Aliant Achieves Strong Performance in Third Quarter and Announces Strategy to Position for Further Growth


	Aliant Achieves Strong Performance in Third Quarter and Announces Strategy to Position for Further Growth - Accelerates Integration of Operations - Strengthens Ties with Bell Canada HALIFAX, N.S.,Oct. 23 2001 --Aliant Inc. (TSE: AIT) today reported continued strong growth in revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) in its third quarter ended September 30. Revenue and EBITDA both increased by 13% for the third quarter over the same period in 2000. The company also announced an immediate action plan to reduce costs through an accelerated program for integration across Aliant Inc.'s operations. "Aliant has achieved significant growth in the third quarter in the face of increasing competition and a softening economy. Because of the anticipated effects of these market conditions and recent negative regulatory changes in the telecommunications industry impacting 2002, we are implementing an aggressive plan to reduce costs and accelerate the ongoing consolidation of our operations to better position the company for continued solid performance," said Stephen Wetmore, Aliant's President and CEO. "In a separate move to enhance growth opportunities and maintain our telecom unit as the leading Atlantic Canadian telecommunications company, we are strengthening Aliant Telecom's ties with the Bell family. There are many ways for our companies to cooperate, to leverage our assets, to enhance our product and service mix, and to expand into new markets to better serve our customers," said Wetmore. "With these strategic initiatives, we remain on track to meet our financial targets for the year and to continue to drive growth in future years through more efficient and competitive operations," he said. Financial Results In the third quarter, Aliant's total revenues increased to $641 million from $567 million in the same period in 2000. This growth was driven primarily by increases in remote communications and organic growth across all lines of business. For the year to date, Aliant's revenues increased 17% to $1.9 billion from $1.7 billion in the same period in 2000. Total cash operating expenses for the quarter were $224 million compared with $210 million for the third quarter of 2000. For the year to date, expenses increased 12% to $713 million from $639 million in the same period last year, primarily as a result of expanded operations from acquisitions made late in 2000. Over the comparable period in 2000, EBITDA for the quarter increased 13% to $250 million from $221 million and for the year it increased 11% to $712 million from $641 million. Initiatives to enhance shareholder value and customer service Integration Action Plan ----------------------- Aliant's management team is implementing an aggressive action plan to accelerate the second-stage efficiencies resulting from the successful merger in 1999 that created Aliant Inc. Cost savings initiatives will result in a one-time charge in the fourth quarter of $111 million. Management estimates pre-tax cost savings of approximately $56 million annually, a level that will be reached in early 2002. The $56 million annual cost savings helps offset a negative EBITDA impact of approximately $66 million, anticipated in 2002. This expected decline is attributable to the Canadian Radio-Television and Telecommunications Commission's (the "CRTC") new contribution regime and cost subsidy rules. "Our pro-active moves to realize accelerated synergies will position Aliant for continued strong performance. As a result, despite difficult economic and increasingly competitive conditions, this year we expect to achieve consolidated revenue and EBITDA growth in excess of 15%," said Wetmore. Closer ties will Bell Canada ---------------------------- "While our companies currently enjoy a close working relationship, the Aliant merger has progressed to a stage where we can pursue further opportunities for both revenue enhancement and cost reductions with the Bell family," said Wetmore. "Our initiatives, to be disclosed over the coming months, will allow us to create new growth opportunities for our companies, enable us to enhance our services to our customers and make our operations more efficient, thereby ensuring our future success. We are confident in the benefits of this direction and strategy." Telecommunications In the quarter, Aliant Telecom achieved solid performance with revenues increasing by 6% before the impact of the contribution decision, or $27 million over last quarter. Of this revenue growth, $15 million was the result of wireless and Internet revenue growth. In the quarter, telecommunications EBITDA increased 13% to $228 million from $201 million in the same period last year. Year to date EBITDA is $642 million, reflecting a growth rate of 10%. Despite the industry's challenging climate, the growth in Telecom is expected to remain steady in the fourth quarter keeping the Company on track to meet its target Telecom 2001 revenues of between $1.85 to $1.9 billion, and full-year EBITDA growth within its target range of 8-11% ($850 to $875 million). To address the impact of recent regulatory changes, Aliant Telecom is introducing new pricing measures and taking aggressive steps - the most significant of which is the restructuring charge -- to accelerate its plans to realize further synergies from the integration of its operations. Emerging Business Last year, emerging business benefited from a one-time software sale in the third quarter. These types of sales are intermittent in nature and have not been repeated this quarter. Therefore, year-over-year emerging business revenues have decreased by 30%. Excluding the one-time sale, on a year to date basis, revenues improved by 33%. As a result of revenue reductions primarily in Innovatia's Interactive Knowledge division, guidance for 2001 has been revised to revenues of $130 to $150 million, down from $200 to $230 million. Management has revised EBITDA guidance for 2001 from between $25 and $30 million to between $5 and $10 million. Information Technology Aliant's information technology business, operated by its wholly owned subsidiary, xwave, grew revenues by 8% in the third quarter, largely due to organic growth. xwave is on track to deliver expected 2001 revenues in the range of $370 to $390 million, an increase of 12-18% over 2000, due to both organic growth and an acquisition made at the end of 2000. However, higher operating expenses and less demand for systems integration services have resulted in an anticipated shortfall from xwave's target EBITDA. Management is revising guidance for 2001 to between $40 and $45 million, from between $50 and $55 million. Because management believes the economic conditions causing the slowdown in demand will persist for some time, it has implemented cost reduction measures and is more aggressively integrating back office functions to realize planned synergies over a shorter time frame. These initiatives form part of the accelerated integration action plan. Remote Communications Stratos Global Corporation (SGB:TSE), Aliant's 61%-owned remote communications business, was recognized this quarter as the top-ranked company on Deloitte & Touche's prestigious "Canadian Fast 50" program, a ranking of the 50 fastest growing technology companies in Canada. As such, Stratos has been a key contributor to growth in revenue and EBITDA at Aliant in 2001. Year to date, improved gross margins and lower operating costs at Stratos have contributed to expanded EBITDA margins of 22%. Stratos is achieving rapid integration of its four acquisitions made in 2000, realizing significant operating synergies in its expanded operations. Stratos continues to execute their integration plan and to focus on top- line growth, while maintaining margins. On October 1, Stratos announced workforce reductions due to additional synergies from its acquisitions and slowing economic conditions. << Financial Highlights (Quarter Ended September 30, 2001) Three Months Nine Months ---------------------------------------- ($000's except per share amounts) 2001 2000 2001 2000 ------------------------------------------------------------------------- Total operating revenue $640,501 $567,231 $1,937,707 $1,661,746 ------------------------------------------------------------------------- Total cash expenses $390,813 $347,949 $1,225,907 $1,022,114 ------------------------------------------------------------------------- EBITDA $249,688 $221,078 $ 711,800 $ 641,428 ------------------------------------------------------------------------- Net income applicable to common shares $ 43,610 $ 58,920 $ 119,838 $ 157,922 ------------------------------------------------------------------------- Earnings per average common share $ 0.32 $ 0.44 $ 0.89 $ 1.20 ------------------------------------------------------------------------- Net income excluding goodwill $ 50,274 $ 63,119 $ 138,671 $ 168,929 ------------------------------------------------------------------------- Earnings per share excluding goodwill $ 0.37 $ 0.47 $ 1.03 $ 1.29 ------------------------------------------------------------------------- Cash flow per share $ 1.12 $ 0.89 $ 3.28 $ 3.00 ------------------------------------------------------------------------- Average number of common shares outstanding 135,975 134,032 135,216 130,860 ------------------------------------------------------------------------- >> Dividend The Board is committed to providing a regular return to shareholders. Yesterday, Aliant's Board of directors declared a common share dividend of $0.225 per common share, and a preferred share dividend of $0.340625 per preferred share, both payable on December 30, 2001 to shareholders of record on December 14, 2001. Aliant Inc. (TSE:AIT) is one of Canada's top high-tech companies, providing integrated communications and IT solutions through subsidiaries operating worldwide. By combining industry-leading expertise from across the group of companies, Aliant uses the Aliant Premium(TM) model to deliver unique, end-to-end solutions to customers. With 10,000 employees and a market capitalization of almost $4.5 billion, Aliant ranks in the top 10 technology companies, and top 100 publicly traded companies, in the country. More information on Aliant may be found on our web site at www.aliant.ca. A conference call with analysts is scheduled for October 23 at 9:30 a.m. ADT (8:30 a.m. EDT). The dial in number is 1-888-243-1119. Media are invited to attend in a listen-only mode. A replay of the analyst session can be heard between noon ADT (11:00 am EDT), October 23 and midnight, October 30th. To access the replay, dial 1-800-558-5253 and enter the registration number 19779940. A live audio webcast of the call will be available online at www.aliant.ca and at www.q1234.com. This news release contains statements and information about potential future circumstances and developments. Such statements and information are qualified by the inherent risks and uncertainties surrounding future expectations generally and may differ materially from Aliant's actual future experience. Aliant disclaims any intention or obligation to update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise. ALIANT INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001 Highlights of Aliant's third quarter and nine-month results Aliant Inc. (Aliant or the Company) earned consolidated revenues of $640.5 million for the third quarter of 2001, growing by 12.9% from $567.2 million in 2000. Revenue growth has slowed from that seen in the previous two quarters, however, this pattern was anticipated as the acquisition growth included in the first half of the year will not continue its impact through the second half. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter was $249.7 million compared with $221.1 million for the third quarter of 2000, showing growth of 13.0%. The normalized EBITDA growth trend in the third quarter was actually 18.7% as the third quarter of 2000 included a $10.7 million intellectual property sale. Aliant's 2001 earnings guidance issued on March 28 forecasted revenue and EBITDA growth in the 15-20% range. With year-over-year revenue growth of 16.6% and EBITDA growth of 11.0% for three-quarters of the year, management continues to expect to meet this guidance for the full year, but weakening general economic conditions will probably mean results will be closer to the lower end of the indicated range. There are issues on the horizon that present challenges for the Company as 2002 approaches. As witnessed by slowing revenue growth, the economic environment has been deteriorating and there is an increasing likelihood that these softer conditions will persist into 2002. In addition, recent contribution and banding decisions by the CRTC will negatively impact financial results next year. The Company has announced an immediate action plan to reduce costs through an accelerated integration program across Aliant's operations, and by strengthening ties with parent Bell Canada Holdings. Aliant is implementing an aggressive plan to reduce costs and accelerate the ongoing consolidation of its operations to better position the Company for continued solid performance. With the formation of Aliant in 1999, management initiated a plan to achieve significant operating synergy targets, which have all since been met or surpassed. There has also been significant progress in achieving synergies from acquisitions made by Aliant's lines of business over the last year. Even further long-term opportunities for efficiency and cost savings have been identified and plans made to reap these benefits over a number of years. The action being taken now is an acceleration of these long- term plans, advancing the pace of staff reductions and other restructuring initiatives necessary across Aliant's lines of business to increase productivity and reduce operating costs. These measures will help defend against margin erosion in the face of anticipated regulatory impacts on Aliant Telecom in 2002 and slower growth that is now being seen in operating revenues. The cost of this further restructuring is estimated to be $111 million on a consolidated basis and will be taken as a special charge against earnings in the fourth quarter. It is anticipated that the majority of this amount will be spent over the next 3 months on severance payments for employees and necessary systems changes to allow for the more efficient workforce. Annual operating expense savings of $56 million will be realized, this run-rate being achieved early in 2002. In a separate move to enhance growth opportunities and maintain Aliant Telecom as the leading Atlantic Canadian telecommunications company, it is strengthening ties with Bell Canada. There are many ways for the companies to cooperate to tap into additional synergies and additional revenue opportunities - a mutually beneficial move that will allow both companies to leverage assets, enhance product and service mix, and expand into new markets. Aliant anticipates implementing plans to realize these opportunities over the next several months. With these strategic initiatives, Aliant will remain on track to meet our financial targets for the year and will continue to drive growth in future years through more efficient and competitive operations. Aliant is maintaining its year-end targets for capital investments, having already put in place much of the infrastructure necessary to expand and optimize its wireless and Internet protocol (IP) networks. These investments brought telecom capital spending to $282.7 million for the first three- quarters of 2001, up from $268.1 million in 2000. Capital expenditures in the telecom segment for 2001 will be in the range of $375-400 million, with approximately half allocated to broadband and wireless infrastructure. This investment in broadband is critical to the future growth of Aliant - this IP network is required to meet the needs of high-speed Internet customers and deliver an enhanced line-up of applications, which are expected to significantly augment future revenues. Aliant does not expect the long-term growth in demand for broadband services to be dampened by the current economic slowdown, however short-term cutbacks in consumer spending may slow the growth in demand for such premium services for a time. Throughout 2001 Aliant has been implementing its plan to strengthen its balance sheet and remove costs to prepare for the possibility of an economic downturn. Management believes the improved financing and operating leverage position will enable Aliant to weather the current conditions without severe adverse effects on the Company's financial results. Prior acquisitions and capital investment are impacting Aliant's 2001 earnings through higher interest, depreciation and goodwill amortization charges. Management reiterates its guidance that 2001 consolidated depreciation and amortization expense will increase by $75-80 million over 2000 and interest expense will be $35-40 million higher. The non-recognition of tax benefits associated with the current operating losses of Aliant's 61%-owned subsidiary, Stratos Global Corporation (Stratos Global) is also resulting in lower reported net income in 2001. The future tax benefit of Stratos Global's operating losses, if recognized, would have led to a reduction in the consolidated tax provision of approximately $14.5 million year-to-date ($4.8 million for first nine-months of 2000) and increased Aliant's net income by its proportionate share, or approximately $8.9 million year-to-date ($2.9 million in 2000). Consolidated net income applicable to common shares was $43.6 million, or $0.32 per share in the quarter, compared with $58.9 million and $0.44 per share for the third quarter of 2000. Year-to-date earnings are $0.89 per share compared with $1.20 per share last year. Following is a discussion and analysis of the results and this quarter's developments in the operating environment for each line of business. Telecommunications The telecommunications line of business is comprised of the operations of Aliant Telecom, its subsidiaries and Aliant's telephone directory publishing business. Telecommunications revenues increased 4.5% in the third quarter of 2001 to $464.9 million with trends consistent throughout the first three- quarters of this year. This rate of increase was achieved through continued strong growth in wireless and Internet revenues and stable results from local and long-distance revenues despite the negative impact on these revenues from a regulatory change as discussed below. Telecom revenues for the first three- quarters of $1.4 billion have increased 5.6% and remain on track to meet the expected range of $1.8 to $1.9 billion for the full year. EBITDA increased a strong 13.2% from $201.4 million in the third quarter of 2000 to $228.1 million in 2001, improving on the growth experienced in the first half of the year. EBITDA margins showed continued strength at 49.1% for the quarter. Telecom EBITDA year-to-date has increased 9.7% to $642.1 million. With stable growth expected to continue over the fourth quarter, Aliant's telecom segment is on-pace to achieve its targeted full-year EBITDA growth in the 8-11% range. Revenues for the quarter and year-to-date are negatively impacted, while EBITDA is positively impacted, by changes to the contribution regime required by the Canadian Radio-television and Telecommunications Commission (CRTC or the Commission). Effective January 1, 2001, all service providers must pay a flat 4.5% tax on certain of their telecommunications revenues into a national contribution pool. Local service providers are then able to draw from the pool to help offset the costs of providing basic local services in high-cost areas. These changes have reduced Aliant Telecom's revenues by $7.4 million for the quarter and $26.8 million year-to-date. Without this, revenue growth would have been 6.1% quarter-over-quarter and 7.7% year-to-date. Related costs of revenues are also being reduced as a result of implementing the decision, with the decrease in costs more than offsetting decreased revenues. The positive impact for 2001 EBITDA associated with the change in net contribution pool revenues is expected to be approximately $19 million. The impact for the quarter and year-to-date is detailed in the table below. << Impact of contribution regime changes Quarter ended Nine months ended (millions of dollars) September 30, 2001 September 30, 2001 ----------------------------------------------------------------------- Decreased local revenues $ (2.0) $ (10.3) Decreased long distance revenues (5.4) (16.5) ----------------------------------------------------------------------- Total revenue impact (7.4) (26.8) ----------------------------------------------------------------------- Decreased settlement expense (2.3) (8.9) Decreased contribution expense (9.2) (32.7) ----------------------------------------------------------------------- Total cost of revenues impact (11.5) (41.6) ----------------------------------------------------------------------- Net EBITDA impact $ 4.1 $ 14.8 ----------------------------------------------------------------------- Any positive impact from the contribution decision will affect the current year only, as starting in 2002 expected changes to the calculation of the cost of service will lower the net contribution amount that Aliant Telecom will be eligible to receive. Earlier in the year the CRTC announced its "banding" decision, defining high-cost service areas. As a result of this decision, there will be a significant reduction in the amount of net subsidy Aliant Telecom will receive in 2002. The combined effects of the contribution and banding decisions are anticipated to reduce Aliant Telecom's net subsidies, and therefore EBITDA, by approximately $66 million in 2002 (compared with 2001). Pricing measures taken this year should reduce this EBITDA gap to approximately $40 million, the remainder necessitating a redesign of Aliant Telecom's cost structure. Work processes in operations and corporate support functions are being restructured, further rationalization of common infrastructure will occur and service points will be improved through on-line channels where possible. The special charge that will be taken in the fourth quarter ($71 million related to telecom) will provide for planned staff reductions. Annual expense savings of an estimated $31 million will be reached in early 2002, with a payback period for the charges of approximately 2 years. Telecommunications operating results Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Local $ 219,341 $ 209,102 4.9 $ 649,463 $ 635,290 2.2 Long-distance 100,392 110,091 (8.8) 306,587 330,121 (7.1) Wireless 68,317 59,898 14.1 183,814 157,079 17.0 Other 76,887 65,977 16.5 237,355 181,410 30.8 ------------------------------------------------------------------------ Total revenues 464,937 445,068 4.5 1,377,219 1,303,900 5.6 Cost of revenues 57,698 66,000 (12.6) 177,182 186,138 (4.8) ------------------------------------------------------------------------ Net operating revenues 407,239 379,068 7.4 1,200,037 1,117,762 7.4 Operating expenses 179,167 177,644 0.9 557,943 532,236 4.8 ------------------------------------------------------------------------ EBITDA 228,072 201,424 13.2 642,094 585,526 9.7 Depreciation and amorti- zation 86,140 72,455 18.9 261,865 230,150 13.8 ------------------------------------------------------------------------ Operating income $ 141,932 $ 128,969 10.1 $ 380,229 $ 355,376 7.0 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Telecommunications operating statistics For the quarter ended and as at September 30 2001 2000 Market Market % share() Number share() Number change ------------------------------------------------------------------------- Network access services (NAS) - residence 98.4% 944,959 99.5% 953,730 (0.9) - business 96.5% 614,301 97.5% 605,020 1.5 ------------------------------------------------------------------------- Cellular customers 75.0% 450,134 74.6% 357,928 25.8 ------------------------------------------------------------------------- Internet customers - dial-up 69.4% 187,058 66.0% 164,000 14.1 - high-speed 61.8% 61,111 49.5% 27,303 123.8 ------------------------------------------------------------------------- Long-distance minutes for the quarter (000) 87.5% 849,438 87.5% 807,523 5.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*)Estimated Revenues Local Local revenues are earned through the provision of voice and data network access, telephone set rentals, enhanced service options and contribution payments. Total local revenues increased by 4.9% to $219.3 million for the third quarter and by 2.2% to $649.5 million for the first three-quarters of 2001. Without the loss of revenues from the January 1 implementation of the CRTC contribution changes, local revenues would have increased 5.9% for the quarter and 3.9% year-to-date. Local voice NAS revenue for the quarter increased by 2.3% to $116.3 million as residential price increases implemented during the second and third quarters this year took effect. Management estimates these price increases will add $4-5 million to local revenues this year, and $10-12 million in 2002. NAS growth has slowed (0.03% increase over September 30, 2000) with some small market share losses earlier this year, however Aliant Telecom's overall market share for local services remains strong and unchanged from the previous quarter at 98%. CRTC proceedings are currently underway to consider a proposal by Aliant Telecom for potential price increases for customers in rural communities. These price increases are desired to better offset the cost of providing access services in these areas, a move that is precipitated by the loss of subsidies from contribution payments in 2002. Data access revenues increased to $24.5 million for the quarter, showing growth of 4.4% as solid growing demand for data circuits is being offset by price reductions. Although data access revenues show modest growth due to price reductions (up 4.0% year-to-date), the growing importance of data overall is seen in the significant increases in Internet and e-commerce revenues. Revenues from enhanced local service options increased 18.0% to $22.1 million for the quarter, a combined result of price increases earlier this year and continued growth in penetration of bundled services. The growth of acceptance of bundled service offerings is slowing as penetration, now at approximately 27% amongst residential customers, will reach a saturation point. Business customer penetration, at approximately 2%, is still expected to grow rapidly as new bundled offerings have recently been introduced. Terminal rental revenue declined $0.2 million, or 1.1%, compared with the third quarter of 2000 due to the continued conversion of the rental set base to outright sales. Long distance Aliant Telecom's minute volumes in the third quarter increased by 5.2% from 807.5 million in 2000 to 849.4 million in 2001. This brings year-to-date minute volumes to 2.6 billion, up 6.7% from the first three-quarters of 2000. The large base of call-centre customers located in the Atlantic region continues to be a significant driver of minute growth in the toll-free market. Bundled service offerings, including a flat-rate long-distance component, continue to drive up calling volumes in the residential market. Lower average per-minute prices continue to offset the impact of demand growth on long-distance revenues. Before considering the changes to toll settlement rates required under the new CRTC contribution regime, long- distance revenues declined 3.9% for the third quarter and 2.1% year-to-date. With the reduction in toll settlement rates resulting from the contribution decision, there was a year-over-year decline in third-quarter long distance revenues of 8.8% and a decline in the year-to-date revenues of 7.1%. Wireless Aliant Telecom's wireless business continued its steady strong growth, resulting in increased revenues of 14.1% compared with the third quarter last year and 17.0% growth year-to-date. Aliant maintains an industry-leading market share for cellular services, and continued new demand for these services is being reflected in customer growth. Aliant's cellular customers numbered over 450,000 at September 30, 2001, representing growth of 25.8% over the last year and encompassing a 234% increase in digital subscribers. This growth is being accomplished while maintaining lower-than-average customer churn rates and customer acquisition costs. Customer churn has averaged 1.5% per month through the first nine months of 2001, unchanged from 2000 levels. Part of the growing demand for cellular services, including new digital services, is being stimulated by declining overall prices. The greater penetration of cellular service in the population therefore leads to lower average revenues per customer, which declined by 7.9% to $44.94 per month during the first nine months of 2001 compared with $48.80 per month for the same period last year. Also, the softening economic conditions may have a moderating affect on new cellular customer growth as, unlike wireline services, these services are still considered to be somewhat a discretionary item in consumer budgets. This may also negatively impact churn rates and customer acquisition costs. Operating cost reduction measures will mitigate these negative factors and help to preserve wireless EBITDA margins. Other Other telecommunications revenues are derived from Internet services, telephone directory advertising, equipment sales, consulting services and new services such as VibeVision - Aliant Telecom's interactive digital television offering. Total other revenues were up $10.9 million, or 16.5% for the third quarter, and $55.9 million or 30.8% so far in 2001. Internet services continued to generate tremendous growth over the past year as the number of Aliant Telecom's high-speed customers increased by 124% to 61,111 and the number of regular dial-up customers grew by 14% to 187,058. Revenues from Internet services increased 47.0% to $20.9 million for the third quarter, leading to 44.3% growth year-to-date. Directory advertising revenues were $9.0 million, up 9.7% from the third quarter of 2000. Outright sales of telecom equipment increased only 1.8% to $26.9 million for the quarter. Growth in cellular set sales by Aliant Telecom's 50% subsidiary, Atlantic Mobility Products Limited and sales of call centre switching equipment was offset by the significant one-time sales of traditional telecom equipment that occurred in the third quarter last year. The $3.0 million or 17.3% increase in other miscellaneous revenues is a result of strong growth in newer services such as e-commerce, operating an Internet help-desk, digital television services and the export of call centre services. This growth is offset by a $1.9 million reduction in pole rental revenues during the quarter as 2001 revenues from Newfoundland poles were transferred to Newfoundland Power on the closing of the pole sale transaction. Other revenue detail Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Internet $ 20,911 $ 14,228 47.0 $ 57,089 $ 39,572 44.3 Product sales 26,869 26,398 1.8 81,920 64,038 27.9 Directory revenues 9,002 8,206 9.7 34,966 33,200 5.3 Other miscellaneous 20,105 17,145 17.3 63,380 44,600 42.1 ------------------------------------------------------------------------ $ 76,887 $ 65,977 16.5 $ 237,355 $ 181,410 30.8 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Expenses Cost of revenues Cost of revenues includes cost of goods sold, contribution payments and settlement costs paid to other telecommunications carriers to transit and terminate long-distance calls originating on Aliant Telecom's network. The 12.6% decrease in cost of revenues compared with the third quarter of 2000 reflects the impact of lower contribution and settlement payments, partially offset by higher cost of product sales. Cost of product sales in the third quarter increased by $3.9 million or 13.7%, related to the growth in revenues from equipment sales plus the costs of operating the Internet help-desk. Contribution costs were lower by $10.5 million for the quarter and by $34.0 million for the first nine months, reflecting the lower contribution required by the new CRTC decision. Settlement expense for calls terminating on other companies' networks was lower by $1.7 million compared to the third quarter of 2000 and down $8.3 million for the three-quarters. This decline continues to be caused by lower settlement rates, also as a result of the CRTC contribution decision. Depreciation and amortization Telecommunications' depreciation and amortization expenses were up $13.7 million for the quarter and $31.7 million for the first three-quarters compared to last year. The combined effects of higher capital expenditures in 2000 and 2001 and a conservative approach to depreciating plant and equipment contributed to the increased expense. The focus of capital spending has shifted away from the traditional voice network and toward the broadband and wireless areas with their higher revenue-growth potential. Aliant Telecom has closed the transaction for the sale of most of its telephone poles in Newfoundland to Newfoundland Power. Under the terms of the sale agreement, Aliant Telecom realized proceeds of $23 million on closing, with an additional $23 million to be received between 2002 and 2005. Without the ownership of the poles, future depreciation expense and interest charges will be reduced, however attachment fees paid to Newfoundland Power for access to the poles will be an operating expense. While negative on an EBITDA basis, the transaction is positive economically to Aliant as it both frees capital otherwise committed to legacy infrastructure and results in a more efficient operating arrangement for poles. Other operating expenses Other telecommunications operating expenses increased only $1.5 million or 0.9% for the quarter, bringing the year-to-date growth rate to 4.8%. These expenses include salaries and benefits, property expense, direct operating expenses and other general corporate expenses. Salaries and benefits increased $9.4 million for the quarter primarily due to increased pay rates for both unionized and non-unionized employees in 2001 and lower salary costs charged to capital as the capital spending program was more heavily weighted to the first half of 2001. Year-to-date salaries and benefits have increased $20.9 million or 9.6%. Cellular roaming costs continued to rise as well, up $1.4 million for the quarter and $4.2 million year-to-date related to growth in revenues. Higher power and fuel costs have added $1.0 million to the quarter's expenses, and $2.9 million over nine months. Most other general and administrative operating expenses combined for an overall quarter-over-quarter decrease as efficiency gains continue to be realized. Information technology Aliant's information technology (IT) line of business is operated by its wholly-owned subsidiary, Xwave Solutions Inc. (xwave). As a result of both organic growth and one acquisition made during the fourth quarter of 2000, xwave's third quarter revenues increased by $6.3 million or 8.0% to $85.3 million. With year-to-date revenue growth of 18.9% to $286.2 million, xwave is on track to deliver the expected full-year 2001 revenues in the range of $370- $390 million, an increase of 12-18 % over 2000. Revenue growth in the third quarter slowed considerably compared with the pace of the first half of the year. Slower growth in the higher-margin IT services business, combined with higher operating expenses and lower utilization levels of IT resources have led to lower EBITDA margins year-to- date. As a result, management now expects to fall short of the previously issued guidance range of $50-55 million for EBITDA. Lower utilization levels are primarily due to slowing demand for systems integration services industry- wide over the past nine months, and will lead to a $40 - $45 million EBITDA range for 2001. Despite the slowdown in sales, xwave expects to be able to achieve improved EBITDA margins going forward as synergies from integrating its various acquired and merged operations come into effect. The integration that has already taken place this year, combined with further measures to be implemented in the fourth quarter will strengthen xwave's position for 2002. xwave has chosen to take a one-time charge in the fourth quarter ($28 million) to provide for severance and other restructuring initiatives to meet these goals. The full annual expected rate of savings of $20 million from this restructuring is anticipated to be achieved by the end of 2002. In the third quarter organic growth accounted for approximately $4.8 million, or 6.1% growth over the third quarter of 2000, while an estimated $1.5 million of the increase is attributable to acquisitions. xwave continues to be an important supplier to other Aliant companies, especially to Aliant Telecom as it makes significant investments in network systems and accelerates its operating efficiency programs. However, external sales growth is outpacing xwave's sales to other Aliant lines of business, thereby resulting in Aliant's consolidated IT revenues increasing 6.8% for the quarter and 20.0% year-to- date, as presented in Note 12 to Aliant's consolidated financial statements. Sales made to other Aliant lines of business have increased 7.5% for the quarter and 16.4% year-to-date. Revenues from IT consulting, technical support services and data processing services grew by 0.4% to $56.3 million for the third quarter - reflecting both the organic trend and the acquisition of TechKnowledge Inc. in December 2000. Product sales from xwave's IT fulfillment business grew more significantly, 30.5% to $29.1 million for the quarter, all due to organic growth. The gross margin on product sales decreased from 8.8% for the third quarter of 2000 to 8.3% for the third quarter of 2001. Year-to-date gross margins are 9.4% compared with 9.0% last year. Information technology operating results Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Services $ 56,262 $ 56,041 0.4 $ 184,834 $ 168,827 9.5 Product sales 29,054 22,968 30.5 101,388 71,866 41.1 ------------------------------------------------------------------------ Total revenues 85,316 79,009 8.0 286,222 240,693 18.9 Cost of product sales 26,633 20,944 27.2 91,904 65,393 40.5 ------------------------------------------------------------------------ Net operating revenues 58,683 58,065 1.1 194,318 175,300 10.8 Operating expenses 52,096 48,507 7.4 168,085 144,536 16.3 ------------------------------------------------------------------------ EBITDA 6,587 9,558 (31.1) 26,233 30,764 (14.7) Depreciation and amorti- zation 4,562 3,170 43.9 11,695 9,760 19.8 ------------------------------------------------------------------------ Operating income $ 2,025 $ 6,388 (68.3) $ 14,538 $ 21,004 (30.8) ------------------------------------------------------------------------ ------------------------------------------------------------------------ Remote communications Aliant's remote communications line of business is represented by its 61% ownership of Stratos Global. Stratos Global's results in 2001 are significantly impacted by its December 31, 2000 acquisition of British Telecommunications plc's Aeronautical and Maritime Division (BT A&M), approximately doubling the company's size. During the first three-quarters of 2001 Stratos Global has worked to effectively integrate and consolidate the BT A&M operations. To date the integration is progressing on track and Stratos Global expects to meet all plan milestones for the balance of the year. Stratos Global completed a total of four acquisitions in 2000. Synergies being gained as a result of these integration efforts as well as a slowing global economy, have resulted in a decision by Stratos Global to make further staff reductions, beyond those that were estimated and provided for at the time of the acquisition. Therefore, Stratos Global has taken a US$1.2 million one-time charge in the third quarter to allow for additional severance and restructuring costs. Annual savings are US$3.8 million, a run rate that was achieved effective October 1, 2001. The $65.4 million increase in third-quarter revenue from remote communications, and the $196.2 million increase year-to-date, can be attributed to the four acquisitions Stratos Global made in 2000 and organic growth in the business. The base of business in Stratos Global's telecommunications services, as it existed prior to the BT A&M acquisition, has shown organic growth of an estimated 11% for the third quarter of 2001 compared with the third quarter of 2000, and 12% year-to-date. There was an increase of approximately $193 million in year-to-date revenues from telecommunications services ($61 million increase in the third quarter) and a $3 million increase in network equipment and terminal sales ($4 million increase in the third quarter). Gross margin as a percentage of revenue increased to 37.7% for the nine- months ended September 30, 2001 compared to 28.3% for same period in 2000, resulting in a 244.6% increase in net operating revenues. The higher gross margin is attributable to both an improvement in margins in the pre- acquisition business and higher margins in the businesses that were acquired. Despite the significant increase in scale of Stratos Global's business as a result of the acquisitions, remote communications operating expenses for the quarter increased by only $3.3 million, evidencing the realization of significant operating synergies in the expanded operations. Operating expenses as a percentage of revenue have declined from 23.9% for the first three- quarters of 2000 to 15.4% so far in 2001. The improved gross margins and lower operating cost percentages have contributed to significant growth in EBITDA this year. EBITDA for the year-to-date has increased by $66.1 million to $71.5 million. EBITDA margins improved from 4.3% of revenue in 2000 to 22.3% of revenue for the first nine months of 2001. Depreciation expense and goodwill amortization increased $8.5 million in the quarter, and $28.7 million year-to-date, due to the 2000 acquisitions. The rise in these expenses, combined with added interest costs and non-recognition of tax benefits for current operating losses, is negatively impacting Stratos Global's bottom line results in 2001. Stratos Global announced a third quarter net loss of US$4.8 million compared with a US$6.5 million loss in the third quarter of 2000. These net losses do not reflect the tax benefit of current operating losses. Remote communications operating results Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Revenues $ 110,831 $ 45,420 144.0 $ 320,390 $ 124,184 158.0 Cost of revenues 69,607 33,334 108.8 199,483 89,097 123.9 ------------------------------------------------------------------------ Net operating revenues 41,224 12,086 241.1 120,907 35,087 244.6 Operating expenses 15,091 11,761 28.3 49,406 29,695 66.4 ------------------------------------------------------------------------ EBITDA 26,133 325 - 71,501 5,392 - Depreciation and amorti- zation 13,719 5,226 162.5 41,680 13,028 219.9 ------------------------------------------------------------------------ Operating income (loss) $ 12,414 $ (4,901) - $ 29,821 $ (7,636) - ------------------------------------------------------------------------ ------------------------------------------------------------------------ Emerging business Aliant's emerging business is made up of the following operating subsidiaries: 100%-owned Innovatia Inc. (Innovatia), 92%-owned Prexar LLC (Prexar) and 57%-owned AMI Offshore Inc. (AMI). Innovatia is focused on the research and development of Internet-based services for broadband networks. Prexar is an Internet services provider operating in the northern New England States. AMI provides process and systems control technical services, logistics and supply chain management and contract manufacturing solutions to the offshore oil and gas and other industries. Aliant's emerging business revenues decreased 30.2% to $28.4 million in the third quarter compared to the same period last year, and are down 2.8% to $102.4 million year-to-date. Emerging business is less predictable than the other lines of business in delivering revenue, EBITDA and net earnings on a quarterly trend basis. Its revenues are derived from a combination of licensing, subscription, transaction and consulting revenues, which have a reasonable degree of consistency, and from the sales of software, intellectual property and joint developments, which are less predictable in terms of timing and magnitude. For those investments considered core to the business, sales are treated as revenues. There have been a number of investment sales, particularly in 2000, which distort year over year comparisons. First quarter 2000 revenues contained a $7.8 million sale of intellectual property and second quarter 2000 contained $9.1 million in revenues on the sale of Connectivity. The third quarter of 2000 contained $ 10.7 million in revenue on the sale of software. Soft market conditions in 2001 for technology and telecommunications have affected Aliant's ability to realize appropriate value from sales of its intellectual property offerings. This is expected to only be a delay in realizing revenues, as the sales cycle is lengthened. Recurring revenue streams (excluding these sales items) show year-to-date growth of $24.6 million or 31.6%. Management now anticipates that the 2001 revenue target of $200-230 million and EBITDA target of $25-30 million for emerging businesses will not be met, although the impact will not materially affect the realization of Aliant's consolidated targets. Revenues of $130-150 million are now expected for 2001. Compensating adjustments in operating expenses have been made to reduce the impact of the revenue shortfall, resulting in an expectation of positive EBITDA of $5-10 million by the end of the year. These changes in cost structure have had to be made rapidly due to the dramatic downturn in the technology industry and its impact on the emerging business group's customers and demands for its products and services. The economic downturn has abruptly slowed revenue growth in all emerging business segments (revenues down 20.5% in the third quarter of 2001 compared with the second quarter), however immediate corrective action has decreased costs quarter-over-quarter by 22.5%. The full impact of the cost containment measures will continue into the fourth quarter and 2002 and, with the further restructuring measures being taken, will offset revenue declines. The restructuring will result in staff reductions at Innovatia and a special charge of $1.6 million taken in the fourth quarter. An inventory write-off will result in an additional one- time charge of $5.5 million, bringing the total emerging business charge to approximately $7 million. This year Innovatia has seen its revenues increase 66.0% to $30.1 million. This is driven by the early-stage revenues associated with the first of two e-learning contracts with Nortel Networks Corp. (Nortel). Expectations for these contracts have had to be adjusted given the current downturn in the global telecom sector and the resulting sales challenges being faced by Nortel, however cost reduction efforts are being made to balance any negative or delayed-revenue consequences. The revenue value of these two contracts is now expected to be down 25-35% from the original 5-year estimate of $350- million. The contracts should offer EBITDA margins of approximately 30%. The DMS contract started in September 2000, while the second contract in support of Nortel's UMTS portfolio should begin to generate revenue in the fourth quarter of this year. Prexar's acquisition of six Internet service providers since August 1, 2000 has given it a significant market presence in New England, with Internet access customers numbering 31,879 at September 30, 2001 and year-to-date revenues of $12.0 million. This is an increase of $9.6 million over the first three-quarters of 2000. In the third quarter, Prexar's revenues increased $1.7 million to $2.7 million. AMI's revenues have grown 4.2% to $57.6 million year-to-date. For the third quarter, revenues of $17.5 million are down 19.3% from the third quarter last year. AMI's sales in its contract manufacturing business, NewTech, are also being impacted by the downturn in telecom equipment purchasing. Year over year the operating expenses have increased significantly in both Innovatia and Prexar, reflecting the change in sales mixes of the businesses, as well as the up-front costs associated with their start-up situation. However, expense growth has slowed during the third quarter due to the cost containment initiatives that have already been implemented. Emerging business operating results Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Revenues $ 28,433 $ 40,743 (30.2) $ 102,425 $ 105,369 (2.8) Cost of revenues 13,179 17,218 (23.5) 44,978 42,334 6.2 ------------------------------------------------------------------------ Net operating revenues 15,254 23,525 (35.2) 57,447 63,035 (8.9) Operating expenses 18,752 12,448 50.6 62,143 34,954 77.8 ------------------------------------------------------------------------ EBITDA (3,498) 11,077 - (4,696) 28,081 - Depreciation and amorti- zation 2,058 673 205.7 5,203 3,026 72.0 ------------------------------------------------------------------------ Operating income (loss) $ (5,556) $ 10,404 - $ (9,899) $ 25,055 - ------------------------------------------------------------------------ ------------------------------------------------------------------------ Other consolidated results Other income Aliant's other income (losses) decreased from $2.3 million in the third quarter of 2000 to a loss of $7.2 million for the same period in 2001. Other income includes gains and losses on sales of assets and investments and Aliant's share of earnings and losses in equity-accounted investments. Miscellaneous investment income earned in the quarter was offset by $1.9 million in costs incurred by Stratos Global in transitioning operations of BT A&M and $1.6 million for Aliant's share of losses in equity- accounted investments. Year-to-date there is a loss of $11.0 million compared to income of $5.7 million in the first three-quarters of 2000. Interest expense Consolidated interest expense increased from $30.0 million in the third quarter of 2000 to $38.8 million in the third quarter of 2001; year-to-date the increase is from $91.6 million to $122.9 million. Higher debt levels related to the acquisitions made by Stratos Global in 2000 drive this increase. Stratos Global's additional debt led to a $11.3 million increase in Aliant's consolidated interest charges when compared to the third quarter of 2000 and a $37.3 million increase year-to-date. As capital market conditions improve, Stratos Global will seek an opportunity to refinance this debt and reduce future interest costs. Interest expense in the telecommunications line of business was reduced by $0.5 million during the first three-quarters of 2001. This decline is primarily due to Aliant Telecom reducing its overall debt levels during 2001. Also, the refinancing of higher-cost debt issues in recent years has been reducing Aliant Telecom's average interest rates on its long-term debt. There is a $0.5 million non-cash component to Aliant Telecom's 2001 interest expense as four long-term bond issues have been called prior to their maturity. This represents prior years' unamortized issue discounts being recognized in interest expense this year as these bond issues are refinanced. The combined interest expense in all other lines of business and on holding company borrowings has declined overall in the last year. The issuance of $175 million in preferred shares by Aliant during the second quarter and the application of the net proceeds to reducing debt is having a mitigating impact on interest costs. Aliant's consolidated interest coverage ratios for the twelve-month periods ended September 30, 2001 and September 30, 2000 were 3.5 times and 4.7 times, respectively. The lower coverage is a result of the growth in net operating income being more than offset by higher interest expense. Taxes Aliant's consolidated income tax provision increased by 1.6% from $52.4 million in the third quarter of 2000 to $53.2 million in 2001, and by 0.8% from $139.0 million in the first three-quarters of 2000 to $140.2 million so far in 2001. This was despite a decline in net income before income taxes. Notwithstanding a decline in the statutory combined tax rates, the effective tax rate appears higher in 2001 due to the non-deductibility of certain expense items, like increased amortization of goodwill, for tax purposes and the operating losses of Stratos Global, for which the future tax benefit is not currently being recognized. Liquidity and capital resources Operating Activities Aliant's operating cash flow for the third quarter of 2001, before changes in working capital, was $155.6 million, up 30.5% from the same period in 2000. This increase is primarily due to increased cash earnings from operations and changes in non-cash items such as pension costs and deferred taxes, which affected net income in the quarter. Year-to-date operating cash flow before working capital changes increased 13.0% to $443.1 million. Management's focus to improve working capital balances continued to see results in the third quarter. Working capital balances were improved by $43.4 million during the third quarter, bringing growth in working capital to $83.9 million year-to-date compared with $109.9 million in 2000. This contributed to an increase in Aliant's net cash flow from operations of 27.2% to $359.2 million year-to-date. Investing Activities Aliant's consolidated net capital expenditures were $90.1 million in the third quarter and $339.9 million year-to-date. This represents a 20.7% decrease over the third quarter last year, but 15.5% growth for the first nine months. Both these trends are primarily attributable to variation in spending in the telecommunications business. Aliant Telecom accelerated its significant investments in broadband and wireless networks during the latter part of 2000 and first quarter of 2001 in order to meet customer demand for high-speed Internet, digital television and cellular services. The 2001 plan for expansion of high-speed Internet has been refocused to service needs in the major urban areas, concentrating on increasing penetration rather than geographic coverage. The 124% increase in Aliant's high-speed Internet customers and increased market share is evidence of both the strong demand for these services and Aliant's success in meeting those demands. Investment is also being made in 2001 to expand the coverage of digital wireless services to 48% of the population, to transition customer contact points to new web-based self-serve applications and to acquire additional PCS spectrum. Similar to the trend seen in the second and third quarters, capital spending will slow down through the remainder of 2001, bringing Aliant Telecom's total capital spending for the year to $375-400 million. In the other lines of business capital spending increased during the quarter. Stratos Global's capital spending reflects the expanded operations after last year's acquisitions, while higher expenditures in IT are related to xwave's office space consolidation and related costs. In the emerging business segment Prexar is investing in its high-speed Internet network in New England and Innovatia is investing in the e-learning content being developed to meet its contract requirements to Nortel. Capital expenditures Quarter ended Nine months ended (thousands September 30 September 30 of dollars) 2001 2000 % change 2001 2000 % change ------------------------------------------------------------------------ Telecommuni- cations $ 66,653 $ 106,225 (37.3) $ 282,727 $ 268,124 5.5 Information technology 5,783 2,598 122.6 10,953 6,896 58.8 Remote communications 7,478 2,374 215.0 15,974 13,693 16.7 Emerging business 9,212 2,126 333.3 29,090 4,815 - Other 932 202 361.4 1,158 833 39.0 ------------------------------------------------------------------------ Total capital expenditures $ 90,058 $ 113,525 (20.7) $ 339,902 $ 294,361 15.5 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Financing Activities Telecommunications Aliant Telecom retired three debt issues totaling $135 million during the quarter: (i) on July 23rd a maturing debenture for $55 million was repaid; (ii) on August 2nd a $50 million mortgage bond issue was redeemed and (iii) on September 24th a $30 million debenture was redeemed. This long-term debt repayment was financed through a combination of cash from operations, short- term financing from Aliant and proceeds from the sale of Newfoundland poles. These issues were not re-financed with additional long-term debt as it is anticipated Aliant Telecom's free cash flow over the next year will be sufficient to repay the temporary increased indebtedness to Aliant. Information technology xwave's use of short-term debt decreased by approximately $6.5 million in the third quarter, bringing the year-to-date decrease in net debt to $3.5 million. The decline this quarter was a result of continued successful efforts to improve working capital balances. Remote communications There were no significant financing activities by Stratos Global during the quarter, but year-to-date $25 million of debt was repaid on the bridge loan facility put in place to finance the BT A&M acquisition. Aliant has guaranteed US$150 million of Stratos Global's obligations under the debt facilities put in place to complete the BT A&M acquisition. The guarantee by Aliant assisted Stratos Global in securing the necessary financing. Stratos Global's credit facilities contain various covenants relating to future financial results. Stratos Global is currently meeting all of its financial covenant requirements and in the second quarter received a six-month extension of its bridge loan facility to January 2003. Corporate financing Aliant issued $24.2 million in common equity during the quarter by way of its employee share purchase plan, dividend reinvestment plan (DRP) and the exercise of options under its employee stock option plan. Total dividends paid by Aliant to its common shareholders in the third quarter rose from 2000 levels due to the increased number of shares outstanding. Aliant maintained its common dividend payment rate per share at $0.225 for the quarter. Aliant also paid preferred share dividends, which totaled $2.4 million for the quarter. Aliant only issued $1.0 million in short-term debt in the third quarter, as cash from operations and common share proceeds were sufficient for debt repayment, dividends and investing needs. Aliant maintains lines of credit totaling $725 million

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