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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 2001
REGISTRATION NO. 333-45378
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</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)
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Copies to:
BRICE T. VORAN, ESQ.
SHEARMAN & STERLING
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario M5L 1E8
(416) 360-8484
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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GT Group Telecom Logo
GT GROUP TELECOM INC.
4,198,563 Class B Non-Voting Shares
855,000 Warrants to Purchase Class B Non-Voting Shares
All of our class B non-voting shares and warrants to purchase class B
non-voting shares offered hereby are being offered by shareholders and
warrantholders of GT Group Telecom Inc. (collectively referred to as the selling
shareholders). We will not receive any proceeds from the sale of the shares and
the warrants.
We have been advised by the selling shareholders that they may sell all or a
portion of the shares from time to time on any national securities exchange or
quotation service on which the shares may be listed or quoted at the time of the
sale. The selling shareholders may also make private sales of the shares or the
warrants to purchasers directly. Alternatively, the selling shareholders may
from time to time offer the shares or the warrants through underwriters,
brokers, dealers or agents, who may receive compensation in the form of
underwriting discounts, commissions or concessions.
Our class B non-voting shares are currently quoted on the Nasdaq National
Market under the symbol "GTTLB" and listed on the Toronto Stock Exchange under
the symbol "GTG.B". On January 12, 2001, the last reported sale price of our
class B non-voting shares on the Nasdaq National Market was US$11.06 per share.
The warrants are not listed on any exchange.
See "Risk Factors" beginning on page 1 to read about factors you should
consider before buying the class B non-voting shares.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Prospectus dated January 19, 2001.
<PAGE> 3
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form F-1 that we
filed with the Securities and Exchange Commission, the SEC, using a "shelf"
registration process. Under this process, the selling shareholders may, from
time to time, sell any combination of the offered securities described in this
prospectus in one or more offerings up to 4,198,563 class B non-voting shares
and up to 855,000 warrants. This prospectus does not contain all of the
information included in the registration statement and the exhibits thereto.
Statements included in this prospectus as to the contents of any contract or
other document that is filed as an exhibit to the registration statement are not
necessarily complete and you should refer to that agreement or document for a
complete description of these matters. You should read both this prospectus and
any prospectus supplement together with the additional information described
below under the heading "Where You Can Obtain More Information About Us."
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have not authorized anyone else to provide you with
different information. This prospectus is an offer to sell or to buy only the
securities referred to in this prospectus, and only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus and any prospectus supplement is current only as of the date on the
front page of those documents. Neither the delivery of this prospectus or any
prospectus supplement, nor any distribution of securities made hereunder or
thereunder shall under any circumstances create any implication that there has
not been any change in the facts set forth in this prospectus or the applicable
prospectus supplement or in the affairs of Group Telecom since the date hereof.
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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.
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THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR
PUBLIC DISTRIBUTION UNDER THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF
CANADA. THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR
SOLD, DIRECTLY OR INDIRECTLY, IN CANADA OR TO ANY RESIDENT THEREOF EXCEPT IN
ACCORDANCE WITH THE SECURITIES LAWS OF THE PROVINCES AND TERRITORIES OF CANADA.
THE SECURITIES OFFERED HEREBY HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION
FROM THE PROSPECTUS REQUIREMENTS OF THE APPLICABLE CANADIAN PROVINCIAL AND
TERRITORIAL SECURITIES LAWS AND MAY BE SOLD IN CANADA ONLY PURSUANT TO AN
EXEMPTION THEREFROM.
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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>
TWELVE MONTHS ENDED SEPTEMBER 30,
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1996 1997 1998 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
High........................................... 0.7527 0.7513 0.7292 0.6828 0.6629
Low............................................ 0.7235 0.7145 0.6341 0.6423 0.6969
Period End..................................... 0.7342 0.7234 0.6552 0.6805 0.6636
Average........................................ 0.7327 0.7286 0.6845 0.6663 0.6791
</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
19 to the audited consolidated financial statements of Group Telecom beginning
on page F-2 and note 10 to the audited financial statements of Shaw FiberLink
beginning on page F-35.
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$0.6649 per Cdn$1.00, which was the
inverse of the noon buying rate on September 30, 2000.
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<PAGE> 5
RISK FACTORS
An investment in our class B non-voting shares or warrants involves a high
degree of risk. You should carefully consider the risks described below and all
other information contained in this prospectus before purchasing our class B
non-voting shares.
THE COSTS OF DEPLOYING OUR NETWORK AND EXPANDING OUR BUSINESS MAY EXCEED
THE CAPITAL AVAILABLE TO US. IF THIS HAPPENS, WE MAY HAVE TO DELAY OR ABANDON
OUR BUSINESS PLAN.
We used substantial capital to fund our acquisitions of the businesses of
Shaw FiberLink and Videon FiberLink, our acquisition of the Cable Atlantic
competitive local exchange carrier and commercial telecommunications operations
and our acquisitions from 360networks, and will have significant capital
expenditures, working capital, debt service and cash flow deficits during the
period in which we are expanding our business and deploying our network,
services and systems. The actual amount and timing of our future capital
requirements may differ materially from our estimates as a result of prevailing
economic conditions and financial, business and other factors, many of which are
beyond our control. We cannot assure you that the capital actually required for
this expansion and deployment 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 our
planned expansion of our network, services and systems, 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 that was initiated by Canada's telecommunications
regulatory authority, the Canadian Radio-television and Telecommunications
Commission (commonly known as the "CRTC") in which interested parties were
invited to comment on the terms and conditions of access to municipal
rights-of-way 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.
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WE ARE DEPENDENT ON OTHER PARTIES IN RESPECT OF THE FIBER WHICH CONSTITUTES
A SIGNIFICANT PART OF OUR NETWORK.
In connection with our acquisition of the business of Shaw FiberLink we
received an indefeasible right to use Shaw FiberLink's fiber for 60 years. Shaw
FiberLink has, in turn, a one-year indefeasible right to use fiber of various
cable companies which are owned by Shaw Communications, renewable annually by
Shaw FiberLink during the term of our indefeasible right to use Shaw FiberLink's
fiber. As a result, in order to have access to the fiber provided by the
indefeasible right to use, we are dependent on Shaw FiberLink's ability to
maintain its indefeasible right to use agreements with the Shaw cable companies.
In addition, the terms of our agreements with Shaw FiberLink, Videon FiberLink,
Cable Atlantic and 360networks provide that our rights under those agreements
are limited if the underlying rights associated with the fiber that is the
subject of the indefeasible rights to use have any limitations or prohibitions.
We entered into performance assurance agreements with Shaw Communications and
Moffat Communications to support our rights under our agreement with Shaw
FiberLink and Videon FiberLink. If we discover that indefeasible right to use
rights are not passed to us as anticipated, or if we, Shaw FiberLink, Videon
FiberLink, Cable Atlantic or 360networks do not obtain and maintain the
necessary underlying rights, or if Shaw Communications or Moffat Communications
do not comply with the performance assurance agreements, we may not have access
to the fiber provided by the indefeasible right to use agreement and this could
substantially impair our ability to carry on business.
SOME OF OUR CUSTOMERS ARE ALSO OUR COMPETITORS AND, GIVEN OUR COMPETITION
WITH THEM, MAY REDUCE THE LEVEL OF BUSINESS THEY DO WITH US.
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 the businesses we have recently
acquired 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 year ended September 30, 2000 and 1999 we had net losses of $138.0
million and $10.0 million and negative cash flow from operating activities of
$49.2 million and $9.0 million, respectively. We expect to incur significant
additional expenditures in connection with the development and expansion of our
network and service offerings. 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
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timely basis or on satisfactory terms. If we fail to obtain new technology, we
may lose customers and market share which could harm our business and operating
results.
OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE.
We have a significant amount of debt. As of September 30, 2000, we had
approximately $953.3 million of long-term debt outstanding. In addition, we
could incur an additional $528.3 million under our senior bank debt and our
vendor facilities with Cisco and 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, they 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 September 30, 2000, would have an annual impact of $2.5
million on our interest cost.
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO PAY OUR DEBT. IF WE FAIL TO
GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO REFINANCE OUR
DEBT, OBTAIN ADDITIONAL FINANCING OR POSTPONE CAPITAL EXPENDITURES.
We cannot assure you that we will generate sufficient cash flow from
operations to make scheduled payments on our debt. Our ability to meet our debt
obligations will depend on whether we can successfully implement our strategy,
as well as on economic, financial, competitive, legal and technical factors.
Some of the factors are beyond our control, such as economic conditions in the
different local markets where we operate or intend to operate, and pressure from
existing and new competitors. If we cannot generate sufficient cash flow from
operations to make scheduled payments on our debt obligations, we may need to
refinance our debt, obtain additional financing, delay planned capital
expenditures or sell assets. Our ability to refinance our debt or obtain
additional financing will depend on, among other things:
- our financial condition at the time;
- restrictions in agreements governing our debt; and
- other factors, including market conditions.
DUE TO RESTRICTIONS IN OUR FINANCING AGREEMENTS, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS AS WE DESIRE.
The financing agreements under which our long-term debt was incurred
contain a number of conditions and limitations on the way in which we can
operate our business, including limitations on our ability to raise debt, sell
or acquire assets and pay dividends as well as various covenants that require us
to maintain specific financial ratios. These limitations may force us to pursue
less than optimal business strategies or forego business arrangements which
could have been financially advantageous to us and our shareholders.
Our failure to comply with the covenants and restrictions contained in our
financing agreements could lead to a default under the terms of one of these
agreements. If a default occurs in one of these
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agreements, the parties to our other financing agreements could declare all
amounts borrowed and all amounts due under these other agreements due and
payable.
WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE WHICH
COULD BE DETRIMENTAL TO HOLDERS OF OUR CLASS B NON-VOTING SHARES AND OUR
WARRANTS.
As a result of an amended and restated shareholders agreement entered into
by shareholders on February 16, 2000 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. In addition, 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, as communications technologies develop, new classes of
competitors will 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
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lease and interconnection arrangements with the incumbent local exchange
carriers, such as rate increases and changes in rules and policies of the CRTC.
WE DEPEND ON OUR SUPPLIERS OF SWITCHES AND OTHER EQUIPMENT AND MAY
EXPERIENCE DELAYS IN RECEIVING REQUIRED COMPONENTS.
We rely on other companies to supply key components of our network
infrastructure, primarily switching and data routing equipment. These components
are only available in the quantities and quality we require from limited
sources. We may experience delays in receiving components or may not be able to
obtain these components on the scale and within the time frames required by us
at an affordable cost, or at all.
IF OUR BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS DO NOT OPERATE AS
WE EXPECT OR IF WE FAIL TO UPGRADE SYSTEMS AS NECESSARY, WE WILL NOT BE ABLE TO
CONDUCT OUR BUSINESS EFFICIENTLY.
Integrated management information and processing systems are vital to our
growth and our ability to monitor costs, process customer orders, bill customers
and operate efficiently. The cost of implementing these systems has been, and we
expect will continue to be, substantial.
We are in the final stages of developing and testing our operational
support system to integrate important facets of our operations. The development
and implementation of this system relies in part on the products and services of
third party vendors, over which we have no control. Unanticipated problems with
our system may harm our business and operating results.
In addition, any of the following developments could harm us:
- our failure to adequately identify and integrate all of our information
and processing needs;
- failure of our processing or information systems to perform as expected;
and
- our failure to upgrade systems as necessary and on a timely basis.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR BUSINESS AND OUR PROSPECTS COULD BE HARMED.
We are dependent on the continued service of a small number of key
executives and operations personnel, including Daniel Milliard, our chief
executive officer, Robert Wolfe, our president, Stephen Shoemaker, our chief
financial officer and Eric Demirian, our executive vice president, corporate
development. The loss of services of one or more of our key executives,
particularly Messrs. Milliard, Wolfe, Shoemaker and Demirian, could harm our
business and our prospects. We do not maintain key person life insurance for any
of our executive officers.
REGULATIONS RELATING TO CANADIAN OWNERSHIP AND CONTROL OF OUR VOTING SHARES
PREVENTS A FOREIGN INVESTOR FROM ACQUIRING US, WHICH COULD LIMIT THE VALUE OF
YOUR CLASS B NON-VOTING SHARES AND YOUR WARRANTS TO PURCHASE CLASS B NON-VOTING
SHARES.
As a competitive local exchange carrier, we are subject to regulations
which require that not less than 66 2/3% of our issued and outstanding voting
shares be beneficially owned by "Canadians" (as defined in these regulations).
To ensure compliance with these regulations, we have placed restrictions on the
transfer of our class A voting shares to non-Canadians. These restrictions
effectively limit the number of potential acquirors of our business and
therefore a takeover bid for us is less likely and you are less likely to
receive the change of control premium that generally comes with such bids.
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
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Department of Industry (commonly known as Industry Canada) pursuant to the
provisions of the Radiocommunication Act. Since 1994, the stated policy of the
CRTC has been to recognize the importance of competition in the local switched
services market. As a relatively new entrant into the Canadian
telecommunications market, we benefit from this policy and these decisions.
However, we cannot assure you that the CRTC's policy to foster the development
of competition in the local switched services market will not change or that the
CRTC will react quickly and efficiently to anti-competitive practices or effects
resulting from the dominant position of Canada's incumbent local exchange
carriers. Any change in the CRTC's policies or regulations could harm our
business, operating results and prospects.
CRTC decisions are subject to review and variance by the CRTC at any time.
CRTC decisions can also be appealed to the Canadian Federal Court of Appeal and
may also be challenged by petition to the Federal Cabinet. We cannot assure you
that the local competition decisions of the CRTC, or other decisions relating to
the telecommunications markets in which we compete will not be reviewed and
varied by the CRTC or by the Federal Court or Cabinet on appeal. Any variance of
these decisions or other rules and regulations of the CRTC could harm our
business.
OUR NEED TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION CAN INCREASE OUR
COSTS AND SLOW OUR GROWTH.
Because we are subject to extensive government regulation, delays in
receiving required regulatory approvals may slow our growth. In addition, the
enactment of new adverse regulations or regulatory requirements may increase our
costs, which could have a harmful effect on us. We also cannot assure you that,
as we expand our business, the CRTC and Industry Canada will continue to grant
us the authority we need to conduct our business or will not take action against
us if we are found to have provided services without obtaining the necessary
authorizations or to have violated other requirements of their rules or orders.
The CRTC, Industry Canada or others could challenge our compliance with
applicable rules and orders, which could cause us to incur substantial legal and
administrative expenses. Lengthy administrative hearings might also delay the
deployment of our network, which could slow our growth.
OUR CLASS B NON-VOTING SHARES HAVE A LIMITED TRADING HISTORY AND THEIR
PRICE MAY BE VOLATILE. WE CANNOT ASSURE YOU THAT OUR SHARE PRICE WILL NOT
DECLINE IN THE FUTURE.
There has only been a public market for our class B non-voting shares since
March 2000. The market price of our class B non-voting shares could be subject
to significant fluctuation. Among the factors that could affect our share price
are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- strategic decisions by us or our competitors, such as acquisitions or
restructurings or changes in business strategy;
- actions by institutional stockholders;
- speculation in the press or investment community;
- general market conditions; and
- economic factors unrelated to our performance.
Recently, stock markets in the United States have experienced significant
price and volume fluctuations and the market prices of securities of
telecommunications services providers and technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be able
to resell their class B non-voting shares at or above the current price reported
on the Nasdaq National Market. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
in the United States has often been instituted against such
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a company. The institution of such litigation against us could result in
substantial costs and a diversion of our management's attention and resources,
which could harm our business and financial condition.
WE DO NOT INTEND TO LIST THE WARRANTS ON ANY STOCK EXCHANGE.
The warrants have not been listed on any stock exchange and we do not
intend to list the warrants on any stock exchange in the future. Although the
warrants are eligible for trading in the PORTAL market of the Nasdaq Stock
Market, Inc. by "qualified institutional buyers" ("QIBs"), as defined in Rule
144A under the U.S. Securities Act of 1933, the absence of a listing on a stock
exchange may cause the warrants to trade at a price lower than the price for the
underlying class B non-voting shares that are traded on the Nasdaq National
Market.
SINCE OUR REVENUE IS IN CANADIAN DOLLARS AND MOST OF OUR DEBT IS IN U.S.
DOLLARS, WE ARE SUBJECT TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN CANADIAN
AND U.S. DOLLARS.
As of September 30, we had debt outstanding denominated in U.S. dollars of
approximately US$562.3 million. Since the majority of our revenue is in Canadian
dollars, we are, and will continue to 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 our U.S. dollar denominated debt. In order to minimize
these effects, as at September 30, 2000, we had entered into certain cross
currency swaps to hedge approximately 69% of our outstanding U.S. dollar
denominated debt. Based on our September 30, 2000 balances, a 1 percent change
in the foreign currency exchange rate between the Canadian and U.S. dollar would
have an impact of $3.8 million on the unhedged portion of our long-term debt.
Any substantial increase in the U.S. dollar relative to the Canadian dollar
could affect our results of operations and our ability to meet our future
payment obligations on our debt.
IF OUR FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ARE INCORRECT, OUR
RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements in "Risk Factors"
beginning on page 1, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 14, "Business" beginning
on page 21 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," "projects," "predicts," "potential," or
"continue" or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under "Risk
Factors", that may cause our or our industry's actual results, levels of
activity, performance or achievements to differ materially from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume and no other
person assumes responsibility for the accuracy and completeness of these
statements.
7
<PAGE> 12
USE OF PROCEEDS
All class B non-voting shares and warrants offered hereby are being offered
by the selling shareholders. We will not receive any of the proceeds from the
sale of the class B non-voting shares or the warrants. The class B non-voting
shares offered hereby include up to 4,198,563 class B non-voting shares issuable
upon the exercise of the warrants currently held by the selling shareholders. As
of the date of this prospectus, each warrant entitles the holder thereof to
purchase 4.9106 shares. No consideration will be paid to us by any holder in
connection with the exercise of such holder's warrants.
In February 2000 we sold units, which consisted of our senior discount
notes and these warrants to purchase our class B non-voting shares. Our net
proceeds from the sale of the units were approximately US$436.9 million, after
deducting underwriting discounts and commissions and estimated offering
expenses, of which approximately US$140.0 million was used to fund our
acquisition of the business of Shaw FiberLink.
Consistent with our business strategy, we continually consider acquisition
opportunities that will enhance our business. As of the date of this prospectus,
we have not entered into any definitive agreements to make any acquisitions
except for those discussed herein.
PRICE RANGE OF CLASS B NON-VOTING SHARES
Our class B non-voting shares have been traded on the Nasdaq National
Market, Nasdaq, and the Toronto Stock Exchange, the TSE, since March 10, 2000.
The following table sets forth, for the periods indicated, the high and low sale
prices per share of our class B non-voting shares as reported on the Nasdaq
National Market and the TSE.
<TABLE>
<CAPTION>
NASDAQ TSE
---------------------- ----------------
HIGH LOW HIGH LOW
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Quarter ending March 31, 2000 (from March
10).......................................... US$30 US$16 1/2 $45.00 $25.00
Quarter ending June 30, 2000................... US$20 13/16 US$11 1/4 $30.45 $16.55
Quarter ending September 30, 2000.............. US$18 13/16 US$12 13/16 $27.40 $19.05
Quarter ending December 31, 2000............... US$13 3/16 US$ 4 3/4 $20.70 $ 9.60
</TABLE>
On January 12, 2001, the last reported sale price of the shares on the
Nasdaq was US$11.06 and on the TSE was $16.75. On December 31, 2000, there were
41,196,858 class B non-voting shares and 79,609,821 class A voting shares
outstanding held by approximately 82 and 412 holders of record, respectively.
DIVIDEND POLICY
We have not paid any dividends on our class B non-voting shares and do not
intend to pay any dividends on our class B non-voting shares in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
future growth of our business. In addition, our ability to pay cash dividends is
currently restricted under the terms of financing agreements related to our long
term debt. For a further description of these restrictions, see "Description of
Our Financing Arrangements" on page 37 and the exhibits contained in the
registration statement of which this prospectus is a part. Future dividends, if
any, will be determined by our board of directors.
8
<PAGE> 13
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 14 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 19 to
our audited financial statements.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
1996(1) 1997 1998 1999 2000
------- ------ ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Canadian GAAP
Revenue................................. $ 29 $2,051 $ 1,823 $ 2,705 $ 73,251
Cost of services........................ 28 1,437 1,131 1,808 51,336
----- ------ ------- -------- ----------
Gross profit............................ 1 614 692 897 21,915
Selling, general and administrative
expenses.............................. 243 989 3,038 10,218 100,959
----- ------ ------- -------- ----------
(242) (375) (2,346) (9,321) (79,044)
Amortization............................ 9 55 255 853 43,055
----- ------ ------- -------- ----------
Operating loss.......................... (251) (430) (2,601) (10,174) 122,099
Interest and finance items (income)..... -- -- (162) (372) 54,354
Tax expense (recovery).................. (5) -- -- 165 (38,467)
----- ------ ------- -------- ----------
Loss for the period..................... $(246) $ (430) $(2,439) $ (9,967) $ (137,986)
===== ====== ======= ======== ==========
Loss per share(2)....................... (0.05) (0.05) (0.26) (0.56) (1.83)
U.S. GAAP
Loss for the period..................... $(269) $ (426) $(3,582) $(10,336) $ (140,648)
===== ====== ======= ======== ==========
Comprehensive loss for the period....... $(269) $ (426) $(3,582) $(10,336) $ (116,722)
===== ====== ======= ======== ==========
Loss per share(2)....................... (0.05) (0.05) (0.38) (0.58) (1.86)
BALANCE SHEET:
Canadian GAAP
Cash and cash equivalents............... $ 5 $ 61 $ 2,476 $ 59,851 $ 444,050
Working capital (deficit)............... (166) (224) (4,199) 47,870 384,090
Property, plant and equipment, net(3)... 64 481 10,555 73,817 954,917
Prepayment on property, plant and
equipment............................. -- -- -- -- 203,703
Goodwill and other assets(4)............ 85 75 207 1,292 227,033
Long-term debt.......................... -- -- 776 47,557 948,928
Shareholders' equity (deficiency)....... (17) 331 5,787 73,928 862,798
U.S. GAAP
Shareholders' equity (deficiency)....... $ (41) $ 316 $ 5,685 $ 73,513 $ 912,731
CASH PROVIDED BY (USED IN):(5)
Operating activities.................... $(127) $ (251) $(1,360) $ (9,033) $ (49,181)
Financing activities.................... 233 769 7,686 75,947 1,145,607
Investing activities.................... (101) (462) (3,911) (9,539) (712,227)
OTHER:
EBITDA(6)............................... $(242) $ (375) $(2,288) $ (8,402) $ (56,836)
</TABLE>
9
<PAGE> 14
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING DATA:
Route kilometers................................ 5 46 9,545(7)
Fiber kilometers................................ 2,030 16,595 190,583(8)
Number of Lucent and Nortel class 5 switches.... 1 1 5
Number of buildings connected................... 8 40 1,569
Number of employees............................. 51 168 987
</TABLE>
---------------
(1) Data is for the period from our incorporation on April 12, 1996 to September
30, 1996.
(2) The effect of the exercise of options and warrants is not dilutive.
Accordingly, fully diluted earnings per share is not presented.
(3) Property, plant and equipment at cost is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1996 1997 1998 1999 2000
---- ---- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property, plant and equipment, at cost..... $69 $517 $10,805 $74,895 $986,416
</TABLE>
(4) Goodwill and other assets includes goodwill and other long-term assets.
(5) Cash flow information represents cash provided by (used in) operating,
financing and investing activities are identical under Canadian and U.S.
GAAP.
(6) EBITDA is calculated in accordance with Canadian GAAP and consists of
earnings (loss) before interest, income taxes, depreciation and amortization
and financing expenses. EBITDA is a financial metric used by substantially
all investors to compare companies in the telecommunications industry on the
basis of operating results, asset value and the ability to incur and service
debt. It is not intended to represent cash flow or results of operations in
accordance with Canadian GAAP. EBITDA may not be comparable to similarly
titled amounts reported by other companies. Under U.S. GAAP, EBITDA for the
period from April 12, 1996, our date of incorporation, to September 30,
1996, the years ended September 30, 1997, 1998, 1999 and 2000 was
$(265,000), $(371,000), $(3,431,000), $(8,769,000) and $(68,281,000),
respectively.
(7) Equivalent to approximately 5,930 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 118,422 fiber miles. Fiber miles equal the
number of route miles installed along a telecommunications path multiplied
by the number of fibers along the path.
10
<PAGE> 15
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, 2000 has been prepared
based on the audited consolidated statement of operations of Group Telecom for
the year ended September 30, 2000 and the unaudited statement of operations of
Shaw FiberLink for the four months ended December 31, 1999, and as if the
acquisition of the business of Shaw FiberLink had occurred on October 1, 1999.
See "Unaudited Pro Forma Condensed Consolidated Financial Information" beginning
on page F-46. The pro forma financial information, summarized from the pro forma
condensed consolidated statement of operations, 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, 2000
-------------------
(IN THOUSANDS EXCEPT
PER SHARE AND
OPERATING DATA)
<S> <C>
STATEMENT OF OPERATIONS:
Revenue..................................................... $ 91,296
Cost of services............................................ 60,208
----------
Gross profit................................................ 31,088
Selling, general and administrative expenses................ 105,392
Amortization(1)............................................. 55,492
----------
Operating loss.............................................. (129,796)
Interest and finance items(2)............................... 69,576
Income tax recovery......................................... (38,442)
----------
Loss for the year under Canadian GAAP....................... $ (160,930)
==========
Loss per share under Canadian GAAP(3)....................... (1.82)
==========
Loss for the year under U.S. GAAP........................... $ (163,592)
==========
Loss per share under U.S. GAAP(3)........................... (1.85)
==========
OTHER:
EBITDA(4)................................................... $ (52,096)
</TABLE>
---------------
(1) Amortization includes the depreciation charge allocated by Shaw
Communications of $2 million for use of distribution network assets. See
note 6(c) to the financial statements of Shaw FiberLink.
(2) Interest and finance items include $15 million in interest expense on $220
million of senior bank debt, and $140 million from the 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, 1999. These figures do
not reflect a corresponding return on proceeds received.
(3) The effect of potential conversions of preferred shares and the exercise of
options and warrants is not dilutive. Accordingly, fully diluted earnings
per share is not presented.
(4) 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, 2000, giving effect to our
acquisition of the business of Shaw FiberLink effective October 1, 1999,
would have been $(65,196,000).
11
<PAGE> 16
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-35. 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>
12
<PAGE> 17
<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.
13
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We have been providing data services since 1996. We constructed 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 September 30, 2000, we had 1,569
buildings connected to our network and had approximately 190,583 fiber
kilometers (118,423 miles) over 9,545 route kilometers (5,930 miles). At
September 30, 2000, we had signed strategic agreements with property management
companies, including Oxford Properties, Brookfield, Cadillac Fairview and O&Y
Enterprises, providing us access to approximately 130 million square feet of
office space across Canada.
We have been providing Internet, high speed data and voice services in all
five of our initial markets of Toronto, Vancouver, Calgary, Montreal and
Edmonton since February 2000. Since then, through organic growth and a series of
acquisitions, we have expanded the reach of our fiber network to include an
additional 8 markets beyond our original targeted network. These new
metropolitan markets include Victoria, Winnipeg, London, Hamilton,
Kitchener/Waterloo, Ottawa, Quebec City, and St. John's, Newfoundland. As of
September 30, 2000, we serve all 13 of these markets.
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 28.
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
14
<PAGE> 19
purchase price was funded by borrowing $100 million under our bank facility and
by using $260 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 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. As at September 30, 2000, we had
received the rights to use $27.0 million of newly constructed fibers under these
arrangements.
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 wavelengths 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 wavelengths. 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 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.
In October 2000, we signed a term sheet with C1 Communications Inc. (C1
Communications) to acquire all of its Atlantic Canada assets and business. The
transaction includes the acquisition of C1 Communication's Atlantic cable
competitive local exchange carrier business, including its fiber optic network,
buildings connected to its network, related assets, customers and employees. As
consideration we will issue 2,372,000 class B non-voting shares and assume
certain outstanding obligations of C1 Communications relating to its fiber
network in Atlantic Canada. The transaction is subject to obtaining certain
approvals.
15
<PAGE> 20
OPERATING DATA
The table below provides selected key operating data:
<TABLE>
<CAPTION>
GROUP TELECOM
--------------------------------------
AT SEPTEMBER 30, AT SEPTEMBER 30,
1999 2000
----------------- -----------------
<S> <C> <C>
OPERATING DATA:
Route kilometers.......................................... 46 9,545(1)
Fiber kilometers.......................................... 16,595 190,583(2)
Number of Lucent and Nortel class 5 switches.............. 1 5
Number of buildings connected............................. 40 1,569
Number of employees....................................... 168 987
</TABLE>
---------------
(1) Equivalent to approximately 5,930 route 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 118,422 fiber miles. Fiber miles equals the
number of miles installed along a telecommunications path multiplied by the
number of fibers along the path.
GROUP TELECOM RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 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 year ended September 30, 2000 increased $70.5 million, or
26,080%, to $73.3 million compared to $2.7 million for the year ended September
30, 1999, due to the addition of new customers and new services and inclusion of
the customer base we acquired from Shaw Fiberlink, Moffat Communications and
Cable Atlantic. We expect to maintain a 20% growth quarter over quarter in the
upcoming year. In the years to come, our expansion strategy is to achieve a
significant penetration of the Canadian business telecommunications market,
including the small and medium enterprise sector.
In fiscal 2000, data revenue accounted for 84.5% of our total revenue,
while voice accounted for 14.5% and applications for 1%. Data ports and private
lines provisioned grew from 134 in the first quarter to 5,206 in the fourth
quarter and from 259 to 38,879, respectively. Growth in our data revenue was
achieved by providing Internet gateway and LAN/WAN extension services, as well
as voice and application services, in bundled product offerings to meet each
client's requirements.
Voice revenue increased during the year, as a result of provisioned access
lines growing from 7,357 in the first quarter to 36,516 in the fourth quarter.
In addition, the percentage of on-net access lines dramatically increased from
fewer than 5% as at September 30, 1999 to 62% as at September 30, 2000
contributing to an improvement in our gross margin as described below.
COST OF SERVICES. Our cost of services consists of network operating costs
which include:
- the costs to install, monitor and repair our network;
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- 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 services for the year ended September 30, 2000 increased $49.5
million, or 27,394%, to $51.3 million compared to $1.8 million for the year
ended September 30, 1999. The increase was due to a corresponding increase in
revenue. For the year ended September 30, 2000, we achieved a gross margin level
of 30%. We expect continued improvement in gross margins in the coming year.
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.
Selling, general and administrative expenses increased $90.7 million, or
8,880%, to $101.0 million for the year ended September 30, 2000 compared to
$10.2 million for the year ended September 30, 1999. During the year ended
September 30, 2000, we undertook a significant national expansion, implemented
back office and operational support systems, and hired over 800 employees to
execute these directives. Accordingly, the majority of our selling, general and
administrative expenses relate to compensation, advertising, facility and travel
costs incurred. In the coming year, we expect to leverage off and realize the
benefits from our established infrastructure as we continue to grow our
business.
AMORTIZATION. Amortization for the year ended September 30, 2000 increased
$42.2 million, or 49,475%, to $43.0 million compared to $0.9 million for the
year ended September 30, 1999 due to an increase in property, plant and
equipment resulting from our acquisitions and the deployment of our network.
INTEREST. Interest income resulted from investment of cash reserves from
debt and equity offerings. Interest income for the year ended September 30, 2000
was $22.2 million compared to $0.9 million for the year ended September 30,
1999.
Interest expense resulted from interest and financing charges related to
our long-term debt. Interest expense for the year ended September 30, 2000 was
$85.8 million compared to $0.5 million for the year ended September 30, 1999. Of
our available financing, we have utilized $100 million of secured bank financing
and $185.4 million of vendor financing. In addition, $662.7 million of senior
discount notes are also outstanding. The senior discount notes incur interest at
an effective rate of
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14.9% while the bank financing has been structured as floating interest rate
debt with the interest rate fixed in six-month intervals using bankers
acceptances and term loans. The vendor facilities bear interest at a floating
rate plus a margin ranging from 2 to 4.25%. As we continue our network expansion
in 2001, our interest expense is expected to increase as we incur interest on
the current utilization of our financing for a full year and incur additional
interest charges through drawing down future amounts of our available financing.
FOREIGN EXCHANGE GAIN. A net foreign exchange gain of $9.3 million was
incurred for the year ended September 30, 2000 due to our significant U.S.
dollar cash position and the devaluation of the Canadian dollar. Foreign
exchange gains and losses associated with U.S. dollar denominated long-term debt
are deferred and amortized over the life of the financing arrangement.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. In the year ended September 30, 2000, a net
recovery of $38.5 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 and Cable
Atlantic acquisitions.
LOSS. As a result of the above, the loss before income taxes for the year
ended September 30, 2000 was $176.5 million compared to $9.8 million for the
year ended September 30, 1999, representing an increase of 17,002%.
EBITDA AND CASH FLOW FROM OPERATIONS. For the year ended September 30,
2000, we experienced a negative EBITDA of $79.0 million, representing a
significant increase over the previous year EBITDA loss of $9.3 million as a
result of our expansion strategies. Cash flow used in operating activities were
$49.2 million in the year ended September 30, 2000 and $9.0 million in the year
ended September 30, 1999. Based on our current funded business plan, we are
projecting a positive EBITDA in the year ended September 30, 2002.
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 results of operations or cash flow results in accordance with Canadian
generally accepted accounting principles. EBITDA may not be comparable to
similarly titled amounts reported by other companies.
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 SERVICES. Cost of services 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 lower 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.
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INTEREST INCOME AND FINANCE CHARGES. Interest income for the year ended
September 30, 1999 was $465,913 as compared to interest expense of $89,188 for
the year ended September 30, 1998. Interest income resulted from investment of
cash reserves from private equity offerings. This was partially offset by
increases in interest expense on long-term debt and financing charges related to
vendor financings.
TAXES. We have not generated any taxable income to date and therefore have
not accrued any income tax expense. We have accrued a provision for large
corporations tax for September 30, 1999, of $165,000. As of September 30, 1999,
we had an aggregate of approximately $13.1 million of non-capital loss carry
forwards, of which $326,000 expire by 2003. We currently have no capital losses.
Non-capital losses can be carried forward 7 years and carried back 3 years.
LOSS. As a result of the above, the loss before income taxes for the year
ended September 30, 1999 was $9.8 million compared to $2.4 million for the year
ended September 30, 1998, representing an increase of 302%.
EBITDA AND CASH FLOW FROM OPERATIONS. For the period ended September 30,
1999, we incurred a negative EBITDA of $9.3 million, representing a significant
increase over the previous year EBITDA loss of $2.4 million as a result of our
expansion strategies. Cash flows used in operating activities were $9.0 million
in the year ended September 30, 1999 and $1.4 million in the year ended
September 30, 1998.
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 cash expenditures for property, plant and equipment for the year ended
September 30, 2000 were $153.6 million compared to $8.5 million for the year
ended September 30, 1999, and were related to the purchase and construction of
switching and data networking equipment, construction of our fiber optic
infrastructure and central office and data hub facilities, transmission
equipment and co-location facilities and construction and implementation of our
back office systems. As a result of our own, build and acquisition strategy, we
expanded our network from 16,595 fiber kilometers as at September 30, 1999 to
190,583 fiber kilometers as at September 30, 2000 and increased the number of
buildings connected to our network from 40 to 1,569 in the same period. In 2001
and as part of our fully funded business plan, we will continue to make capital
expenditures as we expand the reach of our network to target markets. We expect
to grow our network to include over 500,000 fiber kilometers by September 30,
2001.
At September 30, 2000, our current assets were $500.4 million and our
current liabilities were $116.3 million, giving us a working capital of $384.1
million compared to $47.9 million at September 30, 1999. Cash and cash
equivalents at September 30, 2000 were $444.0 million compared to $59.9 million
at September 30, 1999.
Cash used in operating activities for the year ended September 30, 2000 was
$49.2 million, most of which came from our net loss of $138.0 million, partially
offset by an increase in items not affecting cash, such as amortization,
non-cash interest expense and recovery of future income taxes, 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
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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.
In September, 2000 we entered into a credit agreement with Cisco pursuant
to which we can finance up to $120 million of telecommunications equipment and
services purchased from Cisco over a two year period.
We are not required to begin repaying any of our funding obligations until
2003. Interest on the senior discount notes is deferred until 2005 with payment
of the deferred interest and principal due in 2010. After 2005, interest on the
senior discount notes is payable semi-annually. The term portion of the senior
bank facility is repayable in annual increments ranging from 5% to 10% between
2003 and 2005, with a final repayment of 75% of the principal in 2006. The
vendor facilities are with two of the world's leading telecommunication
equipment suppliers, Lucent Technologies Inc. and Cisco Systems Inc. One
requires quarterly installments of 1.25% beginning in 2003 with 75% of the
principal in 2008 and the other requires annual installments ranging from 5% to
20% between 2003 and 2006 with final repayments of 55% in 2007. These repayment
terms are providing us with the flexibility to focus on the growth of our
business which we expect will generate the funds required to service our long-
term debt.
For a detailed description of these financing arrangements, see
"Description of our Financing Arrangements" beginning on page 37.
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 US$14 per
share. The initial public offering resulted in aggregate net proceeds to us of
US$268,100,000.
Our funding has provided us with the stability and the resources to finance
our growth. As at September 30, 2000, we had available approximately $1 billion
in funding to fully fund our business plan to 2004, consisting of $444 million
cash on hand, $415 million in available vendor financing and $120 million in
available senior bank financing.
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 $100 million under our bank facility and by using $260 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
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class B non-voting shares. In May 2000, we acquired and will acquire fiber and
dedicated fiber optic 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.
In October 2000, we signed a term sheet with C1 Communications to acquire all of
its Atlantic Canada business and assets in exchange for the issuance of
2,372,000 class B non-voting shares and the assumption of certain liabilities.
The transaction is subject to obtaining certain approvals.
We believe that the remaining net proceeds of our unit offering, additional
borrowing under our Lucent and Cisco vendor facilities, our bank facility and
the net proceeds of our initial public offering of class B non-voting shares
will be sufficient to fully fund our business plan in 2004. 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 September 30, 2000, we had entered into certain cross currency swaps to hedge
approximately 69% of our outstanding U.S. dollar denominated debt.
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BUSINESS
OVERVIEW
We control and operate the largest independent national broadband network
in Canada enabling us to provide reliable metropolitan and long haul services.
Over our network, we provide Internet, high-speed data and voice services
targeted primarily to small and medium businesses. Our Internet and data
services include web and application hosting, co-location, e-commerce and other
value added Internet services. As part of our co-location services, we house and
manage computer and networking equipment for our data customers. We bundle our
data services with traditional telecommunications products and services,
including local area network extension and enhanced local and long distance
voice services. To serve the growing data and telecommunications markets, we are
continually expanding our fiber optic network and selectively use fixed wireless
and digital subscriber line technologies to extend the reach of our network. We
have acquired and integrated the competitive access provider businesses of Shaw
FiberLink located primarily in western and central Canada, Moffat, located in
western Canada and acquired the competitive local exchange carrier businesses of
Cable Atlantic, located in eastern Canada. We have also entered into agreements
with 360networks to obtain additional long haul fiber assets across Canada and
the United States. We own and operate facilities nationally in 9 Canadian
provinces and in Canada's major metropolitan centers of Toronto, Montreal,
Vancouver, Ottawa, Calgary, Edmonton, Winnipeg and St. John's.
We have been providing Internet, high speed data and voice services in all
five of our initial markets of Toronto, Vancouver, Calgary, Montreal and
Edmonton since February 2000. Since then, through organic growth and a series of
acquisitions, we have expanded the reach of our fiber network to include an
additional 8 markets beyond our original targeted network. These new
metropolitan markets include Victoria, Winnipeg, London, Hamilton,
Kitchener/Waterloo, Ottawa, Quebec City, and St. John's, Newfoundland. As of
September 30, 2000, we serve all 13 of these markets.
RECENT DEVELOPMENTS
OUR ACQUISITIONS
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.
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.
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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. At the time
we acquired it, the business had property, plant and equipment of approximately
$47 million.
TERM SHEET WITH C1 COMMUNICATIONS.
In October 2000, we signed a term sheet with C1 Communications to acquire
all of its Atlantic Canada assets and business. The transaction includes the
acquisition of C1 Communication's Atlantic cable competitive local exchange
carrier business, including its fiber optic network, buildings connected to its
network, related assets, customers and approximately 36 employees. The
acquisition will provide us with approximately 2,325 additional route kilometres
and approximately 44,400 additional fiber kilometres in Nova Scotia and New
Brunswick. As consideration we will issue 2,372,000 class B non-voting shares
and assume certain outstanding obligations of C1 Communications relating to its
fiber network in Atlantic Canada. The transaction is subject to obtaining
certain approvals.
These acquisitions will:
- accelerate the deployment of our network across Canada;
- 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.
The networks of the businesses we have acquired 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 have already fully integrated Shaw FiberLink and
Videon FiberLink and we believe that the integration of the businesses we
acquired from Cable Atlantic and intend to acquire from C1 Communications can be
accomplished in a timely manner. With the addition of these businesses, we now
own and operate facilities nationally in 9 Canadian provinces, including
Canada's major metropolitan centers of Toronto, Montreal, Vancouver, Ottawa,
Calgary, Edmonton, Winnipeg and St. John's. We expect that the combined network
(including the network we intend to acquire from C1 Communications), with its
national coverage, will give us a time-to-market advantage that will lead to
increased market penetration and higher operating margins.
STRATEGIC RELATIONSHIPS
AGREEMENTS 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
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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.
BUILDING LICENSE AGREEMENTS. We have recently entered into a series of
commercial agreements with the largest property managers in Canada securing
access to 304 buildings in 13 of our currently served markets representing
approximately 85 million square feet. As of August 31, 2000 we had a total of
449 building license agreements with property owners, including Oxford
Properties, Brookfield, Cadillac Fairview and O&Y Enterprises. We currently have
1,569 buildings on our network (representing approximately 122 million square
feet). The remaining buildings are proximate to our fiber optic network. For a
further description of building license agreements, see "Business -- Strategic
Relationships -- Building License Agreements" beginning on page 29.
MARKETING AGREEMENTS. In May, 2000, we entered into an agreement with
Research in Motion Limited to market and offer their BlackBerry(TM) wireless
e-mail solution so as to expand our suite of value added applications and
services. In May, 2000 we entered into an agreement with Net Nation
Communications Inc. to develop web and ecommerce hosting application services.
In March, 2000, we entered into an agreement with Jawz Inc. (formerly Offsite
Data Services) to develop PC/Server backup application services. In April, 2000,
we entered into an agreement with Multicom Canada Inc. to provide us with
operator and administration services for our teleconferencing services.
BUSINESS STRATEGY
Our goal is to be the leading data and telecommunications service provider
to Canadian businesses, institutions and other carriers by focusing on data and
Internet applications and services and leveraging our extensive fiber network.
We intend to further this goal by increasing the reach of our network and by
expanding our data and related service offerings. 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.
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- 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.
- OWN AND EXPAND OUR NATIONAL, FACILITIES-BASED NETWORK
INFRASTRUCTURE. We intend to own or control the fiber that comprises
our network in each of our 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 92% from
December 31, 1999 to over 210 sales representatives at September 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 in Eastern
Canada, our intended acquisition of C1 Communications' competitive local
exchange carrier operations, and our 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.
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NETWORK
Our network in each of our current markets looks 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 have integrated the fiber, equipment and operating systems of Shaw
FiberLink and Videon FiberLink and believe that our integration of the business
we acquired from Cable Atlantic and intend to acquire from C1 Communications 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 acquired) 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.
SWITCHES AND DATA ROUTERS
Our Lucent and Nortel Class 5 switches and Cisco data routing equipment are
located in central offices in 5 of our 13 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
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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 five cities: Vancouver, Toronto, Calgary, Montreal and St.
John's. Data and voice traffic from other cities is 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 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.
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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 are actively pursuing strategic relationships with some utilities,
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, 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.
In August 1999, we entered into a 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 provides us with non-exclusive access to conduits
in Calgary's downtown core. 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 terminates
on August 12, 2014 and can be renewed for additional five year terms after this
date with the consent of EPCOR.
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, Calgary, Alberta, the City of Toronto, Region of Waterloo, City of
Waterloo, City of Cambridge, Regional Municipality of Ottawa-Carleton and Quebec
City. 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, City of London, Town of Newmarket and City of Hamilton/Region of
Hamilton-Wentworth; and
- permit authority allowing construction to proceed following permit
application approvals in Winnipeg, Manitoba and Sainte-Foy,
Charlesbourg, Outremont, St. Laurent, LaSalle and Laval, Quebec.
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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. These agreements permit the
expansion of the existing networks where we request, including various major and
minor markets 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 participating in several joint builds of conduit systems in the
Toronto area, and have an existing lease of dark fibers from Toronto Hydro. We
are also finalizing the sublease of an existing decommissioned waterpipe system
from AT&T Canada which is located in the central business district of Toronto.
This waterpipe system was previously refurbished for telecommunications
purposes.
We are in the process of negotiating and finalizing various municipal
access agreements with the City of London, City of Kitchener, City of
Hamilton/Region of Hamilton-Wentworth, City of Hull, City of Edmonton, Region of
York, Town of Richmond Hill, City of Vaughan, Region of Peel and City of
Mississauga, Ontario and Richmond, British Columbia.
We are in the process of negotiating agreements for joint build and access
to existing support structures with various providers and are also considering
joint use, indefeasible right to use 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 construction, 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 tenants.
Because of our long-term building license agreements, we gain access to
potential customers at minimal cost.
At September 30, 2000, in our target markets we had over 493 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
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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.
- Carrier Private Lines -- Point-to-point connections over our network,
targeting carriers rather than small businesses.
- Remote Access/Teleworking -- Corporate modem pools to facilitate dial-in
capability for employees working from home, including the use of
higher-speed technologies.
INTERNET SERVICES. We currently provide the following types of dedicated
Internet services:
- Business Internet Gateway -- Internet connectivity packages for small
and medium-sized businesses.
- Internet Transit/Commercial Internet -- High-speed, scalable Internet
connectivity for Internet professionals who in turn support residential
and business Internet users.
- Outsourced Modem Pools -- Managed modem pools for Internet service
providers; providing the hardware and scalability to enable Internet
service providers to grow capacity over time and incorporating
higher-speed technologies.
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ENHANCED AND OTHER DATA SERVICES. We currently provide and are continuing
development efforts for a variety of innovative data products and services in
order to act as a one-stop shop for all of our customers' data needs, including
the following:
- Enhanced IP Services -- Internet protocol fax capability, and private
branch exchange/local area network gateways using voice over Internet
protocol.
- Web-Based Reporting Services -- Internet virtual private networking and
data service reporting for performance management and usage monitoring
via a web browser interface.
- Data Hardware Resale and Maintenance -- Selling and maintaining routers,
hubs and switches.
APPLICATION SERVICES PORTFOLIO
APPLICATION HOSTING SERVICES. We provide our business customers the
opportunity to outsource their server and application needs to us through
several service offerings:
- Applications Hosting -- Turnkey Internet/Web server hosting packages as
an outsourced solution to small and medium-sized businesses. This
service includes all software, hardware and management required for a
business website or for other general office applications.
- Co-location -- The physical space in close proximity to our network to
colocate, host and/or manage servers or modem pools. This service
includes space, power, security and optional management.
- E-Commerce Hosting -- Enhanced Web server solutions that enable small
and medium-sized businesses to incorporate e-commerce into their
website, including the ability to sell products and services and the
ability to clear credit card purchases.
- Unified Messaging (Voicemail/Email) -- Integration of a business'
voicemail and email services to act as a single message center; complete
with faxing capabilities, future speech to text/text to speech
conversion and encrypted security.
- PC/Server backup -- online ability to backup and restore hard drives of
computing devices through a web interface.
- Teleconferencing -- reservation based audio conferencing with
chairperson controls, web streaming and other operator assistance.
Additional application services in development include online delivery of
office software applications (ASP), multimedia conferencing and Web-based
application service reporting.
SECURE NETWORK SERVICES. We provide our customers with security
enhancements to a basic Internet connection through a variety of service
offerings:
- Networking Security -- Anti-hacker services, such as firewall hosting,
to protect customer local area networks from the Internet.
- Virtual Private Networking -- The ability to travel securely and
privately by tunneling through the Internet, either from one business
location to the next or from one business connection to that of a
partner, on a single user or enterprise wide basis.
- Public Key Infrastructure/Certificate Authority -- The technology to
enable secure transactions and information sharing on the Internet by
serving as a third party manager of the exchange of information via
digital identification certificates.
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VOICE SERVICE PORTFOLIO
LOCAL VOICE SERVICES. We began offering local voice services in November
1999, and offer a full suite of services to accommodate customers that require
varying degrees of sophistication in their telecommunications services.
- Individual and Digital Business Lines and Multiple Line Business Trunks
-- Local switched analog telephone service via individual lines or
multi-line trunks and digital service with enhanced features and
functionality.
- Centrex/Virtual Private Branch Exchange -- Feature-rich phone lines
enabling customers to manage their own phone service internally without
a private branch exchange.
- Private Branch Exchange Interconnect -- A connection between a business'
private branch exchange and the public switched telephone network.
- Digital Tie Lines -- A business with a private telecommunications
network by connecting two private branch exchanges.
ENHANCED VOICE SERVICES. We offer and continue to develop a full suite of
enhanced offerings to complement our standard business voice services.
- Long Distance Service -- Long distance telephone access throughout all
major Canadian cities with toll-free directory/operator services,
account codes and calling cards.
- Other Enhanced Features -- Features such as call transfer, call-waiting,
Web-based reporting service, remote message forwarding, three-way
conferencing, digital display and other custom calling features.
- Voice Hardware Resale and Maintenance -- Telephone sets, private branch
exchange and key systems.
Our products and services will be branded into data, applications and voice
based portfolios and will be branded in support of our service innovation and
client care strategies.
MARKETING AND SALES
We plan to build market share by establishing regionally focused sales
distribution and marketing programs to capture new customers and to grow our
business with existing customers. Our goal is for our sales representatives to
sell services directly to customers in on-net buildings. Our sales and marketing
programs are designed to differentiate us from our competitors by providing
solutions targeted at the needs of small and medium-sized businesses and by
delivering consistently high-quality sales and technical support. All of our
marketing information and promotions are standardized and all of our products
are nationally branded, with the "GT Connect" portfolio brand and "Completely
Connected" tag line. We intend to promote our reputation by delivering uniform
and consistent services and providing the benefits of a single point of contact
with integrated and customized billing.
In each target market, we have identified buildings with tenants that meet
our target profile. Our ideal building has many small and medium-sized business
tenants, each with 10 to 200 employees, that have complex data and other
telecommunications needs, including Internet application and voice requirements.
Once a building has been targeted, we negotiate the building licence agreement
which allows our facilities to be installed in that building. Each member of our
local direct sales force is assigned a territory which includes specific
buildings in which to sell. The sales representative will become intimate with
the needs of all potential customers in those buildings and will be the
relationship manager between us and the customer. The sales representative will
work with a technical expert, when necessary, to differentiate our services from
those of our competitors and cost effectively address our customers' needs. Our
sales force will initially target customers with data telecommunications needs
that are, or will be, located in on-net buildings. Once we provide a
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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 September 30, 2000, we had over 210 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, Metasolv Software Inc. 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.
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.
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We also signed an agreement with Nortel's subsidiary Clarify Inc. to
purchase eBusiness software focused on customer relationship management.
Functions of this software include sales force automation, commissions
management, incentives and compensation, order automation, customer care,
contract management, web self service, and reporting.
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 TBS, from
Metasolv Software Inc. 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 are
attractive to our customers:
- a customer can reach us through their choice of telephone, e-mail or fax
and speak with a live person 24 hours a day, 7 days a week;
- state-of-the-art contact center solutions to manage all customer service
inquiries;
- leading management tools to monitor client services;
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- proactive client management program to provide status updates to clients
and to contact them when we detect problems that require resolution;
- migration toward a 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 have a main telephone number which customers can use to call for
inquiries and requests. In addition, we 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 is equipped with a
state-of-the-art computer telephone integration system, Apropos, which allows 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 failures, 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 September 30, 2000, we had 987 employees, of which 283 were sales and
marketing, 117 were customer service, 508 were technical (network services), and
79 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 hired 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 the
Canadian Imperial Bank of Commerce, 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 was amended
and restated as of September 29, 2000. The bank facility is available in
Canadian
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dollars or U.S. dollars. As at September 30, 2000 we had $100 million
outstanding under our bank facility. 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;
- bears interest at rates of 3.00% to 4.50% over the prevailing yield on
Canadian dollar bankers' acceptances or LIBOR, or 2.00% to 3.25% over
the Canadian or United States bank prime rate, 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 by GT Group Telecom Services (USA) Corp.; and
- a pledge of the shares of GT Group Telecom Services Corp. and GT Group
Telecom Services (USA) Corp.
MATURITY, AVAILABILITY AND REPAYMENT
The bank facility matures on or about February 3, 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 4.9% in 2003, 10% in 2004, 10% in 2005, 20% in 2006 and 55.1% 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;
- 25% of excess cash flow; or
- 50% of the net cash proceeds in excess of $600 million from the issuance
of unsecured debt or senior debt with a United States bank or other
financial institution.
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COVENANTS
The bank facility ranks pari passu with the Lucent facility and the Cisco
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;
- 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 $5 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 was amended
and restated as of September 29, 2000. 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
September 30, 2000, US$91 million was outstanding under our Lucent facility.
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SECURITY
The Lucent facility is secured by:
- a first priority security interest over all our assets and material
agreements;
- a guarantee by us and by GT Group Telecom Services (USA) Corp.; 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 February 3, 2003 or, if earlier, the date on which we
terminate the facility. 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 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;
- 25% of excess cash flow; or
- 50% of the net cash proceeds in excess of $600 million from the issuance
of unsecured debt or senior debt with a United States bank or other
financial institution.
COVENANTS
The Lucent facility ranks pari passu with the Cisco facility and the bank
facility with respect to the security obtained from the borrower, our guarantor
subsidiaries and us. Under the terms of the Lucent facility, we, the borrower,
and our guarantor subsidiaries are restricted by the Lucent 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 investments or guarantee constitutes permitted
obligations of such subsidiaries or to the extent that such investment
or guarantee constitutes permitted indebtedness;
- 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 Lucent facility to maintain certain minimum
debt to total capitalization ratios, debt coverage ratios, revenue and
performance levels.
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The Lucent 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 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 $5 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
On September 29, 2000, we entered into a vendor facility with Cisco Systems
Capital Corporation to finance the purchase of up to $120 million of Cisco
telecommunications equipment and services. The Cisco facility:
- bears interest at rates of 3.00% to 4.25% over the prevailing yield on
Canadian dollar bankers' acceptances, or 2.00% to 3.25% over the prime
rate, 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
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.
The initial borrowings on the Cisco facility must be used to repay amounts
outstanding under our previous facility with Cisco. As at September 30, 2000,
US$10 million was outstanding under our Cisco facility.
SECURITY
The Cisco facility is secured by:
- a first priority security interest over all our assets and material
agreements;
- a guarantee by us and GT Group Telecom Services (USA) Corp.; and
- a pledge of the shares of GT Group Telecom Services Corp. and GT Group
Telecom Services (USA) Corp.
MATURITY, AVAILABILITY, AND REPAYMENT
The Cisco facility matures on September 29, 2007. The availability period
to make advances under the facility will terminate on September 29, 2002. The
amount outstanding under the facility must be repaid 4.89% in 2003, 10% in 2004,
10% in 2005, 20% in 2006 and 55.11% at maturity in 2007.
Amounts outstanding under the Cisco facility may be prepaid at any time,
subject to customary breakage charges.
Amounts available under the Cisco facility are also mandatorily reduced in
pro rata amounts equal to:
- the net proceeds from certain asset sales or insurance claims;
- 25% of excess cash flow; or
- 50% of the net cash proceeds in excess of $600 million from the issuance
of unsecured debt or senior debt with a United States bank or other
financial institution.
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COVENANTS
The Cisco facility ranks pari passu with the Lucent facility and the bank
facility with respect to the security obtained from the borrower, our guarantor
subsidiaries and us. Under the terms of the Cisco facility, we, the borrower,
and our guarantor subsidiaries are restricted by the Cisco 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 investments or guarantee constitutes permitted
obligations of such subsidiaries or to the extent that such investment
or guarantee constitutes permitted indebtedness;
- 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 Cisco facility to maintain certain minimum
debt to total capitalization ratios, debt coverage ratios, revenue and
performance levels.
The Cisco 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 Cisco 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 $5 million, a change of control event or the bankruptcy
or insolvency of us or any of our subsidiaries.
INTER-CREDITOR AGREEMENT
The Canadian Imperial Bank of Commerce, as lead arranger under the bank
facility, Lucent and Cisco 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, Lucent and Cisco 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.
The inter-creditor agreement provides that the banks, Lucent and Cisco
will, in an event of default under the bank facility, the Lucent facility or the
Cisco facility, provide the other parties 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, Lucent and Cisco equally and ratably.
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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).
NON-COMPETITION AGREEMENTS
On the closing of our acquisition of the business of Shaw FiberLink, Shaw
Communications entered into a non-competition agreement in favor of us that
prohibits Shaw Communications or any of its affiliates from providing certain
telecommunications services to business customers and telecommunications
carriers in any area of Canada in which we carry on such business, for three
years. On closing we also entered into a non-competition agreement in favor of
Shaw Communications which prohibits us or any of our affiliates from providing
cable television, residential video, Internet or telephone services or other
residential services in any area of Canada in which Shaw Communications carries
on such business, for three years.
TRADE-MARK LICENSE AGREEMENT
We entered into a trade-mark license agreement with Shaw Communications on
the closing of our acquisition of the business of Shaw FiberLink pursuant to
which Shaw Communications granted us a license to use certain trade-marks
relating to Shaw FiberLink for a six month period and Shaw Communications
granted to us a license to use the trade-mark "FiberLink" in conjunction with
the words "Group Telecom" or "GT" for the term of the indefeasible right to use
agreement.
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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DESCRIPTION OF THE WARRANTS
The warrants that are being offered were issued by Group Telecom on
February 1, 2000. The warrants have been issued pursuant to a warrant agreement
(the "Warrant Agreement"), as of the same date, between Group Telecom and The
Chase Manhattan Bank, as warrant agent (the "Warrant Agent"). On February 1,
2000, Group Telecom issued and sold 855,000 units consisting of $855,000,000 in
stated amount at maturity of 13 1/4% senior discount notes due 2010 and 855,000
warrants to purchase an aggregate 4,198,563 shares. The notes and warrants
became separately transferable in July 2000. As of January 10, 2001, 32,800 of
the outstanding warrants have been exercised. If all the 855,000 outstanding
warrants were exercised at the Exercise Rate (as defined below) in effect at the
date of this prospectus, such exercise would result in the issuance by Group
Telecom of 4,198,563 class B non-voting shares. The following summary of certain
provisions of the Warrant Agreement does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Warrant
Agreement relating thereto, a copy of which may be obtained upon request from
Group Telecom.
GENERAL
As of the date of this prospectus, each warrant, when exercised, will
entitle the holder thereof to receive 4.9106 class B non-voting shares (the
"Exercise Rate") of Group Telecom at no additional cost to the holder of the
warrant. The warrants became exercisable upon the effectiveness of the shelf
registration statement, of which this prospectus forms a part. Unless earlier
exercised, the warrants will expire on February 1, 2010. The number of class B
non-voting shares issuable upon exercise of a warrant is subject to adjustment
in the circumstances described below under "-- Adjustments."
No service charge will be made for registration of transfer or exchange
upon surrender of any warrant certificate at the office of the Warrant Agent
maintained for that purpose. Group Telecom may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with an registration or transfer or exchange of warrant certificates.
The holders of the warrants have no right to vote on matters submitted to
the shareholders of Group Telecom or to receive notice of meetings of
shareholders or any other rights of shareholders of Group Telecom, including any
right to receive cash dividends. The holders of the warrants have no preemptive
rights and are not entitled to share in the assets of Group Telecom in the event
of the liquidation, dissolution or winding up of Group Telecom's affairs.
EXERCISE
The warrants may be exercised by surrendering to Group Telecom the warrant
certificates evidencing such warrants, if any, with the accompanying form of
election to purchase, properly completed and executed. Upon surrender of the
warrant certificate, the Warrant Agent will deliver or cause to be delivered, to
or upon the written order of such holder, stock certificates representing the
number of class B non-voting shares or other securities or property to which
such holder is entitled under the warrants and Warrant Agreement, including,
without limitation, at Group Telecom's option, any cash payable to adjust for
fractional interests in class B non-voting shares issuable upon such exercise.
If less than all of the warrants evidenced by a warrant certificate are to be
exercised, a new warrant certificate will be issued for the remaining number of
warrants.
At Group Telecom's option, fractional class B non-voting shares may not be
issued upon exercise of the warrants. If any fraction of a class B non-voting
share would, except for the foregoing provision, be issuable upon the exercise
of any such warrants (or specified portion thereof), Group Telecom will pay an
amount in cash equal to the Current Market Value per class B non-voting share as
determined on the day immediately preceding the date the warrant is presented
for exercise, multiplied by such fraction, computed to the nearest whole cent.
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ADJUSTMENTS
The number of class B non-voting shares that may be purchased upon the
exercise of the warrants will be subject to adjustment in certain events
including:
(1) the payment by Group Telecom of dividends or other distributions
on class A voting or class B non-voting shares of Group Telecom payable in
such class A voting or class B non-voting shares or other shares of Group
Telecom's capital stock,
(2) subdivisions, combinations and certain reclassifications of class
A voting or class B non-voting shares,
(3) sales by Group Telecom of class A voting or class B non-voting
shares, or of securities convertible into or exchangeable or exercisable
for, class A voting or class B non-voting shares of the Company at less
than the Current Market Value of such shares (provided that no adjustment
shall be made with respect to our issuance, after the date of the
Indenture, of series B first preference shares to Shaw Communications in
connection with our acquisition of the business of Shaw FiberLink), and
(4) the distribution to all holders of class A voting or class B
non-voting shares of any of Group Telecom's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and
warrants referred to in clause (3) above and excluding cash dividends or
other cash distributions from current or retained earnings).
In the event of a taxable distribution to holders of class B non-voting
shares which results in an adjustment to the number of class B non-voting shares
or other consideration for which a warrant may be exercised, the holders of the
warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States Federal Income tax as a dividend. See
"Taxation -- U.S. Federal Income Tax Considerations" on page 93.
In the case of certain reclassifications, redesignations, reorganizations
or change in the number of outstanding shares of class B non-voting shares or
amalgamations, consolidations or mergers of Group Telecom or the sale of all or
substantially all of the assets of Group Telecom, each warrant shall thereafter
be exercisable for the right to receive the kind and amount of shares of stock
or other securities or property to which such holder would have been entitled as
a result of such amalgamation, consolidation, merger or sale had the warrants
been exercised immediately prior thereto.
AMENDMENT
From time to time, Group Telecom and the Warrant Agent, without the consent
of the holders of the warrants, may amend or supplement the Warrant Agreement
for certain purposes, including, without limitation, curing defects or
inconsistencies or making any change that does not adversely affect the rights
of any holder. Any amendment or supplement to the Warrant Agreement that has an
adverse effect on the interests of the holders of the warrants shall require the
written consent of the holders of a majority of the then outstanding warrants.
The consent of each holder of the warrants affected shall be required for an
amendment pursuant to which the number of class B non-voting shares purchasable
upon exercise of warrants would be decreased (other than pursuant to adjustments
provided in the Warrant Agreement).
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any of the warrants remain outstanding, Group Telecom shall cause copies
of the reports and other documents, which it would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act if it was subject to those rules, to be filed with the Warrant
Agent
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and mailed to the holders at their addresses appearing in the register of
warrants maintained by the Warrant Agent.
CERTAIN DEFINITIONS
"Current Market Value" per class B non-voting share or any other security
of Group Telecom at any date means
(1) if the security is not registered under the Exchange Act,
(a) the value of the security, determined in good faith by the
Board of Directors of Group Telecom and certified in a Board resolution
filed with the Warrant Agent, based on the most recently completed
arms-length transaction between Group Telecom and a person other than an
Affiliate of Group Telecom and the closing of which occurs on such date
or shall have occurred with the six-month period preceding such date, or
(b) if no such transaction shall have occurred on such date or
within such six-month period, the fair market value of the security as
determined by a nationally recognized independent financial expert
(provided that, in the case of the calculation of Current Market Value
for determining the cash value of fractional shares, any such
determination within six months that is, in the good faith judgement of
the Board of Directors, a reasonable determination of value, may be
utilized), or
(2) (a) if the security is registered under the Exchange Act, the
average of the daily closing sales prices of the securities for the 20
consecutive days immediately preceding such date, or (b) if the
securities have been registered under the Exchange Act for less than 20
consecutive trading days before such date, then the average of the daily
closing sales prices for all of the trading days before such date for
which closing sales prices are available, in the case of each of (2)(a)
and (2)(b), as certified to the Warrant Agent by the President, the
Chief Executive Officer or the Chief Financial Officer of Group Telecom.
The closing sales price for each such trading day shall be (A) in the
case of a security listed or admitted to trading on any United States
national securities exchange or quotation system, the closing sales
price, regular way, on such day, or if no sale takes place on such day,
the average of the closing bid and asked prices on such day, (B) in the
case of a security not then listed or admitted to trading on any
national securities exchange or quotation system, the last reported sale
price on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, as reported by a reputable
quotation source designated by Group Telecom, (C) in the case of a
security not then listed or admitted to trading on any national
securities exchange or quotation system and as to which no such reported
sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation in
the Borough of Manhattan, City and State of New York, customarily
published on each business day, designated by Group Telecom, or, if
there shall be no bid and asked prices on such day, the average of the
high bid and low asked prices, as so reported, on the most recent day
(not more than 30 days prior to the date in question) for which prices
have been so reported and (D) if there are not bid and asked prices
reported during the 30 days prior to the date in question, the Current
Market Value shall be determined as if the securities were not
registered under the Exchange Act.
If clause (1) of the preceding paragraph is applicable, the Board of
Directors of Group Telecom is required to select an independent financial expert
not more than five business days following an event requiring a valuation.
Within five days after its selection of the independent financial expert, Group
Telecom must deliver to the Warrant Agent a notice setting forth the name of
such independent financial expert. Group Telecom must use its best efforts
(including by selecting another independent financial expert) to cause the
independent financial expert to deliver to Group Telecom, with a copy to the
Warrant Agent, a value report which states the relevant value of the class B
47
<PAGE> 52
non-voting shares or warrants or other securities being valued as of the
valuation date and contains a brief statement as to the nature and scope of the
methodologies upon which the determination was made. The Warrant Agent will have
no duty with respect to the value report of any independent financial expert,
except to keep it on file and available for inspection by the holders of the
warrants. The determination of the independent financial expert as to the
relevant value in accordance with the provisions of the warrant agreement will
be conclusive on all persons.
REGISTRATION COVENANT
Group Telecom entered into a registration rights agreement (the "Warrants
Registration Rights Agreement") pursuant to which Group Telecom agreed, for the
benefit of the holders of the warrants, to file with the Commission the shelf
registration statement (the "Class B Registration Statement"), of which this
prospectus forms a part, under the Securities Act relating to the resale of the
warrants and the class B non-voting shares issuable upon the exercise of the
warrants upon the earlier to occur of
(1) the 180th day following the initial public offering of the class B
non-voting shares of Group Telecom; or
(2) December 31, 2001,
and to use its best efforts to cause such registration statement to become
effective within 90 days following its filing.
Group Telecom agreed to use its best efforts to keep the Class B
Registration Statement effective until the earlier to occur of (i) the second
anniversary of the effective date of the registration statement or (ii) such
time as there are no longer outstanding any warrants or class B non-voting
shares issuable upon exercise of the warrants; provided that Group Telecom may
postpone the filing of, or suspend the effectiveness of, any registration
statement or amendment thereto, suspend the use of any prospectus and shall not
be required to amend or supplement the Class B Registration Statement, any
related prospectus or any document incorporated therein by reference in the
event that, and for a period (a "Suspension Period") not to exceed an aggregate
of 60 days,
(1) an event or circumstance occurs and is continuing as a result of
which the Class B Registration Statement, any related prospectus
or any document incorporated therein by reference as then
supplemented or proposed to be filed would, in Group Telecom's
good faith judgment, contain an untrue statement of material fact
or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and
(2) Group Telecom determines in its good faith judgment that the
disclosure of such an event at such time would have a material
adverse effect on the business, operations or prospects of Group
Telecom or the disclosure otherwise relates to a material business
transaction that has not yet been publicly disclosed.
If the Class B Registration Statement is not declared effective by the
earlier to occur of (1) the 270th day following the initial public offering of
the class B non-voting shares of Group Telecom or (2) March 31, 2002, and the
class B non-voting shares are not at that time listed on a stock exchange
prescribed for Canadian income tax purposes, Group Telecom will be required to
make an offer to purchase all of the outstanding warrants at a price at least
equal to the Current Market Value of the warrants.
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<PAGE> 53
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 41
Austin, TX
Daniel R. Milliard................... Chief Executive Officer and Director 53
Toronto, ON
Robert G. Wolfe...................... President, Chief Operating Officer and Director 44
Toronto, ON
Stephen H. Shoemaker................. Executive Vice President and Chief Financial Officer 39
Toronto, ON
Eric A. Demirian..................... Executive Vice President, Corporate Development 42
Toronto, ON
Michael A. Aymong.................... Executive Vice President, Marketing and Sales 36
Toronto, ON
Robert Watson........................ Executive Vice President, Carrier Services 52
Toronto, ON
Robert M. Fabes...................... Senior Vice President, General Counsel and Corporate 39
Toronto, ON Secretary
Ashok Bhatt.......................... Senior Vice President, Engineering 54
Toronto, ON
Andrew J. Csinger.................... Senior Vice President, Systems Services 37
Toronto, ON
Steven L. Koles...................... Senior Vice President, Marketing 30
Toronto, ON
C. William Rainey.................... Senior Vice President, Sales 47
Toronto, ON
Malcolm Rodrigues.................... Senior Vice President, National Operations 33
Toronto, ON
Patricia A. Saltys................... Vice President, Finance 36
Vancouver, BC
Michael Abram........................ Director 48
Calgary, AB
Michael D'Avella..................... Director 42
Calgary, AB
George Estey......................... Director 44
Toronto, ON
Leo J. Hindery, Jr................... Director 53
Hillsborough, CA
P. Kenneth Kilgour................... Director 40
Toronto, ON
Robert R. Gheewalla.................. Director 33
New York, NY
Jim Shaw............................. Director 43
Calgary, AB
</TABLE>
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<PAGE> 54
JAMES G. MATKIN Mr. Matkin has been the chairman of the board since
September 1997. Mr. Matkin is the chief executive officer of the Law Society of
British Columbia. With over 9,000 members, the Law Society is the governing body
for the British Columbia legal profession. Mr. Matkin has extensive experience
in law, government and business. He is a public policy practitioner and a
Harvard Law School graduate who began his legal career on Wall Street in New
York City before clerking with Mr. Justice Martland of the Supreme Court of
Canada. A former director of the Bank of Canada, Mr. Matkin currently serves on
the boards of several public and private organizations, including the Provincial
Chair of the Council for Canadian Unity. As president of the Business Council of
British Columbia for 10 years (1983-93), Mr. Matkin has represented more than
150 of the largest companies in Canada in their business-government relations.
JAMES M. MANSOUR Mr. Mansour has been a director since April 1998. Mr.
Mansour is former President and owner of National Telecommunications of Florida,
a long distance carrier providing voice and data telecommunications services to
businesses in 32 states which he sold in 1998 to Inter Media Communications,
Inc. Prior to that time, Mr. Mansour founded and ran National Telecommunications
of Austin, one of the largest regional long distance carriers in the United
States, which he sold to WorldCom in March of 1991. In addition, Mr. Mansour
currently serves on the Board of Netpliance, a company providing high-speed
Internet access services. Mr. Mansour holds a Juris Doctorate degree from Tulane
Law School and is a certified public accountant.
DANIEL R. MILLIARD Mr. Milliard has been our chief executive officer since
September, 1999. Mr. Milliard was most recently senior vice president and
secretary of Adelphia Communications and vice chairman and president of Hyperion
Communications. Prior to that time, Mr. Milliard was the first president and
chief operating officer of Hyperion Communications, led the company from its
inception and was instrumental in growing it to become a national competitive
local exchange carrier. He also served as vice president, secretary and/or
general counsel of Adelphia. Mr. Milliard graduated from American University in
1970 with a Bachelor of Science degree in Business Administration. He received
an M.A. degree in Business from Central Missouri State University in 1971, where
he was an instructor in the Department of Finance, School of Business and
Economics, from 1971 to 1973. Mr. Milliard received his Juris Doctor degree from
the University of Tulsa School of Law in 1976. Mr. Milliard is a director of
Charles Cole Memorial Hospital.
ROBERT G. WOLFE Mr. Wolfe has been a director and our president since
February 1999. Prior to joining us, Mr. Wolfe served as chief financial officer
of Trillium Corporation, an international investment company. In addition, he
has significant experience in senior corporate finance positions with Goldman
Sachs. Mr. Wolfe held three overseas posts for Goldman Sachs in London, Tokyo
and Hong Kong. Mr. Wolfe 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.
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
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<PAGE> 55
sales support for TELUS in Calgary. In this position, he managed the marketing
efforts during TELUS' merger with BC Tel. Before joining TELUS, Mr. Aymong was
director of operations of the former MetroNet. Mr. Aymong holds an MBA from the
University of Western Ontario. He is also on the board of directors for the
Muttart Art Gallery, Vicom Communications and Big Picture Technologies and
participates in several other community and business organizations.
ROBERT C. WATSON Mr. Watson has been our executive vice president, carrier
services since February 2000. Mr. Watson was most recently president of Shaw
FiberLink. Prior to that time, Mr. Watson was president and chief executive
officer of ACC Telenterprise. Before then, he was executive vice president and
country manager for Cable & Wireless Inc. Mr. Watson is a graduate in Electronic
Technologies from Ryerson Polytechnical University.
ROBERT M. FABES Mr. Fabes has been our general counsel and corporate
secretary since June 21, 1999. Prior to joining us, he practiced in the area of
corporate finance with Goodman Phillips & Vineberg, Vancouver, our primary
outside legal counsel. Mr. Fabes received his law degrees from McGill University
in 1992 and is a member of both the British Columbia and Quebec law societies.
ASHOK BHATT Mr. Bhatt has been our senior vice president, engineering
since February 2000. Mr. Bhatt brings to our company more than 30 years of
experience both at national and international levels in all aspects of network
services (technology, engineering, and operations). Prior to joining us, Mr.
Bhatt held a senior management consulting position for strategic planning with
Bell Canada International and also held several senior management positions at
Bell Sygma and Bell Canada. Mr. Bhatt received his Masters of Engineering degree
from the Technical University of Nova Scotia and is a member of the Association
of Professional Engineers of Ontario.
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
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<PAGE> 56
position with Trillium Communications, a cable television company in Ontario
which was purchased by Shaw Communications in 1994, where he helped launch the
CAP division. Mr. Rodrigues holds an Electrical Engineering degree from the
University of Toronto and is a licensed Professional Engineer in the Province of
Ontario.
PATRICIA A. SALTYS Ms. Saltys has been our vice president, finance since
December 21, 1999. Prior to that, Ms. Saltys was our chief financial officer
from November 1997 to December 1999. Ms. Saltys was most recently the financial
controller for Bruce Allen Talent (a division of A&F Music) and the Bryan Adams
group of companies responsible for accounting, tax, investments, and financing.
Prior to that time, Ms. Saltys was Assistant Manager at Price Waterhouse in
Vancouver. Ms. Saltys has a Bachelor of Commerce from the University of
Saskatchewan and is a chartered accountant and a member of the Institute of
Chartered Accountants of British Columbia.
MICHAEL ABRAM Mr. Abram has been a director since March 23, 2000. Mr.
Abram is President of Shaw Ventures, the investment division of Shaw
Communications Inc. Prior to joining Shaw, Mr. Abram was the President of a
national office solutions company in Canada. Mr. Abram is a graduate of the
University of Calgary.
MICHAEL D'AVELLA Mr. D'Avella joined us as a director in February 2000.
Mr. D'Avella is the senior vice president of planning for Shaw Communications
and has served in this position since 1991. He has previously held senior
positions with the Canadian Cable Television Association and business
development positions with Telesat Canada. Mr. D'Avella is also a director of
Terayon Communications Systems Inc. (a provider of broadband access systems) and
Canadian Satellite Communications (Cancom). Mr. D'Avella is a graduate of the
University of Toronto with a B.A. in economics and planning.
GEORGE ESTEY Mr. Estey joined us as a director in February 2000. Mr. Estey
is the Chairman of Goldman Sachs Canada. Prior to this, he was involved in
various roles within Goldman, Sachs & Co.'s Investment Banking Division since
joining the firm in 1987. Mr. Estey was also a consultant with McKinsey & Co.
Mr. Estey holds an MBA from the Harvard Graduate School of Business
Administration and a B.Sc. from the University of New Brunswick.
LEO J. HINDERY, JR. Mr. Hindery has been a director since March 23, 2000.
Mr. Hindery is currently chairman and chief executive officer of GlobalCenter
Inc., the Internet commerce services subsidiary of Global Crossing (from March
2000 until October 2000, he was also, on an interim basis, chief executive
officer of Global Crossing Ltd.). 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
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<PAGE> 57
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 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, 2000, we had thirteen executive officers. At September 30,
2000, aggregate cash compensation of $1,242,000 was paid to our executive
officers who were members of our board of directors, and $2,122,700 was paid to
our other executive officers, including salaries, bonuses and other amounts paid
by us.
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<PAGE> 58
SUMMARY COMPENSATION TABLE
We paid the following compensation during the year ended September 30, 2000
to our executive officers:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ------------------------------------------------------
AWARDS PAYOUTS
----------------------------- -------
SECURITIES RESTRICTED
UNDER SHARES OR
OTHER ANNUAL OPTIONS RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
--------------------------- -------- ------- ------------ --------------- ----------- ------- ------------
($) ($) ($) (#) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel R. Milliard........ $416,700 800,000(6) 209,725(2) 175,000 Class B(6) -- -- --
(Chief Executive Officer
and Director)
Robert G. Wolfe........... $358,300 560,000(5)(6) 14,903(3) 100,000 Class B(6) -- -- --
(President, Chief Operating
Officer and Director)
Stephen H. Shoemaker...... $180,700 225,000 -- 460,000 Class B -- -- --
(Executive Vice President
and Chief Financial
Officer)
Eric A. Demirian.......... $167,200 200,000 6,200(4) 440,000 Class A -- -- --
(Executive Vice President,
Corporate Development)
Michael A. Aymong......... $173,500 215,000 -- 260,000 Class A -- -- --
(Executive Vice President,
Marketing and Sales)
Robert Watson............. $150,000 150,000 15,000(7)(8) 340,000 Class A -- -- --
(Executive Vice President,
Carrier Services)
Marek K. Wieckowski(1).... $173,600 90,000 -- -- -- -- --
(Executive Vice President,
Network Services)
Robert M. Fabes........... $132,500 61,250 -- 105,000 Class A -- -- --
(Senior Vice President,
General Counsel and
Corporate Secretary)
Ashok Bhatt............... $ 90,700 32,667 -- 90,000 Class A -- -- --
(Senior Vice President,
Engineering)
Andrew J. Csinger......... $140,000 67,000 -- 50,000 Class A -- -- --
(Senior Vice President,
Systems Services)
Steven L. Koles........... $143,100 66,333 4,400(9) 77,000 Class A -- -- --
(Senior Vice President,
Marketing)
C. William Rainey......... $144,800 51,612 9,200(8)(10) 87,000 Class A -- -- --
(Senior Vice President,
Sales)
Malcolm Rodriguez......... $ 86,800 27,800(2) -- 91,000 Class A -- -- --
(Senior Vice President,
National Operations)
Patricia A. Saltys........ $124,800 60,750 -- 20,000 Class A -- -- --
(Vice President, Finance)
</TABLE>
---------------
(1) Resigned effective April 30, 2000.
(2) Includes imputed interest of $209,725 accrued, at the effective federal
interest rate of the Internal Revenue Code, on an option exercise loan for
an aggregate amount of $4 million and on housing loan of approximately $1
million to Daniel R. Milliard.
(3) Includes imputed interest of $14,903 accrued, at the effective federal
interest rate of the Internal Revenue Code, on an option exercise loan of
$312,500 to Robert G. Wolfe.
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<PAGE> 59
(4) Includes imputed interest of $6,200 accrued, at the prescribed interest rate
of the Canada, Customers and Revenue Agency, on a loan for an aggregate
amount of $190,000 to Eric A. Demirian.
(5) The Company also paid $250,000 during the fiscal year ended September 30,
2000, representing a bonus awarded during the fiscal year ended September
30, 1999.
(6) Subject to board ratification.
(7) Includes imputed interest of $1,250 accrued, at the prescribed interest rate
of the Canada, Customs Revenue Agency, on a housing loan of $250,000 to
Robert Watson.
(8) Includes $13,750 paid to Robert Watson and $7,400 paid to C. William Rainey
for auto allowances.
(9) Includes imputed interest of $4,400 accrued, at the prescribed interest rate
of the Canada, Customs Revenue Agency, on a housing loan of $200,000 to
Steven L. Koles.
(10)Includes imputed interest of $1,800 accrued, at the prescribed interest rate
of the Canada, Customs and Revenue Agency, on a housing loan of $275,000 to
C. William Rainey.
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.
We do not have any plans providing for pension, retirement or similar
benefits. The compensation committee of our board has the discretion to approve
bonus payments to all employees, including executive officers.
REMUNERATION OF DIRECTORS
We currently have 11 directors. No compensation is paid to directors in
their capacity as such. We grant share options to our directors and reimburse
them for their out of pocket expenses with respect to attendance at board
meetings. We maintain $5,000,000 in directors' and officers' liability
insurance.
OPTIONS
At December 31, 2000 we had 9,160,670 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 December 31, 2000 the following options
to purchase a total of 2,969,124 class A voting shares and a total of 1,823,200
class B non-voting shares:
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<PAGE> 60
<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 May 31, 2001 190,000
Chairman and Director 80,000 Nov. 18, 1997 0.50 May 31, 2001
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 460,000
Executive Vice President 60,000(1) Oct. 4, 2000 19.42 Oct. 4, 2005
and Chief Financial Officer
Eric A. Demirian.......... 400,000 Dec. 16, 1999 3.00 Dec. 16, 2004 440,000
Executive Vice President, 40,000 Oct. 4, 2000 19.42 Oct. 4, 2005
Corporate Development
Michael A. Aymong......... 90,000(1) July 15, 1999 1.50 July 15, 2004 352,200
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
2,200 Aug. 22, 2000 20.40 Mar. 9, 2001
Oct. 4, 2000 19.42 Oct. 4, 2005
40,000
Robert Watson............. 300,000 Feb. 9, 2000 8.00 Feb. 9, 2005 340,000
Executive Vice President 40,000 Oct. 4, 2000 19.42 Oct. 4, 2005
Carrier Services
Robert M. Fabes........... 15,000(1) July 15, 1999 1.50 July 15, 2004 124,600
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 4,600 Aug. 22, 2000 20.40 Mar. 9, 2001
35,000 Oct. 4, 2000 19.42 Oct. 4, 2005
Ashok Bhatt............... 40,000 Feb. 15, 2000 8.00 Feb. 15, 2005 90,000
Senior Vice President, 20,000 Feb. 15, 2000 8.00 Feb. 15, 2005
Engineering 30,000 Oct. 4, 2000 19.42 Oct. 4, 2005
Andrew J. Csinger......... 95,000 Mar. 9, 1999 1.25 Sep. 30, 2003 145,000
Senior Vice President, 25,000 Dec. 16, 1999 3.00 Dec. 16, 2004
Systems Services 25,000 Oct. 4, 2000 19.42 Oct. 4, 2005
Steven L. Koles........... 20,000(1) July 15, 1999 1.50 July 15, 2004 101,600
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
4,600 Aug. 22, 2000 20.40 Mar. 9, 2001
30,000 Oct. 4, 2000 19.42 Oct. 4, 2005
C. William Rainey......... 20,000(1) July 15, 1999 1.50 July 15, 2004 108,800
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
1,800 Aug. 22, 2000 20.40 Mar. 9, 2001
30,000 Oct. 4, 2000 19.42 Oct. 4, 2005
</TABLE>
56
<PAGE> 61
<TABLE>
<CAPTION>
TOTAL NUMBER
NUMBER EXERCISE OF SHARES
NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION
--------------------------- --------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Malcolm Rodrigues......... 61,000 Feb. 9, 2000 8.00 Feb. 9, 2005 91,000
Senior Vice President, 30,000 Oct. 4, 2000 19.42 Oct. 4, 2005
National Operations
Patricia A. Saltys........ 30,000 Oct. 15, 1997 1.00 May 31, 2001 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: 4,792,324
=========
</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> 62
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 services are subsidized. Since the
introduction of facilities-based long distance competition in 1992, local
telephone services in Canada have been subsidized by "contribution" payments
from both incumbent and competitive long distance service providers based on the
minutes of long distance traffic that originate or terminate on the local
switched telephone network or on cross-border or overseas access circuits.
On November 30, 2000, the CRTC announced that the contribution system will
be completely overhauled. Effective January 1, 2001, the current per-minute
mechanism will be replaced with a mechanism based on a percentage of eligible
Canadian telecommunications services revenues. The new mechanism will be
national in scope and will be assessed on all Canadian telecommunications
service providers (including competitive local exchange carriers, resellers,
wireless providers, satellite service providers, international licensees,
payphone providers, data and private line providers) with annual revenues from
Canadian telecommunications services of at least $10 million. Contribution-
eligible revenues are determined by including all revenues from Canadian
telecommunications services, less any contribution revenues received,
inter-carrier expenses paid to other service providers for the provision of
contribution-eligible services, and all revenues from retail Internet services,
retail paging services and the sale and rental of terminal equipment. For 2001,
an interim rate of 4.5% of contribution-eligible revenues has been set; a final
rate will be determined in mid-2001 and will be retroactive to January 1, 2001.
As a result of this decision, we will be required to pay contribution on
certain services we offer, such as local telephone service, which have not
previously been subject to contribution. However, the amount of contribution
payable in respect of our long distance voice and data services can be expected
to decline. As well, starting January 1, 2001 the subsidy will only be used to
support local services in high-cost serving areas and the CRTC has announced
that the way in which the subsidy is calculated will be revised effective
January 1, 2002. These changes should result in a reduction in the total amount
of the subsidy, and consequently a reduction in the percentage of contribution
we will be required to pay.
REGULATION OF COMPETITIVE LOCAL EXCHANGE CARRIERS
Although the CRTC has determined that competitive local exchange carriers
are non-dominant carriers that should not be subject to the same degree of
regulation as the incumbent local exchange carriers, the CRTC requires
competitive local exchange carriers to assume certain obligations. For example,
competitive local exchange carriers must file, for CRTC approval,
interconnection
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<PAGE> 65
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 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
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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 was available only to facilities-based carriers interconnecting with
incumbent local exchange carriers under the terms of an agreement and a tariff.
This limitation of mandated co-location to facilities-based carriers created an
opportunity for competitive local exchange carriers to use their transmission
capacity for connection at central offices to provide services to other
telecommunications service providers, including resellers and Internet
providers, which did not have access to mandated co-location arrangements.
However, in September 2000, the CRTC granted mandated co-location and access to
unbundled loops and connecting links to digital subscriber line service
providers. The CRTC prohibited digital subscriber line service providers from
using these arrangements to provide switched local voice services.
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. Competitive telecommunications service providers have identified a
number of problems with the current co-location regime, including, among other
issues, an apparent lack of space in the incumbents' central offices and their
reticence to provide physical co-location, limitations on the type of equipment
allowed within the central offices, the difficulty of obtaining co-location
within the time frames specified by the CRTC and problems gaining access to
co-located equipment on a timely basis. We are one of the 12 competitive
providers which has joined the Coalition for Better Co-Location to attempt to
resolve these issues through consultation with the CRTC's Co-location Sub-
Working Group, as well as through applications for relief from the CRTC.
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
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price cap regime. In addition, the CRTC regulates the rates of certain local
"competitor services" outside the price cap regime. These services are provided
by the incumbent local exchange carriers to their competitors, such as
competitive local exchange carriers, in order to allow their competitors to
provide local and long distance services. Examples of services included in this
category are equal access services provided to long distance service providers,
unbundled local loops, and network access services provided to wireless
carriers. These services are subject to detailed rate regulation and the prices
are set at long run incremental cost plus a 25% markup.
Despite the price constraints contained in the CRTC's price cap regime, the
incumbent local exchange carriers still have the ability under price cap
regulation to increase prices for local services for which there is little
competition (such as residential and single line business local services) and
use the excess profits generated from these activities to subsidize price
reductions in competitive services (such as business and government local
services) that are included in the same basket of services.
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, currently 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. However, as of January
1, 2001, all telecommunications service providers will be required to contribute
to the subsidy based on a percentage of revenues derived from
contribution-eligible Canadian telecommunications services. We will make
contribution payments calculated as a percentage of revenues earned from our
long distance voice and data services, as well as from other eligible services.
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
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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 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 September 2000, the CRTC approved an application by a U.S.-based
provider of digital subscriber line services for 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, as well as
an application by Bell Canada for approval of a tariff under which it would
provide access to its unbundled local loops to resellers using digital
subscriber line access technology. This decision creates 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.
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). The CRTC has initiated a proceeding to consider
its regulatory approach to facilitating non-discriminatory access and customer
choice in multi-dwelling units. Participants have been asked to comment on
possible fees or charges for access and other terms and conditions. A
determination is expected in February 2001.
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In December 1999, the CRTC initiated a proceeding to examine the terms and
conditions the city of Vancouver may impose for access to public lands in order
to construct, maintain and operate telecommunications facilities. The outcome of
this proceeding may permit other service providers to obtain such access on
terms more favorable than those in our agreement with the city of Vancouver, or
may permit us to renegotiate our agreement with the city of Vancouver to the
extent that our agreement contains less favourable terms than those approved by
the CRTC.
REGULATION OF WIRELESS SERVICES
Use of radio spectrum to provide wireless telecommunications services is
subject to licensing by Industry Canada under the Radiocommunication Act
(Canada). Under this legislation, Industry Canada is authorized to issue radio
licences, to plan the allocation and use of the radio spectrum and to perform
other duties to ensure the orderly development and efficient operation of
radiocommunication in Canada. With respect to spectrum licensing, Industry
Canada has the authority to revoke a licence for non-compliance with terms and
conditions or failure to pay associated spectrum licence fees. However,
revocation is rare and licences are usually renewed year to year upon payment of
the applicable fee. Industry Canada levies licence fees on wireless
telecommunications service providers, and generally not on subscribers for the
services offered by such providers.
Industry Canada has issued spectrum licences to us in the 38 GHz frequency
range which allow us to operate point-to-point radio systems in Vancouver,
Calgary, Toronto, Ottawa and Montreal. To obtain licences, applicants operating
as radiocommunication carriers must comply with foreign ownership restrictions
under the Radiocommunication Act.
FOREIGN OWNERSHIP RESTRICTIONS
Group Telecom, and our operating subsidiary GT Group Telecom Services
Corp., which is a telecommunications common carrier for regulatory purposes, are
required by the Canadian Telecommunications Act and the Radiocommunication Act,
and the regulations made under both statutes, to be Canadian-owned and
controlled corporations incorporated or continued under the laws of Canada or a
province of Canada. Our operating subsidiary is deemed to be Canadian-owned and
controlled if: (i) not less than 80% of the members of its board of directors
are Canadians; (ii) Canadians beneficially own and control not less than 80% of
its issued and outstanding voting shares; and (iii) it is not otherwise
controlled in fact by persons that are not Canadians. GT Group Telecom Services
Corp. is a Canadian carrier wholly owned and controlled by us and not less than
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
65
<PAGE> 70
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 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.
66
<PAGE> 71
RELATED PARTY TRANSACTIONS
AGREEMENTS WITH OUR SHAREHOLDERS
Affiliates of Goldman Sachs and CIBC Capital Partners participated in our
series A first preference share offering in May 1999 and received options to
purchase additional series A first preference shares at a price of $1.875 per
share. See "Description of Share Capital". These options were exercised in full
in August 1999. Robert Gheewalla, one of our directors, is a vice president in
the Principal Investment Area at Goldman Sachs. George Estey, another of our
directors, is Chairman of Goldman Sachs Canada. Kenneth Kilgour, another of our
directors, is managing director and head of CIBC Capital Partners. In addition,
three of our directors are executive officers of Shaw Communications. These
directors are Michael Abram, Michael D'Avella and Jim Shaw. In connection with
our series A first preference share offering, on May 7, 1999, we entered into a
shareholders' agreement with our shareholders, including the holders of all of
our then outstanding series A first preference shares. On February 16, 2000, in
connection with our acquisition of the business of Shaw FiberLink, we amended
and restated this agreement to include Shaw Communications as a party. For a
detailed description of this agreement, see "Description of Share Capital"
beginning on page 90. Eleven of our current directors and executive officers are
signatories to the agreement.
67
<PAGE> 72
PRINCIPAL SHAREHOLDERS
To our knowledge, 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 67 and "Description of Share Capital" beginning on
page 90 for a description of these rights. In addition, upon completion of our
acquisition of the business of Shaw FiberLink, Shaw Communications was issued
series B first preference shares (which have now converted into class A voting
shares), became a party to the shareholders' agreement and has similar voting
and other rights.
The following table sets forth, to our knowledge, information as of
December 31, 2000, for (i) each person who beneficially owns 5% or more of our
then issued and outstanding class A voting shares and (ii) all of our directors
and executive officers as a group. The number of shares beneficially owned by a
person includes class A voting shares subject to options held by that person
that were currently exercisable at, or exercisable within 60 days of, December
31, 2000. The class A voting shares issuable under those options are treated as
if they were outstanding for computing the percentage ownership of the person
holding these options but are not treated as if they were outstanding for the
purposes of computing the percentage ownership outstanding for any other person.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME CLASS A SHARES CLASS A SHARES
---- -------------- --------------
<S> <C> <C>
Shaw Communications......................................... 29,096,097 36.55
Goldman Sachs(1)............................................ 18,999,999 23.87
Canadian Imperial Bank of Commerce.......................... 7,500,000 9.42
Directors and executive officers (22 persons)............... 1,362,174 1.71
</TABLE>
---------------
(1) As of December 31, 2000, Goldman Sachs also owned 11,000,002 class B
non-voting shares, representing approximately 26.70% of the class B
non-voting shares then issued and outstanding.
68
<PAGE> 73
SELLING SHAREHOLDERS
All warrants offered hereby by the selling shareholders were originally
issued by Group Telecom as part of a unit which also consisted of our 13 1/4%
senior discount notes. Any class B non-voting shares offered hereby by the
selling shareholders will be issued to the selling shareholders upon the
exercise by the selling shareholders of the warrants held by such selling
shareholder. The following table sets forth certain information that has been
provided to us by the selling shareholders. Information regarding their
beneficial ownership of the class B non-voting shares assumes that all warrants
currently owned by the selling shareholders have been exercised by the selling
shareholders as of the date hereof.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
AEGON USA Pension Plan 2,000 9,821 * 2,000(9) 9,821 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
AUSA Life Insurance Company 6,000 29,463 * 6,000(9) 29,463 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
Life Investors Insurance 2,000 20,870 * 2,000(9) 20,870 0 *
Company of America
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
Veterans Life Insurance Company 4,250 9,821 * 4,250(9) 9,821 0 *
c/o AEGON USA
4333 Edgewood Road NE
Cedar Rapids, IA 52499-5112
AIM High Yield Fund 28,900 141,916 * 28,900 141,916 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM High Yield Fund II 3,000 32,731 * 3,000 14,731 18,000 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM Canadian Bond Fund 100 491 * 100 491 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
AIM V.I. High Yield Fund 500 2,455 * 500 2,455 0 *
c/o AIM Capital Management
11 Greenway Plaza #100
Houston, TX 77046
Shell Canada Pension Trust 2,000 9,821 * 2,000 9,821 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
</TABLE>
69
<PAGE> 74
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Altamira Balanced Fund 400 1,964 * 400 1,964 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Altamira Growth and Income Fund 500 2,455 * 500 2,455 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Altamira High Yield Bond Fund 1,200 5,892 * 1,200 5,892 0 *
c/o Altamira Management Limited
The Exchange Tower
130 King Street West, Suite 900
Toronto, Ontario
Canada M5X 1K9
Ares Leveraged Investment 9,800 48,123 * 9,800 48,123 0 *
Fund II, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
Ares Leveraged Investment 4,450 21,852 * 4,450 21,852 0 *
Fund, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
AXP Variable Portfolio -- 750 3,682 * 750 3,682 0 *
Managed Fund
c/o American Express Financial
Corporation
50592 AXP Financial Center
Minneapolis, MN 55474
AXP Variable Portfolio -- Extra 4,110 20,182 * 4,110 20,182 0 *
Income Fund
c/o American Express Financial
Corporation
50592 AXP Financial Center
Minneapolis, MN 55474
High Yield Portfolio 20,915 102,705 * 20,915 102,705 0 *
c/o American Express Financial
Corporation
50592 AXP Financial Center
Minneapolis, MN 55474
Total Return Portfolio 275 1,350 * 275 1,350 0 *
c/o American Express Financial
Corporation
50592 AXP Financial Center
Minneapolis, MN 55474
</TABLE>
70
<PAGE> 75
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
American Express Retirement Plan 300 1,473 * 300 1,473 0 *
-- High Yield Fixed Income
c/o American Express Asset
Management Group
50189 AXP Financial Center
Minneapolis, MN 55474
BMO CBO Portfolio G7117 4,750 23,325 * 4,750 23,325 0 *
c/o Bank of Montreal
First Canadian Place, 10th Floor
Toronto, Ontario
Canada M5X 1A1
Capital Guardian U.S. Fixed- 8,500 41,740 * 8,500 41,740 0 *
Income
Master Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital Guardian U.S. High-Yield 7,000 34,374 * 7,000 34,374 0 *
Fixed Income Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital Guardian Global 975 4,787 * 975 4,787 0 *
High-Yield
Fixed Income Fund
Semi-Monthly Valued
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
Capital International Global 500 2,455 * 500 2,455 0 *
High Yield Fund
c/o Capital International, Inc.
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025
American High-Income Trust 22,525 110,611 * 22,525 110,611 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
The Bond Fund of America, Inc. 9,500 46,650 * 9,500 46,650 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
The Income Fund of America, Inc. 24,750 121,537 * 24,750 121,537 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
Capital World Bond Fund, Inc. 1,000 4,910 * 1,000 4,910 0 *
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
</TABLE>
71
<PAGE> 76
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
American Variable Insurance 2,250 11,048 * 2,250 11,048 0 *
Series -- Asset Allocation Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
American Variable Insurance 2,000 9,821 * 2,000 9,821 0 *
Series -- Bond Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
American Variable Insurance 6,500 31,918 * 6,500 31,918 0 *
Series -- High Yield Bond Fund
c/o Capital Research &
Management Company
135 South State College Blvd
Brea, California 92821
CIBC World Markets Corp.(2) 8,455 41,519 * 8,455 41,519 0 *
425 Lexington Avenue
New York, NY 10017
Signature High Income Fund 4,050 19,887 * 4,050 19,887 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Signature Corporate Bond Fund 700 3,437 * 700 3,437 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Insight Canadian High Yield 100 491 * 100 491 0 *
Income Pool
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
Keystone High Income Fund 500 2,455 * 500 2,455 0 *
c/o CI Mutual Funds
151 Yonge Street, 8/F
Toronto, Ontario
Canada M5C 2W7
DLJ High Yield Bond Fund 6,750 33,146 * 6,750 33,146 0 *
c/o Custodial Trust Co.
101 Carnegie Center
Princeton, NJ 08540
Triax Diversified High Yield 10,650 52,297 * 10,650 52,297 0 *
Trust
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
</TABLE>
72
<PAGE> 77
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
West Fraser Timber 500 2,455 * 500 2,455 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Kingsway Reinsurance (Bermuda) 650 3,191 * 650 3,191 0 *
Limited
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
DFC Active Fixed Income Fund 2,550 12,522 * 2,550 12,522 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Navigator Canadian Income Fund 650 3,191 * 650 3,191 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Falcon Bridge Bond Fund #2 1,750 8,593 * 1,750 8,593 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
Deans Knight Bond Fund 8,000 39,284 * 8,000 39,284 0 *
c/o Deans Knight Capital
Management
999 West Hastings Street
Suite 730
Vancouver, B.C., Canada
V6C 2W2
Colonial First State North 1,900 9,330 * 1,900 9,330 0 *
American High Yield Fund
c/o Deans Knight Capital
Management
999 West Hastings Street Suite
730
Vancouver, B.C.
Canada V6C 2W2
</TABLE>
73
<PAGE> 78
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eaton Vance High Income 13,900 68,257 * 13,900(10) 68,257 0 *
Portfolio
c/o Eaton Vance Management
High Yield Group
255 State Street
Boston, MA 02109
Eaton Vance Income Fund of 5,650 27,744 * 5,650(11) 27,744 0 *
Boston
c/o Eaton Vance Management
High Yield Group
255 State Street
Boston, MA 02109
First Investors Fund for Income, 3,500 17,187 * 3,500 17,187 0 *
Inc.
95 Wall Street, 22nd Floor
New York, NY 10005
First Investors Special Bond 250 1,227 * 250 1,227 0 *
Fund, Inc.
95 Wall Street, 22nd Floor
New York, NY 10005
Primus Multi-Sector Credit 1,500 7,365 * 1,500 7,365 0 *
Master Fund, Inc.(3)
c/o Goldman, Sachs & Co.
85 Broad Street
New York, N.Y. 10004
Guardian Life Insurance Co/ 8,000 39,284 * 8,000 39,284 0 *
High Yield Securities
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
Guardian High Yield Bond Fund 2,100 10,312 * 2,100 10,312 0 *
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
Guardian VC High Yield Bond Fund 900 4,419 * 900 4,419 0 *
c/o Guardian Life Insurance Co.
of America
7 Hanover Square/20-D
New York, NY 10004
ING Funds Trust -- ING High 500 2,455 * 500 2,455 0 *
Yield Bond Fund
c/o ING Funds Trust
1475 Dunwoody Drive
West Chester, PA 19380
INVESCO Variable Investment Fund 400 1,964 * 400 1,964 0 *
Inc. -- High Yield Fund
7800 E. Union Avenue, Suite 501
Denver, CO 80237
INVESCO Bond Funds, Inc. -- 5,600 27,499 * 5,600 27,499 0 *
High Yield Fund
7800 E. Union Avenue, Suite 501
Denver, CO 80237
</TABLE>
74
<PAGE> 79
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
John Hancock High Income Account 200 982 * 200 982 0 *
101 Huntington Avenue
Boston, MA 02199
SG/Russell Funds PLC 65 319 * 65 319 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
City of New York Employees 2,020 9,919 * 2,020 9,919 0 *
Ret. Sys Fix Account
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Souther Company Strategic Yield 640 3,142 * 640 3,142 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
BP Amoco Global Strategic Yield 185 908 * 185 908 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
HSBC Republic Investments 5 24 * 5 24 0 *
Limited
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
AGF High Yield Fund 215 1,055 * 215 1,055 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Felra & Ufcw Pension Fund 1,295 6,359 * 1,295 6,359 0 *
High Yield
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Gen Retirement Sys for City of 135 662 * 135 662 0 *
Detroit
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Strategic Yield Portfolio 775 3,805 * 775 3,805 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Global Strategic Yield 290 1,424 * 290 1,424 0 *
Fund
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Triax Strategic Yield Management 65 319 * 65 319 0 *
World SY Fund
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
</TABLE>
75
<PAGE> 80
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lazard High Yield Portfolio 1,160 5,696 * 1,160 5,696 0 *
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Asset Management 350 1,718 * 350 1,718 0 *
Investment Trust
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Frank Russell Investment Mgt 35 171 * 35 171 0 *
Fixed Income
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Frank Russell Investment Mgt 40 196 * 40 196 0 *
Multi Strategy
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lazard Freres Global Strategic 225 1,104 * 225 1,104 0 *
Yield
c/o Lazard Asset Management
30 Rockefeller Plaza, 49(th)
Floor
New York, NY 10112-6300
Lutheran Brotherhood High Yield 7,500 36,829 * 7,500 36,829 0 *
Fund RF06
c/o Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, MN 55415
LB Series Fund, Inc. High Yield 13,500 66,293 * 13,500 66,293 0 *
Portfolio RF03
c/o Lutheran Brotherhood
625 Fourth Avenue South
Minneapolis, MN 55415
Atlas Canadian High Yield Bond 3,000 14,731 * 3,000 14,731 0 *
Fund
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Merrill Lynch Variable Series 7,750 38,057 * 7,750 38,057 0 *
Funds, Inc. High Current Income
Fund
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Corporate High Yield Fund III, 7,000 34,374 * 7,000 34,374 0 *
Inc.
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
</TABLE>
76
<PAGE> 81
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate High Yield Fund II, 1,500 7,365 * 15,000 7,365 0 *
Inc.
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
Corporate High Yield Fund, Inc. 4,500 22,097 * 4,500 22,097 0 *
c/o Merrill Lynch Investment
Managers
P.O. Box 9011
Princeton, NJ 08543-9011
MFS Series III: MFS High Yield 750 3,682 * 750 3,682 0 *
Opportunities Fund
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS/Sun Life High Yield Series 2,900 14,240 * 2,900 14,240 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Yield Variable Account 1,050 5,156 * 1,050 5,156 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Fund: VS High Yield Bond 100 491 * 100 491 0 *
Fund
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Income Fund 11,625 57,085 * 11,625 57,085 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Yield Fund 25 122 * 25 122 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Meridian VS High Yield Fund 2,525 12,399 * 2,525 12,399 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS High Income Series 550 2,700 * 550 2,700 0 *
c/o MFS Investment Management
500 Boylston Street
Boston, MA 02116
MFS Institutional Advisors, 475 2,332 * 475 2,332 0 *
Inc.(4)
500 Boylston Street
Boston, MA 02116
MAS High Yield Portfolio 12,000 58,927 * 12,000 58,927 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
77
<PAGE> 82
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
University of Pennsylvania High 2,550 12,522 * 2,550 12,522 0 *
Yield
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Multi-Asset Class Portfolio 140 687 * 140 687 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Offshore Leveraged Fixed Income 2,500 12,276 * 2,500 12,276 0 *
Fund Ltd.
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
High Yield Portfolio 1,850 9,084 * 1,850 9,084 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Morgan Stanley SICAV High Yield 4,290 21,066 * 4,290 21,066 0 *
Bond Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Morgan Stanley Global 240 1,178 * 240 1,178 0 *
Opportunity Bond Fund, Inc.
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MS High Yield Fund 2,145 10,533 * 2,145 10,533 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Van Kampen Worldwide High Income 950 4,665 * 950 4,665 0 *
Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
SunAmerica Series Trust 700 3,437 * 700 3,437 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
78
<PAGE> 83
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Van Kampen High Yield & Total 375 1,841 * 375 1,841 0 *
Return Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MSUF -- High Yield Portfolio 650 3,191 * 650 3,191 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Manufacturers Life Insurance 2,640 12,963 * 2,640 12,963 0 *
Company of New York
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Forthought Life Insurance 1,800 8,839 * 1,800 8,839 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Risk Capital Reinsurance 400 1,964 * 400 1,964 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MS Monthly Income Fund (Wako) 3,400 16,696 * 3,400 16,696 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
GE Investment Management 375 1,841 * 375 1,841 0 *
Incorporation
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
ITM Worldwide High Income Fund 575 2,823 * 575 2,823 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
MSDW SICAV European High Yield 5,000 24,553 * 5,000 24,553 0 *
Fund
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
The University of Chicago 475 2,332 * 475 2,332 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
</TABLE>
79
<PAGE> 84
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
LGT Capital Invest Ltd of Grand 560 2,749 * 560 2,749 0 *
Cayman
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
Gemini High Yield 500 2,455 * 500 2,455 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
SBLI High Yield 535 2,627 * 535 2,627 0 *
c/o Morgan Stanley Dean Witter
Investment Management
One Tower Bridge
West Conshohocken, PA 19428
The Northwestern Mutual Life 2,100 10,312 * 2,100 10,312 0 *
Insurance Company(5)
720 East Wisconsin Avenue
Milwaukee, WI 53202
Northwestern Mutual Series Fund, 1,650 8,102 * 1,650 8,102 0 *
Inc.(6)
720 East Wisconsin Avenue
Milwaukee, WI 53202
Mason Street Funds, Inc.(7) 500 2,455 * 500 2,455 0 *
720 East Wisconsin Avenue
Milwaukee, WI 53202
OZ Master Fund, Ltd. 48,500 238,164 * 48,500 238,164 0 *
9 West 57th Street
New York, NY 10019
OZF Credit Opportunities 3,000 14,731 * 3,000 14,731 0 *
Master Fund, Ltd.
9 West 57th Street
New York, N.Y. 10019
Pacific Life Insurance Company 3,750 18,414 * 3,750 18,414 0 *
700 Newport Center Drive
2nd Floor -- Securities
Operations
Newport Beach, CA 92660
Phoenix Goodwin High Yield Fund 5,450 26,762 * 5,450 26,762 0 *
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
Phoenix Goodwin Multi-Sector 4,000 19,642 * 4,000 19,642 0 *
Fixed Income Fund
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
Phoenix Edge Multi Sector Fixed 3,000 14,731 * 3,000 14,731 0 *
Income Fund
c/o Phoenix Investment Partners
56 Prospect Street
Hartford, CT 06115
</TABLE>
80
<PAGE> 85
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, 6,725 33,023 * 6,725 33,023 0 *
Inc., High Yield Bond Portfolio
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
Prudential High Yield Fund, Inc. 13,825 68,489 * 13,825 67,889 600 *
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
Prudential High Yield Total 1,170 8,545 * 1,170 5,745 2,800 *
Return Fund, Inc.
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
The Prudential Insurance Company 6,520 32,017 * 6,520 32,017 0 *
of America
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
The Prudential Life Insurance 260 1,276 * 260 1,276 0 *
Company of Arizona
c/o Prudential Investments
Two Gateway Center, 3rd Floor
Newark, NJ 07102
PW Managed High Yield Plus Fund 7,750 38,057 * 7,750 38,057 0 *
c/o Mitchell Hutchins
51 West 52nd Street, 21st Floor
New York, NY 10019
Smith Barney Diversified 2,750 13,504 * 2,750 13,504 0 *
Strategic Income Fund
388 Greenwich Street, 23rd Floor
New York, NY 10013
Greenwich St. Series -- 85 417 * 85 417 0 *
Diversified Strategic Income
Portfolio
388 Greenwich Street, 23rd Floor
New York, NY 10013
Global Horizons: Diversified 50 245 * 50 245 0 *
Strategic Income
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney High Income Fund 5,215 25,608 * 5,215 25,608 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
High Income Opportunity Fund, 2,490 12,227 * 2,490 12,227 0 *
Inc.
388 Greenwich Street, 23rd Floor
New York, NY 10013
Managed High Income Fund 1,500 7,365 * 1,500 7,365 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney Balanced Fund 740 3,633 * 740 3,633 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
</TABLE>
81
<PAGE> 86
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
SB/Travelers High Income 695 3,412 * 695 3,412 0 *
Portfolio
388 Greenwich Street, 23rd Floor
New York, NY 10013
Smith Barney USA High Yield Fund 230 1,129 * 230 1,129 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
Zenix Income Fund 495 2,430 * 495 2,430 0 *
388 Greenwich Street, 23rd Floor
New York, NY 10013
Spinnaker Offshore Ltd. 2,000 9,821 * 2,000 9,821 0 *
c/o ING Ghent Asset Management
LLC
230 Park Avenue
New York, NY 10169
The Surdna Foundation 612 3,005 * 612 3,005 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
UMASS Memorial Health Care, Inc. 175 859 * 175 859 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
New Century Energies Inc. 1,050 5,156 * 1,050 5,156 0 *
Master Retirement Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
The Havican Insurance Co. 325 1,595 * 325 1,595 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Father Flanagans Boys Home 475 2,332 * 475 2,332 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Ford Motor Co. 7,625 37,443 * 7,625 37,443 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Retirement Plan for the 2,050 10,066 * 2,050 10,066 0 *
Employees of Texas Utilities Co.
System
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Bell Atlantic Master Trust 10,300 50,579 * 10,300 50,579 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Standish World High Yield 575 2,823 * 575 2,823 0 *
Portfolio
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
</TABLE>
82
<PAGE> 87
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-Style, Multi-Manager Funds 1,698 8,338 * 1,698 8,338 0 *
PLC-High Yield Fund
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
MAFCO Holdings Master Trust 295 1,448 * 295 1,448 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Pneumo Abex Corp Retirement 165 810 * 165 810 0 *
Income Master Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
PCFG Long Term Investment Co. 840 4,124 * 840 4,124 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Worcester Memorial Hospital, 175 859 * 175 859 0 *
Inc. Retirement Plan
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Holy Cross Health System Corp. 975 4,787 * 975 4,787 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Holy Cross Employees Retirement 625 3,069 * 625 3,069 0 *
Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Fieldcrest Cannon Inc. 400 1,964 * 400 1,964 0 *
Retirement Plan for Salaried
Employees
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Fieldcrest Cannon Inc. 150 736 * 150 736 0 *
Retirement Plan for Hourly
Employees
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
William Penn Foundation 1,075 5,278 * 1,075 5,278 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Northeastern University 925 4,542 * 925 4,542 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
</TABLE>
83
<PAGE> 88
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Board of Pensions of the 2,825 13,872 * 2,825 13,872 0 *
Presbyterian Church (USA)
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Wellesley College Endowment 600 2,946 * 600 2,946 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Frank Russell Insurance Funds -- 365 1,792 * 365 1,792 0 *
Core Bonds
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Emerson Electric Co. Retirement 1,100 5,402 * 1,100 5,402 0 *
Master Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Frank Russell -- Fixed III 1,200 5,892 * 1,200 5,892 0 *
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
Frank Russell -- Multi Strategy 1,475 7,243 * 1,475 7,243 0 *
Bond
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
AT & T Long Term Investment 3,875 19,028 * 3,875 19,028 0 *
Trust
c/o Standish, Ayer & Wood
One Financial Center
Boston, MA 02111
GM Employers Domestic Group 2,000 9,821 * 2,000 9,821 0 *
Pension Trust
c/o State Street Bank and Trust
1776 Heritage Drive
N. Quincy, MA 02171
Stein Roe High Yield Fund 1,750 8,593 * 1,750 8,593 0 *
c/o Stein, Roe & Farnham
1 South Wacker Drive
Chicago, IL 60606
The Sumitomo Trust & Banking Co. 575 2,823 * 575 2,823 0 *
Ltd.
c/o Sumitomo Trust & Banking Co.
(USA)
527 Madison Avenue
New York, NY 10022
Sun America Inc. 38,000 186,602 * 38,000 186,602 0 *
1 Sun America Center
Los Angeles, CA 90025
</TABLE>
84
<PAGE> 89
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sun America High Income Fund 1,500 7,366 * 1,500 7,366 0 *
733 3rd Avenue
New York, NY 10017
Sun America Series Trust 2,250 11,048 * 2,250 11,048 0 *
High Yield Portfolio
733 3rd Avenue
New York, NY 10017
TCW Group, Inc. 81,749 401,436 * 81,749 401,436 0 *
865 South Figueroa Street,
21st Floor
Los Angeles, CA 90017
TD Securities (USA), Inc. 19,325 94,897 * 19,325 94,897 0 *
31 West 52nd Street
New York, NY 10019-6101
USAA High Yield Opportunities 2,750 324,504 * 2,750 13,504 311,000 *
Fund
c/o State Street Corporation/
USAA Fund Group
1776 Heritage Drive
North Quincy, MA 02171
Van Kampen High Income Trust 1,260 6,187 * 1,260 6,187 0 *
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen Trust, on behalf 5,270 25,878 * 5,270 25,878 0 *
of its series Van Kampen
High Yield Fund
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen Income Corporate Bond 12,010 58,976 * 12,010 58,976 0 *
Fund
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Van Kampen High Income Trust II 960 4,714 * 960 4,714 0 *
c/o Van Kampen Investments, Inc.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Waddell & Reed Advisors Fund, 6,250 30,691 * 6,250 30,691 0 *
Inc. -- High Income Fund
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
Waddell & Reed Advisors Fund, 2,250 11,048 * 2,250 11,048 0 *
Inc. -- High Income Fund II
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
</TABLE>
85
<PAGE> 90
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Target/United Funds, Inc. -- 1,000 4,910 * 1,000 4,910 0 *
High Income Portfolio
c/o Waddell & Reed
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
Agway Employees Retirement Plan 750 3,682 * 750 3,682 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Housing Authority Risk Retention 85 417 * 85 417 0 *
Group
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Illinois Municipal Retirement 500 2,455 * 500 2,455 0 *
Fund
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
High Yield Bond Portfolio, a 180 883 * 180 883 0 *
series of John Hancock Variable
Series Trust
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Lexmark International Group, 260 1,276 * 260 1,276 0 *
Inc.
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Teachers' Retirement System of 750 3,682 * 750 3,682 0 *
Louisiana
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
North American Security Life 150 736 * 150 736 0 *
Series Trust Investment
Quality Bond
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
The John & Mary R. Markle 100 491 * 100 491 0 *
Foundation
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
86
<PAGE> 91
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Oregon Public Retirement Fund 1,000 4,910 * 1,000 4,910 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Income Portfolio 15 73 * 15 73 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Income/ 20 98 * 20 98 0 *
Equity Portfolio
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Growth Portfolio 20 98 * 20 98 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Multi-Managed Moderate 25 122 * 25 122 0 *
Growth Portfolio
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
State Boston High Yield Plus 500 2,455 * 500 2,455 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
WTC-CIF II Core Bond Plus/ 25 122 * 25 122 0 *
High Yield Plus
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
SBL Fund Series K 40 196 * 40 196 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Anchor Series High Yield Fund 100 491 * 100 491 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Anchor Series Aggressive 100 491 * 100 491 0 *
Multi-Asset
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
87
<PAGE> 92
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- ---------------------------
NUMBER OF
CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF
NON- CLASS B NON-VOTING CLASS B CLASS B
NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING
WARRANTS SHARES SHARES BEING BEING SHARES SHARES
NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1)
---- --------- --------- -------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
The High Yield Plus Fund 850 4,174 * 850 4,174 0 *
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
New England Zenith Balanced 75 368 * 75 368 0 *
Series
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
Tate & Lyle Reinsurance Limited 100 491 * 100 491 0 *
High Yield
c/o Wellington Management
Company, LLP
75 State Street
Boston, MA 02109
All other warrant holders 115,751 568,406 1.36% 115,751 568,406 0 *
combined(8)
</TABLE>
---------------
* Less than 1.0%
(1) Based on the 41,196,858 class B non-voting shares that were issued and
outstanding as of December 31, 2000. All shares issuable upon exercise of
the currently outstanding warrants are deemed outstanding for the purpose
of calculating the percentage ownership of the person holding such Warrants
but are not deemed outstanding for calculating the percentage ownership of
any other person.
(2) To our knowledge, as of the date of this prospectus, an affiliate of CIBC
World Markets Inc. beneficially owns more than 5% of our issued and
outstanding class A voting shares. The Canadian Imperial Bank of Commerce,
which is also an affiliate of this selling shareholder, acted as lead
arranger and administrative agent under our bank facility. See "Description
of Our Financing Arrangements -- Bank Facility". In addition, in the
ordinary course of its business, this selling shareholder and its
affiliates have engaged in, and may in the future engage in, investment
banking transactions with us.
(3) An affiliate of Goldman, Sachs & Co. indirectly holds more than a 5%
interest in this selling shareholder. This affiliate of Goldman, Sachs &
Co. has no control over the warrants and underlying class B non-voting
shares being offered by this selling shareholder. See "Description of Our
Financing Arrangements" and "Principal Shareholders" for a description of
certain material relationships that this affiliate has had with us within
the past three years. In addition, in the ordinary course of its business,
this selling shareholder and its affiliates have engaged in, and may in the
future engage in, investment banking transactions with us.
(4) Of which, 200 warrants are held for its Endeavor High Yield Fund, 175
warrants are held for its Members High Income Fund and 100 warrants are
held for its Jefferson Pilot Variable High Yield Fund.
(5) These warrants are held for its Group Annuity Separate Account.
(6) These warrants are held for its High Yield Bond Portfolio.
(7) Of which, 100 warrants are held for its Asset Allocation Fund and 400
warrants are held for its High Yield Bond Fund.
(8) As of the date of this prospectus, these warrant holders have not returned
to us the documentation required for them to be included within, and to
sell their warrants and class B
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non-voting shares pursuant to, this prospectus. Consequently, none of
warrants or class B non-voting shares listed here are currently being
offered by this prospectus. Each of these warrant holders will be entitled
to be named in, and sell their warrants and class B non-voting shares
pursuant to, this prospectus or a supplement to this prospectus upon
returning to us the documentation required by the Warrants Registration
Rights Agreement.
(9) As of the date of this prospectus, these warrants have been exercised in
full.
(10)As of the date of this prospectus, 13,250 of these warrants have been
exercised.
(11)As of the date of this prospectus, 5,300 of these warrants have been
exercised.
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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 the
material United States federal income tax considerations to you of the purchase,
ownership and disposition of the warrants and class B non-voting shares acquired
on the exercise of warrants as capital property (the "Warrant Shares"). The
discussion of the United States federal income tax consequences set forth below
is based upon the Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations, and judicial decisions and
administrative interpretations thereunder, all as currently in effect, and such
authorities may be repealed, revoked, or modified, possibly on a retroactive
basis, so as to result in federal income tax consequences different from those
discussed below. There can be no assurance that the Internal Revenue Service
will not challenge one or more of the tax consequences described herein, and the
Company has not obtained, nor does it intend to obtain, a ruling from the
Internal Revenue Service or an opinion of counsel with respect to the United
States federal income tax consequences of acquiring or holding warrants and
Warrant Shares. The discussion below pertains only to you if you are a U.S.
holder. As used herein, you are a U.S. holder if you are a beneficial owner of
warrants or Warrant Shares and you are:
- a citizen or resident of the United States,
- a corporation, partnership or other entity created in or under the laws
of the United States or any political subdivision thereof,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if (x) a court within the United States is able to exercise
primary supervision over the administration of the trust and (y) one or
more United States persons have the authority to control all substantial
decisions of the trust.
This discussion does not purport to deal with all aspects of United States
federal income taxation that may be relevant to a particular holder in light of
the holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Internal Revenue Code). Also, this discussion does
not deal with special rules that may apply to you if you are a member of a
special class of holders subject to special rules, including
- a dealer in securities or currencies,
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
- a bank,
- a life insurance company,
- a tax-exempt organization,
- a person that actually or constructively owns 10% or more of our voting
stock,
- a person holding Warrant Shares as part of a hedging, conversion or
constructive sale transaction or straddle or
- a person whose "functional currency" is not the United States dollar.
The discussion below assumes that you hold (or would hold if you acquired)
the warrants and Warrant Shares as capital assets within the meaning of Section
1221 of the Internal Revenue Code. The discussion also does not discuss any
aspect of state, local or foreign law, nor federal estate and gift tax law.
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EACH HOLDER OR PROSPECTIVE HOLDER OF WARRANTS AND WARRANT SHARES IS
STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX
SITUATION INCLUDING THE TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
TAX TREATMENT OF THE WARRANTS REPRESENTING WARRANT SHARES
Because there is no exercise price for a warrant, a warrant should be
considered to be constructively exercised for United States federal income tax
purposes on the day on which the warrant is acquired and you should be
considered a holder of Warrant Shares subject to the warrant as of the date you
acquired the warrant. Consequently, the following discussion is applicable to
holders of Warrant Shares and warrants. You will not realize gain or loss on the
exercise of a warrant for class B non-voting shares.
PAYMENT OF DIVIDENDS. The gross amount of any dividends paid to you
(including amounts withheld to pay Canadian withholding taxes) will be treated
as dividend income to you to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax
principles. Such income will be includable in your gross income as ordinary
income on the day received by you. Such dividends will not be eligible for the
dividends received deduction allowed to corporations under the Internal Revenue
Code. Such dividends will be foreign source income and will be either "passive
income" or "financial services" income for United States foreign tax credit
purposes.
The amount of any dividend paid in Canadian dollars will equal the United
States dollar value of the Canadian dollars received calculated by reference to
the exchange rate in effect on the date the dividend is received by you
regardless of whether the Canadian dollars are converted into United States
dollars. If you do not convert the Canadian dollars into United States dollars
on the date of receipt, you will have a basis in the Canadian dollars equal to
its United States dollar value on the date of receipt. Any gain or loss realized
on a subsequent conversion or other disposition of the Canadian dollars will be
treated as United States source ordinary income or loss.
If you are a U.S. holder, the maximum rate of Canadian withholding tax on
dividends paid to you is 15%. You may be entitled to deduct or credit such tax,
subject to applicable limitations in the Internal Revenue Code. The rules
governing the foreign tax credit are complex. You are urged to consult your tax
advisors regarding the availability of the foreign tax credit under your
particular circumstances.
To the extent that the amount of any distribution paid to you exceeds our
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of capital, causing a
reduction in the adjusted basis of your Warrant Shares (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by you on a
subsequent disposition of the Warrant Shares), and the balance in excess of
adjusted basis will be taxed as capital gain recognized on a sale or exchange.
To the extent such distributions are treated as capital gain, such gain would be
United States source. Accordingly, you would not be able to use the foreign tax
credit arising from any Canadian withholding tax imposed on such distribution
unless such credit can be applied (subject to applicable limitations) against
United States tax due on other foreign source income in the appropriate category
for foreign tax credit purposes.
SALE, EXCHANGE OR REPURCHASE OF WARRANTS OR WARRANT SHARES. Generally, the
issue price of the warrants is determined by reference to the price paid for the
warrants. For the initial purchasers of our warrants in the February 2000 unit
offering, we allocated US$47.91 to the warrants comprising each unit, for tax
and accounting purposes.
You generally will recognize taxable gain or loss on the disposition of a
warrant or Warrant Share in an amount equal to the difference between the amount
realized for the warrant or the Warrant Share and your adjusted tax basis in the
warrant or Warrant Share. Such gain or loss will be capital
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gain or loss, and such gain or loss will be long-term capital gain or loss if
you held the Warrant Share for more than one year. Certain non-corporate U.S.
holders, including individuals, are eligible for reduced rates of taxation on
net long-term capital gains. The deductibility of capital losses is subject to
limitations. Such gain or loss, if any, will be United States source.
If we repurchase Warrant Shares, the repurchase generally will be treated
as a sale or exchange of stock subject to the rules discussed above. However,
under certain circumstances as provided by Section 302 of the Internal Revenue
Code, the repurchase may be treated fully or partially as a dividend taxable as
ordinary income to you. You should consult your own tax advisor concerning the
United States federal income tax consequences of the repurchase under your
particular circumstances.
PASSIVE FOREIGN INVESTMENT COMPANY RULES. In general, we will be a passive
foreign investment company (a "PFIC") with respect to you if for any taxable
year in which you held our warrants or Warrant Shares:
- 75% or more of our gross income consists of passive income, such as
dividends, interest, rents and royalties, or
- 50% or more of the average quarterly value of our assets consists of
assets that produce, or are held for the production of, passive income.
If a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income. We
believe that we will not satisfy either of the PFIC tests in the current or
subsequent taxable years. However, because the PFIC determination is made
annually on the basis of our income and assets, including goodwill, there can be
no assurance that we will not be a PFIC in the current or subsequent taxable
years.
If we were a PFIC in any taxable year and you held warrants and Warrant
Shares, you generally would be subject to special rules with respect to "excess
distributions" made by us on the Warrant Shares and with respect to gain from
the disposition of Warrant Shares. An "excess distribution" generally is defined
as the excess of the distributions with respect to the Warrant Shares in any
taxable year over 125% of the average annual distributions received by you from
us during the shorter of the three preceding years, or your holding period for
the class shares. Generally, you would be required to allocate any excess
distribution or gain from the disposition of the Warrant Shares ratably over
your holding period for the Warrant Shares. The portion of the excess
distribution or gain allocated to a prior taxable year, other than a year prior
to the first year in which we became a PFIC, effectively would be taxed at the
highest United States federal income tax rate on ordinary income in effect for
such taxable year, and you would be subject to an interest charge on the
resulting tax liability, determined as if the tax liability had been due with
respect to the particular taxable year. The portion, if any, of the excess
distribution or gain that is not allocated to prior taxable years would be
included in your gross income for the taxable year of the excess distribution or
disposition and taxed as ordinary income.
The foregoing rules with respect to excess distributions and dispositions
may be avoided if you are eligible for and timely make a valid "mark-to-market"
election. If you make a valid mark-to-market election, you will not be subject
to the PFIC rules described above. Instead, in calculating income for each
taxable year, you generally would be required, subject to certain limitations,
to take into account the difference, if any, between the fair market value and
the adjusted tax basis of the Warrant Shares as ordinary gain or loss at the end
of taxable year (but only to the extent of the net amount of previously included
income as a result of the mark-to-market election). Your basis in the Warrant
Shares will be adjusted to reflect any such income or loss amounts. The
mark-to-market election is made with respect to marketable stock in a PFIC on a
shareholder-by-shareholder basis and, once made, can only be revoked with the
consent of the Internal Revenue Service. Under applicable
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Treasury regulations, the term "marketable stock" includes stock of a PFIC that
is "regularly traded" on a qualified exchange or other market. For these
purposes, a class of stock is regularly traced on a qualified exchange or other
market for any calendar year during which such class of stock is traded (other
than in de minimis quantities) on at least 15 days during each calendar quarter.
It is expected that the shares will be treated as marketable stock for these
purposes, but no assurances can be given.
If you own Warrant Shares during any year that we are a PFIC, you must file
Internal Revenue Service Form 8621. If we are a PFIC, U.S. holders who acquire
shares from decedents could be denied the step-up of the income tax basis for
such shares which would otherwise have been available.
INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, information
reporting requirements will apply to certain payments made in respect of the
warrants or Warrant Shares (or in respect of the Warrant Shares received upon
exercise of the warrants) and the proceeds received on the disposition of
warrants or Warrant Shares paid within the United States (and in certain cases,
outside of the United States) to U.S. holders other than certain exempt
recipients (such as corporations), and a 31 percent backup withholding may apply
to such amounts if you are a non-corporate U.S. holder and you:
- fail to provide an accurate taxpayer identification number,
- are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your federal
income tax returns, or
- in certain circumstances, fail to comply with applicable certification
requirements.
Persons that are not United States persons may be required to establish
their exemption from information reporting and backup withholding by certifying
their status on Internal Revenue Service Form W-8 (or successor form).
If you sell your warrants or Warrant Shares to or through a United States
office of broker, the payment of the proceeds is subject to both United States
backup withholding and information reporting unless you certify that you are a
non-U.S. person, under penalties of perjury, or you otherwise establish an
exemption, provided that the broker does not have actual knowledge that you are
a U.S. person or that the conditions of any such exemption are not satisfied. If
you sell your warrants or Warrant Shares outside the United States through a
non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you
outside the United States, then United States backup withholding and information
reporting requirements generally will not apply to that payment. However, United
States information reporting, but not backup withholding, will apply to a
payment of sales proceeds, even if that payment is made outside the United
States, if you sell your warrants or Warrant Shares through a non-U.S. office of
a broker that:
- is a United States person;
- derives 50% or more of its gross income for a specified three-year
period from the conduct of a trade or business in the United States;
- is a "controlled foreign corporation" as to the United States; or
- with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in United
States Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interest in the partnership; or
- at any time during its tax year the foreign partnership is engaged in
a United States trade or business;
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unless the broker has documentary evidence in its records that you are a
non-United States person and does not have actual knowledge that you are a U.S.
person or you otherwise establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the United States Internal Revenue Service. The amount of any backup
withholding from a payment to you will be allowed as a credit against your
United States federal income tax liability.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to the acquisition, holding and disposition
of Warrants by a holder (a "U.S. Holder") who, for the purposes of the Income
Tax Act (Canada) (the "ITA") and the Canada-United States Income Tax
Convention(1980) (the "Convention"), as applicable, and at all relevant times,
(i) is a resident of the United States and not resident, nor deemed to be
resident, in Canada, (ii) holds Warrants and Warrant Shares as capital property,
(iii) does not use or hold (and is not deemed to use or hold) Warrants or
Warrant Shares in connection with a trade or business carried on (or deemed to
be carried on) in Canada and (iv) deals at arm's length with Group Telecom. For
the purpose of the ITA, related persons (as defined therein) are deemed not to
deal at arm's length, and it is a question of fact whether persons not related
to each other deal at arm's length. In general, Warrants and Warrant Shares will
be considered to be capital property to a U.S. Holder unless the U.S. Holder
holds the Warrants or Warrant Shares, as the case may be, in the course of
carrying on business or acquired the Warrants or Warrant Shares, as the case may
be, in a transaction or transactions considered to be an adventure or concern in
the nature of trade. Special rules, which are not discussed in this summary, may
apply to "financial institutions" (as defined in the ITA) and to non-resident
insurers carrying on an insurance business in Canada and elsewhere, and
accordingly, such persons should consult their own tax advisors.
This summary is based on the current provisions of the ITA and the
regulations thereunder and the Convention, specific proposals to amend the ITA
or the regulations thereunder announced by the Canadian Minister of Finance
prior to the date hereof (the "Tax Proposals") and the current published
administrative practices of the Canada Customs and Revenue Agency (the "CCRA").
This summary is not exhaustive of all possible Canadian federal income tax
consequences and, except for the Tax Proposals, does not otherwise take into
account or anticipate any changes in law or administrative practice nor does it
otherwise take into account income tax laws or considerations of any province or
territory of Canada, which may differ from the federal income tax consequences
described herein, or any jurisdiction other than Canada. This summary is of a
general nature only and is not intended to be, and should not be interpreted as,
legal or tax advice to any particular investor, and no representation with
respect to the tax consequence to any particular U.S. Holder is made.
All amounts relating to the acquisition, holding or disposition of Warrants
and Warrant Shares must be converted into Canadian dollars for the purposes of
the ITA.
EXERCISE OF WARRANTS
A U.S. Holder will not realize a gain or a loss on the exercise of a
Warrant for Warrant Shares.
DIVIDENDS
Under the ITA and the Convention, dividends paid or credited, or deemed to
be paid or credited (e.g., as described below), on the Warrant Shares to a U.S.
Holder who owns less than 10% of the voting shares of Group Telecom will be
subject to Canadian withholding tax at the rate of 15% of the gross amount of
such dividends or deemed dividends, provided that the U.S. Holder is the
beneficial owner of such dividends or deemed dividends.
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Under the Convention, dividends paid to certain religious, scientific,
charitable and similar tax exempt organizations and certain pension
organizations that are resident, and exempt from tax, in the United States and
who have complied with certain administrative procedures may be exempt from this
Canadian withholding tax.
DISPOSITION OF WARRANTS OR WARRANT SHARES
A U.S. Holder will not be subject to tax under the ITA in respect of any
capital gain realized on a disposition or deemed disposition of a Warrant or a
Warrant Share unless at the time of such disposition or deemed disposition such
Warrant or Warrant Share constitutes taxable Canadian property of the U.S.
Holder for purposes of the ITA and such U.S. Holder is not entitled to relief
under the Convention. The Warrants and Warrant Shares will generally not
constitute taxable Canadian property of a U.S. Holder at the time of disposition
of such Warrants or Warrant Shares provided that (i) the U.S. Holder does not
use or hold such Warrants or Warrant Shares, as the case may be, in connection
with carrying on business in Canada, (ii) the U.S. Holder, alone or together
with persons with whom it does not deal at arm's length, did not own (taking
into account any interest in or option in respect of such shares) 25% or more of
the issued shares of any class or series of the capital stock of Group Telecom
during the five-year period that ends at such time of disposition, and (iii)
furthermore, the Warrant Shares are listed on a prescribed stock exchange. In
any event, pursuant to the Convention, a U.S. Holder will not generally be
subject to Canadian income tax on any capital gain realized on the disposition
or deemed disposition of a Warrant or a Warrant Share (including a disposition
to Group Telecom) provided that the value of the Warrant or the Warrant Share,
as the case may be, at the time of the disposition is not derived principally
from real property situated in Canada (as defined in the Convention). To the
extent the Warrants or Warrant Shares disposed of constitute taxable Canadian
property, a U.S. Holder will be required to file a Canadian tax return for the
taxation year in which the disposition occurs even if the gain arising from such
a disposition is exempt from tax because of the Convention.
If Group Telecom purchases a Warrant Share from a U.S. Holder, other than
by a purchase in the open market in the manner in which shares would normally be
purchased by a member of the public in the open market, Group Telecom will be
deemed to have paid and the U.S. Holder will be deemed to have received a
dividend equal to the amount paid by Group Telecom in excess of the paid-up
capital of the Warrant Share for the purposes of the ITA at the time of the
purchase. The paid-up capital of the Warrant Share may be less than the U.S.
Holder's cost of the share. Such deemed dividend will be subject to the
withholding tax described under "Dividends" above. The amount by which the
purchase price of the Warrant Share exceeds the amount of the deemed dividend
will be treated as proceeds of disposition of the Warrant Share.
98
<PAGE> 103
PLAN OF DISTRIBUTION
We have been advised by the selling shareholders that the class B
non-voting shares or warrants may be sold from time to time to purchasers
directly by the selling shareholders. Alternatively, the selling shareholders
may from time to time offer the shares or warrants to or through underwriters,
broker/dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling shareholders
or the purchasers of such securities for whom they may act as agents. The
selling shareholders and any underwriters, broker/dealers or agents that
participate in the distribution of the shares or warrants may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
The shares or warrants may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. Such
prices will be determined by the selling stockholders or by agreement between
such selling stockholders and underwriters or dealers who receive fees or
commissions in connection therewith. The sale of the shares or warrants may be
effected in transactions (1) on any national securities exchange or quotation
service on which the shares may be listed or quoted at the time of the sale, (2)
in the over-the-counter markets, (3) in transactions otherwise than on such
exchange or in the over-the-market or (4) through the writing of options. Shares
also may be delivered in connection with the issuance of securities by issuers
other than Group Telecom that are exchangeable for (whether optional or
mandatory) or payable in, such shares or pursuant to which such shares may be
distributed. At the time a particular offering of the shares is made, a
prospectus supplement, if required, will be distributed which will set forth the
aggregate amount and type of the securities being offered and the terms of the
offering, including the name or names of any underwriter, broker/dealers or
agents, any discounts, commissions and other terms constituting compensation
from the selling shareholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/dealers. This prospectus also may be used
by transferees of the selling shareholders or by other persons acquiring
securities, including brokers who borrow the securities to settle short sales of
stock. In addition, the securities which qualify for sale under an applicable
exemption from registration under the Securities Act may be sold pursuant to
such exemption rather than this prospectus.
To comply with the securities laws of certain jurisdictions, if applicable,
the securities will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the securities may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
The selling shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the securities by the selling
shareholders. The foregoing may affect the marketability of such securities.
We have agreed to bear all expenses (other than any commissions or
discounts of underwriters, dealers or agents or brokers' fee and the fees and
expenses of their counsel) in connection with the registration of the securities
being offered by the selling shareholders hereby.
99
<PAGE> 104
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon by:
- Shearman & Sterling, our United States counsel, on matters of United
States and New York law; and
- Goodmans, our Canadian counsel, on matters of Canadian law.
EXPERTS
Our consolidated financial statements as of September 30, 2000, 1999 and
1998 included in this prospectus have been audited by PricewaterhouseCoopers
LLP, independent public accountants, as stated in their report appearing in this
prospectus and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. Shaw FiberLink's
financial statements as of August 31, 1999 and 1998 and for the three year
period ended August 31, 1999 included in this prospectus have been audited by
Ernst & Young LLP, independent public accountants, as stated in their report
appearing in this prospectus and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
REGISTRARS AND TRANSFER AGENTS
The registrar and transfer agent for the class B non-voting shares in
Canada is CIBC Mellon Trust Company at its principal offices in Toronto and in
the United States is ChaseMellon Shareholder Services at its principal offices
in New York.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a Canadian corporation. Some of our directors, controlling persons
and officers, and the experts named in this prospectus, are residents of Canada,
and a substantial portion of their assets and all of our assets are located
outside the United States. As a result, it may be difficult for you to effect
service of process within the United States upon the directors, controlling
persons, officers and experts who are not residents of the United States or to
enforce against them judgements of courts of the United States based upon the
civil liability under the federal securities laws of the United States. We have
been advised by Goodmans, 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.
100
<PAGE> 105
WHERE YOU CAN OBTAIN MORE INFORMATION ABOUT US
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and, file
periodic reports and other information with the Commission through its
Electronic Data Gathering, Analysis and Retrieval (or EDGAR) system. Our SEC
filings, including the registration statement, of which this prospectus is a
part, and the exhibits thereto, are available for inspection and copying at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W. Washington, D.C. 20549, and the Commission's regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part
of the registration statement may be obtained from these offices after payment
of fees prescribed by the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Commission also maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Because we are a foreign private
issuer, we, our directors and our officers are also exempt from the shortswing
profit recovery and disclosure regime of section 16 of the Exchange Act.
101
<PAGE> 106
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants of GT Group
Telecom................................................... F-2
Consolidated Financial Statements of GT Group Telecom....... F-3
Notes to Consolidated Financial Statements of GT Group
Telecom................................................... F-6
Report of Independent Public Accountants of Shaw FiberLink
Ltd. -- FiberLink Division................................ F-35
Financial Statements of Shaw FiberLink Ltd. -- FiberLink
Division.................................................. F-36
Notes to Financial Statements of Shaw FiberLink Ltd. --
FiberLink Division........................................ F-39
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-46
Notes to Pro Forma Condensed Consolidated Statement of
Operations................................................ F-48
</TABLE>
F-1
<PAGE> 107
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, 2000 and 1999 and the consolidated statements of operations and
deficit and cash flows for the years ended September 30, 2000, 1999 and 1998.
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 and United States
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,
2000 and 1999 and the results of its operations and its cash flows for the years
ended September 30, 2000, 1999 and 1998 in accordance with Canadian generally
accepted accounting principles.
Toronto, Canada /s/ PRICEWATERHOUSECOOPERS LLP
November 3, 2000 Independent Public Accountants
F-2
<PAGE> 108
GT GROUP TELECOM INC.
CONSOLIDATED BALANCE SHEETS
(expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
2000 1999
--------- -------
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... 444,050 59,851
Accounts receivable (note 4)................................ 49,952 3,783
Prepaid expenses............................................ 5,939 526
Inventory................................................... 436 545
--------- -------
500,377 64,705
PROPERTY, PLANT AND EQUIPMENT (note 5)...................... 954,917 73,817
PREPAYMENTS ON PROPERTY, PLANT AND EQUIPMENT (notes 3(a) and
3(b))..................................................... 203,703 --
LONG-TERM INVESTMENT (note 6)............................... 43,238 --
GOODWILL AND OTHER ASSETS (note 7).......................... 227,033 1,292
--------- -------
1,929,268 139,814
========= =======
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 8)........... 111,395 14,926
Unearned revenue (note 9)................................... 544 656
Current portion of long-term debt (note 10)................. 4,348 1,253
--------- -------
116,287 16,835
LONG-TERM UNEARNED REVENUE (note 9)......................... 1,255 1,494
LONG-TERM DEBT (note 10).................................... 948,928 47,557
--------- -------
1,066,470 65,886
--------- -------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 11)
Authorized
Common shares
Unlimited number of Class A voting and convertible 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
Issued and outstanding
Common shares
79,542,239 Class A voting shares (1999 -- 18,261,149)... 463,333 12,573
41,105,767 Class B non-voting shares (1999 --
4,148,569)............................................. 495,370 5,026
Preferred shares
Nil Series A first preference shares (1999 --
41,500,002)............................................ -- 67,281
--------- -------
958,703 84,880
ADDITIONAL PAID-IN CAPITAL.................................. 255 255
WARRANTS (note 11(f))....................................... 58,776 --
LOANS TO OFFICERS (note 11(g)).............................. (3,868) --
SHARES TO BE ISSUED (note 11(h))............................ -- 1,875
DEFICIT..................................................... (151,068) (13,082)
--------- -------
862,798 73,928
--------- -------
1,929,268 139,814
========= =======
COMMITMENTS AND CONTINGENCIES (note 14)
SUBSEQUENT EVENTS (note 17)
</TABLE>
APPROVED BY THE BOARD OF DIRECTORS
<TABLE>
<S> <C>
(signed) DANIEL R. MILLIARD (signed) JAMES G. MATKIN
Director Director
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
<PAGE> 109
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
2000 1999 1998
-------- ------- ------
$ $ $
<S> <C> <C> <C>
REVENUE..................................................... 73,251.. 2,705 1,823
COST OF SERVICES............................................ 51,336 1,808 1,131
-------- ------- ------
21,915 897 692
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 100,959 10,219 3,038
-------- ------- ------
(79,044) (9,322) (2,346)
AMORTIZATION................................................ 43,055 853 255
INTEREST AND FINANCE ITEMS
Interest income............................................. (22,208) (920) (58)
Interest on long-term debt.................................. 81,207 262 147
Finance charges............................................. 4,631 192 --
Foreign exchange loss (gain)................................ (9,276) 93 (251)
-------- ------- ------
54,354 (373) (162)
-------- ------- ------
LOSS BEFORE INCOME TAXES.................................... (176,453) (9,802) (2,439)
PROVISION FOR (RECOVERY OF) INCOME TAXES (note 12)
Current..................................................... 3,833 165 --
Future...................................................... (42,300) -- --
-------- ------- ------
(38,467) 165 --
-------- ------- ------
LOSS FOR THE YEAR........................................... (137,986) (9,967) (2,439)
DEFICIT -- BEGINNING OF YEAR................................ (13,082) (3,115) (676)
-------- ------- ------
DEFICIT -- END OF YEAR...................................... (151,068) (13,082) (3,115)
======== ======= ======
LOSS PER SHARE.............................................. (1.83) (0.56) (0.26)
======== ======= ======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (in
thousands)................................................ 75,442 17,859 9,542
======== ======= ======
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
<PAGE> 110
GT GROUP TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
2000 1999 1998
--------- ------ ------
$ $ $
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the year........................................... (137,986) (9,967) (2,439)
Items not affecting cash
Amortization.............................................. 43,055 853 255
Non-cash interest expense................................. 79,832 -- --
Additional paid-in capital................................ -- -- 84
Shares issued for interest on long-term debt.............. -- 171 62
Recovery of future income taxes........................... (42,300) -- --
--------- ------ ------
(57,399) (8,943) (2,038)
--------- ------ ------
Changes in non-cash working capital items
Increase in accounts receivable........................... (44,112) (2,417) (723)
Increase in prepaid expenses.............................. (5,179) (500) (1)
Decrease (increase) in inventory.......................... 343 (545) --
Increase in accounts payable and accrued liabilities...... 57,771 1,295 1,363
Increase (decrease) in unearned revenue................... (605) 2,077 39
--------- ------ ------
8,218 (90) 678
--------- ------ ------
Cash flows used in operating activities..................... (49,181) (9,033) (1,360)
--------- ------ ------
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 690,711 4,421 1,762
Issuance of shares.......................................... 396,120 71,526 5,924
Proceeds from issuance of warrants.......................... 58,776 -- --
--------- ------ ------
1,145,607 75,947 7,686
--------- ------ ------
INVESTING ACTIVITIES
Business acquisitions....................................... (446,720) -- --
Purchase of property, plant and equipment................... (153,569) (8,454) (3,738)
Increase in other assets.................................... (64,832) (1,085) (173)
Purchase of long-term investment............................ (43,238) -- --
Issuance of loans to officers............................... (3,868) -- --
--------- ------ ------
(712,227) (9,539) (3,911)
--------- ------ ------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 384,199 57,375 2,415
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 59,851 2,476 61
--------- ------ ------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... 444,050 59,851 2,476
========= ====== ======
</TABLE>
Additional cash flow disclosures (note 15)
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
<PAGE> 111
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts expressed in thousands of Canadian dollars)
1 NATURE OF BUSINESS
GT Group Telecom Inc. ("GT") was incorporated on April 12, 1996 under the
Canada Business Corporations Act. GT, through its wholly owned subsidiaries
GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp.
(collectively known as "the Company") markets and sells telecommunications
services and related products over GT's owned fiber-optic infrastructure to
small and medium-sized businesses. The Company also uses digital subscriber
lines 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
installation services.
2 SIGNIFICANT ACCOUNTING POLICIES
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 19.
(A) 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.
(B) 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.
(C) REVENUE RECOGNITION
Revenue from network usage and access is recognized when services are
provided. Revenue from equipment sales is recognized at the time the
equipment is delivered and accepted by the customer. Revenue from
installation 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.
Unearned revenue is recorded for services when cash payment has been
received 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.
F-6
<PAGE> 112
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
amortization. Amortization is provided over 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.
(E) LONG-TERM INVESTMENT
The long-term investment is accounted for on the cost basis. The
carrying value of the investment is written down to net realizable value
if there is a loss of value that is considered to be other than
temporary.
(F) GOODWILL AND OTHER ASSETS
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.
Non-compete agreements, license rights and deferred charges are
amortized on a straight-line basis over the term of the agreements or
estimated useful life ranging from 3 to 10 years.
Financing costs are amortized on a straight-line basis over the terms of
the related debt financing.
(G) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan, which is described in
note 11(f). No compensation expense is recognized for the plan when
stock options are issued to
F-7
<PAGE> 113
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
employees. Any consideration paid by employees on exercise of stock
options is credited to share capital.
(H) 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: (i) gains or losses
relating to long-term monetary liabilities which are deferred and
amortized over the remaining term of the assets and liabilities; and
(ii) hedged balances which are described in note 13.
(I) 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 existing
assets and liabilities and their respective tax bases. Future tax assets
and liabilities are measured using substantively enacted tax rates in
effect in the period 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 realization of future tax assets.
(J) LOSS PER COMMON SHARE
Loss per common share is calculated using the weighted average number of
common shares outstanding during the years. The exercise of options and
warrants outstanding at September 30, 2000, 1999 and 1998 would have had
an anti-dilutive effect on loss per common share.
(K) SEGMENTED INFORMATION
The Company is a Canadian 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 telecommunications
services provided in Canada.
(L) 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.
F-8
<PAGE> 114
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
3 BUSINESS ACQUISITIONS
Summary of the assets acquired and liabilities assumed during the year
ended September 30, 2000:
<TABLE>
<CAPTION>
SHAW VIDEON CABLE
FIBERLINK FIBERLINK ATLANTIC
(A) (B) (C) OTHER TOTAL
---------- --------- --------- ------- ----------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
ASSETS
Indefeasible right to use
agreements
Property, plant and
equipment for
constructed fibers..... 329,000 88,359 29,689 -- 447,048
Prepayment for fibers to
be constructed......... 223,000 7,600 -- -- 230,600
Property, plant and
equipment................. 100,000 7,397 17,560 435 125,392
License rights.............. 13,800 -- -- -- 13,800
Non-compete agreements...... 15,000 -- 1,200 -- 16,200
Goodwill including
acquisition costs......... 119,513 -- 25,025 3,261 147,799
Other current assets........ 204 784 1,107 24 2,119
---------- --------- --------- ------- ----------
800,517 104,140 74,581 3,720 982,958
========== ========= ========= ======= ==========
LIABILITIES
Current liabilities......... 246 -- 881 -- 1,127
Future income taxes......... 28,200 -- 14,100 -- 42,300
---------- --------- --------- ------- ----------
28,446 -- 14,981 -- 43,427
========== ========= ========= ======= ==========
PURCHASE CONSIDERATION
Cash paid................... 360,000 68,784 15,226 2,710 446,720
Class A voting shares....... -- -- -- 1,010 1,010
Class B non-voting shares... -- 32,356 42,374 -- 74,730
Series B first preference
shares.................... 400,071 -- -- -- 400,071
Acquisition costs........... 12,000 3,000 2,000 -- 17,000
---------- --------- --------- ------- ----------
772,071 104,140 59,600 3,720 939,531
========== ========= ========= ======= ==========
NUMBER OF SHARES ISSUED
Class A voting shares....... -- -- -- 336,666 336,666
========== ========= ========= ======= ==========
Class B non-voting shares... -- 1,667,000 1,740,196 -- 3,407,196
========== ========= ========= ======= ==========
Series B first preference
shares.................... 29,096,097 -- -- -- 29,096,097
========== ========= ========= ======= ==========
</TABLE>
The acquisitions of 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
F-9
<PAGE> 115
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
recorded as goodwill. The results of operations are included in the
Company's consolidated statement of operations from the dates of
acquisition.
(A) SHAW FIBERLINK
On February 16, 2000, the Company purchased from Shaw Communications
Inc. ("Shaw Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink")
all of the property and assets of Shaw FiberLink used in connection with
the high-speed data and competitive access business.
The Company and Shaw FiberLink also entered into an indefeasible right
to use agreement 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. Certain of the existing
fibers located in New Brunswick, Canada under the indefeasible right to
use agreement will be available for use in 2003. In addition, the
Company will receive an indefeasible right to use fibers to be built
over the next three years in mutually agreed regions. As at September
30, 2000, the carrying value of newly constructed fibers obtained for
use by the Company amounts to $27 million.
(B) VIDEON FIBERLINK
On April 27, 2000, the Company purchased from Moffat Communications
Limited ("Moffat Communications") all the property and assets used as a
competitive access provider in its Videon FiberLink business. The
Company and Moffat Communications also entered into an indefeasible
right to use agreement 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.
(C) CABLE ATLANTIC
On July 21, 2000, the Company purchased from Cable Atlantic Inc. ("Cable
Atlantic") all the property and assets used in connection with the
fiber-optic telecom business. The Company also entered into an
indefeasible right to use agreement which granted the Company an
indefeasible right to use certain specifically identified existing
fibers in the fiber-optic cable networks of Cable Atlantic for 30 years.
The following unaudited pro forma data summarizes the results of operations
for the years indicated as if the Shaw FiberLink acquisition had been
completed as of the beginning of the years presented. The pro forma data
give effect to actual operating results prior to the acquisition, adjusted
to give effect to interest expense on long-term debt of $360 million and
amortization of the assets acquired. These pro forma amounts do not purport
to be indicative of
F-10
<PAGE> 116
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
the results that would have actually been obtained if the acquisition
occurred as of the beginning of the years presented or that may be obtained
in the future.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
$ $
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... 91,296 43,176
Income (loss) before amortization, interest and finance
items and income tax...................................... (74,304) 2,863
Net loss.................................................... (160,930) (53,195)
Loss per share.............................................. (1.82) (2.98)
Weighted average number of common shares outstanding (in
thousands)................................................ 88,639 17,859
</TABLE>
Pro forma results including the other acquisitions completed by the Company
during the year ended September 30, 2000 have not been provided as the
results of operations are not considered significant and the information is
not readily available.
4 ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
2000 1999
------ -----
$ $
<S> <C> <C>
Trade receivables........................................... 34,759 1,191
Sales tax receivable........................................ 12,568 2,140
Employee receivables........................................ 3,105 487
Other....................................................... 4,026 --
Allowance for doubtful accounts............................. (4,506) (35)
------ -----
49,952 3,783
====== =====
</TABLE>
5 PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------------
ACCUMULATED
COST AMORTIZATION NET
------- ------------ -------
$ $ $
<S> <C> <C> <C>
Land................................................. 550 -- 550
Buildings............................................ 3,950 139 3,811
Furniture and fixtures............................... 4,694 664 4,030
Computer equipment and software...................... 40,786 3,094 37,692
Telecommunication networks........................... 927,734 27,059 900,675
Leasehold improvements............................... 8,702 543 8,159
------- ------ -------
986,416 31,499 954,917
======= ====== =======
</TABLE>
F-11
<PAGE> 117
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
ACCUMULATED
COST AMORTIZATION NET
------- ------------ -------
$ $ $
<S> <C> <C> <C>
Land................................................. 490 -- 490
Buildings............................................ 887 87 800
Furniture and fixtures............................... 877 56 821
Computer equipment and software...................... 4,551 361 4,190
Telecommunication networks........................... 67,638 476 67,162
Leasehold improvements............................... 452 98 354
------- ------ -------
74,895 1,078 73,817
======= ====== =======
</TABLE>
Included in telecommunication networks as at September 30, 2000 are costs
of $87 million (1999 -- $40 million) relating to assets not yet available
for use on which no amortization has been charged.
Included in telecommunication networks are assets under capital lease with
a cost of $447 million (1999 -- $nil) and accumulated amortization of $13
million.
Furniture and fixtures, and computer equipment and software, as at
September 30, 2000 include capital lease asset costs of $4 million and $1
million (1999 -- $0.3 million and $0.9 million) respectively, and related
accumulated amortization of $nil. (1999 -- $nil).
For the year ended September 30, 2000, interest and finance charges of $3
million were capitalized on projects under construction (1999 -- $2
million).
6 LONG-TERM INVESTMENT
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 September 30, 2000 is $77 million.
7 GOODWILL AND OTHER ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
2000 1999
------- -----
$ $
<S> <C> <C>
Goodwill net of accumulated amortization of $4,319 (1999 --
$nil)..................................................... 131,464 --
Non-compete agreements and license rights net of accumulated
amortization of $4,098 (1999 -- $nil)..................... 26,172 --
Deferred charges net of accumulated amortization of $527
(1999 -- $32)............................................. 19,122 605
Deferred financing charges net of accumulated amortization
of $2,684 (1999 -- $38)................................... 48,609 457
Deferred foreign exchange loss net of accumulated
amortization of $179 (1999 -- $1)......................... 1,666 12
Deposits.................................................... -- 218
------- -----
227,033 1,292
======= =====
</TABLE>
F-12
<PAGE> 118
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
2000 1999
------- ------
$ $
<S> <C> <C>
Trade accounts payable...................................... 53,404 2,017
Accounts payable and accruals for purchases of property,
plant and equipment....................................... 32,498 9,355
Accrued vacation and bonuses................................ 10,795 1,139
Capital tax, large corporations tax and sales taxes
payable................................................... 6,786 622
Other accrued liabilities................................... 7,912 1,383
Accrual for inventory purchases............................. -- 410
------- ------
111,395 14,926
======= ======
</TABLE>
9 UNEARNED REVENUE
Unearned revenue represents 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>
<CAPTION>
$
---
<S> <C>
Year ending September 30,
2001................................................... 500
2002................................................... 500
2003................................................... 500
2004................................................... 250
2005................................................... 250
Thereafter............................................. 750
</TABLE>
F-13
<PAGE> 119
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
10 LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
2000 1999
------- ------
$ $
<S> <C> <C>
Senior discount notes (a)................................... 662,661 --
Vendor financing (b)........................................ 153,565 40,398
Vendor financing (c)........................................ 31,859 6,481
Senior bank facility (d).................................... 100,144 --
Capital leases payable (f).................................. 4,292 1,155
Note payable (e)............................................ 755 776
------- ------
953,276 48,810
Less: Current portion....................................... 4,348 1,253
------- ------
948,928 47,557
======= ======
</TABLE>
Repayments of long-term debt in each of the next five years are as follows:
<TABLE>
<CAPTION>
SENIOR SENIOR CAPITAL LEASES
DISCOUNT VENDOR BANK AND NOTES
NOTES FINANCING FACILITY PAYABLE
-------- --------- -------- --------------
$ $ $ $
<S> <C> <C> <C> <C>
Year ending September 30,
2001.............................. -- 1,615 -- 2,463
2002.............................. -- 1,479 -- 1,676
2003.............................. -- 8,783 4,907 1,155
2004.............................. -- 10,703 10,014 339
2005.............................. -- 13,727 10,014 --
Thereafter........................ 662,661 149,117 75,209 --
-------- ------- -------- -----
662,661 185,424 100,144 5,633
Less: Amounts representing
interest........................ -- -- -- (586)
-------- ------- -------- -----
662,661 185,424 100,144 5,047
======== ======= ======== =====
</TABLE>
SENIOR DISCOUNT NOTES
(a) Pursuant to an indenture dated February 1, 2000, the Company issued
855,000 units, consisting of U.S.$855 million (issued at a price of
52.651% of the stated amount) 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 million, equivalent to
approximately CDN$651 million. Expenses related to the offering
amounted to approximately $20 million. Of the total proceeds, $592
million was allocated to the senior discount notes and $59 million was
allocated to the share purchase warrants (note 11(f)).
The senior discount notes accrue interest at 13.25% on the face value of
the notes until February 1, 2005. The interest accrued to February 1,
2005 is payable at maturity together with the face value of the notes.
After February 1, 2005, interest is payable semi-annually in cash in
arrears February 1 and August 1 of each year, at an annual rate of
13.25%. The effective interest rate on the senior discount notes is
14.9%.
F-14
<PAGE> 120
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
On or after February 1, 2003, the Company can elect to commence the
payment of interest in cash semi-annually on February 1 and August 1 of
each year, thereby reducing the stated amount of the note.
The Company has an early redemption option at any time after February 1,
2005 for all or part of the senior discount notes. The redemption prices
for the notes for each year ending February 1, are as follows: 106.625%
in 2005, 104.417% in 2006, 102.208% in 2007 and 100% thereafter, plus
unpaid interest. In addition, prior to February 1, 2005, the company may
redeem up to 35% of the notes at a redemption price of 113.25% of the
outstanding amounts of the notes at the time of redemption.
The notes are unsecured obligations of the Company and the indenture
contains certain restrictive covenants including limitation on
indebtedness, restriction on the payment of dividends and other
payments, limitations on liens, asset dispositions, change of control
and limitation on transactions with subsidiaries.
To reduce the exposure to U.S. dollar exchange rate fluctuations, the
Company has entered into cross currency swaps as described in note 13.
VENDOR FINANCING
(b) On May 28, 1999, the Company entered into a credit facility to finance
the Company's purchase of telecommunication equipment and services to
a value of U.S.$40 million.
On February 3, 2000, the Company entered into a U.S.$315 million
facility with this vendor to finance the purchase and installation of
telecommunication equipment and services. The initial borrowings under
this vendor facility were used to repay amounts outstanding under the
existing credit facility with this vendor.
The balance of vendor financing at September 30, 2000 of $154 million is
comprised of amounts payable to the vendor of $17 million, and
additional amounts drawn on the vendor credit facility of $137 million
(denominated as U.S.$91 million).
The vendor facility matures on June 30, 2008 with quarterly principal
repayments at the rate of 1.25% of the amount outstanding, starting on
March 31, 2003 until December 31, 2007. In March and June of 2008, the
principal is repayable in two installments of 37.5% of the outstanding
amount.
Availability under the credit facility is by way of multiple draw-downs.
At the option of the Company, draw-downs under the credit facility bear
interest at either LIBOR plus an applicable margin or U.S. Prime Rate
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 LIBOR is between 3.0% and 4.5% and the margin added
to the U.S. Prime Rate is between 2.0% and 3.5%. The effective interest
rate on outstanding amounts during the year ended September 30, 2000 was
11.5% (1999 -- 10.2%).
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.
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, engage in sale and leaseback
F-15
<PAGE> 121
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
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.
(c) On July 27, 1999 the Company entered into an agreement for a U.S.$15
million credit facility with a vendor.
On September 29, 2000, the Company entered into a new vendor credit
facility for $120 million to replace the U.S.$15 million vendor facility
and finance the purchase and installation of telecommunication equipment
and services provided by this vendor. The vendor credit facility matures
September 29, 2007 with annual principal repayment at a rate of 4.89% of
the outstanding amount on September 30, 2003, 10% on September 30, 2004
and September 30, 2005, 20% on September 20, 2006, and 55.11% on
September 30, 2007. Availability under the vendor credit facility is by
way of multiple draw-downs.
The balance of vendor financing at September 30, 2000 of $32 million is
comprised of amounts payable to the vendor of $16 million, and
additional amounts drawn on the credit facility of $16 million
(denominated as U.S.$10 million).
At the option of the Company, the credit facility bears interest at
either the Prime Rate (published rate of a Schedule I Canadian Bank) or
the quoted banker acceptances rate ("BA rate") plus an applicable
margin. The applicable margin on Prime Rate loans ranges from 2.00% to
3.25% and the margin applicable to BA Rate loans ranges from 3.00% to
4.25%, depending upon the Company's consolidated ratio of total debt to
annualized earnings before interest, taxes and amortization. The
effective interest rate on outstanding amounts during the year ended
September 30, 2000 and 1999 was 12.0%.
In addition, a commitment fee of 0.5% per annum is payable on the
undrawn portion of the credit facility.
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, 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.
SENIOR BANK FACILITY
(d) On February 3, 2000, the Company entered into a credit agreement for a
senior bank facility for an amount of $220 million to finance part of
the acquisition of the business of Shaw FiberLink (note 3(a)). The
bank facility is comprised of a $120 million seven year revolving
reducing term loan and a $100 million reducing term loan.
The $120 million revolving term loan reduces, starting February 3, 2003
to $108 million and reduces on every anniversary thereafter to $90
million in 2004, $72 million in 2005, $48 million in 2006 and nil in
2007. The $100 million reducing term loan is amortized annually by 4.9%
on February 3, 2003, 10% on February 3, 2004 and 2005, 20% on February
3, 2006 and 55.1% on February 3, 2006.
At the option of the Company, 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
F-16
<PAGE> 122
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
U.S. dollars and standby letters of credit in Canadian or U.S. dollars.
The margins added to the applicable interest rates may vary from 2.0% to
4.5%, depending upon the Company's consolidated ratio of total debt to
annualized earnings before interest, taxes and amortization. The
effective interest rate on outstanding amounts during the year ended
September 30, 2000 was 11.9%.
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, 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.
COLLATERAL AGENCY AND INTERCREDITOR AGREEMENT
The Company has granted the lenders under the vendor credit facilities,
the senior bank credit facility and cross currency swaps (note 13)
general security agreements providing the lenders a first priority lien
on all the present and future property and assets of a subsidiary of the
Company. The parties to the various credit agreements have entered into
an amended and restated Collateral Agency and Intercreditor Agreement,
which among other things, sets out the agreement between the lenders for
the priority and security of the obligations of the Company's
subsidiaries to the lenders, and rights enforcement and allocation of
proceeds.
NOTES PAYABLE
(e) In 1998, the Company purchased land and a building for $900 thousand,
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
installments of principal and interest of $8 thousand per month, a
lump sum payment against principal of $100 thousand 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
(f) Capital leases are payable in equal monthly instalments of $37
thousand including principal and interest at rates varying between 6%
and 10%. The leases are collateralized by the underlying assets and
expire in 2002.
F-17
<PAGE> 123
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
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
convertible Class B non-voting shares without nominal or par value.
Other than with respect to voting rights and limited 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 voting and Class B non-voting 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-to-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 and February 14, 2000, Series A and Series B first
preference shares were created, respectively. In addition to the rights
and privileges of the first preference shares described above, the
Series A and Series B 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
September 30, 2000, there were 50,000,000 authorized Series A and
100,000,000 authorized Series B first preference shares (1999: Series A
-- 50,000,000 and Series B -- nil).
F-18
<PAGE> 124
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
ISSUED
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NUMBER OF NUMBER OF SERIES A SERIES B
CLASS A CLASS B FIRST FIRST
VOTING NON-VOTING PREFERENCE PREFERENCE
SHARES SHARES SHARES SHARES AMOUNT
---------- ---------- ----------- ----------- -------
$
<S> <C> <C> <C> <C> <C>
Balance as at September 30, 1997........... 7,095,132 -- -- -- 836
Class A voting shares issued for
Cash................................... 4,880,629 -- -- -- 6,083
Upon exercise of options (e)........... 822,167 -- -- -- 332
Upon exercise of warrants (e).......... 7,900 -- -- -- 4
Upon conversion of debentures (d)...... 2,482,592 -- -- -- 1,886
Share issuance costs................... -- -- -- -- (495)
---------- ---------- ----------- ----------- -------
Balance as at September 30, 1998........... 15,288,420 -- -- -- 8,646
Class A voting shares issued for
Cash................................... 2,004,322 -- -- -- 3,480
Upon exercise of options (e)........... 630,000 -- -- -- 70
Upon conversion of debentures (d)...... 338,407 -- -- -- 423
Share issuance costs................... -- -- -- -- (46)
Class B non-voting shares issued for
Cash................................... -- 721,101 -- -- 901
Upon conversion of debentures (d)...... -- 3,427,468 -- -- 4,284
Share issuance costs................... -- -- -- -- (159)
Series A first preference shares issued
for
Cash................................... -- -- 27,666,667 -- 41,500
Upon exercise of options (e)........... -- -- 13,833,335 -- 25,938
Share issuance costs................... -- -- -- -- (157)
---------- ---------- ----------- ----------- -------
Balance as at September 30, 1999........... 18,261,149 4,148,569 41,500,002 -- 84,880
Class A voting shares issued for
Cash................................... 35,000 -- -- -- 280
Purchase of businesses (note 3)........ 336,666 -- -- -- 1,010
Upon exercise of options (e)........... 313,327 -- -- -- 336
Class B non-voting shares issued for
Cash (b)............................... -- 20,700,000 -- -- 422,280
Upon exercise of options (e)........... -- 1,850,000 -- -- 3,875
Purchase of businesses (note 3)........ -- 3,407,196 -- 29,096,097 474,801
Share issuance costs................... -- -- -- -- (30,634)
Series A first preference shares issued
for acquisition of rights of way (h)... -- -- 1,000,000 -- 1,875
Conversions (c).......................... 60,596,097 11,000,002 (42,500,002) (29,096,097) --
---------- ---------- ----------- ----------- -------
Balance as at September 30, 2000........... 79,542,239 41,105,767 -- -- 958,703
========== ========== =========== =========== =======
</TABLE>
(A) REDESIGNATION OF COMMON 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.
F-19
<PAGE> 125
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
(B) INITIAL PUBLIC OFFERING
Pursuant to an initial public offering on March 15, 2000, the Company
issued 18,000,000 Class B non-voting shares for aggregate cash proceeds
of U.S.$232.9 million, net of U.S.$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 Class B
non-voting shares for net proceeds of U.S.$35.2 million to the Company.
Aggregate net proceeds of the Initial Public Offering amounted to $391.7
million.
(C) CONVERSION OF SHARES
On completion of the Company's initial public offering on March 15,
2000, 42,500,002 Series A and 29,096,097 Series B first preference
shares were automatically converted into 60,596,097 Class A voting
shares and 11,000,002 Class B non-voting shares on a one-for-one basis.
(D) CONVERTIBLE DEBENTURES
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.
(E) 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 September 30, 1999,
all the options had been exercised, resulting in the issuance of
13,833,335 Series A first preference shares.
(F) COMMON SHARE OPTIONS AND WARRANTS
OPTIONS
The Board of Directors has established a stock option plan under which
options to purchase Class A voting shares and Class B non-voting shares
are granted to directors, officers and employees of the Company. Options
are granted at exercise prices estimated to be at least equal to the
fair value of the shares, vest over a three-year period and generally
expire five years from the date of grant.
F-20
<PAGE> 126
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
At September 30, 2000, there were 5,594,635 (1999 -- 2,161,842) options
to purchase Class A voting shares and 1,770,600 (1999 -- 2,300,000)
options to purchase Class B non-voting shares outstanding. These options
expire between April 2001 and September 2005.
Option activity for the year is as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
---------- -------- --------- --------
$ $
<S> <C> <C> <C> <C>
Outstanding -- Beginning of year... 4,461,842 1.64 1,854,978 0.69
Class A voting shares
Granted.......................... 4,076,700 9.09 1,658,228 1.34
Exercised........................ (313,327) 1.07 (630,000) 0.11
Class B non-voting shares
Granted.......................... 1,320,600 5.20 2,300,000 2.04
Exercised........................ (1,850,000) 2.10 -- --
Expired............................ -- -- (682,003) 0.50
Cancelled.......................... (330,580) 7.76 (39,361) 1.25
---------- ---- --------- ----
Outstanding -- End of year......... 7,365,235 6.36 4,461,842 1.64
========== ==== ========= ====
Exercisable -- End of year
Class A voting shares.............. 2,289,626 3.47 1,726,564 1.19
Class B non-voting shares.......... 715,525 2.83 1,883,333 2.16
---------- ---- --------- ----
Total.............................. 3,005,151 3.32 3,609,897 1.69
========== ==== ========= ====
</TABLE>
A summary of stock options outstanding at September 30, 2000 is set out
below:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------ EXERCISABLE STOCK OPTIONS
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE NUMBER LIFE PRICE NUMBER PRICE
-------------- --------- ----------- -------- ----------- ----------
$ $ $
<S> <C> <C> <C> <C> <C>
0.50 - 1.875......... 2,437,513 3.01 years 1.42 1,908,634 1.40
3.00................. 2,025,932 3.97 years 3.00 599,463 3.00
8.00................. 1,890,289 4.38 years 8.00 380,097 8.00
20.40 - 20.86........ 666,801 4.63 years 20.52 94,241 20.48
24.08................ 300,700 4.79 years 24.08 20,882 24.08
26.21................ 44,000 4.88 years 26.21 1,834 26.21
--------- ---------- ----- --------- -----
7,365,235 3.86 years 6.36 3,005,151 3.32
========= ========== ===== ========= =====
</TABLE>
F-21
<PAGE> 127
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
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
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE NUMBER LIFE PRICE NUMBER 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>
WARRANTS
Warrant activity for each of the years is as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
$ $
<S> <C> <C> <C> <C>
Outstanding -- Beginning of year....... 100,000 0.50 415,000 0.50
Class A voting shares
Expired.............................. -- -- (313,311) 0.50
Cancelled............................ -- -- (1,689) 0.50
Class B non-voting shares
Issued............................... 855,000 -- -- --
------- ---- -------- ----
Outstanding -- End of year............. 955,000 0.05 100,000 0.50
======= ==== ======== ====
</TABLE>
The warrants for Class A voting shares vested on the date of grant and
expire on November 30, 2000.
The warrants for Class B non-voting shares were issued at a value of $59
million pursuant to an indenture dated February 1, 2000 (note 10(a)).
The warrants entitle the holders to purchase 4,198,563 Class B
non-voting shares in the aggregate through to February 1, 2010 for nil
consideration. The warrants are exercisable upon a registration
statement, relating to the resale of warrants and the Class B non-voting
shares issuable upon exercise of the warrants, becoming effective
providing that the Class B non-voting shares continue to be listed on a
stock exchange.
(G) LOANS TO OFFICERS
Pursuant to employment contracts, certain officers have been provided
option-exercise loans which bear interest at the effective applicable
federal interest rate of the Internal Revenue
F-22
<PAGE> 128
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
Code and are due the earlier of: (i) five years from the date of
purchase ranging from September 1, 2004 to January 4, 2005, (ii)
cessation of employment or (iii) upon the sale of the shares purchased.
The option exercise loans are secured by a first charge against the
shares purchased. These loans amount to $4 million at September 30, 2000
(1999 -- $nil).
(H) 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 Series A first
preference shares were issued in December 1999.
12 INCOME TAXES
The tax effects of temporary differences that give rise to future income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
2000 1999
------- ------
$ $
<S> <C> <C>
Future income tax assets
Accounts receivable....................................... 1,876 --
Property, plant and equipment............................. -- 27
Deferred charges.......................................... -- 63
Long-term debt............................................ 6,149 --
Debt and share issue costs................................ 8,381 257
Operating loss carry forwards............................. 57,403 5,709
------- ------
73,809 6,056
Valuation allowance......................................... (44,219) (6,056)
------- ------
29,590
Future income tax liabilities
Property, plant and equipment............................. (27,465) --
Deferred charges and other assets......................... (2,125) --
------- ------
(29,590) 6,056
------- ------
-- --
======= ======
</TABLE>
Management has recorded a valuation allowance for the net amount of future
income tax assets.
F-23
<PAGE> 129
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
The Company has non-capital losses available to reduce taxable income in
future years. These losses expire as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
Year ending September 30,
2002................................................... 11
2003................................................... 315
2004................................................... 522
2005................................................... 4,523
2006................................................... 7,764
2007................................................... 112,749
-------
125,884
=======
</TABLE>
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 for years ended as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ ------
$ $ $
<S> <C> <C> <C>
Statutory Canadian federal and provincial income tax
rates................................................... 45.6% 45.6% 45.6%
------- ------ ------
Income tax recovery based on the statutory rates.......... (80,463) (4,470) (1,112)
Differences from statutory rates relating to
Change in valuation allowance........................... 38,163 4,470 1,112
Large corporations tax.................................. 3,833 165 --
------- ------ ------
(38,467) 165 --
======= ====== ======
</TABLE>
13 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of cash and cash equivalents, accounts receivable, and
accounts payable and accrued liabilities approximate their carrying values
due to the short-term nature of these instruments. At September 30, 2000,
and 1999, using discounted cash flow analysis, the carrying value of
long-term debt approximates its fair value, except for the senior discount
notes. The fair value of the senior discount notes is $649 million based on
its trading price at September 30, 2000.
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.
F-24
<PAGE> 130
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
For the year ended September 30, 2000, one customer of the Company
accounted for approximately 15% of revenue (note 16) and 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%). For the
year ended September 30, 1998, two customers of the Company accounted for
approximately 55% of the Company's revenue (one customer accounted for 37%
and a second customer accounted for 18%).
INTEREST RATE AND FOREIGN CURRENCY RISK
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. The following
table summarizes the Company's exposure to interest rate foreign currency
risk:
<TABLE>
<CAPTION>
FIXED RATE
FLOATING WITHIN FIXED RATE FIXED RATE NON-INTEREST
RATE ONE YEAR 1-5 YEARS 6-10 YEARS BEARING
-------- ---------- ---------- ---------- ------------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
September 30,
Financial assets
Cash and cash
equivalents
Canadian dollars...... 123,203 -- -- -- --
U.S. dollars
(U.S.$213,329)..... 320,847 -- -- -- --
Accounts receivable..... -- -- -- -- 49,952
Loans to officers....... -- -- 3,868 -- --
Financial liabilities
Accounts payable and
accrued liabilities
Canadian dollars...... -- -- -- -- 90,218
U.S. dollars
(U.S.$14,431)...... -- -- -- -- 21,177
Long-term debt
Canadian dollars...... 115,367 755 4,292 -- --
U.S. dollars
(U.S.$565,871)..... 170,201 -- -- 662,661 --
</TABLE>
F-25
<PAGE> 131
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
FIXED RATE
FLOATING WITHIN FIXED RATE FIXED RATE NON-INTEREST
RATE ONE YEAR 1-5 YEARS 6-10 YEARS BEARING
-------- ---------- ---------- ---------- ------------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
September 30, 1999
Financial assets
Cash and cash
equivalents
Canadian dollars...... 39,794 -- -- -- --
U.S. dollars
(U.S.$13,657)...... 20,057 -- -- -- --
Accounts receivable..... -- -- -- -- 3,783
Financial liabilities
Accounts payable and
accrued liabilities
Canadian dollars...... -- -- -- -- 9,554
U.S. dollars
(U.S.$3,660)....... -- -- -- -- 5,372
Long-term debt
Canadian dollars...... -- 327 1,603 -- --
U.S. dollars
(U.S.$31,815)...... 40,398 926 5,556 -- --
</TABLE>
CROSS CURRENCY SWAP
On February 15 and August 14, 2000, the Company entered into cross currency
swaps with several financial institutions to convert approximately 69%
(representing a notional amount of U.S. $590 million) of the future U.S.
dollar payments on the senior discount notes to Canadian dollars at a fixed
average exchange rate of approximately $1.4450. The payments represent the
semi-annual interest payments from August 1, 2005 to August 1, 2009 and the
principal repayment on February 1, 2010. As a result of the cross currency
swap, the average fixed interest rate on the portion of the senior discount
notes decreased from 13.25% to approximately 12.96%. The Company and the
financial institutions each have the right to terminate the swap on
February 1, 2005. As at September 30, 2000, the fair value of these swap
agreements is not significant. The Company has granted the financial
institutions a general security as part of the Collateral Agency and
Intercreditor Agreement as described in Note 10(d).
From the date the swap agreements were entered, the portion of the senior
discount notes to which the exchange rate has been fixed by the swap has
been converted to Canadian dollars using the swap forward rate.
14 COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
(A) AGREEMENT WITH 360NETWORKS
On May 24, 2000, the Company completed a multiple element agreement with
360networks, inc. Pursuant to this transaction, the Company:
F-26
<PAGE> 132
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
i) Purchased certain dark fibers to be constructed along Canadian
route paths for $137 million. Of this amount, $32 million was paid
in the year ended September 30, 2000 which is included in
property, plant and equipment. The balance will be paid over the
next three years when the fiber becomes available to the Company;
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 exclusive rights to fiber-optic
wavelengths along a diverse route in Canada and the United States
under long-term lease arrangements and the option 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 when the fiber becomes
available to the Company, amount to approximately $85 million. In
October 2000, the Company accepted approximately 28% of the
fiber-optic wavelengths under the long-term capacity lease
arrangement.
(B) VENDOR FINANCING AGREEMENT
The Company has entered into a vendor financing agreement (note 10(b))
to purchase and license certain engineering and construction services
together with digital switches and related network software and
equipment from a supplier. The minimum future purchase commitment is
U.S.$213 million over the next twenty months.
LETTER OF CREDIT
As of September 30, 2000, the Company has letters of credit in favour of
network equipment suppliers in the amount of $0.5 million.
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>
$
------
<S> <C>
Year ending September 30,
2001................................................... 8,410
2002................................................... 8,422
2003................................................... 8,442
2004................................................... 8,412
2005................................................... 8,345
Thereafter............................................. 50,740
</TABLE>
The rent expense under operating leases for the following years was as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ---- ----
$ $ $
<S> <C> <C> <C>
Operating lease expense..................................... 5,733 197 165
</TABLE>
F-27
<PAGE> 133
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
15 ADDITIONAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
2000 1999 1998
----- ---- ----
$ $ $
<S> <C> <C> <C>
Interest paid............................................... 7,862 95 53
Income taxes paid........................................... 819 -- --
</TABLE>
NON-CASH TRANSACTIONS
Purchases of property, plant and equipment of $159 million for the year
ended September 30, 2000 (1999 -- $55 million) and purchases of other
assets of $6 million at September 30, 2000 (1999 -- $nil) were financed
through long-term debt, notes payable and through accounts payable and
accrued liabilities. In addition, the Company issued $476 million in Class
A voting and Class B non-voting shares in respect of businesses acquired
during the year ended September 30, 2000 (note 3). Accordingly, these
transactions are not reflected in the Statement of Cash Flows.
16 RELATED PARTY TRANSACTIONS
During the year ended September 30, 2000, the Company earned $11 million
(1999 -- $nil) of revenues and incurred $2 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 $11 million (1999 -- $nil)
receivable from this customer, $4 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 September 30, 2000 to this related company. The above
transactions were entered into in the ordinary course of business and were
recorded at the exchange amount.
17 SUBSEQUENT EVENT
On October 16, 2000, the Company entered into a term sheet with C1
Communications Inc. ("C1"). Under the term sheet, the Company will purchase
from C1 all the property and assets used in its Atlantic Cable competitive
local exchange carrier business. The Company will also assume an
indefeasible right to use agreement which will grant the company an
indefeasible right to use certain specifically identified existing fibers
in the fiber-optic networks of C1 for 19 years.
The purchase consideration consists of rights to acquire 2,372,000 class B
non-voting shares of the Company and the assumption of C1's obligations
under the indefeasible right to use agreement, which amount to $22 million
on a present value basis. Acquisition costs are estimated to be $2 million.
18 PRIOR YEAR COMPARATIVE AMOUNTS
Certain prior years' comparative numbers have been reclassified to conform
to the current year's presentation.
F-28
<PAGE> 134
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
19 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 ("U.S. GAAP") 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>
2000 1999 1998
-------- ------- ------
$ $ $
<S> <C> <C> <C>
Loss for the year in accordance with Canadian
GAAP............................................. (137,986) (9,967) (2,439)
Impact of U.S. accounting principles
Amortization of purchase price adjustment (c).... (617) -- --
Deferred charges................................. (15) (301) (87)
Stock based compensation (d)..................... (11,430) (56) (1,056)
Deferred foreign exchange (e).................... (1,655) (12) --
Recovery of future income taxes (f).............. 11,055 -- --
-------- ------- ------
Net loss for the year in accordance with U.S.
GAAP............................................. (140,648) (10,336) (3,582)
Unrealized gains on securities, net of tax of
$10,366 (f)...................................... 23,926 -- --
-------- ------- ------
Comprehensive loss in accordance with U.S. GAAP.... (116,722) (10,336) (3,582)
======== ======= ======
Net loss per share in accordance with U.S. GAAP.... (1.86) (0.58) (0.38)
======== ======= ======
</TABLE>
The reconciliation of the change in shareholders' equity from Canadian
to U.S. GAAP is as follows:
<TABLE>
<CAPTION>
2000 1999
------- ------
$ $
<S> <C> <C>
Shareholders' equity in accordance with Canadian GAAP at
September 30.............................................. 862,798 73,928
Purchase price adjustment, net of amortization of $617 (1999
and 1998 -- $nil) (c)..................................... 17,035 --
Deferred charges............................................ (417) (403)
Cumulative stock-based compensation expense (d)............. (11,651) (1,118)
Deferred stock based compensation expense (d)............... (34,266) (287)
Net change in stock options (d)............................. 45,917 1,405
Deferred foreign exchange (e)............................... (1,666) (12)
Recovery of future income taxes (f)......................... 11,055 --
Other comprehensive income (f).............................. 23,926 --
------- ------
Shareholders' equity in accordance with U.S. GAAP at
September 30.............................................. 912,731 73,513
======= ======
</TABLE>
F-29
<PAGE> 135
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
(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>
2000 1999
--------- -------
$ $
<S> <C> <C>
Property, plant and equipment (c)........................... 957,957 73,817
Long-term investment (f).................................... 77,530 --
Goodwill and other assets (c)............................... 239,327 877
Share capital (c)........................................... 1,032,079 85,480
Additional paid-in capital.................................. 337 337
Deferred stock-based compensation expense (d)............... (34,266) (287)
Stock options outstanding (d)............................... 45,917 723
Deficit..................................................... (155,263) (14,615)
Other comprehensive income (f).............................. 23,926 --
</TABLE>
(C) PURCHASE PRICE ADJUSTMENT
For U.S. GAAP, the Company has recorded the purchase price of the assets
acquired from Moffat Communications (note 3(b)), 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>
ASSETS ACQUIRED
Indefeasible right to use agreement
Property, plant and equipment for constructed fibers...... 91,748
Prepayment for fibers to be constructed................... 7,600
Videon FiberLink acquisition
Property, plant and equipment............................. 7,397
Non-competition agreement................................. 2,360
Goodwill.................................................. 12,594
Other current assets...................................... 784
-------
122,483
=======
LIABILITIES ASSUMED
Future income taxes......................................... 689
=======
</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-30
<PAGE> 136
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in 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 of
the options. For U.S. GAAP, the compensation cost not yet recognized is
presented as 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 financial statements 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>
2000 1999 1998
-------- ------- ------
$ $ $
<S> <C> <C> <C>
Loss in accordance with U.S. GAAP.................. (140,648) (10,336) (3,582)
Additional compensation expense.................... (2,106) (174) (18)
-------- ------- ------
Pro forma net loss................................. (142,754) (10,510) (3,600)
======== ======= ======
Pro forma loss per share........................... (1.89) (0.59) (0.38)
======== ======= ======
</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 between
4.10% - 6.41%; (ii) expected volatility ranging between nil - 70%; (iii)
expected dividend yield of nil; and (iv) an estimated average life
ranging from 2.17 - 3 years.
(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.
Under U.S. GAAP, this also resulted in an additional $11 million
recovery of future income taxes. The concept of comprehensive
income/loss does not exist under Canadian GAAP.
F-31
<PAGE> 137
GT GROUP TELECOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tabular amounts expressed in thousands of Canadian dollars)
(G) DETAILS OF AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
2000 1999 1998
------ ---- ----
$ $ $
<S> <C> <C> <C>
Amortization expense for the year consists of:
Property, plant and equipment............................ 30,510 839 213
Goodwill, non-complete agreements and license rights..... 8,417 -- 33
Deferred charges......................................... 4,128 14 9
------ --- ---
43,055 853 255
====== === ===
</TABLE>
(H) RECENT ACCOUNTING PRONOUNCEMENTS
(I) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 will adopt SFAS No. 133 effective October 1, 2000 and
will record a cumulative effect-type adjustment of $18 million, net
of tax of $nil, as a charge to other comprehensive income to
recognize derivatives designated as cash flow hedges at fair value.
The resulting effect is that foreign exchange gains and losses on
the hedged portion of the long-term debt will be reflected in other
comprehensive income, together with the change in the fair value of
the hedging instruments.
As the Financial Accounting Standards Board continues to issue
additional guidance and interpretations on SFAS No. 133, the Company
will review its accounting practises for derivative instruments, and
make adjustments, if necessary.
(II) REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 on Revenue Recognition. The
adoption of this pronouncement will not have a material impact on
the Company's financial statements.
F-32
<PAGE> 138
GT GROUP TELECOM INC.
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
2000 2000 2000 1999
------------- --------- --------- ------------
$ $ $ $
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... 444,050 526,231 732,053 29,348
Accounts receivable
Trade................................. 30,253 32,799 12,801 1,922
Other................................. 19,699 7,786 2,456 3,858
Prepaid expenses........................ 5,939 8,958 5,227 2,074
Inventory............................... 436 201 201 545
--------- --------- --------- -------
500,377 575,975 752,738 37,747
PROPERTY, PLANT AND EQUIPMENT........... 954,917 778,926 567,568 108,009
PREPAYMENT ON PROPERTY, PLANT AND
EQUIPMENT............................. 203,703 230,600 223,000 --
LONG-TERM INVESTMENT.................... 43,238 43,238 -- --
GOODWILL AND OTHER ASSETS............... 227,033 199,710 192,366 14,902
--------- --------- --------- -------
1,929,268 1,828,449 1,735,672 160,658
========= ========= ========= =======
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities........................... 111,395 88,485 42,583 34,963
Unearned revenue........................ 544 1,325 925 676
Current portion of long-term debt....... 4,348 1,204 6,203 3,746
--------- --------- --------- -------
116,287 91,014 49,711 39,385
LONG-TERM UNEARNED REVENUE.............. 1,255 1,080 1,219 1,356
LONG-TERM DEBT.......................... 948,928 853,123 781,447 57,028
FUTURE INCOME TAXES..................... -- -- 28,200 --
--------- --------- --------- -------
1,066,470 945,217 860,577 97,769
--------- --------- --------- -------
SHAREHOLDERS' EQUITY
SHARE CAPITAL AND OTHER EQUITY ITEMS.... 1,013,866 971,468 937,550 88,035
DEFICIT................................. (151,068) (88,236) (62,455) (25,146)
--------- --------- --------- -------
862,798 883,232 875,095 62,889
--------- --------- --------- -------
1,929,268 1,828,449 1,735,672 160,658
========= ========= ========= =======
</TABLE>
F-33
<PAGE> 139
GT GROUP TELECOM INC.
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
2000 2000 2000 1999
------------- -------- --------- ------------
$ $ $ $
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE.................................. 32,167 25,558 13,259 2,267
COST OF SERVICES......................... 21,230 17,415 10,553 2,138
-------- ------- ------- -------
10,937 8,143 2,706 129
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 38,901 30,984 20,286 10,788
-------- ------- ------- -------
(27,964) (22,841) (17,580) (10,659)
AMORTIZATION............................. 20,241 15,447 6,169 1,198
INTEREST AND FINANCING CHARGES........... 26,488 14,488 13,237 141
-------- ------- ------- -------
LOSS BEFORE INCOME TAXES................. (74,693) (52,776) (36,986) (11,998)
PROVISION (RECOVERY) OF FUTURE INCOME
TAXES.................................. (11,861) (26,995) 323 66
-------- ------- ------- -------
LOSS FOR THE PERIOD...................... (62,832) (25,781) (37,309) (12,064)
DEFICIT -- BEGINNING OF PERIOD........... (88,236) (62,455) (25,146) (13,082)
-------- ------- ------- -------
DEFICIT -- END OF PERIOD................. (151,068) (88,236) (62,455) (25,146)
======== ======= ======= =======
LOSS PER SHARE........................... (0.52) (0.22) (0.90) (0.54)
======== ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (in thousands)............. 120,256 118,376 41,506 22,474
======== ======= ======= =======
</TABLE>
F-34
<PAGE> 140
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-35
<PAGE> 141
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-36
<PAGE> 142
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-37
<PAGE> 143
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-38
<PAGE> 144
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-39
<PAGE> 145
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-40
<PAGE> 146
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-41
<PAGE> 147
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-42
<PAGE> 148
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-43
<PAGE> 149
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-44
<PAGE> 150
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-45
<PAGE> 151
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statement of
operations is 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. The pro forma financial statements give effect to financing
required to complete the acquisition, consisting of senior bank debt of $220
million and additional financing of $140 million in debt and share purchase
warrants.
The unaudited pro forma condensed consolidated statements of operations for
the year ended September 30, 2000 gives effect to such transactions as if they
occurred at the beginning of the year then ended. 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 would actually have been had these transactions in fact
occurred on such dates or to project the Company's results of operations 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.
F-46
<PAGE> 152
GT GROUP TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 2000
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHAW
GT GROUP FIBERLINK
TELECOM INC. FOUR MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, PRO FORMA
2000 1999 ADJUSTMENTS NOTES PRO FORMA
------------- ------------ ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE.......................... $ 73,251 $18,045 -- $ 91,296
COST OF SERVICES................. 51,336 8,872 -- 60,208
--------- ------- -------- ---------
21,915 9,173 -- 31,088
--------- ------- -------- ---------
Selling, general and
administrative expenses........ 100,959 3,933 -- 105,392
500 2(iii)
Amortization..................... 43,055 2,831 3,788 2(i) 55,492
3,620 2(ii)
2,198 2(i)
Charge allocated by Shaw
Communications for use of
distribution network assets.... -- 2,198 (2,198) 2(i) --
Interest and finance items
(income)....................... 54,354 -- 7,700 2(iv) 69,576
6,953 2(v)
569 2(vi)
--------- ------- -------- ---------
198,368 8,962 21,130 230,460
--------- ------- -------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... (176,453) 211 (23,130) 199,372
PROVISION FOR (RECOVERY OF)
INCOME TAXES................... (38,467) 25 -- (38,442)
--------- ------- -------- ---------
NET INCOME (LOSS) FOR THE YEAR... $(137,986) $ 186 $(23,130) $(160,930)
========= ======= ======== =========
PRO FORMA LOSS PER SHARE......... (1.82)
=========
PRO FORMA WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (IN
THOUSANDS)..................... 88,639
=========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial
information.
F-47
<PAGE> 153
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) SEPTEMBER 30, 2000
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The pro forma condensed consolidated statement of operations has been
prepared to give effect to the acquisition of the assets of Shaw FiberLink Ltd.
-- FiberLink Division ("Shaw FiberLink") by GT Group Telecom Inc. ("Group
Telecom") and the grant by Shaw FiberLink of an Indefeasible Right to Use
("IRU") certain specifically identified fibers in the fiber optic cable networks
of Shaw Communications Inc. ("Shaw Communications") to Group Telecom as of
October 1, 1999. The pro forma financial statements give effect to financing
consisting of senior bank debt of $220 million and an additional amount of $140
million representing a portion of the proceeds from the company's issuance of
Units consisting of Senior Discount Notes and Warrants to purchase Class B
Non-Voting Shares. Such proceeds have only been included in these pro-forma
financial statements to the extent of $140 million required to complete the
funding of the acquisition of the business of Shaw FiberLink.
On February 16, 2000, Group Telecom purchased from Shaw Communications Inc.
("Shaw Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink") all of the
property and assets of Shaw FiberLink used in connection with the high-speed
data and competitive access business. Group Telecom and Shaw FiberLink also
entered into an indefeasible right to use agreement 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. Certain of the
existing fibers located in New Brunswick Canada under the indefeasible right to
use the agreement will be available for use in 2003. In addition, Group Telecom
will receive an indefeasible right to use fibers to be built over the next three
years in mutually agreed regions (refer to note 3 in the audited consolidated
financial statements of Group Telecom) beginning on page F-9.
The pro forma condensed consolidated statement of operations for the year
ended September 30, 2000 is based on the audited consolidated statement of
operations of Group Telecom for the year ended September 30, 2000 and the
unaudited statement of operations of Shaw FiberLink for the four months ended
December 31, 1999, as Group Telecom and Shaw FiberLink had non-coterminous
year-ends.
A pro forma condensed consolidated balance sheet has not been prepared as
the acquisition of Shaw FiberLink is reflected in the audited consolidated
balance sheet of Group Telecom as at September 30, 2000 (page F-3).
The pro forma condensed consolidated statements do not purport to represent
what Group Telecom's results of operations would actually have been, had these
transactions in fact occurred on such dates or to project Group Telecom's
results of operations for any future date or period. The pro forma condensed
consolidated statement of operations 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 offering circular.
2. PRO FORMA ASSUMPTIONS
The pro forma condensed consolidated statement of operations gives effect
to the above acquisition as if it had occurred effective October 1, 1999.
F-48
<PAGE> 154
GT GROUP TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(UNAUDITED) SEPTEMBER 30, 2000
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(i) The additional amortization expense relates to the increase of $429
million in 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.
(ii) The additional amortization expense relates to the allocation of the
purchase price of $120 million to goodwill and $29 million to other intangible
assets. The amortization is based on the estimated useful life of 20 years for
goodwill, 10 years for license rights and 3 years for the amount recorded as a
non-compete agreement.
(iii) The increase in selling, general and administration expense is an
annual fiber maintenance fee as set out in the IRU agreement.
(iv) The increase in interest expense is based on the senior bank financing
of $220 million obtained to finance part of the acquisition of Shaw FiberLink.
The interest expense was calculated using an interest rate of 10.50%.
(v) The increase in interest expense is based on additional financing of
$140 million in debt and share purchase warrants. The interest expense was
calculated using an interest rate of 13.25% plus debt discount amortization.
(vi) The deferred financing costs of $14.5 million relating to the debt
issuances described in (iv) and (v) are amortized over the term of the related
debts, assumed to be 7 and 10 years.
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 20 of Group Telecom consolidated financial statements for a reconciliation
of differences impacting the Company.
<TABLE>
<S> <C>
Pro forma loss under Canadian GAAP.......................... $(160,930)
Group Telecom adjustments:
Amortization of purchase price adjustment................. (617)
Deferred charges.......................................... (15)
Stock-based compensation.................................. (11,430)
Deferred foreign exchange................................. (1,655)
Recovery of future income taxes........................... 11,055
---------
Pro forma loss under U.S. GAAP.............................. $(163,592)
=========
Pro forma loss per share.................................... (1.85)
=========
Pro forma weighted average number of common shares (in
thousands)................................................ 88,639
=========
</TABLE>
F-49
<PAGE> 155
APPENDIX A
FORM OF NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT
[FOR THE TRANSFER OF WARRANTS, ADDRESS TO: THE CHASE MANHATTAN BANK
GT GROUP TELECOM INC.
C/O CHASE NATIONAL CORPORATE SERVICES INC.
1301 FIFTH AVENUE, SUITE 3410
SEATTLE, WASHINGTON 98101
ATTENTION: MR. MICHAEL A. JONES]
[FOR THE TRANSFER OF CLASS B NON-VOTING SHARES, ADDRESS TO:
CIBC MELLON TRUST COMPANY
CHASEMELLON SHAREHOLDER SERVICES
GT GROUP TELECOM INC.
C/O CIBC MELLON TRUST COMPANY
1066 WEST HASTINGS STREET, SUITE 1600
VANCOUVER, B.C. V6E 3X1
ATTENTION: MS. TRICIA MURPHY
Re: GT Group Telecom Inc. (the "Company")
Warrants and Class B Non-Voting Shares
Dear Sirs:
Please be advised that _____________________ has transferred
___________________ of the above-referenced [WARRANTS] [CLASS B NON-VOTING
SHARES] pursuant to an effective Registration Statement on Form F-1 (File No.
333- ____________ ) filed by the Company.
We hereby certify that the prospectus delivery requirements, if any, of the
Securities Act of 1933, as amended, have been satisfied and that the above-named
beneficial owner of the [WARRANTS] [CLASS B NON-VOTING SHARES] is named as a
"Selling Shareholder" in the Prospectus dated [DATE] or in supplements thereto,
and that the [WARRANTS] [CLASS B NON-VOTING SHARES] transferred are the
[WARRANTS] [CLASS B NON-VOTING SHARES] listed in such Prospectus opposite such
owner's name.
Dated:
Very truly yours,
--------------------------------------
(Name)
By:
--------------------------------------
(Authorized Signature)
A-1
<PAGE> 156
---------------------------------------------------------
---------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................... i
Exchange Rates.............................. ii
Presentation of our Financial and Other
Information............................... ii
Risk Factors................................ 1
Use of Proceeds............................. 8
Price Range of Class B Non-Voting Shares.... 8
Dividend Policy............................. 8
Selected Historical Financial and Operating
Information of Group Telecom.............. 9
Selected Unaudited Pro Forma Consolidated
Financial and Operating Information....... 11
Selected Historical Financial and Operating
Information of Shaw FiberLink............. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 14
Business.................................... 22
Description of Our Financing Arrangements... 37
Our Acquisition of the Shaw FiberLink
Business.................................. 43
Description of the Warrants................. 45
Management.................................. 49
Regulation.................................. 58
Related Party Transactions.................. 67
Principal Shareholders...................... 68
Selling Shareholders........................ 69
Description of Share Capital................ 90
Taxation.................................... 93
Plan of Distribution........................ 99
Legal Matters............................... 100
Experts..................................... 100
Registrars and Transfer Agents.............. 100
Enforceability of Civil Liabilities......... 100
Where You Can Obtain More Information About
Us........................................ 101
Index to Financial Statements............... F-1
Appendix A.................................. A-1
</TABLE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
GT Group Telecom Logo
4,198,563 Class B Non-Voting Shares
855,000 Warrants to Purchase
Class B Non-Voting Shares
------------------------------------
PROSPECTUS
------------------------------------
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses relating to the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... US$ 16,796
Printing and Engraving Expenses............................. 80,000
Legal Fees and Expenses..................................... 125,000
Accounting Fees and Expenses................................ 53,200
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 1,000
----------
Total..................................................... US$280,996
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Canada Business Corporations Act (the "CBCA"), a corporation may
indemnify a present or former director or officer to such corporation or a
person who acts or acted at the corporation's request as a director or officer
of another corporation of which the corporation is or was a shareholder or
creditor, and his heirs and legal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of his
being or having been a director or officer of such corporation and provided that
the director or officer acted honestly and in good faith with a view to the best
interests of the corporation, and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with a derivative action only with court approval. A director
or officer is entitled to indemnification from the corporation as a matter of
right in respect of all costs, charges and expenses reasonably incurred by him
in connection with the defense of a civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the corporation if he was substantially successful on the
merits and fulfilled the conditions set forth above.
In accordance with the CBCA, the by-laws of the Registrant, a copy of which
is filed as Exhibit 3.2 to this Registration Statement, indemnify a director or
officer of the Registrant, a former director or officer of the Registrant or any
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or creditor and
his heirs and legal representatives against all costs, charges and expenses
including an amount paid to settle an action or satisfy a judgment reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he has been made a party by reason of being or having been a
director or officer of the Registrant or such body corporate if (i) he acted
honestly and in good faith with a view to the best interests of the Registrant,
and (ii) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful.
The Registrant will also indemnify such directors or officers who have been
substantially successful in the defence of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director of the Registrant or body corporate against all costs, charges
and expenses reasonably incurred by him in respect of such action or proceeding.
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
II-1
<PAGE> 158
and officers of the Registrant, including liabilities arising under the
Securities Act of 1933, and also reimburses the Registrant for payments made
pursuant to the indemnity provisions under the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that, in the opinion of the U.S.
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to unregistered securities issued or sold
by us within the prior three years:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
Units February 1, 2000 qualified institutional buyers
and non-U.S. persons 855,000 526.51
Class A Voting Shares February 1998 directors 100,000 0.01
March 1998 employees 4,500 0.76
April 15, 1998 executive officers and
non-U.S. persons 302,881 0.76
May 23, 1998 employees 10,000 0.76
June 17, 1998 sophisticated investors,
directors, employees and
non-U.S. persons 4,828,124 1.25
July 22, 1998 directors, sophisticated
investors and non-U.S.
persons 2,482,592 0.76923
September 1998 directors and employees 230,000 0.01
September 1998 employees and non-U.S. persons 56,863 0.50
December 2, 1998 employees and non-U.S. persons 40,000 0.50
December 1998 directors 100,000 0.01
January 1999 directors 90,000 0.50
March 1999 directors 300,000 0.01
April 19, 1999 directors and employees 476,580 1.25
April 30, 1999 non-U.S. persons 104,504 1.25
April 30, 1999 employees and non-U.S. persons 233,903 1.25
May 1999 non-U.S. persons 100,000 0.01
August 31, 1999 employees and non-U.S. persons 1,527,742 1.875
November 1999 non-U.S. persons 167 1.875
November 1999 non-U.S. person 1,090 0.50
November 1999 employee 10,000 1.25
December 16, 1999 employees 863 1.875
January 2000 non-U.S. person 55,425 0.50
January 2000 employee 10,000 1.25
January 2000 non-U.S. person 250 1.875
February 2000 employee 3,778 1.25
February 2000 employee 334 3.00
February 2000 non-U.S. person 56 3.00
February 2000 non-U.S. person 167 3.00
February 2000 non-U.S. person 112 1.875
February 2000 non-U.S. person 84 3.00
February 2000 employee 111 3.00
February 2000 employee 10,000 8.00
</TABLE>
II-2
<PAGE> 159
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
February 2000 employee 10,000 8.00
March 2000 employees 15,000 8.00
March 2000 sophisticated investors and
non-U.S. persons 60,596,097 0.00(1)
March 2000 employees 121,792 0.50
March 2000 employees 47,884 1.25
March 2000 employees 2,056 1.875
March 2000 employees 362 3.00
March 2000 non-U.S. persons 1,090 0.50
March 2000 employees 42 8.00
April 2000 employees 4,505 1.25
April 2000 employees 83 1.875
April 2000 employees 417 3.00
April 2000 employees 307 8.00
May 2000 employees 3,864 1.25
May 2000 employees 1,000 3.00
May 2000 employees 1,141 8.00
June 2000 employees 11,351 1.25
June 2000 employees 1,500 1.875
June 2000 employees 250 1.50
June 2000 employees 1,181 3.00
June 2000 employees 954 8.00
June 2000 employees 223 20.40
July 2000 employees 7,502 1.25
July 2000 employees 1,167 1.875
July 2000 employees 2,641 3.00
July 2000 employees 334 8.00
August 2000 employees 8,417 1.25
August 2000 employees 1,106 3.00
August 2000 employees 2,362 1.875
August 2000 employees 2,082 8.00
August 2000 employees 42 20.40
September 2000 employees 806 1.875
September 2000 employees 1,571 3.00
September 2000 employees 2,712 8.00
October 2000 employees 7,500 1.00
October 2000 employees 5,000 1.25
October 2000 employees 500 1.875
October 2000 employees 7,607 3.00
October 2000 employees 1,168 8.00
November 2000 employees 1,112 1.875
November 2000 employees 584 8.00
November 2000 employees 26,747 0.50
November 2000 employees 500 3.00
December 2000 employees 7,500 1.25
December 2000 employees 834 1.875
December 2000 employees 3,000 3.00
December 2000 employees 5,500 8.00
Class B Non-Voting
Shares April 19, 1999 directors and sophisticated
investors 721,101 1.25
</TABLE>
II-3
<PAGE> 160
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY
---------- ---- --------- --------------- ---------
<S> <C> <C> <C> <C>
April 30, 1999 directors and sophisticated
investors 2,592,103 1.25
April 30, 1999 directors and sophisticated
investors 835,365 1.25
January 2000 director and employee 250,000 1.25
March 2000 sophisticated investor 11,000,002 0.00(1)
March 2000 director and employee 1,100,000 1.875
March 2000 director and employee 500,000 3.00
August 2000 non-U.S. persons 1,740,196 25.64
August 2000 non-U.S. persons 1,667,000 30.00
Series A First
Preference Shares May 7, 1999 sophisticated investors 27,666,667 1.50
August 10, 1999 sophisticated investors 13,833,335 1.875
December 3, 1999 non-U.S. persons 1,000,000 1.875
Series B First
Preference Shares February 16, 2000 non-U.S. person 29,096,097 13.93
Convertible
Debentures February 18, 25 and March
17, 1999 directors, sophisticated
investors and non-U.S.
persons 18,240 100.00
December 10 and December
15, 1998 directors, employees,
sophisticated investors and
non-U.S. persons 30,993 100.00
March 5, 1999 directors, employees,
sophisticated investors and
non-U.S. persons 13,120 100.00
</TABLE>
In addition, from December 31, 1997 through to December 31, 2000, we have
issued an aggregate of 9,964,396 stock options and warrants to purchase our
class A non-voting shares and 3,430,600 stock options to purchase our class B
non-voting shares to our directors, executive officers and employees. Of these,
7,330,070 and 1,830,600 are outstanding, respectively.
Each of the foregoing securities were sold pursuant to exemptions from
registration under Section 4(2) or Rule 701 of the Securities Act or offered and
sold outside the United States in accordance with Regulation S of the Securities
Act. No underwriter or underwriting discount or commission was involved in any
of such sales.
---------------
(1) Conversion of previously issued first preference shares.
II-4
<PAGE> 161
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
*2.1 Asset Purchase and Subscription Agreement dated December 22,
1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.2 Indefeasible Right of Use Agreement dated February 16, 2000
between Shaw FiberLink Ltd. and GT Group Telecom Inc.
*2.3 Non-competition Agreement in favour of Group Telecom dated
February 16, 2000 among Shaw Communications Inc., Shaw
FiberLink Ltd. and GT Group Telecom Inc.
*2.4 Non-competition Agreement in favour of Shaw dated February
16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd.
and GT Group Telecom Inc.
*2.5 Transitional Services Agreement dated February 16, 2000
among Shaw Communications Inc., Shaw FiberLink Ltd., GT
Group Telecom Inc. and GT Group Telecom Services Corp.
*2.6 Performance Assurance Agreement dated February 16, 2000
among Shaw Communications Inc., GT Group Telecom Inc. and GT
Group Telecom Services Corp.
+**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide
Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3,
Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp.
+**2.8 Capacity Lease Agreement dated May 24, 2000 by and between
Worldwide Fiber Network Services Ltd. and Worldwide Fiber
Network Services, Inc. and GT Group Telecom Services Corp.
and GT Group Telecom Services (USA) Corp.
+**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide
Fiber Network Services, Inc. and GT Group Telecom Services
(USA) Corp.
*3.1 Articles of Incorporation of GT Group Telecom Inc.
*3.2 By-laws of GT Group Telecom Inc.
*4.1 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
*4.2 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.
*5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the Class B
non-voting shares and the warrants being registered
*5.2 Opinion of Shearman & Sterling as to the legality of the
warrants being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000, as amended and restated as of September 29, 2000, with
Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000, as amended
and restated as of September 29, 2000, among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
*10.4 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.
*10.5 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**10.6 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
</TABLE>
II-5
<PAGE> 162
<TABLE>
<C> <S>
*10.7 Credit Agreement, dated as of September 29, 2000, with Cisco
Systems Capital Corporation
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
*23.2 Consent of Ernst & Young LLP, Chartered Accountants
*23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
*23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
***24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Incorporated by reference to the Registrant's Registration Statement on Form
F-4 (File No. 333-38058).
*** Previously filed
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (i) and (ii) above shall not apply if
this registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-6
<PAGE> 163
(4) As long as the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Item 8.A. of Form 20-F at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that the registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Not withstanding the foregoing, if this registration
statement is on Form F-3, a post-effective amendment need not be filed to
include financial statements and information required by Section 10(a)(3) of the
Act or Item 8.A of Form 20-F if such financial statements and information are
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Form F-3.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 164
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-1 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 19th day of January, 2001.
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 January 19, 2001
---------------------------------------------
James G. Matkin
Director and Chair of Executive
--------------------------------------------- Committee
James M. Mansour
* Chief Executive Officer and Director January 19, 2001
--------------------------------------------- (principal executive officer)
Daniel R. Milliard
* President, Chief Operating Officer January 19, 2001
--------------------------------------------- and Director
Robert G. Wolfe
* Executive Vice President and Chief January 19, 2001
--------------------------------------------- Financial Officer (principal
Stephen H. Shoemaker financial officer and principal
accounting officer)
* Director January 19, 2001
---------------------------------------------
Michael Abram
* Director January 19, 2001
---------------------------------------------
Michael D'Avella
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director January 19, 2001
---------------------------------------------
George Estey
Director
---------------------------------------------
Leo J. Hindery
* Director January 19, 2001
---------------------------------------------
P. Kenneth Kilgour
* Director January 19, 2001
---------------------------------------------
Robert R. Gheewalla
* Director January 19, 2001
---------------------------------------------
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 19th day
of January, 2001.
GT GROUP TELECOM SERVICES (USA) CORP.
(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
<PAGE> 166
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 Warrant Agreement dated February 1, 2000 between GT Group
Telecom Inc. and The Chase Manhattan Bank
*4.2 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.
*5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to
GT Group Telecom Inc., as to the legality of the class B
non-voting shares and the warrants being registered
*5.2 Opinion of Shearman & Sterling as to the legality of the
warrants being registered
*10.1 Preference Share Purchase Agreement dated May 7, 1999 among
GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin
B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc.,
First Marathon Capital Corporation and MGN Group LLC
*10.2 Credit Agreement, as amended and restated, dated February 3,
2000, as amended and restated as of September 29, 2000, with
Lucent Technologies Canada Inc.
*10.3 Senior Credit Facility dated February 3, 2000, as amended
and restated as of September 29, 2000, among GT Group
Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit
Partners, Royal Bank of Canada and Toronto Dominion Bank
</TABLE>
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
*10.4 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.
*10.5 Indenture dated February 1, 2000 between GT Group Telecom
Inc. and The Chase Manhattan Bank
**10.6 First Supplemental Indenture dated July 11, 2000 between GT
Group Telecom Inc. and The Chase Manhattan Bank
*10.7 Credit Agreement, dated as of September 29, 2000, with Cisco
Systems Capital Corporation
**21.1 Subsidiaries of GT Group Telecom Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants
*23.2 Consent of Ernst & Young LLP, Chartered Accountants
*23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit
5.1)
*23.4 Consent of Shearman & Sterling (included in Exhibit 5.2)
***24.1 Powers of Attorney (contained on the signature pages of the
Registration Statement)
</TABLE>
---------------
* Incorporated by reference to the Registrant's Registration Statement of Form
F-1 (File No. 333-11506)
** Incorporated by reference to the Registrant's Registration Statement on Form
F-4 (File No. 333-38058).
*** Previously filed
+ Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
