Document:

exv4w19

 

AUDITORS’ REPORT

To the Directors of

Microcell Telecommunications Inc.

     
We have audited the consolidated balance sheets
of Microcell Telecommunications Inc. as at
December 31, 2003, May 1, 2003 and December 31,
2002, and the consolidated statements of net income (loss) and
deficit and cash flows for the eight months ended
December 31, 2003, the four months ended April 30,
2003 and the years ended December 31, 2002 and 2001. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     
We conducted our audits in accordance with
Canadian generally accepted auditing standards and the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.

     
In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2003,
May 1, 2003 and December 31, 2002, and the results of
its operations and its cash flows for the eight months ended
December 31, 2003, the four months ended April 30,
2003 and the years ended December 31, 2002 and 2001 in
accordance with Canadian generally accepted accounting
principles.

		
	 	
    /s/     ERNST &
    YOUNG LLP
    
	 	
    Chartered Accountants
    

Montreal, Canada,

February 11, 2004

except for note 20 which is as at
November 19, 2004

1

 

MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31		May 1		December 31
			2003		2003		2002
			
		
		

			$				$
					$		[Note 1]
			
			[In thousands of Canadian dollars]
	
    ASSETS
    [note 8]
	
    
    Current assets

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Cash and cash equivalents
    

    	 	 	43,094	 	 	 	111,765	 	 	 	26,979	 
	
    
    Short-term investments
    

    	 	 	60,927	 	 	 	9,912	 	 	 	83,181	 
	
    
    Marketable securities
    

    	 	 	—	 	 	 	—	 	 	 	164	 
	
    
    Receivables [note 3]
    

    	 	 	76,796	 	 	 	64,552	 	 	 	61,889	 
	
    
    Inventories
    

    	 	 	27,593	 	 	 	21,865	 	 	 	19,527	 
	
    
    Prepaid license fees, rental sites and other
    prepaid expenses
    

    	 	 	26,850	 	 	 	34,043	 	 	 	19,021	 
	
    
    Deferred charges
    

    	 	 	10,601	 	 	 	7,044	 	 	 	16,525	 
	
    
    Other current assets
    

    	 	 	6,188	 	 	 	2,906	 	 	 	4,070	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Total current assets

    	 	 	252,049	 	 	 	252,087	 	 	 	231,356	 
	
    
    Property, plant and equipment [note 4]
    

    	 	 	318,041	 	 	 	289,692	 	 	 	655,646	 
	
    
    Intangible assets [note 5]
    

    	 	 	233,819	 	 	 	241,202	 	 	 	2,727	 
	
    
    Long-term investments and other non-current
    assets [note 6]
    

    	 	 	4,797	 	 	 	5,227	 	 	 	12,335	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	808,706	 	 	 	788,208	 	 	 	902,064	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 
	
    LIABILITIES AND SHAREHOLDERS’
    EQUITY
	
    
    Current liabilities

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Accounts payable and accrued liabilities
    [note 7]
    

    	 	 	91,634	 	 	 	65,026	 	 	 	121,539	 
	
    
    Deferred revenues
    

    	 	 	42,328	 	 	 	34,207	 	 	 	37,573	 
	
    
    Derivative instruments [notes 8 and
    20]
    

    	 	 	6,348	 	 	 	—	 	 	 	—	 
	
    
    Current portion of long-term debt
    [notes 8 and 20]
    

    	 	 	9,298	 	 	 	10,000	 	 	 	7,500	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Total current liabilities

    	 	 	149,608	 	 	 	109,233	 	 	 	166,612	 
	
    
    Long-term debt [notes 8 and 20]
    

    	 	 	315,164	 	 	 	340,000	 	 	 	2,032,678	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	464,772	 	 	 	449,233	 	 	 	2,199,290	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Shareholders’ equity
    (deficiency)

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Share capital [notes 9 and 20]
    

    	 	 	338,154	 	 	 	321,049	 	 	 	1,167,678	 
	
    
    Warrants [notes 9 and 20]
    

    	 	 	17,926	 	 	 	17,926	 	 	 	1,770	 
	
    
    Deficit
    

    	 	 	(12,146	)	 	 	—	 	 	 	(2,466,674	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	343,934	 	 	 	338,975	 	 	 	(1,297,226	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	808,706	 	 	 	788,208	 	 	 	902,064	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

Commitments and contingencies
[note 15]

Subsequent events [note 20]

See accompanying notes

2

 

MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF

NET INCOME (LOSS) AND DEFICIT

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization [note 1]
					

			Eight months		Four months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

			$		$		$		$
			
			[In thousands of Canadian dollars,
			except for per share data]
	
    
    Revenues

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Services
    

    	 	 	357,483	 	 	 	170,196	 	 	 	566,706	 	 	 	509,082	 
	
    
    Products
    

    	 	 	35,610	 	 	 	7,498	 	 	 	24,356	 	 	 	32,408	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	393,093	 	 	 	177,694	 	 	 	591,062	 	 	 	541,490	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Costs and expenses
    [notes 10 and 12]

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Cost of services [exclusive of depreciation and
    amortization of $43,567, $56,246, $226,567 and $164,386
    respectively]
    

    	 	 	123,029	 	 	 	59,079	 	 	 	187,042	 	 	 	193,539	 
	
    
    Cost of products
    

    	 	 	93,552	 	 	 	23,416	 	 	 	102,110	 	 	 	143,214	 
	
    
    Selling and marketing
    

    	 	 	73,185	 	 	 	24,585	 	 	 	103,953	 	 	 	119,410	 
	
    
    General and administrative
    

    	 	 	55,306	 	 	 	32,058	 	 	 	106,945	 	 	 	95,130	 
	
    
    Restructuring charges [note 10]
    

    	 	 	—	 	 	 	—	 	 	 	7,494	 	 	 	5,226	 
	
    
    Depreciation and amortization
    [note 10]
    

    	 	 	46,771	 	 	 	59,388	 	 	 	465,815	 	 	 	177,990	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	391,843	 	 	 	198,526	 	 	 	973,359	 	 	 	734,509	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Operating income (loss)
    

    	 	 	1,250	 	 	 	(20,832	)	 	 	(382,297	)	 	 	(193,019	)
	
    
    Interest income
    

    	 	 	2,609	 	 	 	1,888	 	 	 	5,479	 	 	 	6,553	 
	
    
    Interest expenses [note 10]
    

    	 	 	(14,817	)	 	 	(70,608	)	 	 	(226,829	)	 	 	(224,237	)
	
    
    Foreign exchange gain (loss)
    

    	 	 	13,926	 	 	 	136,553	 	 	 	926	 	 	 	(51,129	)
	
    
    Gain on financial instruments
    [note 10]
    

    	 	 	—	 	 	 	—	 	 	 	6,570	 	 	 	—	 
	
    
    Write-down of deferred financing costs and
    deferred gain and loss on financial instruments
    [note 10]
    

    	 	 	—	 	 	 	—	 	 	 	(16,947	)	 	 	—	 
	
    
    Gain (loss) on investments, marketable securities
    and other assets [note 10]
    

    	 	 	2,578	 	 	 	312	 	 	 	(16,086	)	 	 	(33,093	)
	
    
    Share of net loss in investees
    

    	 	 	—	 	 	 	—	 	 	 	(13,212	)	 	 	(5,282	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Income (loss) before income taxes
    

    	 	 	5,546	 	 	 	47,313	 	 	 	(642,396	)	 	 	(500,207	)
	
    
    Income tax benefit (expense) [note 13]
    

    	 	 	(587	)	 	 	(1,796	)	 	 	71,895	 	 	 	1,722	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss)

    	 	 	4,959	 	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	
    
    Accretion on redemption price —
    Preferred Shares [note 9]
    

    	 	 	(17,105	)	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss) applicable to Class A
    and Class B shares [for the eight
    months ended December 31, 2003 only]
    

    	 	 	(12,146	)	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	
    
    Deficit, beginning of period
    

    	 	 	—	 	 	 	(2,466,674	)	 	 	(1,896,173	)	 	 	(1,397,688	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Deficit, end of period

    	 	 	(12,146	)	 	 	(2,421,157	)	 	 	(2,466,674	)	 	 	(1,896,173	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic and diluted earnings (loss) per share
    [note 11]

    	 	 	(3.22	)	 	 	0.19	 	 	 	(2.37	)	 	 	(4.56	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

See accompanying notes

3

 

MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

			$		$		$		$
			
			[In thousands of Canadian dollars,
			except for per share data]
	
    
    OPERATING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net income (loss)
    

    	 	 	4,959	 	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	
    
    Adjustments to reconcile net income (loss) to
    cash provided by (used in) operating activities Depreciation and
    amortization
    

    	 	 	46,771	 	 	 	59,388	 	 	 	465,815	 	 	 	177,990	 
	
    
    Accreted interest on long-term debt
    

    	 	 	2,693	 	 	 	13,425	 	 	 	72,762	 	 	 	158,194	 
	
    
    Amortization of deferred financing costs
    

    	 	 	—	 	 	 	—	 	 	 	9,128	 	 	 	7,674	 
	
    
    Income tax provision
    

    	 	 	(507	)	 	 	—	 	 	 	(73,519	)	 	 	(3,966	)
	
    
    Foreign exchange (gain) loss
    

    	 	 	(14,542	)	 	 	(130,166	)	 	 	(493	)	 	 	50,281	 
	
    
    Write-down of deferred financing costs and
    deferred gain and loss on financial instruments
    

    	 	 	—	 	 	 	—	 	 	 	16,947	 	 	 	—	 
	
    
    Reversal of provision for sales tax
    

    	 	 	—	 	 	 	—	 	 	 	(13,806	)	 	 	—	 
	
    
    Gain on financial instruments
    

    	 	 	—	 	 	 	—	 	 	 	(6,570	)	 	 	—	 
	
    
    Loss (gain) in value of investments and
    marketable securities
    

    	 	 	(2,436	)	 	 	14	 	 	 	16,005	 	 	 	33,079	 
	
    
    Gain on disposal of assets
    

    	 	 	—	 	 	 	(326	)	 	 	—	 	 	 	—	 
	
    
    Share of net loss in investees
    

    	 	 	—	 	 	 	—	 	 	 	13,212	 	 	 	5,282	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	36,938	 	 	 	(12,148	)	 	 	(71,020	)	 	 	(69,951	)
	
    
    Changes in operating assets and liabilities
    [note 14]
    

    	 	 	17,616	 	 	 	26,665	 	 	 	30,038	 	 	 	(52,303	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) operating
    activities

    	 	 	54,554	 	 	 	14,517	 	 	 	(40,982	)	 	 	(122,254	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    INVESTING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Decrease (increase) in short-term investments and
    marketable securities
    

    	 	 	(51,015	)	 	 	73,680	 	 	 	75,851	 	 	 	35,529	 
	
    
    Additions to property, plant and equipment
    

    	 	 	(67,318	)	 	 	(5,500	)	 	 	(124,683	)	 	 	(277,395	)
	
    
    Additions to intangible assets
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(130,000	)
	
    
    Proceeds from termination of derivative
    instruments
    

    	 	 	—	 	 	 	—	 	 	 	31,041	 	 	 	—	 
	
    
    Additions to long-term investments and other
    non-current assets
    

    	 	 	(133	)	 	 	—	 	 	 	(3,728	)	 	 	(12,023	)
	
    
    Proceeds from the sale of long-term investments
    

    	 	 	2,581	 	 	 	2,089	 	 	 	949	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) investing
    activities

    	 	 	(115,885	)	 	 	70,269	 	 	 	(20,570	)	 	 	(383,889	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    FINANCING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Issuance of shares
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	450,755	 
	
    
    Share issuance costs
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(11,434	)
	
    
    Increase in long-term debt
    

    	 	 	—	 	 	 	—	 	 	 	100,000	 	 	 	270,813	 
	
    
    Repayment of long-term debt
    

    	 	 	(7,340	)	 	 	—	 	 	 	(10,732	)	 	 	(270,809	)
	
    
    Deferred financing costs
    

    	 	 	—	 	 	 	—	 	 	 	(19,742	)	 	 	(1,555	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) financing
    activities

    	 	 	(7,340	)	 	 	—	 	 	 	69,526	 	 	 	437,770	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Increase (decrease) in cash and cash equivalents
    for the period
    

    	 	 	(68,671	)	 	 	84,786	 	 	 	7,974	 	 	 	(68,373	)
	
    
    Cash and cash equivalents, beginning of period
    

    	 	 	111,765	 	 	 	26,979	 	 	 	19,005	 	 	 	87,378	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash and cash equivalents, end of
    period

    	 	 	43,094	 	 	 	111,765	 	 	 	26,979	 	 	 	19,005	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Additional information

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Interest paid
    

    	 	 	12,710	 	 	 	13	 	 	 	82,348	 	 	 	49,933	 
	
    
    Income taxes paid
    

    	 	 	1,034	 	 	 	639	 	 	 	2,294	 	 	 	2,249	 

See accompanying notes.

4

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

 

		
	1.	
    Description of Business, Financial
    Reorganization and Basis of Presentation

 

		
		
    Description of Business

     
Microcell Telecommunications Inc.
[“Microcell”] is incorporated under the Canada
Business Corporations Act [“CBCA”] and is a
provider of wireless telecommunications services in Canada. As
at December 31, 2003, Microcell conducted its wireless
communications business through two wholly-owned subsidiaries
[collectively, the “Company”], which were: Microcell
Solutions Inc. [“Solutions”] and Inukshuk Internet
Inc. [“Inukshuk”].

     
Solutions operates a Global System for Mobile
Communication [“GSM”] network across Canada and
markets Personal Communications Services [“PCS”] and
General Packet Radio Service [“GPRS”] under the Fido
brand name pursuant to a 30Mhz PCS license [the “PCS
license”] issued by the Minister of Industry (Canada)
[“Industry Canada”].

     
Inukshuk was awarded Multipoint Communication
Systems [“MCS”] Licenses to deploy a high-speed
Internet Protocol-based data network using MCS technology in
Canada. In November 2003, Inukshuk entered into a new venture
with two partners which, depending on the results of
phase 1 of the project, may result in the deployment of a
MCS network in Canada. As at December 31, 2003, the
activities of this venture were not significant for the Company.

     
The Company continues to experience
growth-related capital requirements arising from the need to
fund network capacity improvements, ongoing maintenance and the
cost of acquiring new PCS customers. Microcell’s ability to
generate positive net income and cash flow in the future is
dependent upon various factors, including the level of market
acceptance of its services, the degree of competition
encountered by the Company, the cost of acquiring new customers,
technology risks, general economic conditions and regulatory
requirements.

 

		
		
    Financial Reorganization

     
On May 1, 2003, the predecessor company of
Microcell [“Old Microcell”], and certain subsidiaries
of Old Microcell, emerged from a restructuring plan under the
Companies’ Creditors Arrangement Act
[“CCAA”] and CBCA. The terms of Old
Microcell’s restructuring plan are set out in Old
Microcell’s plan of reorganization and of compromise and
arrangement [the “Plan”], a copy of which is contained
in the Information Circular and Proxy Statement dated
February 17, 2003 [the “Circular”] filed on SEDAR
on February 19, 2003 and on EDGAR with the
U.S. Securities and Exchange Commission [“SEC”]
on Form 6-K on February 20, 2003. Pursuant to the
Plan, Microcell became a holding company for Old Microcell, its
previous subsidiaries, which amalgamated together to form
Solutions and Inukshuk. The Board of directors was replaced by a
new Board of directors and Microcell’s long-term debt
obligations decreased by approximately $1.6 billion. On
December 31, 2003, Old Microcell was liquidated into
Microcell.

     
Prior to May 1, 2003, Old Microcell’s
Class B Non-Voting Shares were registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934. Under
the terms of the Plan, Microcell issued First Preferred Voting
Shares, First Preferred Non-Voting Shares, Second Preferred
Voting Shares, Second Preferred Non-Voting Shares, Class A
Restricted Voting Shares [“Class A Shares”], new
Class B Non-Voting Shares [“Class B Shares”]
and warrants. Two series of warrants [collectively the
“Warrants”] were issued pursuant to the Plan:
[i] 2-year warrants entitling the holders thereof to
subscribe, until May 1, 2005, for Class A Shares or
Class B Shares of Microcell, as the case may be, at an
exercise price of $19.91 per share [the “Warrants
2005”]; and [ii] 5-year warrants entitling the holders
thereof to subscribe, until May 1, 2008, for Class A
Shares or Class B Shares of Microcell, as the case may be,
at an exercise price of $20.69 per share [the
“Warrants 2008”].

5

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

     
For a more detailed description of the
transactions related to the Plan, readers are referred to the
Plan.

 

		
		
    Basis of Presentation

     
Effective May 1, 2003, the date of
reorganization, the Company has accounted for its financial
reorganization by using the principles of fresh start
accounting. Accordingly, all assets and liabilities were
revalued at estimated fair values and Microcell’s deficit
was eliminated. Microcell determined that its enterprise value
was $689 million of which $350 million has been
allocated to long-term debt and $339 million to equity.
This enterprise value was determined based on several
traditional valuation methodologies, utilizing projections
developed by management including discounted cash flow analysis
and comparable company trading analysis. A comprehensive
revaluation of the assets and liabilities of the Company has
been done based on this enterprise value.

     
The following table summarizes the adjustments
recorded to implement the financial reorganization and to
reflect the fresh start basis of accounting:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			Microcell as at						
			April 30, 2003		Reorganization				Microcell as at
			Prior to		and Fresh Start				May 1, 2003
			Reorganization		Adjustments				After Adjustments
			
		
				

			$		$				$
	
    
    Assets

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Current assets
    

    	 	 	288,849	 	 	 	(36,762	)	 	 	[i]	 	 	 	252,087	 
	
    
    Property, plant and equipment
    

    	 	 	602,066	 	 	 	(312,374	)	 	 	[i]	 	 	 	289,692	 
	
    
    Intangible assets
    

    	 	 	2,727	 	 	 	238,475	 	 	 	[i]	 	 	 	241,202	 
	
    
    Long-term investments and other assets
    

    	 	 	8,972	 	 	 	(3,745	)	 	 	[i]	 	 	 	5,227	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 	 	 	902,614	 	 	 	(114,406	)	 	 	 	 	 	 	788,208	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 
	
    
    Liabilities

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Accounts payable and accrued liabilities
    

    	 	 	196,501	 	 	 	(131,475	)	 	 	[ii]	 	 	 	65,026	 
	
    
    Deferred revenues
    

    	 	 	34,207	 	 	 	—	 	 	 	 	 	 	 	34,207	 
	
    
    Current portion of long-term debt
    

    	 	 	10,000	 	 	 	—	 	 	 	 	 	 	 	10,000	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 	 	 	240,708	 	 	 	(131,475	)	 	 	 	 	 	 	109,233	 
	
    
    Senior Secured Term Loans
    

    	 	 	543,925	 	 	 	(203,925	)	 	 	[ii]	 	 	 	340,000	 
	
    
    Senior Discount Notes
    

    	 	 	1,369,690	 	 	 	(1,369,690	)	 	 	[ii]	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 	 	 	2,154,323	 	 	 	(1,705,090	)	 	 	 	 	 	 	449,233	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	
    
    Shareholders’ equity
    (deficiency)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Share capital
    

    	 	 	1,167,678	 	 	 	(846,629	)	 	 	[ii]	 	 	 	321,049	 
	
    
    Warrants
    

    	 	 	1,770	 	 	 	16,156	 	 	 	[ii]	 	 	 	17,926	 
	
    
    Deficit
    

    	 	 	(2,421,157	)	 	 	2,421,157	 	 	 	 	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 	 	 	(1,251,709	)	 	 	1,590,684	 	 	 	 	 	 	 	338,975	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 
	 	 	 	902,614	 	 	 	(114,406	)	 	 	 	 	 	 	788,208	 
	 	 	 	
	 	 	 	
	 	 	 	 	 	 	 	
	 

6

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Summary of Adjustments

     
[i] The Company revalued its assets and
liabilities and adjusted their carrying values to reflect the
enterprise value of the Company following the financial
reorganization. This resulted in a reduction of the current
assets [mainly consisting of the deferred charges incurred
during the recapitalization process], the property, plant and
equipment, the long-term investments and the accrued
liabilities. The Company also assigned a value, calculated at
management’s best estimate of fair value, to the
Company’s intangible assets, which are the PCS license at
$188 million, determined using the replacement cost based
on comparable transactions, the Fido brand name at
$28.5 million, determined using the replacement cost
method, and the customer list at $24.7 million, determined
using the discounted future cash flows method.

     
[ii] Pursuant to the Plan, the senior secured
term loans of Old Microcell [carrying value of
$553.9 million], the unpaid accrued interest
[$12.2 million], and a net payable to Old Microcell’s
secured creditors relating to cross currency and interest rate
swaps terminated in December 2002 [$9.4 million], were
converted into a term loan of $300 million [the
“Tranche B Debt”], a term loan of
$50 million [the “Tranche C Debt”],
11,766,667 First Preferred Shares [$176.5 million] and
3,600,186 Second Preferred Shares [$54 million] for a total
equity interest in the new Company of 68% and 95.6% of voting
rights.

     
Old Microcell’s senior discount
notes [carrying value of $1.4 billion] and the unpaid
accrued interest thereon [$103.6 million] were converted
into 3,600,186 Second Preferred Shares [$54 million],
30,000 Class A Shares [$0.3 million], 3,578,676
Class B Shares [$36 million], 1,329,312 Warrants 2005
[$1.5 million] and 2,215,521 Warrants 2008
[$4.4 million] for a total equity interest in the new
Company of 31.9% and 4.4% of voting rights.

     
The shareholders of Old Microcell [carrying value
of $1.2 billion] received 22,469 Class B Shares
[$0.2 million], 2,668,990 Warrants 2005 [$3.1 million]
and 4,448,422 Warrants 2008 [$8.9 million] for a total
equity interest in the new Company of 0.1% and no voting rights.

 

		
		
    Comparative Figures

     
Comparative financial statements for periods
prior to May 1, 2003 have been presented pursuant to
regulatory requirements. In reviewing these comparative
financial statements, readers are reminded that they do not
reflect the effects of the Plan nor the application of fresh
start accounting.

 

		
	2.	
    Summary of Significant Accounting
    Policies

     
These consolidated financial statements have been
prepared by management in accordance with Canadian generally
accepted accounting principles [“Canadian GAAP”]. As
further described in note 18, these accounting principles
differ in certain respects from those that would have been
followed if these financial statements had been prepared in
conformity with accounting principles generally accepted in the
United States [“US GAAP”] and related rules and
regulations adopted by the SEC.

     
The preparation of financial statements by
management in accordance with Canadian GAAP requires the
selection of accounting policies from existing acceptable
alternatives. The summary of significant accounting policies is
as follows:

 

		
		
    Use of Estimates

     
The preparation of the consolidated financial
statements 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.

7

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Long-term Investments

     
The consolidated financial statements include the
results of operations of Microcell and all of its subsidiaries
as well as its share of assets, liabilities, revenues and
expenses of all joint ventures, if any, in which the Company
participates. Intercompany transactions and balances are
eliminated on consolidation.

     
The Company accounts for investments in which it
exercises significant influence using the equity method. Other
investments are accounted for at cost. The investments are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable, and a provision for loss in value is recorded when
a decline in value below the carrying amount is considered to be
other than temporary.

 

		
		
    Revenue Recognition

     
Monthly access charges are billed in advance and
recognized when the services are provided and collection is
reasonably assured. Airtime charges are recognized as revenue
when provided. City Fido’s activation fees and related
incremental direct costs are deferred and recognized as revenue
and expenses over the estimated life of a subscriber. Sales of
products such as handsets and related equipment are recognized
when goods are delivered, wireless service is activated, and
collection is reasonably assured. Prepaid service revenues are
deferred and recognized when services are provided. When prepaid
airtime vouchers are sold to retailers, the revenue for airtime
is measured at the amount paid by the subscriber and is recorded
when services are provided to the subscriber. Commissions paid
on prepaid airtime vouchers to third party retailers are
classified within cost of products and cost of services. [See
note 20(4)]

 

		
		
    Subscriber Acquisition Costs

     
The excess of the cost of handsets to the Company
over the amount recovered from sales to subscribers is
recognized when goods are delivered and wireless service is
activated and is recorded in the cost of products. [See
note 20(4)]

 

		
		
    Advertising Costs

     
Advertising costs are expensed as incurred.

 

		
		
    Cash Equivalents

     
Cash equivalents are short-term, highly liquid,
held-to-maturity, investment-grade debt securities with
maturities of 90 days or less from the date of purchase.

 

		
		
    Short-term Investments

     
Short-term investments consist of highly liquid,
held-to-maturity, investment-grade debt securities, such as term
deposits, commercial paper and similar instruments, with
maturities greater than 90 days but not exceeding twelve
months. Short-term investments are accounted for at the lower of
cost and market value. As at December 31, 2003, interest
rates on most of the short-term investments vary from 2.5% to
2.8% [3.5% on May 1, 2003].

 

		
		
    Marketable Securities

     
Marketable securities are recorded at the lower
of cost and fair market value.

8

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Inventories

     
Inventories consist of handsets, subscriber
identity module [“SIM”] cards and accessories held for
resale, and are stated at the lower of cost [on a first-in,
first-out basis] and replacement cost.

 

		
		
    Property, Plant and Equipment

     
Property, plant and equipment are recorded at
cost. The PCS network includes direct costs such as equipment,
material, labor, engineering, site development, interest
incurred during the network buildout, and overhead costs. The
costs of PCS network construction in progress are transferred to
the PCS network in service as construction projects are
completed and put into commercial service. Depreciation starts
when the assets are put into service, and is provided on a
straight-line basis over their estimated useful lives as follows:

	 	 	 	 	 
	
    
    PCS network — Switches
    

    	 	 	7 years	 
	
    
    PCS network — Infrastructure and towers
    

    	 	 	20 years	 
	
    
    PCS network — Radio equipment
    

    	 	 	8 years	 
	
    
    Application hardware and software
    

    	 	 	5 years	 
	
    
    Computer hardware and software
    

    	 	 	3 years	 
	
    
    Office furniture and equipment
    

    	 	 	5 years	 
	
    
    Leasehold improvements
    

    	 	 	Term of the related leases	 

     
For property, plant and equipment that existed as
at May 1, 2003, the above periods of depreciation were
reduced in order to reflect a new cost basis as a result of
applying fresh start accounting.

     
The cost of maintenance and replacement of minor
items of property, plant and equipment are charged to
maintenance expense. Enhancements and improvements are
capitalized.

 

		
		
    Intangible Assets

     
Intangible assets consist of the Company’s
PCS license, the Fido brand name and the customer list. The
customer list is amortized over 30 months. The PCS license
and the Fido brand name were determined to have an indefinite
useful life and are not being amortized. [See note 20(4)]

     
The annual licensing fees are charged to expense
as incurred.

 

		
		
    Impairment of Long-lived
    Assets

     
When events or changes in circumstances indicate
that the carrying amount of a long-lived asset or group of
assets held for use, including property, plant and equipment and
intangible assets subject to amortization, may not be
recoverable, an impairment loss is recognized when the carrying
amount of those assets exceeds the sum of the undiscounted
future cash flows related to them. The impairment loss is
included in the statement of operations and the carrying value
of the asset or group of assets is reduced to its fair value as
determined by the sum of the discounted future cash flows
related to those assets.

     
Intangible assets that are not subject to
amortization are tested for impairment on an annual basis, or
more frequently if events or changes in circumstances indicate
that the assets might be impaired. The impairment test consists
of a comparison of the carrying amount with the fair value of
the intangible asset. When the carrying amount of the intangible
asset exceeds its fair value, an impairment loss is recognized
in an amount equal to the excess.

     
Impairment charge, if any, is presented within
depreciation and amortization expense of the related long-lived
assets in the statement of income (loss).

9

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Derivative Instruments

     
Derivative financial instruments are accounted
for at fair value with changes in fair value affecting income
unless designated as effective hedges in which case the gains
(losses) on these instruments are recognized in the income
statement when the hedged item affects earnings. As at
December 31, 2003, the Company has not designated its
financial instruments as hedges [see note 8].

 

		
		
    Financing Costs

     
The costs of obtaining debt financing are
deferred and amortized over the life of the debt to which they
relate. The costs of issuing equity are recorded as a reduction
of the item to which they relate.

 

		
		
    Stock Option Plan

     
The Company has a stock option plan, which is
described in note 9. The Company has chosen to recognize no
compensation when stock options are granted to employees and
directors under stock option plans with no cash settlement
features. Direct awards of stock to employees and stock and
stock option awards granted to non-employees are accounted for
in accordance with the fair value method of accounting for
stock-based compensation. The fair value of direct awards of
stock is determined by the quoted market price of the
Company’s stock on the grant date, and the fair value of
stock options is determined using the Black-Scholes option
pricing model. Pro forma information regarding net income is
required and has been determined as if the Company had accounted
for its employee stock options under the fair value method
[see note 9].

     
Up to December 31, 2003, no compensation
expense was recognized for these plans when stock options were
issued to employees. Any consideration paid by employees on
exercise of stock options is credited to share capital.

 

		
		
    Income Taxes

     
The Company follows the liability method of
accounting for income tax allocation. Under this method,
deferred income tax assets and liabilities are determined based
on the differences between the financial reporting and tax bases
of assets and liabilities, and are measured using the
substantively enacted tax rates and laws that are expected to be
in effect in the periods in which the deferred income tax assets
or liabilities are expected to be realized or settled. Deferred
income tax assets, net of an appropriate valuation allowance,
are recognized only to the extent that management believes it to
be more likely than not that the assets will be realized and
will first be applied to reduce the unamortized amount of
intangible assets that were recognized as at May 1, 2003.

 

		
		
    Research and Development

     
Research costs are charged against income in the
year of expenditure. Development costs are charged against
income in the year of expenditure unless a development project
meets the criteria under Canadian generally accepted accounting
principles for deferral and amortization.

 

		
		
    Foreign Currency

     
The Company’s functional currency is the
Canadian dollar. Monetary assets and liabilities denominated in
foreign currencies are translated at the rates of exchange
prevailing at the period-end. Revenues and expenses denominated
in foreign currencies are translated at the rates of exchange
prevailing on the transaction dates. Realized and unrealized
gains and losses on currency transactions are included in income
as they arise.

10

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Earnings (Loss) Per Share

     
Basic and diluted earnings (loss) per share are
calculated using the treasury stock method. Basic earnings
(loss) per share is calculated using the weighted average number
of Class A Shares and Class B Shares. Diluted earnings
(loss) per share are calculated taking into consideration the
effect of the exercise of securities, which have a dilutive
effect.

 

		
		
    Recent Developments

     
The CICA modified Section 3870, Stock-based
compensation and other stock-based payments. This section has
been amended to require the expensing of certain stock-based
compensation awards for fiscal years beginning on or after
January 1, 2004. As permitted by this amendment, the
Company will apply this new standard retroactively, without
restatement, beginning January 1, 2004, for options granted
since May 1, 2003. Consequently, the opening deficit as at
January 1, 2004 will be adjusted to reflect an expense of
$1.3 million relating to options granted since May 1,
2003.

     
The CICA also modified Section 3860,
Financial instruments — disclosure and presentation.
This section has been amended to provide guidance for
classifying certain financial instruments that embody
obligations that may be settled by the issuance of the
issuer’s equity shares when the instrument that embodies
the obligations does not establish an ownership relationship.
The new standard is effective for fiscal years beginning on or
after November 1, 2004. Initial application should be
recognized on a retroactive basis and disclosed as an accounting
policy change. As a result, the Company assesses that its
Preferred Shares having an accreted value of $296.9 million
and $284.5 million as at December 31, 2003 and
May 1, 2003, respectively, which are classified as equity
instruments under current rules, would have to be reclassified
as liabilities. The accreted of their redemption price of
$17.1 million during the eight-month period ended
December 31, 2003 presented as an adjustment to the
retained earnings (deficit) would have to be presented as
an interest expense in the determination of the net income
(loss). There would be no impact on the net loss attributable to
Class A and B shares and on the earnings per share.

 

		
	3.	
    Receivables

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-organization
			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    Trade receivables
    

    	 	$	79,901	 	 	$	73,553	 	 	$	73,024	 
	
    
    Allowance for doubtful accounts
    

    	 	 	(6,627	)	 	 	(11,844	)	 	 	(14,885	)
	
    
    Receivable from related companies
    

    	 	 	—	 	 	 	—	 	 	 	866	 
	
    
    Taxes receivable
    

    	 	 	3,164	 	 	 	2,830	 	 	 	2,866	 
	
    
    Interest receivable
    

    	 	 	358	 	 	 	13	 	 	 	18	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	76,796	 	 	 	64,552	 	 	 	61,889	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

11

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
	4.	
    Property, Plant and Equipment

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
											
											Pre-reorganization
											

							
			December 31, 2003		May 1, 2003		December 31, 2002
			
		
		

					Accumulated				Accumulated				Accumulated
			Cost		Depreciation		Cost		Depreciation		Cost		Depreciation
			
		
		
		
		
		

	
    
    PCS network
    

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Switches
    

    	 	$	137,461	 	 	$	18,008	 	 	$	119,034	 	 	$	—	 	 	$	533,511	 	 	$	199,433	 
	 	
    
    Infrastructure and towers
    

    	 	 	111,564	 	 	 	6,034	 	 	 	96,303	 	 	 	—	 	 	 	352,234	 	 	 	231,510	 
	 	
    
    Radio equipment
    

    	 	 	51,747	 	 	 	4,410	 	 	 	33,931	 	 	 	—	 	 	 	256,660	 	 	 	168,680	 
	
    
    Application hardware and software
    

    	 	 	37,912	 	 	 	7,822	 	 	 	26,991	 	 	 	—	 	 	 	198,215	 	 	 	110,413	 
	
    
    Computer hardware and software
    

    	 	 	8,280	 	 	 	1,346	 	 	 	5,277	 	 	 	—	 	 	 	26,426	 	 	 	22,432	 
	
    
    Office furniture and equipment
    

    	 	 	4,860	 	 	 	618	 	 	 	4,491	 	 	 	—	 	 	 	32,588	 	 	 	23,196	 
	
    
    Leasehold improvements
    

    	 	 	5,187	 	 	 	732	 	 	 	3,665	 	 	 	—	 	 	 	26,912	 	 	 	15,236	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	357,011	 	 	 	38,970	 	 	 	289,692	 	 	 	—	 	 	 	1,426,546	 	 	 	770,900	 
	
    
    Accumulated depreciation
    

    	 	 	(38,970	)	 	 	 	 	 	 	—	 	 	 	 	 	 	 	(770,900	)	 	 	 	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net carrying value

    	 	 	318,041	 	 	 	 	 	 	 	289,692	 	 	 	 	 	 	 	655,646	 	 	 	 	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
The PCS network includes PCS network construction
in progress, amounting to $7.7 million as at
December 31, 2003.

 

		
	5.	
    Intangible Assets

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    PCS license
    

    	 	$	188,002	 	 	$	188,002	 	 	$	2,727	 
	
    
    Fido brand name
    

    	 	 	28,493	 	 	 	28,493	 	 	 	—	 
	
    
    Customer list, net of accumulated amortization of
    $7.4 million as at December 31, 2003
    

    	 	 	17,324	 	 	 	24,707	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	233,819	 	 	 	241,202	 	 	 	2,727	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
Radio and spectrum licenses are issued for a term
and may be renewed at Industry Canada’s discretion.
Revocation is rare and licenses have a high expectation of
renewal unless a breach of a license condition has occurred, a
fundamental reallocation of spectrum to a new service is
required, or an overriding policy need arises. The Company
intends to renew the PCS license indefinitely, and expects to be
able to do so. The technology used in wireless
telecommunications is not expected to be replaced by another
technology in the foreseeable future. In December of 2003,
Industry Canada issued its Spectrum Licensing Policy for
Cellular and Incumbent Personal Communications Services, in
which it announced the results of its review of the PCS terms,
fees and conditions, as well as its intention to renew the
Company’s PCS license up to March 31, 2011. Industry
Canada also announced its intention to renew the PCS license
every 10 years instead of every 5 years. Therefore,
the Company anticipates generating sales and cash flows under
its PCS license for an indefinite period of time and as a
result, has classified the PCS license under this basis.

12

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

     
The Company has determined that its Fido brand
name has an indefinite life because there are no legal,
regulatory, contractual or other factors that limit the useful
life of the brand name, the Company considers the brand name to
be effective in the market place and the Company anticipates
generating sales and cash flows under this brand name for an
indefinite period of time.

 

		
	6.	
    Long-Term Investments and Other Non-Current
    Assets

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    Equity interest in a venture capital entity, at
    equity
    

    	 	$	3,955	 	 	$	4,100	 	 	$	9,898	 
	
    
    Other equity interest, at cost
    

    	 	 	189	 	 	 	189	 	 	 	773	 
	
    
    Other non-current assets
    

    	 	 	653	 	 	 	938	 	 	 	1,664	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	4,797	 	 	 	5,227	 	 	 	12,335	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

 

		
	7.	
    Accounts Payable and Accrued
    Liabilities

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    Accounts payable — trade
    

    	 	$	46,548	 	 	$	35,793	 	 	$	22,345	 
	
    
    Accounts payable — property, plant and
    equipment
    

    	 	 	16,420	 	 	 	8,513	 	 	 	5,858	 
	
    
    Accounts payable — related companies
    

    	 	 	—	 	 	 	—	 	 	 	23	 
	
    
    Accrued interest
    

    	 	 	—	 	 	 	—	 	 	 	64,055	 
	
    
    Wages and benefits
    

    	 	 	22,636	 	 	 	13,123	 	 	 	11,355	 
	
    
    Other current liabilities
    

    	 	 	6,030	 	 	 	7,597	 	 	 	17,903	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	91,634	 	 	 	65,026	 	 	 	121,539	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

13

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
	8.	
    Long-Term Debt

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    Tranche B Debt
    

    	 	$	271,769	 	 	$	300,000	 	 	$	—	 
	
    
    Tranche C Debt
    

    	 	 	52,693	 	 	 	50,000	 	 	 	—	 
	
    
    Long-term debt Pre-reorganization:

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Senior Secured Term Loans
    

    	 	 	—	 	 	 	—	 	 	 	590,048	 
	 	
    
    Series B Senior Discount Notes due 2006,
    interest payable semi-annually beginning June 1, 2002
    

    	 	 	—	 	 	 	—	 	 	 	659,394	 
	 	
    
    Series A and B Senior Discount Notes due
    2007, interest payable semi-annually beginning April 15,
    2003
    

    	 	 	—	 	 	 	—	 	 	 	429,443	 
	 	
    
    Series B Senior Discount Notes due 2009,
    interest payable semi-annually beginning December 1, 2004
    

    	 	 	—	 	 	 	—	 	 	 	357,638	 
	 	
    
    Other
    

    	 	 	—	 	 	 	—	 	 	 	3,655	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	324,462	 	 	 	350,000	 	 	 	2,040,178	 
	
    
    Less current portion of principal
    

    	 	 	(9,298	)	 	 	(10,000	)	 	 	(7,500	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	315,164	 	 	 	340,000	 	 	 	2,032,678	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
The minimum contractual payments of
Tranche B Debt and Tranche C Debt for the next five
years are as follows: $9.3 million in 2004;
$9.3 million in 2005; $13.9 million in 2006;
$13.9 million in 2007; and $225.5 million in 2008.

     
The financing arrangements of the Company, as at
December 31, 2003, consisted of the following credit
agreements:

 

		
		
    Tranche A Facility

     
The Company has access to a revolving bank credit
facility [the “Tranche A Facility”] of
$25 million, which bears interest at the prime rate plus
2.5%, base rate plus 2.5% or bankers’ acceptance rate plus
3.5%. Pursuant to the terms of the credit agreement of the
Tranche A Facility, the Company is entitled to raise up to
an additional $50 million in revolving bank credit
facility. The Tranche A Facility is payable in April 2006.
A commitment fee computed at the rate of 1.0% per annum on
the aggregate undrawn amount of the Tranche A Facility is
payable on a quarterly basis. The Tranche A Facility is
collateralized by a first lien on all of the Company’s
assets. As at December 31, 2003 and May 1, 2003, no
amounts were drawn on this facility.

 

		
		
    Tranche B Debt

     
The Tranche B Debt, a term loan in the
amount of $300 million, comprising a Canadian dollar series
in the amount of $104.8 million and a U.S. dollar
series with a principal amount equivalent to Canadian
$195.2 million [US$134.3 million]. The Tranche B
Debt bears interest at the prime rate plus 3.0%, base rate plus
3.0% or bankers’ acceptance rate plus 4.0%. The
Tranche B Debt is payable in quarterly installments, which
started in June 2003 and will mature in December 2008. The
Tranche B Debt is collateralized by a second lien on all of
the Company’s assets. Reimbursements of Tranche B Debt
are as follows: 2.5% of the principal amount was reimbursed in
2003; 3.33% will be reimbursed in 2004; 3.33% in

14

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

2005; 5% in 2006; 5% in 2007; and 80.84% in 2008.
As at December 31, 2003, the effective interest rate on
Tranche B Debt was 6.5%.

     
The Company entered into swap transactions with a
preferred shareholder, who is also a lender, to manage its
exposure to foreign exchange rate fluctuations on part of the
U.S. dollar denominated portion of the Tranche B Debt;
the Company swapped, in November 2003, $50 million
[US$35.5 million] of the principal of the Tranche B
Debt at a rate of 1.4072 and $50 million
[US$36.7 million] of the principal of the Tranche B
Debt at a rate of 1.3634. The swap transactions have a duration
of three months. These swap transactions, which have not been
designated as hedging instruments, are presented at their fair
value as derivative instruments on the balance sheet and changes
in fair value are recognized within foreign exchange gain (loss).

 

		
		
    Tranche C Debt

     
The Tranche C Debt, a term loan in the
amount of $50 million, is payable in April 2013. The
Tranche C Debt bears interest at the rate of 8.0% payable
semi-annually at the Company’s discretion: [i] in
cash; or [ii] accruing and compounding such interest
semi-annually until paid. As at December 31, 2003,
$2.7 million of such accreted interest has been capitalized
to the Tranche C Debt. The Tranche C Debt is
collateralized by a third lien on all of the Company’s
assets.

 

		
		
    Covenants

     
Under the above credit agreements, the Company is
committed to respect certain covenants, including restrictions
on the ability to incur certain indebtedness, pay dividends,
make certain other payments, create liens, sell assets and
engage in mergers.

     
The Company must also maintain certain financial
covenants and ratios under the credit agreements of the
Tranche A Facility and Tranche B Debt, including
minimum EBITDA [as defined in the credit agreements], number of
subscribers, average retail revenue per subscriber per month,
liquidity and maximum capital expenditures.

 

		
		
    Excess Cash Flow Sweep

     
The Articles of the Company, and the credit
agreements governing the Tranche B Debt and Tranche C
Debt, require the Company to make the following payments to the
Tranche B Debt and Tranche C Debt lenders and to the
holders of First and Second Preferred Shares [or Units if
issued]: [i] the net sale proceeds of material asset sales
[sale of more than $2 million]; [ii] 75% of the amount
calculated each fiscal year equal to excess cash flow [as this
term is defined in the Articles of the Company and in the credit
agreements]; and [iii] 75% of the amount of net proceeds
from equity offerings [including proceeds from the exercise of
Warrants]. Each payment on account of material asset sales and
net proceeds from equity offerings has to be made within five
business days following receipt of the proceeds thereof, and
each payment hereunder on account of excess cash flow has to be
made on or before March 31 of each fiscal year, commencing
on March 31, 2004, with respect to the excess cash flow [if
any] for the previous fiscal year.

     
Subject to the maintenance of a minimum cash
balance of $45 million as at each year-end [prior to the
Company’s 25% share of such year’s excess cash flow],
such amounts are to be applied in the order of priority set
forth below when First and Second Preferred Shares are issued:
[i] repayment of the Tranche B Debt, up to 25% of the
principal amount thereof; [ii] payment of interest on the
Tranche C Debt; [iii] payment of dividends on the
First Preferred Shares; [iv] until May 1, 2008, on a
pro rata basis, repayment of the principal amount of the
Tranche C Debt, up to 25% of the principal amount thereof,
and redemption of up to 75% of the number of First Preferred
Shares originally issued; [v] payment of

15

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

dividends on the Second Preferred Shares;
[vi] until May 1, 2008, redemption of up to 75% of the
number of Second Preferred Shares originally issued;
[vii] after May 1, 2008, on a pro rata basis,
repayment of remaining principal amount of the Tranche C
Debt and redemption of First Preferred Shares originally issued;
and [viii] after May 1, 2008, redemption of the
remaining Second Preferred Shares. If First and Second Units are
issued, the order of priority set forth above is substantially
similar, with the exception that the repayment of First and
Second Units is limited to 25% until May 1, 2008.

     
As of December 31, 2003, the Company
reimbursed $0.4 million to the Tranche B Debt, under
the excess cash flow sweep rules, following the sale of its
equity investment in Saraide Inc.

 

		
		
    Long-term Debt —
    Pre-reorganization

     
Prior to the financial reorganization, as at
December 31, 2002, the long-term debt, all of which was in
default, consisted of the following:

 

		
		
    Senior Secured Term Loans

 

		
		
    Tranche A

     
Term Loan of $151.2 million, bearing
interest at the prime rate plus 1% or Bankers’ Acceptance
rate plus 2%, payable in quarterly installments starting in June
2002 and maturing in December 2005.

 

		
		
    Tranche B

     
Term Loan of US$50.9 million, bearing
interest at the U.S. base rate plus 2% or the
U.S. LIBOR rate plus 3%, payable in quarterly installments
starting in June 2002 and maturing in March 2006.

 

		
		
    Tranche C

     
Term Loan of $18.8 million, bearing interest
at the prime rate plus 1% or Eurocanadian plus 2%, payable in
quarterly installments starting in June 2002 and maturing in
December 2005.

 

		
		
    Tranche D

     
Term Loan of $34.2 million, bearing interest
at the prime rate plus 1% or Eurocanadian plus 2%, payable in
quarterly installments starting in September 2002 and maturing
in December 2005.

 

		
		
    Tranche E

     
Term Loan of US$137.6 million, bearing
interest at the U.S. base rate plus 2.25% or the
U.S. LIBOR rate plus 3.25%, payable in quarterly
installments starting in June 2002 and maturing in March 2006.

 

		
		
    Tranche F

     
Term Loan of US$62.9 million, bearing
interest at the U.S. base rate plus 2.5% or the
U.S. LIBOR rate plus 3.5%, payable in quarterly
installments starting in March 2003 and maturing in February
2007.

     
As of December 31, 2002, the full amounts
were drawn on all Tranches of the Senior Secured Term Loans.

     
The Senior Secured Loans were collateralized by
debentures of $1,100,000,000, issued under trust deeds. The
debentures were collateralized by a first ranking security
interest in all property and assets of these companies.

16

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Series B Senior Discount Notes due
    2006

     
The unsecured Senior Discount Notes due 2006
consist of 417,973 Units, each Unit consisting of US$1,000 at
maturity, 14% Series B Senior Discount Notes due on
June 1, 2006 and four initial warrants each to
purchase 2.1899 Class B Non-Voting Shares issued for
gross proceeds of $273.3 million [US$200 million].

 

		
		
    Series A and Series B Senior
    Discount Notes due 2007

     
The unsecured Senior Discount Notes due 2007
consist of $429.4 million, 11 1/8% Series A and B
Senior Discount Notes due on October 15, 2007, issued for
gross proceeds of $250 million.

 

		
		
    Series B Senior Discount Notes due
    2009

     
The unsecured Senior Discount Notes due 2009
consist of US$270 million, 12% Series B Senior
Discount Notes due on June 1, 2009, issued for gross
proceeds of $221.2 million [US$150.5 million].

 

		
	9.	
    Share Capital

 

		
		
    Authorized

     
An unlimited number of Class A Shares;

     
An unlimited number of Class B Shares;

     
An unlimited number of First Preferred Shares,
issuable as First Preferred Voting Shares, First Preferred
Non-Voting Shares, First Preferred Voting 2 Shares and
First Preferred Non-Voting 2 Shares; and

     
An unlimited number of Second Preferred Shares
issuable as Second Preferred Voting Shares, Second Preferred
Non-Voting Shares, Second Preferred Voting 2 Shares and
Second Preferred Non-Voting 2 Shares.

 

		
		
    Class A Shares

 

		
		
    Dividends and Rights upon
    Liquidation

     
Holders of Class A Shares are entitled to
receive dividends, and the remaining assets of the Company on
the winding-up, liquidation or dissolution of the Company, pari
passu with the holders of Class B Shares, on a per share
basis.

 

		
		
    Exchange Rights

     
Each Class A Share may, at the option of the
holders, be exchanged at any time into one Class B Share.

 

		
		
    Class B Shares

 

		
		
    Dividends and Rights upon
    Liquidation

     
Holders of Class B Shares are entitled to
receive dividends, and the remaining assets of the Company on
the winding-up, liquidation or dissolution of the Company, pari
passu with the holders of Class A Shares, on a per share
basis.

17

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Exchange Rights

     
The Class B Shares are exchangeable, at the
option of the holders, into Class A Shares on a
share-for-share basis, in the following circumstances:
[i] any time upon provision by a holder of Class B
Shares of a residency declaration to the Company’s transfer
agent certifying that the holder is a Canadian; [ii] upon a
bid being made for the Class A Shares where no equivalent
bid is made for the Class B Shares, for the purposes of
allowing the Class B Shares to tender to an exclusionary
bid; and [iii] automatically upon the repeal or relaxation
of the Canadian rules governing the Company’s ownership and
control, but only to the extent of such repeal or relaxation and
non-Canadian ownership and control of the Company and its
subsidiaries not otherwise being restricted by law.

 

		
		
    First and Second Preferred Shares,
    excluding First and Second Preferred 2 Shares [the
    “Preferred Shares”]

 

		
		
    Rights upon Liquidation

     
Holders of First Preferred Shares are entitled to
receive, on the winding-up, liquidation or dissolution of the
Company and in priority to any payment or distribution in
respect of shares of any other class, an amount per share equal
to the PS Redemption Price [as described below] plus any
declared but unpaid dividends.

     
Holders of Second Preferred Shares are entitled
to receive, on the winding-up, liquidation or dissolution of the
Company and in priority to any payment or distribution in
respect of shares of any other class, other than the First
Preferred Shares, an amount per share equal to the Preferred
Share Redemption Price [as described below] plus any declared
but unpaid dividends.

 

		
		
    Non-Cumulative Dividend

     
The holders of Preferred Shares are entitled to a
fixed, non-cumulative preferential dividend at the rate of
9% per annum, from time to time and payable semi-annually
in arrears in cash.

 

		
		
    Maturity

     
The Preferred Shares shall be mandatorily
redeemed on May 1, 2013.

 

		
		
    Redemption Price

     
The redemption price of each Preferred Share [the
“PS Redemption Price”] is initially the issue price
therefor, increased at the beginning of each semi-annual period
commencing on November 1, 2003 by [i] an amount equal
to the dividend accrued during such period; less [ii] the
amount of any cash dividend that has been declared and paid in
respect of such semi-annual period. As at December 31,
2003, the PS Redemption Price is estimated to be
$15.91 per share. In the event of any redemption or
mandatory conversion of Preferred Shares other than as at the
end of a semi-annual period, the PS Redemption Price is to be
adjusted by adding the accrued dividend on a pro rata basis with
reference to the number of days from the beginning of the then
current semi-annual period to the date of such redemption or
conversion, less the amount of any cash dividend that has been
declared and paid in respect of such period.

 

		
		
    Redemption

     
The Preferred Shares are redeemable as follows:
[i] in whole or in part at any time at the option of the
Company at the then current PS Redemption Price, payable in
cash, provided however that holders of Preferred Shares may
exercise any conversion rights prior to any such redemption;
[ii] at maturity,

18

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

[a] mandatorily at a price per share equal
to the then current PS Redemption Price payable in cash or
[b] at the Company’s option, if the Class A
Shares and the Class B Shares continue to be listed and
posted for trading on a recognized exchange, in consideration of
the issuance of a number of Class A Shares or Class B
Shares [as the case may be] equal to the PS Redemption Price
divided by the average share price of such shares;
[iii] mandatorily prior to maturity at the then current PS
Redemption Price to the extent that the Company has funds
available for such purpose [determined by reference to certain
thresholds established in the Articles]; and [iv] at any
time prior to maturity, in whole or in part, at the option of
the Company upon payment of the then current PS Redemption Price
by issuing Units composed of a note and a Preferred Voting
2 Share or Preferred Non-Voting 2 Share.

 

		
		
    Intra Class Exchange Rights

     
The First Preferred Non-Voting Shares are
exchangeable, at the option of the holders, into First Preferred
Voting Shares on a share-for-share basis, and the Second
Preferred Non-Voting Shares are exchangeable, at the option of
the holders, into Second Preferred Voting Shares on a
share-for-share basis, in the following circumstances:
[i] at any time upon provision by a holder of Preferred
Non-Voting Shares of a residency declaration to the
Company’s transfer agent certifying that the holder is a
Canadian; [ii] upon a bid being made for the Preferred
Voting Shares where no equivalent bid is made for the Preferred
Non-Voting Shares for the purposes of allowing the Preferred
Non-Voting Shares to tender to an exclusionary bid;
[iii] automatically upon the repeal or relaxation of the
Canadian rules restricting the Company’s ownership and
control, but only to the extent of such repeal or relaxation and
non-Canadian ownership and control of the Company and its
subsidiaries not otherwise being restricted by law. The First
Preferred Voting Shares are exchangeable, at the option of the
holders, into First Preferred Non-Voting Shares on a
share-for-share basis. The Second Preferred Voting Shares are
exchangeable, at the option of the holders, into Second
Preferred Non-Voting Shares on a share-for-share basis.

 

		
		
    Conversion Features

     
The Preferred Shares have the following
conversion features: [i] at any time, the Preferred Voting
Shares and the Preferred Non-Voting Shares are convertible, at
the option of the holders into Class A Shares and
Class B Shares, respectively, on a share-for-share basis;
[ii] if at any time prior to May 1, 2008, the Company
shall complete an offering of Class A Shares or
Class B Shares for gross proceeds of not less than
$150 million and at a per share price equal to or greater
than 200% of the then current PS Redemption Price and the
proceeds thereof are used as provided in the Articles, the
Preferred Voting Shares and the Preferred Non-Voting Shares that
remain outstanding after the application of such proceeds will
be converted, at the option of the Company, into Class A
Shares and Class B Shares, respectively, on a
share-for-share basis; and [iii] if at any time on or after
May 1, 2008, on the 25th day [or if such day is not a
trading day, then on the next following trading day] following
the release by the Company of its quarterly or annual financial
statements, as the case may be, the Preferred Voting Shares and
the Preferred Non-Voting Shares are in-the-money [namely that
the PS Redemption Price is less than the average share price of
the Class A Shares and Class B Shares], they will be
converted automatically into Class A Shares and
Class B Shares respectively on a share-for-share basis.

     
Upon conversion of any Preferred Voting Shares or
Preferred Non-Voting Shares into Class A Shares or
Class B Shares, the holders of such Preferred Voting Shares
or Preferred Non-Voting Shares will have no right to receive any
payment in cash on account of the PS Redemption Price.

 

		
		
    Anti-layering Provisions

     
The Articles of the Company provide that, so long
as there remain outstanding First Preferred Shares [or First
Units, if issued] representing in the aggregate an initial issue
price in excess of $75 million, or

19

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

Second Preferred Shares [or Second Units, if
issued] representing in the aggregate an initial issue price in
excess of $50 million, the approval: [i] by written
resolution signed by the holders of a majority of the aggregate
number [or principal amount, as the case may be] of First
Preferred Shares [or First Units, if issued] and, as the case
may be, Second Preferred Shares [or Second Units if issued] then
outstanding or [ii] by a majority of the holders of First
Preferred Shares [or First Units, if issued] and, as the case
may be, Second Preferred Shares [or Second Units if issued] then
outstanding represented in person or by proxy at a meeting of
such holders called for such purpose, will be required before
the Company and its subsidiaries either [X] issue any
shares ranking prior to or pari passu with the First Preferred
Shares [or First Units, if issued] and, as the case may be,
Second Preferred Shares [or Second Units if issued] or
[Y] incur funded debt [other than permitted debt under the
Company’s credit facilities, First Units and Second Units],
as a result of which the aggregate consolidated funded debt
thereof would be in excess of 4.0 times consolidated annual
EBITDA [as defined in the credit agreements], calculated on a
pro forma basis based upon the four consecutive quarters ended
as at the fiscal quarter-end immediately prior to the date of
the resolution of the Board of the Company approving such
issuance or incurrence, as the case may be.

 

		
		
    Excess Cash Flow Sweep

     
The Preferred Shares are subject to the excess
cash flow sweep described in note 8 of these financial
statements.

 

		
		
    First and Second Preferred 2 Shares
    [the “Preferred 2 Shares”]

 

		
		
    Rights upon Liquidation

     
Holders of First Preferred 2 Shares are
entitled to receive, on the winding-up, liquidation or
dissolution of the Company and in priority to any payment or
distribution in respect of shares of any other class, an amount
per share equal to the Preferred 2 Shares Redemption Price
[the “PS2 Redemption Price”, as described below]
plus any declared but unpaid dividends. Holders of Second
Preferred 2 Shares are entitled to receive, on the
winding-up, liquidation or dissolution of the Company and in
priority to any payment or distribution in respect of shares of
any other class, other than the First Preferred 2 Shares,
an amount per share equal to the PS2 Redemption Price [as
described below] plus any declared but unpaid dividends.

 

		
		
    Dividends

     
The holders of Preferred 2 Shares are not
entitled to receive any dividends in respect thereof.

 

		
		
    Redemption

     
The Preferred 2 Shares will be automatically
redeemed at the PS2 Redemption Price [as described below] upon
the repayment, redemption or conversion of the First and Second
Units, as the case may be, of which they form part. The PS2
Redemption Price is equal to $0.0001 per Preferred
2 Share.

 

		
		
    First and Second Units [the
    “Units”]

     
The Units are hybrid instruments designed to
duplicate the economic interest and other features [including as
to voting entitlements] attaching to the Preferred Shares. Each
Unit is composed of a note, which provides the holder of the
Unit with an economic interest similar to that of a holder of
Preferred Share, together with a First Preferred Voting
2 Share or First Preferred Non-Voting 2 Share [in the
case of First Units] or with a Second Preferred Voting
2 Share or Second Preferred Non-Voting 2 Share [in

20

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

the case of Second Units]. The First Units are
senior in right of payment to the Second Units. As at
December 31, 2003, no Units were issued.

 

		
		
    Issued

 

		
		
    Number of shares issued

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			First		First		Second		Second				
			Preferred		Preferred		Preferred		Preferred				
			Voting		Non-Voting		Voting		Non-Voting		Class A		Class B
			Shares		Shares		Shares		Shares		Shares		Shares
			
		
		
		
		
		

	
    
    Balance as at [May 1, 2003]
    

    	 	 	544,828	 	 	 	11,221,839	 	 	 	106,400	 	 	 	7,093,972	 	 	 	30,000	 	 	 	3,601,145	 
	
    
    Converted
    

    	 	 	(292,532	)	 	 	193,365	 	 	 	(91,618	)	 	 	(114,444	)	 	 	38	 	 	 	305,191	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance as at December 31, 2003

    	 	 	252,296	 	 	 	11,415,204	 	 	 	14,782	 	 	 	6,979,528	 	 	 	30,038	 	 	 	3,906,336	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

 

		
		
    Carrying value of shares issued

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			First		First		Second		Second						
			Preferred		Preferred		Preferred		Preferred						Total
			Voting		Non-Voting		Voting		Non-Voting		Class A		Class B		Value of
			Shares		Shares		Shares		Shares		Shares		Shares		Shares
			
		
		
		
		
		
		

			$		$		$		$		$		$		$
	
    
    Balance as at May 1, 2003
    

    	 	 	8,172	 	 	 	168,328	 	 	 	1,596	 	 	 	106,410	 	 	 	302	 	 	 	36,241	 	 	 	321,049	 
	
    
    Converted
    

    	 	 	(4,510	)	 	 	2,978	 	 	 	(1,412	)	 	 	(1,755	)	 	 	(2	)	 	 	4,701	 	 	 	—	 
	
    
    Accretion on redemption price
    

    	 	 	352	 	 	 	10,311	 	 	 	51	 	 	 	6,391	 	 	 	—	 	 	 	—	 	 	 	17,105	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance as at December 31, 2003

    	 	 	4,014	 	 	 	181,617	 	 	 	235	 	 	 	111,046	 	 	 	300	 	 	 	40,942	 	 	 	338,154	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
Prior to the financial reorganization, authorized
and issued share capital were as follow:

 

		
		
    Authorized —
    Pre-reorganization

     
Unlimited number of Common Shares, each of which
may, at any time, at the holder’s option, be converted into
one Class B Non-Voting Share or into one Class A
Non-Voting Share, if necessary, to comply with the restrictions
on non-Canadian ownership and control.

     
Unlimited number of participating Class A
Non-Voting Shares, each of which may, at any time, at the
holder’s option, be converted into one Class B
Non-Voting Share or into one Common Share, to the extent that
the Company does not cease to comply with the restrictions on
non-Canadian ownership and control as a result.

     
Unlimited number of participating Class B
Non-Voting Shares.

     
Unlimited number of Non-Voting First Preferred
Shares issuable in one or more series.

21

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Issued —
    Pre-reorganization

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
											
					Class A		Class B		
			Common Shares		Non-Voting Shares		Non-Voting Shares		
			
		
		
		Total
			Number		$		Number		$		Number		$		$
			
		
		
		
		
		
		

	
    
    Balance as of December 31, 2001
    

    	 	 	27,631,537	 	 	 	73,888	 	 	 	9,590,000	 	 	 	394,477	 	 	 	202,951,539	 	 	 	699,006	 	 	 	1,167,371	 
	
    
    Issued
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Converted
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Exercise of warrants
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	43,372	 	 	 	307	 	 	 	307	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance as of December 31, 2002

    	 	 	27,631,537	 	 	 	73,888	 	 	 	9,590,000	 	 	 	394,477	 	 	 	202,994,911	 	 	 	699,313	 	 	 	1,167,678	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

 

		
		
    Warrants

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31		May 1		December 31
			2003		2003		2002
			
		
		

			$		$		$
	
    
    3,998,302 Warrants 2005, exercise price of $19.91
    

    	 	 	4,598	 	 	 	4,598	 	 	 	—	 
	
    
    6,663,943 Warrants 2008, exercise price of $20.69
    

    	 	 	13,328	 	 	 	13,328	 	 	 	—	 
	
    
    115,700 initial warrants
    

    	 	 	—	 	 	 	—	 	 	 	1,770	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	17,926	 	 	 	17,926	 	 	 	1,770	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
In connection with the Plan, the Company issued
on May 1, 2003 two series of warrants entitling holders
thereof, at any time, to purchase one Class A Share or
Class B Share as the case may be, for each warrant at the
exercise price until their maturity on May 1, 2005 and
May 1, 2008, respectively.

     
The initial warrants were each exercisable for
2,899 Class B non-voting shares at an exercise price of
US$0.01 per share.

 

		
		
    Employee Stock Purchase Plan

     
The Company has a stock purchase plan for its
employees under which participants can contribute up to 10% of
their salary. The Company makes a contribution in shares for the
benefit of the participant equal to one-third the number of
shares purchased with the participant’s contribution during
the year [up to 5% of the participant’s salary]. The
Company’s contribution is executed only if, on June 30
of the following year, the participant is still an employee of
the Company and still holds the shares purchased with their
contributions during the year. The Company may choose to make
its contribution in treasury shares or to deposit with the
administrative agent of the plan a sufficient amount of money to
enable the administrative agent of the plan to purchase the
appropriate number of shares in the market. The total number of
treasury Class A Shares and Class B Shares that can be
issued by the Company in order to make its contribution pursuant
to this plan shall not exceed 250,000 shares. As at
December 31, 2003, no shares were issued under this stock
purchase plan.

 

		
		
    Stock Option Plan

     
A new stock option plan was implemented on
May 1, 2003. The new stock option plan, as amended on
November 20, 2003, authorizes the issuance of up to 3,000
Class A Shares and 2,006,818 Class B Shares. The Board
may amend, supersede or terminate the stock option plan.

22

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

     
The stock option plan is administered by the
Board, which has sole discretion to designate the recipients of
options and to determine the number of Class A Shares or
Class B Shares of the Company covered by each of such
options, the date of grants and the subscription price of each
option. Each option allows its holder to acquire one
Class A Share or one Class B Share, as the case may
be, at its exercise price following the vesting period. Options
granted under the stock option plan have the terms and
conditions, including exercise price, vesting and expiration, as
established by the Board, from time to time, provided that the
pricing of options is in accordance with the requirements of the
Toronto Stock Exchange and is not less than the market prices
for the Class A Shares and Class B Shares at the time
of the grant of options.

     
During the eight-month period ended
December 31, 2003, the Company granted
1,781,359 options and 48,400 options were forfeited.
As a result, 1,732,959 options were outstanding as of
December 31, 2003. 50%, 25% and 25% will vest and become
exercisable on the second, third and fourth anniversaries of the
grant. Accelerated vesting will be applicable after the first
anniversary date of the grant in the event that the market price
of the shares reaches a certain level.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight		Four		
			Months		Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
	Weighted-Average Assumptions		2003		2003		2002		2001
	
		
		
		
		

	
    
    Risk-free interest rate
    

    	 	 	3.0	%	 	 	3.0	%	 	 	3.0	%	 	 	3.0	%
	
    
    Expected dividend yield
    

    	 	 	0	%	 	 	0	%	 	 	0	%	 	 	0	%
	
    
    Expected share price volatility
    

    	 	 	64.6	%	 	 	107.9	%	 	 	107.9	%	 	 	89.8	%
	
    
    Expected life
    

    	 	 	5.0 years	 	 	 	5.5 years	 	 	 	5.5 years	 	 	 	5.5 years	 

     
For the purposes of pro forma disclosures, the
estimated fair value of the options at the grant date is
amortized to expense over the options’ vesting periods.

     
All the outstanding options granted under the
prior stock option plan were cancelled upon the implementation
of the Company’s financial reorganization on May 1,
2003.

23

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Pro forma disclosure regarding stock options
    plan:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight		Four		
			Months		Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

			$		$		$		$
	
    
    Net income (loss) for basic earnings (loss) per
    share calculation
    

    	 	 	(12,146	)	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	
    
    Stock-based employee compensation costs that
    would have been included in the determination of net income if
    the fair value based method had been applied to all awards as
    reported
    

    	 	 	(1,327	)	 	 	(1,577	)	 	 	(2,228	)	 	 	(6,155	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Pro forma net income (loss) as if the fair value
    based method had been applied to all awards
    

    	 	 	(13,473	)	 	 	43,940	 	 	 	(572,729	)	 	 	(504,640	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic and diluted earnings (loss) per share as if
    the fair value based method had been applied to all awards
    

    	 	 	(3.57	)	 	 	0.18	 	 	 	(2.38	)	 	 	(4.62	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
The following table summarizes information about
stock options outstanding, none of which were exercisable, as of
December 31, 2003:

	 	 	 	 	 	 	 	 	 	 	 	 	 
			
			Options Outstanding
			

			Number		
			Outstanding as at		Weighted-average		Weighted-average
	Range of Exercise Prices		December 31, 2003		Remaining Life		Exercise Price
	
		
		
		

	
    
    $10.50 to $11.25
    

    	 	 	1,648,544	 	 	 	4.48 years	 	 	 	10.51	 
	
    
    $17.75 to $18.74
    

    	 	 	84,415	 	 	 	4.20 years	 	 	 	18.51	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    $10.50 to $18.74
    

    	 	 	1,732,959	 	 	 	4.46 years	 	 	 	10.90	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

24

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

10.     Supplementary
Consolidated Statement of Net Income
(Loss) Information

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			Eight Months		Four Months		Pre-reorganization		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Depreciation and amortization

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Property, plant and equipment
    

    	 	$	38,970	 	 	$	59,121	 	 	$	240,384	 	 	$	176,712	 
	
    
    Intangible assets
    

    	 	 	7,383	 	 	 	—	 	 	 	223,399	 	 	 	—	 
	
    
    Other non-current assets
    

    	 	 	418	 	 	 	267	 	 	 	2,032	 	 	 	1,278	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	46,771	 	 	 	59,388	 	 	 	465,815	 	 	 	177,990	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Interest expenses

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Interest on long-term debt
    

    	 	 	14,705	 	 	 	70,174	 	 	 	208,389	 	 	 	202,429	 
	
    
    Other interest
    

    	 	 	112	 	 	 	434	 	 	 	7,867	 	 	 	13,459	 
	
    
    Amortization of deferred financing costs
    

    	 	 	—	 	 	 	—	 	 	 	10,573	 	 	 	8,349	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	14,817	 	 	 	70,608	 	 	 	226,829	 	 	 	224,237	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Other information

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Bad debt expense
    

    	 	 	2,853	 	 	 	4,153	 	 	 	32,306	 	 	 	16,148	 
	
    
    Advertising costs
    

    	 	 	31,823	 	 	 	8,290	 	 	 	37,341	 	 	 	33,293	 

     
Intangible assets’ amortization for the next
two years is expected to be approximately $8.6 million per
year. Costs of products and costs of services are exclusive of
depreciation and amortization, which are shown separately.

 

		
		
    Post-reorganization

 

		
		
    Gain (Loss) on Investments, Marketable
    Securities and Other Assets

     
During the eight-month period ended
December 31, 2003, the Company received proceeds of
$2.4 million following the sale of its equity investment in
Saraide Inc., which was previously written down to a value of
nil. The entire amount was recorded as a gain on investments.

 

		
		
    Pre-reorganization

 

		
		
    Impairment of Assets

     
In 2002, the Company wrote down the value of its
MCS Licenses to nil and an impairment charge of
$223.4 million was recorded and included with depreciation
and amortization of intangible assets. A related deferred income
tax recovery of $72.9 million was also recorded. Also
included with depreciation and amortization of property, plant
and equipment in 2002 was an impairment charge of
$37.3 million as a result of write-downs related to the
network and to application software.

     
In light of the decline in market conditions for
high-technology companies, the Company reduced the value of
certain of its investments to their net estimated realizable
value. Accordingly, write-downs of $11.8 million were
recorded in 2002 and $28.0 million in 2001.

 

		
		
    Restructuring Charges

     
In 2002, the Company laid off approximately
350 employees [approximately 200 in 2001] to adjust its
work force to the requirements of its operating plan. The
restructuring charges of $7.5 million recorded in 2002
[$5.2 million in 2001] relate primarily to severance
payments to the employees laid off.

25

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Gain on Financial Instruments

     
During 2002, the Company terminated
cross-currency swaps, interest rate swaps and hedging agreements
related to the old long-term debt. These terminations generated
net proceeds of $21.5 million, net deferred gain of
$3.1 million and gain on financial instruments of
$5.5 million. The net gain on financial instruments in 2002
also includes the amortization of the deferred gains of
$1.4 million and the amortization of the deferred losses
generated by the termination of the interest rate swaps of
$0.3 million.

 

		
		
    Write-down of Deferred Financing Costs and
    Deferred Gain and Loss on Financial Instruments

     
In 2002, the Company wrote down
$18.9 million of deferred financing costs,
$17.7 million of deferred loss on financial instruments and
$19.7 million of deferred gain on financial instruments for
a net total of $16.9 million, all of which related to the
Company’s long-term debt, which was in default as at
December 31, 2002.

26

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
	11.	
    Earnings (Loss) Per Share

     
The reconciliation of the numerator and
denominator for the calculation of earnings (loss) per
share is as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Numerator:

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net income (loss) for diluted earnings
    (loss) per share calculation
    

    	 	$	4,959	 	 	$	45,517	 	 	$	(570,501	)	 	$	(498,485	)
	
    
    Accretion on redemption price of First and Second
    Preferred Shares
    

    	 	 	(17,105	)	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss) for basic earnings
    (loss) per share calculation
    

    	 	 	(12,146	)	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	Number	 	 	 	Number	 	 	 	Number	 	 	 	Number	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Denominator: (in thousands)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Weighted-average number of shares outstanding
    

    	 	 	3,774	 	 	 	240,217	 	 	 	240,204	 	 	 	108,915	 
	
    
    Shares issuable pursuant to the exercise of
    initial warrants
    

    	 	 	—	 	 	 	253	 	 	 	253	 	 	 	297	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Number of shares for basic earnings
    (loss) per share calculation
    

    	 	 	3,774	 	 	 	240,470	 	 	 	240,457	 	 	 	109,212	 
	
    
    Additional shares for diluted loss per share
    calculation
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,312	 
	
    
    Shares issuable pursuant to the conversion of
    Preferred Shares
    

    	 	 	18,662	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Shares issuable pursuant to the exercise of stock
    options
    

    	 	 	463	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Number of shares for diluted earnings
    (loss) per share calculation
    

    	 	 	22,899	 	 	 	240,470	 	 	 	240,457	 	 	 	112,524	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic and diluted earnings (loss) per
    share (in dollars)

    	 	 	(3.22	)	 	 	0.19	 	 	 	(2.37	)	 	 	(4.56	)

     
Basic and diluted earnings (loss) per share
are identical, as the effect of dilutive securities is
antidilutive.

12.     Related Party
Transactions

     
Since May 1, 2003, certain holders of the
long-term debt and the derivative instruments are also
shareholders of the Company.

     
During the pre-reorganization period, the Company
has entered into transactions with shareholders, companies under
common control, joint ventures and equity-accounted companies.
These transactions are undertaken in the normal course of
operations and are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related
parties. Amounts due from or to related parties are payable or
receivable in cash on demand. These transactions consist
primarily of the purchase or sale by the Company of engineering,
telecommunications, development and management services or

27

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

equipment. The effect on the consolidated
financial statements, excluding amounts related to long-term
debt and derivative instruments, is as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Costs capitalized to property, plant and
    equipment and deferred charges
    

    	 	$	—	 	 	$	—	 	 	$	—	 	 	$	5,165	 
	
    
    Cost of products and services
    

    	 	 	—	 	 	 	—	 	 	 	3,007	 	 	 	6,965	 
	
    
    General and administrative services
    

    	 	 	—	 	 	 	103	 	 	 	304	 	 	 	562	 
	
    
    Selling and marketing
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	225	 
	
    
    Equipment sales and service revenues
    

    	 	 	—	 	 	 	—	 	 	 	4,698	 	 	 	5,470	 
	
    
    Equipment purchases
    

    	 	 	—	 	 	 	—	 	 	 	224	 	 	 	192	 

13.     Income
Taxes

     
Significant components of the income tax benefit
(expense) consist of the following:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Current income tax benefit (expense) before the
    following:
    

    	 	$	(587	)	 	$	(6,180	)	 	$	(80,484	)	 	$	(40,101	)
	
    
    Tax benefit of previously unrecognized losses and
    temporary differences
    

    	 	 	—	 	 	 	4,384	 	 	 	78,860	 	 	 	37,857	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Current income tax benefit (expense)
    

    	 	 	(587	)	 	 	(1,796	)	 	 	(1,624	)	 	 	(2,244	)
	
    
    Deferred income tax recovery related to reversal
    of temporary differences
    

    	 	 	—	 	 	 	—	 	 	 	73,519	 	 	 	3,966	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Income tax benefit (expense)

    	 	 	(587	)	 	 	(1,796	)	 	 	71,895	 	 	 	1,722	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

28

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

     
The reconciliation of income tax computed at the
statutory income tax rates to the income tax benefit (expense)
is as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Income tax benefit (expense) based on the
    combined statutory income tax rate of 33% [32% in 2002 and 33%
    in 2001]
    

    	 	$	(1,830	)	 	$	(15,613	)	 	$	205,567	 	 	$	165,068	 
	
    
    Non-taxable portion of capital items
    

    	 	 	2,825	 	 	 	16,519	 	 	 	(3,665	)	 	 	(14,596	)
	
    
    Unrecognized tax expense (benefit) of losses and
    temporary differences
    

    	 	 	(913	)	 	 	(5,264	)	 	 	(210,063	)	 	 	(187,376	)
	
    
    Tax benefit of previously unrecognized losses and
    temporary differences
    

    	 	 	—	 	 	 	4,384	 	 	 	78,860	 	 	 	37,857	 
	
    
    Large corporations tax
    

    	 	 	(587	)	 	 	(1,796	)	 	 	(1,624	)	 	 	(2,244	)
	
    
    Other
    

    	 	 	(82	)	 	 	(26	)	 	 	2,820	 	 	 	3,013	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Income tax benefit (expense)

    	 	 	(587	)	 	 	(1,796	)	 	 	71,895	 	 	 	1,722	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
Significant components of the Company’s
deferred tax assets and liabilities as of December 31, 2003
are as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 
							Pre-reorganization
							

			December 31,		May 1,		December 31,
			2003		2003		2002
			
		
		

	
    
    Deferred income tax liabilities:

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Deferred gains and other
    

    	 	$	2,779	 	 	$	517	 	 	$	873	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Total deferred income tax liabilities
    

    	 	 	2,779	 	 	 	517	 	 	 	873	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Deferred income tax assets:

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Tax values of marketable securities and
    investments in excess of accounting values
    

    	 	 	416	 	 	 	416	 	 	 	4,568	 
	
    
    Operating losses carried forward
    

    	 	 	542,552	 	 	 	612,370	 	 	 	481,105	 
	
    
    Tax values of capital assets in excess of
    accounting values
    

    	 	 	55,849	 	 	 	40,553	 	 	 	162,806	 
	
    
    Provisions and other temporary differences
    

    	 	 	23,906	 	 	 	25,651	 	 	 	83,576	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Total deferred income tax assets
    

    	 	 	622,723	 	 	 	678,990	 	 	 	732,055	 
	
    
    Valuation allowance
    

    	 	 	(619,944	)	 	 	(678,473	)	 	 	(731,182	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net deferred income tax assets

    	 	 	2,779	 	 	 	517	 	 	 	873	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net deferred income tax

    	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
Approximately $1.8 billion of the operating
losses carried forward and $200 million of temporary
differences existed at the date of the Company’s financial
reorganization as described in note 1. The tax benefits related
to these operating losses carried forward and temporary
differences were not included in the assets as part of the fresh
start accounting, as a valuation allowance of approximately
$678 million was provided. Accordingly, if and when it is
more likely than not that the tax benefits of these unrecognized
losses carried forward and temporary differences will be
realized, they will be applied to reduce

29

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

unamortized intangible assets to nil. During the
period of eight months ended December 31, 2003, no amount
of tax benefits related to these losses and temporary
differences was realized.

     
As at December 31, 2003, the Company had net
operating losses carried forward for income tax purposes
totalling $1.6 billion, which expire as follows: 2004,
$217.8 million; 2005, $57.9 million; 2006,
$283.7 million; 2007, $282.6 million; 2008,
$322.0 million; 2009, $480.1 million. The Company had
also approximately $234.5 million of deductible temporary
differences.

     
In addition, the use of tax losses carried
forward will generally be restricted in future years to profits
from those businesses carried on prior to the restructuring plan.

14.     Supplementary
Information on Consolidated Statement of Cash Flows

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

	
    
    Receivables
    

    	 	$	(12,244	)	 	$	(2,689	)	 	$	13,783	 	 	$	(18,947	)
	
    
    Inventories
    

    	 	 	(5,728	)	 	 	(4,035	)	 	 	370	 	 	 	17,545	 
	
    
    Prepaid license fees, rental sites and other
    prepaid
    

    	 	 	7,193	 	 	 	(14,188	)	 	 	(1,235	)	 	 	(980	)
	
    
    Deferred charges
    

    	 	 	(3,557	)	 	 	9,481	 	 	 	(5,477	)	 	 	(7,727	)
	
    
    Other current assets
    

    	 	 	(3,282	)	 	 	(34,250	)	 	 	6,754	 	 	 	13,116	 
	
    
    Accounts payable and accrued liabilities
    

    	 	 	27,113	 	 	 	75,712	 	 	 	16,385	 	 	 	(61,289	)
	
    
    Deferred revenues
    

    	 	 	8,121	 	 	 	(3,366	)	 	 	(542	)	 	 	5,979	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net change in operating assets and liabilities
    

    	 	 	17,616	 	 	 	26,665	 	 	 	30,038	 	 	 	(52,303	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

15.     Commitments
and Contingencies

 

		
		
    Operating Leases

     
The aggregate minimum annual payments under
operating leases related to sites, switch rooms, offices and
stores are as follows:

	 	 	 	 	 
			$
			

	
    
    2004
    

    	 	 	34,148	 
	
    
    2005
    

    	 	 	29,774	 
	
    
    2006
    

    	 	 	21,399	 
	
    
    2007
    

    	 	 	17,528	 
	
    
    2008
    

    	 	 	14,653	 
	
    
    Subsequent to 2008
    

    	 	 	41,384	 
	 	 	 	
	 
	 	 	 	158,886	 
	 	 	 	
	 

     
Rental expenses for the eight months ended
December 31, 2003 and for the four months ended
April 30, 2003 amounted to $19.0 million and
$9.7 million respectively [$29.7 million for 2002 and
$29.5 million for 2001].

30

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

     
Under its site leases, the Company is generally
committed to returning each site to its original state. The
associated exit costs are expected to be insignificant because
the Company estimates that most of its lease sites will be
renewed at their expiry. Consequently, no provision has been
recorded for asset retirement obligations and the associated
exit costs will be provided for when such liabilities arise.

 

		
		
    Letters of Credit

     
As at December 31, 2003, the Company had
outstanding letters of credit for an aggregate amount of
$0.4 million [$1.3 million as at May 1, 2003].

 

		
		
    Supply Agreement

     
Under a supply agreement, the Company is
committed until 2006 to acquire certain of its core wireless
network equipment and call server products from a major
supplier. Under this agreement, the Company has no unconditional
purchase commitments.

 

		
		
    PCS License

     
On April 15, 1996, the Company was informed
of the conditions attached to its PCS license, which had an
initial term of five years. On March 29, 2001, Industry
Canada renewed the Company’s PCS license for a second
five-year term, commencing on April 1, 2001. On
December 12, 2003, Industry Canada issued Canada Gazette
Notice DGRB-006-03 announcing that the license terms of existing
cellular and PCS licensees, including the Company, will be
extended to March 31, 2011. Industry Canada also announced
that it will make certain changes to the cellular and PCS
license conditions, including granting licensees the power to
divide and transfer their licenses, by both spectrum amount and
geographic area.

     
Other License conditions detailed in Gazette
Notice DGRB-006-03 that apply to the Company include:

		
	 	     
    [i] to comply with applicable spectrum
    aggregation limits;
    
	 
	 	     
    [ii] to comply with the Canadian ownership
    and control provisions;
    
	 
	 	     
    [iii] to ensure that radio stations are
    installed and operated in compliance with applicable regulations
    from Health Canada [electromagnetic field exposure] and
    Transport Canada [air navigation], and only after meaningful
    consultations have taken place with applicable local land use
    authorities;
    
	 
	 	     
    [iv] to invest a minimum of 2% of adjusted
    gross revenues resulting from operations in the spectrum, over
    the term of the License, in eligible research and development
    activities. As at December 31, 2003, 2% of the
    Company’s adjusted gross revenues represented a cumulative
    amount of $26.7 million. Up to December 31, 2003, the
    Company has spent approximately $15.9 million;
    
	 
	 	     
    [v] to provide for and maintain lawful
    interception activities as authorized by law; and
    
	 
	 	     
    [vi] to offer PCS resale to other PCS
    licensees on a non-discriminatory basis.
    

 

		
		
    MCS Licenses

     
In November 2003, Inukshuk announced the creation
of a new venture with two partners. The new company plans to
build a MCS network to offer high speed Internet, IP-based voice
and local networking services using broadband wireless access
technology. Each partner owns one-third of the new company,
which will operate as an independent entity. The first phase
will allow partners to validate technological and commercial
acceptance to develop a detailed business plan. The first
commercial service launches are

31

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

planned for early 2004. Inukshuk will contribute
the use of 60 MHz of its MCS Licenses, but no monetary
investment. Contributions to the venture will be made in two
phases and the second phase is subject to certain conditions.

     
As of December 31, 2003, the venture was at
an early stage of activities and had no significant impact on
the Company’s financial statements.

 

		
		
    Litigations

     
On April 10, 2002, ASP Wireless Net Inc., or
ASP, a former service provider of Solutions, filed a notice of
arbitration pursuant to an agreement that ASP had with
Solutions. ASP claims in the notice of arbitration that
Solutions has breached its agreements with ASP and ASP therefore
suffered damages in the amount of $18.5 million, which ASP
is claiming from the Company. The breach alleged by ASP relates
to Microcell’s failure to provide ASP access to
Microcell’s PCS network. The Company considers ASP’s
claim frivolous and unfounded in fact and in law and intends to
vigorously contest it.

     
Furthermore, the Company is involved from time to
time in other legal and regulatory proceedings incidental to its
business. The Company does not believe that such proceedings
will have, individually or in the aggregate, a materially
adverse effect on the Company.

 

		
	16.	
    Financial Instruments

 

		
		
    Concentration of Credit Risk

     
The Company has a limited concentration of credit
risk due to the composition of its customer base, which includes
a large number of individuals and businesses. The Company
evaluates the credit-worthiness of customers in order to limit
the amount of credit extended where appropriate and establishes
an allowance for doubtful accounts receivable sufficient to
cover probable and reasonably estimated losses. Cash and cash
equivalents and short-term investments are contracted with a
limited number of financial institutions. However, risk of
losses is managed by the Company through a policy of dealing
only with large, creditworthy financial institutions.

 

		
		
    Interest Rate Risk

     
The Company has exposure to interest rate risk
for both fixed interest rate and floating interest rate
instruments. Fluctuations in interest rates will have an effect
on the valuation and the collection or repayment of these
instruments.

 

		
		
    Foreign Exchange Rate Risk

     
The Company is subject to foreign exchange rate
fluctuations as a portion of its assets and liabilities are
unhedged and denominated in currencies other than Canadian
dollars.

 

		
		
    Fair Value

     
Fair value estimates are made as of a specific
point in time, using available information about the financial
instruments. These estimates are subjective in nature and often
cannot be determined with precision.

     
The fair value of cash and cash equivalents,
short-term investments, receivables, accounts payable and
accrued liabilities approximate their carrying value due to the
short-term maturity of these instruments.

     
The fair value of the Tranche B Debt and Tranche
C Debt is determined based on an amount quoted on the
over-the-counter market at the balance sheet date. The fair
value of the derivative instruments is

32

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

determined based on market rates prevailing at
the balance sheet date obtained from the Company’s
financial institutions for similar derivative instruments.

     
Fair values of the Company’s financial
instruments, as at December 31, 2003, where the fair values
differ from the carrying amounts on the financial statements,
are as follows:

	 	 	 	 	 	 	 	 	 
			Carrying		Estimated Fair
			Value		Value
			
		

			$		$
	
    
    Tranche B Debt
    

    	 	 	271,769	 	 	 	266,334	 
	
    
    Tranche C Debt
    

    	 	 	52,693	 	 	 	41,100	 

 

		
	17.	
    Segmented Information

     
In the preceding years, the Company carried out
its operations through three strategic business segments: PCS,
wireless Internet and investments. As a result of the
restructuring process, the Company realigned its cash flows to
concentrate on the PCS activities. Consequently, the Company has
determined that it operates in one segment since January 1,
2003, as the wireless internet and investments operations were
no longer significant.

 

		
	18.	
    Accounting Principles Generally Accepted in
    the United States

     
These financial statements were prepared in
accordance with Canadian GAAP. The following summary sets out
the material adjustments to the Company’s financial
statements, which would be required to conform to U.S. GAAP.

 

		
		
    Reconciliation of Consolidated Net Income
    (Loss) and Comprehensive Income (Loss)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
							
							Pre-Reorganization
							

					Eight Months		Four Months		
					Ended		Ended		Year Ended		Year Ended
					December 31,		April 30,		December 31,		December 31,
					2003		2003		2002		2001
					
		
		
		

					$		$		$		$
	
    Net income (loss) under Canadian
    GAAP	 	 	4,959	 	 	 	45,517	 	 	 	(570,501	)	 	 	(498,485	)
	
    
    [a]
    

    	 	
    Reversal of amortization of Intangible assets
    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	139	 
	
    
    [b]
    

    	 	
    Share of net income (net loss) in investees
    	 	 	—	 	 	 	(500	)	 	 	4,772	 	 	 	(22,079	)
	
    
    [d]
    

    	 	
    Development costs
    	 	 	—	 	 	 	—	 	 	 	6,108	 	 	 	(3,502	)
	
    
    [e]
    

    	 	
    Stock compensation
    	 	 	—	 	 	 	—	 	 	 	478	 	 	 	(478	)
	
    
    [g]
    

    	 	
    Reorganization items
    	 	 	—	 	 	 	1,253,660	 	 	 	—	 	 	 	—	 
	
    
    [d]
    

    	 	
    Amortization of net deferred gain on financial
    instruments
    	 	 	—	 	 	 	—	 	 	 	(1,110	)	 	 	—	 
	
    
    [d]
    

    	 	
    Amortization of other comprehensive income
    related to financial instruments
    	 	 	—	 	 	 	—	 	 	 	1,110	 	 	 	—	 
	
    
    [i]
    

    	 	
    Changes in fair market value of a fair value hedge
    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,367	 
	
    
    [i]
    

    	 	
    Cumulative effect as of January 1, 2001
    resulting from the adoption of SFAS 133
    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(900	)
	
    
    [h]
    

    	 	
    Effect of legislated tax rate changes on deferred
    tax liabilities
    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	25,771	 
	
    
    [a]
    

    	 	
    Impairment of intangible assets
    	 	 	—	 	 	 	—	 	 	 	(25,771	)	 	 	—	 
	 	 	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

33

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
							
							Pre-Reorganization
							

					Eight Months		Four Months		
					Ended		Ended		Year Ended		Year Ended
					December 31,		April 30,		December 31,		December 31,
					2003		2003		2002		2001
					
		
		
		

					$		$		$		$
	 	 	
    Net income (loss) under U.S.
    GAAP	 	 	4,959	 	 	 	1,298,677	 	 	 	(584,914	)	 	 	(498,167	)
	
    
    [c]
    

    	 	
    Unrealized gain (loss) in value of
    marketable securities
    	 	 	—	 	 	 	(145	)	 	 	(177	)	 	 	322	 
	
    
    [i]
    

    	 	
    Changes in fair market value of cash flow hedges
    	 	 	—	 	 	 	—	 	 	 	367	 	 	 	(1,364	)
	
    
    [d]
    

    	 	
    Reversal of cumulative income taxes related to
    changes in fair market value of cash flow hedges
    	 	 	—	 	 	 	—	 	 	 	1,036	 	 	 	—	 
	
    
    [d]
    

    	 	
    Amortization of other comprehensive income
    related to financial instruments
    	 	 	—	 	 	 	—	 	 	 	(1,110	)	 	 	—	 
	
    
    [i]
    

    	 	
    Write off of other comprehensive income related
    to financial instruments
    	 	 	—	 	 	 	—	 	 	 	(1,968	)	 	 	—	 
	
    
    [i]
    

    	 	
    Cumulative effect as of January 1, 2001,
    resulting from the adoption of SFAS 133
    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,939	 
	 	 	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	
    Comprehensive income (loss) under U.S.
    GAAP	 	 	4,959	 	 	 	1,298,532	 	 	 	(586,766	)	 	 	(495,270	)
	 	 	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	
    Basic and diluted earnings (loss) per
    share under U.S. GAAP [dollars]
    	 	 	(3.22	)	 	 	5.40	 	 	 	(2.43	)	 	 	(4.56	)

 

		
		
    Reconciliation of Consolidated Cash Flow
    Captions

     
There are no significant differences between
Canadian GAAP and U.S. GAAP, which affect the captions of the
cash flow statements.

 

		
		
    Reconciliation of Consolidated Balance
    Sheet Captions

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
													
													Pre-Reorganization
													

							May 1,		
					December 31, 2003		2003		December 31, 2002
					
		
		

					Canadian				U.S.		U.S.		Canadian				U.S.
					GAAP		Adjustments		GAAP		GAAP		GAAP		Adjustments		GAAP
					
		
		
		
		
		
		

					$		$		$		$		$		$		$
	
    Debit (credit)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    [c]
    

    	 	Marketable securities	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	164	 	 	 	145	 	 	 	309	 
	
    
    [a]
    

    	 	Intangible assets	 	 	233,819	 	 	 	—	 	 	 	233,819	 	 	 	241,202	 	 	 	2,727	 	 	 	(2,727	)	 	 	—	 
	
    
    [b]
    

    	 	Long-term investments and other non current assets	 	 	4,797	 	 	 	—	 	 	 	4,797	 	 	 	—	 	 	 	12,335	 	 	 	1,276	 	 	 	13,611	 
	
    
    [f]
    

    	 	Preferred shares	 	 	—	 	 	 	(296,912	)	 	 	(296,912	)	 	 	(284,506	)	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    [f][k]
    

    	 	Share capital	 	 	(338,154	)	 	 	309,058	 	 	 	(29,096	)	 	 	(36,543	)	 	 	(1,167,678	)	 	 	(60,723	)	 	 	(1,228,401	)
	
    
    [f]
    

    	 	 	Deficit	 	 	 	12,146	 	 	 	(12,146	)	 	 	—	 	 	 	—	 	 	 	2,466,674	 	 	 	62,174	 	 	 	2,528,848	 
	
    
    [c]
    

    	 	Accumulated other comprehensive income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(145	)	 	 	(145	)

34

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    [a]             Amortization
    and Impairment of Intangible Assets

     
The PCS license, which included certain
development costs, and other costs associated with obtaining the
PCS license from Industry Canada were deferred under Canadian
GAAP. Under U.S. GAAP, such development costs are expensed
as incurred. This difference created a reversal of amortization
of intangible assets of $0.1 million in 2001. During 2002,
the Company wrote down the value of the MCS Licenses to nil.
Prior to this write-down, the carrying values of these licenses
were $249.2 million and $223.4 million under
U.S. GAAP and Canadian GAAP respectively, representing a
difference of $25.8 million.

 

		
		
    [b]             Investment
    in Entity Subject to Significant Influence

     
Under Canadian GAAP, the investor should continue
to record its portion of investee losses unless the investor
would be unlikely to share in losses of the investee. Under
U.S. GAAP, in situations where an investor is not required
to advance additional funds to the investee and where previous
losses have reduced the common and the preferred stock
investment account to zero, the Company should continue to
report its share of equity method losses in its statement of
operations to the extent of and as an adjustment to the loans to
the investee.

     
In addition, under Canadian GAAP, the share of
net income in an investee that is a private investment company
is calculated based on its realized gains or losses. Under
U.S. GAAP, the share of net income in such investees is
calculated based on both realized and unrealized gains or losses.

 

		
		
    [c]             Marketable
    Securities

     
Under Canadian GAAP, the marketable securities
are recorded as explained in note 2. Under U.S. GAAP,
the marketable securities are classified as available for sale,
and any changes to the market value, net of income taxes, are
recorded in other comprehensive income (loss). Fair value of
marketable securities was $0.3 million as at
December 31, 2002.

 

		
		
    [d]             Deferred
    Charges and Other Assets

     
Under Canadian GAAP, certain development costs
are deferred and amortized. Under U.S. GAAP, such costs
would be expensed as incurred.

     
Under Canadian GAAP, a deferred gain or loss is
recorded upon either the de-designation of a derivative
financial instrument as a hedge or upon the early termination of
a derivative financial instrument qualifying as a hedge. This
deferred gain or loss represents the appreciation or
depreciation of the fair market value of the derivative
financial instrument from its inception until the date of the
de-designation or early termination. The deferred gain or loss
is then amortized over the remaining life of the originally
hedged item. Under US GAAP, the appreciation or depreciation of
the fair market value of the derivative financial instrument
from its inception until the date of its de-designation or early
termination is accumulated in other comprehensive income. The
accumulated balance is then amortized to net income
(loss) over the remaining life of the originally hedged
item.

 

		
		
    [e]     Stock
    Compensation

     
Under Canadian GAAP, certain costs related to
bonuses in connection with stock compensation awards granted
at-the-money with a minimum guaranteed performance, are not
accounted for until the bonus is likely to be paid out and the
amount can be quantified. Under U.S. GAAP, such costs are
accounted for on a combined basis with the recognition of
compensation cost over the service period equal to the bonus
element. As at December 31, 2002, all such stock
compensation awards granted in the past have been cancelled.

35

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    Additional Disclosure Regarding Stock
    Options Plan:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

			$		$		$		$
	
    
    Net income (loss) under U.S. GAAP as reported
    

    	 	 	4,959	 	 	 	1,298,677	 	 	 	(584,914	)	 	 	(498,167	)
	
    
    Accretion on redemption price of First and Second
    Preferred Shares
    

    	 	 	(17,105	)	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net loss applicable to Class A and
    Class B shares [for the eight months ended
    December 31, 2003 only]
    

    	 	 	(12,146	)	 	 	1,298,677	 	 	 	(584,914	)	 	 	(498,167	)
	
    
    Stock-based employee compensation costs that
    would have been included in the determination of net income if
    the fair value based method had been applied to all awards as
    reported [note 9]
    

    	 	 	(1,327	)	 	 	(1,577	)	 	 	(2,228	)	 	 	(6,155	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Pro forma net income (loss) under US GAAP as
    if the fair value based method had been applied to all awards
    

    	 	 	(13,473	)	 	 	1,297,100	 	 	 	(587,142	)	 	 	(504,322	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic and diluted earnings (loss) per share
    under US GAAP as reported
    

    	 	 	(3.22	)	 	 	5.40	 	 	 	(2.43	)	 	 	(4.56	)
	
    
    Pro forma basic and diluted earnings
    (loss) per share under US GAAP as if the fair value method
    had been applied to all awards
    

    	 	 	(3.57	)	 	 	5.39	 	 	 	(2.44	)	 	 	(4.62	)

 

		
		
    [f]     Classification
    of Financial Instrument as Debt or Equity

     
The preferred shares contain conversion features
which result in the Company’s obligation to redeem such
shares being conditional. Therefore, under US GAAP, these shares
are outside the scope of 

 SFAS 150. In such a case, redeemable preferred shares subject
to mandatory redemption requirements that are outside the
control of the issuer are excluded from “shareholders’
equity (deficiency)” and presented separately in the
issuer’s balance sheet between liabilities and
shareholders’ equity (deficiency). The related accretions
are presented as a charge to retained earnings or, in the
absence of retained earnings, by charges against share capital.

 

		
		
    [g]     Reorganization
    Items

     
Under U.S. GAAP, the forgiveness of debt and the
effects of the adjustments on the reported amounts of individual
assets and liabilities resulting from the adoption of fresh
start accounting should be reflected in the predecessor
entity’s final statement of operations. Under Canadian
GAAP, such adjustments are reflected as capital transactions.
The reorganization items in the amount of $1.254 billion
were comprised of $1.366 billion of forgiveness of debt and
$112.5 million of adjustments resulting from the
application of fresh-start accounting.

36

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    [h]     Deferred Tax
    Liabilities

     
Under Canadian GAAP, the impact of changes in
income tax rates on the measurement of deferred tax assets and
liabilities are recorded when the changes in tax rates have been
substantively enacted. Under U.S. GAAP, changes in income
tax rates are recorded when the change in tax rates has been
legislated. Under Canadian GAAP, the estimated deferred tax
liabilities related to the MCS Licenses acquired during 2001, in
the amount of $72.9 million, resulting from the difference
between the carrying value and the tax basis of the asset
acquired, was capitalized to the MCS Licenses. This amount was
determined using substantially enacted tax rates at the date of
acquisition. Using legislated tax rates at the date of
acquisition, the tax liability and related increase in the
carrying value of the asset was $98.7 million under
US GAAP. During 2001, the change in rates was legislated,
which resulted in a decrease in the deferred tax liability and a
credit to income of $25.8 million under U.S. GAAP.

 

		
		
    [i]     Derivative
    Instruments

     
The Financial Accounting Standards Board has
issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statements 137 and 138.
The Company adopted 

 SFAS 133 effective January 1, 2001. The Statements require
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the effective
portion of the fair value of derivatives are either offset
against the change in fair value of assets, liabilities, or firm
commitments through earnings, or recognized in other
comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a
derivative’s change in fair value is recognized in earnings.

     
The adoption of SFAS 133, as amended by
Statements 137 and 138, resulted in the cumulative effect as of
January 1, 2001, of an accounting change of $0.9 million
being recognized as an expense in the statement of net loss and
as a credit of $3.9 million in other comprehensive loss.
For 2001, the adoption of SFAS 133 resulted in $1.4 million
being recognized as income in the statement of net loss and in a
charge of $1.4 million in other comprehensive income. As of
December 31, 2002, all such derivative instruments have
been terminated.

37

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

 

		
		
    [j]     Additional
    Disclosure under U.S. GAAP and SEC Requirements

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
					Pre-reorganization
					

			Eight Months		Four Months		
			Ended		Ended		Year Ended		Year Ended
			December 31,		April 30,		December 31,		December 31,
			2003		2003		2002		2001
			
		
		
		

			$		$		$		$
	
    
    Provision for restructuring charges

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Balance, beginning of period
    

    	 	 	162	 	 	 	1,036	 	 	 	2,314	 	 	 	—	 
	
    
    Addition: severance expenses
    

    	 	 	—	 	 	 	—	 	 	 	7,494	 	 	 	5,226	 
	
    
    Deduction: severance payments and adjustments
    

    	 	 	(162	)	 	 	(874	)	 	 	(8,772	)	 	 	(2,912	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance, end of period
    

    	 	 	—	 	 	 	162	 	 	 	1,036	 	 	 	2,314	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Allowance for doubtful accounts

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Balance, beginning of period
    

    	 	 	11,844	 	 	 	14,885	 	 	 	10,717	 	 	 	4,116	 
	
    
    Addition: bad debt expenses
    

    	 	 	2,853	 	 	 	4,153	 	 	 	32,306	 	 	 	16,148	 
	
    
    Deduction: uncollectible accounts written off,
    net of recoveries
    

    	 	 	(8,070	)	 	 	(7,194	)	 	 	(28,138	)	 	 	(9,547	)
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance, end of period
    

    	 	 	6,627	 	 	 	11,844	 	 	 	14,885	 	 	 	10,717	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

     [k]     Option
to Purchase Class A Non Voting Shares

     
In 1996, an amount of $60.7 million was
expensed with a corresponding increase in share capital under
U.S. GAAP representing stock options recorded using
APB 25.

19.     Comparative
Figures

     
Some of the comparative figures have been
reclassified to conform to the presentation adopted in the
current year.

20.     Subsequent
Events

     
(1) On March 17, 2004, the Company
obtained financing of an aggregate principal amount equivalent
to $450 million for its wholly owned subsidiary, Solutions,
from a syndicate of lenders. The proceeds were used mainly to
refinance the Company’s previous senior secured credit
facilities (see note 8). The amended facilities consist of
a six-year $50 million first lien revolving credit
facility, and of a seven-year first lien term loan and of a
seven-and-a-half-year second lien term loan, each in an
aggregate principal amount equivalent to $200 million. The
revolving credit facility is denominated in Canadian dollars,
and both term loans are denominated in U.S. dollars. Pricing is
LIBOR plus 4% for the revolving credit facility and the first
lien term loan and LIBOR plus 7% for the second lien term loan.
The loan pricing for the second lien term loan includes a LIBOR
floor of 2%. The credit facilities are secured by a pledge on
substantially all of the Company’s assets.

     
(2) In March 2004, the Company has entered
into swap transactions to manage its exposure to foreign
exchange rate fluctuations on the new U.S.-dollar-denominated
first and second lien term loan described above. The Company
swapped the total principal of both term loans in the amount of
$400 million [US$299.9 million] at a rate of 1.3340. The
Company also swapped the floating interest rate of Libor plus 4%
on the first lien term loan, payable in US dollars, to a
floating interest rate of Libor plus 5.085%, payable in Canadian
dollars. The Company also swapped the floating interest rate of
Libor plus 7% on the second lien term loan, payable in
US dollars, to a floating interest rate of Libor plus
8.485%,

38

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

payable in Canadian dollars. The maturity of the
swap transactions corresponds to the maturity of both term
loans. These swap transactions are presented at their fair value
as derivative instruments on the balance sheet and changes in
fair value are recognized in income as foreign exchange gains or
losses.

     
The Company’s swap agreements include a
recouponing provision which allowed both parties to enter into
an amendment of the economic variables when the fair market
value of the swaps exceed a threshold of $16 million, in
such manner that the market value is reduced to an amount no
greater than $16 million. As of September 30, 2004, an
amendment occurred between the parties to revise the limit of
$16 million to $24.8 million. Consequently, the
economic variables were amended to reduce the market value of
the swaps from $34.4 million payable by the Company to
$24.7 million, generating a payment by the Company to the
counterparties of $9.7 million on October 3, 2004.
Under this amendment, the floating interest rates of the
Company’s swap agreements relating to its Term Loan A and
Term Loan B were reduced to LIBOR plus 4.616% and LIBOR plus
8.006% respectively.

     
(3) Pursuant to a final prospectus dated
March 24, 2004, the Company distributed to the holders of
its class A restricted voting shares, class B non-voting shares,
First Preferred Voting Shares, First Preferred Non-Voting
Shares, Second Preferred Voting Shares and Second Preferred
Non-Voting Shares, rights to subscribe for an aggregate of
4,519,636 class B non-voting shares. Each five rights entitled
the holder thereof to purchase one class B non-voting share at a
subscription price of $22 per share. In connection with the
rights offering, the Company entered into a standby purchase
agreement with COM Canada, LLC [“COM”] pursuant to
which it has agreed to purchase, at the rights subscription
price, all class B non-voting shares not otherwise purchased
pursuant to the rights offering. In addition, to the extent COM
purchased less than $50 million of such shares, it
committed to purchase, at the subscription price, additional
class B non-voting shares having an aggregate subscription price
equal to the deficiency.

     
The closing of the rights offering occurred on
April 30, 2004. The rights offering resulted in the
issuance by Microcell of 4,519,636 class B non-voting shares.
COM purchased concurrently, at a price of $22.00 per share,
2,272,727 class B non-voting shares. Furthermore, the Company
granted COM, 3,977,272 warrants to acquire, at a price of $22.00
per share, additional class B non-voting shares for exercise at
a later date. The net proceeds from the rights offering and
private placement to COM amounted to approximately $147 million
[net of approximately $2 million of issuance fees] and have
been used by Microcell to redeem 75,233 outstanding preferred
shares, at a price of $16.39 per share, for a total of
$1.2 million. The remaining balance of $145.8 million will
be used to fund capital expenditures and for general corporate
purposes.

     
As a result, the Company’s share capital as
at May 3, 2004, was composed of the following: 235,961
class A restricted voting shares; 29,079,353 class B non-voting
shares; 3,998,302 Warrants 2005; 6,663,943 Warrants 2008; and,
3,977,272 new warrants issued to COM. In accordance with the
warrant indentures governing the Warrants 2005 and the Warrants
2008, the number of shares issuable upon the exercise of the
Warrants 2005 and the Warrants 2008 has been adjusted from 1.0
to 1.02 Class A Share or Class B Shares, as the case
may be, for each warrant. This adjustment was made as a result
of the Company’s rights offering.

     
(4) On March 19, 2004, the Company
received a comment letter from the SEC in connection with its
review of the Company’s registration statement filed on
March 3, 2004 for the registration of its Class A
Shares and Class B Shares issuable upon exercise of the
Warrants 2005 and the Warrants 2008. The Company responded to
the SEC’s March letter and filed an amended registration
statement on June 29, 2004. The Company received a letter
to its response on August 9, 2004. The Company responded to
the SEC’s August letter and filed an amended registration
statement on October 22, 2004. The Company received a
letter to its response on November 5, 2004. The SEC staff,
among other things, has questioned whether the Company’s
Fido brand name has an indefinite useful life and consequently
whether it should be subject to periodic amortization. The
Company believes that such brand name should be

39

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

considered to have an indefinite life. However,
were periodic amortization to be applied, assuming
hypothetically a useful life of ten years, this would reduce net
income by $1.9 million, increase loss per share by $0.50 but
have no effect on cash flows for the eight months ended
December 31, 2003, and shareholders’ equity would
decrease by $1.9 million as of December 31, 2003. The
hypothetical amortization period of ten years is presented for
illustrative purposes only.

     
The SEC staff, amongst other things, has also
asked the Company for additional information regarding certain
of the Company’s accounting policies regarding revenue
recognition and measurement and related costs, including the
recognition of both revenues and related costs associated with
the sale of handsets and prepaid airtime vouchers to the
Company’s third party retailers. As described in
note 2, sales of products such as handsets and their
related costs are recognized when goods are delivered, wireless
service is activated and collection is reasonably assured. For
prepaid airtime vouchers, the revenue is measured at the amount
paid by the subscribers and is recorded when services are
provided to the subscriber and related commissions paid to third
party dealers are classified within cost of product. The Company
believes these accounting policies are appropriate based on
risks assumed by the Company until the handset is activated or
prepaid airtime vouchers are sold and used by the Company’s
ultimate customers. Alternatively, other parties, including the
SEC, could assess that the sale of handset and associated costs
be recognized upon the delivery of the handset to third party
retailers or to be deferred and amortized over the expected life
of the customer. For the prepaid airtime vouchers,
alternatively, other parties, including the SEC, could assess
that the commissions to the third party dealers be considered as
a discount and be classified as a reduction of service revenues.
As at December 31, 2003, the balance sheet includes
deferred revenues and deferred costs of $2.6 million and
$8.7 million respectively in connection with handsets at
the dealers location not yet activated by the ultimate
customers. Commissions paid to third party retailers for the
prepaid airtime vouchers totaled $8.3 million,
$4.7 million, $12.8 million and $14.9 million for
the eight-month period ended December 31, 2003, the
four-month period ended April 30, 2003 and the years ended
December 31, 2002 and 2001 respectively.

     
During the first quarter of 2004, the Company
introduced a new retention program, the “Fido
Rewards,” which allows its postpaid customers to accumulate
“FidoDollars” based on their spending. Each FidoDollar
allows its holder to obtain a discount of $1 on the suggested
retail price of a future purchase of a handset. Since this
handset will generate future service revenues after its
acquisition, the Company will account for the cost of this
reward program, consisting primarily of the subsidy on the
handset, when such FidoDollars are redeemed. At that date, the
Company will recognize as equipment revenue the amount received
from its customers, net of applicable FidoDollars, as well as
the cost of the related handset. The Company accrues for its
estimated obligation as awards are earned by its customers which
are registered with the program. The SEC staff has also asked
for additional information regarding this new program. The
Company believes that the accounting treatment for this program
is appropriate since the FidoDollars can be used only to acquire
handsets that will allow the Company to continue to generate
service revenues following the exercise of such rewards.
Alternatively, other parties, including the SEC, could assess
that such rewards be accounted for in reduction of service
revenues and that the total amount of fidodollars be recognized
when such fidodollars are earned by the customer instead of when
such FidoDollars are used.

     
Following its acquisition by Rogers Wireless
Inc,, the Company decided not to register the warrants with the
SEC, therefore, the Company intends to withdraw its F-1 filing.

     
(5) On April 21, 2004, UBS Wireless
Services, Inc., an Ontario corporation that manufactures and
operates wireless products and services, filed a lawsuit against
Microcell, Solutions, Inukshuk and Allstream in the Ontario
Superior Court of Justice. In its statement of claim, UBS
claims, among other things, for damages in the amount of
$160 million from each of Microcell, Solutions and Inukshuk
for breach of contract, breach of confidence and breach of
fiduciary duty and punitive damages. UBS also claims from
Inukshuk, as an alternative to the damages claims, an order for
specific performance of a

40

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

conditional agreement between Inukshuk and UBS
with respect to the use of 38 MHz of Inukshuk’s spectrum by
UBS. UBS also claims certain other equitable relief, including
disgorgement of profits that UBS alleges would otherwise
unjustly enrich Inukshuk, Solutions and Microcell. The action is
at a very early stage with no statement of defence yet
delivered. Based on information currently available, management
considers that the companies have substantive defences to the
action brought by UBS and intend to vigorously defend the action.

     
(6) On August 9, 2004, a proceeding
under the Class Actions Act (Saskatchewan) has been brought
against Microcell and other providers of wireless
telecommunications services in Canada. The proceeding involves
allegations of deceit, misrepresentation and false advertising
by wireless telecommunications service providers with respect to
the monthly system access fees being charged to customers. The
plaintiffs seek unquantified damages from the defendant wireless
telecommunications service providers, plus costs and
pre-judgment and post-judgment interest. Microcell believes it
has good defences to the allegations made by the plaintiffs.
Further, the proceeding has not been certified as a class action
and it is too early to determine whether the proceeding will
qualify for certification as a class action.

     
(7) On September 19, 2004, the special
committee of Microcell’s board of directors met to review
the terms of the offers submitted by Rogers Wireless Inc.
(“Rogers”) to purchase all Microcell’s
Class A Shares for $35.00 per share, Class B Shares
for $35.00 per share, Warrants 2005 for $15.79 per warrant and
Warrants 2008 for $15.01 per warrant, and the terms of a
proposed support agreement. Following Microcell’s special
committee’s review of the relevant considerations and based
upon the advice received from its legal and financial advisors
and the opinions of its financial advisors to its board of
directors to the effect that, as at such date and subject to the
matters stated in such opinions, the consideration to be
received by holders of shares under the share offers was fair,
from a financial point of view, to such holders,
Microcell’s special committee unanimously concluded that
the share offers were fair to the holders of shares and in the
best interests of Microcell and determined to unanimously
recommend that Microcell’s board of directors recommend
that holders of shares accept the share offers.

     
On September 19, 2004, Microcell’s
board of directors met immediately following the meeting of its
special committee and confirmed and ratified the special
committee’s recommendation. At such meeting,
Microcell’s board of directors approved the entering into
of a support agreement in connection therewith. Microcell
entered into a support agreement late on September 19, 2004
in respect of the Rogers offers. In accordance with the support
agreement, Microcell’s board of directors also resolved on
such date to waive the application of certain provisions of the
shareholder rights plan to allow Rogers to proceed with the
Rogers offers without any dilutive effects.

     
On September 20, 2004, Microcell and Rogers
jointly announced the execution of the support agreement with
respect to the Rogers offers and on November 8, 2004,
Rogers announced that the terms and conditions of its offers for
the securities of Microcell have been satisfied with the
necessary number of securities having been successfully tendered
and regulatory approvals secured to complete the acquisition. As
a result of the successful tender offers, Rogers has taken up
and accepted for payment approximately 181,721 Class A
Shares, 28,389,649 Class B Shares, 3,296,652 Warrants 2005
and 5,405,387 Warrants 2008, being all of the securities of
Microcell validly tendered to the offers and not withdrawn prior
to the 5:00 p.m. November 5, 2004 expiry time. The tendered
securities represent approximately 96% of the outstanding
Class A Shares, 92% of the outstanding Class B Shares,
82% of the outstanding Warrants 2005 and 81% of the outstanding
Warrants 2008.

     
The change in control described in note 7
constitutes an event of default under the Company’s credit
agreements. On November 4, 2004, the administrative agent,
on behalf of the Company’s secured lenders, has waived the
event of default arising from the change in control until the
earlier of (1) 90 days after the completion of the
acquisition of Microcell by Rogers, and (2) March 1, 2005.
However, the Company gave notice of prepayment of its
outstanding debt and related derivative financial instrument
positions and

41

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

such prepayment occurred on November 16,
2004. On this date the Company repaid its long-term debt in the
amount of $362.1 million and the derivative instruments
were terminated generating a payment of $64.6 million to
the counterparty. These payments were financed with cash on hand
and an advance of $220 million from Rogers. A call premium
fee, in the amount of approximately $5.4 million was also
paid by the Company with respect to the prepayment of its Term
loan B debt. Finally, deferred financing costs in the amount of
approximately $11.9 million were written off by the Company.

     
As a result of this acquisition by Rogers, all
the members of Microcell’s board of directors and certain
senior officers of Microcell, including the President and Chief
Executive Officer [the “CEO”] and the Chief Financial
Officer [the “CFO”], have resigned on November 9,
2004. On the same day, Microcell announced the composition of
its new board of directors and the nomination of the new CEO and
the new CFO of Microcell.

     
In conjunction with its strategic review process,
Microcell has incurred both financial and legal fees. The
Company has engaged two financial advisors to determine the best
way to maximize value for all security holders. Based on Rogers
offers, the final financial advisor fees amounted approximately
to $13.7 million of which $2.1 million have already
been paid. Furthermore, approximately $12.8 million of
legal and other general expenses related to this process were
incurred. Finally, the consequential impact of the offers on
Microcell’s share price led to an accelerated vesting of
shares under the Company’s stock option plan, resulting in
an acceleration of a compensation expense of $7.8 million
that the Company would have otherwise recognized over the
remaining initial vesting period. On November 9, 2004, all
of the 1,319,306 outstanding stock options were exercised.

     
On November 19, 2004, as provided for in the
agreement governing the venture described in note 1, the Company
gave notice of its intent to purchase the share of the venture
currently owned by one of the other two partners in the venture.
Should the third partner make the same offer to the selling
partner, the Company would acquire 50% of the selling
partner’s share for which the Company estimates the cost to
be between approximately $4 million to $5 million.
Following the upcoming change in the ownership of the venture
and the anticipated beginning of Phase 2 for the deployment of a
MCS network in Canada, the Company will reassess the accounting
of its investment in the venture. Up to September 30, 2004,
this investment was accounted for using the equity method.

42

 

MICROCELL TELECOMMUNICATIONS INC.

INTERIM CONSOLIDATED BALANCE SHEETS

[Unaudited]

	 	 	 	 	 	 	 	 	 
			
			As at
			

			September 30,		December 31,
			2004		2003
			$		$
			
		

					[Note 1]
			
			(In thousands of
			Canadian dollars)
	
    ASSETS [note
    5]
	
    
    Current assets

    	 	 	 	 	 	 	 	 
	
    
    Cash and cash equivalents
    

    	 	 	110,977	 	 	 	43,094	 
	
    
    Short-term investments
    

    	 	 	22,804	 	 	 	60,927	 
	
    
    Receivables
    

    	 	 	91,430	 	 	 	76,796	 
	
    
    Inventories
    

    	 	 	51,038	 	 	 	27,593	 
	
    
    Prepaid license fees, rental sites and other
    prepaid expenses
    

    	 	 	31,998	 	 	 	26,850	 
	
    
    Deferred charges
    

    	 	 	21,280	 	 	 	10,601	 
	
    
    Other current assets
    

    	 	 	4,679	 	 	 	6,188	 
	 	 	 	
	 	 	 	
	 
	
    
    Total current assets

    	 	 	334,206	 	 	 	252,049	 
	
    
    Property, plant and equipment
    

    	 	 	462,161	 	 	 	318,041	 
	
    
    Intangible assets
    

    	 	 	226,885	 	 	 	233,819	 
	
    
    Deferred charges and other non-current assets
    

    	 	 	33,147	 	 	 	653	 
	
    
    Long-term investments
    

    	 	 	4,146	 	 	 	4,144	 
	 	 	 	
	 	 	 	
	 
	 	 	 	1,060,545	 	 	 	808,706	 
	 	 	 	
	 	 	 	
	 
	
    LIABILITIES AND SHAREHOLDERS’
    EQUITY
	
    
    Current liabilities

    	 	 	 	 	 	 	 	 
	
    
    Accounts payable and accrued liabilities
    

    	 	 	127,982	 	 	 	91,634	 
	
    
    Deferred revenues
    

    	 	 	47,450	 	 	 	42,328	 
	
    
    Derivative instruments [note 5]
    

    	 	 	9,677	 	 	 	6,348	 
	
    
    Current portion of long-term debt [note 5]
    

    	 	 	12,000	 	 	 	9,298	 
	 	 	 	
	 	 	 	
	 
	
    
    Total current liabilities

    	 	 	197,109	 	 	 	149,608	 
	
    
    Long-term debt [note 5]
    

    	 	 	360,616	 	 	 	315,164	 
	
    
    Derivative instruments [note 5]
    

    	 	 	24,740	 	 	 	—	 
	 	 	 	
	 	 	 	
	 
	 	 	 	582,465	 	 	 	464,772	 
	 	 	 	
	 	 	 	
	 
	
    
    Shareholders’ equity

    	 	 	 	 	 	 	 	 
	
    
    Share capital [note 6]
    

    	 	 	486,245	 	 	 	338,154	 
	
    
    Warrants [note 6]
    

    	 	 	29,202	 	 	 	17,926	 
	
    
    Contributed surplus [note 2]
    

    	 	 	4,288	 	 	 	—	 
	
    
    Deficit
    

    	 	 	(41,655	)	 	 	(12,146	)
	 	 	 	
	 	 	 	
	 
	 	 	 	478,080	 	 	 	343,934	 
	 	 	 	1,060,545	 	 	 	808,706	 
	 	 	 	
	 	 	 	
	 
	
    
    Contingencies [note 8]
    

    	 	 	 	 	 	 	 	 
	
    
    Commitment [note 1]
    

    	 	 	 	 	 	 	 	 

See accompanying notes.

43

 

MICROCELL TELECOMMUNICATIONS INC.

INTERIM CONSOLIDATED STATEMENTS OF

NET INCOME (LOSS) AND RETAINED EARNINGS
(DEFICIT)

[Unaudited]

	 	 	 	 	 	 	 	 	 	 	 	 	 
			Nine Months		Five Months		Four Months
			Ended		Ended		Ended
			September 30, 2004		September 30, 2003		April 30, 2003
			$		$		$
			
		
		

							[Pre-reorganization]
			
			[In thousands of Canadian dollars,
			except for per share data]
	
    
    Revenues

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Services
    

    	 	 	445,935	 	 	 	222,866	 	 	 	170,196	 
	
    
    Products
    

    	 	 	36,168	 	 	 	18,793	 	 	 	7,498	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	482,103	 	 	 	241,659	 	 	 	177,694	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Costs and expenses

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Cost of services
    

    	 	 	153,332	 	 	 	75,073	 	 	 	59,079	 
	
    
    Cost of products
    

    	 	 	83,041	 	 	 	44,346	 	 	 	23,416	 
	
    
    Selling and marketing
    

    	 	 	87,822	 	 	 	38,600	 	 	 	24,585	 
	
    
    General and administrative
    

    	 	 	67,522	 	 	 	33,950	 	 	 	32,058	 
	
    
    Special charges [notes 2 and 7]
    

    	 	 	9,668	 	 	 	—	 	 	 	—	 
	
    
    Depreciation and amortization
    

    	 	 	61,072	 	 	 	28,780	 	 	 	59,388	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	462,457	 	 	 	220,749	 	 	 	198,526	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Operating income (loss)
    

    	 	 	19,646	 	 	 	20,910	 	 	 	(20,832	)
	
    
    Interest income
    

    	 	 	1,486	 	 	 	1,670	 	 	 	1,888	 
	
    
    Interest expense
    

    	 	 	(23,782	)	 	 	(9,702	)	 	 	(70,608	)
	
    
    Foreign exchange gain (loss)
    

    	 	 	(15,757	)	 	 	12,196	 	 	 	136,553	 
	
    
    Gain on investments, marketable securities and
    other assets
    

    	 	 	57	 	 	 	73	 	 	 	312	 
	
    
    Share of net loss in investees
    [note 1]
    

    	 	 	(1,690	)	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Income (loss) before income taxes
    

    	 	 	(20,040	)	 	 	25,147	 	 	 	47,313	 
	
    
    Income tax expense
    

    	 	 	(2,958	)	 	 	(8,940	)	 	 	(1,796	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss)

    	 	 	(22,998	)	 	 	16,207	 	 	 	45,517	 
	
    
    Accretion on redemption price —
    preferred shares [note 6]
    

    	 	 	(5,184	)	 	 	(10,590	)	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss) applicable to
    Class A and Class B shares
    [for the post-reorganization periods
    only]
    

    	 	 	(28,182	)	 	 	5,617	 	 	 	45,517	 
	
    
    Deficit, beginning of period, as previously
    reported
    

    	 	 	(12,146	)	 	 	—	 	 	 	(2,466,674	)
	
    
    Cumulative effect of a change in an accounting
    policy [note 2]
    

    	 	 	(1,327	)	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Retained earnings (deficit), end of
    period

    	 	 	(41,655	)	 	 	5,617	 	 	 	(2,421,157	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic earnings (loss) per share
    [note 4]

    	 	 	(1.44	)	 	 	1.51	 	 	 	0.19	 
	
    
    Diluted earnings (loss) per share
    [note 4]

    	 	 	(1.44	)	 	 	0.71	 	 	 	0.19	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

See accompanying notes.

44

 

MICROCELL TELECOMMUNICATIONS INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH
FLOWS

[Unaudited]

	 	 	 	 	 	 	 	 	 	 	 	 	 
			Nine Months		Five Months		Four Months
			Ended		Ended		Ended
			September 30, 2004		September 30, 2003		April 30, 2003
			$		$		$
			
		
		

							[Pre-reorganization]
			
			(In thousands of Canadian dollars)
	
    
    OPERATING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net income (loss)
    

    	 	 	(22,998	)	 	 	16,207	 	 	 	45,517	 
	
    
    Adjustments to reconcile net income
    (loss) to cash provided by operating activities
    

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Depreciation and amortization
    

    	 	 	61,072	 	 	 	28,780	 	 	 	59,388	 
	
    
    Deferred charges
    

    	 	 	(20,764	)	 	 	—	 	 	 	—	 
	
    
    Accreted interest on long-term debt
    

    	 	 	693	 	 	 	1,667	 	 	 	13,425	 
	
    
    Stock option expense
    

    	 	 	5,652	 	 	 	—	 	 	 	—	 
	
    
    Foreign exchange loss (gain)
    

    	 	 	16,066	 	 	 	(12,243	)	 	 	(130,166	)
	
    
    Gain on investments, marketable securities and
    other assets
    

    	 	 	—	 	 	 	—	 	 	 	(312	)
	
    
    Share of net loss in investees
    

    	 	 	1,690	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	 	 	41,411	 	 	 	34,411	 	 	 	(12,148	)
	
    
    Changes in operating assets and liabilities
    

    	 	 	(11,490	)	 	 	26,383	 	 	 	26,665	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) operating
    activities

    	 	 	29,921	 	 	 	60,794	 	 	 	14,517	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    INVESTING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Decrease (increase) in short-term
    investments and marketable securities
    

    	 	 	38,123	 	 	 	9,912	 	 	 	73,680	 
	
    
    Additions to property, plant and equipment
    

    	 	 	(198,159	)	 	 	(30,648	)	 	 	(5,500	)
	
    
    Proceeds from sale of long-term investments
    

    	 	 	(2	)	 	 	—	 	 	 	2,089	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) investing
    activities

    	 	 	(160,038	)	 	 	(20,736	)	 	 	70,269	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    FINANCING ACTIVITIES

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Issuance of share capital and warrants
    

    	 	 	154,161	 	 	 	—	 	 	 	—	 
	
    
    Share issuance costs
    

    	 	 	(1,436	)	 	 	—	 	 	 	—	 
	
    
    Redemption of preferred shares
    

    	 	 	(1,233	)	 	 	—	 	 	 	—	 
	
    
    Increase in long-term debt
    

    	 	 	400,000	 	 	 	—	 	 	 	—	 
	
    
    Repayment of long-term debt
    

    	 	 	(336,285	)	 	 	(4,786	)	 	 	—	 
	
    
    Termination of derivative instruments
    

    	 	 	(4,250	)	 	 	—	 	 	 	—	 
	
    
    Deferred financing costs
    

    	 	 	(12,957	)	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash provided by (used in) financing
    activities

    	 	 	198,000	 	 	 	(4,786	)	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Increase (decrease) in cash and cash
    equivalents for the period
    

    	 	 	67,883	 	 	 	35,272	 	 	 	84,786	 
	
    
    Cash and cash equivalents, beginning of period
    

    	 	 	43,094	 	 	 	111,765	 	 	 	26,979	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Cash and cash equivalents, end of
    period

    	 	 	110,977	 	 	 	147,037	 	 	 	111,765	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Additional Information
    

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Interest paid
    

    	 	 	22,802	 	 	 	8,035	 	 	 	13	 
	
    
    Income taxes paid
    

    	 	 	1,085	 	 	 	684	 	 	 	639	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

See accompanying notes.

[All tabular amounts are in thousands of Canadian
dollars unless otherwise indicated.]

45

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED]

September 30, 2004

 

		
	1.	
    Description of Business, Financial
    Reorganization and Basis of Presentation

 

		
		
    Description of Business

     
Microcell Telecommunications Inc.
[“Microcell”] is incorporated under the Canada
Business Corporations Act [“CBCA”] and is a
provider of wireless telecommunications services in Canada. As
at September 30, 2004, Microcell conducted its wireless
communications business through two wholly-owned subsidiaries
[Microcell, collectively with its subsidiaries, the
“Company”], which were: Microcell Solutions Inc.
[“Solutions”] and Inukshuk Internet Inc.
[“Inukshuk”].

     
Solutions operates a Global System for Mobile
Communication [“GSM”] network across Canada and
markets Personal Communications Services [“PCS”] and
General Packet Radio Service [“GPRS”] under the Fido
brand name pursuant to a 30MHz PCS license [the “PCS
License”] issued by the Minister of Industry (Canada)
[“Industry Canada”]. The Company also provides
wireless high-speed Internet access in selected locations under
the brand name iFidoTM.

     
Inukshuk was awarded Multipoint Communication
Systems [“MCS”] licenses [the “MCS
Licenses”] to deploy a high-speed Internet Protocol-based
data network using MCS technology in Canada. Inukshuk entered
into a venture with two partners to build an MCS network in
order to offer high-speed Internet, IP-based voice and local
networking services to selected markets across Canada.
Inukshuk’s commitments to the venture are to transfer its
MCS Licenses to the venture, to permit the utilization of its
MCS Licenses by the venture pending Industry Canada’s
approval of the transfer and to make cash contributions of up to
$6.0 million. Up to September 30, 2004, this venture
was accounted for using the equity accounting method.
Accordingly, amounts of $0.8 million and $1.7 million
have been recognized during the three- and nine-month periods
ended September 30, 2004, respectively, as the
Company’s share of loss in this venture. On
November 19, 2004, as provided for in the venture
agreement, the Company gave notice of its intent to purchase the
share of the venture currently owned by one of the other two
partners in the venture. Should the third partner make the same
offer to the selling partner, the Company would acquire 50% of
the selling partner’s share for which the Company estimates
the cost to be between approximately $4 million to
$5 million. Following the upcoming change in the ownership
of the venture and the anticipated beginning of Phase 2 for the
deployment of a MCS network in Canada, the Company will reassess
the accounting of its investment in the venture.

     
The Company continues to experience
growth-related capital requirements arising from the need to
fund network capacity improvements, ongoing maintenance and the
cost of acquiring new PCS customers. In addition, in the event
that our actual results vary from our projections or if the
assumptions underlying our projections were to change, we may
need additional funds. Sources of funding for our further
financing requirements may include additional bank financing,
vendor financing, public offerings or private placements of
equity or debt securities, capital contributions from
shareholders and disposition of assets. There can be no
assurance that additional financing will be available to us or,
if available, that we will be able to obtain it on a timely
basis and on terms acceptable to us and within the limitations
contained in our credit facilities. Microcell’s ability to
generate positive net income and cash flows in the future is
dependent upon various factors, including the level of market
acceptance of its services, the degree of competition
encountered by the Company, the cost of acquiring new customers,
the cost to maintain and retain existing customers, technology
risks, general economic conditions and regulatory requirements.

 

		
		
    Financial Reorganization

     
On May 1, 2003, the predecessor company of
Microcell [“Old Microcell”] and certain subsidiaries
of Old Microcell emerged from a restructuring plan under the
Companies’ Creditors Arrangement Act

46

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

[“CCAA”] and the CBCA. As a result, at
that date, the Company has accounted for its financial
reorganization by using the principles of fresh start
accounting. Accordingly, all assets and liabilities were
comprehensively revalued at estimated fair values and
Microcell’s deficit of $2.4 billion was eliminated and
long-term debt obligations decreased by approximately
$1.6 billion. Microcell determined that its enterprise
value was $689 million, of which $350 million was
allocated to the long-term debt and $339 million to the
equity. This enterprise value was determined based on several
traditional valuation methodologies, utilizing projections
developed by management, including discounted cash flow analysis
and comparable company trading analysis.

     
A comprehensive revaluation of the assets and
liabilities of the Company has been done based on this
enterprise value. This resulted in a reduction of the current
assets of $36.8 million [mainly consisting of the deferred
charges incurred during the recapitalization process], the
property, plant and equipment of $289.7 million, the
long-term investments of $3.7 million and the accrued
liabilities of $131.5 million. The Company also assigned a
value, calculated at management’s best estimate of fair
value, to the Company’s intangible assets, which are the
PCS License at $188 million, determined using the
replacement cost based on comparable transactions, the Fido
brand name at $28.5 million, determined using the
replacement cost method, and the customer list at
$24.7 million, determined using the discounted future cash
flow method.

 

		
		
    Basis of Presentation

     
The accompanying unaudited interim consolidated
financial statements of Microcell have been prepared in
accordance with accounting principles generally accepted in
Canada [“Canadian GAAP”] for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by Canadian GAAP for annual
financial statements. In the opinion of management, all
adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation have been included. The
consolidated balance sheet as of December 31, 2003 in these
unaudited interim consolidated financial statements has been
derived from the audited consolidated financial statements at
that date, but does not include all of the information and
footnotes required by Canadian GAAP for annual financial
statements.

     
Operating results for interim periods are not
necessarily indicative of the results that may be expected for
the full year. Specifically, during the fourth quarter, the
Company’s operations are subject to certain seasonal
factors associated with subscriber acquisition during the
holiday period, which historically is the largest acquisition
period of the year for the wireless industry. As a result,
operating and net income during this period will be affected by
the cost of acquiring a proportionately higher number of
subscribers compared with each of the other three quarters of
the year.

     
These unaudited interim consolidated financial
statements should be read in conjunction with Microcell’s
audited consolidated financial statements and footnotes for the
year ended December 31, 2003. The accounting policies and
methods followed in the preparation of these unaudited interim
consolidated financial statements are the same as those used in
the audited financial statements for the year ended
December 31, 2003, except for the change related to
stock-based compensation and asset retirement obligations as
described in note 2. The Company also introduced new
customer retention programs during the period as described in
note 3.

     
Comparative financial information for the
four-month period ended April 30, 2003 has been presented
pursuant to regulatory requirements. In reviewing this
comparative financial information, readers are reminded that it
does not reflect the effects of the financial reorganization and
the application of fresh start accounting.

     
On March 19, 2004, the Company received a
comment letter from the U.S. Securities and Exchange
Commission [“SEC”] in connection with its review of
the Company’s registration statement filed on

47

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

March 3, 2004 for the registration of its
Class A Restricted Voting Shares [“Class A
Shares”] and Class B Non-Voting Shares
[“Class B Shares”] issuable upon exercise of the
Warrants 2005 and the Warrants 2008. The Company responded to
the SEC’s March letter and filed an amended registration
statement on June 29, 2004. The Company received a letter
to its response on August 9, 2004 and responded to the SEC
on October 22, 2004. The Company received a letter to its
response on November 5, 2004. SEC staff, among other
things, has questioned whether the Company’s Fido brand
name has an indefinite useful life and, consequently, whether it
should be subject to periodic amortization. The Company believes
such brand name should be considered to have an indefinite life.
However, were such periodic amortization to be applied, assuming
hypothetically a useful life of ten years, this would decrease
the Company’s net income by $0.7 million and decrease
basic and diluted earnings per share by $0.02 for the
three-month period ended September 30, 2004 and increase
the Company’s net loss by $2.1 million and increase
basic and diluted loss per share by $0.11 for the nine-month
period ended September 30, 2004. There would have been no
effect on cash flows for the three- and nine-month periods ended
September 30, 2004. In addition, opening deficit would be
increased by $1.9 million.

     
The SEC staff, among other things, has also asked
the Company for additional information regarding certain of the
Company’s accounting policies regarding revenue recognition
and measurement and related costs, including the recognition of
both revenues and related costs associated with the sale of
handsets and prepaid airtime vouchers to the Company’s
third party retailers. Sales of products such as handsets and
their related costs are recognized when goods are delivered,
wireless service is activated and collection is reasonably
assured. For prepaid airtime vouchers, the revenue is measured
at the amount paid by the subscribers and is recorded when
services are provided to the subscriber and related commissions
paid to third party dealers are classified within cost of
product. The Company believes these accounting policies are
appropriate based on risks assumed by the Company until the
handset is activated or prepaid airtime vouchers are sold and
used by the Company’s ultimate customers. Alternatively,
other parties, including the SEC, could assess that the sale of
handset and associated costs be recognized upon the delivery of
the handset to third party retailers or to be deferred and
amortized over the expected life of the customer. For the
prepaid airtime vouchers, alternatively, other parties,
including the SEC, could assess that the commissions to the
third party dealers be considered as a discount and be
classified as a reduction of service revenues. As at
September 30, 2004, the balance sheet includes deferred
revenues and deferred costs of $6.9 million and
$9.8 million respectively in connection with handsets at
the dealers location not yet activated by the ultimate
customers. Commissions paid to third party retailers for the
prepaid airtime vouchers totaled $5.6 million,
$5.6 million and $4.7 million for the nine-month
periods ended September 30, 2004, the five-month period
ended September 30, 2003 and the four-month period ended
April 30, 2003, respectively.

     
The SEC staff has also asked for additional
information regarding the FidoDollars program described in
note 3. The Company believes that the accounting treatment
for this program is appropriate since the FidoDollars can be
used only to acquire handsets that will allow the Company to
continue to generate service revenues following the exercise of
such rewards. Alternatively, other parties, including the SEC,
could assess that such rewards be accounted for in reduction of
service revenues and that the total amount of FidoDollars be
recognized when such FidoDollars are earned by the customer
instead of when such FidoDollars are used.

     
Following its acquisition by Rogers Wireless Inc,
the Company decided not to register the warrants with the SEC
and, therefore, the Company intends to withdraw its F-1 filing.

48

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

 

		
	2.	
    Change in Accounting Policies

 

		
		
    Stock-Based Compensation

     
Effective January 1, 2004, the Company
adopted the standard set forth in Section 3870 of the
Canadian Institute of Chartered Accountants [“CICA”]
Handbook, Stock-based compensation and other stock-based
payments. This section has been amended to require the
expensing of certain stock-based compensation awards using the
fair value-based method for fiscal years beginning on or after
January 1, 2004. Under the amended rules, the Company is
required to expense, over the vesting period, the fair value of
the options at the date of the grant. As permitted by this
amendment, the Company applied this change retroactively,
without restatement, for options granted since May 1, 2003.
Consequently, the opening deficit as at January 1, 2004 was
adjusted to reflect an expense of $1.3 million relating to
options granted since May 1, 2003.

     
For the nine-month period ended
September 30, 2004, an amount of $2.1 million,
respectively, is included within general and administrative
expenses, reflecting the recurring cost associated with the
normal vesting of employee stock options. As a result of the
appreciation in Microcell’s share price, resulting
primarily from public takeover offers detailed in note 7,
and in accordance with accelerated vesting rules of the
Company’s stock option plan, $3.6 million of special
charges were recognized during the nine-month period ended
September 30, 2004. Accordingly, an amount of
$7.0 million was credited to the contributed surplus. Also,
as of September 30, 2004, an amount of $2.7 million of
contributed surplus was transferred to Class B shares
pursuant to the exercise of stock options. The Company used the
Black Scholes option pricing model to determine the fair value
of the options with the following weighted-average assumptions:
risk-free interest rate of 3%, share price volatility of 64%, no
dividend yield and expected life of five years. Prior to
January 1, 2004, no compensation expense was recognized
when options were issued to employees or directors. The
Company’s pro forma information, as if the fair value-based
method had been applied, is as follows for periods prior to
January 1, 2004:

	 	 	 	 	 	 	 	 	 
			Five Months		Four Months
			Ended		Ended
			September 30, 2003		April 30, 2003
			$		$
			
		

					[Pre-reorganization]
	
    
    Net income (loss) as reported
    

    	 	 	5,617	 	 	 	45,517	 
	
    
    Stock-based employee compensation costs that
    would have been included in the determination of net income if
    the fair value based method had been applied to all awards as
    reported
    

    	 	 	(701	)	 	 	(1,577	)
	 	 	 	
	 	 	 	
	 
	
    
    Pro forma net income as if the fair value based
    method had been applied to all awards
    

    	 	 	4,916	 	 	 	43,940	 
	 	 	 	
	 	 	 	
	 
	
    
    Basic earnings (loss) per share as reported (in
    dollars)
    

    	 	 	1.51	 	 	 	0.19	 
	
    
    Stock-based employee compensation costs impact
    (in dollars)
    

    	 	 	(0.19	)	 	 	(0.01	)
	 	 	 	
	 	 	 	
	 
	
    
    Pro forma basic earnings (loss) per share as if
    the fair value method had been applied to all awards (in dollars)
    

    	 	 	1.32	 	 	 	0.18	 
	 	 	 	
	 	 	 	
	 
	
    
    Diluted earnings (loss) per share as reported (in
    dollars)
    

    	 	 	0.71	 	 	 	0.19	 
	
    
    Stock-based employee compensation costs impact
    (in dollars)
    

    	 	 	(0.03	)	 	 	(0.01	)
	 	 	 	
	 	 	 	
	 
	
    
    Pro forma diluted earnings (loss) per share as if
    the fair value method had been applied to all awards (in dollars)
    

    	 	 	0.68	 	 	 	0.18	 
	 	 	 	
	 	 	 	
	 

49

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

     
Basic and diluted losses per share are identical,
except for the five-month period ended September 30, 2003,
as the effect of diluted items are antidilutive.

 

		
		
    Asset Retirement Obligations

     
Effective January 1, 2004, the Company
adopted the standard set forth in Section 3110 of the
Canadian Institute of Chartered Accountants Handbook entitled
Asset Retirement Obligations, which harmonizes Canadian
GAAP with U.S. Financial Accounting Standards Board’s
Statement No. 143, Accounting for Asset Retirement
Obligations. The standard provides guidance for the
recognition, measurement and disclosure of liabilities for asset
retirement obligations and the associated retirement costs. The
asset retirement cost is capitalized as part of the related
asset and is amortized into earnings over time.

     
Under its site leases, the Company is generally
committed to returning each site to its original state. In order
to calculate a provision for asset retirement obligations, the
Company used the following significant assumptions: the Company
expects that most of its lease sites will be renewed at their
expiry; the Company expects that approximately 1% of its sites
per year will have to be changed based on operational needs or
vocation changes and as a result, the Company will have to
return these sites to their original state; remediation costs
that are indicative of what third party vendors would charge the
Company to remediate the sites; expected inflation rates that
are consistent with historical inflation rates; and
credit-adjusted risk-free rates that approximate the
Company’s incremental borrowing rates. As a result, a
liability of $1 million has been accounted for by the
Company as at January 1, 2004. The Company has not adjusted
its opening deficit because the amount is not material and was
compensated by charges made under the prior accounting policy
which was to expense such costs as incurred. When a liability is
initially recorded, the cost is capitalized by increasing the
carrying amount of the related long-lived asset. Over time, the
liability is increased each period to reflect an interest
element considered in its initial measurement at fair value and
reduced as related payments are made. Furthermore, the
capitalized cost is amortized over the useful life of the
related asset. The Company will continue to evaluate on a
periodic basis whether the estimated asset retirement
obligations and related financial statement amounts continue to
be reasonably stated.

 

		
	3.	
    Customer Retention Programs

     
During the first quarter of 2004, the Company
introduced two specific customer retention programs. Firstly,
the Company allowed its postpaid customers to enter into a
24-month agreement for airtime services and, in exchange, the
Company granted additional discounts or credits for the purchase
of handsets. Since the related handset is bundled with airtime,
the Company considers this arrangement as a revenue arrangement
with multiple deliverables. Accordingly, the arrangement
consideration is allocated among the separate units of
accounting based on their relative fair values. However, because
the handset is provided in the arrangement and the customer has
no obligation to the Company if airtime service is not provided,
the amount allocated to the handset is limited to the amount
initially received. The direct incremental cost related to this
retention program, consisting of the incremental loss on the
sale of the handset, is deferred and amortized in the cost of
products over the term of the agreement. As of
September 30, 2004, $20.7 million is included within
deferred charges and other non-current assets in this regard.

     
Secondly, the Company launched “Fido
Rewards,” which allows its postpaid customers to accumulate
“FidoDollars” based on their spending. Each FidoDollar
allows its holder to obtain a discount of $1 on the suggested
retail price of a future purchase of a handset. Since this
handset will generate future service revenues after its
acquisition, the Company will account for the cost of this
reward program, consisting primarily of the subsidy on the
handset, when such FidoDollars are redeemed. At that date, the
Company will recognize as equipment revenue the amount received
from its customers, net of applicable FidoDollars, as well as
the cost of the related handset. The Company accrues for its
estimated obligation

50

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

as awards are earned by its customers which are
registered with the program. As at September 30, 2004,
8.1 million FidoDollars were issued to approximately
599,000 registered customers and 1.0 million of FidoDollars
were redeemed. As a result, an amount of $7.1 million is
included in the Company’s balance sheet within deferred
charges and accounts payable and accrued liabilities. If all of
the Company’s customers were registered in this program,
deferred charges and accounts payable and accrued liabilities as
at September 30, 2004 would be increased by
$7.9 million. [See note 1]

 

		
	4.	
    Earnings (Loss) Per Share

     
The reconciliation of the numerator and
denominator for the calculation of earnings (loss) per share is
as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 
			Nine Months		Five Months		Four Months
			Ended		Ended		Ended
			September 30, 2004		September 30, 2003		April 30, 2003
			$		$		$
			
		
		

							[Pre-reorganization]
	
    
    Net income (loss) for diluted earnings (loss) per
    share calculation
    

    	 	 	(22,998	)	 	 	16,207	 	 	 	45,517	 
	
    
    Accretion on redemption price of First and Second
    Preferred Shares
    

    	 	 	(5,184	)	 	 	(10,590	)	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Net income (loss) for basic earnings (loss) per
    share calculation
    

    	 	 	(28,182	)	 	 	5,617	 	 	 	45,517	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Denominator [in thousands]:

    	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Weighted-average number of Class A and
    Class B Shares outstanding
    

    	 	 	19,568	 	 	 	3,728	 	 	 	240,217	 
	
    
    Shares issuable pursuant to the exercise of
    initial warrants
    

    	 	 	—	 	 	 	—	 	 	 	253	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Number of shares for basic earnings (loss) per
    share calculation
    

    	 	 	19,568	 	 	 	3,728	 	 	 	240,470	 
	
    
    Shares issuable pursuant to conversion of
    preferred shares
    

    	 	 	—	 	 	 	18,828	 	 	 	—	 
	
    
    Shares issuable pursuant to exercise of stock
    options
    

    	 	 	751	 	 	 	332	 	 	 	—	 
	
    
    Shares issuable pursuant to exercise of warrants
    

    	 	 	3,917	 	 	 	—	 	 	 	—	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Number of shares for diluted earnings (loss) per
    share calculation
    

    	 	 	24,236	 	 	 	22,888	 	 	 	240,470	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Basic earnings (loss) per share [in
    dollars]

    	 	 	(1.44	)	 	 	1.51	 	 	 	0.19	 
	
    
    Diluted earnings (loss) per share [in
    dollars]

    	 	 	(1.44	)	 	 	0.71	 	 	 	0.19	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

     
Except for the periods of three months ended
September 30, 2004 and five months ended September 30,
2003, basic and diluted earnings (loss) per share are identical,
as the effect of potential dilutive securities is antidilutive.

51

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

 

		
	5.	
    Long-Term Debt

	 	 	 	 	 	 	 	 	 
			September 30,		December 31,
			2004		2003
			$		$
			
		

	
    
    Tranche B Debt
    

    	 	 	—	 	 	 	271,769	 
	
    
    Tranche C Debt
    

    	 	 	—	 	 	 	52,693	 
	
    
    Term Loan A
    

    	 	 	184,416	 	 	 	—	 
	
    
    Term Loan B
    

    	 	 	188,200	 	 	 	—	 
	 	 	 	
	 	 	 	
	 
	 	 	 	372,616	 	 	 	324,462	 
	
    
    Less: current portion of principal
    

    	 	 	(12,000	)	 	 	(9,298	)
	 	 	 	
	 	 	 	
	 
	 	 	 	360,616	 	 	 	315,164	 
	 	 	 	
	 	 	 	
	 

     
The minimum contractual payments of term
loan A debt [“Term Loan A”] and term
loan B debt [“Term Loan B”] for the next
five years are as follows: $3.0 million for the rest of
2004; $12.0 million in 2005; $12.0 million in 2006;
$12.0 million in 2007; $12.0 million in 2008 and
$41.5 million for the first nine months of 2009.

     
On March 17, 2004, the Company entered into
amended and restated credit agreements with a syndicate of
lenders, certain of which were also shareholders of the Company.
The proceeds have been used mainly to refinance borrowings under
the previous senior secured credit facilities in the amount of
$330.3 million and to terminate previous swap transactions
in the amount of $4.3 million.

     
In conjunction with the amended and restated
credit agreements, the Company paid, during the first nine
months of 2004, $13.0 million of financing costs, which are
being deferred and amortized over the term of the loans. As of
September 30, 2004, the financing arrangements of the
Company consisted of the following credit agreements:

 

		
		
    Revolving Facility

     
The Company has access to a first lien revolving
credit facility [the “Revolving Facility”] of
$50 million, which bears interest at CDOR or LIBOR plus
4.0% and is payable in March 2010. A commitment fee computed at
the rate of 0.5% per annum on the aggregate undrawn amount
of the Revolving Facility is payable on a quarterly basis. The
Revolving Facility is secured by a pledge of a first lien on
substantially all of the Company’s assets. As at
September 30, 2004, no amounts were drawn on this facility.
However, any credit exposure under the swap transactions
described below is deducted from the amount otherwise available
to be borrowed under the Revolving Facility. An amount of
$16 million was agreed upon to be the initial swap exposure
of the Company’s swap counterparty. As of
September 30, 2004, an amendment occurred between the
parties to revise the limit of $16 million to
$24.8 million.

 

		
		
    Term Loan A

     
The Term Loan A debt consists of a first
lien term loan with a principal amount equivalent to
$200 million [US$149.9 million]. It bears interest at
LIBOR plus 4% and is payable in quarterly installments, which
commenced in June 2004 and will mature in March 2011. As of
September 30, 2004, 2.5% of the principal amount was
repaid. The Term Loan A is collateralized by a pledge on
substantially all of the Company’s assets. As at
September 30, 2004, the effective interest rate on Term
Loan A was 6.66%.

52

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

 

		
		
    Term Loan B

     
The Term Loan B debt consists of a second
lien term loan with a principal amount equivalent to
$200 million [US$149.9 million]. It bears interest at
LIBOR plus 7%, with a LIBOR floor at 2%, and is payable in
quarterly installments, which commenced in June 2004 and will
mature in September 2011. As of September 30, 2004, 0.5% of
the principal amount was repaid. The Term Loan B is
collateralized by a pledge on substantially all of the
Company’s assets. As at September 30, 2004, the
effective interest rate on Term Loan B was 10.06%.

 

		
		
    Additional Debt and Swap
    Transactions

     
Pursuant to the terms of the credit agreements
governing the Company’s credit facilities, the Company is
entitled to raise up to an additional $25 million under the
Revolving Facility or Term Loan A, and up to an additional
$50 million under Term Loan B.

     
The Company has entered into swap transactions to
manage its exposure to foreign exchange rate fluctuations on the
U.S.-dollar-denominated Term Loan A and Term Loan B.
The Company swapped, in March 2004, the total principal of Term
Loan A and Term Loan B in the amount of
$400 million [US$299.9 million] at a rate of $1.3340
for US$1.00. The Company also swapped the floating interest rate
of LIBOR plus 4% on Term Loan A, payable in US dollars, to
a floating interest rate of LIBOR plus 5.085%, payable in
Canadian dollars. The Company also swapped the floating interest
rate of LIBOR plus 7% on Term Loan B, payable in US
dollars, to a floating interest rate of LIBOR plus 8.485%,
payable in Canadian dollars. These swap agreements included a
recouponing provision which allows both parties to enter into an
amendment of the economic variables when the fair market value
of the swaps exceed a threshold of $16 million, in such
manner that the market value is reduced to an amount no greater
than $16 million. As of September 30, 2004, an
amendment occurred between the parties to revise the limit of
$16 million to $24.8 million. Consequently, the
economic variables were amended to reduce the market value of
the swaps from $34.4 million payable by the Company to
$24.7 million, generating a payment by the Company to the
counterparties of $9.7 million on October 3, 2004.
Under this amendment, the floating interest rates of the
Company’s swap agreements relating to its Term Loan A
and Term Loan B were reduced to LIBOR plus 4.616% and LIBOR
plus 8.006% respectively. The maturity of the swap transactions
corresponds to the maturity of both term loans. These swap
transactions are presented at their fair value as derivative
instruments on the balance sheet and changes in fair value are
recognized in income as foreign exchange gains or losses.

 

		
		
    Covenants and Mandatory
    Prepayments

     
Under the credit agreements governing the
Revolving Facility, Term Loan A and Term Loan B, the
Company is committed to respect certain covenants, including
restrictions on the ability to incur indebtedness, pay
dividends, make various payments, create liens, sell assets and
engage in mergers. The Company must also maintain certain
financial covenants and ratios under its credit agreements,
including levels of operating income excluding a number of
specific items, levels of debt, liquidity levels and maximum
levels of capital expenditures.

     
The credit agreements governing Term Loan A
and Term Loan B require the Company to make, subject to
certain conditions, prepayments to Term Loan A and Term
Loan B lenders with respect to [i] net proceeds
received by the Company from the sale of assets, [ii] the excess
cash flow generated by the Company during any fiscal year, and
[iii] the net proceeds received by the Company from the issuance
of equity securities.

     
The credit agreements also provide that if an
event of default occurs, then the loans outstanding become,
under certain circumstances, due and payable in whole. A change
of control of the Company

53

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

would constitute an event of default under the
Company’s credit agreements and the Rogers offers
[described in note 7], if consummated, will result in a
change of control of the Company. The credit agreement governing
the Term Loan B debt provides that any prepayment of such
debt shall be accompanied by a call premium fee, calculated on
the amount of such prepayment, of [i] 3%, if the prepayment is
made prior to March 17, 2005; [ii] 2%, if the prepayment is
made prior to March 17, 2006; and, [iii] 1%, if the
prepayment is made prior to March 17, 2007.

     
The change in control described in note 7
constitutes an event of default under the Company’s credit
agreements. On November 4, 2004, the administrative agent,
on behalf of the Company’s secured lenders, has waived the
event of default arising from the change in control until the
earlier of (1) 90 days after the completion of the
acquisition of Microcell by Rogers, and (2) March 1, 2005.
However, the Company gave notice of prepayment of its
outstanding debt and related derivative financial instrument
positions and such prepayment occurred on November 16,
2004. On this date the Company repaid its long-term debt in the
amount of $362.1 million and the derivative instruments
were terminated generating a payment of $64.6 million to
the counterparty. These payments were financed with cash on hand
and an advance of $220 million from Rogers. A call premium
fee, in the amount of approximately $5.4 million was also
paid by the Company with respect to the prepayment of its Term
loan B debt. Finally, deferred financing costs in the amount of
approximately $11.9 million were written off by the Company.

 

		
	6.	
    Share Capital

     
Number of shares issued [in units]

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			First				Second		Second				
			Preferred		First Preferred		Preferred		Preferred				
			Voting		Non-Voting		Voting		Non-Voting		Class A		Class B
			Shares		Shares		Shares		Shares		Shares		Shares
			
		
		
		
		
		

	
    
    Balance as at

    December 31, 2003
    

    	 	 	252,296	 	 	 	11,415,204	 	 	 	14,782	 	 	 	6,979,528	 	 	 	30,038	 	 	 	3,906,336	 
	
    
    Issued
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	6,792,363	 
	
    
    Exercise of stock options
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	449,673	 
	
    
    Redeemed
    

    	 	 	(1,450	)	 	 	(40,688	)	 	 	—	 	 	 	(33,095	)	 	 	—	 	 	 	—	 
	
    
    Converted
    

    	 	 	(250,846	)	 	 	(11,374,516	)	 	 	(14,782	)	 	 	(6,946,433	)	 	 	168,641	 	 	 	18,417,936	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance as at

    September 30, 2004

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	198,679	 	 	 	29,566,308	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

54

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

 

		
		
    Carrying Value of Shares
    Issued

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			First		First		Second		Second						
			Preferred		Preferred		Preferred		Preferred						Total
			Voting		Non-Voting		Voting		Non-Voting		Class A		Class B		Value of
			Shares		Shares		Shares		Shares		Shares		Shares		Shares
			$		$		$		$		$		$		$
			
		
		
		
		
		
		

	
    
    Balance as at

    December 31, 2003
    

    	 	 	4,014	 	 	 	181,617	 	 	 	235	 	 	 	111,046	 	 	 	300	 	 	 	40,942	 	 	 	338,154	 
	
    
    Issued
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	136,719	 	 	 	136,719	 
	
    
    Exercise of stock options
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,729	 	 	 	4,729	 
	
    
    Transfer from contributed surplus
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,692	 	 	 	2,692	 
	
    
    Redeemed
    

    	 	 	(24	)	 	 	(667	)	 	 	—	 	 	 	(542	)	 	 	—	 	 	 	—	 	 	 	(1,233	)
	
    
    Converted
    

    	 	 	(4,071	)	 	 	(184,235	)	 	 	(240	)	 	 	(112,317	)	 	 	2,764	 	 	 	298,099	 	 	 	—	 
	
    
    Accretion on redemption price
    

    	 	 	81	 	 	 	3,285	 	 	 	5	 	 	 	1,813	 	 	 	—	 	 	 	—	 	 	 	5,184	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 
	
    
    Balance as at

    September 30, 2004

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,064	 	 	 	483,181	 	 	 	486,245	 
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 	 	 	
	 

 

		
		
    Warrants

	 	 	 	 	 	 	 	 	 
			September 30,		December 31,
			2004		2003
			$		$
			
		

	
    
    3,998,302 Warrants 2005, exercise price of $19.91
    

    	 	 	4,598	 	 	 	4,598	 
	
    
    6,663,943 Warrants 2008, exercise price of $20.69
    

    	 	 	13,328	 	 	 	13,328	 
	
    
    3,977,272 Warrants, exercise price of $22.00
    

    	 	 	11,276	 	 	 	—	 
	 	 	 	
	 	 	 	
	 
	 	 	 	29,202	 	 	 	17,926	 
	 	 	 	
	 	 	 	
	 

     
Pursuant to a final prospectus dated
March 24, 2004, the Company distributed to the holders of
its Class A Shares, Class B Shares, First Preferred
Voting Shares, First Preferred Non-Voting Shares, Second
Preferred Voting Shares and Second Preferred Non-Voting Shares,
rights to subscribe for an aggregate of 4,519,636 Class B
Shares. Each five rights entitled the holder thereof to purchase
one Class B Share at a subscription price of $22 per
share. In connection with the rights offering, the Company
entered into a standby purchase agreement with COM Canada, LLC
[“COM”] pursuant to which it agreed to purchase, at a
price of $22.00, all Class B Shares not otherwise purchased
under the rights offering. In addition, to the extent COM
purchased less than $50 million of such shares, it
committed to purchase, at a price of $22.00, additional
Class B Shares having an aggregate subscription price equal
to the deficiency.

     
The closing of the rights offering occurred on
April 30, 2004. The rights offering resulted in the
issuance by Microcell of 4,519,636 Class B Shares. On
May 3, 2004, COM purchased, at a price of $22.00 per
share, 2,272,727 Class B Shares. Furthermore, Microcell
issued to COM 3,977,272 warrants to acquire, at a price of
$22.00 per share, additional Class B Shares. The net
proceeds from the rights offering and private placement to COM
amounted to approximately $148 million [net of
approximately $1.4 million of issuance fees] and have been
used by Microcell to redeem as of May 1, 2004, 1,450 First
Preferred Voting Shares, 40,688 First Preferred Non-Voting
Shares and 33,095 Second Preferred Non-Voting Shares
outstanding as at April 30, 2004 at a price of
$16.39 per share, for a total of $1.2 million. The
remaining balance of $146.8 million is being used to fund
capital expenditures and for general corporate purposes. The
Company has estimated the fair value of warrants issued to COM
to be

55

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

$11.3 million and this amount has been
applied as a reduction of the value attributed to the
Class B Shares.

     
In accordance with the warrant indentures
governing the Warrants 2005 and the Warrants 2008, the number of
shares issuable upon the exercise of the Warrants 2005 and the
Warrants 2008 were adjusted from 1.0 to 1.02 Class A Share
or Class B Shares, as the case may be, for each warrant.
This adjustment has been made as a result of the Company’s
rights offering.

 

		
		
    Stock Option Plan

     
Changes in options outstanding are as follows:

	 	 	 	 	 	 	 	 	 
			
			Nine Months Ended
			September 30, 2004
			

					Weighted-
			Number of		Average
			Options [In		Exercise Price
			Units]		[In Dollars]
			
		

	
    
    Outstanding as at December 31, 2003
    

    	 	 	1,732,959	 	 	$	10.90	 
	
    
    Exercised
    

    	 	 	(449,673	)	 	$	10.52	 
	
    
    Granted
    

    	 	 	127,958	 	 	$	24.36	 
	
    
    Forfeited
    

    	 	 	(71,052	)	 	$	12.05	 
	 	 	 	
	 	 	 	
	 
	
    
    Outstanding as at September 30, 2004
    

    	 	 	1,340,192	 	 	$	12.25	 
	 	 	 	
	 	 	 	
	 
	
    
    Exercisable as at September 30, 2004
    

    	 	 	698,503	 	 	$	10.87	 
	 	 	 	
	 	 	 	
	 

     
In May 2004, an amendment to the Company’s
stock option plan, to increase the number of Class B Shares
that may be issued pursuant to options granted under the Option
Plan by 682,236 (from 2,006,818 to 2,689,054) was approved by
Microcell’s shareholders.

 

		
	7.	
    Special Charges

     
On May 17, 2004, TELUS Corporation
[“TELUS”] launched unsolicited offers to purchase
Microcell’s Class A Shares for $29.00 per share,
Class B Shares for $29.00 per share, Warrants 2005 for
$9.67 per warrant and Warrants 2008 for $8.89 per
warrant. On May 20, 2004, Microcell announced that, after
careful review and analysis of the TELUS offers performed with
the assistance of its legal and financial advisors,
Microcell’s board of directors recommended that holders of
these securities not tender into the TELUS offers. Further to
the TELUS offers, Microcell’s board of directors initiated
a full strategic review in order to determine the best way to
maximize value for all holders of securities. The special
committee of the board of directors, created to consider,
evaluate and negotiate alternatives to the TELUS offers,
directed the financial advisors to contact TELUS and a number of
other parties, in order to evaluate all strategic and financial
alternatives available. Among the parties so contacted was
Rogers Communications Inc., Rogers Wireless Communications Inc.
and Rogers Wireless Inc. [collectively, “Rogers”]. On
June 22, 2004, TELUS announced that it would extend the
TELUS offers until July 22, 2004. The TELUS offers were
further extended on July 22, 2004, on August 20, 2004
and, after the announcement of the Rogers offers (described
below) on September 20, 2004. On October 12, 2004,
TELUS announced that it would not extend its offer to purchase
all of the issued and outstanding publicly traded shares and
warrants of Microcell and, as a result, the TELUS offers expired
on that day.

     
On September 19, 2004, the special committee
of Microcell’s board of directors met to review the terms
of the offers submitted by Rogers, to purchase all
Microcell’s Class A Shares for $35.00 per share,
Class B Shares for $35.00 per share, Warrants 2005 for
$15.79 per warrant and Warrants 2008 for $15.01 per
warrant, and the terms of a proposed support agreement.
Following Microcell’s special

56

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

committee’s review of the relevant
considerations and based upon the advice received from the legal
and financial advisors and the opinions of its financial
advisors to the effect that, as at such date and subject to the
matters stated in such opinions, the consideration to be
received by holders of shares under the share offers was fair,
from a financial point of view, to such holders,
Microcell’s special committee unanimously concluded that
the share offers were fair to the holders of shares and in the
best interests of Microcell and determined to unanimously make a
favourable recommendation to Microcell’s board of directors
to recommend that holders of shares accept the share offers and
tender their shares into the Rogers offers.

     
On September 19, 2004, Microcell’s
board of directors met immediately following the meeting of its
special committee and approved the special committee’s
recommendation. Microcell entered into a support agreement late
on September 19, 2004 in respect of the Rogers offers. In
accordance with the support agreement, Microcell’s board of
directors also resolved on such date to waive the application of
certain provisions of the shareholder rights plan to allow
Rogers to proceed with the Rogers offers without any dilutive
effects.

     
On September 20, 2004, Microcell and Rogers
jointly announced the execution of the support agreement with
respect to the Rogers offers and on November 8, 2004,
Rogers announced that the terms and conditions of its offers for
the securities of Microcell have been satisfied with the
necessary number of securities having been successfully tendered
and regulatory approvals secured to complete the acquisition. As
a result of the successful tender offers, Rogers Wireless has
taken up and accepted for payment approximately 181,721
Class A Shares, 28,389,649 Class B Shares, 3,296,652
Warrants 2005 and 5,405,387 Warrants 2008, being all of the
securities of Microcell validly tendered to the offers and not
withdrawn prior to the 5:00 p.m. November 5, 2004
expiry time. The tendered securities represent approximately 96%
of the outstanding Class A Shares, 92% of the outstanding
Class B Shares, 82% of the outstanding Warrants 2005 and
81% of the outstanding Warrants 2008.

     
In conjunction with its strategic review process,
Microcell is incurring both financial and legal fees. The
Company engaged two financial advisors to determine the best way
to maximize value for all security holders. One of the two
financial advisors has affiliates which are shareholders,
lenders or agent of the Company’s lenders. Engagement
letters entered into with these advisors provide for advisory
services to be rendered with minimum fees amounting to
$6.5 million. Such fees will be recognized over the
estimated period for which the services are rendered. If a
transaction occurs, a transaction fee will be payable that will
be calculated as a percentage of the consideration paid to
acquire Microcell’s equity which may represent a
significantly higher amount based on the value of the
transaction. As of September 30, 2004, an expense amounting
to $4.6 million was recognized with respect to these
agreements. Furthermore, the consequential impact of the offers
on Microcell’s share price led to an accelerated vesting of
shares under the Company’s stock option plan, resulting in
an acceleration of a compensation expense of $3.6 million
that the Company would have otherwise recognized over the
remaining initial vesting period [see note 2]. Finally,
$1.5 million of legal and other general expenses related to
this process were recognized as of September 30, 2004. The
Company expects that total expenses related to this process will
amount to approximately $25 million. As a result of the
acquisitions of Microcell by Rogers, the final financial advisor
fees amounted approximately to $13.7 million of which
$2.1 million have already been paid. Furthermore,
approximately $12.8 million of legal and other general
expenses related to this process were incurred. Finally, the
consequential impact of the offers on Microcell’s share
price led to an accelerated vesting of shares under the
Company’s stock option plan, resulting in an acceleration
of a compensation expense of $7.8 million that the Company
would have otherwise recognized over the remaining initial
vesting period. On November 9, 2004, all the 1,319,306
outstanding stock options were exercised.

     
As a result of the acquisition of Microcell by
Rogers, all the members of Microcell’s board of directors
and certain senior officers of Microcell, including the
President and Chief Executive Officer [the “CEO”] and
the Chief Financial Officer [the “CFO”], have resigned
on November 9, 2004. On the same

57

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

day, Microcell announced the composition of its
new board of directors and the nomination of the new CEO and the
new CFO of Microcell.

 

		
	8.	
    Contingencies

     
On April 21, 2004, Unique Broadband Wireless
Services, Inc. [“UBS”], an Ontario corporation that
manufactures and operates wireless products and services, filed
a lawsuit against Microcell, Solutions, Inukshuk and Allstream
Corp. in the Ontario Superior Court of Justice. In its statement
of claim, UBS claims, among other things, for damages in the
amount of $160 million from each Microcell, Solutions and
Inukshuk for breach of contract, breach of confidence and breach
of fiduciary duty and punitive damages. UBS also claims from
Inukshuk, as an alternative to the damages claims, an order for
specific performance of a conditional agreement between Inukshuk
and UBS with respect to the use of 38 MHz of
Inukshuk’s spectrum by UBS. UBS also claims certain other
equitable relief, including disgorgement of profits that UBS
alleges would otherwise unjustly enrich Inukshuk, Solutions and
Microcell. The action is at a very early stage with no statement
of defense yet delivered. Based on information currently
available, management considers that the companies have
substantive defenses to the action brought by UBS and intend to
vigorously defend the action.

     
On August 9, 2004, a proceeding under the
Class Actions Act (Saskatchewan) was brought against
Microcell and other providers of wireless telecommunications
services in Canada. The proceeding involves allegations of
deceit, misrepresentation and false advertising by wireless
telecommunications service providers with respect to the monthly
system access fees being charged to customers. The plaintiffs
seek unquantified damages from the defendant wireless
telecommunications service providers, plus costs and
pre-judgment and post-judgment interest. Microcell believes it
has good defences to the allegations made by the plaintiffs.
Further, the proceeding has not been certified as a class action
and it is too early to determine whether the proceeding will
qualify for certification as a class action.

 

		
	9.	
    Comparative Figures

     
Certain of the comparative figures have been
reclassified to conform to the presentation adopted in the
current year.

 

		
	10.	
    Accounting Principles Generally Accepted in
    the United States

     
The unaudited interim financial statements as at
and for the nine months ended September 30, 2004 were
prepared in accordance with Canadian GAAP. The following summary
sets out the material adjustments to the Company’s reported
net income (loss), for the nine-month periods ended
September 30, 2004, the five months ended
September 30, 2003 and the four months ended April 30,
2003, which would be made in order to conform with
U.S. GAAP and the accounting principles and practices
required by the SEC.

58

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

 

		
		
    Reconciliation of Unaudited Consolidated
    Net Income (Loss) and Comprehensive Income (Loss)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
			Nine Months		Five Months		Pre-reorganization
			Ended		Ended		Four Months
			September 30,		September 30,		Ended April 30,
			2004		2003		2003
			
		
		

			$		$		$
	
    
    Net income (loss) under Canadian
    GAAP

    	 	 	(22,998	)	 	 	16,207	 	 	 	45,517	 
	
    
    [a] Share of net loss in investees
    

    	 	 	—	 	 	 	—	 	 	 	(500	)
	
    
    [b] Reorganization items
    

    	 	 	—	 	 	 	—	 	 	 	1,253,660	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	
    
    Net income (loss) under
    U.S. GAAP

    	 	 	(22,998	)	 	 	16,207	 	 	 	1,298,677	 
	
    
    [c] Unrealized loss in value of marketable
    securities
    

    	 	 	—	 	 	 	—	 	 	 	(145	)
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	
    
    Comprehensive income (loss) under
    U.S. GAAP

    	 	 	(22,998	)	 	 	16,207	 	 	 	1,298,532	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	
    
    Basic earnings (loss) per share under
    U.S. GAAP [dollars]
    

    	 	 	(1.44	)	 	 	(1.51	)	 	 	5.39	 
	 	 	 	
	 	 	 	
	 	 	 	
	 
	 	
    
    Diluted earnings (loss) per share under
    U.S. GAAP [dollars]
    

    	 	 	(1.44	)	 	 	0.71	 	 	 	5.39	 
	 	 	 	
	 	 	 	
	 	 	 	
	 

 

		
		
    Reconciliation of Unaudited Consolidated
    Cash Flow Captions

     
There are no significant differences between
Canadian GAAP and U.S. GAAP, which affect the captions of
the cash flow statements.

 

		
		
    Reconciliation of Unaudited Consolidated
    Balance Sheet Captions

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
					
			September 30, 2004		December 31, 2003
			
		

			Canadian				U.S.		Canadian				U.S.
			GAAP		Adjustments		GAAP		GAAP		Adjustments		GAAP
			
		
		
		
		
		

			$		$		$		$		$		$
	
    
    [d] Contributed surplus
    

    	 	 	(4,288	)	 	 	1,327	 	 	 	(2,961	)	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    [e] Preferred shares
    

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(296,912	)	 	 	(296,912	)
	
    
    [e] Share capital
    

    	 	 	(486,245	)	 	 	17,330	 	 	 	(468,915	)	 	 	(338,154	)	 	 	309,058	 	 	 	29,096	 
	
    
    [d][e] Deficit
    

    	 	 	41,655	 	 	 	(18,657	)	 	 	22,998	 	 	 	12,146	 	 	 	(12,146	)	 	 	—	 

 

		
		
    [a] Investment in Entity Subject to
    Significant Influence

     
Under Canadian GAAP, the investor should continue
to record its portion of investee losses unless the investor
would be unlikely to share in losses of the investee. Under
U.S. GAAP, in situations where an investor is not required
to advance additional funds to the investee and where previous
losses have reduced the common and the preferred stock
investment account to zero, the Company should continue to
report its share of equity method losses in its statement of
operations to the extent of and as an adjustment to the loans to
the investee.

     
In addition, under Canadian GAAP, the share of
net income in an investee that is a private investment company
is calculated based on its realized gains or losses. Under
U.S. GAAP, the share of net income in such investees is
calculated based on both realized and unrealized gains or losses.

 

		
		
    [b] Reorganization Items

     
Under U.S. GAAP, the forgiveness of debt and
the effects of the adjustments on the reported amounts of
individual assets and liabilities resulting from the adoption of
fresh start accounting should be

59

 

MICROCELL TELECOMMUNICATIONS INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS [UNAUDITED] — (Continued)

reflected in the predecessor entity’s final
statement of operations. Under Canadian GAAP, such adjustments
are reflected as capital transactions. The reorganization items
in the amount of $1.254 billion were comprised of
$1.366 billion of forgiveness of debt and
$112.5 million of adjustments resulting from the
application of fresh-start accounting.

 

		
		
    [c] Marketable Securities

     
Under Canadian GAAP, the marketable securities
are recorded as explained in note 2 to the annual
consolidated financial statements. Under U.S. GAAP, the
marketable securities are classified as available for sale, and
any changes to the market value, net of income taxes, are
recorded in other comprehensive income (loss).

 

		
		
    [d] Stock Compensation

     
Effective January 1, 2004, under Canadian
GAAP, the Company adopted the standard set forth in
Section 3870 of the CICA Handbook, as described in
Note 2 to the unaudited interim consolidated financial
statements as at and for the nine months ended
September 30, 2004 included elsewhere in this document.
Under U.S. GAAP, since the Company has selected the
modified prospective method as permitted by SFAS 148, the
adjustment to opening deficit in the amount of $1.3 million
under Canadian GAAP would not be recorded under U.S. GAAP.

 

		
		
    [e] Classification of Financial
    Instrument as Debt or Equity

     
The preferred shares contain conversion features
which result in the Company’s obligation to redeem such
shares being conditional. Therefore, under US GAAP, these shares
are outside the scope of SFAS 150. In such a case,
redeemable preferred shares subject to mandatory redemption
requirements that are outside the control of the issuer are
excluded from “shareholders’ equity (deficiency)”
and presented separately in the issuer’s balance sheet
between liabilities and shareholders’ equity (deficiency).
The related accretions of $17.3 million as of
September 30, 2004 are presented as a charge to retained
earnings or, in the absence of retained earnings, by charges
against share capital.

60exv4w20

 

	Preliminary Views on Value

	Project Ring

 

 

	Process Update Process Update Industry Overview Capital Markets Perspective RCM
Overview Microcell Overview Approach to Value Financial Forecasts Preliminary
Views on Value

	Project Ring 1

 

 

	Overview

	•Rogers Wireless Communications Inc. (“RCM“or the “Company”) is considering
executing a Substantial Issuer Bid

	•The transaction will have the effect of transferring financial leverage
related to RCI Communications’ (“RCI”) acquisition of AWE’s stake in RCM from
RCI to RCM

	•Potential transaction would be subject to formal valuation requirements (OSC
Rule 61-501, Quebec Policy Q-27 and RCM’s Minority Shareholder Protection
Agreement)

	•BMO Nesbitt Burns retained to provide formal valuation of Class B Restricted
Voting Shares

	•Formal valuation is to be conducted pro forma Microcell acquisition

	•This draft document provides preliminary views on value based onwork done to
date

	•Closure on outstanding issues/due diligence, including feedback from the
Independent Committee and finalization of terms of the issuer bid transaction,
are required for BMO Nesbitt Burns to be in a position to provide the formal
valuation

	Project Ring 2

 

 

	Work Status

	•Process to be conducted:
-information request list provided to management
-preliminary information received
-organizational meeting
-financial modeling working session
-conference call (financial model)
-management due diligence session
-management due diligence (financial model)
-approach to value internal beat-up
-preliminary views as to value internal beat-up
-conference call (general due diligence)
-management confirmation of forecast
-preliminary valuation internal beat-up
-final due diligence
-review RCI intention
-deliver final valuation report

	•BMO Nesbitt Burns would expect to deliver a
formal valuation to the Independent Committee a week
after this presentation subject to timely completion
of duediligence and finalization of the terms of the
issuer bid transaction
Project Ring 3

 

 

	Status of Work

	•Outstanding Items/Due Diligence:
-due diligence sessions:
legal
auditors
-management certificate

	Project Ring 4

 

 

	Scope of Review

	•Annual Reports, Annual Information Forms and Management Proxy Circulars and
Quarterly Reports (1999-2003)

	•3-yr Strategic Plan (Dated Feb 3, 2004)
-3 year historical management reports

	•FY 2004 -2006 summary Budget (dated mid-September 2004)

	•Draft Board presentation on Microcellacquisition (dated September 16, 2004)

	•Presentation to credit rating agencies (week of October 25, 2004)

	•Management due diligence sessions

	•Management forecast 2004-2009 based on management due diligence sessions
Project Ring 5

 

 

	Assumptions and Limitations

	•Among other things; BMO Nesbitt Burns has
relied upon, and assumed:

	- the review by BMO Nesbitt
Burns did not encompass a review of a complete
copy of the TDSI/Management financial model as
Management has indicated thatit was the
intellectual property of TDSI

	- the completeness, accuracy
and fair presentation of all financial or
other information obtained from public
sources or provided by management or the
Company

	- thatforecasts, projections and
budgets are reasonable in the circumstances
and consistent with historical operating
experience and accounting policies andreflect
the best currently available estimates or
judgments of management and the Company

	- that no prior valuations
relating to the Company, its subsidiaries
(including Microcell) or any of their
businesses or assets have been prepared during
the past 24 months

	- that there is no plan or
proposal for any material change in theaffairs
of the Company or any of its subsidiaries
aside from the Microcellacquisition

	- that no formal offers or
negotiations for all or a material partof the
securities or assets of the Company or any of
its subsidiaries have been made or occurred
during the past 24 months other than the offer
to acquire AWE’s stake in RCM
Project Ring 6

 

 

	Industry Overview Process Update Industry Overview Capital Markets Perspective
RCM Overview Microcell Overview Approach to Value Financial Forecasts
Preliminary Views on Value
Project Ring 7

 

 

	Canadian Wireless Industry -Penetration Forecasts
Penetration Forecasts
Forecasts of market penetration differ substantially
Source: Yankee Group, BMO NB Research, RCM Management
A forward 5-year CAGR of 7.3% would achieve 65% market penetration by 2009
Canadian Wireless Subscriber Growth
Source: Canadian Wireless Telecommunications Association and RCMManagement
32.1%23.2%26.4%29.5%26.8%22.3%12.6%11.0%11.8%8.9%8.4%7.3%5.9%0.05.010.015.020.02
5.0199519961997199819992000200120022003200420052006200720082009Wireless
Subscribers0%5%10%15%20%25%30%35%YoY Growth Rate 2004 — 2009 CAGR = 7.3%Total
Canadian Subscribers YoY Growth1999 — 2004 CAGR = 167%Forecasted Canadian
Subscribers47%59%55%51%62%65%20304050607080200120022003200420052006200720082009P
enetration (%)Yankee’s U.S.Yankee’s 3-Yr Lagged CanadaYankee’s CanadaRCMBMO NB
Research CanadaRBC CMResearch Canada
Project Ring 8

 

 

	Global Wireless Industry -Market Penetration
Source: Yankee Group
Global Market Penetration Forecast
Canadian market penetration lags that of other developed markets
Time-Adjusted Market Penetration Since Service Launch
Recently Canada has de-coupled from tracking US trendline
Source: RCM 010203040506070809010020012002200320042005200620072008Penetration
(%)United Kingdom Finland Australia Japan South Korea United States Canada
Canada 3Yr lag 0% 25% 50% 75% 100% 10111213141516171819202122
France Japan Sweden UK USA Canada
Project Ring 9

 

 

	Canadian Wireless Industry -Competition for Subscribers
Leading players converging on ability to win new customers
Market Share of Wireless Subscribers
Source: BMO NB Research Microcell RCM TelusBell 0% 5% 10% 15% 20% 25% 30% 35%
40% Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04 Source: RCM
Quarterly Net Subscriber Additions RCMBell
MobilityTelusMicrocell0%5%10%15%20%25%30%35%40%45%Q3 ‘03Q4 ‘03Q1 ‘04Q2 ‘04Q3
‘0429.2%38.1%27.2%5.5%Annual 2003 Market Share
Project Ring 10

 

 

	ARPU (blended)
Churn (blended)
Constant trend in ARPU over last several quarters
Churn trending downwards for industry. Microcellaffected by higher mix of
prepaid subs
Source: RCM
Source: RCM Canadian Wireless Industry -ARPU and
Churn$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.001Q002Q003Q004Q001Q012Q013Q01
4Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04 Monthly ARPU
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%1Q002Q003Q004Q001Q012Q013Q014Q011Q022Q023Q02
4Q021Q032Q033Q034Q031Q042Q04Monthly Churn
BellTelusRCMMicrocell
BellTelusRCMMicrocell
Project Ring 11

 

 

	Canadian Wireless Industry -ARPU
ARPU (prepaid)
ARPU (postpaid)
Prepaid ARPU dramatically lower than Postpaid
Constant trend in postpaid ARPU over last several quarters
Source: RCM
Source: RCM
$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.001Q002Q003Q004Q001Q012Q013Q014Q011
Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04Monthly ARPU
$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.001Q002Q003Q004Q001Q012Q013Q014Q011
Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04Monthly ARPU
BellRCMMicrocell
BellRCMMicrocell
Project Ring 12

 

 

	Canadian Wireless Industry -Churn
Churn (prepaid)
Churn (postpaid)
RCM not focused on prepaid churn
Postpaid churn trending downward for industry leaders
Source: RCM
Source: RCM
Note: Churn shown for TelusMobility is its blended churn
Note: Churn shown for TelusMobility is its blended churn
0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%1Q002Q003Q004Q001Q012Q013Q014Q011Q0
22Q023Q024Q021Q032Q033Q034Q031Q042Q04Monthly Churn
0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%1Q002Q003Q004Q001Q012Q013
Q014Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04Montly Churn
BellRCMMicrocellTelus
BellRCMMicrocellTelus
Project Ring 13

 

 

	Canadian Wireless Industry -Revenue Mix (Voice vs. Data)
Source: Yankee Group
Data will become an increasingly important
source of revenue for the industry
99%91%92%93%94%95%97%100%0%20%40%60%80%100%20012002200320042005200620072008
Voice RevenueData
Revenue$5,536$7,297$6,464$8,964$8,540$8,084$9,549$9,295Canadian Wireless Voice
and Data Revenue Forecast
Project Ring 14

 

 

	EBITDA Margins
Margins continuing on an upward trend
Note: Bell Mobility data not available for periods prior to Q1/02
Source: RCM Historic EBITDA
Margins0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%Q1/01Q2/01Q3/01Q4/01
Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04EBITDA MarginsMobility
RCMBell MobilityTelus
Project Ring 15

 

 

	Capex as a % of Network Revenue reaching 11-14% for leading players
11%10%13%14%14%25%050100150200250Q1/01Q2/01Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2
/03Q3/03Q4/03Q1/04Q2/04Capex (C$ millions)-20%0%20%40%60%80%100%Capex as a % of
Network Revenue
Canadian Wireless Industry
-CapexSpendRCMMicrocellBellTelus14%24%44%55%27%41%17%20%22%22%37%31%25%34%050100
150200250Q1/01Q2/01Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04C
apex (C$ millions)0%10%20%30%40%50%60%70%80%90%100%Capex as a % of Network
Revenue63%56%155%82%9%4%3%10%15%27%68%27%31%48%050100150200250Q1/01Q2/01Q3/01Q4/
01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Capex (C$
millions)0%10%20%30%40%50%60%70%80%90%100%Capex as a % of Network
Revenue13%9%26%39%20%25%11%16%18%23%42%48%23%34%050100150200250Q1/01Q2/01Q3/01Q4
/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Capex (C$
millions)0%10%20%30%40%50%60%70%80%90%100%Capex as a % of Network
RevenueCapital expenditure figures not reported

	Project Ring 16

 

 

	Canadian Wireless Industry -Competitors’
Prepaid and Postpaid Strategies

	Recent trend towards lower mix of prepaid customers
among leading players Prepaid/Postpaid Split (2Q
‘02)26%15%23%46%74%85%77%54%0%10%20%30%40%50%60%70%80%90%100%BellTelusRCMMicroce
llPercentage of Wireless SubscribersPrepaid/Postpaid Split (2Q
‘04)24%18%19%52%76%82%81%48%0%10%20%30%40%50%60%70%80%90%100%BellTelusRCMMicroce
llPercentage of Wireless Subscribers
PrepaidPostpaid
PrepaidPostpaid
Project Ring 17

 

 

	Canadian Wireless Market Trends
ARPU Growth
Timeline to 3G Introduction
Market has exhibited ARPU growth to date (2000 -2004 CAGR of 3.2%) but is
forecast to slow
RCM forecasts a flat to declining ARPU profile Canada appears to be on a
2-3 year lag versus US market and more versus European markets Wide range of
estimates for 2009 penetration: Yankee Group 55%, RCM management 65%, RBC CM
Research 60.1%, UBS 61% by 2010 and, BMO NB Research 61.6% by 2008 Canadian
Penetration LevelsGrowth in DataFactors Influencing Churn Market seeing better
than expected growth in data revenue Boosts ARPU and margins Microcell
transaction reduces competition Disciplined pricing environment Anticipated
entry of Virgin into prepaid market in 2005 Growth in prepaid customers
Potential for wireless number portability, but not likely until post 2005
Introduction of 3G Timing of capex spend being accelerated by some
competitors, delayed by others Likely to emerge in the US first, impacting
Canadian roaming revenues Handset development importantImpact of Wi-Fi / WiMax
Potential risk to cellular industry long term Not yet a topic of concern among
industry analysts
Project Ring 18

 

 

	Canadian Wireless Market -Analyst Commentary
Research analysts generally positive on industry outlook Research Scotia
Capital Henderson, John Fall 2004 “Our work shows the most important driver of
value increases in the wireless industry is ARPU growth, followed by reductions
in churn, cost of acquisition declines, and growth in subscriber additions.
Year-to-date growth in ARPU has continued at robust 5%+ levels, of which we
estimate 40% is derived from wireless data adoption” BMO Nesbitt Burns Rhamey,
Peter October 1, 2004 “In the wireless segment, performance has been
impressive, characterized by strong top-line growth and improved cost
efficiencies” RBC Capital Markets Talbot, Richard October 1, 2004 “Following a
strong 2003, Canada’s wireless operators continued to exceed the high end of
expectations in the first half of 2004. Both financial and operating metrics
for the four major operators continued to improve.” “The launch of Virgin
Mobile Canada in early 2005 will likely result in increased competition in the
prepaid market. As a result we forecast that customer churn levels will
actually increase in the near term (2005), before declining in 2006.” TD
Securities Lambert, David July 20, 2004 “...increased minutes of use and a
subscriber growth acceleration could drive all four carriers to increase their
capex guidance”
Project Ring 19

 

 

	Capital Markets Perspective Process Update Industry Overview Capital Markets
Perspective RCM Overview Microcell Overview Approach to Value Financial
Forecasts Preliminary Views on Value
Project Ring 20

 

 

	Relative Performance
RCM showing strong performance Relative PerformanceJan 1, 2004 -Nov 8,
2004050100150200250Jan-04Apr-04Jul-04Oct-04Western Wireless 51% RCM 57% US
Cellular 19%Nextel 0%AT&T Wireless 85% Microcell 104%Feb-17-2004Cingular
announces bid for AT&T WirelessMay-13-2004TELUS launches bid for
MicrocellRelative PerformanceJan 1, 2003 -Nov 8,
20040100200300400500600700Jan-03Apr-03Jul-03Oct-03Jan-04Apr-04Jul-04Oct-04Wester
n Wireless 472% RCM 199% US Cellular 62%Nextel 123%AT&T Wireless 140% Microcell
138%May-13-2004TELUS launches bid for MicrocellFeb-17-2004Cingular announces
bid for AT&T Wireless
Project Ring21

 

 

	RCM -Turn of the Float Analysis
Approximately 99% of float has turned at or below current share price of $43.97
5%25%33%19%12%1%4%1%5%30%64%82%94%95%99%100%0%20%40%60%80%100%120%$31-$33$33-$35
$35-$37$37-$39$39-$41$41-$43$43-$45$45-$47Volume (%)Current Price (8-Nov-04):
$43.97Non CumulativeCumulativeNote: Last turn of float (June 2004 to Nov
2004)RCM — Turn of the Float Analysis
Project Ring 22

 

 

	Share Price Performance
Strong performance despite announcement of potentially high leverage post
re-capitalization transaction
Price$10$15$20$25$30$35$40$45$50Jan-04Mar-04May-04Jul-04Sep-04Nov-04Share Price
(C$)13-Sept-04RCI to acquire AT&T Wireless’ stake in RCM for cash consideration
of $36.37 per shareRCMShare Price PerformanceYear-to-Date28-April-04RCI
receives letter from AT&T Wireless’ of its intention to explore monetization of
its RCM stake17-Feb-04RCM prices private placement of US$750 Million Notes
26-Oct-04RCM announces 3rd 03-Nov-04CRTC approvesMicrocell
transaction16-Sept-04RCM makes filings with the Canadian Competition Bureau
regarding Microcell20-Sept-04RCM announces agreement to purchase Microcell for
cash consideration of $35/share05-Nov-04Microcell quarter results; indicates
intention to fund both Microcell & AWE stake purchases with debttransaction
offer expires. 96% of class A shares tendered to RCM offer 3-Sept-04RCI and AWE
enter agreement to facilitate possible sale by AWE of its entire 34% stake in
RCM
Project Ring 23

 

 

	Wide range of target prices although most agree RCM is an “Outperform”
Analysts’ Views Rogers Wireless EPS Estimate EBITDA Estimate Firm
Recommendations Current Target Price (C$) % Change Year over Year Date 2004E
2005E 2004E 2005E Selected Commentary RBC Capital Markets Outperform $50.00 85%
27-Oct-04 $1.36 $2.13 $940 $1,122 “RCM shares trade at 8.9x 2004E and 7.2x
2005E EBITDA, a premium to US wireless peers at 7.1x and 6.5x, which we feel is
warranted given RCM’s superior EBITDA growth and more favourable competitive
environement.” Merril Lynch Outperform $50.00 N/A 27-Oct-04 N/A N/A N/A N/A N/A
CIBC World Markets Outperform $52.00 73% 26-Oct-04 $1.40 $0.02 $935 $1,049
“Rogers Wireless continues to generate strong operating results driven by
healthy post-paid subscriber growth, impressive increases in ARPU, strong
network revenue growth, significant margin improvements and attractive free
cash flow. In our view this reflects the attractive fundamentals associated
with the Canadian wireless sector” BMO Nesbitt Burns Hold $47.00 45% 26-Oct-04
$1.39 $2.80 $934 $1,100 “We have increased our revenue estimates by 3-4% in
2004 and 2005 to reflect good subscriber and ARPU performance... Our 2005
estimate (EBITDA) has been increased to reflect the stronger growth outlook for
the company” Credit Suisse First Boston Outperform $48.00 92% 26-Oct-04 $1.24
$2.98 $921 $1,053 “On a longer term view, the acquisition should enable Rogers
to add to its spectrum holdings, lower operating costs and add a significant
brand in the pre-paid segment... Microcell standalone EBITDA margin could rise
to the level of Rogers Wireless” Scotia Capital Outperform $65.00 71% 27-Oct-04
$1.54 $2.80 $943 $1,350 “Rogers Wireless currently trades at 7.7x EV/EBITDA
(NTM). Rogers Wireless’ US peer group valuation multiples are 6x-7x (excluding
AWE at 11x). Our $65 target price represent a 7.5x multiple... We believe the
dynamics of the Canadian wireless market are far more attractive than in the
US”
Project Ring24

 

 

	RCM Overview Process Update Industry Overview Capital Markets Perspective RCM
Overview Microcell Overview Approach to Value Financial Forecasts Preliminary
Views on Value
Project Ring 25

 

 

	Historical Operating Statistics -RCM Cost of
Acquisition$279$295$377$390$366$398$428$385$361$416$362$372$344$0$50$100$150$200
$250$300$350$400$450Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04
Q3/04Cost of AcquisitionARPU by
Product$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00Q3/01Q4/01Q1/02Q2/02Q3/02Q
4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04ARPU (monthly)Postpaid ARPUPrepaid
ARPUPaging ARPUNet Subscriber AdditionsChurn (Blended)PrepaidPostpaid Market
share of net adds
2.63%2.01%1.93%2.23%2.65%2.07%2.13%2.02%1.98%2.23%1.97%2.14%2.03%0.00%1.00%2.00%
3.00%Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04Churn
Rate
(Monthly)58.1106.010.8(7.8)17.323.7(11.0)(11.6)18.26.4(29.4)(5.7)8.755.474.254.2
71.371.4123.061.275.797.0166.283.288.388.833.9%26.7%23.3%25.8%22.0%29.5%22.7%31.
7%30.6%20.4%22.8%24.6%26.8%(50.0)0.050.0100.0150.0200.0Q3/01Q4/01Q1/02Q2/02Q3/02
Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04Net Additions
(000s)0%5%10%15%20%25%30%35%40%Market share of net adds
Project Ring 26

 

 

	Historical Operating Performance -RCM
Network Revenue and EBITDA Margins
Free Cash Flow Generation(1)
Strong historic margin improvements and cash flow generation
1.Defined as EBITDA -Capex
(100.0)(50.0)0.050.0100.0150.0200.0250.0300.0Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03
Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04($
millions)41.9%29.6%21.8%33.2%36.5%40.7%30.6%39.8%41.1%26.9%30.1%34.3%26.1%010020
0300400500600700Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/0
4Network Revenue ($ millions)0%5%10%15%20%25%30%35%40%45%EBITDA Margin
Project Ring 26

 

 

	RCM -Key Business Issues
Competition for MicrocellSubs
Large Prepaid Component of MicrocellSubs
Near-term, Microcellsubs targeted heavily by competitors
BCE already has specific offering to Microcellsubs
RCM to maintain City Fido plan
RCM forecasting Year 1 net loss of 15% of Microcellpostpaid subs post
“reacquisition” efforts
Microcell’sportfolio more prepaid than RCM’s(52% vs 19%)
RCM focused on postpaid subs, implying high true $/sub acquisition cost
for the deal
Spectrum Value / Sale?
Management currently assumes the sale of 10 MHz of spectrum in 2006 for
$200m
Several reasons why this assumption could be challenged: i) demand
questionable; ii) valuation challenging, iii) may be attractive to keep long
term Timing of UMTS and other technologies uncertain, affecting
capexforecasting Analysts comment that BCE and TELUS better positioned for 3G
wave given their relatively greater debt capacitiesUMTS Spend and 3G
PreparednessLeadership in Data Revenue RCM forecasts greater-than-average
portion of data in overall network revenue Forecast based on fact that RCM is
the leader in the data markettoday Industry churn likely to rise initially but
then settle again (similar to the impact felt in US) Not expected until after
2005 in CanadaImpact of Local Number Portability
Project Ring28

 

 

	MicrocellOverview Process Update Industry Overview Capital Markets Perspective
RCM Overview Microcell Overview Approach to Value Financial Forecasts
Preliminary Views on Value
Project Ring29

 

 

	Historical Operating Statistics -Microcell
2.60%3.00%2.80%2.80%2.80%3.90%3.80%2.60%3.30%3.30%3.50%2.80%3.30%0.00%1.00%2.00%
3.00%4.00%5.00%Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04
Churn Rate (monthly)Net Subscriber AdditionsChurn (Blended)
9.948.529.031.148.329.6(8.9)(17.8)27.832.3(1.0)(29.3)(1.9)56.851.8(2.4)11.9(42.4
)(59.8)(31.1)(10.4)13.575.113.445.977.72.3%10.6%16.6%19.1%5.2%5.0% (10.0%)
(6.3%)
(25.2%)13.8%9.3%13.7%15.7%(80)(60)(40)(20)020406080100Q3/01Q4/01Q1/02Q2/02Q3/02Q
4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04Net Additions (000s) (30%) (25%) (20%)
(15%) (10%) (5%)0%5%10%15%20%25%PrepaidPostpaid % of Net AddsMarket Share of
Net AddsCost of AcquisitionARPU by ProductPrepaid ARPUPostpaid
$311$262$298$294$251$287$274$261$254241$289$253$250$0$30$60$90$120$150$180$210$2
40$270$300$330Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04C
ost of Acquisition
$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/
03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04ARPU (monthly)ARPU

	Project Ring 30

 

 

	Historical Operating Performance -Microcell
Revenue and EBITDA Margins
Free Cash Flow Generation (1)
1.Defined as EBITDA -Capex
Microcell’s margins and cash flow generation are depressed
(120)(100)(80)(60)(40)(20)02040Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/0
3Q1/04Q2/04Q3/04($ millions)
25.5%14.9%15.8%18.2%9.7%17.5%12.9%-1.5%20.2%25.2%22.7%9.8%3.8%020406080100120140
160180Q3/01Q4/01Q1/02Q2/02Q3/02Q4/02Q1/03Q2/03Q3/03Q4/03Q1/04Q2/04Q3/04Revenue
($millions)(5%)0%5%10%15%20%25%30%EBITDA MarginMargin RevenueEBITDA
31Project Ring

 

 

	Analysts fairly consistent regarding synergies,
PV of tax losses and pro forma leverage
Analysts’ Summary of MicrocellTransaction RBC BMO Scotia CSFB Valuation 7.25x
EV/EBITDA ‘05/’06 7.4x EV/EBITDA ‘05/’adds $4.00 to share price “Fairly benign”
Annual Synergies $54m in ‘05 $111m in ‘06 Network EBITDA margin to 43.2% in ‘06
$150-200m of EBITDA Large component from network integration $100m + EBITDA
improvement $90m EBITDA upside to 200s PV of Tax Losses Value $100 — $200m
$300m $300m $250m Leverage Strong free cash flow reduces financing risk
Expected to rise to 5.0-5.5x Net Debt/LTM EBITDA Pro forma 5.2x Debt/ EBITDA in
2005 5.2x Debt/EBITDA Research RBC Capital Markets Talbot, Richard October 14,
2004 “The migration path for GSM players to the next generation (3G networks is
expected to be costly. As a result, Rogers’ future capex requirements are
likely to be further increased following the purchase. While none of the
Canadian wireless carriers have yet made public their plans with respect to 3G
we estimate it will likely be a 2006 event at the earliest... Rogers may be at
a disadvantage to TELUS Mobility and Bell Mobility, which have less debt
leverage, and the ability to move quickly to 3G and gain competitive advantage
over RCM.” BMO Nesbitt Burns Rhamey, Peter September 21, 2004 “We note that for
TELUS and Bell Canada, the prospect of Rogers Wireless gaining market share
advantage is amply offset by the prospect that the competitive dynamics in the
industry have improved and that Rogers Wireless with significant debt will
price rationally going forward.”
06Deal 32Project Ring

 

 

	Approach to Value Process Update Industry Overview Capital Markets Perspective
RCM Overview Microcell Overview Approach to Value Financial Forecasts
Preliminary Views on Value
33Project Ring

 

 

	Approach to Value
•BMO Nesbitt Burns has examined three methodologies
-discounted cash flow approach
-comparable trading approach
-precedent transaction approach
•En-bloc value:
-highest price available in an open and unrestricted market
-no adjustment for liquidity, lack of control or effect of transaction
-Must consider potential buyers: Review of Potential Buyers International
Buyers Blocked by foreign ownership restrictions Bell Almost certain to be
blocked by Competition Bureau Telus Almost certain to be blocked by Competition
Bureau Shaw Communications Potential buyer but without significant synergies,
only bundling capabilities Québecor — Videotron Potential buyer but without
significant synergies, only bundling capabilities Financial Buyers Possible, no
operational synergy value created. Full use of tax losses not certain Rogers
Communications Potential buyer but without significant synergies, only bundling
capabilities -Little synergy value expected from buyer universe
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	Methodology #1: Discounted Cash Flow Approach
•Methodology:
-based on Management’s forecast for 2005 -2009
-mid-period discounting
-tax loss carry-forwards modeled/valued separately
•Key assumptions:
-pro forma Microcell
-effective assessment date as of Monday November, 8th
-WACC of 9.5% -10.5%, tax loss carry-forwards discounted at Cost of Equity
-pre Issuer Bid financing
•Key limitations:
-highly sensitive to financial assumptions
-terminal value calculation assumes a “steady state”, difficult to assess in
the volatile wireless industry
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	Methodology #2: Comparable Trading Approach
•Methodology:
-observed trading multiples from the North American wireless industry
-focused on EV/EBITDA multiples for 2005 and 2006 and P/E multiples for 2006
-derived trading value range applying selected multiples
-applied take-over premium reflecting premiums paid in precedent Canadian
public company transactions
•Key limitations:
-post acquisition of Microcellthere are no publicly traded comparable companies
in Canada
-while not directly comparable due to differences in size, growthpotential,
coverage, network and industry dynamics between the U.S. and Canada, we believe
that the U.S. companies such as Nextel, AT&T Wireless (pre bid), US Cellular
and Western Wireless may provide benchmarks
-the wireless industry is more mature in Europe and Japan and less mature in
Asia Pacific, Africa and South America rendering companies in these markets
less comparable to RCM
-observed trading multiples may reflect factors not to be taken into account in
an assessment of en-bloc value (e.g. liquidity, minority discounts)
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	Methodology #3: Precedent Transaction Approach
•Methodology:
-considered recent transactions with purchase prices greater than$500 million
principally in the U.S. and Europe
-focused more specifically on the Cingular/ AT&T Wireless, BCE / Bell Mobility,
and RCM / Microcelltransactions in particular
-relied primarily on: EV/EBITDA, adjusted for announced synergies, and,
premiapaid
•Key limitations:
-there have been very few relevant, comparable completed public transactions in
the wireless industry in recent years (i.e. unaffected by Tech bubble)
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	Financial Forecasts Process Update Industry Overview Capital Markets
Perspective RCM Overview Microcell Overview Approach to Value Financial
Forecasts Preliminary Views on Value
38Project Ring

 

 

	Background to Development of the Management Case
•BMO NB has developed the “Management Case” model on behalf of Management
-BMO NB has made clear to Management that this is RCM’smodel and we have acted
as designers and builders on their behalf
-Management has at various times reviewed and vetted the model created
•Model developed through:
-initial budget and forecast figures supplied by Management (internal budgets
‘04 -’06) and copies of Board and Credit Rating Agency presentations regarding
the Microcellacquisition
-sessions with Management adjusting assumptions and forecasts to arrive at a
current Management view of both RCM stand-alone and RCM pro forma Microcell
39Project Ring

 

 

	Model Logic -Subscriber Base
Canadian Population
Wireless Market Penetration
Wireless Market Size and Annual “Net Adds”
RCM Existing Market Share
RCM Market Share of Net Adds
RCM Subscribers (“Subs”)
MicrocellSubs Acquired
One-time Loss of MicrocellSubs
Pro Forma MergeCo Subs
Annual Net Adds
Annual Deactivations (Both RCM and MicrocellSubs)
Gross Adds (Both RCM and MicrocellSubs)
X
+
+
-
=
-
+
= % Post-Paid Subscribers-Higher value becausehigher ARPU% Pre-Paid
Subscribers-lower valuebecause lower ARPU
40Project Ring

 

 

	Model Logic -Revenues
Number of Subs
Average Revenue Per User -“ARPU”
Cellular Revenue
X
Roaming Revenue
Data Revenue
One-way Messaging
Network Revenues
Equipment Sales
+
+
+
=
+
-Essentially a pass-through with
little or no margin
Total Revenue
=
Focus for Management
41Project Ring

 

 

	Model Logic -Costs
Number of Subs
Operating Costs -Driven per Sub or through simple growth rates
-Customer Service
-Retention
-Credit & Collections
-IT
-Finance & Accounting
-Admin
-Other
X
Additional Microcell Opex
-Schedule provided by Microcell
+
One-time MicrocellTransition Costs
+
Sales & Marketing (“Cost of Acquisition”)
-Large fixed cost component
-Variable components driven by “Gross Adds”
+
+
Equipment Costs
Total Costs
=
-Only in ‘05 and ‘06
42Project Ring

 

 

	Key Drivers -Market Share
Strong penetration forecast offset somewhat by slight market share decline
forecast Canadian Wireless
Penetration35%38%42%47%51%55%59%62%65%0.05.010.015.020.025.030.035.0200120022003
200420052006200720082009(mm of Canadians)0%10%20%30%40%50%60%70%Market
ShareVoice penetrationPro Forma Voice
Subscribers37%36%34%34%34%35%0.01.02.03.04.05.06.07.08.0RingMuse2004
Combined20052006200720082009Subscribers
(mm)32%33%33%34%34%35%35%36%36%37%37%38%Blended Market ShareShare
PostpaidPrepaidMarket
subsCanadian populationWireless 43Project Ring

 

 

	Forecast fairly consistent market share of Net Adds post 2007 Key Drivers -Net
AdditionsNet Subscriber
Additions28%25%32%33%33%28%(50)-501001502002503003504004502004200520062007200820
09Net Adds (000s)0%5%10%15%20%25%30%35%Market share of Net Postpaid
AddsPrepaidPostpaidMarket Share of Net Postpaid Adds
44Project Ring

 

 

	Key Drivers -ARPU
Moderate decline in postpaid ARPUs forecast
Note: Average Revenue per User (ARPU) expressed on a monthly basis is defined
as cellular revenue divided by the average subscriber base for the period
1. Actuals for 2001 -2003 include some in-bound roaming revenue modelled
separately in forecasts for 2004 -2014
RCM and New Subscribers’ ARPU(1)
Microcell Legacy Subscribers’ ARPU
$55.78$56.16$53.56$52.58$51.91$51.24$50.59$49.94$57.25$13.00$12.75$12.50$11.75$1
1.50$11.02$10.08$10.17$10.29$0$10$20$30$40$50$60$7020012002200320042005200620072
0082009Monthly ARPUPostpaid
ARPU$48.45$48.97$50.04$51.69$51.69$15.00$15.00$15.00$15.00$15.00$0$10$20$30$40$5
0$60$7020052006200720082009Monthly ARPUPostpaid ARPU
ARPUPrepaid
ARPUPrepaid 45Project Ring

 

 

	Key Drivers -Monthly Churn
Forecast moderate decline in churn to 2009
Note: Churn is defined as lost subscribers divided by the average number of
subscribers in the period Postpaid Subscriber Churn RatesPrepaid Subscriber
Churn
Rates0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%20012002200320042005200620072008200
9Monthly
ChurnForma0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%200120022003200420052006200720
082009Monthly ChurnForma
RCMMicrocellPro
RingMicrocellPro 46Project Ring

 

 

	Other Assumptions -PP&E and Tax Attributes

	•Treatment of PP&E

	-RCM book and tax balances provided by class

	-RCM book and tax depreciation rates provided by class

	-capex details provided by class

	-Microcell book PP&E allocated to RCM PP&E classes based on historical public
information

	Microcell total UCC pools provided by RCM management and allocated to
classes based on Microcell book split
used same book and tax depreciation rates as for RCM

	-capex savings from Microcell acquisition allocated to Network Equipment

	•Net Operating Losses (NOLs)

	-total of approximately $2.8 billion (post implementation of tax planning
strategies)

	RCM has approximately $1.0 billion

	Microcellhas approximately $1.8 billion

	-full amount of NOLs available to shelter taxable income
47Project Ring

 

 

	Other Assumptions -Purchase Equation
Over $600 million of goodwill assumed Purchase Equation(C$ mm)Total purchase
price$1,287Less: book value of equity acquired($478)Excess purchase
price$809Allocation of excess purchase priceSpectrum and
Brand$173Goodwill$636Total$809Key Assets(C$ mm)Microcell @RCM @Book
ValuesWrite-UpsFair ValuesPP&E$462$0$462Spectrum and
Brand$227$173$400Goodwill$0$636$636
48Project Ring

 

 

	BMO NB Difference to Management Case
•No credit given for sale of spectrum. Management forecasts $200million sale in
2006
49Project Ring

 

 

	Financial Projections -Summary Data Financial Projections2004-2009(C$
millions)200420052006200720082009CAGRNetwork
Revenue$2,399.9$3,308.4$3,594.0$3,862.9$4,131.1$4,351.213%EBITDA
(1)913.51,224.61,437.91,619.01,806.41,929.216% EBITDA Margin of Network
Revenue38.1%37.0%40.0%41.9%43.7%44.3%Depreciation &
Amortization$466.6$581.3$649.8$599.6$562.9$605.35%Capital
Expenditures416.0577.0456.8545.6425.0611.38%Cash
Taxes0.00.00.00.045.1447.6naEBITDA less
Capex497.5647.6981.11,073.41,381.41,317.922%EBITDA less Capex less Cash
Taxes497.5647.6981.11,073.41,336.4870.312%Total Debt /
EBITDA2.3x3.0x2.5x2.2x2.0x1.8xNet Debt / EBITDA2.1x2.6x1.6x0.9x0.1xna1.
Adjusted for one-time integration costs of $224.9 mm in 2005 and $1.5 mm in
2006
50Project Ring

 

 

	Incremental Impact of Microcell Incremental Impact of Microcell($
millions)200420052006200720082009Network Revenue
Stand-alone$2,399.9$2,676.9$2,958.2$3,288.6$3,537.8$3,740.0 Pro
Forma$2,399.9$3,308.4$3,594.0$3,862.9$4,131.1$4,351.2Incremental Network
Revenue$0.0$631.5$635.8$574.3$593.3$611.2EBITDA
Stand-alone$913.5$1,067.9$1,187.3$1,378.6$1,531.3$1,617.1 Pro
Forma(1)913.51,224.61,437.91,619.01,806.41,929.2Incremental
EBITDA$0.0$156.8$250.6$240.3$275.2$312.2Depreciation & Amortization
Stand-alone$466.6$527.3$597.1$559.8$531.5$584.6 Pro
Forma466.6581.3649.8599.6562.9605.3Incremental Depreciation &
Amortization$0.0$54.0$52.6$39.8$31.4$20.6Capital Expenditures
Stand-alone$416.0$489.0$572.8$685.6$454.0$683.3 Pro
Forma416.0577.0456.8545.6425.0611.3Incremental Capital
Expenditures$0.0$88.0($116.0)($140.0)($29.0)($72.0)Cash Taxes
Stand-alone$0.0$0.0$103.1$262.9$318.7$352.1 Pro
Forma0.00.00.00.045.1447.6Savings in Cash
Taxes$0.0$0.0$103.1$262.9$273.6($95.6)EBITDA less Capex
Stand-alone$497.5$578.9$614.5$693.1$1,077.3$933.8 Pro
Forma497.5647.6981.11,073.41,381.41,317.9Incremental EBITDA less
Capex$0.0$68.8$366.6$380.3$304.2$384.2EBITDA less Capex less Cash Taxes
Stand-alone$497.5$578.9$511.4$430.2$758.6$581.7 Pro
Forma497.5647.6981.11,073.41,336.4870.3Incremental EBITDA less Capex less Cash
Taxes$0.0$68.8$469.7$643.2$577.8$288.61. Adjusted for one-time integration
costs of $224.9 mm in 2005 and $1.5 mm in 2006
51Project Ring

 

 

	Preliminary Views
on Value Process Update Industry Overview Capital Markets Perspective RCM
Overview Microcell Overview Approach to Value Financial Forecasts Preliminary
Views on Value
52Project Ring

 

 

	DCF Assumptions
•5 Year DCF
•WACC range of 9.5% -10.5%
•Terminal growth approach to calculating terminal value (1.5% -2.5% )
•Mid-year discounting convention
•Tax losses valued separately
53Project Ring

 

 

	Observations on WACC Selected WACC range of 9.5% -10.5%•Very few comparable
companies in North America•Observed betas have very low R-squared’s•Microcell
ignored due to zero R-squared and uncharacteristically low beta of .22•AT&T
Wireless (pre-bid) includedto broaden the universe •Selected beta of 1.3
implies an unleveredbeta of 1.02 based on a targeted 40%/60% Debt / Equity
structure•Cost of debt based on the spread between current yield on RCM’s 6.75%
U.S. Note due 2014 and benchmark US Treasury rate swapped into Canadian
dollars•Equity Risk Premium of 6% based on observed historicalpremia over
benchmark Canadian treasuries
54Project Ring

 

 

	WACC LeveredEstimatedDebt/Company NameBarra BetaBloomberg BetaR2Tax RateMarket
EquityUnlevered Beta% Debt% EquityAT&T
Wireless(1)1.271.130.1735.0%32.2%0.9324.4%75.6%Microcell Telecommunications Inc
(1)0.330.220.0033.0%82.6%0.1445.2%54.8%Nextel Communications
Inc.1.351.350.2135.0%29.1%1.1422.5%77.5%US Cellular
Corp.0.910.900.2035.0%33.4%0.7425.0%75.0%Western
Wireless1.271.880.1635.0%67.0%1.3140.1%59.9%Rogers Wireless
(3)0.411.190.1236.3%58.5%0.8736.9%63.1%Mean
0.851.1134.9%54.1%0.8434.0%66.0%Median 0.911.1935.0%58.5%0.8736.9%63.1%Average
(ex. Microcell)1.041.291.00AssumptionsCost of EquityCorporate Tax Rate36.3%Cost
of Equity:Target Capital Structure:Debt40% Where:Equity60% Risk Free Rate
(Rf):4.5% Market Risk Premium:6.0%WACC Calculation Risk Free Rate
(Rf)(2):4.46%Spead3.25% Beta1.30Cost of Debt7.7%Cost of Debt (After-Tax)4.9%
Cost of Common Equity = 12.3%BetaWACCUnleveredLeveredBloomberg Beta of
Comparables (Mean)1.001.42 Cost of Debt (After-Tax)4.9%Bloomberg Beta of
Comparables (Median)0.871.24Barra Beta — Wireless telecommunications1.05Cost of
Common Equity = 12.3%Selected Levered Beta0.911.30WACC=9.3%1. Capitalization
reflects pre-bid prices; No longer publicly traded2. Govt. of Canada 10 Yr3.
Pro Forma for Microcell Transaction
55Project Ring

 

 

	Five Year DCF -Pre NPV of NOLs Stand-alone11/9/2004 to Projected Fiscal Year
Ending 12/31Free Cash
Flow12/31/200412/31/2004(1)20052006200720082009Terminal(C$ million)Selected
Data:Revenue$2,644.5$537.8$3,703.8$4,005.7$4,272.3$4,530.8$4,753.9$4,849.0EBITDA
913.5$177.8999.71,436.41,619.01,806.41,929.21,967.8 EBITDA
Margin34.5%33.1%27.0%35.9%37.9%39.9%40.6%40.6%Unlevered Free Cash FlowsEBIT
$447.0$93.4$418.4$786.7$1,019.3$1,243.5$1,324.01,350.5 Cash
Taxes(162.3)(33.9)(151.9)(285.6)(370.0)(451.4)(480.6)(490.2)Unlevered Net
Income$284.7$59.5$266.5$501.1$649.3$792.1$843.4$860.2 Depreciation
466.6$84.4581.3649.8599.6562.9605.3617.4 Increase in Deferred
Taxes0.2$2.416.5(13.4)(0.5)6.9(10.8)0.0 Changes in Working
Capital(4.7)$1.812.2(7.5)(7.4)(21.6)0.41.6 Capital
Expenditures(416.0)($83.8)(577.0)(456.8)(545.6)(425.0)(611.3)(525.0) Changes in
Other0.0$0.00.00.00.00.00.00.0Unlevered Free Cash
Flow$330.8$64.3$299.6$673.1$695.5$915.3$827.0$954.2Terminal Growth RateTerminal
Growth Rate1.0%1.5%2.0%2.5%3.0%1.0%1.5%2.0%2.5%3.0%WACCTerminal
ValueWACCImplied Terminal Trailing P/E
Multiple(c)10.0%$10,601.8$11,225.4$11,927.0$12,722.2$13,630.910.0%14.5 x15.3
x16.2 x17.3 x18.5 xWACCEnterprise Value as of November 8, 2004WACCEquity Value
as of November 8,
2004(a)9.0%$10,700.3$11,233.1$11,842.1$12,544.7$13,364.59.0%$7,304.1$7,836.9$8,4
45.9$9,148.5$9,968.29.5%$10,037.310,497.611,019.211,615.3$12,303.29.5%6,641.17,1
01.37,623.08,219.18,907.010.0%$9,448.79,849.210,299.810,810.5$11,394.210.0%6,052
        .46,453.06,903.67,414.37,997.910.5%$8,922.59,273.59,665.710,106.9$10,606.910.5%5
        ,526.35,877.26,269.46,710.67,210.711.0%$8,449.6$8,758.9$9,102.5$9,486.6$9,918.61
1.0%5,053.45,362.65,706.36,090.36,522.4WACCImplied Terminal Trailing EBITDA
MultipleWACCEquity Value per Share as of November 8, 2004(b)9.0%6.2 x6.6 x7.1
x7.6 x8.2
x9.0%$50.07$53.73$57.90$62.72$68.349.5%5.86.26.67.17.69.5%45.5348.6852.2656.3561
        .0610.0%5.55.86.26.67.110.0%41.4944.2447.3350.8354.8310.5%5.25.55.86.26.610.5%37
        .8940.2942.9846.0149.4311.0%4.95.25.55.86.211.0%34.6436.7639.1241.7544.711.
Equal to approximately 2 months’ of 2005 free cash flow adjusted for one-time
costsNote: Terminal year reflected above represents a 2.0% perpetual growth
rate.(a) Equity Value equals Enterprise Value less total debt and preferreds,
plus cash, option proceeds and investments in unconsolidated subsidiaries.(b)
Equity Value per Share equals Equity Value divided by Fully Diluted shares
outstanding.(c) Terminal Equity Value equals the Terminal Value less net debt
plus the book value of unconsolidated investments.
56Project Ring

 

 

	DCF Sensitivity Analysis (Pre NPV of NOLs) Sensitivity Analysis20052009Market
Penetration (+/- 2.5%)51.1%65.0%$42.12to $52.54Market Share of Net Adds (+/-
4%) — Postpaid35.2%32.0%$44.15to $50.51 — Prepaid23.0%28.3%Monthly Churn (+/-
0.2%) — Postpaid1.68%1.44%$45.52to $49.13 — Prepaid3.07%2.74%Monthly ARPU (+/-
$1.00) — Postpaid$52.58$49.94$42.76to $51.89 — Prepaid$11.50$13.00Capex (+/-
10%)$416$611$43.73to $50.93$41$43$45$47$49$51$53$55Mid-Point of DCF Value
Range$5.21($5.21)$3.18($3.18)$1.80$4.56$3.60($1.80)($4.56)($3.60)$47.33
57Project Ring

 

 

	NPV of NOLs
•NPV is equal to 22% of NOLs Net Present Value of Tax Losses($
millions)200420052006200720082009Cash Taxes without NOLs
$100.2$18.0$205.8$291.6$376.9$434.7Cash Taxes with
NOLS$0.0$0.0$0.0$0.0$45.1$447.6Savings$100.2$18.0$205.8$291.6$331.8($13.0)Discou
nt Rate12.00%12.25%12.50%NPV$647.77$617.3$612.4$607.6NPV per
share$4.23$4.20$4.17Aggregate DCF Value per ShareTerminal Growth
RateWACC1.0%1.5%2.0%2.5%3.0%9.0%$54.27$57.92$62.10$66.92$72.549.5%$49.73$52.88$5
6.46$60.54$65.2610.0%$45.69$48.44$51.53$55.03$59.0310.5%$42.08$44.49$47.18$50.20
$53.6311.0%$38.84$40.96$43.32$45.95$48.91
58Project Ring

 

 

	Precedent Transaction Analysis Premium and Multiple Analysis
SummaryAcquirorRCMCingularTelusBCETargetMicrocellAT&T WirelessClearnetBell
MobilityAverageOffer Price$35.00$15.00$0.53$58.75Target share price
(unaffected)$21.00$8.55$45.80$49.00Equity premium over unaffected price:1 day
66.7%26.9%52.8%19.9%41.6%1 week 37.3%33.3%58.0%29.4%39.5%4
weeks47.7%44.4%66.5%30.6%47.3%Implied EV / EBITDA
Multiple:LTM17.7x10.9xNMF16.0x14.8xFY +113.4x10.9xNA14.7x13.0xFY
+27.9x9.8x34.1x12.0x16.0xImplied EV / Subscriber
Multiple:LTM$1,306$2,792$9,249$3,132$4,120FY +1$1,061$2,619$7,728$2,769$3,544FY
+2$943$2,542$5,445$2,264$2,798Implied EV / EBITDA Multiple:Excludes Tax Asset
and SynergiesLTM14.0x(1)6.6xNMF16.0x12.2xFY +110.7x6.6xNA14.7x10.7xFY
+26.3x6.0x22.7x12.0x11.8x1. Assumes $0.20 per dollar of tax assets
($1.6bn).Note: see detailed transaction list in Appendix C.
59Project Ring

 

 

	M&A Database -PremiaPaid Precedent Canadian Transactions — Equity Value >
C$500MNumber ofAveragePremiumTransactionsSize (1)Transaction Period1 Day1 Week1
Month3
Month200023%28%39%60%24$2,887200121%25%32%38%242,427200225%25%49%62%53,558200315
%17%12%29%45,3312004YTD17%17%20%11%121,4792000 -
2004YTD20%23%30%40%69$3,1362002-2004YTD(No Anticipated
Synergies)20%21%20%12%8$2,5841. Represents Equity Value of the transaction
60Project Ring

 

 

	Preliminary Public Comparable Trading Analysis North American Wireless
Comparable Trading AnalysisShare($ millions except per share
data)PriceMarketEnterpriseEV / EBITDA(1)P / EEV / FCF
(5)08-Nov-04CapValue2004E2005E2006E2005E2006E2005E2006ECanadian Comparables
(C$)Microcell (2)$22.00$854$1,0018.6x 5.1x 3.6x 58.3x 12.6x nmf19.6x RCM
(I/B/E/S) (3)43.976,2919,947NA7.5 6.2 22.4 11.2 14.0 11.5 RCM (Management)
(4)43.976,2919,947NA8.1 6.9 17.7 10.0 15.4 10.1 Group Average8.6x 6.3x 4.9x
40.4x 11.9x U.S. Comparables (US$) NationalNextel Communications
Inc.$27.75$30,730$39,2657.7x 6.7x 5.9x 15.9x 13.0x 13.3 12.9 AT&T Wireless
(Pre-bid)11.8232,51937,3588.8 7.9 8.0 nmfnmf19.7x 15.1x U.S. Comparables (US$)
Regional PlayersWestern Wireless$28.78$2,876$4,9177.8x 6.9x 6.1x 12.7x 12.4x
12.0x 9.9x US Cellular Corp.42.013,6224,7037.0 5.9 5.2 29.8 22.6 32.4 18.6
Group Average US (excluding AWE)7.5x 6.5x 5.7x 19.5x 16.0x 19.2x 13.8x Total
average (pre-bid) excluding RCM8.0x 6.5x 5.8x 29.2x 15.2x 19.3x 15.2x 1.
Estimates per selected street research2. Microcell share price is as of May 30,
2004 prior to Telus’s takeover bid. 3. Estimates taken from select street
research.4. Using management forecasts as estimates.5. FCF defined as EBITDA
less Capex.EV/ Net Debt /EBITDA
MarginsSubscriber(1)EBITDA2004E2005E2004E2005E2004E2005E2004E34.9%69.0%17.8%24.9
%$741$6462.4x
30.617.835.138.72,0131,8472.227.534.134.533.11,7591,6833.932.8%43.4%26.4%31.8%$1
,377$1,2462.3x 17.5%15.4%39.9%41.3%$2,454$2,2571.5x
-5.410.425.527.61,5501,4711.4 43.8%13.3%33.5%34.5%$1,646n/a2.8x
4.417.224.325.8943$8521.816.2%10.2%19.4%20.3%$1,681$1,5542.0x
19.1%25.0%28.2%30.8%$1,467$1,3062.0x EBITDA YOYGrowth Rates
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	Market Metrics Analysis Implied EV / 2006E EBITDA
Multiple5.0x7.1x$25.65$46.717.1x9.0x$47.00$65.006.6x7.4x$40.40$48.506.0x6.8x$34.
50$42.906.0x7.0x$34.90$44.70Share Price RangeMethodologySelected Multiple
RangeBenchmark(1)Indicative Value Per Share Range(2) (C$mm except per share
amounts)Market MetricsHistorical Trading Range52 Wk High52 Wk Low $25.75 -
$46.71Analyst Price Targets(3)$47.00 — $65.00Comparable Trading Analysis2006E
Price / Earnings10.0x12.0x$4.042005E EV / EBITDA7.0x8.0x$1,2252006E EV /
EBITDA6.0x7.0x$1,4381. All figures pro forma Microcell acquisition per
management plan $20$25$30$35$40$45$50$55$60$65$702. As at November 08, 2004.
Pro forma Net Debt of $3396 million as at December 31, 2004.3. Range of $47 to
$52 excluding Scotia Capital
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	Summary Analysis
Least MostRelevanceMethodologySelected Multiple RangeBenchmark(1)Indicative
Value Per Share Range(2) (C$mm except per share amounts)Transaction
MetricsRangeMethodologySelected Comparable Transaction AnalysisEV/EBITDA 2006E
plus PV of NOLs(3)6.0x7.0x$1,438Trading Comparables + 20% Premium2005E EV /
EBITDA (5)7.0x8.0x$1,2252006E EV / EBITDA (5)6.0x7.0x$1,438Discounted Cash Flow
MethodIncluding NOLs — WACC / Growth Rate10.0%/2.0%Indicative RangeIndicative
Range1. All figures pro forma Microcell acquisition per management plan
$35.00$37.50$40.00$42.50$45.00$47.50$50.00$52.50$55.00$57.50$60.0002. As at
November 08, 2004. Pro forma Net Debt of $3396 million as at December 31,
2004.3. Multiple derived from AT&T Wireless and Cingular transaction (synergies
of $6.50 per share or $18B)4. Includes $4.20 of present value NOLs per share5.
Control premium of 20%. Adjusted for capital structure using 40% debt to 60%
equityImplied EV / 2006E EBITDA
Multiple6.4x7.4x$39.10(4)$48.90(4)6.7x7.6x$41.60(3)$51.00(3)6.7x7.8x$42.00(3)$53
        .00(3)7.2x8.1x$47.20$56.50$46.00$54.00Share Price Range
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	Observations
•Preliminary En bloc range $46.00 to $54.00; $50.00 mid-point
•Need to finalize due diligence
•Board has not approved Management forecast
•Meets requirements of 61-501 / Q-27
•Issuer bid value may be different than En bloc value. Fair price
-depends on RCI’sintentions
-capital structure
•Need to confirm no prior valuations
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	Appendices
November 4, 2004
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	Appendix A
Other Information
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	Analyst Comments -Microcell Acquisition
A -1 Date Target Price Comments Richard Talbot RBC CM Oct. 14, 2004 Outperform
Pre Post(1) $50 $54 Deal Reaction - “...purchase of Microcell is an attractive
and potentially accretive transaction...” Valuation - “We value RCM shares
using a combination of 7.25x 2005/06 EV/EBITDA, 16.0x EPS, and a DCF with 5.5x
terminal multiple...” Synergies - “Combined company can achieve significant
cost synergies ($54mm in 2005E rising to $111mm in 2006E)...improve network
EBITDA margins from 35.2% in 2004E to 39.3% in 2005E and 43.5% in 2006E...” Tax
loss - “...estimate the present value of the tax loss shield to RCM to be $100
mm to $200 mm” Leverage - “...debt leverage is the highest in Canada, strength
in RCM’s free cash flow as well as the company’s demonstrated ability to access
the capital markets at attractive rates, reduces financing risk.” Randal
Rudniski CSFB Sept. 22, 2004 Market Perform $46 $46 Deal Reaction - “... a
successful acquisition of Microcell could create meaningful synergies and
shareholder value...” Valuation - “Valuation of the acquisition is fairly
benign, if Microcell can produce the street’s EBIDA expectation in 2005 and if
synergies are produced” Synergies - “Assuming RCM can raise Muse’s margins to
its own level (35%), $90 mm in EBITDA upside to 2005 results... Tax loss -
”...tax loss carry forwards have an NPV of roughly $250 million” Leverage -
“Pro forma RCM debt/EBIDTA will rise to 5.2x from 2.4x...management must
arrange an increase in covenant package...Financing options: 1. Dividend paid
by RCM to equity holders 2. RCM purchases the 48.6 million shares from RCI 3.
Inter-company loan 4. Wireless buys equity in RCI” John Henderson Scotia Sept.
21, 2004 Outperform $60 $64 Deal Reaction - “We believe the proposed Microcell
transaction adds material value to RCM shareholders” Valuation - “At a minimum
we believe Microcell adds $4/share to our RCM target price” Synergies -
“Subscriber churn at Microcell should decrease about 4-5 times...we expect RCM
should be able to generate significant operating and capital cost synergies
(assuming $100 mm of annual cost synergies)” Tax loss - “...estimate of $300
mm” Leverage - “...pro forma debt to rise to 5.2x, which could unnerve
investors...in 2005, we forecast RCMs leverage ratio should improve to 4x”
Peter Rhamey BMO NB Sept. 21, 2004 Market Perform $45 $43 Deal Reaction -
”...increased risk associated with the company given its high financial
leverage and execution risk as the company integrates Muse...” Valuation -
“target priced reduced to $43 from $45 representing a target multiple of 7.4x
2005E pro forma EBITDA” Synergies - “...largest synergies come from network
integration and optimization due to Muse’s network and spectrum position...an
additional $150-$200 mm of EBITDA could be generated off Muse’s subscriber
base” Tax loss - “tax loss carryforwards — $300 mm of value to RCM” Leverage -
“RCM’s leverage is expected to rise to 5.0x-5.5x Net debt/trailing EBITDA...How
the funds can be transferred back to RCI remains to be seen (i.e., intercompany
loan or share buyback at RCM)” 1. Pro forma acquisition of Microcell
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	Other Assumptions
•Other cost line assumptions provided by management (examples)
-Fixed S&M costs growing at 5%
-Customer service costs flat at $3.42/post paid sub and $1.00 perprepaid sub
per month
-Retention costs per sub flat at $4.91/post paid sub per month
•Working capital assumption driven by historical days of turnover
•Sale of spectrum in 2006 for $200m -management assumption
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	Appendix B
Description of Comparable Companies
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	Nextel
B -1 LFY Revenue Mix — US$10,820 mmService revenue91%Equipment revenue9%Company
Overview Area(s) of operation: Throughout the United States Network: Integrated
Digital Enhanced Network (iDEN) Wireless Subscribers: 12.9mm Penetration: Na
Headquarters: Reston, Virginia Employees: 17,000 Other Services: Digital
wireless mobile services, Nextel nationwide, Direct Connect walkie-talkie
service and various other services Capitalization & TradingShare Price
(1)$24.61EV/2005 Rev.2.4xShares Out.1107.6EV/2004 EBITDA6.9xMarket
Cap.$28,027EV/2005 EBITDA6.1xEnterprise Value$34,920P/2005 EPS13.6x1. As of
October 18, 2004.Financial SummaryCY 2003CY 2004CY
2005Revenue$10,820$13,080$14,582Gross Profit$7,669nanaEBITDA$4,321$5,093$5,763
EBITDA Margin40%39%40%EBIT$2,627nanaNet Income
(Reported)$1,472$2,020$2,001Capex$1,716Source: Capital IQ
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	U.S. Cellular
B -2 LFY Revenue Mix — US$2,259 mmService Revenue94%Equipment Sales6%Company
Overview Area(s) of operation: 165 territories in 28 U.S. States Network: CDMA
1XRTT Wireless Subscribers: 4.4 mm Penetration: 10% Headquarters: Chicago,
Illinois Employees: 6,175 Other Services: Offer both digital and analog
handsets, dual and tri mode phones Capitalization & TradingShare Price
(1)$43.25EV/2005 Rev.1.6xShares Out.86.2EV/2004 EBITDA7.2xMarket
Cap.$3,728EV/2005 EBITDA6.1xEnterprise Value$4,995P/2005 EPS31.9x1. As of
October 18, 2004.Financial SummaryCY 2003CY 2004CY
2005Revenue$2,583$2,783$3,062Gross Profit$1,651nanaEBITDA$647$676$792 EBITDA
Margin25%24%26%EBIT$214nanaNet Income (Repo$43$84$117CapexSource: Capital IQ
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	Western Wireless Corp.
B -3 Company Overview Area(s) of operation: 19 Western U.S. States (rural
focus) Network: TDMA/CDMA/GSM Wireless Subscribers: 1.3 mm Penetration: 12%
Headquarters: Washington/Missouri Employees: 2,400 Other: Formed in 1994
through the combination of Pacific Northwest Cellular and General Cellular LFY
Revenue Mix — US$1501 mmSubscriber 47%Austrian operations25%Other foreign
11%Other domestic0%Equipment3%Roamer14%Capitalization & TradingShare Price
(1)$28.20EV/2005 Rev.2.2xShares Out.91.9EV/2004 EBITDA7.4xMarket
Cap.$2,592EV/2005 EBITDA6.5xEnterprise Value$4,674P/2005 EPS12.7x1. As of
October 18, 2004.Financial SummaryCY 2003CY 2004CY
2005Revenue$1,501$1,881$2,065Gross Profit$918nanaEBITDA$449$630$713 EBITDA
Margin30%33%35%EBIT$173nanaNet Income (Reported)($0)$152$204Capex$266Source:
Capital IQ
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	Appendix C
Precedent Transactions
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	Precedent Transaction Analysis
C -1 Wireless Service Providers — Precedent Transactions(C$ millions)LTMFY+1 EV
/ SubscribersDateDateEnterpriseEV /EV /EV /EV
/AnnouncedCompletedAcquirerTargetValueSalesEBITDAEBITDALTMFY + 1POPSCanadian
Transactions20-Sep-04PendingRCMMicrocell$1,5662.47x17.7x13.4x$1,306$943$8213-Sep
-0413-Oct-04RCIRCM
(1)7,3512.948.77.9x1,8721,47524521-Aug-0019-Oct-00TelusClearnet6,76213.63NMFNMF9
        ,2495,15731930-Jul-9925-Oct-99BCEBCE Mobile
Communications5,0113.9316.0x14.7x3,1322,769290Average
5.74x14.1x12.0x$3,890$2,586$234U.S. Transactions17-Feb-0417-Feb-04CingularAT&T
Wireless$60,6842.74x10.9x9.8x$2,792$2,542$20520-Dec-0120-Dec-01US UnwiredIWO
Holdings1,0785.42N/AN/A17108-Oct-0115-Feb-02AT&T
WirelessTelecorp8,50020.65NMF9,999N/A29-Aug-0130-Nov-01AirGate
PCSiPCS1,48110.59NMF6,97612719-Mar-0101-Aug-02AlltelCenturyTel Wireless
assets2,488N/AN/AN/A300Average 9.85x10.9x9.8x$6,589$161International
Transactions08-Jul-04PendingTeliaSoneraOrange
A/S$9791.43x8.4x10.9x$1,619N/A13-Jun-0328-Nov-03Cesky TelecomEurotel
Praha(1)2,7871.463.066128821-May-0121-Dec-01MatavWestel
Mobil2,780N/AN/A1,209N/A19-Nov-0119-Nov-01IPOMMO2 (BT’s Cellphone
unit)16,7712.3323.59.2x1,016105Average 1.74x11.6x10.0x$1,126$196Overall Average
6.15x12.6x11.0x$3,621$213Overall Average (excl. High &
Low)5.51x14.8x$3,957$1711. No change of control.Note: All numbers converted to
Canadian $ based on exchange ratio at close of transaction.
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	Case Study -RCM Acquisition of Microcell
Background:
•On May 14, 2004 TELUS announced an unsolicited takeover bid for Microcell
valued at $1.1bn
-The offer, of $29.00/share represented a 38% and 36% premium to the Class A
and Class B shares respectively
•Microcell’s Board of Directors recommended that shareholders vote against the
proposed deal
-On September 20, 2004 Microcell announced they entered into an agreement with
RCM for the purchase of the company, the bid was valued at $1.6 bn at
announcement
-The offer of $35/share represented a 20% premium to TELUS’ bid
Strategic Rationale:
•Significantly enhances spectrum position
•Acquisition of 1.2 million subscribers (54% of which arepostpaid-postpaidARPU
of $62)
•Improved share in youth segment
•Improved share in Quebec region
•Acquisition of strong Canadian brand
•Access to use significant tax losses (approximately $1.6bn as ofDecember 31,
2003)
•Potential upside withMicrocell’sinterest inInukshuk
C -2
$0.00$5.00$10.00$15.00$20.00$25.00$30.00$35.00$40.00Oct-03Nov-03Dec-03Jan-04Feb-
04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-0402,000,0004,000,0006,000,0008,
000,00010,000,00012,000,000Sep. 20, 2004Rogers announces its bid for
MicrocellMicrocell Class B Share Price PerformanceOctober 21, 2003 — October
20, 2004May 13, 2004Telus announces its bid for MicrocellImplied
PremiumUnaffectedAt Announcement13-May-0420-Sep-04Final Offer Price$35.00$35.00
1 — Day 66.7%5.7%1 — Week 37.3%9.7%4 — Weeks47.7%17.1%
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	Case Study -RCM Acquisition of Microcell
C -3 Transaction ValuePrice Per share$35.00Shares OutstandngBasic29.8McCaw
Warrants4.0Options / Warrants 1.3Fully diluted shares outstanding35.1Gross
Equity Value$1,227.9Less: Proceeds from exercise of Options/Warrants(16.4)
Proceeds from exercise of McCaw Warrants (87.5)Existing Warrants163.2Equity
Capitalization1,287.1Debt (1)$412.7Cash on Hand(133.8)Net Debt /
(Cash)$278.9Plus: Minority Interest—Less: Non-consolidated Investments—Total
Enterprise Value ($MM)$1,566.01. Includes $34.42 million relating to cross
currency swapsTransaction Multiples — Benchmarks(C$ millions)LTMLFY + 1LFY
+2Sales$634$658$795EBITDA$89$117$197Subscribers1.2 1.5 1.7 POPs19.0 Transaction
Multiples — Without Tax AssetLTMLFY + 1LFY +2EV / Sales2.47 x2.38 x1.97 xEV /
EBITDA17.65 x13.40 x7.93 xEV / Subscribers$1,306$1,061$943EV /
POPs$82Transaction Multiples — With Tax Asset (1)LTMLFY + 1LFY +2EV / Sales1.97
x1.89 x1.57 xEV / EBITDA14.04 x10.67 x6.31 xEV / Subscribers$1,039$844$750EV /
POPs$661. Assumes $0.20 per dollar or $320m of tax assets ($1.6bn)
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	Case Study -Cingular’s Acquisition of AT&T Wireless
Background:
•On Jan. 14, 2004, rumours surface that AT&T Wireless is in merger talks
•On Feb. 17, 2004, CingularWireless LLC, a joint venture between SBC
Communications Inc. and BellSouth Corp., announced an agreement to acquire AT&T
Wireless
•Cingular offered AT&T Wireless shareholders $15 cash per common share or
approximately $41 billion
•Combined company would have 46 million customers and coverage in 97 of the top
100 markets
•Combined 2003 annual revenues of the two companies will exceed $32 billion.
Strategic Rationale:
•Give customers access to a larger GSM network in the US
•Improve coverage and call quality
•Improved spectrum holding will allow company to accelerate its offering of
advanced wireless data services
•Combined company expects to achieve more than US$1 billion in operating
expense and capital expenditure synergies in 2006, and in excess of US$2
billion in annual savings beginning in 2007
C -4 Implied PremiumAtAtAnnouncementCompletion17-Feb-0426-Oct-04Final Offer
Price$35.00$35.001 — Day 6.5%0.5%1 — Week 8.6%1.4%4 — Weeks18.7%1.4%Bid History
$8.55$15.00$1.44$3.79$1.22Bid History $0.00$4.00$8.00$12.00$16.00Unaffected
SharePriceTakeover SpeculationCingularAnnouncementBid PriceFinal Purchase
Price13-Jan-0414-Jan-0417-Feb-04
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	Case Study -Cingular’s Acquisition of AT&T Wireless

	C -5 Transaction ValuePrice Per share (US$)$15.00Shares
OutstandngBasic2,729.7Options / Warrants 71.7Fully diluted shares
outstanding2,801.4Gross Equity Value$42,021.3Less: Proceeds from exercise of
Options/Warrants(603.3)Equity Capitalization41,417.9Debt$10,322.0Cash on
Hand(6,026.9)Net Debt / (Cash)$4,295.1Plus: Minority Interests$32.0Less:
Non-consolidated Investments($1,152.0)Total Enterprise Value
($MM)$44,593.0Transaction Multiples — Benchmarks(US$ millions)LTMLFY + 1LFY +
2Sales$16,883$16,738$17,041EBITDA$4,238$4,264$4,707Subscribers21.7 23.2 23.9
POPs226.0 Transaction Multiples without SynergiesLTMLFY + 1LFY + 2EV /
Sales2.74 x2.77 x2.72 xEV / EBITDA10.93 x10.86 x9.84 xEV /
Subscribers$2,792$2,619$2,542EV / POPs$205Transaction Multiples with
Synergies(1)LTMLFY + 1LFY + 2EV / Sales1.66 x1.68 x1.65 xEV / EBITDA6.63 x6.59
x5.97 xEV / Subscribers$1,694$1,590$1,543EV / POPs$1631. Announced synergies of
US$1 bn in 2006, and in excess of US$2 bn in annual savings beginning in 2007.
Synergies assumed to be valued at US$6.50 per share or US$18.2 bn based on
street research.
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	Case Study -Privatization of Bell Mobility
Background
•On July 30, 1999 Bell Canada announced it had reached a deal with BCE Mobile
Communications to acquire the remaining 35% of outstanding shares that Bell
Canada did not already own
•Independent valuation provided a range of $54.50 to $63.00
•The price of $58.75 represented the mid-point of the valuation range, and a
31% premium to the one-month closing price and a 47% premium to the two-month
closing price
Strategic Rationale
•Allow BCE to provide customers a single point of contact for all of their
communications needs
•Simplify the ability for both companies to pursue national expansion and allow
the two companies to leverage their business experience in reviewing expansion
opportunities
•allow for greater operational synergies for BCE Mobile through the opportunity
to leverage the assets and resources of Bell Canada.
C -6
$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00Jan-99Feb-99Mar-99Apr-99May-99Jun
-99Jul-99Aug-99Sep-99Oct-9901,000,0002,000,0003,000,0004,000,0005,000,0006,000,0
007,000,000BCE Mobile Communications Share Price PerformanceJanuary 1, 1999 -
October 22, 1999July 30, 1999BCE announces its intention to take BCE Mobile
privateImplied PremiumAtAtAnnouncementCompletion30-Jul-9925-Oct-99Final Offer
Price$58.75$58.751 — Day 19.9%5.7%1 — Week 29.4%6.1%4 — Weeks30.6%4.4%
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	Case Study -Privatization of Bell Mobility
C -7 Transaction MultiplesLTMLFY + 1LFY + 2EV / Sales3.93 x4.34 x3.89 xEV /
EBITDA15.96 x14.70 x11.99 xEV / Subscribers$3,132$2,769$2,264EV /
POPs$290Transaction Multiples — Benchmarks(C$ millions)LTMLFY + 1LFY +
2Sales$1,275$1,155$1,287EBITDA$314$341$418Subscribers1.6 1.8 2.2 POPs17.3
Transaction ValuePrice Per share (C$)$58.75Shares OutstandngFully diluted
shares outstanding76.8Equity Capitalization$4,510.8Net Debt / (Cash)$570.0Plus:
Minority Interests—Less: Non-consolidated Investments($69.4)Total Enterprise
Value ($MM)$5,011.5
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	Case Study -Telus’ Acquisition of Clearnet
Background:
•On August 21, 2000 TELUS announced its intent to
purchaseClearnetCommunications
-The offer of $70.00/share was payable in cash or 1.636 shares of TELUS
•The offer represented a 53% premium toClearnetsunaffected closing price the
day before the transaction was announced
•At time of acquisition, the deal was the largest in Canadian
telecommunications history
Strategic Rationale:
•Advances TELUS to the leading wireless company in Canada
•1.8 million customers and ability to provide coverage to 30.7 million
potential customers
•Transaction was meant to provide a foundation for TELUS’ data and Internet
strategy
•increased bundling opportunities
•Clearnetshareholders, holding 86% of voting shares and 30% economic interest
entered into a lock up agreement to sell their shares to TELUS
C -8 Implied PremiumAtAtAnnouncementCompletion21-Aug-0019-Oct-00Final Offer
Price$70.00$70.001 — Day 52.8%5.7%1 — Week 58.0%6.1%4 -
Weeks66.5%4.4%$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00$80.00Jan-00Feb-00M
ar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00010000002000000300000040000005000
000600000070000008000000Clearnet — Share Price PerformanceJanuary 1, 2000 -
October 20, 2000Aug. 21, 2000Telus announces its bid for Microcell
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	Case Study -Telus’ Acquisition of Clearnet
C -9 Transaction ValueAt AnnouncementAt Completion21-Aug-0019-Oct-00Cash
Consideration (C$)Price per share$70.00$70.00Maximum cash
consideration$2,190.25$2,179.00Share Consideration (C$)Share Price
$43.25$38.15Exchange Ratio1.6361.636Shares OutstandngFully diluted shares
outstanding62.662.6Telus Shares Issued50.651.2Equity
Capitalization$4,427.9$3,905.7Total Share
Consideration2,213.91,954.0Debt$2,600.0$2,600.0Cash on Hand(318.7)(318.7)Net
Debt / (Cash)$2,281.3$2,281.3Total Enterprise Value
($MM)$6,685.5$6,414.3Transaction Multiples — Benchmarks(C$ millions)LTMLFY +
1LFY + 2Sales$496$547$823EBITDANMFNA$198Subscribers0.7 0.9 1.2 POPs21.2
Transaction Multiples without SynergiesLTMLFY + 1LFY + 2EV / Sales13.63 x12.36
x8.22 xEV / EBITDANMFNMF34.08 xEV / Subscribers$9,249$7,728$5,445EV /
POPs$319Transaction Multiples with Synergies (1)LTMLFY + 1LFY + 2EV / Sales9.10
x8.25 x1.57 xEV / EBITDANMFNMF22.74 xEV / Subscribers$6,172$5,157$3,633EV /
POPs$2131. Announced synergies of C$2.1 bn to C$2.4 bn.

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