Cogeco 2010 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... listed on the Toronto Stock Exchange ("TSX") under the symbol CCA. Cogeco Cable builds on its cable distribution base by offering Analogue and Digital Television, High Speed Internet ("HSI"), Telephony, data communications and other advanced telecommunication services such as Ethernet, private line...

  • Page 3
    Annual Report Financial highlights ...4 Message to shareholders...5 Management's Discussion and Analysis (MD&A) ...7 Consolidated Financial Statements ...43 Three-year financial highlights ...74 Investor information ...75 Customer statistics ...77 Board of Directors and corporate management ...78 ...

  • Page 4
    ... Definition High Speed Internet Internet Protocol Megabits per second Megahertz Revenue-Generating Units include Basic Cable, HSI, Digital Television and Telephony Service Customers Subscription Video on Demand Services Video on Demand Services Voice-over-Internet Protocol COGECO CABLE INC. 2010 3

  • Page 5
    ... Capital expenditures and increase in deferred charges Free cash flow(2) Financial Condition Fixed assets Total assets Indebtedness(3) Shareholders' equity RGU growth Per Share Data(4) Earnings (loss) per share Adjusted earnings per share(2) Weighted average number of outstanding shares 3.24 2.63 48...

  • Page 6
    ... and higher quality experience, we enhanced our video content offering in residential markets in Canada by expanding Digital content, VOD and HD services. We augmented our Internet offering with new packages, including services powered by DOCSIS 3.0, which enables customers to benefit from speeds up...

  • Page 7
    .... We extend our sincere thanks and gratitude and count on them to keep striving to satisfy our customers with a warm welcome, an attentive ear and commitment to service. Louis Audet President and Chief Executive Officer Jan Peeters Board Chair 6 COGECO CABLE INC. 2010 Message to shareholders

  • Page 8
    ... operations ...32 European operations ...33 Three-year annual financial highlights and quarterly financial highlights ...35 Fiscal 2011 financial guidelines ...39 Non-GAAP financial measures ...40 Additional information ...42 Management's Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 7

  • Page 9
    .... It is Cogeco Cable's general policy to fully own its distribution networks, head-ends and data centres as well as its transmission equipment and access facilities. As at August 31, 2010, Digital Television, VOD and Telephony services were available to approximately 99%, 95% and 92% of homes passed...

  • Page 10
    ...cable modem investments and backoffice applications, all while maintaining service continuity with existing video, VoIP, and ultra-broadband Internet services. In addition, Cogeco Data Services Inc. ("CDS") operates a 625 kilometre fibre optic network that extends throughout the Greater Toronto Area...

  • Page 11
    .... Penetration statistics measure Cogeco Cable's market share. Cogeco Cable computes the penetration for Basic Cable services as a percentage of homes passed and, in the case of all other services, as a percentage of Basic Cable Service customers in the areas where the service is offered. For further...

  • Page 12
    ... service potential are expensed. Cogeco Cable capitalizes direct labour and direct overhead costs incurred to construct new assets, enhance existing assets and connect new customers. Although capitalization of financial expense is permitted for construction activities, it is the Corporation's policy...

  • Page 13
    .... Loans and receivables instruments and all financial liabilities are carried at amortized cost using the effective interest rate method. The Corporation has determined that none of its financial assets are classified as available-for-sale or held-to-maturity. 12 COGECO CABLE INC. 2010 Management...

  • Page 14
    ..., Chief Legal Officer and Secretary and the Vice President and Treasurer. No direct remuneration is payable to such senior executives by the Corporation. The Corporation granted 33,266 stock options to these senior executives, who also are COGECO's senior executives, during the 2010 fiscal year...

  • Page 15
    ... fiscal 2010 Goodwill and intangible assets In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. The new Section...

  • Page 16
    ... the transition to IFRS. This team reports periodically to the Audit Committee, which oversees the IFRS implementation project on behalf of the Board of Directors. The Corporation is assisted by external advisors as required. Management's Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 15

  • Page 17
    ...and For each area review identified in the scoping and diagnostic phase Test and execute changes to information systems and business processes. Obtain formal approval of required accounting policy changes and selected accounting policy choices. Communicate impact on accounting policies and business...

  • Page 18
    ... growth opportunities for HSI, Digital Television and Telephony services in its footprint, making the most efficient use of its own hybrid fibre-coaxial ("HFC") plant. As markets evolve and mobility becomes a more cost-effective substitute to wireline communications, Cogeco Cable may need to add...

  • Page 19
    ... new VOD service on its digital platform in 2011, and thus be able to compete with the other VOD service offerings available in the Portuguese market. While Cabovisão and Zon continue to carry a number of legacy video services on less bandwidth-efficient analog channels, the competitive television...

  • Page 20
    ..., cable carriers have argued that the pricing methodology used to determine current rates in effect is adequate and that support structure service rates should not be increased. The CRTC is expected to issue a decision before the end of the calendar year. In Telecom Notice of Consultation CRTC 2010...

  • Page 21
    .... Shaw, the largest broadcasting distributor in Canada with approximately 3.2 million basic wireline and direct-to-home satellite customers, will ultimately control a national overthe-air television network, some 36 English-language specialty television services, as well as pay television and VOD...

  • Page 22
    ... and its relevant market. The development of new services or additional lines of business, and the acquisition of new business properties, may not necessarily generate the anticipated results or benefits. There is no assurance that Cogeco Cable will be able to maintain or increase distributions to...

  • Page 23
    ... of HSI usage billing, rate increases implemented at the end of fiscal 2009 and during fiscal 2010 and the revenue related to the new levy amounting to 1.5% of gross Cable Television service revenue imposed by the CRTC in order to finance the new Local Programming Improvement Fund ("LPIF") in the...

  • Page 24
    ... by the increase in amortization expense. Excluding the impact of the decrease in (1) corporate income tax rates described above, adjusted net income would have amounted to $127.5 million for the year. At $157.3 million, fiscal 2010 net income significantly exceeded the revised projection issued on...

  • Page 25
    ...Broadcasters ("CAB"), Videotron and CF Cable TV Inc. as plaintiffs and the Crown as the defendant. Cogeco Cable sought and obtained intervener status in this proceeding with a view of supporting the position of the plaintiffs and protecting its rights to recover past payments of Part II licence fees...

  • Page 26
    ... losses, tax benefits granted, tax inspections, claims or appeals in progress. Consequently, Cabovisão's tax returns for the taxation years 2006 to 2010 are still subject to review by the tax authorities and therefore, the amount of available tax losses could be significantly reduced based on past...

  • Page 27
    ... in income tax payments stemming from modifications to the corporate structure. Changes in non-cash operating items required cash outflows of $77.5 million, mainly as a result of a decrease in income tax liabilities combined with increases in income taxes receivable and accounts receivable, partly...

  • Page 28
    ...more details. Cogeco Cable incurs significant costs to reconnect or activate additional services for Basic Cable, HSI, Digital Television and Telephony customers. Equipment subsidies, which were mainly related to subsidies on sales of digital terminals in Canada and cable modems in Portugal are now...

  • Page 29
    ... no long-term debt issue was completed in the fiscal year. It also reflects the lower amount drawn on the new Term Revolving Facility which replaced the Corporation's Term Facility on July 12, 2010 as described in the "Financing" section. In fiscal 2011, the financial leverage ratio relating to net...

  • Page 30
    ...the rise in the average cost of Indebtedness described above. See "Fiscal 2011 financial guidelines" section on page 39 for further details. Outstanding share data A description of Cogeco Cable's share data as at September 30, 2010 is presented in the table below. Additional details are provided in...

  • Page 31
    ... of a new Term Revolving Facility. As part of the usual conduct of its business, Cogeco Cable maintains a working capital deficiency due to a low level of accounts receivable as the majority of the Corporation's customers pay before their services are rendered, unlike accounts payable and accrued...

  • Page 32
    ... pension plan liabilities and accrued employee benefits. The nature of those obligations prevents the Corporation from estimating an annual breakdown. (4) Annual breakdown excludes other long-term obligations. In the normal course of business, Cogeco Cable enters into agreements containing features...

  • Page 33
    ...mainly due to the increased penetration in areas where the service is already offered and to new areas where the service was launched. Telephony service coverage, as a percentage of homes passed, was above 90% at both August 31, 2010 and 2009. Finally, the net additions of Digital Television service...

  • Page 34
    ... fees payable to COGECO, rose by $75.2 million, or 14.1%, compared to fiscal 2009. The increase in operating costs is mainly attributable to servicing additional RGU, the launch of new HD channels, additional marketing initiatives and the new levy amounting to 1.5% of gross Cable Television service...

  • Page 35
    ... dollar which surpassed increases in operating costs related to additional marketing initiatives and the launch of new channels, net of the impact of cost reduction initiatives implemented by Cabovisão. Operating costs from the European operations for fiscal 2010 in the local currency amounted to...

  • Page 36
    ... tax rates. (4) Long-term financial liabilities include long-term debt, derivative financial instrument liabilities and pension plan liabilities and accrued employee benefits. (5) Per multiple and subordinate voting share. Management's Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 35

  • Page 37
    ...the end of the television seasons, and students leaving their campuses 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 in Canada, and Aveiro, Covilh...

  • Page 38
    ... interest for HD television services. In Europe, fourth-quarter fiscal 2010 net additions show a return to customer growth for the Corporation's European operations, and the Basic Cable service customer base has begun to stabilize and reflect the benefits of Cabovisão's customer retention and...

  • Page 39
    ... year. The increase in operating costs is mainly attributable to servicing additional RGU, the launch of new HD channels, additional marketing initiatives and the new levy amounting to 1.5% of gross Cable Television service revenue imposed by the CRTC in order to finance the LPIF in Canada. Fourth...

  • Page 40
    ... strong interest in the Corporation's growing HD service offerings. Canadian operations revenue will also benefit from the impact of rate increases implemented in June 2010 in Ontario and Québec, averaging $2 per Basic Cable service customer. Cogeco Cable's strategies include consistently effective...

  • Page 41
    ... charges Free cash flow Net customer addition guidelines RGU growth 250,000 287,111 1,340 530 39.6% 275 70 65 120 340 55 1,281 510 39.8% 259 65 (41) 157 320 175 $ Actuals Fiscal 2010 $ Non-GAAP financial measures This section describes non-GAAP financial measures used by Cogeco Cable throughout...

  • Page 42
    ... the application of the CICA Handbook Section 3064. Please refer to the "Critical accounting policies and estimates" section on page 11 for more details. Adjusted net income and adjusted earnings per share Adjusted net income and adjusted earnings per share are used by Cogeco Cable's management and...

  • Page 43
    ... policies and estimates" section on page 11 for more details. Additional information This MD&A was prepared on October 27, 2010. Additional information relating to the Corporation, including its Annual Information Form, is available on SEDAR at www.sedar.com. 42 COGECO CABLE INC. 2010 Management...

  • Page 44
    Consolidated Financial Statements Consolidated Financial Statements Management's responsibility ...44 Auditor's report...44 Consolidated statements of income (loss) ...45 ......48 Notes to the consolidated financial statements ...49 Consolidated Financial Statements COGECO CABLE INC. 2010 43

  • Page 45
    ... of Cogeco Cable Inc. and its subsidiaries has developed, and continues to improve administrative and accounting systems in order to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and maintains internal accounting controls to ensure that financial records...

  • Page 46
    ...share data) Revenue Service Equipment Operating costs Management fees - COGECO... taxes Income taxes (note 8) Net income (loss) 1,270,391 10...2010 $ 2009 $ (restated) Earnings (loss) per share (note 9) Basic Diluted 3.24 3.23 (5.32) (5.32) Consolidated Financial Statements COGECO CABLE INC. 2010 45

  • Page 47
    ... 31, (In thousands of dollars) Balance as reported, beginning of year Changes in accounting policies (note 1B)) Balance as restated, beginning of year Net income (loss) Dividends on multiple voting shares Dividends on subordinate voting shares Balance, end of year 2010 $ 17,172 (24,279) (7,107) 157...

  • Page 48
    ... 2,702,819 On behalf of the Board of Directors, 990,061 4,849 (7,107) 19,581 1,007,384 2,630,912 244,173 41,020 33,877 - 44,674 - 363,744 1,009,788 2,168 12,900 3,113 231,815 1,623,528 Jan Peeters Director L. G. Serge Gadbois Director Consolidated Financial Statements COGECO CABLE INC. 2010 47

  • Page 49
    ..., net of discounts and transaction costs Repayments of long-term debt and settlement of derivative financial instruments Increase in deferred transaction costs Issuance of subordinate voting shares (note 14) Acquisition of subordinate voting shares held in trust under the Incentive Share Unit Plan...

  • Page 50
    ... Nature of operations Cogeco Cable Inc. (the "Corporation") is a Canadian public company whose shares are listed on the Toronto Stock Exchange ("TSX"). The Corporation's core business is providing Cable Television, High Speed Internet ("HSI"), Telephony and other telecommunications services to its...

  • Page 51
    ... retrospective application to the beginning of the 2009 fiscal year, without restatement of prior periods. The adoption of this new abstract during the second quarter of 2009 had no significant impact on the consolidated balance sheet at September 1, 2008. 50 COGECO CABLE INC. 2010 Consolidated...

  • Page 52
    ... sources is as follows Revenue from Cable Television, HSI, Telephony and other telecommunications services are recognized when services are rendered; Revenue generated from sales of home terminal devices is recorded as equipment revenue upon activation of services as management considers the sale...

  • Page 53
    ...which they are incurred. Amortization is recorded mainly on a straight-line basis over the estimated useful lives over the following periods: Buildings Cable systems Equipment, programming equipment, furniture and fixtures Home terminal devices Rolling stock and equipment under capital leases Other...

  • Page 54
    ... at the grant date by using the binomial pricing model and a compensation expense is recognized on a straight-line basis over the vesting period, which is three to five years, with a corresponding increase in contributed surplus. When the stock options are exercised, capital stock is credited by the...

  • Page 55
    ... related financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility, which are amortized over the term of the related financing on a straight-line basis. Derivative financial instruments and hedge accounting The Corporation uses...

  • Page 56
    ... operating segment. The Corporation's activities are carried out in Canada and in Europe. The principal financial information per business segment is presented in the table below: Canada 2010 (in thousands of dollars) Revenue Operating costs Management fees - COGECO Inc. Operating income before...

  • Page 57
    ... accrued represented management's best estimate based on the information available at that time. Management reviews its estimates periodically to take into consideration payments made relating to these contingencies as well as newly available information which would allow the Corporation to improve...

  • Page 58
    ...and approved by the Portuguese tax authorities on November 25, 2009. As part of their review, the Portuguese tax authorities have audited Cabovisão's tax returns for the 2003, 2004 and 2005 taxation years, which have resulted in notices Consolidated Financial Statements COGECO CABLE INC. 2010 57

  • Page 59
    ...: 2011 (in thousands of dollars) $ 31,143 2012 $ 48,964 2014 $ 21,154 2015 $ 13,548 9. Earnings (loss) per share The following table provides the reconciliation between basic and diluted earnings (loss) per share: 2010 (in thousands of dollars, except number of shares and per share data) Net...

  • Page 60
    10. Fixed assets 2010 (in thousands of dollars) Cost Land Buildings Cable systems Equipment, programming equipment, furniture and fixtures Home terminal devices Rolling stock and equipment under capital leases Other equipment Leasehold improvements 6,504 51,777 1,966,175 43,015 352,555 17,515 67,072...

  • Page 61
    ... currently available information and any additional recognition of pre-acquisition tax losses will be recorded as a reduction of goodwill. At August 31, 2010 and 2009, the Corporation tested the value of goodwill for impairment and concluded that no impairment existed. 60 COGECO CABLE INC. 2010...

  • Page 62
    ... on July 28, 2011. In addition to the interest swap rate of 2.08%, the Corporation will continue to pay the applicable margin on these Euro-denominated loans in accordance with the Term Revolving Facility. a) The Corporation benefits from a new $750 million Term Revolving Facility with a group...

  • Page 63
    ... expense, and are as follows: 2011 (in thousands of dollars) $ 2,883 2012 $ 2,183 2013 $ 847 2014 $ 35 14. 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...

  • Page 64
    ... 2010. The new plan is accessible to all employees up to a maximum of 7% of their base annual salary and the Corporation contributes 25% of the employee contributions. The subscriptions are made monthly and employee shares are purchased on the st stock market. Prior to January 1 , 2010, the Plan was...

  • Page 65
    ... stock options granted for the year ended August 31, 2010 was $8.12 ($8.74 in 2009) per option. For the purpose of compensation expense, stock-based compensation costs are amortized to expense on a straight-line basis over the vesting period, which is three to five years. Incentive share unit plan...

  • Page 66
    ... Share Unit Plan ("DSU Plan") to assist in the attraction and retention of qualified individuals to serve on the Board of Directors ("Board") of the Corporation. Each existing or new member of the Board may elect to be paid a percentage of the annual retainer in the form of deferred share units...

  • Page 67
    ...by the Corporation to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans, and cash contributed to its defined contribution plans, totalled $6,094,000 for the year ended August 31, 2010 ($5,351,000 in 2009). 66 COGECO CABLE INC. 2010 Consolidated...

  • Page 68
    ... plan liabilities and accrued employee benefits". 2010 (in thousands of dollars) Defined benefit pension costs Current service cost Past service cost Interest cost Actual return on plan assets Actuarial loss (gain) on obligation Cost before adjustments to recognize the long-term nature of employee...

  • Page 69
    ...assumptions used in measuring the Corporation's pension and other obligations are as follows: 2010 % Accrued benefit obligation Discount rate Rate of compensation increase Defined benefit pension costs Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 6.25...

  • Page 70
    ... policies in place and has established various credit controls, including credit checks, deposits on accounts and advance billing, and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated existing payment...

  • Page 71
    ...of its financial instruments as follows: a) The carrying amount of cash and cash equivalents, accounts receivable and accounts payable and accrual liabilities approximates fair value because of the short-term nature of these instruments. 70 COGECO CABLE INC. 2010 Consolidated Financial Statements

  • Page 72
    ... capital requirements. The following table summarizes certain of the key ratios used by management to monitor and manage the Corporation's capital structure: 2010 Net indebtedness (1) 2009 (restated) 1.0 2.0 7.3 / shareholders' equity 0.8 1.8 7.9 Net indebtedness(1) / operating income before...

  • Page 73
    ... Officer and Secretary and the Vice President and Treasurer. No direct remuneration is payable to such senior executives by the Corporation. The Corporation granted 33,266 stock options and 9,981 incentive share units (29,711 stock options in 2009) to these senior executives, who also are COGECO...

  • Page 74
    ...for amounts of $4,206,000. Related revenue and operating costs of an equivalent amount were recorded. 22. Governmental assistance In 2010, the Corporation recorded tax credits related to research and development costs in the amount of $921,000. These credits were accounted for as a reduction of the...

  • Page 75
    ... million related to the reduction of Canadian federal income tax rates. (5) Indebtedness is defined as the total of bank indebtedness, principal on long-term debt and obligations under derivative financial instruments. (6) Per multiple and subordinate voting share. 74 COGECO CABLE INC. 2010 Three...

  • Page 76
    ...337 Registrar / Transfer agent Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, ON M5J 2Y1 Tel.: 514-982-7555 Tel.: 1 800-564-6253 Fax: 416-263-9394 Stock exchange listing Trading symbol The Toronto Stock Exchange CCA Investor information COGECO CABLE INC. 2010 75

  • Page 77
    ... Toronto Stock Exchange High Low Close Volume (shares) Nov. 30 $ 44.50 26.08 31.15 4,716,677 Feb. 28 $ 36.50 27.83 31.43 4,119,787 May 31 $ 33.86 26.80 27.00 7,151,644 Aug. 31 $ 30.24 26.48 27.13 7,745,415 23,733,523 76 COGECO CABLE INC. 2010 Investor information

  • Page 78
    ...2010 Homes passed Canada Portugal(1) Total Homes connected(2) Canada Portugal Total Revenue-generating units Canada Portugal Total Basic Cable service customers Canada Penetration as a percentage of homes passed Portugal Penetration as a percentage of homes passed Total HSI service customers Canada...

  • Page 79
    ... JAN PEETERS Montréal (Québec) President and Chief Executive Officer Board Chair Olameter Inc. Board Chair LOUIS AUDET, Eng., MBA Westmount (Québec) President and Chief Executive Officer Cogeco Cable Inc. and COGECO Inc. Director WILLIAM PRESS COOPER, B. Sc., P.Eng. F.C.S.C.E. Oakville (Ontario...

  • Page 80
    ... and credit / collection YVES MAYRAND Vice President, Corporate Affairs ANNE MEZEI Vice President, Human Resources CLAUDETTE PAQUIN Vice President, Programming and Community Relations RON A. PERROTTA Vice President, Marketing and Strategic Planning LOUISE ST-PIERRE Senior Vice President, Residential...

  • Page 81
    Operations and corporate information Operations HEAD OFFICE 5 Place Ville Marie Suite 1700 Montréal (Québec) H3B 0B3 Tel.: 514-764-4700 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 QU...

  • Page 82
    ... (Ontario) M5X 1B2 1 Place Ville Marie Suite 3900 Montréal (Québec) H3B 4M7 TRANSFER AGENT SENIOR SECURED DEBENTURES AND SENIOR SECURED NOTES Computershare Trust Company of Canada QUARTER ENDS November, February, May YEAR END August 31 Operations and corporate information COGECO CABLE INC. 2010...

  • Page 83
    ... to report any perceived or actual instances of violations of the Code of Ethics (including complaints regarding accounting, internal accounting controls and audit matters). The Ethics Line is comprised of two toll-free telephone lines as well as a secure web site (see details below). The COGECO Inc...

  • Page 84
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