Cogeco 2004 Annual Report Download - page 19

MANAGEMENT’S DISCUSSION AND ANALYSIS
Cogeco Cable Inc. 2004 17
Operating Income
OPERATING INCOME INCREASED 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 Margin has resulted in the
margin going up from 35.9% in fiscal 2003 to 38.6% in fiscal 2004.
Fixed Charges
Years ended August 31, 2004 2003
(in thousands of dollars, (restated) Change
except percentages) $$%
Amortization 140,214 110,234 27.2
Financial expense 57,957 61,113 (5.2)
Excluding the financial impact of a change in the useful lives of
certain long-term assets described below, amortization amounted
to $120.1 million. Increased amortization mainly stems from capital
expenditures linked to HSI and digital services.
Effective September 1, 2003, the estimated useful life of home
terminal devices rented by the Corporation’s customers was
revised downward since unit costs, converted into Canadian
dollars, declined significantly during 2003. Considering the lower
unit costs, it is now often more economical to replace defective
devices rather than repair them. As a result of this evolution, the
estimated useful life of cable modems was revised from seven
years to three years and since the digital terminal unit cost has
declined more gradually, their estimated useful life was revised
from seven years to five years. The change in the useful life of
home terminal devices and certain other long-term assets resulted
in an increase of $20.1 million in amortization expense.
Financial expense declined by $3.2 million as the level of Indebt-
edness was lower due to Free Cash Flow generated and lower
short-term interest rates on the Term Facility. The average interest
rate was 7.2% in fiscal 2004 compared to 7.3% in fiscal 2003.
Income Taxes
Income taxes for fiscal 2004 amounted to $37.3 million compared
to $4.4 million for fiscal 2003. Excluding the financial impact of
non-cash adjustments described below, income taxes amounted
to $11.8 million compared to $4.4 million a year earlier. The
income tax increase was mainly attributable to the Operating
Income growth.
In November 2003, the Ontario government announced that
corporate income tax rates would not decline in the future but
would instead rise to 14% effective January 1, 2004. Prior to this
announcement, the tax rate was expected to decline from 11%
in 2004 to 8% in 2007. As a result, a $32.5 million non-cash
adjustment was recorded for future income tax liabilities. This
amount was partly offset by a non-cash reduction of future income
tax liabilities of $7 million. This reduction is related to the decline
in the carrying value of home terminal devices and certain other
long-term assets.
Current income taxes of $2.1 million in fiscal 2004 mainly relate
to the large corporation tax, which is computed on the basis of
the Corporation’s capital base. Since Cogeco Cable has accumu-
lated non-capital income tax losses of about $139.7 million as at
August 31, 2004, most of the income taxes arising from earnings
are deferred.
Net Loss
In fiscal 2004, net loss amounted to $32.2 million, or $0.81 per
share, compared to $124,000, or $0.00 per share, in fiscal 2003.
The net loss in fiscal 2004 is attributable, as previously mentioned,
to non-cash adjustments for amortization and income taxes,
which totaled $45.6 million. Additional amortization relating to
achange in the useful life of certain long-term assets amounted
to $13.1 million net of income taxes, and the income tax adjust-
ment associated to the increase in the Ontario income tax rates
amounted to $32.5 million.
During fiscal 2004 and 2003, 164,980 and 141,020 stock options
were granted, respectively. The Corporation recorded compensation
expense for options granted on or after September 1, 2003. As
discussed in Note 9 on page 40, if compensation cost had been
recognized using the fair-value-based method at the grant date for
options granted between September 1, 2001 and August 31, 2003,
Cogeco Cable’s net loss for fiscal 2004 and 2003 would have been
increased by $384,000 and $389,000, respectively.