/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
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