Cogeco 2007 Annual Report Download - page 25

Management’s Discussion and Analysis COGECO CABLE INC. 2007 23
FIXED CHARGES
YEARS ENDED AUGUST 31, 2007 2006 CHANGE
(in thousands of dollars, except percentages) $ $ %
AMORTIZATION 189,323 120,782 56.7
FINANCIAL EXPENSE 84,569 57,366 47.4
Fiscal 2007 amortization amounted to $189.3 million compared to $120.8 million for the same period last year. Amortization
increased due to several factors: the consolidation of the fi nancial results of Cabovisão for a twelve-month period in fi scal
2007 compared to only one month in fi scal 2006, the amortization of the intangible assets and the valuation of the fair
market value of tangible assets acquired in Portugal following the completion of the purchase price allocation of the
Cabovisão acquisition, as well as the increased capital expenditures arising from customer premise equipment demand,
scalable infrastructure, upgrade/rebuild, support capital and deferred charges for the Canadian operations.
Fiscal 2007 fi nancial expense increased by $27.2 million compared to the same period last year to reach $84.6 million.
This is due to the higher level of Indebtedness required to fi nance the acquisition of the Portuguese subsidiary, Cabovisão
and to a one-time charge of $2.6 million related to the early repayment of the Second Secured Debentures Series A. The
average interest rate was 6.3% in fi scal 2007 compared to 6.5% in fi scal 2006. The average interest rate reduction is
discussed in the “Capital Structure” section on page 28.
INCOME TAXES
For fi scal 2007, income tax expense amounted to $12.2 million compared to $9.3 million for fi scal 2006.
The income tax increase was mainly due to the operating income before amortization growth for the Canadian operations
outpacing the increase in fi xed charges, which was partly offset by the elimination of Canadian federal capital tax on
January 1, 2006 and, in fi scal 2007, by a non-cash adjustment of $16.2 million related to the recognition of benefi ts from
prior years’ income tax losses, minimum income tax paid and a reduction of Canadian federal enacted income tax rate
effective in January 2011. For fi scal 2006, a non-cash adjustment of $20 million was recorded to reduce future income
taxes due to the announcement by the Canadian federal government 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. Excluding
income tax adjustments for both years, income taxes would have amounted to $28.4 million in fi scal 2007 compared to
$29.3 million in fi scal 2006.
The Corporation’s subsidiary, Cabovisão, has also income tax losses of approximately ¤201.5 million ($290 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 and Cabovisão has not yet
received a reply. The benefi ts resulting from
these tax losses have not been recognized in the fi nancial statements.