November 5, 1999
Management's Discussion and Analysis
This document has been filed by BCE with Canadian securities commissions and the U.S. Securities and Exchange Commission. It can also be found on BCE's Web site at: www.bce.ca or is available upon request from:
BCE Inc.
Investor Relations
1000, rue de La Gauchetière Ouest
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Fax:
E-mail: investor.relations@BCE.ca
Management's Discussion and Analysis (MD&A)*
* Unless the context indicates otherwise, BCE Inc and its subsidiaries are collectively referred to herein as BCE.
HIGHLIGHTS
On October 22, 1999, the shareholders of BCE Mobile Communications Inc. (renamed Bell Mobility Inc. (Bell Mobility) on October 22, 1999) approved an agreement to merge Bell Mobility with several indirect wholly-owned subsidiaries of Bell Canada. As a result, the minority shareholders of Bell Mobility received a total cash consideration of approximately
On October 4, 1999, Bell Canada announced its intention to make a cash offer to purchase up to 15.
On June 1, 1999, BCE and SBC/Ameritech finalized their strategic partnership announced on March 24, 1999. Under the terms of the partnership, SBC/Ameritech acquired an indirect 20% minority interest in Bell Canada for $5.1 billion. Bell Canada has been reorganized to hold certain telecommunications assets previously held by BCE. Bell Canada acquired, on May 31, 1999, at net book value from BCE, BCE's indirect interests in Bell Mobility, Teleglobe Inc. (Teleglobe), Aliant, BCE's interests in three other regional Canadian telecommunications companies and other investments. Furthermore, Bell Canada transferred to BCE, at net book value, its investments in BCE Emergis Inc. (BCE Emergis) and CGI Group Inc. (CGI).
In the first quarter of 1999, BCE organized its activities around five business groups: Bell Canada, CGI and BCE Emergis, BCE Media, Nortel Networks and Bell Canada International, to better reflect the scope of its operations.
BCE's earnings excluding special items (baseline earnings), increased by $
- increased contribution of
$ at Nortel Networks Corporation (Nortel Networks); and87 million - improved results at Corporate and Other of
$ 65 million
partially offset by:
- decreased contribution of
$ at Bell Canada.62 million
BCE's baseline earnings increased
- increased contribution of
$ at Nortel Networks; and182 million - improved results at Corporate and Other of
$ 118 million
partially offset by:
- decreased contribution of
$ at Bell Canada.62 million
BCE's net earnings applicable to common shares were
The special net charges for the third quarter of 1999 related mainly to the following:
- BCE's share ($
) of Nortel Networks' acquisition related costs (the amortization of intangible assets from the acquisition of Bay Networks, Inc. (Bay Networks) and all subsequent acquisitions, together with the amortization of any purchased in-process research and development (R&D) from prior acquisitions); 226 million - BCE's share ($
) of BCI's losses; and 104 million - BCE Media's
$ write-down of its investment in SkyView Media Group, Inc. (SkyView), a provider of foreign language ethnic media service to the American market.62 million The special net gains for the third quarter of 1998 related mainly to the following:
- a
$3.6 billion dilution gain on the reduction of BCE's ownership interest in Nortel Networks from, approximately 51% to 41%, as a result of Nortel Networks' acquisition, through the issuance of shares, of Bay Networkspartially offset by:
- BCE's share ($
) of Nortel Networks' acquisition related costs. 271 million The special net gains for the first nine months of 1999 related mainly to the following:
- a
$4.2 billion dilution gain on the reduction of BCE's ownership in Bell Canada, from 100% to 80%, as a result of the SBC/Ameritech partnership, for cash proceeds of $5.1 billion;- a
$ gain on the sale of BCE's interest in Jones Intercable Inc. (Jones) for net cash proceeds of US $234 million ; and 508 million - a
$ dilution gain on the reduction of BCE's ownership in Nortel Networks, from 40.4% to 39.6%, mainly as a result of Nortel Networks' acquisition, through the issuance of shares, of Shasta Networks, Inc.257 million partially offset by:
- restructuring and other charges of $
relating primarily to Bell Canada ($ 201 million ) and to the write-down of BCE Media's investment in SkyView ($ 127 million ); 62 million - BCE's share ($
) of Nortel Networks' acquisition related costs; and 947 million - BCE's share ($
) of BCI's losses. 230 million The special net gains for the first nine months of 1998 related mainly to the following:
- the
$3.6 billion dilution gain on the reduction of BCE's ownership interest in Nortel Networks in the third quarter of 1998; and- a
$ gain on the sale of BCE's interest in Cable & Wireless Communications plc. (CWC) for net cash proceeds of513 million $2.3 billion partially offset by:
- Bell Canada's restructuring and other charges of
$ ;392 million - BCE's share
($ of Nortel Networks' acquisition related costs; and) 562 million - BCE's share
($ of BCI's losses.) 89 million
Excluding Nortel Networks, revenues increased
RESULTS BY OPERATING GROUP
| 1 | Effective March 31, 1999, BCE's business segments were modified and now include two new segments: (1) CGI and BCE Emergis and (2) BCE Media (which includes Bell ExpressVu and Telesat Canada). These companies were previously included in the Bell Canada segment. In addition, Corporate and Other includes BCE's equity investment in Cable & Wireless Communications plc (which was sold in June 1998) and Jones Intercable, Inc. (which was sold in April 1999). These companies were previously included in the International Telecommunications segment, which comprised Bell Canada International Inc. (BCI) and Other International Telecom. BCI is now reported as a separate segment. Previously reported amounts have been reclassified to conform with the current presentation. |
| 2 | Represents the consolidation of Bell Canada Holdings Inc. (BCH) with Bell Canada and its consolidated subsidiaries. BCH owns 100% of Bell Canada. BCE owns 80% of BCH, the remaining 20% is owned by SBC/Ameritech. In addition, as part of the reorganization of Bell Canada, Bell Canada assumed $3.1 billion of debt due to BCE which was repaid on June 1, 1999 using a portion of the proceeds received from SBC/Ameritech. For segment reporting purposes, the interest expense/income on this debt was not included in the Bell Canada or in the Corporate and Other segment results. |
| 3 | Effective September 1, 1998, BCE equity accounts for its investment in Nortel Networks. |
| 4 | Includes BCE's share of gains on reduction of ownership in subsidiary and associated companies, Nortel Networks' acquisition related costs, net gains on disposal of investments, restructuring and other charges, amortization of purchased in-process R&D expense and BCI's results. |
BELL CANADA
Bell Canada's results discussed in this MD&A represent the consolidation of BCH with Bell Canada and its consolidated subsidiaries (including Bell Mobility, BCE Nexxia Inc., Bell ActiMedia Inc., Northern Telephone Limited, Northwestel Inc. and Télébec ltée) as well as Bell Canada's equity investments in Aliant, Manitoba Telecom Services Inc. (MTS) and Teleglobe. These entities provide a full range of domestic and international communications services to customers. BCE owns 80% of BCH, the remaining 20% is owned by SBC/Ameritech. BCH owns 100% of Bell Canada.
Bell Canada's baseline earnings increased 3% to $
Bell Canada's results for the third quarter and for the first nine months of 1999 compared with the same periods of 1998 reflected increased operating revenues and cash operating expenses and lower depreciation and amortization expense. In addition, results for the first nine months of 1999 also reflected the impact of restructuring and other charges in the aggregate amount of $
Operating Revenues
1Network access services represent, approximately, the number of lines in service
Local and access services revenues decreased $
- the deconsolidation of NewTel as of May 31, 1999 (see page 8 of this MD&A); and
- lower single line terminal sales
partially offset by:
- network access services growth (primarily business line growth); and
- higher SmartTouchTM services revenues which were positively impacted by the increased penetration of these services.
SmartTouch is a trade-mark of Stentor Resource Center Inc. Bell Canada is a licensed user.
Local and access services revenues for the first nine months of 1999 increased $
- growth in network access services (primarily business line growth);
- higher SmartTouchTM services revenues; and
- increased revenues from competitors accessing the local network
partially offset by:
- lower single line terminal sales;
- the deconsolidation of NewTel; and
- the impact of the reduction in local business rates.
Long distance and network services revenues decreased $
+ First Rate is a trade-mark of MTS NetCom Inc.
Wireless services revenues increased $
At September 30, 1999, there were 1,687,000 cellular and PCS subscribers, reflecting net additions of 340,000 or 25% from September 30, 1998. Included in the cellular and PCS base were 326,000 PCS subscribers.
Terminal sales, directory advertising and other revenues increased $
Excluding the impact of the deconsolidation of NewTel as of May 31, 1999 (as a result of its combination into Aliant and Bell Canada's resulting 42% ownership in Aliant), local and access services revenues increased $
Regulatory Decisions
On November 5, 1999, Industry Canada released its decision in its review of the PCS Spectrum Cap. Industry Canada has increased the cap, from its current level of 40MHz, to 55MHz. Industry Canada stated that the increased cap is intended to help address capacity constraints, i.e. in Toronto and Montréal, as well as to assist in the development of 3G PCS services. Industry Canada's release also indicates that the remaining 40 MHz of PCS spectrum in the C and E blocks will be allocated through an auction which will be completed by the Fall of 2000.
On October 13, 1999, in Order 99-991, the Canadian Radio-television and Telecommunications Commission (CRTC) determined that it would no longer be necessary to regulate mobile wireless services provided in-house by incumbent wireline carriers. This decision will permit Bell Canada to market cellular services directly without tariff approval.
On October 8, 1999, in Order 99-972, the CRTC concluded that the current prohibition on the resale of Inter-exchange Voice services by affiliated companies was no longer required. With respect to local services, the CRTC concluded that resale of local exchange services or facilities by an affiliated reseller is prohibited. However, this restriction does not apply to: 1) affiliates who are Canadian carriers; or 2) any affiliate, whether a Canadian carrier or reseller, operating in the serving territory of an unaffiliated incumbent local exchange carrier.
On June 8, 1999, in Order 99-513, the CRTC approved Bell Canada's May 10, 1999 application to revise rates for its residence Call Answer and Call Answer Plus Messaging Services. These changes, which have increased rates for the fully integrated residence Call Answer Service, decreased rates for the residence Call Answer Plus feature and increased charges for integrated residential mail boxes, have increased bottom line contribution while better positioning these services in the competitive market place.
On June 1, 1999, in Order 99-489, the CRTC approved price reductions proposed by the Company as part of its second annual price cap filing on March 31, 1999. The rate changes, which became effective June 1, 1999, lower the cost to customers of digital communications for services such as MEGALINKTM Digital Network Access, Direct Inward Dialing, Digital Exchange Access and Centrex Multiple Appearance Directory service. Prices for Bell Canada's other access services remain unchanged.
MEGALINK is a trade-mark of Stentor Resource Center Inc.
On March 12, 1999, in Order 99-239, the CRTC established on an interim basis the manner in which Bell Canada can recover, over a three year period, costs associated with local competition start-up and local number portability. The portion to be recovered from services subject to price cap regulation is to be reflected as an exogenous factor in the price cap formula.
Pending a final decision this amount is to be used only to mitigate price decreases that would otherwise be required.
Operating Expenses
Cash operating expenses increased $
At September 30, 1999, the total number of employees was 44,017 reflecting a decrease of 1,292 from September 30, 1998 mainly as a result of the deconsolidation of NewTel, partially offset by the repatriation of employees from Stentor. Total salaries and wages (including capitalized amounts) were $
On May 17, 1999, Bell Canada and its Operator Services employees and Craft and Services employees, represented by the Communications, Energy and Paperworkers' Union (CEP), signed new five-year agreements (effective as of May 15, 1999) replacing the collective agreements which expired on November 24, 1998 and November 30, 1998, respectively, putting an end to the five-week strike, which began on April 9, 1999. Employees began returning to work on May 16, 1999 and the approximately 5,500 management staff on work reassignment resumed their normal assignments on May 18, 1999.
Depreciation and amortization
The depreciation and amortization expense decreases of $
Restructuring and other charges
In the second quarter of 1999, Bell Canada recorded a pre-tax charge of $
Wind down of Stentor Canadian Network Management (SCNM)
On July 6, 1999, Bell Canada and Telus Communications Inc. (BCT.Telus) announced that they had reached an agreement on the creation of a new model for managing national network operations currently performed by SCNM. Since January 1999, the member companies of SCNM have been negotiating a number of key agreements that govern how SCNM works, and how the members work together through SCNM. As a result of this new arrangement, beginning January 1, 2000, Bell Canada will provide national operational support services to BCT.Telus, and to Bell Canada's partners, Aliant, Saskatchewan Telecommunications (SaskTel) and MTS. SCNM, the central organization created in 1992 to perform these functions, will be wound down by the end of 1999. Many of SCNM's employees and functions will be transferred to Bell Canada and the other SCNM members. The companies will continue their co-operative efforts to ensure continuity and seamless service of their shared national network for the benefit of their customers.
Wage Practices Investigation
On September 30, 1999, Bell Canada and the Communications, Energy and Paperworkers Union of Canada (CEP) and the Canadian Telephone Employees' Association (CTEA) announced that they had reached a tentative $
CGI AND BCE EMERGIS
CGI is an information technology (IT) services company, which provides outsourcing, systems integration, consulting and business solutions to customers worldwide. BCE Emergis is an electronic commerce services provider, which delivers network-centric e-commerce solutions to customers worldwide.
Revenues at CGI and BCE Emergis increased $
CGI's baseline earnings contribution to BCE was $
Effective July 1, 1999, CGI finalized the acquisition of DRT Systems International Inc. from Deloitte Consulting Inc. DRT Systems International Inc. has annual revenue approaching US $
On September 10, 1999, CGI announced a three year enterprise alliance with Microsoft Corporation, enabling CGI to develop and deploy leading edge solutions for the telecommunications, government and financial services markets across the United States and Canada.
On October 29, 1999, CGI, Portugal Telecom (PT), IBM Global Services and Case signed an agreement creating a systems and information technology partnership worth US $1 billion over 10 years. The agreement involves the creation of two companies: PT Information Systems and Data, Computers and Information Solutions. The information systems and data processing functions of the PT Group companies will be outsourced to these new companies.
On November 1, 1999, BCE Emergis acquired 100% of SNS/Assure Corp. and Assure Health Inc., companies providing electronic commerce solutions principally to the financial services and health insurance sectors, for a purchase price of approximately $
BCE MEDIA
BCE Media includes Telesat Canada (Telesat), Bell ExpressVu Limited Partnership (Bell ExpressVu), TMI Communications and Company Limited Partnership as well as Other media interests. These entities provide the delivery of satellite entertainment and business services.
Revenues at BCE Media increased $
This group's contribution to BCE's baseline earnings was a loss of $
At September 30, 1999, Bell ExpressVu had approximately 304,000 subscribers, up 156% compared with September 1998. In the second quarter of 1999 Telesat successfully launched NIMIQTM, Canada's first direct broadcast satellite, which has enabled Bell ExpressVu to offer a broader entertainment line-up and significantly improve the quality of its signal.
NIMIQ is a trade-mark of Telesat Canada
NORTEL NETWORKS
The following discussion of Nortel Networks' results is based on results for the three and nine months ended September 30, 1999. BCE's consolidated statement of operations for the third quarter and for the first nine months of 1999 reflects BCE's share of these results in the line item "equity in net losses of associated companies", while Nortel Networks' results for the first eight months of 1998 are reflected in BCE's 1998 consolidated statement of operations on a line-by-line basis and for the last four months in 1998 are included in the line item "equity in net losses of associated companies". While Nortel Networks reports its results in U.S. dollars, all amounts presented here are in Canadian dollars, except where otherwise noted.
On November 2, 1999, Nortel Networks announced that it will invest an additional US $
On October 18, 1999, Nortel Networks and Clarify Inc. (Clarify) announced the signing of a definitive agreement whereby Nortel Networks will acquire Clarify, a provider of front office solutions for eBusiness. Under the terms of the agreement, Clarify stockholders will receive a fixed exchange ratio of 1.3 Nortel Networks common shares for each share of Clarify common stock. Based on the closing price of US $52.69 per Nortel Networks common share on October 15, 1999, this represents an aggregate purchase price of approximately US $2.1 billion for the common shares of Clarify on a fully diluted basis. The Boards of Directors of Nortel Networks and Clarify have approved the transaction. The acquisition is subject to certain customary regulatory and other approvals, including the approval by the Clarify stockholders. The acquisition is expected to close in the first quarter of 2000.
On August 24, 1999, Nortel Networks and Periphonics Corporation (Periphonics) announced the signing of a definitive agreement whereby Nortel Networks will acquire Periphonics, a global provider of interactive voice solutions used in call centers and other voice and data network applications. Under the terms of the agreement, each share of Periphonics common stock will be converted into a fraction of a Nortel Networks common share at an exchange ratio based on the average price of Nortel Networks common shares during a specified period prior to closing. This represents an aggregate purchase price of approximately US $
On April 16, 1999, Nortel Networks acquired Shasta Networks, Inc., a privately-held company based in Sunnyvale, California, which provides gateways and systems for Internet Protocol public data networks. The acquisition was completed for an aggregate purchase price of approximately US $
On January 13, 1999, Nortel Networks announced the acceleration of its operations strategy designed to better meet the rapidly changing needs and values of its customers worldwide. A key element of Nortel Networks' strategy is the transition from vertical integration (making and assembling most of its products and systems) to virtual integration (acting as a system house). As part of this operations strategy, on May 13, 1999, Nortel Networks announced its intention to create a network of seven global systems houses located in Canada, the United States and Europe, in part by divesting and/or outsourcing to contract manufacturers all but its most complex printed circuit board assembly, most of its electromechanical subsystems manufacturing, and a significant part of its repair business. The systems houses will link customers, design centers, internal manufacturing, suppliers, contract manufacturers, and other parts of the supply chain to establish a flexible structure for today's fast-changing environment. These system houses will also be responsible for overall quality, customer delivery and new product introduction.
Nortel Networks' contribution to BCE's baseline earnings was $
Revenues
Nortel Networks' revenues increased by $
The following tables show details of Nortel Networks' revenues by principal segment and by geographic areas.
| 1 | Revenues by segment for the nine months ended September 30, 1999 and the three months and nine months ended September 30, 1998, have been reclassified to reflect the evolution of certain businesses within the management structure. The primary effect of this reclassification was to move certain businesses among Enterprise, Other and Carrier to more closely align the businesses with their primary customers. |
| 2 | Revenues are based on the location of the customer rather than the location of the selling organization. Geographic revenues have been reclassified to reflect the evolution of certain non operating businesses within the management structure. |
Carrier revenue growth of $
The considerable increases in sales of optical networking systems in the third quarter and first nine months of 1999, compared with the same periods in 1998, were driven by very strong customer demand. Customer demand for optical networking systems in the third quarter of 1999 exceeded Nortel Networks' ability to supply these systems within customary delivery periods, creating a backlog of orders for Nortel Networks' optical networking systems. Nortel Networks' management is addressing this situation by increasing internal manufacturing capacity and expanding the use of contract manufacturers. Nortel Networks expects that it will clear the existing backlog by the end of 1999.
Enterprise revenue growth of $
The Asia Pacific region has been, and may continue to be, affected by unstable economies and the volatility of certain currencies. Although revenues for the third quarter and the first nine months of 1999 increased substantially compared with the third quarter and first nine months of 1998, the economic instability in this region may impact the demand for Nortel Networks' products in future periods.
Global financial market uncertainty, in addition to the economic instability in certain countries, including countries in CALA, may also impact demand generally for Nortel Networks' products. In addition, the devaluation of the Brazilian real may continue to slow economic growth in 1999 for the CALA region. Although demand for Nortel Networks' products has been and is expected to continue to be impacted in the short-term, Nortel Networks anticipates that the long-term growth prospects for the CALA region remain strong.
Gross margin
Gross margin was 42.5% of revenues for the third quarter and 43.1% of revenues for the first nine months of 1999 compared with 43.3% of revenues for the third quarter and 42.3% for the first nine months of 1998. The 0.8 of a percentage point decline in gross margin for the third quarter of 1999 compared with the same period last year reflected an unfavourable shift in sales mix. Weakening gross margins for the third quarter were realized in Enterprise, as a result of a unfavourable product mix as compared with the same period in 1998. Gross margin for the first nine months of 1999 improved by 0.8 of a percentage point over the same period last year, reflecting a favourable shift in sales mix. Improved gross margins for the first nine months of 1999 were realized in Carrier, as a result of a more favourable product mix, as compared with the same period in 1998. Enterprise gross margins were moderately lower for the first nine months of 1999, as compared with the same period in 1998, due to continued competitive pricing pressures.
Although competitive pricing pressures continue, particularly with respect to sales of mobility systems, overall Nortel Networks has been able to help mitigate such pricing pressures through increased sales of higher-margin products and manufacturing and other cost-reduction programs. Gross margin can be negatively affected by the introduction of new products, continued expansion into new markets, and increases in products manufactured by other suppliers in network solutions offered by Nortel Networks.
Selling, general and administrative (SG&A) expense
During the third quarter and the first nine months of 1999, SG&A expense increased by $
Research and development (R&D) expense
Nortel Networks' R&D expense increased by $
Investment and other income - net
Total investment and other income-net was $
Nortel Networks continues to expand its business globally and, as such, an increasing proportion of its business will be denominated in currencies other than U.S. dollars. As a result, fluctuations in foreign currencies may have an impact on Nortel Networks' business and financial results. Nortel Networks endeavours to minimize the impact of such currency fluctuations through its ongoing commercial practices and by attempting to hedge its exposures to major currencies. In attempting to manage this foreign exchange risk, Nortel Networks identifies operations and transactions that may have foreign exchange exposure, based upon, among other factors, the excess or deficiency of foreign currency receipts over foreign currency expenditures in each of Nortel Networks' significant foreign currencies. Nortel Networks' significant currency flows for the third quarter and first nine months of 1999, were in United States dollars, Canadian dollars, United Kingdom pounds and the Euro. For the third quarter and first nine months of 1999, the net impact of foreign exchange fluctuations was a gain of $
Legal proceedings
On October 14, 1998, a class action complaint was filed in the United States District Court for the Southern District of New York purportedly on behalf of all persons whose Bay Networks common shares or stock options were exchanged for Nortel Networks' common shares in connection with the merger of Bay Networks with a subsidiary of Nortel Networks (the Bay Networks Merger). The complaint alleged that Nortel Networks and certain named officers violated the Securities Act of 1933 and the Securities Exchange Act of 1934 because the proxy statement/prospectus and registration statement for the Bay Networks Merger and the related issuance of common shares of Nortel Networks (the Bay Networks Proxy Statement), as well as certain public statements made by Nortel Networks contained materially false and misleading statements and omissions concerning Nortel Networks' financial condition. Two additional class action complaints were filed in the same court on November 16, 1998, and December 11, 1998, alleging substantially similar claims. The complaints sought relief in the form of compensatory damages and recission rights. The court granted the plaintiffs' motion to consolidate all three actions on February 1, 1999. On April 21, 1999, the plaintiffs filed a Consolidated Amended Class Action Complaint. Nortel Networks has filed a motion to dismiss this complaint.
On March 4, 1997, Bay Networks announced that shareholders had filed two separate lawsuits against Bay Networks and ten of Bay Networks' current and former officers and directors. One lawsuit was filed in the United States District Court for the Northern District of California (the Federal Court) and alleges violations of the federal securities laws (the Federal Action). The other lawsuit was filed in California Superior Court, County of Santa Clara (the California Court), and alleges violations of the California Corporations Code (the First State Action). Both lawsuits purported to seek damages on behalf of a class of shareholders who purchased Bay Networks' common shares during the period of May 1, 1995 through October 14, 1996. On April 18, 1997, a shareholder (represented by some of the same plaintiffs' law firms as in the aforementioned cases) filed a second lawsuit in the California Court, alleging violations of the federal securities laws and California Corporations Code by Bay Networks and nine of its current and former officers and directors (the Second State Action). The Second State Action purported to seek damages on behalf of a class of shareholders who acquired Bay Networks' common shares pursuant to the registration statement and prospectus that became effective on November 15, 1995. In April 1998, the California Court granted the plaintiffs' motion to consolidate the First State Action and the Second State Action (the Consolidated State Action), but denied the plaintiffs' motion for class certification. The plaintiffs in the Consolidated State Action have appealed this decision. Oral arguments in this appeal will be heard on November 9, 1999. In September 1998, the Federal Court dismissed the plaintiffs' complaint in the Federal Action, granting leave for the plaintiffs to amend the complaint. In November 1998, the Federal Court ordered a stay of the proceedings until a decision regarding pleading standards in securities litigation has been rendered by the United States Court of Appeals for the Ninth Circuit (the Ninth Circuit) in an unrelated case involving Silicon Graphics, Inc. The Ninth Circuit rendered judgment in the Silicon Graphics case on July 2, 1999 favorable to the defense and a petition filed by the plaintiffs in August 1999 for rehearing en banc was rejected in October 1999.
In June 1993, certain holders of Nortel Networks' securities commenced three class actions in the United States District Court for the Southern District of New York alleging that Nortel Networks and certain of its officers violated the Securities Exchange Act of 1934 and common law by making material misstatements of, or omitting to state, material facts relating to the business operations and prospects and financial condition of Nortel Networks. Compensatory and punitive damages were sought in each of the class actions. All three actions were subsequently consolidated and the plaintiffs were permitted to file a Second Consolidated Amended Complaint after the first Consolidated Amended Complaint had been dismissed without prejudice. A defense motion challenging the sufficiency of the Second Consolidated Amended Complaint was denied in part and granted in part on August 19, 1994. An Answer to this Complaint was filed on September 22, 1994. On February 24, 1995, the consolidated action was certified as a class action and on April 10, 1996, a Stipulation and Order of Dismissal was granted permitting one of the named officers to be dismissed from the suit. On May 2, 1996, the plaintiffs filed a motion to file a Third Consolidated Amended Complaint. A defense motion challenging the sufficiency of the Third Consolidated Amended Complaint was denied in part and granted in part on March 24, 1999. All discovery in the consolidated action has been completed and on August 18, 1999, Nortel Networks moved for summary judgement with respect to all claims in the case.
Environmental matters
Nortel Networks, primarily as a result of its manufacturing operations, is subject to numerous environmental laws and regulations and is exposed to liabilities and compliance costs arising from its past and current generation, management and disposition of hazardous substances and wastes.
BELL CANADA INTERNATIONAL
Revenues at BCI increased by $
On June 15, 1999, BCI increased its effective ownership in KG Telecom from 10% to 20% and began proportionately consolidating its results.
The total number of subscribers in companies in which BCI has an interest was approximately
BCE's share of BCI's losses was $
CORPORATE AND OTHER
Corporate and other income - net (excluding special items) was $
LIQUIDITY AND CAPITAL RESOURCES
BCE CONSOLIDATED
BCE's consolidated cash flows from operating activities for the first nine months of 1999 decreased by $
A discussion of the liquidity and capital resources of Bell Canada, Nortel Networks, BCI and Corporate and Other is outlined below.
BELL CANADA
The principal components of Bell Canada's cash flows include:
Cash flows from operating activities for the first nine months of 1999 were $
As part of the reorganization of Bell Canada (see page 2 of this MD&A), Bell Canada assumed $3.1 billion of debt due to BCE and issued $2.0 billion of new debt to BCE. These debts were repaid on June 1, 1999, using the $5.1 billion of cash proceeds received from SBC/Ameritech. In addition, as part of the reorganization, BCH issued $4.1 billion of new debt to BCE. For segment reporting purposes, the interest expense/income on the $3.1 billion and $2.0 billion loans is not included in the Bell Canada or Corporate and Other segment results for 1999 and 1998. Interest on the $4.1 billion loans is included as an expense in the Bell Canada segment and as interest income in the Corporate and Other segment. The $4.1 billion loans consist of three senior unsecured notes. Senior Note 1 of $1.5 billion, at an interest rate of 5.85%, matures May 31, 2001, Senior Note 2 of $1.7 billion, at an interest rate of 5.94%, matures May 31, 2009 and Senior Note 3 of $0.9 billion, at an interest rate of 6.0%, matures May 31, 2009. Intercompany loans and related interest are eliminated on the BCE consolidated financial statements.
In addition, on June 8, 1999 and July 19, 1999, Bell Canada issued $
Bell Canada's cash requirements during the first nine months of 1999, including the financing of capital expenditures and investments, were mainly met by cash flows from operations and by external financing. Long-term debt totalling approximately $
On September 30, 1999, outstanding third party commercial paper totalled approximately $
NORTEL NETWORKS
The following discussion of Nortel Networks' liquidity and capital resources is based on the full nine months ending September 30, 1999 and September 30, 1998. BCE's consolidated statement of cash flows, as of September 1, 1998, no longer reflects the cash flows related to Nortel Networks on a line-by-line basis.
Cash flows used in operating activities for the nine months ended September 30, 1999 were $
Cash flows used in investing activities for the nine months ended September 30, 1999 were $
Cash flows generated from financing activities for the nine months ended September 30, 1999 were $
On April 15, 1999, Nortel Networks amended its 364-day syndicated credit agreements which permit borrowings in an aggregate amount not to exceed US $
The competitive environment requires Nortel Networks and many of its principal competitors to provide significant amounts of medium-term and long-term customer financing in connection with the sale of products and services. While Nortel Networks has traditionally been able to place a large portion of its customer financings with third-party lenders, Nortel Networks anticipates that, due to the amount of financing it expects to provide and the higher risks typically associated with such financings (particularly when provided to start-up operations or to customers in developing countries), the amount of such financings required to be supported directly by Nortel Networks for at least the initial portion of their term is expected to continue to increase significantly in the future. At September 30, 1999, Nortel Networks had entered into certain financing agreements for which the remaining future provision of unfunded customer financing was up to approximately US $
BELL CANADA INTERNATIONAL
During the first nine months of 1999, BCI's cash flows used in operating activities were $
On September 8, 1999, BCI announced that its Colombian cellular subsidiary, Comunicación Celular S.A. (Comcel), had restructured its senior secured term loans. The restructuring of the senior secured term loans was prompted by Comcel's inability to comply with certain financial covenants as of July 1, 1999. Under the terms of the restructuring, Comcel's shareholders subscribed for additional common shares of Comcel in the aggregate amount of US $
CORPORATE AND OTHER
Investments during the first nine months of 1999 totalled $
- an additional investment of $
339 million - the acquisition of 1,977,365 Class B Multiple Voting Shares of CGI, resulting from the exercise, in part, of a put option by the three largest shareholders of CGI, for a total of $
78 million - an additional $
49 million
The additional investments in BCE Media and BCE Emergis were financed through available cash resources. The shares in CGI were acquired in exchange for the issuance of BCE Inc. common shares.
Dividends to shareholders totalled $
During the first nine months of 1999, 2,325,375 common shares were issued for $
In September 1999, BCE Inc.'s shareholder dividend reinvestment and stock purchase plan was amended to provide that common shares to be acquired upon reinvestment of cash dividends and investment of optional cash payments will, at BCE's option, either be purchased on the open market through a stock exchange or will continue to be purchased directly from BCE Inc. This change enables BCE Inc. to avoid issuing treasury shares when additional capital is not required.
On July 30, 1999, BCE Inc. redeemed prior to maturity $
At September 30, 1999, BCE Inc. had committed credit facilities totalling $
On March 25, 1999, following BCE Inc.'s announcement of a strategic partnership with SBC/Ameritech, BCE Inc.'s credit ratings were placed under review. In May 1999, Canadian Bond Rating ServiceTM (CBRS), Moody's Investors Service (Moody's) and Standard & Poor'sTM Ratings Group (S&P) completed their annual reviews of BCE Inc.'s credit worthiness, together with special analysis of the transaction with SBC/Ameritech. CBRS confirmed BCE Inc.'s ratings, while Moody's raised BCE Inc.'s long-term debt rating from A3 to A1 and BCE Inc.'s commercial paper rating from Prime 2 to Prime 1, both with Stable trends. S&P confirmed BCE Inc.'s corporate credit rating of single-A-plus, which remains on CreditWatch with positive implications. Dominion Bond Rating ServiceTM (DBRS) completed its annual review of BCE Inc., in July 1999, by upgrading BCE Inc.'s long-term debt and preferred share ratings to A (high) from A and to Pfd-2 (high) from Pfd-2, respectively, both with Stable trends and confirmed BCE Inc.'s commercial paper rating at R-1(middle) with a Stable trend.
Canadian Bond Rating Service is a trade-mark of C.B.R.S. Inc.
Standard & Poor's is a trade-mark of The McGraw-Hill Companies Inc.
Dominion Bond Rating Service is a trade-mark of Dominion Bond Rating Service Ltd.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains forward-looking statements with respect to either BCE Inc. or certain of its subsidiary or associated companies (the "BCE Group companies"). These forward-looking statements, by their nature, necessarily involve known and unknown risks, uncertainties and other factors that could cause actual results or events to differ materially from those contemplated by the forward-looking statements.
In addition to the factors previously referred to herein, certain other factors which could cause results or events to differ materially from current expectations are outlined in Schedule A attached hereto. For a description of the risk factors relating to the Year 2000 issue, the reader is referred to the following section entitled "Impact of Year 2000 Issue (Year 2000 Readiness Disclosure)" which reviews the impact of the Year 2000 issue on BCE Inc.'s two principal business segments, namely, Bell Canada and Nortel Networks. BCE Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
IMPACT OF YEAR 2000 ISSUE (YEAR 2000 READINESS DISCLOSURE)
The Year 2000 issue relates to the way dates have traditionally been stored and used in computing systems. To conserve expensive memory space, years were stored as two digits, so that the year 2000 will appear in many computing systems as "00". Many systems and computers will interpret "00" as the year 1900 instead of the year 2000. This could create difficulties in performing certain computing functions or potentially cause system failures. This in turn could result in miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. In addition, similar problems could have arisen in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000.
The BCE Group companies have established Year 2000 programs with the objective of seeking to ensure that all aspects of their operations are being addressed to meet the Year 2000 issue. The following discussion reviews the impact of the Year 2000 issue on BCE Inc.'s two principal business segments, namely, Bell Canada and Nortel Networks.
BELL CANADA
Bell Canada's subsidiary and associated companies have established Year 2000 programs with the objective of seeking to ensure that all aspects of their operations are being addressed to meet the Year 2000 issue. As of May 31, 1999, the corporate structure of Bell Canada has changed with the transfer to Bell Canada of several companies formerly held by BCE. While each of these companies has its respective Year 2000 program, Bell Canada has instituted an overview program with its subsidiaries to monitor the Year 2000 compliance status of these companies. As of October 31, 1999, Bell Canada's subsidiaries have substantially completed the effort required to convert or upgrade, test and deploy (i.e. put back into service) their network elements, information systems/information technology and products and services to be Year 2000 ready. It is anticipated that certain subsidiaries will complete the remaining elements of their Year 2000 programs in November 1999. The following discussion reviews the impact of the Year 2000 issue on Bell Canada and the companies that comprised its subsidiaries prior to the May 31, 1999 reorganization discussed on page 2.
A Year 2000 Program Management Office (PMO) was established in 1997 with the mandate to minimize the impact of the Year 2000 issue on Bell Canada's operations. The Year 2000 PMO has the responsibility to ensure that all aspects of Bell Canada's operations are being addressed to meet the Year 2000 issue. Bell Canada and the other Stentor Operating Companies have also set up a National Year 2000 Program Management Office (PMO). The Stentor Year 2000 PMO has developed a Year 2000 action plan to address the continued functionality of nationally delivered services up to, through, and beyond the year 2000.
A comprehensive governance process has been established to oversee Bell Canada's Year 2000 program. The Year 2000 program is reviewed monthly with the Chairman and CEO of Bell Canada and other senior officers of the company. Updates are provided on a quarterly basis to the Bell Canada Board of Directors. In addition and in collaboration with the Stentor Year 2000 PMO, the Stentor National Year 2000 program is reviewed monthly with the Board of Directors of Stentor Canadian Network Management (SCNM).
At the outset of Bell Canada's Year 2000 program, Bell Canada identified the following requirements in order to get ready for Year 2000: of approximately
As of September 30, 1999, Bell Canada had completed 100% of the effort required to convert or upgrade, test and deploy (i.e. put back into service) the network elements required to be Year 2000 compliant. All of the network elements comprising the Public Switched Telephone Network (PSTN) had been converted or upgraded, tested and put back into service as of December 31, 1998. Similarly, as of September 30, 1999, Bell Canada had completed the renovation, upgrade, code conversion and testing of 100% of the software code in Bell Canada's information systems and information technology (IS/IT), with 100% of this code having been deployed back into service. The renovation, upgrade, conversion and re-deployment of the national mission critical applications that Bell Canada uses in collaboration with its business partners were substantially complete as of the end of June 1999. As of September 30, 1999, 100% of the products and services Bell Canada offers its customers, including those national products and services which Bell Canada offers in collaboration with its business partners, were Year 2000 "service ready". A product or service is "service ready" when all of the network components and operating systems required for basic functionality of the product or service are Year 2000 ready; basic functionality means that the product or service itself performs normally for the customer. As of September 30, 1999, 100% of these products and services were "customer ready". A product or service is "customer ready" when all network components and operating systems which materially affect the customer's experience of the product or service are Year 2000 ready; this includes everything necessary to be "service ready" and also usually includes ordering, service assurance and billing components and systems. As part of Bell Canada's ongoing Year 2000 test program, further testing of the network elements, information systems and products and services will occur in the remainder of 1999. Bell Canada will also be monitoring its network elements, information systems and product and services before, during and after the Year 2000 rollover to identify any unexpected events.
Bell Canada has undertaken a detailed testing and internal certification program which seeks to ensure that each Bell Canada Year 2000 IS/IT project is reviewed and approved by the appropriate officers or other employees of Bell Canada. Before it is put back into service, each IS/IT application and network element is subjected to a series of date-related tests that seek to ensure that it will continue to work before and beyond the Year 2000. In addition, Bell Canada, in cooperation with the other Stentor Operating Companies, has completed a series of national interoperability tests of the national elements it shares with the Stentor Operating Companies. Bell Canada is also taking steps which seek to ensure that its mission critical and priority building systems, as well as the IS/IT systems that support the physical environment, are being prepared for the Year 2000. The majority of the effort required to upgrade, test and deploy the systems that support the physical environment was substantially completed as of September 30, 1999. Bell Canada anticipates that the remaining few elements in its building systems will be Year 2000 ready in November 1999.
The Year 2000 program is integrated with Bell Canada's IS/IT modernization program, network evolution planning and product line simplification, the implementation of which is a dynamic process and therefore is likely to be modified or adjusted prior to Year 2000. Bell Canada estimates that it will spend approximately $
Bell Canada performs reviews of its Year 2000 program on a regular basis. In addition, three specific reviews have been conducted by an independent third party, and further independent reviews of key aspects of Bell Canada's Year 2000 program may be conducted in the future. Although there are significant risks and uncertainties associated with a program of this magnitude, Bell Canada believes it will meet its overall schedule. However, a delay in any critical element of Bell Canada's Year 2000 program could materially impact Bell Canada's ability to meet its projected target dates and its ability to be ready by January 1, 2000. Some of these critical elements include the delivery of compliant products and services from Bell Canada's suppliers, delays in the conversion and deployment of critical network elements or critical IS/IT components that, in either case, may be introduced in the Bell Canada environment to the end of 1999, and cross-impacts of Bell Canada's modernization program delays. All changes to any of Bell Canada's network elements, systems and products and services are being closely scrutinized for Year 2000 exposure. Business continuity plans (contingency plans) would be invoked should any delay or failure be deemed to significantly jeopardize Bell Canada's operations.
Bell Canada's Year 2000 business continuity plans will address the following objectives in the context of a Year 2000 disruption: a) safeguarding public and employee health and safety; b) minimizing impact on customer service; c) minimizing financial impact to Bell Canada; and d) meeting regulatory requirements. Bell Canada's plans will align with those of key business partners, including the Stentor Year 2000 PMO and the other members of the Year 2000 Canadian Telecommunications Industry Forum. Bell Canada has secured external resources with expertise and experience in business continuity planning to assist in the preparation and completion of its business continuity plans. Bell Canada's business continuity plans are divided into 6 phases: 1) Organizational and Strategic Alignment, 2) Business Assessment, 3) Risk Assessment, 4) Plan Development, 5) Implementation and Exercising, and 6) Readiness and Activation. As of September 30, 1999, Bell Canada had completed the Organizational and Strategic Alignment phase, the Business Assessment phase, the Risk Assessment phase and the Plan Development phase of its business continuity plans. Bell Canada has now entered into the Implementation and Exercising phase of its plans. As of October 31, 1999, Bell Canada had substantially completed the Implementation & Exercising phase for its mission critical business continuity plans and expects to have completed this phase by approximately mid November, coincident with a corporate-wide simulation exercise. Bell Canada has also entered the Readiness and Activation phase of its business continuity plans in September 1999.
From September 8 to September 10, 1999, Bell Canada activated its Emergency Operations Centres to monitor the rollover to September 9, 1999. The 9999 series of numbers has traditionally been used in many applications to indicate the end of input or end of file. It was generally anticipated that on September 9, 1999 (9/9/99), the similarity of the date to this commonly used numeric convention might have caused software problems if some computers would have interpreted the numerals as end of file instead of a valid date. However, since this convention is not generally used in telecommunications systems, it was not expected to cause any disruptions to Bell Canada's network or Bell Canada services. As expected, there were no reported incidents within Bell Canada associated with the September 9 rollover.
The Readiness and Activation phase will remain active until Bell Canada is satisfied that its Year 2000 business continuity plans are no longer required. This is expected to occur in March 2000. As part of the Readiness and Activation phase, Bell Canada intends to again activate its Emergency Operations Centres during certain critical periods (such as the roll-over from 1999 to 2000 and the leap year rollover on February 29, 2000) so that it can respond in a timely fashion to any unexpected event which may occur.
The risk and challenge of Bell Canada's Year 2000 program is amplified by the fact that many of Bell Canada's applications and systems interact with those of customers and other third parties which are beyond the control of Bell Canada but whose failure to make their systems Year 2000 compliant could materially impact Bell Canada. Bell Canada is highly dependent on many suppliers who provide Bell Canada with an extensive array of products and services critical to its operations.
Since January 1997, Bell Canada has instituted a comprehensive vendor management program, which seeks to ensure that the products and services it receives from its suppliers are or will be Year 2000 compliant. As of December 31, 1998, Bell Canada had completed its due diligence process with most of its suppliers and intends to continue its monitoring of its suppliers to seek to ensure that products and services will be Year 2000 compliant and that Year 2000 ready products will be delivered when promised. Bell Canada has undertaken a further review of its most critical suppliers to monitor their Year 2000 status and that of their suppliers. However, there can be no assurance that the products or systems of other companies which Bell Canada or its customers utilize or rely upon will be converted in a timely and effective manner, or that a failure to convert by another company or a conversion that is incompatible with Bell Canada's systems, would not have material adverse effects on Bell Canada or its customers.
Bell Canada believes that the restructuring of the Stentor alliance will not materially affect its Year 2000 program. The Stentor alliance has undergone significant restructuring in the last year. As was announced by Bell Canada and BCT.Telus on July 6, 1999, Stentor Canadian Network Management (SCNM), the central organization created in 1992 to manage national network operations on behalf of the alliance, will be wound down by the end of 1999. Starting January 1, 2000, Bell Canada will provide national operational support services to BCT.Telus, and to Bell Canada's partners, Aliant, SaskTel and Manitoba Telecom Services Inc., services that were previously provided by SCNM. This move from SCNM to Bell Canada is expected to be transparent to customers. The Stentor companies remain committed to a seamless transition to the Year 2000. As of September 30, 1999, the Stentor National Year 2000 program was substantially complete. Bell Canada and SCNM have established a transition plan that will seek to ensure that the national Year 2000 program and the current state of readiness are not affected by the transition to Bell Canada. Through the transition, it is expected that the National Year 2000 Program Office, which will now report into Bell Canada effective January 1, 2000, will continue to lead and co-ordinate national activities related to the national Year 2000 program before, during and for a suitable period after the rollover to the Year 2000.
While Bell Canada believes it has an appropriate plan in place, the Year 2000 issue is a unique event which raises unprecedented challenges and risks. Bell Canada presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if any additional modifications and conversions are not completed on a timely basis prior to the end of 1999, if any of Bell Canada's mission critical suppliers fail to deliver Year 2000 ready products and services, if products or systems of other companies which Bell Canada or its customers utilize or rely on are not converted in a timely and effective manner, or if there is a failure to convert by another company or a conversion that is incompatible with Bell Canada's systems, and if Bell Canada's business continuity plans are ineffective, the Year 2000 issue could have a material adverse effect on the financial condition and results of Bell Canada.
NORTEL NETWORKS
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer systems and products that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Nortel Networks' business operations, including, for example, its finance, human resources, manufacturing, and customer order management functions, make extensive use of information technology ("IT") and, as such, are exposed to significant risk from the Year 2000 issue.
In 1994, Nortel Networks began a long-term program to deploy an enterprise backbone architecture to establish a common suite of business applications throughout Nortel Networks and its subsidiaries. The new applications are being deployed as Year 2000 ready, and for those business units relying on replacement of certain legacy applications as part of their Year 2000 strategy, they are expected to replace a number of legacy applications by the end of 1999. All business system applications not addressed by the enterprise backbone deployment, including vendor supplied applications, are expected to be made Year 2000 ready through Nortel Networks' Year 2000 Program.
In 1996, Nortel Networks initiated its Year 2000 Program and subsequently determined that it would be necessary to modify or replace significant portions of software so that business applications, computing environments and products would properly utilize Year 2000 dates before and beyond December 31, 1999. Nortel Networks' Year 2000 Program consists of a product program (the "Product Program"), an information services program (the "IS Program") and a facilities program (the "Facilities Program").
In September 1998, following the acquisition of Bay Networks, Nortel Networks commenced the integration of Bay Networks' Year 2000 Program into Nortel Networks' overall Year 2000 Program. This integration is now complete.
The Product Program focuses on identifying and resolving Year 2000 issues relating to Nortel Networks' products and deploying solutions to customers. Through this program Nortel Networks has made its current product offerings Year 2000 ready. In addition, Nortel Networks is providing an upgrade or migration path and other information to customers and distributors who have non-Year 2000 ready products. The Product Program consists of the following three major phases: Phase I (analysis, remediation, and verification), Phase II (deployment), and Phase III (business continuity planning).
Phase I of the Product Program was completed as at the end of September 1999. Nortel Networks is also working with outside agencies, such as Telecordia Technologies, Inc. (formerly Bellcore), the United States government (GSA), the Telco Year 2000 Forum in the United States, Alliance for Telecommunications Industry Solutions, and the Canadian Year 2000 Telecom Industry Forum, to support independent verification and interoperability testing of selected products. Phase II, deployment of Year 2000 ready products and product upgrades, was commenced in 1998 and is expected to continue throughout 1999. This phase was substantially completed as of September 1999, excluding those customers who appear to have elected not to deploy Year 2000 ready products or product upgrades and excluding Enterprise customers who have purchased Nortel Networks' products through distributors. Nortel Networks has initiated formal communications with its customers (except where Nortel Networks sells its products through distributors, in which case formal communications have been initiated primarily with such distributors). Customers and/or distributors are being notified of known risk areas and the availability of Year 2000 ready products and product upgrades and migration paths. Customers are being encouraged to arrange for deployment of Year 2000 ready products and product upgrades promptly to ensure that they will be deployed prior to the year 2000. Although Nortel Networks currently believes that it has the resources to provide timely support to its customers seeking to deploy Year 2000 ready products and product upgrades, increased orders of Year 2000 ready products and product upgrades towards the end of 1999 may overburden available installation resources.
The IS Program addresses business applications primarily used internally within Nortel Networks and includes third-party supplier assessment and joint venture activities related to Year 2000 readiness. The IS Program consists of the following three major phases: Phase I (assessment and validation - inventory of Year 2000 affected items, assessment of Year 2000 readiness, and prioritization of items determined to be material to Nortel Networks); Phase II (implementation and deployment - repair, retirement or replacement of items determined not to be Year 2000 ready, testing of all items that have been repaired or replaced or have been identified as Year 2000 ready and are considered to be material to Nortel Networks, and redeployment of tested items into Year 2000 ready operating environments); and Phase III (business continuity planning - planning to reduce the risk of business interruption to Nortel Networks resulting from potential Year 2000 issues).
Business applications have undergone and are undergoing an assessment and are being remedied, retired, or replaced, as appropriate. Third-party supplied software is similarly being assessed, and has been or will be upgraded or replaced. Nortel Networks had completed Phase I and II activities as at September 30, 1999, with the exception of 28 legacy applications, which represent approximately 1% of the total applications, will be replaced by the enterprise backbone deployment, scheduled for completion before the end of 1999. These 28 applications and the enterprise backbone deployment are being actively tracked by the Business Continuity Planning Program (the BCP Program). None of Nortel Networks' IT projects have been delayed due to the implementation of the Year 2000 Program.
Third-party suppliers are being assessed to determine the potential for Year 2000 impact. These relationships include third-party suppliers that provide manufacturing materials, software applications, tools, outsourced services, telecommunications, and other infrastructure-related products and services required by Nortel Networks. Assessment activities include the identification and prioritization of critical suppliers, direct communications with suppliers regarding their plans and progress in addressing the Year 2000 issue relating to products and services supplied to Nortel Networks and/or their own internal operations, and specific assessment of direct interfaces between third party suppliers and Nortel Networks. Formal communications between Nortel Networks and significant third party suppliers are focused to determine the extent to which Nortel Networks may be vulnerable to these third parties' potential failure to remedy their own Year 2000 issue. Where appropriate, Nortel Networks has executed Year 2000 compliance agreements with such parties. Detailed evaluations of the most critical third parties and their products or services were completed as at the end of the second quarter of 1999. Where appropriate, the results of such evaluations were assessed in the Year 2000 business continuity plans during the third quarter. Non-ready suppliers will be replaced and/or retained based on acceptable risk assessments completed in the third quarter of 1999.
Nortel Networks is monitoring its joint ventures and working closely with the Year 2000 teams at these joint ventures. Nortel Networks' joint ventures have Year 2000 programs in place, however, the target completion dates for joint venture Year 2000 programs are generally later than that of Nortel Networks' overall Year 2000 Program, particularly in respect of joint ventures located outside of North America. Progress has been made by the joint ventures in accelerating their completion dates and all components of the joint venture Year 2000 programs are expected to be complete before the end of 1999. Each component was substantially completed by the end of the third quarter of 1999.
The Facilities Program encompasses the building infrastructure including environmental controls, security systems, life safety systems, and associated embedded systems that are used in the control or operation of all facilities operated by Nortel Networks. Also addressed under the Facilities Program are factory-based embedded systems used in the manufacture and testing of Nortel Networks' products. The Facilities Program is on schedule. The repair or replacement and testing of equipment and systems determined not to be Year 2000 ready was completed at the end of the third quarter. Business Continuity Planning will continue to progress through the fourth quarter of 1999.
Business continuity planning, which commenced in the Product Program, IS Program, and Facilities Program during the third and fourth quarters of 1998, is being coordinated under the BCP Program. The governing objective of the BCP Program is to protect corporate resources in the face of a potential Year 2000 event, to continue the delivery of essential services to both internal and external customers, and to minimize the effects of the disruption on the operations of Nortel Networks' business and its customers. The BCP Program planning process is based on an industry-accepted, process-focused approach. BCP Program activities include joint implementation of business continuity plans with customers where appropriate, and development of business continuity actions to address potential exposures from critical product and service providers. BCP Program activities also address such issues as the anticipated increase in demand by customers for product deployment towards the end of 1999. Business continuity plans have been constructed, with implementation, monitoring and execution of business continuity plans occurring during the fourth quarter. Certain BCP Program activities were completed prior to the end of the third quarter in order to prepare for potential Year 2000-related events that could occur prior to the year 2000.
Nortel Networks is utilizing both internal and external resources to reprogram, or replace, and test for Year 2000 modifications. The total cost associated with Nortel Networks' Year 2000 Program is being funded through operating cash flows and is not expected to be material to Nortel Networks' financial position. The estimated total cost of the Year 2000 Program is approximately US $
The costs of the Year 2000 Program and the dates by which Nortel Networks plans to substantially complete the various aspects of the Year 2000 Program are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, the completion of third-party Year 2000 programs, timely customer ordering of Year 2000 ready products and product upgrades and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences and which may impact the success of Nortel Networks' Year 2000 Program in mitigating the impact of Year 2000 issues on its business include, but are not limited to, timely actions by customers, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the timely completion of third-party remediation plans, and similar uncertainties.
Nortel Networks presently believes that with the replacement of certain internal legacy applications, modifications to existing software, and conversions to new software, the Year 2000 issue can be mitigated. However, if such replacement, modifications, and conversions are not made, or are not completed on a timely basis and if Nortel Networks' business continuity plans are ineffective, the Year 2000 issue could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks. Although Nortel Networks had replaced a number of legacy applications used by certain lines of business as at the end of the third quarter of 1999 through the enterprise backbone program, failure to replace the remaining 28 applications before the beginning of the year 2000 could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks. Nortel Networks' total Year 2000 Program cost through September 30, 1999 and estimates of remaining costs to be incurred include the estimated costs and time associated with the impact of third parties' Year 2000 issues on Nortel Networks' internal systems, and are based on presently available information. However, there can be no assurance that the systems of other companies on which Nortel Networks' systems rely will be converted in a timely manner, or that a failure to convert by a third party, or a conversion that is incompatible with Nortel Networks' systems, would not have a material adverse effect on Nortel Networks. Nortel Networks' Year 2000 Program should limit its exposure to contingencies related to the Year 2000 issue for the products it has sold, but this is wholly dependent on customers' timely ordering of Year 2000 ready products and upgrades from Nortel Networks, and, in the Enterprise market, from Nortel Networks' distribution channels.
In planning for the most reasonably likely worst-case scenarios, Nortel Networks has addressed all three programs that comprise its Year 2000 Program. Nortel Networks expects that its products will be ready for the Year 2000, and that its most significant exposure lies with customers who are not aware or not willing to complete the required upgrades to make their Nortel Networks products Year 2000 ready or that delay their decision to deploy Year 2000 ready products or upgrades until it is too late to complete the deployment. Nortel Networks' Product Program includes advertising in trade journals, conducting seminars, and maintaining a dedicated Website of Year 2000 ready Nortel Networks product information to inform all possible customers that may possess non-Year 2000 ready products. Nortel Networks expects that its IT systems will be ready for the Year 2000, but that it may experience isolated incidences of non-compliance and potential outages with respect to IT infrastructure. Nortel Networks plans to allocate internal resources and retain dedicated consultants and vendor representatives to be ready to take action should these events occur. Business continuity planning for facilities is currently in process, and Nortel Networks is simultaneously putting the required resources in place to carry out those plans for key facilities. Critical business partners have been contacted to assess their Year 2000 readiness and appropriate Year 2000 business continuity plans have been developed at the end of the third quarter of 1999 to address potential business interruptions that may be experienced by such parties. It is a reasonably likely worst-case scenario that some of Nortel Networks' suppliers will experience business interruptions due to the Year 2000 issue. Although Nortel Networks values its established relationships with key suppliers, alternative products and/or services will be considered in situations where timely confirmation of Year 2000 readiness of existing suppliers cannot be established. If certain suppliers are unable to deliver products and/or services on a timely basis due to their own Year 2000 issues, business continuity plans should assure a timely transition to an alternate supplier to provide the required products and/or services. Nortel Networks also recognizes the risks to its business if other key suppliers in utilities, communications, transportation, banking, and government are not ready for the year 2000, and continues to develop business continuity plans to minimize the potential adverse impacts of these risks.
COSTS ASSOCIATED WITH THE YEAR 2000 ISSUE
The BCE Group companies have used and will continue to use both internal and external resources to reprogram, or replace, and test their software for Year 2000 modifications. BCE's share of the BCE Group companies' total costs for the various Year 2000 projects are estimated at approximately $
BCE's share of the BCE Group companies' costs incurred in connection with their various Year 2000 programs was approximately $
YEAR 2000 ISSUE OUTLOOK
While BCE Inc. believes that the BCE Group companies have appropriate plans in place, the Year 2000 issue is a unique event which raises unprecedented challenges and risks. BCE Inc. presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not completed on a timely basis, if any of the BCE Group companies' mission critical suppliers fails to deliver Year 2000 ready products and services, if products or systems of other companies which the BCE Group companies or their customers utilize or rely on are not converted in a timely and effective manner, or if there is a failure to convert by another company or a conversion that is incompatible with the BCE Group companies' systems, products and services, and if the BCE Group companies' contingency plans are ineffective, the Year 2000 issue could have a material adverse effect on the financial condition and results of the BCE Group companies.
Notes to the Condensed Consolidated Financial Statements
Note 1. Accounting policies
For a full description of accounting policies, refer to BCE's 1998 Annual Report. All amounts are in Canadian dollars unless otherwise indicated. Certain previously reported amounts have been restated to conform with the current presentation.
In the fourth quarter of 1998, Nortel Networks Corporation (Nortel Networks) revised its valuation methodology of acquired in-process research and development in light of guidance provided by the United States Securities and Exchange Commission. For a full description, reference is made to BCE's 1998 Annual Report. The net effect, on BCE's Consolidated Statement of Operations, for the three and nine months ended September 30, 1998, was an increase of $
The Consolidated Statement of Cash Flows for the nine months ended September 30, 1998, has been restated to reflect the new requirements under Section 1540 of the Canadian Institute of Chartered Accountants Handbook, "Cash Flow Statements". For purposes of the cash flow statement, all highly liquid investments with short-term maturities are classified as cash and cash equivalents.
Note 2. Strategic partnership with Ameritech Corporation (Ameritech)
On June 1, 1999, BCE and SBC/Ameritech finalized their strategic partnership announced on March 24, 1999. Under the terms of the partnership, SBC/Ameritech acquired an indirect 20% minority interest in Bell Canada for $5.1 billion. Bell Canada has been reorganized to hold certain telecommunications assets previously held by BCE. Bell Canada acquired, on May 31, 1999, at net book value from BCE, BCE's indirect interests in BCE Mobile Communications Inc. (renamed Bell Mobility Inc. (Bell Mobility) on October 22, 1999), Teleglobe Inc., Aliant Inc. (Aliant), (the company under which, on May 31, 1999, Bruncor Inc., Maritime Telegraph and Telephone Company, Limited, and NewTel Enterprises Limited were combined; Bell Canada's ownership in Aliant is approximately 42%), BCE's interests in three other regional Canadian telecommunications companies and other investments. Furthermore, Bell Canada transferred to BCE, at net book value, its investments in BCE Emergis Inc. and CGI Group Inc.
Note 3. Restructuring and other charges
In 1999, BCE recorded a pre-tax charge of $
Note 4. Gain on reduction of ownership in subsidiary and associated companies
In the second quarter of 1999, BCE recognized a gain of $4.2 billion on the reduction of its ownership in Bell Canada from 100% to 80% (see Note 2). In addition, in the first nine months of 1999, BCE recognized a gain of $
Note 5. Other income
Included in other income for 1999 is a pre-tax gain of $
Note 6. Subsequent event
On October 22,1999, the shareholders of Bell Mobility approved the agreement to merge Bell Mobility with several indirect wholly-owned subsidiaries of Bell Canada. The minority shareholders of Bell Mobility received a total consideration of approximately $1.6 billion in exchange for their shares. Bell Canada's ownership in Bell Mobility is now 100%.
SCHEDULE A
FORWARD-LOOKING STATEMENTS
Certain information and statements contained in the attached Management's Discussion and Analysis, including statements which may contain words such as "could", "expect", "seek", "may", "intend", and similar expressions, and statements that are based on current expectations and estimates about the markets in which BCE Inc. and its subsidiaries and associated companies (the "BCE Group companies") operate and management's beliefs and assumptions regarding these markets, constitute forward-looking statements with respect to the financial condition, results of operations and business of the BCE Group companies. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by or on behalf of one or more of the BCE Group companies. This information and such statements are subject to important risks, uncertainties, and assumptions which are difficult to predict. The results or events predicted in these written or oral statements may differ materially from actual results or events. Certain of the factors which could cause results or events to differ from current expectations are discussed below under the heading "Risk Factors". The risk factors discussed below relate primarily to BCE Inc.'s three principal business groups, namely, Bell Canada, Nortel Networks and BCI. BCE Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
RISK FACTORS
The BCE Group companies' future operating results may be affected by various trends and factors which must be managed in order to achieve favourable operating results. In addition, there are trends and factors beyond the BCE Group companies' control which affect their operations. Such trends and factors include adverse changes in the conditions in the specific markets for the BCE Group companies' products and services, the conditions in the broader market for telecommunications and the conditions in the domestic or global economy generally.
The BCE Group companies participate in a highly volatile and rapidly growing telecommunications industry which is characterized by vigorous competition for market share and rapid technological development. These factors could result in aggressive pricing practices and growing competition both from start-up and well capitalized companies.
In addition to the risk factors outlined above and in the attached Management's Discussion and Analysis, the following additional factors should be considered. Collectively these factors increase the risks for the BCE Group companies.
BELL CANADA GROUP
a) General
Expenditures, capital and demand for services
The level of expenditures necessary to maintain quality of service, the availability and cost of capital, and the extent of demand for telephone access lines, optional services, basic long distance services and wireless services, in the markets served by Bell Canada and its subsidiaries and associated companies (the "Bell Canada Group companies"), constitute factors which could materially affect their results of operations and financial condition in the future.
Economic fluctuations
The performance of the Bell Canada Group companies is affected by the general condition of the economy, with demand for services and the amount of use tending to decline when economic growth and retail activity decline. It is not possible for the Bell Canada Group companies to accurately predict economic fluctuations and the impact of such fluctuations on their performance.
b) Bell Canada Group Wireline Companies
Increasing competition
With the advent of competition in the local service market in 1998, all parts of Bell Canada's business and of the business of certain of its subsidiaries and associated companies are facing substantial and intensifying competition. Factors such as product pricing and service are under continued pressure while the necessity to reduce costs is ongoing. The Bell Canada Group wireline companies must not only try to anticipate, but must also respond promptly to, continuous and rapid developments in their businesses and their markets.
In addition, the significant growth and size, as well as the increasing global scope, of the telecommunications industry are attracting new entrants and encouraging parties other than existing participants to expand their services and their markets. Mergers and acquisitions, as well as alliances and joint ventures, are creating new or larger participants with broad skills and significant resources which will further impact the competitive landscape. Current and future competitors are coming not just from within Canada, but also globally, and include not only major telecommunications companies, such as BCT.Telus, AT&T Canada inc. and Sprint Canada inc., but also cable companies, Internet companies, wireless service providers and other companies that offer network services, such as providers of business information systems and systems integrators, as well as an increasing number of other companies that deal with or have access to customers through various communications networks. Many of these companies are significant in size and resources and have a significant market presence with brand recognition and existing customer relationships.
Technology
The telecommunications industry, as with many others, is characterized by rapidly changing technology with the related changes in customer demands and the need for new products and services at competitive prices. Technological developments are also shortening product life cycles and facilitating convergence of different segments of the increasingly global information industry. The Bell Canada Group wireline companies' future success will be impacted by their ability to anticipate, invest in and implement new technologies with the levels of service and prices that consumers demand. Technological advances may also affect the Bell Canada Group wireline companies' level of earnings by shortening the useful life of some of their assets. Furthermore, technological advances may well emerge that reduce or replace the costs of plant and equipment and eliminate or reduce barriers that deter other companies from competing in particular market segments.
Decisions of the CRTC
During 1997, the CRTC released several important decisions that set out the rules for the evolution to total competition in Canada's telecommunications industry. Included in these decisions were those related to the introduction of local service competition, the implementation of price cap regulation, and forbearance from long distance and private line service regulation. These decisions, which are described under the heading "Regulatory framework" of BCE Inc.'s Annual Information Form for the year ended December 31, 1998, represent significant challenges and opportunities for Bell Canada and certain of its subsidiaries and associated companies and are expected, together with continued intense competition across all lines of business coupled with the rapid pace of technological change (as previously discussed) to have a significant impact on their results in the future.
c) Wireless - Bell Mobility
Competition
The Canadian wireless telecommunications industry is highly competitive. The year 1998 was the first year that four wireless competitors were in the Canadian wireless market for an entire year, making 1998 the most competitive year in the history of the Canadian wireless telecommunications industry. Bell Mobility competes directly with three other wireless service providers with aggressive product and service introductions, pricing and marketing. Bell Mobility expects competition to continue to increase through the development of new technologies, products and services.
Industry Canada continues to reserve 40 MHz of spectrum in the 1.9 GHz band for future use, which potentially could be licensed to Bell Mobility, competitors or companies not currently holding cellular or PCS licenses. The number of competitors may also increase if wireless system operators choose to sell wireless services in bulk to other companies for resale to the public.
The market for paging services in Canada is also highly competitive. Bell Mobility currently competes with numerous other local and national paging companies.
Bell Mobility is a participant in Mobility Canada, which is owned and operated by the wireless affiliates or divisions of Canada's major telephone companies. Mobility Canada provides support to its owner companies in the delivery of wireless services to their subscribers. In May 1999, Mobility Canada announced a significant restructuring of its organization, creating two groups of carriers who can compete anywhere in the country to bring the fast-evolving benefits of wireless communications to national customers. The new agreement, with implementation expected in the first quarter of the Year 2000, changes the wireless landscape in Canada by removing restrictions that kept Mobility Canada members from competing in each other's territories. The new groups will each be able to offer Canada-wide wireless service, either by selling network services to each other or competing head to head. Although the new agreement will permit Bell Mobility to expand its business from a territorial perspective, it will also have the effect of increasing competition in the territory in which Bell Mobility currently operates. There can be no assurance that Bell Mobility will be able to successfully geographically expand its operations nor that it will be able to successfully compete with new competitors in its traditional territory. These factors could, in the future, have a material adverse effect on Bell Mobility's financial condition and results of operations.
Rapid technological change
The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of digital and other upgrades to existing analog wireless systems, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products, and enhancements to and changes in end-user requirements and preferences. Such continuing technological advances make it difficult to predict the extent of future competition with cellular and PCS and paging services. As a result, there can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future and render cellular, PCS or paging systems less profitable or even obsolete.
The operations of Bell Mobility depend in part upon the successful deployment of continually evolving wireless communications technologies, which will require significant capital expenditures to deploy. There can be no assurance that such technologies will be developed according to anticipated schedules, that they will perform according to expectations, or that they will achieve commercial acceptance. Bell Mobility may be required to make more capital expenditures than are currently expected if suppliers fail to meet anticipated schedules, if a technology's performance falls short of expectations, or if commercial success is not achieved.
PCS operations
Bell Mobility launched PCS service in October 1997. Bell Mobility is continuing to incur significant costs to develop a PCS customer base including capital expenditures, promotional offerings and handset subsidies. Competition is intense in the PCS market with four PCS service providers in each service area. In addition, increases in Bell Mobility's PCS customer base will result in the reduction, over time, of Bell Mobility's existing cellular customer base. In particular, Bell Mobility has focused on migrating its existing high-usage cellular customers to PCS. While Bell Mobility believes its PCS operations will eventually become profitable and generate positive cash flow, building its PCS customer base will continue to adversely affect Bell Mobility's profitability and its margins in the short to medium term.
Regulation
The operation of cellular, PCS and other radio-telecommunications systems in Canada is subject to initial licensing requirements and the oversight of Industry Canada. Operating licenses are issued at the discretion of the Minister of Industry pursuant to the Radiocommunication Act. Industry Canada grants cellular and PCS licenses for a maximum term of five years. Bell Mobility's cellular and PCS licenses will expire on March 31, 2001 and April 30, 2001, respectively. Industry Canada has the authority at any time to require modifications to the license conditions applicable to the provision of such services in Canada to the extent necessary to ensure the efficient and orderly development of radiocommunication facilities and services in Canada. Industry Canada can revoke a license at any time for failure to comply with its terms. At this time, Bell Mobility knows of no reason why its current licenses will not be renewed as they expire.
In October 1998, Industry Canada issued Canada Gazette Notice DGTP-015-98 soliciting public comment on whether to continue, modify or rescind the application of a limit on the aggregate amount of spectrum that may be held by PCS providers. At the time of the initial selection of PCS licensees in December 1995, Industry Canada adopted a Spectrum Cap Policy which was set at 40 MHz and consists of frequency assignments for PCS at 2 GHz, cellular radiotelephony and similar public high mobility radiotelephony services. Bell Mobility currently has a license for 25 MHz of cellular spectrum and 10 MHz of PCS spectrum.
On November 5, 1999, Industry Canada released its decision in its review of the PCS Spectrum Cap. Industry Canada has increased the cap, from its current level of 40MHz, to 55MHz. Industry Canada stated that the increased cap is intended to help address capacity constraints, i.e. in Toronto and Montréal, as well as to assist in the development of 3G PCS services. Industry Canada's release also indicates that the remaining 40 MHz of PCS spectrum in the C and E blocks will be allocated through an auction which will be completed by the Fall of 2000.
Radio frequency emission concerns
Media reports have suggested that certain radio frequency emissions from cellular telephones may be linked to certain medical conditions such as cancer. In addition, certain interest groups have requested investigations into claims that digital transmissions from handsets used in connection with digital wireless technologies pose health concerns and cause interference with hearing aids and other medical devices. There can be no assurance that the findings of such studies will not have a material effect on Bell Mobility's business or will not lead to governmental regulation. The actual or perceived health risks of wireless communications devices could adversely affect wireless communications service providers through reduced subscriber growth, reduced network usage per subscriber, threat of product liability lawsuits or reduced availability of external financing to the wireless communications industry.
NORTEL NETWORKS
Rapid technological change and voice and data convergence
Nortel Networks expects that data communications traffic will grow substantially in the future compared to the modest growth expected for voice traffic. The growth of data traffic is expected to have a significant impact on traditional voice networks and create market discontinuities which will drive the convergence of data and telephony and give rise to the demand for IP-optimized networks. Many of Nortel Networks' traditional customers have already begun to invest in data networking. Given the dynamic and evolving nature of the communications business and the technology involved, there can be no assurance as to the rate of such convergence. Consequently, there is no assurance that the market discontinuities and the resulting demand for IP-optimized network equipment will continue to develop. Certain events (including the evolution of other technologies) may occur which would increase the demand for products based on other technologies and reduce the demand for IP-optimized network equipment. A lack of demand for IP-optimized network equipment in the future could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks.
In order to position Nortel Networks to take advantage of the anticipated growth in demand for IP-optimized network equipment, Nortel Networks has made, and may continue to make, strategic acquisitions which involve significant risks and uncertainties. These risks and uncertainties include the risk that the industry does not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in the industry, the difficulty in integrating new businesses and operations in an efficient and effective manner, the risks of customers of Nortel Networks or the acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition on Nortel Networks' future product strategy, the potential loss of key employees of the acquired businesses, the risk of diverting the attention of senior management from the operation of the business, and the risks of entering new markets in which Nortel Networks has limited experience. The inability to successfully integrate acquisitions made by Nortel Networks could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks.
The markets for Nortel Networks' products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions, and short product life cycles. Nortel Networks' success is expected to depend, in substantial part, on the timely and successful introduction of new products and upgrades of current products to comply with emerging industry standards and to address competing technological and product developments carried out by others. The development of new, technologically advanced products, including IP-optimized network products, is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. The success of new or enhanced products, including IP-optimized network products, is dependent on a number of other factors including the timely introduction of such products, market acceptance of new technologies and industry standards, and the pricing and marketing of such products. An unanticipated change in one or more of the technologies affecting telecommunications and data networking, or in market demand for products based on a specific technology, particularly lower than anticipated demand for IP-optimized network products, could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks if it fails to respond in a timely and effective manner to such changes.
Competition
Nortel Networks' principal competitors are large telecommunications equipment suppliers, such as Lucent Technologies Inc. ("Lucent"), Siemens AG, and L.M. Ericsson, and data networking companies such as Cisco Systems and 3Com Corporation. Since the markets in which Nortel Networks competes are characterized by rapid growth and, in certain cases, low barriers to entry and rapid technological changes, smaller niche market companies and start-up ventures may become principal competitors in the future. The acquisition of Bay Networks by Nortel Networks was followed by Lucent's agreement to acquire Ascend Communications Inc. These acquisitions may have the effect of inducing certain of Nortel Networks' other competitors to enter into additional business combinations, to accelerate product development, or to engage in aggressive price reductions or other competitive practices, thereby creating even more powerful or aggressive competitors.
Nortel Networks expects that it will face additional competition from existing competitors and from a number of companies that may enter Nortel Networks' existing and future markets. Some of Nortel Networks' current and potential competitors have greater financial (which includes the ability to provide customer financing in connection with the sale of its products), marketing, and technical resources. Many of Nortel Networks' current and potential competitors have also established relationships with Nortel Networks' current and potential customers. Increased competition could result in price reductions, reduced profit margins, and loss of market share, each of which could have a material adverse effect on the business, results of operations, and financial condition of Nortel Networks.
International growth, foreign exchange, and interest rates
Nortel Networks intends to continue to pursue growth opportunities in international markets. In many international markets, long-standing relationships between Nortel Networks' potential customers and their local providers, and protective regulations, including local content requirements and type approvals, create barriers to entry. In addition, pursuit of such international growth opportunities may require significant investments for an extended period before returns on such investments, if any, are realized. Such projects and investments could be adversely affected by reversals or delays in the opening of foreign markets to new competitors, exchange controls, currency fluctuations, investment policies, repatriation of cash, nationalization, social and political risks, taxation, and other factors, depending on the country in which such opportunity arises. Difficulties in foreign financial markets and economies, and of foreign financial institutions, could adversely affect demand from customers in the affected countries.
In order to successfully grow in international markets, it is expected that Nortel Networks will be required to provide significant amounts of customer financing in connection with the sale of products and services.
Consolidations in telecommunications industry
The telecommunications industry has experienced the consolidation of industry participants and this trend is expected to continue. Nortel Networks and one or more of its competitors may each supply products to the corporations that have merged or will merge. This consolidation could result in delays in purchasing decisions by the merged corporations and/or Nortel Networks playing a lesser role in the supply of communications products to the merged corporations, and could have a material adverse effect on Nortel Networks' business, results of operations, and financial condition.
BCI
Capital requirements
BCI's operations are in the start-up or early growth stages. Consequently, capital is required to fund ongoing operations and investment activities such as license fees, network construction and other start-up costs. Capital is also required for the acquisition of new properties.
BCI expects all of its operating companies to require additional debt and equity financing to complete or expand the construction of their networks. While BCI believes its operating companies will be able to secure debt financing from third parties and additional equity capital from the parent company and its partners, there can be no assurance that financing will be available on terms satisfactory to or when required by BCI and its operating companies.
Dependence upon cash flow from operating companies
BCI's assets consist almost entirely of its shareholdings in its operating companies. Certain of BCI's operating companies may be significantly restricted by the laws of their home countries or by debt instruments from making distributions to BCI. More importantly, most of BCI's principal operating companies are still in the start-up stages and have, as expected, negative cash flows. There can be no assurance that BCI's operating companies will become profitable or produce positive cash flow. For those companies in which BCI holds a minority interest, BCI is legally unable to cause dividends or other distributions to be made to it.
Exchange rates
BCI reports its financial statements in Canadian dollars. BCI's principal operating companies function in different currency jurisdictions and all report in local currencies.
To the extent that the operating companies have commenced commercial operations, revenues that they generate will be paid to them in the local currency. However, many significant liabilities of these companies may be payable in currencies other than the local currency (such as U.S. dollar liabilities incurred for the financing of telecommunications equipment). As a result, any devaluation in the local currency relative to the currencies in which such liabilities are payable could have a material adverse effect on BCI. In some developing countries, significant devaluation relative to the Canadian and United States dollars have occurred in the past and may occur again in the future.
In September 1999, the Central Bank of Colombia eliminated its currency's trading band, allowing the peso to float freely according to the supply and demand of foreign currency.
As discussed in further detail under "Colombia" below, the combination of economic contraction and sporadic guerilla activity in Colombia has created a climate of uncertainty and instability which caused a substantial depreciation in value of the Colombian peso relative to the Canadian Dollar. The depreciation in value of the peso in the third quarter and first nine months of 1999 was 14% and 26% respectively, compared to an appreciation of 16% and a depreciation of 35% for the same periods in 1998.
Inflation
Inflation has had and may continue to have adverse effects on the economies and securities markets of certain emerging market countries and could have adverse effects on the operating companies and start-up projects in those countries, including their ability to obtain financing. Colombia, Brazil, India and China have, in the past, periodically experienced relatively high rates of inflation.
Foreign exchange controls
Although there are currently no foreign exchange controls in the countries in which BCI's telecommunications companies operate which would significantly restrict the ability of such companies to repatriate cash, instruments of credit or securities in foreign currencies, difficulties may be encountered in some countries in converting large amounts of local currency into foreign currency due to limited foreign exchange markets.
Colombia
In Latin America, Colombia is experiencing its worst recession this century. The combination of economic contraction and sporadic guerilla activity in the run-up to peace negotiations has created a climate of uncertainty and instability, which caused a substantial depreciation in value of the peso relative to the Canadian and U.S. Dollars. Faced with these difficulties, the results of the BCI companies, Comcel and Occel, operating in Colombia have weakened sharply. On September 8, 1999, Comcel restructured its senior secured term loans. Although BCI is taking measures in order to support its Colombian companies through these difficult times, there can be no assurance that such difficulties will be resolved. These difficulties have had an important adverse effect on BCI's results of operations and financial condition and may, if they persist, result in a material deterioration of such results of operations and financial condition.