Evolving Our Business Delivering on Our Strategy
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evolving our business delivering on our strategy ® TELUS Communications Inc. • annual report 2002 table of contents forward-looking statements inside front cover management’s discussion and analysis 1 consolidated statistics 22 management’s report 23 auditors’ report 24 consolidated financial statements 25 directors and officers 51 investor information 52 forward-looking statements Management’s discussion and analysis contains statements about expected future events and financial and operating results that are forward-looking and subject to risks and uncertainties. TELUS Communications Inc.’s actual results, performance or achievement could differ materially from those expressed or implied by such statements. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. Factors that could cause actual results to differ materially include but are not limited to: general business and economic conditions in TELUS Communications Inc.’s service territories across Canada and future demand for services; competition in wireline and wireless services, including voice, data and Internet services and within the Canadian telecommunications industry generally; re-emergence from receivership of newly restructured competitors; levels of capital expenditures; success of operational and capital efficiency programs including maintenance of customer service levels; success of integrating acquisitions; network upgrades, billing system conversions, and reliance on legacy systems; implementation of new customer relationship management software; realization of tax savings; the impact of credit rating changes; availability and cost of capital including renewal of credit facilities; financial condition and credit risk of customers affecting collectibility of receivables; ability to maintain an accounts receivable securitization program; adverse regulatory action; attraction and retention of key personnel; collective labour agreement negotiations and the outcome of conciliation efforts; future costs of retirement and pension obligations and returns on invested pension assets; technological advances; the final outcome of pending or future litigation; the effect of environment, health and safety concerns and other risk factors described in Risks and Uncertainties and listed from time to time in TELUS Communications Inc.’s reports, TELUS Communications Inc.’s comprehensive public disclosure documents, including the Annual Information Form, and in other filings with securities commissions in Canada and the U.S. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Copyright © 2003 TELUS Corporation. All rights reserved. Certain brands of products and services named in this report are trademarks: * indicates those under licence; ™/ ® indicates those owned by TELUS Corporation or its subsidiaries. management’s discussion and anaylsis The following is a discussion of the consolidated financial condition and results of operations of TELUS Communications Inc.1 (“TCI” or the “Corporation”) for the years ended December 31, 2002 and 2001. This discussion contains forward-looking information that is qualified by reference to, and should be read in conjunction with, the Corporation’s discussion regarding forward-looking statements (see forward-looking statements on the inside front cover). The following should also be read in conjunction with the accompanying Audited Consolidated Financial Statements of TCI and notes thereto. The Consolidated Financial Statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). Developments in 2002 Accounting entity Change in external auditor in 2002 On September 30, 2002, TELUS Communications Inc., Clearnet Inc. Effective for the second quarter of 2002, as a result of the partners and 612459 B.C. Ltd., corporations under the common control of and staff of the Canadian operations of Arthur Andersen LLP joining TELUS Corporation, the ultimate parent corporation, effected a corpo- Deloitte & Touche LLP, Deloitte & Touche LLP was appointed as rate reorganization. Clearnet Inc. changed from being the immediate the external auditor of TCI. parent corporation of TELUS Communications Inc., to becoming TELUS Communications Inc.’s subsidiary, when 612459 B.C. Ltd. trans- Accounting policy changes in 2002 ferred its ownership interest in Clearnet Inc. to TELUS Communications The 2002 financial results reflect the adoption of three recent accounting Inc. As a consequence of this corporate reorganization, 612459 B.C. pronouncements. Ltd. replaced Clearnet Inc. as TELUS Communications Inc.’s immediate Earlier in 2002, the Corporation adopted the provisions of parent corporation. Furthermore, this reorganization resulted in the TELE- Financial Accounting Standards Board (“FASB”) EITF 01-9 regarding MOBILE COMPANY partnership becoming wholly-owned by TELUS the accounting for consideration given by a vendor to a customer. Communications Inc. On September 30, 2002, Clearnet Inc. was wound The application of this standard by TCI results in costs specific to the up into TELUS Communications Inc. On December 31, 2002, TELUS Mobility and Internet operations, which were previously recorded as Communications Inc. purchased TELUS Risk Management Inc. from operations expenses, being reclassified to offset revenues. Comparative TELUS Corporation. Subsequently on December 31, 2002, TELUS Risk revenues and operations expense for the year ended December 31, 2001 Management Inc. was wound up into TELUS Communications Inc. for Mobility operations were reduced by $122.1 million restated on As related party transactions not involving a substantive change a consistent basis with 2002 results (which have been reduced by in ownership, these transactions were recorded at net book value and $139.5 million) – with no change to reported 2001 earnings or other key accounted for using the continuity-of-interests method, which is similar operating metrics such as marketing cost of acquisition (“COA”). See to the pooling-of-interests method. Under this method, the assets, Note 3(b) to the Consolidated Financial Statements for more information. liabilities, shareholders’ equity and results of operations for the current In addition, effective January 1, 2002, the Corporation adopted and prior periods have been restated to reflect the Corporation’s oper- the changes in accounting policy as required by Canadian Institute ations on a combined basis. See Note 1, Note 11 and Note 18 to the of Chartered Accountants (“CICA”) Handbook Section 3062 – Goodwill Consolidated Financial Statements for more information. and Other Intangible Assets. As a result, the Corporation no longer amortizes goodwill or indefinite life intangible assets. 1 TELUS Communications Inc. is a wholly-owned subsidiary of TELUS Corporation (“TELUS”), a public reporting issuer whose shares are listed on the Toronto and New York stock exchanges. All of TELUS’ Mobility operations, including those previously carried out by Clearnet Communications Inc. and TELUS Québec Mobilité, are con- ducted by TELE-MOBILE COMPANY partnership (“TMC”) and are included in TCI, as are TELUS’ British Columbia and Alberta wireline operations and Non-ILEC operations outside of the Province of Québec. TELUS Québec Mobilité results are included effective July 1, 2001, when they became part of TMC. TELUS COMMUNICATIONS INC. • ANNUAL REPORT 2002 • PAGE 1 management’s discussion and analysis Under Section 3062, rather than being systematically amortized, In 2001, TCI filed with the CRTC a ‘review and vary’ request the value of intangible assets with indefinite lives and goodwill are relating to the costing assumptions prescribed to be used in calculating periodically tested for impairment. In the first quarter of 2002, TELUS portable subsidy requirements, relating to CRTC Decisions 2000-745 assessed its intangible assets with indefinite lives, which are its wireless and 2001-238. Under these decisions, the costs the Corporation can spectrum licences, and determined it necessary to record a transitional recover through the contribution regime were reduced. On October 25, impairment amount in the TELUS Corporation financial statements. 2002, the CRTC released Decision 2002-67, denying the ‘review and As a result of the corporate structure of TELUS Corporation, the con- vary’ request. However, the CRTC noted it would consider portfolio solidated financial statements of TCI are not affected by the TELUS expenses in upcoming proceedings. Other than the impacts described Corporation transitional impairment amount. TELUS Corporation also in the paragraph above, no additional financial impacts are expected. completed its test for transitional impairment for goodwill and deter- The Corporation believes that Decision 2002-67 made two critical policy mined that there was no transitional goodwill impairment amount. TELUS errors: first, that the costs TCI and other Incumbent Local Exchange Corporation’s annual review of impairment for intangible assets with Carriers (“ILECs”) are required to use to calculate subsidies for residential indefinite lives and for goodwill will be complete as of December each primary exchange service and for unbundled loops are not actual year. No impairment was recorded as a result of TELUS Corporation’s