<PAGE> 1
EXPLANATORY NOTE
Paper copies of this prospectus were filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(1) of the Securities Act of 1933, as amended
(the "Securities Act"), on March 13, 2000. Shares from the initial public
offering to which this prospectus refers were delivered by the underwriters on
March 15, 2000.
Pursuant to Rule 100(a) of Registration S-T the Registrant, GT Group
Telecom Inc., is not required to file electronically on EDGAR. However, in the
interest of improving public access to information regarding the Registrant, GT
Group Telecom Inc. has decided to include an electronic copy of this filing on
EDGAR. The Registrant will make all required filings under the Securities Act
and the Securities Exchange Act of 1934, as amended, exclusively in electronic
format.
<PAGE> 2
SUPPLEMENT TO PROSPECTUS DATED MARCH 9, 2000
GT GROUP TELECOM INC.
On March 23, 2000, we announced that we have entered into a binding
agreement with 360networks Inc. (formerly Worldwide Fiber Inc.) to (1) lease
fiber optic capacity and (2) either purchase or be granted an indefeasible right
to use unused fiber optic cable, in Canada and the United States. If we exercise
all of our rights to acquire fiber under the agreement, the aggregate purchase
price will be approximately C$352 million. The agreement is subject to execution
of definitive documents on or before April 14, 2000.
Under the agreement, 360networks will lease to us fiber optic cable
capacity at a bandwith 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 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. This fiber will be located primarily in
Canada.
360networks will also grant us the right to use an additional 12 fibers
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, with options to
renew.
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 to use this fiber by 360networks and payment by us
will be made in installments over the next four years. We will also pay
360networks fees for installing and maintaining the fibers.
In addition, we will invest approximately C$50 million in the equity of
360networks on a private placement basis.
________________
Prospectus Supplement dated March 24, 2000
<PAGE> 3
THIS DOCUMENT IS A COPY OF THE RULE 424(B)(1) PROSPECTUS FILED ON MARCH 13,
2000.
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-11506
GT Group Telecom Logo
18,000,000 Shares
GT GROUP TELECOM INC.
Class B Non-Voting Shares
------------------------
This is an initial public offering of class B non-voting shares of GT Group
Telecom Inc.
Prior to this offering, there has been no public market for the class B
non-voting shares. The initial public offering price per share is US$14. Our
class B non-voting shares have been approved for quotation on the Nasdaq
National Market under the symbol "GTTLB" and approved for listing on the Toronto
Stock Exchange under the symbol "GTG.B".
See "Risk Factors" beginning on page 7 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.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price....................... US$14.00 US$252,000,000
Underwriting discount............................... US$ 0.95 US$ 17,100,000
Proceeds, before expenses, to Group Telecom......... US$13.05 US$234,900,000
</TABLE>
To the extent that the underwriters sell more than 18,000,000 class B
non-voting shares, the underwriters have the option to purchase up to an
additional 2,700,000 shares from us at the initial offering price less the
underwriting discount.
------------------------
The underwriters expect to deliver the shares in New York, New York on
March 15, 2000.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
CIBC WORLD MARKETS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
RBC DOMINION SECURITIES
CORPORATION
------------------------
Prospectus dated March 9, 2000.
<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>
TWELVE MONTHS ENDED SEPTEMBER 30,
--------------------------------- THREE MONTHS ENDED
1996 1997 1998 1999 DECEMBER 31, 1999
------ ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C>
High............................... 0.7527 0.7513 0.7292 0.6828 0.6688
Low................................ 0.7235 0.7145 0.6341 0.6423 0.6925
Period End......................... 0.7342 0.7234 0.6552 0.6805 0.6925
Average............................ 0.7327 0.7286 0.6845 0.6663 0.6792
</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 significant 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-31.
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$0.6863 per Cdn$1.00, which was the
inverse of the noon buying rate on March 9, 2000.
ii
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information that you will find elsewhere in this
prospectus. This summary does not contain all the information you should
consider before buying shares in this offering. You should carefully read the
entire prospectus and the risk factors beginning on page 7.
GROUP TELECOM
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 will further extend our network by using wireless or digital
subscriber line technology. We operate nationally in 7 Canadian provinces,
including Canada's major metropolitan centers of Toronto, Vancouver, Calgary,
Montreal and Edmonton.
Our goal is to be the leading telecommunications service provider to
Canadian businesses, institutions and other telecommunications carriers. Our
recent acquisition of the business of Shaw FiberLink enhances our market
opportunity by adding network infrastructure, significant additional customers
and valuable access agreements. We believe that Shaw FiberLink is one of the few
metropolitan fiber networks in Canada with the infrastructure to support a
national competitive local exchange carrier.
Our pro forma combined business has:
- 7,834 route kilometers (4,896 miles);
- 125,953 fiber kilometers (78,721 miles);
- 1,064 buildings connected;
- $503 million of net property, plant and equipment at September 30, 1999;
- $42 million of revenue for the year ended September 30, 1999;
- a significant investment by Shaw Communications; and
- an experienced management team.
Our pro forma net loss for the year ended September 30, 1999 was $152.3
million. In addition, we expect to incur significant additional expenditures in
connection with the development and expansion of our network as well as future
operating losses and negative cash flow for the next few years.
OUR ACQUISITION OF THE BUSINESS OF SHAW FIBERLINK
On February 16, 2000, we closed the acquisition of the business of Shaw
FiberLink from Shaw Communications for approximately $760 million in cash and
shares. 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. For a definition of EBITDA, see page 6. The acquisition will
accelerate the deployment of our network, especially in the greater metropolitan
areas of Toronto, Calgary and Edmonton; reduce our reliance on the incumbent
local exchange carriers; give us a complementary competitive access provider
business; and significantly expand our business to long distance carriers,
wireless telecommunications companies and Internet service providers.
1
<PAGE> 6
BUSINESS STRATEGY
The key components of our strategy are:
- Lead with data and Internet application services.
- Be a one-stop integrated telecommunications provider.
- Build and own a national, facilities-based network infrastructure.
- Acquire and retain market share through a direct sales force, proactive
customer service and bundled product offerings.
- Leverage our state-of-the-art, scalable back office systems.
- Continue to expand through alliances and acquisitions.
- Leverage the experience of our management team.
2
<PAGE> 7
THE OFFERING
Class B non-voting shares
offered.................. 18,000,000 shares.
Class B non-voting shares
to be outstanding after
the offering............. 22,398,569 shares.
Class A voting shares
to be outstanding after
the offering............. 18,700,262 shares.
Use of proceeds............ To fund the development and expansion of our
network, and for working capital and other general
corporate purposes, including potential
acquisitions. See "Use of Proceeds".
Proposed Nasdaq National
Market Symbol............ "GTTLB".
Proposed Toronto Stock
Exchange Symbol.......... "GTG.B".
Class B non-voting shares to be outstanding after this offering is based on
shares outstanding as of February 17, 2000, excluding:
- 2,700,000 class B non-voting shares that may be sold pursuant to the
underwriters' over-allotment option;
- 7,548,563 class B non-voting shares that may be issued upon exercise of
outstanding options and warrants;
- 11,000,002 class B non-voting shares that will be issued upon conversion
of outstanding series A first preference shares at the completion of
this offering.
Class A voting shares to be outstanding after this offering is based on
shares outstanding as of February 17, 2000, excluding:
- 5,020,239 class A voting shares that may be issued upon exercise of
outstanding options and warrants;
- 31,500,000 class A voting shares that will be issued upon conversion of
outstanding series A first preference shares at the completion of this
offering; and
- 29,096,097 class A voting shares that will be issued upon conversion of
outstanding series B first preference shares at the completion of this
offering.
3
<PAGE> 8
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA
FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical consolidated and pro
forma financial and operating information for Group Telecom and Shaw FiberLink
for the periods indicated. The financial statements of Group Telecom and Shaw
FiberLink 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 Group Telecom's financial statements
beginning on page F-2 and in note 10 to Shaw FiberLink's financial statements
beginning on page F-31.
On February 1, 2000, we issued 855,000 units consisting of U.S.$855 million
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 amounted to U.S.$450.2
million, equivalent to approximately Canadian $651 million.
The unaudited pro forma condensed statement of operations information for
the twelve months ended September 30, 1999 has been prepared as if the
acquisition of the business of Shaw FiberLink and the offering of our units had
occurred on October 1, 1998. Interest expense amounting to $88.4 million on the
debt proceeds raised in the offering of our units has been reflected in full for
the year ended September 30, 1999 in the unaudited pro forma consolidated
statement of operations, without a corresponding return on proceeds received.
The unaudited pro forma condensed consolidated balance sheet information has
been prepared as if the acquisition of the business of Shaw FiberLink and the
offering of our units had occurred on September 30, 1999. The pro forma
financial information, summarized from the pro forma condensed consolidated
financial statements beginning on page F-42, 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.
4
<PAGE> 9
<TABLE>
<CAPTION>
GROUP TELECOM SHAW
--------------------------- FIBERLINK PRO FORMA
TWELVE MONTHS ENDED ----------- ----------------
SEPTEMBER 30, TWELVE MONTHS ENDED
--------------------------- -------------------------------
AUGUST 31, SEPTEMBER 30,
1997 1998 1999 1999 1999
------ ------- -------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Canadian GAAP
Revenue.......................... $2,051 $ 1,823 $ 2,705 $ 38,815 $ 41,520
Cost of sales.................... 1,437 1,131 1,808 17,800 21,108
------ ------- -------- -------- ---------
Gross profit..................... 614 692 897 21,015 20,412
Selling, general and
administrative expenses........ 989 3,038 10,218 8,893 19,111
------ ------- -------- -------- ---------
(375) (2,346) (9,321) 12,122 1,301
Amortization..................... 55 255 853 12,214(1) 39,267
------ ------- -------- -------- ---------
Operating loss................... (430) (2,601) (10,174) (92) (37,966)
Interest and finance items....... -- (162) (372) -- (114,028)
Income taxes..................... -- -- (165) (92) (257)
------ ------- -------- -------- ---------
Net loss for the year............ $ (430) $(2,439) $ (9,967) $ (184) $(152,251)
====== ======= ======== ======== =========
Loss per share(2)................ (0.05) (0.26) (0.56) -- (8.53)
U.S. GAAP
Net loss for the year............ $ (426) $(3,582) $(10,336) $ (184) $(152,620)
====== ======= ======== ======== =========
Loss per share(2)................ (0.05) (0.38) (0.58) -- (8.55)
BALANCE SHEET:
Canadian GAAP
Cash and cash equivalents........ $ 61 $ 2,476 $ 59,851 $ -- $ 523,651
Working capital (deficit)........ (224) (4,199) 47,871 4,205 511,671
Prepayment on property, plant and
equipment...................... -- -- -- -- 223,000(3)
Property, plant and equipment,
net(4)......................... 481 10,555 73,817 70,472 502,817(5)
Intangible and other assets...... 75 207 1,292 -- 182,892
Long-term debt................... -- 776 47,557 -- 860,077
Shareholders' equity............. 331 5,787 73,929 -- 530,809
U.S. GAAP
Shareholders' equity............. $ 316 $ 5,685 $ 73,514 -- $ 530,394
CASH PROVIDED BY (USED IN)(6):
Operating activities............. (251) (1,360) (9,033) (3,493) (115,794)
Financing activities............. 769 7,686 75,948 33,737 953,385
Investing activities............. (462) (3,911) (9,539) (30,244) (419,783)
OTHER:
EBITDA(7)........................ $ (375) $(2,288) $ (8,401) $ 12,122 $ 2,221
</TABLE>
5
<PAGE> 10
<TABLE>
<CAPTION>
SHAW
GROUP TELECOM FIBERLINK PRO FORMA
---------------------------- ------------ ------------
AT AT AT AT
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Route kilometers...................... 46 69 7,765 7,834(8)
Fiber kilometers...................... 16,595 24,407 101,546 125,953(9)
Number of Lucent class 5 switches..... 1 4 -- 4
Number of buildings connected......... 40 50 1,014 1,064
Number of employees................... 168 342 137 479
</TABLE>
- ---------------
(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) The effect of potential conversions of preferred shares and the exercise of
options and warrants is not dilutive. Accordingly, fully diluted earnings
per share is not presented.
(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) Property, plant and equipment at cost is as follows:
<TABLE>
<CAPTION>
GROUP TELECOM SHAW
------------------------ FIBERLINK PRO FORMA
SEPTEMBER 30, ---------- -------------
------------------------ AUGUST 31, SEPTEMBER 30,
1997 1998 1999 1999 1999
---- ------- ------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property, plant and equipment, at
cost................................. $517 $10,805 $74,895 $84,040 $503,895
</TABLE>
(5) 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.
(6) Cash flow information represents cash provided by (used in) operating,
financing and investing activities and is identical under Canadian and U.S.
GAAP.
(7) Earnings before interest, taxes, depreciation and amortization ("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
years ended September 30, 1997, 1998 and 1999, and pro forma for the year
ended September 30, 1999, giving effect to our acquisition of the business
of Shaw FiberLink effective October 1, 1998, was $(371,000), $(3,431,000),
$(8,769,000) and would have been $1,852,000, respectively.
(8) Equivalent to approximately 4,896 route miles. Route miles equal the number
of miles of the telecommunications path in which we own or lease installed
fiber optic cable.
(9) Equivalent to approximately 78,721 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path.
6
<PAGE> 11
RISK FACTORS
An investment in our class B non-voting shares 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 acquisition of the business of Shaw
FiberLink, 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.
WE ARE DEPENDENT ON SHAW FIBERLINK'S RIGHT TO USE 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
7
<PAGE> 12
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 agreement with Shaw
FiberLink provide that our rights under this agreement are limited if the
underlying rights associated with the fiber that is the subject of the
indefeasible right to use have any limitations or prohibitions. We entered into
a performance assurance agreement with Shaw Communications to support our rights
under our agreement with Shaw FiberLink. If we discover that indefeasible right
to use rights are not passed to us as anticipated, or if we or Shaw FiberLink do
not obtain and maintain the necessary underlying rights, or if Shaw
Communications does not comply with the performance assurance agreement, 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
OPERATING LOSSES.
For the three months ended December 31, 1999 and for the year ended
September 30, 1999 we had operating losses of $11.9 million and $10.2 million
and negative cash flow from operating activities of $7.9 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 operating 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 and determine whether you should purchase our
class B non-voting shares.
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 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
8
<PAGE> 13
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 December 31, 1999, adjusting
for our acquisition of Shaw FiberLink and related financings, including our
offering of units on February 1, 2000, we had approximately $873 million of
long-term debt outstanding. In addition, we could incur an additional $423
million under our Cisco facility and our new vendor financing with Lucent,
assuming we could incur a 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 debt
outstanding at December 31, 1999, adjusted for our senior bank debt financing,
would have an annual impact of $2.6 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 optimal business strategies or forego business arrangements which
could have been financially advantageous to us and our shareholders.
9
<PAGE> 14
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.
As a result of an amended and restated shareholders agreement entered into
by shareholders 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, will be able to nominate a majority of our
directors. Affiliates of Goldman Sachs and CIBC World Markets hold approximately
33.0% of our equity and will have upon their election, as a group, 4 of 11 seats
on our board of directors. In addition, Shaw Communications received
approximately 27.1% of our fully diluted equity upon the closing of its sale to
us of the business of Shaw FiberLink and will have, upon their election, 2
additional directors on our board of directors (for a total of 3 directors).
Shaw Communications and Goldman Sachs also have the right to nominate two
additional persons who are neither employees nor directors of our major
investors as members of our board. In addition, 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 our class B non-voting shares. 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
10
<PAGE> 15
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 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.
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
11
<PAGE> 16
less likely and you are less likely to receive the change of control premium
that generally comes with such bids.
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 NO PRIOR MARKET AND THEIR PRICE MAY BE
VOLATILE. WE CANNOT ASSURE YOU THAT OUR SHARE PRICE WILL NOT DECLINE AFTER THIS
OFFERING.
Before this offering, there has not been a public market for our class B
non-voting shares, and an active public market for our class B non-voting shares
may not develop or be sustained after this offering. The initial offering price
for the class B non-voting shares will be determined by negotiations between us
and the representatives of the underwriters and may not be indicative of prices
that will prevail in the trading market. The market price of our class B
non-voting shares could be subject to significant fluctuation after this
offering. 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;
12
<PAGE> 17
- 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 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 initial public
offering price. 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.
IF YOU PURCHASE CLASS B NON-VOTING SHARES IN THIS OFFERING, YOU WILL
EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our class B non-voting shares is
substantially higher than the book value per share of the outstanding class A
voting and class B non-voting shares. Accordingly, if you purchase class B
non-voting shares in this offering, you will experience immediate dilution of
approximately $13.39 in the book value per class B non-voting share, meaning
that the net tangible book value of each share purchased by you will be less
than the purchase price you paid. To the extent that outstanding options to
purchase our class A voting and class B non-voting shares are exercised, or
options reserved for issuance are issued and exercised, each shareholder
purchasing in this offering will experience further substantial dilution.
SINCE OUR REVENUE IS IN CANADIAN DOLLARS AND SOME 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 the date of this prospectus, we had debt outstanding denominated in
U.S. dollars of approximately US$457 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. A 1 percent change in the foreign
currency exchange rate between the Canadian and U.S. dollar would have an impact
of $6.7 million on our long-term debt. While we intend to hedge all or a portion
of our U.S. dollar 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 "Prospectus Summary"
beginning on page 1, "Risk Factors" beginning on page 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 25, "Business" beginning on page 38 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.
13
<PAGE> 18
USE OF PROCEEDS
At the initial public offering price of US$14 the net proceeds from the
sale of our 18,000,000 class B non-voting shares are approximately US$233
million, or approximately US$268 million if the over-allotment option granted to
the underwriters is exercised in full, after deducting the underwriting
commission of approximately US$17.1 million, or an underwriting commission of
approximately US$19.7 million if the over-allotment option is exercised in full,
and estimated expenses of US$2 million. We intend to use the net proceeds from
this offering to fund the development and expansion of our network, and for
working capital and other general corporate purposes, including potential
acquisitions.
We intend to spend approximately $480 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.
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. Future dividends, if any, will be determined by our board of
directors.
14
<PAGE> 19
CAPITALIZATION
The following table sets forth the following information:
(1) our actual capitalization as of December 31, 1999;
(2) our capitalization as of December 31, 1999 as adjusted to give effect
to:
- the acquisition of the business of Shaw FiberLink;
- our bank facility;
- the conversion of our issued and outstanding series A and series B
first preference shares into class A voting and class B non-voting
shares;
- the issuance on February 1, 2000 of 855,000 units consisting of
US$855,000,000 (issued at a price of 52.651%) of 13 1/4% senior
discount notes due 2010 and 855,000 warrants to purchase 4,198,563 of
our class B non-voting shares; and
- the sale of 18,000,000 class B non-voting shares in this offering at
an assumed offering price of US$14 a share, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
15
<PAGE> 20
Our capitalization as adjusted assumes no exercise of the underwriters'
over-allotment option. You should read this table together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 25, "Selected Unaudited Pro Forma Consolidated Financial and
Operating Information" beginning on page 18 and the financial information
beginning on page F-1.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 29,348 $ 832,504
======== ==========
Long-term debt (including current portion):
Bank facility(1).......................................... $ -- $ 220,000
13 1/4% senior discount notes due 2010.................... -- 592,520
Vendor financing(2)....................................... 57,779 57,779
Note payable(3)........................................... 771 771
Capital leases............................................ 2,224 2,224
-------- ----------
Total long-term debt................................... $ 60,774 $ 873,294
-------- ----------
Shareholders' equity:
First preference shares, no par value, unlimited shares
authorized:
Series A first preference shares: 50,000,000 shares
authorized; 42,500,002 shares issued and outstanding,
actual, and no shares issued and outstanding, as
adjusted.............................................. $ 69,156 $ --
Class A voting shares, no par value: unlimited shares
authorized; 18,609,935 shares issued and outstanding
actual and 79,206,032 issued and outstanding, as
adjusted............................................... 13,598 464,854
Class B non-voting shares, no par value: unlimited shares
authorized; 4,148,569 shares issued and outstanding
actual and 33,148,571 shares issued and outstanding, as
adjusted............................................... 5,026 362,281
Warrants.................................................. -- 56,880
Additional paid in capital................................ 255 255
Deficit................................................... $(25,146) $ (25,146)
-------- ----------
Total shareholders' equity................................ 62,889 859,124
-------- ----------
Total capitalization................................... $123,663 $1,732,418
======== ==========
</TABLE>
- ---------------
(1) For a description of the terms of the bank facility, see "Description of our
Financing Arrangements -- Bank Facility" on page 52.
(2) Includes (1) a credit agreement with Cisco by which Cisco agreed to finance
our purchase and installation of up to US$15 million of Cisco networking
hardware and software and (2) a credit agreement with Lucent by which Lucent
agreed to finance our purchase and installation of up to US$40 million of
Lucent equipment. Our capitalization does not include a new facility
committed by Lucent that provides us with financing for up to US$315 million
of Lucent equipment. For a description of the new Lucent facility and the
Cisco facility, see "Description of our Financing Arrangements" beginning on
page 52.
(3) Represents an amount payable pursuant to a right to purchase the building
that houses our central office in Burnaby, British Columbia.
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<PAGE> 21
DILUTION
Our net tangible book value as of December 31, 1999, adjusted for the
issuance of $400,000,000 in series B first preference shares on February 16,
2000, was $448,203,943, or approximately $4.75 per share. Net tangible book
value per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of series A and series B first
preference shares, class A voting and B non-voting shares outstanding. The
calculations give effect to the conversion of all outstanding series A and
series B first preference shares into class A voting and class B non-voting
shares automatically upon this initial public offering. Dilution in net tangible
book value per share represents the difference between the amount per share paid
by purchasers of our class B non-voting shares in this offering and the net
tangible book value per share of our class A voting and class B non-voting
shares immediately afterwards.
After giving effect to the sale of the 18,000,000 class B non-voting shares
in this offering, at an initial public offering price of US$14 per share, the
conversion of our series A and series B first preference shares into class A
voting and class B non-voting shares and after deducting the underwriting
discounts and commissions and the estimated offering expenses payable by us, our
pro forma net tangible book value at December 31, 1999, would have been
$787,559,943, or approximately $7.01 per share. This represents an immediate
increase in pro forma net tangible book value of $2.26 per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$13.39 per share to new investors purchasing class B non-voting shares in this
offering. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share... $ 20.40
Net tangible book value per share as of December
31, 1999..................................... $ 4.75
Increase per share attributable to new
investors.................................... $ 2.26
Pro forma net tangible book value per share after
this offering................................... $ 7.01
--------
Dilution in pro forma net tangible book value per
share to new investors.......................... $ 13.39
========
</TABLE>
The information in this section and the above table does not include:
- 2,700,000 class B non-voting shares to be issued in the event the
underwriters' over-allotment option is exercised;
- 12,568,802 class A voting and class B non-voting shares that may be
issued upon exercise of outstanding options and warrants;
For further information on our outstanding options and warrants, see
"Management -- Options" beginning on page 64 and "Related Party Transactions"
beginning on page 75.
17
<PAGE> 22
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-42. 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.
18
<PAGE> 23
<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>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
---------------
<S> <C>
OPERATING DATA:
Route kilometers(7)......................................... 7,834
Fiber kilometers(8)......................................... 125,953
Number of Lucent class 5 switches........................... 4
Number of buildings connected............................... 1,064
Number of customers......................................... 2,900
Number of employees......................................... 479
</TABLE>
- ---------------
(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
19
<PAGE> 24
occurred on October 1, 1998. These figures do not reflect a corresponding
return on proceeds received.
(3) The effect of potential conversions of preferred shares and the exercise of
options and warrants is not dilutive. Accordingly, fully diluted earnings
per share is not presented.
(4) 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.
(5) 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.
(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. 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.
(7) Equivalent to approximately 4,896 route miles. Route miles equal the number
of miles of the telecommunications path in which we own or lease installed
fiber optic cable.
(8) Equivalent to approximately 78,721 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path.
20
<PAGE> 25
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 25 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 financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
TWELVE MONTHS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------
1996(1) 1997 1998 1999 1998 1999
------- ------ ------- -------- ------- --------
(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 $ 372 $ 2,267
Cost of sales.................. 28 1,437 1,131 1,808 248 2,138
----- ------ ------- -------- ------- --------
Gross profit................... 1 614 692 897 124 129
Selling, general and
administrative expenses...... 243 989 3,038 10,218 1,791 10,863
----- ------ ------- -------- ------- --------
(242) (375) (2,346) (9,321) (1,667) (10,734)
Amortization................... 9 55 255 853 137 1,124
----- ------ ------- -------- ------- --------
Operating loss................. (251) (430) (2,601) (10,174) (1,804) (11,858)
Interest and finance items
(income)..................... -- -- (162) (372) 3 (141)
Tax (expense) recovery......... 5 -- -- (165) (8) (65)
----- ------ ------- -------- ------- --------
Loss for the period............ $(246) $ (430) $(2,439) $ (9,967) $(1,815) $(12,064)
===== ====== ======= ======== ======= ========
Loss per share(2).............. (0.05) (0.05) (0.26) (0.56) (0.12) (0.54)
U.S. GAAP
Loss for the period............ $(269) $ (426) $(3,582) $(10,336) $(1,828) $(12,424)
===== ====== ======= ======== ======= ========
Loss per share(2).............. (0.05) (0.05) (0.38) (0.58) (0.12) (0.55)
BALANCE SHEET:
Canadian GAAP
Cash and cash equivalents...... $ 5 $ 61 $ 2,476 $ 59,851 $ 29,348
Working capital (deficit)...... (166) (224) (4,199) 47,871 (1,639)
Property, plant and equipment,
net(3)....................... 64 481 10,555 73,817 108,009
Intangible and other
assets(4).................... 85 75 207 1,292 14,902
Long-term debt................. -- -- 776 47,557 57,028
Shareholders' equity
(deficiency)................. (17) 331 5,787 73,929 62,888
U.S. GAAP
Shareholders' equity
(deficiency)................. $ (41) $ 316 $ 5,685 $ 73,514 $ 63,130
CASH PROVIDED BY (USED IN):(5)
Operating activities........... $(127) $ (251) $(1,360) $ (9,033) $(1,148) $ (7,863)
Financing activities........... 233 769 7,686 75,948 3,162 (136)
Investing activities........... (101) (462) (3,911) (9,539) (932) (22,505)
OTHER:
EBITDA(6)...................... $(242) $ (375) $(2,288) $ (8,401) $(1,653) $(10,154)
</TABLE>
21
<PAGE> 26
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING DATA:
Route kilometers............................... 5 46 69(7)
Fiber kilometers............................... 2,030 16,595 24,407(8)
Number of Lucent class 5 switches.............. 1 1 4
Number of buildings connected.................. 8 40 50
Number of employees............................ 51 168 342
</TABLE>
- ---------------
(1) Data is for the period from our incorporation on April 12, 1996 to September
30, 1996.
(2) The effect of potential conversions of preferred shares and 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 43 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 15,254 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path.
22
<PAGE> 27
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 "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Shaw FiberLink Results of
Operations" beginning on page 29 and the Shaw FiberLink audited financial
statements, including the notes, beginning on page F-32. 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>
23
<PAGE> 28
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
---------------
<S> <C>
OPERATING:
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) 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. 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.
(5) 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. 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.
24
<PAGE> 29
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. In January
2000, we installed a voice switch in Montreal. We expect to provide data and
switched voice services in Toronto and Calgary by February 2000 and in Edmonton
and Montreal by March and May 2000, respectively.
In the fall of 1999, we launched a national marketing effort of our
comprehensive suite of services. As of December 31, 1999, we had 50 buildings
connected to our network and had deployed approximately 24,407 fiber kilometers
(15,254 miles) over 69 route kilometers (43 miles). At December 31, 1999, in our
target markets we had 202 building licence agreements with property owners,
including Cadillac Fairview and Oxford Properties, each a national property
owner. With the acquisition of the business of Shaw FiberLink we will have use
of an additional 101,546 fiber kilometers (63,446 miles) over 7,765 route
kilometers (4,853 miles).
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 43.
OUR ACQUISITION OF THE BUSINESS OF SHAW FIBERLINK
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
25
<PAGE> 30
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 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.
OPERATING DATA
The table below provides selected key operating data:
<TABLE>
<CAPTION>
GROUP TELECOM SHAW FIBERLINK PRO FORMA
------------------------------------ ---------------- ----------------
AT SEPTEMBER 30, AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1999 1999 1999 1999
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Route kilometers............ 46 69 7,765 7,834(1)
Fiber kilometers............ 16,595 24,407 101,546 125,953(2)
Number of Lucent class 5
switches.................. 1 4 -- 4
Number of buildings
connected................. 40 50 1,014 1,064
Number of employees......... 168 342 137 479
</TABLE>
- ---------------
(1) Equivalent to approximately 4,896 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 78,721 miles. Fiber miles equals the number of
miles installed along a telecommunications path multiplied by the number of
fibers along the path.
GROUP TELECOM RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1998
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 three months ended December 31, 1999 increased $1.9
million, or 509%, to $2.3 million compared to $0.4 million for the three months
ended December 31, 1998, due to a larger customer base and new services being
provided. Approximately 70% of our revenue for the three months ended December
31, 1999 was from recurring sources as compared to 65% for the three months
ended 1998. Our recurring revenue was primarily from the sale of access to and
usage of our network.
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;
26
<PAGE> 31
- 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 three months ended December 31, 1999 increased $1.9
million or 760%, to $2.1 million compared to $248,584 for the three months ended
December 31, 1998. The increase was due to a corresponding increase in revenue
and change in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses consist primarily of:
- promotions;
- advertising, travel and entertainment costs;
- commissions, salaries, training and benefits to sales representatives,
administrative, marketing, financial and executive personnel;
- recruiting costs;
- corporate administration costs;
- legal, accounting and other professional fees;
- costs associated with becoming Year 2000 compliant;
- office related expenses; and
- bad debts.
Selling, general and administrative expenses increased $9.1 million, or
507%, to $10.9 million for the three months ended December 31, 1999 compared to
$1.8 million for the three months ended December 31, 1998 resulting from an
increase in salaries due to headcount, a national marketing launch, an increase
in professional fees and increased need for office space and related costs.
AMORTIZATION. Amortization for the three months ended December 31, 1999
increased $986,598, or 717%, to $1.1 million compared to $137,547 for the three
months ended December 31, 1998 due to an increase in property, plant and
equipment available for commercial service.
INTEREST. Interest income resulted from investment of cash reserves from
private equity offerings. Interest income for the three months ended December
31, 1999 was $579,780 compared to $14,032 for the three months ended December
31, 1998.
Interest expense resulted from long-term debt and financing charges related
to vendor financing. Interest expense for the three months ended December 31,
1999 was $441,067 compared to $40,880 for the three months ended December 31,
1998.
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 the three months ended December 31, 1999, of $65,085. As of
December 31, 1999 we had an aggregate of approximately $25 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 three
months ended December 31, 1999 was $12.0 million compared to $1.8 million for
the three months ended December 31, 1998, representing an increase of 564%.
27
<PAGE> 32
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, 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
28
<PAGE> 33
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%.
SHAW FIBERLINK RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 1998
REVENUE. The majority of Shaw FiberLink's revenue is derived from
dedicated transport and access services and switched data services. Revenue for
the three months ended November 30, 1999 was $13.2 million compared to $7.9
million for the three months ended November 30, 1998, an increase of $5.3
million, or 67%. This increase was due to:
- increased growth in demand from our carrier customers:
- increased sales to large business enterprises; and
- the introduction of new services including national transparent LAN and
enhanced Internet products.
For the three months ended November 30, 1999, the portion of revenue from
recurring monthly customer billing was 97%, as compared to 95% for the three
months ended November 30, 1998. Recurring revenue was primarily comprised of the
sale of private line, Internet, and ATM services. Recurring revenue does not
include installation charges and one time equipment sales.
Approximately 20% of Shaw FiberLink's revenue in the first quarter of
fiscal 2000 results from the sale of services to companies affiliated with Shaw
Communications.
COST OF SALES. Our cost of sales primarily includes the lease of local
loops from incumbent local exchange carriers, the lease of inter-city bandwidth
from long distance carriers to connect our serving areas and downstream Internet
connections purchased from Internet service providers. Cost of sales for the
three months ended November 30, 1999 was $6.5 million, compared to $3.5 million
for the three months ended November 30, 1998, an increase of $3.0 million, or
86%. The increase was attributable to increased sales. Cost of sales as a
percentage of revenue increased to 49% as compared to 45% in the same period in
the previous year. This increase was attributable to an increase in the resale
of other carriers' facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative consists of salaries and benefits, promotions and advertising,
travel and entertainment, commissions, rent and corporate allocations. Selling,
general and administrative expenses were $3.0 million for the three months ended
November 30, 1999 compared to $2.0 million for the three months ended November
30, 1998, an increase of $1.0 million, or 50%. This increase was the result of
an increase in
29
<PAGE> 34
personnel as well as increased corporate allocations costs. As a percentage of
revenue, selling, general and administrative expenses represented 23% of total
revenues in the three months ended November 30, 1999 compared to 25% in the same
period in the previous year. The decrease was due to realized efficiencies of
supporting new services, customers, and serving areas with existing personnel.
USE OF FIBER DISTRIBUTION ASSETS. Shaw FiberLink, as a business of Shaw
Communications, shares the use of the fiber distribution assets with other
affiliates of Shaw Communications. The allocation for the use of these fiber
distribution assets for the three months ended November 30, 1999 was $1.6
million as compared to $1.3 million for the three months ended November 30,
1998. This allocation was based on Shaw FiberLink's estimated proportion of Shaw
Communications' annual depreciation related to the fiber distribution assets.
AMORTIZATION. Amortization for the three months ended November 30, 1999
was $2.1 million compared to $1.3 million for the three months ended November
30, 1998, an increase of $800,000, or 62%. This resulted from the continued
capital additions growth experienced within the division.
NET LOSS. As a result of the above, net loss for the three months ended
November 30, 1999 was $92,000 compared to a net loss of $281,000 for the three
months ending November 30, 1998.
YEAR ENDED AUGUST 31, 1999 COMPARED TO YEAR ENDED AUGUST 31, 1998
REVENUE. Revenue for the year ended August 31, 1999 was $38.8 million
compared to $22.3 million for the year ended August 31, 1998, an increase of
$16.5 million, or 74%. This increase was due to:
- increased growth in demand from Shaw FiberLink's carrier customers;
- increased sales to large business enterprises; and
- the introduction of new services including national transparent LAN and
enhanced Internet products.
For the year ended August 31, 1999, the proportion of revenue from
recurring monthly customer billing was 96%, as compared to 94% for the year
ended August 31, 1998. Recurring revenue was primarily comprised of the sale of
private line, Internet, and ATM services. Recurring revenue does not include
installation charges and one time equipment sales.
Approximately 17% of Shaw FiberLink's revenue in fiscal 1999 results from
the sale of services to companies affiliated with Shaw Communications.
COST OF SALES. Cost of sales for the year ended August 31, 1999 was $17.8
million, compared to $10.2 million for the year ended August 31, 1998, an
increase of $7.6 million, or 75%. The increase was attributable to increased
sales. Cost of sales as a percentage of revenue was 46%, consistent with the
previous year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $8.9 million for the year ended August 31, 1999
compared to $7.5 million for the year ended August 31, 1998, an increase of $1.4
million, or 19%. This increase was the result of an increase in personnel. As a
percentage of revenue, selling, general and administrative expenses represented
23% of total revenues in fiscal 1999 compared to 34% in 1998. The decrease was
due to realized efficiencies of supporting new services, customers, and serving
areas with existing personnel.
USE OF FIBER DISTRIBUTION ASSETS. The allocation for the use of these
fiber distribution assets for the year ended August 31, 1999 was $5.6 million as
compared to $4.4 million for the year ended August 31, 1998. This allocation was
based on Shaw FiberLink's estimated proportion of Shaw Communications' annual
depreciation related to the fiber distribution assets.
30
<PAGE> 35
AMORTIZATION. Amortization for the year ended August 31, 1999 was $6.6
million compared to $3.8 million for the year ended August 31, 1998, an increase
of $2.8 million, or 74%. This increase was due to recognizing the full year
amortization of capital additions made in prior years, as well as amortization
of additional capital assets in fiscal 1999.
NET LOSS. As a result of the above, net loss for the year ended August 31,
1999 was $184,000 compared to a net loss of $3.6 million for the year ended
August 31, 1998.
YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997
REVENUE. Revenue for the year ended August 31, 1998 increased $10.7
million, or 92%, to $22.3 million compared to $11.6 million for the year ended
August 31, 1997. This increase was due to:
- increased growth in demand from Shaw FiberLink's carrier customers;
- the introduction of new services, such as metropolitan ATM and broadband
Internet access; and
- the expansion of Shaw FiberLink's service serving areas to include
Winnipeg, Saskatoon and the interior of British Columbia.
Recurring revenue does not include installation charges and one-time
equipment sales. For the year ended August 31, 1998, the proportion of recurring
revenue was 94% as compared to 93% for the year ended August 31, 1997. Shaw
FiberLink's recurring revenue was primarily from sales of private line access,
Internet and ATM services. Approximately 14% of Shaw FiberLink's revenue in
fiscal 1998 results from the sale of services to companies affiliated with the
Shaw Communications group of companies.
COST OF SALES. Cost of sales for the year ended August 31, 1998 increased
$6.2 million, or 157%, to $10.2 million compared to $4.0 million for the year
ended August 31, 1997. Cost of sales as a percentage of revenue in fiscal 1998
increased ten percentage points as compared to fiscal 1997 due to the initial
product deployment of Internet access services into new markets, including
Victoria, the interior of British Columbia, Saskatoon, Winnipeg, and Barrie. The
incremental costs included the purchase of inter-city bandwidth to transport
customer traffic to Shaw FiberLink's main Internet gateways and the purchase of
additional Internet connections.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $7.5 million for the year ended August 31,
1998 compared to $5.2 million for the year ended August 31, 1997, an increase of
$2.3 million, or 44%. As a percentage of total revenues, selling, general and
administrative expenses decreased to 34% in fiscal 1998 compared to 45% in
fiscal 1997. This decrease was primarily due to realized efficiencies as a
result of supporting new services, customers and new serving areas with existing
personnel.
USE OF FIBER DISTRIBUTION ASSETS. The allocation by Shaw Communications
for the use of fiber distribution assets for the year ending August 31, 1998 was
$4.4 million as compared to $3.1 million for the year ending August 31, 1997.
This allocation was based upon Shaw FiberLink's estimated proportion of Shaw
Communications' annual depreciation related to the fiber distribution assets.
AMORTIZATION. Amortization for the year ended August 31, 1998 was $3.8
million, compared to $2.0 million for the year ended August 31, 1997, an
increase of $1.8 million, or 96%. This increase was due to recognizing the full
year amortization of capital additions made in prior years as well as
amortization of additional capital assets in 1998.
NET LOSS. As a result of the above, net loss for the year ended August 31,
1998 was $3.6 million compared to a net loss of $2.6 million for the year ended
August 31, 1997.
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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 and
the operations of the Shaw FiberLink business 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 three months
ended December 31, 1999 were $35.2 million compared to $64.1 million for the
year ended September 30, 1999, and were 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.
For the three months ended December 31, 1999, we funded our capital
expenditures and operating losses through cash and cash equivalents raised prior
to the three months ended December 31, 1999 and through vendor financing
agreements.
On October 29, 1999, we 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. The
results of operations have been included in our consolidated statement of
operations from the date of acquisition. The consideration consisted of the
following:
- cash, paid in the three month period ended December 31, 1999: $2.5
million; and
- 270,000 class A voting shares, issued in the three month period ended
December 31, 1999: $810,000
On October 1, 1999, we entered into an agreement to purchase the assets of
T1 Technologies Inc. The total consideration was $410,000 and consisted of
$210,000 of cash and 66,666 class A voting shares: approximately $200,000.
Shaw FiberLink is financed by Shaw Communications. Capital expenditures
have principally related to the purchase of customer premise equipment, ATM
switches, data routers, synchronous optical networking technology transport
equipment and central office construction. Capital expenditures for the year
ended August 31, 1999 were $30.2 million, compared to $27.5 million for the year
ended August 31, 1998.
From our inception in April 1996 until December 31, 1999, we have funded
our capital expenditures and operating losses as follows:
- In January 1997, we raised $130,000 through an issuance of units
comprised of convertible debentures and warrants. All of the debentures
have now been converted resulting in our issuing 520,000 class A voting
shares, 100,000 warrants exercisable for 100,000 class A voting shares
remain outstanding.
- In June 1998, we raised approximately $6.0 million through the issuance
of 4,818,774 class A voting shares.
- In February and March 1998, we issued $1.9 million of convertible
debentures. In 1998, all holders converted their debentures, resulting
in the issuance of 2,482,592 class A voting shares.
- In December, 1998, we issued approximately $3.2 million of convertible
debentures. In April 1999, all holders of convertible debentures, except
one, converted their debentures resulting in the issuance of 104,504
class A voting shares and 2,592,103 class B non-voting shares. The
holder who did not convert received a payment of principal and interest
equal to $1,570.
- In December 1998 and March 1999, we issued approximately $1.3 million of
convertible debentures. In May 1999, all holders of convertible
debentures converted their debentures
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resulting in the issuance of 233,903 class A voting shares and 835,365
class B non-voting shares.
- In May 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.
- In May 1999, 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.
- In July 1999, 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.
- From our inception until September 30, 1999, we raised gross proceeds of
approximately $1.7 million from the sale of class A voting shares,
options and warrants to purchase class A voting shares, and the
conversion of interest accrued on convertible debentures. During 1998,
we granted stock options to employees who were also directors in lieu of
compensation payable at September 30, 1997. This amount has been
recorded as additional paid-in capital.
At December 31, 1999, our current assets were $37.7 million and our current
liabilities were $39.4 million, giving us a working capital deficit of $1.6
million compared to a surplus of $47.9 million at September 30, 1999. Cash and
cash equivalents at December 31, 1999 were $29.3 million compared to $59.9
million at September 30, 1999.
Cash used in operating activities for the three months ended December 31,
1999 was $7.9 million, most of which came from our net loss of $12.1 million,
partially offset by increases in accounts payable and accrued liabilities.
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. We
plan to hedge our exposure to foreign currency exchange risk on long-term debt
by acquiring financial instruments or taking other financial measures considered
necessary.
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$435,000,000;
- 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" on page 52.
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. 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
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this offering 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.
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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. In connection with our agreement to acquire the
business of Shaw FiberLink, Jim Shaw, the president and chief executive officer
of Shaw Communications, became one of our directors.
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 use to Shaw FiberLink in all of the
indefeasible rights to use fiber which Shaw FiberLink does not own,
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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 is 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 78.
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 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.
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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 78.
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.
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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 will further extend our network by using wireless or digital
subscriber line technology.
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
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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.
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.
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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. We intend to expand our sales force by 44%
from 118 sales representatives at December 31, 1999 to approximately 170
by September 2000 to build and support our customer base. Once we obtain
a customer, we focus on providing proactive customer service, backed by
service-level guarantees, 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 business of Shaw FiberLink, we plan to consider
alliances with and acquisitions of other related or complementary
businesses or asset purchases, including purchases of fiber.
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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 can be accomplished without significant delay or cost.
We also believe we can upgrade the equipment in buildings on Shaw FiberLink's
network and sell our services, in addition to those of Shaw FiberLink, to its
existing customers. Shaw FiberLink's fiber is concentrated in three of our
initial target markets, where, we have little or no existing fiber. In addition,
Shaw FiberLink's telecommunications equipment is industry standard, purchased
from well known vendors, and is compatible with our equipment.
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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 will initially use voice switches and data routing equipment
installed at central offices in four cities: Vancouver, Toronto, Calgary and
Montreal. Edmonton's data and voice traffic will be directed to our central
office in Calgary.
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
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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
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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
rights-of-way to deploy our fiber. We have signed municipal access agreements
with the cities of Vancouver and Burnaby, British Columbia. We are currently
negotiating municipal access agreements with the cities of Toronto, Calgary,
Edmonton and Montreal. These agreements allow us to deploy our network over and
under city property, and to use city streets, poles and bridges to connect our
network to our customers. These rights-of-way are integral to our
facilities-based network. In certain situations, the conduits we use to access
buildings already benefit from existing rights-of-way.
As part of our acquisition of the business of Shaw FiberLink, we have
additional access agreements in some of Canada's fastest growing markets,
including: the greater Toronto area, Edmonton, Calgary, Winnipeg, Vancouver
Island and central British Columbia.
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 tenants.
Because of our long-term building license agreements, we gain access to
potential customers at minimal cost.
At December 31, 1999, in our target markets we had 202 building license
agreements with property owners, 100 of which are with Cadillac Fairview and
Oxford Properties, each a national property owner. 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.
TECHNOLOGY SUPPLIER RELATIONSHIPS
In August 1998, we entered into an agreement with Lucent to provide us with
switching equipment, synchronous optical networking technology and other
telecommunications equipment, fiber
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optic cable and related services, including installation, engineering and
maintenance services. We will work together with Lucent to prepare detailed
lists of equipment and services to be provided to us in each of our markets.
This agreement with Lucent specifies the pricing of this equipment and services
and the terms of its delivery until August 2003. We amended the agreement in
February 2000 in connection with the implementation of the Lucent facility. 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
currently negotiating to become 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.
- Carrier Private Lines -- Point-to-point, unmanaged 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/Extranet Gateway -- Internet/Extranet 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.
- Co-location -- The physical space in close proximity to our network to
colocate, host and/or manage servers or modem pools.
- Data Hardware Resale and Maintenance -- Selling and maintaining routers,
hubs and switches.
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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 software applications.
- 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, speech to text/text to speech conversion and
encrypted security.
Additional application services in development include PC/server backup,
multimedia conferencing and Web-based application service reporting.
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 intend to offer a full suite of services, accommodating 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 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.
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- 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 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 December 31, 1999, we had 118 sales
representatives.
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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 acquisition of the business of Shaw FiberLink.
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;
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- 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.
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, Apropo,
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.
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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.
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 December 31, 1999, we had approximately 342 employees, of which 155
were sales and marketing, 33 were customer service, 122 were technical and 32
were administrative personnel. As a result of our acquisition of the business of
Shaw FiberLink, we have made offers to hire approximately 130 Shaw FiberLink
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
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represented by a collective bargaining agreement. We believe we enjoy good
relationships with our employees.
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.
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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$435 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.
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;
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- 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;
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<PAGE> 58
- 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 the
date of this prospectus, US$37.9 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
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<PAGE> 59
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 the date of this prospectus,
we have borrowed US$9.9 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.
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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.
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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
Coudersport, PA
Robert G. Wolfe...................... President, Chief Operating Officer and Director 43
Seattle, WA
Stephen H. Shoemaker................. Executive Vice President and Chief Financial Officer 39
Littleton, CO
Eric A. Demirian..................... Executive Vice President, Corporate Development 41
Toronto, ON
Michael A. Aymong.................... Executive Vice President, Marketing and Sales 35
Calgary, AB
Robert Watson........................ Executive Vice President, Carrier Services 52
Toronto, ON
Marek K. Wieckowski.................. Executive Vice President, Network Services 55
Delta, BC
Robert M. Fabes...................... Senior Vice President, General Counsel and Corporate 38
Vancouver, BC Secretary
Andrew J. Csinger.................... Senior Vice President, Systems Services 37
Vancouver, BC
Steven L. Koles...................... Senior Vice President, Marketing 29
Calgary, AB
C. William Rainey.................... Senior Vice President, Sales 46
Calgary, AB
Malcolm Rodrigues.................... Senior Vice President, National Operations 33
Toronto, ON
Patricia A. Saltys................... Vice President, Finance 35
Vancouver, BC
Michael D'Avella..................... Director 41
Calgary, AB
George Estey......................... Director 43
Toronto, ON
P. Kenneth Kilgour................... Director 44
Toronto, ON
Robert R. Gheewalla.................. Director 32
New York, NY
Jim Shaw............................. Director 42
Calgary, AB
</TABLE>
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<PAGE> 62
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
Citizens Bancorp. Mr. Milliard is also a director of Charles Cole Memorial
Hospital.
ROBERT G. WOLFE Mr. Wolfe has been a director and our president since
February 1999. Mr. Wolfe has over twenty years business and management
experience. Prior to joining us, Mr. Wolfe served as chief financial officer of
Trillium Corporation, an international investment company with significant
forestry, real estate, and other investments. In addition, he has significant
experience in the financial services industry, including senior corporate
finance positions with two leading global investment banking firms, Goldman
Sachs and Merrill Lynch. In addition to assisting clients across the United
States, Mr. Wolfe held three overseas posts for Goldman Sachs in London, Tokyo
and Hong Kong. Mr. Wolfe now serves on the boards of Babylon Entertainment
(founder) (New York, NY) and RODI Power Systems (Kent, WA). 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.
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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.
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 held the position of president and
chief operating officer of STN Inc. Before then, he was president and chief
executive officer of ACC Telenterprise. Mr. Watson is a graduate in Electronic
Technologies from Ryerson Polytechnical University.
MAREK K. WIECKOWSKI Mr. Wieckowski has been our executive vice president,
network services since 1998. Mr. Wieckowski was most recently vice president of
network infrastructure at the former MetroNet (now AT&T Canada). Prior to that
time, Mr. Wieckowski was vice president of engineering and operations. Before
then, Mr. Wieckowski held various management and operational engineering
positions at Northern Telecom, Spar Aerospace, Microtel and the former BC Tel.
Mr. Wieckowski has over thirty years of expertise in the telecommunications
industry. Mr. Wieckowski has a M.Sc. in electrical engineering from the
University of Warsaw.
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.
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
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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
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 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
Canadian Cable Television Association and is actively involved in the cable
industry's strategic planning initiatives.
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.
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 Worldwide Fiber, Inc., Diginet
Americas, Digital Access and North American RailNet.
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.
In February 2000, Leo J. Hindery agreed to join our board of directors,
subject to shareholder approval. Mr. Hindery is currently the chairman and chief
executive officer of GlobalCenter, Inc., the Internet commerce services
subsidiary of Global Crossing. Prior to joining GlobalCenter, Mr. Hindery
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was president and chief executive officer of AT&T Broadband & Internet Services
and president of 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 of San
Francisco, 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 the chairman of Adauction.com, Inc., a director of BigVine.com,
Knowledge Enterprises, Inc., Sybase, Inc., Tanning Technology Corp. and TD
Waterhouse Group, Inc.
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 agreed to provide
Mr. Demirian with an interest free loan in the aggregate amount of approximately
$190,000.
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SUMMARY COMPENSATION TABLE
We paid the following compensation paid during the year ended September 30,
1999 to our executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- -------------------------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES RESTRICTED
UNDER SHARES OR
OTHER ANNUAL OPTIONS RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
- --------------------------- -------- ----- ------------ ---------- ----------- ------- ------------
($) ($) ($) (#) ($) ($) ($)
<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............ $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>
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 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.
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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 9 directors. We agreed in connection with our acquisition
of the business of Shaw FiberLink to increase the size of our board to 11. Upon
their election, we will have 11 directors on our board. 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.
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OPTIONS
At February 29, 2000 we had 12,568,802 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 February 29, 2000 the following options
to purchase a total of 2,757,716 class A voting shares and a total of 3,050,000
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 Nov. 18, 1997 $0.50 Nov. 30, 2000 90,000
Chairman and Director 80,000 Nov. 18, 1997 0.50 Nov. 30, 2000
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
Daniel R. Milliard....... 1,000,000(1) Sep. 1, 1999 1.88 Sep. 1, 2004 1,600,000
Chief Executive Officer and 500,000(1) Sep. 1, 1999 3.00 Sep. 1, 2004
Director 100,000(1) Sep. 1, 1999 1.88 Mar. 1, 2000
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 Jan. 26, 2000 1.50 Jan. 26, 2005
Robert Watson............ 300,000 Feb. 9, 2000 8.00 Feb. 9, 2005 300,000
Executive Vice President
Carrier Services
Marek K. Wieckowski...... 13,592 April 23, 1.25 July 1, 2001 248,592
Executive Vice President, 85,000 1998 1.25 Sep. 30, 2003
Network Services 150,000 Mar. 9, 1999 3.00 Dec. 16, 2004
Dec. 16, 1999
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
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
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........ 22,000 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
</TABLE>
64
<PAGE> 69
<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>
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 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
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: 5,807,716
=========
</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.
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<PAGE> 70
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, with the exception of SaskTel which operates in the province
of Saskatchewan, are subject to the regulatory authority of the CRTC. SaskTel
will come under federal jurisdiction as of June 30, 2000.
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
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time. In areas where traffic is at an imbalance, the CRTC has authorized the use
of a mutual 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.
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. With respect to the
lease of non-essential loops after the expiry of the five-year period, 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 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.
One competitive local exchange carrier has applied to the CRTC requesting that
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the incumbent local exchange carriers be directed to include the tariffed rates
for non-essential loops in the costs which they submit in connection with the
floor price test.
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). 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 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
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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 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
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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 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.
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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 are required to pay the incumbent local
exchange carriers a separate rate of $0.007 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 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 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
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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. In addition, both a long distance
competitor and certain incumbent local exchange carriers have independently
applied to the CRTC to reduce these charges. Any of these initiatives may result
in a change to the unbundled rates to provide equal access.
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 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
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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 and will be so held upon completion of this offering and the
simultaneous conversion of our series A and series B first preference shares.
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 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
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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.
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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. Kenneth Kilgour, another of our
directors, is managing director and head of CIBC Capital Partners. In connection
with this transaction, on May 7, 1999, we entered into a shareholders' agreement
with shareholders, including all of our series A first preference shareholders.
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 77. Eleven of our current directors and
executive officers are signatories to the agreement.
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PRINCIPAL SHAREHOLDERS
We are not directly or indirectly owned or controlled by another
corporation or any foreign government. Certain institutional investors that hold
our series A first preference shares hold voting rights specified under such
shares and a shareholders' agreement with us. See "Related Party Transactions"
on page 75 and "Description of Share Capital" beginning on page 77 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, became a party to the shareholders' agreement and has similar
voting and other rights. As of December 31, 1999 our directors and officers as a
group owned 2,403,521 of our class A voting shares which represented 12.9% of
our then outstanding class A voting shares. At the date of this prospectus no
person beneficially owned 10% or more of our issued and outstanding class A
voting shares. However, upon completion of this offering and the simultaneous
conversion of our series A and series B first preference shares, the following
persons will beneficially own 10% or more of our 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 Inc..................................... 29,096,097 36.7
Goldman, Sachs & Co.(1)..................................... 19,000,000 24.0
</TABLE>
- ---------------
(1) Upon completion of this offering, Goldman, Sachs & Co. will also own
11,000,002 class B non-voting shares, representing approximately 33.0% of
the class B non-voting shares issued and outstanding after this offering. No
other shareholder beneficially owns more than 10% or more of the issued and
outstanding class B non-voting shares upon completion of this offering.
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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.
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SERIES A
On May 7, 1999, the series A first preference shares were created after
being approved by our directors. In addition to the rights, restrictions and
privileges of the first preference shares described above, the series A first
preference shares:
- were initially issued at a per share price of $1.50;
- have a liquidation value equal to the price paid for the share plus a
compound annual rate of return of 10%;
- are convertible into either class A voting shares or class B non-voting
shares, depending on foreign ownership restrictions then in place, at
the option of the holder and automatically upon an initial public
offering of such shares, initially on a one-for-one basis to May 7,
2000, with a compound annual increase of 10%, subject to adjustment;
- have anti-dilutive provisions protecting their conversion into class A
voting shares or class B non-voting shares; and
- have voting rights equal only to the voting rights of the class(s) of
shares into which they could be converted at the time a vote is
required.
SERIES B
Upon completion of our acquisition of the business of Shaw FiberLink, we
issued to Shaw Communications series B first preference shares, representing
27.1% of our equity. The series B first preference shares have the same rights,
restrictions and privileges as the series A first preference shares.
SHAREHOLDERS AGREEMENT
On February 16, 2000, shareholders holding approximately 88.0% of our fully
diluted equity, including all of the series A first preference shareholders and
Shaw Communications, as the holder of our 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 our 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;
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- 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.
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, and conversion of the series A first
preference shares, a total of 33,398,571 of our class B non-voting shares will
be outstanding, assuming no exercise of the underwriters' over-allotment option
or of any other outstanding options. The sale of substantial numbers of class B
non-voting shares in the public market, or the possibility of such a sale, could
adversely affect prevailing market prices for our class B non-voting shares.
All of the class B non-voting shares sold in the offering will be freely
tradable without restriction under the U.S. Securities Act, except by
"affiliates" as defined in Rule 144 under the U.S. Securities Act, or "control
persons" under applicable Canadian securities laws.
Class B non-voting shares previously issued by us are "restricted
securities" as that term is defined in Rule 144 under the U.S. Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 promulgated under
the U.S. Securities Act. Class B non-voting shares previously issued by us are
also subject to a hold period under applicable Canadian securities laws. These
U.S. and Canadian resale restrictions are summarized below.
All of our directors, officers, and senior management, Shaw Communications,
and our series A first preference shareholders will have entered into lock-up
agreements pursuant to which they will agree not to dispose of or hedge any of
their class B non-voting shares or securities convertible into or exchangeable
for our class B non-voting shares for 180 days following the date of the
prospectus without the consent of Goldman Sachs or Salomon Smith Barney on
behalf of the underwriters. See "Underwriting."
U.S. RESALE RESTRICTIONS
In general, under Rule 144, as in effect on the date of this prospectus,
any person, including any of our affiliates, who has beneficially owned class B
non-voting shares for at least one year will be entitled to sell, in any
three-month period, a number of shares that, together with sales of any class B
non-voting shares with which such person's sales must be aggregated, does not
exceed the greater of:
- 1% of the then outstanding class B non-voting shares; and
- the average weekly trading volume of the class B non-voting shares on
the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which such sale is made.
Sales of restricted securities pursuant to Rule 144 are subject to
requirements relating to manner of sale, notice and availability of current
public information about us. Persons who are our affiliates must also comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell class B non-voting shares in the
public market which are not restricted securities.
Our employees, directors, officers, consultants or advisers may rely on
Rule 701 to resell class B non-voting shares issued to them, pursuant to written
compensatory benefit plans or written contracts relating to their compensation.
Rule 701 also will apply to shares acquired upon exercise of options granted
before the date of this prospectus, including exercises after the date of this
prospectus. Class B non-voting shares issued in reliance on Rule 701 are
restricted securities and, subject to the
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180-day lock-up agreements described above, may be sold beginning 90 days after
the date of this prospectus:
- by persons other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
- by persons deemed to be our affiliates under Rule 144 without compliance
with its one-year minimum holding period requirements.
Holders of our series A first preference shares, convertible into either
our class A voting shares or our class B non-voting shares, will be entitled to
require us to register their shares under the U.S. Securities Act, subject to
the lock-up agreements. See "Description of Share Capital -- Registration Rights
Agreement."
CANADIAN RESALE RESTRICTIONS
Any class B non-voting shares previously issued by us and not qualified by
this prospectus will be subject to a hold period under applicable Canadian
securities laws. A holder of previously issued class B non-voting shares will be
prohibited from trading such shares in Canada for one year from the date on
which we become a reporting issuer under applicable Canadian securities laws,
except pursuant to a prospectus filed under such laws or pursuant to an
exemption from the prospectus requirements of such laws. We will become a
reporting issuer in a province or territory of Canada when a final Canadian
prospectus is filed and cleared by the securities regulatory authority in such
province or territory. If the class B non-voting shares are not listed for
trading on a stock exchange in Canada, the applicable statutory hold period in
certain Canadian jurisdictions will be 18 months from the date on which we
become a reporting issuer in such jurisdiction.
If the class B non-voting shares are listed for trading on a stock exchange
in Canada, the class B non-voting shares which are subject to the statutory hold
period will also be listed on such stock exchange. However, the certificates
representing shares subject to a hold period will be affixed with a legend
stating that such shares will not be accepted for settlement of transactions on
the Canadian stock exchange. Following the expiry of the applicable hold period,
holders of such class B non-voting shares may obtain certificates with no such
restrictive legend from the transfer agent of the class B non-voting shares.
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TAXATION
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
considerations with respect to the ownership of class B non-voting shares by
U.S. Holders (as defined below). Except where noted, this summary deals only
with U.S. Holders that hold class B non-voting shares as capital assets and does
not deal with special situations, such as those of dealers in securities or
currencies, financial institutions, tax-exempt entities, life insurance
companies, traders who elect to mark-to-market their securities, persons holding
class B non-voting shares as a part of a hedging, integrated, conversion or
constructive sale transaction or a straddle or persons whose "functional
currency" is not the U.S. dollar. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF CLASS B NON-VOTING
SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL
AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
As used herein, a "U.S. Holder" of a class B non-voting share means a
holder that is:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized 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 that is subject to the supervision of a court within the
United States and the control of one or more United States persons as
described in section 7701 (a)(30) of the Code.
PAYMENT OF DIVIDENDS
The gross amount of dividends paid to a U.S. Holder of class B non-voting
shares (including amounts withheld to pay Canadian withholding taxes) will be
treated as dividend income to such U.S. Holder, 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 the gross
income of a U.S. Holder as ordinary income on the day received by the U.S.
Holder. Such dividends will not be eligible for the dividends received deduction
allowed to corporations under the Code.
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 the U.S.
Holder regardless of whether the Canadian dollars are converted into United
States dollars. If the Canadian dollars received as a dividend are not converted
into United States dollars on the date of receipt, a U.S. Holder 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.
The maximum rate of Canadian withholding tax on dividends paid to a U.S.
Holder entitled to the benefits of the Canada-United States Income Tax
Convention is 15%. A U.S. Holder may be entitled to deduct or credit such tax,
subject to applicable limitations in the Code. The rules governing the foreign
tax credit are complex. Investors are urged to consult their tax advisors
regarding the availability of the foreign tax credit under their particular
circumstances.
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To the extent that the amount of any distribution 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 the class B non-voting shares (thereby increasing the amount of gain,
or decreasing the amount of loss, to be recognized by the investor on a
subsequent disposition of the class B non-voting shares), and the balance in
excess of adjusted basis will be taxed as capital gain recognized on a sale or
exchange. Such distributions in excess of our current and accumulated earnings
and profits would not give rise to foreign source income and a U.S. Holder 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 U.S. tax due on other foreign source income in
the appropriate category for foreign tax credit purposes.
SALE, EXCHANGE OR REDEMPTION OF CLASS B NON-VOTING SHARES
A U.S. Holder will generally recognize taxable gain or loss on the
disposition of a class B share in an amount equal to the difference between the
amount realized for the class B share and the U.S. Holder's basis in the class B
share. Such gain or loss will be capital gain or loss, and such gain or loss
will be long-term capital gain or loss if the class B share has been held for
more than one year. Certain non-corporate taxpayers, including individuals, are
eligible for reduced rates of taxation on net long-term capital gains. The
deductibility of capital losses is subject to limitations. Any gain or loss
recognized by a U.S. Holder will generally be treated as United States source
gain or loss.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
In general, a foreign corporation is a passive foreign investment company
(a "PFIC") for any taxable year in which (1) 75% or more of its gross income
consists of passive income, such as dividends, interest, rents and royalties, or
(2) 50% or more of the average quarterly value of its assets consists of assets
that produce, or are held for the production of, passive 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 and because the principles
and methodology for applying the PFIC tests are not entirely clear, 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 a U.S. Holder held class B
non-voting shares, such holder generally would be subject to special rules with
respect to "excess distributions" made by us on the class B non-voting shares
and with respect to gain from the disposition of class B non-voting shares. An
"excess distribution" generally is defined as the excess of the distributions
with respect to the class B non-voting shares in any taxable year over 125% of
the average annual distributions a U.S. Holder has received from us during the
shorter of the three preceding years, or such holder's holding period for the
class shares. Generally, a U.S. Holder would be required to allocate any excess
distribution or gain from the disposition of the class B non-voting shares
ratably over its holding period for the class B non-voting 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 a U.S. Holder 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 a U.S. Holder's 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 a U.S. Holder is eligible for and timely makes a valid
"mark-to-market" election. If a valid mark-to-market election were made, in
calculating income for each taxable year a U.S. Holder generally would be
required, subject to certain limitations, to take into account the difference,
if any, between the fair
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market value and the adjusted tax basis of the class B non-voting shares as
ordinary gain or loss at the end of such holder's taxable year.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividends in
respect of the class B non-voting shares and the proceeds received on the
disposition of class B non-voting 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 the U.S. Holder fails to provide an accurate
taxpayer identification number or to report interest and dividends required to
be shown on its federal income tax returns. The amount of any backup withholding
from a payment to a U.S. Holder will be allowed as a credit against the U.S.
Holder's United States federal income tax liability.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material Canadian federal income
tax considerations under the Income Tax Act (Canada) (the "Canadian Tax Act")
with respect to the ownership of class B non-voting shares.
This summary applies only to holders of class B non-voting shares who, for
purposes of the Canadian Tax Act, are not resident nor deemed to be resident in
Canada, who deal at arm's length with us, who are not affiliated with us within
the meaning of the Canadian Tax Act, who hold the class B non-voting shares as
capital property and who do not use or hold, and are not deemed to use or hold,
the class B non-voting shares in connection with a trade or business carried on,
or deemed to be carried on in Canada at any time ("Non-Resident Holders"). The
class B non-voting shares will generally be considered to be capital property of
holders unless such shares are held in the course of carrying on a business, or
in an adventure or concern in the nature of trade. Furthermore, this summary
does not apply to any Non-Resident Holder which carries on an insurance business
in Canada and elsewhere, in respect of the class B non-voting shares that are
effectively connected with the non-resident holder's Canadian insurance business
or that are "designated insurance property" as defined in the Canadian Tax Act.
This summary is based upon the current provisions of the Canadian Tax Act,
the regulations thereunder, proposed amendments thereto publicly announced by
the Department of Finance, Canada prior to the date hereof, the provisions of
the Canada -- United States Income Tax Convention (1980) (the "Convention"), and
counsel's understanding of the current published administrative practices of the
Canada Customs and Revenue Agency (which has been statutorily carried over from
Revenue Canada). It has been assumed that the proposed amendments to the
Canadian Tax Act and the regulations thereunder will be enacted and that there
will be no other relevant amendments thereto. However, no assurance can be given
in this respect.
THIS SUMMARY DOES NOT APPLY TO "FINANCIAL INSTITUTIONS" OR "SPECIFIED
FINANCIAL INSTITUTIONS" AS DEFINED IN THE CANADIAN TAX ACT. THE SUMMARY DOES NOT
ADDRESS ANY ASPECT OF ANY PROVINCIAL OR LOCAL TAX LAWS OR THE TAX LAWS OF
JURISDICTIONS OUTSIDE CANADA OR THE TAX CONSIDERATIONS APPLICABLE TO PERSONS
OTHER THAN NON-RESIDENT HOLDERS. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR
DISPOSITION OF CLASS B NON-VOTING SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE CANADIAN FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS,
PURSUANT TO OTHER TAXING JURISDICTIONS. THIS SUMMARY ASSUMES THE CLASS B
NON-VOTING SHARES ARE LISTED AND WILL CONTINUE TO BE LISTED ON A PRESCRIBED
STOCK EXCHANGE (WHICH IS CURRENTLY CONTEMPLATED TO INCLUDE THE TORONTO STOCK
EXCHANGE AND THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION
SYSTEM (COMMONLY KNOWN AS THE "NASDAQ")). FURTHERMORE, THIS SUMMARY ASSUMES THAT
THE CLASS A VOTING SHARES RECEIVED IN EXCHANGE FOR CLASS B NON-VOTING
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SHARES UPON A CONVERSION EVENT (AS DESCRIBED BELOW) WILL, UPON SUCH EXCHANGE, BE
LISTED AND CONTINUE THEREAFTER TO BE LISTED ON A PRESCRIBED STOCK EXCHANGE.
For purposes of the Canadian Tax Act, all amounts must be expressed in
Canadian dollars, including dividends, adjusted cost base and proceeds of
disposition; amounts denominated in United States dollars must be converted into
Canadian dollars based on the United States dollar exchange rate generally
prevailing at that time.
PAYMENT OF DIVIDENDS
Amounts in respect of class B non-voting shares paid or credited or deemed
to be paid or credited as, on account or in lieu of payment of, or in
satisfaction of, dividends to a Non-Resident Holder will generally be subject to
Canadian non-resident withholding tax. Such withholding tax is levied at a basic
rate of 25% which may be reduced pursuant to the terms of an applicable tax
treaty between Canada and the country of residence of the Non-Resident Holder.
Currently, under the Convention, the rate of Canadian non-resident withholding
tax is 15% on the gross amount of dividends beneficially owned by a Non-Resident
Holder who is a resident of the United States for the purpose of the Convention
and whose class B non-voting shares in respect of which the dividends are paid
are not effectively connected to a "permanent establishment" or "fixed base" in
Canada. However, under the Convention, where such a beneficial owner is a
company which is a resident of the United States that owns at least 10% of our
voting stock, the rate of such withholding is reduced to 5%. In the case of
certain tax exempt entities which are residents of the United States for the
purpose of the Convention, the withholding tax on dividends may be eliminated in
those circumstances prescribed by the Convention.
A purchase of class B non-voting shares by us (other than a purchase of
class B non-voting shares by us on the open market) will give rise to a deemed
dividend under the Canadian Tax Act equal to the difference between the amount
paid by us on the purchase and the paid-up capital of such shares determined in
accordance with the Canadian Tax Act. The paid-up capital of such shares may be
less than the Non-Resident Holder's cost of such shares. Any such dividend
deemed to have been received by a Non-Resident Holder will be subject to
non-resident withholding tax as described above. The amount of any such deemed
dividend will reduce the proceeds of disposition of the class B non-voting
shares to the Non-Resident Holder for purposes of computing the amount of the
Non-Resident Holder's capital gain or loss under the Canadian Tax Act. However,
as described below, a loss on the disposition of the class B non-voting shares
may not be available to be used to offset capital gains arising from the
disposition of other property.
DISPOSITION OF CLASS B NON-VOTING SHARES
A Non-Resident Holder will not be subject to tax under the Canadian Tax Act
in respect of any capital gain on a disposition or deemed disposition of class B
non-voting shares (including the death of the Non-Resident Holder) unless at the
time of such disposition such shares constitute taxable Canadian property of the
Non-Resident Holder for purposes of the Canadian Tax Act and such Non-Resident
Holder is not entitled to relief under an applicable tax treaty. The class B
non-voting shares will generally not constitute taxable Canadian property of a
Non-Resident Holder at the time of a disposition of such shares provided (1)
such shares are listed on a prescribed stock exchange (which is currently
contemplated to include the Toronto Stock Exchange and the Nasdaq), (2) the
Non-Resident Holder does not use or hold or is not deemed to use or hold, such
shares in connection with carrying on a business in Canada, and (3) the
Non-Resident Holder, persons with whom such holder does not deal at arm's
length, or the Non-Resident Holder and such persons, has not owned (taking into
account any interest in or option in respect of the shares) 25% or more of the
issued shares of any class or series of our share capital at any time within the
5 years preceding the date of disposition. In any event, under the Convention,
gains derived by a Non-Resident Holder who is a resident of the United States
(within the meaning of the Convention) from the disposition of class B
non-voting shares will generally not be taxable in Canada unless the value of
the class B non-voting
85
<PAGE> 90
shares is derived principally from real property situated in Canada. If the
class B non-voting shares held by a Non-Resident Holder do not constitute
taxable Canadian property or if a capital gain in respect of the class B
non-voting shares would because of a tax treaty be exempt from tax under the
Canadian Tax Act, any capital loss arising upon the disposition of the class B
non-voting shares will not be available to be used to offset a capital gain
realized in respect of another property, which may be subject to tax under the
Canadian Tax Act. To the extent the class B non-voting shares disposed of
constitute taxable Canadian property, the Non-Resident Holder will be required
to file a Canadian tax return, even if the gain arising from such a disposition
is exempt from tax because of a tax treaty.
CONVERSION OF CLASS B NON-VOTING SHARES
A Non-Resident Holder of class B non-voting shares who exchanges same for
class A voting shares in the circumstances prescribed by our Articles of
Incorporation, as amended, which include (1) the elimination of foreign
ownership and control restrictions applicable to us as described in our Articles
of Incorporation, as amended or (2) the making of an Exclusionary Offer as
defined in our Articles of Incorporation, as amended (a "Conversion Event"),
shall generally be deemed not to have disposed of the class B non-voting shares,
provided that (1) the Non-Resident Holder does not file a joint election with us
under Subsection 85(1) of the Canadian Tax Act in respect of the exchange, and
(2) no other property is received by the Non-Resident Holder in respect of the
exchange. Thus, no capital gain or loss should be realized upon such exchange of
the class B non-voting shares for the class A voting shares. The cost to the
Non-Resident Holder of the class A voting shares acquired on the exchange will
be equal to the adjusted cost base to the Non-Resident Holder of its class B
non-voting shares so exchanged, determined immediately prior to the exchange,
which amount will be averaged with the adjusted cost base of any other class A
voting shares held at that time by the Non-Resident Holder as capital property.
Under the current administrative practice of the Canada Customs and Revenue
Agency, a holder who, upon the exchange of class B non-voting shares for class A
voting shares, receives cash not in excess of $200 in lieu of a fraction of a
class A voting share may either treat this amount as proceeds of disposition of
a portion of a class B non-voting share thereby realizing a capital gain or
capital loss, or alternatively, may reduce the adjusted cost base of the class A
voting shares that the holder receives on the exchange by the amount of the cash
received.
If the class B non-voting shares so exchanged constituted "taxable Canadian
property" to their holder then the class A voting shares acquired on the
exchange will be deemed to be taxable Canadian property to the Non-Resident
Holder.
Amounts in respect of class A voting shares paid or credited or deemed to
be paid or credited as, on account or in lieu of payment of, or in satisfaction
of, dividends to a Non-Resident Holder will be subject to the same Canadian
withholding tax treatment as described above for the class B non-voting shares,
under the heading "Payment of Dividends".
A disposition of the class A voting shares by a Non-Resident Holder will be
subject to similar Canadian income tax treatment as discussed above for the
class B non-voting shares, under the heading "Disposition of Class B Non-Voting
Shares", if one replaces the references to class B non-voting shares in such
discussion with a reference to class A voting shares.
86
<PAGE> 91
UNDERWRITING
We and the underwriters named below (the "Underwriters") have entered into
an underwriting agreement with respect to the class B non-voting shares being
offered. Subject to certain conditions, each Underwriter has severally agreed to
purchase the number of class B non-voting shares indicated in the following
table.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Goldman, Sachs & Co...................................... 4,950,000
Salomon Smith Barney Inc................................. 4,950,000
CIBC World Markets Corp.................................. 1,980,000
Merrill Lynch, Pierce, Fenner & Smith.................... 1,620,000
Incorporated
Morgan Stanley & Co. Incorporated........................ 1,620,000
RBC Dominion Securities Corporation...................... 1,620,000
BMO Nesbitt Burns Inc. .................................. 315,000
National Bank Financial Inc.............................. 315,000
Scotia Capital (USA) Inc. ............................... 315,000
TD Securities Inc. ...................................... 315,000
----------
Total.................................................. 18,000,000
==========
</TABLE>
The offering is being made concurrently in all the provinces of Canada and
in the United States. The Underwriters will offer the class B non-voting shares
for sale in the United States and Canada either directly or through their
respective broker-dealer affiliates or agents registered in each jurisdiction.
Subject to applicable law, the Underwriters may offer the class B non-voting
shares outside the United States and Canada.
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
2,700,000 shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the Underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase 2,700,000 additional shares.
<TABLE>
<CAPTION>
PAID BY US
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share................................................... $ 0.95 $ 0.95
Total....................................................... $17,100,000 $19,665,000
</TABLE>
Class B non-voting shares sold by the Underwriters to the public in the
United States will initially be offered at the initial public offering price set
forth on the cover of this prospectus. Any class B non-voting shares sold by the
Underwriters to securities dealers may be sold at a discount of up to $0.57 per
share from the initial public offering price. Any such securities dealers may
resell any class B non-voting shares purchased from the Underwriters to certain
other brokers or dealers at a discount of up to $0.10 per share from the initial
public offering price. If all the class B non-voting shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
We, our directors, officers and senior management, Shaw Communications, and
our series A first preference shareholders, have agreed with the Underwriters
not to dispose of or hedge any of our, or their, class B non-voting shares,
class A voting shares, or securities convertible into or exchangeable for class
B non-voting shares or class A voting shares during the period from the date of
this prospectus continuing through the date 180 days after the date of this
prospectus, except with the
87
<PAGE> 92
prior written consent of Goldman, Sachs & Co. and Salomon Smith Barney Inc. See
"Shares Eligible for Future Sale" on page 80 for a discussion of certain
transfer restrictions.
At our request, the Underwriters have reserved up to approximately 8.3% of
the class B non-voting shares for sale at the initial public offering price to
directors, officers, employees and friends through a directed share program. The
number of class B non-voting shares available for sale to the general public
will be reduced to the extent these persons purchase the reserved class B
non-voting shares. Any shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other class B
non-voting shares offered hereby.
Prior to the offering, there has been no public market for the class B
non-voting shares. The initial public offering price has been negotiated among
us and the representatives. Among the factors to be considered in determining
the initial public offering price of the class B non-voting shares, in addition
to prevailing market conditions, will be our historical performance, estimates
of our business potential and earnings prospects, an assessment of our
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The class B non-voting shares will be listed and posted for trading on The
Toronto Stock Exchange under the symbol "GTG.B". The class B non-voting shares
will also be quoted on the Nasdaq National Market under the symbol "GTTLB".
In connection with the offering, the Underwriters may purchase and sell
shares of class B non-voting shares in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the class B
non-voting shares while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the class B non-voting shares. As a result, the price
of the class B non-voting shares may be higher than the price that otherwise
might exist in the open market. If these activities are commenced, they may be
discontinued by the Underwriters at any time. These transactions may be effected
on the Nasdaq National Market, the Toronto Stock Exchange, in the
over-the-counter market or otherwise.
Pursuant to Policy Statements of the Ontario Securities Commission, the
Underwriters may not, throughout the period of distribution, bid for or purchase
class B non-voting shares. The foregoing restriction is subject to exceptions,
on the condition that the bid or purchase not be engaged in for the purpose of
creating actual or apparent active trading in or raising the price of the class
B non-voting shares. These exceptions include a bid or purchase permitted under
the by-laws and rules of the Toronto Stock Exchange relating to market
stabilization and passive market making activities and a bid or purchase made
for or on behalf of a customer where the order is not solicited during the
period of distribution.
Goldman Sachs may use this prospectus in connection with offers and sales
related to market-making transactions in the class B non-voting shares. Goldman
Sachs may act as principal or agent in such transactions, including as agent for
the counterparty when acting as principal or agent for both counterparties, and
may receive compensation in the form of discounts and commissions, including
from both counterparties when they act as agent for both such parties. Such
sales will be made at prevailing market prices at the time of sale, at prices
related to prevailing market prices or negotiated prices.
88
<PAGE> 93
Goldman Sachs and Salomon Smith Barney are acting as joint book-running
managers for purposes of this offering.
We have been advised by Goldman Sachs that, subject to applicable laws and
regulations, Goldman Sachs currently intends to make a market in the class B
non-voting shares. However, they are not obligated to do so and they may
interrupt or discontinue their market-making activities at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Securities Act of 1933 and the Securities Exchange Act of 1934.
There can be no assurance that an active trading market in the class B
non-voting shares will be developed or sustained.
The Underwriters may not confirm sales to any accounts over which they
exercise discretionary authority without the prior specific written approvals by
the customer.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately US$2,000,000.
We have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Pursuant to our shareholders agreement, Goldman, Sachs & Co. is entitled to
designate three directors and CIBC World Markets is entitled to designate one
director. Goldman, Sachs & Co. has designated Robert Gheewalla and George Estey
as directors. CIBC World Markets has designated Kenneth Kilgour as a director.
Because affiliates of Goldman Sachs and CIBC World Markets beneficially own
our shares, the offering is being conducted in accordance with Rule 2720 of the
National Association of Securities Dealers, Inc. That rule requires that the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter", as defined by the NASD. Salomon Smith
Barney has served in that capacity and performed due diligence investigations
and reviewed and participated in the preparation of the registration statement
of which this prospectus forms a part.
89
<PAGE> 94
LEGAL MATTERS
Certain legal matters will be passed upon by:
- Shearman & Sterling, our United States counsel, on matters of United
States and New York law;
- Goodman Phillips & Vineberg, our Canadian counsel, on matters of
Canadian law;
- Skadden, Arps, Slate, Meagher & Flom LLP, the underwriters' United
States counsel, on matters of United States and New York law; and
- Osler, Hoskin & Harcourt LLP, the underwriters' 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
periods then ended 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.
REGISTRARS AND TRANSFER AGENTS
The registrar and transfer agent for the class B non-voting shares in
Canada is CIBC Mellon Trust Company at its principal offices in Toronto and in
the United States is ChaseMellon Shareholder Services at its principal offices
in New York.
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.
90
<PAGE> 95
WHERE YOU CAN OBTAIN MORE INFORMATION ABOUT US
We have filed a registration statement on Form F-1 with the Securities and
Exchange Commission with respect to the class B non-voting shares offered under
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information in the registration statement
or the exhibits and schedules that are part of the registration statement. For
further information on us and the class B non-voting shares we are offering, you
should review the registration statement and the exhibits filed as a part of the
registration statement. The exhibits to this registration statement should be
referenced for the complete contents of these contracts and documents. The
registration statement, including the exhibits, may be inspected without charge
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.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance with this law, will file periodic reports and other
information with the Commission. These periodic reports and other information
will be available for inspection and copying at the Commission's public
reference rooms referred to above. 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.
91
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants of Group Telecom... F-2
Consolidated Financial Statements of Group Telecom.......... F-3
Notes to Consolidated Financial Statements of Group
Telecom................................................... F-6
Report of Independent Public Accountants of Shaw FiberLink
Ltd. -- FiberLink Division................................ F-31
Financial Statements of Shaw FiberLink Ltd. -- FiberLink
Division.................................................. F-32
Notes to Financial Statements of Shaw FiberLink Ltd. --
FiberLink Division........................................ F-35
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-42
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ F-45
</TABLE>
F-1
<PAGE> 97
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> 98
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-3
<PAGE> 99
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-4
<PAGE> 100
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-5
<PAGE> 101
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-6
<PAGE> 102
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-7
<PAGE> 103
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-8
<PAGE> 104
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-9
<PAGE> 105
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-10
<PAGE> 106
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-11
<PAGE> 107
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-12
<PAGE> 108
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-13
<PAGE> 109
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 U.S.$315 million vendor facility to finance the purchase and installation
of equipment and services. The vendor facility is available in tranches of
U.S.$161 million and U.S.$154 million. The vendor retains the right to convert
up to U.S.$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-14
<PAGE> 110
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-15
<PAGE> 111
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-16
<PAGE> 112
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-17
<PAGE> 113
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-18
<PAGE> 114
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-19
<PAGE> 115
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-20
<PAGE> 116
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-21
<PAGE> 117
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-22
<PAGE> 118
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-23
<PAGE> 119
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-24
<PAGE> 120
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
Property, plant and equipment representing indefeasible
rights to use 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 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-25
<PAGE> 121
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 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. 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-26
<PAGE> 122
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-27
<PAGE> 123
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-28
<PAGE> 124
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-29
<PAGE> 125
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-30
<PAGE> 126
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-31
<PAGE> 127
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-32
<PAGE> 128
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-33
<PAGE> 129
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-34
<PAGE> 130
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-35
<PAGE> 131
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-36
<PAGE> 132
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-37
<PAGE> 133
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-38
<PAGE> 134
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-39
<PAGE> 135
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-40
<PAGE> 136
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-41
<PAGE> 137
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-42
<PAGE> 138
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-43
<PAGE> 139
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-44
<PAGE> 140
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, $592 million was
allocated to the Senior Discount Notes and $59 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-45
<PAGE> 141
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.
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.
F-46
<PAGE> 142
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)
(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 $592 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-47
<PAGE> 143
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-48
<PAGE> 144
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- ---------------------------------------------------------
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>
Exchange Rates.............................. ii
Presentation of our Financial and Other
Information............................... ii
Prospectus Summary.......................... 1
Risk Factors................................ 7
Use of Proceeds............................. 14
Dividend Policy............................. 14
Capitalization.............................. 15
Dilution.................................... 17
Selected Unaudited Pro Forma Consolidated
Financial and Operating Information....... 18
Selected Historical Financial and Operating
Information of Group Telecom.............. 21
Selected Historical Financial and Operating
Information of Shaw FiberLink............. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 25
Our Acquisition of the Shaw FiberLink
Business.................................. 35
Business.................................... 38
Description of Our Financing Arrangements... 52
Management.................................. 57
Regulation.................................. 66
Related Party Transactions.................. 75
Principal Shareholders...................... 76
Description of Share Capital................ 77
Shares Eligible for Future Sale............. 80
Taxation.................................... 82
Underwriting................................ 87
Legal Matters............................... 90
Experts..................................... 90
Registrars and Transfer Agents.............. 90
Enforceability of Civil Liabilities......... 90
Where You Can Obtain More Information About
Us........................................ 91
Index to Financial Statements............... F-1
</TABLE>
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Through and including April 3, 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- ---------------------------------------------------------
- ---------------------------------------------------------
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18,000,000 Shares
GT GROUP TELECOM INC.
Class B Non-Voting Shares
------------------------------------
[GT Group Telecom Logo]
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GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
CIBC WORLD MARKETS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
RBC DOMINION SECURITIES
CORPORATION
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