Cogeco 2004 Annual Report Download

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ANNUAL REPORT 2004

Table of contents

  • Page 1
    ANNUAL REPORT 2 0 0 4

  • Page 2
    ... CUSTOMER STATISTICS BOARD OF DIRECTORS AND CORPORATE MANAGEMENT OPERATIONS AND CORPORATE INFORMATION 1 2 GLOSSARY Digital services: digital video services DVR: digital video recorder (same as Personal Video Recorder or PVR) HD: high-definition 5 26 HSI: high-speed Internet services HSI Lite: high...

  • Page 3
    ... Income Interest coverage Customers and Terminals RGU Basic-service customers Percent of penetration Discretionary service customers HSI service customers Digital terminals Per Share Data (basic) Net loss Cash ï¬,ow from operations Weighted average number of outstanding shares (in thousands) 526...

  • Page 4
    ...CABLE INC. ACHIEVED SOLID IMPROVEMENTS IN ITS KEY PERFORMANCE INDICATORS. OPERATING INCOME AND MARGIN, FREE CASH FLOW AND CUSTOMER NUMBERS IN ITS MAIN SERVICES INCREASED FROM LAST YEAR. HOWEVER, CERTAIN ACCOUNTING CHANGES HAVE RESULTED IN A NET LOSS FOR THE YEAR AND, CONSEQUENTLY, A NEW PRESENTATION...

  • Page 5
    ... terminal launched in April, which integrates both a DVR and HD, provides an optimal television viewing experience and constitutes a true complement to VOD. Using this research and relying on the results of our surveys, we will continually offer new services that will help our customers to connect...

  • Page 6
    ... basic-service customers while increasing the number of Internet and digital cable customers. Cogeco Cable is intent on satisfying its customers and improving the value of the company for its shareholders, and fiscal 2004 has yielded convincing results. During fiscal 2004, excluding the accounting...

  • Page 7
    ... (MD&A) is presented in the following sections: OVERVIEW OF OUR BUSINESS Corporate Strategy and Objectives Cable Networks Key Performance Indicators Critical Accounting Policies and Estimates Related Party Transactions Adoption of New Accounting Standards Uncertainties and Main Risk Factors 15...

  • Page 8
    ... increase the efficiency of its processes with a view to better serving customers and drive down its costs. Still the Fastest Internet Service Fast download speed is highly-valued by customers, and Cogeco Cable's HSI service remains the fastest in the marketplace. Regardless of the connection type...

  • Page 9
    ... Through Acquisitions To increase the Corporation's value and returns, Cogeco Cable strives to acquire, at attractive prices, cable networks that are adjacent to currently serviced zones, and that serve a significant number of customers in non-adjacent territories. Anticipated Results of these...

  • Page 10
    ... as the number of overdue days of the customer's balance owing as well as the customer's collection history with Cogeco Cable. As a result, conditions causing ï¬,uctuations in the aging of customer accounts will directly impact the reported amount of bad debt expenses. 8 Cogeco Cable Inc. 2004

  • Page 11
    ... an improvement and as a result is capitalized. Costs incurred in the maintenance of service potential are expensed. Cogeco Cable capitalizes the direct labour and direct overhead costs incurred to construct new assets, enhance existing assets and connect new customers. Although capitalization of...

  • Page 12
    ...pays monthly fees equal to 2% of its total revenue to COGECO for the above mentioned services. In 1997, the management fee was capped at $7 million per year, subject to annual upward adjustments based on increases in the Consumer Price Index in Canada. Accordingly, for the year ended August 31, 2004...

  • Page 13
    ... from the sale of home terminal devices at a subsidized price, which were recorded as a partial recovery of costs, are now recorded as equipment revenue with an equal amount included in operating costs. The portion of advertising expense incurred to expand the digital and HSI customer base that...

  • Page 14
    ... result in an additional competitive alternative being made available in the Oakville, Burlington and Hamilton area where Bell Canada plans to launch its new VDSL distribution service. Bell Canada's parent company, BCE, which also owns the largest DTH (Digital Terminal Home) satellite distribution...

  • Page 15
    ... business will generate the anticipated return on the capital that must be invested. IN FISCAL 2004, COGECO CABLE STARTED TO OFFER AN ALLDIGITAL CHANNEL LINE-UP IN SOME OF ITS CABLE SYSTEMS. EVENTUALLY, ALL CUSTOMERS WILL BENEFIT FROM DIGITAL DISTRIBUTION OF ALL PROGRAMMING SERVICES. Like most cable...

  • Page 16
    ... the outcome is not known at this time. The distribution of certain video and audio programming services entails the payment of fees to various copyright collectives pursuant to tariffs set by the Copyright Board under the authority of the Copyright Act (Canada). While new SOCAN tariffs for music in...

  • Page 17
    ... rate increases. To stimulate demand in a more mature Ontario market, Cogeco Cable has started offering HSI Lite since July 2004 to new HSI customers that are more cost conscious. However, HSI Lite is only offered on a retention basis in the less mature Québec market. Financial Results and...

  • Page 18
    ... of approximately $0.74 per basic-analog-service customer, effective June 15, 2004 in Ontario and August 1, 2004 in Québec, respectively. These selective rate hikes will result in greater basic rate harmonization across our cable systems. An increase of $4 in the monthly digital basic rate was also...

  • Page 19
    ... BY 16% THANKS TO STRONG INTERNET CUSTOMER GROWTH, VARIOUS PRICE INCREASES, CONTINUED COST CONTROL AND EFFECTIVE MARKETING. Operating Income improved by $27.6 million or 15.7% as a result of revenue growth, strong cost control and effective marketing. Cogeco Cable's focus on improving its Operating...

  • Page 20
    ... on page 24 for further discussion. (2) Includes mainly new and replacement drops but also digital terminals, cable modems and multimedia terminal adapters for telephony. (3) Includes headend equipment and most expenditures related to telephony. (4) Includes capital leases that are excluded in...

  • Page 21
    ... mainly relate to the rollout of VOD service in fiscal 2003. Equipment subsidies relate to subsidies on sales of 56,798 and 50,946 digital terminals in fiscal 2004 and 2003, respectively. During fiscal 2005, a significant reduction in the increase in deferred charges is planned, as Cogeco Cable...

  • Page 22
    ... details. Outstanding Share Data A description of Cogeco Cable's share data as at September 30, 2004 is presented in the table below. Additional details are provided in Note 9 on page 40. Number of shares/ options Common Shares Multiple voting shares Subordinate voting shares Options to Purchase...

  • Page 23
    ... by the parent company, COGECO Inc. At the request of Cogeco Cable, and in light of the reduction of Indebtedness resulting from Free Cash Flow, the total commitment under the Term Facility was reduced from $400 million to $270 million in January 2004. As at August 31, 2004, the Corporation utilized...

  • Page 24
    ... for a guarantee. In connection with the sale of businesses or assets, the Corporation has agreed to indemnify the purchaser against claims related to events, which occurred prior to the sale. Under the terms of the Senior Secured Notes and the Second Secured Debentures, Cogeco Cable has agreed to...

  • Page 25
    ... to the annual total given rounding. Cogeco Cable's operating results are not generally subject to material seasonal ï¬,uctuations. However, the loss in basic-service customers is usually greater, and the addition of HSI customers is generally lower in the third quarter, mainly because students...

  • Page 26
    ..., Cogeco Cable expects to achieve an Operating Margin of about 40% using the new accounting rules implemented in fiscal 2004. IP transport costs are expected to remain ï¬,at despite an anticipated 14% expansion of the HSI customer base. Other network fees are expected to increase as a result of...

  • Page 27
    MANAGEMENT'S DISCUSSION AND ANALYSIS Cogeco Cable Inc. 2004 25

  • Page 28
    ... in this annual report principally through its Audit Committee, which reviews the annual consolidated financial statements of the Corporation and recommends their approval to the Board of Directors. The Committee periodically meets with management and the external auditors to discuss the results of...

  • Page 29
    ... (124) 27 66,074 Balance at beginning As previously reported Changes in accounting policies (note 1c)vi)) As restated Net loss Excess of the attributed value of subordinate voting shares purchased over price paid Balance at end 95,677 (29,603) 66,074 (32,194) - 33,880 Cogeco Cable Inc. 2004 27

  • Page 30
    ... thousands of dollars) 2004 $ 2003 (restated) $ Assets Current Accounts receivable Prepaid expenses Fixed assets (note 4) Deferred charges (note 5) Customer base (note 6) ...,744 On behalf of the Board of Directors, Maurice Myrand Director Pierre Robitaille Director 28 Cogeco Cable Inc. 2004

  • Page 31
    ... voting shares Purchase of subordinate voting shares for cancellation Net change in cash and cash equivalents and cash and cash equivalents at end 3,516 (54,395) 401 - (50,478) - (1,197) (21,632) 134 (118) (22,813) - See supplemental cash ï¬,ow information in note 12. Cogeco Cable Inc. 2004 29

  • Page 32
    ..., 2004 and 2003 1 SIGNIFICANT ACCOUNTING POLICIES a) Nature of operations Cogeco Cable Inc. (the "Corporation") is a Canadian public company whose shares are listed on the Toronto Stock Exchange. The Corporation's core business is providing cable television services and high-speed Internet access...

  • Page 33
    ... that the sale of home terminal devices is considered a single unit of accounting of a multiple element arrangement, while installation and related subscription services must be assessed as an integrated package. In addition, certain direct incremental costs in connection with installation revenues...

  • Page 34
    ... will apply to all annual and interim periods beginning on or after November 1, 2004. The Corporation is currently evaluating the impact of this new accounting guideline but its adoption is not expected to have a material impact on the consolidated financial statements. 32 Cogeco Cable Inc. 2004

  • Page 35
    ...: Revenue from cable television and related services, and from high-speed Internet access services are recognized when services are provided; Revenue generated from sales of home terminal devices are recorded as equipment revenue upon activation of services; Installation revenues are deferred...

  • Page 36
    ... information The Corporation considers its cable distribution and high-speed Internet access activities as a single operating segment. j) Employees future benefits The Pension costs, recorded in operating costs, related to the defined contribution pension plan and the collective registered...

  • Page 37
    ...) subject to lower tax rates Increase in income taxes as a result of changes in substantially enacted tax rates Large corporation tax Other Income taxes at effective income tax rate 1,794 131 32,483 3,700 (839) 37,269 2003 (restated) $ 1,554 (263) - 4,000 (905) 4,386 Cogeco Cable Inc. 2004 35

  • Page 38
    ...2004 (amounts are in thousands of dollars) $ Future income tax assets: Non-capital loss carryforwards Deferred and prepaid income Other Total future income tax assets Future income tax liabilities: Fixed assets Deferred charges Customer base Total... $ 1,000 2014 $ 22,400 36 Cogeco Cable Inc. 2004

  • Page 39
    ...,273 5 DEFERRED CHARGES, NET OF AMORTIZATION 2004 (amounts are in thousands of dollars) $ New services launch costs Reconnect costs Equipment subsidies Financing costs Other 3,398 21,833 20,875 2,152 35 48,293 2003 (restated) $ 7,669 20,026 20,402 3,375 1,714 53,186 Cogeco Cable Inc. 2004 37

  • Page 40
    ... on debt as of August 31, 2004, including stamping fees. 2,920,000 preferred shares (4,320,000 in 2003), 5.5% cumulative dividend, redeemable and retractable to a maximum of $1,400,000 annually. Interest on long-term debt amounted to $54,408,000 ($56,320,000 in 2003). 38 Cogeco Cable Inc. 2004

  • Page 41
    ...2007 $ 183,000 2008 $ - 2009 $ 388,650 g) Minimum payments due under capital leases total $3,522,000 of which $369,000 represents financial expense and are as follows: (amounts are in thousands of dollars) 2005 $ 1,244 2006 $ 1,011 2007 $ 819 2008 $ 443 2009 $ 5 Cogeco Cable Inc. 2004 39

  • Page 42
    ... purchased for cancellation 6,600 subordinate voting shares for an amount of $118,000, while the book value of purchased shares amounted to $145,000. The excess of the book value of purchased shares over the purchase price increased retained earnings by $27,000. 40 Cogeco Cable Inc. 2004

  • Page 43
    ... their annual salary. The subscription date is December 31 and the subscription price is based on the average market price of the shares of the last five business days of November less 10%. A maximum of 167,500 shares are available, up to 40,000 annually, under this plan. Stock Option Plan A total...

  • Page 44
    ...) $ 124 513 0.00 0.01 Since the method of accounting under CICA Handbook section 3870 has not been applied to options granted prior to September 1, 2001, the pro forma compensation cost may not be representative of compensation cost to be expected in future years. 42 Cogeco Cable Inc. 2004

  • Page 45
    ... or otherwise be considered a shareholder of the Corporation nor have any rights to become a shareholder as a result. In 2004, an expense amounting to $101,000 has been recorded related to this plan. In 2003, an amount of $128,000 was recorded as a reduction of expenses. Cogeco Cable Inc. 2004 43

  • Page 46
    ... table provides a reconciliation between basic and diluted loss per share: 2004 (amounts are in thousands of dollars, except number of shares and per share data) $ Net loss Weighted average number of multiple voting and subordinate voting shares outstanding Effect of dilutive stock options...

  • Page 47
    ... In addition, since the Corporation has a large and diversified clientele, credit risk concentration from customers is minimal. 12 STATEMENTS OF CASH FLOW a) Changes in non-cash working capital items and long-term deferred and prepaid income 2004 (amounts are in thousands of dollars) $ Accounts...

  • Page 48
    ... payment of the monthly employer's portion. Expenses related to these two plans amounted to $1,247,000 ($982,000 in 2003). The defined benefit pension plans provide pensions based on the number of years of service and the average salary during the employment of each participant. In addition, the...

  • Page 49
    ... (9) 99 550 2003 $ 286 404 (221) (41) 72 500 Defined benefit pension costs Current service cost Interest cost Actual return on plan assets Difference between expected return and actual return on plan assets Amortization of net actuarial loss Net periodic benefit cost Cogeco Cable Inc. 2004 47

  • Page 50
    ...Debt securities Other Total 64 34 2 100 2003 % 61 34 5 100 The significant weighted average assumptions used in measuring the Corporation's pension and other obligations are as follows: 2004 % Accrued benefit obligation Discount rate Rate of compensation increase Defined benefit pension costs...

  • Page 51
    ... Agreement, the Corporation pays monthly fees equal to 2% of its total revenue to COGECO Inc. for the above mentioned services. In 1997, the management fee was capped at $7,000,000 per year, subject to annual upward adjustment based on increases in the Consumer Price Index in Canada. This limit can...

  • Page 52
    ...xed assets and increase in deferred charges Free Cash Flow Financial condition Fixed assets Net assets employed(1) Total assets Indebtedness Shareholders' equity Other statistics Number of shares outstanding at year end Weighted average number of outstanding shares Per share data (basic) Operating...

  • Page 53
    ... and B Senior Secured Debentures, Series 1 Second Secured Debentures, Series A SHARE INFORMATION As at August 31, 2004 Number of multiple voting shares (10 votes per share) outstanding Number of surbordinate voting shares (1 vote per share) outstanding Stock exchange listing Trading symbol 15,691...

  • Page 54
    ... Total Quarters ended The Toronto Stock Exchange High Low Close Volume (shares) Nov. 30 $ 13.00 6.25 10.90 7,094,607 Feb. 28 $ 12.52 9.10 10.12 2,539,706 May 31 $ 18.35 9.40 17.40 7,625,980 Aug. 31 $ 20.60 16.25 16.50 4,121,531 21,381,824 52 Cogeco Cable Inc. 2004

  • Page 55
    ...on the basis of the systems where the service is offered. Bundles including basic service, discretionary tiers, multiple outlets with the option to include pay television, the advantages of digital service and high-speed Internet service. Homes Passed Basic Service % of Penetration(1) 60.1 53.1 57...

  • Page 56
    ..., Cable Ontario Jules Grenier Vice President and General Manager, Cable Québec Christian Jolivet Chief Legal Officer and Secretary Hélène Laurin Vice President, Administration and Control Yves Mayrand Vice President, Corporate Affairs Ron A. Perrotta Vice President, Marketing and Sales Louise St...

  • Page 57
    ...ce 5 Place Ville Marie Suite 915 Montréal (Québec) H3B 2G2 Tel.: (514) 874-2600 Fax: (514) 874-2625 www.cogeco.ca Cable Ontario 950 Syscon Road P.O. Box 5076 Station Main Burlington (Ontario) L7R 4S6 Tel.: (905) 333-5343 Fax: (905) 332-8426 Cable Québec 1630 6e Rue Suite 200 Trois-Rivières (Qu...

  • Page 58
    ... than a change of address, financial information or a change of registration of shares, please contact the Legal Affairs Department of the Corporation. Duplicate Communications Some shareholders may receive more than one copy of publications such as Quarterly Reports and the Annual Report. Every...

  • Page 59
    bbc4inc.com

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    WWW.COGECO.CA