F-1/A 1 o05321xxf-1a.txt GT GROUP TELECOM INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 2001 REGISTRATION NO. 333-45378 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ POST-EFFECTIVE AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ GT GROUP TELECOM INC. (Exact name of Registrant as specified in its charter) CANADA 4813 NOT APPLICABLE (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
20 BAY STREET, 7TH FLOOR, TORONTO, ONTARIO, CANADA M5J 2N8 (416) 848-2000 (Address and telephone number of Registrant's principal executive offices) CT CORPORATION SYSTEM, 111 EIGHTH AVENUE, 13TH FLOOR, NEW YORK, NY 10011 (212) 894-8940 (Name, address, including zip code and telephone number, including area code, of Agent for Service) ------------------------------------ Copies to: BRICE T. VORAN, ESQ. SHEARMAN & STERLING Commerce Court West 199 Bay Street, Suite 4405 Toronto, Ontario M5L 1E8 (416) 360-8484 ------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 GT Group Telecom Logo GT GROUP TELECOM INC. 4,198,563 Class B Non-Voting Shares 855,000 Warrants to Purchase Class B Non-Voting Shares All of our class B non-voting shares and warrants to purchase class B non-voting shares offered hereby are being offered by shareholders and warrantholders of GT Group Telecom Inc. (collectively referred to as the selling shareholders). We will not receive any proceeds from the sale of the shares and the warrants. We have been advised by the selling shareholders that they may sell all or a portion of the shares from time to time on any national securities exchange or quotation service on which the shares may be listed or quoted at the time of the sale. The selling shareholders may also make private sales of the shares or the warrants to purchasers directly. Alternatively, the selling shareholders may from time to time offer the shares or the warrants through underwriters, brokers, dealers or agents, who may receive compensation in the form of underwriting discounts, commissions or concessions. Our class B non-voting shares are currently quoted on the Nasdaq National Market under the symbol "GTTLB" and listed on the Toronto Stock Exchange under the symbol "GTG.B". On January 31, 2001, the last reported sale price of our class B non-voting shares on the Nasdaq National Market was US$11.50 per share. The warrants are not listed on any exchange. See "Risk Factors" beginning on page 1 to read about factors you should consider before buying the class B non-voting shares. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Prospectus dated February 6, 2001. 3 ABOUT THIS PROSPECTUS This prospectus is part of a registration statement on Form F-1 that we filed with the Securities and Exchange Commission, the SEC, using a "shelf" registration process. Under this process, the selling shareholders may, from time to time, sell any combination of the offered securities described in this prospectus in one or more offerings up to 4,198,563 class B non-voting shares and up to 855,000 warrants. This prospectus does not contain all of the information included in the registration statement and the exhibits thereto. Statements included in this prospectus as to the contents of any contract or other document that is filed as an exhibit to the registration statement are not necessarily complete and you should refer to that agreement or document for a complete description of these matters. You should read both this prospectus and any prospectus supplement together with the additional information described below under the heading "Where You Can Obtain More Information About Us." You should rely only on the information provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. This prospectus is an offer to sell or to buy only the securities referred to in this prospectus, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus and any prospectus supplement is current only as of the date on the front page of those documents. Neither the delivery of this prospectus or any prospectus supplement, nor any distribution of securities made hereunder or thereunder shall under any circumstances create any implication that there has not been any change in the facts set forth in this prospectus or the applicable prospectus supplement or in the affairs of Group Telecom since the date hereof. ------------------------ THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR PUBLIC DISTRIBUTION UNDER THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA. THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN CANADA OR TO ANY RESIDENT THEREOF EXCEPT IN ACCORDANCE WITH THE SECURITIES LAWS OF THE PROVINCES AND TERRITORIES OF CANADA. THE SECURITIES OFFERED HEREBY HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF THE APPLICABLE CANADIAN PROVINCIAL AND TERRITORIAL SECURITIES LAWS AND MAY BE SOLD IN CANADA ONLY PURSUANT TO AN EXEMPTION THEREFROM. i 4 EXCHANGE RATES The following table sets forth, for the periods and rates indicated, information concerning exchange rates for Canadian dollars expressed in United States dollars, based on the inverse of the noon buying rate in the City of New York for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York.
THREE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------- ------------------ 1996 1997 1998 1999 2000 1999 2000 ------ ------ ------ ------ ------ ------- ------- High................... 0.7527 0.7513 0.7292 0.6828 0.6629 0.6688 0.6410 Low.................... 0.7235 0.7145 0.6341 0.6423 0.6969 0.6925 0.6669 Period End............. 0.7342 0.7234 0.6552 0.6805 0.6636 0.6925 0.6669 Average................ 0.7327 0.7286 0.6845 0.6663 0.6791 0.6792 0.6575
The average noon buying rate is derived by taking the average of the noon buying rate on the last business day of each month during the relevant period. PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION Unless we indicate otherwise, financial information in this prospectus has been prepared in accordance with Canadian generally accepted accounting principles. Canadian GAAP differs in some respects from U.S. GAAP and thus our financial statements may not be comparable to the financial statements of U.S. companies. The principal differences as they apply to us are summarized in note 19 to the audited consolidated financial statements of Group Telecom beginning on page F-13 and note 10 to the audited financial statements of Shaw FiberLink beginning on page F-45. We present our financial information in Canadian dollars. In this prospectus, except where we indicate, all dollar amounts are in Canadian dollars. References to "$" or "Cdn$" are to Canadian dollars and references to "US$" are to U.S. dollars. This prospectus contains a translation of some Canadian dollar amounts into U.S. dollars at specified exchange rates solely for your convenience. Unless we indicate otherwise, U.S. dollar amounts have been translated from Canadian dollars at US$0.6678 per Cdn$1.00, which was the inverse of the buying rate for transfers in Canadian dollars as quoted by Reuters on December 31, 2000. ii 5 RISK FACTORS An investment in our class B non-voting shares or warrants involves a high degree of risk. You should carefully consider the risks described below and all other information contained in this prospectus before purchasing our class B non-voting shares. THE COSTS OF DEPLOYING OUR NETWORK AND EXPANDING OUR BUSINESS MAY EXCEED THE CAPITAL AVAILABLE TO US. IF THIS HAPPENS, WE MAY HAVE TO DELAY OR ABANDON OUR BUSINESS PLAN. We used substantial capital to fund our acquisitions of the businesses of Shaw FiberLink and Videon FiberLink, our acquisition of the Cable Atlantic competitive local exchange carrier and commercial telecommunications operations and our acquisitions from 360networks, and will have significant capital expenditures, working capital, debt service and cash flow deficits during the period in which we are expanding our business and deploying our network, services and systems. The actual amount and timing of our future capital requirements may differ materially from our estimates as a result of prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that the capital actually required for this expansion and deployment will not exceed our expectations. If demand in the targeted markets exceeds current expectations, capital requirements may increase materially. In addition, we may identify new markets in the future and, as opportunities develop, we may be required to make additional investments in our network and facilities or pursue strategic alliances to consummate those opportunities. If required, we expect to raise additional capital through the sale of debt and equity and through vendor financing. We cannot assure you that we will be able to raise sufficient capital or that such funding will be available on a timely basis or on terms acceptable to us, if at all. If we fail to raise additional funds when and if required, we may have to delay or abandon our planned expansion of our network, services and systems, which could cause us to lose revenue and would hinder our ability to compete in the telecommunications industry. IF WE ARE UNABLE TO NEGOTIATE ACCESS RIGHTS TO THE PROPERTY OF A VARIETY OF THIRD PARTIES, WE WOULD BE DELAYED IN EXECUTING OUR BUSINESS PLAN. Most of our target customers are tenants within large buildings. To execute our business plan, we will need to obtain additional building license agreements with several different building management companies. We may not be able to secure additional building license agreements on a timely basis or on acceptable terms. If we cannot obtain building license agreements, our operating results will be harmed and we may be required to delay or abandon some of our planned future expansion. To build our network, we must obtain rights and other permits, which include, but are not limited to, rights-to-use underground conduit and aerial pole space and other rights-of-way from entities such as utilities, railroads, long distance providers, provincial highway authorities, local governments and transit authorities. We cannot assure you that we will be successful in either obtaining or maintaining these permits and rights-of-way on commercially reasonable terms and conditions. Certain permits and rights-of-way may require regulatory filings or may be subject to legal challenge by municipal governments, land and building owners or other third parties. For example, there is a public notice proceeding that was initiated by Canada's telecommunications regulatory authority, the Canadian Radio-television and Telecommunications Commission (commonly known as the "CRTC") in which interested parties were invited to comment on the terms and conditions of access to municipal rights-of-way in the city of Vancouver. Loss of substantial permits or rights-of-way or the failure to enter into or maintain required arrangements could cause us to lose revenue or abandon certain markets. If we cannot enter into agreements for access rights or purchase or lease fiber with accompanying access rights, our business and our operating results may be harmed and we may be required to delay or abandon some of our business plan. 1 6 WE ARE DEPENDENT ON OTHER PARTIES IN RESPECT OF THE FIBER WHICH CONSTITUTES A SIGNIFICANT PART OF OUR NETWORK. In connection with our acquisition of the business of Shaw FiberLink we received an indefeasible right to use Shaw FiberLink's fiber for 60 years. Shaw FiberLink has, in turn, a one-year indefeasible right to use fiber of various cable companies which are owned by Shaw Communications, renewable annually by Shaw FiberLink during the term of our indefeasible right to use Shaw FiberLink's fiber. As a result, in order to have access to the fiber provided by the indefeasible right to use, we are dependent on Shaw FiberLink's ability to maintain its indefeasible right to use agreements with the Shaw cable companies. In addition, the terms of our agreements with Shaw FiberLink, Videon FiberLink, Cable Atlantic and 360networks provide that our rights under those agreements are limited if the underlying rights associated with the fiber that is the subject of the indefeasible rights to use have any limitations or prohibitions. We entered into performance assurance agreements with Shaw Communications and Moffat Communications to support our rights under our agreement with Shaw FiberLink and Videon FiberLink. If we discover that indefeasible right to use rights are not passed to us as anticipated, or if we, Shaw FiberLink, Videon FiberLink, Cable Atlantic or 360networks do not obtain and maintain the necessary underlying rights, or if Shaw Communications or Moffat Communications do not comply with the performance assurance agreements, we may not have access to the fiber provided by the indefeasible right to use agreement and this could substantially impair our ability to carry on business. SOME OF OUR CUSTOMERS ARE ALSO OUR COMPETITORS AND, GIVEN OUR COMPETITION WITH THEM, MAY REDUCE THE LEVEL OF BUSINESS THEY DO WITH US. We provide data services to and derive revenue from other telecommunications carriers, even though we also compete with some of them for customers. A large portion of the revenues of the businesses we have recently acquired are also derived from services to other telecommunications carriers. These carriers may not wish to use our services to this extent given our competition with them and they may reduce the level of business they do with us. WE HAVE EXPERIENCED AND ANTICIPATE THAT WE WILL CONTINUE TO EXPERIENCE NET LOSSES. For the three months ended December 31, 2000 and for the year ended September 30, 2000 we had net losses of $79.3 million and $138.0 million and negative cash flow from operating activities of $39.1 million and $49.2 million, respectively. We expect to incur significant additional expenditures in connection with the development and expansion of our network and service offerings. As a result, we expect to continue to incur significant future net losses and negative cash flow. If our revenues do not increase significantly or the increase in our expenses is greater than expected, we may not achieve or sustain profitability or generate positive cash flow in the future. GROUP TELECOM'S LIMITED HISTORY OF OPERATIONS MAY MAKE IT DIFFICULT TO EVALUATE OUR PROSPECTS. Group Telecom was incorporated in 1996. Our short operating history permits us to provide you with only limited operating and financial data which you can use to evaluate our performance. IF WE DO NOT CONTINUALLY ADAPT TO TECHNOLOGICAL CHANGE, WE COULD LOSE CUSTOMERS AND MARKET SHARE. The telecommunications industry is subject to rapid and significant changes in technology, and we rely on outside vendors for the development of and access to new technology. The effect of technological changes on our business cannot be predicted. We believe our future success will depend, in part, on our ability to anticipate or adapt to such changes and to offer, on a timely basis, services that meet customer demands. In addition, we rely on vendors with whom we have financing agreements to anticipate and adapt to new technology and to make products that incorporate such technology available to us. We cannot assure you that we will obtain access to new technology on a 2 7 timely basis or on satisfactory terms. If we fail to obtain new technology, we may lose customers and market share which could harm our business and operating results. OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A COMPETITIVE DISADVANTAGE. We have a significant amount of debt. As of December 31, 2000, we had approximately $1,102.3 million of long-term debt outstanding. In addition, we could incur an additional $482.6 million under our senior bank debt and our vendor facilities with Cisco and Lucent, assuming we could incur debt in compliance with covenants set forth in these facilities. We may need to incur additional debt in the future. Our substantial debt obligations could have important consequences to you. For example, they could: - require us to use a substantial portion of our operating cash flow to pay interest, which reduces funds available to expand our network and for other purposes; - place us at a competitive disadvantage compared to our competitors that have less debt; - make us more vulnerable to economic and industry downturns and reduce our flexibility in responding to changing business and economic conditions; - limit our ability to pursue business opportunities; and - limit our ability to borrow more money for operations or capital in the future. A 1 percent interest rate change on our floating interest rate long-term debt outstanding at December 31, 2000, would have an annual impact of $3.4 million on our interest cost. WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO PAY OUR DEBT. IF WE FAIL TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS, WE MAY NEED TO REFINANCE OUR DEBT, OBTAIN ADDITIONAL FINANCING OR POSTPONE CAPITAL EXPENDITURES. We cannot assure you that we will generate sufficient cash flow from operations to make scheduled payments on our debt. Our ability to meet our debt obligations will depend on whether we can successfully implement our strategy, as well as on economic, financial, competitive, legal and technical factors. Some of the factors are beyond our control, such as economic conditions in the different local markets where we operate or intend to operate, and pressure from existing and new competitors. If we cannot generate sufficient cash flow from operations to make scheduled payments on our debt obligations, we may need to refinance our debt, obtain additional financing, delay planned capital expenditures or sell assets. Our ability to refinance our debt or obtain additional financing will depend on, among other things: - our financial condition at the time; - restrictions in agreements governing our debt; and - other factors, including market conditions. DUE TO RESTRICTIONS IN OUR FINANCING AGREEMENTS, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS AS WE DESIRE. The financing agreements under which our long-term debt was incurred contain a number of conditions and limitations on the way in which we can operate our business, including limitations on our ability to raise debt, sell or acquire assets and pay dividends as well as various covenants that require us to maintain specific financial ratios. These limitations may force us to pursue less than optimal business strategies or forego business arrangements which could have been financially advantageous to us and our shareholders. Our failure to comply with the covenants and restrictions contained in our financing agreements could lead to a default under the terms of one of these agreements. If a default occurs in one of these 3 8 agreements, the parties to our other financing agreements could declare all amounts borrowed and all amounts due under these other agreements due and payable. WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE WHICH COULD BE DETRIMENTAL TO HOLDERS OF OUR CLASS B NON-VOTING SHARES AND OUR WARRANTS. As a result of an amended and restated shareholders agreement entered into by shareholders on February 16, 2000 then holding approximately 88.0% of our fully-diluted equity in connection with our acquisition of the business of Shaw FiberLink, two of our institutional investors (which are affiliates of Goldman Sachs and CIBC World Markets) and Shaw Communications, were able to nominate a majority of our directors. Affiliates of Goldman Sachs and CIBC World Markets hold approximately 32.0% of our equity and have 4 of 11 directors on our board of directors. In addition, Shaw Communications holds approximately 24.8% of our equity and has 3 directors on our board of directors. Each of Shaw Communications and Goldman Sachs has a right to consent to: - specified major transactions by us, including acquisitions and investments in excess of $300 million and mergers or business combinations, for a period of 18 months after February 16, 2000; and - our annual operating budget, for a period of 24 months after February 16, 2000. Decisions concerning our operations or financial structure may present conflicts of interest between these investors, our management and other holders of our securities. In addition, these investors or their affiliates currently have significant investments in other telecommunications companies, including entities that compete with us, and may in the future invest in other entities engaged in the telecommunications business or in related businesses. Conflicts may also arise in the negotiation or enforcement of arrangements entered into by us and entities in which these investors have an interest. SOME OF OUR COMPETITORS HAVE GREATER FINANCIAL, TECHNICAL AND OTHER RESOURCES THAN WE DO, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. The Canadian telecommunications market is highly competitive. We face, and expect to continue to face, intense competition in all of our target markets from the incumbent local exchange carriers, cable companies, competitive long distance providers, wireless providers, new local exchange carriers, and resellers. Many of our current and potential competitors, including the Bell companies, Aliant, BCT.TELUS, AT&T Canada and Call-Net, have longer operating histories in the telecommunications industry and substantially greater financial, marketing, technical, personnel, regulatory and other resources, including greater brand name recognition. The emergence in Canada of a competitive market for local telecommunications services has resulted in price competition among market participants, and this pricing pressure may be more intense than we expect, which could harm our business and our financial condition. Also, as communications technologies develop, new classes of competitors will emerge. OUR BUSINESS STRATEGY DEPENDS ON SECURING AND MAINTAINING INTERCONNECTION AGREEMENTS WITH OTHER PROVIDERS. We provide some local services to our customers using facilities that we lease or purchase from the incumbent local exchange carriers. We must enter into agreements for the interconnection of our network with the networks of the incumbent local exchange carriers and other carriers covering each market in which we intend to offer service. We have entered into interconnection agreements in a number of jurisdictions. However, we cannot assure you that we will successfully renegotiate these agreements as they become due to expire, or negotiate additional agreements as we enter new markets. Although the incumbent local exchange carriers are not entitled to unjustly discriminate against telecommunications carriers like us in respect of the rates or services they provide to us or to disrupt the access of competitors to their respective facilities, we are vulnerable to changes in our 4 9 lease and interconnection arrangements with the incumbent local exchange carriers, such as rate increases and changes in rules and policies of the CRTC. WE DEPEND ON OUR SUPPLIERS OF SWITCHES AND OTHER EQUIPMENT AND MAY EXPERIENCE DELAYS IN RECEIVING REQUIRED COMPONENTS. We rely on other companies to supply key components of our network infrastructure, primarily switching and data routing equipment. These components are only available in the quantities and quality we require from limited sources. We may experience delays in receiving components or may not be able to obtain these components on the scale and within the time frames required by us at an affordable cost, or at all. IF OUR BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS DO NOT OPERATE AS WE EXPECT OR IF WE FAIL TO UPGRADE SYSTEMS AS NECESSARY, WE WILL NOT BE ABLE TO CONDUCT OUR BUSINESS EFFICIENTLY. Integrated management information and processing systems are vital to our growth and our ability to monitor costs, process customer orders, bill customers and operate efficiently. The cost of implementing these systems has been, and we expect will continue to be, substantial. We are in the final stages of developing and testing our operational support system to integrate important facets of our operations. The development and implementation of this system relies in part on the products and services of third party vendors, over which we have no control. Unanticipated problems with our system may harm our business and operating results. In addition, any of the following developments could harm us: - our failure to adequately identify and integrate all of our information and processing needs; - failure of our processing or information systems to perform as expected; and - our failure to upgrade systems as necessary and on a timely basis. IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR BUSINESS AND OUR PROSPECTS COULD BE HARMED. We are dependent on the continued service of a small number of key executives and operations personnel, including Daniel Milliard, our chief executive officer, Robert Wolfe, our president, Stephen Shoemaker, our chief financial officer and Eric Demirian, our executive vice president, corporate development. The loss of services of one or more of our key executives, particularly Messrs. Milliard, Wolfe, Shoemaker and Demirian, could harm our business and our prospects. We do not maintain key person life insurance for any of our executive officers. REGULATIONS RELATING TO CANADIAN OWNERSHIP AND CONTROL OF OUR VOTING SHARES PREVENTS A FOREIGN INVESTOR FROM ACQUIRING US, WHICH COULD LIMIT THE VALUE OF YOUR CLASS B NON-VOTING SHARES AND YOUR WARRANTS TO PURCHASE CLASS B NON-VOTING SHARES. As a competitive local exchange carrier, we are subject to regulations which require that not less than 66 2/3% of our issued and outstanding voting shares be beneficially owned by "Canadians" (as defined in these regulations). To ensure compliance with these regulations, we have placed restrictions on the transfer of our class A voting shares to non-Canadians. These restrictions effectively limit the number of potential acquirors of our business and therefore a takeover bid for us is less likely and you are less likely to receive the change of control premium that generally comes with such bids. OUR ABILITY TO COMPETE IN THE CANADIAN LOCAL TELECOMMUNICATIONS MARKET IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH MAY BE CHANGED IN A MANNER HARMFUL TO OUR BUSINESS. We are subject to regulation by the CRTC pursuant to the provisions of the Canadian Telecommunications Act. We are also subject to radio spectrum regulation by the Canadian Federal 5 10 Department of Industry (commonly known as Industry Canada) pursuant to the provisions of the Radiocommunication Act. Since 1994, the stated policy of the CRTC has been to recognize the importance of competition in the local switched services market. As a relatively new entrant into the Canadian telecommunications market, we benefit from this policy and these decisions. However, we cannot assure you that the CRTC's policy to foster the development of competition in the local switched services market will not change or that the CRTC will react quickly and efficiently to anti-competitive practices or effects resulting from the dominant position of Canada's incumbent local exchange carriers. Any change in the CRTC's policies or regulations could harm our business, operating results and prospects. CRTC decisions are subject to review and variance by the CRTC at any time. CRTC decisions can also be appealed to the Canadian Federal Court of Appeal and may also be challenged by petition to the Federal Cabinet. We cannot assure you that the local competition decisions of the CRTC, or other decisions relating to the telecommunications markets in which we compete will not be reviewed and varied by the CRTC or by the Federal Court or Cabinet on appeal. Any variance of these decisions or other rules and regulations of the CRTC could harm our business. OUR NEED TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION CAN INCREASE OUR COSTS AND SLOW OUR GROWTH. Because we are subject to extensive government regulation, delays in receiving required regulatory approvals may slow our growth. In addition, the enactment of new adverse regulations or regulatory requirements may increase our costs, which could have a harmful effect on us. We also cannot assure you that, as we expand our business, the CRTC and Industry Canada will continue to grant us the authority we need to conduct our business or will not take action against us if we are found to have provided services without obtaining the necessary authorizations or to have violated other requirements of their rules or orders. The CRTC, Industry Canada or others could challenge our compliance with applicable rules and orders, which could cause us to incur substantial legal and administrative expenses. Lengthy administrative hearings might also delay the deployment of our network, which could slow our growth. OUR CLASS B NON-VOTING SHARES HAVE A LIMITED TRADING HISTORY AND THEIR PRICE MAY BE VOLATILE. WE CANNOT ASSURE YOU THAT OUR SHARE PRICE WILL NOT DECLINE IN THE FUTURE. There has only been a public market for our class B non-voting shares since March 2000. The market price of our class B non-voting shares could be subject to significant fluctuation. Among the factors that could affect our share price are: - quarterly variations in our operating results; - changes in revenue or earnings estimates or publication of research reports by analysts; - strategic decisions by us or our competitors, such as acquisitions or restructurings or changes in business strategy; - actions by institutional stockholders; - speculation in the press or investment community; - general market conditions; and - economic factors unrelated to our performance. Recently, stock markets in the United States have experienced significant price and volume fluctuations and the market prices of securities of telecommunications services providers and technology companies, particularly Internet-related companies, have been highly volatile. Investors may not be able to resell their class B non-voting shares at or above the current price reported on the Nasdaq National Market. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation in the United States has often been instituted against such 6 11 a company. The institution of such litigation against us could result in substantial costs and a diversion of our management's attention and resources, which could harm our business and financial condition. WE DO NOT INTEND TO LIST THE WARRANTS ON ANY STOCK EXCHANGE. The warrants have not been listed on any stock exchange and we do not intend to list the warrants on any stock exchange in the future. Although the warrants are eligible for trading in the PORTAL market of the Nasdaq Stock Market, Inc. by "qualified institutional buyers" ("QIBs"), as defined in Rule 144A under the U.S. Securities Act of 1933, the absence of a listing on a stock exchange may cause the warrants to trade at a price lower than the price for the underlying class B non-voting shares that are traded on the Nasdaq National Market. SINCE OUR REVENUE IS IN CANADIAN DOLLARS AND MOST OF OUR DEBT IS IN U.S. DOLLARS, WE ARE SUBJECT TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN CANADIAN AND U.S. DOLLARS. As of December 31, 2000 we had debt outstanding denominated in U.S. dollars of approximately US$599.5 million. Since the majority of our revenue is in Canadian dollars, we are, and will continue to be, exposed to fluctuations in the exchange rate between Canadian and U.S. dollars and the uncertainty of the amount of Canadian dollars that will be required to service the principal and interest payments under our U.S. dollar denominated debt. In order to minimize these effects, as at December 31, 2000, we had entered into certain cross currency swaps to hedge approximately 78% of our outstanding U.S. dollar denominated debt. Based on our December 31, 2000 balances, a 1 percent change in the foreign currency exchange rate between the Canadian and U.S. dollar would have an impact of $1.9 million on the unhedged portion of our long-term debt. Any substantial increase in the U.S. dollar relative to the Canadian dollar could affect our results of operations and our ability to meet our future payment obligations on our debt. IF OUR FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ARE INCORRECT, OUR RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. This prospectus contains forward-looking statements in "Risk Factors" beginning on page 1, "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 14, "Business" beginning on page 23 and elsewhere. These statements relate to future events or our future financial performance. You can generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume and no other person assumes responsibility for the accuracy and completeness of these statements. 7 12 USE OF PROCEEDS All class B non-voting shares and warrants offered hereby are being offered by the selling shareholders. We will not receive any of the proceeds from the sale of the class B non-voting shares or the warrants. The class B non-voting shares offered hereby include up to 4,198,563 class B non-voting shares issuable upon the exercise of the warrants currently held by the selling shareholders. As of the date of this prospectus, each warrant entitles the holder thereof to purchase 4.9106 shares. No consideration will be paid to us by any holder in connection with the exercise of such holder's warrants. In February 2000 we sold units, which consisted of our senior discount notes and these warrants to purchase our class B non-voting shares. Our net proceeds from the sale of the units were approximately US$436.9 million, after deducting underwriting discounts and commissions and estimated offering expenses, of which approximately US$140.0 million was used to fund our acquisition of the business of Shaw FiberLink. Consistent with our business strategy, we continually consider acquisition opportunities that will enhance our business. As of the date of this prospectus, we have not entered into any definitive agreements to make any acquisitions except for those discussed herein. PRICE RANGE OF CLASS B NON-VOTING SHARES Our class B non-voting shares have been traded on the Nasdaq National Market, Nasdaq, and the Toronto Stock Exchange, the TSE, since March 10, 2000. The following table sets forth, for the periods indicated, the high and low sale prices per share of our class B non-voting shares as reported on the Nasdaq National Market and the TSE.
NASDAQ TSE ---------------------- ---------------- HIGH LOW HIGH LOW --------- --------- ------ ------ Quarter ending March 31, 2000 (from March 10).......................................... US$30 US$16 1/2 $45.00 $25.00 Quarter ending June 30, 2000................... US$20 13/16 US$11 1/4 $30.45 $16.55 Quarter ending September 30, 2000.............. US$18 13/16 US$12 13/16 $27.40 $19.05 Quarter ending December 31, 2000............... US$13 3/16 US$ 4 3/4 $20.70 $ 9.60 January 1, 2001 to January 31, 2001............ US$12 1/16 US$ 7 3/97 $18.15 $10.60
On January 31, 2001, the last reported sale price of the shares on the Nasdaq was US$11.50 and on the TSE was $17.00. On January 31, 2001, there were 41,266,833 class B non-voting shares and 79,617,572 class A voting shares outstanding held by approximately 82 and 429 holders of record, respectively. DIVIDEND POLICY We have not paid any dividends on our class B non-voting shares and do not intend to pay any dividends on our class B non-voting shares in the foreseeable future. We currently intend to retain future earnings, if any, to finance the future growth of our business. In addition, our ability to pay cash dividends is currently restricted under the terms of financing agreements related to our long term debt. For a further description of these restrictions, see "Description of Our Financing Arrangements" on page 39 and the exhibits contained in the registration statement of which this prospectus is a part. Future dividends, if any, will be determined by our board of directors. 8 13 SELECTED HISTORICAL FINANCIAL AND OPERATING INFORMATION OF GROUP TELECOM The following table sets forth selected financial and operating information for Group Telecom for the periods indicated. You should read this selected consolidated financial and operating information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 14 and our financial statements, including the notes, beginning on page F-2. Our financial statements are presented in Canadian dollars and are prepared in accordance with Canadian GAAP, which differs in some respects from U.S. GAAP. The principal differences are summarized in note 19 to our audited financial statements.
THREE MONTHS TWELVE MONTHS ENDED SEPTEMBER 30, ENDED DECEMBER 31, ------------------------------------------------------- --------------------- 1996(1) 1997 1998 1999 2000 1999 2000 -------- ------- -------- --------- ----------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) (UNAUDITED) STATEMENT OF OPERATIONS: Canadian GAAP Revenue............................. $ 29 $2,051 $ 1,823 $ 2,705 $ 73,251 $ 2,267 $ 39,924 Cost of services.................... 28 1,437 1,131 1,808 51,336 2,138 25,426 ----- ------ ------- -------- ---------- -------- ---------- Gross profit........................ 1 614 692 897 21,915 129 14,498 Selling, general and administrative expenses.......................... 243 989 3,038 10,218 100,959 10,863 41,780 ----- ------ ------- -------- ---------- -------- ---------- (242) (375) (2,346) (9,321) (79,044) (10,734) (27,282) Amortization........................ 9 55 255 853 43,055 1,124 23,385 ----- ------ ------- -------- ---------- -------- ---------- Operating loss...................... (251) (430) (2,601) (10,174) 122,099 (11,858) (50,667) Interest and finance items (income).......................... -- -- (162) (372) 54,354 141 27,543 Tax expense (recovery).............. (5) -- -- 165 (38,467) 65 1,075 ----- ------ ------- -------- ---------- -------- ---------- Loss for the period................. $(246) $ (430) $(2,439) $ (9,967) $ (137,986) $(12,064) $ (79,285) ===== ====== ======= ======== ========== ======== ========== Loss per share(2)................... (0.05) (0.05) (0.26) (0.56) (1.83) (0.54) (0.63) U.S. GAAP Loss for the period................. $(269) $ (426) $(3,582) $(10,336) $ (140,648) $(12,424) $ (84,644) ===== ====== ======= ======== ========== ======== ========== Comprehensive loss for the period... $(269) $ (426) $(3,582) $(10,336) $ (116,722) $(12,424) $ (92,257) ===== ====== ======= ======== ========== ======== ========== Loss per share(2)................... (0.05) (0.05) (0.38) (0.58) (1.86) (0.55) (0.74) BALANCE SHEET: Canadian GAAP Cash and cash equivalents........... $ 5 $ 61 $ 2,476 $ 59,851 $ 444,050 $ 29,347 $ 365,960 Working capital (deficit)........... (166) (224) (4,199) 47,870 384,090 (1,639) 317,803 Property, plant and equipment, net(3)............................ 64 481 10,555 73,817 954,917 108,009 1,157,739 Prepayment on property, plant and equipment......................... -- -- -- -- 203,703 -- 132,852 Goodwill and other assets(4)........ 85 75 207 1,292 227,033 14,902 229,112 Long-term debt...................... -- -- 776 47,557 948,928 57,028 1,095,966 Shareholders' equity (deficiency)... (17) 331 5,787 73,928 862,798 62,888 783,660 U.S. GAAP Shareholders' equity (deficiency)... $ (41) $ 316 $ 5,685 $ 73,513 $ 912,731 $ 63,130 $ 824,388 CASH PROVIDED BY (USED IN):(5) Operating activities................ $(127) $ (251) $(1,360) $ (9,033) $ (49,181) $ (7,863) $ (39,119) Financing activities................ 233 769 7,686 75,947 1,145,607 (136) 147 Investing activities................ (101) (462) (3,911) (9,539) (712,227) (22,505) (39,118) OTHER: EBITDA(6)........................... $(242) $ (375) $(2,288) $ (8,402) $ (56,836) $(10,154) $ (19,929)
9 14
AT AT AT AT SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1998 1999 2000 2000 ------------- ------------- ------------- ------------ OPERATING DATA: Route kilometers.................... 5 46 9,545 10,516(7) Fiber kilometers.................... 2,030 16,595 190,583 228,765(8) Number of Lucent and Nortel class 5 switches.......................... 1 1 5 5 Number of buildings connected....... 8 40 1,569 1,670 Number of employees................. 51 168 987 1,134
--------------- (1) Data is for the period from our incorporation on April 12, 1996 to September 30, 1996. (2) The effect of the exercise of options and warrants is not dilutive. Accordingly, fully diluted earnings per share is not presented. (3) Property, plant and equipment at cost is as follows:
SEPTEMBER 30, ------------------------------------------ 1996 1997 1998 1999 2000 ---- ---- ------- ------- -------- (IN THOUSANDS) Property, plant and equipment, at cost..... $69 $517 $10,805 $74,895 $986,416
(4) Goodwill and other assets includes goodwill and other long-term assets. (5) Cash flow information represents cash provided by (used in) operating, financing and investing activities are identical under Canadian and U.S. GAAP. (6) EBITDA is calculated in accordance with Canadian GAAP and consists of earnings (loss) before interest expense, income taxes, depreciation and amortization and financing expenses and includes interest income. EBITDA is a financial metric used by substantially all investors to compare companies in the telecommunications industry on the basis of operating results, asset value and the ability to incur and service debt. It is not intended to represent cash flow or results of operations in accordance with Canadian GAAP. EBITDA may not be comparable to similarly titled amounts reported by other companies. Under U.S. GAAP, EBITDA for the period from April 12, 1996, our date of incorporation, to September 30, 1996, the years ended September 30, 1997, 1998, 1999 and 2000 was $(265,000), $(371,000), $(3,431,000), $(8,769,000) and $(68,281,000), respectively. Under U.S. GAAP, EBITDA for the three months ended December 31, 1999 and 2000 was $(11,184,000) and $(23,696,000), respectively. (7) Equivalent to approximately 6,534 route miles. Route miles equal the number of miles of the telecommunications paths in which we own or lease installed fiber optic cable. (8) Equivalent to approximately 142,148 fiber miles. Fiber miles equal the number of route miles installed along a telecommunications path multiplied by the number of fibers along the path. 10 15 SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING INFORMATION The following table sets forth selected unaudited pro forma consolidated financial information relating to the acquisition of the business of Shaw FiberLink. The unaudited pro forma condensed consolidated statement of operations for the twelve months ended September 30, 2000 has been prepared based on the audited consolidated statement of operations of Group Telecom for the year ended September 30, 2000 and the unaudited statement of operations of Shaw FiberLink for the four months ended December 31, 1999, and as if the acquisition of the business of Shaw FiberLink had occurred on October 1, 1999. See "Unaudited Pro Forma Condensed Consolidated Financial Information" beginning on page F-56. The pro forma financial information, summarized from the pro forma condensed consolidated statement of operations, is presented for informational purposes only and does not purport to be indicative of the results which would have actually been obtained or our financial position if the transactions had been completed as of the dates indicated or that may be expected to occur in the future.
TWELVE MONTHS ENDED SEPTEMBER 30, 2000 ------------------- (IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS: Revenue..................................................... $ 91,296 Cost of services............................................ 60,208 ---------- Gross profit................................................ 31,088 Selling, general and administrative expenses................ 105,392 Amortization(1)............................................. 55,492 ---------- Operating loss.............................................. (129,796) Interest and finance items(2)............................... 69,576 Income tax recovery......................................... (38,442) ---------- Loss for the year under Canadian GAAP....................... $ (160,930) ========== Loss per share under Canadian GAAP(3)....................... (1.82) ========== Loss for the year under U.S. GAAP........................... $ (163,592) ========== Loss per share under U.S. GAAP(3)........................... (1.85) ========== OTHER: EBITDA(4)................................................... $ (52,096)
--------------- (1) Amortization includes the depreciation charge allocated by Shaw Communications of $2 million for use of distribution network assets. See note 6(c) to the financial statements of Shaw FiberLink. (2) Interest and finance items include $15 million in interest expense on $220 million of senior bank debt, and $140 million from the debt proceeds raised in the offering of our units on February 1, 2000, giving effect to this units offering as if it had occurred on October 1, 1999. These figures do not reflect a corresponding return on proceeds received. (3) The effect of potential conversions of preferred shares and the exercise of options and warrants is not dilutive. Accordingly, fully diluted earnings per share is not presented. (4) EBITDA is calculated in accordance with Canadian GAAP and consists of earnings (loss) before interest expense, income taxes, depreciation and amortization and financing expenses, and includes interest income. EBITDA is a financial metric used by substantially all investors to compare companies in the telecommunications industry on the basis of operating results, asset value and the ability to incur and service debt. However, it is not intended to represent cash flow or results of operations in accordance with Canadian GAAP. EBITDA may not be comparable to similarly titled amounts reported by other companies. Under U.S. GAAP, pro forma EBITDA for the year ended September 30, 2000, giving effect to our acquisition of the business of Shaw FiberLink effective October 1, 1999, would have been $(63,541,000). 11 16 SELECTED HISTORICAL FINANCIAL AND OPERATING INFORMATION OF SHAW FIBERLINK The following table sets forth selected financial and operating information for Shaw FiberLink for the periods indicated. You should read this selected historical information in conjunction with the Shaw FiberLink audited financial statements, including the notes, beginning on page F-45. The Shaw FiberLink financial statements are presented in Canadian dollars and are prepared in accordance with Canadian GAAP, which differs in some respects from U.S. GAAP. The principal differences are summarized in note 10 to the financial statements of Shaw FiberLink.
THREE MONTHS ENDED TWELVE MONTHS ENDED AUGUST 31, NOVEMBER 30, -------------------------------- ------------------- 1997 1998 1999 1998 1999 -------- -------- -------- ------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS: Revenue.......................... $ 11,631 $ 22,324 $ 38,815 $ 7,876 $ 13,197 Cost of sales.................... 3,965 10,174 17,800 3,529 6,503 -------- -------- -------- ------- -------- Gross profit..................... 7,666 12,150 21,015 4,347 6,694 Selling, general and administrative expenses........ 5,227 7,498 8,893 1,999 3,004 Depreciation..................... 1,954 3,832 6,565 1,347 2,109 Depreciation charge allocated by Shaw Communications for use of distribution network assets(1)...................... 3,073 4,394 5,649 1,259 1,648 -------- -------- -------- ------- -------- Loss before income taxes......... (2,588) (3,574) (92) (258) (67) Income taxes..................... 25 50 92 23 25 -------- -------- -------- ------- -------- Net loss......................... $ (2,613) $ (3,624) $ (184) $ (281) $ (92) ======== ======== ======== ======= ======== BALANCE SHEET: Accounts receivable........................ $ 2,188 $ 7,336 $ 6,264 Prepaids and other......................... 65 289 183 -------- -------- -------- 2,253 7,625 6,447 Property and equipment, net................ 46,793 70,472 78,422 -------- -------- -------- $ 49,046 $ 78,097 $ 84,869 ======== ======== ======== Accounts payable and accrued liabilities... $ 7,613 $ 1,974 $ 1,905 Income taxes payable....................... 148 116 92 Unearned revenue........................... 161 1,330 1,273 -------- -------- -------- 7,922 3,420 3,270 Net investment by Shaw Communications...... 41,124 74,677 81,599 -------- -------- -------- $ 49,046 $ 78,097 $ 84,869 ======== ======== ======== CASH PROVIDED BY (USED IN)(2): Operating activities............. $ 405 $ 5,905 $ (3,493) $(5,922) $ 3,045 Financing activities............. 11,684 21,540 33,737 11,117 7,014 Investing activities............. (12,089) (27,445) (30,244) (5,195) (10,059) OTHER: EBITDA(3).................................. $ 4,652 $ 12,122 $ 2,348 $ 3,690
12 17
AT DECEMBER 31, 1999 --------------- OPERATING DATA: Route kilometers(4)......................................... 7,765 Fiber kilometers(5)......................................... 101,546 Number of buildings connected............................... 1,014 Number of employees......................................... 137
--------------- (1) See note 6(c) to the financial statements of Shaw FiberLink. (2) Cash flow information represents cash provided by (used in) operating, financing and investing activities and is identical under Canadian and U.S. GAAP. (3) EBITDA is calculated in accordance with Canadian GAAP and consists of earnings (loss) before interest, income taxes, depreciation and amortization and financing expenses and the charge allocated by Shaw Communications for the use of distribution network assets. EBITDA is a financial metric used by substantially all investors to compare companies in the telecommunications industry on the basis of operating results, asset value and the ability to incur and service debt. It is not intended to represent cash flow or results of operations in accordance with Canadian GAAP. EBITDA may not be comparable to similarly titled amounts reported by other companies. (4) Equivalent to approximately 4,853 route miles. Route miles equal the number of miles of the telecommunications paths in which Shaw FiberLink owns or leases installed fiber optic cable. Shaw FiberLink route kilometers are calculated as of December 22, 1999, the date that Shaw Communications agreed to grant Group Telecom an indefeasible right to use these route kilometers. (5) Equivalent to approximately 63,466 fiber miles. Fiber miles equal the number of route miles installed along a telecommunications path multiplied by the number of fibers along the path. Shaw FiberLink fiber kilometers are calculated as of December 22, 1999, the date that Shaw Communications agreed to grant Group Telecom an indefeasible right to use these fiber kilometers. 13 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We have been providing data services since 1996. We constructed our facilities-based network in Vancouver. We avoided substantial capital expenditures in the build-out of our network in Vancouver through a contract with BC Hydro, an electric utility, which enabled us to install our fiber through their existing conduits which connect to nearly all buildings in British Columbia. We have used our Vancouver fiber network strategy as a blueprint to enter our other initial target markets across Canada, and have already entered into conduit access agreements with utility companies in Calgary and Edmonton, and intend to pursue similar opportunities in Montreal. In Toronto we intend to acquire and have leased existing fiber to establish our network and in July, 1999 entered into a fiber lease agreement with Toronto Hydro which gives us access to Toronto Hydro's existing fiber optic network. We installed our first Lucent 5ESS voice switch in Vancouver in 1998. We installed voice switches in Toronto and Calgary in December 1999 and in Montreal in January 2000. In the fall of 1999, we launched a national marketing effort of our comprehensive suite of services. As of December 31, 2000, we had 1,670 buildings connected to our network and had approximately 228,765 fiber kilometers (142,148 miles) over 10,516 route kilometers (6,534 miles). At December 31, 2000, we had signed strategic agreements with property management companies, including Oxford Properties, Brookfield, Cadillac Fairview, GWL Realty Advisors and O&Y Enterprises, providing us access to approximately 158 million square feet of office space across Canada. We have been providing Internet, high speed data and voice services in all five of our initial markets of Toronto, Vancouver, Calgary, Montreal and Edmonton since February 2000. Since then, through organic growth and a series of acquisitions, we have expanded the reach of our fiber network to include an additional 8 markets beyond our original targeted network. These new metropolitan markets include Victoria, Winnipeg, London, Hamilton, Kitchener/Waterloo, Ottawa, Quebec City, and St. John's, Newfoundland. As of December 31, 2000, we serve all 13 of these markets. Our network in a city consists of a fiber optic backbone, fiber connection from the backbone to the buildings, equipment in the buildings in which our customers are located, central offices housing data and switching equipment and equipment connecting our network to the public switched telephone network and the Internet. The construction of our network in each target market varies, depending upon the size and complexity of the network. The time required to complete the construction phase is also significantly influenced by the number of route and fiber miles involved, the mix of aboveground versus underground fiber deployment, possible delays in securing rights-of-way and negotiating business licence agreements and required construction permits, time in negotiating leases for central offices and office space and installing electronic equipment. Our strategy is to own or control the fiber that comprises our network in each of our target markets. We believe there are several strategic advantages to serving our customers over owned facilities instead of reselling services or leasing facilities, including earning higher margins. To reduce the capital expenditures required to construct our fiber optic infrastructure, we have established, and expect to continue to establish, access and rights-of-way agreements with utility companies and other companies in our target markets. For further discussion of these relationships, see "Business -- Strategic Relationships -- Access agreements and rights-of-way" beginning on page 29. OUR RECENT ACQUISITIONS On February 16, 2000, we acquired from Shaw Communications the business of Shaw FiberLink for $360 million in cash and the issuance of 27.1% of our fully diluted equity. The cash portion of the 14 19 purchase price was funded by borrowing $100 million under our bank facility and by using $260 million of the net proceeds of our offering of units consisting of our 13 1/4% senior discount notes due 2010 and warrants for our class B non-voting shares. For the year ended August 31, 1999, Shaw FiberLink had revenue of $38.8 million and EBITDA of $12.1 million. As part of our acquisition of the business of Shaw FiberLink, we received rights to 1,502 fiber kilometers through assigned contracts and an indefeasible right to use 100,044 fiber kilometers for 60 years. In addition, Shaw Communications agreed to construct for our use, at no additional cost to us, approximately 97,500 fiber kilometers over the next three years, subject to variance depending on the location of the constructed fiber. We will have an indefeasible right to use these fiber kilometers for between 57 and 60 years. As at December 31, 2000, we have obtained for use newly constructed fibers with a carrying value of $97.7 million pursuant to this arrangement. In April 2000, we purchased from Moffat Communications all the property and assets used in connection with their fiber optic business telecom operations for $68 million in cash and 1,667,000 of our class B non-voting shares. The assets purchased include equipment, operational contracts, equipment contracts, supply contracts, interconnection agreements, co-location agreements, customer contracts, software licences, intellectual property, permits, accounts receivable, prepaid expenses and certain other assets. We also entered into an indefeasible right to use agreement with Moffat Communications which granted us an indefeasible right to use certain specifically identified existing fibers in the fiber optic cable networks of Moffat Communications for 30 years. In May 2000, we agreed with 360networks Inc. to (1) lease from them dedicated fiber optic wavelengths and (2) purchase fiber in Canada and receive from them an indefeasible right to use fiber in the United States. The aggregate price of the dedicated fiber optic capacity and fiber we acquired was approximately $362 million. We have the option to acquire from 360networks additional fiber and dedicated fiber optic wavelengths. In addition, we invested approximately $43 million in the equity of 360networks. As at December 31, 2000, we have accepted approximately 76% of the fibre-optic capacity under a long-term lease arrangement for $61 million. In July 2000, we acquired from Cable Atlantic certain property and assets used in Cable Atlantic's competitive local exchange carrier operations and commercial telecommunications operations in consideration for $15 million in cash, the issuance of 1,740,196 of our class B non-voting shares and a cash payment equal to the value of the net working capital of the acquired business on the closing date. The assets purchased include equipment, land and building, operational contracts, customer contracts, intellectual property, permits, books and records, goodwill, accounts receivable and prepaid expenses. We entered into an agreement with Cable Atlantic that grants to us an indefeasible right to use certain specifically identified existing fibers of Cable Atlantic for 30 years, with a right to purchase these fibers for $1 at any time. In October 2000, we signed a term sheet with C1 Communications Inc. (C1 Communications) to acquire all of its Atlantic Canada assets and business. The transaction includes the acquisition of C1 Communication's Atlantic cable competitive local exchange carrier business, including its fiber optic network, buildings connected to its network, related assets, customers and employees. As consideration we will issue 2,372,000 class B non-voting shares and assume the rights and obligations of C1 Communications relating to its fiber network in Atlantic Canada. The transaction is subject to obtaining certain approvals. 15 20 OPERATING DATA The table below provides selected key operating data:
GROUP TELECOM ---------------------------------------------------------- AT SEPTEMBER 30, AT SEPTEMBER 30, AT DECEMBER 30, 1999 2000 2000 ----------------- ----------------- ---------------- OPERATING DATA: Route kilometers......................... 46 9,545 10,516(1) Fiber kilometers......................... 16,595 190,583 228,765(2) Number of Lucent and Nortel class 5 switches............................... 1 5 5 Number of buildings connected............ 40 1,569 1,670 Number of employees...................... 168 987 1,134
--------------- (1) Equivalent to approximately 6,534 route miles. Route miles equals the number of miles of the telecommunications path in which we own or lease installed fiber optic cable. (2) Equivalent to approximately 142,148 fiber miles. Fiber miles equals the number of miles installed along a telecommunications path multiplied by the number of fibers along the path. GROUP TELECOM RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999 REVENUE. We generate most of our revenue by providing data and voice services over our local network to end-user customers and charging access fees to long distance providers who make use of our local network for their voice and data transmissions. Our major sources of revenue are: - monthly access and usage fees; - telecommunications service fees which we earn by connecting our customers to our network; - sales of our data, Internet application and voice services to customers; and - installation of our customers' equipment at our site to connect them directly to our network. We also earn one time charges for installation and activation of services as well as revenue from the resale of equipment to our customers and the installation of such equipment. Revenue for the three months ended December 31, 2000 increased $37.7 million, or 1,661%, to $39.9 million compared to $2.3 million for the three months ended December 31, 1999, due to the addition of new customers and new services and inclusion of the customer base we acquired from Shaw Fiberlink, Moffat Communications and Cable Atlantic. We expect to maintain a 20% growth quarter over quarter in the upcoming year. In the years to come, our expansion strategy is to achieve a significant penetration of the Canadian business telecommunications market, including the small and medium enterprise sector. COST OF SERVICES. Our cost of services consists of network operating costs which include: - the costs to install, monitor and repair our network; - termination and unbundled network element charges; - charges from long distance carriers for resale of long distance services; - salaries and benefits associated with network operations as well as our customer service personnel; 16 21 - charges for our redundant connection to the Internet; - leased fiber costs; and - building access fees and municipal access fees paid to civic authorities and others for use of rights of way. Cost of services for the three months ended December 31, 2000 increased $23.3 million, or 1,089%, to $25.4 million compared to $2.1 million for the three months ended December 31, 1999. The increase was due to a corresponding increase in revenue. For the three months ended December 31, 2000, we achieved a gross margin level of 36.3%. We expect continued improvement in gross margins in the coming year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and administrative expenses consist primarily of: - promotions; - advertising, travel and entertainment costs; - compensation to sales representatives, administrative, marketing, financial and executive personnel; - recruiting costs; - corporate administration costs; - legal, accounting and other professional fees; - office related expenses; and - bad debts. Selling, general and administrative expenses increased $30.9 million, or 285%, to $41.8 million for the three months ended December 31, 2000 compared to $10.9 million for the three months ended December 31, 1999 due to our national expansion, implementation of our back office and operational support systems, and hiring over 900 employees. Selling, general and administrative expenses as a percentage of revenue decreased from 479% in the three months ended December 31, 1999 to 105% in the three months ended December 31, 2000. As we continue to grow our business, we expect to continue to leverage off and realize the benefits from our established infrastructure. AMORTIZATION. Amortization for the three months ended December 31, 2000 increased $22.3 million, or 1,981%, to $23.4 million compared to $1.1 million for the three months ended December 31, 1999 due to an increase in property, plant and equipment resulting from our acquisitions and the deployment of our network. INTEREST AND FINANCING CHARGES, NET. Interest and financing charges, net of interest income, increased $27.4 million, or 19,434% for the three months ended December 31, 2000 compared to the $0.1 million for the three months ended December 31, 1999. To fund our national expansion, we raised $1 billion in debt as at December 31, 2000 compared to December 31, 1999. Accordingly, our interest and financing costs have increased significantly. TAXES. We have not generated any taxable income to date and therefore have not accrued any income tax expense. We have recorded a provision for large corporations' tax in the amount of $1.1 million for the three months ended December 31, 2000. LOSS. As a result of the above, the loss before income taxes for the three months ended December 31, 2000 was $78.2 million compared to $11.9 million for the three months ended December 31, 1999, representing an increase of 552%. EBITDA AND CASH FLOW FROM OPERATIONS. For the three months ended December 31, 2000, we experienced a negative EBITDA of $19.9 million, representing a significant increase over the three 17 22 months ended December 31, 1999 negative EBITDA of $10.1 million as a result of our expansion strategies. Cash flow used in operating activities were $39.1 million in the three months ended December 31, 2000 and $7.9 million in the three months ended December 31, 1999. Based on our current funded business plan, we are projecting to reach a positive EBITDA in the second half of 2002. EBITDA is a financial metric used by substantially all investors to compare companies in the telecommunications industry on the basis of operating results, asset value and the ability to incur and service debt. It is not intended to represent results of operations or cash flow results in accordance with Canadian generally accepted accounting principles. EBITDA may not be comparable to similarly titled amounts reported by other companies. YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999 REVENUE. Revenue for the year ended September 30, 2000 increased $70.5 million, or 2,608%, to $73.3 million compared to $2.7 million for the year ended September 30, 1999, due to the addition of new customers and new services and inclusion of the customer base we acquired from Shaw Fiberlink, Moffat Communications and Cable Atlantic. In fiscal 2000, data revenue accounted for 84.5% of our total revenue, while voice accounted for 14.5% and applications for 1%. Data ports and private lines provisioned grew from 134 in the first quarter to 5,206 in the fourth quarter and from 259 to 38,879, respectively. Growth in our data revenue was achieved by providing Internet gateway and LAN/WAN extension services, as well as voice and application services, in bundled product offerings to meet each client's requirements. Voice revenue increased during the year, as a result of provisioned access lines growing from 7,357 in the first quarter to 36,516 in the fourth quarter. In addition, the percentage of on-net access lines dramatically increased from fewer than 5% as at September 30, 1999 to 62% as at September 30, 2000 contributing to an improvement in our gross margin as described below. COST OF SERVICES. Cost of services for the year ended September 30, 2000 increased $49.5 million, or 2,739%, to $51.3 million compared to $1.8 million for the year ended September 30, 1999. The increase was due to a corresponding increase in revenue. For the year ended September 30, 2000, we achieved a gross margin level of 30%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $90.7 million, or 888%, to $101.0 million for the year ended September 30, 2000 compared to $10.2 million for the year ended September 30, 1999. During the year ended September 30, 2000, we undertook a significant national expansion, implemented back office and operational support systems, and hired over 800 employees to execute these directives. Accordingly, the majority of our selling, general and administrative expenses relate to compensation, advertising, facility and travel costs incurred. AMORTIZATION. Amortization for the year ended September 30, 2000 increased $42.1 million, or 4,948%, to $43.0 million compared to $0.9 million for the year ended September 30, 1999 due to an increase in property, plant and equipment resulting from our acquisitions and the deployment of our network. INTEREST. Interest income resulted from investment of cash reserves from debt and equity offerings. Interest income for the year ended September 30, 2000 was $22.2 million compared to $0.9 million for the year ended September 30, 1999. Interest expense resulted from interest and financing charges related to our long-term debt. Interest expense for the year ended September 30, 2000 was $85.8 million compared to $0.5 million for the year ended September 30, 1999. Of our available financing, we have utilized $100 million of secured bank financing and $185.4 million of vendor financing. In addition, $662.7 million of senior discount notes are also outstanding. The senior discount notes incur interest at an effective rate of 18 23 14.9% while the bank financing has been structured as floating interest rate debt with the interest rate fixed in six-month intervals using bankers acceptances and term loans. The vendor facilities bear interest at a floating rate plus a margin ranging from 2 to 4.25%. As we continue our network expansion in 2001, our interest expense is expected to increase as we incur interest on the current utilization of our financing for a full year and incur additional interest charges through drawing down future amounts of our available financing. FOREIGN EXCHANGE GAIN. A net foreign exchange gain of $9.3 million was incurred for the year ended September 30, 2000 due to our significant U.S. dollar cash position and the devaluation of the Canadian dollar. Foreign exchange gains and losses associated with U.S. dollar denominated long-term debt are deferred and amortized over the life of the financing arrangement. TAXES. We have not generated any taxable income to date and therefore have not accrued any income tax expense. In the year ended September 30, 2000, a net recovery of $38.5 million of future income taxes was recorded in order to recognize the tax benefit from operating loss carryforwards to the extent of existing temporary differences arising from the Shaw FiberLink and Cable Atlantic acquisitions. LOSS. As a result of the above, the loss before income taxes for the year ended September 30, 2000 was $176.5 million compared to $9.8 million for the year ended September 30, 1999, representing an increase of 1,700%. EBITDA AND CASH FLOW FROM OPERATIONS. For the year ended September 30, 2000, we experienced a negative EBITDA of $56.8 million, representing a significant increase over the previous year EBITDA negative of $8.4 million as a result of our expansion strategies. Cash flow used in operating activities were $49.2 million in the year ended September 30, 2000 and $9.0 million in the year ended September 30, 1999. YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998 REVENUE. Revenue for the year ended September 30, 1999 increased $0.9 million, or 48%, to $2.7 million compared to $1.8 million for the year ended September 30, 1998, due to a larger number of customers and new services being provided. Approximately 72% of our revenue for the year ended September 30, 1999 was from recurring sources as compared to 63% for 1998. Our recurring revenue was primarily from the sale of access and usage of our network. COST OF SERVICES. Cost of services for the year ended September 30, 1999 increased $0.7 million, or 60%, to $1.8 million compared to $1.1 million for the year ended September 30, 1998. The increase was due to corresponding increase in revenue and change in product mix which resulted in lower margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $7.2 million, or 236%, to $10.2 million for the year ended September 30, 1999 compared to $3.0 million for the year ended September 30, 1998 due to an increase in salaries due to increased headcount, a national marketing launch and increased need for office space and related costs. AMORTIZATION. Amortization for the year ended September 30, 1999 increased $597,961, or 234%, to $852,539 compared to $254,578 for the year ended September 30, 1998 due to an increase in property, plant and equipment available for commercial service. INTEREST INCOME AND FINANCE CHARGES. Interest income for the year ended September 30, 1999 was $465,913 as compared to interest expense of $89,188 for the year ended September 30, 1998. Interest income resulted from investment of cash reserves from private equity offerings. This was partially offset by increases in interest expense on long-term debt and financing charges related to vendor financings. TAXES. We have not generated any taxable income to date and therefore have not accrued any income tax expense. We have accrued a provision for large corporations tax for September 30, 1999, 19 24 of $165,000. As of September 30, 1999, we had an aggregate of approximately $13.1 million of non-capital loss carry forwards, of which $326,000 expire by 2003. We currently have no capital losses. Non-capital losses can be carried forward 7 years and carried back 3 years. LOSS. As a result of the above, the loss before income taxes for the year ended September 30, 1999 was $9.8 million compared to $2.4 million for the year ended September 30, 1998, representing an increase of 302%. EBITDA AND CASH FLOW FROM OPERATIONS. For the period ended September 30, 1999, we incurred a negative EBITDA of $8.4 million, representing a significant increase over the previous year EBITDA loss of $2.3 million as a result of our expansion strategies. Cash flows used in operating activities were $9.0 million in the year ended September 30, 1999 and $1.4 million in the year ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES We have incurred significant operating and net losses and expect that such losses will continue as we develop, construct and expand our network and our operations and build our customer base. The cash provided by our operations will not be sufficient to cover these operating and net losses as we construct and expand our network. Our cash expenditures for property, plant and equipment for the three months ended December 31, 2000 were $34.0 million compared to $18.9 million for the three months ended December 31, 1999, and were related to the purchase and construction of switching and data networking equipment, construction of our fiber optic infrastructure and central office and data hub facilities, transmission equipment and co-location facilities and construction and implementation of our back office systems. As a result of our own, build and acquisition strategy, we expanded our network from 24,407 fiber kilometers as at December 31, 1999 to 228,765 fiber kilometers as at December 31, 2000 and increased the number of buildings connected to our network from 50 to 1,670 in the same period. In 2001 and as part of our fully funded business plan, we will continue to make capital expenditures as we expand the reach of our network to target markets. We expect to grow our network to include over 500,000 fiber kilometers by September 30, 2001. At December 31, 2000, our current assets were $430.0 million and our current liabilities were $112.3 million, giving us a working capital of $317.8 million compared to a deficit of $1.6 million at December 31, 1999. Cash and cash equivalents at December 31, 2000 were $366.0 million compared to $29.3 million at December 31, 1999. Cash used in operating activities for the three months ended December 31, 2000 was $39.1 million, most of which came from our net loss of $79.3 million, partially offset by an increase in items not affecting cash, such as amortization and non-cash interest expense, and changes in working capital. From our inception in April 1996 until May 1999, we funded our capital expenditures and operating losses through private placements of our equity and debt. In May and July, 1999 - we raised approximately $41.5 million from a private placement of series A first preference shares to affiliates of Goldman Sachs, CIBC World Markets, National Bank Financial Capital Corp. and MGN Opportunity Group LLC. In August 1999, we raised an additional $28.8 million, $25.9 million of which came from the exercise of options held by these private equity investors resulting in the issuance of 13,833,335 series A first preference shares. - we entered into a credit facility with Lucent which provided for an initial commitment of US$40 million and which is available until May 28, 2001. The facility is to finance the purchase of equipment and services from Lucent to be used in our network. 20 25 - we signed a credit agreement with Cisco pursuant to which we can borrow from Cisco up to US$15 million to finance our purchase and installation of Cisco networking hardware and software. The funds under this credit agreement are available until July 28, 2001 and bear interest at a rate of 12% per year. In February, 2000 - we issued 855,000 units, consisting of US$855,000,000 of 13 1/4% senior discount notes and warrants to purchase 4,198,563 of our class B non-voting shares for net proceeds to us of US$436,900,000; - we entered into an agreement with Lucent which will allow us to finance up to US$315 million of switches, fiber and related electronic equipment and engineering and installation services purchased from Lucent over a three year period from the initial drawdown; and - we entered into an agreement with several banks under which they will provide a $220 million committed bank facility. In September, 2000 we entered into a credit agreement with Cisco pursuant to which we can finance up to $120 million of telecommunications equipment and services purchased from Cisco over a two year period. We are not required to begin repaying any of our funding obligations until 2003. Interest on the senior discount notes is deferred until 2005 with payment of the deferred interest and principal due in 2010. After 2005, interest on the senior discount notes is payable semi-annually. The term portion of the senior bank facility is repayable in annual increments ranging from 5% to 10% between 2003 and 2005, with a final repayment of 75% of the principal in 2006. The vendor facilities are with two of the world's leading telecommunication equipment suppliers, Lucent Technologies Inc. and Cisco Systems Inc. One requires quarterly installments of 1.25% beginning in 2003 with 75% of the principal in 2008 and the other requires annual installments ranging from 5% to 20% between 2003 and 2006 with final repayments of 55% in 2007. These repayment terms are providing us with the flexibility to focus on the growth of our business which we expect will generate the funds required to service our long- term debt. For a detailed description of these financing arrangements, see "Description of our Financing Arrangements" beginning on page 39. We completed our initial public offering on March 15, 2000 with the issuance of 20,700,000 of our class B non-voting shares at a price of US$14 per share. The initial public offering resulted in aggregate net proceeds to us of US$268,100,000. Our funding has provided us with the stability and the resources to finance our growth. As at December 31, 2000, we had available approximately $850 million in funding to fully fund our business plan to 2004, consisting of $366 million cash on hand, $364 million in available vendor financing and $120 million in available senior bank financing. In February 2000, we acquired the business of Shaw FiberLink for $360 million in cash and the issuance of 27.1% of our fully-diluted equity. We funded the cash portion of our acquisition of the business of Shaw FiberLink by borrowing $100 million under our bank facility and by using $260 million of the net proceeds from the issuance of our units. In April 2000, we acquired the business of Videon FiberLink from Moffat Communications for $68 million in cash and 1,667,000 of our class B non-voting shares. In May 2000, we acquired and will acquire fiber and dedicated fiber optic capacity from 360networks for an initial cash payment of approximately $32 million and total future payments of $328 million. We have options to acquire from 360networks further fiber and dedicated fiber optic capacity. In July 2000, we acquired from Cable Atlantic its competitive local exchange carrier and commercial telecommunications operations for $15 million in cash, 1,740,196 of our class B non-voting shares and a cash payment equal to the value of the net working capital of the acquired business on the closing date. In October 2000, we signed a term sheet with C1 21 26 Communications to acquire all of its Atlantic Canada business and assets in exchange for the issuance of 2,372,000 class B non-voting shares and the assumption of certain liabilities. The transaction is subject to obtaining certain approvals. We believe that the remaining net proceeds of our unit offering, additional borrowing under our Lucent and Cisco vendor facilities, our bank facility and the net proceeds of our initial public offering of class B non-voting shares will be sufficient to fully fund our business plan to 2004. The extent of additional financing required, if any, will depend upon the rate of our expansion and the success of our business. Consistent with our business strategy, we continually consider acquisition opportunities that will enhance our business. There can be no assurance that additional financing will be available to us or, if available, that it can be obtained on acceptable terms or within the limitations contained in our existing financing agreements. In the event that our plans change, the assumptions upon which our plans are based prove inaccurate, we expand or accelerate our business plan or we complete acquisitions, the foregoing sources of funds may prove insufficient to fully fund our business plan and we may be required to seek additional financing sooner than we currently expect. Additional sources of financing may include public or private equity or debt financings, capital and operating leases and other financing arrangements. To the extent sufficient funding is not available we may limit which markets we enter into and the degree to which we penetrate a particular market. We can give no assurance that additional financing will be available to us or, if available, that it can be obtained on a timely basis and on acceptable terms or within the limitations contained in our financing arrangements. Failure to obtain such financing could result in the delay or abandonment of some or all of our development and expansion plans and expenditures, which would harm our financial condition and operating results. Such a failure could also limit our ability to make principal and interest payments on our indebtedness. We cannot assure you that financing, if required, will be available in the future or that, if such financing were available, it would be available on terms and conditions acceptable to us. Our revenue is generated primarily in Canadian dollars, while substantial amounts of our current and future liabilities, including interest and principal obligations on our long-term debt, are and will be payable in U.S. dollars. As at December 31, 2000, we had entered into certain cross currency swaps to hedge approximately 78% of our outstanding U.S. dollar denominated debt. 22 27 BUSINESS OVERVIEW We control and operate the largest independent national broadband network in Canada enabling us to provide reliable metropolitan and long haul services. Over our network, we provide Internet, high-speed data and voice services targeted primarily to small and medium businesses. Our Internet and data services include web and application hosting, co-location, e-commerce and other value added Internet services. As part of our co-location services, we house and manage computer and networking equipment for our data customers. We bundle our data services with traditional telecommunications products and services, including local area network extension and enhanced local and long distance voice services. To serve the growing data and telecommunications markets, we are continually expanding our fiber optic network and selectively use fixed wireless and digital subscriber line technologies to extend the reach of our network. We have acquired and integrated the competitive access provider businesses of Shaw FiberLink located primarily in western and central Canada, Moffat, located in western Canada and acquired the competitive local exchange carrier businesses of Cable Atlantic, located in eastern Canada. We have also entered into agreements with 360networks to obtain additional long haul fiber assets across Canada and the United States. We own and operate facilities nationally in 9 Canadian provinces and in Canada's major metropolitan centers of Toronto, Montreal, Vancouver, Ottawa, Calgary, Edmonton, Winnipeg and St. John's. We have been providing Internet, high speed data and voice services in all five of our initial markets of Toronto, Vancouver, Calgary, Montreal and Edmonton since February 2000. Since then, through organic growth and a series of acquisitions, we have expanded the reach of our fiber network to include an additional 8 markets beyond our original targeted network. These new metropolitan markets include Victoria, Winnipeg, London, Hamilton, Kitchener/Waterloo, Ottawa, Quebec City, and St. John's, Newfoundland. As of December 31, 2000, we serve all 13 of these markets. RECENT DEVELOPMENTS OUR ACQUISITIONS SHAW FIBERLINK. On February 16, 2000, we acquired the business of Shaw FiberLink from Shaw Communications for $760 million in cash and shares. We acquired rights to 101,546 fiber kilometers from Shaw FiberLink and, in addition, Shaw Communications has agreed to construct for our use, at no additional cost to us, approximately 97,500 additional fiber kilometers over the next three years. As at December 31, 2000, we have obtained for use newly constructed fibers with a carrying value of $97.7 million pursuant to this arrangement. Since 1993, Shaw FiberLink has provided facilities-based data services over a high bandwidth fiber optic network in Canada to national telecommunications carriers, large businesses and governments. For the year ended August 31, 1999, Shaw FiberLink had revenue of $38.8 million and EBITDA of $12.1 million. Shaw FiberLink operates high capacity fiber optic telecommunications networks in some of Canada's fastest growing markets including: the greater Toronto area (Toronto, Scarborough, Markham, Vaughan, Richmond Hill, Pickering and Barrie), Edmonton, Calgary, Winnipeg, Vancouver Island and central British Columbia (Kamloops, Penticton, Kelowna, Vernon and surrounding areas). Shaw FiberLink also owns and operates several strategically located inter-city networks and several international gateways into the United States. Shaw FiberLink has over 400 customers. Its customer base includes carriers, competitive local exchange carriers, internet service providers, governments, banks, broadcasters, oil and gas companies, and wireless communication providers. These customers demand a wide variety of requirements in terms of bandwidth, type of connectivity and support. As the dominant competitive access provider in Western Canada, Shaw FiberLink also provides technical support, network 23 28 management, and sales and administrative support to a number of smaller competitive access providers. ACQUISITION FROM MOFFAT COMMUNICATIONS LTD. On April 27, 2000, we acquired Videon FiberLink from Moffat Communications Ltd. for $68 million in cash and the right to acquire approximately 1.7 million of our class B non-voting shares. Videon FiberLink is a competitive access provider business. This acquisition provides us with additional customers, employees and an indefeasible right to use for 30 years certain specifically identified existing fibers comprising approximately 620 fiber route kilometers in Edmonton and Winnipeg connected to over 240 buildings. AGREEMENT WITH CABLE ATLANTIC. On July 21, 2000, we acquired from Cable Atlantic its competitive local exchange carrier and commercial telecommunications operations for $15 million in cash, the right to acquire 1,740,196 of our class B non-voting shares and a cash payment equal to the value of the net working capital of the acquired business. This acquisition provides us with additional customers, employees and an indefeasible right to use for 30 years certain specifically identified existing fibers comprising approximately 8,732 fiber kilometres and 390 route kilometres in Newfoundland connected to a minimum of 68 commercial business buildings and 31 Newfoundland government buildings, with a right to purchase these fibers for $1 at any time. At the time we acquired it, the business had property, plant and equipment of approximately $47 million. TERM SHEET WITH C1 COMMUNICATIONS. In October 2000, we signed a term sheet with C1 Communications to acquire all of its Atlantic Canada assets and business. The transaction includes the acquisition of C1 Communication's Atlantic cable competitive local exchange carrier business, including its fiber optic network, buildings connected to its network, related assets, customers and approximately 36 employees. The acquisition will provide us with approximately 2,325 additional route kilometres and approximately 44,400 additional fiber kilometres in Nova Scotia and New Brunswick. As consideration we will issue 2,372,000 class B non-voting shares and assume the rights and obligations of C1 Communications relating to its fiber network in Atlantic Canada. The transaction is subject to obtaining certain approvals. These acquisitions will: - accelerate the deployment of our network across Canada; - expand the addressable market for our current services; - reduce our reliance on the incumbent local exchange carriers for leased facilities; - give us a complementary competitive access provider business; and - significantly expand our business to long distance carriers, wireless telecommunications companies and Internet service providers. The networks of the businesses we have acquired and our network are constructed in compatible, fiber network configurations, with minimal geographic overlap using synchronous optical networking technology and gigabit ethernet connections. Accordingly, we have already fully integrated Shaw FiberLink and Videon FiberLink and we believe that the integration of the businesses we acquired from Cable Atlantic and intend to acquire from C1 Communications can be accomplished in a timely manner. With the addition of these businesses, we now own and operate facilities nationally in 9 Canadian provinces, including Canada's major metropolitan centers of Toronto, Montreal, Vancouver, Ottawa, Calgary, Edmonton, Winnipeg and St. John's. We expect that the combined network (including the network we intend to acquire from C1 Communications), with its national coverage, will give us a time-to-market advantage that will lead to increased market penetration and higher operating margins. 24 29 STRATEGIC RELATIONSHIPS AGREEMENTS WITH 360NETWORKS, INC. In May 2000, we agreed with 360networks, inc. to (1) lease from them dedicated fiber optic capacity and (2) purchase fiber in Canada and receive from them an indefeasible right to use fiber in the United States. The aggregate price of the dedicated fiber optic capacity and fiber we acquired was approximately $362 million. We have the option to acquire from 360networks additional fiber and dedicated fiber optic capacity. Under the agreement, 360networks will lease to us fiber optic capacity at a bandwidth level of 2.4 gigabits per second, in Canada and the United States. The lease will give us the exclusive right to use this fiber capacity for 20 years, comprised of an initial term of 3 years with a 17 year renewal option at our discretion. As at December 31, 2000, we have accepted approximately 76% of the fiber optic capacity lease. In addition, 360networks has sold and will sell to us 12 strands of unused fiber ranging approximately 7,000 kilometers, connecting Seattle, Washington to Halifax, Nova Scotia via Victoria, Kamloops, Edmonton, Calgary, Regina, Winnipeg, Toronto, Ottawa, Montreal and Quebec City. If we choose, 360networks will also grant us the right to use an additional 12 strands of fiber ranging approximately 7,900 kilometers, connecting Seattle, Sacramento, Denver, Chicago, Detroit, Toronto, Buffalo, Albany, New York City, Boston and Montreal. This fiber will be located primarily in the United States. The indefeasible right to use this fiber will be for a term of at least 20 years. We also will have the option to purchase from 360networks additional segments of fiber optic cable connecting the United States and Canada. Delivery of the capacity and the fiber to us by 360networks and payment by us to 360networks will be made in installments over the next four years. An initial installment payment of approximately $32 million has been made. We will also pay 360networks fees for maintaining the fibers. In addition, we invested approximately $43 million in the equity of 360networks. BUILDING LICENSE AGREEMENTS. We currently have commercial agreements with the largest property managers in Canada securing access to 907 buildings in 13 of our currently served markets representing approximately 158 million square feet. As of December 31, 2000 we have signed 613 building license agreements with property owners, including Oxford Properties, Brookfield, Cadillac Fairview, GWL Realty Advisors and O&Y Enterprises. We currently have 1,670 buildings on our network. For a further description of building license agreements, see "Business -- Strategic Relationships -- Building License Agreements" beginning on page 30. MARKETING AGREEMENTS. In May, 2000, we entered into an agreement with Research in Motion Limited to market and offer their BlackBerry(TM) wireless e-mail solution so as to expand our suite of value added applications and services. In May, 2000 we entered into an agreement with Net Nation Communications Inc. to develop web and ecommerce hosting application services. In March, 2000, we entered into an agreement with Jawz Inc. (formerly Offsite Data Services) to develop PC/Server backup application services. In April, 2000, we entered into an agreement with Multicom Canada Inc. to provide us with operator and administration services for our teleconferencing services. BUSINESS STRATEGY Our goal is to be the leading data and telecommunications service provider to Canadian businesses, institutions and other carriers by focusing on data and Internet applications and services and leveraging our extensive fiber network. We intend to further this goal by increasing the reach of 25 30 our network and by expanding our data and related service offerings. The key components of our strategy are: - LEAD WITH DATA AND INTERNET APPLICATION SERVICES. We intend to focus our product offering on data and Internet application services, which we expect will be the fastest growing segment of the Canadian telecommunications services market. We believe our data services represent an attractive entry point to sell a package of data applications and voice services to our customers. We also believe we have a significant opportunity to achieve high profit margins by bundling integrated data, Internet application and voice services. - BE A ONE-STOP INTEGRATED TELECOMMUNICATIONS PROVIDER. We are a single supplier of integrated and comprehensive bundled telecommunications services. We believe that providing one-stop telecommunications services, including data, Internet application and voice services, will enable us to better meet the needs of our customers, capture a larger portion of our customers' telecommunications expenditures and increase customer retention. - OWN AND EXPAND OUR NATIONAL, FACILITIES-BASED NETWORK INFRASTRUCTURE. We intend to own or control the fiber that comprises our network in each of our markets. We believe this will result in the following strategic advantages: - abundant broadband capacity; - higher operating margins than would be possible if we resold services of, or leased facilities from, other carriers; - control over our network, resulting in improved service and minimal reliance on the incumbent local exchange carriers; and - the ability to more easily deploy telecommunications solutions on a national basis. - ACQUIRE AND RETAIN MARKET SHARE THROUGH A DIRECT SALES FORCE AND PROACTIVE CUSTOMER SERVICE. Our sales force has increased 130% from December 31, 1999 to 271 sales representatives at December 31, 2000. We intend to continue to expand our sales force to build and support our customer base. Once we obtain a customer, we focus on providing proactive customer service, backed by service-level commitments, which is available 24 hours a day, 7 days a week. Our customer service is personalized and provided through a single point of contact to increase customer satisfaction. We also offer web-based programs that provide ordering, tracking and reporting capabilities to our customers. We offer incentives to our sales and customer support personnel through a compensation structure that is designed to promote a high level of penetration of the buildings on our network. - LEVERAGE OUR STATE-OF-THE-ART, SCALABLE BACK OFFICE SYSTEMS. We have developed state-of-the-art, scalable operational support systems that integrate every component of our operations. We have selected a combination of best-of-breed systems, which enable us to reduce overhead costs while providing superior customer service. We believe that our open and scalable back office systems enhance our productivity and service quality, and provide us with a significant competitive advantage by: - automating the processes involved in connecting a customer to our network; - enabling single call resolution of customer inquiries; and - providing each of our departments with an integrated view of all provisioning, billing, customer service, trouble-ticketing and collection activities. - CONTINUE TO EXPAND THROUGH ALLIANCES AND ACQUISITIONS. In addition to our acquisition of the businesses of Shaw FiberLink and Videon FiberLink, our acquisition of the Cable Atlantic competitive local exchange carrier and commercial telecommunications operations in Eastern Canada, our intended acquisition of C1 Communications' competitive local exchange carrier 26 31 operations, and our agreements with 360networks, we plan to consider alliances with and acquisitions of other related or complementary businesses or asset purchases, including purchases of fiber. Strategic acquisitions, alliances or asset purchases may enable us to expand more rapidly and further solidify our national presence by adding new infrastructure, customers and additional experienced employees. - LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM. Our management team has extensive experience in the telecommunications industry. We believe the quality, experience and teamwork of our management team will be critical factors in the implementation of our growth strategy. NETWORK Our network in each of our current markets looks similar to the following diagram: [OM NETWORK DIAGRAM] INTEGRATED NETWORK ARCHITECTURE We provide services to our customers over an integrated network that supports high-speed data, Internet application, local and long distance voice services. We believe that the integrated design of our data, Internet application and local and long distance networks significantly reduces our cost of providing a bundled service offering. Our integrated network architecture includes switches and data routers, customer premise equipment and synchronous optical networking technology fiber rings. In addition, approximately 20% of our urban fiber network is comprised of slack and storage fiber in urban area access points. We have integrated the fiber, equipment and operating systems of Shaw FiberLink and Videon FiberLink and believe that our integration of the business we acquired from Cable Atlantic and intend to acquire from C1 Communications can be accomplished without significant delay or cost. We also believe we can upgrade the equipment in buildings on Shaw FiberLink's, Videon FiberLink's and the aforementioned Cable Atlantic business' networks and sell our services (in addition to those of Shaw FiberLink, Videon FiberLink and the Cable Atlantic business we have acquired) to their existing customers. Shaw FiberLink's, Videon FiberLink's and the aforementioned Cable Atlantic business' telecommunications equipment is industry standard, purchased from well known vendors, and is compatible with our equipment. 27 32 SWITCHES AND DATA ROUTERS Our Lucent and Nortel Class 5 switches and Cisco data routing equipment are located in central offices in 5 of our 13 markets. Our central offices are secure, specifically outfitted facilities which have special heating, humidity, air, fire suppression and power requirements to support sensitive electronic equipment. Switches and data routing equipment direct a voice signal or data packet from its origin to its correct destination according to the telephone number or addressing technology. Switched voice services, including basic and advanced telephone services, are provided through switches at central offices. Data services are provided through Cisco equipment in central offices and the buildings connected to our Internet protocol based network. Our network uses data routing equipment and voice switches installed at central offices in five cities: Vancouver, Toronto, Calgary, Montreal and St. John's. Data and voice traffic from other cities is directed to the central office nearest to that city. CUSTOMER PREMISE EQUIPMENT To connect our customers to our network, we install data and voice routing equipment in the building in which they are a tenant. This equipment combines and converts the customer's transmission to an optical signal. The signal is then transmitted through our network to a central office where data and voice traffic are routed to their ultimate destination. Where buildings have fewer tenants, we intend to connect up to ten buildings to the switch/router in one centrally located building. For voice traffic, our network can currently provide up to 2.5 gigabits per second speed connections to our end customers and can easily be upgraded for increasing volume of traffic. For data traffic, our network currently provides up to 1 gigabit per second speed ethernet connections to our end customers. This network's capacity is also easily upgradable. SYNCHRONOUS OPTICAL NETWORKING TECHNOLOGY AND GIGABIT ETHERNET CONNECTIONS We provide our data, Internet application and voice services over our integrated network. Our network uses synchronous optical networking technology and gigabit ethernet connections to transport information along our fiber optic backbone. Synchronous optical networking technology is used primarily to transmit voice services. Synchronous optical networking technology is based on self healing concentric rings, a technology that routes traffic through an alternate path in the event there is a point of failure. This technology results in a very reliable network which is less likely to be subject to disruptions in the event of breakage at one point. Other advantages of synchronous optical networking technology are high capacity and standardization. Synchronous optical networking technology offers large amounts of bandwidth for fiber-optic networks. It provides seamless inter-connectivity among equipment providers which is important when we look to interconnect with other networks on a global basis. Finally, synchronous optical networking technology offers superior bandwidth management, real-time monitoring, and survivability. Ethernet technology is used primarily to transmit data. Ethernet is the standard interface technology for local area networks and has many of the same advantages of synchronous optical networking technology. Ethernet offers simple, scaleable high bandwidth capacity. In addition, we apply intelligent end-to-end network management, which means that the customers' and end users' lines are monitored from a network operations center, 24 hours a day, seven days a week. ADVANTAGES OF FIBER OPTIC CABLE Through our advanced fiber optic network we can provide higher bandwidth, enabling information to be transported at speeds significantly faster than the up to six megabits per second that can be 28 33 achieved using digital subscriber line technology over copper facilities. Fiber optic cable also has high immunity to signal degradation, which means that a signal can be transmitted over extremely long distances without requiring regeneration of the original signal. The result is a transmission that is more reliable, precise, clear and consistent than transmissions over copper wires. Unlike metallic cable, a fiber optic-based infrastructure does not emit any radiation and is immune to noise. In addition, metallic cable is limited in distance, suffers in performance and requires additional equipment to regenerate signals carried by it over a longer distance. OTHER NETWORK COMPONENTS Although we intend to provide our services over our own fiber optic network in each of our target markets, in order to capture customers and generate early revenue as we deploy our network, we intend to use wireless technology or to lease other companies' facilities to provide services to those customers not currently directly connected, but who will be connected in the short term to our local networks. We will also deploy digital subscriber line technology over the leased facilities to extend the current reach of our network. This strategy provides us with rapid access to buildings and allows us to gain market penetration and take advantage of market opportunities before we have completely constructed our network. Customers served by these technologies will be migrated onto our network as it is built. STRATEGIC RELATIONSHIPS We are actively pursuing strategic relationships with some utilities, property owners and technology companies. We intend to use these relationships to maximize the penetration and speed of entry and reduce the cost of deploying our network in our target markets. ACCESS AGREEMENTS AND RIGHTS-OF-WAY We have established, and expect to continue to establish, relationships with electric and other utilities in our target markets to obtain access to customers. In order to cost-effectively build our network in Vancouver, we signed two agreements in December 1997 with BC Hydro, which provide us with access to BC Hydro conduits on its electric distribution network in and around Vancouver and elsewhere across British Columbia. BC Hydro's conduits connect to nearly all buildings in British Columbia. These agreements enable us to lay our fiber in a cost-effective manner because we can do so with minimal excavation of city streets. The BC Hydro agreements expire December 1, 2012, with five year extensions at our option. In August 1999, we entered into a conduit access agreement with ENMAX Corporation, the Calgary power authority. The agreement expires on December 31, 2017 and can be renewed for two additional 5 year periods. We issued to ENMAX Corporation 1.0 million series A first preference shares and agreed to pay fees for installation and access rights and annual fees for maintenance and administration. The agreement provides us with non-exclusive access to conduits in Calgary's downtown core. ENMAX has installed 13 kilometers of our fiber optic cable into these conduits at our cost as of December 31, 1999. In August 1999, we entered into an agreement with EPCOR, Edmonton's power authority, which gives us non-exclusive access to conduits in Edmonton. The EPCOR agreement terminates on August 12, 2014 and can be renewed for additional five year terms after this date with the consent of EPCOR. 29 34 Where our network touches public property, we must obtain local municipal approvals to deploy our fiber in municipal rights-of-way. We have signed municipal access agreements with the cities of Vancouver and Burnaby, British Columbia, Calgary, Alberta, the City of Toronto, Region of Waterloo, City of Waterloo, City of Cambridge, Regional Municipality of Ottawa-Carleton and Quebec City. We also have - a "public user" conduit access agreement with the CSEVM (Commission des Services Electriques de la Ville de Montreal) permitting access to CSEVM conduits in the city core of Montreal; - interim authority allowing construction to proceed in the City of Ottawa, City of London, Town of Newmarket and City of Hamilton/Region of Hamilton-Wentworth; and - permit authority allowing construction to proceed following permit application approvals in Winnipeg, Manitoba and Sainte-Foy, Charlesbourg, Outremont, St. Laurent, LaSalle and Laval, Quebec. Through long term indefeasible right to use agreements, we now have access to various municipal and other rights-of-way by way of underlying rights held or claimed by the indefeasible right to use grantors. These agreements permit the expansion of the existing networks where we request, including various major and minor markets across Canada. We have secured support structure agreements with BCT.Telus (British Columbia and Alberta), MTS (Manitoba) and Bell Canada (Ontario and Quebec) permitting access to available spare capacity on available poles or conduits where approved. We are participating in several joint builds of conduit systems in the Toronto area, and have an existing lease of dark fibers from Toronto Hydro. We are also finalizing the sublease of an existing decommissioned waterpipe system from AT&T Canada which is located in the central business district of Toronto. This waterpipe system was previously refurbished for telecommunications purposes. We are in the process of negotiating and finalizing various municipal access agreements with the City of London, City of Kitchener, City of Hamilton/Region of Hamilton-Wentworth, City of Hull, City of Edmonton, Region of York, Town of Richmond Hill, City of Vaughan, Region of Peel and City of Mississauga, Ontario and Richmond, British Columbia. We are in the process of negotiating agreements for joint build and access to existing support structures with various providers and are also considering joint use, indefeasible right to use or capacity lease opportunities in various markets. These agreements allow us to deploy and use our network over and under a variety of municipal rights-of-way and existing or new support structures permitting us to connect our expanding switch or hub equipment to our customers. These rights and rights-of-way are integral to the construction, installation, operation and expansion of our facilities-based network. BUILDING LICENSE AGREEMENTS Before providing services to customers, we must obtain permission from the property owner to install our equipment, including our voice and data equipment, and to access the riser closets to run fiber directly to the offices of our customers. Once a building has been targeted by our marketing personnel, our network services department negotiates the building license agreement which allows our equipment to be installed in that building. We have adopted a collaborative approach with developers and owners, and have found them generally willing to provide access to their buildings since we are providing enhanced services to the building, thus increasing its value to the building's tenants. Because of our long-term building license agreements, we gain access to potential customers at minimal cost. 30 35 At December 31, 2000, in our target markets we had over 613 building license agreements with national property owners. These agreements typically contain a provision for permanent access by our network, including fiber optic cable, to a specified point inside the building, with a renewable right of access regarding inside wiring to the premises of our clients. These agreements provide us with access to each building on a non-exclusive basis. The CRTC has recently established a presumption that any agreement between a local telephone company and another party, including property owners, that results in the provision of local telephone service to a multi-dwelling unit on an exclusive basis is a violation of the Canadian Telecommunications Act. We believe this presumption will enhance our ability to access additional buildings. FIBER LEASE AGREEMENTS On July 15, 1999, we entered into a fiber optic agreement with Toronto Hydro, Toronto's electric utility company. This agreement provides that we will lease access to Toronto Hydro's existing fiber optic network, which extends throughout Toronto, allowing us to provide service to our customers until we are able to build our own fiber optic network. A permit from Toronto Hydro, which establishes our network access by indicating routing and termination locations and specifies annual rates and one time connection fees, is required before we can provide service to our Toronto customers under this agreement. Permits expire after three years and can be renewed automatically for an additional three years, unless either party gives notice otherwise. We are finalizing negotiations with Ottawa Hydro for a similar arrangement. TECHNOLOGY SUPPLIER RELATIONSHIPS In February 2000, we entered into an agreement with Lucent to provide us with switching equipment, synchronous optical networking technology and other telecommunications equipment, fiber optic cable and related services, including installation, engineering and maintenance services. This agreement replaces an agreement we entered into with Lucent in August 1998. The new agreement with Lucent specifies the pricing of this equipment and services and the terms of its delivery until January 2004. We will work together with Lucent to prepare detailed lists of equipment and services to be provided to us in each of our markets. In addition, we purchase our data switching and routing equipment and our unified messaging equipment from Cisco. We are a "Cisco-powered network" and are an authorized reseller of Cisco products. We believe these supplier relationships enable us to deploy a state-of-art network and give us access to the advanced technologies that our customers require. PRODUCTS AND SERVICES We currently provide the following products and services: DATA SERVICES PORTFOLIO DATA ACCESS. We expect the majority of our revenue to come from data access which includes the following products and services: - Local Area Network Connect (also known as transparent LAN Service) -- a managed high-speed connection to an organization's local area network, for Internet connectivity (including common server capability) and/or connectivity between multiple local area networks delivered over fiber, wireless or digital subscriber technologies. Supported interfaces include ethernet at speeds up to 1 gigabit per second. 31 36 - Carrier Private Lines -- Point-to-point connections over our network, targeting carriers rather than small businesses. - Remote Access/Teleworking -- Corporate modem pools to facilitate dial-in capability for employees working from home, including the use of higher-speed technologies. INTERNET SERVICES. We currently provide the following types of dedicated Internet services: - Business Internet Gateway -- Internet connectivity packages for small and medium-sized businesses. - Internet Transit/Commercial Internet -- High-speed, scalable Internet connectivity for Internet professionals who in turn support residential and business Internet users. - Outsourced Modem Pools -- Managed modem pools for Internet service providers; providing the hardware and scalability to enable Internet service providers to grow capacity over time and incorporating higher-speed technologies. ENHANCED AND OTHER DATA SERVICES. We currently provide and are continuing development efforts for a variety of innovative data products and services in order to act as a one-stop shop for all of our customers' data needs, including the following: - Enhanced IP Services -- Internet protocol fax capability, and private branch exchange/local area network gateways using voice over Internet protocol. - Web-Based Reporting Services -- Internet virtual private networking and data service reporting for performance management and usage monitoring via a web browser interface. - Data Hardware Resale and Maintenance -- Selling and maintaining routers, hubs and switches. APPLICATION SERVICES PORTFOLIO APPLICATION HOSTING SERVICES. We provide our business customers the opportunity to outsource their server and application needs to us through several service offerings: - Applications Hosting -- Turnkey Internet/Web server hosting packages as an outsourced solution to small and medium-sized businesses. This service includes all software, hardware and management required for a business website or for other general office applications. - Co-location -- The physical space in close proximity to our network to colocate, host and/or manage servers or modem pools. This service includes space, power, security and optional management. - E-Commerce Hosting -- Enhanced Web server solutions that enable small and medium-sized businesses to incorporate e-commerce into their website, including the ability to sell products and services and the ability to clear credit card purchases. - Unified Messaging (Voicemail/Email) -- Integration of a business' voicemail and email services to act as a single message center; complete with faxing capabilities, future speech to text/text to speech conversion and encrypted security. - PC/Server backup -- online ability to backup and restore hard drives of computing devices through a web interface. - Teleconferencing -- reservation based audio conferencing with chairperson controls, web streaming and other operator assistance. Additional application services in development include online delivery of office software applications (ASP), multimedia conferencing and Web-based application service reporting. 32 37 SECURE NETWORK SERVICES. We provide our customers with security enhancements to a basic Internet connection through a variety of service offerings: - Networking Security -- Anti-hacker services, such as firewall hosting, to protect customer local area networks from the Internet. - Virtual Private Networking -- The ability to travel securely and privately by tunneling through the Internet, either from one business location to the next or from one business connection to that of a partner, on a single user or enterprise wide basis. - Public Key Infrastructure/Certificate Authority -- The technology to enable secure transactions and information sharing on the Internet by serving as a third party manager of the exchange of information via digital identification certificates. VOICE SERVICE PORTFOLIO LOCAL VOICE SERVICES. We began offering local voice services in November 1999, and offer a full suite of services to accommodate customers that require varying degrees of sophistication in their telecommunications services. - Individual and Digital Business Lines and Multiple Line Business Trunks -- Local switched analog telephone service via individual lines or multi-line trunks and digital service with enhanced features and functionality. - Centrex/Virtual Private Branch Exchange -- Feature-rich phone lines enabling customers to manage their own phone service internally without a private branch exchange. - Private Branch Exchange Interconnect -- A connection between a business' private branch exchange and the public switched telephone network. - Digital Tie Lines -- A business with a private telecommunications network by connecting two private branch exchanges. ENHANCED VOICE SERVICES. We offer and continue to develop a full suite of enhanced offerings to complement our standard business voice services. - Long Distance Service -- Long distance telephone access throughout all major Canadian cities with toll-free directory/operator services, account codes and calling cards. - Other Enhanced Features -- Features such as call transfer, call-waiting, Web-based reporting service, remote message forwarding, three-way conferencing, digital display and other custom calling features. - Voice Hardware Resale and Maintenance -- Telephone sets, private branch exchange and key systems. Our products and services will be branded into data, applications and voice based portfolios and will be branded in support of our service innovation and client care strategies. MARKETING AND SALES We plan to build market share by establishing regionally focused sales distribution and marketing programs to capture new customers and to grow our business with existing customers. Our goal is for our sales representatives to sell services directly to customers in on-net buildings. Our sales and marketing programs are designed to differentiate us from our competitors by providing solutions targeted at the needs of small and medium-sized businesses and by delivering consistently high-quality sales and technical support. All of our marketing information and promotions are standardized and all of our products are nationally branded, with the "GT Connect" portfolio brand and "Completely Connected" tag line. We intend to promote our reputation by delivering uniform and 33 38 consistent services and providing the benefits of a single point of contact with integrated and customized billing. In each target market, we have identified buildings with tenants that meet our target profile. Our ideal building has many small and medium-sized business tenants, each with 10 to 200 employees, that have complex data and other telecommunications needs, including Internet application and voice requirements. Once a building has been targeted, we negotiate the building licence agreement which allows our facilities to be installed in that building. Each member of our local direct sales force is assigned a territory which includes specific buildings in which to sell. The sales representative will become intimate with the needs of all potential customers in those buildings and will be the relationship manager between us and the customer. The sales representative will work with a technical expert, when necessary, to differentiate our services from those of our competitors and cost effectively address our customers' needs. Our sales force will initially target customers with data telecommunications needs that are, or will be, located in on-net buildings. Once we provide a customer with solutions to its data needs and our sales representative has created a relationship with the customer, the sales representative will offer Internet application and voice services to the customer. We believe that once a customer's data needs are met and it is satisfied with our customer service, it will be receptive to purchasing Internet application and voice services from us. Our sales representatives receive a competitive base salary and a series of individual and team bonuses. Their bonuses are based on their attaining a sales quota on a recurring monthly and one time sale basis. Salespeople are further rewarded by the opportunity to participate in our share option plan. We believe our compensation plan will motivate our sales representatives to provide top quality attention and service. We provide our sales and marketing employees with a comprehensive training program which includes introductory formal training, product and service training, leadership development, on going coaching, including on the job training, and a mentor program. We have retained, and intend to continue to retain, people with extensive experience in the telecommunications industry. The market for hiring highly qualified sales representatives is competitive. However, as a result of the recent mergers in the telecommunications industry, we believe a number of highly talented sales representatives are seeking more entrepreneurial companies that provide a higher degree of challenge and more opportunity to develop skills and assume more responsibility. At December 31, 2000, we had 271 sales representatives. MANAGEMENT INFORMATION SYSTEMS, SERVICE ORDER ENTRY, PROVISIONING, BILLING AND CUSTOMER SERVICE OVERVIEW We are committed to the implementation of integrated and scalable operational support systems that enable us to effectively manage and monitor our network, process orders, provision services, track usage and accurately bill our clients with one integrated bill. Our operational support systems integrate substantially every component of our operations. We selected a combination of "best of breed" systems from Hewlett-Packard, Metasolv Software Inc. and Daleen Technologies. We selected this combination of vendors because they met our specific needs in a cost-effective manner, have a strong reputation for reliability and have experienced success throughout North America, particularly with Lucent switching platforms. Our system is scaleable and highly sophisticated and we believe it will reduce human resource expenses, resulting in higher margins. In addition, the scalability of our system will enable us to handle at low incremental costs the additional volume of data traffic that we will experience with the acquisitions of the businesses of Shaw FiberLink and Videon FiberLink and the acquisition of Cable Atlantic's competitive local exchange carrier and commercial telecommunications operations. 34 39 Our system enhances the level of service and care that we can provide our customers by constantly monitoring our network to quickly detect and resolve any failure, often before the customer is aware of a problem. Our operational support systems also allow us to automate additional processes as we require them. Our phased implementation strategy enables us to have initial functional operations support and then to expand support as we grow and our demands increase. New features and additional processes from the same or different vendors can be integrated quickly. We believe our systems provide us with a long term competitive advantage by creating a distinctive, differentiated, and customizable customer interface with the ability to rapidly and seamlessly modify internal automated work flows in response to market developments, all the while relying on powerful and reliable core technology. Our system will scale seamlessly with the addition of large numbers of customers, will minimize the time between order receipt and revenue generation, will improve customer satisfaction, and will enable rapid customization of our product and service offerings to bring new products to market quickly. We also signed an agreement with Nortel's subsidiary Clarify Inc. to purchase eBusiness software focused on customer relationship management. Functions of this software include sales force automation, commissions management, incentives and compensation, order automation, customer care, contract management, web self service, and reporting. SERVICE ORDER ENTRY AND PROVISIONING Our strategy has been to acquire sophisticated off-the-shelf technology that can be easily and cost-effectively configured by our in-house information technology staff. We use the workflow and order-entry module called TBS, from Metasolv Software Inc. This system provides: - convergent customer data entry modules that enable all services and work orders to be entered from a single interface; - advanced workflow functionality that includes job queues for individuals and departments, automatic escalations and jeopardy notifications, scheduling, reporting and tracking; - web-enabled interfaces that provide our clients, partners and agents with the ability to order online and track their order throughout the process; and - integration with circuit and asset inventory to enable "flow-through" provisioning and circuit selection. BILLING Our strategy has been to acquire sophisticated off-the-shelf technology that can be easily and cost-effectively configured by our in-house information technology staff. We are using the Billplex billing and rating engine from Daleen Technologies. This system provides: - integrated billing; - data extractors from multiple systems; - support for meeting Canadian taxation requirements; - output for bills on both paper and in electronic format; and - tracking of overdue accounts. We use an off-the-shelf integration package that ensures data integrity between the products we use for our billing and service order entry and provisioning systems. This increases the functionality of these systems while reducing the costs of deployment. 35 40 CUSTOMER SERVICE Our objective is to deliver a high level of personalized service to our clients and to be pro-active. We believe that the low level of service from some telecommunications companies leads customers to find their own telecommunications solutions. Our experience is that small and medium-sized business customers rarely receive proactive solutions and are unable to get quality customer service from the incumbent local exchange carriers. We believe that the following features of our customer service program are attractive to our customers: - a customer can reach us through their choice of telephone, e-mail or fax and speak with a live person 24 hours a day, 7 days a week; - state-of-the-art contact center solutions to manage all customer service inquiries; - leading management tools to monitor client services; - proactive client management program to provide status updates to clients and to contact them when we detect problems that require resolution; - migration toward a Web-enabled customer service program to allow clients personalized access to their account information, order status and trouble tickets at any time; - simple access to the right expert for their problem; - integrated billing; - service level guarantees; and - clear escalation processes to deal efficiently with any customer concerns. We believe one of the key differences between our approach and that of the incumbent local exchange carriers is how easily our customers will be able to contact us. We have a main telephone number which customers can use to call for inquiries and requests. In addition, we also have a dedicated help desk that provides the technical expertise that customers demand when they need help. Our customers have the option of speaking directly to the right expert, while always having the simplicity of a main contact. Our contact center is equipped with a state-of-the-art computer telephone integration system, Apropos, which allows us to effectively manage all inquiries directed to our customer service representatives, regardless of the medium by which they are sent. A key component of our customer service is our integrated operating support system. Customer relationship management requires instant access to detailed customer data and simple automated workflow tools to support the selling, ordering, delivery and repair of our services. Our operating support system monitors our network to quickly detect failures, often before the customers are aware of a problem. COMPETITION The telecommunications services industry is highly competitive, rapidly evolving and subject to constant technological change. We face, and expect to continue to face, intense competition in all of our markets from the incumbent local exchange carriers, cable companies, resellers of voice services, competitive access providers, utilities, microwave carriers, competitive long distance providers, wireless providers, new competitive local exchange carriers, and private networks built by large end users. Our competitors in the telecommunications services market include and will include Internet service providers, application service providers, other telecommunications companies, e-commerce service providers and Internet software providers. We expect that the principal competitive factors affecting our business will be customer service, the range and quality of services provided and pricing levels. Many of our current and potential 36 41 competitors have financial, personnel and other resources (including brand name recognition) substantially greater than ours, as well as other competitive advantages. However, until recently the Canadian telecommunications services industry has been focused on larger customer accounts, leaving small and medium-sized businesses relatively underserved. In addition, a continuing trend toward consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competitors. Our most significant group of competitors is comprised of companies that previously formed the Stentor Alliance which included NorthwesTel, the recently merged BC Telecom and TELUS, SaskTel, Manitoba Telecom, Bell Canada and the telephone companies located in Eastern Canada which recently merged to form Aliant. Until recently, these companies benefited from a monopoly over the provision of local switched services in their respective geographic regions. They continue to represent approximately 95% of the local voice services market. A number of these companies, including Bell Canada and its Nexxia and Intrigna affiliates, Aliant and BCT.TELUS, are seeking to attract customers nationwide, beyond their historic territories. Many of these companies possess significant financial, technical and marketing resources with which to compete, as well as comprehensive fiber networks and long-standing relationships with their customers. While several key decisions of the CRTC have created a framework for competition in Canadian telecommunications markets generally, competition with the incumbent local exchange carriers is in the early stages of development. In addition to competition from these companies, we face competition from a variety of other current and potential market entrants including Call-Net, AT&T Canada, Videotron and OCI Communications. All of these companies have entered the local voice and data service markets. Some have certain advantages over us, including greater financial, personnel, marketing and technical resources. Most prominent among these is the newly merged AT&T Canada, which has a particular strength in serving large business customers, followed by Call-Net which to date has been more focused on the residential and small business voice market. Beyond the significant competition posed by wireline-based service providers, there is an unknown potential competitive threat from alternative technologies such as wireless and Internet services over cable by cable companies. However, while their fiber and Internet services compete directly with us in major metropolitan markets, to date the cable companies' strategy has been primarily focused on the residential market. EMPLOYEES As of December 31, 2000, we had 1,134 employees, of which 382 were sales and marketing, 119 were customer service, 533 were technical (network services), and 100 were administrative and corporate personnel. 130 of these employees were hired as a result of our acquisition of Shaw FiberLink. We hired 16 Videon FiberLink employees and hired 19 Cable Atlantic employees. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified employees. None of our employees is currently represented by a collective bargaining agreement. We believe we enjoy good relationships with our employees. 37 42 PROPERTIES Our corporate head office is located at Suite 700, 20 Bay Street, Toronto, Ontario, Canada. Our telephone number is (416) 848-2000. Our facilities include administrative and sales offices, central offices and other facilities to house our fiber optic network equipment. The table below describes our material properties:
APPROXIMATE SQUARE LOCATION PURPOSE OWNED OR LEASED FOOTAGE -------- ---------------------- ----------------- ----------- Toronto, Ontario..................... Corporate head office Lease expires on 38,757 and central office December 31, 2014 Vancouver, B.C....................... Network operations and Lease expires on 16,122 engineering July 31, 2006 Burnaby, B.C......................... Central office Owned 7,869 Calgary, Alberta..................... Central office Lease expires on 19,328 December 1, 2014 Edmonton, Alberta.................... Equipment housing Lease expires on 12,738 January 1, 2015 Montreal, Quebec..................... Central office Lease expires on 11,918 January 31, 2015
LEGAL PROCEEDINGS There are no material legal proceedings against us. 38 43 DESCRIPTION OF OUR FINANCING ARRANGEMENTS THE UNITS On February 1, 2000 we issued 855,000 units, consisting of 13 1/4% senior discount notes due 2010 and 855,000 warrants to purchase 4,198,563 class B non-voting shares. Gross proceeds from our sale of the units was US$450,166,050 which, after underwriting commissions and expenses, resulted in net proceeds of approximately US$436.9 million. The notes were issued at a price of 52.651% of the stated amount at maturity. The first interest payment on the notes will be made on August 1, 2005. The notes are redeemable, at our option, at any time on or after February 1, 2003 at various redemption prices set forth in the indenture relating to the notes. The indenture relating to the notes sets forth various occurrences each of which would constitute an event of default. If an event of default occurs, other than our bankruptcy or insolvency, holders of not less than 25% of the principal amount of notes outstanding (voting as one class to the extent equally affected) may declare the accreted value of the notes, together with any accrued interest, to be due and payable. If we become bankrupt or insolvent, the notes immediately become due and payable without any action required by the noteholders. The indenture relating to the notes contains certain covenants that, among other things, limit - our issuance of additional debt, - our payment of dividends and other distributions to shareholders and affiliated persons or companies, - investments in non-wholly owned subsidiaries, - certain transactions with affiliated companies, - the incurrence of liens, - sales of assets, including share capital of subsidiaries, and - certain amalgamations, mergers, consolidations and transfers of assets. Each warrant will entitle the holder to purchase 4.9106 of our class B non-voting shares at no additional cost to the holder, subject to adjustment in the event that we reclassify, split or issue our equity at less than current market value. The class B non-voting shares for which the warrants may be exercised represent approximately 4.0% of our equity on a fully diluted basis as at February 1, 2000, as adjusted for our sale of series B first preference shares to Shaw Communications in connection with our acquisition of the business of Shaw FiberLink. The units were sold in private placements in the United States and outside the United States. We have agreed to register the notes, the warrants and the class B non-voting shares issuable upon exercise of the warrants under the Securities Act of 1933 according to a specified schedule. This prospectus is part of the registration statement to register the notes. BANK FACILITY On February 3, 2000, we entered into a $220 million bank facility with the Canadian Imperial Bank of Commerce, as lead arranger and administrative agent, Goldman Sachs Credit Partners and affiliates of RBC Dominion Securities and TD Securities (USA), as co-arrangers, to finance the acquisition of the business of Shaw FiberLink and for general corporate purposes. The bank facility was amended and restated as of September 29, 2000. The bank facility is available in Canadian 39 44 dollars or U.S. dollars. As at December 31, 2000 we had $100 million outstanding under our bank facility. The bank facility: - consists of two tranches: -- tranche 1, a $120 million seven year revolving reducing bank facility; and -- tranche 2, a $100 million single draw reducing term loan; - bears interest at rates of 3.00% to 4.50% over the prevailing yield on Canadian dollar bankers' acceptances or LIBOR, or 2.00% to 3.25% over the Canadian or United States bank prime rate, based on our financial status; - provides that GT Group Telecom Services Corp., our wholly-owned subsidiary, will be the borrower with guarantees by us and all of our other subsidiaries; - provides for the payment of certain lending, arranging and commitment fees; and - contains covenants that, among other things, require us to meet ongoing financial tests and restrict our ability to incur additional indebtedness, incur liens, pay dividends or repurchase our capital stock. SECURITY The bank facility is secured by: - a first priority security interest over all our assets and material agreements; - a guarantee by us and by GT Group Telecom Services (USA) Corp.; and - a pledge of the shares of GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp. MATURITY, AVAILABILITY AND REPAYMENT The bank facility matures on or about February 3, 2007 (seven years after the closing date). The amounts available under tranche 1 of the facility will be reduced by 10% in 2003, 15% in 2004, 15% in 2005, 20% in 2006 and 40% at maturity in 2007. The amount outstanding under tranche 2 of the facility must be repaid by 4.9% in 2003, 10% in 2004, 10% in 2005, 20% in 2006 and 55.1% at maturity in 2007. Amounts outstanding under the bank facility may be prepaid at any time, subject to customary breakage charges. Amounts available under the bank facility are also mandatorily reduced in pro rata amounts equal to: - the net proceeds from certain asset sales or insurance claims; - 25% of excess cash flow; or - 50% of the net cash proceeds in excess of $600 million from the issuance of unsecured debt or senior debt with a United States bank or other financial institution. 40 45 COVENANTS The bank facility ranks pari passu with the Lucent facility and the Cisco facility with respect to the security obtained from the borrower, our guarantor subsidiaries and us. Under the terms of the bank facility, we, the borrower, and our guarantor subsidiaries are restricted by the bank facility, among other things, from: - making capital expenditures, investments or acquisitions in excess of certain limits; - selling certain assets; - creating liens other than certain permitted encumbrances; - incurring additional indebtedness, other than certain permitted indebtedness; - investing in or guaranteeing the obligations of subsidiaries except to the extent that such investment or guarantee constitutes permitted obligations of such subsidiaries or to the extent that such investment or guarantee constitutes permitted indebtedness; - declaring or setting aside funds for the payment of dividends; - consenting to or agreeing to certain amendments of other financing documents; and - amalgamating, consolidating, merging, or entering into any other form of business combination. We are also required under the bank facility to maintain certain minimum debt to total capitalization ratios, debt coverage ratios, revenue and performance levels. The bank facility restricts the payment of dividends by us or our subsidiaries, other than payments of dividends by our subsidiaries to us or another of our subsidiaries. The bank facility also contains customary events of default, including the failure to pay interest or principal, breach of covenants, cross-defaults or judgements in excess of $5 million, a change of control event or the bankruptcy or insolvency of us or any of our subsidiaries. The bank facility is governed by the laws of the Province of Ontario. LUCENT FACILITY On February 3, 2000, we entered into a vendor facility with Lucent Technologies, Inc., as vendor, to finance the purchase and installation of up to US$315 million of Lucent equipment and services. The Lucent facility was amended and restated as of September 29, 2000. The Lucent facility: - bears interest at rates of 2.00% to 4.50% over the United States bank prime rate, or LIBOR, based principally on our financial status; - provides that GT Group Telecom Services Corp., our wholly-owned subsidiary, will be the borrower with guarantees by us and all of our other subsidiaries; - provides for the payment of certain lending, arranging and commitment fees; and - contains covenants that, among other things, require us to meet ongoing financial tests and restrict our ability to incur additional indebtedness, incur liens, pay dividends or repurchase our capital stock. This facility is available in two tranches of US$161 million and US$154 million. Initial borrowings under tranche A of this Lucent facility must be used to repay amounts outstanding under our previous facility with Lucent. As at December 31, 2000, US$132 million was outstanding under our Lucent facility. 41 46 SECURITY The Lucent facility is secured by: - a first priority security interest over all our assets and material agreements; - a guarantee by us and by GT Group Telecom Services (USA) Corp.; and - a pledge of the shares of all our subsidiaries. MATURITY, AVAILABILITY AND REPAYMENT The Lucent facility matures approximately 8 1/2 years after the initial advance is made. The availability period to make advances under the facility will terminate on February 3, 2003 or, if earlier, the date on which we terminate the facility. After such date, principal amounts outstanding must be repaid in 22 consecutive installments on a quarterly basis in amounts equal to 1.25% of the aggregate amount outstanding for the first 20 quarters and 37.5% of the aggregate amount outstanding for the final 2 quarters. Lucent retains the right, with our prior written agreement with respect to economics and terms, to designate and convert up to US$140 million of the drawings under tranches A and B into a senior secured term loan. Any amounts under the senior secured term loan will be subject to limited amortization, with the balance to be paid in full at maturity. Amounts outstanding under the Lucent facility may be prepaid at any time, subject to customary breakage charges. Amounts available under the Lucent facility are also mandatorily reduced in amounts equal to: - the net proceeds from certain asset sales or insurance claims; - 25% of excess cash flow; or - 50% of the net cash proceeds in excess of $600 million from the issuance of unsecured debt or senior debt with a United States bank or other financial institution. COVENANTS The Lucent facility ranks pari passu with the Cisco facility and the bank facility with respect to the security obtained from the borrower, our guarantor subsidiaries and us. Under the terms of the Lucent facility, we, the borrower, and our guarantor subsidiaries are restricted by the Lucent facility, among other things, from: - making capital expenditures, investments or acquisitions in excess of certain limits; - selling certain assets; - creating liens other than certain permitted encumbrances; - incurring additional indebtedness, other than certain permitted indebtedness; - investing in or guaranteeing the obligations of subsidiaries except to the extent that such investments or guarantee constitutes permitted obligations of such subsidiaries or to the extent that such investment or guarantee constitutes permitted indebtedness; - declaring or setting aside funds for the payment of dividends; - consenting to or agreeing to certain amendments of other financing documents; and - amalgamating, consolidating, merging, or entering into any other form of business combination. We are also required under the Lucent facility to maintain certain minimum debt to total capitalization ratios, debt coverage ratios, revenue and performance levels. 42 47 The Lucent facility restricts the payment of dividends by us or our subsidiaries, other than payments of dividends by our subsidiaries to us or another of our subsidiaries. The Lucent facility also contains customary events of default, including the failure to pay interest or principal, breach of covenants, cross-defaults or judgements in excess of $5 million, a change of control event or the bankruptcy of us or any of our subsidiaries. The Lucent facility is governed by the laws of the State of New York. CISCO FACILITY On September 29, 2000, we entered into a vendor facility with Cisco Systems Capital Corporation to finance the purchase of up to $120 million of Cisco telecommunications equipment and services. The Cisco facility: - bears interest at rates of 3.00% to 4.25% over the prevailing yield on Canadian dollar bankers' acceptances, or 2.00% to 3.25% over the prime rate, based on our financial status: - provides that GT Group Telecom Services Corp. our wholly-owned subsidiary, will be the borrower with guarantees by us and all of our subsidiaries; - provides for the payment of certain lending, arranging, and commitment fees; and - contains covenants that, among other things, require us to meet ongoing financial tests and restrict our ability to incur additional indebtedness, incur liens, pay dividends or repurchase our capital stock. The initial borrowings on the Cisco facility must be used to repay amounts outstanding under our previous facility with Cisco. As at December 31, 2000, $38 million was outstanding under our Cisco facility. SECURITY The Cisco facility is secured by: - a first priority security interest over all our assets and material agreements; - a guarantee by us and GT Group Telecom Services (USA) Corp.; and - a pledge of the shares of GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp. MATURITY, AVAILABILITY, AND REPAYMENT The Cisco facility matures on September 29, 2007. The availability period to make advances under the facility will terminate on September 29, 2002. The amount outstanding under the facility must be repaid 4.89% in 2003, 10% in 2004, 10% in 2005, 20% in 2006 and 55.11% at maturity in 2007. Amounts outstanding under the Cisco facility may be prepaid at any time, subject to customary breakage charges. Amounts available under the Cisco facility are also mandatorily reduced in pro rata amounts equal to: - the net proceeds from certain asset sales or insurance claims; - 25% of excess cash flow; or - 50% of the net cash proceeds in excess of $600 million from the issuance of unsecured debt or senior debt with a United States bank or other financial institution. 43 48 COVENANTS The Cisco facility ranks pari passu with the Lucent facility and the bank facility with respect to the security obtained from the borrower, our guarantor subsidiaries and us. Under the terms of the Cisco facility, we, the borrower, and our guarantor subsidiaries are restricted by the Cisco facility, among other things, from: - making capital expenditures, investments or acquisitions in excess of certain limits; - selling certain assets; - creating liens other than certain permitted encumbrances; - incurring additional indebtedness, other than certain permitted indebtedness; - investing in or guaranteeing the obligations of subsidiaries except to the extent that such investments or guarantee constitutes permitted obligations of such subsidiaries or to the extent that such investment or guarantee constitutes permitted indebtedness; - declaring or setting aside funds for the payment of dividends; - consenting to or agreeing to certain amendments of other financing documents; and - amalgamating, consolidating, merging, or entering into any other form of business combination. We are also required under the Cisco facility to maintain certain minimum debt to total capitalization ratios, debt coverage ratios, revenue and performance levels. The Cisco facility restricts the payment of dividends by us or our subsidiaries, other than payments of dividends by our subsidiaries to us or another of our subsidiaries. The Cisco facility also contains customary events of default, including the failure to pay interest or principal, breach of covenants, cross-defaults or judgements in excess of $5 million, a change of control event or the bankruptcy or insolvency of us or any of our subsidiaries. INTER-CREDITOR AGREEMENT The Canadian Imperial Bank of Commerce, as lead arranger under the bank facility, Lucent and Cisco are parties to an inter-creditor agreement regarding, among other things, the rights of these lenders in the security held by them. Under the inter-creditor agreement, the banks, Lucent and Cisco have agreed to share all of our assets and the assets of our subsidiary in which they have a first priority security interest equally and ratably. The inter-creditor agreement provides that the banks, Lucent and Cisco will, in an event of default under the bank facility, the Lucent facility or the Cisco facility, provide the other parties with notice prior to accelerating any indebtedness under these agreements and will co-operate with each other in connection with any such enforcement. Any amounts recovered upon the enforcement of these financing agreements by the collateral agent will be shared among the banks, Lucent and Cisco equally and ratably. 44 49 OUR ACQUISITION OF THE SHAW FIBERLINK BUSINESS ASSET PURCHASE AND SUBSCRIPTION AGREEMENT On February 16, 2000, we acquired the business of Shaw FiberLink pursuant to an asset purchase and subscription agreement with Shaw Communications and Shaw FiberLink. The purchase consideration of $760 million paid by us consisted of $360 million in cash and sufficient series B first preference shares to provide Shaw Communications with a 27.1% fully diluted interest in us at the date the acquisition was consummated. The fair value of these shares was approximately $400 million. Upon completion of our initial public offering in March 2000, all of these shares were converted into class A voting shares. In connection with our acquisition of the business of Shaw FiberLink, three executive officers of Shaw Communications, became directors of Group Telecom. Under the asset purchase and subscription agreement, we purchased from Shaw Communications all of the property and assets of Shaw FiberLink used in connection with its high speed data and competitive access business. We also assumed certain obligations related to permits, operational contracts, customer contracts, software licenses and certain other obligations. The assets purchased include: - equipment, computer hardware and fixed assets, - operational, equipment supply and customer contracts, - interconnect agreements and co-location agreements, - software and broadband wireless licenses, - permits, - intellectual property, - goodwill, and - certain other fiber business assets. Certain assets were excluded from the acquisition of the business of Shaw FiberLink, including: - certain interconnection, Internet bandwidth and other agreements; - the name "Shaw FiberLink" (subject to a license granted to us pursuant to the trade-mark license agreement described below); - any assets of Shaw Communications or its affiliates used in the cable television, residential Internet or video and other residential services businesses; and - any indefeasible right to use fibers or rights underlying the indefeasible right to use fibers, other than rights assigned to us pursuant to any assigned operational contracts. Where the transfer of any such assets requires consent of a third party and such consent is not obtained, Shaw Communications has agreed to hold such assets in trust for us and to continue to maintain the existence of such assets, at our expense. The asset purchase and subscription agreement contains customary representations, warranties and indemnities. In particular, Shaw Communications has represented that the Shaw FiberLink assets are all the assets and rights (excluding material non-assignable permits, engineering and administration services and certain underlying rights) which are required to enable us to conduct the business of Shaw FiberLink. With limited exceptions, Shaw Communications made no representations or warranties as to the underlying rights to the fibers subject to the indefeasible right to use agreement described below. INDEFEASIBLE RIGHT TO USE AGREEMENT As part of our acquisition of the business of Shaw FiberLink, we received rights to 1,502 fiber kilometers through assigned contracts and an indefeasible right to use 100,044 fiber kilometers for 60 years, including 10,720 fiber kilometers located in New Brunswick available to us on May 1, 2003. Additionally, Shaw FiberLink and each of the affiliates of Shaw Communications which owns indefeasible rights to use fiber has entered into an agreement to grant a one-year indefeasible right of 45 50 use to Shaw FiberLink in all of the indefeasible rights to use fiber which Shaw FiberLink does not own, renewable annually by Shaw FiberLink. On the closing of the acquisition, we fully prepaid the rent for the fibers in which we received the right of use for the full 60 year term of our agreement with Shaw FiberLink. In addition, Shaw Communications agreed to construct for our use, at no additional cost to us, approximately 97,500 additional fiber kilometers over the next three years, subject to variance depending on the location of the constructed fiber, over which we will have an indefeasible right of use. This commitment to build an additional 97,500 fiber kilometers was included in the $760 million purchase price consideration, and has been recorded as a $223 million prepayment of property, plant and equipment. Our indefeasible right to use agreement also allows us to ask Shaw Communications to install new access cables and new segments to our network. Once we pay Shaw FiberLink for the cable they install, Shaw FiberLink will grant us an indefeasible right to use those newly installed fibers for the remainder of our initial 60 year indefeasible right of use term. During the term of our indefeasible right to use agreement with Shaw FiberLink, Shaw FiberLink will, for a fee, provide facilities for our optronics or electronics or our optical or electrical equipment in Shaw Communications hub sites. Shaw FiberLink will repair and maintain our fibers in exchange for a yearly fee. PERFORMANCE ASSURANCE AGREEMENT As part of our acquisition of the business of Shaw FiberLink, and to support the indefeasible right to use agreement, we have entered into a performance assurance agreement with Shaw Communications. Shaw Communications has agreed that if Shaw FiberLink defaults in any of its obligations under the indefeasible right to use agreement, Shaw Communications will perform, or cause to be performed, Shaw FiberLink's obligation in accordance with the terms and conditions of the indefeasible right to use agreement. Shaw Communications' promise to us is independent of the bankruptcy or insolvency of Shaw Communications, Shaw FiberLink or any of their affiliates (including any affiliates that have granted an indefeasible right to use fiber to Shaw FiberLink), and is independent of any acquisition of the business of Shaw Communications, Shaw FiberLink or any of their affiliates (including any affiliates that have granted an indefeasible right to use fiber to Shaw FiberLink). NON-COMPETITION AGREEMENTS On the closing of our acquisition of the business of Shaw FiberLink, Shaw Communications entered into a non-competition agreement in favor of us that prohibits Shaw Communications or any of its affiliates from providing certain telecommunications services to business customers and telecommunications carriers in any area of Canada in which we carry on such business, for three years. On closing we also entered into a non-competition agreement in favor of Shaw Communications which prohibits us or any of our affiliates from providing cable television, residential video, Internet or telephone services or other residential services in any area of Canada in which Shaw Communications carries on such business, for three years. TRADE-MARK LICENSE AGREEMENT We entered into a trade-mark license agreement with Shaw Communications on the closing of our acquisition of the business of Shaw FiberLink pursuant to which Shaw Communications granted us a license to use certain trade-marks relating to Shaw FiberLink for a six month period and Shaw Communications granted to us a license to use the trade-mark "FiberLink" in conjunction with the words "Group Telecom" or "GT" for the term of the indefeasible right to use agreement. TRANSITIONAL SERVICES AGREEMENT In order to facilitate the transfer of the business of Shaw FiberLink from Shaw Communications to us, we and Shaw Communications will provide certain services to each other, on a transitional basis, pursuant to a six month transitional services agreement. 46 51 DESCRIPTION OF THE WARRANTS The warrants that are being offered were issued by Group Telecom on February 1, 2000. The warrants have been issued pursuant to a warrant agreement (the "Warrant Agreement"), as of the same date, between Group Telecom and The Chase Manhattan Bank, as warrant agent (the "Warrant Agent"). On February 1, 2000, Group Telecom issued and sold 855,000 units consisting of $855,000,000 in stated amount at maturity of 13 1/4% senior discount notes due 2010 and 855,000 warrants to purchase an aggregate 4,198,563 shares. The notes and warrants became separately transferable in July 2000. As of January 31, 2001, 32,800 of the outstanding warrants have been exercised. If all the 855,000 outstanding warrants were exercised at the Exercise Rate (as defined below) in effect at the date of this prospectus, such exercise would result in the issuance by Group Telecom of 4,198,563 class B non-voting shares. The following summary of certain provisions of the Warrant Agreement does not purport to be complete and is qualified in its entirety by reference to the provisions of the Warrant Agreement relating thereto, a copy of which may be obtained upon request from Group Telecom. GENERAL As of the date of this prospectus, each warrant, when exercised, will entitle the holder thereof to receive 4.9106 class B non-voting shares (the "Exercise Rate") of Group Telecom at no additional cost to the holder of the warrant. The warrants became exercisable upon the effectiveness of the shelf registration statement, of which this prospectus forms a part. Unless earlier exercised, the warrants will expire on February 1, 2010. The number of class B non-voting shares issuable upon exercise of a warrant is subject to adjustment in the circumstances described below under "-- Adjustments." No service charge will be made for registration of transfer or exchange upon surrender of any warrant certificate at the office of the Warrant Agent maintained for that purpose. Group Telecom may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with an registration or transfer or exchange of warrant certificates. The holders of the warrants have no right to vote on matters submitted to the shareholders of Group Telecom or to receive notice of meetings of shareholders or any other rights of shareholders of Group Telecom, including any right to receive cash dividends. The holders of the warrants have no preemptive rights and are not entitled to share in the assets of Group Telecom in the event of the liquidation, dissolution or winding up of Group Telecom's affairs. EXERCISE The warrants may be exercised by surrendering to Group Telecom the warrant certificates evidencing such warrants, if any, with the accompanying form of election to purchase, properly completed and executed. Upon surrender of the warrant certificate, the Warrant Agent will deliver or cause to be delivered, to or upon the written order of such holder, stock certificates representing the number of class B non-voting shares or other securities or property to which such holder is entitled under the warrants and Warrant Agreement, including, without limitation, at Group Telecom's option, any cash payable to adjust for fractional interests in class B non-voting shares issuable upon such exercise. If less than all of the warrants evidenced by a warrant certificate are to be exercised, a new warrant certificate will be issued for the remaining number of warrants. At Group Telecom's option, fractional class B non-voting shares may not be issued upon exercise of the warrants. If any fraction of a class B non-voting share would, except for the foregoing provision, be issuable upon the exercise of any such warrants (or specified portion thereof), Group Telecom will pay an amount in cash equal to the Current Market Value per class B non-voting share as determined on the day immediately preceding the date the warrant is presented for exercise, multiplied by such fraction, computed to the nearest whole cent. 47 52 ADJUSTMENTS The number of class B non-voting shares that may be purchased upon the exercise of the warrants will be subject to adjustment in certain events including: (1) the payment by Group Telecom of dividends or other distributions on class A voting or class B non-voting shares of Group Telecom payable in such class A voting or class B non-voting shares or other shares of Group Telecom's capital stock, (2) subdivisions, combinations and certain reclassifications of class A voting or class B non-voting shares, (3) sales by Group Telecom of class A voting or class B non-voting shares, or of securities convertible into or exchangeable or exercisable for, class A voting or class B non-voting shares of the Company at less than the Current Market Value of such shares (provided that no adjustment shall be made with respect to our issuance, after the date of the Indenture, of series B first preference shares to Shaw Communications in connection with our acquisition of the business of Shaw FiberLink), and (4) the distribution to all holders of class A voting or class B non-voting shares of any of Group Telecom's assets, debt securities or any rights or warrants to purchase securities (excluding those rights and warrants referred to in clause (3) above and excluding cash dividends or other cash distributions from current or retained earnings). In the event of a taxable distribution to holders of class B non-voting shares which results in an adjustment to the number of class B non-voting shares or other consideration for which a warrant may be exercised, the holders of the warrants may, in certain circumstances, be deemed to have received a distribution subject to United States Federal Income tax as a dividend. See "Taxation -- U.S. Federal Income Tax Considerations" on page 95. In the case of certain reclassifications, redesignations, reorganizations or change in the number of outstanding shares of class B non-voting shares or amalgamations, consolidations or mergers of Group Telecom or the sale of all or substantially all of the assets of Group Telecom, each warrant shall thereafter be exercisable for the right to receive the kind and amount of shares of stock or other securities or property to which such holder would have been entitled as a result of such amalgamation, consolidation, merger or sale had the warrants been exercised immediately prior thereto. AMENDMENT From time to time, Group Telecom and the Warrant Agent, without the consent of the holders of the warrants, may amend or supplement the Warrant Agreement for certain purposes, including, without limitation, curing defects or inconsistencies or making any change that does not adversely affect the rights of any holder. Any amendment or supplement to the Warrant Agreement that has an adverse effect on the interests of the holders of the warrants shall require the written consent of the holders of a majority of the then outstanding warrants. The consent of each holder of the warrants affected shall be required for an amendment pursuant to which the number of class B non-voting shares purchasable upon exercise of warrants would be decreased (other than pursuant to adjustments provided in the Warrant Agreement). REPORTS Whether or not required by the rules and regulations of the Commission, so long as any of the warrants remain outstanding, Group Telecom shall cause copies of the reports and other documents, which it would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act if it was subject to those rules, to be filed with the Warrant Agent 48 53 and mailed to the holders at their addresses appearing in the register of warrants maintained by the Warrant Agent. CERTAIN DEFINITIONS "Current Market Value" per class B non-voting share or any other security of Group Telecom at any date means (1) if the security is not registered under the Exchange Act, (a) the value of the security, determined in good faith by the Board of Directors of Group Telecom and certified in a Board resolution filed with the Warrant Agent, based on the most recently completed arms-length transaction between Group Telecom and a person other than an Affiliate of Group Telecom and the closing of which occurs on such date or shall have occurred with the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the fair market value of the security as determined by a nationally recognized independent financial expert (provided that, in the case of the calculation of Current Market Value for determining the cash value of fractional shares, any such determination within six months that is, in the good faith judgement of the Board of Directors, a reasonable determination of value, may be utilized), or (2) (a) if the security is registered under the Exchange Act, the average of the daily closing sales prices of the securities for the 20 consecutive days immediately preceding such date, or (b) if the securities have been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the daily closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (2)(a) and (2)(b), as certified to the Warrant Agent by the President, the Chief Executive Officer or the Chief Financial Officer of Group Telecom. The closing sales price for each such trading day shall be (A) in the case of a security listed or admitted to trading on any United States national securities exchange or quotation system, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by Group Telecom, (C) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each business day, designated by Group Telecom, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported and (D) if there are not bid and asked prices reported during the 30 days prior to the date in question, the Current Market Value shall be determined as if the securities were not registered under the Exchange Act. If clause (1) of the preceding paragraph is applicable, the Board of Directors of Group Telecom is required to select an independent financial expert not more than five business days following an event requiring a valuation. Within five days after its selection of the independent financial expert, Group Telecom must deliver to the Warrant Agent a notice setting forth the name of such independent financial expert. Group Telecom must use its best efforts (including by selecting another independent financial expert) to cause the independent financial expert to deliver to Group Telecom, with a copy to the Warrant Agent, a value report which states the relevant value of the class B 49 54 non-voting shares or warrants or other securities being valued as of the valuation date and contains a brief statement as to the nature and scope of the methodologies upon which the determination was made. The Warrant Agent will have no duty with respect to the value report of any independent financial expert, except to keep it on file and available for inspection by the holders of the warrants. The determination of the independent financial expert as to the relevant value in accordance with the provisions of the warrant agreement will be conclusive on all persons. REGISTRATION COVENANT Group Telecom entered into a registration rights agreement (the "Warrants Registration Rights Agreement") pursuant to which Group Telecom agreed, for the benefit of the holders of the warrants, to file with the Commission the shelf registration statement (the "Class B Registration Statement"), of which this prospectus forms a part, under the Securities Act relating to the resale of the warrants and the class B non-voting shares issuable upon the exercise of the warrants upon the earlier to occur of (1) the 180th day following the initial public offering of the class B non-voting shares of Group Telecom; or (2) December 31, 2001, and to use its best efforts to cause such registration statement to become effective within 90 days following its filing. Group Telecom agreed to use its best efforts to keep the Class B Registration Statement effective until the earlier to occur of (i) the second anniversary of the effective date of the registration statement or (ii) such time as there are no longer outstanding any warrants or class B non-voting shares issuable upon exercise of the warrants; provided that Group Telecom may postpone the filing of, or suspend the effectiveness of, any registration statement or amendment thereto, suspend the use of any prospectus and shall not be required to amend or supplement the Class B Registration Statement, any related prospectus or any document incorporated therein by reference in the event that, and for a period (a "Suspension Period") not to exceed an aggregate of 60 days, (1) an event or circumstance occurs and is continuing as a result of which the Class B Registration Statement, any related prospectus or any document incorporated therein by reference as then supplemented or proposed to be filed would, in Group Telecom's good faith judgment, contain an untrue statement of material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (2) Group Telecom determines in its good faith judgment that the disclosure of such an event at such time would have a material adverse effect on the business, operations or prospects of Group Telecom or the disclosure otherwise relates to a material business transaction that has not yet been publicly disclosed. If the Class B Registration Statement is not declared effective by the earlier to occur of (1) the 270th day following the initial public offering of the class B non-voting shares of Group Telecom or (2) March 31, 2002, and the class B non-voting shares are not at that time listed on a stock exchange prescribed for Canadian income tax purposes, Group Telecom will be required to make an offer to purchase all of the outstanding warrants at a price at least equal to the Current Market Value of the warrants. 50 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS
NAME POSITION AGE ---- -------- --- James G. Matkin...................... Chairman and Director 57 Vancouver, BC James M. Mansour..................... Director and Chair of Executive Committee 41 Austin, TX Daniel R. Milliard................... Chief Executive Officer and Director 53 Toronto, ON Robert G. Wolfe...................... President, Chief Operating Officer and Director 44 Toronto, ON Stephen H. Shoemaker................. Executive Vice President and Chief Financial Officer 39 Toronto, ON Eric A. Demirian..................... Executive Vice President, Corporate Development 42 Toronto, ON Michael A. Aymong.................... Executive Vice President, Marketing and Sales 36 Toronto, ON Robert Watson........................ Executive Vice President, Carrier Services 52 Toronto, ON Robert M. Fabes...................... Senior Vice President, General Counsel and Corporate 39 Toronto, ON Secretary Ashok Bhatt.......................... Senior Vice President, Engineering 54 Toronto, ON Andrew J. Csinger.................... Senior Vice President, Systems Services 37 Toronto, ON Steven L. Koles...................... Senior Vice President, Marketing 30 Toronto, ON C. William Rainey.................... Senior Vice President, Sales 47 Toronto, ON Michael Abram........................ Director 48 Calgary, AB Michael D'Avella..................... Director 42 Calgary, AB George Estey......................... Director 44 Toronto, ON Leo J. Hindery, Jr................... Director 53 Hillsborough, CA P. Kenneth Kilgour................... Director 40 Toronto, ON Robert R. Gheewalla.................. Director 33 New York, NY Jim Shaw............................. Director 43 Calgary, AB
51 56 JAMES G. MATKIN Mr. Matkin has been the chairman of the board since September 1997. Mr. Matkin is the chief executive officer of the Law Society of British Columbia. With over 9,000 members, the Law Society is the governing body for the British Columbia legal profession. Mr. Matkin has extensive experience in law, government and business. He is a public policy practitioner and a Harvard Law School graduate who began his legal career on Wall Street in New York City before clerking with Mr. Justice Martland of the Supreme Court of Canada. A former director of the Bank of Canada, Mr. Matkin currently serves on the boards of several public and private organizations, including the Provincial Chair of the Council for Canadian Unity. As president of the Business Council of British Columbia for 10 years (1983-93), Mr. Matkin has represented more than 150 of the largest companies in Canada in their business-government relations. JAMES M. MANSOUR Mr. Mansour has been a director since April 1998. Mr. Mansour is former President and owner of National Telecommunications of Florida, a long distance carrier providing voice and data telecommunications services to businesses in 32 states which he sold in 1998 to Inter Media Communications, Inc. Prior to that time, Mr. Mansour founded and ran National Telecommunications of Austin, one of the largest regional long distance carriers in the United States, which he sold to WorldCom in March of 1991. In addition, Mr. Mansour currently serves on the Board of Netpliance, a company providing high-speed Internet access services. Mr. Mansour holds a Juris Doctorate degree from Tulane Law School and is a certified public accountant. DANIEL R. MILLIARD Mr. Milliard has been our chief executive officer since September, 1999. Mr. Milliard was most recently senior vice president and secretary of Adelphia Communications and vice chairman and president of Hyperion Communications. Prior to that time, Mr. Milliard was the first president and chief operating officer of Hyperion Communications, led the company from its inception and was instrumental in growing it to become a national competitive local exchange carrier. He also served as vice president, secretary and/or general counsel of Adelphia. Mr. Milliard graduated from American University in 1970 with a Bachelor of Science degree in Business Administration. He received an M.A. degree in Business from Central Missouri State University in 1971, where he was an instructor in the Department of Finance, School of Business and Economics, from 1971 to 1973. Mr. Milliard received his Juris Doctor degree from the University of Tulsa School of Law in 1976. Mr. Milliard is a director of Charles Cole Memorial Hospital. ROBERT G. WOLFE Mr. Wolfe has been a director and our president since February 1999. Prior to joining us, Mr. Wolfe served as chief financial officer of Trillium Corporation, an international investment company. In addition, he has significant experience in senior corporate finance positions with Goldman Sachs. Mr. Wolfe held three overseas posts for Goldman Sachs in London, Tokyo and Hong Kong. Mr. Wolfe graduated from Washington State University and holds an MBA from Pacific Lutheran University. STEPHEN H. SHOEMAKER Stephen joined us as executive vice president and chief financial officer in December 1999. Before joining us, Mr. Shoemaker held several senior managerial positions at Qwest Communications, most recently as vice president, treasurer. Prior to Qwest Communications, Stephen was the vice president, corporate finance for Host Marriott Services Corporation. Mr. Shoemaker has a B.S. Commerce, concentration in Accounting from the University of Virginia. He is a certified public accountant, a member of the Treasury Management Association and also a member of the AICPA. ERIC A. DEMIRIAN Eric joined us as executive vice president, corporate development, in January 2000. Prior to joining us, Mr. Demirian was a partner with PricewaterhouseCoopers and was the head of the Canadian information and communications group. Mr. Demirian has a Bachelor of Business Management degree from Ryerson University and both Certified General Accountant and Chartered Accountant designations. He is a member of the Treasury Management Association and is a past Director and Treasurer of the Parkinson Foundation of Canada. 52 57 MICHAEL A. AYMONG Mr. Aymong has been our executive vice president, marketing and sales since June 1999. Prior to his present position, he served as acting vice president, marketing and sales support for TELUS in Calgary. In this position, he managed the marketing efforts during TELUS' merger with BC Tel. Before joining TELUS, Mr. Aymong was director of operations of the former MetroNet. Mr. Aymong holds an MBA from the University of Western Ontario. He is also on the board of directors for the Muttart Art Gallery, Vicom Communications and Big Picture Technologies and participates in several other community and business organizations. ROBERT C. WATSON Mr. Watson has been our executive vice president, carrier services since February 2000. Mr. Watson was most recently president of Shaw FiberLink. Prior to that time, Mr. Watson was president and chief executive officer of ACC Telenterprise. Before then, he was executive vice president and country manager for Cable & Wireless Inc. Mr. Watson is a graduate in Electronic Technologies from Ryerson Polytechnical University. ROBERT M. FABES Mr. Fabes has been our general counsel and corporate secretary since June 21, 1999. Prior to joining us, he practiced in the area of corporate finance with Goodman Phillips & Vineberg, Vancouver, our primary outside legal counsel. Mr. Fabes received his law degrees from McGill University in 1992 and is a member of both the British Columbia and Quebec law societies. ASHOK BHATT Mr. Bhatt has been our senior vice president, engineering since February 2000. Mr. Bhatt brings to our company more than 30 years of experience both at national and international levels in all aspects of network services (technology, engineering, and operations). Prior to joining us, Mr. Bhatt held a senior management consulting position for strategic planning with Bell Canada International and also held several senior management positions at Bell Sygma and Bell Canada. Mr. Bhatt received his Masters of Engineering degree from the Technical University of Nova Scotia and is a member of the Association of Professional Engineers of Ontario. ANDREW J. CSINGER Dr. Csinger has been our senior vice president, systems services since January 1999. Dr. Csinger was most recently the president of Xcert Software Inc., which he founded in 1996 to develop the emerging public key infrastructure product. Prior to that time, Dr. Csinger was founding president of InterSpect Systems Consulting, successfully implementing many Internet security projects for clients including the U.S. Food and Drug Administration and the Government of Canada. Before then, Dr. Csinger had various positions in software engineering and electromagnetic design. Dr. Csinger holds a PhD in Computer Science from the University of British Columbia. STEVEN L. KOLES Mr. Koles joined us in May 1999. Prior to joining us, Mr. Koles held several management positions at TELUS, most recently as assistant vice president of internetworking services, where he focused on national expansion strategies. He was also one of the founding team members of TELUS Advanced Communications -- an enhanced data communications and business Internet applications service provider. Mr. Koles also serves on the boards of the Canadian Association of Internet Providers, CA*net's advisory committee and Netera Alliance's board and executive committee. Mr. Koles has a Bachelor of Commerce from the University of Alberta and has completed the Executive Management Program at the University of Western Ontario. C. WILLIAM RAINEY Mr. Rainey joined us in May, 1999. Mr. Rainey has over 20 years of sales and marketing experience in the high tech, finance and telecommunications industries. After receiving a Bachelor of Science degree from the University of Alberta he joined Xerox Canada and held numerous sales, marketing, education and consulting management positions over 10 years. During his 5 years with Royal Trust he led the sales and marketing efforts for investments and lending in Western Canada for 3 years and then spent 2 years in the Toronto head office in senior sales and marketing management positions. Mr. Rainey left TELUS' data company, TELUS Advanced Communications, as Assistant Vice President after 6 years with TELUS. During his tenure at TELUS he completed the Executive Management Program at Queens University. 53 58 MICHAEL ABRAM Mr. Abram has been a director since March 23, 2000. Mr. Abram is President of Shaw Ventures, the investment division of Shaw Communications Inc. Prior to joining Shaw, Mr. Abram was the President of a national office solutions company in Canada. Mr. Abram is a graduate of the University of Calgary. MICHAEL D'AVELLA Mr. D'Avella joined us as a director in February 2000. Mr. D'Avella is the senior vice president of planning for Shaw Communications and has served in this position since 1991. He has previously held senior positions with the Canadian Cable Television Association and business development positions with Telesat Canada. Mr. D'Avella is also a director of Terayon Communications Systems Inc. (a provider of broadband access systems) and Canadian Satellite Communications (Cancom). Mr. D'Avella is a graduate of the University of Toronto with a B.A. in economics and planning. GEORGE ESTEY Mr. Estey joined us as a director in February 2000. Mr. Estey is the Chairman of Goldman Sachs Canada. Prior to this, he was involved in various roles within Goldman, Sachs & Co.'s Investment Banking Division since joining the firm in 1987. Mr. Estey was also a consultant with McKinsey & Co. Mr. Estey holds an MBA from the Harvard Graduate School of Business Administration and a B.Sc. from the University of New Brunswick. LEO J. HINDERY, JR. Mr. Hindery has been a director since March 23, 2000. Mr. Hindery is currently chairman and chief executive officer of GlobalCenter Inc., the Internet commerce services subsidiary of Global Crossing (from March 2000 until October 2000, he was also, on an interim basis, chief executive officer of Global Crossing Ltd.). Prior to joining Global Crossing and GlobalCenter, Mr. Hindery was president and chief executive officer of AT&T Broadband & Internet Services and president and chief executive officer of its predecessor company, Tele-Communications, Inc. (TCI). From 1988 to 1997, Mr. Hindery was the founder and managing general partner of InterMedia Partners, the ninth largest multiple cable system operator in the United States. Prior to this, Mr. Hindery was chief officer for planning and finance of The Chronicle Publishing Company, and chief financial officer and managing director of Becker Paribas, Inc. Mr. Hindery holds an MBA from Stanford University and an honors degree from Seattle University and is a member of the Stanford Business School Advisory Council. He is a director of Tanning Technology Corp., TD Waterhouse Group, Inc. Telocity, Inc. and Vertical Net, Inc. P. KENNETH KILGOUR Mr. Kilgour has been a director since May 1999. Mr. Kilgour is managing director and head of CIBC Capital Partners. Prior to joining CIBC Capital Partners in 1989, Mr. Kilgour was senior manager, corporate finance of Canadian Imperial Bank of Commerce, which he joined in 1982. Mr. Kilgour holds an MBA from the University of Toronto and a B.Sc. (Applied Science) from Queen's University. ROBERT R. GHEEWALLA Mr. Gheewalla has been a director since May 1999. Mr. Gheewalla is a vice president in the principal investment area at Goldman Sachs. He received an MBA from Harvard Business School, an MS from The London School of Economics while on a Fulbright Scholarship, and a BS from Tufts University. Mr. Gheewalla currently serves as a board member for 360networks Inc., Diginet Americas, Digital Access and North American RailNet. JIM SHAW Mr. Shaw joined as a director in December 1999. Mr. Shaw has been president and chief executive officer of Shaw Communications since 1998. Prior to this, Mr. Shaw held various senior management positions at Shaw Communications. Mr. Shaw is also chairman of the Canadian Cable Television Association (CCTA) and a director of: CableLabs, a North American cable television research organization; the At Home Corporation; Canadian Satellite Communications Inc. and @Home Canada. 54 59 COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has three standing committees: an executive committee, an audit committee and a compensation committee. The executive committee consists of Messrs. Gheewalla, Kilgour, Mansour, Matkin, Milliard, Shaw and Estey, and, as a non-voting observer, Mr. Wolfe. A majority of the members of the audit committee are persons who are not our officers or employees or any of our affiliates. The audit committee, which consists of Messrs. Mansour, Matkin and Kilgour, selects and engages, on our behalf, the independent public accountants to audit our annual financial statements, and reviews and approves the planned scope of the annual audit. The compensation committee establishes remuneration levels for our senior officers. The compensation committee consists of Messrs. Matkin, D'Avella and Gheewalla. EXECUTIVE COMPENSATION At September 30, 2000, we had thirteen executive officers. At September 30, 2000, aggregate cash compensation of $1,242,000 was paid to our executive officers who were members of our board of directors, and $2,122,700 was paid to our other executive officers, including salaries, bonuses and other amounts paid by us. 55 60 SUMMARY COMPENSATION TABLE We paid the following compensation during the year ended September 30, 2000 to our executive officers:
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------- ------------------------------------------------------ AWARDS PAYOUTS ----------------------------- ------- SECURITIES RESTRICTED UNDER SHARES OR OTHER ANNUAL OPTIONS RESTRICTED LTIP ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION --------------------------- -------- ------- ------------ --------------- ----------- ------- ------------ ($) ($) ($) (#) ($) ($) ($) Daniel R. Milliard........ $416,700 800,000(6) 209,725(2) 175,000 Class B(6) -- -- -- (Chief Executive Officer and Director) Robert G. Wolfe........... $358,300 560,000(5)(6) 14,903(3) 100,000 Class B(6) -- -- -- (President, Chief Operating Officer and Director) Stephen H. Shoemaker...... $180,700 225,000 -- 460,000 Class B -- -- -- (Executive Vice President and Chief Financial Officer) Eric A. Demirian.......... $167,200 200,000 6,200(4) 440,000 Class A -- -- -- (Executive Vice President, Corporate Development) Michael A. Aymong......... $173,500 215,000 -- 260,000 Class A -- -- -- (Executive Vice President, Marketing and Sales) Robert Watson............. $150,000 150,000 15,000(7)(8) 340,000 Class A -- -- -- (Executive Vice President, Carrier Services) Marek K. Wieckowski(1).... $173,600 90,000 -- -- -- -- -- (Executive Vice President, Network Services) Robert M. Fabes........... $132,500 61,250 -- 105,000 Class A -- -- -- (Senior Vice President, General Counsel and Corporate Secretary) Ashok Bhatt............... $ 90,700 32,667 -- 90,000 Class A -- -- -- (Senior Vice President, Engineering) Andrew J. Csinger......... $140,000 67,000 -- 50,000 Class A -- -- -- (Senior Vice President, Systems Services) Steven L. Koles........... $143,100 66,333 4,400(9) 77,000 Class A -- -- -- (Senior Vice President, Marketing) C. William Rainey......... $144,800 51,612 9,200(8)(10) 87,000 Class A -- -- -- (Senior Vice President, Sales) Malcolm Rodriguez(11)..... $ 86,800 27,800 -- 91,000 Class A -- -- -- (Senior Vice President, National Operations) Patricia A. Saltys(12).... $124,800 60,750 -- 20,000 Class A -- -- -- (Vice President, Finance)
--------------- (1) Resigned effective April 30, 2000. (2) Includes imputed interest of $209,725 accrued, at the effective federal interest rate of the Internal Revenue Code, on an option exercise loan for an aggregate amount of $4 million and on housing loan of approximately $1 million to Daniel R. Milliard. (3) Includes imputed interest of $14,903 accrued, at the effective federal interest rate of the Internal Revenue Code, on an option exercise loan of $312,500 to Robert G. Wolfe. 56 61 (4) Includes imputed interest of $6,200 accrued, at the prescribed interest rate of the Canada, Customers and Revenue Agency, on a loan for an aggregate amount of $190,000 to Eric A. Demirian. (5) The Company also paid $250,000 during the fiscal year ended September 30, 2000, representing a bonus awarded during the fiscal year ended September 30, 1999. (6) Subject to board ratification. (7) Includes imputed interest of $1,250 accrued, at the prescribed interest rate of the Canada, Customs Revenue Agency, on a housing loan of $250,000 to Robert Watson. (8) Includes $13,750 paid to Robert Watson and $7,400 paid to C. William Rainey for auto allowances. (9) Includes imputed interest of $4,400 accrued, at the prescribed interest rate of the Canada, Customs Revenue Agency, on a housing loan of $200,000 to Steven L. Koles. (10) Includes imputed interest of $1,800 accrued, at the prescribed interest rate of the Canada, Customs and Revenue Agency, on a housing loan of $275,000 to C. William Rainey. (11) Resigned effective February 16, 2001. (12) Resigned effective December 31, 2000. EQUITY INCENTIVE PLAN Our board of directors approved our employees' and directors' equity incentive plan effective as of September 1999. The equity incentive plan applies to our (and our affiliates) directors and employees who, in the judgment of our board of directors, will be largely responsible for our future growth and success. The equity incentive plan was approved by our shareholders in March 2000. The equity incentive plan is administered by our board of directors. Options can be exercised for our class A voting shares or our class B non-voting shares. The exercise price for any option granted under the equity incentive plan may not be less than 100% of the weighted average price of our class B non-voting shares on the Toronto Stock Exchange or Nasdaq National Market for the preceding five days of trading. Options are exercisable during a period established at the time of their grant provided that such period will expire no later than 10 years after the date of grant, subject to early termination of the option in the event the holder of the option dies or ceases to be a director or employee. No single participant, together with his or her associates, may be granted options which could result in the cumulative issuance to such persons of options to acquire our shares exceeding 5% of our shares outstanding immediately prior to the grant under the equity incentive plan. The number of our shares reserved for issuance pursuant to options granted to persons beneficially holding, together with their associates, in excess of 10% of our shares must not exceed 10% of our shares outstanding immediately prior to the grant under the equity incentive plan. We do not have any plans providing for pension, retirement or similar benefits. The compensation committee of our board has the discretion to approve bonus payments to all employees, including executive officers. REMUNERATION OF DIRECTORS We currently have 11 directors. No compensation is paid to directors in their capacity as such. We grant share options to our directors and reimburse them for their out of pocket expenses with respect to attendance at board meetings. We maintain $5,000,000 in directors' and officers' liability insurance. OPTIONS At January 31, 2001 we had 9,029,002 outstanding options or warrants to purchase our class A voting shares and our class B non-voting shares. Our directors and executive officers held at 57 62 January 31, 2001, the following options to purchase a total of 2,901,810 class A voting shares and a total of 1,823,200 class B non-voting shares:
TOTAL NUMBER NUMBER EXERCISE OF SHARES NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION --------------------------- --------- ------------- -------- ----------- ------------ James G. Matkin........... 10,000(1) Nov. 18, 1997 $0.50 May 31, 2001 190,000 Chairman and Director 80,000 Nov. 18, 1997 0.50 May 31, 2001 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 James M. Mansour.......... 150,000(1) Feb. 16, 1999 1.25 Feb. 16, 2004 650,000 Director and Chair of 300,000 Apr. 23, 1999 1.50 Apr. 23, 2004 Executive Committee 200,000 Sep. 30, 1999 1.88 Sep. 30, 2004 Robert G. Wolfe........... 500,000(1) Apr. 1, 1999 1.50 Apr. 1, 2004 750,000 President, Chief Operating 250,000(1) Nov. 11, 1999 3.00 Nov. 11, 2004 Officer and Director Stephen H. Shoemaker...... 400,000(1) Dec. 16, 1999 3.00 Dec. 16, 2004 460,000 Executive Vice President 60,000(1) Oct. 4, 2000 19.42 Oct. 4, 2005 and Chief Financial Officer Eric A. Demirian.......... 400,000 Dec. 16, 1999 3.00 Dec. 16, 2004 440,000 Executive Vice President, 40,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Corporate Development Michael A. Aymong......... 90,000(1) July 15, 1999 1.50 July 15, 2004 352,200 Executive Vice President, 150,000 Dec. 16, 1999 3.00 Dec. 16, 2004 Sales and Marketing 70,000 Feb. 9, 2000 1.50 Feb. 9, 2005 2,200 Aug. 22, 2000 20.40 Mar. 9, 2001 Oct. 4, 2000 19.42 Oct. 4, 2005 40,000 Robert Watson............. 300,000 Feb. 9, 2000 8.00 Feb. 9, 2005 340,000 Executive Vice President 40,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Carrier Services Robert M. Fabes........... 15,000(1) July 15, 1999 1.50 July 15, 2004 124,600 Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004 General Counsel and 30,000 Feb. 15, 2000 8.00 Feb. 15, 2005 Corporate Secretary 4,600 Aug. 22, 2000 20.40 Mar. 9, 2001 35,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Ashok Bhatt............... 40,000 Feb. 15, 2000 8.00 Feb. 15, 2005 90,000 Senior Vice President, 20,000 Feb. 15, 2000 8.00 Feb. 15, 2005 Engineering 30,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Andrew J. Csinger......... 95,000 Mar. 9, 1999 1.25 Sep. 30, 2003 145,000 Senior Vice President, 25,000 Dec. 16, 1999 3.00 Dec. 16, 2004 Systems Services 25,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Steven L. Koles........... 20,000(1) July 15, 1999 1.50 July 15, 2004 101,600 Senior Vice President, 25,000 Dec. 16, 1999 3.00 Dec. 16, 2004 Marketing 7,000 Jan. 26, 2000 1.50 Jan. 26, 2005 15,000 Feb. 15, 2000 8.00 Feb. 15, 2005 4,600 Aug. 22, 2000 20.40 Mar. 9, 2001 30,000 Oct. 4, 2000 19.42 Oct. 4, 2005
58 63
TOTAL NUMBER NUMBER EXERCISE OF SHARES NAME AND PRINCIPAL POSITION GRANTED DATE OF GRANT PRICE EXPIRY DATE UNDER OPTION --------------------------- --------- ------------- -------- ----------- ------------ C. William Rainey......... 20,000(1) July 15, 1999 1.50 July 15, 2004 108,800 Senior Vice President, 40,000 Dec. 16, 1999 3.00 Dec. 16, 2004 Sales 7,000 Jan. 26, 2000 1.50 Jan. 26, 2005 10,000 Feb. 15, 2000 8.00 Feb. 15, 2005 1,800 Aug. 22, 2000 20.40 Mar. 9, 2001 30,000 Oct. 4, 2000 19.42 Oct. 4, 2005 Malcolm Rodrigues......... 20,350 Feb. 9, 2000 8.00 Aug. 31, 2001 23,686 Senior Vice President, 3,336 Oct. 4, 2000 19.42 Aug. 31, 2001 National Operations Patricia A. Saltys........ 30,000 Oct. 15, 1997 1.00 (2) 149,124 Vice President, Finance 44,124 Apr. 23, 1998 1.25 (2) 55,000 Mar. 9, 1999 1.25 (2) 20,000 Dec. 16, 1999 3.00 (2) Michael Abram............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director Michael D'Avella.......... 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director George Estey.............. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director Leo J. Hindery............ 200,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 200,000 Director Ken Kilgour............... 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director Robert Gheewalla.......... 100,000(1) Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director Jim Shaw.................. 100,000 Feb. 15, 2000 8.00 Feb. 15, 2005 100,000 Director --------- Total: 4,725,010 =========
--------------- (1) These options entitle the holder to purchase class B non-voting shares. (2)The later of June 30, 2001 and six months after the date the class A voting shares are listed on the TSE. EMPLOYMENT AGREEMENTS We have employment agreements or remuneration arrangements with all of our executive officers. Each agreement or arrangement provides for salary, benefits, bonuses and incentive stock option grants for the executive officer, and for compensation if his or her employment is terminated. 59 64 REGULATION CRTC AND LEGISLATION Companies which own or operate transmission facilities in Canada that are used to offer telecommunications services to the public for compensation are classified as "telecommunications common carriers" under the Telecommunications Act (Canada) and are subject to the regulatory authority of the CRTC. The CRTC has the discretionary power to forbear from exercising certain of its regulatory powers over Canadian carriers where it finds that a telecommunications service or class of services is, or will be, subject to competition sufficient to protect the interests of users. Some Canadian carriers, such as the incumbent local exchange carriers, are classified by the CRTC as "dominant" in the provision of certain services because of their market power and control over the supply of local services and certain long distance services. Carriers classified as "non-dominant" by the CRTC are subject to less regulation than dominant carriers and include facilities-based long distance providers, and competitive access providers. The CRTC has forborne from regulating most of the services offered by non-dominant carriers, including, long distance, private line, dedicated access services, wireless services, local switched services. In addition, the CRTC has forborne from regulating certain services offered by the incumbent carriers, most notably, data, long distance, Internet access and interexchange private line services on certain routes. The CRTC also has the power to exempt any class of Canadian carrier from the application of the Telecommunications Act (Canada) if the CRTC is satisfied that such an exemption is consistent with Canadian telecommunications policy objectives. However, it has not, to date, used that power. Leave to appeal decisions of the CRTC to the Federal Court of Appeal may be sought within 30 days of the decision. The decision may also be challenged by petition to the Federal Cabinet (within 90 days of the decision). CRTC decisions are also subject to review and variance under the Telecommunications Act (Canada) either on the CRTC's own initiative or by way of an application which must generally be brought within 6 months of the decision, but which may be brought as a new proceeding at any time. REGULATION OF LOCAL SWITCHED SERVICES In 1994, the CRTC determined that restrictions on entry into the market for local switched telecommunications services should be removed and that measures should be implemented to enable competitors to offer local telephone services. The regulatory framework for competition in the local market was established as a result of a series of decisions issued on May 1, 1997. These decisions do not currently apply to SaskTel and NorthwesTel nor do they currently apply to roughly 35 small independent local telephone companies located in Ontario, Quebec and British Columbia. The decisions issued on May 1, 1997 effectively opened Canada's local switched services market to competition, ending the historical monopoly of the incumbent local exchange carriers. The decisions established a comprehensive regulatory framework allowing for the introduction of competition in the local switched services market. The following is a summary of those aspects of the decisions and the current regulatory regime which are expected to have a material impact on our business: CO-CARRIER STATUS The CRTC adopted a principle that competitive local exchange carriers will be considered carriers of equal stature with, and not merely customers of, the incumbent local exchange carriers in the local switched services market. Consistent with this principle, the CRTC adopted a "bill and keep" traffic termination mechanism, whereby all local exchange carriers are required to terminate each others' local traffic originating within the same exchange without specifically compensating each other for the termination function that they perform unless there is a traffic imbalance for a significant period of time. In areas where traffic is at an imbalance, the CRTC has authorized the use of a mutual 60 65 compensation scheme under which competitive local exchange carriers and incumbent local exchange carriers charge each other for the traffic termination functions that they perform. The CRTC determined that the incumbent local exchange carriers and competitive local exchange carriers must each identify a point of interconnection within the incumbent local exchange carrier local exchanges where they provide service to permit the interconnection of their respective networks and that incumbent local exchange carriers and competitive local exchange carriers should share the cost of interconnection equally (or under mutually agreed terms). UNBUNDLING OF INCUMBENT LOCAL EXCHANGE CARRIER FACILITIES The CRTC has directed the incumbent local exchange carriers to "unbundle" or make available to competitive local exchange carriers the network elements that competitive local exchange carriers require in order to allow them to provide their own local services. These network elements include facilities that the CRTC deemed essential, as well as certain other facilities that are not essential but which were determined by the CRTC to be necessary to facilitate competition in the market for local switched services in the short term. The CRTC directed the incumbent local exchange carriers to price all services subject to the mandatory unbundling requirement at their long run incremental cost ("phase II costs") plus a 25% mark-up. The incumbent local exchange carrier essential facilities that are subject to the mandatory unbundling rule include central office codes, subscriber listings and local loops (the wire facilities which run from the incumbent local exchange carriers' central offices to the customer premises) in certain small urban and high cost rural areas. All urban local loops, other than those deemed essential, and transiting services were deemed not essential by the CRTC but were nonetheless required to be unbundled and made available to competitive local exchange carriers for five years. Although the incumbent local exchange carriers are currently required to provide these non-essential facilities on an unbundled basis at the price of phase II costs plus a 25% mark-up, this obligation will be discontinued after the expiry of the initial five year period. The incumbent local exchange carriers would, nevertheless, be required to provide those facilities which are essential, beyond the five year period. Many of the competitive local exchange carriers operating in the market make extensive use of unbundled local loops. In a proceeding initiated by the CRTC in July 2000, the CRTC has asked for interested parties' comments on its preliminary view that the five year period for these and other non-essential facilities should be extended for a longer period of time, in order to facilitate competitive entry into local exchange markets. The CRTC has also asked for comments on its preliminary view that it may be appropriate to treat all copper loops as essential facilities. The mandatory unbundling of incumbent local exchange carrier facilities allows us to lease incumbent local exchange carrier local loops to provide services to customers that are not directly on our networks. Depending on the outcome of the proceeding initiated by the CRTC, if and when loops leased by us are no longer priced and offered on an essential facilities basis, we will have to (i) reach an agreement with the relevant incumbent local exchange carriers to continue leasing these local loops (which may be on less favorable terms than the CRTC mandated prices), (ii) build, lease or acquire our own facilities in those markets where we do not already have our own facilities, or (iii) develop other alternatives to reach our customers. SAFEGUARDS AGAINST INCUMBENT LOCAL EXCHANGE CARRIER ANTI-COMPETITIVE PRICING In order to prevent anti-competitive pricing by the incumbent local exchange carriers, the CRTC imposed a floor price test that effectively requires the incumbent local exchange carriers to charge prices for their retail services sufficient to recover their costs which, with respect to essential facilities, must be at least equal to the amount charged to the competitive local exchange carriers (the long run incremental cost of providing the facility plus a 25% markup) and, with respect to non-essential services, must be at least equal to phase II costs. The incumbent local exchange carriers will be required to meet the floor price test in all applications for new local business services (other than for 61 66 market trials and promotions) and applications proposing explicit or implicit price decreases. The CRTC's floor price test is an important safeguard for us against anti-competitive pricing by the incumbent local exchange carriers. However, since incumbent local exchange carriers need not include in their own floor prices the mandated 25% markup that they charge to competitive local exchange carriers for non-essential local services, incumbent local exchange carriers will be able to compete against competitive local exchange carriers that utilize such non-essential services solely on the basis of price. RESALE The incumbent local exchange carriers are required to make their tariffed local switched services (both business and residential) available for resale, but not at a mandated discount as had been proposed to the CRTC by some potential new entrants. The CRTC's denial of mandated discounts does not affect current incumbent local exchange carrier business services offered at volume and contract term discounts, such as Centrex services. However, the absence of mandated discounts pursuant to the CRTC decisions has limited the number of non-facilities-based entrants, such as resellers, into the local switched services market. CONTRIBUTION In Canada, local residential services are subsidized. Since the introduction of facilities-based long distance competition in 1992, local telephone services in Canada have been subsidized by "contribution" payments from both incumbent and competitive long distance service providers based on the minutes of long distance traffic that originate or terminate on the local switched telephone network or on cross-border or overseas access circuits. On November 30, 2000, the CRTC announced that the contribution system will be completely overhauled. Effective January 1, 2001, the current per-minute mechanism will be replaced with a mechanism based on a percentage of eligible Canadian telecommunications services revenues. The new mechanism will be national in scope and will be assessed on all Canadian telecommunications service providers (including competitive local exchange carriers, resellers, wireless providers, satellite service providers, international licensees, payphone providers, data and private line providers) with annual revenues from Canadian telecommunications services of at least $10 million. Contribution- eligible revenues are determined by including all revenues from Canadian telecommunications services, less any contribution revenues received, inter-carrier expenses paid to other service providers for the provision of contribution-eligible services, and all revenues from retail Internet services, retail paging services and the sale and rental of terminal equipment. For 2001, an interim rate of 4.5% of contribution-eligible revenues has been set; a final rate will be determined in mid-2001 and will be retroactive to January 1, 2001. As a result of this decision, we will be required to pay contribution on certain services we offer, such as local telephone service, which have not previously been subject to contribution. However, the amount of contribution payable in respect of our long distance voice and data services can be expected to decline. As well, starting January 1, 2001 the subsidy will only be used to support local services in high-cost serving areas and the CRTC has announced that the way in which the subsidy is calculated will be revised effective January 1, 2002. These changes should result in a reduction in the total amount of the subsidy, and consequently a reduction in the percentage of contribution we will be required to pay. REGULATION OF COMPETITIVE LOCAL EXCHANGE CARRIERS Although the CRTC has determined that competitive local exchange carriers are non-dominant carriers that should not be subject to the same degree of regulation as the incumbent local exchange carriers, the CRTC requires competitive local exchange carriers to assume certain obligations. For example, competitive local exchange carriers must file, for CRTC approval, interconnection 62 67 agreements and tariffs for services that they provide to other carriers. Competitive local exchange carriers must also provide interconnection to all other local exchange carriers within the same exchange, interconnection to wireless service providers and equal access interconnection to long distance providers that offer services in the same territory served by the competitive local exchange carrier on terms and conditions no less favorable than those contained in the incumbent local exchange carriers' tariffs, unless the competitive local exchange carrier can justify a departure from the incumbent local exchange carriers' tariffs. Competitive local exchange carriers are also required, among other things, to provide for reciprocal local exchange carrier-to-local exchange carrier interconnection; to implement local number portability ("LNP"); to provide emergency (911) service and message relay service and to satisfy various other existing and future regulatory requirements designed to protect customer privacy, such as providing consumers, upon request, with information regarding their services, prices and local calling area boundaries. Both wireline and wireless service providers may become competitive local exchange carriers as long as they accept the obligations imposed on competitive local exchange carriers by the CRTC. We believe we have an advantage over the incumbent local exchange carriers in terms of pricing flexibility, offering of services and responsiveness to customer needs since the incumbent local exchange carriers, unlike us, must file and obtain regulatory approval for the rates, terms and conditions of the local services they intend to offer and are subject to price cap regulation of their local services. However, like the incumbent local exchange carriers, competitive local exchange carriers are subject to the prohibitions set forth in the Telecommunications Act (Canada) against unjust discrimination and the granting of undue preferences to end users and to other carriers. In addition, and to the extent that they are not regulated under the Telecommunications Act (Canada), they are subject to anti-trust legislation such as the Competition Act (Canada). LOCAL NUMBER PORTABILITY Local number portability enables customers to retain their local telephone number when they change local exchange carriers. The CRTC requires all local exchange carriers to provide local number portability and has determined that all local exchange carriers should bear their own costs of implementing local number portability. Local number portability was considered to be an important requirement by new entrants due to the reluctance of customers to change local exchange carriers if it meant changing their telephone number. Local number portability has been rolled out in most major urban centres in Canada, including Vancouver, Montreal, Toronto, Calgary, Edmonton, and Ottawa/ Hull in accordance with a schedule for implementation established by the CRTC in a 1998 decision. If no competitive local exchange carrier has initiated interconnection with an incumbent local exchange carrier in a given exchange by the scheduled roll-out date or if there is no scheduled roll-out date for the exchange in question, the industry has agreed to a request-driven roll-out schedule for local number portability. In these circumstances, local number portability must be implemented between 30 and 180 days following a request for local number portability, depending on the nature of the underlying switch configuration. CO-LOCATION On June 16, 1997, the CRTC rendered a decision relating to incumbent local exchange carrier central office co-location arrangements. In its decision, the CRTC mandated the provision by incumbent local exchange carriers of both physical and virtual co-location arrangements, available at the competitive local exchange carrier's option, under CRTC-approved tariffs and standard-form central office licence agreements. Under a virtual co-location arrangement, competitive local exchange carriers and incumbent local exchange carrier traffic is exchanged at a designated point outside the central office, and additional dedicated facilities located in the central office are provided by the incumbent local exchange carrier to complete the competitive local exchange carrier's transmission system. Co-location arrangements are important to us because they allow us to interconnect our transmission systems with those of the incumbent local exchange carriers using the most efficient and 63 68 cost-effective network structure possible. They also allow us to gain immediate access to incumbent local exchange carrier unbundled loops for our off-net customers. Under certain circumstances, competitive local exchange carriers are also permitted to enter into cross-connection arrangements with other co-located competitive local exchange carriers within a central office which allows for increased network efficiency. The CRTC also determined in its co-location decision that mandated co-location was available only to facilities-based carriers interconnecting with incumbent local exchange carriers under the terms of an agreement and a tariff. This limitation of mandated co-location to facilities-based carriers created an opportunity for competitive local exchange carriers to use their transmission capacity for connection at central offices to provide services to other telecommunications service providers, including resellers and Internet providers, which did not have access to mandated co-location arrangements. However, in September 2000, the CRTC granted mandated co-location and access to unbundled loops and connecting links to digital subscriber line service providers. The CRTC prohibited digital subscriber line service providers from using these arrangements to provide switched local voice services. The CRTC also set rates in the decision for a variety of monthly co-location services, including central office floor space and entrance conduit space charges, as well as for certain non-recurring charges. For some of these charges, such as service order and application charges the incumbent local exchange carriers were directed to charge the long run incremental cost of providing the service plus a 25% mark-up. For many other charges, however, the CRTC directed the incumbent local exchange carriers to base their charges upon costs incurred with no mark-ups, (e.g., for construction, site preparation and project management services). A six-month maximum time limit was imposed on the incumbent local exchange carriers between the date of the competitive local exchange carrier's acceptance of the initial report for physical co-location and the availability of the service, and a corresponding three-month maximum time limit to obtain virtual co-location. Competitive telecommunications service providers have identified a number of problems with the current co-location regime, including, among other issues, an apparent lack of space in the incumbents' central offices and their reticence to provide physical co-location, limitations on the type of equipment allowed within the central offices, the difficulty of obtaining co-location within the time frames specified by the CRTC and problems gaining access to co-located equipment on a timely basis. We are one of the 12 competitive providers which has joined the Coalition for Better Co-Location to attempt to resolve these issues through consultation with the CRTC's Co-location Sub- Working Group, as well as through applications for relief from the CRTC. PRICE CAP REGULATION The CRTC has adopted a form of rate regulation for the incumbent local exchange carriers which brings most of their local services under a price cap regime. The price cap mechanism adopted by the CRTC segregates the incumbent local exchange carriers' services into sub-baskets of related services and imposes an overall constraint on price increases for all services subject to the price caps as well as certain specific price constraints for services within each of three sub-baskets. The price of local services under the price cap regime are subject to an overall price cap that limits price increases to an annual percentage linked to the rate of inflation, subject to certain adjustments (including a 4.5% productivity offset). Within the three sub-baskets of local services prescribed by the CRTC (i.e., basic residential local service, single and multi-line business local services and other capped services), the aggregate price levels for the basic residential local service and other capped services sub-baskets will be limited to annual increases equal to the inflation rate. A maximum increase of 10% in any year will apply to individual rates for residential and single-line business services in smaller exchanges. The CRTC decided to exclude certain of the incumbent local exchange carriers' local services such as optional local services, including calling features such as voice mail and call waiting, from the 64 69 price cap regime. In addition, the CRTC regulates the rates of certain local "competitor services" outside the price cap regime. These services are provided by the incumbent local exchange carriers to their competitors, such as competitive local exchange carriers, in order to allow their competitors to provide local and long distance services. Examples of services included in this category are equal access services provided to long distance service providers, unbundled local loops, and network access services provided to wireless carriers. These services are subject to detailed rate regulation and the prices are set at long run incremental cost plus a 25% markup. Despite the price constraints contained in the CRTC's price cap regime, the incumbent local exchange carriers still have the ability under price cap regulation to increase prices for local services for which there is little competition (such as residential and single line business local services) and use the excess profits generated from these activities to subsidize price reductions in competitive services (such as business and government local services) that are included in the same basket of services. Price cap regulation for the incumbent local exchange carriers will be in force until December 31, 2001 and will be reviewed by the CRTC before the end of this period. The CRTC's review may result in the extension of price cap regulation or the elimination of rate regulation for some or all of the incumbent local exchange carriers' local services. REGULATION OF LONG DISTANCE SERVICES We will offer long distance telecommunications services as part of our bundled telecommunications services. Long distance competition has been in place in Canada since 1990 for long distance resellers and since 1992 for facilities-based carriers. Since 1994, the incumbent local exchange carriers have been required to provide "equal access" to long distance carriers and resellers which eliminated the need for customers of competitive long distance providers to dial additional digits when placing long distance calls. As described above, competitive long distance service providers, including resellers, currently make contribution payments to local exchange carriers to reflect the subsidy that long distance services have traditionally contributed to the provision of local residential telephone service. However, as of January 1, 2001, all telecommunications service providers will be required to contribute to the subsidy based on a percentage of revenues derived from contribution-eligible Canadian telecommunications services. We will make contribution payments calculated as a percentage of revenues earned from our long distance voice and data services, as well as from other eligible services. Under the CRTC's 1992 long distance competition decision, competitive long distance providers were required to assume approximately 30% of the cost required to modify the incumbent local exchange carriers' networks to accommodate interconnection with long distance competitors. These initial modification charges are spread over a period of 10 years and are payable on the basis of a specified charge per minute. Competitive long distance providers are also required to pay local exchange carriers charges for other services which they use, including switching and aggregation, primary interexchange carrier information processing (which implements a subscriber's choice of long distance carrier), operator services and certain billing and collection services. The CRTC has refrained from regulating (including tariff approval and rate setting provisions) most long distance services and interexchange private line services provided by the incumbent local exchange carriers and all such services offered by their competitors, apart from access to their respective networks. The incumbent local exchange carriers' basic (undiscounted) long distance rates remain subject to rate regulation as well as their rates in areas that do not yet have equal access. The incumbent local exchange carriers also remain subject to rate regulation on private line services on inter-city routes which are not yet subject to facilities-based competition. The lack of regulation of the incumbent local exchange carriers' long distance services, including the absence of a 65 70 floor price test, has provided the incumbent local exchange carriers with pricing flexibility and has increased their ability to compete with us on the basis of price. UNBUNDLED RATES TO PROVIDE EQUAL ACCESS In April 1997, the CRTC issued a decision which unbundles the rates that long distance providers pay to the incumbent local exchange carriers for various "equal access" or local switching and traffic aggregation services. Under the decision, long distance providers were required to pay the incumbent local exchange carriers a separate rate of $0.007 per minute (recently reduced to $0.003 per minute) for local end office connection and an additional rate of approximately $0.004 to $0.007 per minute for connection at the toll switch; also referred to as "access tandem connection." Competitive local exchange carriers also charge these rates to long distance providers for traffic originating and terminating on their local networks. The CRTC's equal access decision is important to us for two reasons. First, it establishes the prices which we, or those from which we purchase long distance services for resale, will be required to pay to the incumbent local exchange carriers for origination or termination of long distance traffic at either the access tandem or local end office. Second, since we compete with the incumbent local exchange carriers in providing switched access to long distance services, we price our services to compete with the incumbent local exchange carriers' tariffed rates. In May 1999, in a decision relating to the regulatory framework relating to the Internet, referred to as the "New Media" decision, the CRTC acknowledged the proposal of one party to the proceeding that a comprehensive review of interconnection and unbundling arrangements was necessary, and indicated that it would shortly initiate such a proceeding. Furthermore, in June 1999 an application was filed by a competitor requesting the CRTC to review the entire framework for interconnection arrangements between interexchange and local service providers. This application included a proposal to permit all local exchange carriers to interchange traffic with each other regardless of where the traffic originates. Currently, the CRTC is determining the best type of proceeding to deal with this application. It recently held a two-day round-table discussion for interested industry participants in which it solicited views on what issues should be discussed during future proceedings and what issues could be dealt with on a more expedient basis by the CRTC interconnection steering committee. The Commission will issue its determinations resulting from these discussions by the fall of 2000, at which time it should publish a public notice. In September 2000, the CRTC approved an application by a U.S.-based provider of digital subscriber line services for access to the incumbent local exchange carriers' unbundled local loops and central office co-location sites on the same terms and conditions as competitive local exchange carriers, as well as an application by Bell Canada for approval of a tariff under which it would provide access to its unbundled local loops to resellers using digital subscriber line access technology. This decision creates opportunities for additional competition in the high-speed Internet access market from service providers which are not subject to the same restrictions on foreign ownership and control as the competitive local exchange carriers. ACCESS Access to both private and public property is important to our business in order for us to be able to reach our customers in multiple unit dwellings and construct, maintain and operate our network. With respect to access to multiple unit dwellings, the CRTC, which does not have direct jurisdiction over building owners, has recognized the importance of customer choice of service providers and has expressed the view that an exclusive arrangement between a service provider and a landlord of a multiple unit dwelling will generally violate the Telecommunications Act (Canada). The CRTC has initiated a proceeding to consider its regulatory approach to facilitating non-discriminatory access and customer choice in multi-dwelling units. Participants have been asked to comment on possible fees or charges for access and other terms and conditions. A determination is expected in February 2001. 66 71 In December 1999, the CRTC initiated a proceeding to examine the terms and conditions the city of Vancouver may impose for access to public lands in order to construct, maintain and operate telecommunications facilities. The outcome of this proceeding may permit other service providers to obtain such access on terms more favorable than those in our agreement with the city of Vancouver, or may permit us to renegotiate our agreement with the city of Vancouver to the extent that our agreement contains less favourable terms than those approved by the CRTC. REGULATION OF WIRELESS SERVICES Use of radio spectrum to provide wireless telecommunications services is subject to licensing by Industry Canada under the Radiocommunication Act (Canada). Under this legislation, Industry Canada is authorized to issue radio licences, to plan the allocation and use of the radio spectrum and to perform other duties to ensure the orderly development and efficient operation of radiocommunication in Canada. With respect to spectrum licensing, Industry Canada has the authority to revoke a licence for non-compliance with terms and conditions or failure to pay associated spectrum licence fees. However, revocation is rare and licences are usually renewed year to year upon payment of the applicable fee. Industry Canada levies licence fees on wireless telecommunications service providers, and generally not on subscribers for the services offered by such providers. Industry Canada has issued spectrum licences to us in the 38 GHz frequency range which allow us to operate point-to-point radio systems in Vancouver, Calgary, Toronto, Ottawa and Montreal. To obtain licences, applicants operating as radiocommunication carriers must comply with foreign ownership restrictions under the Radiocommunication Act. FOREIGN OWNERSHIP RESTRICTIONS Group Telecom, and our operating subsidiary GT Group Telecom Services Corp., which is a telecommunications common carrier for regulatory purposes, are required by the Canadian Telecommunications Act and the Radiocommunication Act, and the regulations made under both statutes, to be Canadian-owned and controlled corporations incorporated or continued under the laws of Canada or a province of Canada. Our operating subsidiary is deemed to be Canadian-owned and controlled if: (i) not less than 80% of the members of its board of directors are Canadians; (ii) Canadians beneficially own and control not less than 80% of its issued and outstanding voting shares; and (iii) it is not otherwise controlled in fact by persons that are not Canadians. GT Group Telecom Services Corp. is a Canadian carrier wholly owned and controlled by us and not less than 80% of its board of directors are individual Canadians. We will ensure that not less than 80% of the members of the board of directors of our subsidiary will continue to be composed of Canadians. We intend that our operating subsidiary will remain controlled by us, and be our wholly-owned subsidiary. Therefore, all of the outstanding voting shares of the subsidiary are now, and it is intended that the subsidiary will remain, owned by a company controlled by Canadians. A "Canadian" for the purposes of these requirements includes a Canadian citizen who is ordinarily resident in Canada, a permanent resident of Canada and, among other types of entities, corporations in which Canadians beneficially own and control in the aggregate not less than 66 2/3% of the issued and outstanding voting shares and which are not otherwise controlled in fact by non-Canadians. A "voting share" for purposes of these requirements means a share of any class of shares of a corporation carrying voting rights under all circumstances or by reason of an event that has occurred and is continuing or by reason of a condition that has been fulfilled and includes: (i) a security that is convertible into such a share at the time that a calculation of the percentage of shares owned and controlled by Canadians is made; and (ii) an option or right to acquire the share or security referred to in clause (i) that is exercisable at the time that the calculation referred to in that clause is made. Also, regulations made under the Telecommunications Act and the Radiocommunication Act provide that, in order for a company which holds shares in a carrier to be considered Canadian, not 67 72 less than 66 2/3% of the issued and outstanding voting shares of that company must be owned by Canadians and the company must not otherwise be controlled in fact by non-Canadians. This means that not less than 66 2/3% of the issued and outstanding voting shares of GT Group Telecom Inc. must be owned by Canadians and that GT Group Telecom Inc. must not otherwise be controlled in fact by non-Canadians. Our class A voting shares are "voting shares" for these purposes and more than 66 2/3% of the class A voting shares are held by Canadians as at the date of this prospectus. Our class B non-voting shares are not "voting shares" for these purposes. The term "control in fact" is not defined in the relevant legislation and raises various complex questions of interpretation. A number of factors have been considered relevant to the determination of whether a regulated entity is not controlled in fact by non-Canadians, including the election and composition of the board of directors, the industry specific experience of the non-Canadian shareholders, the ability to appoint senior management, the power to determine policies, operations and strategic decision-making and the percentage of equity interest (whether voting or non-voting) held by non-Canadians. We have designed our capital structure to ensure compliance with the Canadian ownership requirements. Our articles of incorporation provide that certain non-voting shares may not be converted into voting shares if the exercise of such conversion rights would cause us to be in violation of any Canadian law applicable to the ownership interests in, or the exercise of control over, a corporation that is providing telecommunication services in Canada. In addition, the regulations under the Telecommunications Act (Canada) provide us with the time and ability to rectify ineligibility resulting from insufficient Canadian ownership of voting shares. In particular, we may, to the extent applicable: (i) refuse to accept any subscription for any voting shares; (ii) refuse to allow any transfer of voting shares to be recorded; (iii) suspend the rights of a holder of voting shares to vote at a meeting of shareholders; and (iv) sell, repurchase or redeem any voting shares. Although we believe that we have at all times been in compliance with the relevant legislation, there can be no assurance that a future CRTC or Industry Canada determination or events beyond our control will not result in us ceasing to comply with the relevant legislation. Should this occur, the ability of our wholly owned subsidiary to operate as a Canadian carrier under the Telecommunications Act (Canada) or to renew or secure licences under the Radiocommunication Act (Canada) could be jeopardized and our business could be materially adversely affected. If we become subject to proceedings before the CRTC or Industry Canada with respect to compliance with the relevant legislation, we could be materially adversely affected, even if we were ultimately successful in such a proceeding. 68 73 RELATED PARTY TRANSACTIONS AGREEMENTS WITH OUR SHAREHOLDERS Affiliates of Goldman Sachs and CIBC Capital Partners participated in our series A first preference share offering in May 1999 and received options to purchase additional series A first preference shares at a price of $1.875 per share. See "Description of Share Capital". These options were exercised in full in August 1999. Robert Gheewalla, one of our directors, is a vice president in the Principal Investment Area at Goldman Sachs. George Estey, another of our directors, is Chairman of Goldman Sachs Canada. Kenneth Kilgour, another of our directors, is managing director and head of CIBC Capital Partners. In addition, three of our directors are executive officers of Shaw Communications. These directors are Michael Abram, Michael D'Avella and Jim Shaw. In connection with our series A first preference share offering, on May 7, 1999, we entered into a shareholders' agreement with our shareholders, including the holders of all of our then outstanding series A first preference shares. On February 16, 2000, in connection with our acquisition of the business of Shaw FiberLink, we amended and restated this agreement to include Shaw Communications as a party. For a detailed description of this agreement, see "Description of Share Capital" beginning on page 92. Eleven of our current directors and executive officers are signatories to the agreement. 69 74 PRINCIPAL SHAREHOLDERS To our knowledge, we are not directly or indirectly owned or controlled by another corporation or any foreign government. Certain institutional investors that held our series A first preference shares, which converted into our class A voting and class B non-voting shares upon our initial public offering, continue to hold rights specified under a shareholders' agreement with us. See "Related Party Transactions" on page 67 and "Description of Share Capital" beginning on page 90 for a description of these rights. In addition, upon completion of our acquisition of the business of Shaw FiberLink, Shaw Communications was issued series B first preference shares (which have now converted into class A voting shares), became a party to the shareholders' agreement and has similar voting and other rights. The following table sets forth, to our knowledge, information as of January 31, 2001, for (i) each person who beneficially owns 5% or more of our then issued and outstanding class A voting shares and (ii) all of our directors and executive officers as a group. The number of shares beneficially owned by a person includes class A voting shares subject to options held by that person that were currently exercisable at, or exercisable within 60 days of, January 31, 2001. The class A voting shares issuable under those options are treated as if they were outstanding for computing the percentage ownership of the person holding these options but are not treated as if they were outstanding for the purposes of computing the percentage ownership outstanding for any other person.
PERCENTAGE OF NUMBER OF OUTSTANDING NAME CLASS A SHARES CLASS A SHARES ---- -------------- -------------- Shaw Communications......................................... 29,096,097 36.55 Goldman Sachs(1)............................................ 18,999,999 23.86 Canadian Imperial Bank of Commerce.......................... 7,500,000 9.42 Directors and executive officers (22 persons)............... 1,362,174 1.71
--------------- (1) As of January 31, 2001, Goldman Sachs also owned 11,000,002 class B non-voting shares, representing approximately 26.70% of the class B non-voting shares then issued and outstanding. 70 75 SELLING SHAREHOLDERS All warrants offered hereby by the selling shareholders were originally issued by Group Telecom as part of a unit which also consisted of our 13 1/4% senior discount notes. Any class B non-voting shares offered hereby by the selling shareholders will be issued to the selling shareholders upon the exercise by the selling shareholders of the warrants held by such selling shareholder. The following table sets forth certain information that has been provided to us by the selling shareholders. Information regarding their beneficial ownership of the class B non-voting shares assumes that all warrants currently owned by the selling shareholders have been exercised by the selling shareholders as of the date hereof.
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- AEGON USA Pension Plan 2,000 9,821 * 2,000(9) 9,821 0 * c/o AEGON USA 4333 Edgewood Road NE Cedar Rapids, IA 52499-5112 AUSA Life Insurance Company 6,000 29,463 * 6,000(9) 29,463 0 * c/o AEGON USA 4333 Edgewood Road NE Cedar Rapids, IA 52499-5112 Life Investors Insurance 2,000 20,870 * 2,000(9) 20,870 0 * Company of America c/o AEGON USA 4333 Edgewood Road NE Cedar Rapids, IA 52499-5112 Veterans Life Insurance Company 4,250 9,821 * 4,250(9) 9,821 0 * c/o AEGON USA 4333 Edgewood Road NE Cedar Rapids, IA 52499-5112 AIM High Yield Fund 28,900 141,916 * 28,900 141,916 0 * c/o AIM Capital Management 11 Greenway Plaza #100 Houston, TX 77046 AIM High Yield Fund II 3,000 32,731 * 3,000 14,731 18,000 * c/o AIM Capital Management 11 Greenway Plaza #100 Houston, TX 77046 AIM Canadian Bond Fund 100 491 * 100 491 0 * c/o AIM Capital Management 11 Greenway Plaza #100 Houston, TX 77046 AIM V.I. High Yield Fund 500 2,455 * 500 2,455 0 * c/o AIM Capital Management 11 Greenway Plaza #100 Houston, TX 77046 Shell Canada Pension Trust 2,000 9,821 * 2,000 9,821 0 * c/o Altamira Management Limited The Exchange Tower 130 King Street West, Suite 900 Toronto, Ontario Canada M5X 1K9
71 76
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Altamira Balanced Fund 400 1,964 * 400 1,964 0 * c/o Altamira Management Limited The Exchange Tower 130 King Street West, Suite 900 Toronto, Ontario Canada M5X 1K9 Altamira Growth and Income Fund 500 2,455 * 500 2,455 0 * c/o Altamira Management Limited The Exchange Tower 130 King Street West, Suite 900 Toronto, Ontario Canada M5X 1K9 Altamira High Yield Bond Fund 1,200 5,892 * 1,200 5,892 0 * c/o Altamira Management Limited The Exchange Tower 130 King Street West, Suite 900 Toronto, Ontario Canada M5X 1K9 Ares Leveraged Investment 9,800 48,123 * 9,800 48,123 0 * Fund II, L.P. 1999 Avenue of the Stars Suite 1900 Los Angeles, CA 90067 Ares Leveraged Investment 4,450 21,852 * 4,450 21,852 0 * Fund, L.P. 1999 Avenue of the Stars Suite 1900 Los Angeles, CA 90067 AXP Variable Portfolio -- 750 3,682 * 750 3,682 0 * Managed Fund c/o American Express Financial Corporation 50592 AXP Financial Center Minneapolis, MN 55474 AXP Variable Portfolio -- Extra 4,110 20,182 * 4,110 20,182 0 * Income Fund c/o American Express Financial Corporation 50592 AXP Financial Center Minneapolis, MN 55474 High Yield Portfolio 20,915 102,705 * 20,915 102,705 0 * c/o American Express Financial Corporation 50592 AXP Financial Center Minneapolis, MN 55474 Total Return Portfolio 275 1,350 * 275 1,350 0 * c/o American Express Financial Corporation 50592 AXP Financial Center Minneapolis, MN 55474
72 77
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- American Express Retirement Plan 300 1,473 * 300 1,473 0 * -- High Yield Fixed Income c/o American Express Asset Management Group 50189 AXP Financial Center Minneapolis, MN 55474 BMO CBO Portfolio G7117 4,750 23,325 * 4,750 23,325 0 * c/o Bank of Montreal First Canadian Place, 10th Floor Toronto, Ontario Canada M5X 1A1 Capital Guardian U.S. Fixed- 8,500 41,740 * 8,500 41,740 0 * Income Master Fund c/o Capital International, Inc. 11100 Santa Monica Blvd., 15th Floor Los Angeles, CA 90025 Capital Guardian U.S. High-Yield 7,000 34,374 * 7,000 34,374 0 * Fixed Income Fund c/o Capital International, Inc. 11100 Santa Monica Blvd., 15th Floor Los Angeles, CA 90025 Capital Guardian Global 975 4,787 * 975 4,787 0 * High-Yield Fixed Income Fund Semi-Monthly Valued c/o Capital International, Inc. 11100 Santa Monica Blvd., 15th Floor Los Angeles, CA 90025 Capital International Global 500 2,455 * 500 2,455 0 * High Yield Fund c/o Capital International, Inc. 11100 Santa Monica Blvd., 15th Floor Los Angeles, CA 90025 American High-Income Trust 22,525 110,611 * 22,525 110,611 0 * c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 The Bond Fund of America, Inc. 9,500 46,650 * 9,500 46,650 0 * c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 The Income Fund of America, Inc. 24,750 121,537 * 24,750 121,537 0 * c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 Capital World Bond Fund, Inc. 1,000 4,910 * 1,000 4,910 0 * c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821
73 78
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- American Variable Insurance 2,250 11,048 * 2,250 11,048 0 * Series -- Asset Allocation Fund c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 American Variable Insurance 2,000 9,821 * 2,000 9,821 0 * Series -- Bond Fund c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 American Variable Insurance 6,500 31,918 * 6,500 31,918 0 * Series -- High Yield Bond Fund c/o Capital Research & Management Company 135 South State College Blvd Brea, California 92821 CIBC World Markets Corp.(2) 8,455 41,519 * 8,455 41,519 0 * 425 Lexington Avenue New York, NY 10017 Signature High Income Fund 4,050 19,887 * 4,050 19,887 0 * c/o CI Mutual Funds 151 Yonge Street, 8/F Toronto, Ontario Canada M5C 2W7 Signature Corporate Bond Fund 700 3,437 * 700 3,437 0 * c/o CI Mutual Funds 151 Yonge Street, 8/F Toronto, Ontario Canada M5C 2W7 Insight Canadian High Yield 100 491 * 100 491 0 * Income Pool c/o CI Mutual Funds 151 Yonge Street, 8/F Toronto, Ontario Canada M5C 2W7 Keystone High Income Fund 500 2,455 * 500 2,455 0 * c/o CI Mutual Funds 151 Yonge Street, 8/F Toronto, Ontario Canada M5C 2W7 DLJ High Yield Bond Fund 6,750 33,146 * 6,750 33,146 0 * c/o Custodial Trust Co. 101 Carnegie Center Princeton, NJ 08540 Triax Diversified High Yield 10,650 52,297 * 10,650 52,297 0 * Trust c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2
74 79
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- West Fraser Timber 500 2,455 * 500 2,455 0 * c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2 Kingsway Reinsurance (Bermuda) 650 3,191 * 650 3,191 0 * Limited c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2 DFC Active Fixed Income Fund 2,550 12,522 * 2,550 12,522 0 * c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2 Navigator Canadian Income Fund 650 3,191 * 650 3,191 0 * c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2 Falcon Bridge Bond Fund #2 1,750 8,593 * 1,750 8,593 0 * c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2 Deans Knight Bond Fund 8,000 39,284 * 8,000 39,284 0 * c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C., Canada V6C 2W2 Colonial First State North 1,900 9,330 * 1,900 9,330 0 * American High Yield Fund c/o Deans Knight Capital Management 999 West Hastings Street Suite 730 Vancouver, B.C. Canada V6C 2W2
75 80
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Eaton Vance High Income 13,900 68,257 * 13,900(10) 68,257 0 * Portfolio c/o Eaton Vance Management High Yield Group 255 State Street Boston, MA 02109 Eaton Vance Income Fund of 5,650 27,744 * 5,650(11) 27,744 0 * Boston c/o Eaton Vance Management High Yield Group 255 State Street Boston, MA 02109 First Investors Fund for Income, 3,500 17,187 * 3,500 17,187 0 * Inc. 95 Wall Street, 22nd Floor New York, NY 10005 First Investors Special Bond 250 1,227 * 250 1,227 0 * Fund, Inc. 95 Wall Street, 22nd Floor New York, NY 10005 Primus Multi-Sector Credit 1,500 7,365 * 1,500 7,365 0 * Master Fund, Inc.(3) c/o Goldman, Sachs & Co. 85 Broad Street New York, N.Y. 10004 Guardian Life Insurance Co/ 8,000 39,284 * 8,000 39,284 0 * High Yield Securities c/o Guardian Life Insurance Co. of America 7 Hanover Square/20-D New York, NY 10004 Guardian High Yield Bond Fund 2,100 10,312 * 2,100 10,312 0 * c/o Guardian Life Insurance Co. of America 7 Hanover Square/20-D New York, NY 10004 Guardian VC High Yield Bond Fund 900 4,419 * 900 4,419 0 * c/o Guardian Life Insurance Co. of America 7 Hanover Square/20-D New York, NY 10004 ING Funds Trust -- ING High 500 2,455 * 500 2,455 0 * Yield Bond Fund c/o ING Funds Trust 1475 Dunwoody Drive West Chester, PA 19380 INVESCO Variable Investment Fund 400 1,964 * 400 1,964 0 * Inc. -- High Yield Fund 7800 E. Union Avenue, Suite 501 Denver, CO 80237 INVESCO Bond Funds, Inc. -- 5,600 27,499 * 5,600 27,499 0 * High Yield Fund 7800 E. Union Avenue, Suite 501 Denver, CO 80237
76 81
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- John Hancock High Income Account 200 982 * 200 982 0 * 101 Huntington Avenue Boston, MA 02199 SG/Russell Funds PLC 65 319 * 65 319 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 City of New York Employees 2,020 9,919 * 2,020 9,919 0 * Ret. Sys Fix Account c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Souther Company Strategic Yield 640 3,142 * 640 3,142 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 BP Amoco Global Strategic Yield 185 908 * 185 908 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 HSBC Republic Investments 5 24 * 5 24 0 * Limited c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 AGF High Yield Fund 215 1,055 * 215 1,055 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Felra & Ufcw Pension Fund 1,295 6,359 * 1,295 6,359 0 * High Yield c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Gen Retirement Sys for City of 135 662 * 135 662 0 * Detroit c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Lazard Strategic Yield Portfolio 775 3,805 * 775 3,805 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Lazard Global Strategic Yield 290 1,424 * 290 1,424 0 * Fund c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Triax Strategic Yield Management 65 319 * 65 319 0 * World SY Fund c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300
77 82
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Lazard High Yield Portfolio 1,160 5,696 * 1,160 5,696 0 * c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Lazard Asset Management 350 1,718 * 350 1,718 0 * Investment Trust c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Frank Russell Investment Mgt 35 171 * 35 171 0 * Fixed Income c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Frank Russell Investment Mgt 40 196 * 40 196 0 * Multi Strategy c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Lazard Freres Global Strategic 225 1,104 * 225 1,104 0 * Yield c/o Lazard Asset Management 30 Rockefeller Plaza, 49(th) Floor New York, NY 10112-6300 Lutheran Brotherhood High Yield 7,500 36,829 * 7,500 36,829 0 * Fund RF06 c/o Lutheran Brotherhood 625 Fourth Avenue South Minneapolis, MN 55415 LB Series Fund, Inc. High Yield 13,500 66,293 * 13,500 66,293 0 * Portfolio RF03 c/o Lutheran Brotherhood 625 Fourth Avenue South Minneapolis, MN 55415 Atlas Canadian High Yield Bond 3,000 14,731 * 3,000 14,731 0 * Fund c/o Merrill Lynch Investment Managers P.O. Box 9011 Princeton, NJ 08543-9011 Merrill Lynch Variable Series 7,750 38,057 * 7,750 38,057 0 * Funds, Inc. High Current Income Fund c/o Merrill Lynch Investment Managers P.O. Box 9011 Princeton, NJ 08543-9011 Corporate High Yield Fund III, 7,000 34,374 * 7,000 34,374 0 * Inc. c/o Merrill Lynch Investment Managers P.O. Box 9011 Princeton, NJ 08543-9011
78 83
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Corporate High Yield Fund II, 1,500 7,365 * 15,000 7,365 0 * Inc. c/o Merrill Lynch Investment Managers P.O. Box 9011 Princeton, NJ 08543-9011 Corporate High Yield Fund, Inc. 4,500 22,097 * 4,500 22,097 0 * c/o Merrill Lynch Investment Managers P.O. Box 9011 Princeton, NJ 08543-9011 MFS Series III: MFS High Yield 750 3,682 * 750 3,682 0 * Opportunities Fund c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS/Sun Life High Yield Series 2,900 14,240 * 2,900 14,240 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS High Yield Variable Account 1,050 5,156 * 1,050 5,156 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS Fund: VS High Yield Bond 100 491 * 100 491 0 * Fund c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS High Income Fund 11,625 57,085 * 11,625 57,085 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS High Yield Fund 25 122 * 25 122 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS Meridian VS High Yield Fund 2,525 12,399 * 2,525 12,399 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS High Income Series 550 2,700 * 550 2,700 0 * c/o MFS Investment Management 500 Boylston Street Boston, MA 02116 MFS Institutional Advisors, 475 2,332 * 475 2,332 0 * Inc.(4) 500 Boylston Street Boston, MA 02116 MAS High Yield Portfolio 12,000 58,927 * 12,000 58,927 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428
79 84
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- University of Pennsylvania High 2,550 12,522 * 2,550 12,522 0 * Yield c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Multi-Asset Class Portfolio 140 687 * 140 687 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Offshore Leveraged Fixed Income 2,500 12,276 * 2,500 12,276 0 * Fund Ltd. c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 High Yield Portfolio 1,850 9,084 * 1,850 9,084 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Morgan Stanley SICAV High Yield 4,290 21,066 * 4,290 21,066 0 * Bond Fund c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Morgan Stanley Global 240 1,178 * 240 1,178 0 * Opportunity Bond Fund, Inc. c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 MS High Yield Fund 2,145 10,533 * 2,145 10,533 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Van Kampen Worldwide High Income 950 4,665 * 950 4,665 0 * Fund c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 SunAmerica Series Trust 700 3,437 * 700 3,437 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428
80 85
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Van Kampen High Yield & Total 375 1,841 * 375 1,841 0 * Return Fund c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 MSUF -- High Yield Portfolio 650 3,191 * 650 3,191 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Manufacturers Life Insurance 2,640 12,963 * 2,640 12,963 0 * Company of New York c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Forthought Life Insurance 1,800 8,839 * 1,800 8,839 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Risk Capital Reinsurance 400 1,964 * 400 1,964 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 MS Monthly Income Fund (Wako) 3,400 16,696 * 3,400 16,696 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 GE Investment Management 375 1,841 * 375 1,841 0 * Incorporation c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 ITM Worldwide High Income Fund 575 2,823 * 575 2,823 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 MSDW SICAV European High Yield 5,000 24,553 * 5,000 24,553 0 * Fund c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 The University of Chicago 475 2,332 * 475 2,332 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428
81 86
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- LGT Capital Invest Ltd of Grand 560 2,749 * 560 2,749 0 * Cayman c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 Gemini High Yield 500 2,455 * 500 2,455 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 SBLI High Yield 535 2,627 * 535 2,627 0 * c/o Morgan Stanley Dean Witter Investment Management One Tower Bridge West Conshohocken, PA 19428 The Northwestern Mutual Life 2,100 10,312 * 2,100 10,312 0 * Insurance Company(5) 720 East Wisconsin Avenue Milwaukee, WI 53202 Northwestern Mutual Series Fund, 1,650 8,102 * 1,650 8,102 0 * Inc.(6) 720 East Wisconsin Avenue Milwaukee, WI 53202 Mason Street Funds, Inc.(7) 500 2,455 * 500 2,455 0 * 720 East Wisconsin Avenue Milwaukee, WI 53202 OZ Master Fund, Ltd. 48,500 238,164 * 48,500 238,164 0 * 9 West 57th Street New York, NY 10019 OZF Credit Opportunities 3,000 14,731 * 3,000 14,731 0 * Master Fund, Ltd. 9 West 57th Street New York, N.Y. 10019 Pacific Life Insurance Company 3,750 18,414 * 3,750 18,414 0 * 700 Newport Center Drive 2nd Floor -- Securities Operations Newport Beach, CA 92660 Phoenix Goodwin High Yield Fund 5,450 26,762 * 5,450 26,762 0 * c/o Phoenix Investment Partners 56 Prospect Street Hartford, CT 06115 Phoenix Goodwin Multi-Sector 4,000 19,642 * 4,000 19,642 0 * Fixed Income Fund c/o Phoenix Investment Partners 56 Prospect Street Hartford, CT 06115 Phoenix Edge Multi Sector Fixed 3,000 14,731 * 3,000 14,731 0 * Income Fund c/o Phoenix Investment Partners 56 Prospect Street Hartford, CT 06115
82 87
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- The Prudential Series Fund, 6,725 33,023 * 6,725 33,023 0 * Inc., High Yield Bond Portfolio c/o Prudential Investments Two Gateway Center, 3rd Floor Newark, NJ 07102 Prudential High Yield Fund, Inc. 13,825 68,489 * 13,825 67,889 600 * c/o Prudential Investments Two Gateway Center, 3rd Floor Newark, NJ 07102 Prudential High Yield Total 1,170 8,545 * 1,170 5,745 2,800 * Return Fund, Inc. c/o Prudential Investments Two Gateway Center, 3rd Floor Newark, NJ 07102 The Prudential Insurance Company 6,520 32,017 * 6,520 32,017 0 * of America c/o Prudential Investments Two Gateway Center, 3rd Floor Newark, NJ 07102 The Prudential Life Insurance 260 1,276 * 260 1,276 0 * Company of Arizona c/o Prudential Investments Two Gateway Center, 3rd Floor Newark, NJ 07102 PW Managed High Yield Plus Fund 7,750 38,057 * 7,750 38,057 0 * c/o Mitchell Hutchins 51 West 52nd Street, 21st Floor New York, NY 10019 Smith Barney Diversified 2,750 13,504 * 2,750 13,504 0 * Strategic Income Fund 388 Greenwich Street, 23rd Floor New York, NY 10013 Greenwich St. Series -- 85 417 * 85 417 0 * Diversified Strategic Income Portfolio 388 Greenwich Street, 23rd Floor New York, NY 10013 Global Horizons: Diversified 50 245 * 50 245 0 * Strategic Income 388 Greenwich Street, 23rd Floor New York, NY 10013 Smith Barney High Income Fund 5,215 25,608 * 5,215 25,608 0 * 388 Greenwich Street, 23rd Floor New York, NY 10013 High Income Opportunity Fund, 2,490 12,227 * 2,490 12,227 0 * Inc. 388 Greenwich Street, 23rd Floor New York, NY 10013 Managed High Income Fund 1,500 7,365 * 1,500 7,365 0 * 388 Greenwich Street, 23rd Floor New York, NY 10013 Smith Barney Balanced Fund 740 3,633 * 740 3,633 0 * 388 Greenwich Street, 23rd Floor New York, NY 10013
83 88
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- SB/Travelers High Income 695 3,412 * 695 3,412 0 * Portfolio 388 Greenwich Street, 23rd Floor New York, NY 10013 Smith Barney USA High Yield Fund 230 1,129 * 230 1,129 0 * 388 Greenwich Street, 23rd Floor New York, NY 10013 Zenix Income Fund 495 2,430 * 495 2,430 0 * 388 Greenwich Street, 23rd Floor New York, NY 10013 Spinnaker Offshore Ltd. 2,000 9,821 * 2,000 9,821 0 * c/o ING Ghent Asset Management LLC 230 Park Avenue New York, NY 10169 The Surdna Foundation 612 3,005 * 612 3,005 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 UMASS Memorial Health Care, Inc. 175 859 * 175 859 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 New Century Energies Inc. 1,050 5,156 * 1,050 5,156 0 * Master Retirement Trust c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 The Havican Insurance Co. 325 1,595 * 325 1,595 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Father Flanagans Boys Home 475 2,332 * 475 2,332 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Ford Motor Co. 7,625 37,443 * 7,625 37,443 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Retirement Plan for the 2,050 10,066 * 2,050 10,066 0 * Employees of Texas Utilities Co. System c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Bell Atlantic Master Trust 10,300 50,579 * 10,300 50,579 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Standish World High Yield 575 2,823 * 575 2,823 0 * Portfolio c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111
84 89
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Multi-Style, Multi-Manager Funds 1,698 8,338 * 1,698 8,338 0 * PLC-High Yield Fund c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 MAFCO Holdings Master Trust 295 1,448 * 295 1,448 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Pneumo Abex Corp Retirement 165 810 * 165 810 0 * Income Master Trust c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 PCFG Long Term Investment Co. 840 4,124 * 840 4,124 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Worcester Memorial Hospital, 175 859 * 175 859 0 * Inc. Retirement Plan c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Holy Cross Health System Corp. 975 4,787 * 975 4,787 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Holy Cross Employees Retirement 625 3,069 * 625 3,069 0 * Trust c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Fieldcrest Cannon Inc. 400 1,964 * 400 1,964 0 * Retirement Plan for Salaried Employees c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Fieldcrest Cannon Inc. 150 736 * 150 736 0 * Retirement Plan for Hourly Employees c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 William Penn Foundation 1,075 5,278 * 1,075 5,278 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Northeastern University 925 4,542 * 925 4,542 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111
85 90
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- The Board of Pensions of the 2,825 13,872 * 2,825 13,872 0 * Presbyterian Church (USA) c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Wellesley College Endowment 600 2,946 * 600 2,946 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Frank Russell Insurance Funds -- 365 1,792 * 365 1,792 0 * Core Bonds c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Emerson Electric Co. Retirement 1,100 5,402 * 1,100 5,402 0 * Master Trust c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Frank Russell -- Fixed III 1,200 5,892 * 1,200 5,892 0 * c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 Frank Russell -- Multi Strategy 1,475 7,243 * 1,475 7,243 0 * Bond c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 AT & T Long Term Investment 3,875 19,028 * 3,875 19,028 0 * Trust c/o Standish, Ayer & Wood One Financial Center Boston, MA 02111 GM Employers Domestic Group 2,000 9,821 * 2,000 9,821 0 * Pension Trust c/o State Street Bank and Trust 1776 Heritage Drive N. Quincy, MA 02171 Stein Roe High Yield Fund 1,750 8,593 * 1,750 8,593 0 * c/o Stein, Roe & Farnham 1 South Wacker Drive Chicago, IL 60606 The Sumitomo Trust & Banking Co. 575 2,823 * 575 2,823 0 * Ltd. c/o Sumitomo Trust & Banking Co. (USA) 527 Madison Avenue New York, NY 10022 Sun America Inc. 38,000 186,602 * 38,000 186,602 0 * 1 Sun America Center Los Angeles, CA 90025
86 91
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Sun America High Income Fund 1,500 7,366 * 1,500 7,366 0 * 733 3rd Avenue New York, NY 10017 Sun America Series Trust 2,250 11,048 * 2,250 11,048 0 * High Yield Portfolio 733 3rd Avenue New York, NY 10017 TCW Group, Inc. 81,749 401,436 * 81,749 401,436 0 * 865 South Figueroa Street, 21st Floor Los Angeles, CA 90017 TD Securities (USA), Inc. 19,325 94,897 * 19,325 94,897 0 * 31 West 52nd Street New York, NY 10019-6101 USAA High Yield Opportunities 2,750 324,504 * 2,750 13,504 311,000 * Fund c/o State Street Corporation/ USAA Fund Group 1776 Heritage Drive North Quincy, MA 02171 Van Kampen High Income Trust 1,260 6,187 * 1,260 6,187 0 * c/o Van Kampen Investments, Inc. 1 Parkview Plaza Oakbrook Terrace, IL 60181 Van Kampen Trust, on behalf 5,270 25,878 * 5,270 25,878 0 * of its series Van Kampen High Yield Fund c/o Van Kampen Investments, Inc. 1 Parkview Plaza Oakbrook Terrace, IL 60181 Van Kampen Income Corporate Bond 12,010 58,976 * 12,010 58,976 0 * Fund c/o Van Kampen Investments, Inc. 1 Parkview Plaza Oakbrook Terrace, IL 60181 Van Kampen High Income Trust II 960 4,714 * 960 4,714 0 * c/o Van Kampen Investments, Inc. 1 Parkview Plaza Oakbrook Terrace, IL 60181 Waddell & Reed Advisors Fund, 6,250 30,691 * 6,250 30,691 0 * Inc. -- High Income Fund c/o Waddell & Reed 6300 Lamar Avenue P.O. Box 29217 Shawnee Mission, KS 66201-9217 Waddell & Reed Advisors Fund, 2,250 11,048 * 2,250 11,048 0 * Inc. -- High Income Fund II c/o Waddell & Reed 6300 Lamar Avenue P.O. Box 29217 Shawnee Mission, KS 66201-9217
87 92
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Target/United Funds, Inc. -- 1,000 4,910 * 1,000 4,910 0 * High Income Portfolio c/o Waddell & Reed 6300 Lamar Avenue P.O. Box 29217 Shawnee Mission, KS 66201-9217 Agway Employees Retirement Plan 750 3,682 * 750 3,682 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Housing Authority Risk Retention 85 417 * 85 417 0 * Group c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Illinois Municipal Retirement 500 2,455 * 500 2,455 0 * Fund c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 High Yield Bond Portfolio, a 180 883 * 180 883 0 * series of John Hancock Variable Series Trust c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Lexmark International Group, 260 1,276 * 260 1,276 0 * Inc. c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Teachers' Retirement System of 750 3,682 * 750 3,682 0 * Louisiana c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 North American Security Life 150 736 * 150 736 0 * Series Trust Investment Quality Bond c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 The John & Mary R. Markle 100 491 * 100 491 0 * Foundation c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109
88 93
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- Oregon Public Retirement Fund 1,000 4,910 * 1,000 4,910 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Multi-Managed Income Portfolio 15 73 * 15 73 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Multi-Managed Income/ 20 98 * 20 98 0 * Equity Portfolio c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Multi-Managed Growth Portfolio 20 98 * 20 98 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Multi-Managed Moderate 25 122 * 25 122 0 * Growth Portfolio c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 State Boston High Yield Plus 500 2,455 * 500 2,455 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 WTC-CIF II Core Bond Plus/ 25 122 * 25 122 0 * High Yield Plus c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 SBL Fund Series K 40 196 * 40 196 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Anchor Series High Yield Fund 100 491 * 100 491 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Anchor Series Aggressive 100 491 * 100 491 0 * Multi-Asset c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109
89 94
BEFORE THE OFFERING AFTER THE OFFERING -------------------------------------- --------------------------- NUMBER OF CLASS B PERCENT OF CLASS B NUMBER OF PERCENT OF NON- CLASS B NON-VOTING CLASS B CLASS B NUMBER OF VOTING NON-VOTING WARRANTS SHARES NON-VOTING NON-VOTING WARRANTS SHARES SHARES BEING BEING SHARES SHARES NAME OWNED OWNED OUTSTANDING(1) OFFERED OFFERED OWNED OUTSTANDING(1) ---- --------- --------- -------------- -------- ---------- ---------- -------------- The High Yield Plus Fund 850 4,174 * 850 4,174 0 * c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 New England Zenith Balanced 75 368 * 75 368 0 * Series c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 Tate & Lyle Reinsurance Limited 100 491 * 100 491 0 * High Yield c/o Wellington Management Company, LLP 75 State Street Boston, MA 02109 All other warrant holders 115,751 568,406 1.37% 115,751 568,406 0 * combined(8)
--------------- * Less than 1.0% (1) Based on the 41,266,833 class B non-voting shares that were issued and outstanding as of January 31, 2001. All shares issuable upon exercise of the currently outstanding warrants are deemed outstanding for the purpose of calculating the percentage ownership of the person holding such Warrants but are not deemed outstanding for calculating the percentage ownership of any other person. (2) To our knowledge, as of the date of this prospectus, an affiliate of CIBC World Markets Inc. beneficially owns more than 5% of our issued and outstanding class A voting shares. The Canadian Imperial Bank of Commerce, which is also an affiliate of this selling shareholder, acted as lead arranger and administrative agent under our bank facility. See "Description of Our Financing Arrangements -- Bank Facility". In addition, in the ordinary course of its business, this selling shareholder and its affiliates have engaged in, and may in the future engage in, investment banking transactions with us. (3) An affiliate of Goldman, Sachs & Co. indirectly holds more than a 5% interest in this selling shareholder. This affiliate of Goldman, Sachs & Co. has no control over the warrants and underlying class B non-voting shares being offered by this selling shareholder. See "Description of Our Financing Arrangements" and "Principal Shareholders" for a description of certain material relationships that this affiliate has had with us within the past three years. In addition, in the ordinary course of its business, this selling shareholder and its affiliates have engaged in, and may in the future engage in, investment banking transactions with us. (4) Of which, 200 warrants are held for its Endeavor High Yield Fund, 175 warrants are held for its Members High Income Fund and 100 warrants are held for its Jefferson Pilot Variable High Yield Fund. (5) These warrants are held for its Group Annuity Separate Account. (6) These warrants are held for its High Yield Bond Portfolio. (7) Of which, 100 warrants are held for its Asset Allocation Fund and 400 warrants are held for its High Yield Bond Fund. (8) As of the date of this prospectus, these warrant holders have not returned to us the documentation required for them to be included within, and to sell their warrants and class B 90 95 non-voting shares pursuant to, this prospectus. Consequently, none of warrants or class B non-voting shares listed here are currently being offered by this prospectus. Each of these warrant holders will be entitled to be named in, and sell their warrants and class B non-voting shares pursuant to, this prospectus or a supplement to this prospectus upon returning to us the documentation required by the Warrants Registration Rights Agreement. (9) As of January 19, 2001, these warrants have been exercised in full. (10) As of January 19, 2001, 13,250 of these warrants have been exercised. (11) As of January 19, 2001, 5,300 of these warrants have been exercised. 91 96 DESCRIPTION OF SHARE CAPITAL Our authorized share capital consists of an unlimited number of class A voting shares, class B non-voting shares, first preference shares issuable in series and second preference shares issuable in series. Provisions as to the modification, amendment or variation of the rights or provisions of these classes of shares are contained in the share terms and in the Canada Business Corporations Act, or the CBCA, and its regulations, our governing statute. On September 23, 1998, our share capital was changed so that our then existing common shares were renamed class A voting shares and our class B non-voting shares were created. These shares were renamed to help us comply with Canadian regulatory restrictions on non-Canadian ownership and control of Canadian facilities-based telecommunications carriers. At a special meeting held on February 18, 1997, our shareholders approved a two-for-one stock split for all common shares then issued and outstanding. CLASS A VOTING SHARES AND CLASS B NON-VOTING SHARES Holders of class A voting shares are entitled to vote at all meetings of our shareholders, other than meetings of other classes of shares where holders of such shares are entitled to vote separately as a class. Holders of class B non-voting shares are not entitled to vote on any matters except as specifically required by law. Upon liquidation or dissolution, the holders of class A voting shares and class B non-voting shares are entitled to share the remaining property equally pro rata, subject to the rights of the holders of our preference shares. Class A voting shares and class B non-voting shares may be paid dividends subject to the provisions of any other class of shares. The holders of class B non-voting shares benefit from take-over bid "coat-tail" provisions, entitling them to convert class B non-voting shares into class A voting shares in certain circumstances in which an offer is made for the purchase of class A voting shares. A non-Canadian holder of class A voting shares may be restricted in its ability to exercise voting rights attached to such shares as a result of regulatory restrictions applicable to Canadian telecommunications carriers. All class B non-voting shares will be converted into class A voting shares if all of the restrictions on the ownership of our voting shares, and the control in fact, or any of our affiliates by non-Canadians under applicable Canadian law are eliminated and our non-Canadian ownership of and control is not otherwise limited by law. Except as described above, the class A voting shares and the class B non-voting shares have the same rights, are equal in all respects and are treated by us as if they were shares of one class only. FIRST PREFERENCE SHARES The first preference shares may be issued at any time or from time to time in one or more series as may be determined by our board of directors. They are authorized to fix before issue the number, consideration per share and designation of such shares, and subject to the special rights and restrictions attached to all first preference shares, the rights and restrictions attaching to the first preference shares of each series including voting rights. The first preference shares of each series rank equally with the first preference shares of each other series with respect to the payment of dividends and the return of capital on our liquidation, dissolution or winding up. The first preference shares are entitled to preference over the second preference shares, the class A voting shares and class B non-voting shares and any other shares ranking junior to the first preference shares with respect to payments of dividends and the return of capital. The rights and restrictions attaching to the first preference shares as a class may not be amended without such approval as may then be required by law, subject to a minimum requirement of approval by the affirmative vote of at least two-thirds of the votes cast at a meeting of the holders of first preference shares to be called and held for that purpose. 92 97 SERIES A On May 7, 1999, the series A first preference shares were created after being approved by our directors. Upon completion of our initial public offering in March 2000, all of the outstanding series A first preference shares converted into either class A voting shares or class B non-voting shares, depending on foreign ownership restrictions then in place, on a one-for-one basis. SERIES B Upon completion of our acquisition of the business of Shaw FiberLink, we issued to Shaw Communications series B first preference shares which, at the time, represented 27.1% of our equity. Upon completion of our initial public offering in March 2000, all of the outstanding series B first preference shares converted into class A voting shares. SHAREHOLDERS AGREEMENT On February 16, 2000, shareholders then holding approximately 88.0% of our fully diluted equity, including all of the then outstanding series A first preference shareholders and Shaw Communications, as the holder of all of the then outstanding series B first preference shares, entered into a shareholders agreement which provides that: - our board will consist of 11 directors; - each of Shaw Communications and Goldman Sachs will be entitled to designate three directors and CIBC World Markets will be entitled to designate one director; and - each of Shaw Communications and Goldman Sachs will have a right to consent to: (1) specified major transactions by us, including acquisitions and investments in excess of $300 million and mergers or business combinations, for a period of 18 months from February 16, 2000. If Shaw Communications or Goldman Sachs withholds its consent in respect of a major transaction, the other party may force it to either sell its shares to the other party or buy the other party's shares; and (2) our annual operating budget, for a period of 24 months from February 16, 2000. REGISTRATION RIGHTS AGREEMENT On February 16, 2000, the initial purchasers of our series A first preference shares and Shaw Communications, as the holder of all of the then outstanding series B first preference shares, entered into a registration rights agreement with us. This agreement: - provides certain of the shareholders with the ability to require us to register their shares with the securities regulatory authority in the jurisdiction in which we made our public offering after we have made a public offering of our shares; - provides the shareholders with the ability to have their shares included with any registration statement to be filed by us with a securities regulatory authority; and - provides for the circumstances in which these rights may be exercised and the restrictions on such rights, including the number of times such requests may be made, our ability to refuse such rights, the number of shares to be registered and the payment of expenses. SECOND PREFERENCE SHARES The second preference shares are identical in all respects to the first preference shares except that they are subordinate in all respects to the first preference shares and any other shares which may rank senior to the second preference shares. 93 98 RESTRICTIONS ON NON-CANADIAN OWNERSHIP AND CONTROL Our articles of incorporation provide that we may, in connection with the issue or transfer of ownership of voting shares in our capital, take any action or refuse to take any action, as the case may be, to the extent necessary to ensure that each of our subsidiaries is and continues to be eligible to operate as a telecommunications common carrier under the Telecommunications Act. We have designed our capital structure to accommodate compliance with the Canadian ownership requirements. Our articles of incorporation provide that certain non-voting shares may not be converted into voting shares if the exercise of such conversion rights would cause us to be in violation of any Canadian law applicable to the ownership interests in, or the exercise of control over, a corporation that is providing telecommunication services in Canada. In addition, the regulations under the Telecommunications Act provide us with the time and ability to rectify ineligibility resulting from insufficient Canadian ownership of voting shares, notwithstanding any provision of our articles or by-laws. In particular, but without limitation, we may, to the extent applicable: - refuse to accept any subscription for any voting shares; - refuse to allow any transfer of voting shares to be recorded in our share register; - suspend the rights of a holder of voting shares to vote at a meeting of shareholders; and - sell, repurchase or redeem any of our voting shares. Although we believe that we have been at all times in compliance with the relevant legislation, and that we will remain in compliance if this offering is consummated, there can be no assurance that a future CRTC or Industry Canada determination or events beyond our control will not result in us ceasing to comply with the relevant legislation. Should this occur, our ability and the ability of Shaw FiberLink to operate as Canadian carriers under the Telecommunications Act or to renew or secure licenses under the Radiocommunication Act could be jeopardized and our business could be materially adversely affected. If we become subject to proceedings before or against the CRTC or Industry Canada with respect to our compliance with the relevant legislation, we could be materially adversely affected, even if we were ultimately successful in such a proceeding. 94 99 TAXATION U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion, based on current law, is a general summary of the material United States federal income tax considerations to you of the purchase, ownership and disposition of the warrants and class B non-voting shares acquired on the exercise of warrants as capital property (the "Warrant Shares"). The discussion of the United States federal income tax consequences set forth below is based upon the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, and judicial decisions and administrative interpretations thereunder, all as currently in effect, and such authorities may be repealed, revoked, or modified, possibly on a retroactive basis, so as to result in federal income tax consequences different from those discussed below. There can be no assurance that the Internal Revenue Service will not challenge one or more of the tax consequences described herein, and the Company has not obtained, nor does it intend to obtain, a ruling from the Internal Revenue Service or an opinion of counsel with respect to the United States federal income tax consequences of acquiring or holding warrants and Warrant Shares. The discussion below pertains only to you if you are a U.S. holder. As used herein, you are a U.S. holder if you are a beneficial owner of warrants or Warrant Shares and you are: - a citizen or resident of the United States, - a corporation, partnership or other entity created in or under the laws of the United States or any political subdivision thereof, - an estate the income of which is subject to United States federal income taxation regardless of its source, or - a trust if (x) a court within the United States is able to exercise primary supervision over the administration of the trust and (y) one or more United States persons have the authority to control all substantial decisions of the trust. This discussion does not purport to deal with all aspects of United States federal income taxation that may be relevant to a particular holder in light of the holder's circumstances (for example, persons subject to the alternative minimum tax provisions of the Internal Revenue Code). Also, this discussion does not deal with special rules that may apply to you if you are a member of a special class of holders subject to special rules, including - a dealer in securities or currencies, - a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings, - a bank, - a life insurance company, - a tax-exempt organization, - a person that actually or constructively owns 10% or more of our voting stock, - a person holding Warrant Shares as part of a hedging, conversion or constructive sale transaction or straddle or - a person whose "functional currency" is not the United States dollar. The discussion below assumes that you hold (or would hold if you acquired) the warrants and Warrant Shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code. The discussion also does not discuss any aspect of state, local or foreign law, nor federal estate and gift tax law. 95 100 EACH HOLDER OR PROSPECTIVE HOLDER OF WARRANTS AND WARRANT SHARES IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION INCLUDING THE TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS. TAX TREATMENT OF THE WARRANTS REPRESENTING WARRANT SHARES Because there is no exercise price for a warrant, a warrant should be considered to be constructively exercised for United States federal income tax purposes on the day on which the warrant is acquired and you should be considered a holder of Warrant Shares subject to the warrant as of the date you acquired the warrant. Consequently, the following discussion is applicable to holders of Warrant Shares and warrants. You will not realize gain or loss on the exercise of a warrant for class B non-voting shares. PAYMENT OF DIVIDENDS. The gross amount of any dividends paid to you (including amounts withheld to pay Canadian withholding taxes) will be treated as dividend income to you to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income will be includable in your gross income as ordinary income on the day received by you. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Internal Revenue Code. Such dividends will be foreign source income and will be either "passive income" or "financial services" income for United States foreign tax credit purposes. The amount of any dividend paid in Canadian dollars will equal the United States dollar value of the Canadian dollars received calculated by reference to the exchange rate in effect on the date the dividend is received by you regardless of whether the Canadian dollars are converted into United States dollars. If you do not convert the Canadian dollars into United States dollars on the date of receipt, you will have a basis in the Canadian dollars equal to its United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Canadian dollars will be treated as United States source ordinary income or loss. If you are a U.S. holder, the maximum rate of Canadian withholding tax on dividends paid to you is 15%. You may be entitled to deduct or credit such tax, subject to applicable limitations in the Internal Revenue Code. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. To the extent that the amount of any distribution paid to you exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of your Warrant Shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the Warrant Shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. To the extent such distributions are treated as capital gain, such gain would be United States source. Accordingly, you would not be able to use the foreign tax credit arising from any Canadian withholding tax imposed on such distribution unless such credit can be applied (subject to applicable limitations) against United States tax due on other foreign source income in the appropriate category for foreign tax credit purposes. SALE, EXCHANGE OR REPURCHASE OF WARRANTS OR WARRANT SHARES. Generally, the issue price of the warrants is determined by reference to the price paid for the warrants. For the initial purchasers of our warrants in the February 2000 unit offering, we allocated US$47.91 to the warrants comprising each unit, for tax and accounting purposes. You generally will recognize taxable gain or loss on the disposition of a warrant or Warrant Share in an amount equal to the difference between the amount realized for the warrant or the Warrant Share and your adjusted tax basis in the warrant or Warrant Share. Such gain or loss will be capital 96 101 gain or loss, and such gain or loss will be long-term capital gain or loss if you held the Warrant Share for more than one year. Certain non-corporate U.S. holders, including individuals, are eligible for reduced rates of taxation on net long-term capital gains. The deductibility of capital losses is subject to limitations. Such gain or loss, if any, will be United States source. If we repurchase Warrant Shares, the repurchase generally will be treated as a sale or exchange of stock subject to the rules discussed above. However, under certain circumstances as provided by Section 302 of the Internal Revenue Code, the repurchase may be treated fully or partially as a dividend taxable as ordinary income to you. You should consult your own tax advisor concerning the United States federal income tax consequences of the repurchase under your particular circumstances. PASSIVE FOREIGN INVESTMENT COMPANY RULES. In general, we will be a passive foreign investment company (a "PFIC") with respect to you if for any taxable year in which you held our warrants or Warrant Shares: - 75% or more of our gross income consists of passive income, such as dividends, interest, rents and royalties, or - 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation's income. We believe that we will not satisfy either of the PFIC tests in the current or subsequent taxable years. However, because the PFIC determination is made annually on the basis of our income and assets, including goodwill, there can be no assurance that we will not be a PFIC in the current or subsequent taxable years. If we were a PFIC in any taxable year and you held warrants and Warrant Shares, you generally would be subject to special rules with respect to "excess distributions" made by us on the Warrant Shares and with respect to gain from the disposition of Warrant Shares. An "excess distribution" generally is defined as the excess of the distributions with respect to the Warrant Shares in any taxable year over 125% of the average annual distributions received by you from us during the shorter of the three preceding years, or your holding period for the class shares. Generally, you would be required to allocate any excess distribution or gain from the disposition of the Warrant Shares ratably over your holding period for the Warrant Shares. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, effectively would be taxed at the highest United States federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to the particular taxable year. The portion, if any, of the excess distribution or gain that is not allocated to prior taxable years would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income. The foregoing rules with respect to excess distributions and dispositions may be avoided if you are eligible for and timely make a valid "mark-to-market" election. If you make a valid mark-to-market election, you will not be subject to the PFIC rules described above. Instead, in calculating income for each taxable year, you generally would be required, subject to certain limitations, to take into account the difference, if any, between the fair market value and the adjusted tax basis of the Warrant Shares as ordinary gain or loss at the end of taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the Warrant Shares will be adjusted to reflect any such income or loss amounts. The mark-to-market election is made with respect to marketable stock in a PFIC on a shareholder-by-shareholder basis and, once made, can only be revoked with the consent of the Internal Revenue Service. Under applicable 97 102 Treasury regulations, the term "marketable stock" includes stock of a PFIC that is "regularly traded" on a qualified exchange or other market. For these purposes, a class of stock is regularly traced on a qualified exchange or other market for any calendar year during which such class of stock is traded (other than in de minimis quantities) on at least 15 days during each calendar quarter. It is expected that the shares will be treated as marketable stock for these purposes, but no assurances can be given. If you own Warrant Shares during any year that we are a PFIC, you must file Internal Revenue Service Form 8621. If we are a PFIC, U.S. holders who acquire shares from decedents could be denied the step-up of the income tax basis for such shares which would otherwise have been available. INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, information reporting requirements will apply to certain payments made in respect of the warrants or Warrant Shares (or in respect of the Warrant Shares received upon exercise of the warrants) and the proceeds received on the disposition of warrants or Warrant Shares paid within the United States (and in certain cases, outside of the United States) to U.S. holders other than certain exempt recipients (such as corporations), and a 31 percent backup withholding may apply to such amounts if you are a non-corporate U.S. holder and you: - fail to provide an accurate taxpayer identification number, - are notified by the Internal Revenue Service that you have failed to report all interest or dividends required to be shown on your federal income tax returns, or - in certain circumstances, fail to comply with applicable certification requirements. Persons that are not United States persons may be required to establish their exemption from information reporting and backup withholding by certifying their status on Internal Revenue Service Form W-8 (or successor form). If you sell your warrants or Warrant Shares to or through a United States office of broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish an exemption, provided that the broker does not have actual knowledge that you are a U.S. person or that the conditions of any such exemption are not satisfied. If you sell your warrants or Warrant Shares outside the United States through a non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you outside the United States, then United States backup withholding and information reporting requirements generally will not apply to that payment. However, United States information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell your warrants or Warrant Shares through a non-U.S. office of a broker that: - is a United States person; - derives 50% or more of its gross income for a specified three-year period from the conduct of a trade or business in the United States; - is a "controlled foreign corporation" as to the United States; or - with respect to payments made after December 31, 2000, is a foreign partnership, if at any time during its tax year: - one or more of its partners are U.S. persons, as defined in United States Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership; or - at any time during its tax year the foreign partnership is engaged in a United States trade or business; 98 103 unless the broker has documentary evidence in its records that you are a non-United States person and does not have actual knowledge that you are a U.S. person or you otherwise establish an exemption. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of the principal Canadian federal income tax considerations generally applicable to the acquisition, holding and disposition of Warrants by a holder (a "U.S. Holder") who, for the purposes of the Income Tax Act (Canada) (the "ITA") and the Canada-United States Income Tax Convention(1980) (the "Convention"), as applicable, and at all relevant times, (i) is a resident of the United States and not resident, nor deemed to be resident, in Canada, (ii) holds Warrants and Warrant Shares as capital property, (iii) does not use or hold (and is not deemed to use or hold) Warrants or Warrant Shares in connection with a trade or business carried on (or deemed to be carried on) in Canada and (iv) deals at arm's length with Group Telecom. For the purpose of the ITA, related persons (as defined therein) are deemed not to deal at arm's length, and it is a question of fact whether persons not related to each other deal at arm's length. In general, Warrants and Warrant Shares will be considered to be capital property to a U.S. Holder unless the U.S. Holder holds the Warrants or Warrant Shares, as the case may be, in the course of carrying on business or acquired the Warrants or Warrant Shares, as the case may be, in a transaction or transactions considered to be an adventure or concern in the nature of trade. Special rules, which are not discussed in this summary, may apply to "financial institutions" (as defined in the ITA) and to non-resident insurers carrying on an insurance business in Canada and elsewhere, and accordingly, such persons should consult their own tax advisors. This summary is based on the current provisions of the ITA and the regulations thereunder and the Convention, specific proposals to amend the ITA or the regulations thereunder announced by the Canadian Minister of Finance prior to the date hereof (the "Tax Proposals") and the current published administrative practices of the Canada Customs and Revenue Agency (the "CCRA"). This summary is not exhaustive of all possible Canadian federal income tax consequences and, except for the Tax Proposals, does not otherwise take into account or anticipate any changes in law or administrative practice nor does it otherwise take into account income tax laws or considerations of any province or territory of Canada, which may differ from the federal income tax consequences described herein, or any jurisdiction other than Canada. This summary is of a general nature only and is not intended to be, and should not be interpreted as, legal or tax advice to any particular investor, and no representation with respect to the tax consequence to any particular U.S. Holder is made. All amounts relating to the acquisition, holding or disposition of Warrants and Warrant Shares must be converted into Canadian dollars for the purposes of the ITA. EXERCISE OF WARRANTS A U.S. Holder will not realize a gain or a loss on the exercise of a Warrant for Warrant Shares. DIVIDENDS Under the ITA and the Convention, dividends paid or credited, or deemed to be paid or credited (e.g., as described below), on the Warrant Shares to a U.S. Holder who owns less than 10% of the voting shares of Group Telecom will be subject to Canadian withholding tax at the rate of 15% of the gross amount of such dividends or deemed dividends, provided that the U.S. Holder is the beneficial owner of such dividends or deemed dividends. 99 104 Under the Convention, dividends paid to certain religious, scientific, charitable and similar tax exempt organizations and certain pension organizations that are resident, and exempt from tax, in the United States and who have complied with certain administrative procedures may be exempt from this Canadian withholding tax. DISPOSITION OF WARRANTS OR WARRANT SHARES A U.S. Holder will not be subject to tax under the ITA in respect of any capital gain realized on a disposition or deemed disposition of a Warrant or a Warrant Share unless at the time of such disposition or deemed disposition such Warrant or Warrant Share constitutes taxable Canadian property of the U.S. Holder for purposes of the ITA and such U.S. Holder is not entitled to relief under the Convention. The Warrants and Warrant Shares will generally not constitute taxable Canadian property of a U.S. Holder at the time of disposition of such Warrants or Warrant Shares provided that (i) the U.S. Holder does not use or hold such Warrants or Warrant Shares, as the case may be, in connection with carrying on business in Canada, (ii) the U.S. Holder, alone or together with persons with whom it does not deal at arm's length, did not own (taking into account any interest in or option in respect of such shares) 25% or more of the issued shares of any class or series of the capital stock of Group Telecom during the five-year period that ends at such time of disposition, and (iii) furthermore, the Warrant Shares are listed on a prescribed stock exchange. In any event, pursuant to the Convention, a U.S. Holder will not generally be subject to Canadian income tax on any capital gain realized on the disposition or deemed disposition of a Warrant or a Warrant Share (including a disposition to Group Telecom) provided that the value of the Warrant or the Warrant Share, as the case may be, at the time of the disposition is not derived principally from real property situated in Canada (as defined in the Convention). To the extent the Warrants or Warrant Shares disposed of constitute taxable Canadian property, a U.S. Holder will be required to file a Canadian tax return for the taxation year in which the disposition occurs even if the gain arising from such a disposition is exempt from tax because of the Convention. If Group Telecom purchases a Warrant Share from a U.S. Holder, other than by a purchase in the open market in the manner in which shares would normally be purchased by a member of the public in the open market, Group Telecom will be deemed to have paid and the U.S. Holder will be deemed to have received a dividend equal to the amount paid by Group Telecom in excess of the paid-up capital of the Warrant Share for the purposes of the ITA at the time of the purchase. The paid-up capital of the Warrant Share may be less than the U.S. Holder's cost of the share. Such deemed dividend will be subject to the withholding tax described under "Dividends" above. The amount by which the purchase price of the Warrant Share exceeds the amount of the deemed dividend will be treated as proceeds of disposition of the Warrant Share. 100 105 PLAN OF DISTRIBUTION We have been advised by the selling shareholders that the class B non-voting shares or warrants may be sold from time to time to purchasers directly by the selling shareholders. Alternatively, the selling shareholders may from time to time offer the shares or warrants to or through underwriters, broker/dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the selling shareholders or the purchasers of such securities for whom they may act as agents. The selling shareholders and any underwriters, broker/dealers or agents that participate in the distribution of the shares or warrants may be deemed to be "underwriters" within the meaning of the Securities Act and any profit on the sale of such securities and any discounts, commissions, concessions or other compensation received by any such underwriter, broker/dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act. The shares or warrants may be sold from time to time in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the selling stockholders or by agreement between such selling stockholders and underwriters or dealers who receive fees or commissions in connection therewith. The sale of the shares or warrants may be effected in transactions (1) on any national securities exchange or quotation service on which the shares may be listed or quoted at the time of the sale, (2) in the over-the-counter markets, (3) in transactions otherwise than on such exchange or in the over-the-market or (4) through the writing of options. Shares also may be delivered in connection with the issuance of securities by issuers other than Group Telecom that are exchangeable for (whether optional or mandatory) or payable in, such shares or pursuant to which such shares may be distributed. At the time a particular offering of the shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount and type of the securities being offered and the terms of the offering, including the name or names of any underwriter, broker/dealers or agents, any discounts, commissions and other terms constituting compensation from the selling shareholders and any discounts, commissions or concessions allowed or reallowed or paid to broker/dealers. This prospectus also may be used by transferees of the selling shareholders or by other persons acquiring securities, including brokers who borrow the securities to settle short sales of stock. In addition, the securities which qualify for sale under an applicable exemption from registration under the Securities Act may be sold pursuant to such exemption rather than this prospectus. To comply with the securities laws of certain jurisdictions, if applicable, the securities will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain jurisdictions the securities may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or any exemption from registration or qualification is available and is complied with. The selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provision may limit the timing of purchases and sales of any of the securities by the selling shareholders. The foregoing may affect the marketability of such securities. We have agreed to bear all expenses (other than any commissions or discounts of underwriters, dealers or agents or brokers' fee and the fees and expenses of their counsel) in connection with the registration of the securities being offered by the selling shareholders hereby. 101 106 LEGAL MATTERS Certain legal matters with respect to the validity of the securities offered hereby will be passed upon by: - Shearman & Sterling, our United States counsel, on matters of United States and New York law; and - Goodmans, our Canadian counsel, on matters of Canadian law. EXPERTS Our consolidated financial statements as of September 30, 2000, 1999 and 1998 included in this prospectus have been audited by PricewaterhouseCoopers LLP, independent public accountants, as stated in their report appearing in this prospectus and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. Shaw FiberLink's financial statements as of August 31, 1999 and 1998 and for the three year period ended August 31, 1999 included in this prospectus have been audited by Ernst & Young LLP, independent public accountants, as stated in their report appearing in this prospectus and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. REGISTRARS AND TRANSFER AGENTS The registrar and transfer agent for the class B non-voting shares in Canada is CIBC Mellon Trust Company at its principal offices in Toronto and in the United States is ChaseMellon Shareholder Services at its principal offices in New York. ENFORCEABILITY OF CIVIL LIABILITIES We are a Canadian corporation. Some of our directors, controlling persons and officers, and the experts named in this prospectus, are residents of Canada, and a substantial portion of their assets and all of our assets are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon the directors, controlling persons, officers and experts who are not residents of the United States or to enforce against them judgements of courts of the United States based upon the civil liability under the federal securities laws of the United States. We have been advised by Goodmans, our Canadian counsel, that there is doubt as to the enforceability in Canada against us or against any of our directors, controlling persons, officers or experts, who are not residents of the United States, in original actions or in actions for enforcement of judgements of United States courts, of liabilities based solely upon the federal securities laws of the United States. 102 107 WHERE YOU CAN OBTAIN MORE INFORMATION ABOUT US We are currently subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, file periodic reports and other information with the Commission through its Electronic Data Gathering, Analysis and Retrieval (or EDGAR) system. Our SEC filings, including the registration statement, of which this prospectus is a part, and the exhibits thereto, are available for inspection and copying at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and the Commission's regional offices located in New York, New York and Chicago, Illinois. Copies of all or any part of the registration statement may be obtained from these offices after payment of fees prescribed by the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. The Commission also maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements to shareholders. Because we are a foreign private issuer, we, our directors and our officers are also exempt from the shortswing profit recovery and disclosure regime of section 16 of the Exchange Act. 103 108 INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants of GT Group Telecom................................................... F-2 Interim Consolidated Financial Statements of GT Group Telecom for the Three Months Ended December 31, 2000 (Unaudited)............................................... F-3 Notes to Interim Consolidated Financial Statements of GT Group Telecom for the Three Months Ended December 31, 2000 (Unaudited)............................................... F-6 Supplemental Information to Interim Consolidated Financial Statements of GT Group Telecom for the Three Months Ended December 31, 2000 (Unaudited)............................. F-11 Consolidated Financial Statements of GT Group Telecom for the Year Ended September 30, 2000......................... F-13 Notes to Consolidated Financial Statements of GT Group Telecom for the Year Ended September 30, 2000............. F-16 Report of Independent Public Accountants of Shaw FiberLink Ltd. -- FiberLink Division................................ F-45 Financial Statements of Shaw FiberLink Ltd. -- FiberLink Division.................................................. F-46 Notes to Financial Statements of Shaw FiberLink Ltd. -- FiberLink Division........................................ F-49 Unaudited Pro Forma Condensed Consolidated Financial Information............................................... F-56 Notes to Pro Forma Condensed Consolidated Statement of Operations................................................ F-58
F-1 109 AUDITORS' REPORT To the Directors of GT GROUP TELECOM INC. We have audited the consolidated balance sheets of GT GROUP TELECOM INC. as at September 30, 2000 and 1999 and the consolidated statements of operations and deficit and cash flows for the years ended September 30, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at September 30, 2000 and 1999 and the results of its operations and its cash flows for the years ended September 30, 2000, 1999 and 1998 in accordance with Canadian generally accepted accounting principles. Toronto, Canada /s/ PRICEWATERHOUSECOOPERS LLP November 3, 2000 Independent Public Accountants F-2 110 GT GROUP TELECOM INC. INTERIM CONSOLIDATED BALANCE SHEETS (thousands of Canadian dollars)
DECEMBER 31, SEPTEMBER 30, 2000 2000 ------------ ------------- $ $ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents................................... 365,960 444,050 Trade accounts receivable................................... 38,765 30,253 Sales tax and other receivables............................. 20,876 19,699 Prepaid expenses............................................ 3,870 5,939 Inventory................................................... 605 436 --------- --------- 430,076 500,377 PREPAYMENTS ON PROPERTY, PLANT AND EQUIPMENT................ 132,852 203,703 PROPERTY, PLANT AND EQUIPMENT............................... 1,157,739 954,917 LONG-TERM INVESTMENT........................................ 43,238 43,238 GOODWILL AND OTHER ASSETS................................... 229,112 227,033 --------- --------- 1,993,017 1,929,268 ========= ========= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities.................... 105,170 111,395 Unearned revenue............................................ 811 544 Current portion of long-term debt........................... 6,292 4,348 --------- --------- 112,273 116,287 LONG-TERM UNEARNED REVENUE.................................. 1,118 1,255 LONG-TERM DEBT.............................................. 1,095,966 948,928 --------- --------- 1,209,357 1,066,470 SHAREHOLDERS' EQUITY SHARE CAPITAL AND OTHER EQUITY ITEMS........................ 1,014,013 1,013,866 DEFICIT..................................................... (230,353) (151,068) --------- --------- 783,660 862,798 --------- --------- 1,993,017 1,929,268 ========= =========
The accompanying notes form an integral part of these interim consolidated financial statements. F-3 111 GT GROUP TELECOM INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT (UNAUDITED) (thousands of Canadian dollars, except for per share amounts)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2000 1999 -------- ------- $ $ REVENUE..................................................... 39,924 2,267 COST OF SERVICES............................................ 25,426 2,138 -------- ------- 14,498 129 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 41,780 10,863 -------- ------- (27,282) (10,734) AMORTIZATION................................................ 23,385 1,124 INTEREST AND FINANCING CHARGES, NET......................... 27,543 141 -------- ------- LOSS BEFORE INCOME TAXES.................................... (78,210) (11,999) PROVISION FOR INCOME TAXES.................................. 1,075 65 -------- ------- LOSS FOR THE PERIOD......................................... (79,285) (12,064) DEFICIT -- BEGINNING OF PERIOD.............................. (151,068) (13,082) -------- ------- DEFICIT -- END OF PERIOD.................................... (230,353) (25,146) ======== ======= LOSS PER SHARE.............................................. (0.63) (0.54) ======== ======= WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES (in thousands)................................................ 124,882 22,475 ======== =======
The accompanying notes form an integral part of these interim consolidated financial statements. F-4 112 GT GROUP TELECOM INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (thousands of Canadian dollars)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2000 1999 -------- ------- $ $ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Loss for the period......................................... (79,285) (12,064) Items not affecting cash Amortization.............................................. 23,385 1,124 Non-cash interest expense................................. 30,551 -- -------- ------- (25,349) (10,940) -------- ------- Changes in non-cash working capital items Increase in accounts receivable........................... (9,689) (1,731) Increase in inventory..................................... (168) -- Increase (decrease) in prepaid expenses................... 2,069 (1,548) Increase (decrease) in accounts payable and accrued liabilities............................................ (6,111) 6,473 Increase (decrease) in unearned revenue................... 129 (117) -------- ------- (13,770) 3,077 -------- ------- Cash used in operating activities........................... (39,119) (7,863) -------- ------- FINANCING ACTIVITIES Repayment of long-term debt................................. -- (150) Issuance of shares.......................................... 147 14 -------- ------- 147 (136) -------- ------- INVESTING ACTIVITIES Purchases of property, plant and equipment.................. (34,048) (18,940) Business acquisitions....................................... -- (2,710) Increase in other assets.................................... (5,070) (855) -------- ------- (39,118) (22,505) -------- ------- DECREASE IN CASH AND CASH EQUIVALENTS....................... (78,090) (30,504) CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 444,050 59,851 -------- ------- CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. 365,960 29,347 ======== =======
The accompanying notes form an integral part of these interim consolidated financial statements. F-5 113 GT GROUP TELECOM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (expressed in Canadian dollars) 1 OPERATIONS AND BASIS OF PRESENTATION The Company markets and sells telecommunications services and related products over fibre-optic infrastructure to small and medium-sized businesses in Canada. The Company also uses Digital Subscriber Lines (DSL) and fixed wireless technology to extend the reach of its network. The Company provides data, Internet applications and voice services. These interim consolidated financial statements are prepared following accounting policies consistent with the Company's consolidated financial statements for the years ended September 30, 2000, 1999 and 1998. These financial statements are in accordance with generally accepted accounting principles in Canada which, in the case of the company, conform in all material respects with those in the United States, except as outlined in note 3. The information presented as at December 31, 2000 and for the interim periods ended December 31, 2000 and 1999 is unaudited. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented; all such adjustments are of a normal recurring nature. 2 SIGNIFICANT TRANSACTIONS (a) During the quarter ended December 31, 2000, the Company accepted approximately 76% of the fibre-optic capacity under the long-term capacity lease agreement entered into with 360networks inc. in May 2000. As a result, the Company recorded an increase in property plant and equipment and long-term debt of $61 million. The Company also obtained for use newly constructed fibres with a carrying value of $70 million pursuant to a prepaid indefeasible right to use arrangement. (b) On October 16, 2000, the Company entered into an asset purchase agreement with C1 Communications Inc. (C1). This transaction is expected to close during the quarter ended March 31, 2001. Under the purchase agreement, the Company will purchase from C1 all the property and assets used in its Atlantic Canada competitive local exchange carrier business. The Company will also assume the rights and obligations with respect to an existing indefeasible right to use agreement, which will grant the Company the right to use certain specifically identified existing fibres for 19 years. The purchase consideration consists of rights to acquire 2,372,000 Class B non-voting shares of the Company and the assumption of $22 million of long-term obligations of C1 relating to the indefeasible right to use agreement. Acquisition costs are estimated to be $2 million. (c) On December 20, 2000, the Company entered into additional cross currency swaps with several financial institutions to convert an additional 31% of the future U.S. dollar payments on the senior discount notes to Canadian dollars at fixed average exchange rate of approximately $1.5335. The Company has now fully hedged its exposure to fluctuations in the U.S. dollar in respect of its senior discount notes included within long-term debt. F-6 114 GT GROUP TELECOM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (expressed in Canadian dollars) 3 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The Company's condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada, which, in the case of the Company conform in all material respects with GAAP in the United States of America, except as outlined below: A) NET LOSS AND SHAREHOLDERS' EQUITY The following summary sets out the adjustments to the Company's loss and shareholders' equity, which would be made to conform to U.S. GAAP:
THREE MONTHS ENDED DECEMBER 31, ------------------ 2000 1999 ------- ------- $ $ Loss for the period in accordance with Canadian GAAP........ (79,285) (12,064) Impact of U.S. accounting principles Amortization of purchase price adjustment(c).............. (396) -- Deferred charges.......................................... -- (15) Stock based compensation(d)............................... (3,767) (1,015) Deferred foreign exchange(e).............................. (2,645) 670 Recovery of future income taxes(g)........................ 1,449 -- ------- ------- Net loss in accordance with U.S. GAAP....................... (84,644) (12,424) Unrealized loss on securities(f).......................... (10,993) -- Unrealized gain on derivative instruments, net of future income tax of $1,449(g)................................ 3,380 -- ------- ------- Comprehensive loss in accordance with U.S. GAAP............. (92,257) (12,424) ======= ======= Net loss per share in accordance with U.S. GAAP............. (0.74) (0.55) ======= =======
THE RECONCILIATION OF SHAREHOLDERS' EQUITY FROM CANADIAN TO U.S. GAAP IS AS FOLLOWS:
AS AT AS AT DECEMBER 31, SEPTEMBER 30, 2000 2000 ------------ ------------- $ $ (AUDITED) Shareholders' equity in accordance with Canadian GAAP................................................. 783,660 862,798 Purchase price adjustment, net of amortization of $1,013 (September 30, 2000 -- $617) (c).............. 16,639 17,035 Deferred charges....................................... (417) (417) Cumulative stock-based compensation expense (d)........ (15,271) (11,651) Deferred stock based compensation expense (d).......... (30,374) (34,266) Net change in stock options (d)........................ 45,645 45,917 Deferred foreign exchange (e).......................... (4,311) (1,666) Recovery of future income taxes (f)(g)................. 12,504 11,055 Other comprehensive income (f)(g)...................... 16,313 23,926 -------- -------- Shareholders' equity in accordance with U.S. GAAP...... $824,388 $912,731 -------- --------
F-7 115 GT GROUP TELECOM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (expressed in Canadian dollars) B) CONDENSED CONSOLIDATED BALANCE SHEETS The following table indicates the restated amounts for the items in the consolidated balance sheets of the Company that would be affected had the financial statements been prepared in accordance with U.S. GAAP:
AS AT AS AT DECEMBER 31, SEPTEMBER 30, 2000 2000 ------------ ------------- $ $ (AUDITED) Property, plant and equipment (c)...................... 1,161,043 957,957 Long-term investment (f)............................... 66,537 77,530 Goodwill and other assets (c)(g)....................... 254,008 239,327 Long-term debt (g)..................................... 1,113,028 -- Share capital (c)...................................... 1,032,373 1,032,079 Additional paid-in capital............................. 337 337 Deferred stock-based compensation expense (c).......... (30,374) (34,266) Stock options outstanding (c).......................... 45,645 45,917 Deficit................................................ (239,907) (155,263) Cumulative other comprehensive income (f)(g)........... 16,313 23,926
C) PURCHASE PRICE ADJUSTMENT For U.S. GAAP, the Company has recorded the purchase price of the assets acquired from Moffat Communications, based on the fair value of consideration at the date the Company entered into the asset purchase agreement in March 2000. For Canadian GAAP, the purchase price of the assets acquired is based on the fair value on the date the transaction closed in April 2000. Accordingly, property, plant and equipment, goodwill and other assets, and share capital increased by $3 million, $15 million and $18 million, respectively. D) STOCK-BASED COMPENSATION For U.S. GAAP, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". This method recognizes compensation cost as the amount by which the fair value of the stock exceeds the exercise price at the date of grant. The compensation cost is recognized over the vesting period. For U.S. GAAP, the compensation cost not yet recognized is presented as a deferred stock-based compensation charge, with a corresponding amount included in stock options outstanding, both of which form part of shareholders' equity. For Canadian GAAP, stock-based compensation expense is not recorded in the accounts of the Company. F-8 116 GT GROUP TELECOM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (expressed in Canadian dollars) Had the Company determined compensation costs based on fair value at the date of grant for its awards under a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" the Company's loss and loss per share would be as follows:
THREE MONTHS ENDED DECEMBER 31, ------------------ 2000 2000 ------- ------- $ $ Loss in accordance with U.S. GAAP........................... (84,644) (12,424) Additional compensation expense............................. (1,011) (105) ------- ------- Pro forma net loss.......................................... (85,655) (12,529) ======= ======= Pro forma loss per share.................................... (0.69) (0.56) ======= =======
The pro-forma compensation expense reflected above has been estimated using the Black-Scholes option-pricing model. Assumptions used in the pricing model included: (i) risk free interest rate of between 4.10% - 6.45%; (ii) expected volatility of ranging between nil - 65%; (iii) expected dividend yield of nil; and (iv) an estimated average life of ranging from 2.67 - 3 years. E) DEFERRED FOREIGN EXCHANGE U.S. GAAP requires immediate recognition in income of unrealized foreign currency exchange gains and losses on long-term monetary items with a fixed or ascertainable life whereas Canadian GAAP requires that these unrealized gains and losses be deferred and amortized over the remaining term of the long-term monetary items. F) UNREALIZED LOSS ON SECURITIES Under U.S. GAAP, portfolio investments which are considered to be "available for sale" securities are measured at market value, with the unrealized gains and losses included in comprehensive income/loss. Under Canadian GAAP, the Company's long-term investment is recorded at cost. The concept of comprehensive income/loss does not exist under Canadian GAAP. G) UNREALIZED GAIN ON DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes methods of accounting for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. The statement requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company adopted SFAS No. 133 effective October 1, 2000 and designated certain derivative instruments as cash flow hedges. For the three months ended December 31, 2000, the Company recorded the foreign exchange loss on the hedged portion of the long-term debt in other comprehensive income, offset by a gain in the fair value of the hedging F-9 117 GT GROUP TELECOM INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (expressed in Canadian dollars) instruments. These transactions were recorded net of tax. Under U.S. GAAP, this resulted in an additional recovery of future income taxes. As the Financial Accounting Standards Board continues to issue additional guidance and interpretations on SFAS No. 133, the Company will review its accounting practices for derivative instruments, and make adjustments, if necessary. F-10 118 GT GROUP TELECOM INC. SUPPLEMENTAL INFORMATION TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED) (thousands of Canadian dollars)
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 2000 2000 2000 2000 ------------ ------------- --------- --------- $ $ $ $ ASSETS CURRENT ASSETS Cash and cash equivalents............. 365,960 444,050 526,231 732,053 Trade accounts receivable............. 38,765 30,253 32,799 12,801 Sales tax and other receivables....... 20,876 19,699 7,786 2,456 Prepaid expenses...................... 3,870 5,939 8,958 5,227 Inventory............................. 605 436 201 201 --------- --------- --------- --------- 430,076 500,377 575,975 752,738 PREPAYMENT ON PROPERTY, PLANT AND EQUIPMENT........................... 132,852 203,703 230,600 223,000 PROPERTY, PLANT AND EQUIPMENT......... 1,157,739 954,917 778,926 567,568 LONG-TERM INVESTMENT.................. 43,238 43,238 43,238 -- GOODWILL AND OTHER ASSETS............. 229,112 227,033 199,710 192,366 --------- --------- --------- --------- 1,993,017 1,929,268 1,828,449 1,735,672 ========= ========= ========= ========= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities......................... 105,170 111,395 88,485 42,583 Unearned revenue...................... 811 544 1,325 925 Current portion of long-term debt..... 6,292 4,348 1,204 6,203 --------- --------- --------- --------- 112,273 116,287 91,014 49,711 LONG-TERM UNEARNED REVENUE............ 1,118 1,255 1,080 1,219 LONG-TERM DEBT........................ 1,095,966 948,928 853,123 781,447 FUTURE INCOME TAXES................... -- -- -- 28,200 --------- --------- --------- --------- 1,209,357 1,066,470 945,217 860,577 --------- --------- --------- --------- SHAREHOLDERS' EQUITY SHARE CAPITAL AND OTHER EQUITY ITEMS............................... 1,014,013 1,013,866 971,468 937,550 DEFICIT............................... (230,353) (151,068) (88,236) (62,455) --------- --------- --------- --------- 783,660 862,798 883,232 875,095 --------- --------- --------- --------- 1,993,017 1,929,268 1,828,449 1,735,672 ========= ========= ========= =========
F-11 119 GT GROUP TELECOM INC. SUPPLEMENTAL INFORMATION TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT (UNAUDITED) (thousands of Canadian dollars)
FOR THE THREE MONTHS ENDED, ------------------------------------------------------ DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 2000 2000 2000 2000 ------------ ------------- -------- --------- $ $ $ $ REVENUE.................................. 39,924 32,167 25,558 13,259 COST OF SERVICES......................... 25,426 21,230 17,415 10,553 -------- -------- ------- ------- 14,498 10,937 8,143 2,706 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................... 41,780 38,901 30,984 20,286 -------- -------- ------- ------- (27,282) (27,964) (22,841) (17,580) AMORTIZATION............................. 23,385 20,241 15,447 6,169 INTEREST AND FINANCING CHARGES........... 27,543 26,488 14,488 13,237 -------- -------- ------- ------- LOSS BEFORE INCOME TAXES................. (78,210) (74,693) (52,776) (36,986) PROVISION FOR (RECOVERY OF) INCOME TAXES.................................. 1,075 (11,861) (26,995) 323 -------- -------- ------- ------- LOSS FOR THE PERIOD...................... (79,285) (62,832) (25,781) (37,309) DEFICIT -- BEGINNING OF PERIOD........... (151,068) (88,236) (62,455) (25,146) -------- -------- ------- ------- DEFICIT -- END OF PERIOD................. (230,353) (151,068) (88,236) (62,455) ======== ======== ======= ======= LOSS PER SHARE........................... (0.63) (0.52) (0.22) (0.90) ======== ======== ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (in thousands)............. 124,882 120,256 118,376 41,506 ======== ======== ======= =======
F-12 120 GT GROUP TELECOM INC. CONSOLIDATED BALANCE SHEETS (expressed in thousands of Canadian dollars)
SEPTEMBER 30, -------------------- 2000 1999 --------- ------- $ $ ASSETS CURRENT ASSETS Cash and cash equivalents................................... 444,050 59,851 Accounts receivable (note 4)................................ 49,952 3,783 Prepaid expenses............................................ 5,939 526 Inventory................................................... 436 545 --------- ------- 500,377 64,705 PROPERTY, PLANT AND EQUIPMENT (note 5)...................... 954,917 73,817 PREPAYMENTS ON PROPERTY, PLANT AND EQUIPMENT (notes 3(a) and 3(b))..................................................... 203,703 -- LONG-TERM INVESTMENT (note 6)............................... 43,238 -- GOODWILL AND OTHER ASSETS (note 7).......................... 227,033 1,292 --------- ------- 1,929,268 139,814 ========= ======= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities (note 8)........... 111,395 14,926 Unearned revenue (note 9)................................... 544 656 Current portion of long-term debt (note 10)................. 4,348 1,253 --------- ------- 116,287 16,835 LONG-TERM UNEARNED REVENUE (note 9)......................... 1,255 1,494 LONG-TERM DEBT (note 10).................................... 948,928 47,557 --------- ------- 1,066,470 65,886 --------- ------- SHAREHOLDERS' EQUITY SHARE CAPITAL (note 11) Authorized Common shares Unlimited number of Class A voting and convertible Class B non-voting common shares without par value Preferred 50,000,000 Series A convertible first preference shares without par value 100,000,000 Series B convertible first preference shares without par value Issued and outstanding Common shares 79,542,239 Class A voting shares (1999 -- 18,261,149)... 463,333 12,573 41,105,767 Class B non-voting shares (1999 -- 4,148,569)............................................. 495,370 5,026 Preferred shares Nil Series A first preference shares (1999 -- 41,500,002)............................................ -- 67,281 --------- ------- 958,703 84,880 ADDITIONAL PAID-IN CAPITAL.................................. 255 255 WARRANTS (note 11(f))....................................... 58,776 -- LOANS TO OFFICERS (note 11(g)).............................. (3,868) -- SHARES TO BE ISSUED (note 11(h))............................ -- 1,875 DEFICIT..................................................... (151,068) (13,082) --------- ------- 862,798 73,928 --------- ------- 1,929,268 139,814 ========= ======= COMMITMENTS AND CONTINGENCIES (note 14) SUBSEQUENT EVENTS (note 17)
APPROVED BY THE BOARD OF DIRECTORS (signed) DANIEL R. MILLIARD (signed) JAMES G. MATKIN Director Director
The accompanying notes form an integral part of these consolidated financial statements. F-13 121 GT GROUP TELECOM INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT (expressed in thousands of Canadian dollars)
YEAR ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 -------- ------- ------ $ $ $ REVENUE..................................................... 73,251.. 2,705 1,823 COST OF SERVICES............................................ 51,336 1,808 1,131 -------- ------- ------ 21,915 897 692 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 100,959 10,219 3,038 -------- ------- ------ (79,044) (9,322) (2,346) AMORTIZATION................................................ 43,055 853 255 INTEREST AND FINANCE ITEMS Interest income............................................. (22,208) (920) (58) Interest on long-term debt.................................. 81,207 262 147 Finance charges............................................. 4,631 192 -- Foreign exchange loss (gain)................................ (9,276) 93 (251) -------- ------- ------ 54,354 (373) (162) -------- ------- ------ LOSS BEFORE INCOME TAXES.................................... (176,453) (9,802) (2,439) PROVISION FOR (RECOVERY OF) INCOME TAXES (note 12) Current..................................................... 3,833 165 -- Future...................................................... (42,300) -- -- -------- ------- ------ (38,467) 165 -- -------- ------- ------ LOSS FOR THE YEAR........................................... (137,986) (9,967) (2,439) DEFICIT -- BEGINNING OF YEAR................................ (13,082) (3,115) (676) -------- ------- ------ DEFICIT -- END OF YEAR...................................... (151,068) (13,082) (3,115) ======== ======= ====== LOSS PER SHARE.............................................. (1.83) (0.56) (0.26) ======== ======= ====== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (in thousands)................................................ 75,442 17,859 9,542 ======== ======= ======
The accompanying notes form an integral part of these consolidated financial statements. F-14 122 GT GROUP TELECOM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (expressed in thousands of Canadian dollars)
YEAR ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 --------- ------ ------ $ $ $ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Loss for the year........................................... (137,986) (9,967) (2,439) Items not affecting cash Amortization.............................................. 43,055 853 255 Non-cash interest expense................................. 79,832 -- -- Additional paid-in capital................................ -- -- 84 Shares issued for interest on long-term debt.............. -- 171 62 Recovery of future income taxes........................... (42,300) -- -- --------- ------ ------ (57,399) (8,943) (2,038) --------- ------ ------ Changes in non-cash working capital items Increase in accounts receivable........................... (44,112) (2,417) (723) Increase in prepaid expenses.............................. (5,179) (500) (1) Decrease (increase) in inventory.......................... 343 (545) -- Increase in accounts payable and accrued liabilities...... 57,771 1,295 1,363 Increase (decrease) in unearned revenue................... (605) 2,077 39 --------- ------ ------ 8,218 (90) 678 --------- ------ ------ Cash flows used in operating activities..................... (49,181) (9,033) (1,360) --------- ------ ------ FINANCING ACTIVITIES Proceeds from long-term debt................................ 690,711 4,421 1,762 Issuance of shares.......................................... 396,120 71,526 5,924 Proceeds from issuance of warrants.......................... 58,776 -- -- --------- ------ ------ 1,145,607 75,947 7,686 --------- ------ ------ INVESTING ACTIVITIES Business acquisitions....................................... (446,720) -- -- Purchase of property, plant and equipment................... (153,569) (8,454) (3,738) Increase in other assets.................................... (64,832) (1,085) (173) Purchase of long-term investment............................ (43,238) -- -- Issuance of loans to officers............................... (3,868) -- -- --------- ------ ------ (712,227) (9,539) (3,911) --------- ------ ------ INCREASE IN CASH AND CASH EQUIVALENTS....................... 384,199 57,375 2,415 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 59,851 2,476 61 --------- ------ ------ CASH AND CASH EQUIVALENTS -- END OF YEAR.................... 444,050 59,851 2,476 ========= ====== ======
Additional cash flow disclosures (note 15) The accompanying notes form an integral part of these consolidated financial statements. F-15 123 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts expressed in thousands of Canadian dollars) 1 NATURE OF BUSINESS GT Group Telecom Inc. ("GT") was incorporated on April 12, 1996 under the Canada Business Corporations Act. GT, through its wholly owned subsidiaries GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp. (collectively known as "the Company") markets and sells telecommunications services and related products over GT's owned fiber-optic infrastructure to small and medium-sized businesses. The Company also uses digital subscriber lines and fixed wireless technology to extend the reach of its network. The Company provides data, Internet applications and voice services and derives revenue from network usage and access, equipment sales, co-location and installation services. 2 SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada which, in the case of the company, conform in all material respects with those in the United States, except as outlined in note 19. (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. (b) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest bearing securities with maturity at the date of purchase of three months or less. The short-term interest bearing securities are recorded at cost plus accrued interest earned, which approximates current market value. (c) REVENUE RECOGNITION Revenue from network usage and access is recognized when services are provided. Revenue from equipment sales is recognized at the time the equipment is delivered and accepted by the customer. Revenue from installation services and from co-locations, where the Company provides a location and services for the customers' servers and telecommunication equipment, are recognized as services are rendered. Unearned revenue is recorded for services when cash payment has been received in advance and is recognized as revenue in the period in which the services are provided. Income from operating leases of fiber-optic facilities is recognized on a straight-line basis over the term of the lease. F-16 124 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided over estimated useful lives on a straight-line basis at the following annual rates: Buildings................................... 7% Furniture and fixtures...................... 20% Computer equipment and software............. 33% Telecommunication networks.................. 5% to 20% Leasehold improvements...................... over the term of the leases (4-8 years)
Telecommunication networks, which are installed on rights of way granted by others, include construction costs, costs of acquiring rights of way, interest costs and network design costs, all of which are incurred in developing new networks or expanding existing networks. Amortization commences when the assets are available for use. Management reviews the carrying values of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing its review for recoverability, management estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. (e) LONG-TERM INVESTMENT The long-term investment is accounted for on the cost basis. The carrying value of the investment is written down to net realizable value if there is a loss of value that is considered to be other than temporary. (f) GOODWILL AND OTHER ASSETS Goodwill represents the excess of the cost of business acquisitions over the fair value of the identifiable net assets acquired. Goodwill is amortized over its estimated useful life ranging from 3 to 20 years. The Company reviews the carrying value of its goodwill to determine whether there has been a permanent impairment in value. The measurement of possible impairment is based primarily on the ability to recover the carrying value from expected future operating cash flows on an undiscounted basis. Non-compete agreements, license rights and deferred charges are amortized on a straight-line basis over the term of the agreements or estimated useful life ranging from 3 to 10 years. Financing costs are amortized on a straight-line basis over the terms of the related debt financing. (g) STOCK-BASED COMPENSATION PLAN The Company has a stock-based compensation plan, which is described in note 11(f). No compensation expense is recognized for the plan when stock options are issued to F-17 125 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) employees. Any consideration paid by employees on exercise of stock options is credited to share capital. (h) FOREIGN CURRENCY TRANSLATION The Company translates all foreign currency denominated monetary assets and liabilities at year-end exchange rates. Revenues and expenses are translated at the rates prevailing on the respective transaction dates. Exchange gains and losses resulting from movements in rates are reflected in net income in the year except for: (i) gains or losses relating to long-term monetary liabilities which are deferred and amortized over the remaining term of the assets and liabilities; and (ii) hedged balances which are described in note 13. (i) INCOME TAXES The Company uses the liability method of accounting for income taxes under which future tax assets and liabilities are recognized for differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates in effect in the period in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. A valuation allowance is recorded to the extent there is uncertainty regarding realization of future tax assets. (j) LOSS PER COMMON SHARE Loss per common share is calculated using the weighted average number of common shares outstanding during the years. The exercise of options and warrants outstanding at September 30, 2000, 1999 and 1998 would have had an anti-dilutive effect on loss per common share. (k) SEGMENTED INFORMATION The Company is a Canadian national facilities based provider of high-speed data, Internet application and voice services comprising a single operating segment. Substantially all of the Company's assets are located in Canada and revenue is derived from telecommunications services provided in Canada. (l) USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-18 126 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 3 BUSINESS ACQUISITIONS Summary of the assets acquired and liabilities assumed during the year ended September 30, 2000:
SHAW VIDEON CABLE FIBERLINK FIBERLINK ATLANTIC (A) (B) (C) OTHER TOTAL ---------- --------- --------- ------- ---------- $ $ $ $ $ ASSETS Indefeasible right to use agreements Property, plant and equipment for constructed fibers..... 329,000 88,359 29,689 -- 447,048 Prepayment for fibers to be constructed......... 223,000 7,600 -- -- 230,600 Property, plant and equipment................. 100,000 7,397 17,560 435 125,392 License rights.............. 13,800 -- -- -- 13,800 Non-compete agreements...... 15,000 -- 1,200 -- 16,200 Goodwill including acquisition costs......... 119,513 -- 25,025 3,261 147,799 Other current assets........ 204 784 1,107 24 2,119 ---------- --------- --------- ------- ---------- 800,517 104,140 74,581 3,720 982,958 ========== ========= ========= ======= ========== LIABILITIES Current liabilities......... 246 -- 881 -- 1,127 Future income taxes......... 28,200 -- 14,100 -- 42,300 ---------- --------- --------- ------- ---------- 28,446 -- 14,981 -- 43,427 ========== ========= ========= ======= ========== PURCHASE CONSIDERATION Cash paid................... 360,000 68,784 15,226 2,710 446,720 Class A voting shares....... -- -- -- 1,010 1,010 Class B non-voting shares... -- 32,356 42,374 -- 74,730 Series B first preference shares.................... 400,071 -- -- -- 400,071 Acquisition costs........... 12,000 3,000 2,000 -- 17,000 ---------- --------- --------- ------- ---------- 772,071 104,140 59,600 3,720 939,531 ========== ========= ========= ======= ========== NUMBER OF SHARES ISSUED Class A voting shares....... -- -- -- 336,666 336,666 ========== ========= ========= ======= ========== Class B non-voting shares... -- 1,667,000 1,740,196 -- 3,407,196 ========== ========= ========= ======= ========== Series B first preference shares.................... 29,096,097 -- -- -- 29,096,097 ========== ========= ========= ======= ==========
The acquisitions of business' assets and liabilities are accounted for by the purchase method of accounting under which the assets and liabilities purchased are recorded at their fair values with the excess of the purchase price over the fair value of identifiable assets and liabilities acquired F-19 127 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) recorded as goodwill. The results of operations are included in the Company's consolidated statement of operations from the dates of acquisition. (a) SHAW FIBERLINK On February 16, 2000, the Company purchased from Shaw Communications Inc. ("Shaw Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink") all of the property and assets of Shaw FiberLink used in connection with the high-speed data and competitive access business. The Company and Shaw FiberLink also entered into an indefeasible right to use agreement which grants the Company an indefeasible right to use certain specifically identified existing fibers in the fiber-optic cable networks of Shaw Communications for 60 years. Certain of the existing fibers located in New Brunswick, Canada under the indefeasible right to use agreement will be available for use in 2003. In addition, the Company will receive an indefeasible right to use fibers to be built over the next three years in mutually agreed regions. As at September 30, 2000, the carrying value of newly constructed fibers obtained for use by the Company amounts to $27 million. (b) VIDEON FIBERLINK On April 27, 2000, the Company purchased from Moffat Communications Limited ("Moffat Communications") all the property and assets used as a competitive access provider in its Videon FiberLink business. The Company and Moffat Communications also entered into an indefeasible right to use agreement which granted the Company an indefeasible right to use certain specifically identified existing fibers in the fiber-optic cable networks of Moffat Communications for 30 years. In addition, the Company will receive an infeasible right to use fibers to be built over the next three years in mutually agreed upon regions. (c) CABLE ATLANTIC On July 21, 2000, the Company purchased from Cable Atlantic Inc. ("Cable Atlantic") all the property and assets used in connection with the fiber-optic telecom business. The Company also entered into an indefeasible right to use agreement which granted the Company an indefeasible right to use certain specifically identified existing fibers in the fiber-optic cable networks of Cable Atlantic for 30 years. The following unaudited pro forma data summarizes the results of operations for the years indicated as if the Shaw FiberLink acquisition had been completed as of the beginning of the years presented. The pro forma data give effect to actual operating results prior to the acquisition, adjusted to give effect to interest expense on long-term debt of $360 million and amortization of the assets acquired. These pro forma amounts do not purport to be indicative of F-20 128 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) the results that would have actually been obtained if the acquisition occurred as of the beginning of the years presented or that may be obtained in the future.
YEAR ENDED SEPTEMBER 30, ------------------- 2000 1999 -------- ------- $ $ (UNAUDITED) Revenue..................................................... 91,296 43,176 Income (loss) before amortization, interest and finance items and income tax...................................... (74,304) 2,863 Net loss.................................................... (160,930) (53,195) Loss per share.............................................. (1.82) (2.98) Weighted average number of common shares outstanding (in thousands)................................................ 88,639 17,859
Pro forma results including the other acquisitions completed by the Company during the year ended September 30, 2000 have not been provided as the results of operations are not considered significant and the information is not readily available. 4 ACCOUNTS RECEIVABLE
2000 1999 ------ ----- $ $ Trade receivables........................................... 34,759 1,191 Sales tax receivable........................................ 12,568 2,140 Employee receivables........................................ 3,105 487 Other....................................................... 4,026 -- Allowance for doubtful accounts............................. (4,506) (35) ------ ----- 49,952 3,783 ====== =====
5 PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, 2000 ---------------------------------- ACCUMULATED COST AMORTIZATION NET ------- ------------ ------- $ $ $ Land................................................. 550 -- 550 Buildings............................................ 3,950 139 3,811 Furniture and fixtures............................... 4,694 664 4,030 Computer equipment and software...................... 40,786 3,094 37,692 Telecommunication networks........................... 927,734 27,059 900,675 Leasehold improvements............................... 8,702 543 8,159 ------- ------ ------- 986,416 31,499 954,917 ======= ====== =======
F-21 129 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars)
SEPTEMBER 30, 1999 ---------------------------------- ACCUMULATED COST AMORTIZATION NET ------- ------------ ------- $ $ $ Land................................................. 490 -- 490 Buildings............................................ 887 87 800 Furniture and fixtures............................... 877 56 821 Computer equipment and software...................... 4,551 361 4,190 Telecommunication networks........................... 67,638 476 67,162 Leasehold improvements............................... 452 98 354 ------- ------ ------- 74,895 1,078 73,817 ======= ====== =======
Included in telecommunication networks as at September 30, 2000 are costs of $87 million (1999 -- $40 million) relating to assets not yet available for use on which no amortization has been charged. Included in telecommunication networks are assets under capital lease with a cost of $447 million (1999 -- $nil) and accumulated amortization of $13 million. Furniture and fixtures, and computer equipment and software, as at September 30, 2000 include capital lease asset costs of $4 million and $1 million (1999 -- $0.3 million and $0.9 million) respectively, and related accumulated amortization of $nil. (1999 -- $nil). For the year ended September 30, 2000, interest and finance charges of $3 million were capitalized on projects under construction (1999 -- $2 million). 6 LONG-TERM INVESTMENT On April 12, 2000, the company purchased a less than 1% equity interest in 360networks, inc. for $43 million in cash. The market value of the investment at September 30, 2000 is $77 million. 7 GOODWILL AND OTHER ASSETS
SEPTEMBER 30, ---------------- 2000 1999 ------- ----- $ $ Goodwill net of accumulated amortization of $4,319 (1999 -- $nil)..................................................... 131,464 -- Non-compete agreements and license rights net of accumulated amortization of $4,098 (1999 -- $nil)..................... 26,172 -- Deferred charges net of accumulated amortization of $527 (1999 -- $32)............................................. 19,122 605 Deferred financing charges net of accumulated amortization of $2,684 (1999 -- $38)................................... 48,609 457 Deferred foreign exchange loss net of accumulated amortization of $179 (1999 -- $1)......................... 1,666 12 Deposits.................................................... -- 218 ------- ----- 227,033 1,292 ======= =====
F-22 130 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
SEPTEMBER 30, ----------------- 2000 1999 ------- ------ $ $ Trade accounts payable...................................... 53,404 2,017 Accounts payable and accruals for purchases of property, plant and equipment....................................... 32,498 9,355 Accrued vacation and bonuses................................ 10,795 1,139 Capital tax, large corporations tax and sales taxes payable................................................... 6,786 622 Other accrued liabilities................................... 7,912 1,383 Accrual for inventory purchases............................. -- 410 ------- ------ 111,395 14,926 ======= ======
9 UNEARNED REVENUE Unearned revenue represents amounts related to an operating lease arrangement entered into in April 1999, whereby the Company is the lessor of 24 strands of dark fiber including rights of way. The Company received an up-front fee for installation costs related to placement of fiber-optic cable, building entrances and fiber-optic cable connections to the lessee's existing cable facilities which is presented as unearned revenue and being recognized as income over the initial term of the lease. Under this contract, the Company also receives annual payments for lease and rights of way which are being recognized as income in equal annual amounts. The lease period ends in April, 2009; however the lessee has the option to extend the lease for an additional ten years. Minimum lease payments receivable for the next five years and thereafter are as follows:
$ --- Year ending September 30, 2001................................................... 500 2002................................................... 500 2003................................................... 500 2004................................................... 250 2005................................................... 250 Thereafter............................................. 750
F-23 131 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 10 LONG TERM DEBT
SEPTEMBER 30, ----------------- 2000 1999 ------- ------ $ $ Senior discount notes (a)................................... 662,661 -- Vendor financing (b)........................................ 153,565 40,398 Vendor financing (c)........................................ 31,859 6,481 Senior bank facility (d).................................... 100,144 -- Capital leases payable (f).................................. 4,292 1,155 Note payable (e)............................................ 755 776 ------- ------ 953,276 48,810 Less: Current portion....................................... 4,348 1,253 ------- ------ 948,928 47,557 ======= ======
Repayments of long-term debt in each of the next five years are as follows:
SENIOR SENIOR CAPITAL LEASES DISCOUNT VENDOR BANK AND NOTES NOTES FINANCING FACILITY PAYABLE -------- --------- -------- -------------- $ $ $ $ Year ending September 30, 2001.............................. -- 1,615 -- 2,463 2002.............................. -- 1,479 -- 1,676 2003.............................. -- 8,783 4,907 1,155 2004.............................. -- 10,703 10,014 339 2005.............................. -- 13,727 10,014 -- Thereafter........................ 662,661 149,117 75,209 -- -------- ------- -------- ----- 662,661 185,424 100,144 5,633 Less: Amounts representing interest........................ -- -- -- (586) -------- ------- -------- ----- 662,661 185,424 100,144 5,047 ======== ======= ======== =====
SENIOR DISCOUNT NOTES (a) Pursuant to an indenture dated February 1, 2000, the Company issued 855,000 units, consisting of U.S.$855 million (issued at a price of 52.651% of the stated amount) of 13.25% senior discount notes due 2010 and 855,000 warrants to purchase 4,198,563 Class B non-voting shares. Gross proceeds amounted to U.S.$450 million, equivalent to approximately CDN$651 million. Expenses related to the offering amounted to approximately $20 million. Of the total proceeds, $592 million was allocated to the senior discount notes and $59 million was allocated to the share purchase warrants (note 11(f)). The senior discount notes accrue interest at 13.25% on the face value of the notes until February 1, 2005. The interest accrued to February 1, 2005 is payable at maturity together with the face value of the notes. After February 1, 2005, interest is payable semi-annually in cash in arrears February 1 and August 1 of each year, at an annual rate of 13.25%. The effective interest rate on the senior discount notes is 14.9%. F-24 132 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) On or after February 1, 2003, the Company can elect to commence the payment of interest in cash semi-annually on February 1 and August 1 of each year, thereby reducing the stated amount of the note. The Company has an early redemption option at any time after February 1, 2005 for all or part of the senior discount notes. The redemption prices for the notes for each year ending February 1, are as follows: 106.625% in 2005, 104.417% in 2006, 102.208% in 2007 and 100% thereafter, plus unpaid interest. In addition, prior to February 1, 2005, the company may redeem up to 35% of the notes at a redemption price of 113.25% of the outstanding amounts of the notes at the time of redemption. The notes are unsecured obligations of the Company and the indenture contains certain restrictive covenants including limitation on indebtedness, restriction on the payment of dividends and other payments, limitations on liens, asset dispositions, change of control and limitation on transactions with subsidiaries. To reduce the exposure to U.S. dollar exchange rate fluctuations, the Company has entered into cross currency swaps as described in note 13. VENDOR FINANCING (b) On May 28, 1999, the Company entered into a credit facility to finance the Company's purchase of telecommunication equipment and services to a value of U.S.$40 million. On February 3, 2000, the Company entered into a U.S.$315 million facility with this vendor to finance the purchase and installation of telecommunication equipment and services. The initial borrowings under this vendor facility were used to repay amounts outstanding under the existing credit facility with this vendor. The balance of vendor financing at September 30, 2000 of $154 million is comprised of amounts payable to the vendor of $17 million, and additional amounts drawn on the vendor credit facility of $137 million (denominated as U.S.$91 million). The vendor facility matures on June 30, 2008 with quarterly principal repayments at the rate of 1.25% of the amount outstanding, starting on March 31, 2003 until December 31, 2007. In March and June of 2008, the principal is repayable in two installments of 37.5% of the outstanding amount. Availability under the credit facility is by way of multiple draw-downs. At the option of the Company, draw-downs under the credit facility bear interest at either LIBOR plus an applicable margin or U.S. Prime Rate plus an applicable margin. Depending on the ratio of consolidated total debt to annualized earnings before interest, taxes and amortization, the margin added to the LIBOR is between 3.0% and 4.5% and the margin added to the U.S. Prime Rate is between 2.0% and 3.5%. The effective interest rate on outstanding amounts during the year ended September 30, 2000 was 11.5% (1999 -- 10.2%). In addition, a commitment fee varying between 0.75% and 1.50% depending on the level of utilization of the vendor facility is payable on the undrawn portion. The credit facility agreement contains certain covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue certain preferred stock, pay dividends or make other distributions, engage in sale and leaseback F-25 133 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. (c) On July 27, 1999 the Company entered into an agreement for a U.S.$15 million credit facility with a vendor. On September 29, 2000, the Company entered into a new vendor credit facility for $120 million to replace the U.S.$15 million vendor facility and finance the purchase and installation of telecommunication equipment and services provided by this vendor. The vendor credit facility matures September 29, 2007 with annual principal repayment at a rate of 4.89% of the outstanding amount on September 30, 2003, 10% on September 30, 2004 and September 30, 2005, 20% on September 20, 2006, and 55.11% on September 30, 2007. Availability under the vendor credit facility is by way of multiple draw-downs. The balance of vendor financing at September 30, 2000 of $32 million is comprised of amounts payable to the vendor of $16 million, and additional amounts drawn on the credit facility of $16 million (denominated as U.S.$10 million). At the option of the Company, the credit facility bears interest at either the Prime Rate (published rate of a Schedule I Canadian Bank) or the quoted banker acceptances rate ("BA rate") plus an applicable margin. The applicable margin on Prime Rate loans ranges from 2.00% to 3.25% and the margin applicable to BA Rate loans ranges from 3.00% to 4.25%, depending upon the Company's consolidated ratio of total debt to annualized earnings before interest, taxes and amortization. The effective interest rate on outstanding amounts during the year ended September 30, 2000 and 1999 was 12.0%. In addition, a commitment fee of 0.5% per annum is payable on the undrawn portion of the credit facility. The credit facility agreement contains certain covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue certain preferred stock, pay dividends or make other distributions, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. SENIOR BANK FACILITY (d) On February 3, 2000, the Company entered into a credit agreement for a senior bank facility for an amount of $220 million to finance part of the acquisition of the business of Shaw FiberLink (note 3(a)). The bank facility is comprised of a $120 million seven year revolving reducing term loan and a $100 million reducing term loan. The $120 million revolving term loan reduces, starting February 3, 2003 to $108 million and reduces on every anniversary thereafter to $90 million in 2004, $72 million in 2005, $48 million in 2006 and nil in 2007. The $100 million reducing term loan is amortized annually by 4.9% on February 3, 2003, 10% on February 3, 2004 and 2005, 20% on February 3, 2006 and 55.1% on February 3, 2006. At the option of the Company, the bank facility may be used as LIBOR loans denominated in U.S. dollars, bankers acceptances in Canadian dollars, U.S. Base rate loans in F-26 134 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) U.S. dollars and standby letters of credit in Canadian or U.S. dollars. The margins added to the applicable interest rates may vary from 2.0% to 4.5%, depending upon the Company's consolidated ratio of total debt to annualized earnings before interest, taxes and amortization. The effective interest rate on outstanding amounts during the year ended September 30, 2000 was 11.9%. The credit facility agreement contains certain covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue certain preferred stock, pay dividends or make other distributions, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. COLLATERAL AGENCY AND INTERCREDITOR AGREEMENT The Company has granted the lenders under the vendor credit facilities, the senior bank credit facility and cross currency swaps (note 13) general security agreements providing the lenders a first priority lien on all the present and future property and assets of a subsidiary of the Company. The parties to the various credit agreements have entered into an amended and restated Collateral Agency and Intercreditor Agreement, which among other things, sets out the agreement between the lenders for the priority and security of the obligations of the Company's subsidiaries to the lenders, and rights enforcement and allocation of proceeds. NOTES PAYABLE (e) In 1998, the Company purchased land and a building for $900 thousand, which was financed substantially by a note payable to a vendor. The note bears interest at 10.5% per annum and is payable in monthly installments of principal and interest of $8 thousand per month, a lump sum payment against principal of $100 thousand on February 15, 1999, and the remaining balance on February 15, 2001. The land and building acquired have been pledged as collateral. CAPITAL LEASES PAYABLE (f) Capital leases are payable in equal monthly instalments of $37 thousand including principal and interest at rates varying between 6% and 10%. The leases are collateralized by the underlying assets and expire in 2002. F-27 135 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 11 SHARE CAPITAL Authorized Common Unlimited number of Class A voting shares without nominal or par value, each Class A share has one vote; unlimited number of convertible Class B non-voting shares without nominal or par value. Other than with respect to voting rights and limited conversion rights, the two classes of common shares have identical rights. Each Class B non-voting share may, under certain limited circumstances at the option of the holder, be converted into one Class A voting share. The holders of Class A and B shares are entitled to receive dividends as determined by the Board of Directors, subject to the rights of the holders of the preferred shares. The holders of Class A voting and Class B non-voting shares are also entitled to participate equally in the event of liquidation of the company, subject to the rights of the holders of the preferred shares. Preferred Unlimited number of non-voting first and second preference shares without nominal or par value. The first and second preference shares may be issued in one or more series. Each share is convertible at the option of the holder into either Class A voting shares or Class B non-voting shares depending on foreign ownership restrictions then in place and automatically upon an initial public offering of such shares, initially on a one-to-one basis to May 7, 2000, with a compound increase of 10%, subject to adjustment. The Board of Directors of the company may fix the number of shares in each series and designate rights, privileges, restriction, conditions and other provisions. The first and second preference shares shall be entitled to preference over any other shares of the company with respect to the payment of dividends and in the event of liquidation of the company. On May 7, 1999 and February 14, 2000, Series A and Series B first preference shares were created, respectively. In addition to the rights and privileges of the first preference shares described above, the Series A and Series B first preference shares have a liquidation value equal to the price paid for the share plus a compound annual rate of return of 10% and have anti-dilutive provisions protecting their conversion into Class A voting shares or Class B non-voting shares. At September 30, 2000, there were 50,000,000 authorized Series A and 100,000,000 authorized Series B first preference shares (1999: Series A -- 50,000,000 and Series B -- nil). F-28 136 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) ISSUED
NUMBER OF NUMBER OF NUMBER OF NUMBER OF SERIES A SERIES B CLASS A CLASS B FIRST FIRST VOTING NON-VOTING PREFERENCE PREFERENCE SHARES SHARES SHARES SHARES AMOUNT ---------- ---------- ----------- ----------- ------- $ Balance as at September 30, 1997........... 7,095,132 -- -- -- 836 Class A voting shares issued for Cash................................... 4,880,629 -- -- -- 6,083 Upon exercise of options (e)........... 822,167 -- -- -- 332 Upon exercise of warrants (e).......... 7,900 -- -- -- 4 Upon conversion of debentures (d)...... 2,482,592 -- -- -- 1,886 Share issuance costs................... -- -- -- -- (495) ---------- ---------- ----------- ----------- ------- Balance as at September 30, 1998........... 15,288,420 -- -- -- 8,646 Class A voting shares issued for Cash................................... 2,004,322 -- -- -- 3,480 Upon exercise of options (e)........... 630,000 -- -- -- 70 Upon conversion of debentures (d)...... 338,407 -- -- -- 423 Share issuance costs................... -- -- -- -- (46) Class B non-voting shares issued for Cash................................... -- 721,101 -- -- 901 Upon conversion of debentures (d)...... -- 3,427,468 -- -- 4,284 Share issuance costs................... -- -- -- -- (159) Series A first preference shares issued for Cash................................... -- -- 27,666,667 -- 41,500 Upon exercise of options (e)........... -- -- 13,833,335 -- 25,938 Share issuance costs................... -- -- -- -- (157) ---------- ---------- ----------- ----------- ------- Balance as at September 30, 1999........... 18,261,149 4,148,569 41,500,002 -- 84,880 Class A voting shares issued for Cash................................... 35,000 -- -- -- 280 Purchase of businesses (note 3)........ 336,666 -- -- -- 1,010 Upon exercise of options (e)........... 313,327 -- -- -- 336 Class B non-voting shares issued for Cash (b)............................... -- 20,700,000 -- -- 422,280 Upon exercise of options (e)........... -- 1,850,000 -- -- 3,875 Purchase of businesses (note 3)........ -- 3,407,196 -- 29,096,097 474,801 Share issuance costs................... -- -- -- -- (30,634) Series A first preference shares issued for acquisition of rights of way (h)... -- -- 1,000,000 -- 1,875 Conversions (c).......................... 60,596,097 11,000,002 (42,500,002) (29,096,097) -- ---------- ---------- ----------- ----------- ------- Balance as at September 30, 2000........... 79,542,239 41,105,767 -- -- 958,703 ========== ========== =========== =========== =======
(a) REDESIGNATION OF COMMON SHARES In September 1998, the Company redesignated all authorized common shares, both issued and unissued, as Class A voting shares and increased authorized capital by creating an unlimited number of shares designated as Class B non-voting shares. This change in classification for issued shares has been presented retroactively in these financial statements. F-29 137 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (b) INITIAL PUBLIC OFFERING Pursuant to an initial public offering on March 15, 2000, the Company issued 18,000,000 Class B non-voting shares for aggregate cash proceeds of U.S.$232.9 million, net of U.S.$19.1 million in underwriting commissions and expenses of the offering. In addition, the underwriters exercised their option to purchase an additional 2,700,000 Class B non-voting shares for net proceeds of U.S.$35.2 million to the Company. Aggregate net proceeds of the Initial Public Offering amounted to $391.7 million. (c) CONVERSION OF SHARES On completion of the Company's initial public offering on March 15, 2000, 42,500,002 Series A and 29,096,097 Series B first preference shares were automatically converted into 60,596,097 Class A voting shares and 11,000,002 Class B non-voting shares on a one-for-one basis. (d) CONVERTIBLE DEBENTURES On December 15, 1998 and March 5, 1999, the Company issued 12% convertible debentures totalling $4,536,000 due March 31, 2000. The debentures plus accrued interest could be converted by the Company into fully-paid Series A first preference shares at a conversion price of $1.25 per preference share before July 1, 1999 ("Mandatory Conversion Period"). If the Company did not exercise its right to convert the debentures into Series A first preference shares, each holder of debentures had the option to convert the debentures into fully paid Class A voting shares or Class B non-voting shares at a conversion price of $1.25 per share, in compliance with CRTC foreign ownership restrictions in effect at the time of conversion. On April 30, 1999, the Company waived the condition that the debentures be converted to Series A first preference shares, and all debentures including accrued interest were converted into 338,407 Class A voting shares and 3,427,468 Class B non-voting shares. (e) PREFERENCE SHARE PURCHASE OPTIONS On May 7, 1999, the Company issued 27,666,667 units to a group of institutional shareholders at $1.50 per unit. Each unit consisted of one Series A first preference share and an option to purchase half of one Series A first preference share at a share price of $1.875 until August 10, 1999 and at $2.25 until November 10, 1999. At September 30, 1999, all the options had been exercised, resulting in the issuance of 13,833,335 Series A first preference shares. (f) COMMON SHARE OPTIONS AND WARRANTS OPTIONS The Board of Directors has established a stock option plan under which options to purchase Class A voting shares and Class B non-voting shares are granted to directors, officers and employees of the Company. Options are granted at exercise prices estimated to be at least equal to the fair value of the shares, vest over a three-year period and generally expire five years from the date of grant. F-30 138 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) At September 30, 2000, there were 5,594,635 (1999 -- 2,161,842) options to purchase Class A voting shares and 1,770,600 (1999 -- 2,300,000) options to purchase Class B non-voting shares outstanding. These options expire between April 2001 and September 2005. Option activity for the year is as follows:
2000 1999 ---------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE ---------- -------- --------- -------- $ $ Outstanding -- Beginning of year... 4,461,842 1.64 1,854,978 0.69 Class A voting shares Granted.......................... 4,076,700 9.09 1,658,228 1.34 Exercised........................ (313,327) 1.07 (630,000) 0.11 Class B non-voting shares Granted.......................... 1,320,600 5.20 2,300,000 2.04 Exercised........................ (1,850,000) 2.10 -- -- Expired............................ -- -- (682,003) 0.50 Cancelled.......................... (330,580) 7.76 (39,361) 1.25 ---------- ---- --------- ---- Outstanding -- End of year......... 7,365,235 6.36 4,461,842 1.64 ========== ==== ========= ==== Exercisable -- End of year Class A voting shares.............. 2,289,626 3.47 1,726,564 1.19 Class B non-voting shares.......... 715,525 2.83 1,883,333 2.16 ---------- ---- --------- ---- Total.............................. 3,005,151 3.32 3,609,897 1.69 ========== ==== ========= ====
A summary of stock options outstanding at September 30, 2000 is set out below:
OUTSTANDING STOCK OPTIONS ------------------------------------ EXERCISABLE STOCK OPTIONS WEIGHTED ------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE NUMBER LIFE PRICE NUMBER PRICE -------------- --------- ----------- -------- ----------- ---------- $ $ $ 0.50 - 1.875......... 2,437,513 3.01 years 1.42 1,908,634 1.40 3.00................. 2,025,932 3.97 years 3.00 599,463 3.00 8.00................. 1,890,289 4.38 years 8.00 380,097 8.00 20.40 - 20.86........ 666,801 4.63 years 20.52 94,241 20.48 24.08................ 300,700 4.79 years 24.08 20,882 24.08 26.21................ 44,000 4.88 years 26.21 1,834 26.21 --------- ---------- ----- --------- ----- 7,365,235 3.86 years 6.36 3,005,151 3.32 ========= ========== ===== ========= =====
F-31 139 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) A summary of stock options outstanding at September 30, 1999 is set out below:
OUTSTANDING STOCK OPTIONS ------------------------------------ EXERCISABLE STOCK OPTIONS WEIGHTED ------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE NUMBER LIFE PRICE NUMBER PRICE -------------- --------- ----------- -------- ----------- ---------- $ $ $ 0.50................. 277,224 1.29 years 0.50 277,224 0.50 1.00................. 37,500 1.08 years 1.00 37,500 1.00 1.25................. 1,239,118 3.76 years 1.25 972,062 1.25 1.50................. 1,108,000 4.60 years 1.50 523,111 1.50 1.875................ 1,300,000 4.59 years 1.875 1,300,000 1.875 3.00................. 500,000 4.92 years 3.00 500,000 3.00 --------- ---------- ----- --------- ----- 4,461,842 4.17 years 1.64 3,609,897 1.69 ========= ========== ===== ========= =====
WARRANTS Warrant activity for each of the years is as follows:
2000 1999 --------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE --------- -------- --------- -------- $ $ Outstanding -- Beginning of year....... 100,000 0.50 415,000 0.50 Class A voting shares Expired.............................. -- -- (313,311) 0.50 Cancelled............................ -- -- (1,689) 0.50 Class B non-voting shares Issued............................... 855,000 -- -- -- ------- ---- -------- ---- Outstanding -- End of year............. 955,000 0.05 100,000 0.50 ======= ==== ======== ====
The warrants for Class A voting shares vested on the date of grant and expire on November 30, 2000. The warrants for Class B non-voting shares were issued at a value of $59 million pursuant to an indenture dated February 1, 2000 (note 10(a)). The warrants entitle the holders to purchase 4,198,563 Class B non-voting shares in the aggregate through to February 1, 2010 for nil consideration. The warrants are exercisable upon a registration statement, relating to the resale of warrants and the Class B non-voting shares issuable upon exercise of the warrants, becoming effective providing that the Class B non-voting shares continue to be listed on a stock exchange. F-32 140 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (g) LOANS TO OFFICERS Pursuant to employment contracts, certain officers have been provided option-exercise loans which bear interest at the effective applicable federal interest rate of the Internal Revenue Code and are due the earlier of: (i) five years from the date of purchase ranging from September 1, 2004 to January 4, 2005, (ii) cessation of employment or (iii) upon the sale of the shares purchased. The option exercise loans are secured by a first charge against the shares purchased. These loans amount to $4 million at September 30, 2000 (1999 -- $nil). (h) SHARES TO BE ISSUED At September 30, 1999, 1,000,000 Series A first preference shares at $1.875 per share remained to be issued in connection with the acquisition of rights of way in August 1999. These Series A first preference shares were issued in December 1999. 12 INCOME TAXES The tax effects of temporary differences that give rise to future income tax assets and liabilities are as follows:
SEPTEMBER 30, ----------------- 2000 1999 ------- ------ $ $ Future income tax assets Accounts receivable....................................... 1,876 -- Property, plant and equipment............................. -- 27 Deferred charges.......................................... -- 63 Long-term debt............................................ 6,149 -- Debt and share issue costs................................ 8,381 257 Operating loss carry forwards............................. 57,403 5,709 ------- ------ 73,809 6,056 Valuation allowance......................................... (44,219) (6,056) ------- ------ 29,590 Future income tax liabilities Property, plant and equipment............................. (27,465) -- Deferred charges and other assets......................... (2,125) -- ------- ------ (29,590) 6,056 ------- ------ -- -- ======= ======
Management has recorded a valuation allowance for the net amount of future income tax assets. F-33 141 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) The Company has non-capital losses available to reduce taxable income in future years. These losses expire as follows:
$ ------- Year ending September 30, 2002................................................... 11 2003................................................... 315 2004................................................... 522 2005................................................... 4,523 2006................................................... 7,764 2007................................................... 112,749 ------- 125,884 =======
The income tax provision for the year differs from the amount obtained by applying the statutory Canadian federal and provincial income tax rates to loss before income taxes for years ended as follows:
2000 1999 1998 ------- ------ ------ $ $ $ Statutory Canadian federal and provincial income tax rates................................................... 45.6% 45.6% 45.6% ------- ------ ------ Income tax recovery based on the statutory rates.......... (80,463) (4,470) (1,112) Differences from statutory rates relating to Change in valuation allowance........................... 38,163 4,470 1,112 Large corporations tax.................................. 3,833 165 -- ------- ------ ------ (38,467) 165 -- ======= ====== ======
13 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The fair values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. At September 30, 2000, and 1999, using discounted cash flow analysis, the carrying value of long-term debt approximates its fair value, except for the senior discount notes. The fair value of the senior discount notes is $649 million based on its trading price at September 30, 2000. CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, and accounts receivable. The Company's cash and cash equivalents are deposited with highly rated financial institutions. The Company's accounts receivable are derived from revenue earned from customers located in Canada. The Company performs ongoing credit evaluations on its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon expected collectibility of accounts receivable. F-34 142 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) For the year ended September 30, 2000, one customer of the Company accounted for approximately 15% of revenue (note 16) and for the year ended September 30, 1999, three customers of the Company accounted for approximately 48% of revenue (one customer accounted for 26%, a second customer accounted for 12% and a third customer accounted for 10%). For the year ended September 30, 1998, two customers of the Company accounted for approximately 55% of the Company's revenue (one customer accounted for 37% and a second customer accounted for 18%). INTEREST RATE AND FOREIGN CURRENCY RISK The Company is exposed to foreign currency fluctuations on its U.S. dollar denominated trade payables and long-term debt to the extent that these liabilities exceed the U.S. dollar cash and cash equivalents. The following table summarizes the Company's exposure to interest rate foreign currency risk:
FIXED RATE FLOATING WITHIN FIXED RATE FIXED RATE NON-INTEREST RATE ONE YEAR 1-5 YEARS 6-10 YEARS BEARING -------- ---------- ---------- ---------- ------------ $ $ $ $ $ September 30, Financial assets Cash and cash equivalents Canadian dollars...... 123,203 -- -- -- -- U.S. dollars (U.S.$213,329)..... 320,847 -- -- -- -- Accounts receivable..... -- -- -- -- 49,952 Loans to officers....... -- -- 3,868 -- -- Financial liabilities Accounts payable and accrued liabilities Canadian dollars...... -- -- -- -- 90,218 U.S. dollars (U.S.$14,431)...... -- -- -- -- 21,177 Long-term debt Canadian dollars...... 115,367 755 4,292 -- -- U.S. dollars (U.S.$565,871)..... 170,201 -- -- 662,661 --
F-35 143 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars)
FIXED RATE FLOATING WITHIN FIXED RATE FIXED RATE NON-INTEREST RATE ONE YEAR 1-5 YEARS 6-10 YEARS BEARING -------- ---------- ---------- ---------- ------------ $ $ $ $ $ September 30, 1999 Financial assets Cash and cash equivalents Canadian dollars...... 39,794 -- -- -- -- U.S. dollars (U.S.$13,657)...... 20,057 -- -- -- -- Accounts receivable..... -- -- -- -- 3,783 Financial liabilities Accounts payable and accrued liabilities Canadian dollars...... -- -- -- -- 9,554 U.S. dollars (U.S.$3,660)....... -- -- -- -- 5,372 Long-term debt Canadian dollars...... -- 327 1,603 -- -- U.S. dollars (U.S.$31,815)...... 40,398 926 5,556 -- --
CROSS CURRENCY SWAP On February 15 and August 14, 2000, the Company entered into cross currency swaps with several financial institutions to convert approximately 69% (representing a notional amount of U.S. $590 million) of the future U.S. dollar payments on the senior discount notes to Canadian dollars at a fixed average exchange rate of approximately $1.4450. The payments represent the semi-annual interest payments from August 1, 2005 to August 1, 2009 and the principal repayment on February 1, 2010. As a result of the cross currency swap, the average fixed interest rate on the portion of the senior discount notes decreased from 13.25% to approximately 12.96%. The Company and the financial institutions each have the right to terminate the swap on February 1, 2005. As at September 30, 2000, the fair value of these swap agreements is not significant. The Company has granted the financial institutions a general security as part of the Collateral Agency and Intercreditor Agreement as described in Note 10(d). From the date the swap agreements were entered, the portion of the senior discount notes to which the exchange rate has been fixed by the swap has been converted to Canadian dollars using the swap forward rate. 14 COMMITMENTS AND CONTINGENCIES CAPITAL EXPENDITURES (a) AGREEMENT WITH 360NETWORKS On May 24, 2000, the Company completed a multiple element agreement with 360networks, inc. Pursuant to this transaction, the Company: F-36 144 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) i) Purchased certain dark fibers to be constructed along Canadian route paths for $137 million. Of this amount, $32 million was paid in the year ended September 30, 2000 which is included in property, plant and equipment. The balance will be paid over the next three years when the fiber becomes available to the Company; and ii) Purchased an indefeasible right to use certain dark fibers to be constructed along United States route paths for $140 million. In addition, the Company acquired exclusive rights to fiber-optic wavelengths along a diverse route in Canada and the United States under long-term lease arrangements and the option to purchase additional wavelengths on similar terms. Assets and obligations under these arrangements, which will be accounted for as capital leases over 20 years commencing in 2001 when the fiber becomes available to the Company, amount to approximately $85 million. In October 2000, the Company accepted approximately 28% of the fiber-optic wavelengths under the long-term capacity lease arrangement. (b) VENDOR FINANCING AGREEMENT The Company has entered into a vendor financing agreement (note 10(b)) to purchase and license certain engineering and construction services together with digital switches and related network software and equipment from a supplier. The minimum future purchase commitment is U.S.$213 million over the next twenty months. LETTER OF CREDIT As of September 30, 2000, the Company has letters of credit in favour of network equipment suppliers in the amount of $0.5 million. OPERATING LEASES The Company has entered into operating leases for its premises, certain equipment and for rights of way. Minimum lease payments for the next five years and thereafter are as follows:
$ ------ Year ending September 30, 2001................................................... 8,410 2002................................................... 8,422 2003................................................... 8,442 2004................................................... 8,412 2005................................................... 8,345 Thereafter............................................. 50,740
The rent expense under operating leases for the following years was as follows:
2000 1999 1998 ----- ---- ---- $ $ $ Operating lease expense..................................... 5,733 197 165
F-37 145 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 15 ADDITIONAL CASH FLOW DISCLOSURES
YEAR ENDED SEPTEMBER 30, --------------------- 2000 1999 1998 ----- ---- ---- $ $ $ Interest paid............................................... 7,862 95 53 Income taxes paid........................................... 819 -- --
NON-CASH TRANSACTIONS Purchases of property, plant and equipment of $159 million for the year ended September 30, 2000 (1999 -- $55 million) and purchases of other assets of $6 million at September 30, 2000 (1999 -- $nil) were financed through long-term debt, notes payable and through accounts payable and accrued liabilities. In addition, the Company issued $476 million in Class A voting and Class B non-voting shares in respect of businesses acquired during the year ended September 30, 2000 (note 3). Accordingly, these transactions are not reflected in the Statement of Cash Flows. 16 RELATED PARTY TRANSACTIONS During the year ended September 30, 2000, the Company earned $11 million (1999 -- $nil) of revenues and incurred $2 million (1999 -- $nil) of administrative expenses in respect of transitional processing fees on the Shaw FiberLink operations from a minority shareholder. The Company has also engaged this related company to process certain cash disbursements on its behalf. Included in accounts receivable is $11 million (1999 -- $nil) receivable from this customer, $4 million of which relates to balances acquired upon the Company's acquisition of Shaw FiberLink. Included in accounts payable and accrued liabilities is $2 million (1999 -- $nil) payable as at September 30, 2000 to this related company. The above transactions were entered into in the ordinary course of business and were recorded at the exchange amount. 17 SUBSEQUENT EVENT On October 16, 2000, the Company entered into a term sheet with C1 Communications Inc. ("C1"). Under the term sheet, the Company will purchase from C1 all the property and assets used in its Atlantic Cable competitive local exchange carrier business. The Company will also assume an indefeasible right to use agreement which will grant the company an indefeasible right to use certain specifically identified existing fibers in the fiber-optic networks of C1 for 19 years. The purchase consideration consists of rights to acquire 2,372,000 class B non-voting shares of the Company and the assumption of C1's obligations under the indefeasible right to use agreement, which amount to $22 million on a present value basis. Acquisition costs are estimated to be $2 million. 18 PRIOR YEAR COMPARATIVE AMOUNTS Certain prior years' comparative numbers have been reclassified to conform to the current year's presentation. F-38 146 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) 19 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada, which, in the case of the Company, conform in all material respects with GAAP in the United States of America ("U.S. GAAP") except as outlined below: (a) NET LOSS AND SHAREHOLDERS' EQUITY The following summary sets out the adjustments to the company's loss and shareholders' equity which would be made to conform to U.S. GAAP:
2000 1999 1998 -------- ------- ------ $ $ $ Loss for the year in accordance with Canadian GAAP............................................. (137,986) (9,967) (2,439) Impact of U.S. accounting principles Amortization of purchase price adjustment (c).... (617) -- -- Deferred charges................................. (15) (301) (87) Stock based compensation (d)..................... (11,430) (56) (1,056) Deferred foreign exchange (e).................... (1,655) (12) -- Recovery of future income taxes (f).............. 11,055 -- -- -------- ------- ------ Net loss for the year in accordance with U.S. GAAP............................................. (140,648) (10,336) (3,582) Unrealized gains on securities, net of tax of $10,366 (f)...................................... 23,926 -- -- -------- ------- ------ Comprehensive loss in accordance with U.S. GAAP.... (116,722) (10,336) (3,582) ======== ======= ====== Net loss per share in accordance with U.S. GAAP.... (1.86) (0.58) (0.38) ======== ======= ======
The reconciliation of the change in shareholders' equity from Canadian to U.S. GAAP is as follows:
2000 1999 ------- ------ $ $ Shareholders' equity in accordance with Canadian GAAP at September 30.............................................. 862,798 73,928 Purchase price adjustment, net of amortization of $617 (1999 and 1998 -- $nil) (c)..................................... 17,035 -- Deferred charges............................................ (417) (403) Cumulative stock-based compensation expense (d)............. (11,651) (1,118) Deferred stock based compensation expense (d)............... (34,266) (287) Net change in stock options (d)............................. 45,917 1,405 Deferred foreign exchange (e)............................... (1,666) (12) Recovery of future income taxes (f)......................... 11,055 -- Other comprehensive income (f).............................. 23,926 -- ------- ------ Shareholders' equity in accordance with U.S. GAAP at September 30.............................................. 912,731 73,513 ======= ======
F-39 147 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (b) CONSOLIDATED BALANCE SHEETS The following table indicates the restated amounts for the items in the consolidated balance sheets of the Company that would be affected had the financial statements been prepared in accordance with U.S. GAAP:
2000 1999 --------- ------- $ $ Property, plant and equipment (c)........................... 957,957 73,817 Long-term investment (f).................................... 77,530 -- Goodwill and other assets (c)............................... 239,327 877 Share capital (c)........................................... 1,032,079 85,480 Additional paid-in capital.................................. 337 337 Deferred stock-based compensation expense (d)............... (34,266) (287) Stock options outstanding (d)............................... 45,917 723 Deficit..................................................... (155,263) (14,615) Other comprehensive income (f).............................. 23,926 --
(c) PURCHASE PRICE ADJUSTMENT For U.S. GAAP, the Company has recorded the purchase price of the assets acquired from Moffat Communications (note 3(b)), based on the fair value of consideration agreed to on March 27, 2000, when the Company entered into an asset purchase agreement. The purchase consideration consisted of $68 million cash and the rights to acquire 1,667,000 Class B non-voting shares of the Company, which had an aggregate value of approximately $50 million at March 27, 2000. For U.S. GAAP purposes, details of assets and liabilities acquired at their fair value are as follows:
$ ------- ASSETS ACQUIRED Indefeasible right to use agreement Property, plant and equipment for constructed fibers...... 91,748 Prepayment for fibers to be constructed................... 7,600 Videon FiberLink acquisition Property, plant and equipment............................. 7,397 Non-competition agreement................................. 2,360 Goodwill.................................................. 12,594 Other current assets...................................... 784 ------- 122,483 ======= LIABILITIES ASSUMED Future income taxes......................................... 689 =======
For Canadian GAAP, the fair value of the shares to be issued as partial consideration of the purchase price has been determined based on the average stock price on April 27, 2000, the date the transaction closed. F-40 148 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (d) STOCK-BASED COMPENSATION For U.S. GAAP, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". This method recognizes compensation cost as the amount by which the fair value of the stock exceeds the exercise price at the date of grant. The compensation cost is recognized over the vesting period of the options. For U.S. GAAP, the compensation cost not yet recognized is presented as deferred stock-based compensation charge, with a corresponding amount included in stock options outstanding, both of which form part of shareholders' equity. For Canadian GAAP, stock-based compensation expense is not recorded in the financial statements of the Company. Had the Company determined compensation costs based on fair value at the date of grant for its awards under a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" the Company's loss and loss per share would be as follows:
2000 1999 1998 -------- ------- ------ $ $ $ Loss in accordance with U.S. GAAP.................. (140,648) (10,336) (3,582) Additional compensation expense.................... (2,106) (174) (18) -------- ------- ------ Pro forma net loss................................. (142,754) (10,510) (3,600) ======== ======= ====== Pro forma loss per share........................... (1.89) (0.59) (0.38) ======== ======= ======
The pro-forma compensation expense reflected above has been estimated using the Black-Scholes option-pricing model. Assumptions used in the pricing model included: (i) risk free interest rate between 4.10% - 6.41%; (ii) expected volatility ranging between nil - 70%; (iii) expected dividend yield of nil; and (iv) an estimated average life ranging from 2.17 - 3 years. (e) DEFERRED FOREIGN EXCHANGE U.S. GAAP requires immediate recognition in income of unrealized foreign currency exchange gains and losses on long-term monetary items with a fixed or ascertainable life whereas Canadian GAAP requires that these unrealized gains and losses be deferred and amortized over the remaining term of the long-term monetary items. (f) UNREALIZED GAIN ON SECURITIES Under U.S. GAAP, portfolio investments which are considered to be "available for sale" securities are measured at market value, with the unrealized gains and losses included in comprehensive income/loss. Under Canadian GAAP, the Company's long-term investment is recorded at cost. Under U.S. GAAP, this also resulted in an additional $11 million recovery of future income taxes. The concept of comprehensive income/loss does not exist under Canadian GAAP. F-41 149 GT GROUP TELECOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tabular amounts expressed in thousands of Canadian dollars) (g) DETAILS OF AMORTIZATION EXPENSE
2000 1999 1998 ------ ---- ---- $ $ $ Amortization expense for the year consists of: Property, plant and equipment............................ 30,510 839 213 Goodwill, non-complete agreements and license rights..... 8,417 -- 33 Deferred charges......................................... 4,128 14 9 ------ --- --- 43,055 853 255 ====== === ===
(h) RECENT ACCOUNTING PRONOUNCEMENTS (i) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes methods of accounting for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. The statement requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company will adopt SFAS No. 133 effective October 1, 2000 and will record a cumulative effect-type adjustment of $18 million, net of tax of $nil, as a charge to other comprehensive income to recognize derivatives designated as cash flow hedges at fair value. The resulting effect is that foreign exchange gains and losses on the hedged portion of the long-term debt will be reflected in other comprehensive income, together with the change in the fair value of the hedging instruments. As the Financial Accounting Standards Board continues to issue additional guidance and interpretations on SFAS No. 133, the Company will review its accounting practises for derivative instruments, and make adjustments, if necessary. (ii) REVENUE RECOGNITION In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 on Revenue Recognition. The adoption of this pronouncement will not have a material impact on the Company's financial statements. F-42 150 GT GROUP TELECOM INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (thousands of Canadian dollars)
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, 2000 2000 2000 1999 ------------- --------- --------- ------------ $ $ $ $ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents............... 444,050 526,231 732,053 29,348 Accounts receivable Trade................................. 30,253 32,799 12,801 1,922 Other................................. 19,699 7,786 2,456 3,858 Prepaid expenses........................ 5,939 8,958 5,227 2,074 Inventory............................... 436 201 201 545 --------- --------- --------- ------- 500,377 575,975 752,738 37,747 PROPERTY, PLANT AND EQUIPMENT........... 954,917 778,926 567,568 108,009 PREPAYMENT ON PROPERTY, PLANT AND EQUIPMENT............................. 203,703 230,600 223,000 -- LONG-TERM INVESTMENT.................... 43,238 43,238 -- -- GOODWILL AND OTHER ASSETS............... 227,033 199,710 192,366 14,902 --------- --------- --------- ------- 1,929,268 1,828,449 1,735,672 160,658 ========= ========= ========= ======= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities........................... 111,395 88,485 42,583 34,963 Unearned revenue........................ 544 1,325 925 676 Current portion of long-term debt....... 4,348 1,204 6,203 3,746 --------- --------- --------- ------- 116,287 91,014 49,711 39,385 LONG-TERM UNEARNED REVENUE.............. 1,255 1,080 1,219 1,356 LONG-TERM DEBT.......................... 948,928 853,123 781,447 57,028 FUTURE INCOME TAXES..................... -- -- 28,200 -- --------- --------- --------- ------- 1,066,470 945,217 860,577 97,769 --------- --------- --------- ------- SHAREHOLDERS' EQUITY SHARE CAPITAL AND OTHER EQUITY ITEMS.... 1,013,866 971,468 937,550 88,035 DEFICIT................................. (151,068) (88,236) (62,455) (25,146) --------- --------- --------- ------- 862,798 883,232 875,095 62,889 --------- --------- --------- ------- 1,929,268 1,828,449 1,735,672 160,658 ========= ========= ========= =======
F-43 151 GT GROUP TELECOM INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT (thousands of Canadian dollars)
FOR THE THREE MONTHS ENDED, ------------------------------------------------------ SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, 2000 2000 2000 1999 ------------- -------- --------- ------------ $ $ $ $ (UNAUDITED) REVENUE.................................. 32,167 25,558 13,259 2,267 COST OF SERVICES......................... 21,230 17,415 10,553 2,138 -------- ------- ------- ------- 10,937 8,143 2,706 129 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................... 38,901 30,984 20,286 10,788 -------- ------- ------- ------- (27,964) (22,841) (17,580) (10,659) AMORTIZATION............................. 20,241 15,447 6,169 1,198 INTEREST AND FINANCING CHARGES........... 26,488 14,488 13,237 141 -------- ------- ------- ------- LOSS BEFORE INCOME TAXES................. (74,693) (52,776) (36,986) (11,998) PROVISION (RECOVERY) OF FUTURE INCOME TAXES.................................. (11,861) (26,995) 323 66 -------- ------- ------- ------- LOSS FOR THE PERIOD...................... (62,832) (25,781) (37,309) (12,064) DEFICIT -- BEGINNING OF PERIOD........... (88,236) (62,455) (25,146) (13,082) -------- ------- ------- ------- DEFICIT -- END OF PERIOD................. (151,068) (88,236) (62,455) (25,146) ======== ======= ======= ======= LOSS PER SHARE........................... (0.52) (0.22) (0.90) (0.54) ======== ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (in thousands)............. 120,256 118,376 41,506 22,474 ======== ======= ======= =======
F-44 152 AUDITORS' REPORT To the Directors of SHAW FIBERLINK LTD. We have audited the balance sheets of SHAW FIBERLINK LTD. -- FIBERLINK DIVISION (the "Division") as at August 31, 1999 and 1998 and the statements of income and net investment by Shaw FiberLink Ltd. and cash flows for each of the years in the three year period ended August 31, 1999. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Division as at August 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three year period ended August 31, 1999 in accordance with accounting principles generally accepted in Canada. As disclosed in note 1, the Division is a segment of Shaw FiberLink Ltd. and has no separate legal status or existence. Calgary, Canada /s/ ERNST & YOUNG LLP December 23, 1999 Independent Public Accountants (except as to Note 11 which is at February 16, 2000) F-45 153 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION BALANCE SHEETS SEE BASIS OF PRESENTATION -- NOTE 1 (thousands of Canadian dollars)
AUGUST 31, NOVEMBER 30, ----------------- 1999 1999 1998 ------------ ------- ------- (UNAUDITED) ASSETS CURRENT Accounts receivable (net of allowance for doubtful accounts of $86; August 31, 1999 -- $79; 1998 -- $84)............. $ 6,264 $ 7,336 $ 2,188 Prepaids and other......................................... 183 289 65 ------- ------- ------- 6,447 7,625 2,253 Property and equipment [note 3]............................ 78,422 70,472 46,793 ------- ------- ------- $84,869 $78,097 $49,046 ======= ======= ======= LIABILITIES AND NET INVESTMENT BY SHAW FIBERLINK LTD. CURRENT Accounts payable and accrued liabilities................... $ 1,905 $ 1,974 $ 7,613 Income taxes payable....................................... 92 116 148 Unearned revenues.......................................... 1,273 1,330 161 ------- ------- ------- 3,270 3,420 7,922 Commitments and contingency [notes 7 and 8] Net investment by Shaw FiberLink Ltd....................... 81,599 74,677 41,124 ------- ------- ------- $84,869 $78,097 $49,046 ======= ======= =======
On behalf of the Board: (Signed) PETER J. BISSONNETTE (Signed) MARGOT M. MICALLEF Director Director
See accompanying notes. F-46 154 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION STATEMENTS OF INCOME AND NET INVESTMENT BY SHAW FIBERLINK LTD. (thousands of Canadian dollars)
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ------------------- --------------------------- 1999 1998 1999 1998 1997 -------- -------- ------- ------- ------- (UNAUDITED) REVENUES................................. $13,197 $ 7,876 $38,815 $22,324 $11,631 Cost of sales (exclusive of items shown separately below)...................... 6,503 3,529 17,800 10,174 3,965 ------- ------- ------- ------- ------- 6,694 4,347 21,015 12,150 7,666 ------- ------- ------- ------- ------- Selling, general and administrative expenses............................... 3,004 1,999 8,893 7,498 5,227 Depreciation............................. 2,109 1,347 6,565 3,832 1,954 Depreciation charge allocated by Shaw for use of distribution network assets [note 6(c)]............................ 1,648 1,259 5,649 4,394 3,073 ------- ------- ------- ------- ------- 6,761 4,605 21,107 15,724 10,254 ------- ------- ------- ------- ------- LOSS BEFORE INCOME TAXES................. (67) (258) (92) (3,574) (2,588) Income taxes [note 4].................... 25 23 92 50 25 ------- ------- ------- ------- ------- Net loss................................. (92) (281) (184) (3,624) (2,613) Net investment by Shaw FiberLink Ltd., beginning of the year.................. 74,677 41,124 41,124 23,208 14,137 Investment by Shaw FiberLink Ltd. during the year............................... 7,014 11,117 33,737 21,540 11,684 ------- ------- ------- ------- ------- NET INVESTMENT BY SHAW FIBERLINK LTD., END OF THE YEAR........................ $81,599 $51,960 $74,677 $41,124 $23,208 ======= ======= ======= ======= =======
See accompanying notes. F-47 155 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION STATEMENTS OF CASH FLOWS (thousands of Canadian dollars)
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ------------------- ------------------------------ 1999 1998 1999 1998 1997 -------- -------- -------- -------- -------- (UNAUDITED) OPERATING ACTIVITIES [note 1] Net loss............................ $ (92) $ (281) $ (184) $ (3,624) $ (2,613) Non-cash items: Depreciation...................... 2,109 1,347 6,565 3,832 1,954 -------- -------- -------- -------- -------- CASH FLOW FROM OPERATIONS........... 2,017 1,066 6,381 208 (659) Net change in non-cash working capital balances related to operations [note 9]............... 1,028 (6,988) (9,874) 5,697 1,064 -------- -------- -------- -------- -------- 3,045 (5,922) (3,493) 5,905 405 -------- -------- -------- -------- -------- INVESTING ACTIVITIES Additions to property and equipment......................... (10,059) (5,195) (30,244) (27,445) (12,089) -------- -------- -------- -------- -------- FINANCING ACTIVITIES Investment by Shaw FiberLink Ltd. during the year................... 7,014 11,117 33,737 21,540 11,684 -------- -------- -------- -------- -------- CHANGE IN CASH DURING THE YEAR AND CASH AT BEGINNING AND END OF YEAR.............................. -- -- -- -- -- ======== ======== ======== ======== ========
See accompanying notes. F-48 156 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Shaw FiberLink Ltd. -- FiberLink Division (the "Division" or "FiberLink") operates high capacity fiber optic telecommunications networks in various Canadian markets including: Greater Metropolitan Toronto, Calgary, Edmonton, Winnipeg, Vancouver Island, Central British Columbia, Saskatoon, Lethbridge and Red Deer. FiberLink also operates several strategically-located inter-city networks and two international gateways into the United States. FiberLink provides its customers with a wide range of telecommunications services including dedicated voice services, switched data transmission and Business Internet services. While the Division owns certain of the assets required to carry on the business, a number of assets, including distribution network assets (see note 6), administrative facilities and maintenance operations are owned by Shaw Communications Inc. These financial statements represent the business operations identified as the FiberLink Division of Shaw FiberLink Ltd. Accordingly, there is no share capital or retained earnings in the Division's accounts. The net investment by Shaw FiberLink Ltd. represents the capital employed in the Division in the form of investments and advances. Shaw FiberLink Ltd. is a wholly owned subsidiary of Shaw Communications Inc. Investments and advancements by Shaw FiberLink Ltd. in the Division are funded by Shaw Communications Inc. to Shaw FiberLink Ltd. The Division has relied extensively upon Shaw FiberLink Ltd. and Shaw Communications Inc. for ongoing financial support and accordingly, these divisional financial statements are not necessarily indicative of the results of operations, cash flows or financial position had the Division operated as an independent entity as at or for the dates and periods presented. Should Shaw FiberLink Ltd. or Shaw Communications Inc. cease to provide such financial support, the Division would require alternative ongoing financing from other sources. Shaw Communications Inc. has allocated corporate, overhead and technical costs to the Division based on an estimate of the services provided, and charges for the use of distribution network assets based on Shaw Communications Inc.'s annual depreciation charge related to these assets (see note 6). The management of Shaw Communications Inc. have estimated the incremental costs of the Division as a stand-alone entity for corporate expenses, other than taxes or interest, would be approximately $1,532,000 annually. Management believes this to be reasonable. The information presented as at and for the interim periods ended November 30, 1999 and 1998 is unaudited. These unaudited financial statements reflect all adjustments which are in the opinion of management necessary to a fair statement of the results for the interim periods presented; all such adjustments are of a normal recurring nature. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles consistently applied within the framework of the accounting policies described below. The policy with respect to accounting for income taxes described below differs from that used in the preparation of the consolidated financial statements of Shaw Communications Inc. REVENUE RECOGNITION FiberLink provides telecommunication services to its customers and earns both recurring and installation revenues. Recurring revenues are recognized on a monthly basis as the services are provided to customers. Unearned recurring revenues are deferred and recognized as earned. Revenues earned on installation contracts are recorded when the installation of an operational link is F-49 157 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) completed unless such revenues exceed the related direct cost of the installation in which case the excess is recognized over the contract period. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets as follows:
ASSET ESTIMATED USEFUL LIFE ----- --------------------- Towers and headends................................... 10 years Distribution network.................................. 10 years Subscriber equipment.................................. 15 years Computer equipment and software....................... 4 years Other equipment....................................... 4-10 years
INCOME TAXES The liability method of tax allocation is used in accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce future income tax assets to the amount expected to be realized. SEGMENTED INFORMATION FiberLink's business of providing local high speed telecommunications and Internet access services is one operating segment. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT
AUGUST 31, NOVEMBER 30, ----------------------------------------------- 1999 1999 1998 ---------------------- ---------------------- ---------------------- ACCUMULATED ACCUMULATED ACCUMULATED COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION ------- ------------ ------- ------------ ------- ------------ (UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS) Towers and headends.... $60,901 $11,612 $55,060 $10,163 $35,206 $5,649 Distribution network... 2,945 467 2,945 394 2,463 123 Subscriber equipment... 25,657 2,327 21,546 1,934 12,734 790 Computer equipment and software......... 1,440 465 1,395 377 777 106 Other equipment........ 3,156 806 3,094 700 2,615 334 ------- ------- ------- ------- ------- ------ $94,099 $15,677 $84,040 $13,568 $53,795 $7,002 ------- ------- ------- ------- ------- ------ NET BOOK VALUE......... $78,422 $70,472 $46,793 --------- --------- --------- --------- --------- ---------
F-50 158 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Labour and other costs attributable to construction and installation are capitalized as part of towers and headends. For the three months ended November 30, 1999 the amount capitalized was $1,818,000 (unaudited) (August 31, 1999 -- $5,641,000; 1998 -- $4,200,000). 4. INCOME TAXES Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Division's future tax liabilities and assets are as follows:
AUGUST 31, NOVEMBER 30, ----------------- 1999 1999 1998 ------------ ------- ------- (THOUSANDS OF (UNAUDITED) CANADIAN DOLLARS) FUTURE TAX LIABILITIES: Property and equipment.................................... (7,844) $(6,590) $(1,026) ------- ------- ------- FUTURE TAX ASSETS: Non-capital losses carried forward........................ 13,257 12,236 6,639 Valuation allowance....................................... (5,413) (5,646) (5,613) ------- ------- ------- 7,844 6,590 1,026 ------- ------- ------- NET FUTURE TAXES.......................................... -- -- -- ======= ======= =======
The Division has incurred losses for income tax purposes that are available to be applied against future years' taxable income expiring as follows:
(THOUSANDS OF CANADIAN DOLLARS) ----------------- 2002.................................................... $ 1,143 2003.................................................... 2,459 2004.................................................... 6,019 2005.................................................... 8,652 2006.................................................... 8,918 Period ending November 30, 2007 (unaudited)............. 2,268 ------- $29,459 =======
F-51 159 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Differences between income taxes calculated at Canadian statutory rates and the income tax provision made in the Divisional accounts are as follows:
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ------------- ------------------------------- 1999 1998 1999 1998 1997 ----- ----- ------- --------- --------- (UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS) Income taxes (recovery) at Canadian statutory rates...................................... $ (30) $(116) $ (41) $(1,608) $(1,165) Differences from statutory rates relating to: Large corporations tax..................... 25 23 92 50 25 Benefit of tax losses not recognized....... 30 116 33 1,612 1,118 Other, including items not deductible for tax purposes............................ -- -- 8 (4) 47 ----- ----- ----- ------- ------- INCOME TAX PROVISION......................... $ 25 $ 23 $ 92 $ 50 $ 25 ===== ===== ===== ======= =======
The components of the income tax provision are as follows:
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ------------- --------------------- 1999 1998 1999 1998 1997 ----- ----- ----- ----- ----- (THOUSANDS OF (UNAUDITED) CANADIAN DOLLARS) Current................................................. $ 25 $ 23 $ 92 $ 50 $ 25 Future.................................................. -- -- -- -- -- ---- ---- ---- ---- ---- $ 25 $ 23 $ 92 $ 50 $ 25 ==== ==== ==== ==== ====
5. FINANCIAL INSTRUMENTS Financial instruments recognized in the balance sheets have fair values approximating their carrying values. CREDIT RISK At November 30, 1999 (unaudited), approximately 34% of the accounts receivable represents amounts due from five customers (August 31, 1999 -- 55% from six customers; 1998 -- 45% from six customers). Revenues from customers (excluding related parties described in note 6) which exceed ten percent of total revenues for the year are as follows:
THREE MONTHS ENDED YEAR ENDED AUGUST 31, NOVEMBER 30, --------------------- 1999 1999 1998 1997 ------------ ----- ----- ----- (THOUSANDS OF (UNAUDITED) CANADIAN DOLLARS) Customer A................................................ 7% 11% 17% 26% Customer B................................................ 5% 8% 11% 7%
F-52 160 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. RELATED PARTY TRANSACTIONS (a) The Division provides high speed Internet services to Shaw Communications Inc. In 1998 and 1997, the divisions of Shaw Communications Inc. negotiated rates and margins on these services which are reflected in the accounts. Subsequent to 1998, the FiberLink Division only passed along to Shaw Communications Inc. the external costs incurred by the Division to provide these services to Shaw Communications Inc. Intercompany revenues, expenses and margins reflected in these financial statements for the provision of Internet services to Shaw Communications Inc. are as follows:
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ---------------- ------------------------------- 1999 1998 1999 1998 1997 ------ ------- --------- -------- -------- (UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS) Revenues.................................... $2,691 $ 1,242 $ 6,627 $3,090 $ 985 Cost of sales............................... 2,691 1,242 6,627 2,115 153 ------ ------- ------- ------ ------ Margin...................................... $ -- $ -- $ -- $ 975 $ 832 ====== ======= ======= ====== ======
(b) These Divisional financial statements reflect corporate allocations from Shaw Communications Inc. for administrative and technical services provided to the Division of $534,000 and $400,000 respectively for the three months ended November 30, 1999 and $85,000 and $225,000 for 1998 (unaudited) (August 31, 1999 -- $340,000 and $900,000 respectively; 1998 -- $180,000 and $900,000 respectively; 1997 -- $90,000 and $24,000 respectively). Allocation of administrative and technical charges are based on the estimated level of services provided to the Division in proportion to Shaw Communications Inc.'s total costs, a method of allocation management believes to be reasonable. Of the corporate allocations from Shaw Communications Inc., $574,000 have been reflected in selling, general and administrative expenses and $360,000 has been capitalized to towers and headends in the three months ended November 30, 1999 and $107,000 and $203,000 respectively for 1998 (unaudited) (see note 3) (August 31, 1999 -- $430,000 and $810,000 respectively; 1998 -- $270,000 and $810,000 respectively; 1997 -- $92,000 and $22,000 respectively). (c) The Division utilizes certain distribution network assets owned by Shaw Communications Inc. (see note 1) in the provision of services to its customers. These Divisional financial statements reflect corporate allocations for the utilization of the distribution network assets of $1,648,000 for the three months ended November 30, 1999 and $1,259,000 for 1998 (unaudited) (August 31, 1999 -- $5,649,000; 1998 -- $4,394,000; 1997 -- $3,073,000). The allocation of these corporate charges is based upon FiberLink's estimated proportion of Shaw Communications Inc.'s annual depreciation charge related to these distribution network assets. Management believes this method of allocation to be reasonable. F-53 161 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS The Division has various long-term operating lease agreements for the use of transmission facilities and premises in each of the next five years as follows:
(THOUSANDS OF CANADIAN DOLLARS) ----------------- 2000.................................................... $ 9,501 2001.................................................... 7,690 2002.................................................... 6,590 2003.................................................... 6,342 2004.................................................... 691 Thereafter.............................................. 721 ------- $31,535 =======
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 9. STATEMENTS OF CASH FLOWS Additional disclosures with respect to the Statements of Cash Flows are as follows: (i) Changes in non-cash working capital balances related to operations include the following:
THREE MONTHS ENDED NOVEMBER 30, YEAR ENDED AUGUST 31, ---------------- ------------------------------- 1999 1998 1999 1998 1997 ------ ------- --------- -------- -------- (UNAUDITED) (THOUSANDS OF CANADIAN DOLLARS) Accounts receivable......................... $1,072 $ (744) $(5,148) $ (90) $ (22) Prepaids and other.......................... 106 (253) (224) (45) 68 Accounts payable and accrued liabilities.... (69) (6,040) (5,639) 5,733 110 Income taxes payable........................ (24) (21) (32) (37) 898 Unearned revenues........................... (57) 70 1,169 136 10 ------ ------- ------- ------ ------ $1,028 $(6,988) $(9,874) $5,697 $1,064 ====== ======= ======= ====== ======
(ii) Interest and income taxes paid Shaw Communications Inc. does not allocate interest on debt to Shaw FiberLink Ltd. and the Division does not have any separate legal existence for purposes of remitting income taxes. Accordingly, amounts included in these Divisional statements for taxes represent allocations only and are included in changes in advances to and from Shaw FiberLink Ltd. F-54 162 SHAW FIBERLINK LTD. -- FIBERLINK DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. UNITED STATES ACCOUNTING PRINCIPLES The financial statements of the Division are prepared in Canadian dollars in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). No additional adjustments have been identified in order to present these financial statements in accordance with accounting policies generally accepted in the United States ("U.S. GAAP"). The following disclosure would be required in order to present these financial statements in accordance U.S. GAAP. Recent developments The Financial Accounting Standards Board in the United States issued a pronouncement entitled "Accounting for Derivative Instruments and Hedging Activities" which the Division is required to adopt in the year ending August 31, 2001. The impact of this pronouncement on these financial statements has not been determined. 11. SUBSEQUENT EVENT On December 22, 1999, Shaw Communications Inc. and Shaw FiberLink Ltd. entered into an asset purchase and subscription agreement ("Purchase Agreement") with GT Group Telecom Inc. ("GT"). This transaction closed on February 16, 2000. Under the Purchase Agreement, Shaw FiberLink Ltd. sold to GT all of the property and assets of FiberLink used in connection with the high speed data and competitive access business and granted to GT an indefeasible right to use the distribution network assets owned by Shaw Communications Inc. (see notes 1 and 6). The assets sold include equipment, computer hardware, fixed assets, replacement parts, operational contracts, equipment contracts, supply contracts, interconnect agreements, co-location agreements, customer contracts, software licenses, broadband wireless licenses, vehicles, intellectual property, permits, prepaid expenses, goodwill related to the FiberLink assets and certain other fiber assets. Under the Indefeasible Right to Use agreement, GT was granted an indefeasible right to use certain specifically identified existing fibers in the fiber optic cable networks of Shaw Communications Inc. for 60 years. In addition, Shaw FiberLink Ltd. granted GT an indefeasible right to use fibers to be built over the next three years in mutually agreed regions. Consideration for this transaction amounts to $760 million, consisting of $360 million in cash, and sufficient series B first preference shares of GT to provide Shaw FiberLink Ltd. with a 28.5% fully diluted interest in GT, subject to adjustments for certain GT transactions relating to financing and employee options and warrants. F-55 163 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated statement of operations is based on the historical financial statements of GT Group Telecom Inc. ("Group Telecom") and the historical financial statements of Shaw FiberLink Ltd. -- FiberLink Division ("Shaw FiberLink") prepared to give effect to Group Telecom's acquisition of the business of Shaw FiberLink and the grant, by Shaw FiberLink, of an indefeasible right to use certain identified fibers in the fiber optic cable networks of Shaw Communications Inc. ("Shaw Communications") to Group Telecom. The pro forma financial statements give effect to financing required to complete the acquisition, consisting of senior bank debt of $220 million and additional financing of $140 million in debt and share purchase warrants. The unaudited pro forma condensed consolidated statements of operations for the year ended September 30, 2000 gives effect to such transactions as if they occurred at the beginning of the year then ended. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that management believes are reasonable. The pro forma statements do not purport to represent what the Company's results of operations would actually have been had these transactions in fact occurred on such dates or to project the Company's results of operations for any future date or period. The pro forma financial statements should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere in this prospectus. F-56 164 GT GROUP TELECOM INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SHAW GT GROUP FIBERLINK TELECOM INC. FOUR MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, PRO FORMA 2000 1999 ADJUSTMENTS NOTES PRO FORMA ------------- ------------ ----------- ------- --------- REVENUE.......................... $ 73,251 $18,045 -- $ 91,296 COST OF SERVICES................. 51,336 8,872 -- 60,208 --------- ------- -------- --------- 21,915 9,173 -- 31,088 --------- ------- -------- --------- Selling, general and administrative expenses........ 100,959 3,933 -- 105,392 500 2(iii) Amortization..................... 43,055 2,831 3,788 2(i) 55,492 3,620 2(ii) 2,198 2(i) Charge allocated by Shaw Communications for use of distribution network assets.... -- 2,198 (2,198) 2(i) -- Interest and finance items (income)....................... 54,354 -- 7,700 2(iv) 69,576 6,953 2(v) 569 2(vi) --------- ------- -------- --------- 198,368 8,962 21,130 230,460 --------- ------- -------- --------- INCOME (LOSS) BEFORE INCOME TAXES.......................... (176,453) 211 (23,130) 199,372 PROVISION FOR (RECOVERY OF) INCOME TAXES................... (38,467) 25 -- (38,442) --------- ------- -------- --------- NET INCOME (LOSS) FOR THE YEAR... $(137,986) $ 186 $(23,130) $(160,930) ========= ======= ======== ========= PRO FORMA LOSS PER SHARE......... (1.82) ========= PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS)..................... 88,639 =========
See accompanying notes to pro forma condensed consolidated financial information. F-57 165 GT GROUP TELECOM INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) SEPTEMBER 30, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The pro forma condensed consolidated statement of operations has been prepared to give effect to the acquisition of the assets of Shaw FiberLink Ltd. -- FiberLink Division ("Shaw FiberLink") by GT Group Telecom Inc. ("Group Telecom") and the grant by Shaw FiberLink of an Indefeasible Right to Use ("IRU") certain specifically identified fibers in the fiber optic cable networks of Shaw Communications Inc. ("Shaw Communications") to Group Telecom as of October 1, 1999. The pro forma financial statements give effect to financing consisting of senior bank debt of $220 million and an additional amount of $140 million representing a portion of the proceeds from the company's issuance of Units consisting of Senior Discount Notes and Warrants to purchase Class B Non-Voting Shares. Such proceeds have only been included in these pro-forma financial statements to the extent of $140 million required to complete the funding of the acquisition of the business of Shaw FiberLink. On February 16, 2000, Group Telecom purchased from Shaw Communications Inc. ("Shaw Communications") and Shaw FiberLink Ltd. ("Shaw FiberLink") all of the property and assets of Shaw FiberLink used in connection with the high-speed data and competitive access business. Group Telecom and Shaw FiberLink also entered into an indefeasible right to use agreement which grants the company an indefeasible right to use certain specifically identified existing fibers in the fiber optic cable networks of Shaw Communications for 60 years. Certain of the existing fibers located in New Brunswick Canada under the indefeasible right to use the agreement will be available for use in 2003. In addition, Group Telecom will receive an indefeasible right to use fibers to be built over the next three years in mutually agreed regions (refer to note 3 in the audited consolidated financial statements of Group Telecom) beginning on page F-9. The pro forma condensed consolidated statement of operations for the year ended September 30, 2000 is based on the audited consolidated statement of operations of Group Telecom for the year ended September 30, 2000 and the unaudited statement of operations of Shaw FiberLink for the four months ended December 31, 1999, as Group Telecom and Shaw FiberLink had non-coterminous year-ends. A pro forma condensed consolidated balance sheet has not been prepared as the acquisition of Shaw FiberLink is reflected in the audited consolidated balance sheet of Group Telecom as at September 30, 2000 (page F-3). The pro forma condensed consolidated statements do not purport to represent what Group Telecom's results of operations would actually have been, had these transactions in fact occurred on such dates or to project Group Telecom's results of operations for any future date or period. The pro forma condensed consolidated statement of operations should be read in conjunction with the consolidated financial statements and related notes of Group Telecom and Shaw FiberLink, including the descriptions of significant accounting policies, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere in this offering circular. 2. PRO FORMA ASSUMPTIONS The pro forma condensed consolidated statement of operations gives effect to the above acquisition as if it had occurred effective October 1, 1999. F-58 166 GT GROUP TELECOM INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED) (UNAUDITED) SEPTEMBER 30, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (i) The additional amortization expense relates to the increase of $429 million in property, plant and equipment and is based on the estimated useful life of the equipment and the fiber optic networks acquired which are amortized on a straight line basis over 10 and 20 years respectively. (ii) The additional amortization expense relates to the allocation of the purchase price of $120 million to goodwill and $29 million to other intangible assets. The amortization is based on the estimated useful life of 20 years for goodwill, 10 years for license rights and 3 years for the amount recorded as a non-compete agreement. (iii) The increase in selling, general and administration expense is an annual fiber maintenance fee as set out in the IRU agreement. (iv) The increase in interest expense is based on the senior bank financing of $220 million obtained to finance part of the acquisition of Shaw FiberLink. The interest expense was calculated using an interest rate of 10.50%. (v) The increase in interest expense is based on additional financing of $140 million in debt and share purchase warrants. The interest expense was calculated using an interest rate of 13.25% plus debt discount amortization. (vi) The deferred financing costs of $14.5 million relating to the debt issuances described in (iv) and (v) are amortized over the term of the related debts, assumed to be 7 and 10 years. 3. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GAAP The pro forma condensed consolidated financial information has been prepared in accordance with Canadian GAAP which differ in some respects from the principles and practices that Group Telecom would have followed had the pro forma financial information been prepared in accordance with U.S. GAAP. Refer to note 20 of Group Telecom consolidated financial statements for a reconciliation of differences impacting the Company. Pro forma loss under Canadian GAAP.......................... $(160,930) Group Telecom adjustments: Amortization of purchase price adjustment................. (617) Deferred charges.......................................... (15) Stock-based compensation.................................. (11,430) Deferred foreign exchange................................. (1,655) Recovery of future income taxes........................... 11,055 --------- Pro forma loss under U.S. GAAP.............................. $(163,592) ========= Pro forma loss per share.................................... (1.85) ========= Pro forma weighted average number of common shares (in thousands)................................................ 88,639 =========
F-59 167 APPENDIX A FORM OF NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT [FOR THE TRANSFER OF WARRANTS, ADDRESS TO: THE CHASE MANHATTAN BANK GT GROUP TELECOM INC. C/O CHASE NATIONAL CORPORATE SERVICES INC. 1301 FIFTH AVENUE, SUITE 3410 SEATTLE, WASHINGTON 98101 ATTENTION: MR. MICHAEL A. JONES] [FOR THE TRANSFER OF CLASS B NON-VOTING SHARES, ADDRESS TO: CIBC MELLON TRUST COMPANY CHASEMELLON SHAREHOLDER SERVICES GT GROUP TELECOM INC. C/O CIBC MELLON TRUST COMPANY 1066 WEST HASTINGS STREET, SUITE 1600 VANCOUVER, B.C. V6E 3X1 ATTENTION: MS. TRICIA MURPHY Re: GT Group Telecom Inc. (the "Company") Warrants and Class B Non-Voting Shares Dear Sirs: Please be advised that _____________________ has transferred ___________________ of the above-referenced [WARRANTS] [CLASS B NON-VOTING SHARES] pursuant to an effective Registration Statement on Form F-1 (File No. 333- ____________ ) filed by the Company. We hereby certify that the prospectus delivery requirements, if any, of the Securities Act of 1933, as amended, have been satisfied and that the above-named beneficial owner of the [WARRANTS] [CLASS B NON-VOTING SHARES] is named as a "Selling Shareholder" in the Prospectus dated [DATE] or in supplements thereto, and that the [WARRANTS] [CLASS B NON-VOTING SHARES] transferred are the [WARRANTS] [CLASS B NON-VOTING SHARES] listed in such Prospectus opposite such owner's name. Dated: Very truly yours, -------------------------------------- (Name) By: -------------------------------------- (Authorized Signature) A-1 168 --------------------------------------------------------- --------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the notes offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------ TABLE OF CONTENTS
Page ---- About This Prospectus....................... i Exchange Rates.............................. ii Risk Factors................................ 1 Use of Proceeds............................. 8 Price Range of Class B Non-Voting Shares.... 8 Dividend Policy............................. 8 Selected Historical Financial and Operating Information of Group Telecom.............. 9 Selected Unaudited Pro Forma Consolidated Financial and Operating Information....... 11 Selected Historical Financial and Operating Information of Shaw FiberLink............. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 14 Business.................................... 23 Description of Our Financing Arrangements... 39 Our Acquisition of the Shaw FiberLink Business.................................. 45 Description of the Warrants................. 47 Management.................................. 51 Regulation.................................. 60 Related Party Transactions.................. 69 Principal Shareholders...................... 70 Selling Shareholders........................ 71 Description of Share Capital................ 92 Taxation.................................... 95 Plan of Distribution........................ 101 Legal Matters............................... 102 Experts..................................... 102 Registrars and Transfer Agents.............. 102 Enforceability of Civil Liabilities......... 102 Where You Can Obtain More Information About Us........................................ 103 Index to Financial Statements............... F-1 Appendix A.................................. A-1
--------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- GT Group Telecom Logo 4,198,563 Class B Non-Voting Shares 855,000 Warrants to Purchase Class B Non-Voting Shares ------------------------------------ PROSPECTUS ------------------------------------ --------------------------------------------------------- --------------------------------------------------------- 169 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses relating to the offering are as follows: Securities and Exchange Commission Registration Fee......... US$ 16,796 Printing and Engraving Expenses............................. 80,000 Legal Fees and Expenses..................................... 125,000 Accounting Fees and Expenses................................ 53,200 Transfer Agent and Registrar Fees........................... 5,000 Miscellaneous............................................... 1,000 ---------- Total..................................................... US$280,996 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the Canada Business Corporations Act (the "CBCA"), a corporation may indemnify a present or former director or officer to such corporation or a person who acts or acted at the corporation's request as a director or officer of another corporation of which the corporation is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of his being or having been a director or officer of such corporation and provided that the director or officer acted honestly and in good faith with a view to the best interests of the corporation, and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his conduct was lawful. Such indemnification may be made in connection with a derivative action only with court approval. A director or officer is entitled to indemnification from the corporation as a matter of right in respect of all costs, charges and expenses reasonably incurred by him in connection with the defense of a civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the corporation if he was substantially successful on the merits and fulfilled the conditions set forth above. In accordance with the CBCA, the by-laws of the Registrant, a copy of which is filed as Exhibit 3.2 to this Registration Statement, indemnify a director or officer of the Registrant, a former director or officer of the Registrant or any person who acts or acted at the Registrant's request as a director or officer of a body corporate of which the Registrant is or was a shareholder or creditor and his heirs and legal representatives against all costs, charges and expenses including an amount paid to settle an action or satisfy a judgment reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he has been made a party by reason of being or having been a director or officer of the Registrant or such body corporate if (i) he acted honestly and in good faith with a view to the best interests of the Registrant, and (ii) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. The Registrant will also indemnify such directors or officers who have been substantially successful in the defence of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director of the Registrant or body corporate against all costs, charges and expenses reasonably incurred by him in respect of such action or proceeding. A policy of directors' and officers' liability insurance is maintained by the Registrant which insures directors and officers for losses as a result of claims based upon the acts or omissions as directors II-1 170 and officers of the Registrant, including liabilities arising under the Securities Act of 1933, and also reimburses the Registrant for payments made pursuant to the indemnity provisions under the Act. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that, in the opinion of the U.S. Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information relates to unregistered securities issued or sold by us within the prior three years:
NUMBER OF PRICE PER SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY ---------- ---- --------- --------------- --------- Units February 1, 2000 qualified institutional buyers and non-U.S. persons 855,000 526.51 Class A Voting Shares February 1998 directors 100,000 0.01 March 1998 employees 4,500 0.76 April 15, 1998 executive officers and non-U.S. persons 302,881 0.76 May 23, 1998 employees 10,000 0.76 June 17, 1998 sophisticated investors, directors, employees and non-U.S. persons 4,828,124 1.25 July 22, 1998 directors, sophisticated investors and non-U.S. persons 2,482,592 0.76923 September 1998 directors and employees 230,000 0.01 September 1998 employees and non-U.S. persons 56,863 0.50 December 2, 1998 employees and non-U.S. persons 40,000 0.50 December 1998 directors 100,000 0.01 January 1999 directors 90,000 0.50 March 1999 directors 300,000 0.01 April 19, 1999 directors and employees 476,580 1.25 April 30, 1999 non-U.S. persons 104,504 1.25 April 30, 1999 employees and non-U.S. persons 233,903 1.25 May 1999 non-U.S. persons 100,000 0.01 August 31, 1999 employees and non-U.S. persons 1,527,742 1.875 November 1999 non-U.S. persons 167 1.875 November 1999 non-U.S. person 1,090 0.50 November 1999 employee 10,000 1.25 December 16, 1999 employees 863 1.875 January 2000 non-U.S. person 55,425 0.50 January 2000 employee 10,000 1.25 January 2000 non-U.S. person 250 1.875 February 2000 employee 3,778 1.25 February 2000 employee 334 3.00 February 2000 non-U.S. person 56 3.00 February 2000 non-U.S. person 167 3.00 February 2000 non-U.S. person 112 1.875 February 2000 non-U.S. person 84 3.00 February 2000 employee 111 3.00 February 2000 employee 10,000 8.00
II-2 171
NUMBER OF PRICE PER SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY ---------- ---- --------- --------------- --------- February 2000 employee 10,000 8.00 March 2000 employees 15,000 8.00 March 2000 sophisticated investors and non-U.S. persons 60,596,097 0.00(1) March 2000 employees 121,792 0.50 March 2000 employees 47,884 1.25 March 2000 employees 2,056 1.875 March 2000 employees 362 3.00 March 2000 non-U.S. persons 1,090 0.50 March 2000 employees 42 8.00 April 2000 employees 4,505 1.25 April 2000 employees 83 1.875 April 2000 employees 417 3.00 April 2000 employees 307 8.00 May 2000 employees 3,864 1.25 May 2000 employees 1,000 3.00 May 2000 employees 1,141 8.00 June 2000 employees 11,351 1.25 June 2000 employees 1,500 1.875 June 2000 employees 250 1.50 June 2000 employees 1,181 3.00 June 2000 employees 954 8.00 June 2000 employees 223 20.40 July 2000 employees 7,502 1.25 July 2000 employees 1,167 1.875 July 2000 employees 2,641 3.00 July 2000 employees 334 8.00 August 2000 employees 8,417 1.25 August 2000 employees 1,106 3.00 August 2000 employees 2,362 1.875 August 2000 employees 2,082 8.00 August 2000 employees 42 20.40 September 2000 employees 806 1.875 September 2000 employees 1,571 3.00 September 2000 employees 2,712 8.00 October 2000 employees 7,500 1.00 October 2000 employees 5,000 1.25 October 2000 employees 500 1.875 October 2000 employees 7,607 3.00 October 2000 employees 1,168 8.00 November 2000 employees 1,112 1.875 November 2000 employees 584 8.00 November 2000 employees 26,747 0.50 November 2000 employees 500 3.00 December 2000 employees 7,500 1.25 December 2000 employees 834 1.875 December 2000 employees 3,000 3.00 December 2000 employees 5,500 8.00 January 2001 employees 4,751 3.00 January 2001 employees 3,000 1.50
II-3 172
NUMBER OF PRICE PER SECURITIES DATE ISSUED TO SECURITIES SOLD SECURITY ---------- ---- --------- --------------- --------- Class B Non-Voting Shares April 19, 1999 directors and sophisticated investors 721,101 1.25 April 30, 1999 directors and sophisticated investors 2,592,103 1.25 April 30, 1999 directors and sophisticated investors 835,365 1.25 January 2000 director and employee 250,000 1.25 March 2000 sophisticated investor 11,000,002 0.00(1) March 2000 director and employee 1,100,000 1.875 March 2000 director and employee 500,000 3.00 August 2000 non-U.S. persons 1,740,196 25.64 August 2000 non-U.S. persons 1,667,000 30.00 Series A First Preference Shares May 7, 1999 sophisticated investors 27,666,667 1.50 August 10, 1999 sophisticated investors 13,833,335 1.875 December 3, 1999 non-U.S. persons 1,000,000 1.875 Series B First Preference Shares February 16, 2000 non-U.S. person 29,096,097 13.93 Convertible Debentures February 18, 25 and March 17, 1999 directors, sophisticated investors and non-U.S. persons 18,240 100.00 December 10 and December 15, 1998 directors, employees, sophisticated investors and non-U.S. persons 30,993 100.00 March 5, 1999 directors, employees, sophisticated investors and non-U.S. persons 13,120 100.00
In addition, from January 31, 1998 through to January 31, 2001, we have issued an aggregate of 9,964,396 stock options and warrants to purchase our class A non-voting shares and 3,430,600 stock options to purchase our class B non-voting shares to our directors, executive officers and employees. Of these, 7,198,402 and 1,830,600 are outstanding, respectively. Each of the foregoing securities were sold pursuant to exemptions from registration under Section 4(2) or Rule 701 of the Securities Act or offered and sold outside the United States in accordance with Regulation S of the Securities Act. No underwriter or underwriting discount or commission was involved in any of such sales. --------------- (1) Conversion of previously issued first preference shares. II-4 173 ITEM 16. EXHIBITS *2.1 Asset Purchase and Subscription Agreement dated December 22, 1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT Group Telecom Inc. and GT Group Telecom Services Corp. *2.2 Indefeasible Right of Use Agreement dated February 16, 2000 between Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.3 Non-competition Agreement in favour of Group Telecom dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.4 Non-competition Agreement in favour of Shaw dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.5 Transitional Services Agreement dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd., GT Group Telecom Inc. and GT Group Telecom Services Corp. *2.6 Performance Assurance Agreement dated February 16, 2000 among Shaw Communications Inc., GT Group Telecom Inc. and GT Group Telecom Services Corp. +**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3, Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp. +**2.8 Capacity Lease Agreement dated May 24, 2000 by and between Worldwide Fiber Network Services Ltd. and Worldwide Fiber Network Services, Inc. and GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp. +**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide Fiber Network Services, Inc. and GT Group Telecom Services (USA) Corp. *3.1 Articles of Incorporation of GT Group Telecom Inc. *3.2 By-laws of GT Group Telecom Inc. *4.1 Warrant Agreement dated February 1, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank *4.2 Registration Rights Agreement dated February 1, 2000 among GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World Markets Corp., Credit Suisse First Boston Corporation, RBC Dominion Securities Corporation, Scotia Capital (USA) Inc. and TD Securities (USA) Inc. ***5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to GT Group Telecom Inc., as to the legality of the Class B non-voting shares and the warrants being registered ***5.2 Opinion of Shearman & Sterling as to the legality of the warrants being registered *10.1 Preference Share Purchase Agreement dated May 7, 1999 among GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc., First Marathon Capital Corporation and MGN Group LLC ***10.2 Credit Agreement, as amended and restated, dated February 3, 2000, as amended and restated as of September 29, 2000, with Lucent Technologies Canada Inc. ***10.3 Senior Credit Facility dated February 3, 2000, as amended and restated as of September 29, 2000, among GT Group Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit Partners, Royal Bank of Canada and Toronto Dominion Bank *10.4 Exchange and Registration Rights Agreement dated February 1, 2000 among GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World Markets Corp., Credit Suisse First Boston Corporation, RBC Dominion Securities Corporation, Scotia Capital (USA) Inc. and TD Securities (USA) Inc. *10.5 Indenture dated February 1, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank **10.6 First Supplemental Indenture dated July 11, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank
II-5 174 ***10.7 Credit Agreement, dated as of September 29, 2000, with Cisco Systems Capital Corporation **21.1 Subsidiaries of GT Group Telecom Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants ***23.2 Consent of Ernst & Young LLP, Chartered Accountants ***23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit 5.1) ***23.4 Consent of Shearman & Sterling (included in Exhibit 5.2) ***24.1 Powers of Attorney (contained on the signature pages of the Registration Statement)
--------------- * Incorporated by reference to the Registrant's Registration Statement of Form F-1 (File No. 333-11506) ** Incorporated by reference to the Registrant's Registration Statement on Form F-4 (File No. 333-38058). *** Previously filed + Confidential material has been omitted and filed separately with the Securities and Exchange Commission. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (i) and (ii) above shall not apply if this registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-6 175 (4) As long as the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Not withstanding the foregoing, if this registration statement is on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Item 8.A of Form 20-F if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 176 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Post-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Province of Ontario, Canada, on this 6th day of February, 2001. GT GROUP TELECOM INC. (Registrant) /s/ ROBERT M. FABES By: -------------------------------------- Name: Robert M. Fabes Title: Senior Vice President, General Counsel and Corporate Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 2 to the Registration Statement has been signed by or on behalf of the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- * Chairman and Director February 6, 2001 --------------------------------------------- James G. Matkin Director and Chair of Executive --------------------------------------------- Committee James M. Mansour * Chief Executive Officer and February 6, 2001 --------------------------------------------- Director Daniel R. Milliard (principal executive officer) * President, Chief Operating Officer February 6, 2001 --------------------------------------------- and Director Robert G. Wolfe * Executive Vice President and Chief February 6, 2001 --------------------------------------------- Financial Officer (principal Stephen H. Shoemaker financial officer and principal accounting officer) * Director February 6, 2001 --------------------------------------------- Michael Abram * Director February 6, 2001 --------------------------------------------- Michael D'Avella
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SIGNATURE TITLE DATE --------- ----- ---- * Director February 6, 2001 --------------------------------------------- George Estey Director --------------------------------------------- Leo J. Hindery * Director February 6, 2001 --------------------------------------------- P. Kenneth Kilgour * Director February 6, 2001 --------------------------------------------- Robert R. Gheewalla * Director February 6, 2001 --------------------------------------------- Jim Shaw
Pursuant to the requirements of the Securities Act of 1933, as amended, the undersigned certifies that it is the duly authorized United States representative of GT Group Telecom Inc. and has duly caused this Post-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, on this 6th day of February, 2001. GT GROUP TELECOM SERVICES (USA) CORP. (Authorized U.S. Representative) * By: -------------------------------------- Name: Stephen H. Shoemaker Title: Executive Vice President and Chief Financial Officer /s/ ROBERT M. FABES *By: -------------------------------------- Robert M. Fabes, Attorney-in-fact 178 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ------ *2.1 Asset Purchase and Subscription Agreement dated December 22, 1999 among Shaw Communications Inc., Shaw FiberLink Ltd., GT Group Telecom Inc. and GT Group Telecom Services Corp. *2.2 Indefeasible Right of Use Agreement dated February 16, 2000 between Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.3 Non-competition Agreement in favour of Group Telecom dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.4 Non-competition Agreement in favour of Shaw dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd. and GT Group Telecom Inc. *2.5 Transitional Services Agreement dated February 16, 2000 among Shaw Communications Inc., Shaw FiberLink Ltd., GT Group Telecom Inc. and GT Group Telecom Services Corp. *2.6 Performance Assurance Agreement dated February 16, 2000 among Shaw Communications Inc., GT Group Telecom Inc. and GT Group Telecom Services Corp. +**2.7 Fiber Sale Agreement dated May 24, 2000 among Worldwide Fiber (F.O.T.S.) Ltd., Worldwide Fiber (F.O.T.S.) No. 3, Ltd., WFI-CN Fibre Inc. and GT Group Telecom Services Corp. +**2.8 Capacity Lease Agreement dated May 24, 2000 by and between Worldwide Fiber Network Services Ltd. and Worldwide Fiber Network Services, Inc. and GT Group Telecom Services Corp. and GT Group Telecom Services (USA) Corp. +**2.9 IRU Agreement dated May 24, 2000 by and between Worldwide Fiber Network Services, Inc. and GT Group Telecom Services (USA) Corp. *3.1 Articles of Incorporation of GT Group Telecom Inc. *3.2 By-laws of GT Group Telecom Inc. *4.1 Warrant Agreement dated February 1, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank *4.2 Registration Rights Agreement dated February 1, 2000 among GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World Markets Corp., Credit Suisse First Boston Corporation, RBC Dominion Securities Corporation, Scotia Capital (USA) Inc. and TD Securities (USA) Inc. ***5.1 Opinion of Goodman Phillips & Vineberg, Canadian counsel to GT Group Telecom Inc., as to the legality of the class B non-voting shares and the warrants being registered ***5.2 Opinion of Shearman & Sterling as to the legality of the warrants being registered *10.1 Preference Share Purchase Agreement dated May 7, 1999 among GT Group Telecom Inc., GS Capital Partners III L.P., DSE Fin B.V., W9 Blanche Eight 10 B.V., CIBC Capital (SFC) Inc., First Marathon Capital Corporation and MGN Group LLC ***10.2 Credit Agreement, as amended and restated, dated February 3, 2000, as amended and restated as of September 29, 2000, with Lucent Technologies Canada Inc. ***10.3 Senior Credit Facility dated February 3, 2000, as amended and restated as of September 29, 2000, among GT Group Telecom Inc., CIBC World Markets Inc., Goldman Sachs Credit Partners, Royal Bank of Canada and Toronto Dominion Bank
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EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ------ *10.4 Exchange and Registration Rights Agreement dated February 1, 2000 among GT Group Telecom Inc. and Goldman, Sachs & Co., CIBC World Markets Corp., Credit Suisse First Boston Corporation, RBC Dominion Securities Corporation, Scotia Capital (USA) Inc. and TD Securities (USA) Inc. *10.5 Indenture dated February 1, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank **10.6 First Supplemental Indenture dated July 11, 2000 between GT Group Telecom Inc. and The Chase Manhattan Bank ***10.7 Credit Agreement, dated as of September 29, 2000, with Cisco Systems Capital Corporation **21.1 Subsidiaries of GT Group Telecom Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Chartered Accountants ***23.2 Consent of Ernst & Young LLP, Chartered Accountants ***23.3 Consent of Goodman Phillips & Vineberg (included in Exhibit 5.1) ***23.4 Consent of Shearman & Sterling (included in Exhibit 5.2) ***24.1 Powers of Attorney (contained on the signature pages of the Registration Statement)
--------------- * Incorporated by reference to the Registrant's Registration Statement of Form F-1 (File No. 333-11506) ** Incorporated by reference to the Registrant's Registration Statement on Form F-4 (File No. 333-38058). *** Previously filed + Confidential material has been omitted and filed separately with the Securities and Exchange Commission.