Cogeco 2005 Annual Report Download - page 24

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Cogeco Cable Inc. 2005
• The rise in other operating 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
significantly surpassed its Operating Income growth objectives
for fiscal 2005, the provision for employee bonuses increased.
Other operating costs as a percentage of service revenue remained
relatively stable.
Management fees paid to COGECO Inc. are discussed in detail in the
“Related Party Transactions” section on page 15.
Operating Income
Operating Income improved by $24.3 million or 11.9% as a result
of revenue growth, offset by a modest increase in operating costs.
Cogeco Cable’s Operating Margin continues to improve, rising
from 38.6% in fiscal 2004 to 41% in fiscal 2005.
Fixed Charges
Years ended August 31, 2005 2004
(in thousands of dollars, Change
except percentages) $$%
Amortization 125,088 140,214 (10.8)
Financial expense 55,692 57,957 (3.9)
Amortization amounted to $125.1 million during fiscal 2005
compared to $126.2 million for the same period last year, excluding
the financial impact of a $14 million adjustment for a change
in the useful lives of certain long-term assets as described below.
Amortization declined as many cable modems and digital
terminals were fully amortized.
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 rather than repair
defective devices. Therefore, 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.
Financial expense declined by $2.3 million as the level of
Indebtedness was lower due to Free Cash Flow generated.
The average interest rate was 7.5% in fiscal 2005 compared
to 7.2% in fiscal 2004.
Income Taxes
For fiscal 2005, income taxes amounted to $18 million compared
to $37.3 million for fiscal 2004, or $9.6 million excluding
the financial impact of non-cash adjustments described below.
The income tax increase, on a normalized basis, 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 in the
first quarter of fiscal 2004. This amount was partly offset by
a non-cash reduction of future income tax liabilities of $4.9 million
during this same quarter. 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 $2.8 million in fiscal 2005 mainly relate
to the large corporation tax, which is computed on the basis of
the Corporation’s capital base. Since Cogeco Cable has accumulated
non-
capital income tax losses of about $86.6 million as at August 31,
2005, most of the income taxes arising from earnings are deferred.
Net Income (Loss)
In fiscal 2005, net income amounted to $28.7 million, or $0.72
per share, compared to a net loss of $32.2 million, or $0.81 per share,
in fiscal 2004. If non-cash adjustments for amortization and income tax
(which amounted to $41.6 million in 2004) are excluded, the net
income for 2004 would have been $9.4 million or $0.24 per share.
During fiscal 2005 and 2004, 140,766 and 164,980 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 44, 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 income for fiscal 2005 would have been reduced
by $384,000 and the net loss for fiscal 2004 would have been
increased by $384,000.
Management’s Discussion and Analysis