Holdco to CRTI for an
all-cash consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by
CTV to total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.15. CRTI may elect to
acquire CTV’s shares within 90 days following receipt of the put notice by delivering a put exercise notice to CTV. If
CRTI elects not to exercise or fails to exercise its put option, CTV may within 90 days following such election or failure
to exercise by CRTI, deliver a call notice to CRTI to purchase all the shares of CRTI in TQS Holdco for an all-cash
consideration calculated as the fair market value of TQS Holdco multiplied by the ratio of shares owned by CRTI to
total shares issued and outstanding in the capital of TQS Holdco, and multiplied by 1.30. Unless the parties decide to
modify the Shareholders Agreement, in the event that CTV notifies CRTI of its offer to sell all its shares in TQS Holdco
to CRTI, CRTI does not buy them and CTV does not buy CRTI’s shares, CRTI and CTV have agreed to put up all
TQS Holdco shares for sale to a third party purchaser, subject to requisite governmental authorizations, with a view to
obtaining the highest possible price and maximizing shareholder va lue.
On August 31, 2006, BGM announced that it had closed off on its new ownership structure whereby BCE sold 48% of
its voting interest in BGM to The Woodbridge Company Limited and affiliates, the Ontario Teachers’ Pension Plan and
Torstar Corporation. This transaction constitutes a change of control under the Shareholders Agreement and,
accordingly, triggers certain purchase rights under the Agreement in favour of CRTI to purchase all, but not less than
all, of the shares owned by CTV.
On November 30, 2006, COGECO Inc. has confirmed that CRTI will not exercise its right to purchase the 40%
interest that CTV holds in TQS Holdco, following the change of control of BGM on August 31, 2006 that triggered the
right for CRTI to acquire all the shares of CTV in TQS Holdco.
Furthermore, CRTI, CTV and TQS Holdco have amended the Shareholder’s Agreement to postpone the beginning of
the Second Put Option Period provided in the Agreem ent from February 15, 2007 to January 1, 2009.
- 35 -
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2007
(amounts in tables are in thousands of dollars, except per share data)
12. Contingencies and guarantees (continued)
Guarantees of payment to the Municipality of Seixal
During the second quarter, the Company’s subsidiary, Cogeco Cable Inc., 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 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 €5.7 million, should Cabovisão fail to pay such require d amounts.