Revenue - SOCAN...Returns FDR - - 1 - Other* 81 39 66 94 87,213 75,652 103,031 95,027 United States...

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2018 was another impressive year for SOCAN, as the organization continues to break records for licensing revenue and distributions to our members.

SOCAN’s total revenue was $375-million, an increase of 11 per cent over the previous year. Gross expenses were $49.7-million, an increase of 4 per cent, due primarily to the additional work required to realize the expansion of business and rights with the acquisition of SODRAC.

Most importantly, royalty distributions to Members were $320-million, an increase of $25 million from the previous year.

This achievement extends SOCAN’s position as one of the top music rights organizations in the world. It demonstrates our strength in licensing the performing right and reproduction right, as well as our continuing focus on efficient expense management. This ensures that more royalties are provided to the 160,000 Canadian songwriters, composers, music publishers and visual artists, and the millions of rightsholders whom we represent in Canada, via agreements with 104 societies in 214 countries and dependent territories.

Financial Greatest Hits in 2018: Internet Revenue 2018 +29%

$320M Distributed to music

creators and publishers

8% $62.6M2018

$48.6M

$33.8M

$15.5M

2017

2016

2015

Record Revenue

$87M

63B

International Revenue for Canadian-created music

performances processed

25% since 2014

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Revenue

Domestic Revenues, inclusive of performing rights, reproduction rights and private copy, totaled $286-million in 2018 (2017: $262-million). Year-over-year variances are shown in Chart No.1

Performing Right Revenue

Performing rights collections from licensing the use of the world’s repertoire in Canada increased by 8% to $282.6-million (2017: $262-million).

In 2018, revenue from traditional sources (TV, Cable & Radio) was $160.8-million, representing a 4% decline from the previous year (2017: $166.9-million), which was an unusual period of growth due primarily to revenue from one-time major sporting events.

Internet revenue continues to exhibit impressive growth, reaching $62.6-million (2017: $48.6-million) due to very strong growth from existing licensed organizations, and new service providers entering Canada.

Satellite Radio has continued to show steady growth, with 2018 revenue at $16.1-million (2017: $15.8-million).

General & Concert revenues exhibited continued stability with revenues of $41.5-million (2017: $41.4-million), as the live music industry remains strong in Canada.

In 2017, a hearing with the Copyright Board of Canada was completed for the Pay Audio Tariff for the licensing periods from 2010 to 2016. The licensees have proposed lower rates under this interim tariff. A decision from the Copyright Board is still pending, and SOCAN may be required to refund license fees previously paid. As such, SOCAN included $0.6-million as an accrued liability as a reduction to revenue in 2019. The potential total liability is $14.5-million.

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The year 2018 was a ground-breaking one for royalties from international affiliated music rights organizations (MROs), increasing by $11.6-million to $87.2-million (2017: $75.6-million), and they continue to surpass any individual source of domestic revenue. The increase arose from a combination of exceptional member activity abroad, and an increasingly proactive approach by our International Relations team.

CHART No. 2 shows a breakdown of the international revenue SOCAN received from the TOP 10 MROs for the past two years, and a summary total for those outside the Top 10. The top two earning MROs in 2018 for SOCAN members were ASCAP and BMI in the United States, where approximately $38.3-million in total was collected (2017: $31.7-million), representing 43.9% of total international royalties.

The next top-earning MRO was SACEM from France, where SOCAN collected royalty income of $10.4-million (2017: $8.5-million), representing 11.9% of total international royalties. The top 10 MROs accounted for 84.3% of SOCAN’s international royalties.

International Royalties

Reproduction Rights

With the acquisition of SODRAC, Reproduction Rights for music creators, publishers and visual artists became a new stream of revenue in 2018. Domestic Reproduction Rights Revenue totalled $3.8-million, with International Reproduction Rights Revenue totalling $1.3-million.

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TABLE NO. 1 - ROYALTIES FROM AND TOINTERNATIONAL MROs (IN THOUSANDS OF DOLLARS)

COUNTRY MRO REVENUE FROM MRO DISTRIBUTIONS TO MRO2018 2017 2018 2017

Argentina SADAIC 504 595 61 32 Australia APRA 2,900 2,749 2,100 2,020 Austria AKM 688 537 72 83 Belarus NCIP - - - - Belgium SABAM 1,292 1,275 173 130 Brazil Various 976 1,348 66 134 Bulgaria MUSICAU-

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Chile SCD - 50 7 11 China MCSC 22 72 8 5 Colombia SAYCO 97 - 24 35 Croatia HDS 97 66 3 3 Czech Republic OSA 112 209 7 18 Denmark KODA 1,548 1,571 221 257 Finland TEOSTO 875 552 90 74 France SACEM 10,420 8,483 3,100 2,987 Germany GEMA 6,117 3,449 900 850 Greece AEPI - - 6 22 Hong Kong CASH 120 115 27 64 Hungary ARTISJUS 192 203 12 22 Ireland IMRO 512 357 325 224 Israel ACUM 332 307 10 28 Italy SIAE 2,819 2,682 391 444 Jamaica JACAP 20 15 7 7 Japan JASRAC 1,553 1,661 118 151 Korea KOMCA 254 195 110 49 Latvia AKKA/LAA 37 16 1 1 Lithuania LATGA-A 41 37 1 1 Malaysia MACP 28 72 3 4 Mexico SACM 225 213 53 44 Netherlands BUMA 2,019 1,563 384 334 Norway TONO 566 457 117 112 Peru APDAYC 14 42 3 2 Philippines FILSCAP 6 38 26 32 Poland ZAIKS 407 358 12 36 Portugal SPA 299 172 21 16 Romania UCMR 310 176 7 9 Russia RAO 39 - 9 - Serbia SOKOJ 45 - 6 - Singapore COMPASS 64 126 2 13 Slovakia SOZA 55 55 1 1 Slovenia SAZAS (3) 59 3 1 South Africa SAMRO 195 242 30 72 Spain SGAE 933 743 370 301 Sweden STIM 1,098 1,138 1,451 1,554 Switzerland SUISA 1,430 1,202 156 155 Taiwan MUST 47 214 39 25 Thailand MCT 26 14 1 - Turkey MESAM 22 57 13 19 Trinidad COTT - - 19 11 United Kingdom PRS 8,350 9,755 14,156 12,790 United States (See below) 39,407 32,297 78,238 71,746

Uruguay AGADU 8 - 2 - Vietnam VCPMC 14 36 1 1 Returns FDR - - 1 - Other* 81 39 66 94

87,213 75,652 103,031 95,027

United States AMRA 500 139 617 532 United States ASCAP 23,563 19,367 34,190 31,446 United States BMI 14,702 12,313 36,149 33,543 United States GMR - - 3,074 2,245 United States SESAC 642 478 4,208 3,980 Total United States 39,407 32,297 78,238 71,746

* Other includes countries under $10K, such as Uruguay, Montenegro, Barbados, Ukraine, Panama, Estonia, Guatemala, Ecuador, Indonesia, Algeria, Serbia, etc.)

TABLE NO. 1 DETAILS THE INTERNATIONAL REVENUE RECEIVED FROM EACH MRO AND THE DISTRIBUTIONS PAID BY SOCAN TO EACH MRO IN 2018

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SOCAN’s net expenses (gross expenses of $49.7M offset by other income, which mainly consists of investment income) increased to $47.2-million in 2018 from $39.6-million the previous year, representing a 19.1% increase.

Gross expenses increased by $2-million, along with a decrease in other income of $5.6-million, due to lower unrealized capital gains on equity investments during 2018, . This resulted in an increase to net expenses of $7.6-million.

As such, net expenses in 2018 represented 12.6% per cent of total revenues (2017: 11.7% per cent), excluding equity investment loss in subsidiaries.

SOCAN’s three main operational activities of collecting music licenses (Licensing), registering works and analyzing performances (Distribution), and supporting members (Membership) account in total for $18.6-million of expenses, which remains in line with the prior year. This comprises less than half of our gross expenses.

Infrastructure-type costs, such as Information Technology and Facilities & Administration, which provide critical support for the three activities above, accounted for $9.3-million, comprising slightly less than a fifth of gross expenses. Other key support services such as Finance, Legal, Communications & Marketing, and Human Resources accounted for most of the remainder. The SOCAN Foundation and Canadian Songwriters Hall of Fame were supported with $1.9-million in 2018.

AS SHOWN IN TABLE NO. 2, SOCAN’S 2018 GROSS EXPENSES WERE $49.7-MILLION, REPRESENTING A 4.1% INCREASE FROM 2017. LISTED BELOW ARE EXPLANATIONS FOR SOME OF THE VARIANCES BY COST CATEGORY.

Expenses

Gross Expenses2018 2017 Variance % of Total 2018

Expenses$ $ $ % %

Staff 27,927 28,576 (649) -2.3% 56.1%Depreciation 5,615 4,606 1,009 21.9% 11.3%Legal & Professional 4,247 3,848 399 10.4% 8.5%Information Technology 3,227 2,509 718 28.6% 6.5%Membership & Communication 2,334 2,393 (59) -2.5% 4.7%SOCAN Foundation & CSHF funding

1,933 1,848 85 4.6% 3.9%

Accommodation 2,224 1,834 390 21.3% 4.5% 1,008 1,043 (35) -3.4% 2.0%

Other 1,226 1,120 106 9.5% 2.5%TOTAL GROSS EXPENSES 49,741 47,777 1,964 4.1% 100.0%

Other Income 2,567 8,170 (5,603) -68.6%Net Expenses 47,174 39,607 7,567 19.1%

Percentage of total revenues 12.6%

TABLE NO . 2 - GROSS EXPENSESBY EXPENSE TYPE: 2018 - $49,741 (2017 - $47,777) (IN THOUSANDS OF DOLLARS)

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Staff

SOCAN’s most significant expense lies in human resources – the exceptional people with the experience, expertise and commitment to achieve these record-breaking results. On average, there were 284 full-time and part-time employees in five offices across Canada and the U.S. in 2018. Staff costs decreased by $0.6-million, primarily due to staff cost capitalization on Phase 4 of the significant BEST technology system revitalization, which is nearing completion.

Legal & Professional

Legal & Professional costs were $400k greater than 2017 due to higher legal costs associated with Copyright Board hearings.

Depreciation

This includes all depreciation relating to SOCAN’s fixed assets. This cost increased by $1-million in 2018 as a result of increased depreciation expenses relating to leasehold and building improvements, IT capital and furniture, as well as Operational Data Store and web development projects.

Membership & Communication

These costs include sponsorships, marketing, public relations, government relations, advertising and awards, which decreased $60k from the previous year, due to strong results in efficiency with improved ROI.

Information Technology

Expenses related to information technology increased by $700k from the prior year due to higher IT maintenance costs, specifically new IT software for a system platform provided by a third party, used for SOCAN applications and online infrastructures.

Accommodation

Expenses for accommodations are $400k greater than prior year, due to a higher than expected L.A. rental expense, and foreign exchange loss.

SOCAN Distributions

2018 was a record year for SOCAN’s Performing Rights royalty distributions, which amounted to $315.3-million, a $20.3-million or 7 per cent increase from the previous year (2017: $295-million). The increase in distributions is in line with the growth in revenue for the year.

Expenses

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Equity Loss on Investment

In 2016, SOCAN through its wholly owned subsidiary MINT Services Corporation, acquired MediaNet Inc and Audiam Inc to enable SOCAN to implement the organization’s strategic vision to lead the global transformation of music rights. During 2018, the equity investment loss in MINT Services Corporation was $9.8-million (2017: $11.0-million). MINT management is confident that the benefits that were envisioned in the business case will be realized in future years, compensating the loss with future profits. The 2018 loss remains within MINT and does not impact SOCAN Member distributions.

Reproduction Rights distributions amounted to $4.4-million, resulting in total distributions of $319.7-million for 2018.

Member advances are not reflected in these numbers. Further details can be found in TABLE No. 3.

TABLE NO. 3 - DISTRIBUTION BY POOL, BY MEMBER TYPE AND INTERNATIONAL AFFILIATION (IN THOUSANDS OF DOLLARS)

2018 2017SOCAN SOCAN International Total SOCAN SOCAN International TotalWriters Publishers Writers Publishers

DistributionsCable 10,087 23,547 23,966 57,600 11,203 24,350 24,085 59,638

(2,038)-3%

Television 7,233 13,935 12,623 33,791 7,705 14,295 12,976 34,976 (1,185)

-3%

Radio - Census 7,298 19,586 18,171 45,055 6,925 18,054 16,630 41,609 3,446 8%Radio - Survey 1,631 3,326 3,438 8,395 2,432 5,286 5,510 13,228

(4,833)-37%

Radio - CBC 2,531 2,535 2,229 7,295 2,541 2,531 2,397 7,469 (174) -2%Total Radio and General 11,460 25,447 23,838 60,745 11,898 25,871 24,537 62,306

(1,561)-3%

Concerts 3,946 9,238 10,514 23,698 3,963 7,938 8,465 20,366 3,332 16%Cinema + Hotel, Motel Services

15 487 577 1,079 16 470 518 1,004 75 7%

Pay Audio 65 228 291 584 180 622 864 1,666 (1,082)

-65%

Internet 1,782 12,474 15,562 29,818 1,195 8,116 10,084 19,395 10,423 54%AV Online 476 5,611 6,851 12,938 363 4,801 6,077 11,241 1,697 15%Satellite Radio 962 5,303 7,141 13,406 1,011 4,960 6,897 12,868 538 4%

36,026 96,270 101,363 233,659 37,534 91,423 94,503 223,460 10,199 5%72,248 9,713 (737) 81,224 61,409 8,430 960 70,799 10,425 15%108,274 105,983 100,626 314,883 98,943 99,853 95,463 294,259 20,624 7%

Distributions in advance of normal payment date

- - - - - - - - -

108,274 105,983 100,626 314,883 98,943 99,853 95,463 294,259 20,624 7%

Private Copying 115 98 154 367 220 157 354 731 (364) -50%

Total Distributions 108,389 106,081 100,780 315,250 99,163 100,010 95,817 294,990 20,260 7%

(315,250.00)$ Change 20,260 % Change 6.9%

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KPMG LLP Vaughan Metropolitan Centre 100 New Park Place, Suite 1400 Vaughan ON L4K 0J3 Canada Tel 905-265-5900 Fax 905-265-6390

KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

INDEPENDENT AUDITORS' REPORT

To the Members of Society of Composers, Authors and Music Publishers of Canada

Opinion We have audited the non-consolidated financial statements of Society of Composers, Authors and Music Publishers of Canada (the Entity), which comprise:

the non-consolidated statement of financial position as at December 31, 2018

the non-consolidated statement of operations for the year then ended

the non-consolidated statement of changes in net assets for the year then ended

the non-consolidated statement of cash flows for the year then ended

and notes to the non-consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the non-consolidated financial position of the Entity as at December 31, 2018, and its non-consolidated results of operations and its non-consolidated cash flows for the year then ended in accordance with Canadian accounting standards for not-for-profit organizations.

Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian accounting standards for not-for-profit organizations, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Entity's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Entity's financial reporting process.

Auditors' Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

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Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Entity to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

Chartered Professional Accountants, Licensed Public Accountants Vaughan, Canada May 21, 2019

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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Non-Consolidated Statement of Financial Position (In thousands of dollars) December 31, 2018, with comparative information for 2017 2018 2017

Assets Current assets:

Cash $ 26,573 $ 18,012 License fees receivable 27,654 23,022 Other receivables and assets (note 10) 6,801 3,886 Advances to subsidiary (note 10(a)) 44,174 28,200 Investments (note 3) 100,203 127,559 205,405 200,679

Capital assets (note 4) 51,543 38,316 Intangible assets (note 5) 1,254 – Accrued employee future benefit asset (note 6) 17,889 21,741 $ 276,091 $ 260,736

Liabilities and Net Assets Current liabilities:

Accounts payable and other liabilities (note 7) $ 29,738 $ 23,726 License fees received in advance 9,857 8,007 Equity investment loss in subsidiary (note 10(a)) 31,420 21,576 71,015 53,309

Accrued employee future benefit liability (note 6) 7,199 6,578 Royalties owing to music copyright owners

(members and affiliated societies): From distributions allocated 8,300 5,061 From distribution fund (note 8) 190,226 179,594 198,526 184,655

276,740 244,542 Net assets:

Internally restricted (note 9) 4,676 15,918 Remeasurements and other items (5,325) 276 (649) 16,194

Commitments and contingencies (notes 10(a) and 12) Guarantee (note 13) $ 276,091 $ 260,736

See accompanying notes to non-consolidated financial statements.

On behalf of the Board: Director Director

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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Non-Consolidated Statement of Operations (In thousands of dollars) Year ended December 31, 2018, with comparative information for 2017 2018 2017 Fees from Canadian licensees $ 282,268 $ 261,255 Royalties received from international affiliated societies 87,213 75,652 Reproduction rights collections 5,134 – Private copying royalties 363 740 374,978 337,647 Expenses and other income:

Administrative expenses (49,741) (47,777) Investment and other income (note 11) 2,567 8,170 Equity investment loss in subsidiary (note 10(a)) (9,844) (11,043) (57,018) (50,650)

Total distributable income 317,960 286,997 Allocated to royalties owing to music copyright owners

(note 8) 329,202 294,084 Unallocated loss $ (11,242) $ (7,087)


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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Non-Consolidated Statement of Changes in Net Assets (In thousands of dollars) Year ended December 31, 2018, with comparative information for 2017 2018 2017 Remeasure- Remeasure- Internally ments and Internally ments and restricted other items Total restricted other items Total (note 9) (note 9) Net assets, beginning of year $ 15,918 $ 276 $ 16,194 $ 23,005 $ (1,093) $ 21,912 Unallocated loss (11,242) – (11,242) (7,087) – (7,087) Remeasurements and other

items (note 6) – (5,601) (5,601) – 1,369 1,369 Net assets, end of year $ 4,676 $ (5,325) $ (649) $ 15,918 $ 276 $ 16,194


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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Non-Consolidated Statement of Cash Flows (In thousands of dollars) Year ended December 31, 2018, with comparative information for 2017 2018 2017 Cash provided by (used in): Operating activities:

Unallocated loss $ (11,242) $ (7,087) Increase (decrease) in royalties owing to music

copyright owners 766 (5,841) Employer future benefit contributions (1,413) (1,674) Items not involving cash:

Amortization of capital assets 5,615 4,607 Net realized loss (gain) on sale of investments (13,703) 1,510 Change in net unrealized loss (gain) on investments 13,751 (6,911) Equity investment loss in subsidiary 9,844 11,043 Employee future benefits expense 285 498

Change in non-cash operating working capital (3,989) 9,031 (86) 5,176

Investing activities:

Acquisition, net of cash acquired (note 2) 1,544 – Advances to subsidiary, net (15,974) (13,731) Purchase of capital assets (18,391) (11,950) Decrease in investments, net 41,468 15,952 8,647 (9,729)

Increase (decrease) in cash 8,561 (4,553) Cash, beginning of year 18,012 22,565 Cash, end of year $ 26,573 $ 18,012


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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Notes to Non-Consolidated Financial Statements (In thousands of dollars) Year ended December 31, 2018

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Society of Composers, Authors and Music Publishers of Canada ("SOCAN") is a not-for-profit organization, incorporated without share capital. SOCAN was continued under the Canada Not-for-profit Corporations Act on July 2, 2014. SOCAN administers the performing and reproduction rights for songwriter, music publisher, composer, visual artist clients and members. SOCAN collects license fees on behalf of music copyright owners pursuant to agreements, and tariffs proposed by SOCAN, and approved by a quasi-judicial federal tribunal, the Copyright Board. Licensees can and do object to proposed tariffs, and public hearings can be, and are, held at which SOCAN acts to support the rights of its members and international affiliates. SOCAN also has reciprocal contracts of affiliation with similar societies throughout the world, which provide for the exchange of copyright royalties. Total revenue, net of operating expenses and internally restricted amounts (note 9), is distributed to members, clients and to affiliated societies (on account of their members) pursuant to distribution rules approved by the Board of Directors. Amounts generally become distributable upon receipt of the related fees and royalties.

SOCAN is a not-for-profit organization under the Income Tax Act (Canada) and, accordingly, is exempt from income taxes, provided certain requirements of the Income Tax Act (Canada) are met.

SOCAN Foundation - Fondation SOCAN (the "Foundation") is a not-for-profit organization under the Income Tax Act (Canada) and was continued under the Canada Not-for-profit Corporations Act on September 17, 2014. The Foundation is set up to promote and further the publication, recording, distribution and performance of music generally in Canada. SOCAN has the ability to control the Foundation by virtue of common membership in the Boards of Directors of the two organizations. The Foundation is not consolidated in these financial statements. Refer to note 10(b).

On December 21, 2011, 7978766 Canada Association was incorporated as a not-for-profit organization without share capital under the Canada Not-for-profit Corporations Act and commenced operations in February 2012. The business name was registered on February 28, 2013 as Canadian Songwriters Hall of Fame ("CSHF"). CSHF has one member, being SOCAN. CSHF's mandate is to honour and celebrate Canadian songwriters and those who have dedicated their lives to the legacy of music, and to educate the public about these achievements. CSHF is not consolidated in these financial statements. Refer to note 10(c).

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SOCIETY OF COMPOSERS, AUTHORS AND MUSIC PUBLISHERS OF CANADA Notes to Non-Consolidated Financial Statements (continued) (In thousands of dollars) Year ended December 31, 2018

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1. Significant accounting policies:

These non-consolidated financial statements have been prepared by management in accordance with Canadian accounting standards for not-for-profit organizations. The significant accounting policies are as follows:

(a) Subsidiaries:

SOCAN accounts for its wholly-owned subsidiary, MINT Services Corporation, using the equity method.

(b) Recognition of fees and royalties:

Royalties from Canadian licensees for performing rights and reproduction rights, royalties from international affiliated societies and private copy royalties are recognized when received or receivable if the amount to be received can be reasonably estimated and collection is reasonably assured.

(c) Financial instruments:

Financial instruments are recorded at fair value on initial recognition. Equity instruments that are quoted in an active market are subsequently measured at fair value. All other financial instruments are subsequently recorded at cost or amortized cost, unless management has elected to carry the instruments at fair value. SOCAN has elected to carry all its investments at fair value.

Transaction costs incurred on the acquisition of financial instruments measured subsequently at fair value are expensed as incurred. All other financial instruments are adjusted by transaction costs incurred on acquisition and financing costs, which are amortized using the straight-line method.

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1. Significant accounting policies (continued):

Financial assets are assessed for impairment on an annual basis at the end of the fiscal year if there are indicators of impairment. If there is an indicator of impairment, SOCAN determines if there is a significant adverse change in the expected amount or timing of future cash flows from the financial asset. If there is a significant adverse change in the expected cash flows, the carrying value of the financial asset is reduced to the highest of the present value of the expected cash flows, the amount that could be realized from selling the financial asset or the amount SOCAN expects to realize by exercising its right to any collateral. If events and circumstances reverse in a future period, an impairment loss will be reversed to the extent of the improvement, not exceeding the initial carrying value.

(d) Investment income:

Investment income, which is recorded on an accrual basis, includes interest income, dividends, net realized gain (loss) on sale of investments and change in net unrealized gain (loss) on investments.

(e) Capital assets:

Capital assets, other than land and artwork, are carried at cost less accumulated amortization. Land and artwork are carried at cost. Capital assets are amortized on a straight-line basis over their estimated useful lives. Annual amortization rates used are as follows:

Building and building improvements 3.70% Furniture, fixtures and equipment 20.0% - 33.3% Computer software 10.0% - 20.0% Leasehold improvements Over term of lease

(f) Impairment of long-lived assets:

Long-lived assets, including capital assets and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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(g) Employee future benefits:

SOCAN offers a pension plan with a defined benefit provision and a defined contribution provision, which between them cover substantially all employees of SOCAN. Employees joining SOCAN after January 1, 2009 are not eligible to join the defined benefit provision plan.

The cost of pensions earned by employees is actuarially determined using the projected benefit method prorated on service and best estimates of expected plan investment performance, salary escalation and retirement ages with appropriate margins for adverse deviation. SOCAN accrues its obligations under the defined benefit plan as the employees render the services necessary to earn the pension and other retirement benefits. The actuarial determination of the accrued benefit obligation for the defined benefit plan is based on the January 1, 2017 funding valuation, extrapolated to December 31, 2018. The measurement date of the plan assets and accrued benefit obligation coincides with SOCAN's fiscal year. The next required valuation will be no later than January 1, 2020.

Actuarial gains (losses) on plan assets arising from the difference between the actual return on plan assets for a period and the expected return on plan assets for that period are immediately recognized in the non-consolidated statement of changes in net assets. Actuarial gains (losses) on the accrued benefit obligation arising from differences between actual and expected experience and from changes in the actuarial assumptions used to determine the accrued benefit obligation are immediately recognized in the non-consolidated statement of changes in net assets.

Past service costs arising from plan amendments are immediately recognized in the non-consolidated statement of changes in net assets.

The cost of the defined contribution provision is based on a percentage of the employee's pensionable earnings.

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Prior to January 1, 2015, SOCAN sponsored a supplementary non-registered plan ("SERP") for its executives that was actuarially determined using an accounting valuation. The SERP was not previously funded. Effective January 1, 2015, SOCAN elected to pre-fund the SERP benefits for its executives through a Registered Retirement Compensation Arrangement, as defined under the Income Tax Act. The cost of the SERP is actuarially determined using the January 1, 2018 funding valuation which incorporates best estimates of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors, including appropriate margins for adverse deviation. The measurement date of the plan assets and accrued benefit obligation of the SERP coincides with SOCAN's fiscal year. The next required valuation will be no later than January 1, 2021.

Actuarial gains (losses) on plan assets arising from the difference between the actual return on plan assets for a period and the expected return on plan assets for that period are immediately recognized in the non-consolidated statement of changes in net assets. Actuarial gains (losses) on the accrued benefit obligation arising from differences between actual and expected experience and from changes in the actuarial assumptions used to determine the accrued benefit obligation are immediately recognized in the non-consolidated statement of changes in net assets.

SOCAN sponsors a retirement medical benefit plan, which provides certain benefits to retired employees and their dependants. The benefits include medical services and dental. The cost of these benefits is actuarially determined using an accounting valuation, prorated on service and management's best estimate of retirement ages of employees, expected health care costs and discount rate. The retirement medical benefit plan is not funded.

(h) Translation of foreign currencies:

SOCAN has investments denominated in foreign currencies which have been translated into Canadian dollars at exchange rates prevailing at the year-end date. Gains and losses have been translated using exchange rates prevailing on the transaction date.

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(i) Use of estimates:

The preparation of non-consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the non-consolidated financial statements and the reported amounts of income and expenses during the year. Significant items subject to such estimates and assumptions include the carrying amount of capital assets, certain accrued liabilities and asset and obligation related to employee future benefits. Actual results could differ from those estimates.

2. Acquisition:

On July 1, 2018, SOCAN closed an agreement to purchase certain net assets from SODRAC 2003 Inc. (SODRAC) for one dollar. The purpose of SODRAC is to receive and distribute reproduction rights.

The assets acquired and liabilities assumed in acquisition are as follows:

Cash $ 1,544 Other receivables and assets 16 Investments 14,160 Capital assets 451 Intangible assets (note 5) 1,254 Accounts payable and other liabilities (607) Due to SPACQ Foundation (1,254) Royalties owing to music copyright owners

from distributions allocated (1,276) Royalties owing to music copyright owners from

distribution fund (11,829) Residual owing to SPACQ Foundation $ 2,459

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3. Investments:

The fair values of investments are as follows:

2018 2017 Short-term investments $ 12,320 $ 661 Domestic equities – 6,778 Domestic bonds 348 – Pooled funds:

Fixed income 44,101 43,442 Foreign equities 43,434 59,937 Foreign floating rate bank loan – 8,493 Global infrastructure securities – 8,248

$ 100,203 $ 127,559

Short-term investments consist of guaranteed investment certificates bearing interest at 0.75% - 2.80% and maturing on February 15, 2019 to January 11, 2022 (2017 - 0.65% - 0.99% and maturing on January 11, 2018 to March 5, 2018).

Investments totalling $40,000 (2017 - $40,000) have been guaranteed to the Bank as described in note 13.

4. Capital assets: 2018 2017 Accumulated Net book Net book Cost amortization value value Land $ 3,073 $ – $ 3,073 $ 3,073 Building and building

improvements 15,913 11,675 4,238 4,977 Furniture, fixtures

and equipment 14,993 10,944 4,049 3,085 Computer software 24,314 11,008 13,306 13,844 Computer software under

development 25,825 – 25,825 12,460 Leasehold improvements 1,539 583 956 781 Artwork 96 – 96 96 $ 85,753 $ 34,210 $ 51,543 $ 38,316

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4. Capital assets (continued):

Amortization charges included in administrative expenses amounted to $5,615 (2017 - $4,607).

5. Intangible assets:

The assets acquired from SODRAC included the right to earn additional commissions in the future associated with various tariffs. These future commissions collected must be remitted to SPACQ Foundation. Accordingly an intangible asset and offsetting liability were recognized on acquisition of $1,254 (note 2). The intangible asset and liability will be reduced as the collections are received and distributions made.

6. Employee future benefits:

(a) Information about SOCAN's employee benefit plans (excluding the defined contribution portion of the pension plan), in aggregate, is as follows:

2018 2017 Retirement Pension medical plan SERP benefit plan Total Total Accrued benefit obligations $ 45,105 $ 15,598 $ 4,366 $ 65,069 $ 67,669 Fair value of plan assets 62,994 12,765 – 75,759 82,832 Funded surplus (deficit) $ 17,889 $ (2,833) $ (4,366) $ 10,690 $ 15,163

Continuity of the accrued benefit liability (asset) is as follows:

2018 2017 Retirement Pension medical plan SERP benefit plan Total Total Balance, beginning of year $ (21,741) $ 2,102 $ 4,476 $ (15,163) $ (12,618) Benefit expenses (271) 356 200 285 498 Employer contributions (991) (217) (205) (1,413) (1,674) Remeasurements and

other items 5,114 592 (105) 5,601 (1,369) Balance, end of year $ (17,889) $ 2,833 $ 4,366 $ (10,690) $ (15,163)

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6. Employee future benefits (continued):

During the year, SOCAN settled a portion of its obligation to current pensioners of the pension plan by purchasing annuities in the amount of $5,066 (2017 - $4,953). SOCAN incurred a settlement loss of $1,649 (2017 - $1,345) which has been recognized in remeasurements and other items in the non-consolidated statement of changes in net assets.

(b) The contributions paid and expensed by SOCAN under the defined contribution portion of the pension plan for the year amounted to $448 (2017 - $356).

7. Accounts payable and other liabilities:

Included in accounts payable and other liabilities are:

2018 2017 Due to SPACQ Foundation $ 1,399 $ – Government remittances 2,152 1,953 General payables and accrued liabilities 9,953 6,551 Licensing fee refunds (note 12(b)) 16,234 15,222 $ 29,738 $ 23,726

8. Royalties owing to music copyright owners:

The availability of funds for distribution for music copyright owners is:

2018 2017 Reproduction Performing Private rights rights copying Total Total Balance, beginning of year $ – $ 179,385 $ 209 $ 179,594 $ 184,913 Acquisition (note 2) 11,829 – – 11,829 – Distributable income 4,460 324,423 319 329,202 294,084 Distributions (4,425) (325,598) (376) (330,399) (299,403) Balance, end of year $ 11,864 $ 178,210 $ 152 $ 190,226 $ 179,594

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9. Internally restricted net assets:

SOCAN distributes all of its income to music copyright owners through an allocation (note 8), except for certain items which the Board of Directors has approved to remain unallocated. These items include investment income, change in net unrealized gain (loss) on investments, net realized gain (loss) on sale of investments, equity investment loss in subsidiary and certain other items related to pension accounting. The unallocated items described above comprise SOCAN's non-consolidated internally restricted net assets balance.

2018 2017 Balance, beginning of year $ 15,918 $ 23,005 Net realized gain (loss) on sale of investments 13,703 (1,510) Change in net unrealized gain (loss) on investments (13,751) 6,911 Amortization of internally generated computer software (1,350) (1,445) Equity investment loss in subsidiary (9,844) (11,043) Balance, end of year $ 4,676 $ 15,918

10. Related party transactions and balances:

(a) MINT Services Corporation ("MINT"):

MINT was incorporated under the Ontario Business Corporations Act and commenced operations on February 12, 2013. MINT provides back office services and operates music rights administration and fulfilment services through its subsidiary, MINT USA, Inc. ("MINT USA"). MINT USA was incorporated on April 11, 2016.

At December 31, 2018, assets, liabilities and shareholder's deficiency of MINT were $76,695, $107,325 and ($30,630) (2017 - $67,257, $89,081 and ($21,824)), respectively.

Revenue for the year ended December 31, 2018 was $13,543 (2017 - $13,695) and expenditures for the year were $23,387 (2017 - $24,737).

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10. Related party transactions and balances (continued):

Cash flows from (used in) operating, financing and investing activities were ($10,210), $22,222 and ($8,995), (2017 - ($6,064), $11,572 and ($2,346)), respectively.

SOCAN has a demand promissory note with MINT to provide principal funds up to $45,100 (2017 - $28,200). At year end, $44,174 (2017 - $28,200) was advanced. The funds are unsecured, non-interest bearing and due on demand. At December 31, 2018, SOCAN has agreed to provide continued financial support to the subsidiary to ensure third party obligations are met when due. SOCAN has agreed not to demand repayment of the outstanding advance until after December 31, 2019. In addition, included in cash is $530 restricted on behalf of MINT for a third party.

The equity investment loss in MINT of $31,420 represents the net cumulative loss as at December 31, 2018 (2017 - $21,576).

SOCAN provides administrative, support services and facilities to MINT in return for a fee. Amounts charged to MINT by SOCAN during the year amounted to $2,639 (2017 - $1,740) which were offset by amounts charged to SOCAN of $463 (2017 - $35). In addition, SOCAN pays certain expenses on MINT's behalf which are reimbursed. Included in other receivables and assets is $5,327 (2017 - $2,688) that remains collectible at year end. Included in accounts payable and other liabilities is $498 (2017 - $35) of amounts owing to MINT.

(b) SOCAN Foundation:

Included in administrative expenses is $1,820 (2017 - $1,683) in funding provided to the Foundation. Included in other receivables and assets is $115 (2017 - $1) owing from the Foundation, which includes an advance of $120, net of amounts payable to the Foundation for amounts received on the Foundation's behalf.

The advance to the Foundation is unsecured, non-interest bearing and due on demand.

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10. Related party transactions and balances (continued):

A summary of the financial information for the Foundation for the years ended December 31, 2018 and 2017 is as follows:

2018 2017 Total assets $ 5,590 $ 5,724 Total liabilities 959 794 Net assets $ 4,631 $ 4,930 Revenue $ 1,957 $ 2,001 Expenses (2,256) (2,063) Excess of expenses over revenue $ (299) $ (62)

(c) Canadian Songwriters Hall of Fame:

Included in administrative expenses is $113 (2017 - $165) in funding provided to CSHF. Included in other receivables and assets is nil (2017 - $6) owing from CSHF.

A summary of the financial information for CSHF for the years ended December 31, 2018 and 2017 is as follows:

2018 2017 Total assets $ 108 $ 115 Total liabilities 31 33 Net assets $ 77 $ 82 Revenue $ 175 $ 821 Expenses (180) (780) Excess of revenue over expenses

(expenses over revenue) $ (5) $ 41

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11. Investment and other income: 2018 2017 Interest income $ 1,815 $ 1,025 Dividend income 901 1,832 Miscellaneous income 123 121 Net realized gain (loss) on sale of investments 13,703 (1,510) Change in net unrealized gain (loss) on investments (13,751) 6,911 Brokerage and investment consulting fees (224) (209) $ 2,567 $ 8,170

12. Commitments and contingencies:

(a) SOCAN has various operating lease commitments for branch office premises, vehicles and office equipment. The future minimum lease payments, inclusive of maintenance costs and realty taxes, for years subsequent to December 31, 2018, are as follows: 2019 $ 549 2020 480 2021 452 2022 453 2023 427 Thereafter 1,780 $ 4,141

(b) SOCAN is party to legal actions arising in the normal course of operations. While it is not feasible to predict the outcome of these actions, it is the opinion of management that the resolution of these matters will not have a material adverse effect on operations.

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12. Commitments and contingencies (continued):

In addition, the Copyright Board does not always have certified tariffs for current years. If SOCAN files proposed tariffs in accordance with the Copyright Act, then the last certified tariff continues to operate on an interim basis and SOCAN may collect license fees in accordance with the previous tariff until the proposed tariff is approved. The certified tariff may be different from the interim tariffs and could cause an adjustment to fees from Canadian licensees. This adjustment, if any, will be recorded in the year in which the tariff decision is published or if management is of the opinion that it is likely than an adjustment will result before it is published.

In 2017, a hearing with the Copyright Board was completed for Pay Audio Tariff for the licensing periods from 2010 to 2016. The licensees have proposed lower rates under this interim tariff. A decision from the Copyright Board is pending; however, SOCAN could be required to refund license fees previously paid as such a provision is included in accounts payable and other liabilities (note 7) for $14,549 (2017 - $13,855).

In 2017, the Copyright Board certified Tariff 22.A (internet) for the licensing periods from 2011 to 2013 which resulted in lower rates. Included in accounts payable and other liabilities (note 7) is $437 (2017 - $437) of license fees to be refunded. The judicial review was heard in November 2018 with a decision expected in 2019.

(c) SOCAN has a Retirement Compensation Arrangement Trust Agreement with CIBC Mellon Trust Company to secure all or a portion of the payments required under the pension plan by letters of credit totalling $3,400 (2017 - $3,500).

13. Guarantees:

On September 14, 2016, MINT USA, Inc., a subsidiary company of MINT, entered into a credit facility agreement. Amendments to the agreement were signed on February 24, 2017 and July 30, 2018. Under the terms of the credit facility agreement, SOCAN is required to provide an unlimited guarantee and postponement of claim supported by the following:

(a) a general security agreement constituting a security interest in all personal property of SOCAN;

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13. Guarantees (continued):

(b) pledge agreements with respect to the investment portfolio of securities held in the accounts maintained with a financial institution; and

(c) a portfolio monitoring and securities control agreement signed by the Bank, SOCAN and the investment custodian pursuant to which the investment custodian agrees, inter alia, that it will not accept instructions from SOCAN with respect to any removal of funds from the investment accounts that would reduce the balance to less than $40,000 (2017 - $40,000) unless such instructions are co-signed by the Bank. The amount will be reviewed annually by the Bank and adjusted downwards to reflect the principal payments made against the borrowings as of the date of each review.

The subsidiary company is required to comply with various financial and non-financial covenants with their credit facility. As at December 31, 2018, the subsidy company was not in compliance with a non-financial covenant.

Subsequent to year end, on April 26, 2019, the subsidiary obtained a tolerance letter from the Bank indicating that it will tolerate the default and not take action to demand repayment of the debt for the remaining term of the loans.

14. Financial risk and concentration risk:

Financial risk relates to the understanding and active management of risks associated with all areas of the business and the associated operating environment. Investments are primarily exposed to interest rate, market price and foreign currency risks. SOCAN has formal policies and procedures that establish target asset mix. SOCAN's policies also require diversification of investments within categories, and set limits on exposure to individual investments. There has been no change in risk exposure from the prior year.

(a) Credit risk:

Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss. SOCAN is exposed to credit risk with respect to license fees receivable. SOCAN assess, on a continuous basis, license fees receivable and provides for any amounts that are not collectible in the allowance for doubtful accounts.

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14. Financial risk and concentration risk (continued):

(b) Interest rate risk:

SOCAN is exposed to interest rate risk on its fixed interest rate financial instruments.

(c) Market price risk:

Market price risk arises as a result of trading in equity securities and fixed income securities. Fluctuations in the market expose SOCAN to a risk of loss. SOCAN mitigates this risk through controls to monitor and limit concentration levels.

(d) Foreign currency risk:

SOCAN is exposed to financial risks as a result of exchange rate fluctuations and the volatility of these rates. Foreign currency risk arises from gains and losses due to fluctuations in foreign currency exchange rates on SOCAN's foreign equity securities. SOCAN does not currently enter into forward contracts to mitigate this risk.

Annual Report 2017

Revenue - SOCAN...Returns FDR - - 1 - Other* 81 39 66 94 87,213 75,652 103,031 95,027 United States...

Documents

Transcript of Revenue - SOCAN...Returns FDR - - 1 - Other* 81 39 66 94 87,213 75,652 103,031 95,027 United States...