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24 COGECO CABLE INC. 2006 Management’s Discussion and Analysis
OPERATING INCOME BEFORE AMORTIZATION
Fiscal 2006 consolidated operating income before amortization increased by $25.5 million or 11.2% to reach $253 million.
Cabovisão’s operating income before amortization for the month of August and fi scal 2006 amounted to $5 million.
Fiscal 2006 operating income before amortization for the Canadian operations rose by $20.5 million or 9%, compared to
fi scal 2005 as the growth in revenue outpaced the rise in operating costs. Cogeco Cable’s operating margin for the
Canadian operations improved slightly to 41.1% compared to 41% for the same period last year even with the launch of
the Digital Telephony service. The Portuguese operations generated an operating margin of 29.5% in August 2006.
As a result, Cogeco Cable’s operating margin declined from 41% for fi scal 2005 to 40.8% for fi scal 2006.
Fiscal 2006 amor tization amounted to $120.8 million compared to $125.1 million for the same period last year. Amortization
declined during fi scal 2006 as many cable modems and digital terminals were fully amortized. Amortization for the
one-month operation of the Portuguese operations amounted to $4.4 million.
Fiscal 2006 fi nancial expense increased by $1.7 million compared to the same period last year to reach $57.4 million. This
is due to the higher level of Indebtedness required to fi nance the acquisition of the Portuguese subsidiary, Cabovisão.
The average interest rate was 6.3% in fi scal 2006 compared to 7.5% in fi scal 2005. The average interest rate reduction
is discussed in the “Capital Structure” section.
INCOME TAXES
For fi scal 2006, income tax expense amounted to $9.3 million. Excluding the impact of the change in substantially enacted
tax rate described below, the expense amounted to $29.3 million compared to $18 million for fi scal 2005. The income tax
increase, excluding the tax rate change, was mainly attributable to the operating income before amortization growth.
On May 2, 2006, the federal government announced its intention to reduce the corporate income tax rate progressively
from 21% to 19% effective in January 2010 and to eliminate the corporate surtax of 1.12% on January 1, 2008. These
measures were considered substantially enacted on June 6, 2006, and as a result a non-cash adjustment of $20 million
was recorded in the fourth quarter of fi scal 2006 to reduce future income taxes.
Fiscal 2006 current income taxes of $4.1 million mainly relate to minimum income tax payable in the Province of Ontario
and to large corporation tax, which is computed on the basis of the Corporation’s capital base in Canada. Since Cogeco Cable
has accumulated non-capital income tax losses of about $53.9 million for its Canadian operations as at August 31, 2006,
most of the income taxes arising from earnings are deferred.
As at December 31, 2005, Cabovisão had deductible temporary differences, which may be used for an indefi nite period.
The related benefi ts have not been recognized in the fi nancial statements. The Corporation’s subsidiary has also income
tax losses of approximately €204.4 million ($289.4 million), which may be used to reduce future years taxable income
subject to confi rmation by Portuguese authorities. In accordance with the Portuguese Companies Income Tax Code
(CIRC), tax losses incurred in a fi nancial year can be carried forward and deducted from taxable profi ts of one or more
of the following six fi nancial years. However, the CIRC provides for certain exceptions whereby the general rule stated
above ceases to apply. One such exception is that tax losses cannot be deducted if the ownership of at least 50% of the
social capital changes from the moment when the tax losses were generated, unless a request is fi led before such
change in the ownership takes place, subject to approval by the Portuguese tax authorities. To this effect, a request for
preservation of tax losses was fi led by Cabovisão, on July 28, 2006. The benefi ts resulting from these tax losses have
not been recognized in the fi nancial statements.
FIXED CHARGES
YEARS ENDED AUGUST 31, 2006 2005 CHANGE
(in thousands of dollars, except percentages) $ $ %
AMORTIZATION 120,782 125,088 (3.4)
FINANCIAL EXPENSE 57,366 55,692 3.0