<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 2000
REGISTRATION NO. 333-38058
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM F-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
GT GROUP TELECOM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CANADA 4813 NOT APPLICABLE
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
</TABLE>
20 BAY STREET, 7TH FLOOR, TORONTO, ONTARIO, CANADA M5J 2N8 (416) 943-9555
(Address and telephone number of Registrant's principal executive offices)
CT CORPORATION SYSTEM, 111 EIGHTH AVENUE, 13TH FLOOR, NEW YORK, NY 10011
(212) 894-8940
(Name, address, including zip code and telephone number, including area code, of
Agent for Service)
------------------------------------
Copies to:
BRUCE CZACHOR, ESQ.
SHEARMAN & STERLING
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario M5L 1E8
(416) 360-8484
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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<PAGE> 2
EXPLANATORY NOTE
This registration statement covers the registration of an aggregate stated
amount at maturity of $855,000,000 of 13 1/4% Senior Discount Notes due 2010 of
GT Group Telecom Inc., which are being registered under the Securities Act
pursuant to a registration statement of which this prospectus is a part, that
may be exchanged for equal stated amounts at maturity of Group Telecom's
outstanding 13 1/4% Senior Discount Notes due 2010. This registration statement
also covers the registration of the exchange notes for resale by Goldman, Sachs
& Co. in market-making transactions. The complete prospectus relating to the
exchange offer follows immediately after this explanatory note. Following the
exchange offer prospectus are some pages of the prospectus relating solely to
these market-making transactions, including alternate outside front cover and
back cover pages, an alternate section entitled "Risk Factors -- You cannot be
sure that an active trading market will develop for the notes," an alternate
section entitled "Use of Proceeds" and an alternate section entitled "Plan of
Distribution." In addition, the market-making prospectus will not include the
following captions, or the information set forth under these captions, in the
exchange offer prospectus: "Summary" -- The Exchange Offer," "Risk Factors --
consequences of failure to exchange your notes for exchange notes," "The
Exchange Offer," "Registration Agreement for Outstanding Notes," "Taxation --
U.S. Federal Income Tax Considerations -- Exchange Offer" and "Taxation --
Canadian Federal Income Tax Considerations -- Canadian Holders -- Exchange". All
other sections of the exchange offer prospectus will be included in the
market-making prospectus.
<PAGE> 3
[GT Group Telecom Logo]
GT GROUP TELECOM INC.
OFFER TO EXCHANGE
ANY AND ALL OUTSTANDING
13 1/4% SENIOR DISCOUNT NOTES DUE 2010
(US$855,000,000 STATED AMOUNT AT MATURITY OUTSTANDING)
FOR
13 1/4% SENIOR DISCOUNT EXCHANGE NOTES DUE 2010
OF
GT GROUP TELECOM INC.
TERMS OF EXCHANGE OFFER
- Expires 5:00 p.m., New York City time, September 14, 2000, unless extended
- Not subject to any other condition other than that the exchange offer does
not violate applicable law or any applicable interpretation of the Staff of
the Securities and Exchange Commission
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged
- Tenders of outstanding notes may be withdrawn by you any time prior to 5:00
p.m., New York City time on the date of the expiration of the exchange offer
- The exchange of notes will not be a taxable exchange for U.S. federal income
tax purposes
- We will not receive any proceeds from the exchange offer
- The terms of the exchange notes to be issued are substantially similar to the
outstanding notes, except for transfer restrictions and registration rights
relating to the outstanding notes
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE
OFFER OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prospectus dated August 15, 2000.
<PAGE> 4
The exchange offer is not being made to, nor will we accept surrenders of
or exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
No dealer, salesperson or other individual has been authorized to give any
information or make any representation not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by us. This prospectus does not constitute an offer or a solicitation in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus, nor any distribution
of securities made hereunder shall under any circumstances, create any
implication that there has not been any change in the facts set forth in this
prospectus or in the affairs of Group Telecom since the date hereof.
------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED
STATES FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR
DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
THE NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR PUBLIC DISTRIBUTION
UNDER THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA. THE NOTES ARE
NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA OR TO ANY RESIDENT THEREOF EXCEPT IN ACCORDANCE WITH THE
SECURITIES LAWS OF THE PROVINCES AND TERRITORIES OF CANADA.
THE NOTES HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS
REQUIREMENTS OF THE APPLICABLE CANADIAN PROVINCIAL AND TERRITORIAL SECURITIES
LAWS AND MAY BE SOLD IN CANADA ONLY PURSUANT TO AN EXEMPTION THEREFROM OR AFTER
ONE YEAR FROM THE DATE WE BECAME A REPORTING ISSUER UNDER SUCH LAWS.
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EXCHANGE RATES
The following table sets forth, for the periods and rates indicated,
information concerning exchange rates for Canadian dollars expressed in United
States dollars, based on the inverse of the noon buying rate in the City of New
York for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED SEPTEMBER 30, JUNE 30,
--------------------------------- -----------------
1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
High.................................. 0.7527 0.7513 0.7292 0.6828 0.6423 0.6629
Low................................... 0.7235 0.7145 0.6341 0.6423 0.6891 0.6969
Period End............................ 0.7342 0.7234 0.6552 0.6805 0.6786 0.6758
Average............................... 0.7327 0.7286 0.6845 0.6663 0.6649 0.6824
</TABLE>
The average noon buying rate is derived by taking the average of the noon buying
rate on the last business day of each month during the relevant period.
PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION
Unless we indicate otherwise, financial information in this prospectus has
been prepared in accordance with Canadian generally accepted accounting
principles. Canadian GAAP differs in some respects from U.S. GAAP and thus our
financial statements may not be comparable to the financial statements of U.S.
companies. The principal differences as they apply to us are summarized in note
22 to the audited consolidated financial statements of Group Telecom beginning
on page F-15 and note 10 to the audited financial statements of Shaw FiberLink
beginning on page F-43.
We present our financial information in Canadian dollars. In this
prospectus, except where we indicate, all dollar amounts are in Canadian
dollars. References to "$" or "Cdn$" are to Canadian dollars and references to
"US$" are to U.S. dollars. This prospectus contains a translation of some
Canadian dollar amounts into U.S. dollars at specified exchange rates solely for
your convenience. Unless we indicate otherwise, U.S. dollar amounts have been
translated from Canadian dollars at US$0.6758 per Cdn$1.00, which was the
inverse of the noon buying rate on June 30, 2000.
ii
<PAGE> 6
SUMMARY
This summary highlights information about the exchange offer that you will
find elsewhere in this prospectus. This summary does not contain all the
information you should consider before participating in this exchange offer. You
should carefully read the entire prospectus and the risk factors beginning on
page 9.
THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to US$855,000,000
aggregate stated amount at maturity of the outstanding 13 1/4% Senior Discount
Notes Due 2010 for an equal aggregate principal amount of exchange notes. The
exchange notes will be our obligations and are entitled to the benefits of the
indenture relating to the outstanding notes. The form and terms of the exchange
notes are identical in all material respects to the form and terms of the
outstanding notes, except that the exchange notes have been registered under the
Securities Act of 1933, and therefore contain no restrictive legends thereon.
Nor are the exchange notes entitled to the benefits of the registration rights
granted under the registration rights agreement, executed as a part of the
offering of the outstanding notes, dated as of February 1, 2000, among us and
the initial purchasers.
Registration Rights........ On February 1, 2000, we and the initial purchasers
agreed that you, as a holder of the outstanding
notes, would be entitled to exchange your notes for
registered notes with substantially identical
terms. This exchange offer is intended to satisfy
these rights. After the exchange offer is complete,
you will no longer be entitled to any exchange or
registration rights with respect to your notes.
The Exchange Offer......... We are offering to exchange US$1,000 principal
amount of 13 1/4% Senior Discount Notes Due 2010
which have been registered under the Securities Act
of 1933 for each US$1,000 principal amount of our
13 1/4% Senior Discount Notes Due 2010, which were
issued on February 1, 2000 in a private offering.
In order to be exchanged, an outstanding note must
be properly tendered and accepted. All outstanding
notes that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are US$855 million in
aggregate stated amount at maturity outstanding
dollar notes.
We will issue the exchange notes to you on or
promptly after the expiration of the exchange
offer.
Resale of the Exchange
Notes...................... Based on an interpretation by the staff of the
Securities and Exchange Commission set forth in
no-action letters issued to third parties,
including "Exxon Capital Holdings Corporation"
(available May 13, 1988), "Morgan Stanley & Co.
Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc. (available June 5, 1991) and
"Warnaco, Inc." (available October 11, 1991), we
believe that the notes issued in the exchange offer
may be offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions of
the Securities Act of 1933 provided that:
- You are acquiring the notes issued in the
exchange offer in the ordinary course of
business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
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in the distribution of the notes issued to you
in the exchange offer;
- you are not a broker-dealer who purchased the
outstanding notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933; and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer any
note issued to you in the exchange offer without
delivering a prospectus meeting the requirements of
the Securities Act of 1933 or without an exemption
from registration of your notes from such
requirements, you may incur liability under the
Securities Act of 1933. We do not assume or
indemnify you against such liability, but we do not
believe that any such liability should exist.
Each broker-dealer that is issued notes in the
exchange offer for its own account in exchange for
notes which were acquired by such broker-dealer as
a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act of 1933 in connection with any
resale of the notes issued in the exchange offer.
The letter of transmittal states that by so
acknowledging and by delivering a prospectus, such
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act of 1933. A broker-dealer may use
this prospectus for an offer to resell or otherwise
retransfer of the notes issued to it in the
exchange offer. We have agreed that, for a period
of 180 days after the date of this prospectus, we
will make this prospectus and any amendment or
supplement to this prospectus available to any such
broker-dealer for use in connection with any such
resales. We do not believe that any registered
holder of the outstanding notes is an affiliate (as
such term is defined in Rule 405 of Securities Act
of 1933) of ours.
The exchange offer is not being made to, nor will
we accept surrenders for exchange from, holders of
outstanding notes in any jurisdiction in which this
exchange offer or the acceptance thereof would not
be in compliance with the securities or blue sky
laws of such jurisdiction.
Expiration of Exchange
Offer...................... The exchange offer will expire at 5:00 p.m., New
York City time, on September 14, 2000, unless we
decide to extend the expiration date.
Accrued Interest on the
Exchange Notes and the
Outstanding Notes........ The exchange notes will bear interest from February
1, 2000. Holders of outstanding notes whose notes
are accepted for exchange will be deemed to have
waived the right to receive any payment in respect
of interest on such outstanding notes accrued from
February 1, 2000 to the date of the issuance of the
exchange notes.
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<PAGE> 8
Conditions of the Exchange
Offer.................... We may terminate the exchange offer if we determine
that our ability to proceed with the exchange offer
could be materially impaired due to any legal or
governmental action, new law, statute, rule or
regulation or any interpretation of the staff of
the Securities and Exchange Commission of any
existing law, statute, rule or regulation. We do
not expect any of the foregoing conditions to
occur, although there can be no assurance that such
conditions will not occur. Holders of outstanding
notes will have certain rights against our company
under the registration rights agreement executed as
part of the offering of the outstanding notes
should we fail to consummate the exchange offer.
Procedures for Tendering
Outstanding Notes........ If you are a holder of an outstanding note and you
wish to tender your note for exchange pursuant to
the exchange offer, you must transmit to The Chase
Manhattan Bank, as exchange agent for the notes, on
or prior to the expiration date:
either
- a properly completed and duly executed letter of
transmittal, which accompanies this prospectus,
or a facsimile of the letter of transmittal,
including all other documents required by the
letter of transmittal, to the exchange agent at
the address set forth on the cover page of the
letter of transmittal; or
- an electronic instruction transmitted by means
of the Depository Trust Company's Automated
Tender Offer Program system ("ATOP") and
received by the exchange agent and forming a
part of a confirmation of book-entry transfer in
which you acknowledge and agree to be bound by
the terms of the letter of transmittal;
and, either
- certificates for the outstanding notes being
tendered must be received by the exchange agent
on or prior to the expiration date along with
the letter of transmittal; or
- a timely confirmation of book-entry transfer of
your outstanding notes into the exchange agent's
account at The Depository Trust Company pursuant
to the procedure for book-entry transfers
described in this prospectus under the heading
"The Exchange Offer -- Procedures for Tendering
Outstanding Notes," must be received by the
exchange agent on or prior to the expiration
date; or
- the documents necessary for compliance with the
guaranteed delivery procedures described below.
By executing the letter of transmittal, or by
agreeing to the terms of the letter of transmittal,
each holder will represent to us that, among other
things, (1) the notes to be issued in the exchange
offer are being obtained in the ordinary course of
business of the person receiving such exchange
notes whether or not such person is the holder, (2)
neither the holder nor any such other person has an
arrangement or understanding with any person to
participate in
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<PAGE> 9
the distribution or such exchange notes and (3)
neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the
Securities Act of 1933, of ours.
Special Procedures for
Beneficial Owners........ If you are a beneficial owner of registered notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such notes or
registered notes in the exchange offer, you should
contact such person in whose name your notes or
registered notes are registered promptly and
instruct such person to tender on your behalf. If
you, as such beneficial holder, wish to tender on
your own behalf you must, prior to completing and
executing the letter of transmittal and delivering
your outstanding notes, either make appropriate
arrangements to register ownership of the
outstanding notes in your name or obtain a properly
completed bond power from the registered holder.
The transfer of record ownership may take
considerable time.
Guaranteed Delivery
Procedures............... If you wish to tender your outstanding notes and
time will not permit your required documents to
reach the exchange agent by the expiration date, or
the procedure for book-entry transfer cannot be
completed on time or certificates for registered
notes cannot be delivered on time, you may tender
your outstanding notes pursuant to the procedures
described in this prospectus under the heading "The
Exchange Offer -- Guaranteed Delivery Procedure."
Withdrawal Rights.......... You may withdraw the tender of your outstanding
notes at any time prior to 5:00 p.m., New York City
time, on September 14, 2000.
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes........... Subject to certain conditions (as summarized above
in "Conditions of the Exchange Offer" and described
more fully under the "The Exchange Offer -- Certain
Conditions to the Exchange Offer" beginning on page
36), we will accept for exchange any and all
outstanding notes which are properly tendered in
the exchange offer prior to 5:00 p.m., New York
City time on the expiration date. The notes issued
pursuant to the exchange offer will be delivered
promptly following the expiration date.
Federal Income Tax
Consequences............. The exchange of the notes will generally not be a
taxable exchange for United States federal income
tax purposes. We believe you will not recognize any
taxable gain or loss or any interest income as a
result of such exchange.
Use of Proceeds............ We will not receive any proceeds from the issuance
of notes pursuant to the exchange offer. We will
pay all expenses incident to the exchange offer.
For a description of the use of proceeds from the
offering of the outstanding notes, see "Use of
Proceeds" on page 17.
4
<PAGE> 10
Exchange Agent for Notes... The Chase Manhattan Bank is serving as exchange
agent. For more information with respect to the
exchange of outstanding notes, the telephone number
for the exchange agent is (206) 903-4908 and the
facsimile number is (206) 624-3867.
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<PAGE> 11
DESCRIPTION OF THE EXCHANGE NOTES
Notes Offered.............. US$855,000,000 aggregate stated amount at maturity
of 13 1/4% senior discount notes due 2010.
Maturity Date.............. February 1, 2010.
Interest................... We will pay cash interest on the exchange notes
from August 1, 2005 at the rate of 13 1/4% per
year, payable semi-annually in arrears on each
February 1 and August 1, commencing on August 1,
2005. Prior to February 1, 2005, interest will
accrue on the original issue price of the notes but
will not be payable in cash. However, we may elect
to commence the accrual of interest payable in cash
on any February 1 or August 1 on or after February
1, 2003. The stated amount at maturity of each note
will be reduced to the accreted value of the notes
on the date that cash interest starts to accrue.
Optional Redemption........ Generally, we may not redeem the notes prior to
February 1, 2005. On or after February 1, 2005, we
may redeem the notes, in whole or in part, at any
time, at the redemption prices set forth under the
section entitled "Description of the Notes --
Optional Redemption" beginning on page 64, together
with accrued and unpaid interest, if any, to the
redemption date.
In addition, before February 1, 2003, we may redeem
up to 35% of the stated amount at maturity of the
exchange notes with the proceeds of sales of
certain kinds of our share capital at a redemption
price of 113.25% of the accreted value of the
notes.
Change of Control.......... If we experience specific kinds of change of
control we must offer to repurchase the exchange
notes at the amount listed under the heading
"Description of the Notes -- Covenants -- Change of
Control" on page 74.
Ranking.................... The exchange notes will rank equally with our other
unsubordinated, unsecured indebtedness. At June 30,
2000, we had no unsubordinated, unsecured
indebtedness other than the outstanding notes. The
exchange notes are effectively subordinated to our
secured indebtedness and all liabilities of our
subsidiaries. At June 30, 2000, we had no
outstanding secured debt and our subsidiaries had
$217.9 million of long-term debt.
Certain Covenants.......... The indenture under which the exchange notes will
be issued will restrict our ability to:
- incur additional indebtedness;
- make investments or certain other restricted
payments;
- create liens;
- pay dividends or make distributions in respect
of share capital;
- redeem share capital;
- sell assets;
- issue or sell shares of restricted subsidiaries;
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<PAGE> 12
- enter into transactions with shareholders or
affiliates; or
- effect a consolidation or merger.
All of these limitations and prohibitions will be
subject to a number of important qualifications and
exceptions. For more details, see the section
entitled "Description of the Notes -- Covenants"
beginning on page 64.
Registration Rights
Agreement.................. Pursuant to a registration rights agreement, we
have agreed to file a registration statement on an
appropriate form with respect to this offer to
exchange the outstanding notes for a new issue of
our debt securities which will be registered under
the Securities Act with terms substantially
identical to the outstanding notes. This prospectus
is a part of that registration statement.
If we fail to file an appropriate registration
statement, or that registration statement does not
become effective, or if the exchange offer is not
completed, in each case within specified time
periods, special interest will accrue and be
payable.
Withholding Tax............ Unless required by law, all our payments with
respect to the exchange notes will be made without
withholding or deduction for any present or future
taxes or governmental charges of whatever nature
imposed or levied by any tax authority within
Canada or any other relevant taxing jurisdiction.
We will pay any additional amounts so that the net
amounts receivable by the holders after any
payment, withholding or deduction in respect of
such tax or liability shall equal the respective
amounts which would have been receivable in respect
of the exchange notes in the absence of such
payments, withholding or deduction.
Consequences of Failure to
Exchange................. Untendered outstanding notes will remain restricted
securities and will continue to be subject to the
following restrictions on transfer:
- outstanding notes may be resold only if
registered pursuant to the Securities Act of
1933, if an exemption from registration is
available thereunder, or if neither such
registration nor such exemption is required by
law,
- outstanding notes shall bear a legend
restricting transfer in the absence of
registration or an exemption therefrom, and
- a holder of outstanding notes who desires to
sell or otherwise dispose of all or any part of
its outstanding notes under an exemption from
registration under the Securities Act of 1933,
if requested by us, must deliver to us an
opinion of independent counsel experienced in
Securities Act matters, reasonably satisfactory
in form and substance to us, that such exemption
is available.
The exchange notes have not been and will not be
qualified for sale under the securities laws of
Canada or any province or territory of Canada. The
exchange notes are not being offered for sale and
may not be offered or sold, directly or indirectly,
in Canada, or to any resident thereof, except in
accordance with the securities laws of the
provinces and territories of Canada.
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<PAGE> 13
Absence of a Public Market
for the Notes.............. The notes are a new issue of securities and there
is currently no established market for them. The
initial purchasers have advised us that they
currently intend to make a market for the notes as
permitted by applicable laws and regulations.
However, they are not obligated to do so and may
discontinue any such market making activities at
any time without notice.
RISK FACTORS
You should consider carefully the information set forth in the section of
this prospectus entitled "Risk Factors" beginning on page 9 and all the other
information provided to you in this prospectus in deciding whether to tender
your outstanding notes for exchange notes.
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<PAGE> 14
RISK FACTORS
An investment in the notes involves a high degree of risk. You should
carefully consider the risks described below and all other information contained
in this prospectus before exchanging your notes. Any of the following risks
could materially harm our business, operating results and financial condition.
Additional risks and uncertainties not currently known to us or that we
currently consider immaterial could also harm our business, operating results
and financial condition. Due to any of these risks, we may not be able to pay
principal or interest on the notes and you could lose all or part of your
investment.
OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE.
We have a significant amount of debt. As of June 30, 2000, we had
approximately $854.3 million of long-term debt outstanding. In addition, we
could incur an additional $373.8 million under our Cisco facility and our new
vendor financing with Lucent, assuming we could incur debt in compliance with
covenants set forth in these facilities. We may need to incur additional debt in
the future. Our substantial debt obligations could have important consequences
to you. For example, it could:
- require us to use a substantial portion of our operating cash flow to
pay interest, which reduces funds available to expand our network and
for other purposes;
- place us at a competitive disadvantage compared to our competitors that
have less debt;
- make us more vulnerable to economic and industry downturns and reduce
our flexibility in responding to changing business and economic
conditions;
- limit our ability to pursue business opportunities; and
- limit our ability to borrow more money for operations or capital in the
future.
A 1 percent interest rate change on our floating interest rate long-term
debt outstanding at June 30, 2000, would have an annual impact of $1.9 million
on our interest cost.
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO PAY OUR DEBT. IF WE FAIL TO
GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO REFINANCE OUR
DEBT, OBTAIN ADDITIONAL FINANCING OR POSTPONE CAPITAL EXPENDITURES.
We cannot assure you that we will generate sufficient cash flow from
operations to make scheduled payments on our debt. Our ability to meet our debt
obligations will depend on whether we can successfully implement our strategy,
as well as on economic, financial, competitive, legal and technical factors.
Some of the factors are beyond our control, such as economic conditions in the
different local markets where we operate or intend to operate, and pressure from
existing and new competitors. If we cannot generate sufficient cash flow from
operations to make scheduled payments on our debt obligations, we may need to
refinance our debt, obtain additional financing, delay planned capital
expenditures or sell assets. Our ability to refinance our debt or obtain
additional financing will depend on, among other things:
- our financial condition at the time;
- restrictions in agreements governing our debt; and
- other factors, including market conditions.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED INDEBTEDNESS AND THE
LIABILITIES OF OUR SUBSIDIARIES.
The notes are effectively subordinated to our secured indebtedness to the
extent of the value of the assets securing the indebtedness. The notes are
effectively subordinated to all liabilities, including trade payables and lease
obligations, of our subsidiaries. Any right we may have to receive assets of any
of our subsidiaries upon liquidation or reorganization will be effectively
subordinated to the claims
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<PAGE> 15
of that subsidiary's creditors, including trade creditors. As of June 30, 2000,
we had no outstanding secured debt and our subsidiaries had approximately $217.9
million of long-term debt (including current portion). In addition, under our
Cisco facility and our new vendor financing with Lucent, we may borrow an
additional $373.8 million of secured debt. The indenture governing the notes and
our credit and vendor facilities contain limitations on our ability and the
ability of our subsidiaries to incur additional debt. However, these limitations
are subject to a number of exceptions, and we cannot assure you that we will not
incur significant additional debt in the future, including debt to which the
holders of the notes would be effectively subordinated.
WE ARE ORGANIZED AS A HOLDING COMPANY AND SO WE WILL DEPEND ON THE CASH
FLOW OF OUR SUBSIDIARIES TO SATISFY OUR OBLIGATIONS UNDER THE NOTES.
Our operating cash flow and our ability to service our debt, including the
notes, depends upon the operating cash flow of our subsidiaries and their
payments to us in the form of loans, dividends or otherwise. Our subsidiaries
are separate legal entities and have no obligation to pay any amounts due on the
notes or to make any funds available for that purpose, whether by dividends,
interest, loans, advances or other payments. In addition, our subsidiaries'
payment of dividends and the making of loans, advances and other payments to us
may be subject to regulatory and contractual restrictions. These restrictions
include requirements to maintain minimum levels of working capital and other
assets. Subsidiary payments are contingent upon earnings and various business
and other considerations.
DUE TO RESTRICTIONS IN OUR FINANCING AGREEMENTS, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS AS WE DESIRE.
The indenture relating to the notes and our other financing agreements will
limit our flexibility in operating our businesses. In particular, the indenture
and our financing agreements limit our ability in certain circumstances to:
- incur additional indebtedness;
- voluntarily prepay indebtedness;
- create liens on our property;
- pay dividends or make distributions in respect of share capital;
- make investments or certain other restricted payments;
- enter into interest rate, currency exchange rate or other hedging
arrangements;
- enter into transactions with shareholders or affiliates;
- enter into sale and leaseback transactions;
- sell assets; and
- merge or consolidate with other companies.
Our future financing arrangements, if any, will most likely contain similar
or more restrictive covenants. As a result of these restrictions, we are limited
in how we conduct business and we may be unable to raise additional debt or
equity financing to operate during economic or business downturns, to compete
effectively or to take advantage of new business opportunities. This may affect
our ability to generate revenues and make profits. Without sufficient revenues
and cash, we may not be able to pay interest and principal on our indebtedness,
including the notes.
Our failure to comply with the covenants and restrictions contained in the
indenture for the notes and our other financing agreements could lead to a
default under the terms of these agreements. If a default occurs, the other
parties to our other financing agreements could declare all amounts borrowed and
all amounts due under these other agreements due and payable.
10
<PAGE> 16
THE COSTS OF DEPLOYING OUR NETWORK AND EXPANDING OUR BUSINESS MAY EXCEED
THE CAPITAL AVAILABLE TO US. IF THIS HAPPENS, WE MAY HAVE TO DELAY OR ABANDON
OUR BUSINESS PLAN.
We used substantial capital to fund our acquisitions of the businesses of
Shaw FiberLink and Videon FiberLink, our acquisition of the Cable Atlantic
competitive local exchange carrier and commercial telecommunications operations
and our acquisitions from 360networks, and will have significant capital
expenditures, working capital, debt service and cash flow deficits during the
period in which we are expanding our business and deploying our network,
services and systems. The actual amount and timing of our future capital
requirements may differ materially from our estimates as a result of prevailing
economic conditions and financial, business and other factors, many of which are
beyond our control. We cannot assure you that the capital actually required to
complete our network in our initial target markets will not exceed our
expectations. If demand in the targeted markets exceeds current expectations,
capital requirements may increase materially. In addition, we may identify new
markets in the future and, as opportunities develop, we may be required to make
additional investments in our network and facilities or pursue strategic
alliances to consummate those opportunities.
If required, we expect to raise additional capital through the sale of debt
and equity and through vendor financing. We cannot assure you that we will be
able to raise sufficient capital or that such funding will be available on a
timely basis or on terms acceptable to us, if at all. If we fail to raise
additional funds when and if required, we may have to delay or abandon expansion
of our network into certain markets, which could cause us to lose revenue and
would hinder our ability to compete in the telecommunications industry.
IF WE ARE UNABLE TO NEGOTIATE ACCESS RIGHTS TO THE PROPERTY OF A VARIETY OF
THIRD PARTIES, WE WOULD BE DELAYED IN EXECUTING OUR BUSINESS PLAN.
Most of our target customers are tenants within large buildings. To execute
our business plan, we will need to obtain additional building license agreements
with several different building management companies. We may not be able to
secure additional building license agreements on a timely basis or on acceptable
terms. If we cannot obtain building license agreements, our operating results
will be harmed and we may be required to delay or abandon some of our planned
future expansion.
To build our network, we must obtain rights and other permits, which
include, but are not limited to, rights-to-use underground conduit and aerial
pole space and other rights-of-way from entities such as utilities, railroads,
long distance providers, provincial highway authorities, local governments and
transit authorities. We cannot assure you that we will be successful in either
obtaining or maintaining these permits and rights-of-way on commercially
reasonable terms and conditions. Certain permits and rights-of-way may require
regulatory filings or may be subject to legal challenge by municipal
governments, land and building owners or other third parties. For example, there
is a public notice proceeding currently before the CRTC in which interested
parties have been invited to comment on the terms and conditions of access in
the city of Vancouver. Loss of substantial permits or rights-of-way or the
failure to enter into or maintain required arrangements could cause us to lose
revenue or abandon certain markets.
If we cannot enter into agreements for access rights or purchase or lease
fiber with accompanying access rights, our business and our operating results
may be harmed and we may be required to delay or abandon some of our business
plan.
WE ARE DEPENDENT ON OTHER PARTIES IN RESPECT OF THE FIBER WHICH CONSTITUTES
A SIGNIFICANT PART OF OUR NETWORK.
In connection with our acquisition of the business of Shaw FiberLink we
received an indefeasible right to use Shaw FiberLink's fiber for 60 years. Shaw
FiberLink has, in turn, a one-year indefeasible right to use fiber of various
cable companies which are owned by Shaw Communications, renewable annually by
Shaw FiberLink during the term of our indefeasible right to use Shaw FiberLink's
fiber. As a result, in order to have access to the fiber provided by the
indefeasible right to use, we are
11
<PAGE> 17
dependent on Shaw FiberLink's ability to maintain its indefeasible right to use
agreements with the Shaw cable companies. In addition, the terms of our
agreements with Shaw FiberLink, Videon FiberLink, Cable Atlantic and 360networks
provide that our rights under those agreements are limited if the underlying
rights associated with the fiber that is the subject of the indefeasible rights
to use have any limitations or prohibitions. We entered into performance
assurance agreements with Shaw Communications and Moffat Communications to
support our rights under our agreement with Shaw FiberLink and Videon FiberLink.
If we discover that indefeasible right to use rights are not passed to us as
anticipated, or if we, Shaw FiberLink, Videon FiberLink, Cable Atlantic or
360networks do not obtain and maintain the necessary underlying rights, or if
Shaw Communications or Moffat Communications do not comply with the performance
assurance agreements, we may not have access to the fiber provided by the
indefeasible right to use agreement and this could substantially impair our
ability to carry on business.
IF WE ARE NOT ABLE TO EFFECTIVELY INTEGRATE THE OPERATIONS OF, AND USE AND
EXPAND THE REVENUE STREAM PROVIDED BY, SHAW FIBERLINK, WE WILL NOT BE ABLE TO
DEPLOY AND EXPAND OUR NETWORK AS QUICKLY AS WE INTEND.
If we fail to integrate the operations and network of Shaw FiberLink, we
will not be able to deploy our network in Toronto, Calgary and Edmonton as
quickly as we otherwise might. In addition, our planned expansion beyond our
initial target markets will be slower if we do not take advantage of the
opportunities that the Shaw FiberLink assets provide. Also, to the extent we
fail to use and expand the revenue stream provided by Shaw FiberLink's business,
our financial condition and our prospects may be harmed. We provide data
services to and derive revenue from other telecommunications carriers, even
though we also compete with some of them for customers. A large portion of the
revenues of Shaw FiberLink are also derived from services to other
telecommunications carriers. These carriers may not wish to use our services to
this extent given our competition with them and they may reduce the level of
business they do with us.
WE HAVE EXPERIENCED AND ANTICIPATE THAT WE WILL CONTINUE TO EXPERIENCE NET
LOSSES.
For the nine months ended June 30, 2000 and for the year ended September
30, 1999 we had net losses of $75.2 million and $10.0 million and negative cash
flow from operating activities of $51.8 million and $9.0 million, respectively.
We expect to incur significant additional expenditures in connection with the
development and expansion of our network infrastructure. As a result, we expect
to continue to incur significant future net losses and negative cash flow. If
our revenues do not increase significantly or the increase in our expenses is
greater than expected, we may not achieve or sustain profitability or generate
positive cash flow in the future.
GROUP TELECOM'S LIMITED HISTORY OF OPERATIONS MAY MAKE IT DIFFICULT TO
EVALUATE OUR PROSPECTS.
Group Telecom was incorporated in 1996. Our short operating history permits
us to provide you with only limited operating and financial data which you can
use to evaluate our performance.
IF WE DO NOT CONTINUALLY ADAPT TO TECHNOLOGICAL CHANGE, WE COULD LOSE
CUSTOMERS AND MARKET SHARE.
The telecommunications industry is subject to rapid and significant changes
in technology, and we rely on outside vendors for the development of and access
to new technology. The effect of technological changes on our business cannot be
predicted. We believe our future success will depend, in part, on our ability to
anticipate or adapt to such changes and to offer, on a timely basis, services
that meet customer demands. In addition, we rely on vendors with whom we have
financing agreements to anticipate and adapt to new technology and to make
products that incorporate such technology available to us. We cannot assure you
that we will obtain access to new technology on a timely basis or on
satisfactory terms. If we fail to obtain new technology, we may lose customers
and market share which could harm our business and operating results.
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<PAGE> 18
WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE WHICH
COULD BE DETRIMENTAL TO HOLDERS OF OUR NOTES.
As a result of an amended and restated shareholders agreement entered into
by shareholders then holding approximately 88.0% of our fully-diluted equity in
connection with our acquisition of the business of Shaw FiberLink, two of our
institutional investors (which are affiliates of Goldman Sachs and CIBC World
Markets) and Shaw Communications, were able to nominate a majority of our
directors. Affiliates of Goldman Sachs and CIBC World Markets hold approximately
32.0% of our equity and have 4 of 11 directors on our board of directors. In
addition, Shaw Communications holds approximately 24.8% of our equity and has 3
directors on our board of directors. Each of Shaw Communications and Goldman
Sachs has a right to consent to:
- specified major transactions by us, including acquisitions and
investments in excess of $300 million and mergers or business
combinations, for a period of 18 months after February 16, 2000; and
- our annual operating budget, for a period of 24 months after February
16, 2000.
Decisions concerning our operations or financial structure may present
conflicts of interest between these investors, our management and other holders
of our securities, including holders of the notes. In addition to their
investments in us, these investors or their affiliates currently have
significant investments in other telecommunications companies, including
entities that compete with us, and may in the future invest in other entities
engaged in the telecommunications business or in related businesses. Conflicts
may also arise in the negotiation or enforcement of arrangements entered into by
us and entities in which these investors have an interest.
SOME OF OUR COMPETITORS HAVE GREATER FINANCIAL, TECHNICAL AND OTHER
RESOURCES THAN WE DO, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The Canadian telecommunications market is highly competitive. We face, and
expect to continue to face, intense competition in all of our target markets
from the incumbent local exchange carriers, cable companies, competitive long
distance providers, wireless providers, new local exchange carriers, and
resellers. Many of our current and potential competitors, including the Bell
companies, Aliant, BCT.TELUS, AT&T Canada and Call-Net, have longer operating
histories in the telecommunications industry and substantially greater
financial, marketing, technical, personnel, regulatory and other resources,
including greater brand name recognition. The emergence in Canada of a
competitive market for local telecommunications services has resulted in price
competition among market participants, and this pricing pressure may be more
intense than we expect, which could harm our business and our financial
condition. Also, we cannot assure you that, as communications technologies
develop, new classes of competitors will not emerge.
OUR BUSINESS STRATEGY DEPENDS ON SECURING AND MAINTAINING INTERCONNECTION
AGREEMENTS WITH OTHER PROVIDERS.
We provide some local services to our customers using facilities that we
lease or purchase from the incumbent local exchange carriers. We must enter into
agreements for the interconnection of our network with the networks of the
incumbent local exchange carriers and other carriers covering each market in
which we intend to offer service. We have entered into interconnection
agreements in a number of jurisdictions. However, we cannot assure you that we
will successfully renegotiate these agreements as they become due to expire, or
negotiate additional agreements as we enter new 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").
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<PAGE> 19
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.
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
14
<PAGE> 20
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.
WE MAY NOT BE ABLE TO OBTAIN ENOUGH FUNDS TO REPURCHASE YOUR NOTES IF A
CHANGE OF CONTROL TAKES PLACE.
If a change of control occurs, you may require us to purchase any or all of
your notes at that time at a price which may be higher than the then-current
market value of the notes. We may not have enough money to purchase your notes
upon a change of control and also may not be able to raise the money to do so.
Furthermore, if you exercise your right to require us to buy back notes, this
might cause a default under our other debt, even if the change of control does
not.
The change of control provision may not protect you in a transaction in
which we borrow a large amount of debt, including a reorganization,
restructuring, merger or other similar transaction, because that kind of
transaction may not involve any shift in voting power or beneficial ownership,
or may not involve a shift large enough to trigger a change of control.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
NOTES.
The notes are new classes of securities that have never been traded. The
initial purchasers have informed us that they intend to make a market in the
notes. They are not obligated to make a market and may discontinue such market
making at any time without notice.
We have agreed to file a registration statement covering these exchange
notes. However, you cannot be sure that an active trading market will develop
for these exchange notes. We do not intend to list the notes issued pursuant to
the exchange offer.
Historically, the market for non-investment grade debt has been highly
volatile in terms of price. It is possible that the market for the exchange
notes will be volatile. This volatility in price may affect your ability to
resell your exchange notes or the timing of their sale.
Because of the potential lack of a trading market, you may not be able to
resell your notes at or above the price you paid for them.
SINCE OUR REVENUE IS IN CANADIAN DOLLARS AND MOST OF OUR DEBT IS IN U.S.
DOLLARS, WE ARE SUBJECT TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN CANADIAN
AND U.S. DOLLARS.
As of June 30, we had debt outstanding denominated in U.S. dollars of
approximately US$505.8 million. Since the majority of our revenue is in Canadian
dollars, we will be exposed to fluctuations in the exchange rate between
Canadian and U.S. dollars and the uncertainty of the amount of Canadian dollars
that will be required to service the principal and interest payments under the
U.S. dollar denominated debt. In order to minimize these effects, as at June 30,
2000, we had entered into certain foreign currency hedging contracts to hedge
approximately 55% of our outstanding U.S. dollar denominated debt. Based on our
June 30, 2000 balances, a 1 percent change in the foreign currency exchange rate
between the Canadian and U.S. dollar would have an impact of
15
<PAGE> 21
$3.9 million on the unhedged portion of our long-term debt. Any substantial
increase in the U.S. dollar relative to the Canadian dollar could affect our
results of operations and our ability to meet our future payment obligations on
our debt.
CONSEQUENCES OF FAILURE TO EXCHANGE YOUR NOTES FOR EXCHANGE NOTES.
If you do not tender your outstanding notes to be exchanged in this
exchange offer, your notes will remain restricted securities and will be subject
to certain transfer restrictions. As restricted securities, your outstanding
notes:
- may be resold only if registered pursuant to the Securities Act of 1933,
if an exemption from registration is available thereunder, or if neither
such registration nor such exemption is required by law; and
- shall bear a legend restricting transfer in the absence of registration
or an exemption therefrom.
In addition, a holder of outstanding notes who desires to sell or otherwise
dispose of all or any part of its outstanding notes under an exemption from
registration under the Securities Act of 1933, if requested by us, must deliver
to us an opinion of independent counsel experienced in Securities Act matters,
reasonably satisfactory in form and substance to us, that such exemption is
available.
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 "Summary" beginning
on page 1, "Risk Factors" beginning on page 9, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 24,
"Business" beginning on page 42 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.
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<PAGE> 22
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes offered hereby. In consideration for issuing the exchange notes
contemplated herein, we will receive in exchange outstanding notes in like
principal amount. The outstanding notes surrendered in exchange for the exchange
notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the exchange notes will not result in any change in our indebtedness.
In February 2000 we sold units, which consisted of the outstanding notes
and warrants to purchase our class B non-voting shares. Our net proceeds from
the sale of units were approximately US$436.9 million, after deducting
underwriting discounts and commissions and estimated offering expenses, of which
approximately US$140.0 million was used to fund our acquisition of the business
of Shaw FiberLink.
We intend to use the remainder of the net proceeds from the unit offering,
together with the Lucent facility, the Cisco facility and the net proceeds of
our initial public offering of class B non-voting shares, to fund the
development and expansion of our network, operational infrastructure and sales
force, for working capital requirements, and for general corporate purposes.
We intend to spend approximately $480.0 million on the development and
expansion of our network in the next two years.
Consistent with our business strategy, we continually consider acquisition
opportunities that will enhance our business. As of the date of this prospectus,
we have not entered into any definitive agreements to make any acquisitions
except for those discussed herein.
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<PAGE> 23
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 24 and our financial statements, including the
notes, beginning on page F-2. Our financial statements are presented in Canadian
dollars and are prepared in accordance with Canadian GAAP, which differs in some
respects from U.S. GAAP. The principal differences are summarized in note 22 to
our audited financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------- --------------------
1996(1) 1997 1998 1999 1999 2000
------- ------ ------- -------- ------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Canadian GAAP
Revenue............................. $ 29 $2,051 $ 1,823 $ 2,705 $ 1,432 $ 41,084
Cost of sales....................... 28 1,437 1,131 1,808 851 30,106
----- ------ ------- -------- ------- ----------
Gross profit........................ 1 614 692 897 581 10,978
Selling, general and administrative
expenses.......................... 243 989 3,038 10,218 5,432 62,058
----- ------ ------- -------- ------- ----------
(242) (375) (2,346) (9,321) (4,851) (51,080)
Amortization........................ 9 55 255 853 664 22,814
----- ------ ------- -------- ------- ----------
Operating loss...................... (251) (430) (2,601) (10,174) (5,515) (73,894)
Interest and finance items
(income).......................... -- -- (162) (372) (241) 27,866
Tax expense (recovery).............. (5) -- -- 165 -- (26,606)
----- ------ ------- -------- ------- ----------
Loss for the period................. $(246) $ (430) $(2,439) $ (9,967) $(5,274) $ (75,154)
===== ====== ======= ======== ======= ==========
U.S. GAAP
Loss for the period................. $(269) $ (426) $(3,582) $(10,336) $(5,500) $ (89,392)
===== ====== ======= ======== ======= ==========
Comprehensive loss for the period... $(269) $ (426) $(3,582) $(10,336) $(5,500) $ (68,292)
BALANCE SHEET:
Canadian GAAP
Cash and cash equivalents........... $ 5 $ 61 $ 2,476 $ 59,851 $38,095 $ 526,231
Working capital (deficit)........... (166) (224) (4,199) 47,871 33,722 484,961
Prepayment on property, plant and
equipment......................... -- -- -- -- -- 230,600
Property, plant and equipment,
net(2)............................ 64 481 10,555 73,817 30,717 778,926
Intangible and other assets(3)...... 85 75 207 1,292 754 199,710
Long-term debt...................... -- -- 776 47,557 17,411 854,327
Shareholders' equity (deficiency)... (17) 331 5,787 73,929 47,938 883,232
U.S. GAAP
Shareholders' equity (deficiency)... $ (41) $ 316 $ 5,685 $ 73,514 $45,255 $ 914,944
CASH PROVIDED BY (USED IN):(4)
Operating activities................ $(127) $ (251) $(1,360) $ (9,033) $(2,094) $ (51,808)
Financing activities................ 233 769 7,686 75,948 47,144 1,141,586
Investing activities................ (101) (462) (3,911) (9,539) (9,431) (623,398)
OTHER:
EBITDA(5)........................... $(242) $ (375) $(2,288) $ (8,401) $(4,851) $ (51,080)
Ratio of earnings to fixed
charges(6)........................ -- -- -- -- -- --
</TABLE>
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<PAGE> 24
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1998 1999 2000
------------- ------------- --------
<S> <C> <C> <C>
OPERATING DATA:
Route kilometers.................................... 5 46 8,500(7)
Fiber kilometers.................................... 2,030 16,595 156,544(8)
Number of Lucent class 5 switches................... 1 1 4
Number of buildings connected....................... 8 40 1,331
Number of employees................................. 51 168 872
</TABLE>
---------------
(1) Data is for the period from our incorporation on April 12, 1996 to September
30, 1996.
(2) 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>
(3) Intangible and other assets include goodwill and other long-term assets.
(4) Cash flow information represents cash provided by (used in) operating,
financing and investing activities are identical under Canadian and U.S.
GAAP.
(5) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses. EBITDA is a financial metric used by substantially
all investors to compare companies in the telecommunications industry on the
basis of operating results, asset value and the ability to incur and service
debt. 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.
(6) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent earnings (loss) before income taxes and fixed charges, consisting
of interest and financing expenses. 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, our earnings were insufficient to cover our fixed
charges by $251,000, $430,000, $2,439,000 and $11,390,000, respectively. For
the nine months ended June 30, 1999 and 2000, our earnings were insufficient
to cover our fixed charges by $6,689,000 and $103,669,000, respectively.
(7) Equivalent to approximately 5,285 route miles. Route miles equal the number
of miles of the telecommunications paths in which we own or lease installed
fiber optic cable.
(8) Equivalent to approximately 97,276 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path.
19
<PAGE> 25
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected unaudited pro forma consolidated
financial information relating to the acquisition of the business of Shaw
FiberLink. The unaudited pro forma condensed consolidated statement of
operations for the twelve months ended September 30, 1999 has been prepared
based on the audited consolidated statement of operations of Group Telecom for
the year ended September 30, 1999 and the audited statement of operations of
Shaw FiberLink for the year ended August 31, 1999, and as if the acquisition of
the business of Shaw FiberLink had occurred on October 1, 1998. The unaudited
pro forma condensed consolidated balance sheet information has been prepared as
if the acquisition of the business of Shaw FiberLink had occurred on September
30, 1999. See "Unaudited Pro Forma Condensed Consolidated Financial Information"
beginning on page F-54. The pro forma financial information, summarized from the
pro forma condensed consolidated financial statements, is presented for
informational purposes only and does not purport to be indicative of the results
which would have actually been obtained or our financial position if the
transactions had been completed as of the dates indicated or that may be
expected to occur in the future.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1999
-------------------
(IN THOUSANDS EXCEPT
PER SHARE AND
OPERATING DATA)
<S> <C>
STATEMENT OF OPERATIONS:
Revenue..................................................... $ 41,520
Cost of sales............................................... 21,108
----------
Gross profit................................................ 20,412
Selling, general and administrative expenses................ 19,111
Amortization(1)............................................. 39,267
----------
Operating loss.............................................. (37,966)
Interest and finance items(2)............................... (114,028)
Income taxes................................................ (257)
----------
Loss for the year under Canadian GAAP....................... $ (152,251)
==========
Loss for the year under U.S. GAAP........................... $ (152,620)
==========
BALANCE SHEET:
Cash and cash equivalents................................... $ 523,651
Working capital............................................. 511,671
Prepayment on property, plant and equipment(3).............. 223,000
Property, plant and equipment, net(4)....................... 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(5)................................................... $ 2,221
Ratio of earnings to fixed charges(6)....................... --
</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.
20
<PAGE> 26
(2) Interest and finance items include $88,400,000 in interest expense on debt
proceeds raised in the offering of our units on February 1, 2000, giving
effect to this units offering as if it had occurred on October 1, 1998.
These figures do not reflect a corresponding return on proceeds received.
(3) This amount represents a prepayment associated with our indefeasible right
to use certain fibers to be built by Shaw Communications over the next three
years.
(4) This amount includes property, plant and equipment of $100 million
associated with our acquisition of the business of Shaw FiberLink, and
property, plant and equipment valued at $329 million associated with our
indefeasible right to use certain identified fibers in the fiber optic
networks of Shaw Communications. Property, plant and equipment at cost on a
pro forma basis at September 30, 1999 was $503,895,000.
(5) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses. EBITDA is a financial metric used by substantially
all investors to compare companies in the telecommunications industry on the
basis of operating results, asset value and the ability to incur and service
debt. However, it is not intended to represent cash flow or results of
operations in accordance with Canadian GAAP. EBITDA may not be comparable to
similarly titled amounts reported by other companies. Under U.S. GAAP, pro
forma EBITDA for the year ended September 30, 1999, giving effect to our
acquisition of the business of Shaw FiberLink effective October 1, 1998,
would have been $1,852,000.
(6) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent earnings (loss) before income taxes and fixed charges, consisting
of interest and financing expenses. Assuming the acquisition of the business
of Shaw FiberLink and the financings related thereto had occurred on October
1, 1998, our pro forma earnings for the year ended September 30, 1999 would
have been insufficient to cover our fixed charges by $153,582,000.
21
<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 the Shaw FiberLink audited financial
statements, including the notes, beginning on page F-43. 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>
22
<PAGE> 28
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
---------------
<S> <C>
OPERATING DATA:
Route kilometers(4)......................................... 7,765
Fiber kilometers(5)......................................... 101,546
Number of buildings connected............................... 1,014
Number of employees......................................... 137
</TABLE>
---------------
(1) See note 6(c) to the financial statements of Shaw FiberLink.
(2) Cash flow information represents cash provided by (used in) operating,
financing and investing activities and is identical under Canadian and U.S.
GAAP.
(3) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses and the charge allocated by Shaw Communications for
the use of distribution network assets. EBITDA is a financial metric used by
substantially all investors to compare companies in the telecommunications
industry on the basis of operating results, asset value and the ability to
incur and service debt. It is not intended to represent cash flow or results
of operations in accordance with Canadian GAAP. EBITDA may not be comparable
to similarly titled amounts reported by other companies.
(4) Equivalent to approximately 4,853 route miles. Route miles equal the number
of miles of the telecommunications paths in which Shaw FiberLink owns or
leases installed fiber optic cable. Shaw FiberLink route kilometers are
calculated as of December 22, 1999, the date that Shaw Communications agreed
to grant Group Telecom an indefeasible right to use these route kilometers.
(5) Equivalent to approximately 63,466 fiber miles. Fiber miles equal the number
of route miles installed along a telecommunications path multiplied by the
number of fibers along the path. Shaw FiberLink fiber kilometers are
calculated as of December 22, 1999, the date that Shaw Communications agreed
to grant Group Telecom an indefeasible right to use these fiber kilometers.
23
<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 and in Montreal
in January 2000.
In the fall of 1999, we launched a national marketing effort of our
comprehensive suite of services. As of June 30, 2000, we had 1,331 buildings
connected to our network and had approximately 156,544 fiber kilometers (97,276
miles) over 8,500 route kilometers (5,285 miles). At June 30, 2000, we had 345
building licence agreements with property owners, including Oxford Properties,
Brookfield, Cadillac Fairview and O&Y Enterprises, each a national property
owner.
Our network in a city consists of a fiber optic backbone, fiber connection
from the backbone to the buildings, equipment in the buildings in which our
customers are located, central offices housing data and switching equipment and
equipment connecting our network to the public switched telephone network and
the Internet.
The construction of our network in each target market varies, depending
upon the size and complexity of the network. The time required to complete the
construction phase is also significantly influenced by the number of route and
fiber miles involved, the mix of aboveground versus underground fiber
deployment, possible delays in securing rights-of-way and negotiating business
licence agreements and required construction permits, time in negotiating leases
for central offices and office space and installing electronic equipment.
Our strategy is to own or control the fiber that comprises our network in
each of our target markets. We believe there are several strategic advantages to
serving our customers over owned facilities instead of reselling services or
leasing facilities, including earning higher margins. To reduce the capital
expenditures required to construct our fiber optic infrastructure, we have
established, and expect to continue to establish, access and rights-of-way
agreements with utility companies and other companies in our target markets. For
further discussion of these relationships, see "Business -- Strategic
Relationships -- Access agreements and rights-of-way" beginning on page 47.
OUR RECENT ACQUISITIONS
On February 16, 2000, we acquired from Shaw Communications the business of
Shaw FiberLink for $360 million in cash and the issuance of 27.1% of our fully
diluted equity. The cash portion of the purchase price was funded by borrowing
$220 million under our bank facility and by using $140 million of the net
proceeds of our offering of units consisting of our 13 1/4% senior discount
notes due 2010 and warrants for our class B non-voting shares. For the year
ended August 31, 1999, Shaw FiberLink had revenue of $38.8 million and EBITDA of
$12.1 million. As part of our acquisition of the business of Shaw FiberLink, we
received rights to 1,502 fiber kilometers through assigned contracts and an
indefeasible right to use 100,044 fiber kilometers for 60 years. In addition,
Shaw Communications agreed to construct for our use, at no additional cost to
us, approximately 97,500 fiber kilometers over
24
<PAGE> 30
the next three years, subject to variance depending on the location of the
constructed fiber. We will have an indefeasible right to use these fiber
kilometers for between 57 and 60 years.
In April 2000, we purchased from Moffat Communications all the property and
assets used in connection with their fiber optic business telecom operations for
$68 million in cash and 1,667,000 of our class B non-voting shares. The assets
purchased include equipment, operational contracts, equipment contracts, supply
contracts, interconnection agreements, co-location agreements, customer
contracts, software licences, intellectual property, permits, accounts
receivable, prepaid expenses and certain other assets. We also entered into an
indefeasible right to use agreement with Moffat Communications which granted us
an indefeasible right to use certain specifically identified existing fibers in
the fiber optic cable networks of Moffat Communications for 30 years.
In May 2000, we agreed with 360networks Inc. to (1) lease from them
dedicated fiber optic capacity and (2) purchase fiber in Canada and receive from
them an indefeasible right to use fiber in the United States. The aggregate
price of the dedicated fiber optic capacity and fiber we acquired was
approximately $362 million. We have the option to acquire from 360networks
additional fiber and dedicated fiber optic capacity. In addition, we invested
approximately $43 million in the equity of 360networks.
In July 2000, we acquired from Cable Atlantic certain property and assets
used in Cable Atlantic's competitive local exchange carrier operations and
commercial telecommunications operations in consideration for $15 million in
cash, the issuance of 1,740,196 of our class B non-voting shares and a cash
payment equal to the value of the net working capital of the acquired business
on the closing date. The assets purchased include equipment, land and building,
operational contracts, customer contracts, intellectual property, permits, books
and records, goodwill, accounts receivable and prepaid expenses. We entered into
an indefeasible right to use agreement with Cable Atlantic that grants to us an
indefeasible right to use certain specifically identified existing fibers of
Cable Atlantic for 30 years, with a right to purchase these fibers for $1 at any
time.
OPERATING DATA
The table below provides selected key operating data:
<TABLE>
<CAPTION>
GROUP TELECOM
---------------------------------
AT SEPTEMBER 30, AT JUNE 30,
1999 2000
----------------- ------------
<S> <C> <C>
OPERATING DATA:
Route kilometers............................................ 46 8,500(1)
Fiber kilometers............................................ 16,595 156,544(2)
Number of Lucent class 5 switches........................... 1 4
Number of buildings connected............................... 40 1,331
Number of employees......................................... 168 872
</TABLE>
---------------
(1) Equivalent to approximately 5,285 miles. Route miles equals the number of
miles of the telecommunications path in which we own or lease installed
fiber optic cable.
(2) Equivalent to approximately 97,276 miles. Fiber miles equals the number of
miles installed along a telecommunications path multiplied by the number of
fibers along the path.
25
<PAGE> 31
GROUP TELECOM RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
REVENUE. We generate most of our revenue by providing data and voice
services over our local network to end-user customers and charging access fees
to long distance providers who make use of our local network for their voice and
data transmissions. Our major sources of revenue are:
- monthly access and usage fees;
- telecommunications service fees which we earn by connecting our
customers to our network;
- sales of our data, Internet application and voice services to customers;
and
- installation of our customers' equipment at our site to connect them
directly to our network.
We also earn one time charges for installation and activation of services
as well as revenue from the resale of equipment to our customers and the
installation of such equipment.
Revenue for the nine months ended June 30, 2000 increased $39.7 million, or
27,690%, to $41.1 million compared to $1.4 million for the nine months ended
June 30, 1999, due to the inclusion of the customer base we acquired from Shaw
Communications and Moffat Communications, and the addition of new customers and
new services.
COST OF SALES. Our cost of sales consists of network operating costs which
include:
- the costs to install, monitor and repair our network;
- termination and unbundled network element charges;
- charges from long distance carriers for resale of long distance
services;
- salaries and benefits associated with network operations as well as our
customer service personnel;
- charges for our redundant connection to the Internet;
- leased fiber costs; and
- building access fees and municipal access fees paid to civic authorities
and others for use of rights of way.
Cost of sales for the nine months ended June 30, 2000 increased $29.2
million or 34,377%, to $30.1 million compared to $0.9 million for the nine
months ended June 30, 1999. The increase was due to a corresponding increase in
revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses consist primarily of:
- promotions;
- advertising, travel and entertainment costs;
- compensation to sales representatives, administrative, marketing,
financial and executive personnel;
- recruiting costs;
- corporate administration costs;
- legal, accounting and other professional fees;
- office related expenses; and
- bad debts.
26
<PAGE> 32
Selling, general and administrative expenses increased $56.6 million, or
10,424%, to $62.0 million for the nine months ended June 30, 2000 compared to
$5.4 million for the nine months ended June 30, 1999 resulting from an increase
in compensation due to an increase in headcount, a national marketing launch, an
increase in professional fees and increased need for office space and related
costs.
AMORTIZATION. Amortization for the nine months ended June 30, 2000
increased $22.1 million, or 33,358%, to $22.8 million compared to $0.7 million
for the nine months ended June 30, 1999 due to an increase in property, plant
and equipment resulting from our acquisitions of Shaw FiberLink and Videon
FiberLink and the deployment of our network.
INTEREST. Interest income resulted from investment of cash reserves from
debt and equity offerings. Interest income for the nine months ended June 30,
2000 was $15.1 million compared to $0.3 million for the nine months ended June
30, 1999.
Interest expense resulted from interest and financing charges related to
our long-term debt. Interest expense for the nine months ended June 30, 2000 was
$43.0 million compared to $0.3 million for the nine months ended June 30, 1999.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. In the nine months ended June 30, 2000, a
recovery of $26.6 million of future income taxes was recorded in order to
recognize the tax benefit from operating loss carryforwards to the extent of
existing temporary differences arising from the Shaw FiberLink acquisition.
LOSS. As a result of the above, the loss before income taxes for the nine
months ended June 30, 2000 was $75.2 million compared to $5.3 million for the
nine months ended June 30, 1999, representing an increase of 13,250%.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
REVENUE. Revenue for the year ended September 30, 1999 increased $0.9
million, or 48%, to $2.7 million compared to $1.8 million for the year ended
September 30, 1998, due to a larger number of customers and new services being
provided. Approximately 72% of our revenue for the year ended September 30, 1999
was from recurring sources as compared to 63% for 1998. Our recurring revenue
was primarily from the sale of access and usage of our network.
COST OF SALES. Cost of sales for the year ended September 30, 1999
increased $0.7 million, or 60%, to $1.8 million compared to $1.1 million for the
year ended September 30, 1998. The increase was due to corresponding increase in
revenue and change in product mix which resulted in higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.2 million, or 236%, to $10.2 million for
the year ended September 30, 1999 compared to $3.0 million for the year ended
September 30, 1998 due to an increase in salaries due to increased headcount, a
national marketing launch and increased need for office space and related costs.
AMORTIZATION. Amortization for the year ended September 30, 1999 increased
$597,961, or 234%, to $852,539 compared to $254,578 for the year ended September
30, 1998 due to an increase in property, plant and equipment available for
commercial service.
INTEREST INCOME AND FINANCE CHARGES. Interest income for the year ended
September 30, 1999 was $465,913 as compared to interest expense of $89,188 for
the year ended September 30, 1998. Interest income resulted from investment of
cash reserves from private equity offerings. This was partially offset by
increases in interest expense on long-term debt and financing charges related to
vendor financings.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. We have accrued a provision for large
corporations tax for September 30, 1999,
27
<PAGE> 33
of $165,000. As of September 30, 1999, we had an aggregate of approximately
$13.1 million of non-capital loss carry forwards, of which $326,000 expire by
2003. We currently have no capital losses. Non-capital losses can be carried
forward 7 years and carried back 3 years.
LOSS. As a result of the above, the loss before income taxes for the year
ended September 30, 1999 was $9.8 million compared to $2.4 million for the year
ended September 30, 1998, representing an increase of 302%.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
REVENUE. Revenue for the year ended September 30, 1998 decreased $0.3
million, or 11%, to $1.8 million compared to $2.1 million for the year ended
September 30, 1997. This decrease was due to the inability to purchase equipment
for resale to our customers as a result of working capital shortages. In
addition, in 1997 we had an unusually large equipment resale, which resulted in
additional non-recurring revenue of approximately $400,000. At September 30,
1998, the proportion of revenue from recurring sources increased to
approximately 63% from 38% at September 30, 1997. Our recurring revenue was
primarily from sales of access, usage and co-location with our network.
COST OF SALES. Cost of sales for the year ended September 30, 1998
decreased $0.3 million, or 21%, to $1.1 million compared to $1.4 million for the
year ended September 30, 1997, due to a corresponding decrease in revenue and
change in product mix sold. Our cost of sales in 1998 was comprised primarily of
the cost of interconnecting our network to the Internet backbone, our cost of
purchasing equipment to be resold to our customers and costs of securing rights
of way.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.0 million, or 207%, to $3.0 million for the
year ended September 30, 1998 compared to $988,933 for the year ended September
30, 1997. During February and June 1998, we obtained equity financing and began
to ramp up our business and commenced construction of our facilities-based
network in Vancouver. We incurred costs associated with the hiring of additional
sales, administrative, head office executives, financial and human resource
employees, additional administrative overhead, larger office facilities and
expenditures related to fund raising efforts.
AMORTIZATION. Amortization for the year ended September 30, 1998 increased
$199,432, or 362%, to $254,578 compared to $55,146 for the year ended September
30, 1997. This increase was due to more telecommunications assets being put into
commercial service at September 30, 1998 as a result of the expansion of our
network in Vancouver.
INTEREST AND FINANCING CHARGES. Interest and financing charges for the
year ended September 30, 1998 was $89,188 compared to nil for the year ended
September 30, 1997. Interest and financing charges in 1998 resulted from issuing
convertible debentures and the interest on those debentures and from payments we
made with respect to the financing of our central office in Burnaby, B.C.,
offset in part by interest income. We earned interest income by investing our
cash balances in short-term investment grade securities.
LOSS. As a result of the above, the loss for the year ended September 30,
1998 was $2.4 million compared to $430,000 for the year ended September 30,
1997, representing an increase of 467%.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses and expect that such
losses will continue as we develop, construct and expand our network and our
operations and build our customer base. The cash provided by our operations will
not be sufficient to cover these operating and net losses as we construct and
expand our network.
Our expenditures for property, plant and equipment for the nine months
ended June 30, 2000 were $92.5 million compared to $64.1 million for the year
ended September 30, 1999, and were
28
<PAGE> 34
related to the purchase and construction of switching and data networking
equipment, construction of our fiber optic infrastructure and central office and
data hub facilities, transmission equipment and co-location facilities and
construction and implementation of our back office systems.
At June 30, 2000, our current assets were $575.9 million and our current
liabilities were $91.0 million, giving us a working capital of $484.9 million
compared to $47.9 million at September 30, 1999. Cash and cash equivalents at
June 30, 2000 were $526.2 million compared to $59.9 million at September 30,
1999.
Cash used in operating activities for the nine months ended June 30, 2000
was $51.8 million, most of which came from our net loss of $75.1 million,
partially offset by an increase in items not affecting cash and changes in
working capital.
From our inception in April 1996 until May 1999, we funded our capital
expenditures and operating losses through private placements of our equity and
debt.
In May and July, 1999
- we raised approximately $41.5 million from a private placement of series
A first preference shares to affiliates of Goldman Sachs, CIBC World
Markets, National Bank Financial Capital Corp. and MGN Opportunity Group
LLC. In August 1999, we raised an additional $28.8 million, $25.9
million of which came from the exercise of options held by these private
equity investors resulting in the issuance of 13,833,335 series A first
preference shares.
- we entered into a credit facility with Lucent which provided for an
initial commitment of US$40 million and which is available until May 28,
2001. The facility is to finance the purchase of equipment and services
from Lucent to be used in our network.
- we signed a credit agreement with Cisco pursuant to which we can borrow
from Cisco up to US$15 million to finance our purchase and installation
of Cisco networking hardware and software. The funds under this credit
agreement are available until July 28, 2001 and bear interest at a rate
of 12% per year.
In February, 2000
- we issued 855,000 units, consisting of US$855,000,000 of 13 1/4% senior
discount notes and warrants to purchase 4,198,563 of our class B
non-voting shares for net proceeds to us of US$436,900,000;
- we entered into an agreement with Lucent which will allow us to finance
up to US$315 million of switches, fiber and related electronic equipment
and engineering and installation services purchased from Lucent over a
three year period from the initial drawdown; and
- we entered into an agreement with several banks under which they will
provide a $220 million committed bank facility.
For a detailed description of these financing arrangements, see "Description of
our Financing Arrangements" beginning on page 56.
We completed our initial public offering on March 15, 2000 with the
issuance of 20,700,000 of our class B non-voting shares at a price of U.S.$14
per share, including 2,700,000 class B non-voting shares issued upon exercise of
the underwriters' over-allotment option. The initial public offering resulted in
aggregate net proceeds to us of U.S.$268,100,000.
In February 2000, we acquired the business of Shaw FiberLink for $360
million in cash and the issuance of 27.1% of our fully-diluted equity. We funded
the cash portion of our acquisition of the business of Shaw FiberLink by
borrowing $220 million under our bank facility and by using $140 million of the
net proceeds from the issuance of our units. In April 2000, we acquired the
business of Videon FiberLink from Moffat Communications for $68 million in cash
and 1,667,000 of our class B non-voting shares. In May 2000, we acquired and
will acquire fiber and dedicated fiber optic
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capacity from 360networks for an initial cash payment of approximately $32
million and total future payments of $330 million. We have options to acquire
from 360networks further fiber and dedicated fiber optic capacity. In July 2000,
we acquired from Cable Atlantic its competitive local exchange carrier and
commercial telecommunications operations for $15 million in cash, 1,740,196 of
our class B non-voting shares and a cash payment equal to the value of the net
working capital of the acquired business on the closing date.
We believe that the remaining net proceeds of our unit offering, additional
borrowing under our Lucent and Cisco vendor facilities and the net proceeds of
our initial public offering of class B non-voting shares will be sufficient to
fully fund our business plan. The extent of additional financing required, if
any, will depend upon the rate of our expansion and the success of our business.
Consistent with our business strategy, we continually consider acquisition
opportunities that will enhance our business. There can be no assurance that
additional financing will be available to us or, if available, that it can be
obtained on acceptable terms or within the limitations contained in our existing
financing agreements.
In the event that our plans change, the assumptions upon which our plans
are based prove inaccurate, we expand or accelerate our business plan or we
complete acquisitions, the foregoing sources of funds may prove insufficient to
fully fund our business plan and we may be required to seek additional financing
sooner than we currently expect. Additional sources of financing may include
public or private equity or debt financings, capital and operating leases and
other financing arrangements. To the extent sufficient funding is not available
we may limit which markets we enter into and the degree to which we penetrate a
particular market.
We can give no assurance that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms or within the limitations contained in our financing arrangements. Failure
to obtain such financing could result in the delay or abandonment of some or all
of our development and expansion plans and expenditures, which would harm our
financial condition and operating results. Such a failure could also limit our
ability to make principal and interest payments on our indebtedness. We cannot
assure you that financing, if required, will be available in the future or that,
if such financing were available, it would be available on terms and conditions
acceptable to us.
Our revenue is generated primarily in Canadian dollars, while substantial
amounts of our current and future liabilities, including interest and principal
obligations on our long-term debt, are and will be payable in U.S. dollars. As
at June 30, 2000, we had entered into certain foreign currency hedging contracts
to hedge approximately 55% of our outstanding U.S. dollar denominated debt.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OUTSTANDING NOTES
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept for exchange
outstanding notes which are properly tendered on or prior to the Expiration Date
and not withdrawn as permitted below. As used herein, the term "Expiration Date"
means 5:00 p.m., New York City time, on September 14, 2000, provided, however,
that if we, in our sole discretion, have extended the period of time for which
the Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this prospectus, US$855,000,000 stated amount at maturity
of notes are outstanding. This prospectus, together with the letter of
transmittal, is first being sent on or about August 15, 2000, to all holders of
outstanding notes known to us. Our obligation to accept outstanding notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth below under "-- Certain Conditions to the Exchange Offer."
Outstanding notes tendered in the Exchange Offer must be in denominations
of principal amount of US$1,000 and any integral multiple thereof.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the Exchange Offer is open, and thereby delay
acceptance for exchange of any outstanding notes, by giving oral or written
notice of such extension to the holders thereof as described below. During any
such extension, all outstanding notes previously tendered will remain subject to
the Exchange Offer and may be accepted for exchange by Group Telecom. Any
outstanding notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Outstanding notes tendered in the Exchange Offer must be in denominations
of principal amount of US$1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the Exchange Offer,
and not to accept for exchange any outstanding notes not theretofore accepted
for exchange, upon the occurrence of any of the events specified below under "--
Certain Conditions to the Exchange Offer." We will give oral or written notice
of any extension, amendment, non-acceptance or termination to the holders of the
outstanding notes as promptly as practicable, such notice in the case of any
extension to be issued by means of a press release or other public announcement
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to us of outstanding notes by a holder thereof as set forth
below and the acceptance thereof by us will constitute a binding agreement
between the tendering holder and Group Telecom upon the terms and subject to the
conditions set forth in this prospectus and in the accompanying letter of
transmittal. Except as set forth herein, a holder who wishes to tender
outstanding notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such letter of transmittal, to The Chase Manhattan Bank,
as exchange agent (the "Exchange Agent") at the address set forth below under
"-- Exchange Agent" on or prior to the Expiration Date. In addition, either (1)
certificates for such outstanding notes must be received by the Exchange Agent
along with the letter of transmittal, or (2) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such outstanding notes, if
such procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date,
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or (3) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OUTSTANDING
NOTES SHOULD BE SENT TO GROUP TELECOM.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the outstanding notes surrendered for
exchange pursuant thereto are tendered (1) by a registered holder of the
outstanding notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of transmittal or
(2) for the account of an Eligible Institution (as defined herein). In the event
that signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantees may be by a firm
which is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If outstanding notes are registered in
the name of a person other than a signer of the letter of transmittal, the
outstanding notes surrendered for exchange must be endorsed by, or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by Group Telecom in its sole discretion, duly
executed by, the registered holder with the signature thereon guaranteed by an
Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of outstanding notes tendered for exchange will be
determined by Group Telecom in its sole discretion, which determination shall be
final and binding. We reserve the absolute right to reject any and all tenders
of any particular outstanding notes not properly tendered or to not accept any
particular outstanding notes which acceptance might, in the judgement of Group
Telecom or its counsel, be unlawful. We also reserve the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular outstanding notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender outstanding notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular outstanding notes
either before or after the Expiration Date (including the letter of transmittal
and the instructions thereto) by us shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
outstanding notes for exchange must be cured within such reasonable period of
time as we shall determine. Neither Group Telecom, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of outstanding notes for exchange, nor
shall any of them incur any liability for failure to give such notification.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of outstanding notes, such outstanding notes
must be endorsed or accompanied by appropriate powers of attorney, in either
case signed exactly as the name or names of the registered holder or holders
that appear on the outstanding notes.
If the letter of transmittal or any outstanding notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
Group Telecom, proper evidence satisfactory to us of the authority to so act
must be submitted.
By tendering, each holder will represent to Group Telecom that, among other
things, the exchange notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
exchange notes, whether or not such person is the holder, and that neither the
holder nor such other person has any arrangement or understanding with any
person
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to participate in the distribution of the exchange notes. In the case of a
holder that is not a broker-dealer, each such holder, by tendering, will also
represent to Group Telecom that such holder is not engaged in, or intends to
engage in, a distribution of the exchange notes. If any holder or any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
Group Telecom, or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such exchange
notes to be acquired pursuant to the Exchange Offer, such holder or any such
other person (i) may not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives exchange notes for its own account
in exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution." The letter
of transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
we will accept, promptly after the Expiration Date, all outstanding notes
properly tendered and will issue the exchange notes promptly, after acceptance
of the outstanding notes. See "-- Certain Conditions to the Exchange Offer."
For purposes of the Exchange Offer, we shall be deemed to have accepted
properly tendered outstanding notes for exchange when, as and if we have given
oral or written notice thereof to the Exchange Agent, with written confirmation
of any oral notice to be given promptly thereafter.
For each outstanding note accepted for exchange, the holder of such
outstanding note will receive an exchange note having a stated amount at
maturity equal to that of the surrendered outstanding note. Interest on the
exchange notes will accrue from the last interest payment date on which interest
was paid on the outstanding notes surrendered in exchange therefor or, if no
interest has been paid on the outstanding notes from the date of original issue
of the outstanding notes. Holders of outstanding notes whose outstanding notes
are accepted for exchange will not receive any payment in respect of accrued
interest on such outstanding notes otherwise payable on any interest payment
date the record date for which occurs on or after consummation of the Exchange
Offer. In certain circumstances the rate per annum at which the outstanding
notes bear interest will be increased temporarily. See "Registration Agreement
for Outstanding Notes".
In all cases, issuance of exchange notes for outstanding notes that are
accepted for exchange pursuant to the Exchange Offer, will be made only after
timely receipt by the Exchange Agent of certificates for such outstanding notes
or a timely Book-Entry Confirmation of such outstanding notes into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed letter of transmittal (or, if the tender is being effected through
ATOP, an electronic instruction as described in "-- Book-Entry Transfer") and
all other required documents. If any tendered outstanding notes are not accepted
for any reason set forth in the terms and conditions of the Exchange Offer or if
outstanding notes are submitted for a greater principal amount that the holder
desired to exchange, such unaccepted or non-exchanged outstanding notes will be
returned without expense to the tendering holder thereof (or, in the case of
outstanding notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged outstanding notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the outstanding notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of outstanding notes by causing
the Book-Entry Transfer Facility to transfer such outstanding notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. If delivery of
outstanding notes is to be effected through book-entry transfer at the Book-
entry Transfer Facility, the letter of transmittal need not be manually
executed; provided, however, that tenders of outstanding notes must be effected
in accordance with the procedures mandated by ATOP. To tender outstanding notes
through ATOP, the electronic instructions sent to DTC and transmitted by DTC to
the Exchange Agent must contain the character by which the participant
acknowledges its receipt of and agrees to be bound by the letter of transmittal.
GUARANTEED DELIVERY PROCEDURE
If a registered holder of the outstanding notes desires to tender such
outstanding notes and the outstanding notes are not immediately available, or
time will not permit such holder's outstanding notes or other required documents
to reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent received from such Eligible
Institution a properly completed and duly executed letter of transmittal (or a
facsimile thereof) (or, if the tender is being effected through ATOP, an
electronic instruction as described in "-- Book-Entry Transfer") and Notice of
Guaranteed Delivery, substantially in the form provided by Group Telecom (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of outstanding notes and the amount of
outstanding notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered outstanding notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the letter of transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered outstanding notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the letter of transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of outstanding notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
persons having tendered the outstanding notes to be withdrawn, identify the
outstanding notes to be withdrawn (including the principal amount of such
outstanding notes), and (where certificates for outstanding notes have been
transmitted) specify the name in which such outstanding notes are registered, if
different from that of the withdrawing holder. If certificates for outstanding
notes have been delivered or otherwise identified to the Exchange Agent, then,
prior to the release of such certificates the withdrawing holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such holder is an Eligible Institution. If outstanding notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn
outstanding notes and otherwise comply with the procedures of such facility. All
questions as to the validity, form and eligibility (including time of
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receipt) of such notices will be determined by Group Telecom, whose
determination shall be final and binding on all parties. Any outstanding notes
so withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any outstanding notes which have been tendered
for exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of outstanding notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such outstanding notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the outstanding notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn outstanding notes may be retendered by
following one of the procedures described under "-- Procedures for Tendering
Outstanding Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer shall be subject to the following conditions: (1)
neither the Exchange Offer, nor the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the staff of the Commission,
(2) the due tendering of Registrable Notes (as defined in the Registration
Rights Agreement) in accordance with the Exchange Offer, (3) no action or
proceeding shall have been instituted or threatened in any court or by or before
any governmental agency with respect to the Exchange Offer which, in Group
Telecom's judgment, would reasonably be expected to impair the ability of Group
Telecom to proceed with the Exchange Offer, (4) there shall not have been
adopted or enacted any law, statute, rule or regulation which, in Group
Telecom's judgment, would reasonably be expected to impair the ability of Group
Telecom to proceed with the Exchange Offer, (5) there shall not have been
declared by U.S. federal, New York State or Canadian federal authorities a
banking moratorium which, in Group Telecom's judgment, would reasonably be
expected to impair the ability of Group Telecom to proceed with the Exchange
Offer, (6) trading generally in the United States or Canadian over-the-counter
market shall not have been suspended by order of the Commission, any securities
commission or securities regulatory authority in Canada or any other
governmental authority, which, in Group Telecom's judgement, would reasonably be
expected to impair the ability of Group Telecom to proceed with the Exchange
Offer and (7) each Holder of outstanding notes (other than participating
broker-dealers) who wishes to exchange such outstanding notes for exchange notes
in the Exchange Offer shall have represented that (A) it is not an affiliate of
Group Telecom, (B) any exchange notes to be received by it were acquired in the
ordinary course of business and (C) at the time of the commencement of the
Exchange Offer it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the exchange notes
and shall have made such other representations as may be reasonably necessary
under applicable Commission rules, regulations or interpretations to render the
use of Form F-4 or another appropriate form under the Securities Act available;
provided, however, that none of the foregoing conditions shall relieve Group
Telecom of its obligations under the Registration Rights Agreement or effect any
increase in the interest rate borne by the outstanding notes pursuant to the
Registration Rights Agreement.
The foregoing conditions are for the sole benefit of Group Telecom and may
be asserted by Group Telecom regardless of the circumstances giving rise to any
such condition or may be waived by Group Telecom in whole or in part at any time
and from time to time. The failure by Group Telecom at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such rights and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
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EXCHANGE AGENT
The Chase Manhattan Bank, a New York banking corporation, has been
appointed as the Exchange Agent for the Exchange Offer. All executed letters of
transmittal should be directed to the Exchange Agent at the address set forth in
the letter of transmittal. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery should be directed to the Exchange
Agent addressed as follows:
By Mail, Hand or Overnight Delivery:
The Chase Manhattan Bank
c/o Chase National Corporate Services, Inc.
1301 Fifth Avenue, Suite 3410
Seattle, WA 98101
Attention: Michael A. Jones
Vice President
Facsimile: (206) 624-3867
Confirm by Telephone: (206) 903-4908
DELIVERY TO AN ADDRESS OTHER THAN THE DEPOSITORY TRUST COMPANY (ATOP) OR AS
SET FORTH IN THE LETTER OF TRANSMITTAL OR TRANSMISSION OF INSTRUCTIONS VIA
FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
Group Telecom will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The cash expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent, accounting and certain
legal fees, will be paid by Group Telecom.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be obliged
to pay any transfer taxes in connection therewith, except that holders who
instruct Group Telecom to register exchange notes in the name of, or request
that outstanding notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
outstanding notes and the restrictions on transfer of such outstanding notes as
set forth in the legend thereon as a consequence of the issuance of the
outstanding notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the outstanding notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Group Telecom does not currently anticipate that it will
register outstanding notes under the Securities Act. See "Registration Agreement
for Outstanding Notes." Based on interpretations by the staff of the Commission,
as set forth in no-action letters issued to third parties, Group Telecom
believes that exchange notes issued pursuant to the Exchange Offer in exchange
for outstanding notes may be offered for resale, resold or otherwise transferred
by holders thereof (other than any such holder which is an "affiliate" of Group
Telecom within the meaning of Rule 405 under the Securities Act)
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without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such exchange notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with any person to participate in the distribution of such
exchange notes. However, Group Telecom does not intend to request the Commission
to consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that (i) the exchange notes received by such holder will be
acquired in the ordinary course of its business, (ii) at the time of the
consummation of the Exchange Offer such holder will have not engaged in, and
does not intend to engage in, a distribution of exchange notes and has no
arrangement or understanding to participate in a distribution of exchange notes
and (iii) such holder is not an affiliate of Group Telecom within the meaning of
Rule 405 of the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. If any holder is an affiliate of Group
Telecom, or is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the exchange notes to be
acquired pursuant to the Exchange Offer, such holder (i) may not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
exchange notes for its own account in exchange for outstanding notes, where such
outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such exchange notes.
See "Plan of Distribution" beginning on page 128. In addition, in order to
comply with state securities laws, the exchange notes may not be offered or sold
in any state unless they have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with.
The exchange notes have not been and will not be qualified for public
distribution under the securities laws of any province or territory of Canada.
The exchange notes are not being offered for sale and may not be offered or
sold, directly or indirectly, in Canada, or to any resident thereof, except in
accordance with the securities laws of the provinces and territories of Canada.
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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. Upon completion of our initial public offering in
March 2000, all of these shares were converted into class A voting shares. In
connection with our acquisition of the business of Shaw FiberLink, three
executive officers of Shaw Communications, became directors of Group Telecom.
Under the asset purchase and subscription agreement, we purchased from Shaw
Communications all of the property and assets of Shaw FiberLink used in
connection with its high speed data and competitive access business. We also
assumed certain obligations related to permits, operational contracts, customer
contracts, software licenses and certain other obligations. The assets purchased
include:
- equipment, computer hardware and fixed assets,
- operational, equipment supply and customer contracts,
- interconnect agreements and co-location agreements,
- software and broadband wireless licenses,
- permits,
- intellectual property,
- goodwill, and
- certain other fiber business assets.
Certain assets were excluded from the acquisition of the business of Shaw
FiberLink, including:
- certain interconnection, Internet bandwidth and other agreements;
- the name "Shaw FiberLink" (subject to a license granted to us pursuant
to the trade-mark license agreement described below);
- any assets of Shaw Communications or its affiliates used in the cable
television, residential Internet or video and other residential services
businesses; and
- any indefeasible right to use fibers or rights underlying the
indefeasible right to use fibers, other than rights assigned to us
pursuant to any assigned operational contracts.
Where the transfer of any such assets requires consent of a third party and
such consent is not obtained, Shaw Communications has agreed to hold such assets
in trust for us and to continue to maintain the existence of such assets, at our
expense.
The asset purchase and subscription agreement contains customary
representations, warranties and indemnities. In particular, Shaw Communications
has represented that the Shaw FiberLink assets are all the assets and rights
(excluding material non-assignable permits, engineering and administration
services and certain underlying rights) which are required to enable us to
conduct the business of Shaw FiberLink. With limited exceptions, Shaw
Communications made no representations or warranties as to the underlying rights
to the fibers subject to the indefeasible right to use agreement described
below.
INDEFEASIBLE RIGHT TO USE AGREEMENT
As part of our acquisition of the business of Shaw FiberLink, we received
rights to 1,502 fiber kilometers through assigned contracts and an indefeasible
right to use 100,044 fiber kilometers for 60 years, including 10,720 fiber
kilometers located in New Brunswick available to us on May 1, 2003.
Additionally, Shaw FiberLink and each of the affiliates of Shaw Communications
which owns indefeasible rights to use fiber has entered into an agreement to
grant a one-year indefeasible right of
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use to Shaw FiberLink in all of the indefeasible rights to use fiber which Shaw
FiberLink does not own, renewable annually by Shaw FiberLink. On the closing of
the acquisition, we fully prepaid the rent for the fibers in which we received
the right of use for the full 60 year term of our agreement with Shaw FiberLink.
In addition, Shaw Communications agreed to construct for our use, at no
additional cost to us, approximately 97,500 additional fiber kilometers over the
next three years, subject to variance depending on the location of the
constructed fiber, over which we will have an indefeasible right of use. This
commitment to build an additional 97,500 fiber kilometers was included in the
$760 million purchase price consideration, and has been recorded as a $223
million prepayment of property, plant and equipment. Our indefeasible right to
use agreement also allows us to ask Shaw Communications to install new access
cables and new segments to our network. Once we pay Shaw FiberLink for the cable
they install, Shaw FiberLink will grant us an indefeasible right to use those
newly installed fibers for the remainder of our initial 60 year indefeasible
right of use term.
During the term of our indefeasible right to use agreement with Shaw
FiberLink, Shaw FiberLink will, for a fee, provide facilities for our optronics
or electronics or our optical or electrical equipment in Shaw Communications hub
sites. Shaw FiberLink will repair and maintain our fibers in exchange for a
yearly fee.
PERFORMANCE ASSURANCE AGREEMENT
As part of our acquisition of the business of Shaw FiberLink, and to
support the indefeasible right to use agreement, we have entered into a
performance assurance agreement with Shaw Communications. Shaw Communications
has agreed that if Shaw FiberLink defaults in any of its obligations under the
indefeasible right to use agreement, Shaw Communications will perform, or cause
to be performed, Shaw FiberLink's obligation in accordance with the terms and
conditions of the indefeasible right to use agreement. Shaw Communications'
promise to us is independent of the bankruptcy or insolvency of Shaw
Communications, Shaw FiberLink or any of their affiliates (including any
affiliates that have granted an indefeasible right to use fiber to Shaw
FiberLink), and is independent of any acquisition of the business of Shaw
Communications, Shaw FiberLink or any of their affiliates (including any
affiliates that have granted an indefeasible right to use fiber to Shaw
FiberLink).
SHAREHOLDERS AGREEMENT
On February 16, 2000, we amended our May 7, 1999 shareholders agreement to
include Shaw Communications as a party to such agreement. For a description of
the shareholders agreement, see "Description of Share Capital -- First
Preference Shares -- Shareholders Agreement" on page 119.
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
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Communications granted to us a license to use the trade-mark "FiberLink" in
conjunction with the words "Group Telecom" or "GT" for the term of the
indefeasible right to use agreement.
REGISTRATION RIGHTS AGREEMENT
On February 16, 2000, we amended our registration rights agreement with the
initial purchasers of our series A first preference shares to include Shaw
Communications as a party to such agreement. For a description of the
registration rights agreement, see "Description of Share Capital -- First
Preference Shares -- Registration Rights Agreement" beginning on page 120.
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 use digital subscriber lines and fixed wireless technology to extend
the reach of our networks.
OUR ACQUISITION OF THE BUSINESS OF SHAW FIBERLINK
On February 16, 2000, we acquired the business of Shaw FiberLink from Shaw
Communications for $760 million in cash and shares. We acquired rights to
101,546 fiber kilometers from Shaw FiberLink and, in addition, Shaw
Communications has agreed to construct for our use, at no additional cost to us,
approximately 97,500 additional fiber kilometers over the next three years.
Since 1993, Shaw FiberLink has provided facilities-based data services over
a high bandwidth fiber optic network in Canada to national telecommunications
carriers, large businesses and governments. For the year ended August 31, 1999,
Shaw FiberLink had revenue of $38.8 million and EBITDA of $12.1 million. The
acquisition will:
- accelerate the deployment of our network, especially in the greater
metropolitan areas of Toronto, Calgary and Edmonton;
- expand the addressable market for our current services;
- reduce our reliance on the incumbent local exchange carriers for leased
facilities;
- give us a complementary competitive access provider business; and
- significantly expand our business to long distance carriers, wireless
telecommunications companies and Internet service providers.
Shaw FiberLink operates high capacity fiber optic telecommunications
networks in some of Canada's fastest growing markets including: the greater
Toronto area (Toronto, Scarborough, Markham, Vaughan, Richmond Hill, Pickering
and Barrie), Edmonton, Calgary, Winnipeg, Vancouver Island and central British
Columbia (Kamloops, Penticton, Kelowna, Vernon and surrounding areas). Shaw
FiberLink also owns and operates several strategically located inter-city
networks and several international gateways into the United States.
Shaw FiberLink has over 400 customers. Its customer base includes carriers,
competitive local exchange carriers, internet service providers, governments,
banks, broadcasters, oil and gas companies, and wireless communication
providers. These customers demand a wide variety of requirements in terms of
bandwidth, type of connectivity and support. As the dominant competitive access
provider in Western Canada, Shaw FiberLink also provides technical support,
network management, and sales and administrative support to a number of smaller
competitive access providers.
Both the Shaw FiberLink network and our network are constructed in
compatible, fiber network configurations, with minimal geographic overlap using
synchronous optical networking technology and gigabit ethernet connections.
Accordingly, we believe that their integration can be accomplished in a timely
manner. With the addition of Shaw FiberLink, we now operate nationally in 7
Canadian provinces, including Canada's major metropolitan centers of Toronto,
Vancouver, Calgary, Montreal
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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.
RECENT DEVELOPMENTS
AGREEMENT WITH 360NETWORKS INC.
In May 2000, we agreed with 360networks Inc. to (1) lease from them
dedicated fiber optic capacity and (2) purchase fiber in Canada and receive from
them an indefeasible right to use fiber in the United States. The aggregate
price of the dedicated fiber optic capacity and fiber we acquired was
approximately $362 million. We have the option to acquire from 360networks
additional fiber and dedicated fiber optic capacity.
Under the agreement, 360networks will lease to us fiber optic cable
capacity at a bandwidth level of 2.4 gigabits per second, in Canada and the
United States. The lease will give us the exclusive right to use this fiber
capacity for 20 years, comprised of an initial term of 3 years with a 17 year
renewal option at our discretion.
In addition, 360networks has sold and will sell to us 12 strands of unused
fiber ranging approximately 7,000 kilometers, connecting Seattle, Washington to
Halifax, Nova Scotia via Victoria, Kamloops, Edmonton, Calgary, Regina,
Winnipeg, Toronto, Ottawa, Montreal and Quebec City.
If we choose, 360networks will also grant us the right to use an additional
12 strands of fiber ranging approximately 7,900 kilometers, connecting Seattle,
Sacramento, Denver, Chicago, Detroit, Toronto, Buffalo, Albany, New York City,
Boston and Montreal. This fiber will be located primarily in the United States.
The indefeasible right to use this fiber will be for a term of at least 20
years.
We also will have the option to purchase from 360networks additional
segments of fiber optic cable connecting the United States and Canada.
Delivery of the capacity and the fiber to us by 360networks and payment by
us to 360networks will be made in installments over the next four years. An
initial installment payment of approximately $32 million has been made. We will
also pay 360networks fees for maintaining the fibers.
In addition, we invested approximately $43 million in the equity of
360networks.
ACQUISITION FROM MOFFAT COMMUNICATIONS LTD.
On April 27, 2000, we acquired Videon FiberLink from Moffat Communications
Ltd. for $68 million in cash and the right to acquire approximately 1.7 million
of our class B non-voting shares. Videon FiberLink is a competitive access
provider business. This acquisition provides us with additional customers,
employees and an indefeasible right to use for 30 years certain specifically
identified existing fibers comprising approximately 620 fiber route kilometers
in Edmonton and Winnipeg connected to over 240 buildings.
AGREEMENT WITH CABLE ATLANTIC
On July 21, 2000, we acquired from Cable Atlantic its competitive local
exchange carrier and commercial telecommunications operations for $15 million in
cash, the right to acquire 1,740,196 of our class B non-voting shares and a cash
payment equal to the value of the net working capital of the acquired business.
This acquisition provides us with additional customers, employees and an
indefeasible right to use for 30 years certain specifically identified existing
fibers comprising approximately 8,732 fiber kilometres and 390 route kilometres
in Newfoundland connected to a minimum of 68 commercial business buildings and
31 Newfoundland government buildings, with a right to purchase these fibers for
$1 at any time.
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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. Our sales force has increased 140% from
December 31, 1999 to over 190 sales representatives at June 30, 2000. We
intend to continue to expand our sales force to build and support our
customer base. Once we obtain a customer, we focus on providing
proactive customer service, backed by service-level commitments, which
is available 24 hours a day, 7 days a week. Our customer service is
personalized and provided through a single point of contact to increase
customer satisfaction. We also offer web-based programs that provide
ordering, tracking and reporting capabilities to our customers. We offer
incentives to our sales and customer support personnel through a
compensation structure that is designed to promote a high level of
penetration of the buildings on our network.
- LEVERAGE OUR STATE-OF-THE-ART, SCALABLE BACK OFFICE SYSTEMS. We have
developed state-of-the-art, scalable operational support systems that
integrate every component of our operations. We have selected a
combination of best-of-breed systems, which enable us to reduce overhead
costs while providing superior customer service. We believe that our
open and scalable back office systems enhance our productivity and
service quality, and provide us with a significant competitive advantage
by:
- automating the processes involved in connecting a customer to our
network;
- enabling single call resolution of customer inquiries; and
- providing each of our departments with an integrated view of all
provisioning, billing, customer service, trouble-ticketing and
collection activities.
- CONTINUE TO EXPAND THROUGH ALLIANCES AND ACQUISITIONS. In addition to
our acquisition of the businesses of Shaw FiberLink and Videon
FiberLink, our acquisition of the Cable Atlantic competitive local
exchange carrier and commercial telecommunications operations, and our
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agreements with 360networks, we plan to consider alliances with and
acquisitions of other related or complementary businesses or asset
purchases, including purchases of fiber. Strategic acquisitions,
alliances or asset purchases may enable us to expand more rapidly and
further solidify our national presence by adding new infrastructure,
customers and additional experienced employees.
- LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM. Our management team has
extensive experience in the telecommunications industry. We believe the
quality, experience and teamwork of our management team will be critical
factors in the implementation of our growth strategy.
NETWORK
Our network in each of our target markets will look similar to the
following diagram:
[OM NETWORK DIAGRAM]
INTEGRATED NETWORK ARCHITECTURE
We provide services to our customers over an integrated network that
supports high-speed data, Internet application, local and long distance voice
services. We believe that the integrated design of our data, Internet
application and local and long distance networks significantly reduces our cost
of providing a bundled service offering. Our integrated network architecture
includes switches and data routers, customer premise equipment and synchronous
optical networking technology fiber rings. In addition, approximately 20% of our
urban fiber network is comprised of slack and storage fiber in urban area access
points.
We believe that our integration of the fiber, equipment and operating
systems of Shaw FiberLink, Videon FiberLink and the Cable Atlantic business we
acquired can be accomplished without significant delay or cost. We also believe
we can upgrade the equipment in buildings on Shaw FiberLink's, Videon
FiberLink's and the aforementioned Cable Atlantic business' networks and sell
our services (in addition to those of Shaw FiberLink, Videon FiberLink and the
Cable Atlantic business we have agreed to acquire) to their existing customers.
Shaw FiberLink's, Videon FiberLink's and the aforementioned Cable Atlantic
business' telecommunications equipment is industry standard, purchased from well
known vendors, and is compatible with our equipment.
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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 uses data routing equipment and voice switches installed at
central offices in four cities: Vancouver, Toronto, Calgary and Montreal. Data
and voice traffic from other cities will be directed to the central office
nearest to that city.
CUSTOMER PREMISE EQUIPMENT
To connect our customers to our network, we install data and voice routing
equipment in the building in which they are a tenant. This equipment combines
and converts the customer's transmission to an optical signal. The signal is
then transmitted through our network to a central office where data and voice
traffic are routed to their ultimate destination. Where buildings have fewer
tenants, we intend to connect up to ten buildings to the switch/router in one
centrally located building.
For voice traffic, our network can currently provide up to 2.5 gigabits per
second speed connections to our end customers and can easily be upgraded for
increasing volume of traffic. For data traffic, our network currently provides
up to 1 gigabit per second speed ethernet connections to our end customers. This
network's capacity is also easily upgradable.
SYNCHRONOUS OPTICAL NETWORKING TECHNOLOGY AND GIGABIT ETHERNET CONNECTIONS
We provide our data, Internet application and voice services over our
integrated network. Our network uses synchronous optical networking technology
and gigabit ethernet connections to transport information along our fiber optic
backbone. Synchronous optical networking technology is used primarily to
transmit voice services. Synchronous optical networking technology is based on
self healing concentric rings, a technology that routes traffic through an
alternate path in the event there is a point of failure. This technology results
in a very reliable network which is less likely to be subject to disruptions in
the event of breakage at one point. Other advantages of synchronous optical
networking technology are high capacity and standardization. Synchronous optical
networking technology offers large amounts of bandwidth for fiber-optic
networks. It provides seamless inter-connectivity among equipment providers
which is important when we look to interconnect with other networks on a global
basis. Finally, synchronous optical networking technology offers superior
bandwidth management, real-time monitoring, and survivability. Ethernet
technology is used primarily to transmit data. Ethernet is the standard
interface technology for local area networks and has many of the same advantages
of synchronous optical networking technology. Ethernet offers simple, scaleable
high bandwidth capacity.
In addition, we apply intelligent end-to-end network management, which
means that the customers' and end users' lines are monitored from a network
operations center, 24 hours a day, seven days a week.
ADVANTAGES OF FIBER OPTIC CABLE
Through our advanced fiber optic network we can provide higher bandwidth,
enabling information to be transported at speeds significantly faster than the
up to six megabits per second that can be
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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
approvals to deploy our fiber in municipal rights-of-way.
We have signed municipal access agreements with the cities of Vancouver and
Burnaby, British Columbia and Calgary, Alberta. We also have
- a "public user" conduit access agreement with the CSEVM (Commission des
Services Electriques de la Ville de Montreal) permitting access to CSEVM
conduits in the city core of Montreal;
- interim authority allowing construction to proceed in the City of Ottawa
and Region of Ottawa-Carleton, Ontario; and
- permit authority allowing construction to proceed following permit
application approval in Winnipeg, Manitoba.
Through long term indefeasible right to use agreements, we now have access
to various municipal and other rights-of-way by way of underlying rights held or
claimed by the indefeasible right to use grantors. The agreements permit the
expansion of the existing networks where we request, including various major
cities across Canada.
We have secured support structure agreements with BCT.Telus (British
Columbia and Alberta), MTS (Manitoba) and Bell Canada (Ontario and Quebec)
permitting access to available spare capacity on available poles or conduits
where approved.
We are in the process of finalizing a long-term municipal access agreement
with the City of Toronto. Also, in addition to our existing lease of dark
fibers, we are arranging for the sublease from Toronto Hydro of an existing
decommissioned waterpipe system located within downtown Toronto that was
previously refurbished for telecommunications purposes.
We are in the process of negotiating and finalizing various municipal
access agreements with the City of London, Region of Waterloo, City of Waterloo,
City of Kitchener, City of Hamilton/Region of Hamilton-Wentworth, City of Hull,
City of Edmonton and City of Quebec City as well as negotiating final municipal
access agreements with the City of Ottawa and Region of Ottawa-Carleton pursuant
to their grants of interim authority.
We are in the process of negotiating agreements for access to existing
support structures with various providers and are also considering joint use,
joint build or capacity lease opportunities in various markets.
These agreements allow us to deploy and use our network over and under a
variety of municipal rights-of-way and existing or new support structures
permitting us to connect our expanding switch or hub equipment to our customers.
These rights and rights-of-way are integral to the installation, operation and
expansion of our facilities-based network.
BUILDING LICENSE AGREEMENTS
Before providing services to customers, we must obtain permission from the
property owner to install our equipment, including our voice and data equipment,
and to access the riser closets to run fiber directly to the offices of our
customers. Once a building has been targeted by our marketing personnel, our
network services department negotiates the building license agreement which
allows our equipment to be installed in that building. We have adopted a
collaborative approach with developers and owners, and have found them generally
willing to provide access to their buildings since we are providing enhanced
services to the building, thus increasing its value to the building's
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tenants. Because of our long-term building license agreements, we gain access to
potential customers at minimal cost.
At June 30, 2000, in our target markets we had over 345 building license
agreements with national property owners. These agreements typically contain a
provision for permanent access by our network, including fiber optic cable, to a
specified point inside the building, with a renewable right of access regarding
inside wiring to the premises of our clients. These agreements provide us with
access to each building on a non-exclusive basis.
The CRTC has recently established a presumption that any agreement between
a local telephone company and another party, including property owners, that
results in the provision of local telephone service to a multi-dwelling unit on
an exclusive basis is a violation of the Canadian Telecommunications Act. We
believe this presumption will enhance our ability to access additional
buildings.
FIBER LEASE AGREEMENTS
On July 15, 1999, we entered into a fiber optic agreement with Toronto
Hydro, Toronto's electric utility company. This agreement provides that we will
lease access to Toronto Hydro's existing fiber optic network, which extends
throughout Toronto, allowing us to provide service to our customers until we are
able to build our own fiber optic network. A permit from Toronto Hydro, which
establishes our network access by indicating routing and termination locations
and specifies annual rates and one time connection fees, is required before we
can provide service to our Toronto customers under this agreement. Permits
expire after three years and can be renewed automatically for an additional
three years, unless either party gives notice otherwise. We are finalizing
negotiations with Ottawa Hydro for a similar arrangement.
TECHNOLOGY SUPPLIER RELATIONSHIPS
In February 2000, we entered into an agreement with Lucent to provide us
with switching equipment, synchronous optical networking technology and other
telecommunications equipment, fiber optic cable and related services, including
installation, engineering and maintenance services. This agreement replaces an
agreement we entered into with Lucent in August 1998. The new agreement with
Lucent specifies the pricing of this equipment and services and the terms of its
delivery until January 2004. We will work together with Lucent to prepare
detailed lists of equipment and services to be provided to us in each of our
markets. In addition, we purchase our data switching and routing equipment and
our unified messaging equipment from Cisco. We are a "Cisco-powered network" and
are an authorized reseller of Cisco products. We believe these supplier
relationships enable us to deploy a state-of-art network and give us access to
the advanced technologies that our customers require.
PRODUCTS AND SERVICES
We currently provide the following products and services:
DATA SERVICES PORTFOLIO
DATA ACCESS. We expect the majority of our revenue to come from data
access which includes the following products and services:
- Local Area Network Connect (also known as transparent LAN Service) -- a
managed high-speed connection to an organization's local area network,
for Internet connectivity (including common server capability) and/or
connectivity between multiple local area networks delivered over fiber,
wireless or digital subscriber technologies. Supported interfaces
include ethernet at speeds up to 1 gigabit per second.
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- 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.
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.
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- 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.
- 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
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requirements. Once a building has been targeted, we negotiate the building
licence agreement which allows our facilities to be installed in that building.
Each member of our local direct sales force is assigned a territory which
includes specific buildings in which to sell. The sales representative will
become intimate with the needs of all potential customers in those buildings and
will be the relationship manager between us and the customer. The sales
representative will work with a technical expert, when necessary, to
differentiate our services from those of our competitors and cost effectively
address our customers' needs. Our sales force will initially target customers
with data telecommunications needs that are, or will be, located in on-net
buildings. Once we provide a customer with solutions to its data needs and our
sales representative has created a relationship with the customer, the sales
representative will offer Internet application and voice services to the
customer. We believe that once a customer's data needs are met and it is
satisfied with our customer service, it will be receptive to purchasing Internet
application and voice services from us.
Our sales representatives receive a competitive base salary and a series of
individual and team bonuses. Their bonuses are based on their attaining a sales
quota on a recurring monthly and one time sale basis. Salespeople are further
rewarded by the opportunity to participate in our share option plan. We believe
our compensation plan will motivate our sales representatives to provide top
quality attention and service.
We provide our sales and marketing employees with a comprehensive training
program which includes introductory formal training, product and service
training, leadership development, on going coaching, including on the job
training, and a mentor program.
We have retained, and intend to continue to retain, people with extensive
experience in the telecommunications industry. The market for hiring highly
qualified sales representatives is competitive. However, as a result of the
recent mergers in the telecommunications industry, we believe a number of highly
talented sales representatives are seeking more entrepreneurial companies that
provide a higher degree of challenge and more opportunity to develop skills and
assume more responsibility. At June 30, 2000, we had over 190 sales
representatives.
MANAGEMENT INFORMATION SYSTEMS, SERVICE ORDER ENTRY, PROVISIONING, BILLING AND
CUSTOMER SERVICE
OVERVIEW
We are committed to the implementation of integrated and scalable
operational support systems that enable us to effectively manage and monitor our
network, process orders, provision services, track usage and accurately bill our
clients with one integrated bill. Our operational support systems integrate
substantially every component of our operations. We selected a combination of
"best of breed" systems from Hewlett-Packard, Eftia OSS Solutions and Daleen
Technologies. We selected this combination of vendors because they met our
specific needs in a cost-effective manner, have a strong reputation for
reliability and have experienced success throughout North America, particularly
with Lucent switching platforms. Our system is scaleable and highly
sophisticated and we believe it will reduce human resource expenses, resulting
in higher margins. In addition, the scalability of our system will enable us to
handle at low incremental costs the additional volume of data traffic that we
will experience with the acquisitions of the businesses of Shaw FiberLink and
Videon FiberLink and the acquisition of Cable Atlantic's competitive local
exchange carrier and commercial telecommunications operations.
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.
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We believe our systems provide us with a long term competitive advantage by
creating a distinctive, differentiated, and customizable customer interface with
the ability to rapidly and seamlessly modify internal automated work flows in
response to market developments, all the while relying on powerful and reliable
core technology. Our system will scale seamlessly with the addition of large
numbers of customers, will minimize the time between order receipt and revenue
generation, will improve customer satisfaction, and will enable rapid
customization of our product and service offerings to bring new products to
market quickly.
SERVICE ORDER ENTRY AND PROVISIONING
Our strategy has been to acquire sophisticated off-the-shelf technology
that can be easily and cost-effectively configured by our in-house information
technology staff. We use the workflow and order-entry module called a.Scribe,
from Eftia OSS Solutions. This system provides:
- convergent customer data entry modules that enable all services and work
orders to be entered from a single interface;
- advanced workflow functionality that includes job queues for individuals
and departments, automatic escalations and jeopardy notifications,
scheduling, reporting and tracking;
- web-enabled interfaces that provide our clients, partners and agents
with the ability to order online and track their order throughout the
process; and
- integration with circuit and asset inventory to enable "flow-through"
provisioning and circuit selection.
BILLING
Our strategy has been to acquire sophisticated off-the-shelf technology
that can be easily and cost-effectively configured by our in-house information
technology staff. We are using the Billplex billing and rating engine from
Daleen Technologies. This system provides:
- integrated billing;
- data extractors from multiple systems;
- support for meeting Canadian taxation requirements;
- output for bills on both paper and in electronic format; and
- tracking of overdue accounts.
We use an off-the-shelf integration package that ensures data integrity
between the products we use for our billing and service order entry and
provisioning systems. This increases the functionality of these systems while
reducing the costs of deployment.
CUSTOMER SERVICE
Our objective is to deliver a high level of personalized service to our
clients and to be pro-active. We believe that the low level of service from some
telecommunications companies leads customers to find their own
telecommunications solutions. Our experience is that small and medium-sized
business customers rarely receive proactive solutions and are unable to get
quality customer service from the incumbent local exchange carriers.
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;
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- leading management tools to monitor client services;
- proactive client management program to provide status updates to clients
and to contact them when we detect problems that require resolution;
- industry-leading Web-enabled customer service program to allow clients
personalized access to their account information, order status and
trouble tickets at any time;
- simple access to the right expert for their problem;
- integrated billing;
- service level guarantees; and
- clear escalation processes to deal efficiently with any customer
concerns.
We believe one of the key differences between our approach and that of the
incumbent local exchange carriers is how easily our customers will be able to
contact us. We will have a main telephone number which customers can use to call
for inquiries and requests. In addition, we will also have a dedicated help desk
that provides the technical expertise that customers demand when they need help.
Our customers have the option of speaking directly to the right expert, while
always having the simplicity of a main contact. Our contact center will be
equipped with a state-of-the-art computer telephone integration system, Apropos,
which will allow us to effectively manage all inquiries directed to our customer
service representatives, regardless of the medium by which they are sent.
A key component of our customer service is our integrated operating support
system. Customer relationship management requires instant access to detailed
customer data and simple automated workflow tools to support the selling,
ordering, delivery and repair of our services. Our operating support system
monitors our network to quickly detect and resolve any failure, often before the
customers are aware of a problem.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. We face, and expect to
continue to face, intense competition in all of our markets from the incumbent
local exchange carriers, cable companies, resellers of voice services,
competitive access providers, utilities, microwave carriers, competitive long
distance providers, wireless providers, new competitive local exchange carriers,
and private networks built by large end users. Our competitors in the
telecommunications services market include and will include Internet service
providers, application service providers, other telecommunications companies,
e-commerce service providers and Internet software providers.
We expect that the principal competitive factors affecting our business
will be customer service, the range and quality of services provided and pricing
levels. Many of our current and potential competitors have financial, personnel
and other resources (including brand name recognition) substantially greater
than ours, as well as other competitive advantages. However, until recently the
Canadian telecommunications services industry has been focused on larger
customer accounts, leaving small and medium-sized businesses relatively
underserved.
In addition, a continuing trend toward consolidation of telecommunications
companies and the formation of strategic alliances within the telecommunications
industry, as well as the development of new technologies, could give rise to
significant new competitors.
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
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Bell Canada and its Nexxia and Intrigna affiliates, Aliant and BCT.TELUS, are
seeking to attract customers nationwide, beyond their historic territories.
Many of these companies possess significant financial, technical and
marketing resources with which to compete, as well as comprehensive fiber
networks and long-standing relationships with their customers. While several key
decisions of the CRTC have created a framework for competition in Canadian
telecommunications markets generally, competition with the incumbent local
exchange carriers is in the early stages of development.
In addition to competition from these companies, we face competition from a
variety of other current and potential market entrants including Call-Net, AT&T
Canada, Videotron and OCI Communications. All of these companies have entered
the local voice and data service markets. Some have certain advantages over us,
including greater financial, personnel, marketing and technical resources. Most
prominent among these is the newly merged AT&T Canada, which has a particular
strength in serving large business customers, followed by Call-Net which to date
has been more focused on the residential and small business voice market. Beyond
the significant competition posed by wireline-based service providers, there is
an unknown potential competitive threat from alternative technologies such as
wireless and Internet services over cable by cable companies. However, while
their fiber and Internet services compete directly with us in major metropolitan
markets, to date the cable companies' strategy has been primarily focused on the
residential market.
EMPLOYEES
As of June 30, 2000, we had 872 employees, of which 306 were sales and
marketing, 106 were customer service, 352 were technical (network services) and
108 were administrative and corporate personnel. 130 of these employees were
hired as a result of our acquisition of Shaw FiberLink. We hired 16 Videon
FiberLink employees and have made offers to hire approximately 19 Cable Atlantic
employees. We believe that our future success will depend on our continued
ability to attract and retain highly skilled and qualified employees. None of
our employees is currently represented by a collective bargaining agreement. We
believe we enjoy good relationships with our employees.
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$436.9 million.
The notes were issued at a price of 52.651% of the stated amount at
maturity. The first interest payment on the notes will be made on August 1,
2005. The notes are redeemable, at our option, at any time on or after February
1, 2003 at various redemption prices set forth in the indenture relating to the
notes.
The indenture relating to the notes sets forth various occurrences each of
which would constitute an event of default. If an event of default occurs, other
than our bankruptcy or insolvency, holders of not less than 25% of the principal
amount of notes outstanding (voting as one class to the extent equally affected)
may declare the accreted value of the notes, together with any accrued interest,
to be due and payable. If we become bankrupt or insolvent, the notes immediately
become due and payable without any action required by the noteholders.
The indenture relating to the notes contains certain covenants that, among
other things, limit
- our issuance of additional debt,
- our payment of dividends and other distributions to shareholders and
affiliated persons or companies,
- investments in non-wholly owned subsidiaries,
- certain transactions with affiliated companies,
- the incurrence of liens,
- sales of assets, including share capital of subsidiaries, and
- certain amalgamations, mergers, consolidations and transfers of assets.
Each warrant will entitle the holder to purchase 4.9106 of our class B
non-voting shares at no additional cost to the holder, subject to adjustment in
the event that we reclassify, split or issue our equity at less than current
market value. The class B non-voting shares for which the warrants may be
exercised represent approximately 4.0% of our equity on a fully diluted basis as
at February 1, 2000, as adjusted for our sale of series B first preference
shares to Shaw Communications in connection with our acquisition of the business
of Shaw FiberLink.
The units were sold in private placements in the United States and outside
the United States. We have agreed to register the notes, the warrants and the
class B non-voting shares issuable upon exercise of the warrants under the
Securities Act of 1933 according to a specified schedule. This prospectus is
part of the registration statement to register the notes.
BANK FACILITY
On February 3, 2000, we entered into a $220 million bank facility with CIBC
World Markets, as lead arranger and administrative agent, Goldman Sachs Credit
Partners and affiliates of RBC Dominion Securities and TD Securities (USA), as
co-arrangers, to finance the acquisition of the business of Shaw FiberLink and
for general corporate purposes. The bank facility is available in Canadian
dollars or U.S. dollars. The bank facility:
- consists of two tranches:
-- tranche 1, a $120 million seven year revolving reducing bank facility;
and
-- tranche 2, a $100 million single draw reducing term loan;
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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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- declaring or setting aside funds for the payment of dividends;
- consenting to or agreeing to certain amendments of other financing
documents; and
- amalgamating, consolidating, merging, or entering into any other form of
business combination.
We are also required under the bank facility to maintain certain minimum
debt to total capitalization ratios, debt coverage ratios, revenue and
performance levels.
The bank facility restricts the payment of dividends by us or our
subsidiaries, other than payments of dividends by our subsidiaries to us or
another of our subsidiaries.
The bank facility also contains customary events of default, including the
failure to pay interest or principal, breach of covenants, cross-defaults or
judgements in excess of $1 million, a change of control event or the bankruptcy
or insolvency of us or any of our subsidiaries.
The bank facility is governed by the laws of the Province of Ontario.
LUCENT FACILITY
On February 3, 2000, we entered into a vendor facility with Lucent
Technologies, Inc., as vendor, to finance the purchase and installation of up to
US$315 million of Lucent equipment and services. The Lucent facility:
- bears interest at rates of 2.00% to 4.50% over the United States bank
prime rate, or LIBOR, based principally on our financial status;
- provides that GT Group Telecom Services Corp., our wholly-owned
subsidiary, will be the borrower with guarantees by us and all of our
other subsidiaries;
- provides for the payment of certain lending, arranging and commitment
fees; and
- contains covenants that, among other things, require us to meet ongoing
financial tests and restrict our ability to incur additional
indebtedness, incur liens, pay dividends or repurchase our capital
stock.
This facility is available in two tranches of US$161 million and US$154
million. Initial borrowings under tranche A of this Lucent facility must be used
to repay amounts outstanding under our previous facility with Lucent. As at June
30, 2000, US$64.3 million was outstanding under our previous Lucent facility.
SECURITY
The Lucent facility is secured by:
- a first priority security interest over all our assets and material
agreements; and
- a pledge of the shares of all our subsidiaries.
MATURITY, AVAILABILITY AND REPAYMENT
The Lucent facility matures approximately 8 1/2 years after the initial
advance is made. The availability period to make advances under the facility
will terminate on the earlier of (1) the third anniversary of the date of the
initial advance and (2) January 31, 2003. After such date, principal amounts
outstanding must be repaid in 22 consecutive installments on a quarterly basis
in amounts equal to 1.25% of the aggregate amount outstanding for the first 20
quarters and 37.5% of the aggregate amount outstanding for the final 2 quarters.
Lucent retains the right, with our prior written agreement with respect to
economics and terms, to designate and convert up to US$140 million of the
drawings under tranches A and B into a senior
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secured term loan. Any amounts under the senior secured term loan will be
subject to limited amortization, with the balance to be paid in full at
maturity.
Amounts outstanding under the Lucent facility may be prepaid at any time,
subject to customary breakage charges.
Amounts available under the Lucent facility are also mandatorily reduced in
amounts equal to:
- the net proceeds from certain asset sales or insurance claims;
- 50% of excess cash flow; or
- the pro rata amount of any mandatory or voluntary prepayment of any
senior debt, including the bank facility.
The Lucent facility also contains customary events of default, including
the failure to pay interest or principal, breach of covenants, cross-defaults or
judgements in excess of $1 million, a change of control event or the bankruptcy
of us or any of our subsidiaries.
The Lucent facility is governed by the laws of the State of New York.
CISCO FACILITY
In July 1999, we signed a credit agreement with Cisco Systems in which
Cisco agreed to provide us with up to US$15 million to finance the purchase and
installation by us of Cisco networking hardware and software. This credit
agreement:
- is guaranteed by us;
- is for a commitment of up to US$15 million in a tranche of US$9 million,
a tranche of US$1 million and a tranche of US$5 million;
- each tranche is available for a period of one year from the date on
which a loan is initially made to us under that tranche;
- bears interest at a rate of 12% per year;
- has interest payable quarterly in arrears and the principal amount of
the loan amortized for quarterly payments over the term of the loan (4
years for the US$9 million tranche and 2 years for the US$1 million and
US$5 million tranches);
- is secured against any equipment purchased with the funds made
available; and
- contains certain covenants which, among other things, require us to meet
ongoing financial tests and restrict our ability to incur additional
indebtedness, incur liens, pay dividends or repurchase our capital
stock.
In order to draw down funds under this facility, we must meet certain
financial covenants, which we currently meet. As at June 30, 2000, we have
borrowed US$13.5 million under this facility.
INTER-CREDITOR AGREEMENT
CIBC World Markets, as lead arranger under the bank facility and Lucent are
parties to an inter-creditor agreement regarding, among other things, the rights
of these lenders in the security held by them.
Under the inter-creditor agreement, the banks and Lucent have agreed to
share all of our assets and the assets of our subsidiary in which they have a
first priority security interest equally and ratably.
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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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DESCRIPTION OF THE NOTES
The outstanding notes and the exchange notes are referred to collectively
herein as the "Notes". The outstanding notes were, and the exchange notes will
be, issued under an Indenture, dated as of February 1, 2000, between Group
Telecom and The Chase Manhattan Bank, as trustee (the "Trustee"), as amended by
a supplemental indenture dated July 11, 2000 between Group Telecom and the
Trustee (the "Indenture"). The statements under this caption relating to the
Notes and the Indenture are summaries and do not purport to be complete, and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein.
The Indenture is by its terms subject to and governed by the Trust Indenture Act
of 1939, as amended. Unless otherwise indicated, references under this caption
to sections, "sec." or articles are references to the Indenture. Where reference
is made to particular provisions of the Indenture or to defined terms not
otherwise defined herein, such provisions or defined terms are incorporated
herein by reference. Copies of the Indenture and the Registration Rights
Agreement (see "Registration Agreement for Outstanding Notes" beginning on page
94 for a description of this agreement) are available for review at the
corporate office of the Trustee and may also be obtained from Group Telecom upon
request (see "Additional Information" below.).
As used in this Description of Notes, references to the "Group Telecom"
refer to GT Group Telecom Inc. only, without reference to its subsidiaries.
GENERAL
Group Telecom issued Units consisting of Notes with an aggregate stated
amount at maturity of US$855 million, and Warrants, and will be issued at an
issue price of US$526.51 per US$1,000 (or 52.651%) stated amount at maturity of
the Notes (the "Issue Price"), to generate gross proceeds of approximately
US$450 million. The indenture governing the Notes will allow Group Telecom to
issue Notes having up to an additional aggregate stated amount at maturity of
US$200 million. The issuance of any of those additional Notes will be subject to
Group Telecom's ability to incur indebtedness under the covenant "Limitation on
Debt" and similar restrictions in the instruments governing Group Telecom's
other Debt. Any such additional Notes will be treated as part of the same class
and series as the Notes for purposes of voting under the Indenture governing the
Notes. Notes will be issued in denominations of US$1,000 in stated amount at
maturity and integral multiples of US$1,000 in stated amount at maturity. The
Notes will mature on February 1, 2010.
The Notes will bear interest on the Issue Price at the rate of 13 1/4% per
year computed on a semiannual bond equivalent basis using a 360-day year
comprised of twelve 30-day months from the date of original issuance of the
Notes. In the period prior to February 1, 2005, interest at the rate of 13 1/4%
per year will accrue on the Issue Price but will not be payable in cash until
the maturity date ("Deferred Interest"). For U.S. federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income, will
be recognized by a holder of Notes as such Deferred Interest accrues from the
date of original issuance of the Notes. See "Taxation -- U.S. Federal Income Tax
Considerations."
Beginning on February 1, 2005, the Notes will bear interest ("Current
Interest") on the stated amount at maturity at the rate per annum shown on the
front cover of this prospectus, payable in cash semi-annually on February 1 and
August 1 of each year, commencing August 1, 2005, to the Person in whose name
the Note (or any predecessor Note) is registered at the close of business on the
preceding January 15 or July 15, as the case may be. The stated amount at
maturity is US$1,000 per Note and represents the Issue Price plus Deferred
Interest accrued but unpaid to February 1, 2005. The Notes will bear interest on
overdue principal and premium, if any, and, to the extent permitted by law,
overdue interest at the rate of 13 1/4% per year plus 1%. Interest on the Notes
will be computed on the basis of a 360-day year of twelve 30-day months. The
yearly rate of interest that is equivalent to the rate payable under the Notes
is the rate payable multiplied by the actual number of days in the year and
divided by 360 and is disclosed herein solely for purpose of providing the
disclosure required by the Interest Act (Canada).
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Group Telecom may elect upon not less than 90 days prior notice, to
commence the accrual of interest payable in cash on all outstanding Notes on any
February 1 or August 1 on or after February 1, 2003 and prior to February 1,
2005, in which case the stated amount at maturity of each Note will on such
commencement date be reduced to the Accreted Value of such Note as of such date
and cash interest shall by payable with respect to such Note on each August 1
and February 1 thereafter. (sec.sec. 301, 308 and 311)
Group Telecom has agreed to file and cause to become effective a
registration statement relating to an exchange offer for the Notes, or, in lieu
thereof, to file and cause to become effective a resale shelf registration
statement for the Notes. This prospectus is a part of that registration
statement. If such exchange offer or shelf registration statement is not filed
or is not declared effective, or if such exchange offer is not consummated,
within the time periods set forth herein, special interest will accrue and be
payable on the Notes either temporarily or permanently. See "Registration
Agreement for Outstanding Notes" beginning on page 95.
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of Group Telecom maintained for that purpose
in the Borough of Manhattan, the City of New York, provided, that at the option
of Group Telecom, payment of interest on the Notes may be made by check mailed
to the address of the Person entitled thereto as it appears in the Note
Register. Until otherwise designated by Group Telecom, such office or agency
will be the corporate trust office of the Trustee, as Paying Agent and
Registrar. (sec.sec. 301, 305 and 1002)
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 stated amount at maturity and any integral multiple
thereof. (sec. 302) No service charge will be made for any registration of
transfer or exchange of Notes, but Group Telecom may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. (sec. 305) Notes will not be issued in bearer form.
The exchange notes are identical in all material respects to the terms of
the outstanding notes, except for certain transfer restrictions and registration
rights relating to the outstanding notes and except that, in certain
circumstances, the rate per annum at which the outstanding notes bear interest
could be increased. For a description of those circumstances, see "Registration
Agreement For Outstanding Notes" beginning on page 95.
RANKING
The Notes will be senior unsecured obligations of Group Telecom, will rank
pari passu in right of payment with all existing and future senior unsecured
obligations of Group Telecom and will rank senior in right of payment to all
future subordinated obligations of Group Telecom. Holders of secured obligations
of Group Telecom, however, will have claims that are prior to the claims of the
holders of the Notes with respect to the assets securing such other obligations.
Group Telecom's principal operations are conducted through its Subsidiaries
and, therefore, Group Telecom is dependent upon the cash flow of its
Subsidiaries to meet its obligations. Group Telecom's Subsidiaries will have no
obligation to guarantee or otherwise pay amounts due under the Notes. Therefore,
the Notes will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables) of Group Telecom's
Subsidiaries. Any right of Group Telecom to receive assets of any of its
Subsidiaries upon any liquidation or reorganization of such Subsidiary (and the
consequent right of holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of the Subsidiary's creditors, except to
the extent that Group Telecom is itself recognized as a creditor of the
Subsidiary. Any recognized claims of Group Telecom as a creditor of the
Subsidiary would be subordinate to any prior security interest held by any other
creditor of the Subsidiary and obligations of the Subsidiary that are senior to
those owing to Group Telecom.
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OPTIONAL REDEMPTION
GENERAL
Group Telecom may redeem the Notes, at its option, in whole or in part, at
any time on or after February 1, 2005 and prior to maturity, upon not less than
30 nor more than 60 days' notice mailed to each holder of Notes to be redeemed
at such holder's address appearing in the note register, in amounts of US$1,000
stated amount at maturity or an integral multiple of US$1,000 stated amount at
maturity, at the following redemption prices (expressed as percentages of the
stated amount at maturity) plus accrued and unpaid Current Interest to but
excluding the Redemption Date (subject to the right of holders of record on the
relevant Regular Record Date to receive interest due on an Interest Payment Date
that is on or prior to the Redemption Date), if redeemed during the 12-month
period beginning February 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2005..................................................... 106.625%
2006..................................................... 104.417%
2007..................................................... 102.208%
2008 and thereafter...................................... 100.000%
</TABLE>
Group Telecom may redeem the Notes prior to February 1, 2005 only in the
event that on or before February 1, 2003, Group Telecom receives net proceeds
from the sale of its Common Stock in one or more Public Equity Offerings or
Strategic Equity Investments, in which case Group Telecom may, at its option,
use all or a portion of any such net proceeds to redeem Notes up to 35% of the
stated amount at maturity of the Notes, provided, however, that Notes in an
amount equal to at least 65% of the aggregate stated amount at maturity of the
Notes remain outstanding after each such redemption. Any such redemption must
occur on a Redemption Date within 75 days of any such sale and upon not less
than 30 nor more than 60 days' notice mailed to each holder of Notes to be
redeemed at such holder's address appearing in the note register, in stated
amounts of US$1,000 at maturity or integral multiples thereof, at a redemption
price of 113.25% of the Accreted Value of the Notes plus accrued and unpaid
Current Interest, if any, to but excluding the Redemption Date.
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of US$1,000;
provided that the Trustee shall redeem the Notes on as nearly a pro rata basis
as is practicable. (sec.sec. 203, 1101, 1104, 1105 and 1107)
The Notes will not have the benefit of any sinking fund.
REDEMPTION FOR CHANGES IN CANADIAN WITHHOLDING TAX
Group Telecom may, at its option, redeem the Notes, as a whole but not in
part, at any time upon not less than 30 nor more than 60 days' notice mailed to
each holder of Notes at the addresses appearing in the Note Register at a
redemption price equal to 100% of the Accreted Value of the Notes plus accrued
and unpaid Current Interest to but excluding the Redemption Date if Group
Telecom has become or would become obligated to pay on the next date on which
any amount would be payable under or with respect to the Notes, any Additional
Amounts as a result of any change or amendment to the laws (or regulations
promulgated thereunder) of Canada (or any political subdivision or taxing
authority thereof or therein), or any change in or amendment to any official
position or administration or assessing practices regarding the application or
interpretation of such laws or regulations, which change or amendment is
announced or becomes effective on or after the date of the Indenture. See "--
Additional Amounts for Canadian Taxes." (sec. 1101)
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COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON DEBT
Group Telecom may not, and may not permit any Restricted Subsidiary of
Group Telecom to, incur any Debt unless
(1) the ratio of
(a) the aggregate principal amount of Debt of Group Telecom and the
Restricted Subsidiaries of Group Telecom outstanding as of the most
recent available quarterly or annual balance sheet, after giving pro
forma effect to the Incurrence of such Debt and any other Debt Incurred
since such balance sheet date and the receipt and application of the
proceeds thereof,
to
(b) Consolidated Cash Flow Available for Fixed Charges for the four
full fiscal quarters immediately preceding the Incurrence of such Debt
for which consolidated financial statements are available, determined on
a pro forma basis as if any such Debt had been Incurred and the proceeds
thereof had been applied at the beginning of such four fiscal quarters,
would be greater than zero and be less than 6.0 to 1.0 for such
four-quarter periods, or
(2) Group Telecom's Consolidated Capital Ratio as of the most recent
available quarterly or annual balance sheet of Group Telecom, after giving
pro forma effect to
(a) the Incurrence of such Debt and any other Debt Incurred since
such balance sheet date,
and
(b) paid-in capital (excluding the amount of any Redeemable Stock)
received since such balance sheet date or concurrently with the
Incurrence of such Debt,
and in each case the receipt and application of the proceeds thereof, is
less than 2.0 to 1.
Even if Group Telecom is not able to comply with the financial ratios
described in the first paragraph of this covenant, Group Telecom and any
Restricted Subsidiary may Incur the following Debt:
(1) Debt under Credit Facilities in an aggregate principal amount at
any one time not to exceed $220 million, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Credit
Facilities, does not exceed the aggregate principal amount outstanding or
available under all Credit Facilities immediately prior to such renewal,
extension, refinancing or refunding;
(2) Purchase Money Debt and Vendor Financing Debt which is incurred
for the construction, acquisition, design, development, installation,
integration, transportation and improvement of Telecommunications Assets;
provided that the amount of such Purchase Money Debt and Vendor Financing
Debt does not exceed 100% of the cost of the construction, acquisition,
design, development, installation, integration, transportation or
improvement of the applicable Telecommunications Assets;
(3) Debt (other than Debt described in another clause of this
paragraph) outstanding on the date of original issuance of the Notes after
giving effect to the application of the proceeds of the Notes and the
Credit Facilities, as described in a schedule to the Indenture;
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(4) Debt Incurred by Group Telecom under the Notes issued as of the
date of the Indenture;
(5) Debt owed by Group Telecom to any Wholly Owned Restricted
Subsidiary of Group Telecom for which fair value has been received or Debt
owed by a Restricted Subsidiary of Group Telecom to Group Telecom or a
Wholly Owned Restricted Subsidiary of Group Telecom; provided, however,
that (a) any such Debt owing by Group Telecom to a Wholly Owned Restricted
Subsidiary shall be Subordinated Debt evidenced by an intercompany
promissory note and (b) upon either (1) the transfer or other disposition
by such Wholly Owned Restricted Subsidiary or Group Telecom of any Debt so
permitted to a Person other than Group Telecom or another Wholly Owned
Restricted Subsidiary of Group Telecom or (2) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other disposition
of shares of Capital Stock (including by consolidation or merger) of such
Wholly Owned Restricted Subsidiary to a Person other than Group Telecom or
another such Wholly Owned Restricted Subsidiary, the provisions of this
clause (iv) shall no longer be applicable to such Debt and such Debt shall
be deemed to have been Incurred at the time of such transfer or other
disposition;
(6) Debt Incurred under a Receivables Facility in an aggregate
principal amount not to exceed at any one time outstanding 80% of (i) the
net book value (after allowance for doubtful accounts) of the Accounts
Receivable of Group Telecom or such Restricted Subsidiary less (ii) the
value of any Accounts Receivable of such Persons pledged, contributed, sold
or otherwise transferred or encumbered pursuant to any Receivables Sale,
determined in accordance with generally accepted accounting principles;
(7) Acquired Debt; provided that after giving pro forma effect to the
applicable merger, amalgamation, consolidation or acquisition to which such
Acquired Debt relates, and treating such Debt as having been Incurred at
the time of such merger, amalgamation, consolidation or acquisition, Group
Telecom could Incur at least US$1.00 of additional Debt pursuant to the
first paragraph of this covenant;
(8) Debt consisting of Permitted Interest Rate or Currency Agreements;
(9) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of, the Notes (including
any Exchange Notes) or outstanding Debt Incurred pursuant to the first
paragraph of this covenant or clause (2) or clause (3) of this paragraph
(each of the foregoing, a "refinancing") in an aggregate principal amount
not to exceed the principal amount of the Debt so refinanced plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt so refinanced or the amount
of any premium reasonably determined by Group Telecom as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of Group Telecom or the Restricted
Subsidiary, as the case may be, incurred in connection with such
refinancing; provided, however, that
(a) Debt the proceeds of which are used to refinance the Notes or
Debt which is pari passu with or subordinate in right of payment to the
Notes shall only be permitted if (i) in the case of any refinancing of
the Notes or Debt which is pari passu to the Notes, the refinancing Debt
is Incurred by Group Telecom and made pari passu to the Notes, or
subordinated to the Notes, and (ii) in the case of any refinancing of
Debt which is subordinated to the Notes, the refinancing Debt is
Incurred by Group Telecom and constitutes Subordinated Debt;
(b) the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued,
(i) does not provide for payments of principal of such Debt at
the stated maturity thereof or by way of a sinking fund applicable
thereto or by way of any mandatory redemption, defeasance, retirement
or repurchase thereof (including any redemption,
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defeasance, retirement or repurchase which is contingent upon events
or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in
each case prior to the stated maturity of the corresponding portion
of the Debt being refinanced, and
(ii) does not permit redemption or other retirement (including
pursuant to an offer to purchase) of such debt at the option of the
holder thereof prior to the final stated maturity of the Debt being
refinanced, other than a redemption or other retirement at the option
of the holder of such Debt (including pursuant to an offer to
purchase) which is conditioned upon provisions substantially similar
to those described under the "Change of Control" and "Limitation on
Asset Dispositions" covenants;
(c) in the case of any refinancing of Debt Incurred by Group
Telecom, the refinancing Debt may be Incurred only by Group Telecom, and
in the case of any refinancing of Debt Incurred by a Restricted
Subsidiary, the refinancing Debt may be Incurred only by such Restricted
Subsidiary or Group Telecom; and
(d) in the case of any refinancing of Preferred Stock of a
Subsidiary, such Preferred Stock may be refinanced only with Preferred
Stock of such Subsidiary or Group Telecom;
(10) Debt
(a) in respect of performance, surety or appeal bonds Incurred in
the ordinary course of business,
(b) in respect of guarantees or letters of credit Incurred in the
ordinary course of business or
(c) arising from customary agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of Group Telecom or any of its Restricted
Subsidiaries pursuant to such agreements, in the case of this clause (c)
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary (other than Guarantees of Debt Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition);
and
(11) Debt Incurred by Group Telecom not otherwise permitted to be
Incurred pursuant to clauses (1) through (10) of this paragraph, which,
together with any other outstanding Debt Incurred pursuant to this clause
(11), has an aggregate principal amount not in excess of US$20 million at
any time outstanding. (sec. 1008)
For purposes of determining compliance with this covenant, in the event
that an item of Debt outstanding or to be Incurred meets the criteria of more
than one of the types of Debt described in this covenant, Group Telecom, in its
sole discretion, may classify such item of Debt and only be required to include
the amount and type of such Debt in one of such clauses. Accrual of interest,
accretion or amortization of original issue discount and the payment of interest
in the form of additional Debt will not be deemed to be an Incurrence of Debt
for purposes of this covenant.
Notwithstanding any other provision of this "-- Limitation on Debt"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "-- Limitation on Debt" covenant shall not
be deemed to be exceeded, with respect to any outstanding Debt, solely as a
result of fluctuations in the exchange rates of currencies.
LIMITATION ON RESTRICTED PAYMENTS
Group Telecom
(1) may not, and may not permit any Restricted Subsidiary of Group
Telecom to, directly or indirectly, declare or pay any dividend or make any
distribution (including any payment in
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connection with any merger, amalgamation or consolidation derived from
assets of Group Telecom or any Restricted Subsidiary) in respect of its
Capital Stock or to the holders thereof, excluding
(a) any dividends or distributions by Group Telecom payable solely
in shares of its Capital Stock (other than Redeemable Stock) or in
options, warrants or other rights to acquire its Capital Stock (other
than Redeemable Stock), and
(b) in the case of a Restricted Subsidiary, dividends or
distributions payable
(i) to Group Telecom or a Restricted Subsidiary, and
(ii) to minority shareholders of such Restricted Subsidiary;
provided that at least a pro rata amount is paid to Group Telecom
and/or a Restricted Subsidiary, as the case may be,
(2) may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, purchase, redeem, or otherwise acquire or retire for value
(a) any Capital Stock of Group Telecom or any Restricted Subsidiary
or any Related Person of Group Telecom, or
(b) any options, warrants or other rights to acquire shares of
Capital Stock of Group Telecom or any Restricted Subsidiary or any
Related Person of Group Telecom or any securities convertible or
exchangeable into shares of Capital Stock of Group Telecom or any
Restricted Subsidiary or any Related Person of Group Telecom, in each
case except, in the case of Capital Stock of a Restricted Subsidiary,
from Group Telecom or a Wholly Owned Restricted Subsidiary of Group
Telecom,
(3) may not make, or permit any Restricted Subsidiary to make, any
Investment in any Unrestricted Subsidiary or any Affiliate or any Person
that would become an Affiliate after giving effect thereto or any Related
Person, other than an Investment
(a) in Group Telecom or a Restricted Subsidiary of Group Telecom or
(b) in a Person that will, as a result of such Investment
(i) become a Restricted Subsidiary of Group Telecom, or
(ii) be merged with or into or amalgamated or consolidated with
a Restricted Subsidiary of Group Telecom in a transaction in which
such Restricted Subsidiary will continue to be a Restricted
Subsidiary of Group Telecom, or the successor entity (if it is not
such Restricted Subsidiary) will become a Restricted Subsidiary of
the Company,
and which is not, in each case, subject to any restriction that would
prevent such Restricted Subsidiary from repaying such Investment, and
(4) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment, Debt of Group
Telecom which is subordinate in right of payment to the Notes
(each of clauses (1) through (4) being a "Restricted Payment") if:
(1) an Event of Default, or an event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default, shall
have occurred and is continuing or would result from such Restricted
Payment, or
(2) after giving pro forma effect to such Restricted Payment as if
such Restricted Payment had been made at the beginning of the applicable
four-fiscal-quarter period, Group Telecom could not Incur at least US$1.00
of additional Debt pursuant to the terms of the Indenture described in the
first paragraph of the "Limitation on Debt" covenant above, or
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(3) after giving pro forma effect to such Restricted Payment, the
aggregate of all Restricted Payments from the date of original issuance of
the Notes exceeds the sum of:
(a) cumulative Consolidated Cashflow Available for Fixed Charges of
Group Telecom, less 150% of the cumulative Consolidated Interest Expense
of Group Telecom, determined from the date of original issuance of the
Notes through the last day of the last full fiscal quarter ending
immediately preceding the date of such Restricted Payment for which
quarterly or annual financial statements are available (taken as a
single accounting period); plus
(b) an amount equal to the net reduction in investments by Group
Telecom and its Restricted Subsidiaries subsequent to the date of
original issuance of the Notes in any Unrestricted Subsidiary resulting
from dividends, repayments of loans or advances, or other transfers of
assets, in each case to Group Telecom or any Restricted Subsidiary from
such Unrestricted Subsidiary, or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries, but only to the extent such
amount is not included in Consolidated Net Income and not to exceed in
the case of any one Unrestricted Subsidiary the amount of Investments
previously made by Group Telecom and its Restricted Subsidiaries in such
Unrestricted Subsidiary;
provided, however, that if the requirements of clauses (1) and (2) above
are satisfied, Group Telecom or a Restricted Subsidiary of Group Telecom
may make a Restricted Payment in an amount equal to the aggregate Net
Available Proceeds, and the fair market value of property consisting of
Telecommunications Assets (determined by the Board of Directors as
evidenced by a resolution of the Board of Directors filed with the
Trustee), received after the date of original issuance of the Notes as
capital contributions to Group Telecom or from the issuance, other than
to a Subsidiary, of Capital Stock (other than Redeemable Stock and other
than Capital Stock in an amount equal to $160 million) of Group Telecom
and options, warrants or other rights to acquire Capital Stock (other
than Redeemable Stock) of Group Telecom and the amount by which Debt of
Group Telecom has been reduced on Group Telecom's balance sheet upon the
conversion or exchange (other than by a Restricted Subsidiary of Group
Telecom) after the date of original issuance of the Notes of any Debt of
Group Telecom convertible or exchangeable for Capital Stock (other than
Redeemable Stock) of Group Telecom, less the amount of any cash or the
fair market value of any property distributed by Group Telecom upon such
conversion or exchange; provided that any such net proceeds received by
Group Telecom from an employee stock ownership plan financed by loans
from Group Telecom or a Restricted Subsidiary of Group Telecom shall be
included only to the extent such loans have been repaid with cash on or
prior to the date of determination.
Prior to the making of any Restricted Payment pursuant to clauses 3(a) and (b)
above that, itself or together with Restricted Payments not previously reported
pursuant to the requirements of this sentence, exceeds US$1 million, Group
Telecom shall deliver to the Trustee an Officers' Certificate setting forth the
computations by which the determinations required by such clauses were made and
stating that no Event of Default, or event that with the passing of time or the
giving of notice, or both, would constitute an Event of Default, has occurred
and is continuing or will result from such Restricted Payment.
Even if Group Telecom is unable to comply with the first paragraph of this
covenant, so long as no Event of Default, or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing or would result therefrom,
(1) Group Telecom and any Restricted Subsidiary of Group Telecom may
pay any dividend on Capital Stock of any class within 60 days after the
declaration thereof if, on the date when the dividend was declared, Group
Telecom or such Restricted Subsidiary could have paid such dividend in
accordance with the foregoing provisions;
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(2) Group Telecom may refinance any Debt otherwise permitted by clause
(9) of the second paragraph under the "Limitation on Debt" covenant above
or solely in exchange for or out of the net proceeds of the substantially
concurrent sale (other than from or to a Restricted Subsidiary or from or
to an employee stock ownership plan financed by loans from Group Telecom or
a Restricted Subsidiary) of shares of Capital Stock (other than Redeemable
Stock) of Group Telecom;
(3) Group Telecom may purchase, redeem, acquire or retire any shares
of Capital Stock of Group Telecom solely in exchange for or out of the net
proceeds of the substantially concurrent sale (other than from or to a
Restricted Subsidiary or from or to an employee stock ownership plan
financed by loans from Group Telecom or a Restricted Subsidiary) of shares
of Capital Stock (other than Redeemable Stock) of Group Telecom;
(4) Group Telecom and any Restricted Subsidiary of Group Telecom may
purchase or redeem any Debt from Net Available Proceeds to the extent
permitted under the "Limitation on Asset Dispositions" covenant;
(5) Group Telecom may redeem any right issued to holders of its
Capital Stock generally under a shareholders rights plan at a price not to
exceed $0.01 per right;
(6) Group Telecom may purchase, redeem, acquire, cancel or otherwise
retire for value shares of Capital Stock of Group Telecom to the extent
necessary under provisions limiting foreign ownership of Group Telecom's
Capital Stock in the Telecommunications Act (Canada) (after bona fide
efforts by Group Telecom to enforce provisions in the Telecommunications
Act (Canada)) to enable Group Telecom or any Restricted Subsidiary to
operate as a Canadian carrier under the Telecommunications Act (Canada);
(7) Group Telecom and any Restricted Subsidiary of Group Telecom may
make a Permitted Telecommunications Investment in an amount which, together
with the aggregate amount of any other Permitted Telecommunications
Investment made pursuant to this clause (7), does not exceed the sum of
US$20 million;
(8) Group Telecom and any Restricted Subsidiary of Group Telecom may
make any Investment in exchange for, or out of the Net Available Proceeds
of, a substantially concurrent issue and sale (other than from or to a
Restricted Subsidiary or from or to an employee stock ownership plan
financed by loans from Group Telecom or a Restricted Subsidiary) of Capital
Stock (other than Redeemable Stock) of Group Telecom;
(9) Group Telecom may redeem, repurchase, retire or otherwise acquire
for value any Capital Stock of Group Telecom and options, warrants or other
rights to acquire Capital Stock of Group Telecom held at any time by any
director, officer or employee of the Company or any of its Restricted
Subsidiaries upon termination of such person's position with the Company or
any of its Restricted Subsidiaries in an aggregate amount in any fiscal
year not to exceed $2 million; and
(10) Group Telecom and any Restricted Subsidiary of Group Telecom may
make Restricted Payments in an aggregate amount not to exceed US$20
million.
Any payment made pursuant to clauses (1), (6), (7), (9) or (10) of the
second paragraph of this covenant shall be a Restricted Payment for purposes of
calculating aggregate Restricted Payments pursuant to the first paragraph of
this covenant and the amount of net proceeds from any exchange, conversion or
sale of Capital Stock of Group Telecom pursuant to clauses (2), (3) or (8) of
the second paragraph of this covenant shall be excluded from the calculation of
the amount available for Restricted Payments pursuant to the proviso after
clause (3)(b) of the first paragraph of this covenant. (sec. 1009)
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Group Telecom may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of Group Telecom
(1) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by Group Telecom or any
other Restricted Subsidiary of Group Telecom or pay any Debt or other
obligation owed to Group Telecom or any other Restricted Subsidiary;
(2) to make loans or advances to Group Telecom or any other Restricted
Subsidiary; or
(3) to transfer any of its property or assets to Group Telecom or any
other Restricted Subsidiary.
Even if Group Telecom is unable to comply with the first paragraph of this
covenant, Group Telecom may, and may permit any Restricted Subsidiary to, suffer
to exist any such encumbrance or restriction:
(1) pursuant to any agreement existing on the date of original
issuance of the Notes as described in a schedule to the Indenture;
(2) pursuant to an agreement relating to any Debt Incurred by a Person
(other than a Restricted Subsidiary of Group Telecom existing on the date
of original issuance of the Notes or any Restricted Subsidiary carrying on
any of the businesses of any such Restricted Subsidiary) prior to the date
on which such Person became a Restricted Subsidiary of Group Telecom and
outstanding on such date and not Incurred in anticipation of becoming a
Restricted Subsidiary, which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other than the
Person so acquired;
(3) pursuant to an agreement effecting a renewal, extension, refunding
or refinancing of Debt Incurred pursuant to an agreement referred to in
clause (1) or (2) above, provided, however, that the provisions contained
in such renewal, extension, refunding or refinancing agreement relating to
such encumbrance or restriction are no more restrictive in any material
respect than the provisions contained in the agreement the subject thereof,
as determined in good faith by the Board of Directors and evidenced by a
resolution of the Board of Directors filed with the Trustee;
(4) in the case of clause (3) of the first paragraph of this covenant,
pursuant to restrictions contained in any security agreement (including a
capital lease) securing Debt of a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement;
(5) in the case of clause (3) of the first paragraph of this covenant,
pursuant to customary nonassignment provisions entered into in the ordinary
course of business consistent with past practices in leases and other
contracts to the extent such provisions restrict the transfer or subletting
of any such lease or the assignment of rights under any such contract;
(6) with respect to a Restricted Subsidiary of Group Telecom imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary, provided that consummation of such transaction
would not result in an Event of Default or an event that, with the passing
of time or the giving of notice or both, would constitute an Event of
Default, that such restriction terminates if such transaction is closed or
abandoned and that the closing or abandonment of such transaction occurs
within one year of the date such agreement was entered into; or
(7) if such encumbrance or restriction is the result of applicable
corporate law or other regulation relating to the payment of dividends or
distributions. (sec. 1010)
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LIMITATION ON LIENS
Group Telecom may not, and may not permit any Restricted Subsidiary of
Group Telecom to, directly or indirectly, Incur or suffer to exist any Lien on
or with respect to any property or assets, now owned or hereafter acquired, to
secure any Debt without making, or causing such Restricted Subsidiary to make,
effective provision for securing the Notes
(1) equally and ratably with such Debt as to such property for so long
as such Debt will be so secured, or
(2) in the event such Debt is Debt of Group Telecom which is
subordinate in right of payment to the Notes, prior to such Debt as to such
property for so long as such Debt will be so secured.
Even if Group Telecom does not satisfy the requirements in the first
paragraph of this covenant, Group Telecom and any Restricted Subsidiary may
incur:
(1) Liens existing on the date of the Indenture and securing Debt
outstanding on the date of the Indenture, after giving effect to the
application of the proceeds of the Notes, as described in a schedule to the
Indenture;
(2) Liens securing only the Notes;
(3) Liens securing Debt under clause (1) or clause (2) under the
second paragraph of the "Limitation on Debt" covenant;
(4) Liens in favor of Group Telecom or any Wholly-Owned Subsidiary of
Group Telecom;
(5) Liens on real or personal property of Group Telecom or a
Restricted Subsidiary of Group Telecom acquired, constructed or
constituting improvements made after the date of original issuance of the
Notes to secure Purchase Money Debt or Vendor Financing Debt which is
Incurred for the construction, design, development, installation,
integration, transportation, acquisition or improvement of
Telecommunications Assets and is otherwise permitted under the Indenture,
provided, however, that
(a) the principal amount of any Debt secured by such a Lien does
not exceed 100% of such purchase price or cost of construction or
improvement of the property subject to such Liens,
(b) such Lien attaches to such property prior to, at the time of or
within 180 days after the acquisition, completion of construction or
commencement of operation of such property, and
(c) such Lien does not extend to or cover any property other than
the specific item of property (or portion thereof) acquired, constructed
or constituting the improvements made with the proceeds of such Purchase
Money Debt;
(6) Liens to secure Acquired Debt, provided, however, that
(a) such Lien attaches to the acquired asset prior to the time of
the acquisition of such asset, and
(b) such Lien does not extend to or cover any other asset;
(7) Liens to secure Debt Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Debt secured by any Lien referred to in the foregoing
clauses (1), (2), (5) and (6) so long as such Lien does not extend to any
other property and the principal amount of Debt so secured is not increased
except as
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otherwise permitted under clause (9) of the second paragraph of the "--
Limitation on Debt" covenant;
(8) Permitted Liens.
In addition to the foregoing, Group Telecom and its Restricted Subsidiaries
may incur a Lien to secure any Debt or enter into a Sale and Leaseback
Transaction, without equally and ratably securing the Notes, if the sum of
(1) the amount of Debt secured by any Lien incurred after the date of
the Indenture and otherwise prohibited by the Indenture, and
(2) the Attributable Value of all Sale and Leaseback Transactions
entered into after the date of the Indenture and otherwise prohibited by
the Indenture
does not exceed 5% of Consolidated Tangible Assets of the Company. (sec. 1011)
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Group Telecom may not, and may not permit any Restricted Subsidiary of
Group Telecom to, enter into any Sale and Leaseback Transaction unless
(1) Group Telecom or such Restricted Subsidiary would be entitled to
Incur a Lien to secure Debt by reason of the provisions described under the
"Limitation on Liens" covenant above, equal in amount to the Attributable
Value of the Sale and Leaseback Transaction without equally and ratably
securing the Notes, and
(2) the Sale and Leaseback Transaction is treated as an Asset
Disposition and all of the conditions of the Indenture described under the
"Limitation on Asset Dispositions" covenant (including the provisions
concerning the application of Net Available Proceeds) are satisfied with
respect to such Sale and Leaseback Transaction, treating all of the
consideration received in such Sale and Leaseback Transaction as Net
Available Proceeds for purposes of such covenant. (sec. 1012)
LIMITATION ON ASSET DISPOSITIONS
Group Telecom may not, and may not permit any Restricted Subsidiary to,
make any Asset Disposition in one or more related transactions unless:
(1) Group Telecom or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair
market value for the assets sold or disposed of as determined by the Board
of Directors in good faith and evidenced by a resolution of the Board of
Directors filed with the Trustee; and
(2) at least 75% of the consideration for such disposition consists of
(a) cash or readily marketable cash equivalents or the assumption
of Debt of Group Telecom (other than Debt that is subordinated to the
Notes) or of such Restricted Subsidiary, as the case may be, relating to
such assets and release from all liability on the Debt assumed, or
(b) Telecommunications Assets.
An amount equal to all Net Available Proceeds, less any amounts invested
within 360 days of such disposition in assets related to the business of Group
Telecom and its Restricted Subsidiaries, must be applied within 360 days of such
disposition
(1) first, to the permanent repayment or reduction of Debt then
outstanding under any Credit Facility or Vendor Financing Debt, to the
extent such agreements would require such application or prohibit payments
pursuant to clause (2) of this paragraph,
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(2) second, to the extent of remaining Net Available Proceeds, to make
an Offer to Purchase outstanding Notes at 100% of their Accreted Value plus
accrued and unpaid Current Interest to the date of purchase and, to the
extent required by the terms thereof, any other Debt of Group Telecom that
is pari passu with the Notes at a price no greater than 100% of the
principal amount thereof plus accrued interest to the date of purchase,
(3) third, to the extent of any remaining Net Available Proceeds
following the completion of the Offer to Purchase, within 15 days after the
completion of such Offer to Purchase, to the repayment of other Debt of
Group Telecom or Debt of a Restricted Subsidiary of Group Telecom, to the
extent permitted under the terms of such Debt, and
(4) fourth, to the extent of any remaining Net Available Proceeds, to
any other use as determined by Group Telecom for any purpose which is not
otherwise prohibited by the Indenture.
Notwithstanding the requirements of the second paragraph of this covenant,
Group Telecom shall not be required to make an Offer to Purchase pursuant to
clause (2) of the second paragraph of this covenant if the remaining Net
Available Proceeds after giving effect to the application required by clause (1)
of the second paragraph of this covenant is less than US$5 million. (sec. 1013)
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
Group Telecom may not, and may not permit any Restricted Subsidiary of
Group Telecom to, issue, transfer, convey, lease or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary of Group Telecom or
securities convertible or exchangeable into, or options, warrants, rights or any
other interest with respect to, Capital Stock of a Restricted Subsidiary of
Group Telecom if, as a result of such transaction, such Restricted Subsidiary
would cease to be a Restricted Subsidiary, unless such transaction
(1) consists of a sale of all of the Capital Stock of such Restricted
Subsidiary owned by Group Telecom and its Restricted Subsidiaries, and
(2) complies with the provisions described under the "Limitation on
Asset Dispositions" covenant above to the extent such provisions apply.
(sec. 1014)
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
Group Telecom may not, and may not permit any Restricted Subsidiary of
Group Telecom to, enter into any transaction (or series of related transactions)
with an Affiliate or Related Person of Group Telecom (other than Group Telecom
or a Wholly Owned Restricted Subsidiary of Group Telecom), including any
Investment, either directly or indirectly, unless such transaction is on terms
no less favorable to Group Telecom or such Restricted Subsidiary than those that
could be obtained in a comparable arm's-length transaction with an entity that
is not an Affiliate or Related Person and is in the best interests of such
Company or such Restricted Subsidiary.
For any transaction that involves in excess of US$250,000 but less than or
equal to US$2,500,000, the Chief Executive Officer or Chief Operating Officer of
Group Telecom shall determine that the transaction satisfies the above criteria
and shall evidence such a determination by a certificate filed with the Trustee.
For any transaction that involves in excess of US$2,500,000, a majority of
the disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a determination
by a Board Resolution filed with the Trustee. For any transaction that involves
in excess of US$10,000,000 (other than for investments by or financial advisory
or financing services provided by any of Goldman Sachs Merchant Bank, Canadian
Imperial Bank of Commerce, First Marathon Securities Limited or their respective
Affiliates, in respect of which the pricing or fees are negotiated in good faith
by Group Telecom, as determined by the Board of
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Directors), Group Telecom shall also obtain an opinion from a nationally
recognized expert in the United States or Canada with experience in appraising
the terms and conditions of the type of transaction (or series of related
transactions) for which the opinion is required stating that such transaction
(or series of related transactions) is on terms no less favorable to Group
Telecom or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or
Related Person of Group Telecom, which opinion shall be filed with the Trustee.
The requirements described in the preceding paragraphs of this covenant
shall not apply to
(1) any compensation or employment benefit arrangements (including
stock options) entered into by Group Telecom or any Restricted Subsidiary
in the ordinary course of business of Group Telecom or such Restricted
Subsidiary or which have been approved by the Compensation Committee of the
Board of Directors of Group Telecom, and
(2) any transaction pursuant to agreements or arrangements in
existence on the date of the Indenture. (sec. 1015)
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, Group Telecom will
be required to make an Offer to Purchase all Outstanding Notes at a purchase
price equal to 101% of the Accreted Value thereof plus Current Interest, if any,
to the date of purchase.
A "Change of Control" will be deemed to occur at such time as either:
(1) any Person or any Persons acting together that would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Securities
Exchange Act of 1934, or any successor provision thereto, together with any
Affiliates or Related Persons thereof, other than Permitted Holders, shall
beneficially own (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, or any successor provision thereto) at least 50% of
the aggregate voting power of all classes of Voting Stock of Group Telecom;
or
(2) any Person or Group other than Permitted Holders, together with
any Affiliates or Related Persons thereof, shall succeed in having a
sufficient number of its nominees elected to the Board of Directors of
Group Telecom so that such nominees, when added to any existing director
remaining on the Board of Directors of Group Telecom after such election
who was a nominee of or is an Affiliate or Related Person of such Person or
Group, will constitute a majority of the Board of Directors of Group
Telecom.
Group Telecom will not be required to make an Offer to Purchase any Notes
upon a Change of Control if it has exercised its right to redeem all of the
Notes as described above under "-- Optional Redemption" or if a third party
makes an Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture applicable to an
Offer to Purchase made by Group Telecom and purchases all of the Notes of such
series validly tendered and not withdrawn under such an Offer to Purchase.
If Group Telecom makes an Offer to Purchase, we cannot assure you that
Group Telecom will have funds sufficient to pay the purchase price and accrued
interest described above for all of the Notes that might be tendered by holders
of the Notes seeking to accept the Offer to Purchase. If Group Telecom fails to
make the Offer to Purchase or fails to pay the purchase price and accrued
interest described above on the date specified therefor, the Trustee and the
holders of Notes will have the rights described under "-- Events of Default."
In the event that Group Telecom makes an Offer to Purchase the Notes, Group
Telecom intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Securities Exchange Act of 1934. (sec. 1016)
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PROVISION OF FINANCIAL INFORMATION
Whether or not Group Telecom is required to be subject to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, or any successor provision
thereto, Group Telecom shall file with the Commission the annual reports,
quarterly reports and other documents which Group Telecom would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) or
any successor provision thereto if Group Telecom were so required, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which Group Telecom would have been required so
to file such documents if Group Telecom were so required. Group Telecom shall
also in any event
(1) within 15 days of each Required Filing Date
(a) transmit by mail to all holders of the Notes, as their names
and addresses appear in the Security Register, without cost to such, and
(b) file with the Trustee, copies of the annual reports, quarterly
reports and other documents which Group Telecom files with the
Commission pursuant to such Section 13(a) or 15(d) or any successor
provision thereto or would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) or any successor
provisions thereto if Group Telecom were required to be subject to such
Sections, and
(2) if filing such documents by Group Telecom with the Commission is
not permitted under the Securities Exchange Act of 1934, promptly upon
written request supply copies of such documents to any prospective holder
of Notes. (sec. 1017)
UNRESTRICTED SUBSIDIARIES
Group Telecom may designate any Subsidiary of Group Telecom to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. "Unrestricted
Subsidiary" means
(1) any Subsidiary designated as such by the Board of Directors as set
forth below where
(a) neither Group Telecom nor any of its other Subsidiaries, other
than another Unrestricted Subsidiary,
(i) provides credit support for, or Guarantee of, any Debt of
such Subsidiary or any Subsidiary of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Debt), or
(ii) is directly or indirectly liable for any Debt of such
Subsidiary or any Subsidiary of such Subsidiary, and
(b) no default with respect to any Debt of such Subsidiary or any
Subsidiary of such Subsidiary, including any right which the holders
thereof may have to take enforcement action against such Subsidiary
would permit, upon notice, lapse of time or both, any holder of any
other Debt of Group Telecom and its Subsidiaries, other than another
Unrestricted Subsidiary, to declare a default on such other Debt or
cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity, and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other
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Subsidiary of Group Telecom which is not a Subsidiary of the Subsidiary to be so
designated or otherwise an Unrestricted Subsidiary, provided that either
(1) the Subsidiary to be so designated has total assets of US$1,000 or
less, or
(2) immediately after giving effect to such designation, Group Telecom
could Incur at least US$1.00 of additional Debt pursuant to the first
paragraph under the "Limitation on Debt" covenant,
and provided, further, that Group Telecom could make a Restricted Payment in an
amount equal to the greater of the fair market value and book value of such
Subsidiary pursuant to the "Limitation on Restricted Payments" covenant and such
amount is thereafter treated as a Restricted Payment for the purpose of
calculating the aggregate amount available for Restricted Payments thereunder.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary provided that, immediately after giving effect to such
designation,
(1) no Event of Default or event that with the passing of time or the
giving of notice, or both, would constitute an Event of Default shall have
occurred and be continuing,
(2) Group Telecom could Incur at least US$1.00 of additional Debt
pursuant to the first paragraph under the "Limitation on Debt" covenant,
and
(3) all Liens of such Subsidiary outstanding immediately following
such designation would, if incurred at that time, have been permitted to be
Incurred for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced by filing
with the Trustee a certified copy of the resolution of the Board of Directors
giving effect to such designation and an officers' certificate certifying that
such designation complies with the foregoing conditions. (sec. 101)
AMALGAMATIONS, MERGERS, CONSOLIDATIONS AND CERTAIN SALES AND PURCHASES OF ASSETS
Group Telecom may not, in a single transaction or a series of related
transactions,
(1) amalgamate, consolidate or merge with or into any other Person or
permit any other Person to amalgamate, consolidate or merge with or into
Group Telecom, or
(2) directly or indirectly transfer, sell, lease or otherwise dispose
of all or substantially all of its assets,
unless:
(1) in a transaction in which Group Telecom does not survive or in
which Group Telecom sells, leases or otherwise disposes of all or
substantially all of its assets, the successor entity to Group Telecom is
organized under the laws of the United States of America, any State
thereof, the District of Columbia, Canada or any territory or province
thereof and shall expressly assume, by a supplemental indenture executed
and delivered to the Trustee in form satisfactory to the Trustee, all of
Group Telecom's obligations under the Indenture;
(2) immediately before and after giving effect to such transaction and
treating any Debt which becomes an obligation of Group Telecom or a
Restricted Subsidiary as a result of such transaction as having been
Incurred by Group Telecom or such Restricted Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default shall
have occurred and be continuing;
(3) immediately after giving effect to such transaction, the
Consolidated Net Worth of Group Telecom (or other successor entity to Group
Telecom) is equal to or greater than that of Group Telecom immediately
prior to the transaction;
(4) immediately after giving effect to such transaction and treating
any Debt which becomes an obligation of Group Telecom or a Restricted
Subsidiary as a result of such transaction as
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having been Incurred by Group Telecom or such Restricted Subsidiary at the
time of the transaction, Group Telecom (including any successor entity to
Group Telecom) could Incur at least US$1.00 of additional Debt pursuant to
the provisions of the Indenture described in the first paragraph under the
"Limitation on Debt" covenant above;
(5) if, as a result of any such transaction, property or assets of
Group Telecom would become subject to a Lien prohibited by the provisions
of the Indenture described under the "Limitation on Liens" covenant above,
Group Telecom or the successor entity to Group Telecom shall have secured
the Notes as required by such covenant; and
(6) certain other conditions are met. (sec. 801)
ADDITIONAL AMOUNTS FOR CANADIAN TAXES
All payments made by Group Telecom under or with respect to the Notes will
be made free and clear of and without withholding or deduction for or on account
of, any present or future tax, duty, levy, impost, assessment or other
governmental charge imposed or levied by or on behalf of the Government of
Canada or of any province or territory thereof or by any authority or agency
therein or thereof having power to tax (hereinafter "Taxes"), unless Group
Telecom is required to withhold or deduct Taxes by law or by the interpretation
or administration thereof. If Group Telecom is so required to withhold or deduct
any amount for or on account of Taxes from any payment made under or with
respect to the Notes, Group Telecom will pay such additional amounts
("Additional Amounts") as may be necessary so that the net amount received by
each holder of the Notes (including Additional Amounts) after such withholding
or deduction will not be less than the amount the holder would have received if
such Taxes had not been withheld or deducted; provided that no Additional
Amounts will be payable with respect to a payment made to a holder of the Notes
(an "Excluded Holder")
(1) with which Group Telecom does not deal at arm's length (within the
meaning of the Income Tax Act (Canada)) at the time of making such payment,
or
(2) which is subject to such Taxes by reason of any connection between
such holder and Canada or any province or territory thereof other than the
mere holding of Notes or the receipt of payments thereunder.
Group Telecom will also
(1) make such withholding or deduction, and
(2) remit the full amount deducted or withheld to the relevant
authority in accordance with applicable law.
Group Telecom will furnish to the holders of the Notes, within 30 days
after the date the payment of any Taxes is due pursuant to applicable law,
certified copies of tax receipts evidencing such payment by Group Telecom. Group
Telecom will indemnify and hold harmless each holder of the Notes (other than
all Excluded Holders) for the amount of
(1) any Taxes not withheld or deducted by Group Telecom and levied or
imposed and paid by such holder as a result of payments made under or with
respect to the Notes,
(2) any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, and
(3) any Taxes imposed with respect to any reimbursement under clauses
(1) or (2) of this paragraph.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if Group Telecom is aware that it will
be obligated to pay Additional Amounts with respect to such payment, Group
Telecom will deliver to the Trustee an Officers' Certificate stating the fact
that such Additional Amounts will be payable, the amounts so payable and will
set forth such
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other information necessary to enable the Trustee to pay such Additional Amounts
to holders of the Notes on the payment date. Whenever in the Indenture there is
mentioned, in any context, the payment of principal (and premium, if any),
Accreted Value, interest or any other amount payable under or with respect to
any Note, such mention shall be deemed to include mention of the payment of
Additional Amounts provided for in this section to the extent that, in such
context, Additional Amounts are, were or would be payable in respect thereof.
(sec. 1018)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (sec. 101)
"Accreted Value" means, as of any date (the "Specified Date"), with respect
to each US$1,000 stated amount at maturity of Notes the sum of (a) the Issue
Price of each Note and (b) the amount of accrued but unpaid Deferred Interest on
such Note to the Specified Date such that:
(1) if the Specified Date is one of the following dates (each a
"Semiannual Accrual Date") the Accreted Value will be the amount set
forth opposite such date below:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRUAL DATE ACCRETED VALUE
----------------------- ----------------
<S> <C>
Issue Date.................................................. US$ 526.51
August 1, 2000.............................................. 561.39
February 1, 2001............................................ 598.58
August 1, 2001.............................................. 638.24
February 1, 2002............................................ 680.52
August 1, 2002.............................................. 725.61
February 1, 2003............................................ 773.68
August 1, 2003.............................................. 824.94
February 1, 2004............................................ 879.59
August 1, 2004.............................................. 937.86
February 1, 2005 and thereafter............................. US$1,000.00
</TABLE>
(2) if the Specified Date occurs before February 1, 2005, and between two
Semiannual Accrual Dates, the sum of (A) the Accreted Value for the
Semiannual Accrual Date immediately preceding the Specified Date and (B)
an amount equal to the Deferred Interest accrued from such Semiannual
Accrual Date to the Specified Date;
provided that, if Group Telecom has elected to accrue interest payable in cash
commencing on any date (the "cash election date") on or after February 1, 2003
and prior to February 1, 2005, the Accreted Value of any Note on any Specified
Date after such cash election date will be equal to the Accreted Value as of
such cash election date.
"Accounts Receivable" of a Person means the Receivables of such person
arising in the ordinary course of business from the sale of products or the
provision or sale of services by such Person.
"Acquired Debt" means, with respect to any specified Person,
(1) Debt of any other Person existing at the time such Person merges
with or into or amalgamates or consolidates with or becomes a Restricted
Subsidiary of such specified Person,
(2) Debt secured by a Lien encumbering any asset acquired by such
specified Person,
which Debt was not Incurred in anticipation of, and was outstanding prior to,
such merger, amalgamation, consolidation or acquisition but excluding Debt which
is extinguished, retired or repaid in connection with such other Person merging
with or into or amalgamating or consolidating with or becoming a Restricted
Subsidiary of such Person.
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"Acquisition" means the Acquisition of the business and assets of Shaw
FiberLink Ltd. pursuant to the Asset Purchase and Subscription Agreement, dated
as of December 22, 1999, among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp., as the same may be
amended from time to time.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary, but excluding a
disposition by a Restricted Subsidiary of such Person to such Person or a Wholly
Owned Restricted Subsidiary of such Person or by such Person to a Wholly Owned
Restricted Subsidiary of such Person) of (i) shares of Capital Stock (other than
directors' qualifying shares) or other ownership interests of a Restricted
Subsidiary of such Person, (ii) substantially all of the assets of such Person
or any of its Restricted Subsidiaries representing a division or line of
business or (iii) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business, provided in each of the
foregoing instances that the aggregate consideration for such transfer,
conveyance, sale, lease or other disposition is equal to US$2 million or more.
The term "Asset Disposition" shall not include
(1) the designation of any Subsidiary as an Unrestricted Subsidiary;
(2) the contribution to the capital of any Unrestricted Subsidiary, in
either case in compliance with the applicable provisions of the Indenture;
(3) exchanges or swaps of Telecommunications Assets for other
Telecommunications Assets where the fair market value of the
Telecommunications Assets received is at least equal to the fair market
value of the Telecommunications Assets disposed of or, if less, the
difference is received in cash and such cash is Net Available Proceeds;
(4) sales of Receivables in connection with a Receivables Facility; or
(5) an Investment that is permitted under the "Limitation on
Restricted Payments" covenant.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by such Person under such lease during the initial term
thereof as determined in accordance with generally accepted accounting
principles, discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of penalty, such net amount shall also
include the lesser of the amount of such penalty (in which case no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated) or the rent which would otherwise be
required to be paid if such lease is not so terminated. "Attributable Value"
means, as to a Capital Lease Obligation, the capitalized amount
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thereof that would appear on the face of a balance sheet in accordance with
generally accepted accounting principles.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Capital Ratio" as of any date means the ratio of:
(1) the aggregate consolidated principal amount of Debt of Group
Telecom and any Debt of its Restricted Subsidiaries then outstanding; to
(2) the consolidated capital of Group Telecom and its Restricted
Subsidiaries as of such date.
For purposes of this calculation, "capital" shall mean shareholders' equity
(deficit), except that all Preferred Stock (other than Redeemable Stock) shall
be included and retained earnings (deficit) shall be excluded, each in
accordance with generally accepted accounting principles.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of Group Telecom and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of Group
Telecom and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of Group Telecom and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of Group Telecom and its Restricted
Subsidiaries for such period, plus (iv) other non-cash charges of Group Telecom
and its Restricted Subsidiaries reducing Consolidated Net Income for such
period, minus (v) other non-cash items of Group Telecom and its Restricted
Subsidiaries for such period increasing Consolidated Net Income for such period.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of Group Telecom and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of Group Telecom and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication or, to the
extent not so included, with the addition of,
(1) the amortization of Debt discounts;
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities or with respect to any Credit Facility or
Vendor Financing Debt;
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(3) fees with respect to interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements;
(4) Preferred Stock dividends of Group Telecom and its Restricted
Subsidiaries (other than with respect to Redeemable Stock) declared and
paid or payable;
(5) accrued Redeemable Stock dividends of Group Telecom and its
Restricted Subsidiaries, whether or not declared or paid;
(6) interest on Debt guaranteed by Group Telecom and its Restricted
Subsidiaries; and
(7) the portion of any rental obligation allocable to interest
expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of Group Telecom and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom
(1) the net income (or loss) of any Person acquired by Group Telecom
or a Restricted subsidiary of Group Telecom in a pooling-of-interests
transaction for any period prior to the date of such transaction,
(2) the net income (or loss) of any Person that is not a Restricted
Subsidiary of Group Telecom except to the extent of the amount of dividends
or other distributions actually paid to Group Telecom or a Restricted
Subsidiary of Group Telecom by such Person during such period,
(3) gains or losses on Asset Dispositions by Group Telecom or its
Restricted Subsidiaries,
(4) all extraordinary gains and extraordinary losses,
(5) the cumulative effect of changes in accounting principles,
(6) non-cash gains or losses resulting from fluctuations in currency
exchange rates, and
(7) the tax effect of any of the items described in clauses (1)
through (6) of this definition;
provided, further, that for purposes of any determination pursuant to the
provisions described under "Limitation on Restricted Payments," there shall
further be excluded therefrom the net income (but not net loss) of any
Restricted Subsidiary of Group Telecom that is subject to a restriction which
prevents the payment of dividends or the making of distributions to Group
Telecom or another Restricted Subsidiary of Group Telecom to the extent of such
restriction.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person, provided, however, that, adjustments following
the date of the Indenture to the accounting books and records of such Person
required to be made in accordance with Accounting Principles Board Opinions Nos.
16 and 17 (or successor opinions thereto), or comparable standards in Canada
resulting from the acquisition of control of such Person by another Person shall
not be given effect.
"Consolidated Tangible Assets" of any Person means the sum of the Tangible
Assets of such Person after eliminating inter-company items, determined on a
consolidated basis in accordance with generally accepted accounting principles,
including appropriate deductions for any minority interest in Tangible Assets of
such Person's Restricted Subsidiaries; provided, however, that, adjustments
following the date of the Indenture to the accounting books and records of such
Person required to be made in accordance with Accounting Principles Board
Opinions Nos. 16 and 17 (or successor opinions thereto), or comparable standards
in Canada resulting from the acquisition of control of such Person by another
Person shall not be given effect.
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"Credit Facility" means credit agreements or other arrangements made
available from time to time to Group Telecom and its Restricted Subsidiaries by
banks, other financial institutions and/or equipment manufacturers for the
Incurrence of Debt, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent,
(1) every obligation of such Person for money borrowed,
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations Incurred in
connection with the acquisition of property, assets or businesses,
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person,
(4) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (including securities repurchase
agreements but excluding trade accounts payable or accrued liabilities
arising in the ordinary course of business which are not overdue or which
are being contested in good faith),
(5) every Capital Lease Obligation of such Person,
(6) all Receivables Sales of such Person, together with any obligation
of such Person to pay any discount, interest, fees, indemnities, penalties,
recourse, expenses or other amounts in connection therewith,
(7) all Redeemable Stock issued by such Person,
(8) if such Person is a Restricted Subsidiary of Group Telecom, all
Preferred Stock issued by such Person,
(9) every obligation to pay rent or other payment amounts of such
Person with respect to any Sale and Leaseback Transaction to which such
Person is a party,
(10) every obligation under Interest Rate or Currency Agreements of
such Person and
(11) every obligation of the type referred to in clauses (1) through
(10) of this definition of another Person and all dividends of another
Person the payment of which, in either case, such Person has Guaranteed or
is responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise.
The "amount" or "principal amount" of Debt at any time of determination as
used herein represented by
(1) any contingent Debt, shall be the maximum principal amount
thereof,
(2) any Debt issued at a price that is less than the principal amount
at maturity thereof, shall be the face amount of the liability less the
remaining unamortized portion of the original issue discount determined in
accordance with generally accepted accounting principles,
(3) any Receivables Sale, shall be the amount of the unrecovered
capital or principal investment of the purchaser (other than Group Telecom
or a Wholly Owned Restricted Subsidiary of Group Telecom) thereof,
excluding amounts representative of yield or interest earned on such
investment,
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(4) any Redeemable Stock, shall be the maximum fixed redemption or
repurchase price in respect thereof, and
(5) any Preferred Stock, shall be the maximum voluntary or involuntary
liquidation preference plus accrued and unpaid dividends in respect
thereof, in each case as of such time of determination.
"Full Accretion Date" means February 1, 2005.
"generally accepted accounting principles" means, as at any date of
determination, generally accepted accounting principles in Canada (unless
otherwise indicated) and which are applicable as of the date of such
determination.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Debt,
(2) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or
(3) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Debt
and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing; provided, however, that the Guarantee by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to generally accepted accounting principles or otherwise, of
any such Debt or other obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in generally
accepted accounting principles that results in an obligation of such Person that
exists at such time becoming Debt shall not be deemed an Incurrence of such
Debt.
"Interest Rate or Currency Agreement" of any Person means any forward
contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars, puts and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person, but shall not include
(1) trade accounts receivable in the ordinary course of business on
credit terms made generally available to the customers of such Person,
(2) any non-cash consideration received in connection with an Asset
Disposition that was made in compliance with the "Limitation on Asset
Dispositions" covenant,
(3) Permitted Interest Rate or Currency Agreements,
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(4) loans and advances to employees made in the ordinary course of
business, and
(5) prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
documents.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Net Available Proceeds" means
(1) with respect to any Asset Disposition by any Person, cash or
readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Debt or other obligations relating to such properties or
assets) therefrom by such Person, net of
(a) all legal, title and recording tax expenses, commissions and
other fees and expenses Incurred and all federal, state, provincial,
foreign and local taxes required to be accrued as a liability as a
consequence of such Asset Disposition,
(b) all payments made by such Person or its Restricted Subsidiaries
on any Debt which is secured by such assets in accordance with the terms
of any Lien upon or with respect to such assets or which must by the
terms of such Lien, or in order to obtain a necessary consent to such
Asset Disposition or by applicable law, be repaid out of the proceeds
from such Asset Disposition,
(c) all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of such Person or joint ventures as a
result of such Asset Disposition, and
(d) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in
accordance with generally accepted accounting principles against any
liabilities associated with such assets and retained by such Person or
any Restricted Subsidiary thereof, as the case may be, after such Asset
Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination
costs associated with such Asset Disposition, in each case as determined
by the Board of Directors, in its reasonable good faith judgment
evidenced by a resolution of the Board of Directors filed with the
Trustee; provided, however, that any reduction in such reserve within
twelve months following the consummation of such Asset Disposition will
be treated for all purposes of the Indenture and the Notes as a new
Asset Disposition at the time of such reduction with Net Available
Proceeds equal to the amount of such reduction, and
(2) with respect to any issuance or sale of Capital Stock by any
Person, the proceeds of such issuance or sale in the form of cash or
readily marketable cash equivalents received therefrom by such Person, net
of
(a) attorneys' fees,
(b) accountants' fees,
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(c) underwriters' or placement agents' fees, discounts or
commissions, and
(d) brokerage, consultant, printing and other fees and expenses,
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Offer to Purchase" means a written offer (the "Offer") sent by Group
Telecom by first class mail, postage prepaid, to each Holder at his address
appearing in the Note Register on the date of the Offer offering to purchase up
to the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date. Group
Telecom shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of
Group Telecom's obligation to make an Offer to Purchase, and the Offer shall be
mailed by Group Telecom or, at Group Telecom's request, by the Trustee in the
name and at the expense of Group Telecom. The Offer shall contain information
concerning the business of Group Telecom and its Restricted Subsidiaries which
Group Telecom in good faith believes will enable such holders of the Notes to
make an informed decision with respect to the Offer to Purchase (which at a
minimum will include)
(1) the most recent annual and quarterly financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the documents required to be filed with the
Trustee pursuant to the Indenture (which requirements may be satisfied by
delivery of such documents together with the Offer),
(2) a description of material developments in Group Telecom's business
subsequent to the date of the latest of such financial statements referred
to in clause (i) (including a description of the events requiring Group
Telecom to make the Offer to Purchase),
(3) if applicable, appropriate pro forma financial information
concerning the Offer to Purchase and the events requiring Group Telecom to
make the Offer to Purchase and
(4) any other information required by applicable law to be included
therein.
The Offer shall contain all instructions and materials necessary to enable
such holders of the Notes to tender Notes pursuant to the Offer to Purchase. The
Offer shall also state:
(1) the section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to
be purchased by Group Telecom pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such has been determined pursuant to
the Section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
(4) the purchase price to be paid by Group Telecom for each US$1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of US$1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
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(7) that interest on any Note not tendered or tendered but not
purchased by Group Telecom pursuant to the Offer to Purchase will continue
to accrue;
(8) that on the Purchase Date, the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder of the Notes electing to tender a Note pursuant
to the Offer to Purchase will be required to surrender such Note at the
place or places specified in the Offer prior to the close of business on
the Expiration Date (such Note being, if Group Telecom or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to Group Telecom and the Trustee duly
executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders of the Notes will be entitled to withdraw all or any
portion of Notes tendered if Group Telecom (or its Paying Agent) receives,
not later than the close of business on the Expiration Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Note the holder tendered, the
certificate number of the Note the holder tendered and a statement that
such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, Group Telecom shall purchase all such Notes and
(b) if Notes in an aggregate principal amount in excess of the Purchase
Amount are tendered and not withdrawn pursuant to the Offer to Purchase,
Group Telecom shall purchase Notes having an aggregate principal amount
equal to the Purchase Amount on a pro rata basis (with such adjustments as
may be deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in
part, Group Telecom shall execute, and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Holder" means Goldman, Sachs & Co., Canadian Imperial Bank of
Commerce, Shaw Communications Inc. and their respective Affiliates.
"Permitted Interest Rate or Currency Agreement" of any Person means any
Interest Rate or Currency Agreement entered into with one or more financial
institutions in the ordinary course of business that is designed to protect such
Person against fluctuations in interest rates or currency exchange rates with
respect to Debt Incurred and which shall have a notional amount no greater than
the payments due with respect to the Debt being hedged thereby.
"Permitted Liens" means:
(1) Liens incidental to the conduct of Group Telecom's or a Restricted
Subsidiary's business or the ownership of its Property and assets, and that
are not Incurred in connection with the borrowing of money or the obtaining
of advances of credit and which do not in the aggregate materially detract
from the value of Group Telecom's and its Restricted Subsidiaries' Property
or other assets when taken as a whole, or materially impair the use thereof
in the operation of its business;
(2) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to secure Debt owing to Group Telecom;
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(3) deposits made to secure the performance of tenders, bids, leases,
surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money);
(4) any interest or title of a lessor in the Property subject to any
lease other than a Capital Lease;
(5) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Group Telecom and its
Restricted Subsidiaries;
(6) Liens encumbering Property or other assets under construction
arising from progress or partial payments by a customer of Group Telecom or
its Restricted Subsidiaries relating to such Property or other assets;
(7) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other Property relating to such
letters of credit and the products and proceeds thereof;
(8) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are either within the general parameters customary in
the industry and Incurred in the ordinary course of business securing
Indebtedness under Permitted Interest Rate Agreements or Currency
Agreements; and
(9) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
Group Telecom or any of its Restricted Subsidiaries in the ordinary course
of business.
"Permitted Telecommunications Investment" means an investment in an entity
engaged primarily in a Telecommunications Business.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of Group Telecom pursuant to an effective registration statement
under the Securities Act of 1933, as amended, or pursuant to applicable Canadian
securities laws.
"Purchase Money Debt" means Debt of Group Telecom or any one or more of its
Restricted Subsidiaries (including Debt represented by Capital Lease
Obligations, mortgage financings and purchase money obligations) Incurred for
the purpose of financing all or any part of the cost of construction, design,
development, installation, integration, transportation, acquisition or
improvement of any Telecommunications Assets of Group Telecom or any Restricted
Subsidiary of Group Telecom, and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time.
"Receivables" means chattel paper, instruments, documents, contract rights
or intangibles evidencing or relating to the right to payment of money.
"Receivables Facility" means any agreement or agreements between Group
Telecom or one or more Restricted Subsidiaries of Group Telecom and a financial
institution or institutions providing for the making of loans or advances,
letters of credit or bankers acceptances on a revolving basis for working
capital requirements, which is either unsecured or secured by no assets other
than Accounts Receivable of Group Telecom or such Restricted Subsidiaries;
provided, however, that such term shall not include a Credit Facility or any
renewal, extension, refinancing or refunding thereof as permitted under the
"Limitation on Debt" covenant.
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"Receivables Sales" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purposes of collection and not as a
financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed for cash or Debt (pursuant to
any sinking fund obligation or otherwise) or is convertible into or exchangeable
for Debt or is redeemable at the option of the holder thereof, in whole or in
part, for cash or Debt at any time prior to the final Stated Maturity of the
Notes.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the Outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary of Group Telecom, whether
existing on or after the date of the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an agreement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 180 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Strategic Equity Investment" means the issuance and sale of Capital Stock
(other than Redeemable Stock) to a Person that has an equity market
capitalization, net asset value or annual revenues of at least $1.0 billion and
owns and operates businesses primarily in a Telecommunications Business.
"Subordinated Debt" means Debt of Group Telecom as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent:
(1) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be permitted for so long as any
default in the payment of principal (or premium, if any) or Interest on the
Notes exists;
(2) in the event that any other default that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
exists with respect to the Notes, upon notice by 25% or more in principal
amount of the Notes to the Trustee, the Trustee shall have the right to
give notice to Group Telecom and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in
respect of such Debt may be made for a period of 179 days from the date of
such notice; and
(3) such Debt may not
(a) provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by
way of any mandatory redemption, defeasance, retirement or repurchase
thereof by Group Telecom (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but
excluding
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any retirement required by virtue of acceleration of such Debt upon an
event of default thereunder), in each case prior to the final Stated
Maturity of the Notes or
(b) permit redemption or other retirement (including pursuant to an
Offer to Purchase made by Group Telecom) of such other Debt at the
option of the holder thereof prior to the final Stated Maturity of the
Notes, other than a redemption or other retirement at the option of the
holder of such Debt (including pursuant to an Offer to Purchase made by
Group Telecom) which is conditioned upon a change of control of Group
Telecom pursuant to provisions substantially similar to those described
under "Change of Control" (and which shall provide that such Debt will
not be repurchased pursuant to such provisions prior to Group Telecom's
repurchase of the Notes required to be repurchased by Group Telecom
pursuant to the provisions described under "Change of Control").
"Subsidiary" of any Person means
(1) a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such
Person and one or more Subsidiaries thereof, or
(2) any other Person (other than a corporation) in which such Person,
or one or more other Subsidiaries of such Person or such Person and one or
more other Subsidiaries thereof, directly or indirectly, has at least a
majority ownership and power to direct the policies, management and affairs
thereof.
"Tangible Assets" of any Person means, at any date, the gross book value as
shown by the accounting books and records of such Person of all its property
both real and personal, less (i) the net book value of all its licenses,
patents, patent applications, copyrights, trademarks, trade names, goodwill,
non-compete agreements or organizational expenses and other like intangibles,
(ii) unamortized Debt discount and expenses, (iii) all reserves for
depreciation, obsolescence, depletion and amortization of its properties and
(iv) all other proper reserves which in accordance with generally accepted
accounting principles should be provided in connection with the business
conducted by such Person, provided, however, that, adjustments to the value of
such Tangible Assets following the date of the Indenture to the accounting books
and records of such Person required to be made in accordance with Accounting
Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto), or
comparable standards in Canada resulting from the acquisition of control of such
Person by another Person shall not be given effect.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of
(1) transmitting, or providing products or services relating to the
transmission or storage of, voice, data or Internet applications through
owned or leased transmission facilities, including wireless facilities,
(2) creating, developing, marketing or providing communications
related network equipment, software or other devices or products for use in
a Telecommunications Business, or
(3) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in clauses (1) or
(2) of this definition;
provided that the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors of Group Telecom.
"U.S. Government Securities" means securities that are direct obligations
of the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and
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interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of indebtedness of a
direct claim upon the instruments described above and money market mutual funds
that invest solely in such securities.
"Vendor Financing Debt" means Debt of Group Telecom or any one or more of
its Restricted Subsidiaries Incurred pursuant to any agreement between Group
Telecom or a Restricted Subsidiary and one or more vendors or lessors (or any
affiliate of any such vendor or lessor) of Telecommunications Assets used or
intended for use in a Telecommunications Business by Group Telecom or any of its
Restricted Subsidiaries providing financing for all or any part of the cost of
construction, design, acquisition, integration, installation, development,
transportation or improvement by Group Telecom or any Restricted Subsidiary of
any Telecommunications Assets from any such vendor or lessor (or any affiliate
of such vendor or lessor) and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time. Vendor Financing Debt shall not include any working capital
facility or Debt to fund interest or other similar expenses made available by
any vendor.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(1) failure to pay principal of (or premium, if any, on) any Note when
due;
(2) failure to pay any interest on any Note when due, continued for 30
days;
(3) default in the payment of principal and interest on Notes required
to be purchased pursuant to an Offer to Purchase as described under the
"Change of Control" and "Limitation on Asset Dispositions" covenants when
due and payable;
(4) failure to perform or comply with the provisions described under
"-- Amalgamations, Mergers, Consolidations and Certain Sales and Purchases
of Assets";
(5) failure to perform any other covenant or agreement of Group
Telecom under the Indenture or the Notes continued for 30 days after
written notice to Group Telecom by the Trustee or holders of at least 25%
in aggregate principal amount of Outstanding Notes;
(6) default under the terms of any instrument evidencing or securing
Debt for money borrowed by Group Telecom or any Restricted Subsidiary
having an outstanding principal amount of US$10 million individually or in
the aggregate which default results in the acceleration of the payment of
all or any portion of such indebtedness or constitutes the failure to pay
all or any portion of such indebtedness when due;
(7) the rendering of a final judgment or judgments (not subject to
appeal) against Group Telecom or any Restricted Subsidiary in an amount in
excess of US$10 million which remains undischarged or unstayed for a period
of 60 days after the date on which the right to appeal has expired;
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(8) certain events of bankruptcy, insolvency or reorganization
affecting Group Telecom or any Restricted Subsidiary; and
(9) Group Telecom shall challenge the Escrow Agreement prior to the
time that the escrow is to be released or the Escrow Agreement becomes, or
Group Telecom asserts, that the Escrow Agreement is, invalid and
unenforceable, otherwise than in accordance with its terms. (sec. 501)
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders of the Notes, unless
such holders shall have offered to the Trustee reasonable indemnity. (sec. 603)
Subject to such provisions for the indemnification of the Trustee, the holders
of a majority in aggregate principal amount of the Outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee. (sec. 512)
If an Event of Default (other than an Event of Default described in Clause
(8) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(8) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder of the Notes. (sec. 502) For information as to waiver of defaults,
see "Modification and Waiver."
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the holders of a majority
in aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (sec. 507) However, such limitations do not apply to a suit instituted by
a holder of a Note for enforcement of payment of the principal of and premium,
if any, or interest on such Note on or after the respective due dates expressed
in such Note. (sec. 508)
Group Telecom will be required to furnish to the Trustee quarterly a
statement as to the performance by Group Telecom of certain of its obligations
under the Indenture and as to any default in such performance. (sec. 1019)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all Outstanding
Notes except as to
(1) rights of registration of transfer and exchange and Group
Telecom's right of optional redemption,
(2) substitution of apparently mutilated, defaced, destroyed, lost or
stolen Notes,
(3) rights of holders of the Notes to receive payment of principal and
interest on the Notes,
(4) rights, obligations and immunities of the Trustee under the
Indenture, and
(5) rights of the of the Notes as beneficiaries of the Indenture with
respect to any property deposited with the Trustee payable to all or any of
them,
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if Group Telecom will have paid or caused to be paid the principal of and
interest on the Notes as and when the same will have become due and payable or
(y) all outstanding Notes (except lost, stolen or destroyed Notes which have
been replaced or paid) have been delivered to the Trustee for cancellation.
(Article Four)
DEFEASANCE
The Indenture will provide that, at the option of Group Telecom,
(a) if applicable, Group Telecom will be discharged from any and all
obligations in respect of the Outstanding Notes or
(b) if applicable, Group Telecom may omit to comply with certain
restrictive covenants, that such omission shall not be deemed to be an
Event of Default under the Indenture and the Notes,
in either of clause (a) or (b) upon irrevocable deposit with the Trustee, in
trust for the benefit of holders of the Notes, or money and/or U.S. government
obligations which will provide money in an amount sufficient in the opinion of a
nationally recognized firm of independent certified public accountants to pay
the principal of and premium, if any, and each installment of interest, if any,
on the Outstanding Notes. With respect to clause (b), the obligations under the
Indenture other than with respect to such covenants and the Events of Default
other than the Events of Default relating to such covenants above shall remain
in full force and effect. Such trust may only be established if, among other
things
(1) with respect to clause (a), Group Telecom has received from, or
there has been published by, the Internal Revenue Service a ruling or there
has been a change in law, which in the Opinion of Counsel qualified to
practice in the United States provides that holders of the Notes will not
recognize gain or loss for U.S. federal income tax purposes as a result of
such deposit, defeasance and discharge and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge had not
occurred; or, with respect to clause (b), above, Group Telecom has
delivered to the Trustee an Opinion of Counsel qualified to practice in the
United States to the effect that the holders of the Notes will not
recognize gain or loss for U.S. federal income tax purposes as a result of
such deposit and defeasance and will be subject to U.S. federal income tax
on the same amount, in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred;
(2) Group Telecom has delivered to the Trustee an Opinion of Counsel
qualified to practice in Canada or a ruling from the Canada Customs and
Revenue Agency to the effect that the holders of the Notes will not
recognize income, gain or loss for Canadian federal, provincial or
territorial income tax or other tax purposes as a result of such deposit
and defeasance and will be subject to Canadian federal or provincial income
tax and other tax on the same amounts, in the same manner and at the same
times as would have been the case had such deposit and defeasance not
occurred (and for the purposes of such opinion, such Canadian counsel shall
assume that holders of the Notes include holders who are not resident in
Canada);
(3) such deposit, defeasance and discharge will not result in a breach
or violation of, or constitute a default under, any agreement or instrument
to which Group Telecom or any Restricted Subsidiary is party or by which
Group Telecom or any Restricted Subsidiary is bound;
(4) no Event of Default or event that with the passing of time or the
giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing;
(5) Group Telecom has delivered to the Trustee an Opinion of Counsel
to the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; and
(6) certain other customary conditions precedent are satisfied.
(Article Twelve)
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MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by Group Telecom
and the Trustee with the consent of the holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
Outstanding Note affected thereby,
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(2) reduce the principal amount of, (or the premium) or interest on,
any Note,
(3) change the place or currency of payment of principal of (or
premium), or interest on, any Note,
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note,
(5) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture,
(6) reduce the percentage of aggregate principal amount of Outstanding
Notes necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults,
(7) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults
or covenants, except as otherwise specified,
(8) following the mailing of any Offer to Purchase, modify any Offer
to Purchase for the Notes required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the
Indenture in a manner materially adverse to the holders thereof, or
(9) modify any provisions in the Indenture relating to the payment of
Additional Amounts. (sec. 902)
The holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all holders of Notes, may waive compliance by Group Telecom
with certain restrictive provisions of the Indenture. (sec. 1020) Subject to
certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the Outstanding Notes, on behalf of
all holders of Notes, may waive any past default under the Indenture, except a
default in the payment or principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase.
(sec. 513)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
(sec.sec. 601 and 603)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of Group Telecom, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
otherwise. The Trustee is permitted to engage in other transactions with Group
Telecom or any Affiliate, provided, however, that if it acquires any conflicting
interest (as defined in the Indenture or in the Trust Indenture Act), it must
eliminate such conflict or resign. (sec. 608)
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REGISTRATION AGREEMENT FOR OUTSTANDING NOTES
Group Telecom entered into an Exchange and Registration Rights Agreement
(the "Registration Rights Agreement") pursuant to which Group Telecom agreed,
for the benefit of the holders of the outstanding notes, (i) to file with the
Commission, no later than 120 days following the date of original issuance of
the Notes (the "Closing Date"), a registration statement under the Securities
Act relating to an offer to exchange any and all of the outstanding notes for a
like number of notes which are substantially identical to the notes (except that
such notes have been registered pursuant to an effective registration statement
under the Securities Act and do not contain provisions for the additional
interest described below) (the "exchange notes") at the option of the holders
thereof and (ii) to use its best efforts to cause the Exchange Registration
Statement to become effective not earlier than 150 days and not later than 180
days after the Closing Date. Group Telecom has further agreed to use its best
efforts to commence and complete the Exchange Offer promptly but no later than
60 days after the Exchange Registration Statement has become effective, hold the
Exchange Offer open for at least 30 days, and exchange exchange notes for all
outstanding notes validly tendered and not withdrawn on or before the expiration
of the offer.
Under existing Commission interpretations, the exchange notes would in
general be freely transferable after the exchange offer without further
registration under the Securities Act, except that broker-dealers
("Participating Broker-Dealers") receiving exchange notes in the exchange offer
will be subject to a prospectus delivery requirement with respect to resales of
those exchange notes. The Commission has taken the position that participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the exchange notes (other than a resale of an unsold allotment from the
original sale of Notes pursuant to the Registration Rights Agreement). Group
Telecom is required to allow Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Registration Statement in connection with the resale
of such exchange notes. The Exchange Registration Statement will be kept
effective for a period of 180 days after the Exchange Offer has been completed
in order to permit resales of exchange notes acquired by broker-dealers in
after-market transactions. Each holder of outstanding notes (other than certain
specified holders) who wishes to exchange such outstanding notes for exchange
notes in the Exchange Offer will be required to represent that any exchange
notes to be received by it will be acquired in the ordinary course of its
business, that at the time of the commencement of the Exchange Offer it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the exchange notes and that it is not an
Affiliate of Group Telecom.
However, if (i) on or before the Exchange Offer is completed, the existing
Commission interpretations are changed such that the Exchange Notes are not or
would not in general be freely transferable in such manner on such date without
restrictions under the Securities Act, (ii) the Exchange Offer has not been
completed within 240 days following the Closing Date or (iii) the Exchange Offer
is not available to any holder of the outstanding notes, Group Telecom will, in
lieu of (or, in the case of clause (iii), in addition to) effecting registration
of the Exchange Notes, file as soon as possible, but not later than 30 days
after such obligation arises, a registration statement under the Securities Act
relating to a shelf registration of the Notes for resale by holders or, in the
case of clause (iii), of the Notes held by the Purchaser for resale by the
Purchaser (such filing, the "Shelf Registration", and such registration
statement, the "Shelf Registration Statement"). Group Telecom will use its best
efforts to cause the Shelf Registration Statement to become or be declared
effective no later than 90 days after such registration statement is filed and
to remain effective until two years following the effective date of such
registration statement or such shorter period that will terminate when all the
securities covered by the Shelf Registration Statement have been sold pursuant
to the Shelf Registration Statement. Group Telecom will, in the event of the
Shelf Registration Statement, provide to the holder or holders of the applicable
Notes copies of the prospectus that is a part of the registration statement
filed in connection with the Shelf Registration Statement, notify such holder or
holders when the Shelf Registration Statement for the applicable
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Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the applicable Notes. A holder of Notes that
sells such Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification obligations).
In the event that (i) Group Telecom has not filed the Exchange Registration
Statement relating to the Exchange Offer within 120 days following the Closing
Date or, if applicable, the Shelf Registration Statement within 30 days
following the obligation to file, as discussed above, (ii) such Exchange
Registration Statement has not become effective within 180 days following the
Closing Date or the Shelf Registration Statement has not become effective within
90 days after being filed, or (iii) the Exchange has not been completed within
60 days after the initial effective date of the Exchange Registration Statement
or (iv) any registration statement required by the Registration Rights Agreement
is filed and declared effective but shall thereafter cease to be effective
(except as specifically permitted therein) without being succeeded immediately
by an additional registration statement filed and declared effective (any such
event referred to in clauses (i) through (iv), the "Registration Default"), then
the per annum interest rate on the outstanding notes will increase, for the
period from the occurrence of the Registration Default until such time as no
Registration Default is in effect (at which time the interest rate will be
reduced to its initial rate) by 0.5% during the first 60-day period following
the occurrence of such Registration Default, and by an additional 0.5%
thereafter (to a maximum of 1.0%). If Group Telecom has not consummated the
Exchange Offer (or, if applicable, the Shelf Registration has not become
effective), within 240 days following the Closing, then the per annum interest
rate on the outstanding notes will increase by an additional 0.5% for so long as
Group Telecom has not consummated the Exchange Offer (or until such Shelf
Registration becomes effective).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirely by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to Group Telecom.
The outstanding notes and the exchange notes will be considered
collectively to be a single class for all purposes under the Indenture,
including, without limitation, waivers, amendments, redemptions and Offers to
Purchase.
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FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
GLOBAL NOTES
The exchange notes initially will be represented by one or more securities
in registered, global form (collectively, the "Global Securities"). The Global
Securities will be deposited upon issuance with the Trustee as custodian for The
Depository Trust Company ("DTC"), in New York, New York, and registered in the
name of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
Each Global Security will be held by DTC on behalf of its account holders
(each a "DTC Participant"). Except as set forth below, the Global Securities may
be transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Securities
may not be exchanged for securities in certificated form except in the limited
circumstances described below under "-- Exchanges of Book-Entry Securities for
Certificated Securities."
EXCHANGE OF BOOK-ENTRY SECURITIES FOR CERTIFICATED SECURITIES
A beneficial interest in a Global Security may not be exchanged for a
security in certificated form unless (i) DTC (x) notifies Group Telecom that it
is unwilling or unable to continue as Depositary for such Global Security or (y)
has ceased to be clearing agency registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in either case Group Telecom
thereupon fails to appoint a successor Depositary, (ii) Group Telecom, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Notes. In all cases,
certificated Notes delivered in exchange for any Global Security or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures). Any such exchange will be effected through the DWAC
System and an appropriate adjustment will be made in the records of the
applicable security registrar to reflect a decrease in the principal amount of
the relevant Global Security.
CERTAIN BOOK-ENTRY PROCEDURES
The descriptions of the operations and procedures of DTC, Euroclear and
CEDEL that follow are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. Group
Telecom take no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
DTC has advised Group Telecom as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised Group Telecom that its current practice, upon the issuance
of a Restricted Global Security and a Regulation S Global Security, is to
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Security to the
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accounts with DTC of the individual beneficial interests represented by such
Global Security to the accounts with DTC of the participants through which such
interests are to be held. Ownership of beneficial interests in the Global
Securities will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominees (with respect to
interests of participants).
As long as DTC, or its nominee, is the registered holder of a Global
Security, DTC or such nominee, as the case may be, will be considered the sole
owner and holder of the Notes represented by such Global Security for all
purposes under the Indenture. Except in the limited circumstances described
above under "-- Exchanges of Book-Entry Securities for Certificated Securities,"
owners of beneficial interests in a Global Security will not be entitled to have
any portions of such Global Security registered in their names, will not receive
or be entitled to received physical delivery of Notes in definitive form and
will not be considered the owners or holders of the Global Security (or any
security represented thereby) under the Indenture.
Investors may hold their interests in a Global Security directly through
DTC, if they are participants in such system, or in directly through
organizations (including Euroclear and CEDEL) which are participants in such
system. Some investors may hold their interests in a Global Security through
organizations which are participants in such systems. CEDEL and Euroclear will
hold interests in a Global Security on behalf of their participants through
customers' securities accounts in their respective names on the books of their
respective depositories. The depositories, in turn, will hold such interests in
such Global Securities in customers' securities accounts in the depositories'
names on the books of DTC. Those interests held through Euroclear or CEDEL will
also be subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Security to such persons may be
limited to that extent. Because DTC can act only on behalf of its participants,
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having beneficial interest, in a Global Security to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interests.
Payments of the principal of, premium, if any, and interest on the Global
Securities will be made to DTC or its nominee as the registered owner thereof.
Neither Group Telecom, the Trustee nor any of their respective agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Group Telecom expects that DTC or its nominee, upon receipt of any payment
of principal or interest in respect of a Global Security representing any Notes
held by it or its nominee, will immediately credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Security for such Notes as shown on the
records of DTC or its nominee. Group Telecom also expect that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers registered in "street name." Such payment will be the responsibility
of such participants.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Securities will trade in DTC's settlement system and
secondary market trading activity in such interest will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and its participants. Transfers between participants in DTC will be effected
in accordance with DTC's procedure, and will be settled in same-day funds.
Transfers between participants in Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
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<PAGE> 103
Subject to compliance with the transfer and exchange requirements
applicable to the Notes described elsewhere herein, cross-market transfers
between DTC participants, on the one hand, and Euroclear or CEDEL participants,
on the other hand, will be effected by DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Security in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and CEDEL
participants may not deliver instructions directly to the depositories for
Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Security from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the DTC settlement date. Cash received in Euroclear or
CEDEL as a result of sales of interests in a Global Security by or through a
Euroclear or CEDEL participant to a DTC participant will be received with value
on the DTC settlement date but will be available in the relevant Euroclear or
CEDEL cash account only as of the business day for Euroclear or CEDEL following
the DTC settlement date.
DTC has advised Group Telecom that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants to
whose account with DTC interests in the Global Securities are credited and only
in respect of such portion of the aggregate stated amount at maturity of the
Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default (as defined below) under the
Notes, the Global Securities will be exchanged for legended Notes in
certificated form, and distributed to DTC's participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the Global
Securities among participants of DTC, Euroclear and CEDEL, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Group Telecom, the Trustee
or Exchange Agent nor any of their respective agents will have any
responsibility for the performance by DTC, Euroclear and CEDEL, their
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations, including maintaining,
supervising or reviewing the records relating to, or payments made on account
of, beneficial ownership interests in Global Securities.
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<PAGE> 104
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
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 Abram........................ Director 48
Calgary, AB
Michael D'Avella..................... Director 41
Calgary, AB
George Estey......................... Director 43
Toronto, ON
Leo J. Hindery, Jr................... Director 52
Hillsborough, CA
P. Kenneth Kilgour................... Director 44
Toronto, ON
Robert R. Gheewalla.................. Director 32
New York, NY
Jim Shaw............................. Director 42
Calgary, AB
</TABLE>
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<PAGE> 105
JAMES G. MATKIN Mr. Matkin has been the chairman of the board since
September 1997. Mr. Matkin is the chief executive officer of the Law Society of
British Columbia. With over 9,000 members, the Law Society is the governing body
for the British Columbia legal profession. Mr. Matkin has extensive experience
in law, government and business. He is a public policy practitioner and a
Harvard Law School graduate who began his legal career on Wall Street in New
York City before clerking with Mr. Justice Martland of the Supreme Court of
Canada. A former director of the Bank of Canada, Mr. Matkin currently serves on
the boards of several public and private organizations, including the Provincial
Chair of the Council for Canadian Unity. As president of the Business Council of
British Columbia for 10 years (1983-93), Mr. Matkin has represented more than
150 of the largest companies in Canada in their business-government relations.
JAMES M. MANSOUR Mr. Mansour has been a director since April 1998. Mr.
Mansour is former President and owner of National Telecommunications of Florida,
a long distance carrier providing voice and data telecommunications services to
businesses in 32 states which he sold in 1998 to Inter Media Communications,
Inc. Prior to that time, Mr. Mansour founded and ran National Telecommunications
of Austin, one of the largest regional long distance carriers in the United
States, which he sold to WorldCom in March of 1991. In addition, Mr. Mansour
currently serves on the Board of Netpliance, a company providing high-speed
Internet access services. Mr. Mansour holds a Juris Doctorate degree from Tulane
Law School and is a certified public accountant.
DANIEL R. MILLIARD Mr. Milliard has been our chief executive officer since
September, 1999. Mr. Milliard was most recently senior vice president and
secretary of Adelphia Communications and vice chairman and president of Hyperion
Communications. Prior to that time, Mr. Milliard was the first president and
chief operating officer of Hyperion Communications, led the company from its
inception and was instrumental in growing it to become a national competitive
local exchange carrier. He also served as vice president, secretary and/or
general counsel of Adelphia. Mr. Milliard graduated from American University in
1970 with a Bachelor of Science degree in Business Administration. He received
an M.A. degree in Business from Central Missouri State University in 1971, where
he was an instructor in the Department of Finance, School of Business and
Economics, from 1971 to 1973. Mr. Milliard received his Juris Doctor degree from
the University of Tulsa School of Law in 1976. Mr. Milliard is a director of
Charles Cole Memorial Hospital.
ROBERT G. WOLFE Mr. Wolfe has been a director and our president since
February 1999. Prior to joining us, Mr. Wolfe served as chief financial officer
of Trillium Corporation, an international investment company. In addition, he
has significant experience in senior corporate finance positions with two
leading global investment banking firms, Goldman Sachs and Merrill Lynch. 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.
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.
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<PAGE> 106
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.
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 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.
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<PAGE> 107
PATRICIA A. SALTYS Ms. Saltys has been our vice president, finance since
December 21, 1999. Prior to that, Ms. Saltys was our chief financial officer
from November 1997 to December 1999. Ms. Saltys was most recently the financial
controller for Bruce Allen Talent (a division of A&F Music) and the Bryan Adams
group of companies responsible for accounting, tax, investments, and financing.
Prior to that time, Ms. Saltys was Assistant Manager at Price Waterhouse in
Vancouver. Ms. Saltys has a Bachelor of Commerce from the University of
Saskatchewan and is a chartered accountant and a member of the Institute of
Chartered Accountants of British Columbia.
MICHAEL ABRAM Mr. Abram has been a director since March 23, 2000. Mr.
Abram is President of Shaw Ventures, the investment division of Shaw
Communications Inc. Prior to joining Shaw, Mr. Abram was the President of a
national office solutions company in Canada. Mr. Abram is a graduate of the
University of Calgary.
MICHAEL D'AVELLA Mr. D'Avella joined us as a director in February 2000.
Mr. D'Avella is the senior vice president of planning for Shaw Communications
and has served in this position since 1991. He has previously held senior
positions with the Canadian Cable Television Association and business
development positions with Telesat Canada. Mr. D'Avella is also a director of
Terayon Communications Systems Inc. (a provider of broadband access systems) and
Canadian Satellite Communications (Cancom). Mr. D'Avella is a graduate of the
University of Toronto with a B.A. in economics and planning.
GEORGE ESTEY Mr. Estey joined us as a director in February 2000. Mr. Estey
is the Chairman of Goldman Sachs Canada. Prior to this, he was involved in
various roles within Goldman, Sachs & Co.'s Investment Banking Division since
joining the firm in 1987. Mr. Estey was also a consultant with McKinsey & Co.
Mr. Estey holds an MBA from the Harvard Graduate School of Business
Administration and a B.Sc. from the University of New Brunswick.
LEO J. HINDERY, JR. Mr. Hindery has been a director since March 23, 2000.
Mr. Hindery is currently chief executive officer of Global Crossing Ltd. and the
chairman and chief executive officer of GlobalCenter Inc., the Internet commerce
services subsidiary of Global Crossing. Prior to joining Global Crossing and
GlobalCenter, Mr. Hindery was president and chief executive officer of AT&T
Broadband & Internet Services and president and chief executive officer of its
predecessor company, Tele-Communications, Inc. (TCI). From 1988 to 1997, Mr.
Hindery was the founder and managing general partner of InterMedia Partners, the
ninth largest multiple cable system operator in the United States. Prior to
this, Mr. Hindery was chief officer for planning and finance of The Chronicle
Publishing Company, and chief financial officer and managing director of Becker
Paribas, Inc. Mr. Hindery holds an MBA from Stanford University and an honors
degree from Seattle University and is a member of the Stanford Business School
Advisory Council. He is a director of Tanning Technology Corp., TD Waterhouse
Group, Inc. Telocity, Inc. and Vertical Net, Inc.
P. KENNETH KILGOUR Mr. Kilgour has been a director since May 1999. Mr.
Kilgour is managing director and head of CIBC Capital Partners. Prior to joining
CIBC Capital Partners in 1989, Mr. Kilgour was senior manager, corporate finance
of Canadian Imperial Bank of Commerce, which he joined in 1982. Mr. Kilgour
holds an MBA from the University of Toronto and a B.Sc. (Applied Science) from
Queen's University.
ROBERT R. GHEEWALLA Mr. Gheewalla has been a director since May 1999. Mr.
Gheewalla is a vice president in the principal investment area at Goldman Sachs.
He received an MBA from Harvard Business School, an MS from The London School of
Economics while on a Fulbright Scholarship, and a BS from Tufts University. Mr.
Gheewalla currently serves as a board member for 360networks Inc., Diginet
Americas, Digital Access and North American RailNet.
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
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research organization; the At Home Corporation; Canadian Satellite
Communications Inc. and @Home Canada.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has three standing committees: an executive
committee, an audit committee and a compensation committee. The executive
committee consists of Messrs. Gheewalla, Kilgour, Mansour, Matkin, Milliard,
Shaw and Estey, and, as a non-voting observer, Mr. Wolfe. A majority of the
members of the audit committee are persons who are not our officers or employees
or any of our affiliates. The audit committee, which consists of Messrs.
Mansour, Matkin and Kilgour, selects and engages, on our behalf, the independent
public accountants to audit our annual financial statements, and reviews and
approves the planned scope of the annual audit. The compensation committee
establishes remuneration levels for our senior officers. The compensation
committee consists of Messrs. Matkin, D'Avella and Gheewalla.
EXECUTIVE COMPENSATION
At September 30, 1999, we had nine executive officers. At September 30,
1999, aggregate cash compensation of $277,273 was paid to our executive officers
who were members of our board of directors, and $393,958 was paid to our other
executive officers, including salaries, bonuses and other amounts paid by us.
Pursuant to our employment agreements with Daniel Milliard, our chief
executive officer and director, and with Robert Wolfe, our president, chief
operating officer and director, we have agreed to provide Mr. Milliard with a
housing-assistance loan and an option-exercise loan in the aggregate amount of
approximately $4 million and Mr. Wolfe with an option-exercise loan in the
amount of approximately $312,500, each of which will bear interest at the
effective applicable federal rate in effect under Section 1274(d) of the
Internal Revenue Code. Pursuant to our employment agreement with Eric Demirian,
our executive vice president, corporate development, we have provided Mr.
Demirian with an interest free loan in the aggregate amount of approximately
$190,000.
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<PAGE> 109
SUMMARY COMPENSATION TABLE
We paid the following compensation paid during the year ended September 30,
1999 to our executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- -------------------------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES RESTRICTED
UNDER SHARES OR
OTHER ANNUAL OPTIONS RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
--------------------------- -------- ----- ------------ ---------- ----------- ------- ------------
($) ($) ($) (#) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel R. Milliard............. $ 33,333 -- -- 1,600,000 -- -- --
(Chief Executive Officer and
Director)
Robert G. Wolfe................ $145,831 50,000 -- 750,000 -- -- --
(President, Chief Operating
Officer and Director)
Michael A. Aymong.............. $ 55,192 -- -- 190,000 -- -- --
(Executive Vice President,
Marketing and Sales)
Marek K. Wieckowski(1)......... $101,917 -- -- 85,000 -- -- --
(Executive Vice President,
Network Services)
Robert M. Fabes................ $ 26,250 -- -- 15,000 -- -- --
(Senior Vice President, General
Counsel and Corporate
Secretary)
Andrew J. Csinger.............. $101,000 -- -- 95,000 -- -- --
(Senior Vice President,
Systems Services)
Steven L. Koles................ $ 47,596 -- -- 30,000 -- -- --
(Senior Vice President,
Marketing)
C. William Rainey.............. $ 46,362 -- -- 35,000 -- -- --
(Senior Vice President, Sales)
Patricia A. Saltys............. $ 97,083 -- -- 55,000 -- -- --
(Vice President, Finance)
</TABLE>
---------------
(1) Resigned effective April 30, 2000.
EQUITY INCENTIVE PLAN
Our board of directors approved our employees' and directors' equity
incentive plan effective as of September 1999. The equity incentive plan applies
to our (and our affiliates) directors and employees who, in the judgment of our
board of directors, will be largely responsible for our future growth and
success. The equity incentive plan was approved by our shareholders in March
2000.
The equity incentive plan is administered by our board of directors.
Options can be exercised for our class A voting shares or our class B non-voting
shares. The exercise price for any option granted under the equity incentive
plan may not be less than 100% of the weighted average price of our class B
non-voting shares on the Toronto Stock Exchange or Nasdaq National Market for
the preceding five days of trading. Options are exercisable during a period
established at the time of their grant provided that such period will expire no
later than 10 years after the date of grant, subject to early termination of the
option in the event the holder of the option dies or ceases to be a director or
employee. No single participant, together with his or her associates, may be
granted options which could result in the cumulative issuance to such persons of
options to acquire our shares exceeding 5% of our shares outstanding immediately
prior to the grant under the equity incentive plan. The number of our shares
reserved for issuance pursuant to options granted to persons beneficially
holding, together with their associates, in excess of 10% of our shares must not
exceed 10% of our shares outstanding immediately prior to the grant under the
equity incentive plan.
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<PAGE> 110
We do not have any plans providing for pension, retirement or similar
benefits. The compensation committee of our board has the discretion to approve
bonus payments to all employees, including executive officers.
REMUNERATION OF DIRECTORS
We currently have 11 directors. No compensation is paid to directors in
their capacity as such. We grant share options to our directors and reimburse
them for their out of pocket expenses with respect to attendance at board
meetings. We maintain $5,000,000 in directors' and officers' liability
insurance.
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<PAGE> 111
OPTIONS
At July 31, 2000 we had 6,881,813 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 July 31, 2000 the following options to
purchase a total of 2,609,124 class A voting shares and a total of 1,750,000
class B non-voting shares:
<TABLE>
<CAPTION>
TOTAL NUMBER
NUMBER EXERCISE OF SHARES
NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION
--------------------------- --------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
James G. Matkin.......... 10,000(1) Nov. 18, 1997 $0.50 Nov. 30, 2000 190,000
Chairman and Director 80,000 Nov. 18, 1997 0.50 Nov. 30, 2000
100,000 Feb. 15, 2000 8.00 Feb. 15, 2005
James M. Mansour......... 150,000(1) Feb. 16, 1999 1.25 Feb. 16, 2004 650,000
Director and Chair of 300,000 Apr. 23, 1999 1.50 Apr. 23, 2004
Executive Committee 200,000 Sep. 30, 1999 1.88 Sep. 30, 2004
Robert G. Wolfe.......... 500,000(1) Apr. 1, 1999 1.50 Apr. 1, 2004 750,000
President, Chief Operating 250,000(1) Nov. 11, 1999 3.00 Nov. 11, 2004
Officer and Director
Stephen H. Shoemaker..... 400,000(1) Dec. 16, 1999 3.00 Dec. 16, 2004 400,000
Executive Vice President
and Chief Financial Officer
Eric A. Demirian......... 400,000 Dec. 16, 1999 3.00 Dec. 16, 2004 400,000
Executive Vice President,
Corporate Development
Michael A. Aymong........ 90,000 July 15, 1999 1.50 July 15, 2004 310,000
Executive Vice President, 150,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Sales and Marketing 70,000 Feb. 9, 2000 1.50 Feb. 9, 2005
Robert Watson............ 300,000 Feb. 9, 2000 8.00 Feb. 9, 2005 300,000
Executive Vice President
Carrier Services
Robert M. Fabes.......... 15,000 July 15, 1999 1.50 July 15, 2004 85,000
Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004
General Counsel and 30,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Corporate Secretary
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........ 20,000 July 15, 1999 1.50 July 15, 2004 77,000
Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Sales 7,000 Jan. 26, 2000 1.50 Jan. 26, 2005
10,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Malcolm Rodrigues........ 61,000 Feb. 9, 2000 8.00 Feb. 9, 2005 61,000
Senior Vice President,
National Operations
</TABLE>
106
<PAGE> 112
<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>
Patricia A. Saltys....... 30,000 Oct. 15, 1997 1.00 Oct. 31, 2000 149,124
Vice President, Finance 44,124 Apr. 23, 1998 1.25 July 1, 2001
55,000 Mar. 9, 1999 1.25 Sep. 30, 2000
20,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Michael Abram............ 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Michael D'Avella......... 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
George Estey............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Leo J. Hindery........... 200,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 200,000
Director
Ken Kilgour.............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Robert Gheewalla......... 100,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
Jim Shaw................. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000
Director
---------
Total: 4,359,124
=========
</TABLE>
---------------
(1) These options entitle the holder to purchase class B non-voting shares.
EMPLOYMENT AGREEMENTS
We have employment agreements or remuneration arrangements with all of our
executive officers. Each agreement or arrangement provides for salary, benefits,
bonuses and incentive stock option grants for the executive officer, and for
compensation if his or her employment is terminated.
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<PAGE> 113
REGULATION
CRTC AND LEGISLATION
Companies which own or operate transmission facilities in Canada that are
used to offer telecommunications services to the public for compensation are
classified as "telecommunications common carriers" under the Telecommunications
Act (Canada) and are subject to the regulatory authority of the CRTC.
The CRTC has the discretionary power to forbear from exercising certain of
its regulatory powers over Canadian carriers where it finds that a
telecommunications service or class of services is, or will be, subject to
competition sufficient to protect the interests of users. Some Canadian
carriers, such as the incumbent local exchange carriers, are classified by the
CRTC as "dominant" in the provision of certain services because of their market
power and control over the supply of local services and certain long distance
services. Carriers classified as "non-dominant" by the CRTC are subject to less
regulation than dominant carriers and include facilities-based long distance
providers, and competitive access providers. The CRTC has forborne from
regulating most of the services offered by non-dominant carriers, including,
long distance, private line, dedicated access services, wireless services, local
switched services. In addition, the CRTC has forborne from regulating certain
services offered by the incumbent carriers, most notably, data, long distance,
Internet access and interexchange private line services on certain routes. The
CRTC also has the power to exempt any class of Canadian carrier from the
application of the Telecommunications Act (Canada) if the CRTC is satisfied that
such an exemption is consistent with Canadian telecommunications policy
objectives. However, it has not, to date, used that power.
Leave to appeal decisions of the CRTC to the Federal Court of Appeal may be
sought within 30 days of the decision. The decision may also be challenged by
petition to the Federal Cabinet (within 90 days of the decision). CRTC decisions
are also subject to review and variance under the Telecommunications Act
(Canada) either on the CRTC's own initiative or by way of an application which
must generally be brought within 6 months of the decision, but which may be
brought as a new proceeding at any time.
REGULATION OF LOCAL SWITCHED SERVICES
In 1994, the CRTC determined that restrictions on entry into the market for
local switched telecommunications services should be removed and that measures
should be implemented to enable competitors to offer local telephone services.
The regulatory framework for competition in the local market was established as
a result of a series of decisions issued on May 1, 1997. These decisions do not
currently apply to SaskTel and NorthwesTel nor do they currently apply to
roughly 35 small independent local telephone companies located in Ontario,
Quebec and British Columbia.
The decisions issued on May 1, 1997 effectively opened Canada's local
switched services market to competition, ending the historical monopoly of the
incumbent local exchange carriers. The decisions established a comprehensive
regulatory framework allowing for the introduction of competition in the local
switched services market. The following is a summary of those aspects of the
decisions and the current regulatory regime which are expected to have a
material impact on our business:
CO-CARRIER STATUS
The CRTC adopted a principle that competitive local exchange carriers will
be considered carriers of equal stature with, and not merely customers of, the
incumbent local exchange carriers in the local switched services market.
Consistent with this principle, the CRTC adopted a "bill and keep" traffic
termination mechanism, whereby all local exchange carriers are required to
terminate each others' local traffic originating within the same exchange
without specifically compensating each other for the termination function that
they perform unless there is a traffic imbalance for a significant period of
time. In areas where traffic is at an imbalance, the CRTC has authorized the use
of a mutual
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compensation scheme under which competitive local exchange carriers and
incumbent local exchange carriers charge each other for the traffic termination
functions that they perform.
The CRTC determined that the incumbent local exchange carriers and
competitive local exchange carriers must each identify a point of
interconnection within the incumbent local exchange carrier local exchanges
where they provide service to permit the interconnection of their respective
networks and that incumbent local exchange carriers and competitive local
exchange carriers should share the cost of interconnection equally (or under
mutually agreed terms).
UNBUNDLING OF INCUMBENT LOCAL EXCHANGE CARRIER FACILITIES
The CRTC has directed the incumbent local exchange carriers to "unbundle"
or make available to competitive local exchange carriers the network elements
that competitive local exchange carriers require in order to allow them to
provide their own local services. These network elements include facilities that
the CRTC deemed essential, as well as certain other facilities that are not
essential but which were determined by the CRTC to be necessary to facilitate
competition in the market for local switched services in the short term. The
CRTC directed the incumbent local exchange carriers to price all services
subject to the mandatory unbundling requirement at their long run incremental
cost ("phase II costs") plus a 25% mark-up. The incumbent local exchange carrier
essential facilities that are subject to the mandatory unbundling rule include
central office codes, subscriber listings and local loops (the wire facilities
which run from the incumbent local exchange carriers' central offices to the
customer premises) in certain small urban and high cost rural areas. All urban
local loops, other than those deemed essential, and transiting services were
deemed not essential by the CRTC but were nonetheless required to be unbundled
and made available to competitive local exchange carriers for five years.
Although the incumbent local exchange carriers are currently required to provide
these non-essential facilities on an unbundled basis at the price of phase II
costs plus a 25% mark-up, this obligation will be discontinued after the expiry
of the initial five year period. The incumbent local exchange carriers would,
nevertheless, be required to provide those facilities which are essential,
beyond the five year period.
Many of the competitive local exchange carriers operating in the market
make extensive use of unbundled local loops. In a proceeding initiated by the
CRTC in July 2000, the CRTC has asked for interested parties' comments on its
preliminary view that the five year period for these and other non-essential
facilities should be extended for a longer period of time, in order to
facilitate competitive entry into local exchange markets. The CRTC has also
asked for comments on its preliminary view that it may be appropriate to treat
all copper loops as essential facilities.
The mandatory unbundling of incumbent local exchange carrier facilities
allows us to lease incumbent local exchange carrier local loops to provide
services to customers that are not directly on our networks. Depending on the
outcome of the proceeding initiated by the CRTC, if and when loops leased by us
are no longer priced and offered on an essential facilities basis, we will have
to (i) reach an agreement with the relevant incumbent local exchange carriers to
continue leasing these local loops (which may be on less favorable terms than
the CRTC mandated prices), (ii) build, lease or acquire our own facilities in
those markets where we do not already have our own facilities, or (iii) develop
other alternatives to reach our customers.
SAFEGUARDS AGAINST INCUMBENT LOCAL EXCHANGE CARRIER ANTI-COMPETITIVE PRICING
In order to prevent anti-competitive pricing by the incumbent local
exchange carriers, the CRTC imposed a floor price test that effectively requires
the incumbent local exchange carriers to charge prices for their retail services
sufficient to recover their costs which, with respect to essential facilities,
must be at least equal to the amount charged to the competitive local exchange
carriers (the long run incremental cost of providing the facility plus a 25%
markup) and, with respect to non-essential services, must be at least equal to
phase II costs. The incumbent local exchange carriers will be required to meet
the floor price test in all applications for new local business services (other
than for
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market trials and promotions) and applications proposing explicit or implicit
price decreases. The CRTC's floor price test is an important safeguard for us
against anti-competitive pricing by the incumbent local exchange carriers.
However, since incumbent local exchange carriers need not include in their own
floor prices the mandated 25% markup that they charge to competitive local
exchange carriers for non-essential local services, incumbent local exchange
carriers will be able to compete against competitive local exchange carriers
that utilize such non-essential services solely on the basis of price.
RESALE
The incumbent local exchange carriers are required to make their tariffed
local switched services (both business and residential) available for resale,
but not at a mandated discount as had been proposed to the CRTC by some
potential new entrants. The CRTC's denial of mandated discounts does not affect
current incumbent local exchange carrier business services offered at volume and
contract term discounts, such as Centrex services. However, the absence of
mandated discounts pursuant to the CRTC decisions has limited the number of
non-facilities-based entrants, such as resellers, into the local switched
services market.
CONTRIBUTION
In Canada, local residential telephone services are subsidized. This
subsidy comes from "contribution" payments that are made by certain
telecommunications service providers. The current contribution regime was
originally established by the CRTC in 1992 as a means of ensuring that rates for
local residential telephone service remain affordable. Under the regime,
providers of certain types of voice and data services (principally long distance
carriers) are required to make contribution payments on each minute of traffic
that originates or terminates on the local switched telephone network or on
cross-border or overseas access circuits. Contribution payments are collected by
local exchange carriers from long distance service providers and are remitted to
an independent administrator who in turn apportions them among local exchange
carriers that serve residential customers that are located in areas that are
designated for the subsidy. The subsidy is payable on a per Network Access
Service basis and varies in amount depending on the location of the customer. We
will not receive any of these subsidies if we do not provide telephone service
to residential customers.
Contribution charges are regulated by the CRTC and are currently set at
separate per minute rates for peak and off-peak traffic. The CRTC has also
established separate contribution rates for each incumbent local exchange
carrier territory and has frozen the rates for a four year period ending on
December 31, 2001. The CRTC recently turned down a request by competitors in the
long distance industry to remove the rate freeze on contribution that is
currently in effect.
On March 1, 1999, the CRTC initiated a proceeding to consider possible
reforms to the current contribution mechanism. In the public notice that
initiated the proceeding, the CRTC invited interested parties to submit
proposals on other mechanisms which could be used to collect contribution. Some
parties to this proceeding have advocated an approach to the collection of
contribution which is based on a percentage of a telecommunications service
provider's revenues (regardless of the types of services offered by the service
provider), while others have advocated an approach based on a charge per
access-line. At the present time, several of the services that we offer, such as
local telephone service and Internet access services, do not attract the
obligation to pay contribution. However, given that the current contribution
regime is under review by the CRTC, there can be no assurance that we will not
be required in the future to pay a greater amount of contribution than what we
currently pay.
REGULATION OF COMPETITIVE LOCAL EXCHANGE CARRIERS
Although the CRTC has determined that competitive local exchange carriers
are non-dominant carriers that should not be subject to the same degree of
regulation as the incumbent local exchange
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carriers, the CRTC requires competitive local exchange carriers to assume
certain obligations. For example, competitive local exchange carriers must file,
for CRTC approval, interconnection agreements and tariffs for services that they
provide to other carriers. Competitive local exchange carriers must also provide
interconnection to all other local exchange carriers within the same exchange,
interconnection to wireless service providers and equal access interconnection
to long distance providers that offer services in the same territory served by
the competitive local exchange carrier on terms and conditions no less favorable
than those contained in the incumbent local exchange carriers' tariffs, unless
the competitive local exchange carrier can justify a departure from the
incumbent local exchange carriers' tariffs. Competitive local exchange carriers
are also required, among other things, to provide for reciprocal local exchange
carrier-to-local exchange carrier interconnection; to implement local number
portability ("LNP"); to provide emergency (911) service and message relay
service and to satisfy various other existing and future regulatory requirements
designed to protect customer privacy, such as providing consumers, upon request,
with information regarding their services, prices and local calling area
boundaries. Both wireline and wireless service providers may become competitive
local exchange carriers as long as they accept the obligations imposed on
competitive local exchange carriers by the CRTC.
We believe we have an advantage over the incumbent local exchange carriers
in terms of pricing flexibility, offering of services and responsiveness to
customer needs since the incumbent local exchange carriers, unlike us, must file
and obtain regulatory approval for the rates, terms and conditions of the local
services they intend to offer and are subject to price cap regulation of their
local services. However, like the incumbent local exchange carriers, competitive
local exchange carriers are subject to the prohibitions set forth in the
Telecommunications Act (Canada) against unjust discrimination and the granting
of undue preferences to end users and to other carriers. In addition, and to the
extent that they are not regulated under the Telecommunications Act (Canada),
they are subject to anti-trust legislation such as the Competition Act (Canada).
LOCAL NUMBER PORTABILITY
Local number portability enables customers to retain their local telephone
number when they change local exchange carriers. The CRTC requires all local
exchange carriers to provide local number portability and has determined that
all local exchange carriers should bear their own costs of implementing local
number portability. Local number portability was considered to be an important
requirement by new entrants due to the reluctance of customers to change local
exchange carriers if it meant changing their telephone number. Local number
portability has been rolled out in most major urban centres in Canada, including
Vancouver, Montreal, Toronto, Calgary, Edmonton, and Ottawa/ Hull in accordance
with a schedule for implementation established by the CRTC in a 1998 decision.
If no competitive local exchange carrier has initiated interconnection with an
incumbent local exchange carrier in a given exchange by the scheduled roll-out
date or if there is no scheduled roll-out date for the exchange in question, the
industry has agreed to a request-driven roll-out schedule for local number
portability. In these circumstances, local number portability must be
implemented between 30 and 180 days following a request for local number
portability, depending on the nature of the underlying switch configuration.
CO-LOCATION
On June 16, 1997, the CRTC rendered a decision relating to incumbent local
exchange carrier central office co-location arrangements. In its decision, the
CRTC mandated the provision by incumbent local exchange carriers of both
physical and virtual co-location arrangements, available at the competitive
local exchange carrier's option, under CRTC-approved tariffs and standard-form
central office licence agreements. Under a virtual co-location arrangement,
competitive local exchange carriers and incumbent local exchange carrier traffic
is exchanged at a designated point outside the central office, and additional
dedicated facilities located in the central office are provided by the incumbent
local exchange carrier to complete the competitive local exchange carrier's
transmission
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system. Co-location arrangements are important to us because they allow us to
interconnect our transmission systems with those of the incumbent local exchange
carriers using the most efficient and cost-effective network structure possible.
They also allow us to gain immediate access to incumbent local exchange carrier
unbundled loops for our off-net customers. Under certain circumstances,
competitive local exchange carriers are also permitted to enter into
cross-connection arrangements with other co-located competitive local exchange
carriers within a central office which allows for increased network efficiency.
The CRTC also determined in its co-location decision that mandated
co-location is available only to facilities-based carriers interconnecting with
incumbent local exchange carriers under the terms of either an agreement or
tariff. We believe that the requirement limiting co-location to facilities-based
carriers creates an opportunity for competitive local exchange carriers to
resell their transmission capacity for connection at central offices to other
telecommunications service providers, including resellers and Internet
providers, which do not have access to mandated co-location arrangements.
The CRTC also set rates in the decision for a variety of monthly
co-location services, including central office floor space and entrance conduit
space charges, as well as for certain non-recurring charges. For some of these
charges, such as service order and application charges the incumbent local
exchange carriers were directed to charge the long run incremental cost of
providing the service plus a 25% mark-up. For many other charges, however, the
CRTC directed the incumbent local exchange carriers to base their charges upon
costs incurred with no mark-ups, (e.g., for construction, site preparation and
project management services).
A six-month maximum time limit was imposed on the incumbent local exchange
carriers between the date of the competitive local exchange carrier's acceptance
of the initial report for physical co-location and the availability of the
service, and a corresponding three-month maximum time limit to obtain virtual
co-location.
PRICE CAP REGULATION
The CRTC has adopted a form of rate regulation for the incumbent local
exchange carriers which brings most of their local services under a price cap
regime. The price cap mechanism adopted by the CRTC segregates the incumbent
local exchange carriers' services into sub-baskets of related services and
imposes an overall constraint on price increases for all services subject to the
price caps as well as certain specific price constraints for services within
each of three sub-baskets. The price of local services under the price cap
regime are subject to an overall price cap that limits price increases to an
annual percentage linked to the rate of inflation, subject to certain
adjustments (including a 4.5% productivity offset). Within the three sub-baskets
of local services prescribed by the CRTC (i.e., basic residential local service,
single and multi-line business local services and other capped services), the
aggregate price levels for the basic residential local service and other capped
services sub-baskets will be limited to annual increases equal to the inflation
rate. A maximum increase of 10% in any year will apply to individual rates for
residential and single-line business services in smaller exchanges.
The CRTC decided to exclude certain of the incumbent local exchange
carriers' local services such as optional local services, including calling
features such as voice mail and call waiting, from the price cap regime. In
addition, the CRTC regulates the rates of certain local "competitor services"
outside the price cap regime. These services are provided by the incumbent local
exchange carriers to their competitors, such as competitive local exchange
carriers, in order to allow their competitors to provide local and long distance
services. Examples of services included in this category are equal access
services provided to long distance service providers, unbundled local loops, and
network access services provided to wireless carriers. These services are
subject to detailed rate regulation and the prices are set at long run
incremental cost plus a 25% markup.
Despite the price constraints contained in the CRTC's price cap regime, the
incumbent local exchange carriers still have the ability under price cap
regulation to increase prices for local services
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for which there is little competition (such as residential and single line
business local services) and use the excess profits generated from these
activities to subsidize price reductions in competitive services (such as
business and government local services) that are included in the same basket of
services.
Price cap regulation for the incumbent local exchange carriers will be in
force until December 31, 2001 and will be reviewed by the CRTC before the end of
this period. The CRTC's review may result in the extension of price cap
regulation or the elimination of rate regulation for some or all of the
incumbent local exchange carriers' local services.
REGULATION OF LONG DISTANCE SERVICES
We will offer long distance telecommunications services as part of our
bundled telecommunications services. Long distance competition has been in place
in Canada since 1990 for long distance resellers and since 1992 for
facilities-based carriers. Since 1994, the incumbent local exchange carriers
have been required to provide "equal access" to long distance carriers and
resellers which eliminated the need for customers of competitive long distance
providers to dial additional digits when placing long distance calls.
As described above, competitive long distance service providers, including
resellers, must make contribution payments to local exchange carriers to reflect
the subsidy that long distance services have traditionally contributed to the
provision of local residential telephone service. As a long distance provider of
voice and data services, we will make contribution payments in respect of long
distance voice and data services which originate or terminate on the public
switched telephone network. The CRTC is currently in the process of reviewing
the appropriateness of its overall contribution collection mechanism in a
proceeding initiated on March 1, 1999.
Under the CRTC's 1992 long distance competition decision, competitive long
distance providers were required to assume approximately 30% of the cost
required to modify the incumbent local exchange carriers' networks to
accommodate interconnection with long distance competitors. These initial
modification charges are spread over a period of 10 years and are payable on the
basis of a specified charge per minute. Competitive long distance providers are
also required to pay local exchange carriers charges for other services which
they use, including switching and aggregation, primary interexchange carrier
information processing (which implements a subscriber's choice of long distance
carrier), operator services and certain billing and collection services.
The CRTC has refrained from regulating (including tariff approval and rate
setting provisions) most long distance services and interexchange private line
services provided by the incumbent local exchange carriers and all such services
offered by their competitors, apart from access to their respective networks.
The incumbent local exchange carriers' basic (undiscounted) long distance rates
remain subject to rate regulation as well as their rates in areas that do not
yet have equal access. The incumbent local exchange carriers also remain subject
to rate regulation on private line services on inter-city routes which are not
yet subject to facilities-based competition. The lack of regulation of the
incumbent local exchange carriers' long distance services, including the absence
of a floor price test, has provided the incumbent local exchange carriers with
pricing flexibility and has increased their ability to compete with us on the
basis of price.
UNBUNDLED RATES TO PROVIDE EQUAL ACCESS
In April 1997, the CRTC issued a decision which unbundles the rates that
long distance providers pay to the incumbent local exchange carriers for various
"equal access" or local switching and traffic aggregation services. Under the
decision, long distance providers were required to pay the incumbent local
exchange carriers a separate rate of $0.007 per minute (recently reduced to
$0.003 per minute) for local end office connection and an additional rate of
approximately $0.004 to $0.007 per minute for connection at the toll switch;
also referred to as "access tandem connection." Competitive local
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exchange carriers also charge these rates to long distance providers for traffic
originating and terminating on their local networks.
The CRTC's equal access decision is important to us for two reasons. First,
it establishes the prices which we, or those from which we purchase long
distance services for resale, will be required to pay to the incumbent local
exchange carriers for origination or termination of long distance traffic at
either the access tandem or local end office. Second, since we compete with the
incumbent local exchange carriers in providing switched access to long distance
services, we price our services to compete with the incumbent local exchange
carriers' tariffed rates.
In May 1999, in a decision relating to the regulatory framework relating to
the Internet, referred to as the "New Media" decision, the CRTC acknowledged the
proposal of one party to the proceeding that a comprehensive review of
interconnection and unbundling arrangements was necessary, and indicated that it
would shortly initiate such a proceeding.
Furthermore, in June 1999 an application was filed by a competitor
requesting the CRTC to review the entire framework for interconnection
arrangements between interexchange and local service providers. This application
included a proposal to permit all local exchange carriers to interchange traffic
with each other regardless of where the traffic originates. Currently, the CRTC
is determining the best type of proceeding to deal with this application. It
recently held a two-day round-table discussion for interested industry
participants in which it solicited views on what issues should be discussed
during future proceedings and what issues could be dealt with on a more
expedient basis by the CRTC interconnection steering committee. The Commission
will issue its determinations resulting from these discussions by the fall of
2000, at which time it should publish a public notice.
In May 2000, a U.S.-based digital subscriber line provider applied to the
CRTC to obtain access to the incumbent local exchange carriers' unbundled local
loops and central office co-location sites on the same terms and conditions as
competitive local exchange carriers. In addition, Bell Canada has applied for
approval of a tariff under which it would provide access to its unbundled local
loops to resellers using digital subscriber line access technology. If granted
approval, either of these applications could create opportunities for additional
competition in the high-speed Internet access market from service providers
which are not subject to the same restrictions on foreign ownership and control
as the competitive local exchange carriers. Oppositions to these applications
were filed by the other incumbent local exchange carriers and a group of
competitive local exchange carriers, including Group Telecom.
ACCESS
Access to both private and public property is important to our business in
order for us to be able to reach our customers in multiple unit dwellings and
construct, maintain and operate our network. With respect to access to multiple
unit dwellings, the CRTC, which does not have direct jurisdiction over building
owners, has recognized the importance of customer choice of service providers
and has expressed the view that an exclusive arrangement between a service
provider and a landlord of a multiple unit dwelling will generally violate the
Telecommunications Act (Canada).
In December 1999, the CRTC initiated a proceeding to examine the terms and
conditions the city of Vancouver may impose for access to public lands in order
to construct, maintain and operate telecommunications facilities. The outcome of
this proceeding may permit other service providers to obtain such access on
terms more favorable than those in our agreement with the city of Vancouver, or
may permit us to renegotiate our agreement with the city of Vancouver to the
extent that our agreement contains less favourable terms than those approved by
the CRTC.
REGULATION OF WIRELESS SERVICES
Use of radio spectrum to provide wireless telecommunications services is
subject to licensing by Industry Canada under the Radiocommunication Act
(Canada). Under this legislation, Industry
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Canada is authorized to issue radio licences, to plan the allocation and use of
the radio spectrum and to perform other duties to ensure the orderly development
and efficient operation of radiocommunication in Canada. With respect to
spectrum licensing, Industry Canada has the authority to revoke a licence for
non-compliance with terms and conditions or failure to pay associated spectrum
licence fees. However, revocation is rare and licences are usually renewed year
to year upon payment of the applicable fee. Industry Canada levies licence fees
on wireless telecommunications service providers, and generally not on
subscribers for the services offered by such providers.
Industry Canada has issued spectrum licences to us in the 38 GHz frequency
range which allow us to operate point-to-point radio systems in Vancouver,
Calgary, Toronto, Ottawa and Montreal. To obtain licences, applicants operating
as radiocommunication carriers must comply with foreign ownership restrictions
under the Radiocommunication Act.
FOREIGN OWNERSHIP RESTRICTIONS
Group Telecom, and our operating subsidiary GT Group Telecom Services
Corp., which is a telecommunications common carrier for regulatory purposes, are
required by the Canadian Telecommunications Act and the Radiocommunication Act,
and the regulations made under both statutes, to be Canadian-owned and
controlled corporations incorporated or continued under the laws of Canada or a
province of Canada. Our operating subsidiary is deemed to be Canadian-owned and
controlled if: (i) not less than 80% of the members of its board of directors
are Canadians; (ii) Canadians beneficially own and control not less than 80% of
its issued and outstanding voting shares; and (iii) it is not otherwise
controlled in fact by persons that are not Canadians. GT Group Telecom Services
Corp. is a Canadian carrier wholly owned and controlled by us and not less than
80% of its board of directors are individual Canadians. We will ensure that not
less than 80% of the members of the board of directors of our subsidiary will
continue to be composed of Canadians.
We intend that our operating subsidiary will remain controlled by us, and
be our wholly-owned subsidiary. Therefore, all of the outstanding voting shares
of the subsidiary are now, and it is intended that the subsidiary will remain,
owned by a company controlled by Canadians. A "Canadian" for the purposes of
these requirements includes a Canadian citizen who is ordinarily resident in
Canada, a permanent resident of Canada and, among other types of entities,
corporations in which Canadians beneficially own and control in the aggregate
not less than 66 2/3% of the issued and outstanding voting shares and which are
not otherwise controlled in fact by non-Canadians. A "voting share" for purposes
of these requirements means a share of any class of shares of a corporation
carrying voting rights under all circumstances or by reason of an event that has
occurred and is continuing or by reason of a condition that has been fulfilled
and includes: (i) a security that is convertible into such a share at the time
that a calculation of the percentage of shares owned and controlled by Canadians
is made; and (ii) an option or right to acquire the share or security referred
to in clause (i) that is exercisable at the time that the calculation referred
to in that clause is made.
Also, regulations made under the Telecommunications Act and the
Radiocommunication Act provide that, in order for a company which holds shares
in a carrier to be considered Canadian, not less than 66 2/3% of the issued and
outstanding voting shares of that company must be owned by Canadians and the
company must not otherwise be controlled in fact by non-Canadians. This means
that not less than 66 2/3% of the issued and outstanding voting shares of GT
Group Telecom Inc. must be owned by Canadians and that GT Group Telecom Inc.
must not otherwise be controlled in fact by non-Canadians.
Our class A voting shares are "voting shares" for these purposes and more
than 66 2/3% of the class A voting shares are held by Canadians as at the date
of this prospectus. Our class B non-voting shares are not "voting shares" for
these purposes.
The term "control in fact" is not defined in the relevant legislation and
raises various complex questions of interpretation. A number of factors have
been considered relevant to the determination of
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whether a regulated entity is not controlled in fact by non-Canadians, including
the election and composition of the board of directors, the industry specific
experience of the non-Canadian shareholders, the ability to appoint senior
management, the power to determine policies, operations and strategic
decision-making and the percentage of equity interest (whether voting or
non-voting) held by non-Canadians.
We have designed our capital structure to ensure compliance with the
Canadian ownership requirements. Our articles of incorporation provide that
certain non-voting shares may not be converted into voting shares if the
exercise of such conversion rights would cause us to be in violation of any
Canadian law applicable to the ownership interests in, or the exercise of
control over, a corporation that is providing telecommunication services in
Canada. In addition, the regulations under the Telecommunications Act (Canada)
provide us with the time and ability to rectify ineligibility resulting from
insufficient Canadian ownership of voting shares. In particular, we may, to the
extent applicable:
(i) refuse to accept any subscription for any voting shares;
(ii) refuse to allow any transfer of voting shares to be recorded;
(iii) suspend the rights of a holder of voting shares to vote at a meeting
of shareholders; and
(iv) sell, repurchase or redeem any voting shares.
Although we believe that we have at all times been in compliance with the
relevant legislation, there can be no assurance that a future CRTC or Industry
Canada determination or events beyond our control will not result in us ceasing
to comply with the relevant legislation. Should this occur, the ability of our
wholly owned subsidiary to operate as a Canadian carrier under the
Telecommunications Act (Canada) or to renew or secure licences under the
Radiocommunication Act (Canada) could be jeopardized and our business could be
materially adversely affected. If we become subject to proceedings before the
CRTC or Industry Canada with respect to compliance with the relevant
legislation, we could be materially adversely affected, even if we were
ultimately successful in such a proceeding.
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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. George Estey, another of our
directors, is Chairman of Goldman Sachs Canada. Kenneth Kilgour, another of our
directors, is managing director and head of CIBC Capital Partners. In addition,
three of our directors are executive officers of Shaw Communications. These
directors are Michael Abram, Michael D'Avella and Jim Shaw. In connection with
this transaction, on May 7, 1999, we entered into a shareholders' agreement with
our shareholders, including the holders of all of our then outstanding series A
first preference shares. On February 16, 2000, in connection with our
acquisition of the business of Shaw FiberLink, we amended and restated this
agreement to include Shaw Communications as a party. For a detailed description
of this agreement, see "Description of Share Capital" beginning on page 119.
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 held
our series A first preference shares, which converted into our class A voting
and class B non-voting shares upon our initial public offering, continue to hold
rights specified under a shareholders' agreement with us. See "Related Party
Transactions" on page 117 and "Description of Share Capital" beginning on page
119 for a description of these rights. In addition, upon completion of our
acquisition of the business of Shaw FiberLink, Shaw Communications was issued
series B first preference shares (which have now converted into class A voting
shares), became a party to the shareholders' agreement and has similar voting
and other rights. As of June 30, 2000 our directors and officers as a group
owned 2,344,061 of our class A voting shares which represented 2.95% of our then
outstanding class A voting shares. As of June 30, 2000, the following persons
beneficially owned 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
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Shaw Communications......................................... 29,096,097 36.60
Goldman Sachs(1)............................................ 18,999,999 23.90
</TABLE>
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(1) Goldman Sachs also owns 11,000,002 class B non-voting shares, representing
approximately 29.17% of the class B non-voting shares issued and
outstanding. No other shareholder beneficially owns more than 10% or more of
the issued and outstanding class B non-voting shares.
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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. Upon completion of our initial public offering
in March 2000, all of the outstanding series A first preference shares converted
into either class A voting shares or class B non-voting shares, depending on
foreign ownership restrictions then in place, on a one-for-one basis.
SERIES B
Upon completion of our acquisition of the business of Shaw FiberLink, we
issued to Shaw Communications series B first preference shares which, at the
time, represented 27.1% of our equity. Upon completion of our initial public
offering in March 2000, all of the outstanding series B first preference shares
converted into class A voting shares.
SHAREHOLDERS AGREEMENT
On February 16, 2000, shareholders then holding approximately 88.0% of our
fully diluted equity, including all of the then outstanding series A first
preference shareholders and Shaw Communications, as the holder of all of the
then outstanding series B first preference shares, entered into a shareholders
agreement which provides that:
- our board will consist of 11 directors;
- each of Shaw Communications and Goldman Sachs will be entitled to
designate three directors and CIBC World Markets will be entitled to
designate one director; and
- each of Shaw Communications and Goldman Sachs will have a right to
consent to:
(1) specified major transactions by us, including acquisitions and
investments in excess of $300 million and mergers or business
combinations, for a period of 18 months from February 16, 2000. If
Shaw Communications or Goldman Sachs withholds its consent in
respect of a major transaction, the other party may force it to
either sell its shares to the other party or buy the other party's
shares; and
(2) our annual operating budget, for a period of 24 months from February
16, 2000.
REGISTRATION RIGHTS AGREEMENT
On February 16, 2000, the initial purchasers of our series A first
preference shares and Shaw Communications, as the holder of all of the then
outstanding series B first preference shares, entered into a registration rights
agreement with us. This agreement:
- provides certain of the shareholders with the ability to require us to
register their shares with the securities regulatory authority in the
jurisdiction in which we made our public offering after we have made a
public offering of our shares;
- provides the shareholders with the ability to have their shares included
with any registration statement to be filed by us with a securities
regulatory authority; and
- provides for the circumstances in which these rights may be exercised
and the restrictions on such rights, including the number of times such
requests may be made, our ability to refuse such rights, the number of
shares to be registered and the payment of expenses.
SECOND PREFERENCE SHARES
The second preference shares are identical in all respects to the first
preference shares except that they are subordinate in all respects to the first
preference shares and any other shares which may rank senior to the second
preference shares.
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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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TAXATION
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, based on current law, is a general summary of
certain U.S. federal income tax considerations relating to the receipt,
ownership and disposition of the Notes. The discussion of the U.S. federal
income tax consequences set forth below is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), and judicial decisions and administrative
interpretations 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. There can be no assurance
that the Internal Revenue Service (the "IRS") will not challenge one or more of
the tax consequences described herein, and the Company has not obtained, nor
does it intend to obtain, a ruling from the IRS or an opinion of counsel with
respect to the U.S. federal income tax consequences of acquiring or holding
Notes. The discussion below pertains only to U.S. Holders. As used herein, a
U.S. Holder means (i) a citizen or resident (within the meaning of Section
7701(b) of the Code) of the U.S., (ii) a corporation, partnership or other
entity created in or under the laws of the U.S. or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, (iv) a trust (X) that is subject to the
primary supervision of a court within the U.S. and the control of a U.S. person
as described in Section 7701(a)(30) of the Code or (Y) that has a valid election
in effect under applicable U.S. Treasury Regulations to be treated as a U.S.
person.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, some of which (such as foreign corporations,
dealers in securities, banks, insurance companies, tax-exempt organizations, and
persons holding Notes as part of a hedging or conversion transaction or straddle
or persons deemed to sell Notes under the constructive sale provisions of the
Code) may be subject to special rules. The discussion below assumes that the
Notes are held (or would be held if acquired) as capital assets within the
meaning of Section 1221 of the Code and the holders are initial purchasers of
Units who purchase Units at their issue price (as defined in Section 1273 of the
Code). The discussion further assumes the Notes constitute indebtedness for U.S.
federal income tax purposes. This summary does not discuss the tax
considerations applicable to subsequent purchasers. The discussion also does not
discuss any aspect of state, local or foreign law, nor federal estate and gift
tax law.
EACH HOLDER OR PROSPECTIVE HOLDER OF NOTES IS STRONGLY URGED TO CONSULT ITS
OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION INCLUDING THE TAX
EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE CHANGES IN
THE TAX LAWS.
EXCHANGE OFFER
The exchange of outstanding notes for exchange notes pursuant to the
Exchange Offer will not be a taxable event for U.S. federal income tax purposes
and a U.S. Holder will have the same tax basis in the exchange notes as in the
notes exchanged therefor.
TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NOTES
ORIGINAL ISSUE DISCOUNT. For U.S. federal income tax purposes, the Notes
have been issued with original issue discount, and each U.S. Holder will be
required to include in its gross income original issue discount income as
described below (regardless of whether the holder is a cash or accrual basis
taxpayer). A U.S. Holder must include original issue discount in income as
ordinary interest income as it accrues on the basis of a constant yield to
maturity. Generally, original issue discount must be included in income in
advance of the receipt of cash representing such income.
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Original issue discount on each Note equals the excess of the stated
redemption price at maturity of the Note over its issue price. The stated
redemption price at maturity of a Note equals the sum of all payments other than
any "qualified stated interest" payments. Qualified stated interest is stated
interest that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate. Because
interest is not payable prior to August 1, 2005 none of the payments on the
Notes constitute qualified stated interest. Accordingly, all payments on the
Notes are treated as part of their stated redemption price at maturity.
Generally, the issue price of the Notes is determined by allocating the
"issue price" of each Unit between the Note and the Warrant comprising such Unit
on the basis of the proportion which the fair market value of each such element
of the Unit bears to the fair market value of the Unit. The issue price of the
Units equalled the first price for which a substantial amount of Units were
sold. The Company allocated US$478.60 to the Notes and US$47.91 to the Warrants
comprising each Unit, for tax and accounting purposes. A U.S. Holder may make an
allocation that is different from the Company's allocation by disclosing such
allocation on a statement attached to the holder's timely filed U.S. federal
income tax return for the taxable year that included the acquisition date of the
Unit.
A U.S. Holder must include in gross income, for all days during its taxable
year in which it holds a Note, the sum of the "daily portions" of original issue
discount. The "daily portions" are determined by allocating to each day in an
"accrual period" (generally the period between interest payments or compounding
dates) a pro rata portion of the original issue discount that accrued during
such accrual period. The amount of original issue discount that will accrue
during an accrual period is the product of the "adjusted issue price" of the
Note at the beginning of the accrual period and its yield to maturity
(determined on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the particular accrual period). The adjusted
issue price of a Note is the sum of its issue price, plus prior accruals of
original issue discount, reduced by the total payments made with respect to such
Note in all prior periods and on the first day of the current accrual period.
Each payment on a Note will be treated as a payment of original issue discount
(which was previously includable in income) to the extent that original issue
discount has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
There are several circumstances under which we could make a payment on a
Note which would affect the yield to maturity of a Note, including the optional
redemption of Notes by us as described under "Description of the Notes --
Optional Redemption -- General" and the repurchase of Notes by the Company
pursuant to a Change of Control (as described under "Description of the Notes --
Change of Control"). According to Treasury Regulations, the possibility of a
change in circumstances will not affect the amount of interest income recognized
by a U.S. Holder (or the timing of such recognition) if the likelihood of the
change, as of the date the debt obligations are issued, is remote. The Company
believes that the likelihood of these circumstances happening is remote and does
not intend to treat such possibility as affecting the yield to maturity.
Original issue discount accrued with respect to the Notes will constitute
foreign source income, and generally will be "passive" or "financial services"
income, which is treated separately from other types of income, for purposes of
computing any foreign tax credit that may be allowable to a U.S. Holder.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. A U.S. Holder
may elect to treat all "interest" on a Note as original issue discount and
calculate the amount includable in gross income under the method described
above. For this purpose, "interest" includes stated and unstated interest,
original issue discount, acquisition discount, market discount and de minimis
market discount, as adjusted by any acquisition premium. The election is to be
made for the taxable year in which the U.S. Holder acquired the Note and may not
be revoked without the consent of the IRS.
MARKET DISCOUNT AND ACQUISITION PREMIUM. Any principal payment or gain
realized by a U.S. Holder on disposition or retirement of a Note will be treated
as ordinary income to the extent that
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there is accrued market discount on the Note. Unless a U.S. Holder elects to
accrue under a constant-interest method, accrued market discount is the total
market discount multiplied by a fraction, the numerator of which is the number
of days the holder has held the obligation and the denominator of which is the
number of days from the date the holder acquired the obligation until its
maturity. A U.S. Holder may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a Note purchased with market discount. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includable in income. If the U.S.
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by the U.S. holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
A U.S. Holder that acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date other than payments of
qualified stated interest will be considered to have purchased such Note at an
"acquisition premium." Under the acquisition premium rules of the Code and the
Treasury Regulations, the daily portion of original issue discount which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the original issue discount
multiplied by a fraction, the numerator of which is the amount of such
acquisition premium and the denominator of which is the original issue discount
remaining from the date the Note was purchased to its maturity date.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange or
retirement of a Note, a U.S. Holder generally will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange or
retirement (which does not include any amount attributable to accrued but unpaid
interest) and the holder's adjusted tax basis in the Note. A holder's adjusted
tax basis in the Note will equal the holder's cost for the Note (in the case of
an initial purchaser, its issue price, as discussed above) increased by any
original issue discount or market discount previously included in income by such
holder with respect to such Note and decreased by any payments received thereon.
Gain or loss realized on the sale, exchange or retirement of a Note will be
capital gain or loss (subject to the market discount rules, discussed above),
and will be long-term capital gain or loss if at the time of sale, exchange or
retirement the Note has been held for more than one year. Certain non-corporate
U.S. Holders, including individuals, are eligible for reduced rates of taxation
on net long-term capital gains. The deductibility of capital losses is subject
to limitations. Such gain or loss, if any, will be U.S. source. U.S. Holders are
urged to consult their tax advisor with respect to the taxation of capital gains
and losses.
INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, information
reporting requirements will apply to certain payments made in respect of the
Notes and the proceeds received on the disposition of Notes paid within the U.S.
(and in certain cases, outside of the U.S.) 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 (including original issue
discount) and dividends required to be shown on its U.S. 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 U.S. federal income tax
liability.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
This summary is based on the current provisions of the Income Tax
Act(Canada) (the "Tax Act"), the regulations thereunder (the "Regulations"), the
Canada-United States Income Tax Convention (1980) (the "Convention"), specific
proposals to amend the Tax Act or the Regulations publicly announced by the
Canadian Minister of Finance prior to the date hereof (the "Tax Proposals") and
the current administrative published practices of the Canada Customs and Revenue
Agency (the "CCRA"). This summary is not exhaustive of all possible Canadian
federal income tax
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consequences and, except for the Tax Proposals, does not otherwise take into
account or anticipate any changes in law or administrative practice, nor does it
take into account income tax laws or considerations of any province or territory
of Canada which may differ from the federal income tax consequences described
herein, or any jurisdiction other than Canada.
THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE INTERPRETED AS, LEGAL
OR TAX ADVICE TO ANY PARTICULAR HOLDER OF NOTES, AND NO REPRESENTATIONS WITH
RESPECT TO THE INCOME TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF NOTES ARE
MADE. ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF EXCHANGING, HOLDING AND DISPOSING OF
NOTES INCLUDING THE APPLICATION AND EFFECT OF THE INCOME AND OTHER TAX LAWS OF
ANY COUNTRY, PROVINCIAL OR LOCAL TAX AUTHORITY.
All amounts relating to the acquisition, holding, redemption, disposition
or exchange of Notes must be converted into Canadian dollars for the purposes of
the Tax Act.
CANADIAN HOLDERS
The following is a general summary of the principal Canadian federal income
tax considerations generally applicable under the Tax Act to a holder (a
"Canadian Holder") of Notes who exchanges outstanding notes for exchange notes
pursuant to the exchange offer and who, for purposes of the Tax Act and at all
relevant times, is resident in Canada, holds Notes as capital property and deals
at arm's length with Group Telecom. For the purpose of the Tax Act, related
persons (as defined therein) are deemed not to deal at arm's length, and it is a
question of fact whether persons not related to each other deal at arm's length.
In general, Notes will be considered to be capital property to a Canadian Holder
unless the Canadian Holder holds the Notes in the course of carrying on a
business or acquired the Notes as part of an adventure or concern in the nature
of trade. Certain persons to whom Notes would not otherwise constitute capital
property may elect, under certain circumstances and subject to certain
conditions, to have the Notes treated as capital property under subsection 39(4)
of the Tax Act. Notes held by certain "financial institutions" (as defined in
the Tax Act) will generally not be capital property to such Canadian Holders and
will be subject to special rules contained in the Tax Act applicable to
securities held by financial institutions. These rules are not discussed in this
summary as this summary is not applicable to financial institutions, and
therefore financial institutions should consult their own tax advisors with
respect to their particular circumstances.
INTEREST. A Canadian Holder that is a corporation, partnership, unit trust
or trust of which a corporation or partnership is a beneficiary (each such
Canadian Holder, a "corporate holder") will be required to include in computing
its income for a taxation year the amount of any interest on a Note that accrued
or is deemed to have accrued to the Canadian Holder to the end of the taxation
year or that became receivable or was received by it before the end of the year,
except to the extent that such amount was included in its income for a preceding
taxation year.
Any Canadian Holder other than a corporate holder described in the
foregoing paragraph, including an individual, will be required to include in
computing its income for a taxation year any amount received or receivable by
such Canadian Holder in the year (depending on the method regularly followed by
the Canadian Holder in computing income) as interest on a Note, except to the
extent that such amount was otherwise included in its income for the year or a
preceding taxation year. In addition, if in a taxation year such a Canadian
Holder holds a Note on an "anniversary day" thereof, the Canadian Holder will be
required to include in computing its income for the year interest that has
accrued on the Note to the Canadian Holder to the end of that day, to the extent
that interest was not otherwise included in computing the Canadian Holder's
income for the taxation year or a preceding taxation year. For this purpose,
"anniversary day" of a Note means: (i) the day that is one year after the day
immediately preceding the date of its issue; (ii) the day that occurs at every
successive one year interval from the day determined under (i); and (iii) the
day on which it was disposed of.
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It is not clear whether, for purposes of the Tax Act, the Notes are
"prescribed debt obligations" as defined by the Regulations. If the Notes are
not prescribed debt obligations, interest will accrue to a Canadian Holder for
purposes of the provisions set out above, during the period ending on February
1, 2005 and thereafter, at the rate of 13.25% (compounded semi-annually). If the
Notes are prescribed debt obligations, interest will be deemed to accrue to a
Canadian Holder for purposes of the provisions set out above at a rate
determined in accordance with the Regulations, which rate may be higher than the
rate referred to in the preceding sentence. CANADIAN HOLDERS ARE ADVISED TO
CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THESE RULES DURING THE
PERIOD OF OWNERSHIP AND UPON A DISPOSITION OF A NOTE.
The outstanding notes were issued together with warrants (the "Warrants")
(the "Units") pursuant to an offering circular dated January 27, 2000. As a
result of the allocation of a portion of the issue price for a Unit to the
Warrant, the outstanding notes were considered to be issued at a discount to
their principal amount. It is unclear whether such discount would be
characterized, in respect of a Canadian Holder, as interest subject to certain
deemed accrual rules, as an income amount or as proceeds of disposition on the
sale or maturity of a Note. ACCORDINGLY, CANADIAN HOLDERS SHOULD CONSULT WITH
THEIR OWN TAX ADVISORS AS TO THE TREATMENT OF SUCH ORIGINAL ISSUE DISCOUNT.
EXCHANGE. The exchange of the outstanding notes held by a Canadian Holder
for the exchange notes pursuant to the exchange offer will take place on a
tax-free basis for the purposes of the Tax Act with the result that a Canadian
Holder will not realize a gain or loss as a result of the exchange. A Canadian
Holder will have the same adjusted cost base in the exchange notes as in the
outstanding notes.
DISPOSITION. A Canadian Holder who disposes of or is deemed to dispose of
a Note (including by redemption or at maturity) will generally realize a capital
gain (or capital loss) to the extent that the proceeds of disposition of the
Note, net of amounts included in the Canadian Holder's income as interest as
described in the following paragraph and any reasonable costs of disposition,
exceed (or are exceeded by) the Canadian Holder's adjusted cost base thereof at
the time of disposition (which will generally include the excess of amounts
included in the Canadian Holder's income as interest, other than as described in
the following paragraph, over amounts received as interest). See "Taxation of
Capital Gains" below.
Upon the assignment or other transfer of a Note by a Canadian Holder at any
time including by redemption or at maturity, the Canadian Holder will be
required to include in income for the taxation year in which the assignment or
other transfer occurs, an amount equal to the amount of interest that was
accrued or deemed to have accrued on the Note to the time of the assignment or
other transfer and that is not payable until after that time, to the extent that
such interest was not otherwise included in computing the Canadian Holder's
income for the taxation year or a preceding taxation year. In addition, any
premium paid by Group Telecom to a Canadian Holder in a taxation year as a
result of the early redemption of the Notes will be deemed to be interest
received by a Canadian Holder and be included in the Canadian Holder's income in
the taxation year to the extent that such interest was not otherwise included in
computing the Canadian Holder's income for the taxation year or a previous
taxation year and to the extent that such premium can reasonably be considered
to relate to, and does not exceed the value at the time of redemption, of the
amount of interest that would otherwise have been paid or payable by Group
Telecom on the Notes for taxation years ending after the redemption.
Where, in a taxation year, a Canadian Holder has disposed of a Note for
consideration equal to its fair market value, the Canadian Holder may deduct in
computing income for the taxation year in which the disposition occurs such
portion of the total of all amounts included in the Canadian Holder's income for
the year or a preceding taxation year as interest on the Note as cannot
reasonably be considered to have been received or become receivable by the
Canadian Holder in the year or in a preceding taxation year. Any amount so
deducted by the Canadian Holder in computing income will
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not be included in the Canadian Holder's adjusted cost base for purposes of
calculating the Canadian Holder's capital gain or capital loss, upon the
disposition of the Note.
TAXATION OF CAPITAL GAINS. Subject to the February 28, 2000 federal
budget, three-quarters of the amount of any capital gain (a "taxable capital
gain") realized by a Canadian Holder in a taxation year on the disposition or
deemed disposition of Notes must be included in computing the Canadian Holder's
income for the year, and three-quarters of the amount of any capital loss (an
"allowable capital loss") realized by the Canadian Holder in a taxation year may
be deducted from any taxable capital gains realized by the Canadian Holder in
the year. Under the February 28, 2000 federal budget, the inclusion and
deduction rate for capital gains and capital losses, respectively, was reduced
from three-quarters to two-thirds for capital gains and capital losses realized
after February 27, 2000, subject to transitional rules for dispositions that
occur during a taxation year which includes February 27, 2000 and February 28,
2000. Any excess of allowable capital losses over taxable capital gains for a
taxation year may generally be carried back and deducted in any of the three
preceding taxation years or carried forward and deducted in any following
taxation year against net taxable capital gains realized in such years to the
extent and subject to the limitations prescribed in the Tax Act. Generally,
where such allowable capital losses are used to offset net taxable capital gains
in another taxation year for which the capital gains inclusion rate is
different, the amount of the allowable capital losses is adjusted to match the
inclusion rate in effect for the taxation year in which the losses are being
applied. Capital gains realized by an individual Canadian Holder may give rise
to alternative minimum tax, depending upon the individual Canadian Holder's
circumstances.
ADDITIONAL REFUNDABLE TAX. A Canadian Holder that is a
"Canadian-controlled private corporation" (as defined in the Tax Act) may be
liable to pay an additional refundable tax of 6 2/3% on investment income,
including amounts in respect of interest and taxable capital gains.
U.S. HOLDERS
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to a holder (a "U.S. Holder") of Notes who
exchanges outstanding notes for exchange notes pursuant to the exchange offer
and who, for purposes of the Tax Act and the Convention, as applicable, and at
all relevant times, (i) is a resident of the United States and not resident nor
deemed to be resident in Canada; (ii) holds Notes as capital property; (iii)
does not use or hold (and is not deemed to use or hold) the Notes in connection
with a trade or business carried on (or deemed to be carried on) in Canada; and
(iv) deals at arm's length with Group Telecom. For the purpose of the Tax Act,
related persons (as defined therein) are deemed not to deal at arm's length, and
it is a question of fact whether persons not related to each other deal at arm's
length. In general, Notes will be considered to be capital property to a U.S.
Holder unless the U.S. Holder holds the Notes in the course of carrying on a
business or acquired the Notes as part of an adventure or concern in the nature
of trade. Special rules, which are not discussed in this summary, may apply to
"financial institutions" (as defined in the Tax Act) and to non-resident
insurers carrying on an insurance business in Canada and elsewhere, and
accordingly, such persons should consult their own tax advisors. This summary
does not address the income tax consequences and implications to a U.S. Holder
of defeasance or assumption of obligations under the Notes by another party.
The payment by Group Telecom of interest, principal or premium, if any, on
the Notes to a U.S. Holder will be exempt from Canadian withholding tax.
In addition, no other tax on income (including taxable capital gains) will
be payable under the Tax Act by a U.S. Holder in respect of the acquisition,
holding, redemption or disposition of the Notes.
The exchange of the outstanding notes held by a U.S. Holder for the
exchange notes pursuant to the exchange offer will take place on a tax-free
basis for the purposes of the Tax Act with the result that a U.S. Holder will
not realize a gain or loss as a result of the exchange for Canadian income tax
purposes. A U.S. Holder will have the same adjusted cost base in the exchange
notes as in the outstanding notes.
127
<PAGE> 133
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the Commission set forth in
no-action letters issued to Exxon Capital Holdings Corp. and Morgan Stanley &
Co. Inc., among others, we believe that exchange notes issued pursuant to the
Exchange Offer in exchange for outstanding notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Group Telecom within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who acquired notes directly from us, or
(iii) broker-dealers who acquired notes as a result of market-making or other
trading activities) without compliance with the registration and prospectus
delivery provisions for the Securities Act provided that such exchange notes are
acquired in the ordinary course of such holders' business, and such holders are
not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such exchange
notes, provided that broker-dealers ("Participating Broker-Dealers") receiving
exchange notes in the exchange offer will be subject to a prospectus delivery
requirement with respect to resales of such exchange notes. To date, the staff
of the Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to transactions
involving an exchange of securities such as the exchange pursuant to the
exchange offer (other than a resale of an unsold allotment from the sale of the
outstanding notes to the initial purchasers thereof) with the prospectus
contained in the Registration Statement. Pursuant to the registration rights
agreement we, the Company has agreed to permit Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use this Prospectus in connection with the resale of such exchange notes. We
have agreed that, for a period of 180 days after the exchange offer has been
consummated, we will make this prospectus, and any amendment or supplement to
this prospectus, available to any broker-dealer that requests such documents in
the Letter of Transmittal.
Each holder of outstanding notes who wishes to exchange its outstanding
notes for exchange notes in the exchange offer will be required to make certain
representations to us as set forth in "The Exchange Offer". In addition, each
holder who is a broker-dealer and who receives exchange notes for its own
account in exchange for outstanding notes that were acquired by it as a result
of market-making activities or other trading activities, will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such exchange notes.
Holders who tender outstanding notes in the exchange offer with the
intention to participate in a distribution of the exchange notes may not rely
upon the Exxon Capital Holdings Corp., the Morgan Stanley & Co. inc. or similar
no-action letters.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the outstanding notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
128
<PAGE> 134
LEGAL MATTERS
Certain legal matters with respect to the validity of the exchange notes in
connection with the exchange offer will be passed upon by:
- Shearman & Sterling, our United States counsel, on matters of United
States and New York law; and
- Goodman Phillips & Vineberg, our Canadian counsel, on matters of
Canadian law.
EXPERTS
Our consolidated financial statements as of September 30, 1999, 1998 and
1997 included in this prospectus have been audited by PricewaterhouseCoopers
LLP, independent public accountants, as stated in their report appearing in this
prospectus and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. Shaw FiberLink's
financial statements as of August 31, 1999 and 1998 and for the three year
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.
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.
129
<PAGE> 135
WHERE YOU CAN OBTAIN MORE INFORMATION ABOUT US
We have filed a registration statement on Form F-4 with the Securities and
Exchange Commission with respect to the exchange notes 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 exchange notes 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. The
Commission also maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and, file
periodic reports and other information with the Commission. Our SEC filings are
available for inspection and copying at the Commission's public reference rooms
and the Web site of the Commission 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.
In addition, pursuant to the indenture for the notes, we have agreed to the
extent permitted by the Commission to file with the Commission and in all events
to distribute to the trustee for the notes and the holders of notes our annual
reports containing audited financial statements and unaudited financial
statements for each of the first three quarters of each fiscal year. We will do
this without regard to whether we are subject to the informational requirements
of the Exchange Act.
130
<PAGE> 136
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants of Group Telecom... F-2
Interim Condensed Consolidated Financial Statements of Group
Telecom for the Nine Months Ended June 30, 2000
(Unaudited)............................................... F-3
Notes to Interim Condensed Consolidated Financial Statements
of Group Telecom for the Nine Months Ended June 30, 2000
(Unaudited)............................................... F-6
Consolidated Financial Statements of Group Telecom for the
Year Ended September 30, 1999............................. F-15
Notes to Consolidated Financial Statements of Group Telecom
for the Year Ended September 30, 1999..................... F-18
Report of Independent Public Accountants of Shaw FiberLink
Ltd. -- FiberLink Division................................ F-43
Financial Statements of Shaw FiberLink Ltd. -- FiberLink
Division.................................................. F-44
Notes to Financial Statements of Shaw FiberLink Ltd. --
FiberLink Division........................................ F-47
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-54
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ F-57
</TABLE>
F-1
<PAGE> 137
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> 138
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -------------
$
(UNAUDITED) $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... 526,231 59,851
Accounts receivable
Trade..................................................... 32,799 1,192
Other..................................................... 7,786 2,592
Prepaid expenses............................................ 8,958 526
Inventory................................................... 201 545
--------- -------
575,975 64,706
PREPAYMENTS ON PROPERTY, PLANT AND EQUIPMENT................ 230,600 --
PROPERTY, PLANT AND EQUIPMENT............................... 778,926 73,817
LONG-TERM INVESTMENT........................................ 43,238 --
GOODWILL AND OTHER ASSETS................................... 199,710 1,291
--------- -------
1,828,449 139,814
--------- -------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................... 88,485 14,926
Unearned revenue............................................ 1,325 656
Current portion of long-term debt........................... 1,204 1,253
--------- -------
91,014 16,835
LONG-TERM UNEARNED REVENUE.................................. 1,080 1,494
LONG-TERM DEBT.............................................. 853,123 47,557
--------- -------
945,217 65,886
SHAREHOLDERS' EQUITY
SHARE CAPITAL AND OTHER EQUITY ITEMS (note 3)............... 971,468 87,010
DEFICIT..................................................... (88,236) (13,082)
--------- -------
883,232 73,928
--------- -------
1,828,449 139,814
========= =======
SUBSEQUENT EVENTS (note 7)
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) JAMES G. MATKIN (Signed) DANIEL R. MILLIARD
Director Director
</TABLE>
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-3
<PAGE> 139
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(UNAUDITED)
(thousands of Canadian dollars, except for per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2000 1999 2000 1999
-------- ------- -------- ------
$ $ $ $
<S> <C> <C> <C> <C>
REVENUE......................................... 25,558 558 41,084 1,432
COST OF SALES................................... 17,415 290 30,106 851
------- ------ -------- ------
8,143 268 10,978 581
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 30,984 2,179 62,058 5,432
------- ------ -------- ------
(22,841) (1,911) (51,080) (4,851)
AMORTIZATION.................................... 15,447 389 22,814 664
INTEREST AND FINANCING CHARGES, NET............. 14,488 (305) 27,866 (241)
------- ------ -------- ------
LOSS BEFORE INCOME TAXES........................ (52,776) (1,995) (101,760) (5,274)
RECOVERY OF FUTURE INCOME TAXES................. (26,995) -- (26,606) --
------- ------ -------- ------
LOSS FOR THE PERIOD............................. (25,781) (1,995) (75,154) (5,274)
DEFICIT -- BEGINNING OF PERIOD.................. (62,455) (6,394) (13,082) (3,115)
------- ------ -------- ------
DEFICIT -- END OF PERIOD........................ (88,236) (8,389) (88,236) (8,389)
======= ====== ======== ======
LOSS PER SHARE (note 4)......................... (0.22) (0.10) (1.24) (0.32)
======= ====== ======== ======
</TABLE>
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-4
<PAGE> 140
GT GROUP TELECOM INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
--------- ------
$ $
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period......................................... (75,154) (5,274)
Items not affecting cash
Amortization.............................................. 22,814 664
Non-cash interest expense................................. 41,676 --
Shares issued for interest on long-term debt.............. -- 171
Recovery of future income taxes........................... (26,606) --
--------- ------
(37,270) (4,439)
--------- ------
Changes in non-cash working capital items
Increase in accounts receivable........................... (36,537) (1,535)
Increase in prepaid expenses.............................. (8,227) (520)
Decrease in inventory..................................... 343 --
Increase in accounts payable and accrued liabilities...... 29,626 2,162
Increase in unearned revenue.............................. 257 2,238
--------- ------
(14,538) 2,345
--------- ------
Cash used in operating activities........................... (51,808) (2,094)
--------- ------
FINANCING ACTIVITIES
Issuance of shares.......................................... 396,036 42,718
Proceeds from long-term debt, net........................... 690,583 4,426
Proceeds from issuance of warrants.......................... 58,775 --
Issuance of loans to officers............................... (3,808) --
--------- ------
1,141,586 47,144
--------- ------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (92,528) (8,883)
Purchase of long-term investment............................ (43,238) --
Increase in other assets.................................... (56,922) (548)
Business acquisitions....................................... (430,710) --
--------- ------
(623,398) (9,431)
--------- ------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 466,380 35,619
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 59,851 2,476
--------- ------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. 526,231 38,095
========= ======
</TABLE>
Additional cash flow disclosures (note 5)
The accompanying notes form an integral part of these
interim condensed consolidated financial statements.
F-5
<PAGE> 141
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
1 OPERATIONS AND BASIS OF PRESENTATION
The company markets and sells telecommunications services and related
products over fiber optic infrastructure to small and medium-sized
businesses in Canada. The company also uses Digital Subscriber Lines (DSL)
and fixed wireless technology to extend the reach of its network. The
company provides data, internet applications and voice services and derives
revenue from network usage and access, equipment sales, co-location and
consulting services and certain fiber optic leases.
The company's principal operations effectively began in the last quarter of
fiscal 1999, when its Vancouver telecommunication networks and facilities
were put into commercial service to provide customers with integrated
services. In fiscal 1999, the company also completed various agreements
with respect to financing and started developing telecommunication networks
and facilities under a national expansion strategy.
The company is a national facilities based provider of high-speed data,
internet application and voice services comprising a single operating
segment. Substantially all of the company's assets are located in Canada
and revenue is derived from services provided in Canada.
These condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in Canada which,
in the case of the company, conform in all material respects with those in
the United States, except as outlined in note 8.
The information presented as at and for the interim periods ended June 30,
2000 and 1999 are unaudited. These unaudited interim financial statements
reflect all adjustments which are, in the opinion of management, necessary
to a fair statement of the results for the interim periods presented; all
such adjustments are of a normal recurring nature.
These condensed consolidated financial statements should be read in
conjunction with the company's consolidated financial statements for the
years ended September 30, 1999, 1998 and 1997. The results of operations
for the nine months ended June 30, 2000 are not necessarily indicative of
the results to be expected for the year ending September 30, 2000.
2 SIGNIFICANT TRANSACTIONS
(a) Pursuant to an offering circular and purchase agreement which closed
on February 1, 2000, the company issued 855,000 units, consisting of
US$855 million (issued at a price of 52.651%) of 13.25% Senior
Discount Notes due 2010 and 855,000 Warrants to Purchase 4,198,563
Class B non-voting shares. Gross proceeds amounted to US$450 million,
equivalent to approximately Cdn $651 million. Expenses related to the
offering amounted to approximately $20 million. Of the total proceeds
amounting to $651 million, $592 million was allocated to the Senior
Discount Notes and $59 million was allocated to the share purchase
warrants.
(b) On December 22, 1999, the company entered into an asset purchase and
subscription agreement with Shaw Communications Inc. ("Shaw
Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink"). This
transaction closed on February 16, 2000. Under the purchase agreement,
the company purchased from Shaw FiberLink all of the property and
assets of Shaw FiberLink used in connection with the high-speed data
and competitive access business. The assets purchased include
equipment, computer hardware, fixed
F-6
<PAGE> 142
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
assets, replacement parts, operational contracts, equipment contracts,
supply contracts, interconnect agreements, co-location agreements,
customer contracts, software licences, broadband wireless licences,
vehicles, intellectual property, permits, goodwill and certain other
fiber assets. The company and Shaw FiberLink also entered into an
indefeasible right to use agreement ("indefeasible right to use") which
grants the company an indefeasible right to use certain specifically
identified existing fibers in the fiber optic cable networks of Shaw
Communications for 60 years. In addition, the company will receive an
indefeasible right to use fibers to be built over the next three years
in mutually agreed regions. The company will also assume certain
obligations related to permits, operational contracts, customer
contracts, software licences and certain other obligations.
The purchase consideration of $760 million consisted of $360 million in
cash and 29,096,097 series B first preference shares of the company to
provide Shaw Communications with a 27.1% fully diluted interest in the
company at the date of the acquisition. The fair value of these shares
was determined to be $400 million. Acquisition costs amounted to $12
million.
Details of the assets and liabilities acquired at their fair value are
as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 329,000
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 223,000
Shaw FiberLink acquisition
Property, plant and equipment............................. 100,000
Licence rights............................................ 13,800
Non-competition agreement................................. 15,000
Goodwill.................................................. 119,400
Future income taxes....................................... (28,200)
-------
772,000
=======
</TABLE>
The prepayment of $223 million on property, plant and equipment
represents the prepayment of an indefeasible right to use certain fibers
to be built by Shaw Communications over the next three years.
Included in property, plant and equipment is an amount of $22 million
for an indefeasible right to use certain existing fibers located in New
Brunswick, Canada commencing in 2003.
Upon completion of the Initial Public Offering on March 15, 2000 (note
2(c)), the series B first preference shares issued to Shaw
Communications were automatically converted into Class A voting shares
of the company on a one-for-one basis.
(c) Pursuant to an Initial Public Offering which closed on March 15, 2000,
the company issued 18,000,000 Class B non-voting shares for aggregate
cash proceeds of US$232.9 million, net of US$19.1 million in
underwriting commissions and expenses of the offering. In addition,
the underwriters exercised their option to purchase an additional
2,700,000
F-7
<PAGE> 143
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
Class B non-voting shares for net proceeds of US$35.2 million to the
company. Aggregate net proceeds of the Initial Public Offering amounted
to $391.7 million expressed in Canadian dollars.
Upon completion of the Initial Public Offering, 42,500,002 series A
first preference shares were automatically converted into 31,500,000
Class A voting shares and 11,000,002 Class B non-voting shares on a
one-for-one basis.
(d) On March 27, 2000, the company entered into an asset purchase
agreement with Moffat Communications Limited ("Moffat
Communications"). This transaction closed on April 27, 2000. Under the
purchase agreement, the company purchased from Moffat Communications
all the property and assets used as a competitive access provider. The
assets purchased include equipment, operational contracts, customer
contracts, software licences, intellectual property, permits and
certain other assets. The company and Moffat Communications also
entered into an indefeasible right to use agreement ("indefeasible
right to use") which granted the company an indefeasible right to use
certain specifically identified existing fibers in the fiber optic
cable networks of Moffat Communications for 30 years. In addition, the
company will receive an infeasible right to use fibers to be built
over the next three years in mutually agreed upon regions. The company
also assumed certain liabilities related to permits, operational
contracts, customer contracts, software licences and certain other
obligations.
The purchase consideration consisted of $68 million in cash and the
rights to acquire 1,667,000 Class B non-voting shares of the company. At
April 27, 2000, the closing date of this transaction, these shares had
an aggregate value of approximately $32 million. At June 30, 2000, these
shares remain unissued. Acquisition costs are estimated to be $3
million.
Details of the assets and liabilities acquired at their fair value are
as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 88,359
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 7,600
Moffat Communications asset purchase
Property, plant and equipment............................. 7,397
-------
103,356
=======
</TABLE>
The prepayment of $7.6 million on property, plant and equipment
represents the prepayment of an indefeasible right to use certain fibers
to be built by Moffat Communications over the next three years.
(e) On May 24, 2000, the company completed a multiple element agreement
with 360networks Inc. Pursuant to this transaction, the company:
(i) purchased certain dark fibers to be constructed along Canadian
route paths for $137 million. Of this amount, $32 million was paid
in the quarter ended June 30, 2000
F-8
<PAGE> 144
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
which is included in property, plant and equipment. The balance
will be paid over the next 3 years; and
(ii) purchased an indefeasible right to use certain dark fibers to be
constructed along United States route paths for $140 million. In
addition, the company acquired fiber optic capacity along a
diverse route in Canada and the United States under a long-term
lease arrangement giving the company exclusive telecommunication
rights on certain specific wavelengths and acquired options to
purchase additional wavelengths on similar terms. Assets and
obligations under these arrangements, which will be accounted for
as capital leases over 20 years commencing in 2001, amount to
approximately $85 million.
On April 12, 2000, the company purchased a less than 1% equity interest
in 360networks Inc. for $43 million in cash. The market value of the
investment at June 30, 2000 is $60 million.
3 SHARE CAPITAL AND OTHER EQUITY ITEMS
SHARE CAPITAL
Authorized
Common shares
Unlimited number of convertible Class A voting and Class B
non-voting common shares without par value
Preferred
50,000,000 Series A, convertible first preference shares without
par value
100,000,000 Series B, convertible first preference shares without
par value
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$ $
<S> <C> <C>
Common shares issued
79,511,351 (September 30, 1999 -- 18,261,149)
Class A voting shares................................ 463,246 12,573
37,698,571 (September 30, 1999 -- 4,148,569)
Class B non-voting shares............................ 420,696 5,026
Preferred shares issued
Nil (September 30, 1999 -- 41,500,002) Series A, first
preference shares.................................... -- 67,281
------- ------
883,942 84,880
Shares to be issued (note 2(d))........................... 32,303 1,875
------- ------
916,245 86,755
Warrants (note 2(a))...................................... 58,776 --
Additional paid-in capital................................ 255 255
Loans to officers......................................... (3,808) --
------- ------
971,468 87,010
======= ======
</TABLE>
F-9
<PAGE> 145
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
4 LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common shares outstanding for the periods presented. The weighted average
number of common shares for the three months ended June 30, 2000 amounted
to 118,375,924; 1999 -- 19,375,508 (nine months ended June 30, 2000 --
60,395,353; 1999 -- 16,743,424) shares.
Fully diluted loss per share has not been disclosed as it would be
anti-dilutive.
5 ADDITIONAL CASH FLOW DISCLOSURES
NON-CASH TRANSACTIONS
Purchases of property, plant and equipment of $101 million for the nine
months ended June 30, 2000 (nine months ended June 30, 1999 -- $12 million)
and purchases of other assets of $9 million at June 30, 2000 (nine months
ended June 30, 1999 -- $nil) were financed through long-term debt, notes
payable and through accounts payable and accrued liabilities. Accordingly,
these transactions are not reflected in the statements of cash flows.
6 RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2000, the company earned $6 million
(1999 -- $nil) of revenues and incurred $1 million (1999 -- $nil) of
administrative expenses in respect of transitional processing fees on the
Shaw FiberLink operations from a minority shareholder. The company has also
engaged this related company to process certain cash disbursements on its
behalf. Included in accounts receivable is $12 million (1999 -- $nil)
receivable from this customer, $6 million of which relates to balances
acquired upon the company's acquisition of Shaw FiberLink. Included in
accounts payable and accrued liabilities is $2 million (1999 -- $nil)
payable as at June 30, 2000 to this related company.
7 SUBSEQUENT EVENT
On July 13, 2000, the company entered into an asset purchase agreement with
Cable Atlantic Inc. ("Cable Atlantic"). This transaction closed on July 21,
2000. Under the purchase agreement, the company purchased from Cable
Atlantic all the property and assets used in connection with the fiber
optic business telecom operations. The assets purchased include property,
plant and equipment. The company also entered into an indefeasible right to
use agreement in respect of specifically identified existing fibers in the
fiber optic cable networks of Cable Atlantic.
The purchase consideration consisted of $15 million in cash and the rights
to acquire 1,740,196 Class B non-voting shares of the company. The
aggregate fair value of the assets purchased is estimated to be $57
million. Acquisition costs are estimated to be $2 million.
F-10
<PAGE> 146
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
8 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
The company's condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") in Canada, which, in the case of the company conform in all
material respects with GAAP in the United States of America, except as
outlined below:
(A) NET LOSS AND SHAREHOLDERS' EQUITY
The following summary sets out the adjustments to the company's loss and
shareholders' equity, which would be made to conform to U.S. GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- ------- ------- ------
$ $ $ $
<S> <C> <C> <C> <C>
Loss for the period in accordance with
Canadian GAAP........................... (25,781) (1,995) (75,154) (5,274)
Impact of U.S. accounting principles
Amortization of purchase price
adjustment (c)....................... (230) -- (230) --
Deferred charges........................ -- (75) (15) (226)
Stock based compensation (d)............ (3,801) -- (7,610) --
Deferred foreign exchange (e)........... (5,993) -- 2,617 --
------- ------ ------- ------
Net loss in accordance with U.S. GAAP..... (35,805) (2,070) (89,392) (5,500)
Unrealized gains on securities net of
tax (f).............................. 12,100 -- 12,100 --
------- ------ ------- ------
Comprehensive loss in accordance with U.S.
GAAP.................................... (23,705) (2,070) (68,292) (5,500)
======= ====== ======= ======
Net loss per share in accordance with U.S.
GAAP.................................... (0.30) (0.11) (1.48) (0.33)
======= ====== ======= ======
</TABLE>
The reconciliation of shareholders' equity from Canadian to U.S. GAAP is
as follows
<TABLE>
<CAPTION>
AS AT
-------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$
$ (AUDITED)
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP..... 883,232 73,928
Purchase price adjustment, net of amortization of $230
(c)..................................................... 17,424 --
Deferred charges.......................................... (417) (402)
Cumulative stock-based compensation expense (d)........... (7,925) (1,118)
Deferred stock based compensation expense................. (38,387) (287)
Net change in stock options............................... 46,312 1,405
Deferred foreign exchange (e)............................. 2,605 (12)
Other comprehensive income (f)............................ 12,100 --
------- ------
Shareholders' equity in accordance with U.S. GAAP......... 914,944 73,514
======= ======
</TABLE>
F-11
<PAGE> 147
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(B) CONDENSED CONSOLIDATED BALANCE SHEETS
The following table indicates the restated amounts for the items in the
consolidated balance sheets of the company that would be affected had
the financial statements been prepared in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
AS AT
-------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
$
$ (AUDITED)
<S> <C> <C>
Property, plant and equipment............................. 782,315 73,817
Long-term investment...................................... 60,636 --
Deferred income taxes payable............................. 5,298 --
Goodwill and other assets................................. 208,573 877
Deferred stock-based compensation expense (c)............. (38,387) (287)
Share capital............................................. 989,588 85,480
Additional paid-in capital................................ 337 337
Stock options outstanding (c)............................. 46,312 723
Cumulative other comprehensive income..................... 12,100 --
Deficit................................................... (95,006) (14,614)
</TABLE>
(C) PURCHASE PRICE ADJUSTMENT
For U.S. GAAP, the company has recorded the purchase price of the assets
acquired from Moffat Communications (Note 2 (d)), based on the fair
value of consideration agreed to on March 27, 2000, when the company
entered into an asset purchase agreement. The purchase consideration
consisted of $68 million cash and the rights to acquire 1,667,000 Class
B non-voting shares of the company, which had an aggregate value of
approximately $50 million at March 27, 2000. For U.S. GAAP purposes,
details of assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Indefeasible Right to Use Agreement
Property, plant and equipment representing indefeasible
rights to use constructed fibers....................... 91,748
Prepayment for indefeasible rights to use fibers to be
constructed............................................ 7,600
Moffat Communications acquisition
Property, plant and equipment............................. 7,397
Non-competition agreement................................. 2,360
Goodwill.................................................. 11,905
-------
121,010
=======
</TABLE>
For Canadian GAAP, the fair value of the shares to be issued as partial
consideration of the purchase price has been determined based on the
average stock price on April 27, 2000, the date the transaction closed.
F-12
<PAGE> 148
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(D) STOCK-BASED COMPENSATION
For U.S. GAAP, the company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". This method recognizes compensation cost as the amount by
which the fair value of the stock exceeds the exercise price at the date
of grant. The compensation cost is recognized over the vesting period.
For U.S. GAAP, the compensation cost not yet recognized is presented as
a deferred stock-based compensation charge, with a corresponding amount
included in stock options outstanding, both of which form part of
shareholders' equity. For Canadian GAAP, stock-based compensation
expense is not recorded in the accounts of the company.
Had the company determined compensation costs based on fair value at the
date of grant for its awards under a method prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" the company's loss and loss per share would be
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ -----------------
$ $
<S> <C> <C>
Loss in accordance with U.S. GAAP.................. (35,805) (89,392)
Additional compensation expense.................... (678) (1,148)
------- -------
Pro forma net loss................................. (36,483) (90,540)
======= =======
Pro forma loss per share........................... (0.31) (1.50)
======= =======
</TABLE>
The pro-forma compensation expense reflected above has been estimated
using the Black Scholes option-pricing model. Assumptions used in the
pricing model included: (i) risk free interest rate of between 4.10% -
6.41%; (ii) expected volatility of ranging between nil - 65%; (iii)
expected dividend yield of nil; and (iv) an estimated average life of
ranging from 2.67 - 3 years.
A summary of stock options outstanding at June 30, 2000 is set out
below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------- --------- ---------------- -------------- --------- --------------
$ $ $
<S> <C> <C> <C> <C> <C>
0.50 97,827 0.54 years 0.50 97,827 0.50
1.00 37,500 0.33 years 1.00 37,500 1.00
1.25 887,933 2.84 years 1.25 709,060 1.25
1.50 1,064,056 3.92 years 1.50 718,167 1.50
1.875 373,505 3.29 years 1.875 247,561 1.875
3.00 2,056,221 4.18 years 3.00 429,860 3.00
8.00 1,932,421 4.63 years 8.00 241,265 8.00
20.40 367,864 4.83 years 20.40 32,252 20.40
--------- ---------- ------- --------- -------
6,817,327 4.00 years $ 4.79 2,513,492 $ 2.54
========= ========== ======= ========= =======
</TABLE>
F-13
<PAGE> 149
GT GROUP TELECOM INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2000 AND 1999
(thousands of Canadian dollars)
(E) DEFERRED FOREIGN EXCHANGE
U.S. GAAP requires immediate recognition in income of unrealized foreign
currency exchange gains and losses on long-term monetary items with a fixed
or ascertainable life whereas Canadian GAAP requires that these unrealized
gains and losses be deferred and amortized over the remaining term of the
long-term monetary items.
(F) UNREALIZED GAIN ON SECURITIES
Under U.S. GAAP, portfolio investments which are considered to be
"available for sale" securities are measured at market value, with the
unrealized gains and losses included in comprehensive income/loss. Under
Canadian GAAP, the company's long-term investment is recorded at cost. The
concept of comprehensive income/loss does not exist under Canadian GAAP.
(G) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes methods of accounting for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. The statement requires that entities recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The company is not required to adopt this
statement until its fiscal year ended September 30, 2001. The company is
currently evaluating the effect that implementation will have on its
results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 on Revenue Recognition. The company is not
required to adopt any associated effects until the commencement of its
fiscal year ending September 30, 2001. The company has not yet quantified
the impact of implementing the Bulletin, if any.
F-14
<PAGE> 150
GT GROUP TELECOM INC.
CONSOLIDATED BALANCE SHEETS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 29,347,816 $ 59,851,461 $ 2,476,445 $ 60,925
Accounts receivable (note 3)................................ 5,779,510 3,783,557 1,102,967 380,198
Prepaid expenses............................................ 2,074,373 526,270 26,354 25,197
Inventory................................................... 544,590 544,590 -- --
------------ ------------ ----------- ----------
37,746,289 64,705,878 3,605,766 466,320
PROPERTY, PLANT AND EQUIPMENT (note 4)...................... 108,009,250 73,816,711 10,555,202 481,021
GOODWILL (note 5)........................................... 3,105,443 -- -- 32,822
OTHER ASSETS (note 6)....................................... 11,796,529 1,291,654 206,667 41,968
------------ ------------ ----------- ----------
$160,657,511 $139,814,243 $14,367,635 $1,022,131
============ ============ =========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 7)........... $ 34,962,840 $ 14,926,086 $ 2,914,867 $ 599,523
Vendor payable (note 8)..................................... -- -- 4,702,260 --
Unearned revenue (note 9)................................... 676,185 655,605 73,159 34,257
Current portion of long-term debt (note 10)................. 3,746,098 1,253,358 114,743 57,000
------------ ------------ ----------- ----------
39,385,123 16,835,049 7,805,029 690,780
LONG-TERM UNEARNED REVENUE (note 9)......................... 1,356,250 1,493,750 -- --
LONG-TERM DEBT (note 10).................................... 57,027,723 47,556,922 775,636 --
------------ ------------ ----------- ----------
$ 97,769,096 $ 65,885,721 $ 8,580,665 $ 690,780
------------ ------------ ----------- ----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 11)
Authorized
Common shares
Unlimited number of convertible Class A voting and Class
B non-voting common shares without par value
Preferred
50,000,000 Series A convertible first preference shares
without par value
Issued and outstanding
Common shares
18,609,935 Class A voting shares (September 30, 1999 --
18,261,149; 1998 -- 15,288,420; 1997 -- 7,095,132).... $ 13,597,705 $ 12,573,300 $ 8,646,152 $ 836,135
4,148,569 Class B non-voting shares..................... 5,026,015 5,026,015 -- --
Preferred shares
42,500,002 Series A first preference shares (September
30, 1999 -- 41,500,002)............................... 69,155,541 67,280,541 -- --
------------ ------------ ----------- ----------
87,779,261 84,879,856 8,646,152 836,135
ADDITIONAL PAID-IN CAPITAL (note 11)........................ 255,375 255,375 255,375 171,100
SHARES TO BE ISSUED (note 11)............................... -- 1,875,000 -- --
DEFICIT..................................................... (25,146,221) (13,081,709) (3,114,557) (675,884)
------------ ------------ ----------- ----------
62,888,415 73,928,522 5,786,970 331,351
------------ ------------ ----------- ----------
$160,657,511 $139,814,243 $14,367,635 $1,022,131
============ ============ =========== ==========
COMMITMENTS AND CONTINGENCIES (note 16)
SUBSEQUENT EVENTS (note 20)
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) JAMES G. MATKIN (Signed) DANIEL R. MILLIARD
Director Director
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-15
<PAGE> 151
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
1999 1998 1999 1998 1997
------------ ----------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................ $ 2,266,566 $ 372,388 $ 2,705,432 $ 1,823,222 $2,051,122
COST OF SALES (EXCLUSIVE OF ITEMS
SHOWN SEPARATELY BELOW).......... 2,137,527 248,584 1,808,475 1,131,249 1,436,986
------------ ----------- ------------ ----------- ----------
129,039 123,804 896,957 691,973 614,136
------------ ----------- ------------ ----------- ----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 10,863,343 1,790,689 10,218,799 3,038,126 988,933
------------ ----------- ------------ ----------- ----------
(10,734,304) (1,666,885) (9,321,842) (2,346,153) (374,797)
AMORTIZATION....................... 1,124,145 137,547 852,539 254,578 55,146
INTEREST AND FINANCE ITEMS
Interest income.................... (579,780) (14,032) (920,399) (58,052) --
Interest on long-term debt......... 441,067 40,880 262,089 147,240 --
Finance charges.................... 25,378 7,945 192,397 -- --
Foreign exchange loss (gain)....... 254,313 (32,078) 93,684 (251,246) --
------------ ----------- ------------ ----------- ----------
140,978 2,715 (372,229) (162,058) --
------------ ----------- ------------ ----------- ----------
LOSS BEFORE INCOME TAXES........... (11,999,427) (1,807,147) (9,802,152) (2,438,673) (429,943)
PROVISION FOR INCOME TAXES (note
13)
Current............................ 65,085 7,847 165,000 -- --
------------ ----------- ------------ ----------- ----------
LOSS FOR THE PERIOD................ (12,064,512) (1,814,994) (9,967,152) (2,438,673) (429,943)
DEFICIT -- BEGINNING OF PERIOD..... (13,081,709) (3,114,557) (3,114,557) (675,884) (245,941)
------------ ----------- ------------ ----------- ----------
DEFICIT -- END OF PERIOD........... $(25,146,221) $(4,929,551) $(13,081,709) $(3,114,557) $ (675,884)
============ =========== ============ =========== ==========
LOSS PER SHARE (note 12)........... $ (0.54) $ (0.12) $ (0.56) $ (0.26) $ (0.05)
============ =========== ============ =========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-16
<PAGE> 152
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
1999 1998 1999 1998 1997
------------ ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period......................... $(12,064,512) $(1,814,994) $(9,967,152) $(2,438,673) $(429,943)
Items not affecting cash
Amortization.............................. 1,124,145 137,547 852,539 254,578 55,146
Additional paid-in capital................ -- -- -- 84,275 --
Shares issued for services rendered....... -- -- -- -- 7,080
Shares issued for interest on convertible
debentures.............................. -- -- 171,345 62,425 --
------------ ----------- ----------- ----------- ---------
(10,940,367) (1,677,447) (8,943,268) (2,037,395) (367,717)
------------ ----------- ----------- ----------- ---------
Changes in non-cash working capital items
Decrease (increase) in accounts
receivable.............................. (1,731,953) 472,888 (2,416,590) (722,769) (363,978)
Increase in prepaid expenses.............. (1,548,103) (72,699) (499,916) (1,157) (24,598)
Increase in inventory..................... -- -- (544,590) -- --
Increase in accounts payable and accrued
liabilities............................. 6,474,042 127,476 1,294,773 1,362,705 471,261
Increase (decrease) in unearned revenue... (116,920) 1,844 2,076,196 38,902 34,257
------------ ----------- ----------- ----------- ---------
3,077,066 529,509 (90,127) 677,681 116,942
------------ ----------- ----------- ----------- ---------
Cash flows used in operating activities..... (7,863,301) (1,147,938) (9,033,395) (1,359,714) (250,775)
------------ ----------- ----------- ----------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of convertible
debentures................................ -- 3,224,300 4,536,000 1,824,000 130,000
Issuance of shares for cash................. 14,976 31,000 71,889,120 6,418,529 665,259
Payment of share issuance costs............. (569) -- (362,761) (494,937) (23,604)
Repayment of notes payable.................. (150,222) (92,897) (114,749) (61,621) (3,000)
------------ ----------- ----------- ----------- ---------
(135,815) 3,162,403 75,947,610 7,685,971 768,655
------------ ----------- ----------- ----------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment
for cash.................................. (18,939,595) (888,171) (8,452,984) (3,737,522) (455,001)
Increase in other assets.................... (854,934) (43,337) (1,086,215) (173,215) (6,970)
Cash paid for business acquisitions......... (2,710,000) -- -- -- --
------------ ----------- ----------- ----------- ---------
(22,504,529) (931,508) (9,539,199) (3,910,737) (461,971)
------------ ----------- ----------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (30,503,645) 1,082,957 57,375,016 2,415,520 55,909
CASH AND CASH EQUIVALENTS -- BEGINNING OF
PERIOD.................................... 59,851,461 2,476,445 2,476,445 60,925 5,016
------------ ----------- ----------- ----------- ---------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.. $ 29,347,816 $ 3,559,402 $59,851,461 $ 2,476,445 $ 60,925
============ =========== =========== =========== =========
</TABLE>
Additional cash flow disclosures (note 17)
The accompanying notes form an integral part of these consolidated financial
statements.
F-17
<PAGE> 153
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION
GT Group Telecom Inc. ("GT") was incorporated on April 12, 1996 under the
Canada Business Corporations Act. GT and, through its wholly owned subsidiary GT
Group Telecom Services Corp. ("Services") (collectively known as "the company")
provides data, internet applications and voice services and derives revenues
from network usage and access, equipment sales, co-location and consulting
services and certain fiber optic leases. The company markets and sells
telecommunications services and related products over fiber optic infrastructure
to small and medium-sized businesses in Canada.
During the year ended September 30, 1999, the company's former subsidiaries
GT Grouptelecom Networks Inc. and Planet Right Communications Group Inc. were
amalgamated with Services.
The company was considered a development stage company in prior years and
for part of the current year. As a development stage company, the principal
activities of the company included developing business plans, raising capital
and debt financing and acquiring and developing telecommunication networks. The
company's principal operations effectively began in the last quarter of fiscal
1999, when its Vancouver telecommunication networks and facilities were put into
commercial service to provide customers with integrated services which include
voice telecommunication services in addition to the data and internet
application services previously offered. In fiscal 1999, the company also
completed various agreements with respect to financing and started developing
telecommunication networks and facilities under a national expansion strategy.
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada which, in the case of the
company, conform in all material respects with those in the United States,
except as outlined in note 22.
The information presented as at and for the interim periods ended December
31, 1999 and 1998 is unaudited. These unaudited interim financial statements
reflect all adjustments which are in the opinion of management necessary to a
fair statement of the results for the interim periods presented; all such
adjustments are of a normal recurring nature.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated on consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and highly liquid
short-term interest bearing securities with maturity at the date of purchase of
three months or less. The short-term interest bearing securities are recorded at
cost plus accrued interest earned, which approximates current market value.
REVENUE RECOGNITION
Revenue from network usage and access is recognized when services are
provided. Revenue from network equipment sales is recognized at the time the
equipment is delivered and accepted by the customer. Revenue from consulting
services and from co-locations, where the company provides a location and
services for the customers' servers and telecommunication equipment, are
recognized as services are rendered.
F-18
<PAGE> 154
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unearned revenue is recorded for services billed in advance and is
recognized as revenue in the period in which the services are provided.
Income from operating leases of fiber optic facilities is recognized on a
straight-line basis over the term of the lease.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
amortization. Amortization is provided over their estimated useful lives on a
straight-line basis at the following annual rates:
<TABLE>
<S> <C>
Buildings.............................................. 7%
Furniture and fixtures................................. 20%
Computer equipment and software........................ 33%
Telecommunication networks............................. 5% to 20%
Leasehold improvements................................. over the term of the leases (4-8 years)
</TABLE>
Telecommunication networks which are installed on rights of way granted by
others include construction costs, costs of acquiring rights of way, interest
costs and network design costs all of which are incurred in developing new
networks or expanding existing networks. Amortization commences when the assets
are available for use.
Management reviews the carrying values of its property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing its review for
recoverability, management estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized.
GOODWILL
Goodwill represents the excess of the cost of business acquisitions over
the fair value of the identifiable net assets acquired. Goodwill is amortized
over its estimated useful life ranging from 3 to 20 years. The company reviews
the carrying value of its goodwill to determine whether there has been a
permanent impairment in value. The measurement of possible impairment is based
primarily on the ability to recover the carrying value from expected future
operating cash flows on an undiscounted basis.
LEASES
Leases are classified as either capital or operating. Those leases that
transfer substantially all the benefits and risks of ownership of the property
to the company are accounted for as capital leases. Capital lease obligations
reflect the present value of future lease payments discounted at appropriate
interest rates.
All other leases are accounted for as operating leases wherein rental
payments are charged to income as incurred.
DEFERRED CHARGES
Deferred charges include costs such as those incurred as a result of the
registration of Services as a competitive local exchange carrier with the
Canadian Radio-television and Telecommunications Commission ("CRTC") as well as
amounts incurred relating to negotiations for rights of way and
F-19
<PAGE> 155
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
access. These amounts are amortized on a straight-line basis over a period of
three to five years from the date commercial services become available.
The company has deferred expenditures incurred in the set up of business
operations. These amounts are being amortized on a straight-line basis over a
period of three to five years from the date they are used in the business.
DEFERRED FINANCING CHARGES
Financing costs incurred in connection with the issue of debt or share
capital are deferred until completion or abandonment of the planned transaction.
Costs relating to a debt issue are amortized over the term of the debt whereas
costs relating to issue of shares are recorded as a reduction of share capital.
Costs capitalized as deferred financing charges relating to transactions that
are abandoned are expensed in full.
INVENTORY
Inventory which consists of computer equipment, is valued at the lower of
cost, determined on a first-in first-out basis, and net realizable value.
FOREIGN CURRENCY TRANSLATION
The company translates all foreign currency denominated monetary assets and
liabilities at year-end exchange rates. Revenues and expenses are translated at
the rates prevailing on the respective transaction dates. Exchange gains and
losses resulting from movements in rates are reflected in net income in the year
except for gains or losses relating to long-term monetary assets and liabilities
which are deferred and amortized over the remaining term of the assets and
liabilities.
INCOME TAXES
The company uses the liability method of accounting for income taxes under
which future tax assets and liabilities are recognized for differences between
the financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases. Future tax assets and liabilities are measured
using enacted tax rates in effect in which those temporary differences are
expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized as part of the provision for
income taxes in the period that includes the enactment date. A valuation
allowance is recorded to the extent there is uncertainty regarding utilization
of future tax assets.
INTEREST EXPENSE
Interest is expensed as incurred, except where it relates to the financing
of major projects under construction where it is capitalized until the assets
are available for use.
SEGMENTED INFORMATION
The company is a national facilities-based provider of high-speed data,
Internet application and voice services comprising a single operating segment.
Substantially all of the company's assets are located in Canada and revenues are
derived from services provided in Canada.
F-20
<PAGE> 156
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1999 1999 1998 1997
------------ ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Trade receivables......................... $2,094,870 $1,191,895 $ 331,871 $346,163
Goods and services tax receivable......... 3,781,418 2,140,107 573,928 11,985
Employee receivables and other............ 76,490 486,805 212,293 22,050
Allowance for doubtful accounts........... (173,268) (35,250) (15,125) --
---------- ---------- ---------- --------
$5,779,510 $3,783,557 $1,102,967 $380,198
========== ========== ========== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (UNAUDITED)
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 887,019 101,235 785,784
Furniture and fixtures.......................... 1,616,840 125,082 1,491,758
Computer equipment and software................. 15,261,255 519,820 14,741,435
Telecommunication networks...................... 91,284,310 1,169,656 90,114,654
Leasehold improvements.......................... 512,698 126,923 385,775
------------ ---------- ------------
$110,051,966 $2,042,716 $108,009,250
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 887,019 87,168 799,851
Furniture and fixtures.......................... 877,424 56,038 821,386
Computer equipment and software................. 4,550,574 360,839 4,189,735
Telecommunication networks...................... 67,637,759 476,125 67,161,634
Leasehold improvements.......................... 452,397 98,136 354,261
------------ ---------- ------------
$ 74,895,017 $1,078,306 $ 73,816,711
============ ========== ============
</TABLE>
F-21
<PAGE> 157
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................ $ 489,844 $ -- $ 489,844
Buildings....................................... 859,955 33,245 826,710
Furniture and fixtures.......................... 129,412 23,710 105,702
Computer equipment and software................. 1,021,424 79,398 942,026
Telecommunication networks...................... 7,872,884 96,115 7,776,769
Leasehold improvements.......................... 431,393 17,242 414,151
------------ ---------- ------------
$ 10,804,912 $ 249,710 $ 10,555,202
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures.......................... $ 41,536 $ 7,605 $ 33,931
Computer equipment and software................. 60,756 14,408 46,348
Telecommunication networks...................... 391,826 9,100 382,726
Leasehold improvements.......................... 23,373 5,357 18,016
------------ ---------- ------------
$ 517,491 $ 36,470 $ 481,021
============ ========== ============
</TABLE>
Included in telecommunication networks as at December 31, 1999 (unaudited)
are costs of $77,454,221 (September 30, 1999 -- $39,571,949; 1998 -- $6,060,818;
1997 -- $50,988) relating to assets not yet available for use on which no
amortization has been charged.
Furniture and fixtures and computer equipment and software, as at December
31, 1999 (unaudited) include capital lease asset costs of $1,155,282 (September
30, 1999 -- $298,654) and $1,309,182 (September 30, 1999 -- $900,938)
respectively, and related accumulated amortization of $69,803 (September 30,
1999 -- $nil) and $125,185 (September 30, 1999 -- $nil).
For the period ended December 31, 1999 (unaudited), interest and finance
charges of $2,831,242 were capitalized on projects under construction (September
30, 1999 -- $1,588,204; 1998 -- $nil; 1997 -- $nil).
The ultimate recoverability of the company's investment in property, plant
and equipment is dependent upon, after an expected period of initial losses,
achieving and maintaining profitability which is subject to risks and
uncertainties relating to the market conditions, the competitive environment,
technological changes, the Canadian telecommunications regulatory environment
and the company's ability to obtain adequate financing to meet future capital
expenditure requirements.
5. GOODWILL
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ ---------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Goodwill net of accumulated amortization
and write downs of $201,356 (September
30, 1999 -- $45,801; 1998 -- $45,801;
1997 -- $12,979)....................... $ 3,105,443 $ -- $ -- $32,822
=========== ========== ======== =======
</TABLE>
F-22
<PAGE> 158
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ ---------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deposits................................. $ 217,500 $ 217,500 $ 37,782 $26,970
Deferred charges net of accumulated
amortization of $36,397 (September 30,
1999 -- $32,217; 1998 -- $19,133; 1997
-- $10,617)............................ 619,769 605,309 168,885 14,998
Deferred financing charges net of
accumulated amortization of $nil....... 10,795,734 456,989 -- --
Deferred foreign exchange loss (gain) net
of accumulated amortization of $25,697
(September 30, 1999 -- $974; 1998 --
$nil; 1997 -- $nil).................... (658,490) 11,856 -- --
Deferred acquisition costs............... 822,016 -- -- --
----------- ---------- -------- -------
$11,796,529 $1,291,654 $206,667 $41,968
=========== ========== ======== =======
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1999 1999 1998 1997
------------ ----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Trade accounts payable............... $ 6,006,370 $ 2,016,701 $ 812,741 $322,468
Accounts payable and accruals for
purchases of property, plant and
equipment.......................... 12,264,159 9,354,947 1,776,121 129,384
Accrual for inventory purchases...... 600,645 409,799 -- --
Accrual for financing charges........ 9,014,262 -- -- --
Accrued vacation and bonuses......... 2,347,256 1,139,236 154,784 126,822
Capital tax, large corporations tax
and other taxes payable............ 906,183 622,394 12,928 19,273
Other accrued liabilities............ 3,823,965 1,383,009 158,293 1,576
----------- ----------- ---------- --------
$34,962,840 $14,926,086 $2,914,867 $599,523
=========== =========== ========== ========
</TABLE>
8. VENDOR PAYABLE
The outstanding vendor payable balance of $4,702,260 represented an amount
of US$3,070,965 at September 30, 1998 due in connection with equipment
acquisitions and is included in the US$40 million credit facility entered into
on May 28, 1999 (note 10(a)). The effective interest rate on the vendor payable
was 9%.
F-23
<PAGE> 159
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. UNEARNED REVENUE
Unearned revenue includes amounts related to an operating lease arrangement
entered into in April 1999, whereby the company is the lessor of 24 strands of
dark fiber including rights of way. The company received an up-front fee for
installation costs related to placement of fiber optic cable, building entrances
and fiber optic cable connections to the lessee's existing cable facilities
which is presented as unearned revenue and being recognized as income over the
initial term of the lease. Under this contract, the company also receives annual
payments for lease and rights of way which are being recognized as income in
equal annual amounts. The lease period ends in April, 2009, however the lessee
has the option to extend the lease for an additional ten years. Minimum lease
payments receivable for the next five years and thereafter are as follows:
<TABLE>
<S> <C>
Year ending September 30,
2000.................................................... $ 500,000
2001.................................................... 500,000
2002.................................................... 500,000
2003.................................................... 500,000
2004.................................................... 250,000
Thereafter................................................ 1,000,000
</TABLE>
10. LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------
1999 1999 1998 1997
------------ ----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Capital leases payable..................... $ 2,224,061 $ 1,155,178 $ -- $ --
Vendor financing(a)........................ 43,809,236 40,397,833 -- --
Vendor financing(b)........................ 13,969,927 6,481,639 -- --
Note payable(a)............................ -- -- -- 57,000
Note payable(b)............................ 770,597 775,630 890,379 --
----------- ----------- -------- -------
60,773,821 48,810,280 890,379 57,000
Less: Current portion...................... 3,746,098 1,253,358 114,743 57,000
----------- ----------- -------- -------
$57,027,723 $47,556,922 $775,636 $ --
=========== =========== ======== =======
</TABLE>
Repayments of long-term debt in each of the next five years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1999
--------------------------- ---------------------------
VENDOR VENDOR
FINANCING AND CAPITAL FINANCING AND CAPITAL
NOTES PAYABLE LEASES NOTES PAYABLE LEASES
------------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
2000............................... $ 3,018,321 $ 837,872 $ 942,263 $ 395,202
2001............................... 6,062,869 784,558 3,616,639 439,627
2002............................... 6,198,348 640,323 3,872,020 490,729
2003............................... 5,200,497 173,015 3,872,020 --
2004............................... 2,206,941 -- 2,020,123 --
Thereafter......................... 35,862,784 -- 33,332,037 --
----------- ---------- ----------- ----------
58,549,760 2,435,768 47,655,102 1,325,558
Less: Interest..................... -- (211,707) -- (170,380)
----------- ---------- ----------- ----------
$58,549,760 $2,224,061 $47,655,102 $1,155,178
=========== ========== =========== ==========
</TABLE>
F-24
<PAGE> 160
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VENDOR FINANCING
(a) On May 28, 1999, the company entered into a credit facility with a
vendor pursuant to which the vendor has agreed to sell equipment to the company
and to finance the company's purchase of engineering and construction services
together with digital switches and related network software and equipment to a
value of US$40 million. The balance of vendor financing at December 31, 1999
(unaudited) of $43,809,236 (denominated as US$30,119,796) and September 30, 1999
of $40,397,833 (denominated as US$27,415,668) is comprised of amounts payable to
the vendor of $2,550,973 (September 30, 1999 -- $29,886,813), and additional
amounts drawn on the vendor credit facility of $41,258,263 (September 30, 1999
-- $10,511,020).
At the option of the company, the credit facility bears interest at either
adjusted LIBOR plus an applicable margin, or "Alternate Base Rate" ("ABR"),
which is defined as U.S. Prime Rate or U.S. Federal Funds Rate plus 0.5% plus an
applicable margin. Depending on the ratio of consolidated total debt to
annualized earnings before interest, taxes and amortization, the margin added to
the ABR is between 3.00% and 3.75% and the margin added to the LIBOR Base is
between 4.00% and 4.75%. The effective interest rate at December 31, 1999
(unaudited) is 10.59% (September 30, 1999 -- 10.19%) which is LIBOR rate of
5.84% (September 30, 1999 -- 5.44%) plus 4.75% margin.
The credit facility is repayable over 7 1/2 years with interest only
payments for the initial two years. At the end of the second year, the principal
is repayable quarterly at the rate of 1.25% of the amount outstanding until the
end of year seven. Between the end of year seven and the expiry of the credit
facility in 2006, the principal is repayable quarterly at the rate of 37.5% of
the outstanding amount. In addition, a commitment fee of 0.375% per annum is
payable on the undrawn portion of the credit facility. For the period ended
December 31, 1999 (unaudited) the interest cost related to the vendor financing
was $670,501 (US$456,123) (September 30, 1999 -- $706,038 (US$478,607)).
The credit facility is collateralized by a first charge over present and
future assets of the company.
The credit facility agreement contains certain covenants that restrict the
ability of the company and its subsidiaries to incur additional indebtedness and
issue certain preferred stock, pay dividends or make other distributions,
repurchase equity interests or subordinated indebtedness, engage in sale and
leaseback transactions, create certain liens, enter into certain transactions
with affiliates, sell assets of the company or its subsidiaries, issue or sell
equity interests of the company's subsidiaries or enter into certain mergers and
consolidations.
(b) On July 27, 1999 the company entered into an agreement for a US$15
million credit facility with a vendor.
The credit facility is available in tranches of US$9 million, US$1 million
and US$5 million. The final payments on these facilities are due in 2003, 2001
and 2001 respectively. They are repayable in equal principal instalments plus
12% interest per annum on the last day of each quarter. In addition, a
commitment fee of 0.5% per annum is payable on the undrawn portion of the credit
facility. The loan is collateralized over present and future assets of the
company purchased from this vendor.
The credit facility agreement contains certain covenants which limit the
payment of dividends, the redemption of shares and the incurrence of additional
indebtedness or liens.
The amount due to this vendor at December 31, 1999 (unaudited) was
$13,969,927 (US$9,604,625) (September 30, 1999 -- $6,481,639 (US$4,399,639)).
F-25
<PAGE> 161
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE
(a) During 1996, the company issued a note in connection with the purchase
of a former subsidiary. The loan was non-interest bearing and had no repayment
terms. The loan was repaid in 1997 and 1998.
(b) In 1998, the company purchased land and a building for $900,000 which
was financed substantially by a note payable to a vendor. The note bears
interest at 10.5% per annum and is payable in monthly instalments of principal
and interest of $8,308, a lump sum payment against principal of $100,000 on
February 15, 1999, and the remaining balance on February 15, 2001. The land and
building acquired have been pledged as collateral.
CAPITAL LEASES PAYABLE
At December 31, 1999 (unaudited), capital leases are payable in equal
monthly instalments of $65,379 (September 30, 1999 -- $36,635) including
principal and interest at rates varying between 4.00 to 10.00%. The leases are
collateralized by the underlying assets and expire in 2002 and 2003.
SENIOR BANK FACILITY
On December 17, 1999, the company's subsidiary signed a commitment letter
relating to a senior bank facility for an amount of $220 million to finance part
of the acquisition of the business of Shaw FiberLink Ltd. (note 20(a)). The bank
facility is comprised of a $120 million seven year revolving reducing term loan
and a $100 million reducing term loan. The bank facility will be collateralized
by a first ranking fixed and floating charge and security interest in all of the
assets of the company's subsidiary. The parent company also has provided a
guarantee, collateralized by the parent company's assets, including a pledge of
its shares of the subsidiary. In addition, the bank facility is collateralized
by the parent and subsidiary's present and future assets including
telecommunications equipment, inventory, real property, owned or leased, used at
a major switching and transmission node location, all interconnection agreements
to the extent permitted by law, general intangibles, contract rights,
indefeasible rights of use, points of presence and franchises and licenses.
At the option of the company's subsidiary, the bank facility may be used as
LIBOR loans denominated in U.S. dollars, bankers acceptances in Canadian
dollars, U.S. Base rate loans in U.S. dollars and standby letters of credit in
Canadian or U.S. dollars. Depending on the financial status of the company, the
margins added to the applicable interest rates may vary from 2.0% to 4.5%.
ADDITIONAL VENDOR FINANCING
On December 17, 1999, the company's subsidiary signed a commitment letter
for a US$315 million vendor facility to finance the purchase and installation of
equipment and services. The vendor facility is available in tranches of US$161
million and US$154 million. The vendor retains the right to convert up to US$140
million into a senior secured loan. The vendor facility becomes available upon
receipt by the company of additional debt and equity commitments. The initial
borrowings under this vendor facility must be used to repay amounts outstanding
under the existing credit facility with this vendor (see note 10(a)).
The vendor facility will be repayable over 8 1/2 years with quarterly
principal repayment at the rate of 1.25% of the amount outstanding, starting in
2003 until the end of year eight. For the last two quarters in 2008, the
principal is repayable quarterly at the rate of 37.5% of the outstanding amount.
F-26
<PAGE> 162
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any amounts converted into a senior secured loan payable is subject to limited
amortization, with the balance to be repaid at maturity.
The vendor facility bears interest at rates of 2.0% to 4.5% over the United
States bank prime rate or over LIBOR based on the company's financial status.
In addition, a commitment fee varying between 0.75% and 1.50% depending on
the level of utilization of the vendor facility is payable on the undrawn
portion.
11. SHARE CAPITAL
Authorized
Common
Unlimited number of Class A voting shares without nominal or par
value, each Class A share has one vote; unlimited number of Class B
non-voting shares without nominal or par value. Other than with respect to
voting rights and conversion rights, the two classes of common shares have
identical rights. Each Class B non-voting share may, under certain limited
circumstances at the option of the holder, be converted into one Class A
voting share. The holders of Class A and B shares are entitled to receive
dividends as determined by the Board of Directors, subject to the rights of
the holders of the preferred shares. The holders of Class A and B shares
are also entitled to participate equally in the event of liquidation of the
company, subject to the rights of the holders of the preferred shares.
Preferred
Unlimited number of non-voting first and second preference shares
without nominal or par value. The first and second preference shares may be
issued in one or more series. Each share is convertible at the option of
the holder into either Class A voting shares or Class B non-voting shares
depending on foreign ownership restrictions then in place and automatically
upon an initial public offering of such shares, initially on a one-for-one
basis to May 7, 2000, with a compound increase of 10%, subject to
adjustment. The Board of Directors of the company may fix the number of
shares in each series and designate rights, privileges, restriction,
conditions and other provisions. The first and second preference shares
shall be entitled to preference over any other shares of the company with
respect to the payment of dividends and in the event of liquidation of the
company.
On May 7, 1999, the first preference shares, Series A first preference
shares were created. In addition to the rights and privileges of the first
preference shares described above, the Series A first preference shares
have a liquidation value equal to the price paid for the share plus a
compound annual rate of return of 10% and have anti-dilutive provisions
protecting their conversion into Class A voting shares or Class B
non-voting shares. At December 31, 1999 (unaudited) and September 30, 1999,
there were 50,000,000 authorized Series A first preference shares.
F-27
<PAGE> 163
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Issued
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
CLASS A CLASS B SERIES A
VOTING NON-VOTING FIRST PREFERENCE
SHARES SHARES SHARES AMOUNT
---------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Balance as at September 30, 1996..... 5,175,500 -- -- $ 228,500
Class A voting shares issued for
cash............................ 154,000 -- -- 136,250
Share re-organization (b).......... 5,329,500 -- -- --
Less cancelled shares (b).......... (5,000,000) -- -- (171,100)
Class A voting shares issued for --
Cash............................ 1,661,781 -- -- 352,448
Upon exercise of options
relating to warrants (c)...... 310,000 -- -- 77,500
Upon exercise of options........ 79,737 -- -- 39,868
Upon exercise of warrants (c)... 144,385 -- -- 72,193
Upon conversion of debentures
(c)........................... 520,000 -- -- 130,000
For services rendered........... 20,229 -- -- 7,080
Shares redeemed and cancelled... (1,300,000) -- -- (13,000)
Share issuance costs............ -- -- -- (23,604)
---------- --------- ---------- -----------
Balance as at September 30, 1997..... 7,095,132 -- -- $ 836,135
Class A voting shares issued for
Cash............................ 4,880,629 -- -- 6,082,677
Upon exercise of options........ 822,167 -- -- 331,902
Upon exercise of warrants....... 7,900 -- -- 3,950
Upon conversion of debentures
(c)........................... 2,482,592 -- -- 1,886,425
Share issuance costs............ -- -- -- (494,937)
---------- --------- ---------- -----------
Balance at September 30, 1998........ 15,288,420 -- -- $ 8,646,152
Class A voting shares issued for
Cash............................ 2,004,322 -- -- 3,480,241
Upon exercise of options........ 630,000 -- -- 70,000
Upon conversion of debentures
(c)........................... 338,407 -- -- 423,010
Share issuance costs............ -- -- -- (46,103)
Series A first preference shares
issued for
Cash (d)........................ -- -- 27,666,667 41,500,000
Upon exercise of options (d).... -- -- 13,833,335 25,937,503
Share issuance costs............ -- -- -- (156,962)
Class B non-voting shares issued
for
Cash............................ -- 721,101 -- 901,376
Upon conversion of debentures
(c)........................... -- 3,427,468 -- 4,284,335
Share issuance costs............ -- -- -- (159,696)
---------- --------- ---------- -----------
Balance at September 30, 1999........ 18,261,149 4,148,569 41,500,002 $84,879,856
Class A voting shares issued for
Purchase of businesses (note
19)........................... 336,666 -- -- 1,009,998
Upon exercise of options........ 12,120 -- -- 14,976
Share issuance costs............ -- -- -- (569)
Series A first preference shares
issued for
Acquisition of rights of way
(g)........................... -- -- 1,000,000 1,875,000
---------- --------- ---------- -----------
Balance at December 31, 1999
(unaudited)........................ 18,609,935 4,148,569 42,500,002 $87,779,261
========== ========= ========== ===========
</TABLE>
F-28
<PAGE> 164
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) CHANGE IN AUTHORIZED AND ISSUED SHARES
In September 1998, the company redesignated all authorized common shares,
both issued and unissued, as Class A voting shares and increased authorized
capital by creating an unlimited number of shares designated as Class B
non-voting shares. This change in classification for issued shares has been
presented retroactively in these financial statements.
(B) SHARE RE-ORGANIZATION
On February 18, 1997, the company undertook a re-organization of shares
held by shareholders of record at January 23, 1997. Under the re-organization,
the company divided its existing issued common shares on the basis of two new
shares for each existing share. The founding shareholders then returned their
"founders" shares (5,000,000) for cancellation. As a result, the weighted
average cost of these shares of $171,100 was transferred to additional paid-in
capital.
(C) CONVERTIBLE DEBENTURES
YEAR ENDED SEPTEMBER 30, 1999
On December 15, 1998 and March 5, 1999, the company issued 12% convertible
debentures totalling $4,536,000 due March 31, 2000. The debentures plus accrued
interest could be converted by the company into fully-paid Series A first
preference shares at a conversion price of $1.25 per preference share before
July 1, 1999 ("Mandatory Conversion Period"). If the company did not exercise
its right to convert the debentures into Series A first preference shares, each
holder of debentures had the option to convert the debentures into fully paid
Class A voting shares or Class B non-voting shares at a conversion price of
$1.25 per share, in compliance with CRTC foreign ownership restrictions in
effect at the time of conversion.
On April 30, 1999, the company waived the condition that the debentures be
converted to Series A first preference shares, and all debentures including
accrued interest were converted into 338,407 Class A voting shares and 3,427,468
Class B non-voting shares.
YEAR ENDED SEPTEMBER 30, 1998
During the period from February 18, 1998 to March 17, 1998, the company
issued 14% convertible debentures totalling $1,824,000 due in 2001 which were
converted together with accrued interest, on the basis of one Class A voting
share for each $.7692307 of indebtedness resulting in the issuance of 2,482,592
Class A voting shares in 1998.
YEAR ENDED SEPTEMBER 30, 1997
The company issued $130,000 of units comprised of convertible debt and
share purchase warrants under agreements dated January 6, 1997 and January 9,
1997. Unitholders were entitled to convert into shares, principal owing at the
rate of $0.50 per share, and share purchase warrants at a rate of two for every
$1.00 invested. Unitholders were also granted the option to invest an additional
amount of equity under the same conversion and share purchase warrant terms
within 90 days of the last principal instalment. The effect of the share
re-organization of February 18, 1997 was to change the effective conversion
price of the convertible debt to $0.25 per share.
During the year ended September 30, 1997 all unitholders exercised their
conversion right resulting in the issuance of 520,000 Class A voting shares and
a number of unitholders exercised their options and warrants resulting in the
issuance of 310,000 and 144,385 Class A voting shares
F-29
<PAGE> 165
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. There was no effect on the exercise price contained in the
convertible debt share purchase warrants.
(D) PREFERENCE SHARE PURCHASE OPTIONS
On May 7, 1999, the company issued 27,666,667 units to a group of
institutional shareholders at $1.50 per unit. Each unit consisted of one Series
A first preference share and an option to purchase half of one Series A first
preference share at a share price of $1.875 until August 10, 1999 and at $2.25
until November 10, 1999. At the year-end, all the options had been exercised,
resulting in the issuance of 13,833,335 Series A first preference shares.
(E) COMMON SHARE OPTIONS AND WARRANTS
From time to time, the company grants incentive stock options to officers,
directors, and employees of the company. These options are subject to early call
by the company to comply with regulatory requirements upon the filing of a
preliminary prospectus to complete an initial public offering.
OPTIONS
At December 31, 1999 (unaudited), there were 3,728,094 (September 30, 1999
-- 2,161,842) options to purchase Class A voting shares and 2,950,000 (September
30, 1999 -- 2,300,000) options to purchase Class B non-voting shares
outstanding. These options expire between March 1, 2000 and December 16, 2004.
Option activity for each of the years is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding -- Beginning of period......... 4,461,842 1,854,978 1,311,263 145,000
Granted
Class A voting shares at a weighted
average price of $2.86 per share
(September 30, 1999 -- $1.34; 1998 --
$0.44; 1997 -- $0.50)................. 1,610,800 1,658,228 1,690,792 1,646,000
Class B non-voting shares at a weighted
average price of $3.00 per share
(September 30, 1999 -- $2.04; 1998 --
nil; 1997 -- nil)..................... 650,000 2,300,000 -- --
Class A voting shares:
Exercised at a weighted average price of
$1.24 per share (September 30, 1999 --
$0.11; 1998 -- $0.40; 1997 --
$0.50)................................ (12,120) (630,000) (822,167) (79,737)
Expired.................................. -- (682,003) (24,910) --
Cancelled................................ (32,428) (39,361) (300,000) (400,000)
--------- --------- --------- ---------
Outstanding -- End of period............... 6,678,094 4,461,842 1,854,978 1,311,263
========= ========= ========= =========
Exercisable -- End of period
Class A voting shares.................... 1,861,739 1,726,564 1,854,978 1,311,263
Class B non-voting shares................ 1,940,972 1,883,333 -- --
--------- --------- --------- ---------
Total...................................... 3,802,711 3,609,897 1,854,978 1,311,263
========= ========= ========= =========
</TABLE>
F-30
<PAGE> 166
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the options granted in 1999 vest over a period of 36 months.
Other options vest on the date of the grant with some of the shares underlying
the options vesting over a period of 36 months.
WARRANTS
Warrant activity for each of the years is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1999 1999 1998 1997
------------ -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding -- Beginning of period............. 100,000 415,000 270,615 --
Granted at a weighted average price of $nil per
share (September 30, 1999 -- $nil; 1998 --
$0.50; 1997 -- $0.50)........................ -- -- 152,285 415,000
Exercised at a weighted average price of $nil
per share (September 30, 1999 -- $nil; 1998
-- $0.50; 1997 -- $0.50)..................... -- -- (7,900) (144,385)
Expired........................................ -- (313,311) -- --
Cancelled...................................... -- (1,689) -- --
------- -------- ------- --------
Outstanding -- End of period................... 100,000 100,000 415,000 270,615
======= ======== ======= ========
</TABLE>
The warrants vested on the date of grant and are exercisable on Class A
voting shares and expire on November 30, 2000.
(F) ADDITIONAL PAID-IN CAPITAL
During the year ended September 30, 1998, the company granted stock options
to certain employees who were also directors in lieu of compensation payable at
September 30, 1997. An amount of $84,275 in compensation payable forgiven has
been recorded as additional paid-in capital.
(G) SHARES TO BE ISSUED
At September 30, 1999, 1,000,000 Series A first preference shares at $1.875
per share remained to be issued in connection with the acquisition of rights of
way in August 1999. These were issued in December 1999.
12. LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common shares outstanding for the years after giving retroactive effect to the
share reorganization (note 11(b)) on February 18, 1997. The weighted average
number of common shares for the periods ended December 31, 1999 (unaudited)
amounted to 22,473,692 and December 31, 1998 (unaudited) amounted to 15,341,753
(September 30, 1999 -- 17,859,352; 1998 -- 9,541,861; 1997 -- 8,024,006) shares.
Fully diluted loss per share has not been disclosed as it would be
anti-dilutive.
F-31
<PAGE> 167
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The tax effects of temporary differences that give rise to future income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Future income tax assets
Accounts receivable............ $ 52,000 $ -- $ -- $ --
Property, plant and
equipment................... 192,000 27,000 -- --
Deferred charges............... -- 63,000 12,000 9,000
Debt and share issue costs..... 86,000 257,000 222,000 11,000
Operating loss carryforwards... 11,281,000 5,709,000 1,488,000 298,000
------------ ----------- ----------- ---------
11,611,000 6,056,000 1,722,000 318,000
Future income tax liabilities
Deferred charges............... (122,000) -- -- --
Property, plant and
equipment................... -- -- (79,000) (30,000)
------------ ----------- ----------- ---------
11,489,000 6,056,000 1,643,000 288,000
Less: Valuation allowance........ (11,489,000) (6,056,000) (1,643,000) (288,000)
------------ ----------- ----------- ---------
$ -- $ -- $ -- $ --
============ =========== =========== =========
</TABLE>
Management has recorded a valuation allowance for the net amount of future
income tax assets.
The company has non-capital losses available to reduce taxable income in
future years. These losses expire as follows:
<TABLE>
<S> <C>
Year ending September 30,
2002..................................................... $ 11,000
2003..................................................... 315,000
2004..................................................... 522,000
2005..................................................... 4,523,000
2006..................................................... 7,764,000
Period ending December 31, (unaudited)
2007..................................................... 11,604,000
-----------
$24,739,000
===========
</TABLE>
F-32
<PAGE> 168
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision for the year differs from the amount obtained by
applying the statutory Canadian federal and provincial income tax rates to loss
before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory Canadian federal and
provincial income tax rates...... 45.6% 45.6% 45.6% 45.6%
----------- ----------- ----------- ---------
Income tax recovery based on the
statutory rates.................. $(5,471,739) $(4,469,781) $(1,112,035) $(196,054)
Differences from statutory rates
relating to
Tax effect of loss benefits which
have not been recorded........ 5,471,739 4,469,781 1,112,035 196,054
Large corporations tax............. 65,085 165,000 -- --
----------- ----------- ----------- ---------
$ 65,085 $ 165,000 $ -- $ --
=========== =========== =========== =========
</TABLE>
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities and short-term vendor payable amounts
approximate their carrying values due to the short-term nature of these
instruments. At December 31, 1999 (unaudited) and September 30, 1999 and 1998,
the carrying value of long-term debt approximates its fair value. The fair value
of the long-term debt was calculated using discounted cash flow analysis.
CREDIT RISK
Financial instruments that potentially subject the company to a
concentration of credit risk consist of cash and cash equivalents, and accounts
receivable. The company's cash and cash equivalents are deposited with highly
rated financial institutions. The company's accounts receivable are derived from
revenue earned from customers located in Canada. The company performs ongoing
credit evaluations on its customers' financial condition and, generally,
requires no collateral from its customers. The company maintains an allowance
for doubtful accounts receivable based upon expected collectibility of accounts
receivable.
For the period ended December 31, 1999 (unaudited), two customers of the
company accounted for 50% (one customer accounted for 42% and a second customer
accounted for 8%) of the company's revenue while for the period ended December
31, 1998 (unaudited), one customer accounted for 35% of the company's revenue.
For the year ended September 30, 1999, three customers of the company accounted
for approximately 48% of revenue (one customer accounted for 26%, a second
customer accounted for 12% and a third customer accounted for 10%) and for the
year ended September 30, 1998, two customers of the company accounted for
approximately 55% (one customer accounted for 37% and a second customer
accounted for 18%) of the company's revenue. For the year ended September 30,
1997 one customer of the company accounted for approximately 28% of the
company's revenue.
F-33
<PAGE> 169
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE AND FOREIGN CURRENCY RISK
The following table summarizes the company's exposure to interest rate
risk:
<TABLE>
<CAPTION>
FIXED RATE
FLOATING WITHIN FIXED RATE NON-INTEREST
RATE ONE YEAR 1-5 YEARS BEARING
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999 (UNAUDITED)
Financial assets
Cash and cash equivalents
Canadian dollars................. $ 6,446,610 $ -- $ -- $ --
U.S. dollars (US$15,745,071)..... 22,901,206 -- -- --
Other current assets............. -- -- -- 5,779,510
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 33,858,864
U.S. dollars (US$759,007)........ -- -- -- 1,103,976
Long-term debt
Canadian dollars................. -- 752,542 2,242,116 --
U.S. dollars (US$39,724,418)..... 43,809,236 2,993,556 10,976,371 --
SEPTEMBER 30, 1999
Financial assets
Cash and cash equivalents
Canadian dollars................. 39,794,095 -- -- --
U.S. dollars (US$13,657,292)..... 20,057,366 -- -- --
Other current assets............. -- -- -- 3,783,557
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 9,554,370
U.S. dollars (US$3,660,454)...... -- -- -- 5,371,716
Long-term debt
Canadian dollars................. -- 327,410 1,603,398 --
U.S. dollars (US$31,815,047)..... 40,397,833 925,948 5,555,691 --
SEPTEMBER 30, 1998
Financial assets
Cash and cash equivalents
Canadian dollars................. 1,615,250 -- -- --
U.S. dollars (US$562,429)........ 861,195 -- -- --
Other current assets............... -- -- -- 1,102,967
Financial liabilities
Other current liabilities
Canadian dollars................. -- -- -- 2,035,571
U.S. dollars (US$574,296)........ -- -- -- 879,296
Vendor payable (US$3,070,965)...... 4,702,260 -- -- --
Long-term debt..................... -- 114,743 775,636 --
SEPTEMBER 30, 1997
Financial assets
Cash and cash equivalents.......... 60,925 -- -- --
Other current assets............... -- -- -- 380,198
Financial liabilities
Note payable....................... -- -- -- 57,000
Other current liabilities.......... -- -- -- 599,523
</TABLE>
F-34
<PAGE> 170
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company is exposed to foreign currency fluctuations on its U.S. dollar
denominated trade payables and long-term debt to the extent that these
liabilities exceed the U.S. dollar cash and cash equivalents.
15. FOREIGN EXCHANGE
During the period ended December 31, 1999 (unaudited), the company realized
a foreign exchange loss of $254,313 (December 31, 1998 (unaudited) -- gain of
$32,078) on the translation of U.S. cash and cash equivalents and U.S. payables
(September 30, 1999 -- $93,684; 1998 -- gain of $251,246; 1997 -- $nil) which
has been recognized in the statement of operations.
16. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The company has entered into a vendor financing agreement (note 10) to
purchase and licence certain engineering and construction services together with
digital switches and related network software and equipment from a supplier. At
September 30, 1999 the minimum future purchase commitment is US$12.6 million
over the next twenty months.
LETTER OF CREDIT
In October 1999, the company granted a letter of credit in favour of a
network equipment supplier in the amount of $253,133.
OPERATING LEASES
The company has entered into operating leases for its premises, certain
equipment and for rights of way. Minimum lease payments for the next five years
and thereafter are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
2000........................................................ $ 4,825,646 $ 1,732,405
2001........................................................ 4,779,316 1,985,362
2002........................................................ 4,782,152 1,988,198
2003........................................................ 4,025,660 1,992,588
2004........................................................ 4,010,742 1,994,966
Thereafter.................................................. 32,693,343 16,284,087
</TABLE>
The rent expense under operating leases for the following periods was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------
1999 1998 1999 1998 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating lease expense.......... $630,011 $45,804 $196,933 $165,150 $135,473
</TABLE>
F-35
<PAGE> 171
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. ADDITIONAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------
1999 1998 1999 1998 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid.................... $310,868 $21,832 $ 95,054 $ 53,000 $ --
Income taxes paid................ -- -- -- -- --
</TABLE>
NON-CASH TRANSACTIONS
Purchases of property, plant and equipment of $15,252,944 for the period
ended December 31, 1999 (unaudited) (September 30, 1999 -- $55,166,478; 1998 --
$6,549,899; 1997 -- $nil) and purchase of other assets of $9,649,941 at December
31, 1999 (unaudited) were financed through long-term debt, notes payable and
through accounts payable and accrued liabilities. Accordingly, these
transactions are not reflected in the Statements of Cash Flows.
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
the year 2000 dates are processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant system failures which could
affect the company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
19. BUSINESS ACQUISITIONS
(a) In October, 1999, the company entered into an agreement to purchase the
assets of T1 Technologies Inc., a Calgary based telecommunications company. The
total consideration is $410,000 and consists of $210,000 of cash and 66,666
Class A voting shares.
(b) In October, 1999, the company purchased the business and certain assets and
liabilities of Single Source Ltd. and Single Source Communications Inc. which
are companies in the business of reselling telecommunications services to
customers in the Toronto region. The acquisition of the business' assets and
liabilities are accounted for by the purchase method of accounting under which
the assets and liabilities purchased are recorded at their fair values with the
excess of the purchase price over the fair value of identifiable assets and
liabilities acquired recorded as goodwill. The results of operations are
included in the company's consolidated statement of operations from the date of
acquisition.
The consideration consisted of the following:
<TABLE>
<S> <C>
Purchase price
Cash...................................................... $2,500,000
Ascribed value of 270,000 Class A voting shares issued.... 810,000
----------
$3,310,000
==========
</TABLE>
F-36
<PAGE> 172
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 264,000
Equipment................................................... 435,000
Goodwill.................................................... 2,851,000
Accounts payable............................................ (240,000)
----------
$3,310,000
==========
</TABLE>
20. SUBSEQUENT EVENTS
(a) On December 22, 1999, the company entered into an asset purchase and
subscription agreement with Shaw Communications Inc. ("Shaw Communications") and
Shaw FiberLink Ltd. ("Shaw FiberLink"). This transaction closed on February 16,
2000. Under the purchase agreement, the company purchased from Shaw FiberLink
all of the property and assets of Shaw FiberLink used in connection with the
high speed data and competitive access business. The assets purchased include
equipment, computer hardware, fixed assets, replacement parts, operational
contracts, equipment contracts, supply contracts, interconnect agreements,
co-location agreements, customer contracts, software licenses, broadband
wireless licenses, vehicles, intellectual property, permits, goodwill and
certain other fiber assets. The company and Shaw FiberLink also entered into an
Indefeasible Right to Use agreement ("indefeasible right to use") which grants
the company an indefeasible right to use certain specifically identified
existing fibers in the fiber optic cable networks of Shaw Communications for 60
years. In addition, the company will receive an indefeasible right to use fibers
to be built over the next three years in mutually agreed regions. The company
will also assume certain obligations related to permits, operational contracts,
customer contracts, software licenses and certain other obligations.
The purchase consideration of $760 million consisted of $360 million in
cash and sufficient series B first preference shares of the company to provide
Shaw Communications with a 28.5% fully diluted interest in the company at the
date the acquisition was consummated, subject to adjustments related to
financing and employee options and warrants. Management's estimate of the fair
value of these shares was $400 million. Acquisition costs amounted to $20
million.
Details of the assets and liabilities acquired at their fair value are as
follows:
<TABLE>
<S> <C>
INDEFEASIBLE RIGHT TO USE AGREEMENT:
Prepayment for indefeasible rights to use fibers to be
constructed............................................. $223,000,000
Property, plant and equipment representing indefeasible
rights to use fibers.................................... 329,000,000
SHAW FIBERLINK PURCHASE:
Property, plant and equipment............................. 100,000,000
Intangible assets......................................... 28,800,000
Goodwill.................................................. 127,200,000
Future income taxes....................................... (28,000,000)
------------
$780,000,000
============
</TABLE>
The prepayment of $223 million on property, plant and equipment represents
the prepayment of an indefeasible right to use certain fibers to be built by
Shaw Communications over the next three years. Included in property, plant and
equipment is an amount of $22 million for an indefeasible right to use certain
existing fibers located in New Brunswick, Canada, commencing in 2003.
F-37
<PAGE> 173
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above noted allocated amounts are based upon the Company's preliminary
estimates of fair values. The allocation of the purchase price may be revised
when additional information is obtained.
(b) Pursuant to an Offering Circular and Purchase Agreement which closed on
February 1, 2000, the company issued 855,000 Units, consisting of US$855 million
(issued at a price of 52.651%) of 13.25% Senior Discount Notes Due 2010 and
855,000 Warrants to Purchase 4,198,563 Class B non-voting shares. Gross proceeds
amounted to US$450.2 million, equivalent to approximately $651 million. Expenses
related to the offering amounted to approximately $22.5 million.
21. PRIOR YEAR COMPARATIVE AMOUNTS
Certain prior years comparative numbers have been reclassified to conform
to the current year's presentation.
22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
The company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in Canada,
which, in the case of the company conform in all material respects with GAAP in
the United States of America, except as outlined below:
(A) NET LOSS AND SHAREHOLDERS' EQUITY
The following summary sets out the adjustments to the company's loss
and shareholders' equity which would be made to conform to U.S. GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- --------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss for the period in
accordance with Canadian
GAAP......................... $(12,064,512) $(1,814,994) $ (9,967,152) $(2,438,673) $(429,943)
Impact of U.S. accounting
principles
Deferred charges(c).......... (14,460) (12,648) (300,780) (86,762) 8,475
Stock-based compensation(d).. (1,015,444) -- (56,017) (1,056,597) (5,000)
Deferred foreign
exchange(e)................ 670,346 -- (11,856) -- --
------------ ----------- ------------ ----------- ---------
Loss and comprehensive loss for
the period in accordance with
U.S. GAAP.................... $(12,424,070) $(1,827,642) $(10,335,805) $(3,582,032) $(426,468)
============ =========== ============ =========== =========
Loss per share in accordance
with U.S. GAAP............... $ (0.55) $ (0.12) $ (0.58) $ (0.38) $ (0.05)
============ =========== ============ =========== =========
</TABLE>
F-38
<PAGE> 174
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the change in shareholders' equity from Canadian
to U.S. GAAP is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------------
1999 1999 1998 1997
------------ ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shareholders' equity in
accordance with Canadian
GAAP......................... $ 62,888,415 $73,928,522 $ 5,786,970 $331,351
Deferred charges(c)............ (417,000) (402,540) (101,760) (14,998)
Cumulative Stock-based
compensation expense(d)...... (2,133,058) (1,117,614) (1,061,597) (5,000)
Deferred stock based
compensation expense......... (19,365,982) (287,176) -- --
Net change in stock
options(d)................... 21,499,040 1,404,790 1,061,597 5,000
Deferred foreign exchange(e)... 658,490 (11,856) -- --
------------ ----------- ----------- --------
Shareholders' equity in
accordance with U.S. GAAP.... $ 63,129,905 $73,514,126 $ 5,685,210 $316,353
============ =========== =========== ========
</TABLE>
(B) CONSOLIDATED BALANCE SHEETS
The following table indicates the restated amounts for the items in
the consolidated balance sheets of the company that would be affected had
the financial statements been prepared in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1999 1999 1998 1997
------------ ----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Other assets(c)................. $ 12,038,019 $ 877,258 $ 104,907 $ 26,970
Deferred stock-based
compensation expense(d)....... (19,365,982) (287,176) -- --
Share capital................... 88,380,251 85,479,556 8,646,152 836,135
Additional paid-in capital...... 337,215 337,215 255,375 171,100
Stock options outstanding(d).... 20,816,210 723,250 -- --
Deficit......................... 26,118,403 14,613,719 4,277,914 695,882
</TABLE>
(C) REPORTING THE COSTS OF START-UP ACTIVITIES
In April 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to
new operations be expensed as incurred and any start-up costs capitalized
in the past must be written off. Canadian GAAP permits these costs to be
deferred and amortized. The company's start-up costs relate to
organization, registration, and negotiation activities.
(D) STOCK-BASED COMPENSATION
For U.S. GAAP, the company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees."
This method recognizes compensation cost as the amount by which the fair
value of the stock exceeds the exercise price at the date of grant. The
compensation cost is recognized over the vesting period. For U.S. GAAP, the
compensation cost not yet recognized is presented as a deferred stock-based
compensation charge, with a corresponding amount included in stock options
outstanding, both of which form part of shareholders' equity. For Canadian
GAAP, stock-based compensation expense is not recorded in the accounts of
the Company.
F-39
<PAGE> 175
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had the company determined compensation costs based on fair value at
the date of grant for its awards under a method prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" the company's loss and loss per share would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Loss in accordance with U.S. GAAP.......... $(10,335,805) $(3,582,032) $(426,468)
Additional compensation expense............ (173,968) (18,208) (59,490)
------------ ----------- ---------
Pro forma net loss......................... $(10,509,773) $(3,600,240) $(485,958)
============ =========== =========
Pro forma loss per share................... $ (0.59) $ (0.38) $ (0.06)
============ =========== =========
</TABLE>
The pro forma compensation expense reflected above has been estimated
using the Black Scholes option-pricing model. Assumptions used in the
pricing model included: (i) risk free interest rate of between 4.10% --
6.16%; (ii) expected volatility of nil; (iii) expected dividend yield of
nil; and (iv) an estimated average life of 2.67 years.
A summary of stock options outstanding at December 31, 1999
(unaudited) is set out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 276,134 1.04 years $0.50 276,134 $0.50
$1.00................... 37,500 0.83 years 1.00 37,500 1.00
$1.25................... 1,229,118 3.45 years 1.25 961,325 1.25
$1.50................... 1,108,000 4.40 years 1.50 621,236 1.50
$1.875.................. 1,473,992 4.13 years 1.875 1,318,699 1.875
$3.00................... 2,553,350 4.68 years 3.00 587,817 3.00
--------- ---------- ------ --------- ------
6,678,094 4.11 years $2.07 3,802,711 $1.72
========= ========== ====== ========= ======
</TABLE>
A summary of stock options outstanding at September 30, 1999 is set out
below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 277,224 1.29 years $ 0.50 277,224 $ 0.50
$1.00................... 37,500 1.08 years 1.00 37,500 1.00
$1.25................... 1,239,118 3.76 years 1.25 972,062 1.25
$1.50................... 1,108,000 4.60 years 1.50 523,111 1.50
$1.875.................. 1,300,000 4.59 years 1.875 1,300,000 1.875
$3.00................... 500,000 4.92 years 3.00 500,000 3.00
--------- ---------- ------ --------- ------
4,461,842 4.17 years $ 1.64 3,609,897 $ 1.69
========= ========== ====== ========= ======
</TABLE>
F-40
<PAGE> 176
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock options outstanding at September 30, 1998 is set
out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.01................... 500,000 2.50 years $0.01 500,000 $0.01
$0.50................... 277,660 1.52 years 0.50 277,660 0.50
$1.00................... 849,067 0.40 years 1.00 849,067 1.00
$1.25................... 228,251 2.75 years 1.25 228,251 1.25
--------- ---------- ----- --------- -----
1,854,978 1.42 years $0.69 1,854,978 $0.69
========= ========== ===== ========= =====
</TABLE>
A summary of stock options outstanding at September 30, 1997 is set
out below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.50................... 1,311,263 1.25 years $0.50 1,311,263 $0.50
</TABLE>
(E) DEFERRED FOREIGN EXCHANGE
U.S. GAAP requires immediate recognition in income of unrealized
foreign currency exchange gains and losses on long-term monetary items with
a fixed or ascertainable life whereas Canadian GAAP requires that these
unrealized gains and losses be deferred and amortized over the remaining
term of the long-term monetary items.
(F) DETAILS OF AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- -----------------------------
1999 1998 1999 1998 1997
------------ ------------ -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amortization expense for
the period consists of:
Property, plant and
equipment............. $ 964,410 $133,175 $839,455 $213,240 $37,511
Goodwill................. 155,555 -- -- 32,822 9,160
Deferred charges......... 4,180 4,372 13,084 8,516 8,475
---------- -------- -------- -------- -------
$1,124,145 $137,547 $852,539 $254,578 $55,146
========== ======== ======== ======== =======
</TABLE>
F-41
<PAGE> 177
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(G) REVENUES AND COST OF SALES WERE SPLIT BETWEEN PRODUCTS AND SERVICES AS
FOLLOWS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- --------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Products........... $ 774,422 $137,707 $ 761,406 $ 674,215 $1,275,687
Services........... 1,492,144 234,681 1,944,026 1,149,007 775,435
---------- -------- ---------- ---------- ----------
$2,266,566 $372,388 $2,705,432 $1,823,222 $2,051,122
========== ======== ========== ========== ==========
Cost of sales
Products........... $ 783,146 $144,384 $ 750,335 $ 657,059 $1,053,455
Services........... 1,354,381 104,200 1,058,140 474,190 383,531
---------- -------- ---------- ---------- ----------
$2,137,527 $248,584 $1,808,475 $1,131,249 $1,436,986
========== ======== ========== ========== ==========
</TABLE>
(H) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The company has determined
that the impact of SOP 98-1 on its financial position, results of
operations, and cash flows is not material.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes methods of accounting for derivative and hedging
activities related to those instruments as well as other hedging
activities. The company has not assessed the impact on its financial
position, results of operations or cash flows of adopting SFAS No. 133. The
company will be required to implement SFAS No. 133 for its fiscal year
ended September 30, 2001.
F-42
<PAGE> 178
AUDITORS' REPORT
To the Directors of
SHAW FIBERLINK LTD.
We have audited the balance sheets of SHAW FIBERLINK LTD. -- FIBERLINK
DIVISION (the "Division") as at August 31, 1999 and 1998 and the statements of
income and net investment by Shaw FiberLink Ltd. and cash flows for each of the
years in the three year period ended August 31, 1999. These financial statements
are the responsibility of the Division's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Division as at August 31, 1999 and 1998
and the results of its operations and its cash flows for each of the years in
the three year period ended August 31, 1999 in accordance with accounting
principles generally accepted in Canada.
As disclosed in note 1, the Division is a segment of Shaw FiberLink Ltd.
and has no separate legal status or existence.
Calgary, Canada /s/ ERNST & YOUNG LLP
December 23, 1999 Independent Public Accountants
(except as to Note 11
which is at February 16, 2000)
F-43
<PAGE> 179
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
BALANCE SHEETS
SEE BASIS OF PRESENTATION -- NOTE 1
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------
1999 1999 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT
Accounts receivable (net of allowance for doubtful accounts
of $86; August 31, 1999 -- $79; 1998 -- $84)............. $ 6,264 $ 7,336 $ 2,188
Prepaids and other......................................... 183 289 65
------- ------- -------
6,447 7,625 2,253
Property and equipment [note 3]............................ 78,422 70,472 46,793
------- ------- -------
$84,869 $78,097 $49,046
======= ======= =======
LIABILITIES AND NET INVESTMENT BY SHAW FIBERLINK LTD.
CURRENT
Accounts payable and accrued liabilities................... $ 1,905 $ 1,974 $ 7,613
Income taxes payable....................................... 92 116 148
Unearned revenues.......................................... 1,273 1,330 161
------- ------- -------
3,270 3,420 7,922
Commitments and contingency [notes 7 and 8]
Net investment by Shaw FiberLink Ltd....................... 81,599 74,677 41,124
------- ------- -------
$84,869 $78,097 $49,046
======= ======= =======
</TABLE>
On behalf of the Board:
<TABLE>
<S> <C>
(Signed) PETER J. BISSONNETTE (Signed) MARGOT M. MICALLEF
Director Director
</TABLE>
See accompanying notes.
F-44
<PAGE> 180
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
STATEMENTS OF INCOME AND NET INVESTMENT BY SHAW FIBERLINK LTD.
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------- ---------------------------
1999 1998 1999 1998 1997
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................. $13,197 $ 7,876 $38,815 $22,324 $11,631
Cost of sales (exclusive of items shown
separately below)...................... 6,503 3,529 17,800 10,174 3,965
------- ------- ------- ------- -------
6,694 4,347 21,015 12,150 7,666
------- ------- ------- ------- -------
Selling, general and administrative
expenses............................... 3,004 1,999 8,893 7,498 5,227
Depreciation............................. 2,109 1,347 6,565 3,832 1,954
Depreciation charge allocated by Shaw for
use of distribution network assets
[note 6(c)]............................ 1,648 1,259 5,649 4,394 3,073
------- ------- ------- ------- -------
6,761 4,605 21,107 15,724 10,254
------- ------- ------- ------- -------
LOSS BEFORE INCOME TAXES................. (67) (258) (92) (3,574) (2,588)
Income taxes [note 4].................... 25 23 92 50 25
------- ------- ------- ------- -------
Net loss................................. (92) (281) (184) (3,624) (2,613)
Net investment by Shaw FiberLink Ltd.,
beginning of the year.................. 74,677 41,124 41,124 23,208 14,137
Investment by Shaw FiberLink Ltd. during
the year............................... 7,014 11,117 33,737 21,540 11,684
------- ------- ------- ------- -------
NET INVESTMENT BY SHAW FIBERLINK LTD.,
END OF THE YEAR........................ $81,599 $51,960 $74,677 $41,124 $23,208
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-45
<PAGE> 181
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------- ------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES [note 1]
Net loss............................ $ (92) $ (281) $ (184) $ (3,624) $ (2,613)
Non-cash items:
Depreciation...................... 2,109 1,347 6,565 3,832 1,954
-------- -------- -------- -------- --------
CASH FLOW FROM OPERATIONS........... 2,017 1,066 6,381 208 (659)
Net change in non-cash working
capital balances related to
operations [note 9]............... 1,028 (6,988) (9,874) 5,697 1,064
-------- -------- -------- -------- --------
3,045 (5,922) (3,493) 5,905 405
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Additions to property and
equipment......................... (10,059) (5,195) (30,244) (27,445) (12,089)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Investment by Shaw FiberLink Ltd.
during the year................... 7,014 11,117 33,737 21,540 11,684
-------- -------- -------- -------- --------
CHANGE IN CASH DURING THE YEAR AND
CASH AT BEGINNING AND END OF
YEAR.............................. -- -- -- -- --
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-46
<PAGE> 182
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Shaw FiberLink Ltd. -- FiberLink Division (the "Division" or
"FiberLink") operates high capacity fiber optic telecommunications networks in
various Canadian markets including: Greater Metropolitan Toronto, Calgary,
Edmonton, Winnipeg, Vancouver Island, Central British Columbia, Saskatoon,
Lethbridge and Red Deer. FiberLink also operates several strategically-located
inter-city networks and two international gateways into the United States.
FiberLink provides its customers with a wide range of telecommunications
services including dedicated voice services, switched data transmission and
Business Internet services.
While the Division owns certain of the assets required to carry on the
business, a number of assets, including distribution network assets (see note
6), administrative facilities and maintenance operations are owned by Shaw
Communications Inc.
These financial statements represent the business operations identified as
the FiberLink Division of Shaw FiberLink Ltd. Accordingly, there is no share
capital or retained earnings in the Division's accounts. The net investment by
Shaw FiberLink Ltd. represents the capital employed in the Division in the form
of investments and advances. Shaw FiberLink Ltd. is a wholly owned subsidiary of
Shaw Communications Inc. Investments and advancements by Shaw FiberLink Ltd. in
the Division are funded by Shaw Communications Inc. to Shaw FiberLink Ltd.
The Division has relied extensively upon Shaw FiberLink Ltd. and Shaw
Communications Inc. for ongoing financial support and accordingly, these
divisional financial statements are not necessarily indicative of the results of
operations, cash flows or financial position had the Division operated as an
independent entity as at or for the dates and periods presented. Should Shaw
FiberLink Ltd. or Shaw Communications Inc. cease to provide such financial
support, the Division would require alternative ongoing financing from other
sources. Shaw Communications Inc. has allocated corporate, overhead and
technical costs to the Division based on an estimate of the services provided,
and charges for the use of distribution network assets based on Shaw
Communications Inc.'s annual depreciation charge related to these assets (see
note 6). The management of Shaw Communications Inc. have estimated the
incremental costs of the Division as a stand-alone entity for corporate
expenses, other than taxes or interest, would be approximately $1,532,000
annually. Management believes this to be reasonable.
The information presented as at and for the interim periods ended November
30, 1999 and 1998 is unaudited. These unaudited financial statements reflect all
adjustments which are in the opinion of management necessary to a fair statement
of the results for the interim periods presented; all such adjustments are of a
normal recurring nature.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared by management in accordance
with Canadian generally accepted accounting principles consistently applied
within the framework of the accounting policies described below. The policy with
respect to accounting for income taxes described below differs from that used in
the preparation of the consolidated financial statements of Shaw Communications
Inc.
REVENUE RECOGNITION
FiberLink provides telecommunication services to its customers and earns
both recurring and installation revenues. Recurring revenues are recognized on a
monthly basis as the services are provided to customers. Unearned recurring
revenues are deferred and recognized as earned. Revenues earned on installation
contracts are recorded when the installation of an operational link is
F-47
<PAGE> 183
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completed unless such revenues exceed the related direct cost of the
installation in which case the excess is recognized over the contract period.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET ESTIMATED USEFUL LIFE
----- ---------------------
<S> <C>
Towers and headends................................... 10 years
Distribution network.................................. 10 years
Subscriber equipment.................................. 15 years
Computer equipment and software....................... 4 years
Other equipment....................................... 4-10 years
</TABLE>
INCOME TAXES
The liability method of tax allocation is used in accounting for income
taxes. Under this method, future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and
liabilities, and measured using the substantially enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce future income tax assets to
the amount expected to be realized.
SEGMENTED INFORMATION
FiberLink's business of providing local high speed telecommunications and
Internet access services is one operating segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------------------------------------
1999 1999 1998
---------------------- ---------------------- ----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
------- ------------ ------- ------------ ------- ------------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Towers and headends.... $60,901 $11,612 $55,060 $10,163 $35,206 $5,649
Distribution network... 2,945 467 2,945 394 2,463 123
Subscriber equipment... 25,657 2,327 21,546 1,934 12,734 790
Computer equipment and
software............. 1,440 465 1,395 377 777 106
Other equipment........ 3,156 806 3,094 700 2,615 334
------- ------- ------- ------- ------- ------
$94,099 $15,677 $84,040 $13,568 $53,795 $7,002
------- ------- ------- ------- ------- ------
NET BOOK VALUE......... $78,422 $70,472 $46,793
</TABLE>
F-48
<PAGE> 184
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Labour and other costs attributable to construction and installation are
capitalized as part of towers and headends. For the three months ended November
30, 1999 the amount capitalized was $1,818,000 (unaudited) (August 31, 1999 --
$5,641,000; 1998 -- $4,200,000).
4. INCOME TAXES
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Division's future tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, -----------------
1999 1999 1998
------------ ------- -------
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C>
FUTURE TAX LIABILITIES:
Property and equipment.................................... (7,844) $(6,590) $(1,026)
------- ------- -------
FUTURE TAX ASSETS:
Non-capital losses carried forward........................ 13,257 12,236 6,639
Valuation allowance....................................... (5,413) (5,646) (5,613)
------- ------- -------
7,844 6,590 1,026
------- ------- -------
NET FUTURE TAXES.......................................... -- -- --
======= ======= =======
</TABLE>
The Division has incurred losses for income tax purposes that are available
to be applied against future years' taxable income expiring as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
CANADIAN DOLLARS)
-----------------
<S> <C>
2002.................................................... $ 1,143
2003.................................................... 2,459
2004.................................................... 6,019
2005.................................................... 8,652
2006.................................................... 8,918
Period ending November 30, 2007 (unaudited)............. 2,268
-------
$29,459
=======
</TABLE>
F-49
<PAGE> 185
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Differences between income taxes calculated at Canadian statutory rates and
the income tax provision made in the Divisional accounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------- -------------------------------
1999 1998 1999 1998 1997
----- ----- ------- --------- ---------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Income taxes (recovery) at Canadian statutory
rates...................................... $ (30) $(116) $ (41) $(1,608) $(1,165)
Differences from statutory rates relating to:
Large corporations tax..................... 25 23 92 50 25
Benefit of tax losses not recognized....... 30 116 33 1,612 1,118
Other, including items not deductible for
tax purposes............................ -- -- 8 (4) 47
----- ----- ----- ------- -------
INCOME TAX PROVISION......................... $ 25 $ 23 $ 92 $ 50 $ 25
===== ===== ===== ======= =======
</TABLE>
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30, YEAR ENDED AUGUST 31,
------------- ---------------------
1999 1998 1999 1998 1997
----- ----- ----- ----- -----
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Current................................................. $ 25 $ 23 $ 92 $ 50 $ 25
Future.................................................. -- -- -- -- --
---- ---- ---- ---- ----
$ 25 $ 23 $ 92 $ 50 $ 25
==== ==== ==== ==== ====
</TABLE>
5. FINANCIAL INSTRUMENTS
Financial instruments recognized in the balance sheets have fair values
approximating their carrying values.
CREDIT RISK
At November 30, 1999 (unaudited), approximately 34% of the accounts
receivable represents amounts due from five customers (August 31, 1999 -- 55%
from six customers; 1998 -- 45% from six customers).
Revenues from customers (excluding related parties described in note 6)
which exceed ten percent of total revenues for the year are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED AUGUST 31,
NOVEMBER 30, ---------------------
1999 1999 1998 1997
------------ ----- ----- -----
(THOUSANDS OF
(UNAUDITED) CANADIAN DOLLARS)
<S> <C> <C> <C> <C>
Customer A................................................ 7% 11% 17% 26%
Customer B................................................ 5% 8% 11% 7%
</TABLE>
F-50
<PAGE> 186
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS
(a) The Division provides high speed Internet services to Shaw
Communications Inc. In 1998 and 1997, the divisions of Shaw Communications Inc.
negotiated rates and margins on these services which are reflected in the
accounts. Subsequent to 1998, the FiberLink Division only passed along to Shaw
Communications Inc. the external costs incurred by the Division to provide these
services to Shaw Communications Inc. Intercompany revenues, expenses and margins
reflected in these financial statements for the provision of Internet services
to Shaw Communications Inc. are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------ -------------------------------
1999 1998 1999 1998 1997
------- -------- --------- -------- --------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $2,691 $ 1,242 $ 6,627 $3,090 $ 985
Cost of sales............................... 2,691 1,242 6,627 2,115 153
------ ------- ------- ------ ------
Margin...................................... $ -- $ -- $ -- $ 975 $ 832
====== ======= ======= ====== ======
</TABLE>
(b) These Divisional financial statements reflect corporate allocations
from Shaw Communications Inc. for administrative and technical services provided
to the Division of $534,000 and $400,000 respectively for the three months ended
November 30, 1999 and $85,000 and $225,000 for 1998 (unaudited) (August 31, 1999
-- $340,000 and $900,000 respectively; 1998 -- $180,000 and $900,000
respectively; 1997 -- $90,000 and $24,000 respectively). Allocation of
administrative and technical charges are based on the estimated level of
services provided to the Division in proportion to Shaw Communications Inc.'s
total costs, a method of allocation management believes to be reasonable. Of the
corporate allocations from Shaw Communications Inc., $574,000 have been
reflected in selling, general and administrative expenses and $360,000 has been
capitalized to towers and headends in the three months ended November 30, 1999
and $107,000 and $203,000 respectively for 1998 (unaudited) (see note 3) (August
31, 1999 -- $430,000 and $810,000 respectively; 1998 -- $270,000 and $810,000
respectively; 1997 -- $92,000 and $22,000 respectively).
(c) The Division utilizes certain distribution network assets owned by Shaw
Communications Inc. (see note 1) in the provision of services to its customers.
These Divisional financial statements reflect corporate allocations for the
utilization of the distribution network assets of $1,648,000 for the three
months ended November 30, 1999 and $1,259,000 for 1998 (unaudited) (August 31,
1999 -- $5,649,000; 1998 -- $4,394,000; 1997 -- $3,073,000). The allocation of
these corporate charges is based upon FiberLink's estimated proportion of Shaw
Communications Inc.'s annual depreciation charge related to these distribution
network assets. Management believes this method of allocation to be reasonable.
F-51
<PAGE> 187
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
The Division has various long-term operating lease agreements for the use
of transmission facilities and premises in each of the next five years as
follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
CANADIAN DOLLARS)
-----------------
<S> <C>
2000.................................................... $ 9,501
2001.................................................... 7,690
2002.................................................... 6,590
2003.................................................... 6,342
2004.................................................... 691
Thereafter.............................................. 721
-------
$31,535
=======
</TABLE>
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
9. STATEMENTS OF CASH FLOWS
Additional disclosures with respect to the Statements of Cash Flows are as
follows:
(i) Changes in non-cash working capital balances related to operations
include the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30, YEAR ENDED AUGUST 31,
------------------ -------------------------------
1999 1998 1999 1998 1997
------- -------- --------- -------- --------
(UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C>
Accounts receivable......................... $1,072 $ (744) $(5,148) $ (90) $ (22)
Prepaids and other.......................... 106 (253) (224) (45) 68
Accounts payable and accrued liabilities.... (69) (6,040) (5,639) 5,733 110
Income taxes payable........................ (24) (21) (32) (37) 898
Unearned revenues........................... (57) 70 1,169 136 10
------ ------- ------- ------ ------
$1,028 $(6,988) $(9,874) $5,697 $1,064
====== ======= ======= ====== ======
</TABLE>
(ii) Interest and income taxes paid
Shaw Communications Inc. does not allocate interest on debt to Shaw
FiberLink Ltd. and the Division does not have any separate legal existence for
purposes of remitting income taxes. Accordingly, amounts included in these
Divisional statements for taxes represent allocations only and are included in
changes in advances to and from Shaw FiberLink Ltd.
F-52
<PAGE> 188
SHAW FIBERLINK LTD. -- FIBERLINK DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNITED STATES ACCOUNTING PRINCIPLES
The financial statements of the Division are prepared in Canadian dollars
in accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). No additional adjustments have been identified in order to present these
financial statements in accordance with accounting policies generally accepted
in the United States ("U.S. GAAP"). The following disclosure would be required
in order to present these financial statements in accordance U.S. GAAP.
Recent developments
The Financial Accounting Standards Board in the United States issued a
pronouncement entitled "Accounting for Derivative Instruments and Hedging
Activities" which the Division is required to adopt in the year ending August
31, 2001. The impact of this pronouncement on these financial statements has not
been determined.
11. SUBSEQUENT EVENT
On December 22, 1999, Shaw Communications Inc. and Shaw FiberLink Ltd.
entered into an asset purchase and subscription agreement ("Purchase Agreement")
with GT Group Telecom Inc. ("GT"). This transaction closed on February 16, 2000.
Under the Purchase Agreement, Shaw FiberLink Ltd. sold to GT all of the property
and assets of FiberLink used in connection with the high speed data and
competitive access business and granted to GT an indefeasible right to use the
distribution network assets owned by Shaw Communications Inc. (see notes 1 and
6). The assets sold include equipment, computer hardware, fixed assets,
replacement parts, operational contracts, equipment contracts, supply contracts,
interconnect agreements, co-location agreements, customer contracts, software
licenses, broadband wireless licenses, vehicles, intellectual property, permits,
prepaid expenses, goodwill related to the FiberLink assets and certain other
fiber assets. Under the Indefeasible Right to Use agreement, GT was granted an
indefeasible right to use certain specifically identified existing fibers in the
fiber optic cable networks of Shaw Communications Inc. for 60 years. In
addition, Shaw FiberLink Ltd. granted GT an indefeasible right to use fibers to
be built over the next three years in mutually agreed regions.
Consideration for this transaction amounts to $760 million, consisting of
$360 million in cash, and sufficient series B first preference shares of GT to
provide Shaw FiberLink Ltd. with a 28.5% fully diluted interest in GT, subject
to adjustments for certain GT transactions relating to financing and employee
options and warrants.
F-53
<PAGE> 189
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements are
based on the historical financial statements of GT Group Telecom Inc. ("Group
Telecom") and the historical financial statements of Shaw FiberLink Ltd. --
FiberLink Division ("Shaw FiberLink") prepared to give effect to Group Telecom's
acquisition of the business of Shaw FiberLink and the grant, by Shaw FiberLink,
of an indefeasible right to use certain identified fibers in the fiber optic
cable networks of Shaw Communications Inc. ("Shaw Communications") to Group
Telecom. This transaction closed on February 16, 2000 (refer to note 1). The pro
forma financial statements give effect to $220 million in senior bank debt as
partial consideration for the acquisition of the business of Shaw FiberLink, and
$651 million in gross proceeds from the issuance of units under an Offering
Circular and Purchase Agreement which closed on February 1, 2000.
The unaudited pro forma condensed consolidated statements of operations for
the year ended September 30, 1999 gives effect to such transactions as if they
occurred at the beginning of the year then ended. The unaudited pro forma
condensed consolidated balance sheet gives effect to such transactions as if
they had occurred effective September 30, 1999. The pro forma adjustments are
described in the accompanying notes and are based upon available information and
certain assumptions that management believes are reasonable.
The pro forma statements do not purport to represent what the Company's
results of operations or financial condition would actually have been had these
transactions in fact occurred on such dates or to project the Company's results
of operations or financial condition for any future date or period. The pro
forma financial statements should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" presented elsewhere in this
prospectus.
The acquisition of the business of Shaw FiberLink and the grant of an
indefeasible right to use certain fibers in the fiber optic cable networks of
Shaw Communications are accounted for under the purchase method of accounting
(refer to note 1). The total purchase price of $780 million, including
acquisition costs of approximately $20 million has been allocated to the
identifiable tangible and intangible assets of the applicable acquired business
based upon the Company's estimate of their fair values with the remainder
allocated to goodwill. The allocation of the purchase price may be revised when
additional information is obtained; however, management does not expect that any
such revisions will have a material effect on the Company's consolidated
financial position or results of operations. The Company has recorded the
purchase price for the business of Shaw FiberLink based on its estimate of the
fair value of the consideration given, which includes $360 million cash and
sufficient Series B first preference shares of the Company to provide the vendor
with a 28.5% fully diluted interest in the Company at the date the acquisition
is consummated, subject to adjustments related to financing and employee options
and warrants. Management's estimate of the fair value of these shares amounts to
$400 million.
F-54
<PAGE> 190
GT GROUP TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED) AS AT SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
GT GROUP SHAW
TELECOM INC. FIBERLINK
SEPTEMBER 30, AUGUST 31, PRO FORMA
1999 1999 ADJUSTMENTS NOTES PRO FORMA
------------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......... $ 59,851 $ -- $ 871,300 2(v) $ 523,651
(360,000) 2(i)
(20,000) 2(i)
(27,500) 2(vi)
Accounts receivable................ 3,784 7,336 (7,336) 2(i) 3,784
Other assets....................... 1,071 289 (289) 2(i) 1,071
-------- ------- ---------- ----------
64,706 7,625 456,175 528,506
PREPAYMENT ON PROPERTY, PLANT AND
EQUIPMENT........................ -- -- 223,000 2(i) 223,000
PROPERTY, PLANT AND EQUIPMENT...... 73,817 70,472 358,528 2(i) 502,817
INTANGIBLE ASSETS.................. -- -- 28,800 2(i) 28,800
GOODWILL........................... -- -- 127,200 2(i) 127,200
OTHER ASSETS....................... 1,292 -- 25,600 2(vi) 26,892
-------- ------- ---------- ----------
$139,815 $78,097 $1,219,303 $1,437,215
======== ======= ========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities...................... $ 14,926 $ 2,090 $ (2,090) 2(i) $ 14,926
Unearned revenue................... 656 1,330 (1,330) 2(i) 656
Current portion of long-term
debt............................. 1,253 -- -- 1,253
-------- ------- ---------- ----------
16,835 3,420 (3,420) 16,835
LONG-TERM UNEARNED REVENUE......... 1,494 -- -- 1,494
LONG-TERM DEBT..................... 47,557 -- 220,000 2(v) 860,077
592,520 2(v)
FUTURE INCOME TAXES................ -- -- 28,000 2(i) 28,000
-------- ------- ---------- ----------
65,886 3,420 837,100 906,406
-------- ------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital...................... 84,880 -- 400,000 2(i) 484,880
Additional paid-in capital......... 255 -- -- 255
Shares to be issued................ 1,875 -- -- 1,875
Warrants........................... -- -- 56,880 2(v) 56,880
Deficit............................ (13,081) -- -- (13,081)
Net investment by Shaw FiberLink... -- 74,677 (74,677) 2(i) --
-------- ------- ---------- ----------
73,929 74,677 382,203 530,809
-------- ------- ---------- ----------
$139,815 $78,097 $1,219,303 $1,437,215
======== ======= ========== ==========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
information.
F-55
<PAGE> 191
GT GROUP TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GT GROUP SHAW
TELECOM INC. FIBERLINK
SEPTEMBER 30, AUGUST 31, PRO FORMA
1999 1999 ADJUSTMENTS NOTES PRO FORMA
------------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE............................... $ 2,705 $ 38,815 $ -- $ 41,520
COST OF SALES (EXCLUSIVE OF ITEMS
SHOWN SEPARATELY BELOW)............. 1,808 17,800 1,500 2(iv) 21,108
------- -------- --------- ---------
897 21,015 (1,500) 20,412
Selling, general and administrative
expenses............................ 10,218 8,893 -- 19,111
------- -------- --------- ---------
(9,321) 12,122 (1,500) 1,301
Amortization.......................... 853 6,565 13,500 2(ii) 39,267
12,700 2(iii)
5,649 2(ii)
Depreciation charge allocated by Shaw
Communications for use of
distribution network assets......... -- 5,649 (5,649) 2(ii) --
Interest and finance items (income)... (372) -- 23,100 2(v) 114,028
88,400 2(v)
2,900 2(vi)
------- -------- --------- ---------
LOSS BEFORE INCOME TAXES.............. (9,802) (92) (142,100) (151,994)
PROVISION FOR INCOME TAXES............ 165 92 -- 257
------- -------- --------- ---------
NET LOSS FOR THE YEAR................. $(9,967) $ (184) $(142,100) $(152,251)
======= ======== ========= =========
PRO FORMA LOSS PER SHARE.............. (8.53)
=========
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (IN THOUSANDS)........ 17,859
=========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
information.
F-56
<PAGE> 192
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The pro forma condensed consolidated balance sheet and condensed
consolidated statement of operations have been prepared to give effect to (a)
the acquisition of the assets of Shaw FiberLink Ltd. -- FiberLink Division
("Shaw FiberLink") by GT Group Telecom Inc. ("Group Telecom"); (b) the grant by
Shaw FiberLink of an indefeasible right to use certain specifically identified
fibers in the fiber optic cable networks of Shaw Communications Inc. ("Shaw
Communications") to Group Telecom; and (c) the Company's issuance of Units
consisting of Senior Discount Notes and Warrants to Purchase Class B non-voting
shares. The Units offering closed on February 1, 2000. The Shaw FiberLink
transactions closed on February 16, 2000.
Group Telecom, through its wholly owned subsidiary GT Group Telecom
Services Corp. entered into an Asset Purchase and Subscription Agreement
("Purchase Agreement") dated December 22, 1999 with Shaw Communications and Shaw
FiberLink. This transaction closed on February 16, 2000. Under the Purchase
Agreement, Group Telecom purchased from Shaw FiberLink all of the property and
assets of Shaw FiberLink used in connection with the high speed data and
competitive access business excluding accounts payable and future income taxes.
The assets purchased include equipment, computer hardware, capital assets,
replacement parts, operational contracts, equipment contracts, supply contracts,
interconnect agreements, co-location agreements, customer contracts, software
licenses, broadband wireless licenses, vehicles, intellectual property, permits,
goodwill and certain other assets. Group Telecom was also granted an
indefeasible right to use certain specifically identified existing fibers in the
fiber optic cable networks of Shaw Communications for 60 years. In addition, the
company received an indefeasible right to use fibers to be built over the next
three years in mutually agreed regions. Group Telecom assumed certain
obligations related to permits, operational contracts, customer contracts,
software licenses and certain other obligations.
The acquisition and the prepaid rental consideration pertaining to the
indefeasible right to use have been accounted for as a purchase. The purchase
consideration of $760 million, consists of $360 million in cash, and sufficient
Series B first preference shares of the Company to provide the vendor with a
28.5% fully diluted interest at the date the acquisition is consummated, subject
to adjustments relating to financing and employee options and warrants, which
shares are currently valued at $400 million. The estimated purchase
consideration of $760 million together with acquisition costs of $20 million,
was allocated to the identifiable assets acquired based on their respective fair
values as at the date of acquisition, with the excess allocated to goodwill.
Pursuant to an Offering Circular and Purchase Agreement which closed on
February 1, 2000, GT Group Telecom issued 855,000 Units, consisting of U.S.$855
million (issued at a price of 52.651%) of 13.25% Senior Discount Notes Due 2010
and 855,000 Warrants to Purchase 4,198,563 Class B non-voting shares. Gross
proceeds amounted to U.S.$450.2 million, equivalent to approximately $651
million. Of the total proceeds amounting to $651 million, $593 million was
allocated to the Senior Discount Notes and $58 million was allocated to the
share purchase warrants.
The pro forma condensed consolidated financial statements give effect to
$220 million in senior bank debt as partial consideration for the acquisition of
the business of Shaw FiberLink, and $646 million in gross proceeds from the
issuance of the Units described in the preceding paragraph.
The pro forma condensed consolidated statement of operations for the year
ended September 30, 1999 is based on the audited consolidated statement of
operations of Group Telecom for the year ended September 30, 1999 and the
audited statement of operations of Shaw FiberLink
F-57
<PAGE> 193
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
for the year ended August 31, 1999, as Group Telecom and Shaw FiberLink had
non-coterminous year-ends.
The pro forma condensed consolidated statements do not purport to represent
what Group Telecom's results of operations or financial condition would actually
have been, had these transactions in fact occurred on such dates or to project
Group Telecom's results of operations or financial condition for any future date
or period. The pro forma condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
of Group Telecom and Shaw FiberLink, including the descriptions of significant
accounting policies, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" presented elsewhere in this prospectus.
2. PRO FORMA ASSUMPTIONS
The pro forma condensed consolidated balance sheet gives effect to the
transactions disclosed in Note 1 above as if they had occurred effective
September 30, 1999. The pro forma condensed consolidated statement of operations
gives effect to these transactions as if they had occurred effective October 1,
1998.
(i) The pro forma financial information reflects the following allocation
of the purchase consideration for the acquisition of the business of Shaw
FiberLink in accordance with the purchase method of accounting:
<TABLE>
<S> <C>
Purchase consideration
Cash...................................................... $360,000
29,096,097 Series B first preference shares............... 400,000
--------
760,000
Acquisition costs........................................... 20,000
--------
$780,000
========
Allocated to
INDEFEASIBLE RIGHT TO USE AGREEMENT:
Prepayment for indefeasible rights to use fibers to be
constructed............................................ $223,000
Prepayment representing indefeasible rights to use
constructed fibers..................................... 329,000
SHAW FIBERLINK PURCHASE:
Property, plant and equipment............................. 100,000
Intangible assets......................................... 28,800
Goodwill.................................................. 127,200
Future income taxes....................................... (28,000)
--------
$780,000
========
</TABLE>
The prepayment of $223 million represents the prepayment of an indefeasible
right to use certain fibers to be built by Shaw Communications over the next
three years. Included in the prepayment representing indefeasible rights to use
constructed fibers is an amount of $22 million for an indefeasible right to use
certain existing fibers located in New Brunswick, Canada, commencing in 2003.
F-58
<PAGE> 194
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The area of accounting for indefeasible rights to use fibers is evolving,
and is currently under consideration by accounting standard setters. The Company
is currently unable to determine the effect, if any, of such potential
accounting changes.
(ii) The additional amortization expense relates to the increased basis of
property, plant and equipment and is based on the estimated useful life of the
equipment and the fiber optic networks acquired which are amortized on a
straight line basis over 10 and 20 years respectively.
(iii) The additional amortization expense relates to the allocation of the
purchase price to goodwill and other intangible assets. The amortization is
based on the estimated useful life of 20 years for goodwill of $127.2 million,
10 years for license rights of $13.8 million and 3 years for $15 million
recorded as a non-compete agreement.
(iv) The increase in cost of sales represents an annual fiber maintenance
fee as set out in the indefeasible right to use agreement.
(v) The increases in long-term debt and related interest expense are based
on senior bank financing of $220 million, for which interest was calculated at a
rate of 10.50% per annum, and $593 million in Senior Discount Notes which have a
stated interest rate of 13.25% and an effective interest rate of 14.93%.
Interest on the senior bank financing of $220 million is based on a floating
rate. A 1 percent rate increase would result in additional interest expense of
$2.2 million not currently reflected in the recorded amounts.
(vi) The deferred financing costs of $27.5 million relating to the debt
issuances described in (v) above are amortized over the term of the related
debts, assumed to be 7 and 10 years.
F-59
<PAGE> 195
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GAAP
The pro forma condensed consolidated financial information has been
prepared in accordance with Canadian GAAP which differ in some respects from the
principles and practices that Group Telecom would have followed had the pro
forma financial information been prepared in accordance with U.S. GAAP. Refer to
note 22 of Group Telecom consolidated financial statements for a reconciliation
of differences impacting the Company.
<TABLE>
<S> <C>
Pro forma loss under Canadian GAAP.......................... $(152,251)
Group Telecom adjustments:
Deferred charges.......................................... (301)
Stock-based compensation.................................. (56)
Deferred foreign exchange................................. (12)
---------
Pro forma loss under U.S. GAAP.............................. $(152,620)
=========
Pro forma loss per share.................................... (8.55)
=========
Pro forma weighted average number of common shares (in
thousands)(1)............................................. 17,859
=========
</TABLE>
---------------
(1) The pro forma weighted average number of common shares is based on
the average number of Class A voting and Class B non-voting shares
outstanding during the year ended September 30, 1999.
<TABLE>
<S> <C>
A reconciliation of pro forma shareholders' equity from
Canadian to U.S. GAAP is as follows:
Pro forma shareholders' equity in accordance with Canadian
GAAP...................................................... $ 530,809
Group Telecom adjustments:
Deferred charges.......................................... (403)
Deferred foreign exchange................................. (12)
---------
Pro forma shareholders' equity under U.S. GAAP.............. $ 530,394
=========
</TABLE>
F-60
<PAGE> 196
---------------------------------------------------------
---------------------------------------------------------
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
Summary..................................... 1
Risk Factors................................ 9
Use of Proceeds............................. 17
Selected Historical Financial and Operating
Information of Group Telecom.............. 18
Selected Unaudited Pro Forma Consolidated
Financial and Operating Information....... 20
Selected Historical Financial and Operating
Information of Shaw FiberLink............. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 24
The Exchange Offer.......................... 31
Our Acquisition of the Shaw FiberLink
Business.................................. 38
Business.................................... 41
Description of Our Financing Arrangements... 56
Description of the Notes.................... 61
Registration Agreement for Outstanding
Notes..................................... 94
Form, Denomination, Transfer, Exchange and
Book-Entry Procedures..................... 96
Management.................................. 99
Regulation.................................. 108
Related Party Transactions.................. 117
Principal Shareholders...................... 118
Description of Share Capital................ 119
Taxation.................................... 122
Plan of Distribution........................ 128
Legal Matters............................... 129
Experts..................................... 129
Enforceability of Civil Liabilities......... 129
Where You Can Obtain More Information About
Us........................................ 130
Index to Financial Statements............... F-1
</TABLE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
US$855,000,000
[GT Group Telecom Logo]
US$855,000,000 Stated Amount
at Maturity of 13 1/4%
Senior Discount Notes Due 2010
------------------------------------
PROSPECTUS
------------------------------------
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 197
[ALTERNATE FRONT COVER PAGE FOR MARKET-MAKING PROSPECTUS]
GT GROUP TELECOM LOGO
GT GROUP TELECOM INC.
TERMS OF THE 13 1/4% SENIOR DISCOUNT NOTES DUE 2010
INTEREST
We will pay cash interest on the notes from August 1, 2005 at the rate of
13 1/4% per year, payable semi-annually in arrears on each February 1 and August
1, commencing on August 1, 2005. Prior to February 1, 2005, interest will accrue
on the original issue price of the notes but will not be payable in cash.
MATURITY
The notes will mature on February 1, 2010.
RANKING
The notes will rank equally with our other unsubordinated, unsecured
indebtedness.
CHANGE OF CONTROL
If we experience specific kinds of change of control, we must offer to
repurchase the notes at the prices specified herein.
OPTIONAL REDEMPTION
On or after February 1, 2005, we may redeem the notes, in whole or in part, at
any time, at the redemption prices specified herein.
In addition, before February 1, 2003, we may redeem up to 35% of the stated
amount at maturity of the notes at the prices specified herein with the proceeds
of sales of certain kinds of our share capital.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE
OFFER OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus has been prepared for and will be used by Goldman, Sachs &
Co. in connection with offers and sales of the notes in market-making
transactions. These transactions may occur in the open market or may be
privately negotiated, at prices related to prevailing market prices at the time
of sale or at negotiated prices. Goldman, Sachs & Co. may act as principal or
agent in these transactions. Group Telecom will not receive any of the proceeds
of such sales of the notes but will bear the expenses of registration.
GOLDMAN, SACHS & CO.
------------------------
Prospectus dated August 15, 2000.
A-1
<PAGE> 198
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
NOTES.
The notes are new classes of securities that have never been traded. The
initial purchasers, including Goldman Sachs & Co., have informed us that they
intend to make a market in the notes. They are not obligated to make a market
and may discontinue such market making at any time without notice. You cannot be
sure that an active trading market will develop for the notes.
Historically, the market for non-investment grade debt has been highly
volatile in terms of price. It is possible that the market for the notes will be
volatile. This volatility in price may affect your ability to resell your notes
or the timing of their sale.
Because of the potential lack of a trading market, you may not be able to
resell your notes at or above the price you paid for them.
Goldman, Sachs & Co. may be deemed to be an affiliate of Group Telecom and,
as such, may be required to deliver a prospectus in connection with its
market-making activities in the exchange notes. We have agreed to file and
maintain a registration statement that would allow Goldman, Sachs & Co. to
engage in market-making transactions in the exchange notes. Subject to certain
exceptions, the registration statement will remain effective for as long as
Goldman, Sachs & Co. may be required to deliver a prospectus in connection with
market-making transactions in the exchange notes. We have agreed to bear the
costs and our legal and accounting expenses related to such registration
statement.
A-2
<PAGE> 199
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the exchange
notes by Goldman, Sachs & Co. in market-making transactions. We will not receive
any of the proceeds from such transactions.
A-3
<PAGE> 200
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus is to be used by Goldman, Sachs & Co. in connection with
offers and sales of the notes in market-making transactions effected from time
to time. Goldman, Sachs & Co. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form of
discounts and commissions, including from both counterparties when it acts as
agent for both. Such sales will be made at prevailing market prices at the time
of sale, at prices related thereto or at negotiated prices.
As at June 30, 2000, investment partnerships affiliated with Goldman, Sachs
& Co. owned 18,999,999 class A voting shares and 11,000,002 class B non-voting
shares, representing 23.9% of the total voting interest of our outstanding
voting securities. Goldman, Sachs & Co. has informed us that it does not intend
to confirm sales of the notes to any accounts over which it exercises
discretionary authority without the prior specific written approval of such
transactions by the customer.
We have been advised by Goldman, Sachs & Co. that, subject to applicable
laws and regulations, Goldman, Sachs & Co. currently intends to make a market in
the notes following completion of the Exchange Offer. However, Goldman, Sachs &
Co. is not obligated to do so and any such market-making may be interrupted or
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. There can be no assurance that an active trading market will
develop or be sustained. See "Risk Factors -- You cannot be sure that an active
trading market will develop for the notes."
Goldman, Sachs & Co. has provided investment banking services to us in the
past and may provide such services and financial advisory services to us in the
future. Goldman, Sachs & Co. acted as one of the initial purchasers in
connection with the initial sale of the notes.
Goldman, Sachs & Co. and we have entered into a registration rights
agreement with respect to the use by Goldman, Sachs & Co. of this prospectus.
Pursuant to such agreement, we agreed to indemnify Goldman, Sachs & Co. against
certain liabilities, including liabilities under the Securities Act.
A-4
<PAGE> 201
---------------------------------------------------------
---------------------------------------------------------
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
Summary..................................... 1
Risk Factors................................
Use of Proceeds.............................
Selected Historical Financial and Operating
Information of Group Telecom..............
Selected Unaudited Pro Forma Consolidated
Financial and Operating Information.......
Selected Historical Financial and Operating
Information of Shaw FiberLink.............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................
Our Acquisition of the Shaw FiberLink
Business..................................
Business....................................
Description of Our Financing Arrangements...
Description of the Notes....................
Form, Denomination, Transfer, Exchange and
Book-Entry Procedures.....................
Management..................................
Regulation..................................
Related Party Transactions..................
Principal Shareholders......................
Description of Share Capital................
Taxation....................................
Plan of Distribution........................
Legal Matters...............................
Experts.....................................
Enforceability of Civil Liabilities.........
Where You Can Obtain More Information About
Us........................................
Index to Financial Statements............... F-1
</TABLE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
US$855,000,000
[GT Group Telecom Logo]
US$855,000,000 Stated Amount
at Maturity of 13 1/4%
Senior Discount Notes Due 2010
------------------------------------
PROSPECTUS
------------------------------------
---------------------------------------------------------
---------------------------------------------------------
A-5
<PAGE> 202
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Canada Business Corporations Act (the "CBCA"), a corporation may
indemnify a present or former director or officer to such corporation or a
person who acts or acted at the corporation's request as a director or officer
of another corporation of which the corporation is or was a shareholder or
creditor, and his heirs and legal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of his
being or having been a director or officer of such corporation and provided that
the director or officer acted honestly and in good faith with a view to the best
interests of the corporation, and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with a derivative action only with court approval. A director
or officer is entitled to indemnification from the corporation as a matter of
right in respect of all costs, charges and expenses reasonably incurred by him
in connection with the defense of a civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the corporation if he was substantially successful on the
merits and fulfilled the conditions set forth above.
In accordance with the CBCA, the by-laws of the Registrant, a copy of which
is filed as Exhibit 3.2 to this Registration Statement, indemnify a director or
officer of the Registrant, a former director or officer of the Registrant or any
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or creditor and
his heirs and legal representatives against all costs, charges and expenses
including an amount paid to settle an action or satisfy a judgment reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he has been made a party by reason of being or having been a
director or officer of the Registrant or such body corporate if (i) he acted
honestly and in good faith with a view to the best interests of the Registrant,
and (ii) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful.
The Registrant will also indemnify such directors or officers who have been
substantially successful in the defence of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director of the Registrant or body corporate against all costs, charges
and expenses reasonably incurred by him in respect of such action or proceeding.
A policy of directors' and officers' liability insurance is maintained by
the Registrant which insures directors and officers for losses as a result of
claims based upon the acts or omissions as directors and officers of the
Registrant, including liabilities arising under the Securities Act of 1933, and
also reimburses the Registrant for payments made pursuant to the indemnity
provisions under the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that, in the opinion of the U.S.
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
II-1
<PAGE> 203
ITEM 21. EXHIBITS
<TABLE>
<C> <S>
*2.1 Asset Purchase and Subscription Agreement dated December 22,
1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.2 Indefeasible Right of Use Agreement dated February 16, 2000
between Shaw FiberLink Ltd. and GT Group Telecom Inc.
*2.3 Non-competition Agreement in favour of Group Telecom dated
February 16, 2000 among Shaw Communications Inc., Shaw
FiberLink Ltd. and GT Group Telecom Inc.
*2.4 Non-competition Agreement in favour of Shaw dated February
16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd.
and GT Group Telecom Inc.
*2.5 Transitional Services Agreement dated February 16, 2000
among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.6 Performance Assurance Agreement dated February 16, 2000
among Shaw Communications Inc., GT Group Telecom Inc. and GT
Group Telecom Services Corp.
+**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide
Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3,
Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp.
+**2.8 Capacity Lease Agreement dated May 24, 2000 by and between
Worldwide Fiber Network Services Ltd. and Worldwide Fiber
Network Services, Inc. and GT Group Telecom Services Corp.
and GT Group Telecom Services (USA) Corp.
+**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide
Fiber Network Services, Inc. and GT Group Telecom Services
(USA) Corp.
*3.1 Articles of Incorporation of GT Group Telecom Inc.
*3.2 By-laws of GT Group Telecom Inc.
*4.1 Exchange and Registration Rights Agreement dated February 1,
2000 among GT Group Telecom Inc. and Goldman, Sachs & Co.,
CIBC World Markets Corp., Credit Suisse First Boston
Corporation, RBC Dominion Securities Corporation, Scotia
Capital (USA) Inc. and TD Securities (USA) Inc.
*4.2 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**4.3 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
**5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the securities
being registered
**5.2 Opinion of Shearman & Sterling as to the legality of the
Securities being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000 with Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000 among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
*10.4 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
*10.5 Registration Rights Agreement dated February 1, 2000 among
GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World
Markets Corp., Credit Suisse First Boston Corporation, RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.
and TD Securities (USA) Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges
</TABLE>
II-2
<PAGE> 204
<TABLE>
<C> <S>
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
23.2 Consent of Ernst & Young LLP, Chartered Accountants
**23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
**23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
**24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
**25.1 Statement of Eligibility of the Trustee on Form T-1
**99.1 Form of Letter of Transmittal
**99.2 Form of Notice of Guaranteed Delivery
**99.3 Form of Letter to Registered Holders
**99.4 Form of Letter to Clients
**99.5 Form of Instruction to Registered Holder
**99.6 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Previously filed.
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 205
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this
Post-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Province of
Ontario, Canada, on this 11th day of August, 2000.
GT GROUP TELECOM INC.
(Registrant)
/s/ ROBERT M. FABES
By:
--------------------------------------
Name: Robert M. Fabes
Title: Senior Vice President,
General Counsel
and Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 1 to the Registration Statement has been
signed by or on behalf of the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Director August 11, 2000
---------------------------------------------
James G. Matkin
Director and Chair of Executive
--------------------------------------------- Committee
James M. Mansour
* Chief Executive Officer and Director August 11, 2000
--------------------------------------------- (principal executive officer)
Daniel R. Milliard
* President, Chief Operating Officer August 11, 2000
--------------------------------------------- and Director
Robert G. Wolfe
* Executive Vice President and Chief August 11, 2000
--------------------------------------------- Financial Officer (principal
Stephen H. Shoemaker financial officer and principal
accounting officer)
* Director August 11, 2000
---------------------------------------------
Michael Abram
* Director August 11, 2000
---------------------------------------------
Michael D'Avella
</TABLE>
II-4
<PAGE> 206
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director
---------------------------------------------
George Estey
* Director August 11, 2000
---------------------------------------------
Leo J. Hindery
Director
---------------------------------------------
P. Kenneth Kilgour
Director
---------------------------------------------
Robert R. Gheewalla
Director
---------------------------------------------
Jim Shaw
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, the
undersigned certifies that it is the duly authorized United States
representative of GT Group Telecom Inc. and has duly caused this Post-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Toronto, on this 11th day
of August, 2000.
STEPHEN H. SHOEMAKER
(Authorized U.S. Representative)
By: *
--------------------------------------
Name: Stephen H. Shoemaker
Title: Executive Vice President
and
Chief Financial Officer
/s/ ROBERT M. FABES
*By:
------------------------------------
Robert M. Fabes
Attorney-in-fact
II-5
<PAGE> 207
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
*2.1 Asset Purchase and Subscription Agreement dated December 22,
1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.2 Indefeasible Right of Use Agreement dated February 16, 2000
between Shaw FiberLink Ltd. and GT Group Telecom Inc.
*2.3 Non-competition Agreement in favour of Group Telecom dated
February 16, 2000 among Shaw Communications Inc., Shaw
FiberLink Ltd. and GT Group Telecom Inc.
*2.4 Non-competition Agreement in favour of Shaw dated February
16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd.
and GT Group Telecom Inc.
*2.5 Transitional Services Agreement dated February 16, 2000
among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.6 Performance Assurance Agreement dated February 16, 2000
among Shaw Communications Inc., GT Group Telecom Inc. and GT
Group Telecom Services Corp.
+**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide
Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3,
Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp.
+**2.8 Capacity Lease Agreement dated May 24, 2000 by and between
Worldwide Fiber Network Services Ltd. and Worldwide Fiber
Network Services, Inc. and GT Group Telecom Services Corp.
and GT Group Telecom Services (USA) Corp.
+**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide
Fiber Network Services, Inc. and GT Group Telecom Services
(USA) Corp.
*3.1 Articles of Incorporation of GT Group Telecom Inc.
*3.2 By-laws of GT Group Telecom Inc.
*4.1 Exchange and Registration Rights Agreement dated February 1,
2000 among GT Group Telecom Inc. and Goldman, Sachs & Co.,
CIBC World Markets Corp., Credit Suisse First Boston
Corporation, RBC Dominion Securities Corporation, Scotia
Capital (USA) Inc. and TD Securities (USA) Inc.
*4.2 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**4.3 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
**5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the Securities
being registered
**5.2 Opinion of Shearman & Sterling as to the legality of the
Securities being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000 with Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000 among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
*10.4 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
</TABLE>
<PAGE> 208
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
*10.5 Registration Rights Agreement dated February 1, 2000 among
GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World
Markets Corp., Credit Suisse First Boston Corporation, RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.
and TD Securities (USA) Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
23.2 Consent of Ernst & Young LLP, Chartered Accountants
**23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
**23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
**24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
**25.1 Statement of Eligibility of the Trustee on Form T-1
**99.1 Form of Letter of Transmittal
**99.2 Form of Notice of Guaranteed Delivery
**99.3 Form of Letter to Registered Holders
**99.4 Form of Letter to Clients
**99.5 Form of Instruction to Registered Holder
**99.6 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Previously filed.
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE> 209
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