<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM F-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
GT GROUP TELECOM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CANADA 4813 NOT APPLICABLE
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
</TABLE>
20 BAY STREET, 7TH FLOOR, TORONTO, ONTARIO, CANADA M5J 2N8 (416) 943-9555
(Address and telephone number of Registrant's principal executive offices)
CT CORPORATION SYSTEM, 111 EIGHTH AVENUE, 13TH FLOOR, NEW YORK, NY 10011 (212)
894-8940
(Name, address, including zip code and telephone number, including area code, of
Agent for Service)
------------------------------------
Copies to:
BRUCE CZACHOR, ESQ.
SHEARMAN & STERLING
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario M5L 1E8
(416) 360-8484
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Non-Voting
Shares.................. 3,606,984 US$16.15625(1) US$58,275,335.25(1) US$15,385
Warrants to Purchase Class
B Non-Voting
Shares(2)............... 734,549 -- -- --
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) under the Securities Act, based on the average of
the high and low sale prices of the Registrant's class B non-voting shares
on the Nasdaq National Market on September 5.
(2) Warrants to purchase up to 3,606,984 class B non-voting shares are held by
the selling shareholders. The shares issuable upon exercise of the warrants
registered hereunder are included in the class B non-voting shares
registered hereunder.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
SUBJECT TO COMPLETION. DATED SEPTEMBER 8, 2000
GT Group Telecom Logo
GT GROUP TELECOM INC.
3,606,984 Class B Non-Voting Shares
734,549 Warrants to Purchase Class B Non-Voting Shares
All of our class B non-voting shares and warrants to purchase class B
non-voting shares offered hereby are being offered by shareholders and
warrantholders of GT Group Telecom Inc. (collectively referred to as the selling
shareholders). We will not receive any proceeds from the sale of the shares and
the warrants.
We have been advised by the selling shareholders that they may sell all or a
portion of the shares from time to time on any national securities exchange or
quotation service on which the shares may be listed or quoted at the time of the
sale. The selling shareholders may also make private sales of the shares or the
warrants to purchasers directly. Alternatively, the selling shareholders may
from time to time offer the shares or the warrants through underwriters,
brokers, dealers or agents, who may receive compensation in the form of
underwriting discounts, commissions or concessions.
Our class B non-voting shares are currently quoted on the Nasdaq National
Market under the symbol "GTTLB" and listed on the Toronto Stock Exchange under
the symbol "GTG.B". On August 15, 2000, the last reported sale price of our
class B non-voting shares on the Nasdaq National Market was US$15.031 per share.
The warrants are not listed on any exchange.
See "Risk Factors" beginning on page 1 to read about factors you should
consider before buying the class B non-voting shares.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Prospectus dated , 2000.
<PAGE> 3
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form F-1 that we
filed with the Securities and Exchange Commission, the SEC, using a "shelf"
registration process. Under this process, the selling shareholders may, from
time to time, sell any combination of the offered securities described in this
prospectus in one or more offerings up to 3,606,984 class B non-voting shares
and up to 734,549 warrants. This prospectus does not contain all of the
information included in the registration statement and the exhibits thereto.
Statements included in this prospectus as to the contents of any contract or
other document that is filed as an exhibit to the registration statement are not
necessarily complete and you should refer to that agreement or document for a
complete description of these matters. You should read both this prospectus and
any prospectus supplement together with the additional information described
below under the heading "Where You Can Obtain More Information About Us."
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have not authorized anyone else to provide you with
different information. This prospectus is an offer to sell or to buy only the
securities referred to in this prospectus, and only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus and any prospectus supplement is current only as of the date on the
front page of those documents. Neither the delivery of this prospectus or any
prospectus supplement, nor any distribution of securities made hereunder or
thereunder shall under any circumstances create any implication that there has
not been any change in the facts set forth in this prospectus or the applicable
prospectus supplement or in the affairs of Group Telecom since the date hereof.
------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED
STATES FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR
DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR
PUBLIC DISTRIBUTION UNDER THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF
CANADA. THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR
SOLD, DIRECTLY OR INDIRECTLY, IN CANADA OR TO ANY RESIDENT THEREOF EXCEPT IN
ACCORDANCE WITH THE SECURITIES LAWS OF THE PROVINCES AND TERRITORIES OF CANADA.
THE SECURITIES OFFERED HEREBY HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION
FROM THE PROSPECTUS REQUIREMENTS OF THE APPLICABLE CANADIAN PROVINCIAL AND
TERRITORIAL SECURITIES LAWS AND MAY BE SOLD IN CANADA ONLY PURSUANT TO AN
EXEMPTION THEREFROM.
i
<PAGE> 4
EXCHANGE RATES
The following table sets forth, for the periods and rates indicated,
information concerning exchange rates for Canadian dollars expressed in United
States dollars, based on the inverse of the noon buying rate in the City of New
York for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED SEPTEMBER 30, JUNE 30,
--------------------------------- -----------------
1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
High.................................. 0.7527 0.7513 0.7292 0.6828 0.6423 0.6629
Low................................... 0.7235 0.7145 0.6341 0.6423 0.6891 0.6969
Period End............................ 0.7342 0.7234 0.6552 0.6805 0.6786 0.6758
Average............................... 0.7327 0.7286 0.6845 0.6663 0.6649 0.6824
</TABLE>
The average noon buying rate is derived by taking the average of the noon buying
rate on the last business day of each month during the relevant period.
PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION
Unless we indicate otherwise, financial information in this prospectus has
been prepared in accordance with Canadian generally accepted accounting
principles. Canadian GAAP differs in some respects from U.S. GAAP and thus our
financial statements may not be comparable to the financial statements of U.S.
companies. The principal differences as they apply to us are summarized in note
22 to the audited consolidated financial statements of Group Telecom beginning
on page F-2 and note 10 to the audited financial statements of Shaw FiberLink
beginning on page F-43.
We present our financial information in Canadian dollars. In this
prospectus, except where we indicate, all dollar amounts are in Canadian
dollars. References to "$" or "Cdn$" are to Canadian dollars and references to
"US$" are to U.S. dollars. This prospectus contains a translation of some
Canadian dollar amounts into U.S. dollars at specified exchange rates solely for
your convenience. Unless we indicate otherwise, U.S. dollar amounts have been
translated from Canadian dollars at US$0.6758 per Cdn$1.00, which was the
inverse of the noon buying rate on June 30, 2000.
ii
<PAGE> 5
RISK FACTORS
An investment in our class B non-voting shares or warrants involves a high
degree of risk. You should carefully consider the risks described below and all
other information contained in this prospectus before purchasing our class B
non-voting shares.
THE COSTS OF DEPLOYING OUR NETWORK AND EXPANDING OUR BUSINESS MAY EXCEED
THE CAPITAL AVAILABLE TO US. IF THIS HAPPENS, WE MAY HAVE TO DELAY OR ABANDON
OUR BUSINESS PLAN.
We used substantial capital to fund our acquisitions of the businesses of
Shaw FiberLink and Videon FiberLink, our acquisition of the Cable Atlantic
competitive local exchange carrier and commercial telecommunications operations
and our acquisitions from 360networks, and will have significant capital
expenditures, working capital, debt service and cash flow deficits during the
period in which we are expanding our business and deploying our network,
services and systems. The actual amount and timing of our future capital
requirements may differ materially from our estimates as a result of prevailing
economic conditions and financial, business and other factors, many of which are
beyond our control. We cannot assure you that the capital actually required to
complete our network in our initial target markets will not exceed our
expectations. If demand in the targeted markets exceeds current expectations,
capital requirements may increase materially. In addition, we may identify new
markets in the future and, as opportunities develop, we may be required to make
additional investments in our network and facilities or pursue strategic
alliances to consummate those opportunities.
If required, we expect to raise additional capital through the sale of debt
and equity and through vendor financing. We cannot assure you that we will be
able to raise sufficient capital or that such funding will be available on a
timely basis or on terms acceptable to us, if at all. If we fail to raise
additional funds when and if required, we may have to delay or abandon expansion
of our network into certain markets, which could cause us to lose revenue and
would hinder our ability to compete in the telecommunications industry.
IF WE ARE UNABLE TO NEGOTIATE ACCESS RIGHTS TO THE PROPERTY OF A VARIETY OF
THIRD PARTIES, WE WOULD BE DELAYED IN EXECUTING OUR BUSINESS PLAN.
Most of our target customers are tenants within large buildings. To execute
our business plan, we will need to obtain additional building license agreements
with several different building management companies. We may not be able to
secure additional building license agreements on a timely basis or on acceptable
terms. If we cannot obtain building license agreements, our operating results
will be harmed and we may be required to delay or abandon some of our planned
future expansion.
To build our network, we must obtain rights and other permits, which
include, but are not limited to, rights-to-use underground conduit and aerial
pole space and other rights-of-way from entities such as utilities, railroads,
long distance providers, provincial highway authorities, local governments and
transit authorities. We cannot assure you that we will be successful in either
obtaining or maintaining these permits and rights-of-way on commercially
reasonable terms and conditions. Certain permits and rights-of-way may require
regulatory filings or may be subject to legal challenge by municipal
governments, land and building owners or other third parties. For example, there
is a public notice proceeding currently before the CRTC in which interested
parties have been invited to comment on the terms and conditions of access in
the city of Vancouver. Loss of substantial permits or rights-of-way or the
failure to enter into or maintain required arrangements could cause us to lose
revenue or abandon certain markets.
If we cannot enter into agreements for access rights or purchase or lease
fiber with accompanying access rights, our business and our operating results
may be harmed and we may be required to delay or abandon some of our business
plan.
1
<PAGE> 6
WE ARE DEPENDENT ON OTHER PARTIES IN RESPECT OF THE FIBER WHICH CONSTITUTES
A SIGNIFICANT PART OF OUR NETWORK.
In connection with our acquisition of the business of Shaw FiberLink we
received an indefeasible right to use Shaw FiberLink's fiber for 60 years. Shaw
FiberLink has, in turn, a one-year indefeasible right to use fiber of various
cable companies which are owned by Shaw Communications, renewable annually by
Shaw FiberLink during the term of our indefeasible right to use Shaw FiberLink's
fiber. As a result, in order to have access to the fiber provided by the
indefeasible right to use, we are dependent on Shaw FiberLink's ability to
maintain its indefeasible right to use agreements with the Shaw cable companies.
In addition, the terms of our agreements with Shaw FiberLink, Videon FiberLink,
Cable Atlantic and 360networks provide that our rights under those agreements
are limited if the underlying rights associated with the fiber that is the
subject of the indefeasible rights to use have any limitations or prohibitions.
We entered into performance assurance agreements with Shaw Communications and
Moffat Communications to support our rights under our agreement with Shaw
FiberLink and Videon FiberLink. If we discover that indefeasible right to use
rights are not passed to us as anticipated, or if we, Shaw FiberLink, Videon
FiberLink, Cable Atlantic or 360networks do not obtain and maintain the
necessary underlying rights, or if Shaw Communications or Moffat Communications
do not comply with the performance assurance agreements, we may not have access
to the fiber provided by the indefeasible right to use agreement and this could
substantially impair our ability to carry on business.
IF WE ARE NOT ABLE TO EFFECTIVELY INTEGRATE THE OPERATIONS OF, AND USE AND
EXPAND THE REVENUE STREAM PROVIDED BY, SHAW FIBERLINK, WE WILL NOT BE ABLE TO
DEPLOY AND EXPAND OUR NETWORK AS QUICKLY AS WE INTEND.
If we fail to integrate the operations and network of Shaw FiberLink, we
will not be able to deploy our network in Toronto, Calgary and Edmonton as
quickly as we otherwise might. In addition, our planned expansion beyond our
initial target markets will be slower if we do not take advantage of the
opportunities that the Shaw FiberLink assets provide. Also, to the extent we
fail to use and expand the revenue stream provided by Shaw FiberLink's business,
our financial condition and our prospects may be harmed. We provide data
services to and derive revenue from other telecommunications carriers, even
though we also compete with some of them for customers. A large portion of the
revenues of Shaw FiberLink are also derived from services to other
telecommunications carriers. These carriers may not wish to use our services to
this extent given our competition with them and they may reduce the level of
business they do with us.
WE HAVE EXPERIENCED AND ANTICIPATE THAT WE WILL CONTINUE TO EXPERIENCE NET
LOSSES.
For the nine months ended June 30, 2000 and for the year ended September
30, 1999 we had net losses of $75.2 million and $10.0 million and negative cash
flow from operating activities of $51.8 million and $9.0 million, respectively.
We expect to incur significant additional expenditures in connection with the
development and expansion of our network infrastructure. As a result, we expect
to continue to incur significant future net losses and negative cash flow. If
our revenues do not increase significantly or the increase in our expenses is
greater than expected, we may not achieve or sustain profitability or generate
positive cash flow in the future.
GROUP TELECOM'S LIMITED HISTORY OF OPERATIONS MAY MAKE IT DIFFICULT TO
EVALUATE OUR PROSPECTS.
Group Telecom was incorporated in 1996. Our short operating history permits
us to provide you with only limited operating and financial data which you can
use to evaluate our performance.
IF WE DO NOT CONTINUALLY ADAPT TO TECHNOLOGICAL CHANGE, WE COULD LOSE
CUSTOMERS AND MARKET SHARE.
The telecommunications industry is subject to rapid and significant changes
in technology, and we rely on outside vendors for the development of and access
to new technology. The effect of
2
<PAGE> 7
technological changes on our business cannot be predicted. We believe our future
success will depend, in part, on our ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands. In
addition, we rely on vendors with whom we have financing agreements to
anticipate and adapt to new technology and to make products that incorporate
such technology available to us. We cannot assure you that we will obtain access
to new technology on a timely basis or on satisfactory terms. If we fail to
obtain new technology, we may lose customers and market share which could harm
our business and operating results.
OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE.
We have a significant amount of debt. As of June 30, 2000, we had
approximately $854.3 million of long-term debt outstanding. In addition, we
could incur an additional $373.8 million under our Cisco facility and our new
vendor financing with Lucent, assuming we could incur debt in compliance with
covenants set forth in these facilities. We may need to incur additional debt in
the future. Our substantial debt obligations could have important consequences
to you. For example, it could:
- require us to use a substantial portion of our operating cash flow to
pay interest, which reduces funds available to expand our network and
for other purposes;
- place us at a competitive disadvantage compared to our competitors that
have less debt;
- make us more vulnerable to economic and industry downturns and reduce
our flexibility in responding to changing business and economic
conditions;
- limit our ability to pursue business opportunities; and
- limit our ability to borrow more money for operations or capital in the
future.
A 1 percent interest rate change on our floating interest rate long-term
debt outstanding at June 30, 2000, would have an annual impact of $1.9 million
on our interest cost.
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO PAY OUR DEBT. IF WE FAIL TO
GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO REFINANCE OUR
DEBT, OBTAIN ADDITIONAL FINANCING OR POSTPONE CAPITAL EXPENDITURES.
We cannot assure you that we will generate sufficient cash flow from
operations to make scheduled payments on our debt. Our ability to meet our debt
obligations will depend on whether we can successfully implement our strategy,
as well as on economic, financial, competitive, legal and technical factors.
Some of the factors are beyond our control, such as economic conditions in the
different local markets where we operate or intend to operate, and pressure from
existing and new competitors. If we cannot generate sufficient cash flow from
operations to make scheduled payments on our debt obligations, we may need to
refinance our debt, obtain additional financing, delay planned capital
expenditures or sell assets. Our ability to refinance our debt or obtain
additional financing will depend on, among other things:
- our financial condition at the time;
- restrictions in agreements governing our debt; and
- other factors, including market conditions.
DUE TO RESTRICTIONS IN OUR FINANCING AGREEMENTS, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS AS WE DESIRE.
The financing agreements under which our long-term debt was incurred
contain a number of conditions and limitations on the way in which we can
operate our business, including limitations on our ability to raise debt, sell
or acquire assets and pay dividends as well as various covenants that require us
to maintain specific financial ratios. These limitations may force us to pursue
less than
3
<PAGE> 8
optimal business strategies or forego business arrangements which could have
been financially advantageous to us and our shareholders.
Our failure to comply with the covenants and restrictions contained in our
financing agreements could lead to a default under the terms of one of these
agreements. If a default occurs in one of these agreements, the parties to our
other financing agreements could declare all amounts borrowed and all amounts
due under these other agreements due and payable.
WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE WHICH
COULD BE DETRIMENTAL TO HOLDERS OF OUR CLASS B NON-VOTING SHARES AND OUR
WARRANTS.
As a result of an amended and restated shareholders agreement entered into
by shareholders then holding approximately 88.0% of our fully-diluted equity in
connection with our acquisition of the business of Shaw FiberLink, two of our
institutional investors (which are affiliates of Goldman Sachs and CIBC World
Markets) and Shaw Communications, were able to nominate a majority of our
directors. Affiliates of Goldman Sachs and CIBC World Markets hold approximately
32.0% of our equity and have 4 of 11 directors on our board of directors. In
addition, Shaw Communications holds approximately 24.8% of our equity and has 3
directors on our board of directors. Each of Shaw Communications and Goldman
Sachs has a right to consent to:
- specified major transactions by us, including acquisitions and
investments in excess of $300 million and mergers or business
combinations, for a period of 18 months after February 16, 2000; and
- our annual operating budget, for a period of 24 months after February
16, 2000.
Decisions concerning our operations or financial structure may present
conflicts of interest between these investors, our management and other holders
of our securities, including holders of the notes. In addition to their
investments in us, these investors or their affiliates currently have
significant investments in other telecommunications companies, including
entities that compete with us, and may in the future invest in other entities
engaged in the telecommunications business or in related businesses. Conflicts
may also arise in the negotiation or enforcement of arrangements entered into by
us and entities in which these investors have an interest.
SOME OF OUR COMPETITORS HAVE GREATER FINANCIAL, TECHNICAL AND OTHER
RESOURCES THAN WE DO, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The Canadian telecommunications market is highly competitive. We face, and
expect to continue to face, intense competition in all of our target markets
from the incumbent local exchange carriers, cable companies, competitive long
distance providers, wireless providers, new local exchange carriers, and
resellers. Many of our current and potential competitors, including the Bell
companies, Aliant, BCT.TELUS, AT&T Canada and Call-Net, have longer operating
histories in the telecommunications industry and substantially greater
financial, marketing, technical, personnel, regulatory and other resources,
including greater brand name recognition. The emergence in Canada of a
competitive market for local telecommunications services has resulted in price
competition among market participants, and this pricing pressure may be more
intense than we expect, which could harm our business and our financial
condition. Also, we cannot assure you that, as communications technologies
develop, new classes of competitors will not emerge.
OUR BUSINESS STRATEGY DEPENDS ON SECURING AND MAINTAINING INTERCONNECTION
AGREEMENTS WITH OTHER PROVIDERS.
We provide some local services to our customers using facilities that we
lease or purchase from the incumbent local exchange carriers. We must enter into
agreements for the interconnection of our network with the networks of the
incumbent local exchange carriers and other carriers covering each market in
which we intend to offer service. We have entered into interconnection
agreements in a number of jurisdictions. However, we cannot assure you that we
will successfully renegotiate these agreements as they become due to expire, or
negotiate additional agreements as we enter new
4
<PAGE> 9
markets. Although the incumbent local exchange carriers are not entitled to
unjustly discriminate against telecommunications carriers like us in respect of
the rates or services they provide to us or to disrupt the access of competitors
to their respective facilities, we are vulnerable to changes in our lease and
interconnection arrangements with the incumbent local exchange carriers, such as
rate increases and changes in rules and policies of Canada's telecommunications
regulatory authority, the Canadian Radio-television and Telecommunications
Commission (commonly known as the "CRTC").
WE DEPEND ON OUR SUPPLIERS OF SWITCHES AND OTHER EQUIPMENT AND MAY
EXPERIENCE DELAYS IN RECEIVING REQUIRED COMPONENTS.
We rely on other companies to supply key components of our network
infrastructure, primarily switching and data routing equipment. These components
are only available in the quantities and quality we require from limited
sources. We may experience delays in receiving components or may not be able to
obtain these components on the scale and within the time frames required by us
at an affordable cost, or at all.
IF OUR BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS DO NOT OPERATE AS
WE EXPECT OR IF WE FAIL TO UPGRADE SYSTEMS AS NECESSARY, WE WILL NOT BE ABLE TO
CONDUCT OUR BUSINESS EFFICIENTLY.
Integrated management information and processing systems are vital to our
growth and our ability to monitor costs, process customer orders, bill customers
and operate efficiently. The cost of implementing these systems has been, and we
expect will continue to be, substantial.
We are in the final stages of developing and testing our operational
support system to integrate important facets of our operations. The development
and implementation of this system relies in part on the products and services of
third party vendors, over which we have no control. Unanticipated problems with
our system may harm our business and operating results.
In addition, any of the following developments could harm us:
- our failure to adequately identify and integrate all of our information
and processing needs;
- failure of our processing or information systems to perform as expected;
and
- our failure to upgrade systems as necessary and on a timely basis.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR BUSINESS AND OUR PROSPECTS COULD BE HARMED.
We are dependent on the continued service of a small number of key
executives and operations personnel, including Daniel Milliard, our chief
executive officer, Robert Wolfe, our president, Stephen Shoemaker, our chief
financial officer and Eric Demirian, our executive vice president, corporate
development. The loss of services of one or more of our key executives,
particularly Messrs. Milliard, Wolfe, Shoemaker and Demirian, could harm our
business and our prospects. We do not maintain key person life insurance for any
of our executive officers.
REGULATIONS RELATING TO CANADIAN OWNERSHIP AND CONTROL OF OUR VOTING SHARES
PREVENTS A FOREIGN INVESTOR FROM ACQUIRING US, WHICH COULD LIMIT THE VALUE OF
YOUR CLASS B NON-VOTING SHARES AND YOUR WARRANTS TO PURCHASE CLASS B NON-VOTING
SHARES.
As a competitive local exchange carrier, we are subject to regulations
which require that not less than 66 2/3% of our issued and outstanding voting
shares be beneficially owned by "Canadians" (as defined in these regulations).
To ensure compliance with these regulations, we have placed restrictions on the
transfer of our class A voting shares to non-Canadians. These restrictions
effectively limit the number of potential acquirors of our business and
therefore a takeover bid for us is less likely and you are less likely to
receive the change of control premium that generally comes with such bids.
5
<PAGE> 10
OUR ABILITY TO COMPETE IN THE CANADIAN LOCAL TELECOMMUNICATIONS MARKET IS
SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH MAY BE CHANGED IN A MANNER
HARMFUL TO OUR BUSINESS.
We are subject to regulation by the CRTC pursuant to the provisions of the
Canadian Telecommunications Act. We are also subject to radio spectrum
regulation by the Canadian Federal Department of Industry (commonly known as
Industry Canada) pursuant to the provisions of the Radiocommunication Act. Since
1994, the stated policy of the CRTC has been to recognize the importance of
competition in the local switched services market. As a relatively new entrant
into the Canadian telecommunications market, we benefit from this policy and
these decisions. However, we cannot assure you that the CRTC's policy to foster
the development of competition in the local switched services market will not
change or that the CRTC will react quickly and efficiently to anti-competitive
practices or effects resulting from the dominant position of Canada's incumbent
local exchange carriers. Any change in the CRTC's policies or regulations could
harm our business, operating results and prospects.
CRTC decisions are subject to review and variance by the CRTC at any time.
CRTC decisions can also be appealed to the Canadian Federal Court of Appeal and
may also be challenged by petition to the Federal Cabinet. We cannot assure you
that the local competition decisions of the CRTC, or other decisions relating to
the telecommunications markets in which we compete will not be reviewed and
varied by the CRTC or by the Federal Court or Cabinet on appeal. Any variance of
these decisions or other rules and regulations of the CRTC could harm our
business.
OUR NEED TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION CAN INCREASE OUR
COSTS AND SLOW OUR GROWTH.
Because we are subject to extensive government regulation, delays in
receiving required regulatory approvals may slow our growth. In addition, the
enactment of new adverse regulations or regulatory requirements may increase our
costs, which could have a harmful effect on us. We also cannot assure you that,
as we expand our business, the CRTC and Industry Canada will continue to grant
us the authority we need to conduct our business or will not take action against
us if we are found to have provided services without obtaining the necessary
authorizations or to have violated other requirements of their rules or orders.
The CRTC, Industry Canada or others could challenge our compliance with
applicable rules and orders, which could cause us to incur substantial legal and
administrative expenses. Lengthy administrative hearings might also delay the
deployment of our network, which could slow our growth.
OUR CLASS B NON-VOTING SHARES HAVE A LIMITED TRADING HISTORY AND THEIR
PRICE MAY BE VOLATILE. WE CANNOT ASSURE YOU THAT OUR SHARE PRICE WILL NOT
DECLINE IN THE FUTURE.
There has only been a public market for our class B non-voting shares since
March 2000. The market price of our class B non-voting shares could be subject
to significant fluctuation. Among the factors that could affect our share price
are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- strategic decisions by us or our competitors, such as acquisitions or
restructurings or changes in business strategy;
- actions by institutional stockholders;
- speculation in the press or investment community;
- general market conditions; and
- economic factors unrelated to our performance.
Recently, stock markets in the United States have experienced significant
price and volume fluctuations and the market prices of securities of
telecommunications services providers and
6
<PAGE> 11
technology companies, particularly Internet-related companies, have been highly
volatile. Investors may not be able to resell their class B non-voting shares at
or above the current price reported on the Nasdaq National Market. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation in the United States has often been
instituted against such a company. The institution of such litigation against us
could result in substantial costs and a diversion of our management's attention
and resources, which could harm our business and financial condition.
WE DO NOT INTEND TO LIST THE WARRANTS ON ANY STOCK EXCHANGE.
The warrants have not been listed on any stock exchange and we do not
intend to list the warrants on any stock exchange in the future. Although the
warrants are eligible for trading in the PORTAL market of the Nasdaq Stock
Market, Inc. by "qualified institutional buyers" ("QIBs"), as defined in Rule
144A under the U.S. Securities Act of 1933, the absence of a listing on a stock
exchange may cause the warrants to trade at a price lower than the price for the
underlying class B non-voting shares that are traded on the Nasdaq National
Market.
SINCE OUR REVENUE IS IN CANADIAN DOLLARS AND MOST OF OUR DEBT IS IN U.S.
DOLLARS, WE ARE SUBJECT TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN CANADIAN
AND U.S. DOLLARS.
As of June 30, we had debt outstanding denominated in U.S. dollars of
approximately US$505.8 million. Since the majority of our revenue is in Canadian
dollars, we will be exposed to fluctuations in the exchange rate between
Canadian and U.S. dollars and the uncertainty of the amount of Canadian dollars
that will be required to service the principal and interest payments under the
U.S. dollar denominated debt. In order to minimize these effects, as at June 30,
2000, we had entered into certain foreign currency hedging contracts to hedge
approximately 55% of our outstanding U.S. dollar denominated debt. Based on our
June 30, 2000 balances, a 1 percent change in the foreign currency exchange rate
between the Canadian and U.S. dollar would have an impact of $3.9 million on the
unhedged portion of our long-term debt. Any substantial increase in the U.S.
dollar relative to the Canadian dollar could affect our results of operations
and our ability to meet our future payment obligations on our debt.
IF OUR FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ARE INCORRECT, OUR
RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements in "Risk Factors"
beginning on page 1, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 16, "Business" beginning
on page 26 and elsewhere. These statements relate to future events or our future
financial performance. You can generally identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors, including the risks outlined under "Risk Factors", that may cause
our or our industry's actual results, levels of activity, performance or
achievements to differ materially from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume and no other
person assumes responsibility for the accuracy and completeness of these
statements.
7
<PAGE> 12
USE OF PROCEEDS
All class B non-voting shares and warrants offered hereby are being offered
by the selling shareholders. We will not receive any of the proceeds from the
sale of the class B non-voting shares or the warrants. The class B non-voting
shares offered hereby include up to -- class B non-voting shares issuable
upon the exercise of the warrants currently held by the selling shareholders. As
of the date of this prospectus, each warrant entitles the holder thereof to
purchase 4.9106 shares. No consideration will be paid to us by any holder in
connection with the exercise of such holder's warrants.
In February 2000 we sold units, which consisted of our senior discount
notes and these warrants to purchase our class B non-voting shares. Our net
proceeds from the sale of the units were approximately US$436.9 million, after
deducting underwriting discounts and commissions and estimated offering
expenses, of which approximately US$140.0 million was used to fund our
acquisition of the business of Shaw FiberLink.
We intend to use the remainder of the net proceeds from the unit offering,
together with the Lucent facility, the Cisco facility and the net proceeds of
our initial public offering of class B non-voting shares, to fund the
development and expansion of our network, operational infrastructure and sales
force, for working capital requirements, and for general corporate purposes.
We intend to spend approximately $480.0 million on the development and
expansion of our network in the next two years.
Consistent with our business strategy, we continually consider acquisition
opportunities that will enhance our business. As of the date of this prospectus,
we have not entered into any definitive agreements to make any acquisitions
except for those discussed herein.
PRICE RANGE OF CLASS B NON-VOTING SHARES
Our class B non-voting shares have been traded on the Nasdaq National
Market and the Toronto Stock Exchange, the TSE, since March 10, 2000. The
following table sets forth, for the periods indicated, the high and low sale
prices per share of our class B non-voting shares as reported on the Nasdaq
National Market and the TSE.
<TABLE>
<CAPTION>
NASDAQ
---------------------
HIGH LOW
--------- --------
<S> <C> <C>
Quarter ending March 31, 2000 (from March 10)............... US$ 30 US$16 1/2
Quarter ending June 30, 2000................................ US$20 13/16 US$11 1/4
Quarter ending September 30, 2000 (through August 15,
2000)..................................................... US$18 13/16 US$14 5/8
</TABLE>
<TABLE>
<CAPTION>
TSE
----------------
HIGH LOW
------ ------
<S> <C> <C>
Quarter ending March 31, 2000 (from March 10)............... $45.00 $25.00
Quarter ending June 30, 2000................................ $30.45 $16.55
Quarter ending September 30, 2000 (through August 15,
2000)..................................................... $27.40 $21.75
</TABLE>
On August 15, 2000, the last reported sale price of the shares on the
Nasdaq was US$15.031 and on the TSE was $22.250. On August 15, 2000, there were
approximately 72 holders of record of our class B non-voting shares and 358
holders of record of our class A voting shares.
8
<PAGE> 13
DIVIDEND POLICY
We have not paid any dividends on our class B non-voting shares and do not
intend to pay any dividends on our class B non-voting shares in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
future growth of our business. In addition, our ability to pay cash dividends is
currently restricted under the terms of financing agreements related to our long
term debt. For a further description of these restrictions, see "Description of
Our Financing Arrangements" on page 41 and the exhibits contained in the
registration statement of which this prospectus is a part. Future dividends, if
any, will be determined by our board of directors.
9
<PAGE> 14
SELECTED HISTORICAL FINANCIAL AND OPERATING
INFORMATION OF GROUP TELECOM
The following table sets forth selected financial and operating information
for Group Telecom for the periods indicated. You should read this selected
consolidated financial and operating information in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 16 and our financial statements, including the
notes, beginning on page F-2. Our financial statements are presented in Canadian
dollars and are prepared in accordance with Canadian GAAP, which differs in some
respects from U.S. GAAP. The principal differences are summarized in note 22 to
our audited financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------- --------------------
1996(1) 1997 1998 1999 1999 2000
------- ------ ------- -------- ------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Canadian GAAP
Revenue............................. $ 29 $2,051 $ 1,823 $ 2,705 $ 1,432 $ 41,084
Cost of sales....................... 28 1,437 1,131 1,808 851 30,106
----- ------ ------- -------- ------- ----------
Gross profit........................ 1 614 692 897 581 10,978
Selling, general and administrative
expenses.......................... 243 989 3,038 10,218 5,432 62,058
----- ------ ------- -------- ------- ----------
(242) (375) (2,346) (9,321) (4,851) (51,080)
Amortization........................ 9 55 255 853 664 22,814
----- ------ ------- -------- ------- ----------
Operating loss...................... (251) (430) (2,601) (10,174) (5,515) (73,894)
Interest and finance items
(income).......................... -- -- (162) (372) (241) 27,866
Tax expense (recovery).............. (5) -- -- 165 -- (26,606)
----- ------ ------- -------- ------- ----------
Loss for the period................. $(246) $ (430) $(2,439) $ (9,967) $(5,274) $ (75,154)
===== ====== ======= ======== ======= ==========
Loss per share(2)................... (0.05) (0.05) (0.26) (0.56) (0.32) (1.24)
U.S. GAAP
Loss for the period................. $(269) $ (426) $(3,582) $(10,336) $(5,500) $ (89,392)
===== ====== ======= ======== ======= ==========
Comprehensive loss for the period... $(269) $ (426) $(3,582) $(10,336) $(5,500) $ (68,292)
Loss per share(2)................... (0.05) (0.05) (0.38) (0.58) (0.33) (1.48)
BALANCE SHEET:
Canadian GAAP
Cash and cash equivalents........... $ 5 $ 61 $ 2,476 $ 59,851 $38,095 $ 526,231
Working capital (deficit)........... (166) (224) (4,199) 47,871 33,722 484,961
Prepayment on property, plant and
equipment......................... -- -- -- -- -- 230,600
Property, plant and equipment,
net(3)............................ 64 481 10,555 73,817 30,717 778,926
Intangible and other assets(4)...... 85 75 207 1,292 754 199,710
Long-term debt...................... -- -- 776 47,557 17,411 854,327
Shareholders' equity (deficiency)... (17) 331 5,787 73,929 47,938 883,232
U.S. GAAP
Shareholders' equity (deficiency)... $ (41) $ 316 $ 5,685 $ 73,514 $45,255 $ 914,944
CASH PROVIDED BY (USED IN):(5)
Operating activities................ $(127) $ (251) $(1,360) $ (9,033) $(2,094) $ (51,808)
Financing activities................ 233 769 7,686 75,948 47,144 1,141,586
Investing activities................ (101) (462) (3,911) (9,539) (9,431) (623,398)
OTHER:
EBITDA(6)........................... $(242) $ (375) $(2,288) $ (8,401) $(4,851) $ (51,080)
</TABLE>
10
<PAGE> 15
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1998 1999 2000
------------- ------------- --------
<S> <C> <C> <C>
OPERATING DATA:
Route kilometers.................................... 5 46 8,500(7)
Fiber kilometers.................................... 2,030 16,595 156,544(8)
Number of Lucent class 5 switches................... 1 1 4
Number of buildings connected....................... 8 40 1,331
Number of employees................................. 51 168 872
</TABLE>
---------------
(1) Data is for the period from our incorporation on April 12, 1996 to September
30, 1996.
(2) The effect of the exercise of options and warrants is not dilutive.
Accordingly, fully diluted earnings per share is not presented.
(3) Property, plant and equipment at cost is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1996 1997 1998 1999
---- ---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Property, plant and equipment, at cost................ $69 $517 $10,805 $74,895
</TABLE>
(4) Intangible and other assets include goodwill and other long-term assets.
(5) Cash flow information represents cash provided by (used in) operating,
financing and investing activities are identical under Canadian and U.S.
GAAP.
(6) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses. EBITDA is a financial metric used by substantially
all investors to compare companies in the telecommunications industry on the
basis of operating results, asset value and the ability to incur and service
debt. It is not intended to represent cash flow or results of operations in
accordance with Canadian GAAP. EBITDA may not be comparable to similarly
titled amounts reported by other companies. Under U.S. GAAP, EBITDA for the
period from April 12, 1996, our date of incorporation, to September 30,
1996, and the years ended September 30, 1997, 1998 and 1999 was $(265,000),
$(371,000), $(3,431,000) and $(8,769,000), respectively.
(7) Equivalent to approximately 5,285 route miles. Route miles equal the number
of miles of the telecommunications paths in which we own or lease installed
fiber optic cable.
(8) Equivalent to approximately 97,276 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path.
11
<PAGE> 16
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected unaudited pro forma consolidated
financial information relating to the acquisition of the business of Shaw
FiberLink. The unaudited pro forma condensed consolidated statement of
operations for the twelve months ended September 30, 1999 has been prepared
based on the audited consolidated statement of operations of Group Telecom for
the year ended September 30, 1999 and the audited statement of operations of
Shaw FiberLink for the year ended August 31, 1999, and as if the acquisition of
the business of Shaw FiberLink had occurred on October 1, 1998. The unaudited
pro forma condensed consolidated balance sheet information has been prepared as
if the acquisition of the business of Shaw FiberLink had occurred on September
30, 1999. See "Unaudited Pro Forma Condensed Consolidated Financial Information"
beginning on page F-54. The pro forma financial information, summarized from the
pro forma condensed consolidated financial statements, is presented for
informational purposes only and does not purport to be indicative of the results
which would have actually been obtained or our financial position if the
transactions had been completed as of the dates indicated or that may be
expected to occur in the future.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1999
-------------------
(IN THOUSANDS EXCEPT
PER SHARE AND
OPERATING DATA)
<S> <C>
STATEMENT OF OPERATIONS:
Revenue..................................................... $ 41,520
Cost of sales............................................... 21,108
----------
Gross profit................................................ 20,412
Selling, general and administrative expenses................ 19,111
Amortization(1)............................................. 39,267
----------
Operating loss.............................................. (37,966)
Interest and finance items(2)............................... (114,028)
Income taxes................................................ (257)
----------
Loss for the year under Canadian GAAP....................... $ (152,251)
==========
Loss per share under Canadian GAAP(3)....................... (8.53)
==========
Loss for the year under U.S. GAAP........................... $ (152,620)
==========
Loss per share under U.S. GAAP(3)........................... (8.55)
BALANCE SHEET:
Cash and cash equivalents................................... $ 523,651
Working capital............................................. 511,671
Prepayment on property, plant and equipment(4).............. 223,000
Property, plant and equipment, net(5)....................... 502,817
Total assets................................................ 1,437,215
Long-term debt.............................................. 860,077
Shareholders' equity........................................ 530,809
Total liabilities and shareholders' equity.................. 1,437,215
CASH PROVIDED BY (USED IN):
Operating activities........................................ (115,794)
Financing activities........................................ 953,385
Investing activities........................................ (419,783)
OTHER:
EBITDA(6)................................................... $ 2,221
</TABLE>
---------------
12
<PAGE> 17
(1) Amortization includes the depreciation charge allocated by Shaw
Communications of $5,649,000 for use of distribution network assets. See
note 6(c) to the financial statements of Shaw FiberLink.
(2) Interest and finance items include $88,400,000 in interest expense on debt
proceeds raised in the offering of our units on February 1, 2000, giving
effect to this units offering as if it had occurred on October 1, 1998.
These figures do not reflect a corresponding return on proceeds received.
(3) This amount represents a prepayment associated with our indefeasible right
to use certain fibers to be built by Shaw Communications over the next three
years.
(4) This amount includes property, plant and equipment of $100 million
associated with our acquisition of the business of Shaw FiberLink, and
property, plant and equipment valued at $329 million associated with our
indefeasible right to use certain identified fibers in the fiber optic
networks of Shaw Communications. Property, plant and equipment at cost on a
pro forma basis at September 30, 1999 was $503,895,000.
(5) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses. EBITDA is a financial metric used by substantially
all investors to compare companies in the telecommunications industry on the
basis of operating results, asset value and the ability to incur and service
debt. However, it is not intended to represent cash flow or results of
operations in accordance with Canadian GAAP. EBITDA may not be comparable to
similarly titled amounts reported by other companies. Under U.S. GAAP, pro
forma EBITDA for the year ended September 30, 1999, giving effect to our
acquisition of the business of Shaw FiberLink effective October 1, 1998,
would have been $1,852,000.
13
<PAGE> 18
SELECTED HISTORICAL FINANCIAL AND
OPERATING INFORMATION OF SHAW FIBERLINK
The following table sets forth selected financial and operating information
for Shaw FiberLink for the periods indicated. You should read this selected
historical information in conjunction with the Shaw FiberLink audited financial
statements, including the notes, beginning on page F-44. The Shaw FiberLink
financial statements are presented in Canadian dollars and are prepared in
accordance with Canadian GAAP, which differs in some respects from U.S. GAAP.
The principal differences are summarized in note 10 to the financial statements
of Shaw FiberLink.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
TWELVE MONTHS ENDED AUGUST 31, NOVEMBER 30,
-------------------------------- -------------------
1997 1998 1999 1998 1999
-------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue.......................... $ 11,631 $ 22,324 $ 38,815 $ 7,876 $ 13,197
Cost of sales.................... 3,965 10,174 17,800 3,529 6,503
-------- -------- -------- ------- --------
Gross profit..................... 7,666 12,150 21,015 4,347 6,694
Selling, general and
administrative expenses........ 5,227 7,498 8,893 1,999 3,004
Depreciation..................... 1,954 3,832 6,565 1,347 2,109
Depreciation charge allocated by
Shaw Communications for use of
distribution network
assets(1)...................... 3,073 4,394 5,649 1,259 1,648
-------- -------- -------- ------- --------
Loss before income taxes......... (2,588) (3,574) (92) (258) (67)
Income taxes..................... 25 50 92 23 25
-------- -------- -------- ------- --------
Net loss......................... $ (2,613) $ (3,624) $ (184) $ (281) $ (92)
======== ======== ======== ======= ========
BALANCE SHEET:
Accounts receivable........................ $ 2,188 $ 7,336 $ 6,264
Prepaids and other......................... 65 289 183
-------- -------- --------
2,253 7,625 6,447
Property and equipment, net................ 46,793 70,472 78,422
-------- -------- --------
$ 49,046 $ 78,097 $ 84,869
======== ======== ========
Accounts payable and accrued liabilities... $ 7,613 $ 1,974 $ 1,905
Income taxes payable....................... 148 116 92
Unearned revenue........................... 161 1,330 1,273
-------- -------- --------
7,922 3,420 3,270
Net investment by Shaw Communications...... 41,124 74,677 81,599
-------- -------- --------
$ 49,046 $ 78,097 $ 84,869
======== ======== ========
CASH PROVIDED BY (USED IN)(2):
Operating activities............. $ 405 $ 5,905 $ (3,493) $(5,922) $ 3,045
Financing activities............. 11,684 21,540 33,737 11,117 7,014
Investing activities............. (12,089) (27,445) (30,244) (5,195) (10,059)
OTHER:
EBITDA(3).................................. $ 4,652 $ 12,122 $ 2,348 $ 3,690
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
---------------
<S> <C>
OPERATING DATA:
Route kilometers(4)......................................... 7,765
Fiber kilometers(5)......................................... 101,546
Number of buildings connected............................... 1,014
Number of employees......................................... 137
</TABLE>
---------------
(1) See note 6(c) to the financial statements of Shaw FiberLink.
(2) Cash flow information represents cash provided by (used in) operating,
financing and investing activities and is identical under Canadian and U.S.
GAAP.
(3) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses and the charge allocated by Shaw Communications for
the use of distribution network assets. EBITDA is a financial metric used by
substantially all investors to compare companies in the telecommunications
industry on the basis of operating results, asset value and the ability to
incur and service debt. It is not intended to represent cash flow or results
of operations in accordance with Canadian GAAP. EBITDA may not be comparable
to similarly titled amounts reported by other companies.
(4) Equivalent to approximately 4,853 route miles. Route miles equal the number
of miles of the telecommunications paths in which Shaw FiberLink owns or
leases installed fiber optic cable. Shaw FiberLink route kilometers are
calculated as of December 22, 1999, the date that Shaw Communications agreed
to grant Group Telecom an indefeasible right to use these route kilometers.
(5) Equivalent to approximately 63,466 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path. Shaw FiberLink fiber kilometers are
calculated as of December 22, 1999, the date that Shaw Communications agreed
to grant Group Telecom an indefeasible right to use these fiber kilometers.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We have been providing data services since 1996 and have commenced
construction of our facilities-based network in Vancouver. We avoided
substantial capital expenditures in the build-out of our network in Vancouver
through a contract with BC Hydro, an electric utility, which enabled us to
install our fiber through their existing conduits which connect to nearly all
buildings in British Columbia. We have used our Vancouver fiber network strategy
as a blueprint to enter our other initial target markets across Canada, and have
already entered into conduit access agreements with utility companies in Calgary
and Edmonton, and intend to pursue similar opportunities in Montreal. In Toronto
we intend to acquire and have leased existing fiber to establish our network and
in July, 1999 entered into a fiber lease agreement with Toronto Hydro which
gives us access to Toronto Hydro's existing fiber optic network.
We installed our first Lucent 5ESS voice switch in Vancouver in 1998. We
installed voice switches in Toronto and Calgary in December 1999 and in Montreal
in January 2000.
In the fall of 1999, we launched a national marketing effort of our
comprehensive suite of services. As of June 30, 2000, we had 1,331 buildings
connected to our network and had approximately 156,544 fiber kilometers (97,276
miles) over 8,500 route kilometers (5,285 miles). At June 30, 2000, we had 345
building licence agreements with property owners, including Oxford Properties,
Brookfield, Cadillac Fairview and O&Y Enterprises, each a national property
owner.
Our network in a city consists of a fiber optic backbone, fiber connection
from the backbone to the buildings, equipment in the buildings in which our
customers are located, central offices housing data and switching equipment and
equipment connecting our network to the public switched telephone network and
the Internet.
The construction of our network in each target market varies, depending
upon the size and complexity of the network. The time required to complete the
construction phase is also significantly influenced by the number of route and
fiber miles involved, the mix of aboveground versus underground fiber
deployment, possible delays in securing rights-of-way and negotiating business
licence agreements and required construction permits, time in negotiating leases
for central offices and office space and installing electronic equipment.
Our strategy is to own or control the fiber that comprises our network in
each of our target markets. We believe there are several strategic advantages to
serving our customers over owned facilities instead of reselling services or
leasing facilities, including earning higher margins. To reduce the capital
expenditures required to construct our fiber optic infrastructure, we have
established, and expect to continue to establish, access and rights-of-way
agreements with utility companies and other companies in our target markets. For
further discussion of these relationships, see "Business -- Strategic
Relationships -- Access agreements and rights-of-way" beginning on page 32.
OUR RECENT ACQUISITIONS
On February 16, 2000, we acquired from Shaw Communications the business of
Shaw FiberLink for $360 million in cash and the issuance of 27.1% of our fully
diluted equity. The cash portion of the purchase price was funded by borrowing
$220 million under our bank facility and by using $140 million of the net
proceeds of our offering of units consisting of our 13 1/4% senior discount
notes due 2010 and warrants for our class B non-voting shares. For the year
ended August 31, 1999, Shaw FiberLink had revenue of $38.8 million and EBITDA of
$12.1 million. As part of our acquisition of the business of Shaw FiberLink, we
received rights to 1,502 fiber kilometers through assigned contracts and an
indefeasible right to use 100,044 fiber kilometers for 60 years. In addition,
Shaw Communications agreed to construct for our use, at no additional cost to
us, approximately 97,500 fiber kilometers over
16
<PAGE> 21
the next three years, subject to variance depending on the location of the
constructed fiber. We will have an indefeasible right to use these fiber
kilometers for between 57 and 60 years.
In April 2000, we purchased from Moffat Communications all the property and
assets used in connection with their fiber optic business telecom operations for
$68 million in cash and 1,667,000 of our class B non-voting shares. The assets
purchased include equipment, operational contracts, equipment contracts, supply
contracts, interconnection agreements, co-location agreements, customer
contracts, software licences, intellectual property, permits, accounts
receivable, prepaid expenses and certain other assets. We also entered into an
indefeasible right to use agreement with Moffat Communications which granted us
an indefeasible right to use certain specifically identified existing fibers in
the fiber optic cable networks of Moffat Communications for 30 years.
In May 2000, we agreed with 360networks Inc. to (1) lease from them
dedicated fiber optic capacity and (2) purchase fiber in Canada and receive from
them an indefeasible right to use fiber in the United States. The aggregate
price of the dedicated fiber optic capacity and fiber we acquired was
approximately $362 million. We have the option to acquire from 360networks
additional fiber and dedicated fiber optic capacity. In addition, we invested
approximately $43 million in the equity of 360networks.
In July 2000, we acquired from Cable Atlantic certain property and assets
used in Cable Atlantic's competitive local exchange carrier operations and
commercial telecommunications operations in consideration for $15 million in
cash, the issuance of 1,740,196 of our class B non-voting shares and a cash
payment equal to the value of the net working capital of the acquired business
on the closing date. The assets purchased include equipment, land and building,
operational contracts, customer contracts, intellectual property, permits, books
and records, goodwill, accounts receivable and prepaid expenses. We entered into
an indefeasible right to use agreement with Cable Atlantic that grants to us an
indefeasible right to use certain specifically identified existing fibers of
Cable Atlantic for 30 years, with a right to purchase these fibers for $1 at any
time.
OPERATING DATA
The table below provides selected key operating data:
<TABLE>
<CAPTION>
GROUP TELECOM
---------------------------------
AT SEPTEMBER 30, AT JUNE 30,
1999 2000
----------------- ------------
<S> <C> <C>
OPERATING DATA:
Route kilometers............................................ 46 8,500(1)
Fiber kilometers............................................ 16,595 156,544(2)
Number of Lucent class 5 switches........................... 1 4
Number of buildings connected............................... 40 1,331
Number of employees......................................... 168 872
</TABLE>
---------------
(1) Equivalent to approximately 5,285 miles. Route miles equals the number of
miles of the telecommunications path in which we own or lease installed
fiber optic cable.
(2) Equivalent to approximately 97,276 miles. Fiber miles equals the number of
miles installed along a telecommunications path multiplied by the number of
fibers along the path.
17
<PAGE> 22
GROUP TELECOM RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
REVENUE. We generate most of our revenue by providing data and voice
services over our local network to end-user customers and charging access fees
to long distance providers who make use of our local network for their voice and
data transmissions. Our major sources of revenue are:
- monthly access and usage fees;
- telecommunications service fees which we earn by connecting our
customers to our network;
- sales of our data, Internet application and voice services to customers;
and
- installation of our customers' equipment at our site to connect them
directly to our network.
We also earn one time charges for installation and activation of services
as well as revenue from the resale of equipment to our customers and the
installation of such equipment.
Revenue for the nine months ended June 30, 2000 increased $39.7 million, or
27,690%, to $41.1 million compared to $1.4 million for the nine months ended
June 30, 1999, due to the inclusion of the customer base we acquired from Shaw
Communications and Moffat Communications, and the addition of new customers and
new services.
COST OF SALES. Our cost of sales consists of network operating costs which
include:
- the costs to install, monitor and repair our network;
- termination and unbundled network element charges;
- charges from long distance carriers for resale of long distance
services;
- salaries and benefits associated with network operations as well as our
customer service personnel;
- charges for our redundant connection to the Internet;
- leased fiber costs; and
- building access fees and municipal access fees paid to civic authorities
and others for use of rights of way.
Cost of sales for the nine months ended June 30, 2000 increased $29.2
million, or 34,377%, to $30.1 million compared to $0.9 million for the nine
months ended June 30, 1999. The increase was due to a corresponding increase in
revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses consist primarily of:
- promotions;
- advertising, travel and entertainment costs;
- compensation to sales representatives, administrative, marketing,
financial and executive personnel;
- recruiting costs;
- corporate administration costs;
- legal, accounting and other professional fees;
- office related expenses; and
- bad debts.
18
<PAGE> 23
Selling, general and administrative expenses increased $56.6 million, or
10,424%, to $62.0 million for the nine months ended June 30, 2000 compared to
$5.4 million for the nine months ended June 30, 1999 resulting from an increase
in compensation due to an increase in headcount, a national marketing launch, an
increase in professional fees and increased need for office space and related
costs.
AMORTIZATION. Amortization for the nine months ended June 30, 2000
increased $22.1 million, or 33,358%, to $22.8 million compared to $0.7 million
for the nine months ended June 30, 1999 due to an increase in property, plant
and equipment resulting from our acquisitions of Shaw FiberLink and Videon
FiberLink and the deployment of our network.
INTEREST. Interest income resulted from investment of cash reserves from
debt and equity offerings. Interest income for the nine months ended June 30,
2000 was $15.1 million compared to $0.3 million for the nine months ended June
30, 1999.
Interest expense resulted from interest and financing charges related to
our long-term debt. Interest expense for the nine months ended June 30, 2000 was
$43.0 million compared to $0.3 million for the nine months ended June 30, 1999.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. In the nine months ended June 30, 2000, a
recovery of $26.6 million of future income taxes was recorded in order to
recognize the tax benefit from operating loss carryforwards to the extent of
existing temporary differences arising from the Shaw FiberLink acquisition.
LOSS. As a result of the above, the loss before income taxes for the nine
months ended June 30, 2000 was $75.2 million compared to $5.3 million for the
nine months ended June 30, 1999, representing an increase of 13,250%.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
REVENUE. Revenue for the year ended September 30, 1999 increased $0.9
million, or 48%, to $2.7 million compared to $1.8 million for the year ended
September 30, 1998, due to a larger number of customers and new services being
provided. Approximately 72% of our revenue for the year ended September 30, 1999
was from recurring sources as compared to 63% for 1998. Our recurring revenue
was primarily from the sale of access and usage of our network.
COST OF SALES. Cost of sales for the year ended September 30, 1999
increased $0.7 million, or 60%, to $1.8 million compared to $1.1 million for the
year ended September 30, 1998. The increase was due to corresponding increase in
revenue and change in product mix which resulted in higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.2 million, or 236%, to $10.2 million for
the year ended September 30, 1999 compared to $3.0 million for the year ended
September 30, 1998 due to an increase in salaries due to increased headcount, a
national marketing launch and increased need for office space and related costs.
AMORTIZATION. Amortization for the year ended September 30, 1999 increased
$597,961, or 234%, to $852,539 compared to $254,578 for the year ended September
30, 1998 due to an increase in property, plant and equipment available for
commercial service.
INTEREST INCOME AND FINANCE CHARGES. Interest income for the year ended
September 30, 1999 was $465,913 as compared to interest expense of $89,188 for
the year ended September 30, 1998. Interest income resulted from investment of
cash reserves from private equity offerings. This was partially offset by
increases in interest expense on long-term debt and financing charges related to
vendor financings.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. We have accrued a provision for large
corporations tax for September 30, 1999,
19
<PAGE> 24
of $165,000. As of September 30, 1999, we had an aggregate of approximately
$13.1 million of non-capital loss carry forwards, of which $326,000 expire by
2003. We currently have no capital losses. Non-capital losses can be carried
forward 7 years and carried back 3 years.
LOSS. As a result of the above, the loss before income taxes for the year
ended September 30, 1999 was $9.8 million compared to $2.4 million for the year
ended September 30, 1998, representing an increase of 302%.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
REVENUE. Revenue for the year ended September 30, 1998 decreased $0.3
million, or 11%, to $1.8 million compared to $2.1 million for the year ended
September 30, 1997. This decrease was due to the inability to purchase equipment
for resale to our customers as a result of working capital shortages. In
addition, in 1997 we had an unusually large equipment resale, which resulted in
additional non-recurring revenue of approximately $400,000. At September 30,
1998, the proportion of revenue from recurring sources increased to
approximately 63% from 38% at September 30, 1997. Our recurring revenue was
primarily from sales of access, usage and co-location with our network.
COST OF SALES. Cost of sales for the year ended September 30, 1998
decreased $0.3 million, or 21%, to $1.1 million compared to $1.4 million for the
year ended September 30, 1997, due to a corresponding decrease in revenue and
change in product mix sold. Our cost of sales in 1998 was comprised primarily of
the cost of interconnecting our network to the Internet backbone, our cost of
purchasing equipment to be resold to our customers and costs of securing rights
of way.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.0 million, or 207%, to $3.0 million for the
year ended September 30, 1998 compared to $988,933 for the year ended September
30, 1997. During February and June 1998, we obtained equity financing and began
to ramp up our business and commenced construction of our facilities-based
network in Vancouver. We incurred costs associated with the hiring of additional
sales, administrative, head office executives, financial and human resource
employees, additional administrative overhead, larger office facilities and
expenditures related to fund raising efforts.
AMORTIZATION. Amortization for the year ended September 30, 1998 increased
$199,432, or 362%, to $254,578 compared to $55,146 for the year ended September
30, 1997. This increase was due to more telecommunications assets being put into
commercial service at September 30, 1998 as a result of the expansion of our
network in Vancouver.
INTEREST AND FINANCING CHARGES. Interest and financing charges for the
year ended September 30, 1998 was $89,188 compared to nil for the year ended
September 30, 1997. Interest and financing charges in 1998 resulted from issuing
convertible debentures and the interest on those debentures and from payments we
made with respect to the financing of our central office in Burnaby, B.C.,
offset in part by interest income. We earned interest income by investing our
cash balances in short-term investment grade securities.
LOSS. As a result of the above, the loss for the year ended September 30,
1998 was $2.4 million compared to $430,000 for the year ended September 30,
1997, representing an increase of 467%.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses and expect that such
losses will continue as we develop, construct and expand our network and our
operations and build our customer base. The cash provided by our operations will
not be sufficient to cover these operating and net losses as we construct and
expand our network.
Our expenditures for property, plant and equipment for the nine months
ended June 30, 2000 were $92.5 million compared to $64.1 million for the year
ended September 30, 1999, and were
20
<PAGE> 25
related to the purchase and construction of switching and data networking
equipment, construction of our fiber optic infrastructure and central office and
data hub facilities, transmission equipment and co-location facilities and
construction and implementation of our back office systems.
At June 30, 2000, our current assets were $575.9 million and our current
liabilities were $91.0 million, giving us a working capital of $484.9 million
compared to $47.9 million at September 30, 1999. Cash and cash equivalents at
June 30, 2000 were $526.2 million compared to $59.9 million at September 30,
1999.
Cash used in operating activities for the nine months ended June 30, 2000
was $51.8 million, most of which came from our net loss of $75.1 million,
partially offset by an increase in items not affecting cash and changes in
working capital.
From our inception in April 1996 until May 1999, we funded our capital
expenditures and operating losses through private placements of our equity and
debt.
In May and July, 1999
- we raised approximately $41.5 million from a private placement of series
A first preference shares to affiliates of Goldman Sachs, CIBC World
Markets, National Bank Financial Capital Corp. and MGN Opportunity Group
LLC. In August 1999, we raised an additional $28.8 million, $25.9
million of which came from the exercise of options held by these private
equity investors resulting in the issuance of 13,833,335 series A first
preference shares.
- we entered into a credit facility with Lucent which provided for an
initial commitment of US$40 million and which is available until May 28,
2001. The facility is to finance the purchase of equipment and services
from Lucent to be used in our network.
- we signed a credit agreement with Cisco pursuant to which we can borrow
from Cisco up to US$15 million to finance our purchase and installation
of Cisco networking hardware and software. The funds under this credit
agreement are available until July 28, 2001 and bear interest at a rate
of 12% per year.
In February, 2000
- we issued 855,000 units, consisting of US$855,000,000 of 13 1/4% senior
discount notes and warrants to purchase 4,198,563 of our class B
non-voting shares for net proceeds to us of US$436,900,000;
- we entered into an agreement with Lucent which will allow us to finance
up to US$315 million of switches, fiber and related electronic equipment
and engineering and installation services purchased from Lucent over a
three year period from the initial drawdown; and
- we entered into an agreement with several banks under which they will
provide a $220 million committed bank facility.
For a detailed description of these financing arrangements, see "Description of
our Financing Arrangements" beginning on page 41.
We completed our initial public offering on March 15, 2000 with the
issuance of 20,700,000 of our class B non-voting shares at a price of U.S.$14
per share, including 2,700,000 class B non-voting shares issued upon exercise of
the underwriters' over-allotment option. The initial public offering resulted in
aggregate net proceeds to us of U.S.$268,100,000.
In February 2000, we acquired the business of Shaw FiberLink for $360
million in cash and the issuance of 27.1% of our fully-diluted equity. We funded
the cash portion of our acquisition of the business of Shaw FiberLink by
borrowing $220 million under our bank facility and by using $140 million of the
net proceeds from the issuance of our units. In April 2000, we acquired the
business of Videon FiberLink from Moffat Communications for $68 million in cash
and 1,667,000 of our class B non-voting shares. In May 2000, we acquired and
will acquire fiber and dedicated fiber optic
21
<PAGE> 26
capacity from 360networks for an initial cash payment of approximately $32
million and total future payments of $330 million. We have options to acquire
from 360networks further fiber and dedicated fiber optic capacity. In July 2000,
we acquired from Cable Atlantic its competitive local exchange carrier and
commercial telecommunications operations for $15 million in cash, 1,740,196 of
our class B non-voting shares and a cash payment equal to the value of the net
working capital of the acquired business on the closing date.
We believe that the remaining net proceeds of our unit offering, additional
borrowing under our Lucent and Cisco vendor facilities and the net proceeds of
our initial public offering of class B non-voting shares will be sufficient to
fully fund our business plan. The extent of additional financing required, if
any, will depend upon the rate of our expansion and the success of our business.
Consistent with our business strategy, we continually consider acquisition
opportunities that will enhance our business. There can be no assurance that
additional financing will be available to us or, if available, that it can be
obtained on acceptable terms or within the limitations contained in our existing
financing agreements.
In the event that our plans change, the assumptions upon which our plans
are based prove inaccurate, we expand or accelerate our business plan or we
complete acquisitions, the foregoing sources of funds may prove insufficient to
fully fund our business plan and we may be required to seek additional financing
sooner than we currently expect. Additional sources of financing may include
public or private equity or debt financings, capital and operating leases and
other financing arrangements. To the extent sufficient funding is not available
we may limit which markets we enter into and the degree to which we penetrate a
particular market.
We can give no assurance that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms or within the limitations contained in our financing arrangements. Failure
to obtain such financing could result in the delay or abandonment of some or all
of our development and expansion plans and expenditures, which would harm our
financial condition and operating results. Such a failure could also limit our
ability to make principal and interest payments on our indebtedness. We cannot
assure you that financing, if required, will be available in the future or that,
if such financing were available, it would be available on terms and conditions
acceptable to us.
Our revenue is generated primarily in Canadian dollars, while substantial
amounts of our current and future liabilities, including interest and principal
obligations on our long-term debt, are and will be payable in U.S. dollars. As
at June 30, 2000, we had entered into certain foreign currency hedging contracts
to hedge approximately 55% of our outstanding U.S. dollar denominated debt.
22
<PAGE> 27
OUR ACQUISITION OF THE SHAW FIBERLINK BUSINESS
ASSET PURCHASE AND SUBSCRIPTION AGREEMENT
On February 16, 2000, we acquired the business of Shaw FiberLink pursuant
to an asset purchase and subscription agreement with Shaw Communications and
Shaw FiberLink. The purchase consideration of $760 million paid by us consisted
of $360 million in cash and sufficient series B first preference shares to
provide Shaw Communications with a 27.1% fully diluted interest in us at the
date the acquisition was consummated. The fair value of these shares was
approximately $400 million. Upon completion of our initial public offering in
March 2000, all of these shares were converted into class A voting shares. In
connection with our acquisition of the business of Shaw FiberLink, three
executive officers of Shaw Communications, became directors of Group Telecom.
Under the asset purchase and subscription agreement, we purchased from Shaw
Communications all of the property and assets of Shaw FiberLink used in
connection with its high speed data and competitive access business. We also
assumed certain obligations related to permits, operational contracts, customer
contracts, software licenses and certain other obligations. The assets purchased
include:
- equipment, computer hardware and fixed assets,
- operational, equipment supply and customer contracts,
- interconnect agreements and co-location agreements,
- software and broadband wireless licenses,
- permits,
- intellectual property,
- goodwill, and
- certain other fiber business assets.
Certain assets were excluded from the acquisition of the business of Shaw
FiberLink, including:
- certain interconnection, Internet bandwidth and other agreements;
- the name "Shaw FiberLink" (subject to a license granted to us pursuant
to the trade-mark license agreement described below);
- any assets of Shaw Communications or its affiliates used in the cable
television, residential Internet or video and other residential services
businesses; and
- any indefeasible right to use fibers or rights underlying the
indefeasible right to use fibers, other than rights assigned to us
pursuant to any assigned operational contracts.
Where the transfer of any such assets requires consent of a third party and
such consent is not obtained, Shaw Communications has agreed to hold such assets
in trust for us and to continue to maintain the existence of such assets, at our
expense.
The asset purchase and subscription agreement contains customary
representations, warranties and indemnities. In particular, Shaw Communications
has represented that the Shaw FiberLink assets are all the assets and rights
(excluding material non-assignable permits, engineering and administration
services and certain underlying rights) which are required to enable us to
conduct the business of Shaw FiberLink. With limited exceptions, Shaw
Communications made no representations or warranties as to the underlying rights
to the fibers subject to the indefeasible right to use agreement described
below.
INDEFEASIBLE RIGHT TO USE AGREEMENT
As part of our acquisition of the business of Shaw FiberLink, we received
rights to 1,502 fiber kilometers through assigned contracts and an indefeasible
right to use 100,044 fiber kilometers for 60 years, including 10,720 fiber
kilometers located in New Brunswick available to us on May 1, 2003.
Additionally, Shaw FiberLink and each of the affiliates of Shaw Communications
which owns indefeasible rights to use fiber has entered into an agreement to
grant a one-year indefeasible right of
23
<PAGE> 28
use to Shaw FiberLink in all of the indefeasible rights to use fiber which Shaw
FiberLink does not own, renewable annually by Shaw FiberLink. On the closing of
the acquisition, we fully prepaid the rent for the fibers in which we received
the right of use for the full 60 year term of our agreement with Shaw FiberLink.
In addition, Shaw Communications agreed to construct for our use, at no
additional cost to us, approximately 97,500 additional fiber kilometers over the
next three years, subject to variance depending on the location of the
constructed fiber, over which we will have an indefeasible right of use. This
commitment to build an additional 97,500 fiber kilometers was included in the
$760 million purchase price consideration, and has been recorded as a $223
million prepayment of property, plant and equipment. Our indefeasible right to
use agreement also allows us to ask Shaw Communications to install new access
cables and new segments to our network. Once we pay Shaw FiberLink for the cable
they install, Shaw FiberLink will grant us an indefeasible right to use those
newly installed fibers for the remainder of our initial 60 year indefeasible
right of use term.
During the term of our indefeasible right to use agreement with Shaw
FiberLink, Shaw FiberLink will, for a fee, provide facilities for our optronics
or electronics or our optical or electrical equipment in Shaw Communications hub
sites. Shaw FiberLink will repair and maintain our fibers in exchange for a
yearly fee.
PERFORMANCE ASSURANCE AGREEMENT
As part of our acquisition of the business of Shaw FiberLink, and to
support the indefeasible right to use agreement, we have entered into a
performance assurance agreement with Shaw Communications. Shaw Communications
has agreed that if Shaw FiberLink defaults in any of its obligations under the
indefeasible right to use agreement, Shaw Communications will perform, or cause
to be performed, Shaw FiberLink's obligation in accordance with the terms and
conditions of the indefeasible right to use agreement. Shaw Communications'
promise to us is independent of the bankruptcy or insolvency of Shaw
Communications, Shaw FiberLink or any of their affiliates (including any
affiliates that have granted an indefeasible right to use fiber to Shaw
FiberLink), and is independent of any acquisition of the business of Shaw
Communications, Shaw FiberLink or any of their affiliates (including any
affiliates that have granted an indefeasible right to use fiber to Shaw
FiberLink).
SHAREHOLDERS AGREEMENT
On February 16, 2000, we amended our May 7, 1999 shareholders agreement to
include Shaw Communications as a party to such agreement. For a description of
the shareholders agreement, see "Description of Share Capital -- First
Preference Shares -- Shareholders Agreement" on page 91.
NON-COMPETITION AGREEMENTS
On the closing of our acquisition of the business of Shaw FiberLink, Shaw
Communications entered into a non-competition agreement in favor of us that
prohibits Shaw Communications or any of its affiliates from providing certain
telecommunications services to business customers and telecommunications
carriers in any area of Canada in which we carry on such business, for three
years. On closing we also entered into a non-competition agreement in favor of
Shaw Communications which prohibits us or any of our affiliates from providing
cable television, residential video, Internet or telephone services or other
residential services in any area of Canada in which Shaw Communications carries
on such business, for three years.
TRADE-MARK LICENSE AGREEMENT
We entered into a trade-mark license agreement with Shaw Communications on
the closing of our acquisition of the business of Shaw FiberLink pursuant to
which Shaw Communications granted us a license to use certain trade-marks
relating to Shaw FiberLink for a six month period and Shaw
24
<PAGE> 29
Communications granted to us a license to use the trade-mark "FiberLink" in
conjunction with the words "Group Telecom" or "GT" for the term of the
indefeasible right to use agreement.
REGISTRATION RIGHTS AGREEMENT
On February 16, 2000, we amended our registration rights agreement with the
initial purchasers of our series A first preference shares to include Shaw
Communications as a party to such agreement. For a description of the
registration rights agreement, see "Description of Share Capital -- First
Preference Shares -- Registration Rights Agreement" beginning on page 91.
TRANSITIONAL SERVICES AGREEMENT
In order to facilitate the transfer of the business of Shaw FiberLink from
Shaw Communications to us, we and Shaw Communications will provide certain
services to each other, on a transitional basis, pursuant to a six month
transitional services agreement.
25
<PAGE> 30
BUSINESS
OVERVIEW
We operate a national broadband network, over which we provide Internet,
high-speed data and voice services to businesses in Canada. Our services include
web and application hosting, co-location, e-commerce and other value-added
Internet services enabled by our public key infrastructure capabilities. We also
provide traditional telecommunications products and services, including local
area network extension and enhanced local and long distance voice services. We
believe the increasing use of Internet services is driving demand for new
services and products that require higher bandwidth. To serve our customers'
growing telecommunications needs, we are continually expanding our fiber optic
network and use digital subscriber lines and fixed wireless technology to extend
the reach of our networks.
OUR ACQUISITION OF THE BUSINESS OF SHAW FIBERLINK
On February 16, 2000, we acquired the business of Shaw FiberLink from Shaw
Communications for $760 million in cash and shares. We acquired rights to
101,546 fiber kilometers from Shaw FiberLink and, in addition, Shaw
Communications has agreed to construct for our use, at no additional cost to us,
approximately 97,500 additional fiber kilometers over the next three years.
Since 1993, Shaw FiberLink has provided facilities-based data services over
a high bandwidth fiber optic network in Canada to national telecommunications
carriers, large businesses and governments. For the year ended August 31, 1999,
Shaw FiberLink had revenue of $38.8 million and EBITDA of $12.1 million. The
acquisition will:
- accelerate the deployment of our network, especially in the greater
metropolitan areas of Toronto, Calgary and Edmonton;
- expand the addressable market for our current services;
- reduce our reliance on the incumbent local exchange carriers for leased
facilities;
- give us a complementary competitive access provider business; and
- significantly expand our business to long distance carriers, wireless
telecommunications companies and Internet service providers.
Shaw FiberLink operates high capacity fiber optic telecommunications
networks in some of Canada's fastest growing markets including: the greater
Toronto area (Toronto, Scarborough, Markham, Vaughan, Richmond Hill, Pickering
and Barrie), Edmonton, Calgary, Winnipeg, Vancouver Island and central British
Columbia (Kamloops, Penticton, Kelowna, Vernon and surrounding areas). Shaw
FiberLink also owns and operates several strategically located inter-city
networks and several international gateways into the United States.
Shaw FiberLink has over 400 customers. Its customer base includes carriers,
competitive local exchange carriers, internet service providers, governments,
banks, broadcasters, oil and gas companies, and wireless communication
providers. These customers demand a wide variety of requirements in terms of
bandwidth, type of connectivity and support. As the dominant competitive access
provider in Western Canada, Shaw FiberLink also provides technical support,
network management, and sales and administrative support to a number of smaller
competitive access providers.
Both the Shaw FiberLink network and our network are constructed in
compatible, fiber network configurations, with minimal geographic overlap using
synchronous optical networking technology and gigabit ethernet connections.
Accordingly, we believe that their integration can be accomplished in a timely
manner. With the addition of Shaw FiberLink, we now operate nationally in 7
Canadian provinces, including Canada's major metropolitan centers of Toronto,
Vancouver, Calgary, Montreal
26
<PAGE> 31
and Edmonton. We expect that the combined network, with its national coverage,
will give us a time-to-market advantage that will lead to increased market
penetration and higher operating margins.
RECENT DEVELOPMENTS
AGREEMENT WITH 360NETWORKS INC.
In May 2000, we agreed with 360networks Inc. to (1) lease from them
dedicated fiber optic capacity and (2) purchase fiber in Canada and receive from
them an indefeasible right to use fiber in the United States. The aggregate
price of the dedicated fiber optic capacity and fiber we acquired was
approximately $362 million. We have the option to acquire from 360networks
additional fiber and dedicated fiber optic capacity.
Under the agreement, 360networks will lease to us fiber optic cable
capacity at a bandwidth level of 2.4 gigabits per second, in Canada and the
United States. The lease will give us the exclusive right to use this fiber
capacity for 20 years, comprised of an initial term of 3 years with a 17 year
renewal option at our discretion.
In addition, 360networks has sold and will sell to us 12 strands of unused
fiber ranging approximately 7,000 kilometers, connecting Seattle, Washington to
Halifax, Nova Scotia via Victoria, Kamloops, Edmonton, Calgary, Regina,
Winnipeg, Toronto, Ottawa, Montreal and Quebec City.
If we choose, 360networks will also grant us the right to use an additional
12 strands of fiber ranging approximately 7,900 kilometers, connecting Seattle,
Sacramento, Denver, Chicago, Detroit, Toronto, Buffalo, Albany, New York City,
Boston and Montreal. This fiber will be located primarily in the United States.
The indefeasible right to use this fiber will be for a term of at least 20
years.
We also will have the option to purchase from 360networks additional
segments of fiber optic cable connecting the United States and Canada.
Delivery of the capacity and the fiber to us by 360networks and payment by
us to 360networks will be made in installments over the next four years. An
initial installment payment of approximately $32 million has been made. We will
also pay 360networks fees for maintaining the fibers.
In addition, we invested approximately $43 million in the equity of
360networks.
ACQUISITION FROM MOFFAT COMMUNICATIONS LTD.
On April 27, 2000, we acquired Videon FiberLink from Moffat Communications
Ltd. for $68 million in cash and the right to acquire approximately 1.7 million
of our class B non-voting shares. Videon FiberLink is a competitive access
provider business. This acquisition provides us with additional customers,
employees and an indefeasible right to use for 30 years certain specifically
identified existing fibers comprising approximately 620 fiber route kilometers
in Edmonton and Winnipeg connected to over 240 buildings.
AGREEMENT WITH CABLE ATLANTIC
On July 21, 2000, we acquired from Cable Atlantic its competitive local
exchange carrier and commercial telecommunications operations for $15 million in
cash, the right to acquire 1,740,196 of our class B non-voting shares and a cash
payment equal to the value of the net working capital of the acquired business.
This acquisition provides us with additional customers, employees and an
indefeasible right to use for 30 years certain specifically identified existing
fibers comprising approximately 8,732 fiber kilometres and 390 route kilometres
in Newfoundland connected to a minimum of 68 commercial business buildings and
31 Newfoundland government buildings, with a right to purchase these fibers for
$1 at any time.
27
<PAGE> 32
OUR MARKET OPPORTUNITY AND THE IMPORTANCE OF DATA
TELECOMMUNICATIONS INDUSTRY GROWTH
We believe, based on industry reports, that the Canadian telecommunications
market had revenue of approximately $24.4 billion in 1999. Approximately $14.7
billion of this estimated revenue is attributable to the business
telecommunications market, comprising local and long distance voice services
($9.1 billion), emerging and traditional data services ($4.3 billion), and
Internet application services ($1.3 billion). Based on industry reports, we
estimate that our initial markets, Toronto, Vancouver, Calgary, Montreal,
Edmonton and the areas surrounding these cities, comprise approximately 46% (or
$6.8 billion) of the 1999 Canadian business telecommunications market.
The data and Internet application services market is one of the fastest
growing segments of the Canadian telecommunications market. We believe, based on
industry reports, that the business data and Internet application services
market will almost double from an estimated $5.6 billion in 1999 to $10.7
billion by 2003. To meet this growing demand, we plan to offer a full range of
bundled high-speed data, Internet application and voice services. We believe
that these services have price and performance characteristics that are more
attractive than traditional alternatives.
DEREGULATION OF CANADIAN MARKET FOR VOICE SERVICES
The market for competitive local and long distance telecommunications
services in Canada was only fully opened to competition in the last decade.
Prior to the 1990s, the incumbent local exchange carriers dominated both the
local switched services and long distance markets. The growth of long distance
competition in Canada was triggered by a decision of the CRTC in 1992 to allow
facilities-based competition and more liberalized resale in the long distance
market. On May 1, 1997, the CRTC issued a series of decisions that opened
Canada's local telecommunications services market to competition. Before these
decisions, the incumbent local exchange carriers had operated in most locations
throughout Canada with a monopoly over the provision of most local voice
services. With these decisions, competitive opportunities rapidly emerged in
Canada in the local telecommunications services market.
OUR INITIAL TARGET MARKETS
We believe there is a significant opportunity to provide a unique mix of
products and services to small and medium-sized businesses. We believe the
increasing use of the Internet and Internet protocol-based services by business
is driving demand for new services and products that require higher bandwidth.
Small and medium-sized businesses represent an attractive market because they:
- generally lack the resources and expertise to address their
telecommunications problems in-house and therefore are more likely than
large businesses to purchase services from an outside provider;
- are more likely to need assistance in determining the appropriate
solution and in integrating the solution; and
- have historically been under-served by incumbent local exchange carriers
who have concentrated on servicing larger businesses, leaving small and
medium-sized businesses with limited alternatives to costly products
that were not designed for them. Advances in technology enable us to
provide these customers with a range of services at an attractive price.
28
<PAGE> 33
BUSINESS STRATEGY
Our goal is to be the leading telecommunications service provider to
Canadian businesses, institutions and other telecommunications carriers. The key
components of our strategy are:
- LEAD WITH DATA AND INTERNET APPLICATION SERVICES. We intend to focus
our product offering on data and Internet application services, which we
expect will be the fastest growing segment of the Canadian
telecommunications services market. We believe our data services
represent an attractive entry point to sell a package of data
applications and voice services to our customers. We also believe we
have a significant opportunity to achieve high profit margins by
bundling integrated data, Internet application and voice services.
- BE A ONE-STOP INTEGRATED TELECOMMUNICATIONS PROVIDER. We are a single
supplier of integrated and comprehensive bundled telecommunications
services. We believe that providing one-stop telecommunications
services, including data, Internet application and voice services, will
enable us to better meet the needs of our customers, capture a larger
portion of our customers' telecommunications expenditures and increase
customer retention.
- PROVIDE SERVICES ACROSS CANADA OVER OUR OWN NETWORK INFRASTRUCTURE. We
intend to own or control the fiber that comprises our network in each of
our initial target markets. We believe this will result in the following
strategic advantages:
- abundant broadband capacity;
- higher operating margins than would be possible if we resold services
of, or leased facilities from, other carriers;
- control over our network, resulting in improved service and minimal
reliance on the incumbent local exchange carriers; and
- the ability to more easily deploy telecommunications solutions on a
national basis.
- ACQUIRE AND RETAIN MARKET SHARE THROUGH A DIRECT SALES FORCE AND
PROACTIVE CUSTOMER SERVICE. Our sales force has increased 140% from
December 31, 1999 to over 190 sales representatives at June 30, 2000. We
intend to continue to expand our sales force to build and support our
customer base. Once we obtain a customer, we focus on providing
proactive customer service, backed by service-level commitments, which
is available 24 hours a day, 7 days a week. Our customer service is
personalized and provided through a single point of contact to increase
customer satisfaction. We also offer web-based programs that provide
ordering, tracking and reporting capabilities to our customers. We offer
incentives to our sales and customer support personnel through a
compensation structure that is designed to promote a high level of
penetration of the buildings on our network.
- LEVERAGE OUR STATE-OF-THE-ART, SCALABLE BACK OFFICE SYSTEMS. We have
developed state-of-the-art, scalable operational support systems that
integrate every component of our operations. We have selected a
combination of best-of-breed systems, which enable us to reduce overhead
costs while providing superior customer service. We believe that our
open and scalable back office systems enhance our productivity and
service quality, and provide us with a significant competitive advantage
by:
- automating the processes involved in connecting a customer to our
network;
- enabling single call resolution of customer inquiries; and
- providing each of our departments with an integrated view of all
provisioning, billing, customer service, trouble-ticketing and
collection activities.
- CONTINUE TO EXPAND THROUGH ALLIANCES AND ACQUISITIONS. In addition to
our acquisition of the businesses of Shaw FiberLink and Videon
FiberLink, our acquisition of the Cable Atlantic competitive local
exchange carrier and commercial telecommunications operations, and our
29
<PAGE> 34
agreements with 360networks, we plan to consider alliances with and
acquisitions of other related or complementary businesses or asset
purchases, including purchases of fiber. Strategic acquisitions,
alliances or asset purchases may enable us to expand more rapidly and
further solidify our national presence by adding new infrastructure,
customers and additional experienced employees.
- LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM. Our management team has
extensive experience in the telecommunications industry. We believe the
quality, experience and teamwork of our management team will be critical
factors in the implementation of our growth strategy.
NETWORK
Our network in each of our target markets will look similar to the
following diagram:
[OM NETWORK DIAGRAM]
INTEGRATED NETWORK ARCHITECTURE
We provide services to our customers over an integrated network that
supports high-speed data, Internet application, local and long distance voice
services. We believe that the integrated design of our data, Internet
application and local and long distance networks significantly reduces our cost
of providing a bundled service offering. Our integrated network architecture
includes switches and data routers, customer premise equipment and synchronous
optical networking technology fiber rings. In addition, approximately 20% of our
urban fiber network is comprised of slack and storage fiber in urban area access
points.
We believe that our integration of the fiber, equipment and operating
systems of Shaw FiberLink, Videon FiberLink and the Cable Atlantic business we
acquired can be accomplished without significant delay or cost. We also believe
we can upgrade the equipment in buildings on Shaw FiberLink's, Videon
FiberLink's and the aforementioned Cable Atlantic business' networks and sell
our services (in addition to those of Shaw FiberLink, Videon FiberLink and the
Cable Atlantic business we have agreed to acquire) to their existing customers.
Shaw FiberLink's, Videon FiberLink's and the aforementioned Cable Atlantic
business' telecommunications equipment is industry standard, purchased from well
known vendors, and is compatible with our equipment.
30
<PAGE> 35
SWITCHES AND DATA ROUTERS
Our Lucent 5ESS switches and Cisco data routing equipment are located in
central offices in four of our initial five target markets. Our central offices
are secure, specifically outfitted facilities which have special heating,
humidity, air, fire suppression and power requirements to support sensitive
electronic equipment.
Switches and data routing equipment direct a voice signal or data packet
from its origin to its correct destination according to the telephone number or
addressing technology. Switched voice services, including basic and advanced
telephone services, are provided through switches at central offices. Data
services are provided through Cisco equipment in central offices and the
buildings connected to our Internet protocol based network.
Our network uses data routing equipment and voice switches installed at
central offices in four cities: Vancouver, Toronto, Calgary and Montreal. Data
and voice traffic from other cities will be directed to the central office
nearest to that city.
CUSTOMER PREMISE EQUIPMENT
To connect our customers to our network, we install data and voice routing
equipment in the building in which they are a tenant. This equipment combines
and converts the customer's transmission to an optical signal. The signal is
then transmitted through our network to a central office where data and voice
traffic are routed to their ultimate destination. Where buildings have fewer
tenants, we intend to connect up to ten buildings to the switch/router in one
centrally located building.
For voice traffic, our network can currently provide up to 2.5 gigabits per
second speed connections to our end customers and can easily be upgraded for
increasing volume of traffic. For data traffic, our network currently provides
up to 1 gigabit per second speed ethernet connections to our end customers. This
network's capacity is also easily upgradable.
SYNCHRONOUS OPTICAL NETWORKING TECHNOLOGY AND GIGABIT ETHERNET CONNECTIONS
We provide our data, Internet application and voice services over our
integrated network. Our network uses synchronous optical networking technology
and gigabit ethernet connections to transport information along our fiber optic
backbone. Synchronous optical networking technology is used primarily to
transmit voice services. Synchronous optical networking technology is based on
self healing concentric rings, a technology that routes traffic through an
alternate path in the event there is a point of failure. This technology results
in a very reliable network which is less likely to be subject to disruptions in
the event of breakage at one point. Other advantages of synchronous optical
networking technology are high capacity and standardization. Synchronous optical
networking technology offers large amounts of bandwidth for fiber-optic
networks. It provides seamless inter-connectivity among equipment providers
which is important when we look to interconnect with other networks on a global
basis. Finally, synchronous optical networking technology offers superior
bandwidth management, real-time monitoring, and survivability. Ethernet
technology is used primarily to transmit data. Ethernet is the standard
interface technology for local area networks and has many of the same advantages
of synchronous optical networking technology. Ethernet offers simple, scaleable
high bandwidth capacity.
In addition, we apply intelligent end-to-end network management, which
means that the customers' and end users' lines are monitored from a network
operations center, 24 hours a day, seven days a week.
ADVANTAGES OF FIBER OPTIC CABLE
Through our advanced fiber optic network we can provide higher bandwidth,
enabling information to be transported at speeds significantly faster than the
up to six megabits per second that can be
31
<PAGE> 36
achieved using digital subscriber line technology over copper facilities. Fiber
optic cable also has high immunity to signal degradation, which means that a
signal can be transmitted over extremely long distances without requiring
regeneration of the original signal. The result is a transmission that is more
reliable, precise, clear and consistent than transmissions over copper wires.
Unlike metallic cable, a fiber optic-based infrastructure does not emit any
radiation and is immune to noise. In addition, metallic cable is limited in
distance, suffers in performance and requires additional equipment to regenerate
signals carried by it over a longer distance.
OTHER NETWORK COMPONENTS
Although we intend to provide our services over our own fiber optic network
in each of our target markets, in order to capture customers and generate early
revenue as we deploy our network, we intend to use wireless technology or to
lease other companies' facilities to provide services to those customers not
currently directly connected, but who will be connected in the short term to our
local networks. We will also deploy digital subscriber line technology over the
leased facilities to extend the current reach of our network. This strategy
provides us with rapid access to buildings and allows us to gain market
penetration and take advantage of market opportunities before we have completely
constructed our network. Customers served by these technologies will be migrated
onto our network as it is built.
STRATEGIC RELATIONSHIPS
We actively pursue strategic relationships with utilities, municipalities,
property owners and technology companies. We intend to use these relationships
to maximize the penetration and speed of entry and reduce the cost of deploying
our network in our target markets.
ACCESS AGREEMENTS AND RIGHTS-OF-WAY
We have established, and expect to continue to establish, relationships
with electric and other utilities in our target markets to obtain access to
customers. In order to cost-effectively build our network in Vancouver, we
signed two agreements in December 1997 with BC Hydro, the electric utility in
British Columbia, which provide us with access to BC Hydro conduits on its
electric distribution network in and around Vancouver and elsewhere across
British Columbia. BC Hydro's conduits connect to nearly all buildings in British
Columbia. These agreements enable us to lay our fiber in a cost-effective manner
because we can do so with minimal excavation of city streets. The BC Hydro
agreements expire December 1, 2012, with five year extensions at our option. We
pay annual fees to BC Hydro based on the facilities of BC Hydro which are
occupied by, or reserved for, us.
In August 1999, we entered into a strategic conduit access agreement with
ENMAX Corporation, the Calgary power authority. The agreement expires on
December 31, 2017 and can be renewed for two additional 5 year periods. We
issued to ENMAX Corporation 1.0 million series A first preference shares and
agreed to pay fees for installation and access rights and annual fees for
maintenance and administration. The agreement with ENMAX Corporation provides us
with non-exclusive access to conduits in Calgary's downtown core over which
ENMAX has contractual rights of access. ENMAX has installed 13 kilometers of our
fiber optic cable into these conduits at our cost as of December 31, 1999.
In August 1999, we entered into an agreement with EPCOR, Edmonton's power
authority, which gives us non-exclusive access to conduits in Edmonton. The
EPCOR agreement allows us to make proposals for access to particular routing
locations and, if the proposal is acceptable to EPCOR, EPCOR will issue us a
permit to access those routing locations typically within three weeks of receipt
of our proposal. Our receipt of a permit from EPCOR will be subject to any
rights granted to third parties by EPCOR to access a conduit for any purpose
whatsoever. Each permit granted under the EPCOR agreement will be effective from
its date of issuance and will expire when the EPCOR agreement terminates on
August 12, 2014. The EPCOR agreement can be renewed for additional five
32
<PAGE> 37
year terms after this date with the consent of EPCOR. We will pay annual fees
based on the amount of EPCOR's conduit which is occupied by, or reserved for,
us. In addition, we will pay EPCOR for the installation of our cables in EPCOR's
conduits.
Where our network touches public property, we must obtain local municipal
approvals to deploy our fiber in municipal rights-of-way.
We have signed municipal access agreements with the cities of Vancouver and
Burnaby, British Columbia and Calgary, Alberta. We also have
- a "public user" conduit access agreement with the CSEVM (Commission des
Services Electriques de la Ville de Montreal) permitting access to CSEVM
conduits in the city core of Montreal;
- interim authority allowing construction to proceed in the City of Ottawa
and Region of Ottawa-Carleton, Ontario; and
- permit authority allowing construction to proceed following permit
application approval in Winnipeg, Manitoba.
Through long term indefeasible right to use agreements, we now have access
to various municipal and other rights-of-way by way of underlying rights held or
claimed by the indefeasible right to use grantors. The agreements permit the
expansion of the existing networks where we request, including various major
cities across Canada.
We have secured support structure agreements with BCT.Telus (British
Columbia and Alberta), MTS (Manitoba) and Bell Canada (Ontario and Quebec)
permitting access to available spare capacity on available poles or conduits
where approved.
We are in the process of finalizing a long-term municipal access agreement
with the City of Toronto. Also, in addition to our existing lease of dark
fibers, we are arranging for the sublease from Toronto Hydro of an existing
decommissioned waterpipe system located within downtown Toronto that was
previously refurbished for telecommunications purposes.
We are in the process of negotiating and finalizing various municipal
access agreements with the City of London, Region of Waterloo, City of Waterloo,
City of Kitchener, City of Hamilton/Region of Hamilton-Wentworth, City of Hull,
City of Edmonton and City of Quebec City as well as negotiating final municipal
access agreements with the City of Ottawa and Region of Ottawa-Carleton pursuant
to their grants of interim authority.
We are in the process of negotiating agreements for access to existing
support structures with various providers and are also considering joint use,
joint build or capacity lease opportunities in various markets.
These agreements allow us to deploy and use our network over and under a
variety of municipal rights-of-way and existing or new support structures
permitting us to connect our expanding switch or hub equipment to our customers.
These rights and rights-of-way are integral to the installation, operation and
expansion of our facilities-based network.
BUILDING LICENSE AGREEMENTS
Before providing services to customers, we must obtain permission from the
property owner to install our equipment, including our voice and data equipment,
and to access the riser closets to run fiber directly to the offices of our
customers. Once a building has been targeted by our marketing personnel, our
network services department negotiates the building license agreement which
allows our equipment to be installed in that building. We have adopted a
collaborative approach with developers and owners, and have found them generally
willing to provide access to their buildings since we are providing enhanced
services to the building, thus increasing its value to the building's
33
<PAGE> 38
tenants. Because of our long-term building license agreements, we gain access to
potential customers at minimal cost.
At June 30, 2000, in our target markets we had over 345 building license
agreements with national property owners. These agreements typically contain a
provision for permanent access by our network, including fiber optic cable, to a
specified point inside the building, with a renewable right of access regarding
inside wiring to the premises of our clients. These agreements provide us with
access to each building on a non-exclusive basis.
The CRTC has recently established a presumption that any agreement between
a local telephone company and another party, including property owners, that
results in the provision of local telephone service to a multi-dwelling unit on
an exclusive basis is a violation of the Canadian Telecommunications Act. We
believe this presumption will enhance our ability to access additional
buildings.
FIBER LEASE AGREEMENTS
On July 15, 1999, we entered into a fiber optic agreement with Toronto
Hydro, Toronto's electric utility company. This agreement provides that we will
lease access to Toronto Hydro's existing fiber optic network, which extends
throughout Toronto, allowing us to provide service to our customers until we are
able to build our own fiber optic network. A permit from Toronto Hydro, which
establishes our network access by indicating routing and termination locations
and specifies annual rates and one time connection fees, is required before we
can provide service to our Toronto customers under this agreement. Permits
expire after three years and can be renewed automatically for an additional
three years, unless either party gives notice otherwise. We are finalizing
negotiations with Ottawa Hydro for a similar arrangement.
TECHNOLOGY SUPPLIER RELATIONSHIPS
In February 2000, we entered into an agreement with Lucent to provide us
with switching equipment, synchronous optical networking technology and other
telecommunications equipment, fiber optic cable and related services, including
installation, engineering and maintenance services. This agreement replaces an
agreement we entered into with Lucent in August 1998. The new agreement with
Lucent specifies the pricing of this equipment and services and the terms of its
delivery until January 2004. We will work together with Lucent to prepare
detailed lists of equipment and services to be provided to us in each of our
markets. In addition, we purchase our data switching and routing equipment and
our unified messaging equipment from Cisco. We are a "Cisco-powered network" and
are an authorized reseller of Cisco products. We believe these supplier
relationships enable us to deploy a state-of-art network and give us access to
the advanced technologies that our customers require.
PRODUCTS AND SERVICES
We currently provide the following products and services:
DATA SERVICES PORTFOLIO
DATA ACCESS. We expect the majority of our revenue to come from data
access which includes the following products and services:
- Local Area Network Connect (also known as transparent LAN Service) -- a
managed high-speed connection to an organization's local area network,
for Internet connectivity (including common server capability) and/or
connectivity between multiple local area networks delivered over fiber,
wireless or digital subscriber technologies. Supported interfaces
include ethernet at speeds up to 1 gigabit per second.
34
<PAGE> 39
- Carrier Private Lines -- Point-to-point connections over our network,
targeting carriers rather than small businesses.
- Remote Access/Teleworking -- Corporate modem pools to facilitate dial-in
capability for employees working from home, including the use of
higher-speed technologies.
INTERNET SERVICES. We currently provide the following types of dedicated
Internet services:
- Business Internet Gateway -- Internet connectivity packages for small
and medium-sized businesses.
- Internet Transit/Commercial Internet -- High-speed, scalable Internet
connectivity for Internet professionals who in turn support residential
and business Internet users.
- Outsourced Modem Pools -- Managed modem pools for Internet service
providers; providing the hardware and scalability to enable Internet
service providers to grow capacity over time and incorporating
higher-speed technologies.
ENHANCED AND OTHER DATA SERVICES. We currently provide and are continuing
development efforts for a variety of innovative data products and services in
order to act as a one-stop shop for all of our customers' data needs, including
the following:
- Enhanced IP Services -- Internet protocol fax capability, and private
branch exchange/local area network gateways using voice over Internet
protocol.
- Web-Based Reporting Services -- Internet virtual private networking and
data service reporting for performance management and usage monitoring
via a web browser interface.
- Data Hardware Resale and Maintenance -- Selling and maintaining routers,
hubs and switches.
APPLICATION SERVICES PORTFOLIO
APPLICATION HOSTING SERVICES. We provide our business customers the
opportunity to outsource their server and application needs to us through
several service offerings:
- Applications Hosting -- Turnkey Internet/Web server hosting packages as
an outsourced solution to small and medium-sized businesses. This
service includes all software, hardware and management required for a
business website or for other general office applications.
- Co-location -- The physical space in close proximity to our network to
colocate, host and/or manage servers or modem pools. This service
includes space, power, security and optional management.
- E-Commerce Hosting -- Enhanced Web server solutions that enable small
and medium-sized businesses to incorporate e-commerce into their
website, including the ability to sell products and services and the
ability to clear credit card purchases.
- Unified Messaging (Voicemail/Email) -- Integration of a business'
voicemail and email services to act as a single message center; complete
with faxing capabilities, future speech to text/text to speech
conversion and encrypted security.
- PC/Server backup -- online ability to backup and restore hard drives of
computing devices through a web interface.
- Teleconferencing -- reservation based audio conferencing with
chairperson controls, web streaming and other operator assistance.
Additional application services in development include online delivery of
office software applications (ASP), multimedia conferencing and Web-based
application service reporting.
35
<PAGE> 40
SECURE NETWORK SERVICES. We provide our customers with security
enhancements to a basic Internet connection through a variety of service
offerings:
- Networking Security -- Anti-hacker services, such as firewall hosting,
to protect customer local area networks from the Internet.
- Virtual Private Networking -- The ability to travel securely and
privately by tunneling through the Internet, either from one business
location to the next or from one business connection to that of a
partner, on a single user or enterprise wide basis.
- Public Key Infrastructure/Certificate Authority -- The technology to
enable secure transactions and information sharing on the Internet by
serving as a third party manager of the exchange of information via
digital identification certificates.
VOICE SERVICE PORTFOLIO
LOCAL VOICE SERVICES. We began offering local voice services in November
1999, and offer a full suite of services to accommodate customers that require
varying degrees of sophistication in their telecommunications services.
- Individual and Digital Business Lines and Multiple Line Business Trunks
-- Local switched analog telephone service via individual lines or
multi-line trunks and digital service with enhanced features and
functionality.
- Centrex/Virtual Private Branch Exchange -- Feature-rich phone lines
enabling customers to manage their own phone service internally without
a private branch exchange.
- Private Branch Exchange Interconnect -- A connection between a business'
private branch exchange and the public switched telephone network.
- Digital Tie Lines -- A business with a private telecommunications
network by connecting two private branch exchanges.
ENHANCED VOICE SERVICES. We offer and continue to develop a full suite of
enhanced offerings to complement our standard business voice services.
- Long Distance Service -- Long distance telephone access throughout all
major Canadian cities with toll-free directory/operator services,
account codes and calling cards.
- Other Enhanced Features -- Features such as call transfer, call-waiting,
Web-based reporting service, remote message forwarding, three-way
conferencing, digital display and other custom calling features.
- Voice Hardware Resale and Maintenance -- Telephone sets, private branch
exchange and key systems.
Our products and services will be branded into data, applications and voice
based portfolios and will be branded in support of our service innovation and
client care strategies.
MARKETING AND SALES
We plan to build market share by establishing regionally focused sales
distribution and marketing programs to capture new customers and to grow our
business with existing customers. Our goal is for our sales representatives to
sell services directly to customers in on-net buildings. Our sales and marketing
programs are designed to differentiate us from our competitors by providing
solutions targeted at the needs of small and medium-sized businesses and by
delivering consistently high-quality sales and technical support. All of our
marketing information and promotions are standardized and all of our products
are nationally branded, with the "GT Connect" portfolio brand and "Completely
Connected" tag line. We intend to promote our reputation by delivering uniform
and
36
<PAGE> 41
consistent services and providing the benefits of a single point of contact with
integrated and customized billing.
In each target market, we have identified buildings with tenants that meet
our target profile. Our ideal building has many small and medium-sized business
tenants, each with 10 to 200 employees, that have complex data and other
telecommunications needs, including Internet application and voice requirements.
Once a building has been targeted, we negotiate the building licence agreement
which allows our facilities to be installed in that building. Each member of our
local direct sales force is assigned a territory which includes specific
buildings in which to sell. The sales representative will become intimate with
the needs of all potential customers in those buildings and will be the
relationship manager between us and the customer. The sales representative will
work with a technical expert, when necessary, to differentiate our services from
those of our competitors and cost effectively address our customers' needs. Our
sales force will initially target customers with data telecommunications needs
that are, or will be, located in on-net buildings. Once we provide a customer
with solutions to its data needs and our sales representative has created a
relationship with the customer, the sales representative will offer Internet
application and voice services to the customer. We believe that once a
customer's data needs are met and it is satisfied with our customer service, it
will be receptive to purchasing Internet application and voice services from us.
Our sales representatives receive a competitive base salary and a series of
individual and team bonuses. Their bonuses are based on their attaining a sales
quota on a recurring monthly and one time sale basis. Salespeople are further
rewarded by the opportunity to participate in our share option plan. We believe
our compensation plan will motivate our sales representatives to provide top
quality attention and service.
We provide our sales and marketing employees with a comprehensive training
program which includes introductory formal training, product and service
training, leadership development, on going coaching, including on the job
training, and a mentor program.
We have retained, and intend to continue to retain, people with extensive
experience in the telecommunications industry. The market for hiring highly
qualified sales representatives is competitive. However, as a result of the
recent mergers in the telecommunications industry, we believe a number of highly
talented sales representatives are seeking more entrepreneurial companies that
provide a higher degree of challenge and more opportunity to develop skills and
assume more responsibility. At June 30, 2000, we had over 190 sales
representatives.
MANAGEMENT INFORMATION SYSTEMS, SERVICE ORDER ENTRY, PROVISIONING, BILLING AND
CUSTOMER SERVICE
OVERVIEW
We are committed to the implementation of integrated and scalable
operational support systems that enable us to effectively manage and monitor our
network, process orders, provision services, track usage and accurately bill our
clients with one integrated bill. Our operational support systems integrate
substantially every component of our operations. We selected a combination of
"best of breed" systems from Hewlett-Packard, Eftia OSS Solutions and Daleen
Technologies. We selected this combination of vendors because they met our
specific needs in a cost-effective manner, have a strong reputation for
reliability and have experienced success throughout North America, particularly
with Lucent switching platforms. Our system is scaleable and highly
sophisticated and we believe it will reduce human resource expenses, resulting
in higher margins. In addition, the scalability of our system will enable us to
handle at low incremental costs the additional volume of data traffic that we
will experience with the acquisitions of the businesses of Shaw FiberLink and
Videon FiberLink and the acquisition of Cable Atlantic's competitive local
exchange carrier and commercial telecommunications operations.
37
<PAGE> 42
Our system enhances the level of service and care that we can provide our
customers by constantly monitoring our network to quickly detect and resolve any
failure, often before the customer is aware of a problem. Our operational
support systems also allow us to automate additional processes as we require
them. Our phased implementation strategy enables us to have initial functional
operations support and then to expand support as we grow and our demands
increase. New features and additional processes from the same or different
vendors can be integrated quickly.
We believe our systems provide us with a long term competitive advantage by
creating a distinctive, differentiated, and customizable customer interface with
the ability to rapidly and seamlessly modify internal automated work flows in
response to market developments, all the while relying on powerful and reliable
core technology. Our system will scale seamlessly with the addition of large
numbers of customers, will minimize the time between order receipt and revenue
generation, will improve customer satisfaction, and will enable rapid
customization of our product and service offerings to bring new products to
market quickly.
SERVICE ORDER ENTRY AND PROVISIONING
Our strategy has been to acquire sophisticated off-the-shelf technology
that can be easily and cost-effectively configured by our in-house information
technology staff. We use the workflow and order-entry module called a.Scribe,
from Eftia OSS Solutions. This system provides:
- convergent customer data entry modules that enable all services and work
orders to be entered from a single interface;
- advanced workflow functionality that includes job queues for individuals
and departments, automatic escalations and jeopardy notifications,
scheduling, reporting and tracking;
- web-enabled interfaces that provide our clients, partners and agents
with the ability to order online and track their order throughout the
process; and
- integration with circuit and asset inventory to enable "flow-through"
provisioning and circuit selection.
BILLING
Our strategy has been to acquire sophisticated off-the-shelf technology
that can be easily and cost-effectively configured by our in-house information
technology staff. We are using the Billplex billing and rating engine from
Daleen Technologies. This system provides:
- integrated billing;
- data extractors from multiple systems;
- support for meeting Canadian taxation requirements;
- output for bills on both paper and in electronic format; and
- tracking of overdue accounts.
We use an off-the-shelf integration package that ensures data integrity
between the products we use for our billing and service order entry and
provisioning systems. This increases the functionality of these systems while
reducing the costs of deployment.
CUSTOMER SERVICE
Our objective is to deliver a high level of personalized service to our
clients and to be pro-active. We believe that the low level of service from some
telecommunications companies leads customers to find their own
telecommunications solutions. Our experience is that small and medium-sized
business customers rarely receive proactive solutions and are unable to get
quality customer service from the incumbent local exchange carriers.
38
<PAGE> 43
We believe that the following features of our customer service program will
be attractive to our customers:
- a customer can reach us through their choice of telephone, e-mail or fax
and speak with a live person 24 hours a day, 7 days a week;
- state-of-the-art contact center solutions to manage all customer service
inquiries;
- leading management tools to monitor client services;
- proactive client management program to provide status updates to clients
and to contact them when we detect problems that require resolution;
- industry-leading Web-enabled customer service program to allow clients
personalized access to their account information, order status and
trouble tickets at any time;
- simple access to the right expert for their problem;
- integrated billing;
- service level guarantees; and
- clear escalation processes to deal efficiently with any customer
concerns.
We believe one of the key differences between our approach and that of the
incumbent local exchange carriers is how easily our customers will be able to
contact us. We will have a main telephone number which customers can use to call
for inquiries and requests. In addition, we will also have a dedicated help desk
that provides the technical expertise that customers demand when they need help.
Our customers have the option of speaking directly to the right expert, while
always having the simplicity of a main contact. Our contact center will be
equipped with a state-of-the-art computer telephone integration system, Apropos,
which will allow us to effectively manage all inquiries directed to our customer
service representatives, regardless of the medium by which they are sent.
A key component of our customer service is our integrated operating support
system. Customer relationship management requires instant access to detailed
customer data and simple automated workflow tools to support the selling,
ordering, delivery and repair of our services. Our operating support system
monitors our network to quickly detect and resolve any failure, often before the
customers are aware of a problem.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. We face, and expect to
continue to face, intense competition in all of our markets from the incumbent
local exchange carriers, cable companies, resellers of voice services,
competitive access providers, utilities, microwave carriers, competitive long
distance providers, wireless providers, new competitive local exchange carriers,
and private networks built by large end users. Our competitors in the
telecommunications services market include and will include Internet service
providers, application service providers, other telecommunications companies,
e-commerce service providers and Internet software providers.
We expect that the principal competitive factors affecting our business
will be customer service, the range and quality of services provided and pricing
levels. Many of our current and potential competitors have financial, personnel
and other resources (including brand name recognition) substantially greater
than ours, as well as other competitive advantages. However, until recently the
Canadian telecommunications services industry has been focused on larger
customer accounts, leaving small and medium-sized businesses relatively
underserved.
In addition, a continuing trend toward consolidation of telecommunications
companies and the formation of strategic alliances within the telecommunications
industry, as well as the development of new technologies, could give rise to
significant new competitors.
39
<PAGE> 44
Our most significant group of competitors is comprised of companies that
previously formed the Stentor Alliance which included NorthwesTel, the recently
merged BC Telecom and TELUS, SaskTel, Manitoba Telecom, Bell Canada and the
telephone companies located in Eastern Canada which recently merged to form
Aliant. Until recently, these companies benefited from a monopoly over the
provision of local switched services in their respective geographic regions.
They continue to represent approximately 95% of the local voice services market.
A number of these companies, including Bell Canada and its Nexxia and Intrigna
affiliates, Aliant and BCT.TELUS, are seeking to attract customers nationwide,
beyond their historic territories.
Many of these companies possess significant financial, technical and
marketing resources with which to compete, as well as comprehensive fiber
networks and long-standing relationships with their customers. While several key
decisions of the CRTC have created a framework for competition in Canadian
telecommunications markets generally, competition with the incumbent local
exchange carriers is in the early stages of development.
In addition to competition from these companies, we face competition from a
variety of other current and potential market entrants including Call-Net, AT&T
Canada, Videotron and OCI Communications. All of these companies have entered
the local voice and data service markets. Some have certain advantages over us,
including greater financial, personnel, marketing and technical resources. Most
prominent among these is the newly merged AT&T Canada, which has a particular
strength in serving large business customers, followed by Call-Net which to date
has been more focused on the residential and small business voice market. Beyond
the significant competition posed by wireline-based service providers, there is
an unknown potential competitive threat from alternative technologies such as
wireless and Internet services over cable by cable companies. However, while
their fiber and Internet services compete directly with us in major metropolitan
markets, to date the cable companies' strategy has been primarily focused on the
residential market.
EMPLOYEES
As of June 30, 2000, we had 872 employees, of which 306 were sales and
marketing, 106 were customer service, 352 were technical (network services) and
108 were administrative and corporate personnel. 130 of these employees were
hired as a result of our acquisition of Shaw FiberLink. We hired 16 Videon
FiberLink employees and have made offers to hire approximately 19 Cable Atlantic
employees. We believe that our future success will depend on our continued
ability to attract and retain highly skilled and qualified employees. None of
our employees is currently represented by a collective bargaining agreement. We
believe we enjoy good relationships with our employees.
40
<PAGE> 45
PROPERTIES
Our corporate head office is located at Suite 700, 20 Bay Street, Toronto,
Ontario, Canada. Our telephone number is (416) 943-9555. Our facilities include
administrative and sales offices, central offices and other facilities to house
our fiber optic network equipment. The table below describes our material
properties:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION PURPOSE OWNED OR LEASED FOOTAGE
-------- ---------------------- ----------------- -----------
<S> <C> <C> <C>
Toronto, Ontario..................... Corporate head office Lease expires on 38,757
and central office December 31, 2014
Vancouver, B.C....................... Network operations and Lease expires on 16,122
engineering July 31, 2006
Burnaby, B.C......................... Central office Owned 7,869
Calgary, Alberta..................... Central office Lease expires on 19,328
December 1, 2014
Edmonton, Alberta.................... Equipment housing Lease expires on 12,738
January 1, 2015
Montreal, Quebec..................... Central office Lease expires on 11,918
January 31, 2015
</TABLE>
LEGAL PROCEEDINGS
There are no material legal proceedings against us.
41
<PAGE> 46
DESCRIPTION OF OUR FINANCING ARRANGEMENTS
THE UNITS
On February 1, 2000 we issued 855,000 units, consisting of 13 1/4% senior
discount notes due 2010 and 855,000 warrants to purchase 4,198,563 class B
non-voting shares. Gross proceeds from our sale of the units was US$450,166,050
which, after underwriting commissions and expenses, resulted in net proceeds of
approximately US$436.9 million.
The notes were issued at a price of 52.651% of the stated amount at
maturity. The first interest payment on the notes will be made on August 1,
2005. The notes are redeemable, at our option, at any time on or after February
1, 2003 at various redemption prices set forth in the indenture relating to the
notes.
The indenture relating to the notes sets forth various occurrences each of
which would constitute an event of default. If an event of default occurs, other
than our bankruptcy or insolvency, holders of not less than 25% of the principal
amount of notes outstanding (voting as one class to the extent equally affected)
may declare the accreted value of the notes, together with any accrued interest,
to be due and payable. If we become bankrupt or insolvent, the notes immediately
become due and payable without any action required by the noteholders.
The indenture relating to the notes contains certain covenants that, among
other things, limit
- our issuance of additional debt,
- our payment of dividends and other distributions to shareholders and
affiliated persons or companies,
- investments in non-wholly owned subsidiaries,
- certain transactions with affiliated companies,
- the incurrence of liens,
- sales of assets, including share capital of subsidiaries, and
- certain amalgamations, mergers, consolidations and transfers of assets.
Each warrant will entitle the holder to purchase 4.9106 of our class B
non-voting shares at no additional cost to the holder, subject to adjustment in
the event that we reclassify, split or issue our equity at less than current
market value. The class B non-voting shares for which the warrants may be
exercised represent approximately 4.0% of our equity on a fully diluted basis as
at February 1, 2000, as adjusted for our sale of series B first preference
shares to Shaw Communications in connection with our acquisition of the business
of Shaw FiberLink.
The units were sold in private placements in the United States and outside
the United States. We have agreed to register the notes, the warrants and the
class B non-voting shares issuable upon exercise of the warrants under the
Securities Act of 1933 according to a specified schedule. This prospectus is
part of the registration statement to register the notes.
BANK FACILITY
On February 3, 2000, we entered into a $220 million bank facility with CIBC
World Markets, as lead arranger and administrative agent, Goldman Sachs Credit
Partners and affiliates of RBC Dominion Securities and TD Securities (USA), as
co-arrangers, to finance the acquisition of the business of Shaw FiberLink and
for general corporate purposes. The bank facility is available in Canadian
dollars or U.S. dollars. The bank facility:
- consists of two tranches:
-- tranche 1, a $120 million seven year revolving reducing bank facility;
and
-- tranche 2, a $100 million single draw reducing term loan;
42
<PAGE> 47
- bears interest at rates of 3.00% to 4.50% over the prevailing yield on
Canadian dollar bankers' acceptances or LIBOR, based on our financial
status;
- provides that GT Group Telecom Services Corp., our wholly-owned
subsidiary, will be the borrower with guarantees by us and all of our
other subsidiaries;
- provides for the payment of certain lending, arranging and commitment
fees; and
- contains covenants that, among other things, require us to meet ongoing
financial tests and restrict our ability to incur additional
indebtedness, incur liens, pay dividends or repurchase our capital
stock.
SECURITY
The bank facility is secured by:
- a first priority security interest over all our assets and material
agreements;
- a guarantee by us; and
- a pledge of the shares of GT Group Telecom Services Corp.
MATURITY, AVAILABILITY AND REPAYMENT
The bank facility matures on or about January 31, 2007 (seven years after
the closing date). The amounts available under tranche 1 of the facility will be
reduced by 10% in 2003, 15% in 2004, 15% in 2005, 20% in 2006 and 40% at
maturity in 2007. The amount outstanding under tranche 2 of the facility must be
repaid by 5% in 2003, 10% in 2004, 10% in 2005, 20% in 2006 and 55% at maturity
in 2007.
Amounts outstanding under the bank facility may be prepaid at any time,
subject to customary breakage charges.
Amounts available under the bank facility are also mandatorily reduced in
pro rata amounts equal to:
- the net proceeds from certain asset sales or insurance claims;
- 50% of excess cash flow; or
- 50% of the net cash proceeds from the issuance of debt or equity
securities, other than the proceeds of a single equity offering, which
may be this offering, borrowings under our vendor financings, including
our new Lucent vendor facility, and any replacement financings of any of
the foregoing.
COVENANTS
The bank facility ranks pari passu with the Lucent facility with respect to
the security obtained from the borrower, our guarantor subsidiaries and us.
Under the terms of the bank facility, we, the borrower, and our guarantor
subsidiaries are restricted by the bank facility, among other things, from:
- making capital expenditures, investments or acquisitions in excess of
certain limits;
- selling certain assets;
- creating liens other than certain permitted encumbrances;
- incurring additional indebtedness, other than certain permitted
indebtedness;
- investing in or guaranteeing the obligations of subsidiaries except to
the extent that such investment or guarantee constitutes permitted
obligations of such subsidiaries or to the extent that such investment
or guarantee constitutes permitted indebtedness;
43
<PAGE> 48
- declaring or setting aside funds for the payment of dividends;
- consenting to or agreeing to certain amendments of other financing
documents; and
- amalgamating, consolidating, merging, or entering into any other form of
business combination.
We are also required under the bank facility to maintain certain minimum
debt to total capitalization ratios, debt coverage ratios, revenue and
performance levels.
The bank facility restricts the payment of dividends by us or our
subsidiaries, other than payments of dividends by our subsidiaries to us or
another of our subsidiaries.
The bank facility also contains customary events of default, including the
failure to pay interest or principal, breach of covenants, cross-defaults or
judgements in excess of $1 million, a change of control event or the bankruptcy
or insolvency of us or any of our subsidiaries.
The bank facility is governed by the laws of the Province of Ontario.
LUCENT FACILITY
On February 3, 2000, we entered into a vendor facility with Lucent
Technologies, Inc., as vendor, to finance the purchase and installation of up to
US$315 million of Lucent equipment and services. The Lucent facility:
- bears interest at rates of 2.00% to 4.50% over the United States bank
prime rate, or LIBOR, based principally on our financial status;
- provides that GT Group Telecom Services Corp., our wholly-owned
subsidiary, will be the borrower with guarantees by us and all of our
other subsidiaries;
- provides for the payment of certain lending, arranging and commitment
fees; and
- contains covenants that, among other things, require us to meet ongoing
financial tests and restrict our ability to incur additional
indebtedness, incur liens, pay dividends or repurchase our capital
stock.
This facility is available in two tranches of US$161 million and US$154
million. Initial borrowings under tranche A of this Lucent facility must be used
to repay amounts outstanding under our previous facility with Lucent. As at June
30, 2000, US$64.3 million was outstanding under our previous Lucent facility.
SECURITY
The Lucent facility is secured by:
- a first priority security interest over all our assets and material
agreements; and
- a pledge of the shares of all our subsidiaries.
MATURITY, AVAILABILITY AND REPAYMENT
The Lucent facility matures approximately 8 1/2 years after the initial
advance is made. The availability period to make advances under the facility
will terminate on the earlier of (1) the third anniversary of the date of the
initial advance and (2) January 31, 2003. After such date, principal amounts
outstanding must be repaid in 22 consecutive installments on a quarterly basis
in amounts equal to 1.25% of the aggregate amount outstanding for the first 20
quarters and 37.5% of the aggregate amount outstanding for the final 2 quarters.
Lucent retains the right, with our prior written agreement with respect to
economics and terms, to designate and convert up to US$140 million of the
drawings under tranches A and B into a senior
44
<PAGE> 49
secured term loan. Any amounts under the senior secured term loan will be
subject to limited amortization, with the balance to be paid in full at
maturity.
Amounts outstanding under the Lucent facility may be prepaid at any time,
subject to customary breakage charges.
Amounts available under the Lucent facility are also mandatorily reduced in
amounts equal to:
- the net proceeds from certain asset sales or insurance claims;
- 50% of excess cash flow; or
- the pro rata amount of any mandatory or voluntary prepayment of any
senior debt, including the bank facility.
The Lucent facility also contains customary events of default, including
the failure to pay interest or principal, breach of covenants, cross-defaults or
judgements in excess of $1 million, a change of control event or the bankruptcy
of us or any of our subsidiaries.
The Lucent facility is governed by the laws of the State of New York.
CISCO FACILITY
In July 1999, we signed a credit agreement with Cisco Systems in which
Cisco agreed to provide us with up to US$15 million to finance the purchase and
installation by us of Cisco networking hardware and software. This credit
agreement:
- is guaranteed by us;
- is for a commitment of up to US$15 million in a tranche of US$9 million,
a tranche of US$1 million and a tranche of US$5 million;
- each tranche is available for a period of one year from the date on
which a loan is initially made to us under that tranche;
- bears interest at a rate of 12% per year;
- has interest payable quarterly in arrears and the principal amount of
the loan amortized for quarterly payments over the term of the loan (4
years for the US$9 million tranche and 2 years for the US$1 million and
US$5 million tranches);
- is secured against any equipment purchased with the funds made
available; and
- contains certain covenants which, among other things, require us to meet
ongoing financial tests and restrict our ability to incur additional
indebtedness, incur liens, pay dividends or repurchase our capital
stock.
In order to draw down funds under this facility, we must meet certain
financial covenants, which we currently meet. As at June 30, 2000, we have
borrowed US$13.5 million under this facility.
INTER-CREDITOR AGREEMENT
CIBC World Markets, as lead arranger under the bank facility and Lucent are
parties to an inter-creditor agreement regarding, among other things, the rights
of these lenders in the security held by them.
Under the inter-creditor agreement, the banks and Lucent have agreed to
share all of our assets and the assets of our subsidiary in which they have a
first priority security interest equally and ratably.
45
<PAGE> 50
The inter-creditor agreement provides that the banks and Lucent will, in an
event of default under the bank facility or our Lucent facility, provide the
other party with notice prior to accelerating any indebtedness under these
agreements and will co-operate with each other in connection with any such
enforcement. Any amounts recovered upon the enforcement of these financing
agreements by the collateral agent will be shared among the banks and Lucent
equally and ratably.
46
<PAGE> 51
DESCRIPTION OF THE WARRANTS
The warrants that are being offered were issued by Group Telecom on
February 1, 2000. The warrants have been issued pursuant to a warrant agreement
(the "Warrant Agreement"), as of the same date, between Group Telecom and The
Chase Manhattan Bank, as warrant agent (the "Warrant Agent"). On February 1,
2000, Group Telecom issued and sold 855,000 units consisting of $855,000,000 in
stated amount at maturity of 13 1/4% senior discount notes due 2010 and 855,000
warrants to purchase an aggregate 4,198,563 shares. The notes and warrants
became separately transferable in July 2000. As of August 15, 2000, none of the
outstanding warrants have been exercised. If all the 855,000 outstanding
warrants are exercised, such exercise will result in the issuance by Group
Telecom of 4,198,563 class B non-voting shares. The following summary of certain
provisions of the Warrant Agreement does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Warrant
Agreement relating thereto, a copy of which may be obtained upon request from
Group Telecom.
GENERAL
As of the date of this prospectus, each warrant, when exercised, will
entitle the holder thereof to receive 4.9106 class B non-voting shares of Group
Telecom at no additional cost to the holder of the warrant. The warrants will
become exercisable upon the effectiveness of the shelf registration statement,
of which this prospectus forms a part. Unless earlier exercised, the warrants
will expire on February 1, 2010. The number of class B non-voting shares
issuable upon exercise of a warrant is subject to adjustment in the
circumstances described below under "-- Adjustments."
No service charge will be made for registration of transfer or exchange
upon surrender of any warrant certificate at the office of the Warrant Agent
maintained for that purpose. Group Telecom may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with an registration or transfer or exchange of warrant certificates.
The holders of the warrants have no right to vote on matters submitted to
the shareholders of Group Telecom or to receive notice of meetings of
shareholders or any other rights of shareholders of Group Telecom, including any
right to receive cash dividends. The holders of the warrants have no preemptive
rights and are not entitled to share in the assets of Group Telecom in the event
of the liquidation, dissolution or winding up of Group Telecom's affairs.
EXERCISE
The warrants may be exercised by surrendering to Group Telecom the warrant
certificates evidencing such warrants, if any, with the accompanying form of
election to purchase, properly completed and executed. Upon surrender of the
warrant certificate, the Warrant Agent will deliver or cause to be delivered, to
or upon the written order of such holder, stock certificates representing the
number of class B non-voting shares or other securities or property to which
such holder is entitled under the warrants and Warrant Agreement, including,
without limitation, at Group Telecom's option, any cash payable to adjust for
fractional interests in class B non-voting shares issuable upon such exercise.
If less than all of the warrants evidenced by a warrant certificate are to be
exercised, a new warrant certificate will be issued for the remaining number of
warrants.
At Group Telecom's option, fractional class B non-voting shares may not be
issued upon exercise of the warrants. If any fraction of a class B non-voting
share would, except for the foregoing provision, be issuable upon the exercise
of any such warrants (or specified portion thereof), Group Telecom will pay an
amount in cash equal to the Current Market Value per class B non-voting share as
determined on the day immediately preceding the date the warrant is presented
for exercise, multiplied by such fraction, computed to the nearest whole cent.
47
<PAGE> 52
ADJUSTMENTS
The number of class B non-voting shares that may be purchased upon the
exercise of the warrants will be subject to adjustment in certain events
including:
(1) the payment by Group Telecom of dividends or other distributions
on class A voting or class B non-voting shares of Group Telecom payable in
such class A voting or class B non-voting shares or other shares of Group
Telecom's capital stock,
(2) subdivisions, combinations and certain reclassifications of class
A voting or class B non-voting shares,
(3) sales by Group Telecom of class A voting or class B non-voting
shares, or of securities convertible into or exchangeable or exercisable
for, class A voting or class B non-voting shares of the Company at less
than the Current Market Value of such shares (provided that no adjustment
shall be made with respect to our issuance, after the date of the
Indenture, of series B first preference shares to Shaw Communications in
connection with our acquisition of the business of Shaw FiberLink), and
(4) the distribution to all holders of class A voting or class B
non-voting shares of any of Group Telecom's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and
warrants referred to in clause (3) above and excluding cash dividends or
other cash distributions from current or retained earnings).
In the event of a taxable distribution to holders of class B non-voting
shares which results in an adjustment to the number of class B non-voting shares
or other consideration for which a warrant may be exercised, the holders of the
warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States Federal Income tax as a dividend. See
"Taxation -- U.S. Federal Income Tax Considerations" on page 93.
In the case of certain reclassifications, redesignations, reorganizations
or change in the number of outstanding shares of class B non-voting shares or
amalgamations, consolidations or mergers of Group Telecom or the sale of all or
substantially all of the assets of Group Telecom, each warrant shall thereafter
be exercisable for the right to receive the kind and amount of shares of stock
or other securities or property to which such holder would have been entitled as
a result of such amalgamation, consolidation, merger or sale had the warrants
been exercised immediately prior thereto.
AMENDMENT
From time to time, Group Telecom and the Warrant Agent, without the consent
of the holders of the warrants, may amend or supplement the Warrant Agreement
for certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not adversely affect the rights
of any holder. Any amendment or supplement to the Warrant Agreement that has an
adverse effect on the interests of the holders of the warrants shall require the
written consent of the holders of a majority of the then outstanding warrants.
The consent of each holder of the warrants affected shall be required for an
amendment pursuant to which the number of class B non-voting shares purchasable
upon exercise of warrants would be decreased (other than pursuant to adjustments
provided in the Warrant Agreement).
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any of the warrants remain outstanding, Group Telecom shall cause copies
of the reports and other documents, which it would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act if it was subject to those rules, to be filed with the Warrant
Agent
48
<PAGE> 53
and mailed to the holders at their addresses appearing in the register of
warrants maintained by the Warrant Agent.
CERTAIN DEFINITIONS
"Current Market Value" per class B non-voting share or any other security
of Group Telecom at any date means
(1) if the security is not registered under the Exchange Act,
(a) the value of the security, determined in good faith by the
Board of Directors of Group Telecom and certified in a Board resolution
filed with the Warrant Agent, based on the most recently completed
arms-length transaction between Group Telecom and a person other than an
Affiliate of Group Telecom and the closing of which occurs on such date
or shall have occurred with the six-month period preceding such date, or
(b) if no such transaction shall have occurred on such date or
within such six-month period, the fair market value of the security as
determined by a nationally recognized independent financial expert
(provided that, in the case of the calculation of Current Market Value
for determining the cash value of fractional shares, any such
determination within six months that is, in the good faith judgement of
the Board of Directors, a reasonable determination of value, may be
utilized), or
(2) (a) if the security is registered under the Exchange Act, the
average of the daily closing sales prices of the securities for the 20
consecutive days immediately preceding such date, or (b) if the
securities have been registered under the Exchange Act for less than 20
consecutive trading days before such date, then the average of the daily
closing sales prices for all of the trading days before such date for
which closing sales prices are available, in the case of each of (2)(a)
and (2)(b), as certified to the Warrant Agent by the President, the
Chief Executive Officer or the Chief Financial Officer of Group Telecom.
The closing sales price for each such trading day shall be (A) in the
case of a security listed or admitted to trading on any United States
national securities exchange or quotation system, the closing sales
price, regular way, on such day, or if no sale takes place on such day,
the average of the closing bid and asked prices on such day, (B) in the
case of a security not then listed or admitted to trading on any
national securities exchange or quotation system, the last reported sale
price on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, as reported by a reputable
quotation source designated by Group Telecom, (C) in the case of a
security not then listed or admitted to trading on any national
securities exchange or quotation system and as to which no such reported
sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation in
the Borough of Manhattan, City and State of New York, customarily
published on each business day, designated by Group Telecom, or, if
there shall be no bid and asked prices on such day, the average of the
high bid and low asked prices, as so reported, on the most recent day
(not more than 30 days prior to the date in question) for which prices
have been so reported and (D) if there are not bid and asked prices
reported during the 30 days prior to the date in question, the Current
Market Value shall be determined as if the securities were not
registered under the Exchange Act.
If clause (1) of the preceding paragraph is applicable, the Board of
Directors of Group Telecom is required to select an independent financial expert
not more than five business days following an event requiring a valuation.
Within five days after its selection of the independent financial expert, Group
Telecom must deliver to the Warrant Agent a notice setting forth the name of
such independent financial expert. Group Telecom must use its best efforts
(including by selecting another independent financial expert) to cause the
independent financial expert to deliver to Group Telecom, with a copy to the
Warrant Agent, a value report which states the relevant value of the class B
non-
49
<PAGE> 54
voting shares or warrants or other securities being valued as of the valuation
date and contains a brief statement as to the nature and scope of the
methodologies upon which the determination was made. The Warrant Agent will have
no duty with respect to the value report of any independent financial expert,
except to keep it on file and available for inspection by the holders of the
warrants. The determination of the independent financial expert as to the
relevant value in accordance with the provisions of the warrant agreement will
be conclusive on all persons.
REGISTRATION COVENANT
Group Telecom entered into a registration rights agreement (the "Warrants
Registration Rights Agreement") pursuant to which Group Telecom agreed, for the
benefit of the holders of the warrants, to file with the Commission the shelf
registration statement (the "Class B Registration Statement"), of which this
prospectus forms a part, under the Securities Act relating to the resale of the
warrants and the class B non-voting shares issuable upon the exercise of the
warrants upon the earlier to occur of
(1) the 180th day following the initial public offering of the class B
non-voting shares of Group Telecom; or
(2) December 31, 2001,
and to use its best efforts to cause such registration statement to become
effective within 90 days following its filing.
Group Telecom agreed to use its best efforts to keep the Class B
Registration Statement effective until the earlier to occur of (i) the second
anniversary of the effective date of the registration statement or (ii) such
time as there are no longer outstanding any warrants or class B non-voting
shares issuable upon exercise of the warrants; provided that Group Telecom may
postpone the filing of, or suspend the effectiveness of, any registration
statement or amendment thereto, suspend the use of any prospectus and shall not
be required to amend or supplement the Class B Registration Statement, any
related prospectus or any document incorporated therein by reference in the
event that, and for a period (a "Suspension Period") not to exceed an aggregate
of 60 days,
(1) an event or circumstance occurs and is continuing as a result of
which the Class B Registration Statement, any related prospectus
or any document incorporated therein by reference as then
supplemented or proposed to be filed would, in Group Telecom's
good faith judgment, contain an untrue statement of material fact
or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and
(2) Group Telecom determines in its good faith judgment that the
disclosure of such an event at such time would have a material
adverse effect on the business, operations or prospects of Group
Telecom or the disclosure otherwise relates to a material business
transaction that has not yet been publicly disclosed.
If the Class B Registration Statement is not declared effective by the
earlier to occur of (1) the 270th day following the initial public offering of
the class B non-voting shares of Group Telecom or (2) March 31, 2002, and the
class B non-voting shares are not at that time listed on a stock exchange
prescribed for Canadian income tax purposes, Group Telecom will be required to
make an offer to purchase all of the outstanding warrants at a price at least
equal to the Current Market Value of the warrants.
50
<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
James G. Matkin...................... Chairman and Director 57
Vancouver, BC
James M. Mansour..................... Director and Chair of Executive Committee 40
Austin, TX
Daniel R. Milliard................... Chief Executive Officer and Director 52
Toronto, ON
Robert G. Wolfe...................... President, Chief Operating Officer and Director 43
Toronto, ON
Stephen H. Shoemaker................. Executive Vice President and Chief Financial Officer 39
Toronto, ON
Eric A. Demirian..................... Executive Vice President, Corporate Development 41
Toronto, ON
Michael A. Aymong.................... Executive Vice President, Marketing and Sales 35
Toronto, ON
Robert Watson........................ Executive Vice President, Carrier Services 52
Toronto, ON
Robert M. Fabes...................... Senior Vice President, General Counsel and Corporate 38
Toronto, ON Secretary
Ashok Bhatt.......................... Senior Vice President, Engineering 54
Toronto, ON
Andrew J. Csinger.................... Senior Vice President, Systems Services 37
Toronto, ON
Steven L. Koles...................... Senior Vice President, Marketing 29
Toronto, ON
C. William Rainey.................... Senior Vice President, Sales 46
Toronto, ON
Malcolm Rodrigues.................... Senior Vice President, National Operations 33
Toronto, ON
Patricia A. Saltys................... Vice President, Finance 35
Vancouver, BC
Michael Abram........................ Director 48
Calgary, AB
Michael D'Avella..................... Director 41
Calgary, AB
George Estey......................... Director 43
Toronto, ON
Leo J. Hindery, Jr................... Director 52
Hillsborough, CA
P. Kenneth Kilgour................... Director 44
Toronto, ON
Robert R. Gheewalla.................. Director 32
New York, NY
Jim Shaw............................. Director 42
Calgary, AB
</TABLE>
51
<PAGE> 56
JAMES G. MATKIN Mr. Matkin has been the chairman of the board since
September 1997. Mr. Matkin is the chief executive officer of the Law Society of
British Columbia. With over 9,000 members, the Law Society is the governing body
for the British Columbia legal profession. Mr. Matkin has extensive experience
in law, government and business. He is a public policy practitioner and a
Harvard Law School graduate who began his legal career on Wall Street in New
York City before clerking with Mr. Justice Martland of the Supreme Court of
Canada. A former director of the Bank of Canada, Mr. Matkin currently serves on
the boards of several public and private organizations, including the Provincial
Chair of the Council for Canadian Unity. As president of the Business Council of
British Columbia for 10 years (1983-93), Mr. Matkin has represented more than
150 of the largest companies in Canada in their business-government relations.
JAMES M. MANSOUR Mr. Mansour has been a director since April 1998. Mr.
Mansour is former President and owner of National Telecommunications of Florida,
a long distance carrier providing voice and data telecommunications services to
businesses in 32 states which he sold in 1998 to Inter Media Communications,
Inc. Prior to that time, Mr. Mansour founded and ran National Telecommunications
of Austin, one of the largest regional long distance carriers in the United
States, which he sold to WorldCom in March of 1991. In addition, Mr. Mansour
currently serves on the Board of Netpliance, a company providing high-speed
Internet access services. Mr. Mansour holds a Juris Doctorate degree from Tulane
Law School and is a certified public accountant.
DANIEL R. MILLIARD Mr. Milliard has been our chief executive officer since
September, 1999. Mr. Milliard was most recently senior vice president and
secretary of Adelphia Communications and vice chairman and president of Hyperion
Communications. Prior to that time, Mr. Milliard was the first president and
chief operating officer of Hyperion Communications, led the company from its
inception and was instrumental in growing it to become a national competitive
local exchange carrier. He also served as vice president, secretary and/or
general counsel of Adelphia. Mr. Milliard graduated from American University in
1970 with a Bachelor of Science degree in Business Administration. He received
an M.A. degree in Business from Central Missouri State University in 1971, where
he was an instructor in the Department of Finance, School of Business and
Economics, from 1971 to 1973. Mr. Milliard received his Juris Doctor degree from
the University of Tulsa School of Law in 1976. Mr. Milliard is a director of
Charles Cole Memorial Hospital.
ROBERT G. WOLFE Mr. Wolfe has been a director and our president since
February 1999. Prior to joining us, Mr. Wolfe served as chief financial officer
of Trillium Corporation, an international investment company. In addition, he
has significant experience in senior corporate finance positions with Goldman
Sachs. Mr. Wolfe held three overseas posts for Goldman Sachs in London, Tokyo
and Hong Kong. Mr. Wolfe serves on the board of Babylon Entertainment (founder)
(New York, NY). He also serves on the advisory board of Northwest Venture
Associates (Seattle, WA). Mr. Wolfe graduated from Washington State University
and holds an MBA from Pacific Lutheran University.
STEPHEN H. SHOEMAKER Stephen joined us as executive vice president and
chief financial officer in December 1999. Before joining us, Mr. Shoemaker held
several senior managerial positions at Qwest Communications, most recently as
vice president, treasurer. Prior to Qwest Communications, Stephen was the vice
president, corporate finance for Host Marriott Services Corporation. Mr.
Shoemaker has a B.S. Commerce, concentration in Accounting from the University
of Virginia. He is a certified public accountant, a member of the Treasury
Management Association and also a member of the AICPA.
ERIC A. DEMIRIAN Eric joined us as executive vice president, corporate
development, in January 2000. Prior to joining us, Mr. Demirian was a partner
with PricewaterhouseCoopers and was the head of the Canadian information and
communications group. Mr. Demirian has a Bachelor of Business Management degree
from Ryerson University and both Certified General Accountant and Chartered
Accountant designations. He is a member of the Treasury Management Association
and is a past Director and Treasurer of the Parkinson Foundation of Canada.
52
<PAGE> 57
MICHAEL A. AYMONG Mr. Aymong has been our executive vice president,
marketing and sales since June 1999. Prior to his present position, he served as
acting vice president, marketing and sales support for TELUS in Calgary. In this
position, he managed the marketing efforts during TELUS' merger with BC Tel.
Before joining TELUS, Mr. Aymong was director of operations of the former
MetroNet. Mr. Aymong holds an MBA from the University of Western Ontario. He is
also on the board of directors for the Muttart Art Gallery, Vicom Communications
and Big Picture Technologies and participates in several other community and
business organizations.
ROBERT C. WATSON Mr. Watson has been our executive vice president, carrier
services since February 2000. Mr. Watson was most recently president of Shaw
FiberLink. Prior to that time, Mr. Watson was president and chief executive
officer of ACC Telenterprise. Before then, he was executive vice president and
country manager for Cable & Wireless Inc. Mr. Watson is a graduate in Electronic
Technologies from Ryerson Polytechnical University.
ROBERT M. FABES Mr. Fabes has been our general counsel and corporate
secretary since June 21, 1999. Prior to joining us, he practiced in the area of
corporate finance with Goodman Phillips & Vineberg, Vancouver, our primary
outside legal counsel. Mr. Fabes received his law degrees from McGill University
in 1992 and is a member of both the British Columbia and Quebec law societies.
ASHOK BHATT Mr. Bhatt has been our senior vice president, engineering
since February 2000. Mr. Bhatt brings to our company more than 30 years of
experience both at national and international levels in all aspects of network
services (technology, engineering, and operations). Prior to joining us, Mr.
Bhatt held a senior management consulting position for strategic planning with
Bell Canada International and also held several senior positions at Bell Sygma
and Bell Canada.
ANDREW J. CSINGER Dr. Csinger has been our senior vice president, systems
services since January 1999. Dr. Csinger was most recently the president of
Xcert Software Inc., which he founded in 1996 to develop the emerging public key
infrastructure product. Prior to that time, Dr. Csinger was founding president
of InterSpect Systems Consulting, successfully implementing many Internet
security projects for clients including the U.S. Food and Drug Administration
and the Government of Canada. Before then, Dr. Csinger had various positions in
software engineering and electromagnetic design. Dr. Csinger holds a PhD in
Computer Science from the University of British Columbia.
STEVEN L. KOLES Mr. Koles joined us in May 1999. Prior to joining us, Mr.
Koles held several management positions at TELUS, most recently as assistant
vice president of internetworking services, where he focused on national
expansion strategies. He was also one of the founding team members of TELUS
Advanced Communications -- an enhanced data communications and business Internet
applications service provider. Mr. Koles also serves on the boards of the
Canadian Association of Internet Providers, CA*net's advisory committee and
Netera Alliance's board and executive committee. Mr. Koles has a Bachelor of
Commerce from the University of Alberta and has completed the Executive
Management Program at the University of Western Ontario.
C. WILLIAM RAINEY Mr. Rainey joined us in May, 1999. Mr. Rainey has over
20 years of sales and marketing experience in the high tech, finance and
telecommunications industries. After receiving a Bachelor of Science degree from
the University of Alberta he joined Xerox Canada and held numerous sales,
marketing, education and consulting management positions over 10 years. During
his 5 years with Royal Trust he led the sales and marketing efforts for
investments and lending in Western Canada for 3 years and then spent 2 years in
the Toronto head office in senior sales and marketing management positions. Mr.
Rainey left TELUS' data company, TELUS Advanced Communications, as Assistant
Vice President after 6 years with TELUS. During his tenure at TELUS he completed
the Executive Management Program at Queens University.
MALCOLM RODRIGUES Mr. Rodrigues has been our senior vice president,
national operations since February 2000. Mr. Rodrigues was most recently vice
president operations -- East at Shaw FiberLink and, before then, held the
position of director of operations for Shaw FiberLink. He held a similar
53
<PAGE> 58
position with Trillium Communications, a cable television company in Ontario
which was purchased by Shaw Communications in 1994, where he helped launch the
CAP division. Mr. Rodrigues holds an Electrical Engineering degree from the
University of Toronto and is a licensed Professional Engineer in the Province of
Ontario.
PATRICIA A. SALTYS Ms. Saltys has been our vice president, finance since
December 21, 1999. Prior to that, Ms. Saltys was our chief financial officer
from November 1997 to December 1999. Ms. Saltys was most recently the financial
controller for Bruce Allen Talent (a division of A&F Music) and the Bryan Adams
group of companies responsible for accounting, tax, investments, and financing.
Prior to that time, Ms. Saltys was Assistant Manager at Price Waterhouse in
Vancouver. Ms. Saltys has a Bachelor of Commerce from the University of
Saskatchewan and is a chartered accountant and a member of the Institute of
Chartered Accountants of British Columbia.
MICHAEL ABRAM Mr. Abram has been a director since March 23, 2000. Mr.
Abram is President of Shaw Ventures, the investment division of Shaw
Communications Inc. Prior to joining Shaw, Mr. Abram was the President of a
national office solutions company in Canada. Mr. Abram is a graduate of the
University of Calgary.
MICHAEL D'AVELLA Mr. D'Avella joined us as a director in February 2000.
Mr. D'Avella is the senior vice president of planning for Shaw Communications
and has served in this position since 1991. He has previously held senior
positions with the Canadian Cable Television Association and business
development positions with Telesat Canada. Mr. D'Avella is also a director of
Terayon Communications Systems Inc. (a provider of broadband access systems) and
Canadian Satellite Communications (Cancom). Mr. D'Avella is a graduate of the
University of Toronto with a B.A. in economics and planning.
GEORGE ESTEY Mr. Estey joined us as a director in February 2000. Mr. Estey
is the Chairman of Goldman Sachs Canada. Prior to this, he was involved in
various roles within Goldman, Sachs & Co.'s Investment Banking Division since
joining the firm in 1987. Mr. Estey was also a consultant with McKinsey & Co.
Mr. Estey holds an MBA from the Harvard Graduate School of Business
Administration and a B.Sc. from the University of New Brunswick.
LEO J. HINDERY, JR. Mr. Hindery has been a director since March 23, 2000.
Mr. Hindery is currently chief executive officer of Global Crossing Ltd. and the
chairman and chief executive officer of GlobalCenter Inc., the Internet commerce
services subsidiary of Global Crossing. Prior to joining Global Crossing and
GlobalCenter, Mr. Hindery was president and chief executive officer of AT&T
Broadband & Internet Services and president and chief executive officer of its
predecessor company, Tele-Communications, Inc. (TCI). From 1988 to 1997, Mr.
Hindery was the founder and managing general partner of InterMedia Partners, the
ninth largest multiple cable system operator in the United States. Prior to
this, Mr. Hindery was chief officer for planning and finance of The Chronicle
Publishing Company, and chief financial officer and managing director of Becker
Paribas, Inc. Mr. Hindery holds an MBA from Stanford University and an honors
degree from Seattle University and is a member of the Stanford Business School
Advisory Council. He is a director of Tanning Technology Corp., TD Waterhouse
Group, Inc. Telocity, Inc. and Vertical Net, Inc.
P. KENNETH KILGOUR Mr. Kilgour has been a director since May 1999. Mr.
Kilgour is managing director and head of CIBC Capital Partners. Prior to joining
CIBC Capital Partners in 1989, Mr. Kilgour was senior manager, corporate finance
of Canadian Imperial Bank of Commerce, which he joined in 1982. Mr. Kilgour
holds an MBA from the University of Toronto and a B.Sc. (Applied Science) from
Queen's University.
ROBERT R. GHEEWALLA Mr. Gheewalla has been a director since May 1999. Mr.
Gheewalla is a vice president in the principal investment area at Goldman Sachs.
He received an MBA from Harvard Business School, an MS from The London School of
Economics while on a Fulbright Scholarship, and a BS from Tufts University. Mr.
Gheewalla currently serves as a board member for 360networks Inc., Diginet
Americas, Digital Access and North American RailNet.
54
<PAGE> 59
JIM SHAW Mr. Shaw joined as a director in December 1999. Mr. Shaw has been
president and chief executive officer of Shaw Communications since 1998. Prior
to this, Mr. Shaw held various senior management positions at Shaw
Communications. Mr. Shaw is also chairman of the Canadian Cable Television
Association (CCTA) and a director of: CableLabs, a North American cable
television research organization; the At Home Corporation; Canadian Satellite
Communications Inc. and @Home Canada.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has three standing committees: an executive
committee, an audit committee and a compensation committee. The executive
committee consists of Messrs. Gheewalla, Kilgour, Mansour, Matkin, Milliard,
Shaw and Estey, and, as a non-voting observer, Mr. Wolfe. A majority of the
members of the audit committee are persons who are not our officers or employees
or any of our affiliates. The audit committee, which consists of Messrs.
Mansour, Matkin and Kilgour, selects and engages, on our behalf, the independent
public accountants to audit our annual financial statements, and reviews and
approves the planned scope of the annual audit. The compensation committee
establishes remuneration levels for our senior officers. The compensation
committee consists of Messrs. Matkin, D'Avella and Gheewalla.
EXECUTIVE COMPENSATION
At September 30, 1999, we had nine executive officers. At September 30,
1999, aggregate cash compensation of $277,273 was paid to our executive officers
who were members of our board of directors, and $393,958 was paid to our other
executive officers, including salaries, bonuses and other amounts paid by us.
Pursuant to our employment agreements with Daniel Milliard, our chief
executive officer and director, and with Robert Wolfe, our president, chief
operating officer and director, we have agreed to provide Mr. Milliard with a
housing-assistance loan and an option-exercise loan in the aggregate amount of
approximately $4 million and Mr. Wolfe with an option-exercise loan in the
amount of approximately $312,500, each of which will bear interest at the
effective applicable federal rate in effect under Section 1274(d) of the
Internal Revenue Code. Pursuant to our employment agreement with Eric Demirian,
our executive vice president, corporate development, we have provided Mr.
Demirian with an interest free loan in the aggregate amount of approximately
$190,000.
55
<PAGE> 60
SUMMARY COMPENSATION TABLE
We paid the following compensation paid during the year ended September 30,
1999 to our executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- -------------------------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES RESTRICTED
UNDER SHARES OR
OTHER ANNUAL OPTIONS RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
--------------------------- -------- ----- ------------ ---------- ----------- ------- ------------
($) ($) ($) (#) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel R. Milliard............. $ 33,333 -- -- 1,600,000 -- -- --
(Chief Executive Officer and
Director)
Robert G. Wolfe................ $145,831 50,000 -- 750,000 -- -- --
(President, Chief Operating
Officer and Director)
Michael A. Aymong.............. $ 55,192 -- -- 190,000 -- -- --
(Executive Vice President,
Marketing and Sales)
Marek K. Wieckowski(1)......... $101,917 -- -- 85,000 -- -- --
(Executive Vice President,
Network Services)
Robert M. Fabes................ $ 26,250 -- -- 15,000 -- -- --
(Senior Vice President, General
Counsel and Corporate
Secretary)
Andrew J. Csinger.............. $101,000 -- -- 95,000 -- -- --
(Senior Vice President,
Systems Services)
Steven L. Koles................ $ 47,596 -- -- 30,000 -- -- --
(Senior Vice President,
Marketing)
C. William Rainey.............. $ 46,362 -- -- 35,000 -- -- --
(Senior Vice President, Sales)
Patricia A. Saltys............. $ 97,083 -- -- 55,000 -- -- --
(Vice President, Finance)
</TABLE>
---------------
(1) Resigned effective April 30, 2000.
EQUITY INCENTIVE PLAN
Our board of directors approved our employees' and directors' equity
incentive plan effective as of September 1999. The equity incentive plan applies
to our (and our affiliates) directors and employees who, in the judgment of our
board of directors, will be largely responsible for our future growth and
success. The equity incentive plan was approved by our shareholders in March
2000.
The equity incentive plan is administered by our board of directors.
Options can be exercised for our class A voting shares or our class B non-voting
shares. The exercise price for any option granted under the equity incentive
plan may not be less than 100% of the weighted average price of our class B
non-voting shares on the Toronto Stock Exchange or Nasdaq National Market for
the preceding five days of trading. Options are exercisable during a period
established at the time of their grant provided that such period will expire no
later than 10 years after the date of grant, subject to early termination of the
option in the event the holder of the option dies or ceases to be a director or
employee. No single participant, together with his or her associates, may be
granted options which could result in the cumulative issuance to such persons of
options to acquire our shares exceeding 5% of our shares outstanding immediately
prior to the grant under the equity incentive plan. The number of our shares
reserved for issuance pursuant to options granted to persons beneficially
holding, together with their associates, in excess of 10% of our shares must not
exceed 10% of our shares outstanding immediately prior to the grant under the
equity incentive plan.
56
<PAGE> 61
We do not have any plans providing for pension, retirement or similar
benefits. The compensation committee of our board has the discretion to approve
bonus payments to all employees, including executive officers.
REMUNERATION OF DIRECTORS
We currently have 11 directors. No compensation is paid to directors in
their capacity as such. We grant share options to our directors and reimburse
them for their out of pocket expenses with respect to attendance at board
meetings. We maintain $5,000,000 in directors' and officers' liability
insurance.
OPTIONS
At August 18, 2000 we had 6,846,969 outstanding options or warrants to
purchase our class A voting shares and our class B non-voting shares. Our
directors and executive officers held at August 18, 2000 the following options
to purchase a total of 2,669,124 class A voting shares and a total of 1,750,000
class B non-voting shares:
<TABLE>
<CAPTION>
TOTAL NUMBER
NUMBER EXERCISE OF SHARES
NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION
--------------------------- --------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
James G. Matkin.......... 10,000(1) Nov. 18, 1997 $0.50 Nov. 30, 2000 190,000
Chairman and Director 80,000 Nov. 18, 1997 0.50 Nov. 30, 2000
100,000 Feb. 15, 2000 8.00 Feb. 15, 2005
James M. Mansour......... 150,000(1) Feb. 16, 1999 1.25 Feb. 16, 2004 650,000
Director and Chair of 300,000 Apr. 23, 1999 1.50 Apr. 23, 2004
Executive Committee 200,000 Sep. 30, 1999 1.88 Sep. 30, 2004
Robert G. Wolfe.......... 500,000(1) Apr. 1, 1999 1.50 Apr. 1, 2004 750,000
President, Chief Operating 250,000(1) Nov. 11, 1999 3.00 Nov. 11, 2004
Officer and Director
Stephen H. Shoemaker..... 400,000(1) Dec. 16, 1999 3.00 Dec. 16, 2004 400,000
Executive Vice President
and Chief Financial Officer
Eric A. Demirian......... 400,000 Dec. 16, 1999 3.00 Dec. 16, 2004 400,000
Executive Vice President,
Corporate Development
Michael A. Aymong........ 90,000 July 15, 1999 1.50 July 15, 2004 310,000
Executive Vice President, 150,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Sales and Marketing 70,000 Feb. 9, 2000 1.50 Feb. 9, 2005
Robert Watson............ 300,000 Feb. 9, 2000 8.00 Feb. 9, 2005 300,000
Executive Vice President
Carrier Services
Robert M. Fabes.......... 15,000 July 15, 1999 1.50 July 15, 2004 85,000
Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004
General Counsel and 30,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Corporate Secretary
Ashok Bhatt.............. 40,000 Feb. 15, 2000 8.00 Feb. 15, 2005 60,000
Senior Vice President, 20,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Engineering
Andrew J. Csinger........ 95,000 Mar. 9, 1999 1.25 Sep. 30, 2003 120,000
Senior Vice President, 25,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Systems Services
</TABLE>
57
<PAGE> 62
<TABLE>
<CAPTION>
TOTAL NUMBER
NUMBER EXERCISE OF SHARES
NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION
--------------------------- --------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Steven L. Koles.......... 20,000 July 15, 1999 1.50 July 15, 2004 67,000
Senior Vice President, 25,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Marketing 7,000 Jan. 26, 2000 1.50 Jan. 26, 2005
15,000 Feb. 15, 2000 8.00 Feb. 15, 2005
C. William Rainey........ 20,000 July 15, 1999 1.50 July 15, 2004 77,000
Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Sales 7,000 Jan. 26, 2000 1.50 Jan. 26, 2005
10,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Malcolm Rodrigues........ 61,000 Feb. 9, 2000 8.00 Feb. 9, 2005 61,000
Senior Vice President,
National Operations
Patricia A. Saltys....... 30,000 Oct. 15, 1997 1.00 Oct. 31, 2000 149,124
Vice President, Finance 44,124 Apr. 23, 1998 1.25 July 1, 2001
55,000 Mar. 9, 1999 1.25 Sep. 30, 2000
20,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Michael Abram............ 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Michael D'Avella......... 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
George Estey............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Leo J. Hindery........... 200,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 200,000
Director
Ken Kilgour.............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Robert Gheewalla......... 100,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Jim Shaw................. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
---------
Total: 4,419,124
=========
</TABLE>
---------------
(1) These options entitle the holder to purchase class B non-voting shares.
EMPLOYMENT AGREEMENTS
We have employment agreements or remuneration arrangements with all of our
executive officers. Each agreement or arrangement provides for salary, benefits,
bonuses and incentive stock option grants for the executive officer, and for
compensation if his or her employment is terminated.
58
<PAGE> 63
REGULATION
CRTC AND LEGISLATION
Companies which own or operate transmission facilities in Canada that are
used to offer telecommunications services to the public for compensation are
classified as "telecommunications common carriers" under the Telecommunications
Act (Canada) and are subject to the regulatory authority of the CRTC.
The CRTC has the discretionary power to forbear from exercising certain of
its regulatory powers over Canadian carriers where it finds that a
telecommunications service or class of services is, or will be, subject to
competition sufficient to protect the interests of users. Some Canadian
carriers, such as the incumbent local exchange carriers, are classified by the
CRTC as "dominant" in the provision of certain services because of their market
power and control over the supply of local services and certain long distance
services. Carriers classified as "non-dominant" by the CRTC are subject to less
regulation than dominant carriers and include facilities-based long distance
providers, and competitive access providers. The CRTC has forborne from
regulating most of the services offered by non-dominant carriers, including,
long distance, private line, dedicated access services, wireless services, local
switched services. In addition, the CRTC has forborne from regulating certain
services offered by the incumbent carriers, most notably, data, long distance,
Internet access and interexchange private line services on certain routes. The
CRTC also has the power to exempt any class of Canadian carrier from the
application of the Telecommunications Act (Canada) if the CRTC is satisfied that
such an exemption is consistent with Canadian telecommunications policy
objectives. However, it has not, to date, used that power.
Leave to appeal decisions of the CRTC to the Federal Court of Appeal may be
sought within 30 days of the decision. The decision may also be challenged by
petition to the Federal Cabinet (within 90 days of the decision). CRTC decisions
are also subject to review and variance under the Telecommunications Act
(Canada) either on the CRTC's own initiative or by way of an application which
must generally be brought within 6 months of the decision, but which may be
brought as a new proceeding at any time.
REGULATION OF LOCAL SWITCHED SERVICES
In 1994, the CRTC determined that restrictions on entry into the market for
local switched telecommunications services should be removed and that measures
should be implemented to enable competitors to offer local telephone services.
The regulatory framework for competition in the local market was established as
a result of a series of decisions issued on May 1, 1997. These decisions do not
currently apply to SaskTel and NorthwesTel nor do they currently apply to
roughly 35 small independent local telephone companies located in Ontario,
Quebec and British Columbia.
The decisions issued on May 1, 1997 effectively opened Canada's local
switched services market to competition, ending the historical monopoly of the
incumbent local exchange carriers. The decisions established a comprehensive
regulatory framework allowing for the introduction of competition in the local
switched services market. The following is a summary of those aspects of the
decisions and the current regulatory regime which are expected to have a
material impact on our business:
CO-CARRIER STATUS
The CRTC adopted a principle that competitive local exchange carriers will
be considered carriers of equal stature with, and not merely customers of, the
incumbent local exchange carriers in the local switched services market.
Consistent with this principle, the CRTC adopted a "bill and keep" traffic
termination mechanism, whereby all local exchange carriers are required to
terminate each others' local traffic originating within the same exchange
without specifically compensating each other for the termination function that
they perform unless there is a traffic imbalance for a significant period of
time. In areas where traffic is at an imbalance, the CRTC has authorized the use
of a mutual
59
<PAGE> 64
compensation scheme under which competitive local exchange carriers and
incumbent local exchange carriers charge each other for the traffic termination
functions that they perform.
The CRTC determined that the incumbent local exchange carriers and
competitive local exchange carriers must each identify a point of
interconnection within the incumbent local exchange carrier local exchanges
where they provide service to permit the interconnection of their respective
networks and that incumbent local exchange carriers and competitive local
exchange carriers should share the cost of interconnection equally (or under
mutually agreed terms).
UNBUNDLING OF INCUMBENT LOCAL EXCHANGE CARRIER FACILITIES
The CRTC has directed the incumbent local exchange carriers to "unbundle"
or make available to competitive local exchange carriers the network elements
that competitive local exchange carriers require in order to allow them to
provide their own local services. These network elements include facilities that
the CRTC deemed essential, as well as certain other facilities that are not
essential but which were determined by the CRTC to be necessary to facilitate
competition in the market for local switched services in the short term. The
CRTC directed the incumbent local exchange carriers to price all services
subject to the mandatory unbundling requirement at their long run incremental
cost ("phase II costs") plus a 25% mark-up. The incumbent local exchange carrier
essential facilities that are subject to the mandatory unbundling rule include
central office codes, subscriber listings and local loops (the wire facilities
which run from the incumbent local exchange carriers' central offices to the
customer premises) in certain small urban and high cost rural areas. All urban
local loops, other than those deemed essential, and transiting services were
deemed not essential by the CRTC but were nonetheless required to be unbundled
and made available to competitive local exchange carriers for five years.
Although the incumbent local exchange carriers are currently required to provide
these non-essential facilities on an unbundled basis at the price of phase II
costs plus a 25% mark-up, this obligation will be discontinued after the expiry
of the initial five year period. The incumbent local exchange carriers would,
nevertheless, be required to provide those facilities which are essential,
beyond the five year period.
Many of the competitive local exchange carriers operating in the market
make extensive use of unbundled local loops. In a proceeding initiated by the
CRTC in July 2000, the CRTC has asked for interested parties' comments on its
preliminary view that the five year period for these and other non-essential
facilities should be extended for a longer period of time, in order to
facilitate competitive entry into local exchange markets. The CRTC has also
asked for comments on its preliminary view that it may be appropriate to treat
all copper loops as essential facilities.
The mandatory unbundling of incumbent local exchange carrier facilities
allows us to lease incumbent local exchange carrier local loops to provide
services to customers that are not directly on our networks. Depending on the
outcome of the proceeding initiated by the CRTC, if and when loops leased by us
are no longer priced and offered on an essential facilities basis, we will have
to (i) reach an agreement with the relevant incumbent local exchange carriers to
continue leasing these local loops (which may be on less favorable terms than
the CRTC mandated prices), (ii) build, lease or acquire our own facilities in
those markets where we do not already have our own facilities, or (iii) develop
other alternatives to reach our customers.
SAFEGUARDS AGAINST INCUMBENT LOCAL EXCHANGE CARRIER ANTI-COMPETITIVE PRICING
In order to prevent anti-competitive pricing by the incumbent local
exchange carriers, the CRTC imposed a floor price test that effectively requires
the incumbent local exchange carriers to charge prices for their retail services
sufficient to recover their costs which, with respect to essential facilities,
must be at least equal to the amount charged to the competitive local exchange
carriers (the long run incremental cost of providing the facility plus a 25%
markup) and, with respect to non-essential services, must be at least equal to
phase II costs. The incumbent local exchange carriers will be required to meet
the floor price test in all applications for new local business services (other
than for
60
<PAGE> 65
market trials and promotions) and applications proposing explicit or implicit
price decreases. The CRTC's floor price test is an important safeguard for us
against anti-competitive pricing by the incumbent local exchange carriers.
However, since incumbent local exchange carriers need not include in their own
floor prices the mandated 25% markup that they charge to competitive local
exchange carriers for non-essential local services, incumbent local exchange
carriers will be able to compete against competitive local exchange carriers
that utilize such non-essential services solely on the basis of price.
RESALE
The incumbent local exchange carriers are required to make their tariffed
local switched services (both business and residential) available for resale,
but not at a mandated discount as had been proposed to the CRTC by some
potential new entrants. The CRTC's denial of mandated discounts does not affect
current incumbent local exchange carrier business services offered at volume and
contract term discounts, such as Centrex services. However, the absence of
mandated discounts pursuant to the CRTC decisions has limited the number of
non-facilities-based entrants, such as resellers, into the local switched
services market.
CONTRIBUTION
In Canada, local residential telephone services are subsidized. This
subsidy comes from "contribution" payments that are made by certain
telecommunications service providers. The current contribution regime was
originally established by the CRTC in 1992 as a means of ensuring that rates for
local residential telephone service remain affordable. Under the regime,
providers of certain types of voice and data services (principally long distance
carriers) are required to make contribution payments on each minute of traffic
that originates or terminates on the local switched telephone network or on
cross-border or overseas access circuits. Contribution payments are collected by
local exchange carriers from long distance service providers and are remitted to
an independent administrator who in turn apportions them among local exchange
carriers that serve residential customers that are located in areas that are
designated for the subsidy. The subsidy is payable on a per Network Access
Service basis and varies in amount depending on the location of the customer. We
will not receive any of these subsidies if we do not provide telephone service
to residential customers.
Contribution charges are regulated by the CRTC and are currently set at
separate per minute rates for peak and off-peak traffic. The CRTC has also
established separate contribution rates for each incumbent local exchange
carrier territory and has frozen the rates for a four year period ending on
December 31, 2001. The CRTC recently turned down a request by competitors in the
long distance industry to remove the rate freeze on contribution that is
currently in effect.
On March 1, 1999, the CRTC initiated a proceeding to consider possible
reforms to the current contribution mechanism. In the public notice that
initiated the proceeding, the CRTC invited interested parties to submit
proposals on other mechanisms which could be used to collect contribution. Some
parties to this proceeding have advocated an approach to the collection of
contribution which is based on a percentage of a telecommunications service
provider's revenues (regardless of the types of services offered by the service
provider), while others have advocated an approach based on a charge per
access-line. At the present time, several of the services that we offer, such as
local telephone service and Internet access services, do not attract the
obligation to pay contribution. However, given that the current contribution
regime is under review by the CRTC, there can be no assurance that we will not
be required in the future to pay a greater amount of contribution than what we
currently pay.
REGULATION OF COMPETITIVE LOCAL EXCHANGE CARRIERS
Although the CRTC has determined that competitive local exchange carriers
are non-dominant carriers that should not be subject to the same degree of
regulation as the incumbent local exchange
61
<PAGE> 66
carriers, the CRTC requires competitive local exchange carriers to assume
certain obligations. For example, competitive local exchange carriers must file,
for CRTC approval, interconnection agreements and tariffs for services that they
provide to other carriers. Competitive local exchange carriers must also provide
interconnection to all other local exchange carriers within the same exchange,
interconnection to wireless service providers and equal access interconnection
to long distance providers that offer services in the same territory served by
the competitive local exchange carrier on terms and conditions no less favorable
than those contained in the incumbent local exchange carriers' tariffs, unless
the competitive local exchange carrier can justify a departure from the
incumbent local exchange carriers' tariffs. Competitive local exchange carriers
are also required, among other things, to provide for reciprocal local exchange
carrier-to-local exchange carrier interconnection; to implement local number
portability ("LNP"); to provide emergency (911) service and message relay
service and to satisfy various other existing and future regulatory requirements
designed to protect customer privacy, such as providing consumers, upon request,
with information regarding their services, prices and local calling area
boundaries. Both wireline and wireless service providers may become competitive
local exchange carriers as long as they accept the obligations imposed on
competitive local exchange carriers by the CRTC.
We believe we have an advantage over the incumbent local exchange carriers
in terms of pricing flexibility, offering of services and responsiveness to
customer needs since the incumbent local exchange carriers, unlike us, must file
and obtain regulatory approval for the rates, terms and conditions of the local
services they intend to offer and are subject to price cap regulation of their
local services. However, like the incumbent local exchange carriers, competitive
local exchange carriers are subject to the prohibitions set forth in the
Telecommunications Act (Canada) against unjust discrimination and the granting
of undue preferences to end users and to other carriers. In addition, and to the
extent that they are not regulated under the Telecommunications Act (Canada),
they are subject to anti-trust legislation such as the Competition Act (Canada).
LOCAL NUMBER PORTABILITY
Local number portability enables customers to retain their local telephone
number when they change local exchange carriers. The CRTC requires all local
exchange carriers to provide local number portability and has determined that
all local exchange carriers should bear their own costs of implementing local
number portability. Local number portability was considered to be an important
requirement by new entrants due to the reluctance of customers to change local
exchange carriers if it meant changing their telephone number. Local number
portability has been rolled out in most major urban centres in Canada, including
Vancouver, Montreal, Toronto, Calgary, Edmonton, and Ottawa/ Hull in accordance
with a schedule for implementation established by the CRTC in a 1998 decision.
If no competitive local exchange carrier has initiated interconnection with an
incumbent local exchange carrier in a given exchange by the scheduled roll-out
date or if there is no scheduled roll-out date for the exchange in question, the
industry has agreed to a request-driven roll-out schedule for local number
portability. In these circumstances, local number portability must be
implemented between 30 and 180 days following a request for local number
portability, depending on the nature of the underlying switch configuration.
CO-LOCATION
On June 16, 1997, the CRTC rendered a decision relating to incumbent local
exchange carrier central office co-location arrangements. In its decision, the
CRTC mandated the provision by incumbent local exchange carriers of both
physical and virtual co-location arrangements, available at the competitive
local exchange carrier's option, under CRTC-approved tariffs and standard-form
central office licence agreements. Under a virtual co-location arrangement,
competitive local exchange carriers and incumbent local exchange carrier traffic
is exchanged at a designated point outside the central office, and additional
dedicated facilities located in the central office are provided by the incumbent
local exchange carrier to complete the competitive local exchange carrier's
transmission
62
<PAGE> 67
system. Co-location arrangements are important to us because they allow us to
interconnect our transmission systems with those of the incumbent local exchange
carriers using the most efficient and cost-effective network structure possible.
They also allow us to gain immediate access to incumbent local exchange carrier
unbundled loops for our off-net customers. Under certain circumstances,
competitive local exchange carriers are also permitted to enter into
cross-connection arrangements with other co-located competitive local exchange
carriers within a central office which allows for increased network efficiency.
The CRTC also determined in its co-location decision that mandated
co-location is available only to facilities-based carriers interconnecting with
incumbent local exchange carriers under the terms of either an agreement or
tariff. We believe that the requirement limiting co-location to facilities-based
carriers creates an opportunity for competitive local exchange carriers to
resell their transmission capacity for connection at central offices to other
telecommunications service providers, including resellers and Internet
providers, which do not have access to mandated co-location arrangements.
The CRTC also set rates in the decision for a variety of monthly
co-location services, including central office floor space and entrance conduit
space charges, as well as for certain non-recurring charges. For some of these
charges, such as service order and application charges the incumbent local
exchange carriers were directed to charge the long run incremental cost of
providing the service plus a 25% mark-up. For many other charges, however, the
CRTC directed the incumbent local exchange carriers to base their charges upon
costs incurred with no mark-ups, (e.g., for construction, site preparation and
project management services).
A six-month maximum time limit was imposed on the incumbent local exchange
carriers between the date of the competitive local exchange carrier's acceptance
of the initial report for physical co-location and the availability of the
service, and a corresponding three-month maximum time limit to obtain virtual
co-location.
PRICE CAP REGULATION
The CRTC has adopted a form of rate regulation for the incumbent local
exchange carriers which brings most of their local services under a price cap
regime. The price cap mechanism adopted by the CRTC segregates the incumbent
local exchange carriers' services into sub-baskets of related services and
imposes an overall constraint on price increases for all services subject to the
price caps as well as certain specific price constraints for services within
each of three sub-baskets. The price of local services under the price cap
regime are subject to an overall price cap that limits price increases to an
annual percentage linked to the rate of inflation, subject to certain
adjustments (including a 4.5% productivity offset). Within the three sub-baskets
of local services prescribed by the CRTC (i.e., basic residential local service,
single and multi-line business local services and other capped services), the
aggregate price levels for the basic residential local service and other capped
services sub-baskets will be limited to annual increases equal to the inflation
rate. A maximum increase of 10% in any year will apply to individual rates for
residential and single-line business services in smaller exchanges.
The CRTC decided to exclude certain of the incumbent local exchange
carriers' local services such as optional local services, including calling
features such as voice mail and call waiting, from the price cap regime. In
addition, the CRTC regulates the rates of certain local "competitor services"
outside the price cap regime. These services are provided by the incumbent local
exchange carriers to their competitors, such as competitive local exchange
carriers, in order to allow their competitors to provide local and long distance
services. Examples of services included in this category are equal access
services provided to long distance service providers, unbundled local loops, and
network access services provided to wireless carriers. These services are
subject to detailed rate regulation and the prices are set at long run
incremental cost plus a 25% markup.
Despite the price constraints contained in the CRTC's price cap regime, the
incumbent local exchange carriers still have the ability under price cap
regulation to increase prices for local services
63
<PAGE> 68
for which there is little competition (such as residential and single line
business local services) and use the excess profits generated from these
activities to subsidize price reductions in competitive services (such as
business and government local services) that are included in the same basket of
services.
Price cap regulation for the incumbent local exchange carriers will be in
force until December 31, 2001 and will be reviewed by the CRTC before the end of
this period. The CRTC's review may result in the extension of price cap
regulation or the elimination of rate regulation for some or all of the
incumbent local exchange carriers' local services.
REGULATION OF LONG DISTANCE SERVICES
We will offer long distance telecommunications services as part of our
bundled telecommunications services. Long distance competition has been in place
in Canada since 1990 for long distance resellers and since 1992 for
facilities-based carriers. Since 1994, the incumbent local exchange carriers
have been required to provide "equal access" to long distance carriers and
resellers which eliminated the need for customers of competitive long distance
providers to dial additional digits when placing long distance calls.
As described above, competitive long distance service providers, including
resellers, must make contribution payments to local exchange carriers to reflect
the subsidy that long distance services have traditionally contributed to the
provision of local residential telephone service. As a long distance provider of
voice and data services, we will make contribution payments in respect of long
distance voice and data services which originate or terminate on the public
switched telephone network. The CRTC is currently in the process of reviewing
the appropriateness of its overall contribution collection mechanism in a
proceeding initiated on March 1, 1999.
Under the CRTC's 1992 long distance competition decision, competitive long
distance providers were required to assume approximately 30% of the cost
required to modify the incumbent local exchange carriers' networks to
accommodate interconnection with long distance competitors. These initial
modification charges are spread over a period of 10 years and are payable on the
basis of a specified charge per minute. Competitive long distance providers are
also required to pay local exchange carriers charges for other services which
they use, including switching and aggregation, primary interexchange carrier
information processing (which implements a subscriber's choice of long distance
carrier), operator services and certain billing and collection services.
The CRTC has refrained from regulating (including tariff approval and rate
setting provisions) most long distance services and interexchange private line
services provided by the incumbent local exchange carriers and all such services
offered by their competitors, apart from access to their respective networks.
The incumbent local exchange carriers' basic (undiscounted) long distance rates
remain subject to rate regulation as well as their rates in areas that do not
yet have equal access. The incumbent local exchange carriers also remain subject
to rate regulation on private line services on inter-city routes which are not
yet subject to facilities-based competition. The lack of regulation of the
incumbent local exchange carriers' long distance services, including the absence
of a floor price test, has provided the incumbent local exchange carriers with
pricing flexibility and has increased their ability to compete with us on the
basis of price.
UNBUNDLED RATES TO PROVIDE EQUAL ACCESS
In April 1997, the CRTC issued a decision which unbundles the rates that
long distance providers pay to the incumbent local exchange carriers for various
"equal access" or local switching and traffic aggregation services. Under the
decision, long distance providers were required to pay the incumbent local
exchange carriers a separate rate of $0.007 per minute (recently reduced to
$0.003 per minute) for local end office connection and an additional rate of
approximately $0.004 to $0.007 per minute for connection at the toll switch;
also referred to as "access tandem connection." Competitive local
64
<PAGE> 69
exchange carriers also charge these rates to long distance providers for traffic
originating and terminating on their local networks.
The CRTC's equal access decision is important to us for two reasons. First,
it establishes the prices which we, or those from which we purchase long
distance services for resale, will be required to pay to the incumbent local
exchange carriers for origination or termination of long distance traffic at
either the access tandem or local end office. Second, since we compete with the
incumbent local exchange carriers in providing switched access to long distance
services, we price our services to compete with the incumbent local exchange
carriers' tariffed rates.
In May 1999, in a decision relating to the regulatory framework relating to
the Internet, referred to as the "New Media" decision, the CRTC acknowledged the
proposal of one party to the proceeding that a comprehensive review of
interconnection and unbundling arrangements was necessary, and indicated that it
would shortly initiate such a proceeding.
Furthermore, in June 1999 an application was filed by a competitor
requesting the CRTC to review the entire framework for interconnection
arrangements between interexchange and local service providers. This application
included a proposal to permit all local exchange carriers to interchange traffic
with each other regardless of where the traffic originates. Currently, the CRTC
is determining the best type of proceeding to deal with this application. It
recently held a two-day round-table discussion for interested industry
participants in which it solicited views on what issues should be discussed
during future proceedings and what issues could be dealt with on a more
expedient basis by the CRTC interconnection steering committee. The Commission
will issue its determinations resulting from these discussions by the fall of
2000, at which time it should publish a public notice.
In May 2000, a U.S.-based digital subscriber line provider applied to the
CRTC to obtain access to the incumbent local exchange carriers' unbundled local
loops and central office co-location sites on the same terms and conditions as
competitive local exchange carriers. In addition, Bell Canada has applied for
approval of a tariff under which it would provide access to its unbundled local
loops to resellers using digital subscriber line access technology. If granted
approval, either of these applications could create opportunities for additional
competition in the high-speed Internet access market from service providers
which are not subject to the same restrictions on foreign ownership and control
as the competitive local exchange carriers. Oppositions to these applications
were filed by the other incumbent local exchange carriers and a group of
competitive local exchange carriers, including Group Telecom.
ACCESS
Access to both private and public property is important to our business in
order for us to be able to reach our customers in multiple unit dwellings and
construct, maintain and operate our network. With respect to access to multiple
unit dwellings, the CRTC, which does not have direct jurisdiction over building
owners, has recognized the importance of customer choice of service providers
and has expressed the view that an exclusive arrangement between a service
provider and a landlord of a multiple unit dwelling will generally violate the
Telecommunications Act (Canada).
In December 1999, the CRTC initiated a proceeding to examine the terms and
conditions the city of Vancouver may impose for access to public lands in order
to construct, maintain and operate telecommunications facilities. The outcome of
this proceeding may permit other service providers to obtain such access on
terms more favorable than those in our agreement with the city of Vancouver, or
may permit us to renegotiate our agreement with the city of Vancouver to the
extent that our agreement contains less favourable terms than those approved by
the CRTC.
REGULATION OF WIRELESS SERVICES
Use of radio spectrum to provide wireless telecommunications services is
subject to licensing by Industry Canada under the Radiocommunication Act
(Canada). Under this legislation, Industry
65
<PAGE> 70
Canada is authorized to issue radio licences, to plan the allocation and use of
the radio spectrum and to perform other duties to ensure the orderly development
and efficient operation of radiocommunication in Canada. With respect to
spectrum licensing, Industry Canada has the authority to revoke a licence for
non-compliance with terms and conditions or failure to pay associated spectrum
licence fees. However, revocation is rare and licences are usually renewed year
to year upon payment of the applicable fee. Industry Canada levies licence fees
on wireless telecommunications service providers, and generally not on
subscribers for the services offered by such providers.
Industry Canada has issued spectrum licences to us in the 38 GHz frequency
range which allow us to operate point-to-point radio systems in Vancouver,
Calgary, Toronto, Ottawa and Montreal. To obtain licences, applicants operating
as radiocommunication carriers must comply with foreign ownership restrictions
under the Radiocommunication Act.
FOREIGN OWNERSHIP RESTRICTIONS
Group Telecom, and our operating subsidiary GT Group Telecom Services
Corp., which is a telecommunications common carrier for regulatory purposes, are
required by the Canadian Telecommunications Act and the Radiocommunication Act,
and the regulations made under both statutes, to be Canadian-owned and
controlled corporations incorporated or continued under the laws of Canada or a
province of Canada. Our operating subsidiary is deemed to be Canadian-owned and
controlled if: (i) not less than 80% of the members of its board of directors
are Canadians; (ii) Canadians beneficially own and control not less than 80% of
its issued and outstanding voting shares; and (iii) it is not otherwise
controlled in fact by persons that are not Canadians. GT Group Telecom Services
Corp. is a Canadian carrier wholly owned and controlled by us and not less than
80% of its board of directors are individual Canadians. We will ensure that not
less than 80% of the members of the board of directors of our subsidiary will
continue to be composed of Canadians.
We intend that our operating subsidiary will remain controlled by us, and
be our wholly-owned subsidiary. Therefore, all of the outstanding voting shares
of the subsidiary are now, and it is intended that the subsidiary will remain,
owned by a company controlled by Canadians. A "Canadian" for the purposes of
these requirements includes a Canadian citizen who is ordinarily resident in
Canada, a permanent resident of Canada and, among other types of entities,
corporations in which Canadians beneficially own and control in the aggregate
not less than 66 2/3% of the issued and outstanding voting shares and which are
not otherwise controlled in fact by non-Canadians. A "voting share" for purposes
of these requirements means a share of any class of shares of a corporation
carrying voting rights under all circumstances or by reason of an event that has
occurred and is continuing or by reason of a condition that has been fulfilled
and includes: (i) a security that is convertible into such a share at the time
that a calculation of the percentage of shares owned and controlled by Canadians
is made; and (ii) an option or right to acquire the share or security referred
to in clause (i) that is exercisable at the time that the calculation referred
to in that clause is made.
Also, regulations made under the Telecommunications Act and the
Radiocommunication Act provide that, in order for a company which holds shares
in a carrier to be considered Canadian, not less than 66 2/3% of the issued and
outstanding voting shares of that company must be owned by Canadians and the
company must not otherwise be controlled in fact by non-Canadians. This means
that not less than 66 2/3% of the issued and outstanding voting shares of GT
Group Telecom Inc. must be owned by Canadians and that GT Group Telecom Inc.
must not otherwise be controlled in fact by non-Canadians.
Our class A voting shares are "voting shares" for these purposes and more
than 66 2/3% of the class A voting shares are held by Canadians as at the date
of this prospectus. Our class B non-voting shares are not "voting shares" for
these purposes.
The term "control in fact" is not defined in the relevant legislation and
raises various complex questions of interpretation. A number of factors have
been considered relevant to the determination of
66
<PAGE> 71
whether a regulated entity is not controlled in fact by non-Canadians, including
the election and composition of the board of directors, the industry specific
experience of the non-Canadian shareholders, the ability to appoint senior
management, the power to determine policies, operations and strategic
decision-making and the percentage of equity interest (whether voting or
non-voting) held by non-Canadians.
We have designed our capital structure to ensure compliance with the
Canadian ownership requirements. Our articles of incorporation provide that
certain non-voting shares may not be converted into voting shares if the
exercise of such conversion rights would cause us to be in violation of any
Canadian law applicable to the ownership interests in, or the exercise of
control over, a corporation that is providing telecommunication services in
Canada. In addition, the regulations under the Telecommunications Act (Canada)
provide us with the time and ability to rectify ineligibility resulting from
insufficient Canadian ownership of voting shares. In particular, we may, to the
extent applicable:
(i) refuse to accept any subscription for any voting shares;
(ii) refuse to allow any transfer of voting shares to be recorded;
(iii) suspend the rights of a holder of voting shares to vote at a meeting
of shareholders; and
(iv) sell, repurchase or redeem any voting shares.
Although we believe that we have at all times been in compliance with the
relevant legislation, there can be no assurance that a future CRTC or Industry
Canada determination or events beyond our control will not result in us ceasing
to comply with the relevant legislation. Should this occur, the ability of our
wholly owned subsidiary to operate as a Canadian carrier under the
Telecommunications Act (Canada) or to renew or secure licences under the
Radiocommunication Act (Canada) could be jeopardized and our business could be
materially adversely affected. If we become subject to proceedings before the
CRTC or Industry Canada with respect to compliance with the relevant
legislation, we could be materially adversely affected, even if we were
ultimately successful in such a proceeding.
67
<PAGE> 72
RELATED PARTY TRANSACTIONS
AGREEMENTS WITH OUR SHAREHOLDERS
Affiliates of Goldman Sachs and CIBC Capital Partners participated in our
series A first preference share offering in May 1999 and received options to
purchase additional series A first preference shares at a price of $1.875 per
share. See "Description of Share Capital". These options were exercised in full
in August 1999. Robert Gheewalla, one of our directors, is a vice president in
the Principal Investment Area at Goldman Sachs. George Estey, another of our
directors, is Chairman of Goldman Sachs Canada. Kenneth Kilgour, another of our
directors, is managing director and head of CIBC Capital Partners. In addition,
three of our directors are executive officers of Shaw Communications. These
directors are Michael Abram, Michael D'Avella and Jim Shaw. In connection with
our series A first preference share offering, on May 7, 1999, we entered into a
shareholders' agreement with our shareholders, including the holders of all of
our then outstanding series A first preference shares. On February 16, 2000, in
connection with our acquisition of the business of Shaw FiberLink, we amended
and restated this agreement to include Shaw Communications as a party. For a
detailed description of this agreement, see "Description of Share Capital"
beginning on page 90. Eleven of our current directors and executive officers are
signatories to the agreement.
68
<PAGE> 73
PRINCIPAL SHAREHOLDERS
We are not directly or indirectly owned or controlled by another
corporation or any foreign government. Certain institutional investors that held
our series A first preference shares, which converted into our class A voting
and class B non-voting shares upon our initial public offering, continue to hold
rights specified under a shareholders' agreement with us. See "Related Party
Transactions" on page 68 and "Description of Share Capital" beginning on page 90
for a description of these rights. In addition, upon completion of our
acquisition of the business of Shaw FiberLink, Shaw Communications was issued
series B first preference shares (which have now converted into class A voting
shares), became a party to the shareholders' agreement and has similar voting
and other rights. As of June 30, 2000 our directors and officers as a group
owned 2,344,061 of our class A voting shares which represented 2.95% of our then
outstanding class A voting shares. As of June 30, 2000, the following persons
beneficially owned 5% or more of our then issued and outstanding class A voting
shares:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME CLASS A SHARES CLASS A SHARES
---- -------------- --------------
<S> <C> <C>
Shaw Communications......................................... 29,096,097 36.60
Goldman Sachs(1)............................................ 18,999,999 23.90
Canadian Imperial Bank of Commerce.......................... 7,500,000 9.43
</TABLE>
---------------
(1) As of June 30, 2000, Goldman Sachs also owns 11,000,002 class B non-voting
shares, representing approximately 29.17% of the class B non-voting shares
then issued and outstanding.
69
<PAGE> 74
SELLING SHAREHOLDERS
All warrants offered hereby by the selling shareholders were originally
issued by Group Telecom as part of a unit which also consisted of our 13 1/4%
senior discount notes. Any class B non-voting shares offered hereby by the
selling shareholders will be issued to the selling shareholders upon the
exercise by the selling shareholders of the warrants held by such selling
shareholder. The following table sets forth estimated information regarding the
beneficial ownerships of the class B non-voting shares by the selling
shareholders and assumes that all warrants currently owned by the selling
shareholders have been exercised by the selling shareholders as of the date
hereof.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
AEGON USA Pension Plan 2,000 9,821 * 2,000 9,821 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
AUSA Life Insurance Company 6,000 29,463 * 6,000 29,463 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
Life Investors Insurance 4,250 20,870 * 4,250 20,870 0 *
Company of America
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
Veterans Life Insurance Company 2,000 9,821 * 2,000 9,821 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
AIM High Yield Fund 28,900 141,916 * 28,900 141,916 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM High Yield Fund II 3,000 32,731 * 3,000 14,731 18,000 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM Canadian Bond Fund 100 491 * 100 491 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM V.I. High Yield Fund 500 2,455 * 500 2,455 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
Shell Canada Pension Trust 2,000 9,821 * 2,000 9,821 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
</TABLE>
70
<PAGE> 75
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Altamira Balanced Fund 400 1,964 * 400 1,964 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Altamira Growth and Income Fund 500 2,455 * 500 2,455 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Altamira High Yield Bond Fund 1,200 5,892 * 1,200 5,892 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Ares Leveraged Investment 9,800 48,123 * 9,800 48,123 0 *
Fund II, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
Ares Leveraged Investment 4,450 21,852 * 4,450 21,852 0 *
Fund, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
AXP Variable Portfolio -- 750 3,682 * 750 3,682 0 *
Managed Fund
c/o American Express Financial
Corporation
52 AXP Financial Center
Minneapolis, MN 55474
AXP Variable Portfolio -- Extra 4,110 20,182 * 4,110 20,182 0 *
Income Fund
c/o American Express Financial
Corporation
52 AXP Financial Center
Minneapolis, MN 55474
High Yield Portfolio 20,915 102,705 * 20,915 102,705 0 *
c/o American Express Financial
Corporation
52 AXP Financial Center
Minneapolis, MN 55474
Total Return Portfolio 275 1,350 * 275 1,350 0 *
c/o American Express Financial
Corporation
52 AXP Financial Center
Minneapolis, MN 55474
</TABLE>
71
<PAGE> 76
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
American Express Retirement Plan 300 1,473 * 300 1,473 0 *
-- High Yield Fixed Income
c/o American Express Asset
Management Group
50189 AXP Financial Center
Minneapolis, MN 55474
BMO CBO Portfolio G7117 4,750 23,325 * 4,750 23,325 0 *
c/o Bank of Montreal
First Canadian Place, 10th Floor
Toronto, Ontario
Canada M5X 1A1
Capital Guardian U.S. 8,500 41,740 * 8,500 41,740 0 *
Fixed-Income
Master Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital Guardian U.S. High-Yield 7,000 34,374 * 7,000 34,374 0 *
Fixed Income Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital Guardian Global 975 4,787 * 975 4,787 0 *
High-Yield
Fixed Income Fund
Semi-Monthly Valued
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital International Global 500 2,455 * 500 2,455 0 *
High Yield Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
American High-Income Trust 22,525 110,611 * 22,525 110,611 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
The Bond Fund of America, Inc. 9,500 46,650 * 9,500 46,650 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
The Income Fund of America, Inc. 24,750 121,537 * 24,750 121,537 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
Capital World Bond Fund, Inc. 1,000 4,910 * 1,000 4,910 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
</TABLE>
72
<PAGE> 77
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
American Variable Insurance 2,250 11,048 * 2,250 11,048 0 *
Series -- Asset Allocation Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
American Variable Insurance 2,000 9,821 * 2,000 9,821 0 *
Series -- Bond Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
American Variable Insurance 6,500 31,918 * 6,500 31,918 0 *
Series -- High Yield Bond Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
CIBC World Markets Corp. 8,255 40,537 * 8,255 40,537 0 *
425 Lexington Avenue
New York, NY 10017
Signature High Income Fund 4,050 19,887 * 4,050 19,887 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Signature Corporate Bond Fund 700 3,437 * 700 3,437 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Insight Canadian High Yield 100 491 * 100 491 0 *
Income Pool
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Keystone High Income Fund 500 2,455 * 500 2,455 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
DLJ High Yield Bond Fund 6,750 33,146 * 6,750 33,146 0 *
c/o Custodial Trust Co.
101 Carnegie Center
Princeton, NJ 08540
Triax Diversified High Yield 10,650 52,297 * 10,650 52,297 0 *
Trust
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
</TABLE>
73
<PAGE> 78
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
West Fraser Timber 500 2,455 * 500 2,455 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Kingsway Reinsurance (Bermuda) 650 3,191 * 650 3,191 0 *
Limited
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
DFC Active Fixed Income Fund 2,550 12,522 * 2,550 12,522 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Navigator Canadian Income Fund 650 3,191 * 650 3,191 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Falcon Bridge Bond Fund #2 1,750 8,593 * 1,750 8,593 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Deans Knight Bond Fund 9,000 44,195 * 9,000 44,195 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street
Suite 730
Vancouver, B.C., Canada
V6C 2W2
Colonial First State North 1,900 9,330 * 1,900 9,330 0 *
American High Yield Fund
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
</TABLE>
74
<PAGE> 79
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eaton Vance High Income 13,900 68,257 * 13,900 68,257 0 *
Portfolio
c/o Eaton Vance Management
High Yield Group
255 State Street
Boston, MA 02109
Eaton Vance Income Fund of 5,650 27,744 * 5,650 27,744 0 *
Boston
c/o Eaton Vance Management
High Yield Group
255 State Street
Boston, MA 02109
First Investors Fund for Income, 3,500 17,187 * 3,500 17,187 0 *
Inc.
95 Wall Street, 22nd Floor
New York, NY 10005
First Investors Special Bond 250 1,227 * 250 1,227 0 *
Fund, Inc.
95 Wall Street, 22nd Floor
New York, NY 10005
Guardian Life Insurance Co/ 8,000 39,284 * 8,000 39,284 0 *
High Yield Securities
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
Guardian High Yield Bond Fund 2,100 10,312 * 2,100 10,312 0 *
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
Guardian VC High Yield Bond Fund 900 4,419 * 900 4,419 0 *
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
ING Funds Trust -- ING High 500 2,455 * 500 2,455 0 *
Yield Bond Fund
c/o ING Funds Trust
1475 Dunwoody Drive
West Chester, PA 19380
INVESCO Variable Investment Fund 400 1,964 * 400 1,964 0 *
Inc. -- High Yield Fund
7800 E. Union Avenue, Suite 501
Denver, CO 80237
INVESCO Bond Funds, Inc. -- 5,600 27,499 * 5,600 27,499 0 *
High Yield Fund
7800 E. Union Avenue, Suite 501
Denver, CO 80237
John Hancock High Income Account 200 982 * 200 982 0 *
101 Huntington Avenue
Boston, MA 02199
</TABLE>
75
<PAGE> 80
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
SG/Russell Funds PLC 65 319 * 65 319 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
City of New York Employees 2,020 9,919 * 2,020 9,919 0 *
Ret. Sys Fix Account
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Souther Company Strategic Yield 640 3,142 * 640 3,142 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
BP Amoco Global Strategic Yield 185 908 * 185 908 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
HSBC Republic Investments 5 24 * 5 24 0 *
Limited
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
AGF High Yield Fund 215 1,055 * 215 1,055 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Felra & Ufcw Pension Fund 1,295 6,359 * 1,295 6,359 0 *
High Yield
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Gen Retirement Sys for City of 135 662 * 135 662 0 *
Detroit
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Strategic Yield Portfolio 775 3,805 * 775 3,805 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Global Strategic Yield 290 1,424 * 290 1,424 0 *
Fund
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Triax Strategic Yield Management 65 319 * 65 319 0 *
World SY Fund
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard High Yield Portfolio 1,160 5,696 * 1,160 5,696 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
</TABLE>
76
<PAGE> 81
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lazard Asset Management 350 1,718 * 350 1,718 0 *
Investment Trust
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Frank Russell Investment Mgt 35 171 * 35 171 0 *
Fixed Income
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Frank Russell Investment Mgt 40 196 * 40 196 0 *
Multi Strategy
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Freres Global Strategic 225 1,104 * 225 1,104 0 *
Yield
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lutheran Brotherhood High Yield 7,500 36,829 * 7,500 36,829 0 *
Fund RF06
c/o Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, MN 55415
LB Series Fund, Inc. High Yield 13,500 66,293 * 13,500 66,293 0 *
Portfolio RF03
c/o Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, MN 55415
Atlas Canadian High Yield Bond 3,000 14,731 * 3,000 14,731 0 *
Fund
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Merrill Lynch Variable Series 7,750 38,057 * 7,750 38,057 0 *
Funds, Inc. High Current Income
Fund
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Corporate High Yield Fund III, 7,000 34,374 * 7,000 34,374 0 *
Inc.
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Corporate High Yield Fund II, 1,500 7,365 * 15,000 7,365 0 *
Inc.
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
</TABLE>
77
<PAGE> 82
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate High Yield Fund, Inc. 4,500 22,097 * 4,500 22,097 0 *
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
MFS Series III: MFS High Yield 750 3,682 * 750 3,682 0 *
Opportunities Fund
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS/Sun Life High Yield Series 2,900 14,240 * 2,900 14,240 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Yield Variable Account 1,050 5,156 * 1,050 5,156 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Fund: VS High Yield Bond 100 491 * 100 491 0 *
Fund
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Income Fund 11,625 57,085 * 11,625 57,085 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Yield Fund 25 122 * 25 122 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Meridian VS High Yield Fund 2,525 12,399 * 2,525 12,399 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Income Series 550 2,700 * 550 2,700 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Institutional Advisors, 475 2,332 * 475 2,332 0 *
Inc.(2)
500 Boylston Street
Boston, MA 02116
MAS High Yield Portfolio 12,000 58,927 * 12,000 58,927 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
University of Pennsylvania High 2,550 12,522 * 2,550 12,522 0 *
Yield
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
78
<PAGE> 83
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-Asset Class Portfolio 140 687 * 140 687 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Offshore Leveraged Fixed Income 2,500 12,276 * 2,500 12,276 0 *
Fund Ltd.
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
High Yield Portfolio 1,850 9,084 * 1,850 9,084 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Morgan Stanley SICAV High Yield 4,290 21,066 * 4,290 21,066 0 *
Bond Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Morgan Stanley Global 240 1,178 * 240 1,178 0 *
Opportunity Bond Fund, Inc.
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MS High Yield Fund 2,145 10,533 * 2,145 10,533 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Van Kampen Worldwide High Income 950 4,665 * 950 4,665 0 *
Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
SunAmerica Series Trust 700 3,437 * 700 3,437 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Van Kampen High Yield & Total 375 1,841 * 375 1,841 0 *
Return Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
79
<PAGE> 84
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
MSUF -- High Yield Portfolio 650 3,191 * 650 3,191 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Manufacturers Life Insurance 2,640 12,963 * 2,640 12,963 0 *
Company of New York
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Forthought Life Insurance 1,800 8,839 * 1,800 8,839 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Risk Capital Reinsurance 400 1,964 * 400 1,964 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MS Monthly Income Fund (Wako) 3,400 16,696 * 3,400 16,696 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
GE Investment Management 375 1,841 * 375 1,841 0 *
Incorporation
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
ITM Worldwide High Income Fund 575 2,823 * 575 2,823 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MSDW SICAV European High Yield 5,000 24,553 * 5,000 24,553 0 *
Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
The University of Chicago 475 2,332 * 475 2,332 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
LGT Capital Invest Ltd of Grand 560 2,749 * 560 2,749 0 *
Cayman
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
80
<PAGE> 85
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gemini High Yield 500 2,455 * 500 2,455 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
SBLI High Yield 535 2,627 * 535 2,627 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
The Northwestern Mutual Life 2,100 10,312 * 2,100 10,312 0 *
Insurance Company(3)
720 East Wisconsin Avenue
Milwaukee, WI 53202
Northwestern Mutual Series Fund, 1,650 8,102 * 1,650 8,102 0 *
Inc.(4)
720 East Wisconsin Avenue
Milwaukee, WI 53202
Mason Street Funds, Inc.(5) 500 2,455 * 500 2,455 0 *
720 East Wisconsin Avenue
Milwaukee, WI 53202
OZ Master Fund, Ltd. 48,500 238,164 * 48,500 238,164 0 *
9 West 57th Street
New York, NY 10019
Pacific Life Insurance Company 2,750 13,504 * 2,750 13,504 0 *
700 Newport Center Drive
2nd Floor -- Securities
Operations
Newport Beach, CA 92660
Phoenix Goodwin High Yield Fund 5,450 26,762 * 5,450 26,762 0 *
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
Phoenix Goodwin Multi-Sector 4,000 19,642 * 4,000 19,642 0 *
Fixed Income Fund
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
Phoenix Edge Multi Sector Fixed 3,000 14,731 * 3,000 14,731 0 *
Income Fund
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
The Prudential Series Fund, 6,725 33,023 * 6,725 33,023 0 *
Inc., High Yield Bond Portfolio
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
Prudential High Yield Fund, Inc. 13,825 68,489 * 13,825 67,889 600 *
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
</TABLE>
81
<PAGE> 86
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prudential High Yield Total 1,170 8,545 * 1,170 5,745 2,800 *
Return Fund, Inc.
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
The Prudential Insurance Company 6,520 32,017 * 6,520 32,017 0 *
of America
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
The Prudential Life Insurance 260 1,276 * 260 1,276 0 *
Company of Arizona
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
PW Managed High Yield Plus Fund 7,750 38,057 * 7,750 38,057 0 *
c/o Mitchell Hutchins
51 West 52nd Street, 21st Floor
New York, NY 10019
Smith Barney Diversified 2,750 13,504 * 2,750 13,504 0 *
Strategic Income Fund
388 Greenwich Street, 23rd Floor
New York, NY 10013
Greenwich St. Series -- 85 417 * 85 417 0 *
Diversified Strategic Income
Portfolio
388 Greenwich Street, 23rd Floor
New York, NY 10013
Global Horizons: Diversified 50 245 * 50 245 0 *
Strategic Income
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney High Income Fund 5,215 25,608 * 5,215 25,608 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
High Income Opportunity Fund, 2,490 12,227 * 2,490 12,227 0 *
Inc.
388 Greenwich Street, 23rd Floor
New York, NY 10013
Managed High Income Fund 1,500 7,365 * 1,500 7,365 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney Balanced Fund 740 3,633 * 740 3,633 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
SB/Travelers High Income 695 3,412 * 695 3,412 0 *
Portfolio
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney USA High Yield Fund 230 1,129 * 230 1,129 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
Zenix Income Fund 495 2,430 * 495 2,430 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
</TABLE>
82
<PAGE> 87
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Spinnaker Offshore Ltd. 2,000 9,821 * 2,000 9,821 0 *
c/o ING Ghent Asset Management
LLC
230 Park Avenue
New York, NY 10169
The Surdna Foundation 612 3,005 * 612 3,005 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
UMASS Memorial Health Care, Inc. 175 859 * 175 859 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
New Century Energies Inc. 1,050 5,156 * 1,050 5,156 0 *
Master Retirement Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
The Havican Insurance Co. 325 1,595 * 325 1,595 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Father Flanagans Boys Home 475 2,332 * 475 2,332 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Ford Motor Co. 7,625 37,443 * 7,625 37,443 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Retirement Plan for the 2,050 10,066 * 2,050 10,066 0 *
Employees of Texas Utilities Co.
System
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Bell Atlantic Master Trust 10,300 50,579 * 10,300 50,579 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Standish World High Yield 575 2,823 * 575 2,823 0 *
Portfolio
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Multi-Style, Multi-Manager Funds 1,698 8,338 * 1,698 8,338 0 *
PLC-High Yield Fund
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
MAFCO Holdings Master Trust 295 1,448 * 295 1,448 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
</TABLE>
83
<PAGE> 88
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pneumo Abex Corp Retirement 165 810 * 165 810 0 *
Income Master Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
PCFG Long Term Investment Co. 840 4,124 * 840 4,124 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Worcester Memorial Hospital, 175 859 * 175 859 0 *
Inc. Retirement Plan
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Holy Cross Health System Corp. 975 4,787 * 975 4,787 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Holy Cross Employees Retirement 625 3,069 * 625 3,069 0 *
Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Fieldcrest Cannon Inc. 400 1,964 * 400 1,964 0 *
Retirement Plan for Salaried
Employees
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Fieldcrest Cannon Inc. 150 736 * 150 736 0 *
Retirement Plan for Hourly
Employees
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
William Penn Foundation 1,075 5,278 * 1,075 5,278 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Northeastern University 925 4,542 * 925 4,542 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
The Board of Pensions of the 2,825 13,872 * 2,825 13,872 0 *
Presbyterian Church (USA)
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Wellesley College Endowment 600 2,946 * 600 2,946 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
</TABLE>
84
<PAGE> 89
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank Russell Insurance Funds -- 365 1,792 * 365 1,792 0 *
Core Bonds
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Emerson Electric Co. Retirement 1,100 5,402 * 1,100 5,402 0 *
Master Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Frank Russell -- Fixed III 1,200 5,892 * 1,200 5,892 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Frank Russell -- Multi Strategy 1,475 7,243 * 1,475 7,243 0 *
Bond
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
AT & T Long Term Investment 3,875 19,028 * 3,875 19,028 0 *
Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
GM Employers Domestic Group 2,000 9,821 * 2,000 9,821 0 *
Pension Trust
c/o State Street Bank and Trust
1776 Heritage Drive
N. Quincy, MA 02171
Stein Roe High Yield Fund 1,750 8,593 * 1,750 8,593 0 *
c/o Stein, Roe & Farnham
1 South Wacker Drive
Chicago, IL 60606
The Sumitomo Trust & Banking Co. 575 2,823 * 575 2,823 0 *
Ltd.
c/o Sumitomo Trust & Banking Co.
(USA)
527 Madison Avenue
New York, NY 10022
Sun America Inc. 38,000 186,602 * 38,000 186,602 0 *
1 Sun America Center
Los Angeles, CA 90025
Sun America High Income Fund 1,500 7,366 * 1,500 7,366 0 *
733 3rd Avenue
New York, NY 10017
Sun America Series Trust 2,250 11,048 * 2,250 11,048 0 *
High Yield Portfolio
733 3rd Avenue
New York, NY 10017
TCW Group, Inc. 81,749 401,436 * 81,749 401,436 0 *
865 South Figueroa Street,
21st Floor
Los Angeles, CA 90017
</TABLE>
85
<PAGE> 90
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
TD Securities (USA), Inc. 19,325 94,897 * 19,325 94,897 0 *
31 West 52nd Street
New York, NY 10019-6101
USAA High Yield Opportunities 2,750 324,504 * 2,750 13,504 311,000 *
Fund
c/o State Street Corporation/
USAA Fund Group
1776 Heritage Drive
North Quincy, MA 02171
Van Kampen High Income Trust 1,260 6,187 * 1,260 6,187 0 *
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen Trust, on behalf 5,270 25,878 * 5,270 25,878 0 *
of its series Van Kampen
High Yield Fund
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen Income Corporate Bond 12,010 58,976 * 12,010 58,976 0 *
Fund
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen High Income Trust II 960 4,714 * 960 4,714 0 *
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Waddell & Reed Advisors Fund, 6,250 30,691 * 6,250 30,691 0 *
Inc. -- High Income Fund
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
Waddell & Reed Advisors Fund, 2,250 11,048 * 2,250 11,048 0 *
Inc. -- High Income Fund II
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
Target/United Funds, Inc. -- 1,000 4,910 * 1,000 4,910 0 *
High Income Portfolio
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
Agway Employees Retirement Plan 750 3,682 * 750 3,682 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
86
<PAGE> 91
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Housing Authority Risk Retention 85 417 * 85 417 0 *
Group
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Illinois Municipal Retirement 500 2,455 * 500 2,455 0 *
Fund
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
High Yield Bond Portfolio, a 180 883 * 180 883 0 *
series of John Hancock Variable
Series Trust
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Lexmark International Group, 260 1,276 * 260 1,276 0 *
Inc.
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Teachers' Retirement System of 750 3,682 * 750 3,682 0 *
Louisiana
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
North American Security Life 150 736 * 150 736 0 *
Series Trust Investment
Quality Bond
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
The John & Mary R. Markle 100 491 * 100 491 0 *
Foundation
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Oregon Public Retirement Fund 1,000 4,910 * 1,000 4,910 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Income Portfolio 15 73 * 15 73 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
87
<PAGE> 92
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-Managed Income/ 20 98 * 20 98 0 *
Equity Portfolio
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Growth Portfolio 20 98 * 20 98 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Moderate 25 122 * 25 122 0 *
Growth Portfolio
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
State Boston High Yield Plus 500 2,455 * 500 2,455 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
WTC-CIF II Core Bond Plus/ 25 122 * 25 122 0 *
High Yield Plus
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
SBL Fund Series K 40 196 * 40 196 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Anchor Series High Yield Fund 100 491 * 100 491 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Anchor Series Aggressive 100 491 * 100 491 0 *
Multi-Asset
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
The High Yield Plus Fund 850 4,174 * 850 4,174 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
88
<PAGE> 93
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ----------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OUTSTANDING OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
New England Zenith Balanced 75 368 * 75 368 0 *
Series
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Tate & Lyle Reinsurance Limited 100 491 * 100 491 0 *
High Yield
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
---------------
* Less than 1.0%
(1) Based on shares outstanding as of August 15, 2000. All shares issuable upon
exercise of the currently outstanding warrants are deemed outstanding for
the purpose of calculating the percentage ownership of the person holding
such Warrants but are not deemed outstanding for calculating the percentage
ownership of any other person.
(2) Of which, 200 warrants are held for its Endeavor High Yield Fund, 175
warrants are held for its Members High Income Fund and 100 warrants are held
for its Jefferson Pilot Variable High Yield Fund.
(3) These warrants are held for its Group Annuity Separate Account.
(4) These warrants are held for its High Yield Bond Portfolio.
(5) Of which, 100 warrants are held for its Asset Allocation Fund and 400
warrants are held for its High Yield Bond Fund.
89
<PAGE> 94
DESCRIPTION OF SHARE CAPITAL
Our authorized share capital consists of an unlimited number of class A
voting shares, class B non-voting shares, first preference shares issuable in
series and second preference shares issuable in series. Provisions as to the
modification, amendment or variation of the rights or provisions of these
classes of shares are contained in the share terms and in the Canada Business
Corporations Act, or the CBCA, and its regulations, our governing statute. On
September 23, 1998, our share capital was changed so that our then existing
common shares were renamed class A voting shares and our class B non-voting
shares were created. These shares were renamed to help us comply with Canadian
regulatory restrictions on non-Canadian ownership and control of Canadian
facilities-based telecommunications carriers. At a special meeting held on
February 18, 1997, our shareholders approved a two-for-one stock split for all
common shares then issued and outstanding.
CLASS A VOTING SHARES AND CLASS B NON-VOTING SHARES
Holders of class A voting shares are entitled to vote at all meetings of
our shareholders, other than meetings of other classes of shares where holders
of such shares are entitled to vote separately as a class. Holders of class B
non-voting shares are not entitled to vote on any matters except as specifically
required by law.
Upon liquidation or dissolution, the holders of class A voting shares and
class B non-voting shares are entitled to share the remaining property equally
pro rata, subject to the rights of the holders of our preference shares.
Class A voting shares and class B non-voting shares may be paid dividends
subject to the provisions of any other class of shares.
The holders of class B non-voting shares benefit from take-over bid
"coat-tail" provisions, entitling them to convert class B non-voting shares into
class A voting shares in certain circumstances in which an offer is made for the
purchase of class A voting shares.
A non-Canadian holder of class A voting shares may be restricted in its
ability to exercise voting rights attached to such shares as a result of
regulatory restrictions applicable to Canadian telecommunications carriers. All
class B non-voting shares will be converted into class A voting shares if all of
the restrictions on the ownership of our voting shares, and the control in fact,
or any of our affiliates by non-Canadians under applicable Canadian law are
eliminated and our non-Canadian ownership of and control is not otherwise
limited by law.
Except as described above, the class A voting shares and the class B
non-voting shares have the same rights, are equal in all respects and are
treated by us as if they were shares of one class only.
FIRST PREFERENCE SHARES
The first preference shares may be issued at any time or from time to time
in one or more series as may be determined by our board of directors. They are
authorized to fix before issue the number, consideration per share and
designation of such shares, and subject to the special rights and restrictions
attached to all first preference shares, the rights and restrictions attaching
to the first preference shares of each series including voting rights. The first
preference shares of each series rank equally with the first preference shares
of each other series with respect to the payment of dividends and the return of
capital on our liquidation, dissolution or winding up. The first preference
shares are entitled to preference over the second preference shares, the class A
voting shares and class B non-voting shares and any other shares ranking junior
to the first preference shares with respect to payments of dividends and the
return of capital. The rights and restrictions attaching to the first preference
shares as a class may not be amended without such approval as may then be
required by law, subject to a minimum requirement of approval by the affirmative
vote of at least two-thirds of the votes cast at a meeting of the holders of
first preference shares to be called and held for that purpose.
90
<PAGE> 95
SERIES A
On May 7, 1999, the series A first preference shares were created after
being approved by our directors. Upon completion of our initial public offering
in March 2000, all of the outstanding series A first preference shares converted
into either class A voting shares or class B non-voting shares, depending on
foreign ownership restrictions then in place, on a one-for-one basis.
SERIES B
Upon completion of our acquisition of the business of Shaw FiberLink, we
issued to Shaw Communications series B first preference shares which, at the
time, represented 27.1% of our equity. Upon completion of our initial public
offering in March 2000, all of the outstanding series B first preference shares
converted into class A voting shares.
SHAREHOLDERS AGREEMENT
On February 16, 2000, shareholders then holding approximately 88.0% of our
fully diluted equity, including all of the then outstanding series A first
preference shareholders and Shaw Communications, as the holder of all of the
then outstanding series B first preference shares, entered into a shareholders
agreement which provides that:
- our board will consist of 11 directors;
- each of Shaw Communications and Goldman Sachs will be entitled to
designate three directors and CIBC World Markets will be entitled to
designate one director; and
- each of Shaw Communications and Goldman Sachs will have a right to
consent to:
(1) specified major transactions by us, including acquisitions and
investments in excess of $300 million and mergers or business
combinations, for a period of 18 months from February 16, 2000. If
Shaw Communications or Goldman Sachs withholds its consent in
respect of a major transaction, the other party may force it to
either sell its shares to the other party or buy the other party's
shares; and
(2) our annual operating budget, for a period of 24 months from February
16, 2000.
REGISTRATION RIGHTS AGREEMENT
On February 16, 2000, the initial purchasers of our series A first
preference shares and Shaw Communications, as the holder of all of the then
outstanding series B first preference shares, entered into a registration rights
agreement with us. This agreement:
- provides certain of the shareholders with the ability to require us to
register their shares with the securities regulatory authority in the
jurisdiction in which we made our public offering after we have made a
public offering of our shares;
- provides the shareholders with the ability to have their shares included
with any registration statement to be filed by us with a securities
regulatory authority; and
- provides for the circumstances in which these rights may be exercised
and the restrictions on such rights, including the number of times such
requests may be made, our ability to refuse such rights, the number of
shares to be registered and the payment of expenses.
SECOND PREFERENCE SHARES
The second preference shares are identical in all respects to the first
preference shares except that they are subordinate in all respects to the first
preference shares and any other shares which may rank senior to the second
preference shares.
91
<PAGE> 96
RESTRICTIONS ON NON-CANADIAN OWNERSHIP AND CONTROL
Our articles of incorporation provide that we may, in connection with the
issue or transfer of ownership of voting shares in our capital, take any action
or refuse to take any action, as the case may be, to the extent necessary to
ensure that each of our subsidiaries is and continues to be eligible to operate
as a telecommunications common carrier under the Telecommunications Act.
We have designed our capital structure to accommodate compliance with the
Canadian ownership requirements. Our articles of incorporation provide that
certain non-voting shares may not be converted into voting shares if the
exercise of such conversion rights would cause us to be in violation of any
Canadian law applicable to the ownership interests in, or the exercise of
control over, a corporation that is providing telecommunication services in
Canada. In addition, the regulations under the Telecommunications Act provide us
with the time and ability to rectify ineligibility resulting from insufficient
Canadian ownership of voting shares, notwithstanding any provision of our
articles or by-laws. In particular, but without limitation, we may, to the
extent applicable:
- refuse to accept any subscription for any voting shares;
- refuse to allow any transfer of voting shares to be recorded in our
share register;
- suspend the rights of a holder of voting shares to vote at a meeting of
shareholders; and
- sell, repurchase or redeem any of our voting shares.
Although we believe that we have been at all times in compliance with the
relevant legislation, and that we will remain in compliance if this offering is
consummated, there can be no assurance that a future CRTC or Industry Canada
determination or events beyond our control will not result in us ceasing to
comply with the relevant legislation. Should this occur, our ability and the
ability of Shaw FiberLink to operate as Canadian carriers under the
Telecommunications Act or to renew or secure licenses under the
Radiocommunication Act could be jeopardized and our business could be materially
adversely affected. If we become subject to proceedings before or against the
CRTC or Industry Canada with respect to our compliance with the relevant
legislation, we could be materially adversely affected, even if we were
ultimately successful in such a proceeding.
92
<PAGE> 97
TAXATION
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, based on current law, is a general summary of the
material United States federal income tax considerations to you of the purchase,
ownership and disposition of the warrants and class B non-voting shares acquired
on the exercise of warrants as capital property (the "Warrant Shares"). The
discussion of the United States federal income tax consequences set forth below
is based upon the Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations, and judicial decisions and
administrative interpretations thereunder, all as currently in effect, and such
authorities may be repealed, revoked, or modified, possibly on a retroactive
basis, so as to result in federal income tax consequences different from those
discussed below. There can be no assurance that the Internal Revenue Service
will not challenge one or more of the tax consequences described herein, and the
Company has not obtained, nor does it intend to obtain, a ruling from the
Internal Revenue Service or an opinion of counsel with respect to the United
States federal income tax consequences of acquiring or holding warrants and
Warrant Shares. The discussion below pertains only to you if you are a U.S.
holder. As used herein, you are a U.S. holder if you are a beneficial owner of
warrants or Warrant Shares and you are:
- a citizen or resident of the United States,
- a corporation, partnership or other entity created in or under the laws
of the United States or any political subdivision thereof,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if (x) a court within the United States is able to exercise
primary supervision over the administration of the trust and (y) one or
more United States persons have the authority to control all substantial
decisions of the trust.
This discussion does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder in light of
the holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Internal Revenue Code). Also, this discussion does
not deal with special rules that may apply to you if you are a member of a
special class of holders subject to special rules, including
- a dealer in securities or currencies,
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
- a bank,
- a life insurance company,
- a tax-exempt organization,
- a person that actually or constructively owns 10% or more of our voting
stock,
- a person holding Warrant Shares as part of a hedging, conversion or
constructive sale transaction or straddle or
- a person whose "functional currency" is not the United States dollar.
The discussion below assumes that you hold (or would hold if you acquired)
the warrants and Warrant Shares as capital assets within the meaning of Section
1221 of the Internal Revenue Code. The discussion also does not discuss any
aspect of state, local or foreign law, nor federal estate and gift tax law.
93
<PAGE> 98
EACH HOLDER OR PROSPECTIVE HOLDER OF WARRANTS AND WARRANT SHARES IS
STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX
SITUATION INCLUDING THE TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
TAX TREATMENT OF THE WARRANTS REPRESENTING WARRANT SHARES
Because there is no exercise price for a warrant, a warrant should be
considered to be constructively exercised for United States federal income tax
purposes on the day on which the warrant is acquired and you should be
considered a holder of Warrant Shares subject to the warrant as of the date you
acquired the warrant. Consequently, the following discussion is applicable to
holders of Warrant Shares and warrants. You will not realize gain or loss on the
exercise of a warrant for class B non-voting shares.
PAYMENT OF DIVIDENDS. The gross amount of any dividends paid to you
(including amounts withheld to pay Canadian withholding taxes) will be treated
as dividend income to you to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax
principles. Such income will be includable in your gross income as ordinary
income on the day received by you. Such dividends will not be eligible for the
dividends received deduction allowed to corporations under the Internal Revenue
Code. Such dividends will be foreign source income and will be either "passive
income" or "financial services" income for United States foreign tax credit
purposes.
The amount of any dividend paid in Canadian dollars will equal the United
States dollar value of the Canadian dollars received calculated by reference to
the exchange rate in effect on the date the dividend is received by you
regardless of whether the Canadian dollars are converted into United States
dollars. If you do not convert the Canadian dollars into United States dollars
on the date of receipt, you will have a basis in the Canadian dollars equal to
its United States dollar value on the date of receipt. Any gain or loss realized
on a subsequent conversion or other disposition of the Canadian dollars will be
treated as United States source ordinary income or loss.
If you are a U.S. holder, the maximum rate of Canadian withholding tax on
dividends paid to you is 15%. You may be entitled to deduct or credit such tax,
subject to applicable limitations in the Internal Revenue Code. The rules
governing the foreign tax credit are complex. You are urged to consult your tax
advisors regarding the availability of the foreign tax credit under your
particular circumstances.
To the extent that the amount of any distribution paid to you exceeds our
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of capital, causing a
reduction in the adjusted basis of your Warrant Shares (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by you on a
subsequent disposition of the Warrant Shares), and the balance in excess of
adjusted basis will be taxed as capital gain recognized on a sale or exchange.
To the extent such distributions are treated as capital gain, such gain would be
United States source. Accordingly, you would not be able to use the foreign tax
credit arising from any Canadian withholding tax imposed on such distribution
unless such credit can be applied (subject to applicable limitations) against
United States tax due on other foreign source income in the appropriate category
for foreign tax credit purposes.
SALE, EXCHANGE OR REPURCHASE OF WARRANTS OR WARRANT SHARES. Generally, the
issue price of the warrants is determined by reference to the price paid for the
warrants. For the initial purchasers of our warrants in the February 2000 unit
offering, we allocated US$47.91 to the warrants comprising each unit, for tax
and accounting purposes.
You generally will recognize taxable gain or loss on the disposition of a
warrant or Warrant Share in an amount equal to the difference between the amount
realized for the warrant or the Warrant Share and your adjusted tax basis in the
warrant or Warrant Share. Such gain or loss will be capital
94
<PAGE> 99
gain or loss, and such gain or loss will be long-term capital gain or loss if
you held the Warrant Share for more than one year. Certain non-corporate U.S.
holders, including individuals, are eligible for reduced rates of taxation on
net long-term capital gains. The deductibility of capital losses is subject to
limitations. Such gain or loss, if any, will be United States source.
If we repurchase Warrant Shares, the repurchase generally will be treated
as a sale or exchange of stock subject to the rules discussed above. However,
under certain circumstances as provided by Section 302 of the Internal Revenue
Code, the repurchase may be treated fully or partially as a dividend taxable as
ordinary income to you. You should consult your own tax advisor concerning the
United States federal income tax consequences of the repurchase under your
particular circumstances.
PASSIVE FOREIGN INVESTMENT COMPANY RULES. In general, we will be a passive
foreign investment company (a "PFIC") with respect to you if for any taxable
year in which you held our warrants or Warrant Shares:
- 75% or more of our gross income consists of passive income, such as
dividends, interest, rents and royalties, or
- 50% or more of the average quarterly value of our assets consists of
assets that produce, or are held for the production of, passive income.
If a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income. We
believe that we will not satisfy either of the PFIC tests in the current or
subsequent taxable years. However, because the PFIC determination is made
annually on the basis of our income and assets, including goodwill, there can be
no assurance that we will not be a PFIC in the current or subsequent taxable
years.
If we were a PFIC in any taxable year and you held warrants and Warrant
Shares, you generally would be subject to special rules with respect to "excess
distributions" made by us on the Warrant Shares and with respect to gain from
the disposition of Warrant Shares. An "excess distribution" generally is defined
as the excess of the distributions with respect to the Warrant Shares in any
taxable year over 125% of the average annual distributions received by you from
us during the shorter of the three preceding years, or your holding period for
the class shares. Generally, you would be required to allocate any excess
distribution or gain from the disposition of the Warrant Shares ratably over
your holding period for the Warrant Shares. The portion of the excess
distribution or gain allocated to a prior taxable year, other than a year prior
to the first year in which we became a PFIC, effectively would be taxed at the
highest United States federal income tax rate on ordinary income in effect for
such taxable year, and you would be subject to an interest charge on the
resulting tax liability, determined as if the tax liability had been due with
respect to the particular taxable year. The portion, if any, of the excess
distribution or gain that is not allocated to prior taxable years would be
included in your gross income for the taxable year of the excess distribution or
disposition and taxed as ordinary income.
The foregoing rules with respect to excess distributions and dispositions
may be avoided if you are eligible for and timely make a valid "mark-to-market"
election. If you make a valid mark-to-market election, you will not be subject
to the PFIC rules described above. Instead, in calculating income for each
taxable year, you generally would be required, subject to certain limitations,
to take into account the difference, if any, between the fair market value and
the adjusted tax basis of the Warrant Shares as ordinary gain or loss at the end
of taxable year (but only to the extent of the net amount of previously included
income as a result of the mark-to-market election). Your basis in the Warrant
Shares will be adjusted to reflect any such income or loss amounts. The
mark-to-market election is made with respect to marketable stock in a PFIC on a
shareholder-by-shareholder basis and, once made, can only be revoked with the
consent of the Internal Revenue Service. Under applicable
95
<PAGE> 100
Treasury regulations, the term "marketable stock" includes stock of a PFIC that
is "regularly traded" on a qualified exchange or other market. For these
purposes, a class of stock is regularly traced on a qualified exchange or other
market for any calendar year during which such class of stock is traded (other
than in de minimis quantities) on at least 15 days during each calendar quarter.
It is expected that the shares will be treated as marketable stock for these
purposes, but no assurances can be given.
If you own Warrant Shares during any year that we are a PFIC, you must file
Internal Revenue Service Form 8621. If we are a PFIC, U.S. holders who acquire
shares from decedents could be denied the step-up of the income tax basis for
such shares which would otherwise have been available.
INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, information
reporting requirements will apply to certain payments made in respect of the
warrants or Warrant Shares (or in respect of the Warrant Shares received upon
exercise of the warrants) and the proceeds received on the disposition of
warrants or Warrant Shares paid within the United States (and in certain cases,
outside of the United States) to U.S. holders other than certain exempt
recipients (such as corporations), and a 31 percent backup withholding may apply
to such amounts if you are a non-corporate U.S. holder and you:
- fail to provide an accurate taxpayer identification number,
- are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your federal
income tax returns, or
- in certain circumstances, fail to comply with applicable certification
requirements.
Persons that are not United States persons may be required to establish
their exemption from information reporting and backup withholding by certifying
their status on Internal Revenue Service Form W-8 (or successor form).
If you sell your warrants or Warrant Shares to or through a United States
office of broker, the payment of the proceeds is subject to both United States
backup withholding and information reporting unless you certify that you are a
non-U.S. person, under penalties of perjury, or you otherwise establish an
exemption, provided that the broker does not have actual knowledge that you are
a U.S. person or that the conditions of any such exemption are not satisfied. If
you sell your warrants or Warrant Shares outside the United States through a
non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you
outside the United States, then United States backup withholding and information
reporting requirements generally will not apply to that payment. However, United
States information reporting, but not backup withholding, will apply to a
payment of sales proceeds, even if that payment is made outside the United
States, if you sell your warrants or Warrant Shares through a non-U.S. office of
a broker that:
- is a United States person;
- derives 50% or more of its gross income for a specified three-year
period from the conduct of a trade or business in the United States;
- is a "controlled foreign corporation" as to the United States; or
- with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in United
States Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interest in the partnership; or
- at any time during its tax year the foreign partnership is engaged in
a United States trade or business;
96
<PAGE> 101
unless the broker has documentary evidence in its records that you are a
non-United States person and does not have actual knowledge that you are a U.S.
person or you otherwise establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the United States Internal Revenue Service. The amount of any backup
withholding from a payment to you will be allowed as a credit against your
United States federal income tax liability.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to the acquisition, holding and disposition
of Warrants by a holder (a "U.S. Holder") who, for the purposes of the Income
Tax Act (Canada) (the "ITA") and the Canada-United States Income Tax
Convention(1980) (the "Convention"), as applicable, and at all relevant times,
(i) is a resident of the United States and not resident, nor deemed to be
resident, in Canada, (ii) holds Warrants and Warrant Shares as capital property,
(iii) does not use or hold (and is not deemed to use or hold) Warrants or
Warrant Shares in connection with a trade or business carried on (or deemed to
be carried on) in Canada and (iv) deals at arm's length with Group Telecom. For
the purpose of the ITA, related persons (as defined therein) are deemed not to
deal at arm's length, and it is a question of fact whether persons not related
to each other deal at arm's length. In general, Warrants and Warrant Shares will
be considered to be capital property to a U.S. Holder unless the U.S. Holder
holds the Warrants or Warrant Shares, as the case may be, in the course of
carrying on business or acquired the Warrants or Warrant Shares, as the case may
be, in a transaction or transactions considered to be an adventure or concern in
the nature of trade. Special rules, which are not discussed in this summary, may
apply to "financial institutions" (as defined in the ITA) and to non-resident
insurers carrying on an insurance business in Canada and elsewhere, and
accordingly, such persons should consult their own tax advisors.
This summary is based on the current provisions of the ITA and the
regulations thereunder and the Convention, specific proposals to amend the ITA
or the regulations thereunder announced by the Canadian Minister of Finance
prior to the date hereof (the "Tax Proposals") and the current published
administrative practices of the Canada Customs and Revenue Agency (the "CCRA").
This summary is not exhaustive of all possible Canadian federal income tax
consequences and, except for the Tax Proposals, does not otherwise take into
account or anticipate any changes in law or administrative practice nor does it
otherwise take into account income tax laws or considerations of any province or
territory of Canada, which may differ from the federal income tax consequences
described herein, or any jurisdiction other than Canada. This summary is of a
general nature only and is not intended to be, and should not be interpreted as,
legal or tax advice to any particular investor, and no representation with
respect to the tax consequence to any particular U.S. Holder is made.
All amounts relating to the acquisition, holding or disposition of Warrants
and Warrant Shares must be converted into Canadian dollars for the purposes of
the ITA.
EXERCISE OF WARRANTS
A U.S. Holder will not realize a gain or a loss on the exercise of a
Warrant for Warrant Shares.
DIVIDENDS
Under the ITA and the Convention, dividends paid or credited, or deemed to
be paid or credited (e.g., as described below), on the Warrant Shares to a U.S.
Holder who owns less than 10% of the voting shares of Group Telecom will be
subject to Canadian withholding tax at the rate of 15% of the gross amount of
such dividends or deemed dividends, provided that the U.S. Holder is the
beneficial owner of such dividends or deemed dividends.
97
<PAGE> 102
Under the Convention, dividends paid to certain religious, scientific,
charitable and similar tax exempt organizations and certain pension
organizations that are resident, and exempt from tax, in the United States and
who have complied with certain administrative procedures may be exempt from this
Canadian withholding tax.
DISPOSITION OF WARRANTS OR WARRANT SHARES
A U.S. Holder will not be subject to tax under the ITA in respect of any
capital gain realized on a disposition or deemed disposition of a Warrant or a
Warrant Share unless at the time of such disposition or deemed disposition such
Warrant or Warrant Share constitutes taxable Canadian property of the U.S.
Holder for purposes of the ITA and such U.S. Holder is not entitled to relief
under the Convention. The Warrants and Warrant Shares will generally not
constitute taxable Canadian property of a U.S. Holder at the time of disposition
of such Warrants or Warrant Shares provided that (i) the U.S. Holder does not
use or hold such Warrants or Warrant Shares, as the case may be, in connection
with carrying on business in Canada, (ii) the U.S. Holder, alone or together
with persons with whom it does not deal at arm's length, did not own (taking
into account any interest in or option in respect of such shares) 25% or more of
the issued shares of any class or series of the capital stock of Group Telecom
during the five-year period that ends at such time of disposition, and (iii)
furthermore, the Warrant Shares are listed on a prescribed stock exchange. In
any event, pursuant to the Convention, a U.S. Holder will not generally be
subject to Canadian income tax on any capital gain realized on the disposition
or deemed disposition of a Warrant or a Warrant Share (including a disposition
to Group Telecom) provided that the value of the Warrant or the Warrant Share,
as the case may be, at the time of the disposition is not derived principally
from real property situated in Canada (as defined in the Convention). To the
extent the Warrants or Warrant Shares disposed of constitute taxable Canadian
property, a U.S. Holder will be required to file a Canadian tax return for the
taxation year in which the disposition occurs even if the gain arising from such
a disposition is exempt from tax because of the Convention.
If Group Telecom purchases a Warrant Share from a U.S. Holder, other than
by a purchase in the open market in the manner in which shares would normally be
purchased by a member of the public in the open market, Group Telecom will be
deemed to have paid and the U.S. Holder will be deemed to have received a
dividend equal to the amount paid by Group Telecom in excess of the paid-up
capital of the Warrant Share for the purposes of the ITA at the time of the
purchase. The paid-up capital of the Warrant Share may be less than the U.S.
Holder's cost of the share. Such deemed dividend will be subject to the
withholding tax described under "Dividends" above. The amount by which the
purchase price of the Warrant Share exceeds the amount of the deemed dividend
will be treated as proceeds of disposition of the Warrant Share.
98
<PAGE> 103
PLAN OF DISTRIBUTION
We have been advised by the selling shareholders that the class B
non-voting shares or warrants may be sold from time to time to purchasers
directly by the selling shareholders. Alternatively, the selling shareholders
may from time to time offer the shares or warrants to or through underwriters,
broker/dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling shareholders
or the purchasers of such securities for whom they may act as agents. The
selling shareholders and any underwriters, broker/dealers or agents that
participate in the distribution of the shares or warrants may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
The shares or warrants may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. Such
prices will be determined by the selling stockholders or by agreement between
such selling stockholders and underwriters or dealers who receive fees or
commissions in connection therewith. The sale of the shares or warrants may be
effected in transactions (1) on any national securities exchange or quotation
service on which the shares may be listed or quoted at the time of the sale, (2)
in the over-the-counter markets, (3) in transactions otherwise than on such
exchange or in the over-the-market or (4) through the writing of options. Shares
also may be delivered in connection with the issuance of securities by issuers
other than Group Telecom that are exchangeable for (whether optional or
mandatory) or payable in, such shares or pursuant to which such shares may be
distributed. At the time a particular offering of the shares is made, a
prospectus supplement, if required, will be distributed which will set forth the
aggregate amount and type of the securities being offered and the terms of the
offering, including the name or names of any underwriter, broker/dealers or
agents, any discounts, commissions and other terms constituting compensation
from the selling shareholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/dealers. This prospectus also may be used
by transferees of the selling shareholders or by other persons acquiring
securities, including brokers who borrow the securities to settle short sales of
stock. In addition, the securities which qualify for sale under an applicable
exemption from registration under the Securities Act may be sold pursuant to
such exemption rather than this prospectus.
To comply with the securities laws of certain jurisdictions, if applicable,
the securities will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the securities may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
The selling shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the securities by the selling
shareholders. The foregoing may affect the marketability of such securities.
We have agreed to bear all expenses (other than any commissions or
discounts of underwriters, dealers or agents or brokers' fee and the fees and
expenses of their counsel) in connection with the registration of the securities
being offered by the selling shareholders hereby.
99
<PAGE> 104
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon by:
- Shearman & Sterling, our United States counsel, on matters of United
States and New York law; and
- Goodman Phillips & Vineberg, our Canadian counsel, on matters of
Canadian law.
EXPERTS
Our consolidated financial statements as of September 30, 1999, 1998 and
1997 included in this prospectus have been audited by PricewaterhouseCoopers
LLP, independent public accountants, as stated in their report appearing in this
prospectus and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. Shaw FiberLink's
financial statements as of August 31, 1999 and 1998 and for the three year
period ended August 31, 1999 included in this prospectus have been audited by
Ernst & Young LLP, independent public accountants, as stated in their report
appearing in this prospectus and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a Canadian corporation. Some of our directors, controlling persons
and officers, and the experts named in this prospectus, are residents of Canada,
and a substantial portion of their assets and all of our assets are located
outside the United States. As a result, it may be difficult for you to effect
service of process within the United States upon the directors, controlling
persons, officers and experts who are not residents of the United States or to
enforce against them judgements of courts of the United States based upon the
civil liability under the federal securities laws of the United States. We have
been advised by Goodman Phillips & Vineberg, our Canadian counsel, that there is
doubt as to the enforceability in Canada against us or against any of our
directors, controlling persons, officers or experts, who are not residents of
the United States, in original actions or in actions for enforcement of
judgements of United States courts, of liabilities based solely upon the federal
securities laws of the United States.
WHERE YOU CAN OBTAIN MORE INFORMATION ABOUT US
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and, file
periodic reports and other information with the Commission through its
Electronic Data Gathering, Analysis and Retrieval (or EDGAR) system. Our SEC
filings, including the registration statement, of which this prospectus is a
part, and the exhibits thereto, are available for inspection and copying at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W. Washington, D.C. 20549, and the Commission's regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part
of the registration statement may be obtained from these offices after payment
of fees prescribed by the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Commission also maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Because we are a foreign private
issuer, we, our directors and our officers are also exempt from the shortswing
profit recovery and disclosure regime of section 16 of the Exchange Act.
100
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants of GT Group
Telecom................................................... F-2
Interim Condensed Consolidated Financial Statements of GT
Group Telecom for the Nine Months Ended June 30, 2000
(Unaudited)............................................... F-3
Notes to Interim Condensed Consolidated Financial Statements
of GT Group Telecom for the Nine Months Ended June 30,
2000 (Unaudited).......................................... F-6
Consolidated Financial Statements of GT Group Telecom for
the Year Ended September 30, 1999......................... F-15
Notes to Consolidated Financial Statements of GT Group
Telecom for the Year Ended September 30, 1999............. F-18
Report of Independent Public Accountants of Shaw FiberLink
Ltd. -- FiberLink Division................................ F-43
Financial Statements of Shaw FiberLink Ltd. -- FiberLink
Division.................................................. F-44
Notes to Financial Statements of Shaw FiberLink Ltd. --
FiberLink Division........................................ F-47
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-54
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ F-57
</TABLE>
F-1
<PAGE> 106
AUDITORS' REPORT
To the Directors of
GT GROUP TELECOM INC.
We have audited the consolidated balance sheets of GT GROUP TELECOM INC. as
at September 30, 1999, 1998 and 1997 and the consolidated statements of
operations and deficit and cash flows for the years ended September 30, 1999,
1998 and 1997. These consolidated financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at September 30,
1999, 1998 and 1997 and the results of its operations and its cash flows for the
years ended September 30, 1999, 1998 and 1997 in accordance with Canadian
generally accepted accounting principles.
Toronto, Canada /s/ PRICEWATERHOUSECOOPERS LLP
November 12, 1999 Independent Public Accountants
(except as to note 10 which is
as at December 17, 1999 and note 20
which is at February 16, 2000)
F-2
<PAGE> 107
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -------------
$
(UNAUDITED) $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... 526,231 59,851
Accounts receivable
Trade..................................................... 32,799 1,192
Other..................................................... 7,786 2,592
Prepaid expenses............................................ 8,958 526
Inventory................................................... 201 545
--------- -------
575,975 64,706
PREPAYMENTS ON PROPERTY, PLANT AND EQUIPMENT................ 230,600 --
PROPERTY, PLANT AND EQUIPMENT............................... 778,926 73,817
LONG-TERM INVESTMENT........................................ 43,238 --
GOODWILL AND OTHER ASSETS................................... 199,710 1,291
--------- -------
1,828,449 139,814
--------- -------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................... 88,485 14,926
Unearned revenue............................................ 1,325 656
Current portion of long-term debt........................... 1,204 1,253
--------- -------
91,014 16,835
LONG-TERM UNEARNED REVENUE.................................. 1,080 1,494
LONG-TERM DEBT.............................................. 853,123 47,557
--------- -------
945,217 65,886
SHAREHOLDERS' EQUITY
SHARE CAPITAL AND OTHER EQUITY ITEMS (note 3)............... 971,468 87,010
DEFICIT..................................................... (88,236) (13,082)
--------- -------
883,232 73,928
--------- -------
1,828,449 139,814
========= =======
SUBSEQUENT EVENTS (note 7)
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) JAMES G. MATKIN (Signed) DANIEL R. MILLIARD
Director Director
</TABLE>
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-3
<PAGE> 108
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(UNAUDITED)
(thousands of Canadian dollars, except for per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2000 1999 2000 1999
-------- ------- -------- ------
$ $ $ $
<S> <C> <C> <C> <C>
REVENUE......................................... 25,558 558 41,084 1,432
COST OF SALES................................... 17,415 290 30,106 851
------- ------ -------- ------
8,143 268 10,978 581
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 30,984 2,179 62,058 5,432
------- ------ -------- ------
(22,841) (1,911) (51,080) (4,851)
AMORTIZATION.................................... 15,447 389 22,814 664
INTEREST AND FINANCING CHARGES, NET............. 14,488 (305) 27,866 (241)
------- ------ -------- ------
LOSS BEFORE INCOME TAXES........................ (52,776) (1,995) (101,760) (5,274)
RECOVERY OF FUTURE INCOME TAXES................. (26,995) -- (26,606) --
------- ------ -------- ------
LOSS FOR THE PERIOD............................. (25,781) (1,995) (75,154) (5,274)
DEFICIT -- BEGINNING OF PERIOD.................. (62,455) (6,394) (13,082) (3,115)
------- ------ -------- ------
DEFICIT -- END OF PERIOD........................ (88,236) (8,389) (88,236) (8,389)
======= ====== ======== ======
LOSS PER SHARE (note 4)......................... (0.22) (0.10) (1.24) (0.32)
======= ====== ======== ======
</TABLE>
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-4
<PAGE> 109
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
--------- ------
$ $
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period......................................... (75,154) (5,274)
Items not affecting cash
Amortization.............................................. 22,814 664
Non-cash interest expense................................. 41,676 --
Shares issued for interest on long-term debt.............. -- 171
Recovery of future income taxes........................... (26,606) --
--------- ------
(37,270) (4,439)
--------- ------
Changes in non-cash working capital items
Increase in accounts receivable........................... (36,537) (1,535)
Increase in prepaid expenses.............................. (8,227) (520)
Decrease in inventory..................................... 343 --
Increase in accounts payable and accrued liabilities...... 29,626 2,162
Increase in unearned revenue.............................. 257 2,238
--------- ------
(14,538) 2,345
--------- ------
Cash used in operating activities........................... (51,808) (2,094)
--------- ------
FINANCING ACTIVITIES
Issuance of shares.......................................... 396,036 42,718
Proceeds from long-term debt, net........................... 690,583 4,426
Proceeds from issuance of warrants.......................... 58,775 --
Issuance of loans to officers............................... (3,808) --
--------- ------
1,141,586 47,144
--------- ------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (92,528) (8,883)
Purchase of long-term investment............................ (43,238) --
Increase in other assets.................................... (56,922) (548)
Business acquisitions....................................... (430,710) --
--------- ------
(623,398) (9,431)
--------- ------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 466,380 35,619
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 59,851 2,476
--------- ------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. 526,231 38,095
========= ======
</TABLE>
Additional cash flow disclosures (note 5)
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-5
<PAGE> 110
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
1 OPERATIONS AND BASIS OF PRESENTATION
The company markets and sells telecommunications services and related
products over fiber optic infrastructure to small and medium-sized
businesses in Canada. The company also uses Digital Subscriber Lines (DSL)
and fixed wireless technology to extend the reach of its network. The
company provides data, internet applications and voice services and derives
revenue from network usage and access, equipment sales, co-location and
consulting services and certain fiber optic leases.
The company's principal operations effectively began in the last quarter of
fiscal 1999, when its Vancouver telecommunication networks and facilities
were put into commercial service to provide customers with integrated
services. In fiscal 1999, the company also completed various agreements
with respect to financing and started developing telecommunication networks
and facilities under a national expansion strategy.
The company is a national facilities based provider of high-speed data,
internet application and voice services comprising a single operating
segment. Substantially all of the company's assets are located in Canada
and revenue is derived from services provided in Canada.
These condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in Canada which,
in the case of the company, conform in all material respects with those in
the United States, except as outlined in note 8.
The information presented as at and for the interim periods ended June 30,
2000 and 1999 are unaudited. These unaudited interim financial statements
reflect all adjustments which are, in the opinion of management, necessary
to a fair statement of the results for the interim periods presented; all
such adjustments are of a normal recurring nature.
These condensed consolidated financial statements should be read in
conjunction with the company's consolidated financial statements for the
years ended September 30, 1999, 1998 and 1997. The results of operations
for the nine months ended June 30, 2000 are not necessarily indicative of
the results to be expected for the year ending September 30, 2000.
2 SIGNIFICANT TRANSACTIONS
(a) Pursuant to an offering circular and purchase agreement which closed
on February 1, 2000, the company issued 855,000 units, consisting of
US$855 million (issued at a price of 52.651%) of 13.25% Senior
Discount Notes due 2010 and 855,000 Warrants to Purchase 4,198,563
Class B non-voting shares. Gross proceeds amounted to US$450 million,
equivalent to approximately Cdn $651 million. Expenses related to the
offering amounted to approximately $20 million. Of the total proceeds
amounting to $651 million, $592 million was allocated to the Senior
Discount Notes and $59 million was allocated to the share purchase
warrants.
(b) On December 22, 1999, the company entered into an asset purchase and
subscription agreement with Shaw Communications Inc. ("Shaw
Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink"). This
transaction closed on February 16, 2000. Under the purchase agreement,
the company purchased from Shaw FiberLink all of the property and
assets of Shaw FiberLink used in connection with the high-speed data
and competitive access business. The assets purchased include
equipment, computer hardware, fixed
F-6
<PAGE> 111
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
assets, replacement parts, operational contracts, equipment contracts,
supply contracts, interconnect agreements, co-location agreements,
customer contracts, software licences, broadband wireless licences,
vehicles, intellectual property, permits, goodwill and certain other
fiber assets. The company and Shaw FiberLink also entered into an
indefeasible right to use agreement ("indefeasible right to use") which
grants the company an indefeasible right to use certain specifically
identified existing fibers in the fiber optic cable networks of Shaw
Communications for 60 years. In addition, the company will receive an
indefeasible right to use fibers to be built over the next three years
in mutually agreed regions. The company will also assume certain
obligations related to permits, operational contracts, customer
contracts, software licences and certain other obligations.
The purchase consideration of $760 million consisted of $360 million in
cash and 29,096,097 series B first preference shares of the company to
provide Shaw Communications with a 27.1% fully diluted interest in the
company at the date of the acquisition. The fair value of these shares
was determined to be $400 million. Acquisition costs amounted to $12
million.
Details of the assets and liabilities acquired at their fair value are
as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 329,000
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 223,000
Shaw FiberLink acquisition
Property, plant and equipment............................. 100,000
Licence rights............................................ 13,800
Non-competition agreement................................. 15,000
Goodwill.................................................. 119,400
Future income taxes....................................... (28,200)
-------
772,000
=======
</TABLE>
The prepayment of $223 million on property, plant and equipment
represents the prepayment of an indefeasible right to use certain fibers
to be built by Shaw Communications over the next three years.
Included in property, plant and equipment is an amount of $22 million
for an indefeasible right to use certain existing fibers located in New
Brunswick, Canada commencing in 2003.
Upon completion of the Initial Public Offering on March 15, 2000 (note
2(c)), the series B first preference shares issued to Shaw
Communications were automatically converted into Class A voting shares
of the company on a one-for-one basis.
(c) Pursuant to an Initial Public Offering which closed on March 15, 2000,
the company issued 18,000,000 Class B non-voting shares for aggregate
cash proceeds of US$232.9 million, net of US$19.1 million in
underwriting commissions and expenses of the offering. In addition,
the underwriters exercised their option to purchase an additional
2,700,000
F-7
<PAGE> 112
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
Class B non-voting shares for net proceeds of US$35.2 million to the
company. Aggregate net proceeds of the Initial Public Offering amounted
to $391.7 million expressed in Canadian dollars.
Upon completion of the Initial Public Offering, 42,500,002 series A
first preference shares were automatically converted into 31,500,000
Class A voting shares and 11,000,002 Class B non-voting shares on a
one-for-one basis.
(d) On March 27, 2000, the company entered into an asset purchase
agreement with Moffat Communications Limited ("Moffat
Communications"). This transaction closed on April 27, 2000. Under the
purchase agreement, the company purchased from Moffat Communications
all the property and assets used as a competitive access provider. The
assets purchased include equipment, operational contracts, customer
contracts, software licences, intellectual property, permits and
certain other assets. The company and Moffat Communications also
entered into an indefeasible right to use agreement ("indefeasible
right to use") which granted the company an indefeasible right to use
certain specifically identified existing fibers in the fiber optic
cable networks of Moffat Communications for 30 years. In addition, the
company will receive an infeasible right to use fibers to be built
over the next three years in mutually agreed upon regions. The company
also assumed certain liabilities related to permits, operational
contracts, customer contracts, software licences and certain other
obligations.
The purchase consideration consisted of $68 million in cash and the
rights to acquire 1,667,000 Class B non-voting shares of the company. At
April 27, 2000, the closing date of this transaction, these shares had
an aggregate value of approximately $32 million. At June 30, 2000, these
shares remain unissued. Acquisition costs are estimated to be $3
million.
Details of the assets and liabilities acquired at their fair value are
as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 88,359
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 7,600
Moffat Communications asset purchase
Property, plant and equipment............................. 7,397
-------
103,356
=======
</TABLE>
The prepayment of $7.6 million on property, plant and equipment
represents the prepayment of an indefeasible right to use certain fibers
to be built by Moffat Communications over the next three years.
(e) On May 24, 2000, the company completed a multiple element agreement
with 360networks Inc. Pursuant to this transaction, the company:
(i) purchased certain dark fibers to be constructed along Canadian
route paths for $137 million. Of this amount, $32 million was paid
in the quarter ended June 30, 2000
F-8
<PAGE> 113
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
which is included in property, plant and equipment. The balance
will be paid over the next 3 years; and
(ii) purchased an indefeasible right to use certain dark fibers to be
constructed along United States route paths for $140 million. In
addition, the company acquired fiber optic capacity along a
diverse route in Canada and the United States under a long-term
lease arrangement giving the company exclusive telecommunication
rights on certain specific wavelengths and acquired options to
purchase additional wavelengths on similar terms. Assets and
obligations under these arrangements, which will be accounted for
as capital leases over 20 years commencing in 2001, amount to
approximately $85 million.
On April 12, 2000, the company purchased a less than 1% equity interest
in 360networks Inc. for $43 million in cash. The market value of the
investment at June 30, 2000 is $60 million.
3 SHARE CAPITAL AND OTHER EQUITY ITEMS
SHARE CAPITAL
Authorized
Common shares
Unlimited number of convertible Class A voting and Class B
non-voting common shares without par value
Preferred
50,000,000 Series A, convertible first preference shares without
par value
100,000,000 Series B, convertible first preference shares without
par value
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$ $
<S> <C> <C>
Common shares issued
79,511,351 (September 30, 1999 -- 18,261,149)
Class A voting shares................................ 463,246 12,573
37,698,571 (September 30, 1999 -- 4,148,569)
Class B non-voting shares............................ 420,696 5,026
Preferred shares issued
Nil (September 30, 1999 -- 41,500,002) Series A, first
preference shares.................................... -- 67,281
------- ------
883,942 84,880
Shares to be issued (note 2(d))........................... 32,303 1,875
------- ------
916,245 86,755
Warrants (note 2(a))...................................... 58,776 --
Additional paid-in capital................................ 255 255
Loans to officers......................................... (3,808) --
------- ------
971,468 87,010
======= ======
</TABLE>
F-9
<PAGE> 114
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
4 LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common shares outstanding for the periods presented. The weighted average
number of common shares for the three months ended June 30, 2000 amounted
to 118,375,924; 1999 -- 19,375,508 (nine months ended June 30, 2000 --
60,395,353; 1999 -- 16,743,424) shares.
Fully diluted loss per share has not been disclosed as it would be
anti-dilutive.
5 ADDITIONAL CASH FLOW DISCLOSURES
NON-CASH TRANSACTIONS
Purchases of property, plant and equipment of $101 million for the nine
months ended June 30, 2000 (nine months ended June 30, 1999 -- $12 million)
and purchases of other assets of $9 million at June 30, 2000 (nine months
ended June 30, 1999 -- $nil) were financed through long-term debt, notes
payable and through accounts payable and accrued liabilities. Accordingly,
these transactions are not reflected in the statements of cash flows.
6 RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2000, the company earned $6 million
(1999 -- $nil) of revenues and incurred $1 million (1999 -- $nil) of
administrative expenses in respect of transitional processing fees on the
Shaw FiberLink operations from a minority shareholder. The company has also
engaged this related company to process certain cash disbursements on its
behalf. Included in accounts receivable is $12 million (1999 -- $nil)
receivable from this customer, $6 million of which relates to balances
acquired upon the company's acquisition of Shaw FiberLink. Included in
accounts payable and accrued liabilities is $2 million (1999 -- $nil)
payable as at June 30, 2000 to this related company.
7 SUBSEQUENT EVENT
On July 13, 2000, the company entered into an asset purchase agreement with
Cable Atlantic Inc. ("Cable Atlantic"). This transaction closed on July 21,
2000. Under the purchase agreement, the company purchased from Cable
Atlantic all the property and assets used in connection with the fiber
optic business telecom operations. The assets purchased include property,
plant and equipment. The company also entered into an indefeasible right to
use agreement in respect of specifically identified existing fibers in the
fiber optic cable networks of Cable Atlantic.
The purchase consideration consisted of $15 million in cash and the rights
to acquire 1,740,196 Class B non-voting shares of the company. The
aggregate fair value of the assets purchased is estimated to be $57
million. Acquisition costs are estimated to be $2 million.
F-10
<PAGE> 115
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
8 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
The company's condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") in Canada, which, in the case of the company conform in all
material respects with GAAP in the United States of America, except as
outlined below:
(A) NET LOSS AND SHAREHOLDERS' EQUITY
The following summary sets out the adjustments to the company's loss and
shareholders' equity, which would be made to conform to U.S. GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- ------- ------- ------
$ $ $ $
<S> <C> <C> <C> <C>
Loss for the period in accordance with
Canadian GAAP........................... (25,781) (1,995) (75,154) (5,274)
Impact of U.S. accounting principles
Amortization of purchase price
adjustment (c)....................... (230) -- (230) --
Deferred charges........................ -- (75) (15) (226)
Stock based compensation (d)............ (3,801) -- (7,610) --
Deferred foreign exchange (e)........... (5,993) -- 2,617 --
------- ------ ------- ------
Net loss in accordance with U.S. GAAP..... (35,805) (2,070) (89,392) (5,500)
Unrealized gains on securities net of
tax (f).............................. 12,100 -- 12,100 --
------- ------ ------- ------
Comprehensive loss in accordance with U.S.
GAAP.................................... (23,705) (2,070) (68,292) (5,500)
======= ====== ======= ======
Net loss per share in accordance with U.S.
GAAP.................................... (0.30) (0.11) (1.48) (0.33)
======= ====== ======= ======
</TABLE>
The reconciliation of shareholders' equity from Canadian to U.S. GAAP is
as follows:
<TABLE>
<CAPTION>
AS AT
-------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$
$ (AUDITED)
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP..... 883,232 73,928
Purchase price adjustment, net of amortization of $230
(c)..................................................... 17,424 --
Deferred charges.......................................... (417) (402)
Cumulative stock-based compensation expense (d)........... (7,925) (1,118)
Deferred stock based compensation expense................. (38,387) (287)
Net change in stock options............................... 46,312 1,405
Deferred foreign exchange (e)............................. 2,605 (12)
Other comprehensive income (f)............................ 12,100 --
------- ------
Shareholders' equity in accordance with U.S. GAAP......... 914,944 73,514
======= ======
</TABLE>
F-11
<PAGE> 116
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(B) CONDENSED CONSOLIDATED BALANCE SHEETS
The following table indicates the restated amounts for the items in the
consolidated balance sheets of the company that would be affected had
the financial statements been prepared in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
AS AT
-------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$
$ (AUDITED)
<S> <C> <C>
Property, plant and equipment............................. 782,315 73,817
Long-term investment...................................... 60,636 --
Deferred income taxes payable............................. 5,298 --
Goodwill and other assets................................. 208,573 877
Deferred stock-based compensation expense (c)............. (38,387) (287)
Share capital............................................. 989,588 85,480
Additional paid-in capital................................ 337 337
Stock options outstanding (c)............................. 46,312 723
Cumulative other comprehensive income..................... 12,100 --
Deficit................................................... (95,006) (14,614)
</TABLE>
(C) PURCHASE PRICE ADJUSTMENT
For U.S. GAAP, the company has recorded the purchase price of the assets
acquired from Moffat Communications (Note 2 (d)), based on the fair
value of consideration agreed to on March 27, 2000, when the company
entered into an asset purchase agreement. The purchase consideration
consisted of $68 million cash and the rights to acquire 1,667,000 Class
B non-voting shares of the company, which had an aggregate value of
approximately $50 million at March 27, 2000. For U.S. GAAP purposes,
details of assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 91,748
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 7,600
Moffat Communications acquisition
Property, plant and equipment............................. 7,397
Non-competition agreement................................. 2,360
Goodwill.................................................. 11,905
-------
121,010
=======
</TABLE>
For Canadian GAAP, the fair value of the shares to be issued as partial
consideration of the purchase price has been determined based on the
average stock price on April 27, 2000, the date the transaction closed.
F-12
<PAGE> 117
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(D) STOCK-BASED COMPENSATION
For U.S. GAAP, the company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". This method recognizes compensation cost as the amount by
which the fair value of the stock exceeds the exercise price at the date
of grant. The compensation cost is recognized over the vesting period.
For U.S. GAAP, the compensation cost not yet recognized is presented as
a deferred stock-based compensation charge, with a corresponding amount
included in stock options outstanding, both of which form part of
shareholders' equity. For Canadian GAAP, stock-based compensation
expense is not recorded in the accounts of the company.
Had the company determined compensation costs based on fair value at the
date of grant for its awards under a method prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" the company's loss and loss per share would be as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ -----------------
$ $
<S> <C> <C>
Loss in accordance with U.S. GAAP.................. (35,805) (89,392)
Additional compensation expense.................... (678) (1,148)
------- -------
Pro forma net loss................................. (36,483) (90,540)
======= =======
Pro forma loss per share........................... (0.31) (1.50)
======= =======
</TABLE>
The pro-forma compensation expense reflected above has been estimated using
the Black Scholes option-pricing model. Assumptions used in the pricing
model included: (i) risk free interest rate of between 4.10% - 6.41%; (ii)
expected volatility of ranging between nil - 65%; (iii) expected dividend
yield of nil; and (iv) an estimated average life of ranging from 2.67 - 3
years.
A summary of stock options outstanding at June 30, 2000 is set out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------- --------- ---------------- -------------- --------- --------------
$ $ $
<S> <C> <C> <C> <C> <C>
0.50 97,827 0.54 years 0.50 97,827 0.50
1.00 37,500 0.33 years 1.00 37,500 1.00
1.25 887,933 2.84 years 1.25 709,060 1.25
1.50 1,064,056 3.92 years 1.50 718,167 1.50
1.875 373,505 3.29 years 1.875 247,561 1.875
3.00 2,056,221 4.18 years 3.00 429,860 3.00
8.00 1,932,421 4.63 years 8.00 241,265 8.00
20.40 367,864 4.83 years 20.40 32,252 20.40
--------- ---------- ------- --------- -------
6,817,327 4.00 years $ 4.79 2,513,492 $ 2.54
========= ========== ======= ========= =======
</TABLE>
F-13
<PAGE> 118
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(E) DEFERRED FOREIGN EXCHANGE
U.S. GAAP requires immediate recognition in income of unrealized foreign
currency exchange gains and losses on long-term monetary items with a fixed
or ascertainable life whereas Canadian GAAP requires that these unrealized
gains and losses be deferred and amortized over the remaining term of the
long-term monetary items.
(F) UNREALIZED GAIN ON SECURITIES
Under U.S. GAAP, portfolio investments which are considered to be
"available for sale" securities are measured at market value, with the
unrealized gains and losses included in comprehensive income/loss. Under
Canadian GAAP, the company's long-term investment is recorded at cost. The
concept of comprehensive income/loss does not exist under Canadian GAAP.
(G) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes methods of accounting for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. The statement requires that entities recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The company is not required to adopt this
statement until its fiscal year ended September 30, 2001. The company is
currently evaluating the effect that implementation will have on its
results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 on Revenue Recognition. The company is not
required to adopt any associated effects until the commencement of its
fiscal year ending September 30, 2001. The company has not yet quantified
the impact of implementing the Bulletin, if any.
F-14
<PAGE> 119
GT GROUP TELECOM INC.
CONSOLIDATED BALANCE SHEETS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $29,347,816 $ 59,851,461 $ 2,476,445 $ 60,925
Accounts receivable (note 3)................................ 5,779,510 3,783,557 1,102,967 380,198
Prepaid expenses............................................ 2,074,373 526,270 26,354 25,197
Inventory................................................... 544,590 544,590 -- --
------------ ------------ ----------- ----------
37,746,289 64,705,878 3,605,766 466,320
PROPERTY, PLANT AND EQUIPMENT (note 4)...................... 108,009,250 73,816,711 10,555,202 481,021
GOODWILL (note 5)........................................... 3,105,443 -- -- 32,822
OTHER ASSETS (note 6)....................................... 11,796,529 1,291,654 206,667 41,968
------------ ------------ ----------- ----------
$160,657,511 $139,814,243 $14,367,635 $1,022,131
============ ============ =========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 7)........... $34,962,840 $ 14,926,086 $ 2,914,867 $ 599,523
Vendor payable (note 8)..................................... -- -- 4,702,260 --
Unearned revenue (note 9)................................... 676,185 655,605 73,159 34,257
Current portion of long-term debt (note 10)................. 3,746,098 1,253,358 114,743 57,000
------------ ------------ ----------- ----------
39,385,123 16,835,049 7,805,029 690,780
LONG-TERM UNEARNED REVENUE (note 9)......................... 1,356,250 1,493,750 -- --
LONG-TERM DEBT (note 10).................................... 57,027,723 47,556,922 775,636 --
------------ ------------ ----------- ----------
$97,769,096 $ 65,885,721 $ 8,580,665 $ 690,780
------------ ------------ ----------- ----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 11)
Authorized
Common shares
Unlimited number of convertible Class A voting and Class
B non-voting common shares without par value
Preferred
50,000,000 Series A convertible first preference shares
without par value
Issued and outstanding
Common shares
18,609,935 Class A voting shares (September 30, 1999 --
18,261,149; 1998 -- 15,288,420; 1997 -- 7,095,132).... $13,597,705 $ 12,573,300 $ 8,646,152 $ 836,135
4,148,569 Class B non-voting shares..................... 5,026,015 5,026,015 -- --
Preferred shares
42,500,002 Series A first preference shares (September
30, 1999 -- 41,500,002)............................... 69,155,541 67,280,541 -- --
------------ ------------ ----------- ----------
87,779,261 84,879,856 8,646,152 836,135
ADDITIONAL PAID-IN CAPITAL (note 11)........................ 255,375 255,375 255,375 171,100
SHARES TO BE ISSUED (note 11)............................... -- 1,875,000 -- --
DEFICIT..................................................... (25,146,221) (13,081,709) (3,114,557) (675,884)
------------ ------------ ----------- ----------
62,888,415 73,928,522 5,786,970 331,351
------------ ------------ ----------- ----------
$160,657,511 $139,814,243 $14,367,635 $1,022,131
============ ============ =========== ==========
COMMITMENTS AND CONTINGENCIES (note 16)
SUBSEQUENT EVENTS (note 20)
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) JAMES G. MATKIN (Signed) DANIEL R. MILLIARD
Director Director
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-15
<PAGE> 120
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
1999 1998 1999 1998 1997
------------ ----------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................ $ 2,266,566 $ 372,388 $ 2,705,432 $ 1,823,222 $2,051,122
COST OF SALES (EXCLUSIVE OF ITEMS
SHOWN SEPARATELY BELOW).......... 2,137,527 248,584 1,808,475 1,131,249 1,436,986
------------ ----------- ------------ ----------- ----------
129,039 123,804 896,957 691,973 614,136
------------ ----------- ------------ ----------- ----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 10,863,343 1,790,689 10,218,799 3,038,126 988,933
------------ ----------- ------------ ----------- ----------
(10,734,304) (1,666,885) (9,321,842) (2,346,153) (374,797)
AMORTIZATION....................... 1,124,145 137,547 852,539 254,578 55,146
INTEREST AND FINANCE ITEMS
Interest income.................... (579,780) (14,032) (920,399) (58,052) --
Interest on long-term debt......... 441,067 40,880 262,089 147,240 --
Finance charges.................... 25,378 7,945 192,397 -- --
Foreign exchange loss (gain)....... 254,313 (32,078) 93,684 (251,246) --
------------ ----------- ------------ ----------- ----------
140,978 2,715 (372,229) (162,058) --
------------ ----------- ------------ ----------- ----------
LOSS BEFORE INCOME TAXES........... (11,999,427) (1,807,147) (9,802,152) (2,438,673) (429,943)
PROVISION FOR INCOME TAXES (note
13)
Current............................ 65,085 7,847 165,000 -- --
------------ ----------- ------------ ----------- ----------
LOSS FOR THE PERIOD................ (12,064,512) (1,814,994) (9,967,152) (2,438,673) (429,943)
DEFICIT -- BEGINNING OF PERIOD..... (13,081,709) (3,114,557) (3,114,557) (675,884) (245,941)
------------ ----------- ------------ ----------- ----------
DEFICIT -- END OF PERIOD........... $(25,146,221) $(4,929,551) $(13,081,709) $(3,114,557) $ (675,884)
============ =========== ============ =========== ==========
LOSS PER SHARE (note 12)........... $ (0.54) $ (0.12) $ (0.56) $ (0.26) $ (0.05)
============ =========== ============ =========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-16
<PAGE> 121
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
1999 1998 1999 1998 1997
------------ ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period......................... $(12,064,512) $(1,814,994) $(9,967,152) $(2,438,673) $(429,943)
Items not affecting cash
Amortization.............................. 1,124,145 137,547 852,539 254,578 55,146
Additional paid-in capital................ -- -- -- 84,275 --
Shares issued for services rendered....... -- -- -- -- 7,080
Shares issued for interest on convertible
debentures.............................. -- -- 171,345 62,425 --
------------ ----------- ----------- ----------- ---------
(10,940,367) (1,677,447) (8,943,268) (2,037,395) (367,717)
------------ ----------- ----------- ----------- ---------
Changes in non-cash working capital items
Decrease (increase) in accounts
receivable.............................. (1,731,953) 472,888 (2,416,590) (722,769) (363,978)
Increase in prepaid expenses.............. (1,548,103) (72,699) (499,916) (1,157) (24,598)
Increase in inventory..................... -- -- (544,590) -- --
Increase in accounts payable and accrued
liabilities............................. 6,474,042 127,476 1,294,773 1,362,705 471,261
Increase (decrease) in unearned revenue... (116,920) 1,844 2,076,196 38,902 34,257
------------ ----------- ----------- ----------- ---------
3,077,066 529,509 (90,127) 677,681 116,942
------------ ----------- ----------- ----------- ---------
Cash flows used in operating activities..... (7,863,301) (1,147,938) (9,033,395) (1,359,714) (250,775)
------------ ----------- ----------- ----------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of convertible
debentures................................ -- 3,224,300 4,536,000 1,824,000 130,000
Issuance of shares for cash................. 14,976 31,000 71,889,120 6,418,529 665,259
Payment of share issuance costs............. (569) -- (362,761) (494,937) (23,604)
Repayment of notes payable.................. (150,222) (92,897) (114,749) (61,621) (3,000)
------------ ----------- ----------- ----------- ---------
(135,815) 3,162,403 75,947,610 7,685,971 768,655
------------ ----------- ----------- ----------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment
for cash.................................. (18,939,595) (888,171) (8,452,984) (3,737,522) (455,001)
Increase in other assets.................... (854,934) (43,337) (1,086,215) (173,215) (6,970)
Cash paid for business acquisitions......... (2,710,000) -- -- -- --
------------ ----------- ----------- ----------- ---------
(22,504,529) (931,508) (9,539,199) (3,910,737) (461,971)
------------ ----------- ----------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (30,503,645) 1,082,957 57,375,016 2,415,520 55,909
CASH AND CASH EQUIVALENTS -- BEGINNING OF
PERIOD.................................... 59,851,461 2,476,445 2,476,445 60,925 5,016
------------ ----------- ----------- ----------- ---------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.. $ 29,347,816 $ 3,559,402 $59,851,461 $ 2,476,445 $ 60,925
============ =========== =========== =========== =========
</TABLE>
Additional cash flow disclosures (note 17)
The accompanying notes form an integral part of these consolidated financial
statements.
F-17
<PAGE> 122
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
GT Group Telecom Inc. ("GT") was incorporated on April 12, 1996 under the
Canada Business Corporations Act. GT and, through its wholly owned subsidiary GT
Group Telecom Services Corp. ("Services") (collectively known as "the company")
provides data, internet applications and voice services and derives revenues
from network usage and access, equipment sales, co-location and consulting
services and certain fiber optic leases. The company markets and sells
telecommunications services and related products over fiber optic infrastructure
to small and medium-sized businesses in Canada.
During the year ended September 30, 1999, the company's former subsidiaries
GT Grouptelecom Networks Inc. and Planet Right Communications Group Inc. were
amalgamated with Services.
The company was considered a development stage company in prior years and
for part of the current year. As a development stage company, the principal
activities of the company included developing business plans, raising capital
and debt financing and acquiring and developing telecommunication networks. The
company's principal operations effectively began in the last quarter of fiscal
1999, when its Vancouver telecommunication networks and facilities were put into
commercial service to provide customers with integrated services which include
voice telecommunication services in addition to the data and internet
application services previously offered. In fiscal 1999, the company also
completed various agreements with respect to financing and started developing
telecommunication networks and facilities under a national expansion strategy.
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada which, in the case of the
company, conform in all material respects with those in the United States,
except as outlined in note 22.
The information presented as at and for the interim periods ended December
31, 1999 and 1998 is unaudited. These unaudited interim financial statements
reflect all adjustments which are in the opinion of management necessary to a
fair statement of the results for the interim periods presented; all such
adjustments are of a normal recurring nature.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated on consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and highly liquid
short-term interest bearing securities with maturity at the date of purchase of
three months or less. The short-term interest bearing securities are recorded at
cost plus accrued interest earned, which approximates current market value.
REVENUE RECOGNITION
Revenue from network usage and access is recognized when services are
provided. Revenue from network equipment sales is recognized at the time the
equipment is delivered and accepted by the customer. Revenue from consulting
services and from co-locations, where the company provides a location and
services for the customers' servers and telecommunication equipment, are
recognized as services are rendered.
F-18
<PAGE> 123
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unearned revenue is recorded for services billed in advance and is
recognized as revenue in the period in which the services are provided.
Income from operating leases of fiber optic facilities is recognized on a
straight-line basis over the term of the lease.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
amortization. Amortization is provided over their estimated useful lives on a
straight-line basis at the following annual rates:
<TABLE>
<S> <C>
Buildings.............................................. 7%
Furniture and fixtures................................. 20%
Computer equipment and software........................ 33%
Telecommunication networks............................. 5% to 20%
Leasehold improvements................................. over the term of the leases (4-8 years)
</TABLE>
Telecommunication networks which are installed on rights of way granted by
others include construction costs, costs of acquiring rights of way, interest
costs and network design costs all of which are incurred in developing new
networks or expanding existing networks. Amortization commences when the assets
are available for use.
Management reviews the carrying values of its property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing its review for
recoverability, management estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized.
GOODWILL
Goodwill represents the excess of the cost of business acquisitions over
the fair value of the identifiable net assets acquired. Goodwill is amortized
over its estimated useful life ranging from 3 to 20 years. The company reviews
the carrying value of its goodwill to determine whether there has been a
permanent impairment in value. The measurement of possible impairment is based
primarily on the ability to recover the carrying value from expected future
operating cash flows on an undiscounted basis.
LEASES
Leases are classified as either capital or operating. Those leases that
transfer substantially all the benefits and risks of ownership of the property
to the company are accounted for as capital leases. Capital lease obligations
reflect the present value of future lease payments discounted at appropriate
interest rates.
All other leases are accounted for as operating leases wherein rental
payments are charged to income as incurred.
DEFERRED CHARGES
Deferred charges include costs such as those incurred as a result of the
registration of Services as a competitive local exchange carrier with the
Canadian Radio-television and Telecommunications Commission ("CRTC") as well as
amounts incurred relating to negotiations for rights of way and
F-19
<PAGE> 124
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
access. These amounts are amortized on a straight-line basis over a period of
three to five years from the date commercial services become available.
The company has deferred expenditures incurred in the set up of business
operations. These amounts are being amortized on a straight-line basis over a
period of three to five years from the date they are used in the business.
DEFERRED FINANCING CHARGES
Financing costs incurred in connection with the issue of debt or share
capital are deferred until completion or abandonment of the planned transaction.
Costs relating to a debt issue are amortized over the term of the debt whereas
costs relating to issue of shares are recorded as a reduction of share capital.
Costs capitalized as deferred financing charges relating to transactions that
are abandoned are expensed in full.
INVENTORY
Inventory which consists of computer equipment, is valued at the lower of
cost, determined on a first-in first-out basis, and net realizable value.
FOREIGN CURRENCY TRANSLATION
The company translates all foreign currency denominated monetary assets and
liabilities at year-end exchange rates. Revenues and expenses are translated at
the rates prevailing on the respective transaction dates. Exchange gains and
losses resulting from movements in rates are reflected in net income in the year
except for gains or losses relating to long-term monetary assets and liabilities
which are deferred and amortized over the remaining term of the assets and
liabilities.
INCOME TAXES
The company uses the liability method of accounting for income taxes under
which future tax assets and liabilities are recognized for differences between
the financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases. Future tax assets and liabilities are measured
using enacted tax rates in effect in which those temporary differences are
expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized as part of the provision for
income taxes in the period that includes the enactment date. A valuation
allowance is recorded to the extent there is uncertainty regarding utilization
of future tax assets.
INTEREST EXPENSE
Interest is expensed as incurred, except where it relates to the financing
of major projects under construction where it is capitalized until the assets
are available for use.
SEGMENTED INFORMATION
The company is a national facilities-based provider of high-speed data,
Internet application and voice services comprising a single operating segment.
Substantially all of the company's assets are located in Canada and revenues are
derived from services provided in Canada.
F-20
<PAGE> 125
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1999 1999 1998 1997
------------ ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Trade receivables......................... $2,094,870 $1,191,895 $ 331,871 $346,163
Goods and services tax receivable......... 3,781,418 2,140,107 573,928 11,985
Employee receivables and other............ 76,490 486,805 212,293 22,050
Allowance for doubtful accounts........... (173,268) (35,250) (15,125) --
---------- ---------- ---------- --------
$5,779,510 $3,783,557 $1,102,967 $380,198
========== ========== ========== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (UNAUDITED)
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 887,019 101,235 785,784
Furniture and fixtures.......................... 1,616,840 125,082 1,491,758
Computer equipment and software................. 15,261,255 519,820 14,741,435
Telecommunication networks...................... 91,284,310 1,169,656 90,114,654
Leasehold improvements.......................... 512,698 126,923 385,775
------------ ---------- ------------
$110,051,966 $2,042,716 $108,009,250
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 887,019 87,168 799,851
Furniture and fixtures.......................... 877,424 56,038 821,386
Computer equipment and software................. 4,550,574 360,839 4,189,735
Telecommunication networks...................... 67,637,759 476,125 67,161,634
Leasehold improvements.......................... 452,397 98,136 354,261
------------ ---------- ------------
$ 74,895,017 $1,078,306 $ 73,816,711
============ ========== ============
</TABLE>
F-21
<PAGE> 126
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 859,955 33,245 826,710
Furniture and fixtures.......................... 129,412 23,710 105,702
Computer equipment and software................. 1,021,424 79,398 942,026
Telecommunication networks...................... 7,872,884 96,115 7,776,769
Leasehold improvements.......................... 431,393 17,242 414,151
------------ ---------- ------------
$ 10,804,912 $ 249,710 $ 10,555,202
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures.......................... $ 41,536 $ 7,605 $ 33,931
Computer equipment and software................. 60,756 14,408 46,348
Telecommunication networks...................... 391,826 9,100 382,726
Leasehold improvements.......................... 23,373 5,357 18,016
------------ ---------- ------------
$ 517,491 $ 36,470 $ 481,021
============ ========== ============
</TABLE>
Included in telecommunication networks as at December 31, 1999 (unaudited)
are costs of $77,454,221 (September 30, 1999 -- $39,571,949; 1998 -- $6,060,818;
1997 -- $50,988) relating to assets not yet available for use on which no
amortization has been charged.
Furniture and fixtures and computer equipment and software, as at December
31, 1999 (unaudited) include capital lease asset costs of $1,155,282 (September
30, 1999 -- $298,654) and $1,309,182 (September 30, 1999 -- $900,938)
respectively, and related accumulated amortization of $69,803 (September 30,
1999 -- $nil) and $125,185 (September 30, 1999 -- $nil).
For the period ended December 31, 1999 (unaudited), interest and finance
charges of $2,831,242 were capitalized on projects under construction (September
30, 1999 -- $1,588,204; 1998 -- $nil; 1997 -- $nil).
The ultimate recoverability of the company's investment in property, plant
and equipment is dependent upon, after an expected period of initial losses,
achieving and maintaining profitability which is subject to risks and
uncertainties relating to the market conditions, the competitive environment,
technological changes, the Canadian telecommunications regulatory environment
and the company's ability to obtain adequate financing to meet future capital
expenditure requirements.
5. GOODWILL
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ ---------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Goodwill net of accumulated amortization
and write downs of $201,356 (September
30, 1999 -- $45,801; 1998 -- $45,801;
1997 -- $12,979)....................... $ 3,105,443 $ -- $ -- $32,822
=========== ========== ======== =======
</TABLE>
F-22
<PAGE> 127
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ ---------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deposits................................. $ 217,500 $ 217,500 $ 37,782 $26,970
Deferred charges net of accumulated
amortization of $36,397 (September 30,
1999 -- $32,217; 1998 -- $19,133; 1997
-- $10,617)............................ 619,769 605,309 168,885 14,998
Deferred financing charges net of
accumulated amortization of $nil....... 10,795,734 456,989 -- --
Deferred foreign exchange loss (gain) net
of accumulated amortization of $25,697
(September 30, 1999 -- $974; 1998 --
$nil; 1997 -- $nil).................... (658,490) 11,856 -- --
Deferred acquisition costs............... 822,016 -- -- --
----------- ---------- -------- -------
$11,796,529 $1,291,654 $206,667 $41,968
=========== ========== ======== =======
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1999 1999 1998 1997
------------ ----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Trade accounts payable............... $ 6,006,370 $ 2,016,701 $ 812,741 $322,468
Accounts payable and accruals for
purchases of property, plant and
equipment.......................... 12,264,159 9,354,947 1,776,121 129,384
Accrual for inventory purchases...... 600,645 409,799 -- --
Accrual for financing charges........ 9,014,262 -- -- --
Accrued vacation and bonuses......... 2,347,256 1,139,236 154,784 126,822
Capital tax, large corporations tax
and other taxes payable............ 906,183 622,394 12,928 19,273
Other accrued liabilities............ 3,823,965 1,383,009 158,293 1,576
----------- ----------- ---------- --------
$34,962,840 $14,926,086 $2,914,867 $599,523
=========== =========== ========== ========
</TABLE>
8. VENDOR PAYABLE
The outstanding vendor payable balance of $4,702,260 represented an amount
of US$3,070,965 at September 30, 1998 due in connection with equipment
acquisitions and is included in the US$40 million credit facility entered into
on May 28, 1999 (note 10(a)). The effective interest rate on the vendor payable
was 9%.
F-23
<PAGE> 128
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. UNEARNED REVENUE
Unearned revenue includes amounts related to an operating lease arrangement
entered into in April 1999, whereby the company is the lessor of 24 strands of
dark fiber including rights of way. The company received an up-front fee for
installation costs related to placement of fiber optic cable, building entrances
and fiber optic cable connections to the lessee's existing cable facilities
which is presented as unearned revenue and being recognized as income over the
initial term of the lease. Under this contract, the company also receives annual
payments for lease and rights of way which are being recognized as income in
equal annual amounts. The lease period ends in April, 2009, however the lessee
has the option to extend the lease for an additional ten years. Minimum lease
payments receivable for the next five years and thereafter are as follows:
<TABLE>
<S> <C>
Year ending September 30,
2000.................................................... $ 500,000
2001.................................................... 500,000
2002.................................................... 500,000
2003.................................................... 500,000
2004.................................................... 250,000
Thereafter................................................ 1,000,000
</TABLE>
10. LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------
1999 1999 1998 1997
------------ ----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Capital leases payable..................... $ 2,224,061 $ 1,155,178 $ -- $ --
Vendor financing(a)........................ 43,809,236 40,397,833 -- --
Vendor financing(b)........................ 13,969,927 6,481,639 -- --
Note payable(a)............................ -- -- -- 57,000
Note payable(b)............................ 770,597 775,630 890,379 --
----------- ----------- -------- -------
60,773,821 48,810,280 890,379 57,000
Less: Current portion...................... 3,746,098 1,253,358 114,743 57,000
----------- ----------- -------- -------
$57,027,723 $47,556,922 $775,636 $ --
=========== =========== ======== =======
</TABLE>
Repayments of long-term debt in each of the next five years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1999
--------------------------- ---------------------------
VENDOR VENDOR
FINANCING AND CAPITAL FINANCING AND CAPITAL
NOTES PAYABLE LEASES NOTES PAYABLE LEASES
------------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
2000............................... $ 3,018,321 $ 837,872 $ 942,263 $ 395,202
2001............................... 6,062,869 784,558 3,616,639 439,627
2002............................... 6,198,348 640,323 3,872,020 490,729
2003............................... 5,200,497 173,015 3,872,020 --
2004............................... 2,206,941 -- 2,020,123 --
Thereafter......................... 35,862,784 -- 33,332,037 --
----------- ---------- ----------- ----------
58,549,760 2,435,768 47,655,102 1,325,558
Less: Interest..................... -- (211,707) -- (170,380)
----------- ---------- ----------- ----------
$58,549,760 $2,224,061 $47,655,102 $1,155,178
=========== ========== =========== ==========
</TABLE>
F-24
<PAGE> 129
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VENDOR FINANCING
(a) On May 28, 1999, the company entered into a credit facility with a
vendor pursuant to which the vendor has agreed to sell equipment to the company
and to finance the company's purchase of engineering and construction services
together with digital switches and related network software and equipment to a
value of US$40 million. The balance of vendor financing at December 31, 1999
(unaudited) of $43,809,236 (denominated as US$30,119,796) and September 30, 1999
of $40,397,833 (denominated as US$27,415,668) is comprised of amounts payable to
the vendor of $2,550,973 (September 30, 1999 -- $29,886,813), and additional
amounts drawn on the vendor credit facility of $41,258,263 (September 30, 1999
-- $10,511,020).
At the option of the company, the credit facility bears interest at either
adjusted LIBOR plus an applicable margin, or "Alternate Base Rate" ("ABR"),
which is defined as U.S. Prime Rate or U.S. Federal Funds Rate plus 0.5% plus an
applicable margin. Depending on the ratio of consolidated total debt to
annualized earnings before interest, taxes and amortization, the margin added to
the ABR is between 3.00% and 3.75% and the margin added to the LIBOR Base is
between 4.00% and 4.75%. The effective interest rate at December 31, 1999
(unaudited) is 10.59% (September 30, 1999 -- 10.19%) which is LIBOR rate of
5.84% (September 30, 1999 -- 5.44%) plus 4.75% margin.
The credit facility is repayable over 7 1/2 years with interest only
payments for the initial two years. At the end of the second year, the principal
is repayable quarterly at the rate of 1.25% of the amount outstanding until the
end of year seven. Between the end of year seven and the expiry of the credit
facility in 2006, the principal is repayable quarterly at the rate of 37.5% of
the outstanding amount. In addition, a commitment fee of 0.375% per annum is
payable on the undrawn portion of the credit facility. For the period ended
December 31, 1999 (unaudited) the interest cost related to the vendor financing
was $670,501 (US$456,123) (September 30, 1999 -- $706,038 (US$478,607)).
The credit facility is collateralized by a first charge over present and
future assets of the company.
The credit facility agreement contains certain covenants that restrict the
ability of the company and its subsidiaries to incur additional indebtedness and
issue certain preferred stock, pay dividends or make other distributions,
repurchase equity interests or subordinated indebtedness, engage in sale and
leaseback transactions, create certain liens, enter into certain transactions
with affiliates, sell assets of the company or its subsidiaries, issue or sell
equity interests of the company's subsidiaries or enter into certain mergers and
consolidations.
(b) On July 27, 1999 the company entered into an agreement for a US$15
million credit facility with a vendor.
The credit facility is available in tranches of US$9 million, US$1 million
and US$5 million. The final payments on these facilities are due in 2003, 2001
and 2001 respectively. They are repayable in equal principal instalments plus
12% interest per annum on the last day of each quarter. In addition, a
commitment fee of 0.5% per annum is payable on the undrawn portion of the credit
facility. The loan is collateralized over present and future assets of the
company purchased from this vendor.
The credit facility agreement contains certain covenants which limit the
payment of dividends, the redemption of shares and the incurrence of additional
indebtedness or liens.
The amount due to this vendor at December 31, 1999 (unaudited) was
$13,969,927 (US$9,604,625) (September 30, 1999 -- $6,481,639 (US$4,399,639)).
F-25
<PAGE> 130
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE
(a) During 1996, the company issued a note in connection with the purchase
of a former subsidiary. The loan was non-interest bearing and had no repayment
terms. The loan was repaid in 1997 and 1998.
(b) In 1998, the company purchased land and a building for $900,000 which
was financed substantially by a note payable to a vendor. The note bears
interest at 10.5% per annum and is payable in monthly instalments of principal
and interest of $8,308, a lump sum payment against principal of $100,000 on
February 15, 1999, and the remaining balance on February 15, 2001. The land and
building acquired have been pledged as collateral.
CAPITAL LEASES PAYABLE
At December 31, 1999 (unaudited), capital leases are payable in equal
monthly instalments of $65,379 (September 30, 1999 -- $36,635) including
principal and interest at rates varying between 4.00 to 10.00%. The leases are
collateralized by the underlying assets and expire in 2002 and 2003.
SENIOR BANK FACILITY
On December 17, 1999, the company's subsidiary signed a commitment letter
relating to a senior bank facility for an amount of $220 million to finance part
of the acquisition of the business of Shaw FiberLink Ltd. (note 20(a)). The bank
facility is comprised of a $120 million seven year revolving reducing term loan
and a $100 million reducing term loan. The bank facility will be collateralized
by a first ranking fixed and floating charge and security interest in all of the
assets of the company's subsidiary. The parent company also has provided a
guarantee, collateralized by the parent company's assets, including a pledge of
its shares of the subsidiary. In addition, the bank facility is collateralized
by the parent and subsidiary's present and future assets including
telecommunications equipment, inventory, real property, owned or leased, used at
a major switching and transmission node location, all interconnection agreements
to the extent permitted by law, general intangibles, contract rights,
indefeasible rights of use, points of presence and franchises and licenses.
At the option of the company's subsidiary, the bank facility may be used as
LIBOR loans denominated in U.S. dollars, bankers acceptances in Canadian
dollars, U.S. Base rate loans in U.S. dollars and standby letters of credit in
Canadian or U.S. dollars. Depending on the financial status of the company, the
margins added to the applicable interest rates may vary from 2.0% to 4.5%.
ADDITIONAL VENDOR FINANCING
On December 17, 1999, the company's subsidiary signed a commitment letter
for a US$315 million vendor facility to finance the purchase and installation of
equipment and services. The vendor facility is available in tranches of US$161
million and US$154 million. The vendor retains the right to convert up to US$140
million into a senior secured loan. The vendor facility becomes available upon
receipt by the company of additional debt and equity commitments. The initial
borrowings under this vendor facility must be used to repay amounts outstanding
under the existing credit facility with this vendor (see note 10(a)).
The vendor facility will be repayable over 8 1/2 years with quarterly
principal repayment at the rate of 1.25% of the amount outstanding, starting in
2003 until the end of year eight. For the last two quarters in 2008, the
principal is repayable quarterly at the rate of 37.5% of the outstanding amount.
F-26
<PAGE> 131
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any amounts converted into a senior secured loan payable is subject to limited
amortization, with the balance to be repaid at maturity.
The vendor facility bears interest at rates of 2.0% to 4.5% over the United
States bank prime rate or over LIBOR based on the company's financial status.
In addition, a commitment fee varying between 0.75% and 1.50% depending on
the level of utilization of the vendor facility is payable on the undrawn
portion.
11. SHARE CAPITAL
Authorized
Common
Unlimited number of Class A voting shares without nominal or par
value, each Class A share has one vote; unlimited number of Class B
non-voting shares without nominal or par value. Other than with respect to
voting rights and conversion rights, the two classes of common shares have
identical rights. Each Class B non-voting share may, under certain limited
circumstances at the option of the holder, be converted into one Class A
voting share. The holders of Class A and B shares are entitled to receive
dividends as determined by the Board of Directors, subject to the rights of
the holders of the preferred shares. The holders of Class A and B shares
are also entitled to participate equally in the event of liquidation of the
company, subject to the rights of the holders of the preferred shares.
Preferred
Unlimited number of non-voting first and second preference shares
without nominal or par value. The first and second preference shares may be
issued in one or more series. Each share is convertible at the option of
the holder into either Class A voting shares or Class B non-voting shares
depending on foreign ownership restrictions then in place and automatically
upon an initial public offering of such shares, initially on a one-for-one
basis to May 7, 2000, with a compound increase of 10%, subject to
adjustment. The Board of Directors of the company may fix the number of
shares in each series and designate rights, privileges, restriction,
conditions and other provisions. The first and second preference shares
shall be entitled to preference over any other shares of the company with
respect to the payment of dividends and in the event of liquidation of the
company.
On May 7, 1999, the first preference shares, Series A first preference
shares were created. In addition to the rights and privileges of the first
preference shares described above, the Series A first preference shares
have a liquidation value equal to the price paid for the share plus a
compound annual rate of return of 10% and have anti-dilutive provisions
protecting their conversion into Class A voting shares or Class B
non-voting shares. At December 31, 1999 (unaudited) and September 30, 1999,
there were 50,000,000 authorized Series A first preference shares.
F-27
<PAGE> 132
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Issued
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
CLASS A CLASS B SERIES A
VOTING NON-VOTING FIRST PREFERENCE
SHARES SHARES SHARES AMOUNT
---------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Balance as at September 30, 1996..... 5,175,500 -- -- $ 228,500
Class A voting shares issued for
cash............................ 154,000 -- -- 136,250
Share re-organization (b).......... 5,329,500 -- -- --
Less cancelled shares (b).......... (5,000,000) -- -- (171,100)
Class A voting shares issued for --
Cash............................ 1,661,781 -- -- 352,448
Upon exercise of options
relating to warrants (c)...... 310,000 -- -- 77,500
Upon exercise of options........ 79,737 -- -- 39,868
Upon exercise of warrants (c)... 144,385 -- -- 72,193
Upon conversion of debentures
(c)........................... 520,000 -- -- 130,000
For services rendered........... 20,229 -- -- 7,080
Shares redeemed and cancelled... (1,300,000) -- -- (13,000)
Share issuance costs............ -- -- -- (23,604)
---------- --------- ---------- -----------
Balance as at September 30, 1997..... 7,095,132 -- -- $ 836,135
Class A voting shares issued for
Cash............................ 4,880,629 -- -- 6,082,677
Upon exercise of options........ 822,167 -- -- 331,902
Upon exercise of warrants....... 7,900 -- -- 3,950
Upon conversion of debentures
(c)........................... 2,482,592 -- -- 1,886,425
Share issuance costs............ -- -- -- (494,937)
---------- --------- ---------- -----------
Balance at September 30, 1998........ 15,288,420 -- -- $ 8,646,152
Class A voting shares issued for
Cash............................ 2,004,322 -- -- 3,480,241
Upon exercise of options........ 630,000 -- -- 70,000
Upon conversion of debentures
(c)........................... 338,407 -- -- 423,010
Share issuance costs............ -- -- -- (46,103)
Series A first preference shares
issued for
Cash (d)........................ -- -- 27,666,667 41,500,000
Upon exercise of options (d).... -- -- 13,833,335 25,937,503
Share issuance costs............ -- -- -- (156,962)
Class B non-voting shares issued
for
Cash............................ -- 721,101 -- 901,376
Upon conversion of debentures
(c)........................... -- 3,427,468 -- 4,284,335
Share issuance costs............ -- -- -- (159,696)
---------- --------- ---------- -----------
Balance at September 30, 1999........ 18,261,149 4,148,569 41,500,002 $84,879,856
Class A voting shares issued for
Purchase of businesses (note
19)........................... 336,666 -- -- 1,009,998
Upon exercise of options........ 12,120 -- -- 14,976
Share issuance costs............ -- -- -- (569)
Series A first preference shares
issued for
Acquisition of rights of way
(g)........................... -- -- 1,000,000 1,875,000
---------- --------- ---------- -----------
Balance at December 31, 1999
(unaudited)........................ 18,609,935 4,148,569 42,500,002 $87,779,261
========== ========= ========== ===========
</TABLE>
F-28
<PAGE> 133
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) CHANGE IN AUTHORIZED AND ISSUED SHARES
In September 1998, the company redesignated all authorized common shares,
both issued and unissued, as Class A voting shares and increased authorized
capital by creating an unlimited number of shares designated as Class B
non-voting shares. This change in classification for issued shares has been
presented retroactively in these financial statements.
(B) SHARE RE-ORGANIZATION
On February 18, 1997, the company undertook a re-organization of shares
held by shareholders of record at January 23, 1997. Under the re-organization,
the company divided its existing issued common shares on the basis of two new
shares for each existing share. The founding shareholders then returned their
"founders" shares (5,000,000) for cancellation. As a result, the weighted
average cost of these shares of $171,100 was transferred to additional paid-in
capital.
(C) CONVERTIBLE DEBENTURES
YEAR ENDED SEPTEMBER 30, 1999
On December 15, 1998 and March 5, 1999, the company issued 12% convertible
debentures totalling $4,536,000 due March 31, 2000. The debentures plus accrued
interest could be converted by the company into fully-paid Series A first
preference shares at a conversion price of $1.25 per preference share before
July 1, 1999 ("Mandatory Conversion Period"). If the company did not exercise
its right to convert the debentures into Series A first preference shares, each
holder of debentures had the option to convert the debentures into fully paid
Class A voting shares or Class B non-voting shares at a conversion price of
$1.25 per share, in compliance with CRTC foreign ownership restrictions in
effect at the time of conversion.
On April 30, 1999, the company waived the condition that the debentures be
converted to Series A first preference shares, and all debentures including
accrued interest were converted into 338,407 Class A voting shares and 3,427,468
Class B non-voting shares.
YEAR ENDED SEPTEMBER 30, 1998
During the period from February 18, 1998 to March 17, 1998, the company
issued 14% convertible debentures totalling $1,824,000 due in 2001 which were
converted together with accrued interest, on the basis of one Class A voting
share for each $.7692307 of indebtedness resulting in the issuance of 2,482,592
Class A voting shares in 1998.
YEAR ENDED SEPTEMBER 30, 1997
The company issued $130,000 of units comprised of convertible debt and
share purchase warrants under agreements dated January 6, 1997 and January 9,
1997. Unitholders were entitled to convert into shares, principal owing at the
rate of $0.50 per share, and share purchase warrants at a rate of two for every
$1.00 invested. Unitholders were also granted the option to invest an additional
amount of equity under the same conversion and share purchase warrant terms
within 90 days of the last principal instalment. The effect of the share
re-organization of February 18, 1997 was to change the effective conversion
price of the convertible debt to $0.25 per share.
During the year ended September 30, 1997 all unitholders exercised their
conversion right resulting in the issuance of 520,000 Class A voting shares and
a number of unitholders exercised their options and warrants resulting in the
issuance of 310,000 and 144,385 Class A voting shares
F-29
<PAGE> 134
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. There was no effect on the exercise price contained in the
convertible debt share purchase warrants.
(D) PREFERENCE SHARE PURCHASE OPTIONS
On May 7, 1999, the company issued 27,666,667 units to a group of
institutional shareholders at $1.50 per unit. Each unit consisted of one Series
A first preference share and an option to purchase half of one Series A first
preference share at a share price of $1.875 until August 10, 1999 and at $2.25
until November 10, 1999. At the year-end, all the options had been exercised,
resulting in the issuance of 13,833,335 Series A first preference shares.
(E) COMMON SHARE OPTIONS AND WARRANTS
From time to time, the company grants incentive stock options to officers,
directors, and employees of the company. These options are subject to early call
by the company to comply with regulatory requirements upon the filing of a
preliminary prospectus to complete an initial public offering.
OPTIONS
At December 31, 1999 (unaudited), there were 3,728,094 (September 30, 1999
-- 2,161,842) options to purchase Class A voting shares and 2,950,000 (September
30, 1999 -- 2,300,000) options to purchase Class B non-voting shares
outstanding. These options expire between March 1, 2000 and December 16, 2004.
Option activity for each of the years is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding -- Beginning of period......... 4,461,842 1,854,978 1,311,263 145,000
Granted
Class A voting shares at a weighted
average price of $2.86 per share
(September 30, 1999 -- $1.34; 1998 --
$0.44; 1997 -- $0.50)................. 1,610,800 1,658,228 1,690,792 1,646,000
Class B non-voting shares at a weighted
average price of $3.00 per share
(September 30, 1999 -- $2.04; 1998 --
nil; 1997 -- nil)..................... 650,000 2,300,000 -- --
Class A voting shares:
Exercised at a weighted average price of
$1.24 per share (September 30, 1999 --
$0.11; 1998 -- $0.40; 1997 --
$0.50)................................ (12,120) (630,000) (822,167) (79,737)
Expired.................................. -- (682,003) (24,910) --
Cancelled................................ (32,428) (39,361) (300,000) (400,000)
--------- --------- --------- ---------
Outstanding -- End of period............... 6,678,094 4,461,842 1,854,978 1,311,263
========= ========= ========= =========
Exercisable -- End of period
Class A voting shares.................... 1,861,739 1,726,564 1,854,978 1,311,263
Class B non-voting shares................ 1,940,972 1,883,333 -- --
--------- --------- --------- ---------
Total...................................... 3,802,711 3,609,897 1,854,978 1,311,263
========= ========= ========= =========
</TABLE>
F-30
<PAGE> 135
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the options granted in 1999 vest over a period of 36 months.
Other options vest on the date of the grant with some of the shares underlying
the options vesting over a period of 36 months.
WARRANTS
Warrant activity for each of the years is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding -- Beginning of period............. 100,000 415,000 270,615 --
Granted at a weighted average price of $nil per
share (September 30, 1999 -- $nil; 1998 --
$0.50; 1997 -- $0.50)........................ -- -- 152,285 415,000
Exercised at a weighted average price of $nil
per share (September 30, 1999 -- $nil; 1998
-- $0.50; 1997 -- $0.50)..................... -- -- (7,900) (144,385)
Expired........................................ -- (313,311) -- --
Cancelled...................................... -- (1,689) -- --
------- -------- ------- --------
Outstanding -- End of period................... 100,000 100,000 415,000 270,615
======= ======== ======= ========
</TABLE>
The warrants vested on the date of grant and are exercisable on Class A
voting shares and expire on November 30, 2000.
(F) ADDITIONAL PAID-IN CAPITAL
During the year ended September 30, 1998, the company granted stock options
to certain employees who were also directors in lieu of compensation payable at
September 30, 1997. An amount of $84,275 in compensation payable forgiven has
been recorded as additional paid-in capital.
(G) SHARES TO BE ISSUED
At September 30, 1999, 1,000,000 Series A first preference shares at $1.875
per share remained to be issued in connection with the acquisition of rights of
way in August 1999. These were issued in December 1999.
12. LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common shares outstanding for the years after giving retroactive effect to the
share reorganization (note 11(b)) on February 18, 1997. The weighted average
number of common shares for the periods ended December 31, 1999 (unaudited)
amounted to 22,473,692 and December 31, 1998 (unaudited) amounted to 15,341,753
(September 30, 1999 -- 17,859,352; 1998 -- 9,541,861; 1997 -- 8,024,006) shares.
Fully diluted loss per share has not been disclosed as it would be
anti-dilutive.
F-31
<PAGE> 136
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The tax effects of temporary differences that give rise to future income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Future income tax assets
Accounts receivable............ $ 52,000 $ -- $ -- $ --
Property, plant and
equipment................... 192,000 27,000 -- --
Deferred charges............... -- 63,000 12,000 9,000
Debt and share issue costs..... 86,000 257,000 222,000 11,000
Operating loss carryforwards... 11,281,000 5,709,000 1,488,000 298,000
------------ ----------- ----------- ---------
11,611,000 6,056,000 1,722,000 318,000
Future income tax liabilities
Deferred charges............... (122,000) -- -- --
Property, plant and
equipment................... -- -- (79,000) (30,000)
------------ ----------- ----------- ---------
11,489,000 6,056,000 1,643,000 288,000
Less: Valuation allowance........ (11,489,000) (6,056,000) (1,643,000) (288,000)
------------ ----------- ----------- ---------
$ -- $ -- $ -- $ --
============ =========== =========== =========
</TABLE>
Management has recorded a valuation allowance for the net amount of future
income tax assets.
The company has non-capital losses available to reduce taxable income in
future years. These losses expire as follows:
<TABLE>
<S> <C>
Year ending September 30,
2002..................................................... $ 11,000
2003..................................................... 315,000
2004..................................................... 522,000
2005..................................................... 4,523,000
2006..................................................... 7,764,000
Period ending December 31, (unaudited)
2007..................................................... 11,604,000
-----------
$24,739,000
===========
</TABLE>
F-32
<PAGE> 137
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision for the year differs from the amount obtained by
applying the statutory Canadian federal and provincial income tax rates to loss
before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory Canadian federal and
provincial income tax rates...... 45.6% 45.6% 45.6% 45.6%
----------- ----------- ----------- ---------
Income tax recovery based on the
statutory rates.................. $(5,471,739) $(4,469,781) $(1,112,035) $(196,054)
Differences from statutory rates
relating to
Tax effect of loss benefits which
have not been recorded........ 5,471,739 4,469,781 1,112,035 196,054
Large corporations tax............. 65,085 165,000 -- --
----------- ----------- ----------- ---------
$ 65,085 $ 165,000 $ -- $ --
=========== =========== =========== =========
</TABLE>
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities and short-term vendor payable amounts
approximate their carrying values due to the short-term nature of these
instruments. At December 31, 1999 (unaudited) and September 30, 1999 and 1998,
the carrying value of long-term debt approximates its fair value. The fair value
of the long-term debt was calculated using discounted cash flow analysis.
CREDIT RISK
Financial instruments that potentially subject the company to a
concentration of credit risk consist of cash and cash equivalents, and accounts
receivable. The company's cash and cash equivalents are deposited with highly
rated financial institutions. The company's accounts receivable are derived from
revenue earned from customers located in Canada. The company performs ongoing
credit evaluations on its customers' financial condition and, generally,
requires no collateral from its customers. The company maintains an allowance
for doubtful accounts receivable based upon expected collectibility of accounts
receivable.
For the period ended December 31, 1999 (unaudited), two customers of the
company accounted for 50% (one customer accounted for 42% and a second customer
accounted for 8%) of the company's revenue while for the period ended December
31, 1998 (unaudited), one customer accounted for 35% of the company's revenue.
For the year ended September 30, 1999, three customers of the company accounted
for approximately 48% of revenue (one customer accounted for 26%, a second
customer accounted for 12% and a third customer accounted for 10%) and for the
year ended September 30, 1998, two customers of the company accounted for
approximately 55% (one customer accounted for 37% and a second customer
accounted for 18%) of the company's revenue. For the year ended September 30,
1997 one customer of the company accounted for approximately 28% of the
company's revenue.
F-33
<PAGE> 138
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE AND FOREIGN CURRENCY RISK
The following table summarizes the company's exposure to interest rate
risk:
<TABLE>
<CAPTION>
FIXED RATE
FLOATING WITHIN FIXED RATE NON-INTEREST
RATE ONE YEAR 1-5 YEARS BEARING
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999 (UNAUDITED)
Financial assets
Cash and cash equivalents
Canadian dollars................. $ 6,446,610 $ -- $ -- $ --
U.S. dollars (US$15,745,071)..... 22,901,206 -- -- --
Other current assets............. -- -- -- 5,779,510
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 33,858,864
U.S. dollars (US$759,007)........ -- -- -- 1,103,976
Long-term debt
Canadian dollars................. -- 752,542 2,242,116 --
U.S. dollars (US$39,724,418)..... 43,809,236 2,993,556 10,976,371 --
SEPTEMBER 30, 1999
Financial assets
Cash and cash equivalents
Canadian dollars................. 39,794,095 -- -- --
U.S. dollars (US$13,657,292)..... 20,057,366 -- -- --
Other current assets............. -- -- -- 3,783,557
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 9,554,370
U.S. dollars (US$3,660,454)...... -- -- -- 5,371,716
Long-term debt
Canadian dollars................. -- 327,410 1,603,398 --
U.S. dollars (US$31,815,047)..... 40,397,833 925,948 5,555,691 --
SEPTEMBER 30, 1998
Financial assets
Cash and cash equivalents
Canadian dollars................. 1,615,250 -- -- --
U.S. dollars (US$562,429)........ 861,195 -- -- --
Other current assets............... -- -- -- 1,102,967
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 2,035,571
U.S. dollars (US$574,296)........ -- -- -- 879,296
Vendor payable (US$3,070,965)...... 4,702,260 -- -- --
Long-term debt..................... -- 114,743 775,636 --
SEPTEMBER 30, 1997
Financial assets
Cash and cash equivalents.......... 60,925 -- -- --
Other current assets............... -- -- -- 380,198
Financial liabilities
Note payable....................... -- -- -- 57,000
Other current liabilities.......... -- -- -- 599,523
</TABLE>
F-34
<PAGE> 139
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company is exposed to foreign currency fluctuations on its U.S. dollar
denominated trade payables and long-term debt to the extent that these
liabilities exceed the U.S. dollar cash and cash equivalents.
15. FOREIGN EXCHANGE
During the period ended December 31, 1999 (unaudited), the company realized
a foreign exchange loss of $254,313 (December 31, 1998 (unaudited) -- gain of
$32,078) on the translation of U.S. cash and cash equivalents and U.S. payables
(September 30, 1999 -- $93,684; 1998 -- gain of $251,246; 1997 -- $nil) which
has been recognized in the statement of operations.
16. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The company has entered into a vendor financing agreement (note 10) to
purchase and licence certain engineering and construction services together with
digital switches and related network software and equipment from a supplier. At
September 30, 1999 the minimum future purchase commitment is US$12.6 million
over the next twenty months.
LETTER OF CREDIT
In October 1999, the company granted a letter of credit in favour of a
network equipment supplier in the amount of $253,133.
OPERATING LEASES
The company has entered into operating leases for its premises, certain
equipment and for rights of way. Minimum lease payments for the next five years
and thereafter are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
2000........................................................ $ 4,825,646 $ 1,732,405
2001........................................................ 4,779,316 1,985,362
2002........................................................ 4,782,152 1,988,198
2003........................................................ 4,025,660 1,992,588
2004........................................................ 4,010,742 1,994,966
Thereafter.................................................. 32,693,343 16,284,087
</TABLE>
The rent expense under operating leases for the following periods was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------
1999 1998 1999 1998 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating lease expense.......... $630,011 $45,804 $196,933 $165,150 $135,473
</TABLE>
F-35
<PAGE> 140
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. ADDITIONAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------
1999 1998 1999 1998 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid.................... $310,868 $21,832 $ 95,054 $ 53,000 $ --
Income taxes paid................ -- -- -- -- --
</TABLE>
NON-CASH TRANSACTIONS
Purchases of property, plant and equipment of $15,252,944 for the period
ended December 31, 1999 (unaudited) (September 30, 1999 -- $55,166,478; 1998 --
$6,549,899; 1997 -- $nil) and purchase of other assets of $9,649,941 at December
31, 1999 (unaudited) were financed through long-term debt, notes payable and
through accounts payable and accrued liabilities. Accordingly, these
transactions are not reflected in the Statements of Cash Flows.
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
the year 2000 dates are processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant system failures which could
affect the company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
19. BUSINESS ACQUISITIONS
(a) In October, 1999, the company entered into an agreement to purchase the
assets of T1 Technologies Inc., a Calgary based telecommunications company. The
total consideration is $410,000 and consists of $210,000 of cash and 66,666
Class A voting shares.
(b) In October, 1999, the company purchased the business and certain assets and
liabilities of Single Source Ltd. and Single Source Communications Inc. which
are companies in the business of reselling telecommunications services to
customers in the Toronto region. The acquisition of the business' assets and
liabilities are accounted for by the purchase method of accounting under which
the assets and liabilities purchased are recorded at their fair values with the
excess of the purchase price over the fair value of identifiable assets and
liabilities acquired recorded as goodwill. The results of operations are
included in the company's consolidated statement of operations from the date of
acquisition.
The consideration consisted of the following:
<TABLE>
<S> <C>
Purchase price
Cash...................................................... $2,500,000
Ascribed value of 270,000 Class A voting shares issued.... 810,000
----------
$3,310,000
==========
</TABLE>
F-36
<PAGE> 141
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 264,000
Equipment................................................... 435,000
Goodwill.................................................... 2,851,000
Accounts payable............................................ (240,000)
----------
$3,310,000
==========
</TABLE>
20. SUBSEQUENT EVENTS
(a) On December 22, 1999, the company entered into an asset purchase and
subscription agreement with Shaw Communications Inc. ("Shaw Communications") and
Shaw FiberLink Ltd. ("Shaw FiberLink"). This transaction closed on February 16,
2000. Under the purchase agreement, the company purchased from Shaw FiberLink
all of the property and assets of Shaw FiberLink used in connection with the
high speed data and competitive access business. The assets purchased include
equipment, computer hardware, fixed assets, replacement parts, operational
contracts, equipment contracts, supply contracts, interconnect agreements,
co-location agreements, customer contracts, software licenses, broadband
wireless licenses, vehicles, intellectual property, permits, goodwill and
certain other fiber assets. The company and Shaw FiberLink also entered into an
Indefeasible Right to Use agreement ("indefeasible right to use") which grants
the company an indefeasible right to use certain specifically identified
existing fibers in the fiber optic cable networks of Shaw Communications for 60
years. In addition, the company will receive an indefeasible right to use fibers
to be built over the next three years in mutually agreed regions. The company
will also assume certain obligations related to permits, operational contracts,
customer contracts, software licenses and certain other obligations.
The purchase consideration of $760 million consisted of $360 million in
cash and sufficient series B first preference shares of the company to provide
Shaw Communications with a 28.5% fully diluted interest in the company at the
date the acquisition was consummated, subject to adjustments related to
financing and employee options and warrants. Management's estimate of the fair
value of these shares was $400 million. Acquisition costs amounted to $20
million.
Details of the assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<S> <C>
INDEFEASIBLE RIGHT TO USE AGREEMENT:
Prepayment for indefeasible rights to use fibers to be
constructed............................................. $223,000,000
Property, plant and equipment representing indefeasible
rights to use fibers.................................... 329,000,000
SHAW FIBERLINK PURCHASE:
Property, plant and equipment............................. 100,000,000
Intangible assets......................................... 28,800,000
Goodwill.................................................. 127,200,000
Future income taxes....................................... (28,000,000)
------------
$780,000,000
============
</TABLE>
The prepayment of $223 million on property, plant and equipment represents
the prepayment of an indefeasible right to use certain fibers to be built by
Shaw Communications over the next three years. Included in property, plant and
equipment is an amount of $22 million for an indefeasible right to use certain
existing fibers located in New Brunswick, Canada, commencing in 2003.
F-37
<PAGE> 142
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above noted allocated amounts are based upon the Company's preliminary
estimates of fair values. The allocation of the purchase price may be revised
when additional information is obtained.
(b) Pursuant to an Offering Circular and Purchase Agreement which closed on
February 1, 2000, the company issued 855,000 Units, consisting of US$855 million
(issued at a price of 52.651%) of 13.25% Senior Discount Notes Due 2010 and
855,000 Warrants to Purchase 4,198,563 Class B non-voting shares. Gross proceeds
amounted to US$450.2 million, equivalent to approximately $651 million. Expenses
related to the offering amounted to approximately $22.5 million.
21. PRIOR YEAR COMPARATIVE AMOUNTS
Certain prior years comparative numbers have been reclassified to conform
to the current year's presentation.
22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
The company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in Canada,
which, in the case of the company conform in all material respects with GAAP in
the United States of America, except as outlined below:
(A) NET LOSS AND SHAREHOLDERS' EQUITY
The following summary sets out the adjustments to the company's loss
and shareholders' equity which would be made to conform to U.S. GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- --------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss for the period in
accordance with Canadian
GAAP......................... $(12,064,512) $(1,814,994) $ (9,967,152) $(2,438,673) $(429,943)
Impact of U.S. accounting
principles
Deferred charges(c).......... (14,460) (12,648) (300,780) (86,762) 8,475
Stock-based compensation(d).. (1,015,444) -- (56,017) (1,056,597) (5,000)
Deferred foreign
exchange(e)................ 670,346 -- (11,856) -- --
------------ ----------- ------------ ----------- ---------
Loss and comprehensive loss for
the period in accordance with
U.S. GAAP.................... $(12,424,070) $(1,827,642) $(10,335,805) $(3,582,032) $(426,468)
============ =========== ============ =========== =========
Loss per share in accordance
with U.S. GAAP............... $ (0.55) $ (0.12) $ (0.58) $ (0.38) $ (0.05)
============ =========== ============ =========== =========
</TABLE>
F-38
<PAGE> 143
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the change in shareholders' equity from Canadian
to U.S. GAAP is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shareholders' equity in
accordance with Canadian
GAAP......................... $ 62,888,415 $73,928,522 $ 5,786,970 $331,351
Deferred charges(c)............ (417,000) (402,540) (101,760) (14,998)
Cumulative Stock-based
compensation expense(d)...... (2,133,058) (1,117,614) (1,061,597) (5,000)
Deferred stock based
compensation expense......... (19,365,982) (287,176) -- --
Net change in stock
options(d)................... 21,499,040 1,404,790 1,061,597 5,000
Deferred foreign exchange(e)... 658,490 (11,856) -- --
------------ ----------- ----------- --------
Shareholders' equity in
accordance with U.S. GAAP.... $ 63,129,905 $73,514,126 $ 5,685,210 $316,353
============ =========== =========== ========
</TABLE>
(B) CONSOLIDATED BALANCE SHEETS
The following table indicates the restated amounts for the items in
the consolidated balance sheets of the company that would be affected had
the financial statements been prepared in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1999 1999 1998 1997
------------ ----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Other assets(c)................. $ 12,038,019 $ 877,258 $ 104,907 $ 26,970
Deferred stock-based
compensation expense(d)....... (19,365,982) (287,176) -- --
Share capital................... 88,380,251 85,479,556 8,646,152 836,135
Additional paid-in capital...... 337,215 337,215 255,375 171,100
Stock options outstanding(d).... 20,816,210 723,250 -- --
Deficit......................... 26,118,403 14,613,719 4,277,914 695,882
</TABLE>
(C) REPORTING THE COSTS OF START-UP ACTIVITIES
In April 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to
new operations be expensed as incurred and any start-up costs capitalized
in the past must be written off. Canadian GAAP permits these costs to be
deferred and amortized. The company's start-up costs relate to
organization, registration, and negotiation activities.
(D) STOCK-BASED COMPENSATION
For U.S. GAAP, the company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees."
This method recognizes compensation cost as the amount by which the fair
value of the stock exceeds the exercise price at the date of grant. The
compensation cost is recognized over the vesting period. For U.S. GAAP, the
compensation cost not yet recognized is presented as a deferred stock-based
compensation charge, with a corresponding amount included in stock options
outstanding, both of which form part of shareholders' equity. For Canadian
GAAP, stock-based compensation expense is not recorded in the accounts of
the Company.
F-39
<PAGE> 144
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had the company determined compensation costs based on fair value at
the date of grant for its awards under a method prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" the company's loss and loss per share would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Loss in accordance with U.S. GAAP.......... $(10,335,805) $(3,582,032) $(426,468)
Additional compensation expense............ (173,968) (18,208) (59,490)
------------ ----------- ---------
Pro forma net loss......................... $(10,509,773) $(3,600,240) $(485,958)
============ =========== =========
Pro forma loss per share................... $ (0.59) $ (0.38) $ (0.06)
============ =========== =========
</TABLE>
The pro forma compensation expense reflected above has been estimated
using the Black Scholes option-pricing model. Assumptions used in the
pricing model included: (i) risk free interest rate of between 4.10% --
6.16%; (ii) expected volatility of nil; (iii) expected dividend yield of
nil; and (iv) an estimated average life of 2.67 years.
A summary of stock options outstanding at December 31, 1999
(unaudited) is set out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 276,134 1.04 years $ 0.50 276,134 $ 0.50
$1.00................... 37,500 0.83 years 1.00 37,500 1.00
$1.25................... 1,229,118 3.45 years 1.25 961,325 1.25
$1.50................... 1,108,000 4.40 years 1.50 621,236 1.50
$1.875.................. 1,473,992 4.13 years 1.875 1,318,699 1.875
$3.00................... 2,553,350 4.68 years 3.00 587,817 3.00
--------- ---------- ------ --------- ------
6,678,094 4.11 years $ 2.07 3,802,711 $ 1.72
========= ========== ====== ========= ======
</TABLE>
A summary of stock options outstanding at September 30, 1999 is set out
below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 277,224 1.29 years $ 0.50 277,224 $ 0.50
$1.00................... 37,500 1.08 years 1.00 37,500 1.00
$1.25................... 1,239,118 3.76 years 1.25 972,062 1.25
$1.50................... 1,108,000 4.60 years 1.50 523,111 1.50
$1.875.................. 1,300,000 4.59 years 1.875 1,300,000 1.875
$3.00................... 500,000 4.92 years 3.00 500,000 3.00
--------- ---------- ------ --------- ------
4,461,842 4.17 years $ 1.64 3,609,897 $ 1.69
========= ========== ====== ========= ======
</TABLE>
F-40
<PAGE> 145
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock options outstanding at September 30, 1998 is set
out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.01................... 500,000 2.50 years $0.01 500,000 $0.01
$0.50................... 277,660 1.52 years 0.50 277,660 0.50
$1.00................... 849,067 0.40 years 1.00 849,067 1.00
$1.25................... 228,251 2.75 years 1.25 228,251 1.25
--------- ---------- ----- --------- -----
1,854,978 1.42 years $0.69 1,854,978 $0.69
========= ========== ===== ========= =====
</TABLE>
A summary of stock options outstanding at September 30, 1997 is set
out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 1,311,263 1.25 years $0.50 1,311,263 $0.50
</TABLE>
(E) DEFERRED FOREIGN EXCHANGE
U.S. GAAP requires immediate recognition in income of unrealized
foreign currency exchange gains and losses on long-term monetary items with
a fixed or ascertainable life whereas Canadian GAAP requires that these
unrealized gains and losses be deferred and amortized over the remaining
term of the long-term monetary items.
(F) DETAILS OF AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- -----------------------------
1999 1998 1999 1998 1997
------------ ------------ -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amortization expense for
the period consists of:
Property, plant and
equipment............. $ 964,410 $133,175 $839,455 $213,240 $37,511
Goodwill................. 155,555 -- -- 32,822 9,160
Deferred charges......... 4,180 4,372 13,084 8,516 8,475
---------- -------- -------- -------- -------
$1,124,145 $137,547 $852,539 $254,578 $55,146
========== ======== ======== ======== =======
</TABLE>
F-41
<PAGE> 146
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(G) REVENUES AND COST OF SALES WERE SPLIT BETWEEN PRODUCTS AND SERVICES AS
FOLLOWS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- --------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Products........... $ 774,422 $137,707 $ 761,406 $ 674,215 $1,275,687
Services........... 1,492,144 234,681 1,944,026 1,149,007 775,435
---------- -------- ---------- ---------- ----------
$2,266,566 $372,388 $2,705,432 $1,823,222 $2,051,122
========== ======== ========== ========== ==========
Cost of sales
Products........... $ 783,146 $144,384 $ 750,335 $ 657,059 $1,053,455
Services........... 1,354,381 104,200 1,058,140 474,190 383,531
---------- -------- ---------- ---------- ----------
$2,137,527 $248,584 $1,808,475 $1,131,249 $1,436,986
========== ======== ========== ========== ==========
</TABLE>
(H) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The company has determined
that the impact of SOP 98-1 on its financial position, results of
operations, and cash flows is not material.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes methods of accounting for derivative and hedging
activities related to those instruments as well as other hedging
activities. The company has not assessed the impact on its financial
position, results of operations or cash flows of adopting SFAS No. 133. The
company will be required to implement SFAS No. 133 for its fiscal year
ended September 30, 2001.
F-42
<PAGE> 147
AUDITORS' REPORT
To the Directors of
SHAW FIBERLINK LTD.
We have audited the balance sheets of SHAW FIBERLINK LTD. -- FIBERLINK
DIVISION (the "Division") as at August 31, 1999 and 1998 and the statements of
income and net investment by Shaw FiberLink Ltd. and cash flows for each of the
years in the three year period ended August 31, 1999. These financial statements
are the responsibility of the Division's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Division as at August 31, 1999 and 1998
and the results of its operations and its cash flows for each of the years in
the three year period ended August 31, 1999 in accordance with accounting
principles generally accepted in Canada.
As disclosed in note 1, the Division is a segment of Shaw FiberLink Ltd.
and has no separate legal status or existence.
Calgary, Canada /s/ ERNST & YOUNG LLP
December 23, 1999 Independent Public Accountants
(except as to Note 11
which is at February 16, 2000)
F-43
<PAGE> 148
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
BALANCE SHEETS
SEE BASIS OF PRESENTATION -- NOTE 1
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------
1999 1999 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT
Accounts receivable (net of allowance for doubtful accounts
of $86; August 31, 1999 -- $79; 1998 -- $84)............. $ 6,264 $ 7,336 $ 2,188
Prepaids and other......................................... 183 289 65
------- ------- -------
6,447 7,625 2,253
Property and equipment [note 3]............................ 78,422 70,472 46,793
------- ------- -------
$84,869 $78,097 $49,046
======= ======= =======
LIABILITIES AND NET INVESTMENT BY SHAW FIBERLINK LTD.
CURRENT
Accounts payable and accrued liabilities................... $ 1,905 $ 1,974 $ 7,613
Income taxes payable....................................... 92 116 148
Unearned revenues.......................................... 1,273 1,330 161
------- ------- -------
3,270 3,420 7,922
Commitments and contingency [notes 7 and 8]
Net investment by Shaw FiberLink Ltd....................... 81,599 74,677 41,124
------- ------- -------
$84,869 $78,097 $49,046
======= ======= =======
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) PETER J. BISSONNETTE (Signed) MARGOT M. MICALLEF
Director Director
</TABLE>
See accompanying notes.
F-44
<PAGE> 149
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
STATEMENTS OF INCOME AND NET INVESTMENT BY SHAW FIBERLINK LTD.
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------- ---------------------------
1999 1998 1999 1998 1997
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................. $13,197 $ 7,876 $38,815 $22,324 $11,631
Cost of sales (exclusive of items shown
separately below)...................... 6,503 3,529 17,800 10,174 3,965
------- ------- ------- ------- -------
6,694 4,347 21,015 12,150 7,666
------- ------- ------- ------- -------
Selling, general and administrative
expenses............................... 3,004 1,999 8,893 7,498 5,227
Depreciation............................. 2,109 1,347 6,565 3,832 1,954
Depreciation charge allocated by Shaw for
use of distribution network assets
[note 6(c)]............................ 1,648 1,259 5,649 4,394 3,073
------- ------- ------- ------- -------
6,761 4,605 21,107 15,724 10,254
------- ------- ------- ------- -------
LOSS BEFORE INCOME TAXES................. (67) (258) (92) (3,574) (2,588)
Income taxes [note 4].................... 25 23 92 50 25
------- ------- ------- ------- -------
Net loss................................. (92) (281) (184) (3,624) (2,613)
Net investment by Shaw FiberLink Ltd.,
beginning of the year.................. 74,677 41,124 41,124 23,208 14,137
Investment by Shaw FiberLink Ltd. during
the year............................... 7,014 11,117 33,737 21,540 11,684
------- ------- ------- ------- -------
NET INVESTMENT BY SHAW FIBERLINK LTD.,
END OF THE YEAR........................ $81,599 $51,960 $74,677 $41,124 $23,208
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-45
<PAGE> 150
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------- ------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES [note 1]
Net loss............................ $ (92) $ (281) $ (184) $ (3,624) $ (2,613)
Non-cash items:
Depreciation...................... 2,109 1,347 6,565 3,832 1,954
-------- -------- -------- -------- --------
CASH FLOW FROM OPERATIONS........... 2,017 1,066 6,381 208 (659)
Net change in non-cash working
capital balances related to
operations [note 9]............... 1,028 (6,988) (9,874) 5,697 1,064
-------- -------- -------- -------- --------
3,045 (5,922) (3,493) 5,905 405
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Additions to property and
equipment......................... (10,059) (5,195) (30,244) (27,445) (12,089)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Investment by Shaw FiberLink Ltd.
during the year................... 7,014 11,117 33,737 21,540 11,684
-------- -------- -------- -------- --------
CHANGE IN CASH DURING THE YEAR AND
CASH AT BEGINNING AND END OF
YEAR.............................. -- -- -- -- --
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-46
<PAGE> 151
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Shaw FiberLink Ltd. -- FiberLink Division (the "Division" or
"FiberLink") operates high capacity fiber optic telecommunications networks in
various Canadian markets including: Greater Metropolitan Toronto, Calgary,
Edmonton, Winnipeg, Vancouver Island, Central British Columbia, Saskatoon,
Lethbridge and Red Deer. FiberLink also operates several strategically-located
inter-city networks and two international gateways into the United States.
FiberLink provides its customers with a wide range of telecommunications
services including dedicated voice services, switched data transmission and
Business Internet services.
While the Division owns certain of the assets required to carry on the
business, a number of assets, including distribution network assets (see note
6), administrative facilities and maintenance operations are owned by Shaw
Communications Inc.
These financial statements represent the business operations identified as
the FiberLink Division of Shaw FiberLink Ltd. Accordingly, there is no share
capital or retained earnings in the Division's accounts. The net investment by
Shaw FiberLink Ltd. represents the capital employed in the Division in the form
of investments and advances. Shaw FiberLink Ltd. is a wholly owned subsidiary of
Shaw Communications Inc. Investments and advancements by Shaw FiberLink Ltd. in
the Division are funded by Shaw Communications Inc. to Shaw FiberLink Ltd.
The Division has relied extensively upon Shaw FiberLink Ltd. and Shaw
Communications Inc. for ongoing financial support and accordingly, these
divisional financial statements are not necessarily indicative of the results of
operations, cash flows or financial position had the Division operated as an
independent entity as at or for the dates and periods presented. Should Shaw
FiberLink Ltd. or Shaw Communications Inc. cease to provide such financial
support, the Division would require alternative ongoing financing from other
sources. Shaw Communications Inc. has allocated corporate, overhead and
technical costs to the Division based on an estimate of the services provided,
and charges for the use of distribution network assets based on Shaw
Communications Inc.'s annual depreciation charge related to these assets (see
note 6). The management of Shaw Communications Inc. have estimated the
incremental costs of the Division as a stand-alone entity for corporate
expenses, other than taxes or interest, would be approximately $1,532,000
annually. Management believes this to be reasonable.
The information presented as at and for the interim periods ended November
30, 1999 and 1998 is unaudited. These unaudited financial statements reflect all
adjustments which are in the opinion of management necessary to a fair statement
of the results for the interim periods presented; all such adjustments are of a
normal recurring nature.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared by management in accordance
with Canadian generally accepted accounting principles consistently applied
within the framework of the accounting policies described below. The policy with
respect to accounting for income taxes described below differs from that used in
the preparation of the consolidated financial statements of Shaw Communications
Inc.
REVENUE RECOGNITION
FiberLink provides telecommunication services to its customers and earns
both recurring and installation revenues. Recurring revenues are recognized on a
monthly basis as the services are provided to customers. Unearned recurring
revenues are deferred and recognized as earned. Revenues earned on installation
contracts are recorded when the installation of an operational link is
F-47
<PAGE> 152
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completed unless such revenues exceed the related direct cost of the
installation in which case the excess is recognized over the contract period.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET ESTIMATED USEFUL LIFE
----- ---------------------
<S> <C>
Towers and headends................................... 10 years
Distribution network.................................. 10 years
Subscriber equipment.................................. 15 years
Computer equipment and software....................... 4 years
Other equipment....................................... 4-10 years
</TABLE>
INCOME TAXES
The liability method of tax allocation is used in accounting for income
taxes. Under this method, future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and
liabilities, and measured using the substantially enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce future income tax assets to
the amount expected to be realized.
SEGMENTED INFORMATION
FiberLink's business of providing local high speed telecommunications and
Internet access services is one operating segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------------------------------------
1999 1999 1998
---------------------- ---------------------- ----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
------- ------------ ------- ------------ ------- ------------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Towers and headends.... $60,901 $11,612 $55,060 $10,163 $35,206 $5,649
Distribution network... 2,945 467 2,945 394 2,463 123
Subscriber equipment... 25,657 2,327 21,546 1,934 12,734 790
Computer equipment and
software............. 1,440 465 1,395 377 777 106
Other equipment........ 3,156 806 3,094 700 2,615 334
------- ------- ------- ------- ------- ------
$94,099 $15,677 $84,040 $13,568 $53,795 $7,002
------- ------- ------- ------- ------- ------
NET BOOK VALUE......... $78,422 $70,472 $46,793
</TABLE>
F-48
<PAGE> 153
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Labour and other costs attributable to construction and installation are
capitalized as part of towers and headends. For the three months ended November
30, 1999 the amount capitalized was $1,818,000 (unaudited) (August 31, 1999 --
$5,641,000; 1998 -- $4,200,000).
4. INCOME TAXES
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Division's future tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------
1999 1999 1998
------------ ------- -------
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C>
FUTURE TAX LIABILITIES:
Property and equipment.................................... (7,844) $(6,590) $(1,026)
------- ------- -------
FUTURE TAX ASSETS:
Non-capital losses carried forward........................ 13,257 12,236 6,639
Valuation allowance....................................... (5,413) (5,646) (5,613)
------- ------- -------
7,844 6,590 1,026
------- ------- -------
NET FUTURE TAXES.......................................... -- -- --
======= ======= =======
</TABLE>
The Division has incurred losses for income tax purposes that are available
to be applied against future years' taxable income expiring as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
CANADIAN DOLLARS)
-----------------
<S> <C>
2002.................................................... $ 1,143
2003.................................................... 2,459
2004.................................................... 6,019
2005.................................................... 8,652
2006.................................................... 8,918
Period ending November 30, 2007 (unaudited)............. 2,268
-------
$29,459
=======
</TABLE>
F-49
<PAGE> 154
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Differences between income taxes calculated at Canadian statutory rates and
the income tax provision made in the Divisional accounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------- -------------------------------
1999 1998 1999 1998 1997
----- ----- ------- --------- ---------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Income taxes (recovery) at Canadian statutory
rates...................................... $ (30) $(116) $ (41) $(1,608) $(1,165)
Differences from statutory rates relating to:
Large corporations tax..................... 25 23 92 50 25
Benefit of tax losses not recognized....... 30 116 33 1,612 1,118
Other, including items not deductible for
tax purposes............................ -- -- 8 (4) 47
----- ----- ----- ------- -------
INCOME TAX PROVISION......................... $ 25 $ 23 $ 92 $ 50 $ 25
===== ===== ===== ======= =======
</TABLE>
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------- ---------------------
1999 1998 1999 1998 1997
----- ----- ----- ----- -----
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Current................................................. $ 25 $ 23 $ 92 $ 50 $ 25
Future.................................................. -- -- -- -- --
---- ---- ---- ---- ----
$ 25 $ 23 $ 92 $ 50 $ 25
==== ==== ==== ==== ====
</TABLE>
5. FINANCIAL INSTRUMENTS
Financial instruments recognized in the balance sheets have fair values
approximating their carrying values.
CREDIT RISK
At November 30, 1999 (unaudited), approximately 34% of the accounts
receivable represents amounts due from five customers (August 31, 1999 -- 55%
from six customers; 1998 -- 45% from six customers).
Revenues from customers (excluding related parties described in note 6)
which exceed ten percent of total revenues for the year are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED AUGUST 31,
NOVEMBER 30, ---------------------
1999 1999 1998 1997
------------ ----- ----- -----
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C> <C>
Customer A................................................ 7% 11% 17% 26%
Customer B................................................ 5% 8% 11% 7%
</TABLE>
F-50
<PAGE> 155
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS
(a) The Division provides high speed Internet services to Shaw
Communications Inc. In 1998 and 1997, the divisions of Shaw Communications Inc.
negotiated rates and margins on these services which are reflected in the
accounts. Subsequent to 1998, the FiberLink Division only passed along to Shaw
Communications Inc. the external costs incurred by the Division to provide these
services to Shaw Communications Inc. Intercompany revenues, expenses and margins
reflected in these financial statements for the provision of Internet services
to Shaw Communications Inc. are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------ -------------------------------
1999 1998 1999 1998 1997
------- -------- --------- -------- --------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $2,691 $ 1,242 $ 6,627 $3,090 $ 985
Cost of sales............................... 2,691 1,242 6,627 2,115 153
------ ------- ------- ------ ------
Margin...................................... $ -- $ -- $ -- $ 975 $ 832
====== ======= ======= ====== ======
</TABLE>
(b) These Divisional financial statements reflect corporate allocations
from Shaw Communications Inc. for administrative and technical services provided
to the Division of $534,000 and $400,000 respectively for the three months ended
November 30, 1999 and $85,000 and $225,000 for 1998 (unaudited) (August 31, 1999
-- $340,000 and $900,000 respectively; 1998 -- $180,000 and $900,000
respectively; 1997 -- $90,000 and $24,000 respectively). Allocation of
administrative and technical charges are based on the estimated level of
services provided to the Division in proportion to Shaw Communications Inc.'s
total costs, a method of allocation management believes to be reasonable. Of the
corporate allocations from Shaw Communications Inc., $574,000 have been
reflected in selling, general and administrative expenses and $360,000 has been
capitalized to towers and headends in the three months ended November 30, 1999
and $107,000 and $203,000 respectively for 1998 (unaudited) (see note 3) (August
31, 1999 -- $430,000 and $810,000 respectively; 1998 -- $270,000 and $810,000
respectively; 1997 -- $92,000 and $22,000 respectively).
(c) The Division utilizes certain distribution network assets owned by Shaw
Communications Inc. (see note 1) in the provision of services to its customers.
These Divisional financial statements reflect corporate allocations for the
utilization of the distribution network assets of $1,648,000 for the three
months ended November 30, 1999 and $1,259,000 for 1998 (unaudited) (August 31,
1999 -- $5,649,000; 1998 -- $4,394,000; 1997 -- $3,073,000). The allocation of
these corporate charges is based upon FiberLink's estimated proportion of Shaw
Communications Inc.'s annual depreciation charge related to these distribution
network assets. Management believes this method of allocation to be reasonable.
F-51
<PAGE> 156
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
The Division has various long-term operating lease agreements for the use
of transmission facilities and premises in each of the next five years as
follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
CANADIAN DOLLARS)
-----------------
<S> <C>
2000.................................................... $ 9,501
2001.................................................... 7,690
2002.................................................... 6,590
2003.................................................... 6,342
2004.................................................... 691
Thereafter.............................................. 721
-------
$31,535
=======
</TABLE>
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
9. STATEMENTS OF CASH FLOWS
Additional disclosures with respect to the Statements of Cash Flows are as
follows:
(i) Changes in non-cash working capital balances related to operations
include the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------ -------------------------------
1999 1998 1999 1998 1997
------- -------- --------- -------- --------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Accounts receivable......................... $1,072 $ (744) $(5,148) $ (90) $ (22)
Prepaids and other.......................... 106 (253) (224) (45) 68
Accounts payable and accrued liabilities.... (69) (6,040) (5,639) 5,733 110
Income taxes payable........................ (24) (21) (32) (37) 898
Unearned revenues........................... (57) 70 1,169 136 10
------ ------- ------- ------ ------
$1,028 $(6,988) $(9,874) $5,697 $1,064
====== ======= ======= ====== ======
</TABLE>
(ii) Interest and income taxes paid
Shaw Communications Inc. does not allocate interest on debt to Shaw
FiberLink Ltd. and the Division does not have any separate legal existence for
purposes of remitting income taxes. Accordingly, amounts included in these
Divisional statements for taxes represent allocations only and are included in
changes in advances to and from Shaw FiberLink Ltd.
F-52
<PAGE> 157
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNITED STATES ACCOUNTING PRINCIPLES
The financial statements of the Division are prepared in Canadian dollars
in accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). No additional adjustments have been identified in order to present these
financial statements in accordance with accounting policies generally accepted
in the United States ("U.S. GAAP"). The following disclosure would be required
in order to present these financial statements in accordance U.S. GAAP.
Recent developments
The Financial Accounting Standards Board in the United States issued a
pronouncement entitled "Accounting for Derivative Instruments and Hedging
Activities" which the Division is required to adopt in the year ending August
31, 2001. The impact of this pronouncement on these financial statements has not
been determined.
11. SUBSEQUENT EVENT
On December 22, 1999, Shaw Communications Inc. and Shaw FiberLink Ltd.
entered into an asset purchase and subscription agreement ("Purchase Agreement")
with GT Group Telecom Inc. ("GT"). This transaction closed on February 16, 2000.
Under the Purchase Agreement, Shaw FiberLink Ltd. sold to GT all of the property
and assets of FiberLink used in connection with the high speed data and
competitive access business and granted to GT an indefeasible right to use the
distribution network assets owned by Shaw Communications Inc. (see notes 1 and
6). The assets sold include equipment, computer hardware, fixed assets,
replacement parts, operational contracts, equipment contracts, supply contracts,
interconnect agreements, co-location agreements, customer contracts, software
licenses, broadband wireless licenses, vehicles, intellectual property, permits,
prepaid expenses, goodwill related to the FiberLink assets and certain other
fiber assets. Under the Indefeasible Right to Use agreement, GT was granted an
indefeasible right to use certain specifically identified existing fibers in the
fiber optic cable networks of Shaw Communications Inc. for 60 years. In
addition, Shaw FiberLink Ltd. granted GT an indefeasible right to use fibers to
be built over the next three years in mutually agreed regions.
Consideration for this transaction amounts to $760 million, consisting of
$360 million in cash, and sufficient series B first preference shares of GT to
provide Shaw FiberLink Ltd. with a 28.5% fully diluted interest in GT, subject
to adjustments for certain GT transactions relating to financing and employee
options and warrants.
F-53
<PAGE> 158
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements are
based on the historical financial statements of GT Group Telecom Inc. ("Group
Telecom") and the historical financial statements of Shaw FiberLink Ltd. --
FiberLink Division ("Shaw FiberLink") prepared to give effect to Group Telecom's
acquisition of the business of Shaw FiberLink and the grant, by Shaw FiberLink,
of an indefeasible right to use certain identified fibers in the fiber optic
cable networks of Shaw Communications Inc. ("Shaw Communications") to Group
Telecom. This transaction closed on February 16, 2000 (refer to note 1). The pro
forma financial statements give effect to $220 million in senior bank debt as
partial consideration for the acquisition of the business of Shaw FiberLink, and
$651 million in gross proceeds from the issuance of units under an Offering
Circular and Purchase Agreement which closed on February 1, 2000.
The unaudited pro forma condensed consolidated statements of operations for
the year ended September 30, 1999 gives effect to such transactions as if they
occurred at the beginning of the year then ended. The unaudited pro forma
condensed consolidated balance sheet gives effect to such transactions as if
they had occurred effective September 30, 1999. The pro forma adjustments are
described in the accompanying notes and are based upon available information and
certain assumptions that management believes are reasonable.
The pro forma statements do not purport to represent what the Company's
results of operations or financial condition would actually have been had these
transactions in fact occurred on such dates or to project the Company's results
of operations or financial condition for any future date or period. The pro
forma financial statements should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" presented elsewhere in this
prospectus.
The acquisition of the business of Shaw FiberLink and the grant of an
indefeasible right to use certain fibers in the fiber optic cable networks of
Shaw Communications are accounted for under the purchase method of accounting
(refer to note 1). The total purchase price of $780 million, including
acquisition costs of approximately $20 million has been allocated to the
identifiable tangible and intangible assets of the applicable acquired business
based upon the Company's estimate of their fair values with the remainder
allocated to goodwill. The allocation of the purchase price may be revised when
additional information is obtained; however, management does not expect that any
such revisions will have a material effect on the Company's consolidated
financial position or results of operations. The Company has recorded the
purchase price for the business of Shaw FiberLink based on its estimate of the
fair value of the consideration given, which includes $360 million cash and
sufficient Series B first preference shares of the Company to provide the vendor
with a 28.5% fully diluted interest in the Company at the date the acquisition
is consummated, subject to adjustments related to financing and employee options
and warrants. Management's estimate of the fair value of these shares amounts to
$400 million.
F-54
<PAGE> 159
GT GROUP TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED) AS AT SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
GT GROUP SHAW
TELECOM INC. FIBERLINK
SEPTEMBER 30, AUGUST 31, PRO FORMA
1999 1999 ADJUSTMENTS NOTES PRO FORMA
------------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......... $ 59,851 $ -- $ 871,300 2(v) $ 523,651
(360,000) 2(i)
(20,000) 2(i)
(27,500) 2(vi)
Accounts receivable................ 3,784 7,336 (7,336) 2(i) 3,784
Other assets....................... 1,071 289 (289) 2(i) 1,071
-------- ------- ---------- ----------
64,706 7,625 456,175 528,506
PREPAYMENT ON PROPERTY, PLANT AND
EQUIPMENT........................ -- -- 223,000 2(i) 223,000
PROPERTY, PLANT AND EQUIPMENT...... 73,817 70,472 358,528 2(i) 502,817
INTANGIBLE ASSETS.................. -- -- 28,800 2(i) 28,800
GOODWILL........................... -- -- 127,200 2(i) 127,200
OTHER ASSETS....................... 1,292 -- 25,600 2(vi) 26,892
-------- ------- ---------- ----------
$139,815 $78,097 $1,219,303 $1,437,215
======== ======= ========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities...................... $ 14,926 $ 2,090 $ (2,090) 2(i) $ 14,926
Unearned revenue................... 656 1,330 (1,330) 2(i) 656
Current portion of long-term
debt............................. 1,253 -- -- 1,253
-------- ------- ---------- ----------
16,835 3,420 (3,420) 16,835
LONG-TERM UNEARNED REVENUE......... 1,494 -- -- 1,494
LONG-TERM DEBT..................... 47,557 -- 220,000 2(v) 860,077
592,520 2(v)
FUTURE INCOME TAXES................ -- -- 28,000 2(i) 28,000
-------- ------- ---------- ----------
65,886 3,420 837,100 906,406
-------- ------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital...................... 84,880 -- 400,000 2(i) 484,880
Additional paid-in capital......... 255 -- -- 255
Shares to be issued................ 1,875 -- -- 1,875
Warrants........................... -- -- 56,880 2(v) 56,880
Deficit............................ (13,081) -- -- (13,081)
Net investment by Shaw FiberLink... -- 74,677 (74,677) 2(i) --
-------- ------- ---------- ----------
73,929 74,677 382,203 530,809
-------- ------- ---------- ----------
$139,815 $78,097 $1,219,303 $1,437,215
======== ======= ========== ==========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
information.
F-55
<PAGE> 160
GT GROUP TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GT GROUP SHAW
TELECOM INC. FIBERLINK
SEPTEMBER 30, AUGUST 31, PRO FORMA
1999 1999 ADJUSTMENTS NOTES PRO FORMA
------------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE............................... $ 2,705 $ 38,815 $ -- $ 41,520
COST OF SALES (EXCLUSIVE OF ITEMS
SHOWN SEPARATELY BELOW)............. 1,808 17,800 1,500 2(iv) 21,108
------- -------- --------- ---------
897 21,015 (1,500) 20,412
Selling, general and administrative
expenses............................ 10,218 8,893 -- 19,111
------- -------- --------- ---------
(9,321) 12,122 (1,500) 1,301
Amortization.......................... 853 6,565 13,500 2(ii) 39,267
12,700 2(iii)
5,649 2(ii)
Depreciation charge allocated by Shaw
Communications for use of
distribution network assets......... -- 5,649 (5,649) 2(ii) --
Interest and finance items (income)... (372) -- 23,100 2(v) 114,028
88,400 2(v)
2,900 2(vi)
------- -------- --------- ---------
LOSS BEFORE INCOME TAXES.............. (9,802) (92) (142,100) (151,994)
PROVISION FOR INCOME TAXES............ 165 92 -- 257
------- -------- --------- ---------
NET LOSS FOR THE YEAR................. $(9,967) $ (184) $(142,100) $(152,251)
======= ======== ========= =========
PRO FORMA LOSS PER SHARE.............. (8.53)
=========
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (IN THOUSANDS)........ 17,859
=========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
information.
F-56
<PAGE> 161
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The pro forma condensed consolidated balance sheet and condensed
consolidated statement of operations have been prepared to give effect to (a)
the acquisition of the assets of Shaw FiberLink Ltd. -- FiberLink Division
("Shaw FiberLink") by GT Group Telecom Inc. ("Group Telecom"); (b) the grant by
Shaw FiberLink of an indefeasible right to use certain specifically identified
fibers in the fiber optic cable networks of Shaw Communications Inc. ("Shaw
Communications") to Group Telecom; and (c) the Company's issuance of Units
consisting of Senior Discount Notes and Warrants to Purchase Class B non-voting
shares. The Units offering closed on February 1, 2000. The Shaw FiberLink
transactions closed on February 16, 2000.
Group Telecom, through its wholly owned subsidiary GT Group Telecom
Services Corp. entered into an Asset Purchase and Subscription Agreement
("Purchase Agreement") dated December 22, 1999 with Shaw Communications and Shaw
FiberLink. This transaction closed on February 16, 2000. Under the Purchase
Agreement, Group Telecom purchased from Shaw FiberLink all of the property and
assets of Shaw FiberLink used in connection with the high speed data and
competitive access business excluding accounts payable and future income taxes.
The assets purchased include equipment, computer hardware, capital assets,
replacement parts, operational contracts, equipment contracts, supply contracts,
interconnect agreements, co-location agreements, customer contracts, software
licenses, broadband wireless licenses, vehicles, intellectual property, permits,
goodwill and certain other assets. Group Telecom was also granted an
indefeasible right to use certain specifically identified existing fibers in the
fiber optic cable networks of Shaw Communications for 60 years. In addition, the
company received an indefeasible right to use fibers to be built over the next
three years in mutually agreed regions. Group Telecom assumed certain
obligations related to permits, operational contracts, customer contracts,
software licenses and certain other obligations.
The acquisition and the prepaid rental consideration pertaining to the
indefeasible right to use have been accounted for as a purchase. The purchase
consideration of $760 million, consists of $360 million in cash, and sufficient
Series B first preference shares of the Company to provide the vendor with a
28.5% fully diluted interest at the date the acquisition is consummated, subject
to adjustments relating to financing and employee options and warrants, which
shares are currently valued at $400 million. The estimated purchase
consideration of $760 million together with acquisition costs of $20 million,
was allocated to the identifiable assets acquired based on their respective fair
values as at the date of acquisition, with the excess allocated to goodwill.
Pursuant to an Offering Circular and Purchase Agreement which closed on
February 1, 2000, GT Group Telecom issued 855,000 Units, consisting of U.S.$855
million (issued at a price of 52.651%) of 13.25% Senior Discount Notes Due 2010
and 855,000 Warrants to Purchase 4,198,563 Class B non-voting shares. Gross
proceeds amounted to U.S.$450.2 million, equivalent to approximately $651
million. Of the total proceeds amounting to $651 million, $593 million was
allocated to the Senior Discount Notes and $58 million was allocated to the
share purchase warrants.
The pro forma condensed consolidated financial statements give effect to
$220 million in senior bank debt as partial consideration for the acquisition of
the business of Shaw FiberLink, and $646 million in gross proceeds from the
issuance of the Units described in the preceding paragraph.
The pro forma condensed consolidated statement of operations for the year
ended September 30, 1999 is based on the audited consolidated statement of
operations of Group Telecom for the year ended September 30, 1999 and the
audited statement of operations of Shaw FiberLink
F-57
<PAGE> 162
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
for the year ended August 31, 1999, as Group Telecom and Shaw FiberLink had
non-coterminous year-ends.
The pro forma condensed consolidated statements do not purport to represent
what Group Telecom's results of operations or financial condition would actually
have been, had these transactions in fact occurred on such dates or to project
Group Telecom's results of operations or financial condition for any future date
or period. The pro forma condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
of Group Telecom and Shaw FiberLink, including the descriptions of significant
accounting policies, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" presented elsewhere in this prospectus.
2. PRO FORMA ASSUMPTIONS
The pro forma condensed consolidated balance sheet gives effect to the
transactions disclosed in Note 1 above as if they had occurred effective
September 30, 1999. The pro forma condensed consolidated statement of operations
gives effect to these transactions as if they had occurred effective October 1,
1998.
(i) The pro forma financial information reflects the following allocation
of the purchase consideration for the acquisition of the business of Shaw
FiberLink in accordance with the purchase method of accounting:
<TABLE>
<S> <C>
Purchase consideration
Cash...................................................... $360,000
29,096,097 Series B first preference shares............... 400,000
--------
760,000
Acquisition costs........................................... 20,000
--------
$780,000
========
Allocated to
INDEFEASIBLE RIGHT TO USE AGREEMENT:
Prepayment for indefeasible rights to use fibers to be
constructed............................................ $223,000
Prepayment representing indefeasible rights to use
constructed fibers..................................... 329,000
SHAW FIBERLINK PURCHASE:
Property, plant and equipment............................. 100,000
Intangible assets......................................... 28,800
Goodwill.................................................. 127,200
Future income taxes....................................... (28,000)
--------
$780,000
========
</TABLE>
The prepayment of $223 million represents the prepayment of an indefeasible
right to use certain fibers to be built by Shaw Communications over the next
three years. Included in the prepayment representing indefeasible rights to use
constructed fibers is an amount of $22 million for an indefeasible right to use
certain existing fibers located in New Brunswick, Canada, commencing in 2003.
F-58
<PAGE> 163
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The area of accounting for indefeasible rights to use fibers is evolving,
and is currently under consideration by accounting standard setters. The Company
is currently unable to determine the effect, if any, of such potential
accounting changes.
(ii) The additional amortization expense relates to the increased basis of
property, plant and equipment and is based on the estimated useful life of the
equipment and the fiber optic networks acquired which are amortized on a
straight line basis over 10 and 20 years respectively.
(iii) The additional amortization expense relates to the allocation of the
purchase price to goodwill and other intangible assets. The amortization is
based on the estimated useful life of 20 years for goodwill of $127.2 million,
10 years for license rights of $13.8 million and 3 years for $15 million
recorded as a non-compete agreement.
(iv) The increase in cost of sales represents an annual fiber maintenance
fee as set out in the indefeasible right to use agreement.
(v) The increases in long-term debt and related interest expense are based
on senior bank financing of $220 million, for which interest was calculated at a
rate of 10.50% per annum, and $593 million in Senior Discount Notes which have a
stated interest rate of 13.25% and an effective interest rate of 14.93%.
Interest on the senior bank financing of $220 million is based on a floating
rate. A 1 percent rate increase would result in additional interest expense of
$2.2 million not currently reflected in the recorded amounts.
(vi) The deferred financing costs of $27.5 million relating to the debt
issuances described in (v) above are amortized over the term of the related
debts, assumed to be 7 and 10 years.
F-59
<PAGE> 164
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GAAP
The pro forma condensed consolidated financial information has been
prepared in accordance with Canadian GAAP which differ in some respects from the
principles and practices that Group Telecom would have followed had the pro
forma financial information been prepared in accordance with U.S. GAAP. Refer to
note 22 of Group Telecom consolidated financial statements for a reconciliation
of differences impacting the Company.
<TABLE>
<S> <C>
Pro forma loss under Canadian GAAP.......................... $(152,251)
Group Telecom adjustments:
Deferred charges.......................................... (301)
Stock-based compensation.................................. (56)
Deferred foreign exchange................................. (12)
---------
Pro forma loss under U.S. GAAP.............................. $(152,620)
=========
Pro forma loss per share.................................... (8.55)
=========
Pro forma weighted average number of common shares (in
thousands)(1)............................................. 17,859
=========
</TABLE>
---------------
(1) The pro forma weighted average number of common shares is based on
the average number of Class A voting and Class B non-voting shares
outstanding during the year ended September 30, 1999.
<TABLE>
<S> <C>
A reconciliation of pro forma shareholders' equity from
Canadian to U.S. GAAP is as follows:
Pro forma shareholders' equity in accordance with Canadian
GAAP...................................................... $ 530,809
Group Telecom adjustments:
Deferred charges.......................................... (403)
Deferred foreign exchange................................. (12)
---------
Pro forma shareholders' equity under U.S. GAAP.............. $ 530,394
=========
</TABLE>
F-60
<PAGE> 165
APPENDIX A
FORM OF NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT
The Chase Manhattan Bank
GT Group Telecom Inc.
c/o The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
and
c/o Chase National Corporate Services Inc.
1301 Fifth Avenue, Suite 3410
Seattle, Washington 98101
Attention: Trust Officer
Re: GT Group Telecom Inc. (the "Company")
Warrants and Class B Non-Voting Shares
Dear Sirs:
Please be advised that _____________________ has transferred
___________________ of the above-referenced [WARRANTS] [CLASS B NON-VOTING
SHARES] pursuant to an effective Registration Statement on Form F-1 (File No.
333- ____________ ) filed by the Company.
We hereby certify that the prospectus delivery requirements, if any, of the
Securities Act of 1933, as amended, have been satisfied and that the above-named
beneficial owner of the [WARRANTS] [CLASS B NON-VOTING SHARES] is named as a
"Selling Shareholder" in the Prospectus dated [DATE] or in supplements thereto,
and that the [WARRANTS] [CLASS B NON-VOTING SHARES] transferred are the
[WARRANTS] [CLASS B NON-VOTING SHARES] listed in such Prospectus opposite such
owner's name.
Dated:
Very truly yours,
--------------------------------------
(Name)
By:
--------------------------------------
(Authorized Signature)
<PAGE> 166
---------------------------------------------------------
---------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................... i
Exchange Rates.............................. ii
Presentation of our Financial and Other
Information............................... ii
Risk Factors................................ 1
Use of Proceeds............................. 8
Price Range of Class B Non-Voting Shares.... 8
Dividend Policy............................. 9
Selected Historical Financial and Operating
Information of Group Telecom.............. 10
Selected Unaudited Pro Forma Consolidated
Financial and Operating Information....... 12
Selected Historical Financial and Operating
Information of Shaw FiberLink............. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 16
Our Acquisition of the Shaw FiberLink
Business.................................. 23
Business.................................... 26
Description of Our Financing Arrangements... 42
Description of the Warrants................. 47
Management.................................. 51
Regulation.................................. 59
Related Party Transactions.................. 68
Principal Shareholders...................... 69
Selling Shareholders........................ 70
Description of Share Capital................ 90
Taxation.................................... 93
Plan of Distribution........................ 99
Legal Matters............................... 100
Experts..................................... 100
Enforceability of Civil Liabilities......... 100
Where You Can Obtain More Information About
Us........................................ 100
Index to Financial Statements............... F-1
</TABLE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
GT Group Telecom Logo
3,606,984 Class B Non-Voting Shares
734,549 Warrants to Purchase
Class B Non-Voting Shares
------------------------------------
PROSPECTUS
------------------------------------
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses relating to the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $15,385
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
-------
Total..................................................... $ *
=======
</TABLE>
---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Canada Business Corporations Act (the "CBCA"), a corporation may
indemnify a present or former director or officer to such corporation or a
person who acts or acted at the corporation's request as a director or officer
of another corporation of which the corporation is or was a shareholder or
creditor, and his heirs and legal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of his
being or having been a director or officer of such corporation and provided that
the director or officer acted honestly and in good faith with a view to the best
interests of the corporation, and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with a derivative action only with court approval. A director
or officer is entitled to indemnification from the corporation as a matter of
right in respect of all costs, charges and expenses reasonably incurred by him
in connection with the defense of a civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the corporation if he was substantially successful on the
merits and fulfilled the conditions set forth above.
In accordance with the CBCA, the by-laws of the Registrant, a copy of which
is filed as Exhibit 3.2 to this Registration Statement, indemnify a director or
officer of the Registrant, a former director or officer of the Registrant or any
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or creditor and
his heirs and legal representatives against all costs, charges and expenses
including an amount paid to settle an action or satisfy a judgment reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he has been made a party by reason of being or having been a
director or officer of the Registrant or such body corporate if (i) he acted
honestly and in good faith with a view to the best interests of the Registrant,
and (ii) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful.
The Registrant will also indemnify such directors or officers who have been
substantially successful in the defence of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director of the Registrant or body corporate against all costs, charges
and expenses reasonably incurred by him in respect of such action or proceeding.
II-1
<PAGE> 168
A policy of directors' and officers' liability insurance is maintained by
the Registrant which insures directors and officers for losses as a result of
claims based upon the acts or omissions as directors and officers of the
Registrant, including liabilities arising under the Securities Act of 1933, and
also reimburses the Registrant for payments made pursuant to the indemnity
provisions under the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that, in the opinion of the U.S.
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to unregistered securities issued or sold
by us within the prior three years:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
Units February 1, 2000 qualified institutional buyers
and non-U.S. persons 855,000 526.51
Class A Voting Shares August 1997 to September
1997 directors, executive officers,
employees and non-U.S.
persons 65,287 0.50
August 1997 to September
1997 employees and non-U.S. persons 142,500 0.50
October 1997 executive officers, employees
and non-U.S. persons 117,923 0.50
October 1997 employees 7,900 0.50
February 1998 directors 100,000 0.01
March 1998 employees 4,500 0.76
April 15, 1998 executive officers and
non-U.S. persons 302,881 0.76
May 23, 1998 employees 10,000 0.76
June 17, 1998 sophisticated investors,
directors, employees and
non-U.S. persons 4,828,124 1.25
July 22, 1998 directors, sophisticated
investors and non-U.S.
persons 2,482,592 0.76923
September 1998 directors and employees 230,000 0.01
September 1998 employees and non-U.S. persons 56,863 0.50
December 2, 1998 employees and non-U.S. persons 40,000 0.50
December 1998 directors 100,000 0.01
January 1999 directors 90,000 0.50
March 1999 directors 300,000 0.01
April 19, 1999 directors and employees 476,580 1.25
April 30, 1999 non-U.S. persons 104,504 1.25
April 30, 1999 employees and non-U.S. persons 233,903 1.25
May 1999 non-U.S. persons 100,000 0.01
August 31, 1999 employees and non-U.S. persons 1,527,742 1.875
November 1999 non-U.S. persons 167 1.875
November 1999 non-U.S. person 1,090 0.50
November 1999 employee 10,000 1.25
</TABLE>
II-2
<PAGE> 169
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
December 16, 1999 employees 863 1.875
January 2000 non-U.S. person 55,425 0.50
January 2000 employee 10,000 1.25
January 2000 non-U.S. person 250 1.875
February 2000 employee 3,778 1.25
February 2000 employee 334 3.00
February 2000 non-U.S. person 56 3.00
February 2000 non-U.S. person 167 3.00
February 2000 non-U.S. person 112 1.875
February 2000 non-U.S. person 84 3.00
February 2000 employee 111 3.00
February 2000 employee 10,000 8.00
February 2000 employee 10,000 8.00
March 2000 employees 15,000 8.00
March 2000 sophisticated investors and
non-U.S. persons 60,596,097 0.00(1)
March 2000 employees 121,792 0.50
March 2000 employees 47,884 1.25
March 2000 employees 2,056 1.875
March 2000 employees 362 3.00
March 2000 non-U.S. persons 1,090 0.50
March 2000 employees 42 8.00
April 2000 employees 4,505 1.25
April 2000 employees 83 1.875
April 2000 employees 417 3.00
April 2000 employees 307 8.00
May 2000 employees 3,864 1.25
May 2000 employees 1,000 3.00
May 2000 employees 1,141 8.00
June 2000 employees 11,351 1.25
June 2000 employees 1,500 1.875
June 2000 employees 250 1.50
June 2000 employees 1,181 3.00
June 2000 employees 954 8.00
June 2000 employees 223 20.40
July 2000 employees 7,502 1.25
July 2000 employees 1,167 1.875
July 2000 employees 2,641 3.00
July 2000 employees 334 8.00
August 2000 employees 8,417 1.25
August 2000 employees 967 3.00
August 2000 employees 751 1.875
August 2000 employees 1,365 8.00
August 2000 employees 42 20.40
Warrants for Class A
Voting Shares November 18, 1997 employees, non-U.S. persons,
directors and sophisticated
investors 152,285 0.50
</TABLE>
II-3
<PAGE> 170
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
Class B Non-Voting
Shares April 19, 1999 directors and sophisticated
investors 721,101 1.25
April 30, 1999 directors and sophisticated
investors 2,592,103 1.25
April 30, 1999 directors and sophisticated
investors 835,365 1.25
January 2000 director and employee 250,000 1.25
March 2000 sophisticated investor 11,000,002 0.00(1)
March 2000 director and employee 1,100,000 1.875
March 2000 director and employee 500,000 3.00
Series A First
Preference Shares May 7, 1999 sophisticated investors 27,666,667 1.50
August 10, 1999 sophisticated investors 13,833,335 1.875
December 3, 1999 non-U.S. persons 1,000,000 1.875
Series B First
Preference Shares February 16, 2000 non-U.S. person 29,096,097 13.93
Convertible
Debentures February 18, 25 and March
17, 1999 directors, sophisticated
investors and non-U.S.
persons 18,240 100.00
December 10 and December
15, 1998 directors, employees,
sophisticated investors and
non-U.S. persons 30,993 100.00
March 5, 1999 directors, employees,
sophisticated investors and
non-U.S. persons 13,120 100.00
</TABLE>
In addition, from August 15, 1997 through to August 15, 2000, we have
issued an aggregate of 7,681,963 stock options and warrants to purchase our
class A non-voting shares and 3,350,000 stock options to purchase our class B
non-voting shares to our directors, executive officers and employees. Of these,
5,096,969 and 1,750,000 are outstanding, respectively.
Each of the foregoing securities were sold pursuant to exemptions from
registration under Section 4(2) or Rule 701 of the Securities Act or offered and
sold outside the United States in accordance with Regulation S of the Securities
Act. No underwriter or underwriting discount or commission was involved in any
of such sales.
---------------
(1) Conversion of previously issued first preference shares.
II-4
<PAGE> 171
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
*2.1 Asset Purchase and Subscription Agreement dated December 22,
1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.2 Indefeasible Right of Use Agreement dated February 16, 2000
between Shaw FiberLink Ltd. and GT Group Telecom Inc.
*2.3 Non-competition Agreement in favour of Group Telecom dated
February 16, 2000 among Shaw Communications Inc., Shaw
FiberLink Ltd. and GT Group Telecom Inc.
*2.4 Non-competition Agreement in favour of Shaw dated February
16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd.
and GT Group Telecom Inc.
*2.5 Transitional Services Agreement dated February 16, 2000
among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.6 Performance Assurance Agreement dated February 16, 2000
among Shaw Communications Inc., GT Group Telecom Inc. and GT
Group Telecom Services Corp.
+**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide
Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3,
Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp.
+**2.8 Capacity Lease Agreement dated May 24, 2000 by and between
Worldwide Fiber Network Services Ltd. and Worldwide Fiber
Network Services, Inc. and GT Group Telecom Services Corp.
and GT Group Telecom Services (USA) Corp.
+**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide
Fiber Network Services, Inc. and GT Group Telecom Services
(USA) Corp.
*3.1 Articles of Incorporation of GT Group Telecom Inc.
*3.2 By-laws of GT Group Telecom Inc.
*4.1 Exchange and Registration Rights Agreement dated February 1,
2000 among GT Group Telecom Inc. and Goldman, Sachs & Co.,
CIBC World Markets Corp., Credit Suisse First Boston
Corporation, RBC Dominion Securities Corporation, Scotia
Capital (USA) Inc. and TD Securities (USA) Inc.
*4.2 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**4.3 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
***5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the Class B
non-voting shares and the warrants being registered
***5.2 Opinion of Shearman & Sterling as to the legality of the
warrants being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000 with Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000 among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
*10.4 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
*10.5 Registration Rights Agreement dated February 1, 2000 among
GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World
Markets Corp., Credit Suisse First Boston Corporation, RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.
and TD Securities (USA) Inc.
**12.1 Computation of Ratio of Earnings to Fixed Charges
</TABLE>
II-5
<PAGE> 172
<TABLE>
<C> <S>
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
23.2 Consent of Ernst & Young LLP, Chartered Accountants
***23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
***23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
**24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Incorporated by reference to the Registrant's Registration Statement on Form
F-4 (File No. 333-38058).
*** To be filed by amendment
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (i) and (ii) above shall not apply if
this registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) As long as the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Item 8.A. of Form 20-F at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information
II-6
<PAGE> 173
otherwise required by Section 10(a)(3) of the Act need not be furnished,
provided that the registrant includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Not withstanding the foregoing, if this registration
statement is on Form F-3, a post-effective amendment need not be filed to
include financial statements and information required by Section 10(a)(3) of the
Act or Item 8.A of Form 20-F if such financial statements and information are
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Form F-3.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 174
POWER OF ATTORNEY
Each director or officer of GT Group Telecom Inc. whose signature appears
below constitutes and appoints each of Stephen H. Shoemaker and Robert M. Fabes
as such person's true and lawful attorney-in-fact and agent, each acting alone,
with full power of substitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any or all amendments,
including post-effective amendments, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, each acting
alone, or such person's substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by or on behalf of the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES G. MATKIN Chairman and Director September 8, 2000
---------------------------------------------
James G. Matkin
Director and Chair of Executive
--------------------------------------------- Committee
James M. Mansour
/s/ DANIEL R. MILLIARD Chief Executive Officer and September 8, 2000
--------------------------------------------- Director
Daniel R. Milliard (principal executive officer)
/s/ ROBERT G. WOLFE President, Chief Operating September 8, 2000
--------------------------------------------- Officer and Director
Robert G. Wolfe
/s/ STEPHEN H. SHOEMAKER Executive Vice President and September 8, 2000
--------------------------------------------- Chief Financial Officer
Stephen H. Shoemaker (principal financial officer and
principal accounting officer)
/s/ MICHAEL ABRAM Director September 8, 2000
---------------------------------------------
Michael Abram
/s/ MICHAEL D'AVELLA Director September 8, 2000
---------------------------------------------
Michael D'Avella
/s/ GEORGE ESTEY Director September 8, 2000
---------------------------------------------
George Estey
Director
---------------------------------------------
Leo J. Hindery
</TABLE>
II-8
<PAGE> 175
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ P. KENNETH KILGOUR Director September 8, 2000
---------------------------------------------
P. Kenneth Kilgour
/s/ ROBERT R. GHEEWALLA Director September 8, 2000
---------------------------------------------
Robert R. Gheewalla
/s/ JIM SHAW Director September 8, 2000
---------------------------------------------
Jim Shaw
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, the
undersigned certifies that it is the duly authorized United States
representative of GT Group Telecom Inc. and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, on this 8th day of September, 2000.
GT GROUP TELECOM SERVICES (USA) CORP.
(Authorized U.S. Representative)
/s/ STEPHEN H. SHOEMAKER
By:
--------------------------------------
Name: Stephen H. Shoemaker
Title: Executive Vice President
and
Chief Financial Officer
II-9
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
*2.1 Asset Purchase and Subscription Agreement dated December 22,
1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.2 Indefeasible Right of Use Agreement dated February 16, 2000
between Shaw FiberLink Ltd. and GT Group Telecom Inc.
*2.3 Non-competition Agreement in favour of Group Telecom dated
February 16, 2000 among Shaw Communications Inc., Shaw
FiberLink Ltd. and GT Group Telecom Inc.
*2.4 Non-competition Agreement in favour of Shaw dated February
16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd.
and GT Group Telecom Inc.
*2.5 Transitional Services Agreement dated February 16, 2000
among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.6 Performance Assurance Agreement dated February 16, 2000
among Shaw Communications Inc., GT Group Telecom Inc. and GT
Group Telecom Services Corp.
+**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide
Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3,
Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp.
+**2.8 Capacity Lease Agreement dated May 24, 2000 by and between
Worldwide Fiber Network Services Ltd. and Worldwide Fiber
Network Services, Inc. and GT Group Telecom Services Corp.
and GT Group Telecom Services (USA) Corp.
+**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide
Fiber Network Services, Inc. and GT Group Telecom Services
(USA) Corp.
*3.1 Articles of Incorporation of GT Group Telecom Inc.
*3.2 By-laws of GT Group Telecom Inc.
*4.1 Exchange and Registration Rights Agreement dated February 1,
2000 among GT Group Telecom Inc. and Goldman, Sachs & Co.,
CIBC World Markets Corp., Credit Suisse First Boston
Corporation, RBC Dominion Securities Corporation, Scotia
Capital (USA) Inc. and TD Securities (USA) Inc.
*4.2 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**4.3 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
***5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the class B
non-voting shares and the warrants being registered
***5.2 Opinion of Shearman & Sterling as to the legality of the
warrants being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000 with Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000 among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
*10.4 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
*10.5 Registration Rights Agreement dated February 1, 2000 among
GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World
Markets Corp., Credit Suisse First Boston Corporation, RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.
and TD Securities (USA) Inc.
**12.1 Computation of Ratio of Earnings to Fixed Charges
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
23.2 Consent of Ernst & Young LLP, Chartered Accountants
***23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
***23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
**24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Incorporated by reference to the Registrant's Registration Statement on Form
F-4 (File No. 333-38058).
*** To be filed by amendment
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
