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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the annual report period ended September 30, 2000
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GT GROUP TELECOM INC.
Suite 700 - 20 Bay Street
Toronto, Ontario, Canada
M5J 2N8
(416) 848-2000
(Address of principal executive offices)
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[indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F]
Form 20-F X Form 40-F ___
[indicate by check mark whether the registrant by furnishing information contained
in this Form is also thereby furnishing the information to the Commission pursuant to
rule 12g3-2(b) under the Securities Exchange Act of 1934]
Yes __ No X
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year 2000
annual report
[GROUP TELECOM LOGO]
www.gt.ca
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Our network, customer base, capital and employee team all grew tremendously in
2000.
Corporate Pro!le
Group Telecom is Canada's largest independent facilities-based Competitive Local
Exchange Carrier (CLEC).
With a next-generation fibre-optic network spanning eight provinces and linked
by 190,583 fibre kilometres, Group Telecom delivers advanced business
communication solutions coast-to-coast to small and medium-sized business
customers.
The Company is headquartered in Toronto with 987 employees located in 13 markets
across the country. Group Telecom's shares are listed on the Toronto Stock
Exchange (GTG.B) and on Nasdaq (GTTLB).
NETWORK MAP
[MAP]
Contents
Message to Shareholders 3
Our Five-Part Strategy in Action:
1 Own the Network 7
2 Lead with Data 9
3 Target Small and Medium-Sized Enterprises 11
4 Sell Directly to the Customer 13
5 Integrated Back Office 15
Employee Focus 17
Management Discussion and Analysis 18
Report of Management 25
Auditors' Report 26
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 30
Supplemental Information 52
Regional Highlights 54
Corporate Information 55
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THE YEAR
IN MILESTONES
In just one year, Group Telecom has become Canada's largest independent
facilities-based Competitive Local Exchange Carrier.
OCTOBER 13, 1999 -- Announces national expansion across Canada.
JANUARY 28, 2000 -- Secures $651 million in high-yield financing in a U.S.$
denominated offering ($450 million).
FEBRUARY 3, 2000 -- Secures $220 million in senior bank financing.
FEBRUARY 3, 2000 -- Secures $474 million in vendor financing from Lucent
Technologies Inc.
FEBRUARY 16, 2000 -- Acquires Shaw FiberLink from Shaw Communications Inc. for
$360 million and 29.1 million Class A shares.
MARCH 9, 2000 -- Completes $422 million Initial Public Offering (IPO) through
listing of 20.7 million Class B shares on TSE and Nasdaq.
MARCH 21, 2000 -- Opens national headquarters in Toronto.
APRIL 26, 2000 -- Acquires Videon FiberLink from Moffat Communications Inc. for
$68 million and 1.7 million Class B shares.
APRIL 28, 2000 -- Opens Montreal office and Eastern Region headquarters.
MAY 24, 2000 -- Enters agreement with 360networks, inc. to build and acquire
fibre-optic cable and high-speed bandwidth capacity for $362 million.
JUNE 5, 2000 -- Announces BlackBerry(TM) wireless email solution in a marketing
and service development agreement with Research in Motion.
JULY 21, 2000 -- Acquires Cable Atlantic Inc.'s fibre-optic telecom business for
$15 million and 1.7 million Class B shares.
SEPTEMBER 29, 2000 -- Opens St. John's, Newfoundland office and Atlantic Region
headquarters.
SEPTEMBER 29, 2000 -- Secures $120 million in vendor financing from Cisco
Systems, Inc.
Subsequent to Year-End
OCTOBER 13, 2000 -- Signs term sheet to acquire Atlantic Canada telecom
operations of C1 Communications. This transaction, when combined with Cable
Atlantic, will make Group Telecom the second-largest telecommunications provider
in Atlantic Canada.
NOVEMBER 2, 2000 -- Announces expansion of existing fibre network in the Greater
Toronto Area (GTA). The proposed build out of 215 fibre route kilometres (over
120,000 fibre kilometres) will nearly triple the size of Group Telecom's fibre-
optic network in the GTA.
NOVEMBER 8, 2000 -- Announces $16 million expansion of fibre-optic network in
Quebec City.
NOVEMBER 15, 2000 -- Announces an additional $10 million expansion of network
throughout the Ottawa/Hull region.
DECEMBER 4, 2000 -- Announces an additional $5 million expansion of network
across southwestern Ontario; opens office in London, Ontario.
DECEMBER 5, 2000 -- Signs term sheet to acquire approximately 650 route
kilometres of dark fibre from Cable-Axion Digitel Inc. and Cable-Axion Quebec
Inc. between Montreal and Quebec City, via Sherbrooke.
DECEMBER 5, 2000 -- Announces agreement to participate in a joint build with
RISQ (Reseau d'Informations Scientifiques du Quebec) in Sherbrooke, Quebec.
DECEMBER 6, 2000 -- Announces an additional $7 million expansion of network in
Winnipeg.
All figures are in Canadian funds unless stated otherwise
[GRAPH-- [GRAPH-- [GRAPH--
EMPLOYEES] TOTAL FIBRE KM] FINANCING RAISED]
[GRAPH--GROSS PROPERTY, [GRAPH--
PLANT & EQUIPMENT] POINTS OF PRESENCE]
5
[DANIEL R. MILLARD & ROBERT G. WOLFE PHOTOGRAPH]
Rather than dealing with different companies for data, application and voice
services, Group Telecom offers small and medium-sized businesses these services
over a next-generation leading-edge network. The result is true end-to-end
solutions from a service provider that delivers on telecom convergence.
Daniel R. Millard Robert G. Wolfe
CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF OPERATING OFFICER
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MESSAGE TO SHAREHOLDERS
THE YEAR
IT ALL CONNECTED
The combination of people, services, technology and sponsorship has allowed us
to become Canada's leading telecom service provider to the small and
medium-sized enterprise market in Canada.
Our first year as a public company was extraordinary by any measure.
On October 13, 1999, we announced an aggressive program of national
expansion and unveiled our five-point strategy to offer high-speed data,
Internet applications and voice services through our leading-edge,
next-generation fibre-optic network. We focus on the Canadian business segment
with an emphasis on serving the small to medium-sized enterprise (SME) customer
by offering an alternative to this sector of the market that has historically
been underserved.
With our coast-to-coast, state-of-the-art owned fibre-optic network in
operation, Group Telecom offers business customers a full suite of
telecommunications products and services while, at the same time, creating a
lasting competitive difference in the Canadian telecom marketplace. In early
1999, we began deploying our unique Gigabit Ethernet architecture which provides
the foundation for our metropolitan area data networks. This architecture
provides Group Telecom flexibility, scalability and cost efficiencies that
cannot be delivered by traditional circuit-based networks.
The combination of this technology and our fibre-rich network has
allowed Group Telecom to differentiate itself in the Canadian telecommunications
market as the next-generation service provider.
Five-point strategy
Crucial to sustaining the pace of our growth and creating long-term value for
our shareholders is Group Telecom's five-point strategy which provides the focus
for all of our efforts.
Our strategy is simple. First,we own our fibre-optic network providing
us with the lowest cost structure and end-to-end control of our service
offerings. Second, we lead with our next-generation data and application
services - the fastest-growing and most profitable segments of the
telecommunications market. Third, we focus on serving the small and medium-sized
enterprise customer - the fastest-growing segment of the economy which has
historically been underserved by incumbent telecommunications providers. Fourth,
we sell directly to our customers, using our own sales force. Fifth, we maintain
our own integrated back office, offering our customers one bill and a single
point of contact.
03
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Fully funded business plan facilitates "early mover" advantage
Our business plan is fully funded into 2004. This means we have the
resources to continue growing, without having to worry about the one thing that
hobbles many young and rapidly growing companies, especially in the telecom
sector - lack of liquidity and access to future capital. During the year, Group
Telecom successfully raised close to two billion dollars through a combination
of public equity and high yield debt offerings and bank and vendor financing
agreements.
GEARING UP FOR GROWTH
During 2000, Group Telecom put in place the pieces necessary to maximize our
growth and profitability. We completed a number of key investments,
partnerships, alliances and acquisitions. We also brought together the people,
services, technology and sponsorship to become Canada's leading next-generation
telecom service provider to the SME market.
In fact, the Company has already grown to be the leading independent
CLEC in Canada. One year ago, Group Telecom had one office in Vancouver; 168
employees; 46 route kilometres in its fibre-optic network; and $73.8 million in
property, plant and equipment. As of our year-end on September 30, 2000, we had
offices in 13 markets across eight provinces; 987 employees; 9,545 route
kilometres; and $954.9 million in property, plant and equipment.
During the period, we made tremendous progress in growing our business.
Group Telecom hired 819 employees, opened 12 new offices, added over 1,500
on-net buildings to our network and provisioned over 5,000 data ports and over
30,000 voice access lines. We also grew our GT CONNECT(TM) portfolio of data,
application, and voice services to include over 30 new, innovative product
offerings. Finally, with our infrastructure in place, we began an aggressive
marketing effort launching national and regional-based advertising
campaigns, while attracting over 15 million hits to our website.
This pace of growth was attributable in large part to the talents and
commitment of our employees, who put forward extraordinary efforts during the
year and deserve the gratitude and thanks of our directors, officers and
shareholders. Our employees have offered levels of service, expertise and
commitment that simply did not exist in this industry before.
MAJOR MARKET PRESENCE
Group Telecom's day-to-day business has evolved into a structure organized along
regional lines - Atlantic, Eastern, Central, Prairie and Pacific - with each
region responsible for its growth and profitability. The combination of a
national support organization and significant coverage in the major markets of
each business region has contributed to our strong organic growth during 2000,
with revenues rising from $2.7 million in the year ended September 30, 1999 to
$73.3 million in the year ended September 30, 2000.
Over the course of the year, we substantially completed our migration
from a deployment model to an operational model. This evolution, started early
in the year, was based on five strong regional organizations supported by a
national structure that develops products, policies and best practices for
regional operations. With local execution and national standards, Group Telecom
has established a strong organizational model that can be leveraged for
continued growth.
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We also dramatically expanded our activities in 13 of Canada's major
markets, including Victoria, Vancouver, Calgary, Edmonton, Winnipeg, Toronto,
London, Hamilton, Kitchener/Waterloo, Ottawa, Quebec City, Montreal and
St. John's, Newfoundland.
During the year we enhanced our organic efforts through selective
acquisitions. Group Telecom was able to accelerate our time-to-market advantage
and to acquire fibre assets in the greater metropolitan areas of Toronto,
Calgary, Edmonton, Winnipeg, Victoria and St. John's. These acquisitions are
natural complements to the organic builds in those markets and provide very
important on-net buildings and customers. In addition to our organic growth and
acquisitions, we also made significant progress in completing an end-to-end
network across Canada, obtaining redundant fibre-optic routes and high-speed
optical wavelength capacity through Canada and the United States.
MEETING FINANCIAL EXPECTATIONS
Group Telecom is in a high growth, capital intensive business. We expect the
Company to reach EBITDA break-even in the latter half of 2002. We ended the year
with $863 million in equity and approximately $1 billion in available funding.
Our explosive growth and the asset values created during the year were
not reflected in our share price at year end. Operating in a sector that overall
shed over 40% of its value from the date of our IPO in March 2000 to our
September year end, Group Telecom performed well in a sector that fell out of
favour.
Despite this, all segments and regions of Group Telecom's operations saw
major increases in sales and market share, and it is clear that our value
proposition is resonating with Canadian businesses seeking a new way to manage
their communications needs.
In closing, we would like to recognize and thank our customers from
across the country who chose Group Telecom for their telecommunications needs.
And, we would like to pay tribute to the hundreds of men and women whose
teamwork, imagination and integrity have been instrumental in our growth and
success, and whose passion to excel and win will play a major role in our drive
to become the provider of choice for Canada's thousands of small and
medium-sized businesses.
/s/ DANIEL R. MILLIARD /s/ ROBERT G. WOLFE
- -------------------------------- --------------------------------
Daniel R. Milliard (signed) Robert G. Wolfe (signed)
CHIEF EXECUTIVE OFFICER PRESIDENT & CHIEF OPERATING
OFFICER
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COMPLETELY CONNECTED BUILDINGS.
During 2000, strategic agreements were signed with six of Canada's largest
property management companies:
* Bentall Real Estate Services (Canada) Ltd.
* Brookfield Management Services Limited
* The Cadillac Fairview Corporation Limited
* Oxford Development Group Inc.
* The Standard Life Assurance Company
* O & Y Properties Inc.
Including these agreements, Group Telecom has access to approximately 130
million square feet of office space in 13 key markets across Canada. These
buildings include some of the nation's best-known office complexes, such as the
Bentall Centre in Vancouver, the Petro Canada Tower and Bankers Hall in
Calgary, the TD Centre and BCE Place in Toronto, Place Alexis Nihon in Montreal
and Cabot Towers in St. John's.
[Graphic]
190,583 KILOMETRES
DURING 2000, GROUP TELECOM'S FIBRE-OPTIC NETWORK GREW FROM 16,595 KM TO
190,583 KM. OVER THE SAME PERIOD, THE COMPANY'S ROUTE KILOMETRES GREW FROM 46
KM IN SEPTEMBER, 1999 TO 9,545 KM A YEAR LATER.
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STRATEGY 1
OWN THE NETWORK
WHY? By owning our network end-to-end, we can offer our customers unique
data, applications and voice services, at a lower cost, with greater scalability
and flexibility.
THIS IS WHY WE HAVE SO AGGRESSIVELY PURSUED THE BUILD-OUT OF A TRUE NATIONAL
FIBRE-OPTIC NETWORK OVER THE PAST YEAR. OUR LEADING-EDGE GIGABIT ETHERNET DATA
NETWORK AND SONET VOICE NETWORK HAVE BEEN DEPLOYED IN 13 OF CANADA'S MAJOR
MARKETS ACROSS THE COUNTRY.
WITH A STRONG PRESENCE IN ALL MAJOR BUSINESS CENTRES, GROUP TELECOM IS
ABLE TO DELIVER A UNIQUE SET OF PRODUCT OFFERINGS THAT CAN BE TAILORED TO THE
INDIVIDUAL BUSINESS CUSTOMER'S NEEDS.
GROUP TELECOM IS ONE OF ONLY TWO SERVICE PROVIDERS THAT OPERATE
NATIONALLY ACROSS CANADA WITH OWNED NETWORK FACILITIES. WE ARE UNIQUELY
POSITIONED IN THE MARKET WITH A FIBRE-RICH NETWORK THAT UTILIZES A
STATE-OF-THE-ART PACKET SWITCHING ARCHITECTURE TO PROVIDE NEXT-GENERATION DATA
AND APPLICATIONS SERVICES. BY DEPLOYING UP TO 864 COUNT FIBRE IN CERTAIN
METROPOLITAN BUILDS AND GIGABIT ETHERNET AS OUR CORE DATA PLATFORM, WE WILL NOT
FACE THE SAME CAPACITY CONSTRAINTS AS THE INCUMBENT PROVIDERS WHO HAVE A
SUBSTANTIAL BASE OF LEGACY COPPER AND CIRCUIT-BASED NETWORK INFRASTRUCTURE.
TOMORROW'S FIBRE NETWORKS WILL BE INCREASINGLY DOMINATED BY INTERNET
PROTOCOL (IP), ENABLING CUSTOMERS TO RECEIVE MANY MORE SERVICES WHILE REDUCING
THEIR COSTS. THIS ENABLES US TO MAXIMIZE OUR INVESTMENT IN THE NETWORK WHILE
OFFERING NEW LEVELS OF CHOICE AND INDIVIDUAL BUNDLED OFFERINGS. OUR FUTURE
NETWORK WILL USE AN OPTICAL-MESHED ARCHITECTURE THAT WILL FURTHER LOWER COSTS,
ENHANCE SERVICE RESPONSIVENESS AND INCREASE DEPLOYMENT FLEXIBILITY.
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ETHERNET TECHNOLOGY DRIVES OUR NETWORK.
Group Telecom utilizes Gigabit Ethernet technology, or GigE, to support our
customers' data services over our owned fibre-optic network.
With GigE as the basis of our network, we can do what few telecom
companies can -- work toward a single converged network solution that lowers
deployment costs, enhances service responsiveness and increases deployment
flexibility.
GigE enables our next-generation high-speed packet-based platforms to
provide higher aggregate bandwidth than our competitors with the flexibility to
allocate bandwidth to meet our customers' requirements.
[Graphic]
5,206 DATA POINTS
THROUGH A FLEXIBLE AND HIGHLY EFFICIENT GIGABIT ETHERNET ARCHITECTURE, GROUP
TELECOM OFFERS INTERNET GATEWAY AND LAN/WAN EXTENSION PRODUCTS THAT ARE UNIQUE
IN THE MARKET. THE "DATA PORT" METRIC IS USED TO MEASURE OUR SUCCESS IN THIS
AREA, WITH EACH PORT REPRESENTING A 10 MEGABIT PER SECOND ETHERNET EQUIVALENT.
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STRATEGY 2
LEAD WITH DATA
WHY? Because data is growing much faster and has higher margins than other
services.
IN 2000, FOUR OUT OF FIVE OF OUR REVENUE DOLLARS WERE GENERATED FROM OUR
UNIQUE DATA PRODUCTS SUCH AS BUSINESS AND COMMERCIAL INTERNET, LAN/WAN EXTENSION
AND PRIVATE LINE SERVICES.
WHEN WE APPROACH A POTENTIAL CUSTOMER, WE LEAD WITH DATA, AND OUR SALES
PROFESSIONALS ARE ABLE TO PROVIDE A DATA TELECOM SOLUTION TO MEET THE INDIVIDUAL
NEEDS OF THE BUSINESS CUSTOMER, AS WELL AS THEIR FUTURE APPLICATIONS NEEDS.
BECAUSE OF OUR FIBRE-OPTIC NETWORK, WE'RE ALSO ABLE TO OFFER A DATA
PRODUCT THAT HAS NO PEER IN CANADA. "BANDWIDTH-ON-DEMAND" MEANS OUR CUSTOMERS
PAY ONLY A LOW FIXED ACCESS RATE EVERY MONTH, PLUS AN AMOUNT BASED UPON THE
ACTUAL DATA THEY SEND OR RECEIVE THAT MONTH. SO, NO MORE HIGH FIXED-RATE MONTHLY
CHARGES. AND NO MORE WAITING FOR A LARGE OR COMPLEX FILE TO DOWNLOAD.
NEEDLESS TO SAY, THE IDEA OF "BANDWIDTH-ON-DEMAND" IS CATCHING ON WITH
CANADA'S BUSINESS MARKET. BUSINESS CUSTOMERS CAN NOW COMPLETELY TAILOR THEIR
SERVICES AND THEIR COSTS TO WHAT THEY ACTUALLY WANT -- AND USE.
09
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FIRST IN UNIFIED MESSAGING.
Group Telecom is the first in Canada to offer a comprehensive IP-based unified
messaging solution for business customers.
In November 1999, we announced the commercial availability of our GT
Message CONNECT(TM) unified messaging service which enables businesses to
access incoming fax, email or voice mail messages from one integrated mailbox.
Through common interfaces, users can access and manage, as well as be notified
of, various message types. And in June 2000, we added the Blackberry(TM)
wireless email solution from Research in Motion to the GT Message CONNECT(TM)
portfolio further enhancing the offering.
[Graphic]
6 BILLION
THE TOTAL SIZE, EXPRESSED IN ANNUAL TELECOM SERVICES REVENUES, OF CANADA'S
SMALL TO MEDIUM-SIZED ENTERPRISE SECTOR AT THE END OF 2000. THE SECTOR IS
EXPECTED TO GROW TO OVER $14 BILLION IN TELECOM REVENUES BY 2009.
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STRATEGY 3
TARGET SMALL AND
MEDIUM-SIZED
ENTERPRISES
WHY? Because the SME market is large and growing, and has been underserved until
now.
CANADA'S SMALL AND MEDIUM-SIZED BUSINESSES ARE GROWING AT AN UNPRECEDENTED RATE.
AS A RESULT, OUR MARKETING EFFORTS ARE FOCUSED ON SMES, WHICH ARE NOT ONLY
GROWING QUICKLY, BUT ALSO SPENDING MORE ON TELECOMMUNICATIONS SERVICES AS THEY
COME TO DEPEND MORE AND MORE ON TECHNOLOGY.
THE SME MARKET PRESENTS A UNIQUE OPPORTUNITY FOR GROUP TELECOM.
HISTORICALLY THIS MARKET HAD NEITHER PRODUCTS OR SERVICES DESIGNED TO MEET THEIR
TELECOM NEEDS, NOR THE IN-HOUSE TELECOM EXPERTISE TO IDENTIFY THE CORRECT
TELECOM SOLUTION. WITH THIS SEGMENT FORECASTED TO GROW AT A FASTER RATE THAN THE
REST OF THE MARKET, GROUP TELECOM IS POSITIONED TO TAKE THE COMPLEXITY OUT OF
TELECOMMUNICATIONS AND DELIVER THE SERVICES THEY REQUIRE.
THIS IS NOT TO SAY WE NEGLECT NEW BUSINESS FROM LARGE FIRMS AND OTHER
SERVICE PROVIDERS. INDEED, DURING 2000, WE ESTABLISHED A STRATEGIC ACCOUNTS TEAM
TO FOCUS ON LARGE COMPANIES THAT REQUIRE THE FLEXIBILITY OF SERVICES GROUP
TELECOM CAN OFFER. WITH THE CONVENIENCE OF DEALING WITH ONE COMPANY, USING A
SINGLE POINT OF CONTACT AND A FULL SUITE OF PRODUCT OFFERINGS, GROUP TELECOM CAN
PROVIDE ANY SIZE OF BUSINESS CUSTOMER WITH A COMPLETE TELECOM SOLUTION.
PROJECTED GROWTH IN
SME TELECOM SPENDING
YEAR C $ BILLION
---- -----------
99 4
00 6
01 7
02 8
03 9
04 10
05 11
06 12
07 13
08 14
09 15
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E-COMMERCE MADE EASY.
Nearly half of Canada's small and medium-sized businesses plan to conduct their
own e-commerce by the end of 2000. Many of those thousands of companies need
help accessing the Internet and conducting business there.
That's why Group Telecom launched the GT eCommerce CONNECT(TM) portfolio
of web-related applications this year. GT eCommerce CONNECT(TM) lets businesses
register domain names quickly and automatically through our website, satisfy all
their web publishing needs, and establish a virtual store on the Internet,
complete with a product catalogue and purchasing and transaction mechanisms.
[Graphic]
4 OUT OF 5 CUSTOMERS
REFER GROUP TELECOM TO OTHER BUSINESSES.
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STRATEGY 4
SELL DIRECTLY TO THE CUSTOMER
WHY? Because it allows us to leverage our network infrastructure, provide the
highest quality of service and build long-term customer relationships.
ONE OUT OF EVERY FOUR GROUP TELECOM EMPLOYEES IS INVOLVED IN SELLING OUR
SERVICES AND MANAGING CUSTOMER RELATIONSHIPS. MORE THAN HALF OF OUR SALES
PROFESSIONALS HAVE COME FROM COMPETITORS IN THE INDUSTRY.
OUR SALES PROFESSIONALS ARE DRAWN TO GT BECAUSE OF OUR PRODUCTS, OUR
PHILOSOPHY AND THE INFRASTRUCTURE WE OFFER THEM IN THE SALES CYCLE. SINCE OUR
BUSINESS MANAGERS ALSO "OWN" THE RELATIONSHIP WITH OUR CUSTOMERS, THEY HAVE AN
OPPORTUNITY TO GET TO KNOW A CUSTOMER'S TELECOMMUNICATION NEEDS IN DEPTH. WITH
THIS KNOWLEDGE THEY ARE ABLE TO SELL THROUGH MORE OF OUR SERVICES AND TO
ANTICIPATE THEIR CUSTOMERS' FUTURE NEEDS. IN THE WORDS OF DANIEL FIELD, MANAGER
OF INFORMATION SYSTEMS FOR IHS ENERGY CANADA LTD., OF CALGARY: "FINALLY, A
COMMUNICATIONS COMPANY THAT LISTENS . . . GT EXCELLED IN BRINGING NEW SERVICES
UP ON TIME, HELPING US BEAT NEXT-TO-IMPOSSIBLE DEADLINES . . . AS THE DEMAND
GROWS FOR RICHER, GRAPHICALLY INTENSIVE DATA BY MORE USERS SUCH AS IHS, GT'S
VISION AND FORESIGHT WILL BECOME MORE APPARENT."
GROUP TELECOM'S ABILITY TO OFFER A SINGLE POINT OF CONTACT FOR MANY
DIFFERENT COMMUNICATIONS SERVICES GIVES OUR CUSTOMERS ACCESS TO ALL OUR PRODUCTS
AND SERVICES THROUGH A SINGLE CONTACT, WHO CLEARLY UNDERSTANDS THE INDIVIDUAL
AND OFTEN UNIQUE NEEDS OF EACH CUSTOMER.
WE ARE ABLE TO PROVIDE SUPERIOR CUSTOMER SERVICE BECAUSE OUR BUSINESS
MANAGERS ACTUALLY VISIT OUR CUSTOMER'S OFFICE; THEY'RE NOT JUST VOICES AT A CALL
CENTRE. PERHAPS THIS IS WHY FOUR OUT OF EVERY FIVE OF OUR CUSTOMERS REFER GROUP
TELECOM TO OTHER BUSINESSES.
GROWTH OF SALES STAFF
SALES OTHER
----- -----
Q1 100 300
Q2 150 500
Q3 200 700
Q4 300 725
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STRONG VENDOR PARTNERSHIPS OFFER BEST IN CLASS SOLUTIONS.
Group Telecom utilizes back-office software solutions and systems, which
enables us to meet our customers' expectations. Partnerships with organizations
like Oracle, Hewlett-Packard, MetaSolv, Daleen and Vitria enable Group Telecom
to lay the foundation for a scalable, cost effective Operations Support Systems
platform.
[GRAPHIC]
15 MILLION
THE NUMBER OF HITS THIS YEAR ON GROUP TELECOM'S WEBSITE -- WWW.GT.CA.
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STRATEGY 5
INTEGRATED BACK OFFICE
WHY? Because our customers benefit from better service and more options in the
future.
IN 2000, WE BUILT AN INTEGRATED BACK OFFICE THAT IS CLIENT-FOCUSED AND
BASED ON AN OPEN ARCHITECTURE FOR RELIABILITY AND RAPID, CONTROLLED CHANGE. THIS
MEANS THAT IT'S COMPLETELY SCALABLE, ABLE TO KEEP UP WITH INCREASING LEVELS OF
GROWTH AND CHANGE, BOTH FOR GROUP TELECOM AND OUR CUSTOMERS. WHAT'S MORE, OUR
BACK OFFICE IS INTEROPERABLE, WHICH MEANS THAT THE SYSTEMS MANAGING OUR DATA
SERVICES, APPLICATIONS AND VOICE SERVICES WILL BE COMPATIBLE. THIS SEAMLESS BACK
OFFICE ALLOWS US TO PROVIDE OUR CUSTOMERS WITH A SINGLE POINT OF CONTACT AND ONE
BILL.
THE GOAL OF GROUP TELECOM'S INTEGRATED BACK OFFICE IS TO PROVIDE A
"CLIENT-CENTRIC" VIEW OF THE WORLD, AVOIDING THE COMMON PROBLEM FOUND WITH MANY
INCUMBENT TELECOM COMPANIES WHICH HAVE "SILO" SYSTEMS THAT DON'T INTEROPERATE
EFFECTIVELY. GROUP TELECOM'S BACK OFFICE WILL PROVIDE OUR CUSTOMERS WITH AN
ELECTRONIC METHOD OF ACCESSING AND MAINTAINING THEIR ACCOUNTS, AND WITH THE
ABILITY TO USE WEB-BASED BILL PRESENTMENT.
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CREATING HIGH TECH JOBS.
The "knowledge economy" demands not only highly trained and skilled people,
but jobs for them as well. During 2000, Group Telecom created over 800 such
positions, boosting our overall workforce from 168 to 987.
[GRAPHIC]
987
NUMBER OF MEN AND WOMEN WORKING FOR GROUP TELECOM ON SEPTEMBER 30, 2000.
20
GOOD PEOPLE
ATTRACT GOOD PEOPLE
GROUP TELECOM FINISHED THE YEAR WITH 987 MEN AND WOMEN EMPLOYED NATIONWIDE. WE
EXPERIENCED SIGNIFICANT GROWTH IN OUR EMPLOYEE BASE IN 2000 AS WE WORKED
DILIGENTLY TO PUT IN PLACE THE ORGANIZATIONAL BASE TO DRIVE FUTURE GROWTH AND
PROFITABILITY.
IN ADDITION TO USING TRADITIONAL RECRUITMENT TECHNIQUES, OUR EMPLOYEES
HELP US FIND NEW ONES. AS DEBBIE TOOLE, OUR VICE PRESIDENT OF HUMAN RESOURCES,
SAID: "GOOD PEOPLE ATTRACT GOOD PEOPLE. WORD OF MOUTH IS NOT ONLY AN EFFECTIVE
MEANS OF RECRUITING; IT'S A TESTAMENT TO THE HEALTH OF A COMPANY WHEN EMPLOYEES
RECOMMEND THEIR EMPLOYER TO FRIENDS."
OUR INNOVATIVE RETENTION STRATEGY HELPS PLAN AN EMPLOYEE'S COMPLETE
CAREER CYCLE WITH GROUP TELECOM. FROM RECRUITMENT THROUGH TO CAREER MANAGEMENT,
EMPLOYEES CAN ACCESS ONLINE EDUCATION AND DEVELOPMENT TOOLS. THESE TOOLS HAVE
BEEN CREATED TO AUGMENT THEIR EXISTING SKILLS, HELP THEM DEVELOP NEW SKILLS FOR
FUTURE ROLES WITHIN GROUP TELECOM, AND ACCESS THE LATEST INDUSTRY COURSES FOR
PERSONAL CAREER DEVELOPMENT.
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MANAGEMENT DISCUSSION AND ANALYSIS
This management discussion and analysis of financial condition as at
September 30, 2000 and results of operation for the year then ended,
focuses on the results of operations and financial situation of GT Group
Telecom Inc. (Group Telecom or the Company) and its subsidiaries. This
discussion is based on results in accordance with accounting principles
generally accepted in Canada and should be read in conjunction with the
Audited Consolidated Financial Statements contained on pages 27 to
51. All figures are in Canadian funds unless stated otherwise.
OVERVIEW
Group Telecom began providing data services in Vancouver, British
Columbia. The Company balanced its growth strategies and limited
financial resources by using wireless connections and conduit access
agreements with utility companies to begin building its network. In
fiscal 1999, a new management team was put in place and the Company
launched its national business plan.
Today, Group Telecom is Canada's largest independent facilities-based
provider of competitive data, applications and voice telecommunications
products and services, with 190,583 kilometres of fibre and 987
employees servicing 5,300 customers from coast-to-coast. Through strong
leadership and a sound strategy the Company has executed its business
plan, raising approximately $2 billion in capital and financing which
will fully fund continued growth into 2004.
Since entering the national telecommunications market 12 months ago, the
Company has grown to be a provider of telecom services in over 13
markets. Our significant growth has been achieved through network
build-out and strategic acquisitions, generating $73 million of revenue
in the year ended September 30, 2000, which represents a 27-fold
increase over the prior year.
In the years to come, Group Telecom's expansion strategy is to achieve a
significant penetration of the Canadian business telecommunications
market, including the small and medium-sized enterprise sector.
To meet our future capacity requirements and expand our market
potential, we intend to incur significant capital expenditures to
further expand our national footprint. This expansion is occurring on a
national level in order to generate an appropriate return on investment
while maintaining our fully funded status into 2004.
Our expansion strategy is to own and control our own network. This
enables Group Telecom to control the services provided to our customers
from end-to-end, provide a higher degree of network reliability, and
earn higher profit margins. We provide services over this network in
conjunction with an integrated back office that allows us to provide our
customers with one contact and one bill.
A YEAR OF CHANGE
The year 2000 has been a year of dramatic change for Group Telecom. The
Company has grown from one office located in Vancouver, 168 employees
and a 16,595 fibre kilometre network, at September 30, 1999, to 13
offices with 987 employees and a fibre-optic network of 190,583 fibre
kilometres nationwide.
FUNDING
During 2000, one of Group Telecom's major objectives was to secure the
funding necessary to fund our business plan. Between January and
September 2000, we raised approximately $2 billion in capital and
financing which fully funds our business plan into 2004:
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22
- $601 million in vendor financing facilities, including Lucent
Technologies Inc. and Cisco Systems Inc., two of the world's
leaders in telecommunications equipment;
- $220 million in senior bank financing;
- $677 million private placement through the sale of 855,000 units
consisting of 13.25% Senior Discount Notes due 2010 and warrants
to acquire approximately 4.2 million of our Class B non-voting
shares; and
- $422 million in equity when the Company completed its initial
public offering issuing 20.7 million Class B non-voting shares,
priced at U.S.$14 per share on Nasdaq and CDN$20.40 per share on
the Toronto Stock Exchange.
Our funding has provided the stability and the resources to finance our
growth. Group Telecom has a strategic edge over many other young and
rapidly growing companies, which are limited by a lack of access to
capital. As at September 30, 2000, the Company had available
approximately $1 billion in funding to execute 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.
GROWTH
Group Telecom has grown exponentially in four areas - our revenue,
network, customer base and employees - both organically and through
acquisition.
REVENUE GROWTH
During the year ended September 30, 2000, revenue from operations grew
as a result of our own market penetration and from acquisitions. Group
Telecom's sales force grew to 264 professionals whose dedication and
success contributed to a 26% sequential revenue growth in our 4th
quarter.
NETWORK EXPANSION
During the year ended September 30, 2000, through a $312.6 million
increase in property, plant and equipment, Group Telecom expanded its
network through fibre build-out and the purchase and installation of
four Class 5 voice switches. The Company's own build and acquisition
strategy boosted its network from 40 on-net buildings and 16,595 fibre
kilometres as at September 30, 1999 to 1,569 on-net buildings and
190,583 fibre kilometres as at September 30, 2000. By September 30,
2001, we expect to grow our network to include over 500,000 fibre
kilometres.
ACQUIRED SHAW FIBERLINK
On February 16, 2000, we acquired Shaw FiberLink from Shaw
Communications for $760 million consisting of $360 million in cash and
the remainder in shares representing a 27.1% interest in Group Telecom.
This transaction immediately made Group Telecom the largest independent
CLEC (Competitive Local Exchange Carrier) in Canada, giving us a
significant "early mover" advantage in a marketplace that has 16
licensed CLECs, but only one other with a true national presence. We
acquired $429 million in property, plant and equipment and made a $223
million prepayment for an indefeasible right to use approximately 97,500
fibres to be constructed over the next 3 years. The Shaw FiberLink
acquisition gave Group Telecom 101,546 fibre kilometres and 943 on-net
buildings, and its employees and customers.
ACQUIRED VIDEON FIBRELINK
On April 27, 2000, Group Telecom purchased Videon FiberLink, the
competitive access provider business of one of Western Canada's leading
communications companies, Moffat Communications of Winnipeg. This gave
us an immediate presence and a strong base in the Prairies. The
transaction, valued at $101 million, made up of $68 million in cash and
1,667,000 Class B non-voting shares in Group Telecom, added
approximately $96 million of telecommunication property, plant and
equipment to our balance sheet. This includes 21,800 fibre kilometres in
Edmonton and Winnipeg, 240 on-net buildings in Alberta and Manitoba, as
well as Videon's employees and customers.
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23
FIBRE BUILD WITH 360NETWORKS
On May 24, 2000, Group Telecom signed an agreement to purchase and lease
approximately $362 million of fibre-optics and high-speed bandwidth
network assets from 360networks, inc. Over the next three years,
360networks will build Group Telecom 12 strands of long-haul
fibre-optics stretching more than 7,000 kilometres from Victoria to
Halifax, and a redundant route of 12 additional long-haul fibre strands,
running 7,900 kilometres connecting major centres in the U.S. and
Canada. Continuing through to the early part of fiscal 2001, the Company
will also acquire fibre-optic wavelengths along a diverse route in
Canada and the U.S. under a long-term lease arrangement with
360networks,inc.
We also invested $43 million in 360networks. At September 30, 2000, our
investment in 360networks was valued at $77 million.
ACQUIRED CABLE ATLANTIC
On July 21, 2000, we acquired the fibre-optic telecom business of Cable
Atlantic, for approximately $15 million in cash and 1,740,196 Class B
non-voting Group Telecom shares. This transaction added approximately
$47 million in property,plant and equipment to the Company's balance
sheet including its 8,732 fibre kilometres, 99 on-net buildings and its
Class 5 voice switch, as well as Cable Atlantic's customers and
employees.
OFFER TO PURCHASE C1 COMMUNICATIONS
On October 16, 2000, subsequent to our September 30, 2000 year end, we
signed a term-sheet to purchase the Atlantic Canada telecom operations
of C1 Communications Inc. in exchange for 2,372,000 Class B non-voting
Group Telecom shares and assumption of certain liabilities. This
transaction will make Group Telecom the largest independent provider of
telecom services in Newfoundland, Nova Scotia and New Brunswick. The
Company will acquire the property,plant and equipment used by C1's
fibre-optic telecom business, its 44,400 fibre kilometres in Nova Scotia
and New Brunswick and 116 on-net buildings,as well as C1's customers and
employees.
RESULTS OF OPERATIONS
The Company's key operating results include those of the acquired
businesses of Shaw FiberLink, Videon FiberLink and Cable Atlantic from
the dates of acquisition.
(in thousands of Canadian dollars) YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------
Revenue $ 73,251 $ 2,705 $ 1,823
Cost of services 51,336 1,808 1,131
----------------------------------------------------------------------------------------------
Gross margin 21,915 897 692
Selling, general and administrative expenses 100,959 10,219 3,038
----------------------------------------------------------------------------------------------
Loss before income taxes and amortization (79,044) (9,322) (2,346)
Amortization 43,055 853 255
Interest and finance items 54,354 (373) (162)
Income tax provision (recovery) (38,467) 165 --
----------------------------------------------------------------------------------------------
Loss for the year $(137,986) $ (9,967) $ (2,439)
==============================================================================================
Loss per share $ (1.83) $ (0.56) $ (0.26)
==============================================================================================
REVENUE
Revenue increased significantly in 2000 to $73.3 million compared to
$2.7 million in 1999, representing a growth factor of 27. The Company
experienced its largest growth in quarterly revenue with a 484% increase
in the 2nd quarter and a 92% increase in the 3rd quarter. These
increases are attributed to a combination of network expansion, market
penetration and the acquisitions of Shaw FiberLink and Videon FiberLink
in the 2nd and 3rd quarters, respectively. Network expansion and sales
penetration into new markets, led by the GT CONNECT(TM) data portfolio
of products and services, were the primary drivers of our sequential
revenue growth of approximately 26% in our 4th quarter. We expect to
maintain a 20% growth quarter over quarter in the upcoming year.
20
24
In fiscal 2000, data revenue accounted for 84.5% of our total revenue,
while voice accounted for 14.5% and applications for less than 1%. Data
ports and private lines provisioned grew from 134 in the 1st quarter to
5,206 in the 4th quarter and from 259 to 38,879, respectively. Growth in
our data revenue was achieved by the success of our unique Internet
gateway and LAN/WAN extension services, which are powered by our Gigabit
Ethernet network infrastructure.
Voice revenue increased during the year as a result of provisioned
access lines growing from 7,357 in the 1st quarter to 36,516 in the 4th
quarter. In addition, the percentage of on-net access lines dramatically
increased from less 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
Cost of services increased to $51.3 million in 2000 from $1.8 million in
1999. This translates into a 28-fold increase. On a quarterly basis, our
cost of services followed a similar growth pattern as our revenue with a
394% and 65% increase in the 2nd and 3rd quarter, respectively. The rate
of growth decreased to 22% in the 4th quarter - consistent with our
sequential revenue growth in the quarter, and the cost savings realized
through selling on-net services. Cost of services includes the costs
incurred for leased network, Internet transit, building access and other
rights of way. We expect these charges to decrease as a percentage of
revenue in the future as we continue to expand our network and grow our
critical mass.
GROSS MARGIN
Gross margin has followed a similar increasing pattern as above reaching
a 34% gross margin for the 4th quarter of 2000 versus a 5.69% gross
margin in the 1st quarter. Overall for the year ended September 30,
2000, the Company achieved a gross margin level of 30%. We expect
continued improvement in gross margins in the coming year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased from $10.2
million in 1999 to $101.0 million in 2000. This significant increase in
SG&A is the result of our rapid growth. During the year ended September
30, 2000, Group Telecom 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 SG&A expenses relate to compensation, advertising, facility and
travel costs incurred. In the coming year, the Company expects to
leverage off and realize the benefits from our established
infrastructure as we continue to grow our business.
AMORTIZATION
Amortization expense increased to $43.0 million in 2000 from $0.9
million in 1999 due to an increase in property, plant and equipment
resulting from our acquisitions and the deployment of our network.
INTEREST AND FINANCE ITEMS
The Company earned interest income of $22.2 million for the year ended
September 30, 2000, compared to $0.9 million in 1999. The increase in
interest income relates primarily to the income earned on the proceeds
for the senior discount notes in February 2000 and initial public
offering in March 2000.
As expected, interest expense has increased substantially from the prior
year by $80.9 million. Of our available financing, the Company has
utilized $100 million of its secured bank financing and $185.4 million
of its 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 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, we expect to
utilize our financing for a full year and incur additional interest
charges.
21
25
A net foreign exchange gain of $9.3 million was incurred for the year
ended September 30, 2000 due to the Company's 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. To minimize the exposure to fluctuations in the U.S.
dollar, during the year the Company entered into cross currency swaps to
convert to Canadian dollars approximately 69% of the future U.S. dollar
payments on the senior discount notes, as at September 30, 2000.
LOSS FOR THE YEAR
The Company recognized a loss for the year ended September 30, 2000 of
$138.0 million compared to a loss of $10.0 million for the year ended
September 30, 1999. The loss for the year 2000 is after giving effect to
a recovery of operating loss benefits to the extent of $42.3 million in
future income taxes associated with assets acquired during the year.
EBITDA AND CASH FLOW FROM OPERATIONS
For the period ended September 2000, the Company 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 flows 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 business plan, we are
projecting to reach EBITDA breakeven in the second half of our fiscal
year ended September 30, 2002.
EBITDA is a financial measure commonly used in the telecommunications
and other industries and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent
results of its operations or its cash flow results in accordance with
generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
Group Telecom has incurred significant operating and net losses and
expects 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;
accordingly, we will utilize existing cash reserves and financing
arrangements to fund these planned shortfalls.
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.
During the year ended September 30, 2000, development of Group Telecom's
national network through acquisition and build-out resulted in cash
outflows of $446.7 million and $153.6 million, respectively. As part of
the Shaw FiberLink and Videon FiberLink acquisitions, the Company made
prepayments of $230.6 million to receive indefeasible rights to use
fibres to be constructed over the next three years. As at September 30,
2000, Group Telecom received the rights to use $27.0 million of newly
constructed fibres under these arrangements. In 2001, and as part of our
fully funded business plan, capital expenditures will continue as we
expand our footprint to reach new target markets.
Other long-term assets, including long-term investments, goodwill and
other assets, increased to $270.3 million at September 30, 2000 from
$1.3 million as at September 30, 1999. The increase resulted from the
strategic acquisitions of Shaw FiberLink, Videon FiberLink and Cable
Atlantic, the purchase of a less than 1% equity investment in
360networks, inc. for $43.2 million and $64.8 million of costs
associated with the acquisitions and financing arrangements completed
during the year. These costs were deferred and are being amortized over
their useful life or term of the financing arrangements, ranging from
three to 10 years.
Total net cash inflows in 2000 were $384.2 million compared to $57.4
million in the prior year. Cash inflows in both periods are due to the
issuance of long-term debt and shares. During the year ended September
30, 2000, the Company's net cash inflows resulted primarily from the
issuance of $749.5 million in long-term debt and warrants,and $391.7
million in shares from its initial public offering.
22
26
At September 30, 2000, the Company's current assets of $500.4 million,
including cash and cash equivalents of $444.0 million, exceeded current
liabilities of $116.3 million, providing a working capital surplus of
$384.1 million. The working capital surplus is a result of the capital
raised and financing secured during the year,offset by the cash paid on
the acquisitions and capital expenditures incurred to expand our fibre
network.
The Company is not required to begin repaying any of its 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 and Cisco. 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 that will generate the funds to service our
long-term debt.
Group Telecom has available approximately $1 billion in funding to
execute 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,as at September 30, 2000, which will
fully fund our business plan into 2004.
The funding of our current business plan is dependent upon the Company
meeting budgeted targets and effectively managing its cash resources. If
the Company is unable to execute its business plan to achieve these
objectives due to controllable or non-controllable factors, the Company
may require additional financing beyond its current funding in order to
meet its obligations.
The telecommunications industry is capital intensive and subject to
rapid and significant changes in technology. 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 such products available to us on a timely basis. We believe that
our existing cash resources and financing will provide adequate funding
to build our network as planned. There can be no assurance that the
amount of funds actually required to complete the planned development of
our network will not exceed the Company's currently anticipated
expenditures.
If additional funding is required, there can be no assurance, however,
that market conditions or the terms of our existing or future
indebtedness will permit the Company to raise sufficient additional
capital or enter other financing arrangements to meet its needs when
required or on terms acceptable to the Company.
RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR
ENDED SEPTEMBER 30, 1998
REVENUE
Revenue for the year ended September 30, 1999 increased 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.
COST OF SERVICES
Cost of services for the year ended September 30, 1999 increased to $1.8
million compared to $1.1 million for the year ended September 30, 1998.
The increase was due to a corresponding increase in revenue and a change
in product mix, which resulted in lower margins.
23
27
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 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 staff, a national
marketing launch and increased need for office space and related costs.
AMORTIZATION
Amortization for the year ended September 30, 1999 increased to $0.8
million compared to $0.3 million for the year ended September 30, 1998
due to an increase in property, plant and equipment available for
commercial service.
INTEREST AND FINANCE ITEMS
Interest income for the year ended September 30, 1999 was $0.5 million
as compared to interest expense of $0.1 million 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 financing.
LOSS FOR THE YEAR
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.
EBITDA AND CASH FLOW FROM OPERATIONS
For the period ended September 30, 1999, the Company 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.
FORWARD-LOOKING STATEMENTS
Certain sections of this discussion contain forward-looking statements
with respect to Group Telecom. These forward-looking statements, by
their nature, necessarily involve risks and uncertainties that could
cause actual results, performance or achievements of Group Telecom to
differ materially from those expressed or implied by the forward-looking
statements.
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28
REPORT OF MANAGEMENT
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF GT GROUP TELECOM
INC. WERE PREPARED BY MANAGEMENT IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. MANAGEMENT IS RESPONSIBLE FOR THEIR INTEGRITY,
OBJECTIVITY AND RELIABILITY AND, WHERE NECESSARY, THEY REFLECT
MANAGEMENT'S BEST ESTIMATES AND JUDGEMENTS. TO PROVIDE REASONABLE
ASSURANCE THAT THE COMPANY'S ASSETS ARE SAFEGUARDED AND THAT RELIABLE
FINANCIAL INFORMATION IS PRODUCED, MANAGEMENT IS ALSO RESPONSIBLE FOR
DEVELOPING AND MAINTAINING AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS.
THE COMPANY MAINTAINS A SYSTEM OF INTERNAL CONTROLS, PROVIDING
MANAGEMENT WITH REASONABLE ASSURANCE THAT ASSETS ARE SAFEGUARDED AND
THAT THE FINANCIAL RECORDS ARE ADEQUATE AND CAN BE RELIED UPON FOR THE
PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
THE BOARD OF DIRECTORS IS RESPONSIBLE FOR ENSURING THAT MANAGEMENT
FULFILS ITS RESPONSIBILITIES THROUGH ITS AUDIT COMMITTEE WHOSE MEMBERS
ARE ALL INDEPENDENT OF MANAGEMENT AND ARE NOT INVOLVED IN THE DAILY
ACTIVITIES OF THE COMPANY. THE AUDIT COMMITTEE MEETS PERIODICALLY WITH
MANAGEMENT AND WITH THE INDEPENDENT AUDITORS, PRICEWATERHOUSECOOPERS
LLP, TO SATISFY ITSELF THAT MANAGEMENT'S RESPONSIBILITIES ARE PROPERLY
DISCHARGED AND TO REVIEW AND REPORT TO THE BOARD WITH RESPECT TO
AUDITING RESULTS, INTERNAL CONTROLS, AND ACCOUNTING PRINCIPLES AND
PRACTICES.
THESE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN REVIEWED AND APPROVED
BY THE BOARD AND HAVE BEEN AUDITED BY PRICEWATERHOUSECOOPERS LLP, WHOSE
REPORT FOLLOWS.
DANIEL R. MILLIARD ROBERT G. WOLFE STEPHEN H. SHOEMAKER
Chief Executive Officer President & Executive Vice President &
Chief Operating Officer Chief Financial Officer
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29
AUDITORS' REPORT TO THE SHAREHOLDERS
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.
PRICEWATERHOUSECOOPERS LLP (SIGNED)
CHARTERED ACCOUNTANTS
Toronto, Canada
November 3, 2000
26
30
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------------
(thousands of Canadian dollars) 2000 1999
- -----------------------------------------------------------------------------------------------------------------
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 EVENT (note 17)
The accompanying notes form an integral part of these consolidated financial
statements.
Approved by the Board of Directors
James G. Matkin (signed) James Mansour (signed) P. Kenneth Kilgour (signed)
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31
CONSOLIDATED STATEMENTS OF OPERATIONS & DEFICIT
YEAR ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------------------------
(thousands of Canadian dollars) 2000 1999 1998
- -----------------------------------------------------------------------------------------------
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
========================================
The accompanying notes form an integral part of these consolidated financial
statements.
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32
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
(thousands of Canadian dollars) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
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
=============================================
Additional cash flow disclosures (note 15)
The accompanying notes form an integral part of these consolidated financial
statements.
29
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts 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 fibre-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 fibre-optic facilities is recognized on a
straight-line basis over the term of the lease.
(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:
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)
30
34
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 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.
31
35
(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.
3 BUSINESS ACQUISITIONS
Summary of the assets acquired and liabilities assumed during the year ended
September 30,2000:
- --------------------------------------------------------------------------------------------------------------------------
SHAW VIDEON CABLE
FIBERLINK FIBERLINK ATLANTIC
(a) (b) (c) OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Indefeasible right to use agreements
Property, plant and equipment
for constructed fibres $ 329,000 $ 88,359 $ 29,689 $-- $ 447,048
Prepayment for fibres
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
- --------------------------------------------------------------------------------------------------------------------------
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 recorded as goodwill.
The results of operations are included in the Company's consolidated statement
of operations from the dates of acquisition.
32
36
(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 fibres in the fibre-optic cable networks of
Shaw Communications for 60 years. Certain of the existing fibres located in New
Brunswick, Canada under the indefeasible right to use the agreement will be
available for use in 2003. In addition, the Company will receive an indefeasible
right to use fibres to be built over the next three years in mutually agreed
regions. As at September 30, 2000, the carrying value of newly constructed
fibres 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
fibres in the fibre-optic cable networks of Moffat Communications for 30 years.
In addition, the Company will receive an indefeasible right to use fibres 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 fibre-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 fibres in the fibre-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 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.
YEAR ENDED SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------
(unaudited)
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
- -----------------------------------------------------------------------------------------------------------
Pro forma results including the other acquisitions completed by the Company
during the year ended September 30, 2000 have not yet been provided as the
results of operations are not considered significant and the information is not
readily available.
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4 ACCOUNTS RECEIVABLE
2000 1999
- ------------------------------------------------------------
Trade receivables $ 34,759 $ 1,191
Sales tax receivables 12,568 2,140
Employee receivables 3,105 487
Other 4,026 --
Allowance for doubtful accounts (4,506) (35)
- ------------------------------------------------------------
$ 49,952 $ 3,783
============================================================
5 PROPERTY, PLANT AND EQUIPMENT
2000
- -------------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
- -------------------------------------------------------------------------
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
=========================================================================
1999
- ----------------------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
- ----------------------------------------------------------------------
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
======================================================================
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.
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38
7 GOODWILL AND OTHER ASSETS
- --------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------
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
============================================================================================
8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ---------------------------------------------------------------------------------------
2000 1999
- ---------------------------------------------------------------------------------------
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
=======================================================================================
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 fibre including rights of way. The Company received an up-front fee for
installation costs related to placement of fibre-optic cable, building entrances
and fibre-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:
- --------------------------------------------------------------------------------
Year ending September 30,
2001 $ 500
2002 500
2003 500
2004 250
2005 250
Thereafter 750
- --------------------------------------------------------------------------------
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10 LONG-TERM DEBT
- ------------------------------------------------------
2000 1999
- ------------------------------------------------------
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
Notes payable (e) 755 776
953,276 48,810
Less: Current portion 4,348 1,253
- ------------------------------------------------------
$948,928 $ 47,557
======================================================
Repayments of long-term debt in each of the next five years are as follows:
- -------------------------------------------------------------------------------------------
CAPITAL
SENIOR SENIOR LEASES
DISCOUNT VENDOR BANK AND NOTES
NOTES FINANCING FACILITY PAYABLE
- -------------------------------------------------------------------------------------------
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
===========================================================================================
(a) SENIOR DISCOUNT NOTES
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%.
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.
36
40
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 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.
37
41
(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.
(d) SENIOR BANK FACILITY
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 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.
38
42
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.
(e) NOTES PAYABLE
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.
(f) CAPITAL LEASES PAYABLE
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.
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, restrictions, 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).
39
43
ISSUED
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
(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.
40
44
(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.
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.
41
45
Option activity for the year is as follows:
2000 1999
- -------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------
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
=================================================================================================
A summary of stock options outstanding at September 30,2000 is set out below:
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
- ---------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- ---------------------------------------------------------------------------------------------
$ 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
=============================================================================================
42
46
A summary of stock options outstanding at September 30,1999 is set out below:
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
- -------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- -------------------------------------------------------------------------------------------
$ 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
==========================================================================================
WARRANTS Warrant activity for each of the years is as follows:
2000 1999
- ----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
- ----------------------------------------------------------------------------------------
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 $ 0.50 100,000 $ 0.50
========================================================================================
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 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).
43
47
(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:
- -----------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------
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) --
- -----------------------------------------------------------------
$ -- $ --
=================================================================
Management has recorded a valuation allowance for the net amount of future
income tax assets.
The Company has non-capital losses available to reduce taxable income in future
years. These losses expire as follows:
- -------------------------------------------------------
Year ending September 30,
2002 $ 11
2003 315
2004 522
2005 4,523
2006 7,764
2007 112,749
- -------------------------------------------------------
$ 125,884
=======================================================
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:
- --------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------
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 $ --
========================================================================================================
44
48
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.
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:
- ----------------------------------------------------------------------------------------------------------------------
FIXED RATE FIXED FIXED NON-
FLOATING WITHIN RATE RATE INTEREST
RATE ONE YEAR 1 - 5 YEARS 6 - 10 YEARS BEARING
- ----------------------------------------------------------------------------------------------------------------------
September 30, 2000
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 --
- ----------------------------------------------------------------------------------------------------------------------
45
49
- --------------------------------------------------------------------------------------------------------------
FIXED RATE FIXED FIXED NON-
FLOATING WITHIN RATE RATE INTEREST
RATE ONE YEAR 1-5 YEARS 6-10 YEARS BEARING
- --------------------------------------------------------------------------------------------------------------
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 -- --
- --------------------------------------------------------------------------------------------------------------
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:
i) Purchased certain dark fibres 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 fibre becomes available
to the Company; and
ii) Purchased an indefeasible right to use certain dark fibres to be constructed
along United States route paths for $140 million. In addition, the Company
acquired exclusive rights to fibre-optic wavelengths along a diverse route in
Canada and the United States under a long-term lease arrangement 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 fibre becomes available to the Company, amount
to approximately $85 million. In October 2000, the Company accepted
approximately 28% of the fibre-optic capacity under the long-term capacity lease
arrangement.
46
50
(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.
LETTERS 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:
- -----------------------------------------------
Year ending September 30,
2001 $ 8,410
2002 8,422
2003 8,442
2004 8,412
2005 8,345
Thereafter 50,740
- -----------------------------------------------
The rent expense under operating leases for the following years was as follows:
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Operating lease expense $5,733 $ 197 $ 165
===========================================================
15 ADDITIONAL CASH FLOW DISCLOSURES
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Paid in the years ended
Interest $7,862 $ 95 $ 53
Income taxes 819 -- --
===========================================================
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 Statements of Cash Flows.
47
51
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 signed 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 fibres in the fibre-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.
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:
- ---------------------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
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)
=========================================================================================================
48
52
The reconciliation of the change in shareholders' equity from Canadian to
U.S. GAAP is as follows:
- ----------------------------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------------------
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
================================================================================================================
(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:
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
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 --
- --------------------------------------------------------------------------------
(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:
- ---------------------------------------------------------------------
ASSETS ACQUIRED
Indefeasible right to use agreement
Property, plant and equipment for constructed fibres $ 91,748
Prepayment for fibres 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
=====================================================================
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.
49
53
(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 a deferred stock-based
compensation charge, with a corresponding amount included in stock options
outstanding, both of which form part of shareholders' equity. For Canadian GAAP,
stock-based compensation expense is not recorded in the 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:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
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)
================================================================================
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.
(g) DETAILS OF AMORTIZATION EXPENSE
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Amortization expense for the year consists of:
Property, plant and equipment $30,510 $ 839 $ 213
Goodwill, non-compete agreements and license rights 8,417 -- 33
Deferred charges 4,128 14 9
- ---------------------------------------------------------------------------------------------
$43,055 $ 853 $ 255
=============================================================================================
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(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 practices 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.
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SUPPLEMENTAL INFORMATION
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
(thousands of Canadian dollars) 2000 2000 2000 1999
- -------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================
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SUPPLEMENTAL INFORMATION
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations and Deficit (unaudited)
FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
(thousands of Canadian dollars) 2000 2000 2000 1999
- ------------------------------------------------------------------------------------------------------------
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
============================================================================================================
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Atlantic Region [PHOTOGRAPH]
PAUL HATCHER
Vice President/General Manager
We entered the Atlantic market with the acquisition of Cable Atlantic's
telecommunications assets in July. From there, we officially opened our
regional office in St. John's in September and have been busy gaining
business from Atlantic Canada companies like St. John's Healthcare
Corporation and from the Province of Newfoundland and Labrador.
Eastern Region [PHOTOGRAPH]
MARC RANCOURT
Vice President/General Manager
Our Eastern Region includes Montreal, Quebec City and the National
Capital Region that boasts a rapidly growing technology sector. In all
three of these markets, we opened offices, and established and expanded
our fibre-optic network to serve hundreds of new customers in the
technology, service and applications space. While we began the year
with only one employee, we ended the year with 177 employees in the
Eastern Region.
Central Region [PHOTOGRAPH]
ROBERT WARBURTON
Vice President/General Manager
Group Telecom has a growing presence in four of Ontario's largest
markets: the Greater Toronto Area (GTA), London, Hamilton and
Kitchener-Waterloo. Subsequent to year-end, we committed to building out
the GTA, tripling the size of our fibre-optic network to better serve
Toronto's business market.
Ontario is the largest market for small and medium-sized enterprises in
Canada and will remain a focus for the Company's significant growth in
the years ahead.
Prairie Region [PHOTOGRAPH]
MICHAEL KURTZ
Vice President/General Manager
We are delighted with our progress in Alberta, Saskatchewan and
Manitoba. We were able to launch very swiftly by working with partners
like Enmax and by purchasing fibre assets from Shaw FiberLink and Videon
FiberLink from Moffat Communications. We were then able to rapidly
expand our business, customer and employee base.
Pacific Region [PHOTOGRAPH]
JIM MCLEAN
Vice President/General Manager
This is where it all began. Today, in addition to offices in Vancouver,
we now serve Vancouver Island and the interior of British Columbia. We
are known as a leader in the burgeoning high-technology business
community.
Carrier Services [PHOTOGRAPH]
DON POTTS
Vice President/General Manager
During 2000, Group Telecom's Carrier Services team completed the
integration of the customers, systems and staff of Shaw FiberLink and
Videon FiberLink. We began the installation of our national Internet
backbone, which will link all of our offices over our own fibre
facilities, and will have direct links to North American Network Access
Points (NAPs) in California, Chicago and New York. When the network is
completed in early 2001, it will be the most geographically extensive
and best connected of any commercial Internet provider in Canada.
Carrier services has built an independent business unit for improved
customer service for regional, national and international carrier
customers.
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[SENIOR MANAGEMENT PHOTO]
Top, from left: Steven Koles, Bill Rainey, Michael Aymong, Robert G. Wolfe,
Daniel R. Milliard, Robert Watson, Debbie Toole, Robert M. Fabes, Ashok K.
Bhatt, Stephen Shoemaker. Bottom, from left: Eric A. Demirian, Andrew Csinger,
Alex Kroon, John Bradley.
SENIOR MANAGEMENT
DANIEL R. MILLIARD
Chief Executive Officer
ROBERT G. WOLFE
President & Chief Operating Officer
STEPHEN SHOEMAKER
Chief Financial Officer
MICHAEL AYMONG
Executive Vice President, Sales,
Marketing & Customer Service
ERIC A. DEMIRIAN
Executive Vice President,
Corporate Development
ROBERT WATSON
Executive Vice President,
Carrier Services
JOHN BRADLEY
Chief Scientist
ASHOK K. BHATT
Senior Vice President, Engineering
ANDREW CSINGER
Senior Vice President,
System Services
ROBERT M. FABES
Senior Vice President
& General Counsel
STEVEN KOLES
Senior Vice President, Marketing
ALEX KROON
Vice President, Customer Service
BILL RAINEY
Senior Vice President,
National Sales & Technical Support
DEBBIE TOOLE
Vice President, Human Resources
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BOARD OF DIRECTORS
JAMES G. MATKIN, Chairman(2,3)
Executive Director, Law Society of
British Columbia
JAMES MANSOUR, Director
Chairman, Executive Committee(1,2)
President, Telephone Management Inc.
DANIEL R. MILLIARD, Director(1)
Chief Executive Officer, Group Telecom
ROBERT G. WOLFE, Director(1)
President and Chief Operating Officer
Group Telecom
MICHAEL ABRAM, Director
President, Shaw Ventures
MICHAEL D'AVELLA, Director(3)
Senior VP, Planning
Shaw Communications Inc.
GEORGE ESTEY, Director
Chairman, Goldman Sachs Canada
ROBERT R. GHEEWALLA, Director(1,3)
Managing Director,
Principal Investment area
Goldman Sachs and Co.,
New York
LEO HINDERY JR., Director
Chairman, HL Capital Inc.
P. KENNETH KILGOUR, Director(1,2)
Managing Director and Head
CIBC Capital Partners, Toronto
JIM SHAW, Director(1)
President and CEO
Shaw Communications Inc.
1. Member of the Executive Committee
2. Member of the Audit Committee
3. Member of the Compensation Committee
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HEAD OFFICE
20 Bay St., Suite 700
Toronto, ON M5J 2N8
T: (416) 848-2000
F: (416) 848-2830
email: info@gt.ca
Toll Free: 1-877-943-9555
VICTORIA
711 Broughton St., Suite 500
Victoria, BC V8B 1E2
T: (250) 953-0011
VANCOUVER
700 West Georgia St., 11th Floor
PO Box 10082, Pacific Centre
Vancouver, BC V7Y 1B6
T: (604) 484-1000
CALGARY
Petro Canada Centre Tower
111 - 5th Ave. S.W., Suite 800
Calgary, AB T2P 3Y6
T: (403) 770-5000
EDMONTON
10032 - 103 Street, Main Floor
Edmonton, AB T5J 0X2
T: (780) 413-6300
WINNIPEG
Century Plaza,
1 Wesley Avenue, Suite 101
Winnipeg, MB R3C 4C6
T: (204) 953-2700
LONDON
130 Dufferin Ave., 2nd Floor
London, ON N6A 5R6
T: (519) 432-4555
Toll Free: 1-888-264-0969
KITCHENER-WATERLOO
30 Duke St. West, Suite 605
Kitchener, ON N2H 3W5
T: (519) 579-9555
Toll Free: 1-888-852-8341
HAMILTON
499 King St. East, Suite 202
Hamilton, ON L8N 1E1
T: (905) 527-1121
Toll Free: 1-888-830-6418
OTTAWA
270 Albert Street, 12th Floor
Ottawa, ON K1P 5G8
T: (613) 482-3500
Toll Free: 1-866-464-9003
MONTREAL
1000 Sherbrooke St. W., 9th Floor
Montreal, QC H3A 3G4
T: (514) 985-2541
Toll Free: 1-877-789-1965
QUEBEC CITY
1050 Rene Levesque Boulevard,
Suite 408
Quebec City, QC G1R 4X3
T: (418) 524-6886
ST. JOHN'S
541 Kenmount Road
St. John's, NF A1B 3M7
T: (709) 575-1000
AUDITORS
PricewaterhouseCoopers LLP
Toronto, Ontario
LEGAL COUNSEL
Goodmans
Vancouver, BC
STOCK LISTINGS AND SYMBOLS
GTG.B - TSE
GTTLB - Nasdaq
TRANSFER AGENTS
CIBC Mellon
Vancouver, BC
Investors, security analysts and other
interested parties seeking financial
information about Group Telecom,
should contact:
INVESTOR RELATIONS DEPARTMENT
Michael Minnes
T: (416) 848-2456
1-877-479-2932
email: investor@gt.ca
This annual report is printed in Canada
on recycled paper, and is recyclable.
On pourra se procurer le texte francais
de ce rapport annuel. Ecrivez-nous a
investisseur@gt.ca
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