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/FIRST AND FINAL ADD - TO054 - Rogers Wireless Earnings/
Rogers Wireless Communications Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Six Months Ended June 30, 2004 and 2003
These interim unaudited Consolidated Financial Statements do not include
all of the disclosures required by Canadian generally accepted accounting
principles (GAAP). They should be read in conjunction with the audited
Annual Consolidated Financial Statements, including the Notes thereto,
for the year ended December 31, 2003.
1. Basis of Presentation and Accounting Policies:
The interim Consolidated Financial Statements include the accounts of
Rogers Wireless Communications Inc. and its subsidiaries (collectively
"the Company"). The Notes presented in these interim Consolidated
Financial Statements include only significant changes and transactions
occurring since the Company's last year-end and are not fully inclusive
of all matters normally disclosed in the Company's annual audited
Consolidated Financial Statements.
These interim Consolidated Financial Statements follow the same
accounting policies and methods of application as the most recent annual
financial statements with the exception of the following policies adopted
in the six months ended June 30, 2004:
a) GAAP Hierarchy
In June 2003, the Canadian Institute of Chartered Accountants (CICA)
released Handbook Section 1100, "Generally Accepted Accounting
Principles". Previously, there had been no clear definition of the
order of authority for sources of GAAP. This standard established
standards for financial reporting in accordance with Canadian GAAP
and applies to our 2004 fiscal year. This section also provides
guidance on sources to consult when selecting accounting policies and
appropriate disclosures when a matter is not dealt with explicitly in
the primary sources of GAAP.
The Company has reviewed this new standard, and as a result has
adopted a classified balance sheet presentation since it believes the
historical industry practice of a declassified balance sheet
presentation is no longer appropriate.
In addition, within the Consolidated Statements of Cash Flows, the
Company has reclassified the change in non-cash working capital items
related to PP&E, to PP&E expenditures under investing activities.
This change had the impact of increasing PP&E expenditures on the
Statements of Cash Flows, compared to the previous method, by
$8.4 million and decreasing PP&E expenditures by $15.5 million in the
three months ended June 30, 2004 and 2003, respectively. For the six
months ended June 30, 2004 PP&E, expenditures on the Statements of
Cash Flows decreased by $8.9 million and for the six months ended
June 30, 2003 this change had the impact of increasing PP&E
expenditures on the Statements of Cash Flows by $77.8 million. In all
periods, the corresponding change was to non-cash working capital
items within operating activities.
b) Hedging Relationships
In November 2001, the CICA issued Accounting Guideline 13, "Hedging
Relationships" (AcG-13), and in November 2002, the CICA amended the
effective date of the guideline. AcG-13 established new criteria for
hedge accounting and will apply to all hedging relationships in
effect on or after January 1, 2004. Effective January 1, 2004, the
Company determined that it would not treat its derivative
instruments, including cross-currency interest rate exchange
agreements and forward foreign exchange agreements, as hedges for
accounting purposes.
As a result, the Company has adjusted the carrying value of these
instruments from $136.5 million at December 31, 2003 to the fair
value of $120.4 million on January 1, 2004. The corresponding
adjustment of $16.1 million has been deferred and will be amortized
into income over the remaining life of the underlying debt
instruments.
Effective July 1, 2004, the Company determined that on a prospective
basis, it will treat certain designated cross-currency interest rate
exchange agreements as hedges of specific debt instruments and will
account for these in accordance with AcG-13. A transitional liability
arising on the change from marked-to-market accounting to hedge
accounting of $53.9 million will be amortized to income over the
shorter of the remaining life of the debt and the term of the swaps.
The impact of this change will be to reduce amortization expense by
$2.0 million for the remainder of 2004.
c) Stock-Based Compensation
Effective January 1, 2004, Canadian GAAP requires the Company to
determine the fair value of stock-based compensation awarded to
employees and to expense the fair value over the vesting period of
the stock options. In accordance with the transition rules, the
Company determined the fair value of stock options granted to
employees since January 1, 2002, using the Black-Scholes Option
Pricing model and recorded an adjustment to opening retained earnings
in the amount of $2.3 million, representing the expense for the 2002
and 2003 fiscal years. The offset to retained earnings is an increase
in contributed surplus. Stock-based compensation expense for the
three and six months ended June 30, 2004 was $0.9 million and
$2.1 million, respectively.
d) Revenue Recognition
Effective January 1, 2004, the Company adopted new Canadian
accounting standards, including the CICA Emerging Issues Committee
Abstract 142 issued in December 2003, regarding the timing of revenue
recognition and the classification of certain items as revenue or
expense.
As a result of the adoption of these new accounting standards, the
following changes to the recognition and classification of revenue
and expenses have been made:
- Activation fees are now classified as equipment revenue.
Previously, these amounts were classified as network revenue.
- Recoveries from new and existing subscribers from the sale of
equipment are now classified as equipment revenue. Previously,
these amounts were recorded as a reduction to sales expense in the
case of a new subscriber, or as a reduction to operating, general
and administrative expense in the case of an existing subscriber.
- Equipment subsidies provided to new and existing subscribers are
now classified as a reduction to equipment revenue. Previously,
these amounts were recorded as a sales expense in the case of a
new subscriber, or as an operating, general and administrative
expense in the case of an existing subscriber. Costs for
equipment provided under retention programs to existing
subscribers are now recorded as equipment cost of sales.
Previously, these amounts were recorded as operating, general and
administrative expenses.
- Certain other recoveries from subscribers related to collections
activities are now recorded as network revenue rather than as a
recovery of operating, general and administrative expenses.
As a result of the adoption of these new accounting standards, the
following changes to the classification of revenue and expenses have
been made:
--------------------------------------------
Three Months Ended June 30,
---------------------------------------------------------------------
(In millions of dollars) 2004 2003
---------------------------------------------------------------------
After Prior to After Prior to
Adoption Adoption Adoption Adoption
Network revenue $ 592.8 $ 594.1 $ 493.2 $ 495.4
Equipment sales 63.2 68.8 39.3 52.5
--------------------- ---------------------
$ 656.0 $ 662.9 $ 532.5 $ 547.9
--------------------- ---------------------
--------------------- ---------------------
Cost of equipment sales $ 114.7 $ 68.4 $ 83.8 $ 54.0
Sales and marketing
expenses 90.2 127.8 82.1 115.9
Operating, general and
administrative expenses 203.9 219.5 184.1 195.4
----------------------------------------------- ---------------------
Operating profit $ 244.2 $ 244.2 $ 179.7 $ 179.7
----------------------------------------------- ---------------------
----------------------------------------------- ---------------------
--------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------
(In millions of dollars) 2004 2003
---------------------------------------------------------------------
After Prior to After Prior to
Adoption Adoption Adoption Adoption
Network revenue $ 1,136.8 $ 1,140.5 $ 954.6 $ 958.4
Equipment sales 112.0 121.8 75.0 99.4
--------------------- ---------------------
$ 1,248.8 $ 1,262.3 $ 1,029.6 $ 1,057.8
--------------------- ---------------------
--------------------- ---------------------
Cost of equipment sales $ 205.9 $ 120.3 $ 157.4 $ 102.4
Sales and marketing
expenses 176.8 246.6 164.9 228.8
Operating, general and
administrative expenses 399.3 428.6 368.9 388.2
--------------------- ---------------------
Operating profit $ 460.9 $ 460.9 $ 332.7 $ 332.7
---------------------------------------------- ---------------------
---------------------------------------------- ---------------------
This change in accounting classification had no effect on the
amounts of reported operating income, net income (loss) or earnings
(loss) per share. All prior period amounts have been conformed to
reflect these changes in classification.
2. Long-term debt:
June 30, December 31,
(In thousands of dollars) 2004 2003
--------------------------------------------------------- -----------
(i) Bank credit facility Floating $ 48,500 $ 138,000
(ii) Senior Secured Notes,
due 2006 10-1/2% 160,000 160,000
(iii) Senior Secured Notes,
due 2007 8.30% - 253,453
(iv) Senior Secured Debentures,
due 2008 9-3/8% - 430,589
(v) Senior Secured Notes,
due 2014 6-3/8% 1,000,350 -
(vi) Senior Secured Notes,
due 2011 9-5/8% 653,562 633,276
(vii) Senior Secured Debentures,
due 2016 9-3/4% 206,606 200,193
(viii) Senior Subordinated Notes,
due 2007 8.80% - 231,443
(ix) Mortgage payable and
capital leases Various 25,099 26,185
--------------------------------------------------------- -----------
2,094,117 2,073,139
Current portion of long-term debt (1,565) (2,378)
--------------------------------------------------------- -----------
2,092,552 2,070,761
Effect of cross-currency interest
rate exchange agreements - 136,464
--------------------------------------------------------- -----------
$2,092,552 $2,207,225
--------------------------------------------------------- -----------
--------------------------------------------------------- -----------
Issued:
In February 2004, the Company issued US$750.0 million 6.375% Senior
Secured Notes due 2014.
On February 20, 2004, the Company entered into US$750.0 million
notional amount of cross-currency interest rate exchange agreements
to reduce the Company's exposure to changes in the exchange rate of
the U.S. dollar as compared to the Canadian dollar. The impact of
these cross-currency interest exchange agreements is to economically
hedge these amounts at an average exchange rate of C$1.33490 to
US$1.00.
Redeemed:
On February 20, 2004, the Company unwound US$333.2 million of
cross-currency interest rate exchange agreements for cash proceeds of
$58.4 million.
On March 26, 2004, the Company redeemed its US$196.1 million Senior
Secured Notes, US$179.1 million Senior Subordinated Notes, and
US$333.2 million Senior Secured Debentures for an aggregate of
US$734.7 million, including payment of redemption premiums. This
resulted in a loss on the repayment of long-term debt of
$2.3 million, which included redemption premiums of $34.7 million,
the write-off of deferred financing costs of $7.8 million, and a
$40.2 million gain on the release of the deferred transition gain
related to the cross-currency interest rate exchange agreements that
were unwound during the quarter which were previously treated as
effective hedges prior to our adoption of new rules with respect to
Hedging Relationships as discussed in Note 1(b).
As indicated in Note 1(b), the Company determined that it would not
account for derivative instruments, including cross-currency interest
rate exchange agreements as effective hedges for accounting purposes.
Accordingly, effective January 1, 2004, the Company records the fair
value of these instruments as a separate component of the balance
sheet. As a result, the effect of the cross-currency interest rate
exchange agreements is no longer recorded as a component of long-term
debt. At June 30, 2004, the fair value of derivative instruments is a
liability of $180.3 million and is disclosed as a separate component
of the balance sheet.
3. Shareholders' equity:
June 30, December 31,
(In thousands of dollars) 2004 2003
------------------------------------------------------------- -----------
Capital stock:
Issued and outstanding-
90,468,259 Class A Multiple
Voting shares $ 962,661 $ 962,661
52,335,707 Class B Restricted
Voting shares (2003 - 51,430,178) 944,290 925,308
------------------------------------------------------------- -----------
1,906,951 1,887,969
Contributed surplus 4,370 -
------------------------------------------------------------- -----------
1,911,321 1,887,969
Deficit (1,394,322) (1,444,889)
------------------------------------------------------------- -----------
$ 516,999 $ 443,080
------------------------------------------------------------- -----------
------------------------------------------------------------- -----------
i. During the six months ended June 30, 2004, the Company issued
905,529 Class B Restricted Voting shares to employees upon the
exercise of employee stock options for cash of $19.0 million.
ii. Stock-based compensation:
On January 1, 2004, the Company adopted CICA Handbook Section
3870 and recorded a charge to opening retained earnings of
$2.3 million for stock options granted to employees after
January 1, 2002 (Note 1(c)).
During the six months ended June 30, 2004, the Company recorded
compensation expense of $2.1 million related to stock options
granted to employees on or after January 1, 2002.
As a result of the above transactions, $4.4 million was recorded
in contributed surplus.
Based on stock options issued subsequent to January 1, 2002, the
stock-based compensation expense for the six months ended
June 30, 2003 would have been $0.7 million, and pro forma net
income for the six months ended June 30, 2003 would have been
$93.0 million or $0.66 per share (basic and diluted).
There were no options granted by the Company for the six months
ended June 30, 2004. The weighted average estimated fair value at
the date of the grant for the options granted by the Company for
the six months ended June 30, 2003 was $10.59 per share. The
"fair value" of each option granted was estimated on the date of
the grant using the Black Scholes Option Pricing Model with the
following assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------------------------------- ---------- ---------- ----------
Risk-free interest rate - 4.66% - 4.66%
Dividend yield - - - -
Volatility factor of the
future expected market
price of the Company's
Class B Restricted
Voting Shares - 56.14% - 56.14%
Weighted average expected
life of the options - 5 years - 5 years
-------------------------------- ---------- ---------- ----------
-------------------------------- ---------- ---------- ----------
4. Earnings per share:
Three Months Ended Six Months Ended
(In thousands, June 30, June 30,
except per share amounts) 2004 2003 2004 2003
---------------------------------------- ---------- ---------- ----------
Numerator:
Net income for the period
- basic and diluted $ 53,823 $ 57,118 $ 52,818 $ 93,749
Denominator:
Weighted average number
of shares - basic 142,627 141,746 142,466 141,743
Effect of dilutive
securities:
Employee stock options 1,123 243 1,106 123
---------------------------------------- ---------- ---------- ----------
Weighted average number
of shares - diluted 143,750 141,989 143,572 141,866
Earnings per share
for the period:
Basic $ 0.38 $ 0.40 $ 0.37 $ 0.66
Diluted 0.37 0.40 0.37 0.66
---------------------------------------- ---------- ---------- ----------
---------------------------------------- ---------- ---------- ----------
5. Pensions:
For the three and six months ended June 30, 2004, the Company has made
required contributions to the RCI pension plan in the amount of
$2.2 million and $3.0 million (2003: $1.5 million and $3.0 million)
respectively, resulting in pension expense of the same amount. In
addition, the Company recorded expense of $0.3 million and $0.7 million
(2003: nil) for the three and six months ended June 30, 2004,
respectively, related to supplemental executive retirement plans that are
unfunded.
6. Employee Share Accumulation Plan:
Effective the first quarter of 2004, the Company launched an employee
share accumulation program that allows employees to voluntarily
participate in a share purchase program. Under the terms of the program,
employees of the Company can contribute a specified percentage of their
regular earnings through regular payroll deductions. The administrator of
the plan then purchases Class B Restricted Voting shares of the Company
on the open market on behalf of the employee.
At the end of each quarter, the Company makes a contribution of 25% of
the employee's contribution in the quarter. The administrator then uses
this amount to purchase additional shares of the Company on behalf of the
employee, as outlined above.
The Company records its contribution as compensation expense, which
amounted to $0.1 million for each of the three and six months ended
June 30, 2004.
7. Consolidated Statement of Cash Flows - Supplemental Information:
The change in non-cash working capital items are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands of dollars) 2004 2003 2004 2003
---------------------------------------- ---------- ---------- ----------
Decrease (increase) in accounts
receivable $ (39,455) $ (1,505) $ (7,168) $ 19,716
Decrease (increase) in
other assets (36,083) 7,834 (23,311) (19,390)
Increase (decrease) in
accounts payable and
accrued liabilities (7,475) (34,571) (104,784) (23,870)
Decrease in unearned revenue (1,336) (12,594) (2,500) (13,454)
Increase (decrease) in amounts
due to (from) affiliated
companies, net (2,442) 380 (285) (4,028)
---------------------------------------- ---------- ---------- ----------
$ (86,791) $ (40,456) $(138,048) $ (41,026)
---------------------------------------- ---------- ---------- ----------
---------------------------------------- ---------- ---------- ----------
The reconciliation of PP&E additions to PP&E expenditures is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands of dollars) 2004 2003 2004 2003
---------------------------------------- ---------- ---------- ----------
Additions to PP&E on the
accrual basis $ (84,992) $ (98,793) $(215,879) $(176,486)
Change in non-cash working
capital items related to PP&E (8,407) 15,537 8,925 (77,781)
---------------------------------------- ---------- ---------- ----------
PP&E expenditures $ (93,399) $ (83,256) $(206,954) $(254,267)
---------------------------------------- ---------- ---------- ----------
---------------------------------------- ---------- ---------- ----------
Supplemental cash flow information:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands of dollars) 2004 2003 2004 2003
---------------------------------------- ---------- ---------- ----------
Interest paid $ 58,922 $ 96,699 $ 90,503 $ 99,867
Income taxes paid 1,596 1,477 3,293 3,255
---------------------------------------- ---------- ---------- ----------
8. Related Party Transactions:
The amounts due from (to) RCI and its subsidiaries and AWE comprise the
following:
June 30, December 31,
(In thousands of dollars) 2004 2003
------------------------------------------------------------- -----------
RCI $ 809 $ (24)
Rogers Cable Inc. ("Cable") 128 (137)
AWE (699) 114
------------------------------------------------------------- -----------
$ 238 $ (47)
------------------------------------------------------------- -----------
------------------------------------------------------------- -----------
The above amounts reflect intercompany charges for capital and operating
expenditures and management fees, and are short-term in nature.
A summary of all significant charges from (to) related parties, which
have been accounted for at exchange amounts, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands of dollars) 2004 2003 2004 2003
---------------------------------------- ---------- ---------- ----------
RCI:
Management fees $ 2,919 $ 2,834 $ 5,838 $ 5,668
Wireless services (282) (149) (609) (602)
Rent income (1,826) (2,158) (3,657) (3,975)
Cost of shared operating
expenses 47,081 45,618 99,282 92,826
Additions to PP&E(1) 4,949 2,814 7,830 6,135
---------------------------------------- ---------- ---------- ----------
52,841 48,959 108,684 100,052
Cable:
Wireless products and
services for resale (5,218) (3,060) (7,014) (5,527)
Subscriber activation
commissions 3,705 1,916 8,501 4,357
Rent income (1,013) (929) (2,024) (1,831)
Wireless services (769) (491) (1,642) (887)
Transmission facilities usage 110 110 220 220
Consolidated billing services (588) (348) (1,164) (634)
---------------------------------------- ---------- ---------- ----------
(3,773) (2,802) (3,123) (4,302)
Rogers Media Inc.:
Advertising 780 1,248 1,426 1,572
Rent income (2,873) (2,703) (5,747) (3,303)
Wireless services (191) (53) (342) (104)
---------------------------------------- ---------- ---------- ----------
(2,284) (1,508) (4,663) (1,835)
AWE:
Roaming revenue (3,771) (2,714) (6,274) (5,689)
Roaming expense 2,990 3,484 6,430 7,787
Over-the-air activation
services (15) 27 31 173
---------------------------------------- ---------- ---------- ----------
(796) 797 187 2,271
---------------------------------------- ---------- ---------- ----------
$ 45,988 $ 45,446 $ 101,085 $ 96,186
---------------------------------------- ---------- ---------- ----------
---------------------------------------- ---------- ---------- ----------
(1) Additions to PP&E relate primarily to expenditures on information
technology infrastructure and call centre technologies.
The Company has entered into certain transactions with Companies, the
partners or senior officers of which are directors of the company and
RCI. During the three and six months ended June 30, 2004 the total
amounts paid by the Company to these related parties for legal services
and commissions paid on premiums for insurance coverage aggregated
$0.5 million and $0.8 million, respectively (three and six months ended
June 30, 2003: $0.5 million and $0.8 million, respectively) and for
interest charges and other financing fees aggregated $1.9 million and
$4.5 million, respectively (2003: $4.2 million and $7.3 million,
respectively).
9. Subsequent Event:
On April 28, the Company received notice from AT&T Wireless Services,
Inc. (AWE) of their intent to explore options to monetize their 34% stake
in Rogers Wireless. On May 20, 2004, the exclusive 21-day negotiation
period (as defined under a August 1999 shareholders' agreement between
Rogers and AWE for the AWE stake) ended without an agreement on price and
a 60 day period began during which AWE was permitted to attempt to sell
its Rogers Wireless shares to third parties. On July 19, 2004, the
Company announced that the disposition process had expired and that AT&T
Wireless had not sold its Rogers Wireless stake. Future initiatives by
AT&T Wireless to sell their 34% stake would require they restart the
disposition process as outlined under the terms of the shareholders'
agreement between the companies.
About the Company:
Rogers Wireless Communications Inc. (TSX: RCM.B; NYSE: RCN) operates Canada's
largest integrated wireless voice and data network, providing advanced voice
and wireless data solutions to customers from coast to coast on its GSM/GPRS
network, the world standard for wireless communications technology. The Company
has approximately 4.1 million customers, and has offices in Canadian cities
across the country. Rogers Wireless Communications Inc. is approximately 55%
owned by Rogers Communications Inc. and 34% owned by AT&T Wireless Services,
Inc.
For Further Information (Investment Community):
Bruce M. Mann, 416.935.3532,
Eric A. Wright, 416.935.3550,
For Further Information (Media):
Heather Armstrong, 416.935.6379,
Quarterly Investment Community Conference Call:
As previously announced, a live Webcast of the quarterly results conference
call with the investment community will be broadcast via the Internet at
http://www.rogers.com/webcast beginning at 10:00 a.m. ET on July 21, 2004. A
re-broadcast of this call will be available on the Webcast Archive page of the
Investor Relations section of http://www.rogers.com/ for a period of at least
two weeks following the call.
END FIRST AND FINAL ADD
DATASOURCE: Rogers Wireless Communications Inc.
CONTACT: PRNewswire -- July 21