Exhibit 99.2
Consolidated Financial Statements
(Expressed in Canadian dollars)
AT&T CANADA INC.
Years ended December 31, 2002, 2001 and 2000
TO THE BOARD OF DIRECTORS
AT&T CANADA INC.
We have audited the consolidated balance sheets of AT&T Canada Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
With respect to the consolidated financial statements for the years ended
December 31, 2002 and 2000, we conducted our audits in accordance with Canadian
generally accepted auditing standards. With respect to the consolidated
financial statements for the year ended December 31, 2001, we conducted our
audit in accordance with Canadian generally accepted auditing standards 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 December 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
KPMG LLP
Chartered Accountants
Toronto, Canada
January 31, 2003, except as
to notes 1, 8 and 25, which are
as of February 25, 2003
COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described
in note 1 to the consolidated financial statements. Our report to the board of
directors, dated January 31, 2003, except as to notes 1, 8 and 25, which are as
of February 25, 2003, is expressed in accordance with Canadian reporting
standards, which do not permit a reference to such conditions and events in the
auditors' report when these are adequately disclosed in the financial
statements.
In addition, in the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there is a change in accounting principles that has a material effect on the
comparability of the Company's financial statements, such as the change
described in note 2(e) to the consolidated financial statements. Our report to
the board of directors dated January 31, 2003, except as to notes 1, 8 and 25,
which are as of February 25, 2003, is expressed in accordance with Canadian
reporting standards, which do not require a reference to such a change in
accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.
KPMG LLP
Chartered Accountants
Toronto, Canada
January 31, 2003, except as
to notes 1, 8 and 25, which are
as of February 25, 2003
AT&T CANADA INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
2002 2001
---- ----
(Restated -
note 2(g))
ASSETS
Current assets:
Cash and cash equivalents (note 4) $ 420,542 $ 537,294
Accounts receivable (note 7(b)) 166,434 70,640
Other current assets 23,045 14,154
----------- -----------
610,021 622,088
Property, plant and equipment (note 5) 952,699 2,180,773
Goodwill (note 6) -- 1,639,065
Other intangible assets (note 6) 7,565 14,531
Deferred pension asset (note 16) 60,430 45,174
Deferred foreign exchange -- 144,287
Other assets, net (note 7) 56,985 117,707
----------- -----------
$ 1,687,700 $ 4,763,625
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Liabilities not subject to compromise:
Accounts payable $ 45,802 $ 63,291
Accrued liabilities 234,549 267,229
Accrued interest payable -- 70,004
Income taxes payable 7,056 5,584
Current portion of capital lease obligations (note 9) 3,952 1,930
Liabilities subject to compromise (note 8) 4,719,591 --
----------- -----------
5,010,950 408,038
Long-term debt (note 8) -- 4,655,077
Long-term portion of capital lease obligations (note 9) 16,601 17,661
Other long-term liabilities 47,547 45,110
Deferred foreign exchange (note 17(b)) 106,617 29,445
Shareholders' deficiency (note 10):
Common shares 1,393,994 1,133,664
Warrants 496 709
Deficit (4,888,505) (1,526,079)
----------- -----------
(3,494,015) (391,706)
----------- -----------
$ 1,687,700 $ 4,763,625
=========== ===========
Reorganization proceedings and basis of presentation (note 1)
Reconciliation to accounting principles generally accepted in the United States
(note 23) Commitments and contingencies (note 24) Subsequent events (note 25)
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Director Director
- ------------------------------------------- ------------------------------------------
Purdy Crawford James J. Meenan
1
AT&T CANADA INC.
Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
(Restated -
note 2(g))
Revenue $ 1,488,145 $ 1,544,721 $ 1,505,378
Expenses:
Service costs 931,949 1,005,790 1,034,860
Selling, general and administrative 333,004 385,966 411,947
Workforce reduction and provision for restructuring
(note 12) 87,069 21,901 (10,249)
Write-down of property, plant and equipment
and goodwill (notes 5 and 6) 1,203,196 -- --
Depreciation and amortization 273,142 465,600 402,551
----------- ----------- -----------
2,828,360 1,879,257 1,839,109
----------- ----------- -----------
Loss from operations (1,340,215) (334,536) (333,731)
Other income (expense):
Interest income 9,193 19,134 17,243
Interest expense (431,625) (401,114) (319,046)
Foreign exchange loss (41,126) (10,097) --
Reorganization expenses (note 14) (7,065) -- --
Write-down of long-term investments and
other assets (note 7(c)) (11,855) -- --
Other (note 13) (2,225) (10,797) 13,739
----------- ----------- -----------
(484,703) (402,874) (288,064)
----------- ----------- -----------
Loss before minority interest and income taxes (1,824,918) (737,410) (621,795)
Minority interest -- -- 104,274
Income taxes (note 15) 6,741 7,965 5,686
----------- ----------- -----------
Loss for the year (1,831,659) (745,375) (523,207)
Deficit, beginning of year:
As previously reported (1,513,805) (780,704) (257,497)
Adjustment for change in accounting policy
for foreign exchange (note 2(g)) (12,274) -- --
----------- ----------- -----------
As restated (1,526,079) (780,704) (257,497)
Adjustment for change in accounting policy for goodwill
(note 2(e)) (1,530,767) -- --
----------- ----------- -----------
Deficit, end of year $(4,888,505) $(1,526,079) $ (780,704)
=========== =========== ===========
Basic and diluted loss per common share (note 2(j)) $ (17.95) $ (7.57) $ (5.48)
=========== =========== ===========
Weighted average number of common shares
outstanding (in thousands) 102,047 98,406 95,561
=========== =========== ===========
See accompanying notes to consolidated financial statements.
2
AT&T CANADA INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
(Restated -
note 2(g))
Cash provided by (used in):
Operating activities:
Loss for the year $(1,831,659) $(745,375) $(523,207)
Adjustments required to reconcile loss to
cash flows from operating activities:
Depreciation and amortization 273,142 465,600 402,551
Write-down of property, plant and
equipment and goodwill (notes 5 and 6) 1,203,196 -- --
Write-down of long-term investments
and other assets (note 7(c)) 11,855 -- --
Accretion of Senior Discount Note interest 156,855 145,148 125,916
Amortization of debt issuance costs 10,807 15,661 16,248
Amortization of deferred gain on termination of
cross-currency swaps and forward contracts
(note 17(b)) (16,232) (4,264) --
Loss (gain) on sale of investments 1,502 8,894 (13,011)
Minority interest -- -- (104,274)
Deferred pension charge (note 16(a)) 8,661 5,074 2,690
Change in pension plan valuation
allowance (note 16(a)) -- (31,934) 2,937
Unrealized foreign exchange loss 59,844 12,275 --
Other (1,422) 3,577 2,012
----------- --------- ---------
(123,451) (125,344) (88,138)
Change in non-cash working capital (note 20) (24,308) 183,636 (80,411)
----------- --------- ---------
Net cash generated by (used in)
operating activities (147,759) 58,292 (168,549)
Investing activities:
Acquisitions, net of cash or bank indebtedness
acquired -- (43,410) (197,867)
Dispositions of investments, net of disposition costs 2,200 3,580 17,656
Additions to property, plant and equipment (143,865) (419,173) (560,404)
Reductions (additions) to other assets 1,355 236 (1,164)
Decrease to restricted investments -- -- 42,429
----------- --------- ---------
Net cash used in investing activities (140,310) (458,767) (699,350)
Financing activities:
Issue of share capital, net of issuance costs 259,022 48,243 35,206
Termination of cross-currency swaps and
forward contracts (note 17(b)) 85,504 150,664 --
Draw from (repayment of) credit facility, net (170,000) (100,000) 270,000
Issues of long-term debt -- 781,959 355,912
Debt issue and credit facility costs (1,304) (6,230) (5,234)
Decrease in other long-term liabilities (1,694) (5,054) (5,935)
Repayment of capital lease (279) (1,695) (2,981)
----------- --------- ---------
Net cash generated by financing activities 171,249 867,887 646,968
Effect of exchange rate changes on cash 68 1,295 187
----------- --------- ---------
Increase (decrease) in cash and cash equivalents (116,752) 468,707 (220,744)
Cash and cash equivalents, beginning of year 537,294 68,587 289,331
----------- --------- ---------
Cash and cash equivalents, end of year $ 420,542 $ 537,294 $ 68,587
=========== ========= =========
Supplemental cash flow information (note 21)
See accompanying notes to consolidated financial statements.
3
AT&T CANADA INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
AT&T Canada Inc. (the "Company") is a holding company, which engages in the
telecommunications business in Canada through its subsidiaries, the most
significant of which is its 69% owned operating subsidiary, AT&T Canada Corp.
The Company's activities in the telecommunications business consist primarily of
the development and construction of telecommunications networks for the
provision of local and data services, internet and IT services and long-distance
services to businesses in Canada.
On October 8, 2002, all of the Company's Class A Voting Shares and Class B
Non-Voting Shares, not already owned by AT&T Corp., were purchased by Brascan
Financial Corporation and CIBC Financial Partners (the "Back-end"). As a result,
the publicly traded Class B Deposit Receipts were de-listed by The Toronto Stock
Exchange (the "TSX") and NASDAQ and are no longer publicly traded.
1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION:
(a) Reorganization proceedings:
On October 15, 2002 (the "Commencement Date"), the Company and
certain of its subsidiaries, namely AT&T Canada Corp., AT&T
Canada Telecom Services Company, AT&T Canada Fibre Canada
Company, MetroNet Fibre US Inc., MetroNet Fibre Washington
Inc. and Netcom Canada Inc. (collectively, the "AT&T Canada
Companies"), voluntarily filed an application for creditor
protection under the Companies' Creditors Arrangement Act
("CCAA") with the Ontario Superior Court of Justice, Toronto,
Ontario, Canada (the "Court") and obtained an order from the
Bankruptcy Court in the Southern District of New York (the
"U.S. Court") under Section 304 of the U.S. Bankruptcy Code to
recognize the CCAA proceedings in the United States. On
January 22, 2003, the AT&T Canada Companies filed a
Consolidated Plan of Arrangement and Reorganization (the
"Plan") and related Management Information Circular with the
Court. The purpose of the Plan is to restructure the balance
sheet and equity of the AT&T Canada Companies, provide for the
compromise, settlement and payment of liabilities of certain
creditors of the AT&T Canada Companies and to simplify the
operating corporate structure of the AT&T Canada Companies.
The Plan provides for, amongst other things:
(i) transactions that will result in a corporate
structure with a new parent company ("New AT&T
Canada"), which will own the existing holding
company, AT&T Canada Inc. and a wholly owned
operating subsidiary ("New OpCo"), which will be
created as a consequence of the amalgamation of
certain of the existing subsidiaries of AT&T Canada
Inc.;
4
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED):
(ii) the cancellation of all existing outstanding equity,
including warrants and share purchase options of AT&T
Canada Inc. and AT&T Canada Corp. for no consideration
(notes 10 and 11); and
(iii) the exchange and compromise of the senior notes of the
Company (the "Senior Notes") and certain other affected
claims ("Affected Creditors") for a combination of cash,
which will not be less than $200 million, and 100% of the
equity of New AT&T Canada upon emergence from CCAA.
On February 20, 2003, the Plan was approved by the holders of the
Senior Notes ("Noteholders"), and other affected creditors. On
February 25, 2003, the Court issued an order sanctioning the Plan and
the U.S. Court issued an order recognizing and enforcing the Court's
sanction order.
As a wholly owned subsidiary of AT&T Canada Inc., New OpCo will carry
on the businesses formerly conducted by each of the Canadian AT&T
Canada Companies. In effect, after the reorganization under the Plan,
AT&T Canada Inc. will operate through one Canadian subsidiary instead
of seven Canadian operating subsidiaries and AT&T Canada Inc. will
become the wholly owned subsidiary of New AT&T Canada, whose
principal asset consists of its ownership of all of the common shares
of AT&T Canada Inc. Following the implementation of the Plan, the
business and operations of AT&T Canada Inc. will not undergo any
change as a result of New AT&T Canada becoming the top company in the
corporate structure.
The completion of the Plan and emergence from the CCAA proceedings
("Plan Implementation Date") is subject to a number of conditions,
including that an appeal period of the Court's approval has expired
with either no appeal commenced or a final determination made by the
Court, and the receipt of certain exemption orders from securities
regulatory authorities in Canada to provide that the shares of New
AT&T Canada (the "New Shares") issued under the Plan will be freely
tradeable, and the listing of the New Shares on the TSX.
Two of the Company's wholly owned subsidiaries, Contour Telecom Inc.
and Montage.DMC eBusiness Services, Inc., were excluded from the CCAA
proceedings. Together, these entities generated less than 5% of
consolidated revenues in 2002 and 2001 (2000 - 5%), and were an
insignificant component of consolidated net loss and the Company's
financial position for each of the years presented.
5
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED):
(b) Basis of presentation:
The consolidated financial statements have been prepared on a going
concern basis in accordance with Canadian generally accepted accounting
principles ("GAAP"). The going concern basis of presentation assumes
that the Company will continue in operation for the foreseeable future
and will be able to realize its assets and discharge its liabilities
and commitments in the normal course of business. There is doubt about
the appropriateness of the use of the going concern assumption in the
preparation of the consolidated financial statements because of the
circumstances of the CCAA reorganization proceedings and circumstances
giving rise to this event, including the Company's long-term debt which
is in default. There can be no assurances that the Plan will be
implemented as contemplated and that the Company will emerge from the
CCCA proceedings. Also, there can be no assurances that even if the
Plan is implemented, the Company will be a going concern
post-emergence.
The consolidated financial statements do not reflect significant
adjustments that would be necessary in the carrying amount of assets
and liabilities, the reported revenue and expenses, and the balance
sheet classifications used if the going concern basis was not
appropriate. The appropriateness of the going concern basis is
dependent upon, among other things, implementation of the Plan, future
profitable operations and the Company's ability to generate sufficient
cash from operations and from financing arrangements to meet its
obligations.
If the Plan is implemented, New AT&T Canada will be required to perform
a comprehensive revaluation of its balance sheet under the provisions
of The Canadian Institute of Chartered Accountants ("CICA") Handbook
Section ("HB") 1625, "Comprehensive Revaluation of Assets and
Liabilities" ("fresh start accounting"). Under fresh start accounting,
the Company's assets and liabilities will be recorded at management's
best estimate of their fair values. The reported amounts in the
accompanying consolidated financial statements could materially change,
because they do not give effect to adjustments to the carrying amount
of assets and liabilities that may ultimately result from the adoption
of fresh start accounting to reflect assets and liabilities at their
fair values. In particular, it is expected that there will be
significant differences (either positive or negative) between the fair
value and carrying amount as a result of fresh start accounting in the
following areas: capital assets, deferred pension asset and long-term
liabilities.
6
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying 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 23.
The consolidated financial statements include all assets and
liabilities of the Company and its majority-owned subsidiaries. All
intercompany transactions and balances have been eliminated on
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the year. Actual results could differ from those
estimates.
Significant estimates are used in determining, but not limited to, the
recoverability of capital assets, allowance for doubtful accounts,
provisions for workforce reduction and restructuring, provisions for
contingent liabilities, liabilities subject to compromise, and income
tax valuation allowances. Assessments of the recoverability of capital
assets require estimates of useful lives, future cash flows, discount
rates and terminal values. Management develops cash flow projections
using assumptions that reflect the Company's planned courses of action
and management's best estimate of the most probable set of economic
conditions. When assessing the reasonableness of the assumptions,
current information, currently prevailing economic conditions and
trends are considered. Liabilities subject to compromise under the CCAA
proceedings have been estimated based upon the Court-approved process
to prove, administer and adjudicate claims. The claims of Noteholders
have been determined in accordance with such process. Claims of other
affected creditors and the amount recorded as liabilities have been
estimated using the information provided by the Affected Creditors and
management's assessment of the merits of the claims. Actual results may
be materially different from assumptions used.
The Company's significant accounting policies are as follows:
(a) Cash and cash equivalents:
Cash equivalents consist of investments in money market
instruments with a maturity at the date of purchase of less
than three months. Cash and cash equivalents are recorded at
cost, which approximates current market value.
7
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Revenue recognition:
The Company derives its revenue primarily from data, local,
internet and IT services and long-distance products and
services. Products and services are sold either standalone or
together as a multiple service arrangement or bundled
solution. Components of multiple service arrangements are
separately accounted for provided the elements have standalone
value to the customer and the fair value of any undelivered
elements can be reliably determined. The Company recognizes
revenue once evidence of an arrangement exists, delivery has
occurred, fees are fixed or determinable and collectability is
probable.
Revenue on long-distance and other usage-based products and
services is recognized based upon minutes of traffic carried.
Revenue on local, data, internet, IT services and other
products and services is recognized as the services are
provided in accordance with contract terms, including any
customer acceptance provisions. Revenue from technical support
and maintenance is recognized over the term of the contract
during which the services are provided.
(c) Accounts receivable securitization:
The Company accounts for the transfer of receivables according
to Accounting Guideline ("AcG") AcG-12, "Transfer of
Receivables." The Company recognizes gains or losses on the
transfer of receivables that qualify as sales and retains a
subordinated retained interest in the accounts receivable
transferred and ongoing servicing responsibilities. Losses on
the sale of accounts receivable are recorded in the
consolidated statements of operations and deficit at the date
of sale.
The amount of the losses depends in part on the carrying
amount of the accounts receivable involved in the transfer,
allocated between the accounts receivable sold and the
Company's retained interest based on their relative fair value
at the date of the transfer. The Company measures fair value
based on the expected future cash receipts to be realized
using management's best estimates of key assumptions for
credit and dilution losses, collection term of the accounts
receivable and the trust's contracted return.
Any subsequent decline in the value of the retained interest
other than a temporary decline, will be recorded in income.
8
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Property, plant and equipment:
Property, plant and equipment are recorded at cost. Included
in telecommunications facilities and equipment are costs
incurred in developing new networks or expanding existing
networks, such as costs of acquiring rights-of-way and network
design. Construction costs related to telecommunications
facilities and equipment that are installed on rights-of-way
granted by others are capitalized and depreciated over the
lives of the rights-of-way. Interest is capitalized on assets
under construction for more than three months at the Company's
weighted average cost of debt. Telecommunications facilities
and equipment are depreciated once the network is put in
service.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
Telecommunications facilities and equipment 3 - 20 years
Buildings 13 - 40 years
Other capital assets 4 - 40 years
Equipment under capital leases 3 - 15 years
Application software 1 - 7 years
Leasehold improvements Term of lease
The carrying amount of property, plant and equipment is
reviewed for impairment on an ongoing basis whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. If the total of the expected future
undiscounted cash flows is less than the carrying amount of
the asset, a loss is recognized for the difference between the
expected future undiscounted cash flows and carrying amount of
the asset.
9
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(e) Business combinations, goodwill and other intangible assets:
Effective January 1, 2002, the Company adopted HB 3062,
"Goodwill and Other Intangible Assets," and HB 1581, "Business
Combinations." The new standards mandate the purchase method
of accounting for business combinations and require that
goodwill and indefinite-life intangible assets no longer be
amortized but tested for impairment at least annually. The
standards also specify criteria that intangible assets must
meet to be recognized and reported apart from goodwill.
The Company has adopted these new standards as at January 1,
2002 and discontinued amortization of all existing goodwill.
Goodwill is allocated to reporting units and any potential
goodwill impairment is identified by comparing the carrying
value of a reporting unit with its fair value. If any
potential impairment is indicated, then it is quantified by
comparing the carrying value of goodwill to its fair value,
based on the fair value of the assets and liabilities of the
reporting unit. HB 3062 requires completion of a transitional
goodwill impairment evaluation within six months of adoption.
Under HB 3062, any transitional impairment loss is recognized
as a charge to opening deficit at January 1, 2002. In 2002,
the Company completed its transitional goodwill impairment
test and determined that unamortized goodwill of $1,530.8
million, as at January 1, 2002, was impaired under the fair
value approach. This amount was charged to opening deficit
with a corresponding reduction in goodwill (note 6).
Intangible assets that have definite lives are amortized over
their estimated useful lives. Intangible assets are tested for
impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is
recognized for the difference between the expected future
undiscounted cash flows and the carrying amount of the asset.
10
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following presents the effects on the year ended December 31, 2001
and 2000 as if the Company had retroactively adopted the change in
accounting policy for non-amortization of goodwill discussed above:
2001 2000
---- ----
Reported loss for the year $ (745,375) $ (523,207)
Add back: goodwill amortization 109,186 94,427
----------- -----------
Adjusted loss for the year $ (636,189) $ (428,780)
=========== ===========
Reported basic and diluted loss per share $ (7.57) $ (5.48)
Add back: goodwill amortization 1.11 0.99
----------- -----------
Adjusted basic and diluted loss per share $ (6.46) $ (4.49)
=========== ===========
Prior to the adoption of HB 3062, goodwill and other intangible assets
recorded at the date of acquisition were amortized on a straight-line
basis over their estimated useful lives of 5 to 25 years. Goodwill and
other intangible assets were reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash
flows was less than the carrying amount of the asset, a loss was
recognized for the difference between the expected future undiscounted
cash flows and the carrying amount of the asset.
(f) Debt issuance costs:
Debt issuance costs are amortized on a straight-line basis over the
terms of the related debt financing.
(g) Foreign currency translation and hedging relationships:
Foreign currency-denominated monetary items are translated into
Canadian dollars at the exchange rate prevailing at the balance sheet
date. Foreign currency-denominated non-monetary items are translated at
the historical exchange rate. Transactions included in operations are
translated at the average exchange rate for the period. Translation
gains or losses are reflected in the consolidated statements of
operations in the period in which they occur.
11
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Effective January 1, 2002, the Company adopted amended HB 1650,
"Foreign Currency Translation," which eliminates the deferral and
amortization of foreign currency translation gains and losses on
long-term monetary items with a fixed or ascertainable life. Exchange
gains and losses on long-term monetary items are included in income.
At December 31, 2001, the Company had approximately $12.3 million (2000
- nil) of unamortized foreign exchange losses related to long-term
debt. Upon adoption, deferred foreign exchange has been reduced by this
amount, with a corresponding increase in opening deficit as of January
1, 2002. HB 1650 also requires restatement of prior periods, the effect
of which was to increase the reported loss and loss per share for the
year ended December 31, 2001 by $12.3 million (2000 - nil) and $(0.12)
(2000 - nil), respectively.
The Company hedges its exposure to foreign currency exchange rate risk
on long-term debt from time to time, by designating existing foreign
currency-denominated monetary assets as hedge instruments and, through
the purchase of currency options, cross-currency swaps and forward
exchange contracts. The Company accounts for these financial
instruments as hedges and, as a result, foreign exchange gains and
losses on hedge instruments are recorded in the same period as the
corresponding gains and losses on the related long-term debt. Premiums
paid to acquire currency options, cross-currency swaps and forward
exchange contracts are deferred and amortized on a straight-line basis
over the terms of the instruments. Changes in fair values of derivative
instruments not designated as hedging instruments and ineffective
portion of hedges, if any, are recognized in earnings in the current
year.
The Company's policy is to formally designate each derivative financial
instrument as a hedge of a specifically identified debt instrument. The
Company believes the derivative financial instruments are effective as
hedges, both at inception and over the term of the instrument.
Gains and losses on terminations of foreign currency derivative
agreements are deferred under other current, or non-current, assets or
liabilities on the balance sheet and amortized to foreign exchange gain
(loss) over the remaining term of the underlying debt for which these
derivative instruments were designated as cash flow hedges. In the
event of early extinguishment of the related debt obligation, any
realized or unrealized gain or loss from the derivative would be
recognized in the consolidated statements of operations at the time of
extinguishment.
12
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Employee benefit plans:
(i) Retirement benefits:
The Company recognizes the costs of retirement
benefits and post-employment benefits over the period
in which employees render services in return for the
benefits. The costs of defined benefit pensions and
other retirement benefits earned by employees are
actuarially determined using the projected benefit
method prorated on credited service and management's
best estimate of expected plan investment
performance, salary escalation and retirement ages of
employees. Changes in these assumptions could impact
future pension expense. For the purpose of
calculating the expected return on plan assets, those
assets are valued using a market-related value. Past
service costs from plan amendments are amortized on a
straight-line basis over the average remaining
service period of employees active at the date of
amendment, except for amendments to the
post-retirement medical and dental benefits programs.
The average remaining life expectancy of former
employees is used for the post-retirement medical and
dental benefits programs as no new members are
allowed to join these plans. The excess of the
cumulative unrecognized net gains (loss) over 10% of
the greater of the benefit obligation and the
market-related value of plan assets is amortized over
the average remaining service period of active
employees, except for the post-retirement medical and
dental benefits programs where the average remaining
life expectancy of former employees is used in the
determination of the amortization period.
When the restructuring of a benefit plan gives rise
to both a curtailment and a settlement of
obligations, the curtailment is accounted for prior
to the settlement.
13
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(ii) Stock-based compensation:
Effective January 1, 2002, the Company adopted HB 3870,
"Stock-based Compensation and Other Stock-based Payments,"
which requires that a fair value-based method of accounting be
applied to all stock-based payments to non-employees and to
employee awards that are direct awards of stock, awards that
call for settlement in cash or other assets, or are stock
appreciation rights that call for settlement by the issuance
of equity instruments. HB 3870 permits the Company to continue
its existing policy of treating all other employee and
director stock options as capital transactions (the settlement
method), but requires pro forma disclosure of net earnings and
per share information as if the Company had accounted for
these stock options under the fair value method (note 11).
HB 3870 requires disclosure of the pro forma effect of awards
granted after January 1, 2002. The Company has elected to
include the pro forma effect of awards granted prior to
January 1, 2002 in its disclosures. The fair value of stock
options issued in the period is determined using the
Black-Scholes option-pricing model for purposes of the
pro-forma disclosures, and is allocated to compensation cost
on a straight-line basis over the vesting period of the award.
The adoption of the new section did not impact the
consolidated financial statements.
(iii) Employee Share Ownership Plan:
Compensation expense is recognized for the Company's
contributions to the Employee Share Ownership Plan. The
Company's contributions are made through the issuance of Class
B Non-Voting Shares from treasury.
14
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Income taxes:
The Company uses the liability method of accounting for income
taxes. Future income tax assets and liabilities are recognized
for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. When necessary, a valuation allowance is recorded to
reduce future income tax assets to an amount where realization
is more likely than not. Future income tax assets and
liabilities are measured using enacted or substantively
enacted tax laws and rates in effect for the year in which
those temporary differences are expected to be recovered or
settled. The effect on future income tax assets and
liabilities of a change in tax laws and rates is recognized as
part of the provision for income taxes in the period that
includes the enactment date (or the period in which the
changes in rates are substantively enacted).
(j) Loss per common share:
Effective January 1, 2001, the Company adopted retroactively
the treasury stock method of calculating diluted earnings per
share in accordance with HB 3500. The treasury stock method
includes only those unexercised options and warrants where the
average market price of the common shares during the period
exceeds the exercise price of the options and warrants. In
addition, this method assumes that the proceeds would be used
to purchase common shares at the average market price during
the period.
The change in the method of calculation of loss per share did
not impact basic and diluted loss per share for 2001 and 2000.
As a result of net losses for the years ended December 31,
2002, 2001 and 2000, respectively, the effect of converting
stock options and warrants has not been included in the
calculation of diluted loss per common share because to do so
would be anti-dilutive.
15
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) Recent pronouncements:
(i) Effective January 1, 2003, the Company will adopt
AcG-14, "Disclosure of Guarantees," which requires a
guarantor to disclose significant information about
guarantees it has provided, without regard to whether
it will have to make any payments under the
guarantees and in addition to the accounting and
disclosure requirements of HB 3290, "Contingencies."
The Guideline is generally consistent with disclosure
requirements for guarantees in the United States
(Financial Accounting Standard Board ("FASB")
Interpretation No. 45) but, unlike the FASB's
guidance, does not apply to product warranties and
does not encompass recognition and measurement
requirements. The Company has evaluated the impact of
adoption of AcG-14 and the disclosures are included
in note 23(b)(ii).
(ii) In December 2002, the CICA issued HB 3063,
"Impairment or Disposal of Long-Lived Assets" and
revised HB 3475, "Disposal of Long-Lived Assets and
Discontinued Operations." These sections supersede
the write-down and disposal provisions of HB 3061,
"Property, Plant and Equipment" and HB 3475,
"Discontinued Operations." The new standards are
consistent with U.S. GAAP. HB 3063 establishes
standards for recognizing, measuring and disclosing
impairment of long-lived assets held-for-use. An
impairment is recognized when the carrying amount of
an asset to be held and used, exceeds the projected
future net cash flows expected from its use and
disposal, and is measured as the amount by which the
carrying amount of the asset exceeds its fair value.
HB 3475 provides specific criteria for and requires
separate classification for assets held-for-sale and
for these assets to be measured at the lower of their
carrying amounts or fair value, less costs to sell.
HB 3475 also broadens the definition of discontinued
operations to include all distinguishable components
of an entity that will be eliminated from operations.
HB 3063 is effective for the Company's 2004 fiscal
year, however, early application is permitted.
Revised HB 3475 is applicable to disposal activities
committed to by the Company after May 1, 2003,
however, early application is permitted. The Company
is currently evaluating the effect of the adoption of
these standards on its financial position, results of
operations and cash flows.
16
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
3. ACQUISITIONS AND DISPOSITIONS:
Details of business acquisitions during 2001 and 2000 are as follows.
Consideration was satisfied in cash unless otherwise noted below.
2001 2000
------- ----------------------------------------------
MONTAGE Contour Brak Netcom DMC
(b) (c) (d) (e) (f)
Current assets $15,493 $10,373 $ 4,044 $ 6,192 $ 3,993
Capital assets 4,717 7,093 548 -- 501
Other assets -- 694 990 5,545 --
Goodwill 51,029 70,032 29,554 66,892 92,309
------- ------- ------- ------- -------
71,239 88,192 35,136 78,629 96,803
Current liabilities 11,869 11,337 4,708 11,157 1,308
Long-term debt -- 6,875 202 -- --
------- ------- ------- ------- -------
11,869 18,212 4,910 11,157 1,308
------- ------- ------- ------- -------
Purchase price $59,370 $69,980 $30,226 $67,472 $95,495
======= ======= ======= ======= =======
(a) On May 1, 2001, the Company disposed of certain call centres.
Proceeds on disposition were $3.6 million in cash. The
disposition generated a loss on sale of $8.9 million.
(b) Acquisition of MONTAGE eIntegration Inc.:
On June 1, 2001, the Company acquired all of the issued and
outstanding shares of MONTAGE eIntegration Inc. ("MONTAGE").
MONTAGE is a Canadian E-Business solutions integrator focused
on transforming traditional organizations into connected
enterprises through internet technologies. Consideration of
$58.4 million was paid on closing, comprised of $13.7 million
in cash and $44.7 million, represented by 967,355 Class B
Non-Voting Shares of the Company. In addition, acquisition
costs of $1.0 million were incurred. The vendors had the
potential to earn up to an additional $30.0 million contingent
upon the attainment by June 30, 2002 of certain specified
performance targets. As determined at June 30, 2002, no
additional consideration was earned.
17
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED):
(c) Acquisition of Contour Telecom Inc. (Canada) (formerly
TigerTel Inc.):
On January 6, 2000, the Company acquired all of the issued and
outstanding shares of Contour Telecom Inc. (Canada) (formerly
TigerTel Inc. ("Contour")), a Canadian business
telecommunications provider.
(d) Acquisition of Brak Systems Inc.:
On March 20, 2000, the Company acquired all of the issued and
outstanding shares of Brak Systems Inc. ("Brak"), a Canadian
internet security company.
(e) Acquisition of Netcom Canada Holding Inc.:
On April 10, 2000, the Company exercised its right to acquire
the remaining 49% of issued and outstanding shares, not
previously owned by the Company, of Netcom Canada Holding Inc.
("Netcom"), an internet service provider for U.S. $46.2
million (Cdn. $67.5 million) in cash.
(f) Acquisition of DMC Inc.:
On May 31, 2000, the Company acquired all of the issued and
outstanding shares of DMC Inc. ("DMC"), a Canadian business
specializing in the deployment of business-focused internet
and E-Business strategies and solutions. Purchase
consideration of $95.5 million, recorded at the date of
acquisition, was funded by a combination of the issuance of
769,231 Class B Non-Voting Shares priced at market on date of
acquisition and $50 million in cash.
(g) Shared Technologies of Canada:
On July 18, 2000, the Company reduced its ownership in Shared
Technologies of Canada ("STOC") from 70% to 15%. Proceeds on
disposition were $16.5 million: $13.6 million received in cash
and a receivable of $2.9 million. STOC also repaid
intercompany loans owing of $4.5 million. The disposition
generated a gain on sale of $13.0 million before income taxes.
During 2002, the Company disposed of its remaining 15%
investment in STOC for net proceeds of $2.2 million (note
7(d)).
18
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED):
Unaudited pro forma consolidated financial information:
The following unaudited pro forma consolidated financial information
reflects the acquisitions of Contour, Brak, Netcom, DMC and MONTAGE as
if these transactions had occurred on January 1, 2000:
2001 2000
---- ----
(Restated -
note 2(g))
Revenue $ 1,568,655 $ 1,560,729
Expenses:
Service costs 1,020,851 1,068,704
Selling, general and administrative
expenses 395,208 430,368
Integration costs, provision for restructuring
and workforce reduction 21,901 (10,249)
Depreciation and amortization 470,309 422,780
----------- -----------
Loss from operations (339,614) (350,874)
Other income (expense):
Interest expense, net (382,094) (302,064)
Foreign exchange loss (10,097) --
Other income (expense) (6,989) 13,874
----------- -----------
(399,180) (288,190)
----------- -----------
Loss before minority interest and income taxes (738,794) (639,064)
Minority interest -- 101,983
Income taxes 9,580 6,073
----------- -----------
Loss for the year $ (748,374) $ (543,154)
=========== ===========
Basic and diluted loss per common share $ (7.60) $ (5.68)
=========== ===========
This financial information has not been adjusted to give effect to the
dispositions of STOC and certain call centres on July 18, 2000 and May
1, 2001, respectively. The pro forma consolidated financial information
has been provided for information purposes only and is not necessarily
indicative of the results of operations that actually would have been
achieved if the acquisitions had been completed on January 1, 2000, or
that may be reported in the future.
19
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
4. CASH AND CASH EQUIVALENTS:
2002 2001
---- ----
Cash on deposit:
Canadian dollar $ 78,551 $ 10,139
U.S. dollar 4,827 214
Short-term investments, at rates of interest
varying between 1.25% and 3.08%:
Canadian dollar 309,436 481,434
U.S. dollar 27,728 45,507
-------- --------
$420,542 $537,294
======== ========
5. PROPERTY, PLANT AND EQUIPMENT:
Accumulated Net book
2002 Cost depreciation value
---- ---- ------------ -----
Telecommunications facilities
and equipment $2,015,809 $1,326,781 $ 689,028
Land and buildings 147,554 96,257 51,297
Other capital assets 608,561 472,890 135,671
Equipment under capital leases 31,018 20,751 10,267
Application software 173,577 118,697 54,880
Leasehold improvements 31,317 19,761 11,556
---------- ---------- ----------
$3,007,836 $2,055,137 $ 952,699
========== ========== ==========
Accumulated Net book
2001 Cost depreciation value
---- ---- ------------ -----
Telecommunications facilities
and equipment $2,060,341 $ 483,964 $1,576,377
Land and buildings 169,516 41,601 127,915
Other capital assets 600,911 254,104 346,807
Equipment under capital leases 28,542 6,430 22,112
Application software 163,253 73,965 89,288
Leasehold improvements 31,115 12,841 18,274
---------- ---------- ----------
$3,053,678 $ 872,905 $2,180,773
========== ========== ==========
20
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED):
As of December 31, 2002, property, plant and equipment include $5.9
million (2001 - $16.9 million) of property, plant and equipment under
construction that are not in service and, accordingly, have not been
depreciated. Interest capitalized to property, plant and equipment
during 2002 amounted to $0.3 million (2001 - $0.9 million) and has been
calculated using the Company's weighted average cost of debt of 11.5%
(2001 - 11.5%) applied to the monthly amount expended in networks in
progress that are not in service.
In the second quarter of 2002, the Company assessed the carrying
amounts of its long-lived assets for impairment. The assessment was
performed due to regulatory decisions issued in the first half of 2002
affecting the Company's business plan, the deterioration of the
economic environment and the substantial decline in market value of
companies in the telecommunications services sector.
An impairment was assessed based on a comparison of the net recoverable
amount, using projected future undiscounted cash flows, to the carrying
amount of the long-lived assets. The impairment charge of $1,095.0
million for certain property, plant and equipment, predominately
telecommunication facilities and equipment, was measured as the
deficiency between the carrying amount and the net recoverable amount,
and has been recorded as a charge to earnings and an increase in
accumulated depreciation.
An additional assessment for impairment of the carrying values of the
Company's long-lived assets was performed due to the brand transition
and changes in ownership as contemplated in the Plan in the fourth
quarter of 2002. It was determined based on this assessment that
projected future undiscounted cash flows exceeded the carrying amount
of the Company's property, plant and equipment, and there was no
further impairment.
21
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
(a) Goodwill:
The change in the carrying amount of goodwill for the year
ended December 31, 2002 is shown below:
Balance, Balance,
December 31, Transitional Impairment December 31,
2001 impairment in 2002 Other 2002
---- ---------- ------- ----- ----
Goodwill $1,639,065 $(1,530,767) $(108,228) $(70) $ --
========== =========== ========= ==== ====
Net goodwill as at December 31, 2001 consisted of cost of
$1,913.2 million less accumulated amortization of $274.1
million.
In the second quarter of 2002, the Company completed its
transitional goodwill impairment test as a result of adopting
HB 3062, and determined that unamortized goodwill of $1,530.8
million as at January 1, 2002, was impaired under the fair
value approach. The one-time transitional adjustment for the
impairment assessment was charged to opening deficit with a
corresponding reduction in goodwill. During the second quarter
of 2002, the Company also performed an assessment for
impairment of the carrying amount of its remaining goodwill
due to the circumstances described in note 5. It was
determined that the remaining unamortized goodwill of $108.2
million was also impaired under the fair value approach.
(b) Other intangible assets:
The following table summarizes the Company's other intangible
assets for the year ended December 31:
Accumulated Net book
2002 Cost amortization value
---- ---- ------------ -----
Customer lists $ 4,025 $ 2,547 $1,478
Right-of-way agreements 702 148 554
Ghz licenses 7,904 2,371 5,533
Non-compete agreements 33,633 33,633 --
------- ------- ------
$46,264 $38,699 $7,565
======= ======= ======
22
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED):
Accumulated Net book
2001 Cost amortization value
---- ---- ------------ -----
Customer lists $ 4,016 $ 937 $ 3,079
Right-of-way agreements 702 111 591
Ghz licenses 7,904 1,581 6,323
Non-compete agreements 33,633 29,095 4,538
------- ------- -------
$46,255 $31,724 $14,531
======= ======= =======
Aggregate amortization expense for intangible assets with
definite lives for the year ended December 31, 2002 was $6.7
million. The weighted average amortization period is six
years, with estimated amortization expense for the next five
years, as follows:
2003 $2,440
2004 827
2005 827
2006 827
2007 827
The Company did not have any intangible assets with an
indefinite life as at December 31, 2002 and 2001.
7. OTHER ASSETS:
Accumulated Net book
2002 Cost amortization value
---- ---- ------------ -----
Debt issuance costs (note 7(e)) $79,303 $39,840 $39,463
Long-term investments, at cost,
less write-downs (note 7(c)) 470 -- 470
Restricted cash (note 7(a)) 13,500 -- 13,500
Other (note 7(c)) 3,848 296 3,552
------- ------- -------
$97,121 $40,136 $56,985
======= ======= =======
23
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
7. OTHER ASSETS (CONTINUED):
Accumulated Net book
2001 Cost amortization value
---- ---- ------------ -----
Debt issuance costs $ 78,926 $ 27,602 $ 51,324
Retained interest on accounts
receivable securitization (note 7(b)) 49,829 -- 49,829
Long-term investments, at cost 10,745 -- 10,745
Other 6,652 843 5,809
-------- -------- --------
$146,152 $ 28,445 $117,707
======== ======== ========
(a) As at December 31, 2002, the Company has restricted
cash comprising cash held in trust of $13.5 million,
which represents further protection for the directors
and officers of the Company with respect to their
potential personal liability for certain statutory
liabilities. The restrictions will terminate upon the
earlier of (i) December 31, 2008 and (ii) three years
from the date of the last claim being conclusively
resolved.
(b) In 2001, the Company sold accounts receivable under a
securitization program with a special purpose trust
for initial proceeds of $100 million and recorded a
loss of $0.4 million, representing the cost relating
to establishing the agreement at the date of the
sale. Under the terms of the securitization
agreement, the Company had the ability to sell
certain of its accounts receivable on a revolving
basis through securitization transactions at varying
monthly limits. The maximum cash proceeds that could
be funded under the program were $150 million. The
accounts receivable pool consisted of the Company's
trade accounts receivable for telecommunications
products and services rendered. On February 20, 2002,
the Company repurchased, for approximately $100
million, all of the outstanding accounts receivable
sold under their securitization program.
The securitization agreement included the requirement
that the Company maintain an investment grade credit
rating from both Moody's Investor Services Inc. and
Standard & Poor's Rating Services.
(c) In 2002, the Company determined there was an other
than temporary decline in the value of its long-term
investments and other assets, and recorded a
write-down of $8.8 million and $3.1 million,
respectively. The determination was based on recent
market valuations.
24
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
7. OTHER ASSETS (CONTINUED):
(d) In the second quarter of 2002, the Company sold its remaining
interest in STOC for net proceeds of $2.2 million.
(e) The Company recorded a write-off of $2.3 million of unamortized debt
issuance costs related to the senior credit facility which was
terminated on October 9, 2002 (see note 8(c)).
8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT:
The liabilities subject to compromise as at December 31, 2002 and
long-term debt as of December 31, 2001 are as follows:
Liabilities
subject to Long-term
compromise debt
---------- ----
Effective 2002 2001
interest rate Cdn. U.S. Cdn. U.S.
------------- ---- ---- ---- ----
12% unsecured Senior Notes,
maturing August 15, 2007 $ 356,237 $225,810 $ 395,988 $ 248,600
10.75% unsecured Senior
Discount Notes, maturing
November 1, 2007 11.04% 268,193 170,001 248,227 155,800
9.95% unsecured Senior Discount
Notes, maturing June 15, 2008 11.24% 1,440,761 913,262 1,341,482 842,200
10.625% unsecured Senior Notes,
maturing November 1, 2008 354,960 225,000 358,380 225,000
7.65% unsecured Senior Notes,
maturing September 15, 2006 1,571,255 995,978 1,592,800 1,000,000
7.15% unsecured Senior Notes,
maturing September 23, 2004 142,850 -- 150,000 --
7.625% unsecured Senior Notes,
maturing March 15, 2005 382,568 242,500 398,200 250,000
Senior Credit Facility -- -- 170,000 --
----- ---------- -------- ---------- ----------
4,516,824 4,655,077
Accrued interest payable 175,778 --
Accrued liabilities 8,220 --
Other liabilities 18,769 --
----- ---------- -------- ---------- ----------
$4,719,591 $4,655,077
===== ========== ======== ========== ==========
25
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):
(a) Liabilities subject to compromise under CCAA proceedings:
Under the CCAA proceedings and the Plan, all of the Company's
liabilities to creditors under the Senior Notes, including accrued
interest thereon, and certain other affected claims at the
Commencement Date, will be compromised subject to the implementation
of the Plan. Such liabilities whose treatment and satisfaction are
dependent on the outcome of the CCAA proceedings have been
segregated and classified as liabilities subject to compromise in
the consolidated financial statements.
The Company has followed a court-approved process to prove,
administer and adjudicate claims. Notices of claims were mailed to
Affected Creditors in November 2002. The last date by which claims
against the Company had to be filed with the court-appointed
monitor, if the claimants wished to receive any distribution under
the CCAA proceedings, was December 23, 2002 ("Claims Bar Date"). If
a notice disputing the claim ("Dispute of Claim") had not been
received by the Claims Bar Date, the Affected Creditor was deemed to
have accepted the claim for both voting and distribution purposes
under the Plan. Unknown creditors were also permitted to file a
proof of claim by the Claims Bar Date. Separate claims procedures
for Affected Creditors other than Noteholders have been established
that differentiate claims for voting purposes and distribution
purposes under the Plan.
In connection with establishing claims by Noteholders, the Company
sent notices to the indenture trustees of each series of Senior
Notes, stating the aggregate accrued amount owing under the relevant
series up to the Commencement Date. The indenture trustees confirmed
the amounts owing under each series. As such, the claims of the
Noteholders have been established for voting and distribution
purposes pending implementation of the Plan.
Pursuant to the CCAA proceedings, proofs of claim and Disputes of
Claims ("Claims") were filed against the Company with the monitor.
The Company either accepted the Claims or issued a notice of
revision or disallowance for Claims that differ in nature,
classification or amount from the Company's records. Where
resolution cannot be reached with the Affected Creditor, the claims
procedure provides for the adjudication of any disputes by the Court
or a Court approved claims officer at the option of the Company. The
decision of the Court or claims officer is final and binding pending
implementation of the Plan.
26
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):
The amounts in total may vary from the stated amount of Claims that
have been provided to the Company and may be subject to future
adjustments depending on the resolution of Claims and/or
determinations by the court. Additional claim amounts may also
arise.
As of February 25, 2003, 82 claims have been received from Affected
Creditors excluding Noteholders. For distribution purposes, as of
the same date, 27 Claims have been disallowed in their entirety and
35 Claims, totaling $15.9 million, have been allowed by the Company.
The remaining 20 Claims, totaling $106.6 million, are being
disputed. In addition, the Company has received five proofs of claim
from certain warrant holders which are for unliquidated amounts.
These claims have been disallowed by the Company.
Upon implementation of the Plan, claims of Affected Creditors will
be compromised and distributed. The determination and ultimate
amount of distribution or settlement is subject to an implemented
Plan and, therefore, is not currently determinable.
The CCAA proceedings do not allow for principal and interest
payments to be made on pre-filing Senior Notes of the Company
without Court approval or until the Plan has been implemented.
Accordingly, the interest generated subsequent to the Commencement
Date no longer accrues to Noteholders and other Affected Creditors
if the Plan is implemented. However, the Company has continued to
accrue for interest expense on the pre-filing Senior Notes until the
Plan is implemented and has classified the amount within liabilities
subject to compromise. As at December 31, 2002, interest expense on
pre-filing Senior Notes accrued but not paid for the period from
October 15, 2002 to December 31, 2002 was $87.1 million.
27
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):
(b) Long-term debt:
On October 15, 2002, the Company elected not to make interest
payments on the Senior Notes totaling approximately U.S. $47.8
million, due on September 15, 2002, and approximately $5.4 million,
due on September 23, 2002, related to its 7.65% Senior Notes and
7.15% Senior Notes, respectively, within 30 days from the scheduled
interest payment date of the 7.65% Senior Notes. Accordingly, as of
October 15, 2002, the Company was in default under the 7.65% Senior
Notes and due to cross default provisions in all other series of
Senior Notes, the Company has defaulted on all of its outstanding
long-term debt. As a result, all of the outstanding long-term debt
has either been accelerated or could be accelerated under the terms
of the indentures governing these Senior Notes and thus declared due
and payable.
On September 24, 2002, the Company unwound all remaining outstanding
swaptions and cross-currency swaps as provided for in the agreement,
resulting in the Company receiving approximately Cdn. $84.9 million
principal amount of certain of its outstanding Senior Notes in
satisfaction of the counterparty's settlement obligation to the
Company rather than receiving cash (note 17(b)). These Senior Notes
are currently being held by the Company and have been recognized as
a reduction to the long-term debt outstanding.
(c) Senior Credit Facility (the "Facility"):
On May 24, 2002, the Facility was amended reducing the total
facility from $600 million to $400 million. Subsequently, on August
15, 2002, the Facility was amended reducing the total facility from
$400 million to approximately $200 million.
On October 9, 2002, the Facility agreement was terminated and the
Company repaid the approximately $200 million of outstanding draws,
of which $30 million was drawn under the Facility in 2002.
28
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
9. CAPITAL LEASE OBLIGATIONS:
The following is a schedule, by year, of the future minimum lease payments
for capital leases, together with the balance of the obligation, as at
December 31, 2002:
2003 $ 4,819
2004 2,176
2005 1,881
2006 1,850
2007 1,850
2008 and thereafter 18,500
----------
Total minimum lease payments 31,076
Less imputed interest at rates varying from 7.5% to 11.8% 10,523
----------
Balance of the obligations 20,553
Less current portion 3,952
----------
$ 16,601
==========
10. SHARE CAPITAL:
On October 8, 2002, Brascan Financial Corporation and CIBC Capital
Partners completed the purchase of all of the outstanding shares of the
Company that AT&T Corp. did not previously own for Cdn. $51.21 per share,
in cash (the "Back-end"). Upon completion of the Back-end, 1519888 Ontario
Limited, a wholly owned subsidiary of Tricap Investments Corp., itself a
wholly owned subsidiary of Brascan Financial Corp., had approximately a
63% equity interest and a 50% voting interest in the Company, and 1520034
Ontario Limited, a wholly owned subsidiary of CIBC Capital Partners
("CIBC") had approximately a 6% equity interest and approximately a 27%
voting interest in the Company. AT&T Corp. retained the balance of its
ownership of the Company, which represents approximately a 31% equity
interest and a 23% voting interest, and has a call right on CIBC's voting
shares. Subsequent to the closing of the Back-end, one of the Company's
warrant holders exercised warrants that resulted in the issuance of
approximately 17,000 Class B Non-Voting Shares.
Following the closing of the Back-end on October 8, 2002 the Company's
Class B Deposit Receipts were de-listed by the TSX and NASDAQ.
29
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
10. SHARE CAPITAL (CONTINUED):
(a) Authorized:
Common: Unlimited number of convertible Class A Voting Shares
without nominal or par value, each Class A Share has one
vote, and unlimited number of Class B Non-Voting Shares
without nominal or par value. Other than with respect to
voting rights and conversion rights, the two classes of
common shares have identical rights. Each Class A Voting
Share may, under certain circumstances at the option of
the holder, be converted into one Class B Non-Voting
Share. Each Class B Non-Voting Share may, under certain
circumstances at the option of the holder, be converted
into one Class A Voting Share. The holders of Common
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 Common
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 Preferred Shares without
nominal or par value. The Preferred Shares may be issued
in one or more series. 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 Preferred 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.
Upon all the restrictions of the foreign ownership of voting shares
being removed by an amendment to the Telecommunications Act, the
Class B Non-Voting Shares will be converted into Class A Voting
Shares on a one-for-one basis.
30
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
10. SHARE CAPITAL (CONTINUED):
(b) Outstanding:
Common shares:
Number of shares (000's)
Voting Non-Voting
Class A Class B Total
------- ------- -----
Balances, December 31, 1999 310 93,561 93,871
Issued - options (note 11) -- 1,959 1,959
Issued for acquisitions (note 3(f)) -- 769 769
Issued - warrants (note 10(c)) -- 155 155
Issued - ESOP (note 11) -- 40 40
------- --------- ---------
Balances, December 31, 2000 310 96,484 96,794
Issued - options (note 11) -- 2,097 2,097
Issued for acquisitions (note 3(b)) -- 967 967
Issued - warrants (note 10(c)) -- 121 121
Issued - ESOP (note 11) -- 27 27
------- --------- ---------
Balances, December 31, 2001 310 99,696 100,006
Issued - options (note 11) -- 7,133 7,133
Issued - warrants (note 10(c)) -- 53 53
Issued - ESOP (note 11) -- 24 24
------- --------- ---------
Balances, December 31, 2002 310 106,906 107,216
======= ========= =========
31
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
10. SHARE CAPITAL (CONTINUED):
Common shares:
Class Voting A Non-Voting B Total
- ----- -------- ------------ -----
Balances, December 31, 1999 $ 416 $ 956,281 $ 956,697
Issued - options (note 11) -- 33,629 33,629
Issued for acquisitions (note 3(f)) -- 45,385 45,385
Issued - warrants (note 10(c)) -- 620 620
Issued - ESOP (note 11) -- 2,734 2,734
---------- ---------- ----------
Balances, December 31, 2000 416 1,038,649 1,039,065
Issued - options (note 11) -- 48,244 48,244
Issued for acquisitions (note 3(b)) -- 44,666 44,666
Issued - warrants (note 10(c)) -- 483 483
Issued - ESOP (note 11) -- 1,206 1,206
---------- ---------- ----------
Balances, December 31, 2001 416 1,133,248 1,133,664
Issued - options (note 11) -- 259,022 259,022
Issued - warrants (note 10(c)) -- 213 213
Issued - ESOP (note 11) -- 1,095 1,095
---------- ---------- ----------
Balances, December 31, 2002 $ 416 $1,393,578 $1,393,994
========== ========== ==========
The Plan contemplates the cancellation of all outstanding classes of
shares without compensation as of the Plan Implementation Date (note
1).
32
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
10. SHARE CAPITAL (CONTINUED):
(c) Warrants:
Number Amount
(000's)
------- ---------
Balances, December 31,1999 132 $ 1,812
Exercised for shares (45) (620)
------- ---------
Balances, December 31, 2000 87 1,192
Exercised for shares (35) (483)
------- ---------
Balances, December 31, 2001 52 709
Exercised for shares (16) (213)
------- ---------
Balances, December 31, 2002 36 $ 496
======= =========
Warrants entitle the holder thereof to acquire 3.429 Class B
Non-Voting Shares at an exercise price of U.S. $0.01, expiring
August 15, 2007. The warrants were issued as part of the issue of
the 12% Senior Notes described in note 8.
The Plan contemplates the cancellation of all warrants as of the
Plan Implementation Date (note 1).
11. SHARE PURCHASE OPTIONS:
The Board of Directors established two stock option plans under which
options to purchase Class B Non-Voting Shares are granted to directors,
officers and employees of the Company. Pursuant to the stock option plans,
17.5 million Class B Non-Voting Shares have been reserved for options.
These options were granted at exercise prices estimated to be at least
equal to the fair value of Class B Non-Voting Shares, vest over a
three-year period and generally expire five years from the date of grant.
33
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
11. SHARE PURCHASE OPTIONS (CONTINUED):
In accordance with the Company's stock option plans, all unvested
outstanding stock options became vested and exercisable on September 28,
2002 as a result of the Back-end. The Company received $225.4 million in
proceeds on October 8, 2002 when 5.8 million of employee options were
exercised. Subsequent to the Back-end, no more options were issued under
these plans.
Number of Exercise Weighted
options prices average
(000' s) per share exercise price
-------- --------- --------------
Outstanding, December 31, 1999 10,019 $ 2.25 - $ 58.25 $ 28.17
Granted 3,760 42.70 - 90.00 56.28
Cancelled (1,342) 2.25 - 90.00 47.97
Exercised (1,959) 0.50 - 45.10 17.19
-------- ------------------ ---------
Outstanding, December 31, 2000 10,478 2.25 - 90.00 37.80
Granted 996 44.20 - 47.96 45.67
Cancelled (587) 14.00 - 90.00 49.42
Exercised (2,097) 2.25 - 45.10 22.79
-------- ------------------ ---------
Outstanding, December 31, 2001 8,790 2.25 - 90.00 41.39
Granted 846 37.99 - 48.05 43.38
Cancelled (810) 14.00 - 90.00 53.29
Exercised (7,133) 2.25 - 51.00 36.28
-------- ------------------ ---------
Outstanding, December 31, 2002 1,693 17.25 - 90.00 58.10
======== ================== =========
At December 31, 2002, 1.7 million options (2001 - 4.9 million; 2000 - 4.2
million) were exercisable at a weighted average exercise price of $58.10
per share (2001 - $35.80; 2000 - $22.83).
The Plan contemplates the termination of all unexercised options under
these plans as of the Plan Implementation Date, without compensation (note
1).
34
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
11. SHARE PURCHASE OPTIONS (CONTINUED):
The following table summarizes information concerning options outstanding
and exercisable at December 31, 2002:
Options outstanding and exercisable
-----------------------------------
Weighted
average
remaining Weighted
Range of Number contractual average
exercise outstanding life exercise
prices (000's) (years) price
- ------ ------- ------- -----
$17.00 - $45.00 9 1.8 $ 37.40
$45.01 - $54.00 717 2.2 53.28
$54.01 - $63.00 495 2.4 56.27
$63.01 - $72.00 408 2.2 65.50
$72.01 - $81.00 21 2.2 74.73
$81.01 - $90.00 43 2.2 85.49
- --------------- ----- ------ --------
1,693 2.2 58.10
===== ====== ========
As permitted by HB 3870, the Company did not adopt the fair value method
of accounting for its employee stock option awards. The standard requires
the disclosure of pro forma loss for the year and loss per share as if the
Company had accounted for employee stock options under the fair value
method. Had the Company adopted the fair value method for employee stock
options using the fair value method described in note 2(h), loss for the
year and loss per share would have increased for the year ended December
31, 2002 as indicated below:
Loss attributable to common shareholders - as reported $(1,831,659)
Stock-based compensation expense (24,677)
-----------
Loss attributable to common shareholders - pro forma $(1,856,336)
===========
Basic and diluted loss per common share - as reported $ (17.95)
Basic and diluted loss per common share - pro forma (18.19)
===========
Weighted average number of shares
outstanding (in thousands) 102,047
===========
The pro forma stock-based compensation expense recorded during the year
related to grants issued subsequent to January 1, 2002 totalled $1.5
million or ($0.02) per share.
35
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
11. SHARE PURCHASE OPTIONS (CONTINUED):
For purposes of the above pro forma disclosures, options granted were
valued using the Black-Scholes option pricing model with the following
weighted average assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate (%) 4.8% 5.1% 6.2%
Expected volatility (%) 31.3% 35.7% 5.4%
Expected life (in years) 1.23 5 5
Expected dividends -- -- --
---- ---- ----
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. Option pricing models also require estimates, which
are highly subjective, including expected volatility of the underlying
stock. The Company bases estimates of volatility on historical stock
prices. Changes in assumptions can materially affect estimates of fair
values.
Options granted during the year had a weighted average fair value of $7.21
(2001 - $18.33; 2000 - $15.16).
Employee Share Ownership Plan ("ESOP"):
The ESOP offered all full-time permanent employees the opportunity to
purchase securities of the Company. Employees were able to contribute
between 1% and 5% of their salary to buy units in a single stock mutual
fund, the Company's Stock Fund, which in turn held only Class B Non-Voting
Shares. The Company contributed the equivalent of 25% of participant
contributions per quarter. The Company's contributions were made through
the issuance of Class B Non-Voting Shares from treasury. 200,000 Class B
Non-Voting Shares have been authorized for issuance for this purpose. In
2002, the Company issued 23,396 shares (2001 - 26,592; 2000 - 40,253)
under the plan and recorded compensation expense of $1.1 million (2001 -
$1.2 million; 2000 - $2.7 million). Effective August 31, 2002, the plan
was terminated.
36
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
12. WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING:
(a) 2002:
Provision,
Net Cash December 31,
provision drawdown Reclassifications 2002
--------- -------- ----------------- ----
Provision for restructuring:
2002 Workforce reduction costs $ 52,925 $(30,400) $ -- $22,525
2002 Facilities consolidation 34,144 (3,167) (18,185) 12,792
-------- -------- -------- -------
$ 87,069 $(33,567) $(18,185) $35,317
======== ======== ======== =======
In 2002, the Company implemented a cost reduction initiative to
bring the Company's cost structure in line with its current and
projected revenue base, and to allocate resources to further enhance
services provided to its established customer base. As a result, the
Company recorded a provision of $87.0 million related to these
activities.
The charge of $87.0 million is comprised of $52.9 million for
employee severance and $34.1 million related to facilities
consolidation. Employee severance costs are the result of a
reduction in workforce of approximately 1,250 personnel, achieved
through terminations, attrition and non-renewal of contract
personnel. These personnel were from various areas across the
Company, including network services, customer service, marketing,
sales and administration. As at December 31, 2002, 1,217 workforce
reductions had been completed and $30.4 million of the employee
severance costs have been paid. The remaining liability balance of
$22.5 million at December 31, 2002 represents salary continuance
payments in accordance with employee severance agreements and/or
statutory minimum severance requirements.
37
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
12. WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING (CONTINUED):
The provision for facilities consolidation of $34.1 million
comprised an initial provision of $34.4 million which was reduced by
$0.3 million as certain facilities were subleased earlier than
planned. The provision for facilities consolidation represents
management's best estimate of the deficiency of expected sublease
recoveries over costs associated with certain leased premises being
exited as a result of the restructuring plan. These facility leases
will expire between 2002 and 2012. The provision will be drawn down
over the remaining term of the leases. As at December 31, 2002, the
provision was drawn down by $3.2 million. Pursuant to the CCAA
proceedings described in note 1, the liabilities related to certain
unused leased premises will be compromised and $18.2 million of the
provision for facility consolidation costs has been reclassified to
liabilities subject to compromise (note 8(a)). Of the remaining
provision, $5.0 million has been included in other long-term
liabilities.
(b) 2001:
During 2001, management approved and carried out a workforce
reduction plan and recorded a provision of $21.9 million for
severance and benefits related to the termination of approximately
650 personnel, achieved through terminations, attrition and
non-renewal of contract personnel. The personnel terminated were
from various areas across the Company, including marketing, network
services, customer service, internet and IT services and
administration. The Company had substantially completed the
terminations as at December 31, 2001. During 2002, the remaining
provision of $6.3 million was drawn down.
(c) 2000:
In 2000, the Company adjusted charges recorded in 1999 as a result
of negotiation of lower expenditures than originally anticipated and
the impact of changes in the real estate market that made it
uneconomical to exit certain properties and recorded a reversal of
previously recorded charges of $10.2 million. In 2001, the remaining
balance of the 1999 charge was drawn down through payments related
to lease contract penalties and settlement of lawsuits. The related
activities have been completed.
38
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
13. OTHER INCOME (EXPENSE):
2002 2001 2000
---- ---- ----
Gain (loss) on disposition of STOC
(note 7(d)) $ (1,502) $ -- $13,011
Loss on disposition of certain call
centres (note 3(a)) -- (8,894) --
Other (723) (1,903) 728
-------- -------- -------
$ (2,225) $(10,797) $13,739
======== ======== =======
14. REORGANIZATION EXPENSES:
The Company incurred the following pretax charges for expenses associated
with its reorganization under the Plan, as described in note 1:
2002
----
Professional fees and other costs $ 7,440
Interest earned on cash accumulated
during CCAA proceedings (375)
-------
$ 7,065
=======
Professional fees and other costs include legal, financial advisory,
accounting and consulting fees incurred subsequent to the filing of the
application for creditor protection under the CCAA.
39
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
15. INCOME TAXES:
The Company uses the liability method of accounting for income taxes. The
tax effects of temporary differences that give rise to significant
portions of future income tax assets and liabilities are as follows:
2002 2001
---- ----
Future tax assets:
Future income tax deductions $ 93,172 $ 56,244
Operating loss carryforwards 755,624 794,172
Deferred foreign exchange 65,569 28,774
Accounting depreciation booked in excess
of amount claimed for tax 409,945 --
----------- ---------
Total future tax assets 1,324,310 879,190
Future tax liabilities:
Deferred pension asset (21,997) (14,748)
Debt and share issue costs (9,847) (6,717)
Tax depreciation claimed in excess of
depreciation booked -- (119,926)
----------- ---------
Total future tax liabilities (31,844) (141,391)
----------- ---------
1,292,466 737,799
Valuation allowance (1,292,466) (737,799)
----------- ---------
Net future income tax assets $ -- $ --
=========== =========
40
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
15. INCOME TAXES (CONTINUED):
The reconciliation of the tax provision for income taxes, which consists
only of current taxes, to amounts computed by applying federal and
provincial tax rates to loss before minority interest and provision for
income taxes is as follows:
2002 2001 2000
---- ---- ----
Computed at combined statutory rate $(702,593) 38.5% $(308,238) 41.8% $(270,481) 43.5%
Tax effect of:
Expenses not deductible for
income tax purposes 15,293 (0.8)% 4,210 (0.5)% 1,639 (0.3)%
Write-off and amortization
of non-deductible goodwill 41,697 (2.3)% 46,117 (6.3)% 41,419 (6.6)%
Income not taxable for
income tax purposes (3,128) 0.2% (891) 0.1% (1,867) 0.3%
Large Corporations Tax 6,741 (0.4)% 7,965 (1.1)% 5,686 (0.9)%
Reduction in tax assets as a
result of loss expiry 5,253 (0.3)% 149,809 (20.3)% 153,670 (24.7)%
Effect of reduction in tax rates 90,073 (5.0)% 149,317 (20.2)% 149,917 (24.1)%
Change in valuation allowance 554,667 (30.4)% (51,180) 6.9% (126,568) 20.3%
Other (1,262) 0.1% 10,856 (1.5)% 52,271 (8.4)%
--------- ----- --------- ----- --------- -----
$ 6,741 (0.4)% $ 7,965 (1.1)% $ 5,686 (0.9)%
========= ===== ========= ===== ========= =====
At December 31, 2002, the Company has non-capital losses of approximately
$2.252 billion, available to reduce future years' taxable income,
including any gain on the settlement of liabilities subject to compromise,
which expire as follows:
2003 $ 190,900
2004 172,100
2005 308,300
2006 169,300
2007 586,700
2008 519,400
2009 255,900
2010 49,900
----------
$2,252,500
==========
Certain amendments to tax filings may be made to avoid the expiry of
losses that would otherwise expire in 2003.
41
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFITS:
The Company provides a number of retirement benefits, including defined
benefit plans, providing pension, other retirement and post-employment
benefits to most of its employees.
(a) The total expense (income) for the Company's defined benefit plans
is as follows:
2002 2001 2000
Plans providing pension benefits $8,661 $(26,860) $5,627
Plans providing other benefits 952 505 474
====== ======== ======
The average remaining service periods of the active employees
covered by the pension plans range from 11 to 13 years (2001 - 10 to
14 years; 2000 - 10 to 12 years).
The average remaining service period of the active employees covered
by the post-retirement life insurance program is 13 years (2001 - 13
years; 2000 - 13 years).
42
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFITS (CONTINUED):
The average remaining life expectancy of the former employees
covered by the post-retirement medical and dental insurance programs
is 15 years (2001 - n/a; 2000 - n/a).
Information about the Company's defined benefit and other retirement
benefit plans as at December 31, 2002, 2001 and 2000, in aggregate,
is as follows:
2002 2001 2000
---- ---- ----
Pension Other Pension Other Pension Other
benefit benefit benefit benefit benefit benefit
plans plans plans plans plans plans
----- ----- ----- ----- ----- -----
Accrued benefit
obligation:
Balance, beginning
of year $ 535,475 $ 6,152 $ 477,665 $ 5,390 $ 443,824 $ 5,965
Interest cost 34,260 728 34,158 379 33,218 353
Actuarial loss (gain) 134 (335) 46,514 374 32,146 (1,012)
Current service cost 7,069 173 7,543 227 6,769 213
Employees'
contributions 2,826 -- 2,867 -- 2,397 --
Plan amendments -- 5,638 4,711 -- 1,031 --
Benefits paid (48,521) (416) (38,349) (192) (37,320) (129)
Settlements -- -- -- -- (4,400) --
Curtailment loss
(gain) 120 (263) 366 (26) -- --
--------- -------- --------- ------- --------- -------
Balance, end of year $ 531,363 $ 11,677 $ 535,475 $ 6,152 $ 477,665 $ 5,390
========= ======== ========= ======= ========= =======
Plan assets:
Fair value,
beginning
of year $ 488,727 $ -- $ 541,237 $ -- $ 528,069 $ --
Actual return
on plan assets (43,975) -- (24,716) -- 44,953 --
Employer
contributions 18,824 416 7,688 192 7,538 129
Accrued employer
contributions 5,093 -- -- -- -- --
Employees'
contributions 2,826 -- 2,867 -- 2,397 --
Benefits paid (48,521) (416) (38,349) (192) (37,320) (129)
Settlements -- -- -- -- (4,400) --
--------- -------- --------- ------- --------- -------
Fair value, end of year $ 422,974 $ -- $ 488,727 $ -- $ 541,237 $ --
========= ======== ========= ======= ========= =======
43
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFITS (CONTINUED):
2002 2001 2000
---- ---- ----
Pension Other Pension Other Pension Other
benefit benefit benefit benefit benefit benefit
plans plans plans plans plans plans
----- ----- ----- ----- ----- -----
Funded status -
plan surplus (deficit) $(108,389) $(11,677) $(46,748) $(6,152) $ 63,572 $(5,390)
Unrecognized
actuarial loss (gain) 165,491 (1,334) 87,110 (1,061) (21,940) (1,510)
Unrecognized prior
service costs 3,328 5,262 4,812 -- 928 --
--------- -------- -------- ------- -------- -------
Accrued benefit
asset (liability) 60,430 (7,749) 45,174 (7,213) 42,560 (6,900)
Valuation allowance
(note 16(b)) -- -- -- -- (31,934) --
--------- -------- -------- ------- -------- -------
Accrued benefit asset
(liability), net of
valuation allowance $ 60,430 $ (7,749) $ 45,174 $(7,213) $ 10,626 $(6,900)
========= ======== ======== ======= ======== =======
The accrued benefit liability for other benefit plans is included in
other long-term liabilities.
The significant actuarial assumptions adopted in measuring the
Company's accrued benefit obligations are as follows (weighted
average assumptions as of December 31, 2002, 2001 and 2000):
2002 2001 2000
Pension Other Pension Other Pension Other
benefit benefit benefit benefit benefit benefit
plans plans plans plans plans plans
----- ----- ----- ----- ----- -----
Discount rate 6.5% 6.5% 6.5% 6.5% 7.0% 7.0%
Expected long-term rate
of return on plan assets 7.75% -- 8.0% -- 8.0% --
Rate of compensation
increase 3.5% -- 3.5% -- 3.5% --
===== ===== ===== ===== ===== =====
44
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFITS (CONTINUED):
The Company's net benefit plan expense for the year ended December
31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
---- ---- ----
Pension Other Pension Other Pension Other
benefit benefit benefit benefit benefit benefit
plans plans plans plans plans plans
----- ----- ----- ----- ----- -----
Current service cost $ 7,069 $ 173 $ 7,543 $ 227 $ 6,769 $ 213
Interest cost 34,260 728 34,158 379 33,218 353
Expected return on
plan assets (38,335) -- (38,711) -- (37,397) --
Prior service costs
amortization 475 376 574 -- 103 --
Valuation allowance
(reversed) provided
against accrued
benefit asset (note 16(b)) -- -- (31,934) -- 2,937 --
Actuarial loss (gain)
recognized 2,363 (62) (24) (75) (3) (92)
Curtailment loss 2,829 (263) 1,534 (26) -- --
-------- ----- -------- ----- -------- -----
Net benefit plan expense
(income) $ 8,661 $ 952 $(26,860) $ 505 $ 5,627 $ 474
======== ===== ======== ===== ======== =====
(b) Change in valuation allowance:
An accrued benefit asset arises when the accumulated cash
contributions to a pension plan exceed the accumulated pension
expense. The accrued benefit asset on an employer's books is
comprised of two components:
(i) plan surplus (i.e., the excess of the fair value of the plan
assets over the accrued benefit obligation of the plan); and
(ii) net unrecognized (gains) losses (i.e., the sum of the
unamortized past service costs, actuarial (gains) and losses
and any transitional (asset) or transitional obligation).
45
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
16. EMPLOYEE BENEFITS (CONTINUED):
The expected future benefit from a surplus is generally the present
value of employer contribution holidays expected in future years.
However, if there is a net unrecognized loss, the accrued benefit
asset will be expected to decrease over time due to the amortization
of the net unrecognized loss. As a result, the accrued benefit asset
on an employer's books cannot exceed the sum of the expected
employer future benefit and any net unrecognized losses. When the
accrued benefit asset first exceeds the limit, a valuation allowance
is established in order to keep the accrued benefit asset on an
employer's books at the limit. In future accounting periods, any
change in the valuation allowance is recorded through the
consolidated statements of operations.
At December 31, 2000, the accrued benefit asset relating to the
Company's defined benefit pension plans was affected by the limit
and contained a cumulative valuation allowance of $31.9 million. The
impact of negative returns on plan assets in the Company's defined
benefit pension plans was an elimination of the pension surplus and
generation of unamortized losses at December 31, 2001. Under
generally accepted accounting principles, the limit on the accrued
benefit asset is required to be increased by the amount of the
losses that will be charged as an expense in future years, resulting
in a reduction in the valuation allowance and a credit to the
pension expense amount of the Company. The impact of the above is
that the valuation allowance of $31.9 million was no longer required
and was recognized in income in 2001.
At December 31, 2002, the Company had unfunded solvency deficits
under its defined benefit pension plans of approximately $135
million. The Company is required to fund this deficit over a
five-year period.
17. FINANCIAL INSTRUMENTS:
(a) Fair values of financial assets and liabilities:
The fair values of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and accrued interest payable
approximate their carrying values due to the short-term nature of
these instruments. The settlement amount of liabilities subject to
compromise is not determinable and will be subject to the Plan
approved by the Court (note 8).
The fair value of the Senior Notes, including the attached warrants,
at December 31, 2002, was approximately $743.0 million (2001 -
$3,022.1 million), based on current trading values.
46
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS (CONTINUED):
Certain foreign currency financial instruments were unwound in the
second quarter of 2002 and the remaining foreign currency financial
instruments were unwound on September 24, 2002.
(b) Foreign currency risk:
The Company is exposed to foreign currency fluctuations on its U.S.
dollar-denominated debt, cash and cash equivalents.
As described below, in May and September 2002, the Company monetized
all remaining outstanding swaptions, cross-currency swaps and
forward contracts. The deferred gains are being recognized in income
over the remaining original contractual term to maturity of the
underlying debt for which these derivatives were designated as cash
flow hedges.
On September 24, 2002, the Company received approximately Cdn. $84.9
million in face value of its outstanding Senior Notes in
satisfaction of the counterparty's settlement obligation to the
Company. The Senior Notes are currently being held by the Company
and have been recognized as a reduction to the long-term debt
outstanding (note 8(b)).
In 2001, the Company monetized certain foreign currency options,
cross-currency swaps and a forward contract. The net deferred gain
is being recognized in earnings over the remaining original
contractual term to maturity of the underlying debt for which the
derivatives were designated as cash flow hedges.
The above transactions are summarized as follows:
Deferred Amount Deferred
Notional Loss gain (loss) recognized gain (loss)
value Proceeds on (gain) December 31, during December 31,
(U.S.dollars) monetization on unwind 2001 2002 2002
------------- ------------ --------- ---- ---- ----
2001:
May $1,208,401 $ 123,964 $ (33,708) $ 29,529 $ (6,687) $ 22,842
November 207,040 26,700 84 (84) 8 (76)
---------- --------- --------- -------- --------- ---------
$1,415,441 $ 150,664 $ (33,624) $ 29,445 (6,679) 22,766
========== ========= =========
2002:
May $1,784,500 $ 85,504 $ (46,899) -- (5,751) 41,148
September 994,581 84,866 (76,340) -- (3,802) 72,538
---------- --------- --------- -------- --------- ---------
$2,779,081 $ 170,370 $(123,239) 29,445 $ (16,232) 136,452
========== ========= ========= =========
Less current portion of
deferred foreign
exchange gains -- 29,835
---------- --------- --------- -------- --------- ---------
Deferred foreign
exchange gain $ 29,445 $ 106,617
========== ========= ========= ======== ========= =========
47
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS (CONTINUED):
As at December 31, 2001, the Company held the following financial
instruments to hedge the following financings:
Foreign Foreign Canadian
currency exchange equivalent
Financial obligation rates interest rate Fair
Debt instruments notional Maturity weighted weighted market
instrument type value date average average value
- ---------- ---- ----- ---- ------- ------- -----
(In millions) (In millions)
10.75% Cross-
Notes currency November 1, Cdn. $1.5702
swaps U.S. $170.0 2007 to U.S. $1.00 11.24% $(2.8)
9.95% Cross-
Notes currency June 15, Cdn. $1.5276
swaps U.S. $970.0 2008 to U.S. $1.00 9.73% $ 71.5
7.65% Cross-
Notes currency September 15, Cdn. $1.4977
swaps U.S. $500.0 2006 to U.S. $1.00 7.72% $ 47.4
7.625% Cross-
Notes currency March 15, Cdn. $1.5489
swaps U.S. $250.0 2005 to U.S. $1.00 7.87% $ 5.7
12% Forward
Notes exchange February 28, Cdn. $1.5532
contract U.S. $250.0 2002 to U.S. $1.00 n/a $ 10.1
10.625% Forward
Notes exchange February 28, Cdn. $1.5532
contract U.S. $225.0 2002 to U.S. $1.00 n/a $ 9.0
------
$140.9
======
In addition to the financial instruments above, the Company held
foreign currency options with a fair value of ($2.1) million,
comprising assets of $28.1 million offset by liabilities of $30.2
million.
48
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS (CONTINUED):
(c) Interest rate risk:
The following table summarizes the Company's exposure to interest
rate risk.
Fixed interest rate maturing within
-----------------------------------
Floating After Non-interest
2002 rate 1 year 1 - 5 years 5 years bearing
- ---- ---- ------ ----------- ------- -------
FINANCIAL ASSETS:
Cash and cash equivalents $ 420,542 $ -- $ -- $ -- $ --
Accounts receivable -- -- -- -- 166,434
FINANCIAL LIABILITIES:
Current liabilities -- 3,952 -- -- 287,407
Capital leases -- -- 16,601 --
Liabilities subject to
compromise -- -- 2,721,103 1,795,721 202,767
========== ========== ========== ========== ==========
Fixed interest rate maturing within
-----------------------------------
Floating After Non-interest
2001 rate 1 year 1 - 5 years 5 years bearing
- ---- ---- ------ ----------- ------- -------
FINANCIAL ASSETS:
Cash and cash equivalents $ 537,294 $ -- $ -- $ -- $ --
Accounts receivable -- -- -- -- 70,640
FINANCIAL LIABILITIES:
Current liabilities -- -- -- -- 406,108
Capital leases -- 1,930 17,661 -- --
Long-term debt 170,000 -- 2,127,672 2,357,404 --
========== ========== ========== ========== ==========
49
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS (CONTINUED):
(d) Credit risk:
The Company's financial instruments that are exposed to credit risk
are cash and cash equivalents, accounts receivable and financial
instruments used for hedging purposes. Cash and cash equivalents,
which consist of investments in highly liquid, highly secure money
market instruments, are on deposit at major financial institutions.
Credit risk with respect to accounts receivable is limited due to the
large number of customers to which the Company provides services.
18. SEGMENTED INFORMATION:
The Company currently operates in one operating segment, the
telecommunications industry in Canada. The Company offers a number of
products, delivered through its integrated fibre optics networks, sold by
a national sales force, agents and telemarketers and provisioned by one
operations group. The Company makes decisions and evaluates financial
performance primarily based on product revenue.
Revenue by product is as follows:
- ---------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------
Data $ 457,962 $ 485,031 $ 465,407
Local 235,095 209,207 177,424
Internet and IT Services 195,600 171,852 129,865
Other 26,693 20,843 32,643
- ---------------------------------------------------------------------
915,350 886,933 805,339
Long distance 572,795 657,788 700,039
- ---------------------------------------------------------------------
$1,488,145 $1,544,721 $1,505,378
=====================================================================
During the years ended December 31, 2002, 2001 and 2000, no customers of
the Company individually represented more than 10% of the Company's revenue.
50
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
19. RELATED PARTY TRANSACTIONS:
Services are exchanged between the Company and its shareholders and
certain of their subsidiaries. These transactions are in the normal
course of operations and are measured at the exchange amounts being the
amounts agreed to by the parties.
Transactions with the above related parties were as follows:
- -----------------------------------------------
2002 2001 2000
- -----------------------------------------------
Revenue $162,153 $146,759 $114,278
Expenses 95,999 100,900 117,173
===============================================
Amounts due from and to the above related parties are as follows:
- -------------------------------------------
2002 2001
- -------------------------------------------
Accounts receivable $23,672 $14,958
Accounts payable 17,399 22,297
===========================================
20. CHANGE IN NON-CASH WORKING CAPITAL:
- -----------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------
Accounts receivable $ (45,965) $ 184,114 $ 10,469
Other current assets (8,891) (986) 1,734
Other assets (13,500) -- --
Accounts payable (16,249) (20,663) (110,155)
Accrued liabilities (48,070) (1,576) 18,977
Accrued interest payable 104,778 21,544 3,349
Income taxes payable 1,472 438 (4,785)
Other long-term liabilities 2,117 765 --
- ------------------------------------------------------------------------
$ (24,308) $ 183,636 $ (80,411)
========================================================================
51
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
21. SUPPLEMENTAL CASH FLOW INFORMATION:
- ----------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 157,931 $ 213,890 $ 165,362
Income taxes paid 9,258 6,241 7,148
Supplemental disclosures of changes
in non-cash investing and financing
activities:
Accrued liabilities and accounts
payable incurred for the acquisition
of property, plant and equipment (10,461) (15,476) (60,291)
Extinguishment of bonds on
termination of swaps (note 17(b)) 84,866 -- --
Capital lease obligations incurred
for the purchase of networks
and equipment -- -- 560
Class B Non-Voting Shares issued
for acquisitions -- 44,666 45,385
Class B Non-Voting Shares issued
for conversion of warrants 213 483 620
Class B Non-Voting Shares issued
for the Company's contributions to
the Employee Share Ownership Plan 1,096 1,206 2,734
==============================================================================================
22. RECLASSIFICATION OF PRIOR PERIODS AMOUNTS:
Certain amounts presented in 2001 and 2000 have been reclassified to
conform with the presentation adopted for 2002.
52
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES:
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
("Canadian GAAP") which, in the case of the Company, conform in all
material respects with those in the United States ("U.S. GAAP"), except
as outlined below:
(a) Consolidated statements of operations, consolidated statements of
comprehensive loss and consolidated balance sheets:
The application of U.S. GAAP would have the following effect on loss
for the year, deficit, basic and diluted loss per common share as
reported:
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(as restated
note 2(g))
Loss for the year, Canadian GAAP $(1,831,659) $ (745,375) $ (523,207)
Stock-based compensation
expense (note 23(a)(ii)) (330) (15,023) (4,364)
Depreciation and amortization (note 23(a)(vi)) 10,899 -- --
Impairment of property, plant and
equipment (note 23(a)(vi)) (161,000) -- --
Gain (loss) on derivative instruments
(note 23(a)(iii)) 22,519 (12,034) --
Change in valuation allowance
(note 23(a)(iv)) -- (31,934) --
- ---------------------------------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP
before accounting changes (1,959,571) (804,366) (527,571)
Cumulative effect of accounting change,
adoption of SFAS 133 (note 23(a)(iii)) -- 4,028 --
Cumulative effect of accounting change,
adoption of SFAS 142 (note 23(a)(v)) (1,530,767) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP (3,490,338) (800,338) (527,571)
Opening deficit, U.S. GAAP (1,594,518) (794,180) (266,609)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending deficit, U.S. GAAP $(5,084,856) $(1,594,518) $ (794,180)
=================================================================================================================================
Basic and diluted loss per common
share under U.S. GAAP:
Before accounting change $ (19.20) $ (8.17) $ (5.52)
Cumulative effect of accounting
change (15.00) 0.04 --
- ---------------------------------------------------------------------------------------------------------------------------------
$ (34.20) $ (8.13) $ (5.52)
=================================================================================================================================
Weighted average number of common
shares outstanding (in thousands) 102,047 98,406 95,561
=================================================================================================================================
53
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
U.S. GAAP also requires disclosure of a statement of comprehensive income
(loss). Comprehensive income (loss) generally encompasses all changes in
shareholders' equity, except those arising from transactions with
shareholders:
- --------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP $(3,490,338) $ (800,338) $ (527,571)
Other comprehensive income,
net of tax of nil:
Cumulative effect of accounting
change on adoption of SFAS 133
(note 23(a)(iii)) -- 21,990 --
Unrealized gain on derivative
instruments (note 23(a)(iii)) 90,055 10,397 --
Minimum pension liability
(note 23(a)(iv)) (112,354) -- --
- --------------------------------------------------------------------------------------
Comprehensive loss, U.S. GAAP $(3,512,637) $ (767,951) $ (527,571)
======================================================================================
The following table indicates the differences between the amounts of
consolidated balance sheet items determined in accordance with Canadian
and U.S. GAAP:
- -------------------------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Canadian U.S. Canadian
GAAP GAAP Difference GAAP GAAP Difference
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Financial derivatives $ -- $ -- $ -- $ 138,773 $ -- $ 138,773
Property, plant and
equipment 802,598 952,699 (150,101) 2,180,773 2,180,773 --
Deferred pension
asset (liability) (83,858) 60,430 (144,288) 13,240 45,174 (31,934)
Deferred foreign exchange -- -- -- -- 144,287 (144,287)
LIABILITIES AND
SHAREHOLDERS'
DEFICIENCY
Accrued liabilities 204,210 234,549 30,339 266,778 267,229 451
Deferred foreign
exchange -- 106,617 106,617 -- 29,445 29,445
Common shares and
additional capital 1,422,824 1,393,994 (28,830) 1,162,164 1,133,664 (28,500)
Accumulated other
comprehensive
income 10,088 -- (10,088) 32,387 -- (32,387)
Deficit (5,084,856) (4,888,505) 196,351 (1,594,518) (1,526,079) 68,439
===============================================================================================================================
54
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
(i) Consolidated statements of cash flows:
Canadian GAAP permits the disclosure of a subtotal of the amount
of funds provided by (used in) operations before changes in
non-cash working capital items in the consolidated statements of
cash flows. U.S. GAAP does not permit this subtotal to be
included.
(ii) Stock-based compensation expense:
For U.S. GAAP purposes, the Company has chosen to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and related
interpretive guidance. Accordingly, compensation expense for
U.S. GAAP purposes has been recognized at the date of share
purchases or option grants at the amount by which the quoted
market price of the stock exceeds the amount an employee must
pay to acquire the stock.
During the year, the Company recorded stock compensation expense
of $0.3 million (2001 - $1.4 million; 2000 - $4.4 million) as a
result of accelerating the vesting period of certain employee
stock option awards that would have otherwise expired
unexercisable pursuant to their original terms. In addition, the
Company recorded nil (2001 - $13.6 million; 2000 - nil) in stock
compensation expense as a result of extending the expiry date of
certain employee stock option awards.
U.S. GAAP also requires that pro forma net loss and loss per
share information be reported annually as if the Company had
adopted the fair value approach under the Statement of Financial
Accounting Standard ("SFAS") No. 123.
55
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
Had the Company determined compensation expense costs based on the
fair value at the date of grant for stock options under SFAS No.
123, loss attributable to common shareholders and basic loss per
share would have increased as indicated below.
- ----------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------
Loss attributable to common
shareholders, U.S. GAAP -
as reported $(3,490,338) $ (800,338) $ (527,571)
Add stock-based employee
compensation expense
included in reported net loss 330 15,023 4,364
Deduct total stock-based
employee compensation
expense determined under
fair value-based method
for all rewards (24,677) (56,158) (54,993)
- ----------------------------------------------------------------------------------
Loss attributable to common
shareholders, U.S. GAAP -
pro forma $(3,514,685) $ (841,473) $ (578,200)
==================================================================================
Loss per common share -
as reported $ (34.20) $ (8.13) $ (5.52)
Loss per common share -
pro forma (34.44) (8.55) (6.05)
==================================================================================
Weighted average number of
common shares outstanding
(in thousands) 102,047 98,406 95,561
==================================================================================
In 2002, 846,000 (2001 - 996,939; 2000 - 3,760,500) options with a
weighted average fair value of $7.21 (2001 - $18.33; 2000 -
$15.16) were granted, and valued for pro forma disclosure purposes
using the following weighted average assumptions:
- ------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------
Risk-free interest rate (%) 4.8% 5.1% 6.2%
Expected volatility (%) 31.3% 35.7% 5.4%
Expected life (in years) 1.23 5 5
Expected dividends -- -- --
==================================================================
56
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
(iii) Gain (loss) on derivative instruments:
For U.S. GAAP reporting purposes, the Company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138 ("SFAS
No. 133") on January 1, 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as
a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in accumulated other
comprehensive income ("AOCI") and are recognized in the income
statement when the hedged item affects earnings. Changes in fair
values of derivative instruments not designated as hedging
instruments and ineffective portion of hedges, if any, are
recognized in earnings in the current year.
On adoption, the Company recognized a one-time transition gain
of $26.0 million, which represented the net effect of
recognizing the market value of the Company's derivative
portfolio of $84.5 million (consisting of assets of $98.2
million and liabilities of $13.7 million), the derecognition of
the unamortized balance of swaption premiums of $17.6 million
and the derecognition of deferred foreign exchange losses of
$40.9 million as at December 31, 2000. The portion of the
one-time transition gain that relates to derivatives designated
and qualifying as cash flow hedges, totaling $22.0 million, was
recognized in the AOCI account and will be reclassified into
earnings over the life of the underlying hedged items, of which
the last expires in June 2008. The portion of the one-time
transition gain related to derivatives not designated as hedges,
totaling $4.0 million, was recognized in earnings as the
cumulative effect of the accounting change on adoption of SFAS
No. 133.
57
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
For the year ended December 31, 2002, as a result of SFAS No.
133 relative to Canadian GAAP, the Company realized a net gain
of $22.5 million (2001 - loss of $12.0 million) due to the net
effect of foreign exchange gains on debt not hedged under U.S.
GAAP of $20.1 million, the favourable net change in time value
of the swaptions of $4.7 million, offset by the unfavourable net
change in the fair market value of derivatives not designated as
hedging instruments of $(0.4) million, and the net difference
between the amortization of deferred gains on unwound swaps
under U.S. and Canadian GAAP of $(1.9) million.
For the year ended December 31, 2001, as a result of SFAS No.
133 relative to Canadian GAAP, the Company realized a net loss
of $12.0 million due to the unfavourable change in time value of
the swaptions of $12.1 million, the net gain in the fair market
value of foreign exchange forward contracts not designated as
hedging instruments of $(39.4) million, the effect of foreign
exchange losses on the related debt of $44.3 million, the
reversal of amortization of option premiums recorded under
Canadian GAAP of $(5.4) million and recognition of $(3.9)
million of a deferred gain relating to unwound swaps, offset by
the reversal of the amortization of the deferred gain under
Canadian GAAP of $4.3 million.
Foreign currency risk:
As at December 31, 2002, as a result of the transactions
described below, the Company held no derivative financial
instruments.
As at December 31, 2001, the Company had designated derivatives
with a net notional value of U.S. $1,890 million (composed of
derivatives to purchase U.S. $2,097 million and derivatives to
sell U.S. $207 million) as cash flow hedges which hedged the
foreign currency risk of cash flows relating to U.S.
dollar-denominated debt with a face value of the same amount.
These cash flow hedges were highly effective in hedging foreign
currency rate risk. The fair value of the derivatives designated
as cash flow hedges was $119.7 million, consisting of assets of
$159.9 million and liabilities of $40.2 million.
58
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
Other derivatives:
In addition, at December 31, 2001, the Company held foreign
exchange forward contracts with a notional value totaling U.S.
$475 million that were not eligible to be designated as
effective hedges, since the term of the contracts did not match
the underlying debt being hedged and, therefore, the changes in
their market value were recorded in earnings. As at December 31,
2001, the fair value of the foreign exchange contracts was $19.1
million.
Termination of derivative contracts:
In May 2002, the Company unwound certain swaptions,
cross-currency swaps and forward contracts with notional value
totaling U.S. $1,784.5 million for proceeds of $85.5 million
(note 17(b)). The related AOCI balances of the derivatives
unwound represented a gain of $37.5 million. This gain is being
recognized in earnings over the remaining original contractual
term to maturity of the underlying debt for which these
derivatives were designated as cash flow hedges.
On September 24, 2002, the Company unwound all remaining
outstanding swaptions and cross-currency swaps with a notional
value of U.S. $994.6 million, and in accordance with their
terms, the Company received approximately Cdn. $84.9 million in
face value of its outstanding Senior Notes in satisfaction of
the counterparties' obligations to the Company. The Senior Notes
are currently being held by the Company. The related AOCI
balances of the derivatives unwound represented a gain of $76.4
million. The gain of $76.4 million is being recognized in
earnings over the remaining original contractual term to
maturity of the underlying debt for which these derivatives were
designated as cash flow hedges. The termination of these hedges
resulted in an increase in the Company's overall foreign
currency exposure.
In May 2001, the Company unwound certain swaptions,
cross-currency swaps and a forward contract. The related AOCI
balances of the derivatives unwound represented a deferred gain
of $29.6. This gain is being recognized in earnings over the
remaining original contractual term to maturity of the
underlying debt for which these derivatives were designated as
cash flow hedges.
59
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
The gains to be recognized related to the above monetizations in
future periods are as follows:
-------------------------------------------------------
2003 $ 27,418
2004 27,418
2005 23,872
2006 21,092
2007 16,232
2008 and thereafter 6,410
-------------------------------------------------------
$ 122,442
=======================================================
(iv) Benefit plan:
In 2001, the Company recognized a gain under Canadian GAAP of
$31.9 million from the reversal of the valuation allowance on
the accrued benefit asset relating to its defined benefit
pension plan. The reversal of the valuation allowance is not
permitted under U.S. GAAP and, accordingly, the gain has been
reversed in the consolidated statements of operations for U.S.
GAAP reporting purposes.
Under U.S. GAAP, SFAS No. 87, "Employers Accounting for
Pensions," the Company is required to record an additional
minimum pension liability when the benefit plans' accumulated
benefit obligation exceeds the plans' assets by more than the
amounts previously accrued for as pension costs. Under U.S.
GAAP, these charges are recorded as a reduction to shareholders'
equity, as a component of accumulated other comprehensive loss.
In 2002, the Company recorded a minimum liability of $112.4
million (2001 and 2000 - nil).
(v) Business combinations, goodwill and other intangible assets:
Effective January 1, 2002, the Company adopted SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," issued by the Financial Accounting Standards
Board ("FASB") in July 2001, which are substantially consistent
with equivalent Canadian HB 1581, "Business Combinations," and
HB 3062, "Goodwill and Other Intangible Assets," except that
under U.S. GAAP, any transitional impairment charge is
recognized in earnings as a cumulative effect of a change in
accounting principles. The accounting policy is described in
note 2(e).
60
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
(vi) Accounting for the impairment or disposal of long-lived assets:
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for
recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale. It
also provides guidance on how a long-lived asset that is used as
part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. SFAS No. 144 retains the basic
provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that
presentation to include a component of an entity (rather than a
segment of a business). There was no effect on adoption of SFAS
No. 144, effective January 1, 2002, on the Company's results of
operations and financial position. In June 30, 2002, a
write-down of property, plant and equipment was recorded (note
5) and resulted in a U.S. GAAP difference as described below.
SFAS No. 144 requires the measurement of an impairment charge to
be based on the excess of the carrying value over the fair value
of the assets, while Canadian GAAP measures the impairment as
the excess of the carrying value over the net recoverable amount
of the assets. The Company assessed the fair value of the
affected asset group based on the market price for similar
functionality and changes in the intended use of the asset group
and asset group's remaining life given changes to the Company's
strategy. The difference in the basis of measurement resulted in
an additional impairment charge of $161 million under U.S. GAAP
recorded in the second quarter of 2002. For the year ended
December 31, 2002, depreciation expense is $10.9 million less
under U.S. GAAP as a result of the difference in measuring the
impairment charge.
61
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
(b) Other disclosures:
(i) Accounts receivable are net of an allowance for doubtful accounts
of $20.2 million (2001 - $24.3 million) at December 31, 2002.
(ii) In addition to the commitments and contingencies described in
note 24, the Company has also provided routine indemnifications,
whose terms range in duration and often are not explicitly
defined. These indemnifications relate to adverse effects due to
changes in tax laws, infringements by third parties related to
intellectual property, and under certain supplier agreements,
losses arising from claims by third parties against suppliers,
including customers, in connection with the use of services and
related equipment by the third party. The maximum amounts from
these indemnifications cannot be reasonably estimated.
Historically, the Company has not made significant payments
related to these indemnifications. The Company has also
indemnified a third party in connection with a marketing
agreement, and has determined that the potential maximum loss is
not significant. The Company has also indemnified certain
financial advisors regarding liability they may incur as a
result of their activity as advisors to the Company or the
Company's Noteholders.
The Company continues to monitor the conditions that are subject
to guarantees and/or indemnifications to identify whether it is
probable that a loss has occurred, and would recognize any such
losses under any guarantees and indemnifications when those
losses are estimable.
62
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
(iii) Recently issued accounting standards:
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development
and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the
end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. The
Company is required to adopt SFAS No. 143 on January 1, 2003.
The Company is currently evaluating the impact of adoption on
the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." SFAS No. 145 amends existing
guidance on reporting gains and losses on the extinguishment of
debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS No.
145 also amends SFAS No. 13 to require sale-leaseback accounting
for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. Earlier
application of these provisions is encouraged. The provisions of
the Statement related to Statement No. 13 were effective for
transactions occurring after May 15, 2002, with early
application encouraged. The Company is currently evaluating the
impact of adoption on the consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which
requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS No. 146
is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. There was no effect on
adoption of SFAS No. 146 on the Company's results of operations
and financial position for 2002 and prior years.
63
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), which requires certain disclosures of
obligations under guarantees. The disclosure requirements of FIN
45 are effective for the Company's year ended December 31, 2002
and are included in note 23(b)(ii) to these consolidated
financial statements. Effective for 2003, FIN 45 also requires
the recognition of a liability by a guarantor at the inception
of certain guarantees entered into or modified after December
31, 2002, based on the fair value of the guarantee. The Company
has not determined the impact of the measurement requirements of
FIN 45.
In November 2002, the Emerging Issues Task Force reached a
consensus on Issue 00-21, addressing how to account for
arrangements that involve the delivery or performance of
multiple products, services, and/or rights to use assets.
Revenue arrangements with multiple deliverables are divided into
separate units of accounting if the deliverables in the
arrangement meet the following criteria: (a) the delivered item
has value to the customer on a standalone basis; (b) there is
objective and reliable evidence of the fair value of undelivered
items; and (c) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values, with
the amount allocated to the delivered item being limited to the
amount that is not contingent on the delivery of additional
items or meeting other specified performance conditions. The
final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption
permitted. The Company is currently evaluating the impact of
adoption on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
64
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED):
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51." This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the Interpretation. The Interpretation applies immediately to
variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. The Interpretation
requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company
will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective. The
application of this Interpretation will not have a material effect
on the Company's financial statements.
24. COMMITMENTS AND CONTINGENCIES:
(a) Contractual commitments:
Under the terms of its operating lease agreements for fibre optics
maintenance, operating facilities, equipment rentals and minimum
purchase commitments under supply contracts and customer contracts,
the Company is committed to make the following payments for the years
ending December 31, as follows:
-----------------------------------------------------------------
2003 $ 159,883
2004 106,891
2005 90,570
2006 47,881
2007 37,944
Thereafter 252,316
-----------------------------------------------------------------
$ 695,485
=================================================================
65
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
24. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED):
(b) Contingent liabilities:
(i) Professional fees:
Upon successful completion of the Plan, the Company is required
to pay success fees to certain financial advisors. These fees
will consist of: (a) a fixed restructuring transaction fee of
U.S. $10.0 million, and (b) a transaction fee, equal to 0.75% of
the fair market value of all cash and/or other securities
received by the Noteholders pursuant to the Plan. The total
amount of these fees due upon successful implementation of the
Plan will be reduced by the monthly payments made to these
financial advisors during 2002 to emergence from CCAA. These
success fees have not been accrued as at December 31, 2002
because payment is contingent on successful implementation of
the Plan.
(ii) Litigation:
As a result of the Company's CCAA filing, virtually all pending
pre-petition litigation against the Company is currently stayed.
A significant portion of the Company's pending pre-petition
litigation will be dealt with during the CCAA proceedings as
described in note 8.
In the normal course of operations, the Company may be subject
to litigation and claims from customers, suppliers and former
employees. Management believes that adequate provisions have
been recorded in the accounts where required. Although it is not
possible to estimate the extent of potential costs, if any,
management believes that the ultimate resolution of such
contingencies would not have a material adverse effect on the
financial position of the Company.
(c) Letters of credit:
In the normal course of business, the Company issues letters of
credit in compliance with its right-of-way agreements with various
municipalities and utility companies. In general, the terms of the
letter of credit permit the municipality or the utility company to
draw on the letter of credit to recover any losses incurred under the
right-of-way agreement, as defined. As at December 31, 2002, the
Company had letters of credit outstanding of $1.3 million with nil
drawn.
66
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
24. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED):
(d) Collective bargaining agreement:
As at December 31, 2002, approximately 21% or 847 employees of the
Company were union members covered by collective bargaining
agreements. The union employees of the Company are currently
represented by two unions, the Canadian Auto Workers ("CAW") Local
2000 and the United Steelworkers of America ("UWSA") TC Local 1976.
The collective bargaining agreements are effective from January 1,
2001 to December 31, 2003. In 2003, the Company will need to
negotiate new collective agreements with its union partners.
25. SUBSEQUENT EVENTS:
In order to facilitate the reorganization pursuant to the Plan, on
January 16, 2003, AT&T Canada entered into the Sale and Call Agreement
with New OpCo, Canada Corp., AT&T Corp., AT&T Canada Holdings Limited
Partnership ("AT&T LP"), Brascan Financial Corporation, Tricap
Investments Corporation and 1519888 Ontario Limited ("BCo"), whereby AT&T
LP agreed to sell all of its direct and indirect ownership interests in
both AT&T Canada and Canada Corp. to BCo. BCo has granted a call option
(the "Option") to New OpCo to buy the shares it acquires from AT&T LP
representing a direct and indirect ownership interest in Canada Corp.
(other than the shares of AT&T Canada) for a purchase price of $0.15
million. The Option is exercisable on or at any time after March 15,
2003. In the event that New OpCo does not exercise the Option before the
implementation of the Plan, New OpCo has agreed to pay $0.15 million to
BCo upon implementation of the Plan. On February 17, 2003 AT&T Corp. sold
all of its direct and indirect ownership interest in Canada Corp. to BCo.
On January 17, 2003, the Company announced it had established a new
commercial agreement with AT&T Corp. The new commercial agreements among
other things, require AT&T Canada to launch a new brand name by September
9, 2003, and to cease use of the AT&T brand by no later than December 31,
2003. In addition, these agreements provide a timeframe for continuity of
the Company's global connectivity, technology platform and product suite,
and maintain network ties between the two companies for the benefit of
customers. These agreements enable AT&T Canada and AT&T Corp. to continue
working together on a non-exclusive basis, and provide the Company the
ability to forge additional supplier relationships that will enhance its
connectivity and product offerings. Also, these arrangements recognize
AT&T Corp.'s ability to serve Canadian customers directly, including
competing with AT&T Canada.
67
AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
25. SUBSEQUENT EVENTS (CONTINUED):
On February 20, 2003, the Plan was approved by the Company's Noteholders
and its other Affected Creditors.
On February 25, 2003, the Court issued an order sanctioning the Plan and
the U.S. Court issued an order recognizing and enforcing the Court's
sanction order.
68