Cogeco 2005 Annual Report Download - page 26

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24
Cogeco Cable Inc. 2005
On the network side, numerous technology advancements will
also help reduce capital expenditures in general. Improvements in
compression and multiplexing techniques will continue to occur,
as they did significantly in the past few years, and will allow for
more and more video signals to be transmitted within a given
bandwidth without signal degradation. A good part of the increased
bandwidth needs, generated by growth in narrowcast digital services
such as Internet and VOD, will be accommodated through further
cost efficient node splitting. Future migration to more advanced
DOCSIS standards will allow for the use of more robust modulation
techniques in the return path as well as substantially higher
transmission speeds. Most importantly, the gradual migration
of cable systems to all-digital networks will allow operators
to recuperate the bandwidth currently used for analog distribution
and use it for digital signals distribution, including HD television
signals. This migration to all-digital systems will take some time
to complete and capacity upgrades will require 3 to 4 years.
As a result, capacity upgrades will consume relatively less capital
than it has been the case in the past.
Increase in Deferred Charges
Increase in deferred charges declined to $13.4 million in fiscal 2005
compared to $20 million in fiscal 2004. The breakdown of the
increase in deferred charges is presented in the table below.
Years ended August 31, 2006 2005 2004
(in thousands of dollars) Guidelines
(1)
$$$
Equipment subsidies — 1,293 9,532
Reconnection costs 15,666 11,468 10,490
New service launch costs
and others 4,924 621 —
20,590 13,382 20,022
(1)
See the “Fiscal 2006 Financial Guidelines” section on page 28
for further discussion.
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 rental program
offered to customers since the fourth quarter of fiscal 2004. New
services launch costs consist mainly of marketing costs associated
with the launch of digital telephony in new markets. During fiscal
2006, the increase in deferred charges should climb due to an
increase in reconnection costs and other deferred charges partly
related to digital telephony.
Free Cash Flow and Financing Activities
Free Cash Flow of $45.3 million was generated during fiscal 2005,
an increase of $1.7 million over fiscal 2004 as a result of rising
cash flow from operations partly offset by an increase in capital
expenditures and deferred charges.
In fiscal 2005, Indebtedness declined by $67.6 million essentially
due to Free Cash Flow of $45.3 million and an increase in non-cash
operating items
of $23.7 million. In fiscal 2004, Indebtedness
declined by $50.9 million essentially due to Free Cash Flow
amounting to $43.5 million and to an increase in non-cash
operating
items
of $4.3 million.
Cogeco Cable declared a quarterly dividend during the first quarter
of fiscal 2005 for the first time since fiscal 2001 as a result of
a significant improvement in its financial results leading to strong
Free Cash Flow. A quarterly dividend of $0.02 per share was
declared for the first three quarters of fiscal 2005 for subordinate
and multiple voting shares and a dividend of $0.04 per share was
declared for the fourth quarter due to a substantial improvement
in the Corporation’s overall results.
FINANCIAL POSITION
Since August 31, 2004, the “Indebtedness” and “Shareholder’s
equity” items of the balance sheet have undergone significant
changes. Indebtedness was reduced by $65.7 million, mainly due
to Free Cash Flow of $45.3 million and to an increase of $23.7 million
in non-cash
operating items
. Shareholder’s equity increased
by $26 million mainly attributable to net income of $28.7 million
partly offset by dividends totalling $4 million. At August 31, 2005,
the Corporation performed an impairment test of the value of
the customer base and concluded that no impairment existed.
Management’s Discussion and Analysis