Cogeco 2005 Annual Report Download

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A World to Build
Annual Report 2005

Table of contents

  • Page 1
    A World to Build Annual Report 2005

  • Page 2
    1,355,818 Revenue-Generating Units

  • Page 3
    ... clientele. Today Cogeco Cable ranks second among cable system operators in Ontario and Québec, and fourth in Canada in terms of the number of basic service customers. This enviable position is largely attributable to the confidence our clients place in us, to a team of dedicated employees present...

  • Page 4
    ... of F-Secure security products, the world leader in virus protection and intrusion prevention, Cogeco Cable facilitates its customers' tasks, allowing them to surf the Internet and receive e-mails with greater security. Free for Standard and Pro customers, and at a low cost for Mini customers, this...

  • Page 5
    .... Switched digital broadcast will allow improved service and better bandwidth utilization. Year after year, Cogeco Cable enriches its offering, provides new services and products and increases the efficiency of its hardware and its network in order to respond to current and future customers' needs...

  • Page 6
    ... public affairs and live coverage, that is exclusive to Cogeco Cable customers. In 2005, TVCOGECO enjoyed major successes with network broadcasting of Québec Major Junior Hockey League hockey matches and of Secondaire en spectacle in Québec, Ontario Hockey League coverage and the first annual...

  • Page 7
    ... CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS THREE-YEAR FINANCIAL HIGHLIGHTS INVESTOR INFORMATION CUSTOMER STATISTICS BOARD OF DIRECTORS AND CORPORATE MANAGEMENT OPERATIONS AND CORPORATE INFORMATION 7 8 11 29 34 54 55 57 58 59 5 Cogeco Cable Inc. 2005

  • Page 8
    ... prices, and striving to provide both superior customer care and growing profitability. GLOSSARY Digital services: digital video services DVR: digital video recorder (same as Personal Video Recorder or PVR) HD: high-definition HSI: high-speed Internet services HSI Lite: high-speed Internet service...

  • Page 9
    ...Interest coverage Customers and Terminals RGU Basic service customers Percent of penetration HSI service customers Digital service customers Digital telephony service customers Digital terminals Per Share Data (basic) Net income (loss) Cash flow from operations Weighted average number of outstanding...

  • Page 10
    ... our stock price up and put Cogeco Cable in a favourable market position. The Corporation's current growth and auspicious prospects support growth in its value. Cogeco Cable: Growing Value Customers, services and performance This growth is a matter of record. Since it made its first acquisition in...

  • Page 11
    ... tiers, expanded the offer of HD and VOD channels, launched a free SVOD offer for our pay television customers, launched the F-Secure security products for our Internet customers and expanded our Internet Lite service offering beyond Ontario on a customer acquisition basis in Québec. Finally, we...

  • Page 12
    ... view to increasing the potential for growth and corporate value. In a more distant future, the migration of our IP platform to the DOCSIS 3.0 standard will make transmission speeds of up to 200 Mbps possible. Switched digital broadcasting will provide improved video service and better bandwidth use...

  • Page 13
    ... 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, the introduction of...

  • Page 14
    ... products, i.e. television, which provides, access to analog, digital, HD, VOD and SVOD; the fastest HSI access in its markets and, just recently, digital telephony, a service that is comparable to conventional telephone service but costs less. The offer is supported by increasingly...

  • Page 15
    ... of homes passed and, in the case of all other services, as a percentage of basic customers in the cable systems where the service is offered. Customer Churn Customer churn provides a key measure of customer satisfaction and the effectiveness of loyalty programs. A retention focus is more cost...

  • Page 16
    ... will receive the services. The average life of a customer's subscription is reviewed annually and changes could have a significant impact on the amortization expense. Monthly fees from cable television and related services, from HSI access services and from digital telephony are recognized when...

  • Page 17
    ... shares. As of September 1, 1992, Cogeco Cable executed a management agreement with COGECO under which the parent company agreed to provide certain executive, administrative, legal, regulatory, strategic and financial planning services and additional services to the Corporation and its subsidiaries...

  • Page 18
    ... the timing of revenue recognition and certain related costs and the classification of certain items such as revenue, expense or capitalized costs. Consequently, Cogeco Cable adopted the following changes: • • Revenue from the sale of home terminal devices at a subsidized price, which...

  • Page 19
    ... information that is disclosed to investors and to the public. The Corporation has already undertaken a process to review and improve its internal controls, enabling its officers to certify Cogeco Cable's compliance with Regulation 52-111. Uncertainties and Main Risk Factors This section outlines...

  • Page 20
    ... for signal theft are still inadequate. Combined offers of services delivered to the home and mobile services are becoming increasingly common across the entire broadband telecommunications market. Some mobile telephone services already carry audio and video content in addition to Internet, e-mail...

  • Page 21
    ... such as MPEG-4, will promote the increased distribution and consumption of movies and television programs on demand through an Internet connection. This trend opens up the possibility that the market for existing analog and digital audiovisual programming distribution services may become fragmented...

  • Page 22
    ... Lite on an acquisition basis in Québec. The number of basic service customers dipped slightly due to stronger competition. 20 During the fourth quarter of the 2005 fiscal year, Cogeco Cable launched its digital telephony service to its HSI customers in Burlington, Oakville and Windsor in Ontario...

  • Page 23
    ...costs Management fees - COGECO Inc. Operating Income Operating Margin Equipment cost of sales declined by $5.3 million as more customers decided to rent their digital terminals instead of purchasing them. Furthermore, IP transport costs for HSI services and affiliation costs for television services...

  • Page 24
    ... costs is largely attributable to the 6.6% rise in RGU that led to greater customer care expenses and to an increase in administration expense related to the review and improvement of internal controls to fulfill the requirements of regulations 52-109 and 52-111. Furthermore, as Cogeco Cable...

  • Page 25
    ... for further discussion on page 28. Includes mainly new and replacement drops but also digital terminals, cable modems and multimedia terminal adapters for telephony. (3) Includes headend equipment and expenditures related to telephony transport. (4) Includes capital leases that are excluded in...

  • Page 26
    ... is presented in the table below. Equipment subsidies mainly relate to subsidies on sales of 12,810 and 56,798 digital terminals in fiscal 2005 and 2004, respectively. During fiscal 2005, a significant reduction in the increase in deferred charges was recorded, in light of the digital terminal...

  • Page 27
    ...-related financial ratios over the last two fiscal years and the fiscal 2006 guidelines. Outstanding Share Data A description of Cogeco Cable's share data as at September 30, 2005 is presented in the table below. Additional details are provided in Note 9 on page 44. Number of shares/ options...

  • Page 28
    ... outlook on Cogeco Cable's ratings. DBRS has raised its outlook to positive on the Senior Secured Debentures and Notes' BB(high) rating and on the Second Secured Debentures' BB rating based on good growth in the number of HSI service customers in a competitive environment and on the use of Free...

  • Page 29
    ...service customers is generally lower in the third quarter, mainly because students leave their campus at the end of the school year. Cogeco Cable offers its services in several university and college towns such as Kingston, Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski...

  • Page 30
    ... for employee bonuses increased in the fourth quarter. Furthermore, the rise in customer care expenses is largely attributable to the 6.6% yearover-year rise in RGUs. On the other hand, costs of sales, including equipment sold, network fees and IP transport costs for HSI services, have declined...

  • Page 31
    ... sections: MANAGEMENT'S RESPONSIBILITY AUDITORS' REPORT CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF RETAINED EARNINGS CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 30 31 31 32 33 34 29 Cogeco Cable Inc. 2005

  • Page 32
    ... Canadian generally accepted accounting principles and have been approved by the Board of Directors. Operating and financial information used elsewhere in the annual report is consistent with that in the financial statements. In fulfilling its responsibilities, management of Cogeco Cable Inc. and...

  • Page 33
    ... 526,480 315,208 8,026 203,246 140,214 63,032 57,957 5,075 37,269 (32,194) Revenue Service Equipment Operating costs (note 1k)) Management fees - COGECO Inc. (note 15) Operating income before amortization Amortization (note 2) Operating income Financial expense (note 8) Income before income taxes...

  • Page 34
    ...,039 4,535 35,574 687,960 48,293 989,552 1,761,379 Fixed assets (note 4) Deferred charges (note 5) Customer base (note 6) Liabilities and Shareholders' equity Liabilities Current Bank indebtedness (note 7) Accounts payable and accrued liabilities Income tax liabilities Deferred and prepaid income...

  • Page 35
    ... Amortization (note 2) Amortization of deferred financing costs Future income taxes (note 3) Other Cash flow from operations Changes in non-cash operating items (note 12a)) Cash flow from investing activities Acquisition of fixed assets (note 12b)) Increase in deferred charges Other (110,365) (13...

  • Page 36
    ... 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, high-speed Internet access and digital telephony services...

  • Page 37
    ... 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 high-speed Internet customer...

  • Page 38
    ... the Binomial option pricing model. As a result of applying these new recommendations, a compensation expense of $484,000 ($238,000 in 2004) was recorded for the year ended August 31, 2005. Supplementary information required under the new recommendations is presented in note 9. 36 Cogeco Cable Inc...

  • Page 39
    ... the principal sources is as follows: • Revenue from cable television and related services, and from high-speed Internet access and digital telephony services are recognized when services are provided; Revenue generated from sales of home terminal devices are recorded as equipment revenue upon...

  • Page 40
    ... The Corporation considers its cable distribution, high-speed Internet access and digital telephony 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 41
    ...and the revenue and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the determination of pension plans liabilities and accrued employee benefits, the determination of allowance for doubtful accounts, the useful life of assets for amortization...

  • Page 42
    ... 3 INCOME TAXES (continued) The following table provides the reconciliation between statutory federal and...Total future income tax assets Future income tax liabilities: Fixed assets Deferred charges Customer base Total future income tax liabilities Net future income tax liabilities 40 Cogeco Cable...

  • Page 43
    ... Cost Land Buildings Cable systems Equipment, programming equipment, furniture and fixtures Home terminal devices Rolling stock under capital leases Other equipment Leasehold improvements Accumulated amortization Buildings Cable systems Equipment, programming equipment, furniture and fixtures Home...

  • Page 44
    ... dollars) 2005 $ 2,067 21,646 13,249 1,262 2 38,226 2004 $ 3,398 21,833 20,875 2,152 35 48,293 New services launch costs Reconnect costs Equipment subsidies Financing costs Other 6 CUSTOMER BASE (amounts are in thousands of dollars) 2005 $ 1,040,333 50,781 989,552 2004 $ 1,040,333 50,781 989...

  • Page 45
    ...'s option at any time, in whole or in part, prior to maturity at 100% of the principal amount plus a make-whole premium. The Series A mature on October 31, 2008 and the Series B mature on October 31, 2011. The Senior Secured Notes Series B have an interest coupon rate of 7.73% per annum, payable...

  • Page 46
    ...2007 $ 1,351 2008 $ 975 2009 $ 381 2010 $ 5 9 CAPITAL STOCK Authorized Unlimited number of: Class A Preference shares, without voting rights, redeemable by the Corporation and retractable at the option of the holder at any time at a price of $1 per share, carrying a cumulative preferential cash...

  • Page 47
    ..., up to 40,000 annually, under this plan. Stock Option Plan A total of 1,832,500 subordinate voting shares are reserved for the purpose of the Stock Option Plan. The minimum purchase price at which options are granted is not less than the market value of such shares at the time the option is granted...

  • Page 48
    ... price $ 86,084 163,190 321,543 19,906 590,723 7.17 7.92 7.25 5.13 7.35 7.05 16.42 22.39 36.39 18.98 Options exercisable Number exercisable 51,650 70,646 184,649 19,906 326,851 Weighted average exercise price $ 7.05 16.26 22.82 36.39 19.74 46 Cogeco Cable Inc...

  • Page 49
    ... options, and because changes in the subjective assumptions can have a significant effect on the fair value estimate, in management's opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 47 Cogeco Cable...

  • Page 50
    ... to $197,000 ($101,000 in 2004) has been recorded related to this plan. 10 EARNINGS (LOSS) PER SHARE The following table provides a reconciliation between basic and diluted earnings (loss) per share: (amounts are in thousands of dollars, except number of shares and per share data) 2005 $ 28,721...

  • Page 51
    ... risk by completing transactions with financial institutions that carry a credit rating equal or superior to A+. In addition, since the Corporation has a large and diversified clientele, credit risk concentration from customers is minimal. 49 Cogeco Cable Inc. 2005

  • Page 52
    ... its subsidiaries' obligations are limited to the payment of the monthly employer's portion. Expenses related to these two plans amounted to $1,239,000 ($1,247,000 in 2004). The defined benefit pension plans provide pensions based on the number of years of service and the average salary during the...

  • Page 53
    ... 385 86 657 2004 $ 355 388 (283) (9) 99 550 Defined benefit pension costs Current service cost Interest cost Actual return on plans' assets Difference between expected return and actual return on plans' assets Amortization of net actuarial loss Net periodic benefit cost 51 Cogeco Cable Inc. 2005

  • Page 54
    ... and its subsidiaries are committed under lease agreements and other long term contracts to make annual payments as follows: (amounts are in thousands of dollars) 2006 $ 15,876 2007 $ 13,336 2008 $ 13,161 2009 $ 11,665 2010 $ 10,754 2011 and thereafter $ 10,836 52 Cogeco Cable Inc. 2005

  • Page 55
    ... Affairs. No direct remuneration is payable to such officers by the Corporation. However, the Corporation granted 38,397 stock options (48,037 in 2004) to COGECO Inc.'s officers during fiscal year 2005. Under the Management Agreement, the Corporation pays monthly fees equal to 2% of its total...

  • Page 56
    ... 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 Income Net...

  • Page 57
    ... Second Secured Debentures, Series A SHARE INFORMATION As at August 31, 2005 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 15,691,100 24,293,486 The Toronto Stock Exchange...

  • Page 58
    ... Total 9,220,082 2004 Total Quarters ended The Toronto Stock... Exchange High Low Close Volume (shares) Nov. 30 $ 18.90 15.35 15.45 6,637,602 Feb. 29 $ 21.98 15.40 20.40 5,296,122 May 31 $ 22.00 17.85 21.70 3,249,800 Aug. 31 $ 22.95 19.55 20.39 2,510,464 17,693,988 56 Cogeco Cable...

  • Page 59
    ... on the billing dates, which are spread throughout the month, instead of the number of customers at the end of the fiscal year. This change produces a downward adjustment. Homes Passed Basic Service % of Penetration(1) 59.0 51.9 56.7 Customers Breakdown by Province Ontario Québec Total 986,401...

  • Page 60
    ... Legal Officer and Secretary Hélène Laurin Vice President, Administration and Control Yves Mayrand Vice President, Corporate Affairs Ron A. Perrotta Vice President, Marketing Louise St-Pierre Vice President and Chief Information Officer 58 Gaston Germain Vice President, Ontario Cogeco Cable...

  • Page 61
    ... Operations Head Office 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...

  • Page 62
    ... Reports are available in the Investor Relations section of the cogeco.ca website or upon request by calling (514) 874-2600. Des versions françaises du rapport annuel, de la notice annuelle et des rapports trimestriels sont disponibles à la section Relations avec les investisseurs du site Internet...

  • Page 63
    ... Milton Fergus Acton Elora Oakville Burlington Brights Grove Camlachie Corunna Mooretown Courtwright Wallaceburg St. Clair Beach Belle River Puce Tecumseh Windsor La Salle Amherstburg Sarnia Wyoming Petrolia Oil City Oil Springs Dresden London Waterdown Hamilton Dundas Ancaster Thorold Welland...

  • Page 64
    ...Inter-city Fiber Deployment CABLE OPTIC NETWORK: 3,550 KM OPTIC FIBER: 44,370 KM Sept-îles Port-Cartier ST. LA WRENCE RIVER Baie-Comeau Gaspé Forestville Matane Alma QUÉBEC Chicoutimi Roberval Mont-Joli Sayabec Amqui Causapscal Chandler Newport Bonaventure Rimouski Campbellton Saint...

  • Page 65
    63 Cogeco Cable Inc. 2005

  • Page 66
    64 Cogeco Cable Inc. 2005

  • Page 67
    Captions : Page 8-Laviolette Bridge: Robert Calvé, Trois-Rivières, Québec Page 9- Niagara Falls: Joan West, Bainsville, Ontario Design: www.bob.ca

  • Page 68
    www.cogeco.ca