Bell Canada Enterprises reports its second quarter 2003 results


	Bell Canada Enterprises reports its second quarter 2003 results (All figures are in Cdn$, unless otherwise indicated) - Cellular and PCS: 131,000 net additions in the quarter - High speed internet: 81,000 net additions in the quarter - Revenue of $4.9 billion; EBITDA of $1.9 billion; EPS at $0.50 - Solid growth from consumer business, soft demand from business and wholesale - Free cash flow of $332 million in the quarter MONTREAL,July 30 2003 --For the second quarter of 2003, BCE Inc. (TSX, NYSE: BCE) reported earnings per share of $0.50 (total earnings applicable to common shares of $461 million), compared to $0.01 per common share (total earnings applicable to common shares of $6 million) last year. Second quarter 2002 earnings per share included net charges of $0.48. Total revenue was $4.9 billion and EBITDA(1) was $1.9 billion, essentially flat over last year. Excluding the impacts of the sale of Bell Canada's directories business on November 29, 2002, and the May 30, 2002 CRTC Price Cap decision, BCE's total revenue growth for the quarter was 2.8% and total EBITDA growth for the quarter was 6.5%. Similarly, for the first half of the year, revenue and EBITDA were up 3.7% and 7.0% respectively. "During the quarter, we implemented a new business structure that simplifies Bell Canada and sharpens our customer focus," said Michael Sabia, President and CEO of Bell Canada Enterprises. "This represented a significant initiative for the company, one that was completed quickly while maintaining the highest levels of customer service." "Our consumer business continues to provide strong growth for the company. We expanded our Cellular and PCS subscriber base by 13%, increased our DSL High-Speed Internet subscriber base to 1.3 million, and grew Bell ExpressVu revenues by 23%." "On the business side, however, our results reflect the impact of an uncertain economic environment and soft demand from our business customers, particularly our wholesale customers." "Challenges on the regulatory and economic fronts aside, our productivity improvement initiatives continue to drive solid growth in EBITDA. At the same time, the tightening of our capital expenditures helped achieve a $400 million turnaround in our cash flow position. Given our strengthening financial position, we paid down $1.5 billion in debt during the second quarter," concluded Mr. Sabia. << Operational Highlights _________________________________________________________________________ 2nd Quarter Subscriber / Total Revenue Growth (Q2 03 vs. Q2 02) _________________________________________________________________________ Cellular and PCS 131,000 13% 4,120,000 net additions subscribers _________________________________________________________________________ High-speed Internet (DSL) 81,000 42% 1,287,000 net additions subscribers _________________________________________________________________________ Bell ExpressVu 18,000 14% 1,335,000 net additions subscribers _________________________________________________________________________ Data revenue $955 million 2.4% n.a. _________________________________________________________________________ Bell Globemedia revenue $357 million 9.5% n.a. _________________________________________________________________________ >> - Excluding the impacts of the sale of Bell Canada's directories business and the Price Cap decision, BCE's total revenue grew by 2.8% due to higher Wireless, DSL High-Speed Internet, and Satellite TV services revenues at Bell Canada, strong television advertising revenues at Bell Globemedia, and increased revenues from CGI, due mainly to its acquisition of Cognicase Inc. - Excluding the impacts of the sale of Bell Canada's directories business and the Price Cap decision, total EBITDA grew by 6.5% as a result of higher revenues and cost control initiatives. As a percentage of revenues, EBITDA margin was at 39.7% in the second quarter of 2003 compared to 38.3% for the same period last year. - Operating income (operating revenues less operating expenses, amortization expense, net benefits plan expense and restructuring and other charges) increased by $380 million to $1.1 billion. Excluding the impacts of the sale of Bell Canada's directories business and the Price Cap decision, operating income increased by $490 million. This was due to increased EBITDA earned in the second quarter of 2003 without the restructuring and other charges incurred in the prior year, partially offset by an increase in the net pension expense. - Earnings per share were $0.50 compared to $0.01 last year. Second quarter 2002 earnings per share included net losses of $393 million consisting of losses from discontinued operations and restructuring and other charges, partially offset by net gains on investments. Excluding these items, net earnings per share for the second quarter of 2002 were at $0.49. The increase of $0.01 per share reflected the net growth in operations. - Free cash flow of $332 million for the second quarter of 2003 improved significantly from the negative $76 million for the same period last year. This resulted mainly from increased cash from operations and reduced capital expenditures. - BCE's net debt to capitalization ratio decreased from 48.8% at December 31, 2002 to 46.7% at June 30, 2003, reflecting free cash flow generation applied towards debt repayments. Outlook BCE confirmed its annual financial guidance of $19.3 billion to $20.0 billion for revenue, $7.4 billion to $7.8 billion for EBITDA, and $1.85 to $1.95 for net earnings per share. RESULTS BY BUSINESS GROUP (unaudited) BCE operated under four segments as at June 30, 2003: Bell Canada, Bell Globemedia, BCE Emergis and BCE Ventures (which consists of BCE's other investments). << (Cdn$ millions, except per share amounts) --------------------------------------------- For the period Second Quarter Six months ended June 30 2003 2002 2003 2002 _________________________________________________________________________ Revenue Bell Canada 4,296 4,402 8,543 8,685 Bell Globemedia 357 326 692 638 BCE Emergis 124 142 248 274 BCE Ventures 309 261 617 524 Corporate and other, including inter-segment eliminations (140) (157) (264) (305) ------ ------ ------ ------ Total revenue 4,946 4,974 9,836 9,816 _________________________________________________________________________ EBITDA Bell Canada 1,792 1,839 3,518 3,594 Bell Globemedia 77 58 114 91 BCE Emergis 20 11 35 (9) BCE Ventures 88 73 172 150 Corporate and other, including inter-segment eliminations (30) (45) (70) (82) ------ ------ ------ ------ Total EBITDA 1,947 1,936 3,769 3,744 _________________________________________________________________________ Net earnings (loss) Bell Canada 419 361 848 676 Bell Globemedia 15 11 13 12 BCE Emergis 6 (62) 12 (77) BCE Ventures 38 59 77 83 Corporate and other, including inter-segment eliminations (1) (46) 2 (15) _________________________________________________________________________ Earnings from continuing operations 477 323 952 679 _________________________________________________________________________ Discontinued operations 1 (303) (1) (349) Dividends on preferred shares (17) (14) (32) (27) _________________________________________________________________________ Net earnings applicable to common shares 461 6 919 303 _________________________________________________________________________ Net earnings per common share 0.50 0.01 1.00 0.38 _________________________________________________________________________ SECOND QUARTER REVIEW (Q2 2003 vs. Q2 2002, unless otherwise indicated) BELL CANADA The Bell Canada segment includes Bell Canada, Aliant, Bell ExpressVu (at 100%) and Bell Canada's interests in other Canadian telcos. _________________________________________________________________________ (Cdn$ millions) --------------------------------------------- Second quarter Six months For the period ended June 30 2003 2002 2003 2002 _________________________________________________________________________ Bell Canada Revenue Local and access 1,512 1,527 3,012 3,046 Long distance 608 645 1,254 1,293 Wireless 621 548 1,191 1,052 Data 955 933 1,888 1,838 DTH Satellite T.V. Services 191 155 368 306 Terminal sales & other 409 456 830 880 Directory advertising - 138 - 270 _________________________________________________________________________ Total Bell Canada revenue 4,296 4,402 8,543 8,685 _________________________________________________________________________ >> - Total Bell Canada revenues declined 2.4%. Excluding the impact of the sale of the directories business and the Price Cap decision, revenues for the quarter increased by $59 million or 1.4%. Wireline - Local and access revenues decreased by 1.0% and reflected the negative effects of the Price Cap decision and a 0.7% reduction in residential and business local access lines. - Long distance revenues decreased by 5.7% due mainly to competitive pressures as well as the impact of the Price Cap decision. Wireless - Wireless revenues were up 13% due to continued strong growth in cellular and PCS subscribers and higher total average revenues per unit (ARPU). - The $2 increase in ARPU to $48 reflected higher revenues from post- paid value added services and an increase in post-paid subscribers as a percentage of the total base. - Wireless postpaid net additions were at 104,000 or 79% of the total net activations in the quarter, bringing the total postpaid customers to 3,096,000 as at June 30. - Total postpaid wireless churn was at a historical low of 1.3% and continued to reflect our priority on customer service. - Wireless EBITDA increased by 6.3% to reach $219 million, due mainly to the increase in revenues. Data - Consumer data revenues increased by 23%. Demand for consumer Sympatico ISP services continued to be strong due to successful marketing efforts. - Consumer High-Speed Internet subscribers surpassed the one million mark in the second quarter. - Total Internet (High-speed and dial-up) subscribers reached 2,198,000 as at June 30. - Business data revenue decreased by 0.7%, reflecting the continued softness in underlying demand from enterprise and wholesale customers as well as the Price Cap decision. DTH (Direct to Home) Satellite T.V. Services - A 14% increase in the subscriber base and higher pricing contributed to a 23% improvement in revenues at Bell ExpressVu. - Net additions totaled 18,000 for the quarter and reflected a slower rate of growth in the digital television market demand. EBITDA and CAPEX - EBITDA at Bell Canada was $1.8 billion. Excluding the impact of the sale of the directories business and the Price Cap decision, Bell Canada's EBITDA increased by $63 million or 3.6% in the second quarter due mainly to productivity gains. - Bell's quarter-end CAPEX intensity (capital expenditures as a percentage of revenue) was 15.5%, down from 18.9% in the second quarter of 2002, due to the focus on capital efficiency and the weighting of certain capital projects towards the second half of 2003. BELL GLOBEMEDIA Bell Globemedia includes CTV and The Globe and Mail. - Total revenue was $357 million in the quarter, an increase of 9.5% compared to the same period last year. - Television advertising revenues significantly improved by 21% compared to the second quarter of 2002. Strength in the television advertising market and high ratings at CTV, with 17 of the top 20 most watched shows at June 30, contributed to the increase. - Print advertising revenues were 4.3% higher than last year. Demand in the print advertising market continues to be soft, partially as a result of reduced demand in the tourism and travel sectors because of SARS. - EBITDA improved by 33% to $77 million, reflecting the increase in revenues, savings from a restructuring of the interactive operations, and management's continued cost control efforts especially in the print operations. BCE EMERGIS - Revenue was $124 million in the second quarter, a decrease of $18 million compared with the same period in 2002. Revenue was negatively affected by lower inter-company revenues from Bell Canada and a weakened U.S. dollar. - Revenue was stable compared to the first quarter of 2003, despite the negative impact of the weakened U.S. dollar. - Year-over-year quarterly EBITDA increased by 82% to $20 million, mainly due to management's continued success in containing costs. - EBITDA was 33% higher compared to the first quarter 2003 EBITDA of $15 million and reflected lower stock compensation expense. - Pressures on revenues from the recent weakened U.S. dollar and lower expected revenues from its E-Health unit contributed to BCE Emergis' lowered annual revenue guidance. BCE VENTURES BCE Ventures includes the activities of CGI, Telesat and other investments. - BCE Ventures' revenue was $309 million in the quarter, an increase of 18% when compared with the same period of 2002, driven mainly by CGI's January 2003 acquisition of Cognicase. - EBITDA was $88 million in the quarter compared with $73 million in the second quarter of 2002, due mainly to CGI's acquisition of Cognicase. BELL CANADA STATUTORY RESULTS Bell Canada "statutory" includes Bell Canada, and Bell Canada's interests in Aliant, Bell ExpressVu (at 52%), and other Canadian telcos. Bell Canada's reported statutory revenue was $4.3 billion in the second quarter of 2003, up 18% due to the consolidation of Aliant and Bell ExpressVu effective January 1, 2003. Net earnings applicable to common shares were $529 million in the second quarter of 2003, compared to a net loss applicable to common shares of $1 billion for the same period last year. Bell Canada's results in 2002 reflected the write-down of its $1.5 billion Teleglobe Inc. investment. ABOUT BCE BCE is Canada's largest communications company. It has 25 million customer connections through the wireline, wireless, data/Internet and satellite services it provides, largely under the Bell brand. BCE's media interests are held by Bell Globemedia, including CTV and The Globe and Mail. As well, BCE has e-commerce capabilities provided under the BCE Emergis brand. BCE shares are listed in Canada, the United States and Europe. BCE 2003 Second Quarter Financial Information: ---------------------------------------------- BCE's 2003 Second Quarter Shareholder Report (which contains BCE's 2003 second quarter MD&A and unaudited consolidated financial statements) and other relevant financial materials are available at www.bce.ca/en/investors, under "Investor Briefcase". BCE's 2003 Second Quarter Shareholder Report is also available on the Website maintained by the Canadian securities regulators at www.sedar.com . It is also available upon request from BCE's Investor Relations Department (e-mail: investor.relations@bce.ca, tel.: 1-800-339-6353; fax: (514) 786-3970). BCE's 2003 Second Quarter Shareholder Report will be sent to BCE's shareholders who have requested to receive it on or about August 4, 2003. Call with Financial Analysts: ----------------------------- BCE will hold a teleconference / Webcast (audio only) for financial analysts to discuss its second quarter results on Wednesday, July 30, 2003 at 8:00 AM (Eastern). The media is welcome to participate on a listen only basis. Michael Sabia, President and Chief Executive Officer, and Siim Vanaselja, Chief Financial Officer, will be present for the teleconference. Interested participants are asked to dial (416) 406-6419 between 7:50 AM and 7:58 AM. If you are disconnected from the call, simply redial the number. If you need assistance during the teleconference, you can reach the operator by pressing "0". This teleconference will also be Webcast live (audio only) on our Web site at www.bce.ca . A replay facility will be available between 12:00 PM on Wednesday, July 30, 2003 and 12:00 PM on Wednesday, August 6, 2003. To access the replay facility, please dial (416) 695-5800 and enter access code 1441329. The Webcast will also be archived on our Web site. Call with the Media: -------------------- BCE will hold a teleconference / Webcast (audio only) for media to discuss its second quarter results on Wednesday, July 30, 2003 at 1:00 PM (Eastern). Michael Sabia will be present for this teleconference. Interested participants are asked to dial 877 793-3795 between 12:50 PM and 12:58 PM. If you are disconnected from the call, simply redial the number. If you need assistance during the teleconference, you can reach the operator by pressing "0". This teleconference will also be Webcast live (audio only) on our Web site at www.bce.ca . CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Certain statements made in this press release, including, but not limited to, the statements appearing under the "Outlook" section, and other statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring items or of any dispositions, monetizations, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. Other factors that could cause results or events to differ materially from current expectations include, among other things: general economic conditions, the level of consumer confidence and spending and the state of capital markets; the impact of adverse changes in laws or regulations or of adverse regulatory initiatives or proceedings; the intensity of competitive activity from both traditional and new competitors, and its resulting impact on the ability to retain existing, and attract new, customers, and the consequent impact on pricing strategies, revenues and net income; the level of demand, including in particular by the business and wholesale sector, and prices, for products and services in the telecom, media and e-business markets; the risk of low returns on pension plan assets continuing resulting in the erosion of our pension fund surpluses which could require us to commence making pension fund contributions and/or recognize pension expenses; the financial condition and credit risk of customers and uncertainties regarding collectibility of receivables; BCE Inc.'s and its subsidiaries' ability to manage costs, generate productivity improvements and decrease capital intensity while maintaining quality of service; the availability and cost of capital required to implement BCE Inc.'s and its subsidiaries' financing plans and fund capital and other expenditures; the ability to deploy new technologies and offer new products and services rapidly and achieve market acceptance thereof; the ability to package and cross sell various services offered by the BCE group of companies; the ability of the BCE group companies' strategies to produce the expected benefits and growth prospects; stock market volatility; the availability of, and ability to retain, key personnel; and the final outcome of pending or future litigation. For additional information with respect to certain of these and other factors, refer to BCE Inc.'s Second Quarter 2003 Management's Discussion and Analysis filed with the U.S. Securities and Exchange Commission, under Form 6-K, and with the Canadian securities commissions. The forward- looking statements contained in this press release represent the expectations of BCE Inc. and its subsidiaries as of July 30, 2003 and, accordingly, are subject to change after such date. However, BCE Inc. and its subsidiaries assume no obligation to update any forward-looking statements, whether as a result of new information or otherwise. ________________________________ (1) The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have any standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures presented by other issuers. We define it as operating revenues less operating expenses, which means it represents operating income before amortization expense, net benefit plans credit (expense) and restructuring and other charges. EBITDA is presented on a basis that is consistent from period to period. We believe EBITDA to be an important measure as it allows us to assess the operating performance of our ongoing businesses without the effects of amortization expense, net benefit plans credit (expense) and restructuring and other charges. We exclude amortization expense and net benefit plans credit (expense) because they substantially depend on the accounting methods and assumptions a company uses, as well as non- operating factors such as the historical cost of capital assets and the fund performance of a company's pension plans. We exclude restructuring and other charges because they are transitional in nature. EBITDA allows us to compare our operating performance on a consistent basis. We also believe that EBITDA is used by certain investors and analysts to measure a company's ability to service debt and to meet other payment obligations or as a valuation measurement that is commonly used in the telecommunications industry. EBITDA should not be confused with net cash flows from operating activities. The most comparable Canadian GAAP earnings measure is operating income. The following is a reconciliation of EBITDA to operating income on a consolidated and on a segmented basis: << _________________________________________________________________________ Bell Bell Corpo- BCE Canada Globe- BCE BCE rate and Consoli- (in $ millions) Segment media Emergis Ventures other dated _________________________________________________________________________ Q2 2003 EBITDA 1,792 77 20 88 (30) 1,947 Amortization expense (757) (14) (13) (31) 18 (797) Net benefit plans credit (expense) (45) (1) - - 3 (43) _________________________________________________________________________ Operating income (loss) 990 62 7 57 (9) 1,107 _________________________________________________________________________ _________________________________________________________________________ Q2 2002 EBITDA 1,839 58 11 73 (45) 1,936 Amortization expense (756) (16) (15) (32) 11 (808) Net benefit plans credit (expense) 11 (1) - - 2 12 Restructuring and other charges (294) - (119) - - (413) _________________________________________________________________________ Operating income (loss) 800 41 (123) 41 (32) 727 _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ Bell Bell Corpo- BCE Canada Globe- BCE BCE rate and Consoli- Segment media Emergis Ventures other dated _________________________________________________________________________ YTD 2003 EBITDA 3,518 114 35 172 (70) 3,769 Amortization expense (1,491) (31) (27) (59) 36 (1,572) Net benefit plans credit (expense) (89) (2) - - 6 (85) _________________________________________________________________________ Operating income (loss) 1,938 81 8 113 (28) 2,112 _________________________________________________________________________ _________________________________________________________________________ YTD 2002 EBITDA 3,594 91 (9) 150 (82) 3,744 Amortization expense (1,469) (33) (38) (64) 26 (1,578) Net benefit plans credit (expense) 19 (2) - - 1 18 Restructuring and other charges (294) - (119) - - (413) _________________________________________________________________________ Operating income (loss) 1,850 56 (166) 86 (55) 1,771 _________________________________________________________________________ _________________________________________________________________________ CONSOLIDATED FINANCIAL STATEMENTS - BCE INC. CONSOLIDATED STATEMENTS OF OPERATIONS _________________________________________________________________________ For the period ended June 30 Three months Six months (in $ millions, except share ____________________________________________ amounts) (unaudited) 2003 2002(1) 2003 2002(1) _________________________________________________________________________ Operating revenues 4,946 4,974 9,836 9,816 ____________________________________________ Operating expenses 2,999 3,038 6,067 6,072 Amortization expense 797 808 1,572 1,578 Net benefit plans expense (credit) 43 (12) 85 (18) Restructuring and other charges - 413 - 413 ____________________________________________ Total operating expenses 3,839 4,247 7,724 8,045 ____________________________________________ Operating income 1,107 727 2,112 1,771 Other income (Note 4) (8) (246) (58) (248) Interest expense (Note 5) 291 263 575 524 ____________________________________________ Earnings from continuing operations before income taxes and non-controlling interest 824 710 1,595 1,495 Income taxes 277 246 522 539 Non-controlling interest 70 141 121 277 ____________________________________________ Earnings from continuing operations 477 323 952 679 Discontinued operations (Note 6) 1 (303) (1) (349) ____________________________________________ Net earnings 478 20 951 330 Dividends on preferred shares (17) (14) (32) (27) _________________________________________________________________________ Net earnings applicable to common shares 461 6 919 303 _________________________________________________________________________ _________________________________________________________________________ Net earnings per common share - basic (Note 7) Continuing operations 0.50 0.38 1.00 0.80 Discontinued operations - (0.37) - (0.42) Net earnings 0.50 0.01 1.00 0.38 Net earnings per common share - diluted (Note 7) Continuing operations 0.50 0.38 1.00 0.80 Discontinued operations - (0.37) - (0.43) Net earnings 0.50 0.01 1.00 0.37 Dividends per common share 0.30 0.30 0.60 0.60 Average number of common shares outstanding (millions) 919.3 808.7 918.2 808.6 _________________________________________________________________________ _________________________________________________________________________ CONSOLIDATED STATEMENTS OF DEFICIT _________________________________________________________________________ For the period ended June 30 Three months Six months (in $ millions, except share ____________________________________________ amounts) (unaudited) 2003 2002(1) 2003 2002(1) _________________________________________________________________________ Balance at beginning of period, as previously reported (6,258) (7,419) (6,149) (7,468) Adjustment for change in accounting policies (Note 1) - (222) (286) (218) ____________________________________________ Balance at beginning of period, as restated (6,258) (7,641) (6,435) (7,686) Net earnings 478 20 951 330 Dividends - Preferred shares (17) (14) (32) (27) - Common shares (276) (242) (551) (485) ____________________________________________ (293) (256) (583) (512) Premium on redemption of preferred shares (Note 10) - - (7) (6) Other (6) 1 (5) (2) _________________________________________________________________________ Balance at end of period (6,079) (7,876) (6,079) (7,876) _________________________________________________________________________ _________________________________________________________________________ (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. CONSOLIDATED BALANCE SHEETS _________________________________________________________________________ _________________________________________________________________________ June 30 December 31 (in $ millions) (unaudited) 2003 2002(1) _________________________________________________________________________ ASSETS Current assets Cash and cash equivalents 795 304 Accounts receivable (net of allowance for doubtful accounts of $224 million and $207 million for 2003 and 2002, respectively) 2,407 2,328 Other current assets 1,048 774 Current assets of discontinued operations 22 26 ______________________ Total current assets 4,272 3,432 Capital assets 20,431 20,633 Other long-term assets 4,217 3,941 Indefinite-life intangible assets (Note 8) 912 900 Goodwill (Note 9) 10,144 10,118 Non-current assets of discontinued operations 53 82 _________________________________________________________________________ Total assets 40,029 39,106 _________________________________________________________________________ LIABILITIES Current liabilities Accounts payable and accrued liabilities 3,574 3,820 Debt due within one year 1,597 2,021 Current liabilities of discontinued operations 20 19 ______________________ Total current liabilities 5,191 5,860 Long-term debt 13,582 13,391 Other long-term liabilities 4,425 3,652 Non-current liabilities of discontinued operations 2 4 ______________________ Total liabilities 23,200 22,907 ______________________ Non-controlling interest 3,630 3,584 ______________________ Commitments and contingencies (Note 13) SHAREHOLDERS' EQUITY Preferred shares (Note 10) 1,670 1,510 ______________________ Common shareholders' equity Common shares (Note 10) 16,643 16,520 Contributed surplus 1,026 1,010 Deficit (6,079) (6,435) Currency translation adjustment (61) 10 ______________________ Total common shareholders' equity 11,529 11,105 ______________________ Total shareholders' equity 13,199 12,615 _________________________________________________________________________ Total liabilities and shareholders' equity 40,029 39,106 _________________________________________________________________________ _________________________________________________________________________ (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. CONSOLIDATED STATEMENTS OF CASH FLOWS _________________________________________________________________________ For the period ended June 30 Three months Six months (in $ millions, (unaudited) 2003 2002(1) 2003 2002(1) _________________________________________________________________________ Cash flows from operating activities Earnings from continuing operations 477 323 952 679 Adjustments to reconcile earnings from continuing operations to cash flows from operating activities: Amortization expense 797 808 1,572 1,578 Net benefit plans expense (credit) 43 (12) 85 (18) Restructuring and other charges - 405 - 405 Net gains on investments - (175) - (175) Future income taxes 121 (117) 119 (122) Non-controlling interest 70 141 121 277 Other items (154) (79) (156) (113) Changes in non-cash working capital 59 (83) (93) (653) ____________________________________________ 1,413 1,211 2,600 1,858 ____________________________________________ ____________________________________________ Cash flows from investing activities Capital expenditures (713) (932) (1,314) (1,792) Business acquisitions (7) (14) (70) (29) Business dispositions - 306 - 432 Decrease (increase) in investments accounted for under the cost and equity methods - 1 7 (56) Other items (45) 14 (82) (13) ____________________________________________ (765) (625) (1,459) (1,458) ____________________________________________ ____________________________________________ Cash flows from financing activities Increase (decrease) in notes payable and bank advances (56) 600 (169) 478 Issue of long-term debt 72 43 1,864 1,295 Repayment of long-term debt (1,493) (402) (1,874) (502) Issue of common shares 4 7 9 9 Issue of preferred shares - - 510 510 Redemption of preferred shares - - (357) (306) Issue of equity securities and convertible debentures by subsidiaries to non- controlling interest 14 150 87 157 Redemption of preferred shares by subsidiaries (16) - (35) - Dividends paid on common and preferred shares (268) (253) (536) (503) Dividends paid by subsidiaries to non-controlling interest (55) (116) (99) (187) Other items (57) 10 (62) 4 ____________________________________________ (1,855) 39 (662) 955 ____________________________________________ ____________________________________________ Effect of exchange rate changes on cash and cash equivalents (2) - (5) - ____________________________________________ ____________________________________________ Cash provided by (used in) continuing operations (1,209) 625 474 1,355 Cash provided by (used in) discontinued operations 17 (527) 16 (934) ____________________________________________ Net increase (decrease) in cash and cash equivalents (1,192) 98 490 421 Cash and cash equivalents at beginning of period 1,988 892 306 569 ____________________________________________ Cash and cash equivalents at end of period 796 990 796 990 ____________________________________________ ____________________________________________ Consists of: Cash and cash equivalents of continuing operations 795 987 795 987 Cash and cash equivalents of discontinued operations 1 3 1 3 ____________________________________________ Total 796 990 796 990 _________________________________________________________________________ _________________________________________________________________________ (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. >> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC. The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2002, as set out on pages 54 to 81 of BCE Inc.'s 2002 Annual Report. Figures in these notes are unaudited. 1. SIGNIFICANT ACCOUNTING POLICIES We have prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP) using the same accounting policies as outlined in Note 1 to the annual consolidated financial statements for the year ended December 31, 2002, except as noted below. We have reclassified some of the figures for previous periods in the consolidated financial statements to make them consistent with the presentation in the current period. We have restated financial information for 2002 to reflect: - the accounting treatment of Aliant Inc.'s (Aliant) investments in AMI Offshore Inc., Prexar LLC and iMagicTV Inc. as discontinued operations effective May 1, 2003 - the adoption of the fair value-based method of accounting for employee stock options effective January 1, 2003 - the change in the method of accounting for subscriber acquisition costs from a deferral and amortization method to an expense as incurred method effective January 1, 2003. RECENT CHANGES TO ACCOUNTING STANDARDS Stock-based compensation and other stock-based payments Effective January 1, 2002, we adopted the recommendations in section 3870 of the CICA Handbook, Stock-based compensation and other stock-based payments, on a prospective basis as permitted by the standard. This section sets standards for recognizing, measuring and disclosing stock-based compensation and other stock-based payments made in exchange for goods and services. The standards require us to use a fair value-based method for: - all stock-based awards to non-employees - direct awards of stock and stock appreciation rights to employees - awards to employees that are settled in cash or other assets. The standards also encourage companies to use a fair value-based method for all other awards granted to employees. Awards that are settled in stock are recorded as equity. Awards that are required to be, or are usually, settled in cash are recorded as liabilities. Prior to January 1, 2003, we accounted for employee stock options by measuring the compensation cost of the options as the amount that the quoted market price of BCE Inc.'s common shares on the date of the grant exceeds the exercise price an employee must pay to buy the common shares. Effective January 1, 2003, we changed our accounting to the fair value based method and started to account for employee stock options by measuring the compensation cost for options granted on or after January 1, 2002 using a Black-Scholes option pricing model. As a result of applying this change in accounting policy, we restated the comparative figures for 2002, and recorded a compensation expense of $4 million and $6 million for the three months and six months ended June 30, 2002, respectively. The effect as at January 1, 2003 was to increase the deficit by $27 million, decrease non-controlling interest by $3 million and increase contributed surplus by $30 million. Please see Note 11, Stock-based compensation plans, for the assumptions used under the fair value method. Subscriber acquisition costs Prior to 2003, we accounted for the costs of acquiring subscribers as follows: - we deferred and amortized the costs of acquiring Direct-to-Home (DTH) satellite television service subscribers into earnings over three years - we deferred and amortized the costs of acquiring wireless subscribers into earnings over the terms of the contracts. The terms are normally up to 24 months - we expensed all other subscriber acquisition costs as they were incurred. The costs we deferred and amortized consisted mainly of hardware subsidies, net of revenues from the sale of wireless handsets. Effective January 1, 2003, we changed our accounting method as permitted by Canadian GAAP, and began expensing all subscriber acquisition costs as they are incurred and began presenting the revenues generated from the sale of wireless handsets. As a result of applying this change in accounting policy, we restated the comparative figures for 2002. For the three months and six months ended June 30, 2002: - operating revenues increased by $51 million and $79 million, respectively - operating expenses increased by $56 million and $86 million, respectively - income taxes decreased by $2 million and $3 million, respectively - non-controlling interest decreased by $2 million and $1 million respectively. The effect as at December 31, 2002 was to: - decrease other current assets by $133 million - decrease other long-term assets by $339 million - increase goodwill by $15 million - decrease future income tax liabilities by $189 million - decrease non-controlling interest by $9 million - increase deficit by $259 million. Disposal of long-lived assets and discontinued operations Effective May 1, 2003, we adopted the new recommendations in section 3475 of the CICA Handbook, Disposal of long-lived assets and discontinued operations. This section provides guidance on recognizing, measuring, presenting and disclosing long-lived assets to be disposed of. It replaces the disposal provisions in section 3061, Property, plant and equipment, and section 3475, Discontinued operations. The new section provides criteria for classifying assets as held for sale. It requires an asset classified as held for sale to be measured at fair value less disposal costs. It also provides criteria for classifying a disposal as a discontinued operation and specifies the presentation of and disclosures for discontinued operations and other disposals of long-lived assets. The adoption of this standard did not have an impact on our financial statements. Disclosure of guarantees Effective January 1, 2003, we adopted Accounting Guideline 14, Disclosure of guarantees. This guideline provides assistance regarding the identification of guarantees and requires a guarantor to disclose the significant details of guarantees that have been given regardless of whether it will have to make payments under the guarantees. Please see Note 12, Contractual obligations, commercial commitments and contingencies, for more information. Although the disclosure requirements of this guideline have been mostly harmonized with similar guidance in the United States, unlike the U.S. standard, this guideline does not require the fair value recognition of guarantees on the balance sheet and does not extend to product warranties. The adoption of this guideline did not have an impact on our financial statements. FUTURE CHANGES TO ACCOUNTING STANDARDS Impairment of long-lived assets The CICA recently issued a new section in the CICA Handbook, section 3063, Impairment of long-lived assets. It provides guidance on recognizing, measuring and disclosing the impairment of long-lived assets. It replaces the write-down provisions in section 3061 of the CICA Handbook, Property, plant and equipment. The new section requires us to recognize an impairment loss for a long- lived asset to be held and used when its carrying value exceeds the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. This section comes into effect on January 1, 2004. We do not expect that adopting this standard in 2004 will affect our consolidated financial statements. Asset retirement obligations The CICA recently issued a new section in the CICA Handbook, section 3110, Asset retirement obligations. This standard focuses on the recognition and measurement of liabilities related to legal obligations associated with the retirement of property, plant and equipment. Under this standard, these obligations are initially measured at fair value and subsequently adjusted for any changes in the underlying discounted cash flow value. The asset retirement cost is to be capitalized to the related asset and amortized into earnings over time. This section comes into effect on January 1, 2004. We are currently evaluating the impact of this standard on our financial statements. Hedging relationships The CICA recently issued Accounting Guideline 13, Hedging relationships. The guideline establishes criteria for the application of hedge accounting in a hedging transaction: - the nature of the specific risk exposures being hedged in accordance with the risk management objective and strategy must be identified at the inception of the hedging relationship - application of hedge accounting to the hedging relationship must be designated at the inception of the hedging relationship - formal documentation must be in place at the inception of the hedging relationship identifying the risk management objective and strategy for establishing the relationship, the specific asset or liability being hedged, the risk that is being hedged, the intended term of the hedging relationship, the type of derivative used, the method for assessing effectiveness and the related accounting treatment - the derivative must be highly effective in offsetting either changes in the fair value or cash flows attributable to the risk being hedged, both at the inception and throughout the term of the hedging relationship. For hedging relationships that qualify for hedge accounting, we will continue applying the existing accounting treatment as described in Note 1 to the consolidated financial statements for the year ended December 31, 2002. For hedging relationships that no longer qualify for hedge accounting on we will stop applying the existing accounting treatment on January 1, 2004 and start recognizing the fair value of the derivative on the balance sheet from that time, with any changes in the fair value of that derivative being recognized immediately in net earnings. The guideline comes into effect on January 1, 2004. We are currently evaluating the impact of this guideline on our financial statements. Consolidation of variable interest entities The CICA recently issued Accounting Guideline 15, Consolidation of variable interest entities. The guideline provides clarification on the consolidation of those entities defined as "Variable Interest Entities," when equity investors are not considered to have a controlling financial interest or they have not invested enough equity to allow the entity to finance its activities without additional subordinated financial support from other parties. Variable interest entities are commonly referred to as special purpose entities. The guideline is consistent, in all material respects, with the recently issued U.S. standard. The guideline comes into effect on January 1, 2004. We currently conduct certain transactions through special purpose entities, which are disclosed in Note 12, Contractual obligations, commercial commitments and contingencies, and are assessing the structure of these transactions against the criteria set out in the guideline. 2. SEGMENTED INFORMATION We operate under four segments, the Bell Canada Segment, Bell Globemedia, BCE Emergis and BCE Ventures. Our segments are organized by products and services, and reflect how we classify our operations for planning and measuring performance. Effective January 1, 2003, the results of Bell Canada Holdings Inc. (BCH), Bell Canada's holding company, are now classified under Corporate and other, whereas previously they were classified under the Bell Canada Segment. << _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002(1) 2003 2002(1) _________________________________________________________________________ _________________________________________________________________________ Operating revenues Bell Canada Segment External 4,253 4,360 8,470 8,601 Inter-segment 43 42 73 84 _________________________________________________________________________ 4,296 4,402 8,543 8,685 Bell Globemedia External 348 315 674 617 Inter-segment 9 11 18 21 _________________________________________________________________________ 357 326 692 638 BCE Emergis External 98 104 198 197 Inter-segment 26 38 50 77 _________________________________________________________________________ 124 142 248 274 BCE Ventures External 246 193 492 397 Inter-segment 63 68 125 127 _________________________________________________________________________ 309 261 617 524 Corporate and other External 1 2 2 4 Inter-segment 5 7 9 11 _________________________________________________________________________ 6 9 11 15 _________________________________________________________________________ Less: Inter-segment eliminations (146) (166) (275) (320) _________________________________________________________________________ Total operating revenues 4,946 4,974 9,836 9,816 _________________________________________________________________________ _________________________________________________________________________ Net earnings applicable to common shares Bell Canada Segment 419 361 848 676 Bell Globemedia 15 11 13 12 BCE Emergis 6 (62) 12 (77) BCE Ventures 38 59 77 83 Corporate and other, including inter-segment eliminations (1) (46) 2 (15) _________________________________________________________________________ Total earnings from continuing operations 477 323 952 679 Discontinued operations 1 (303) (1) (349) Dividends on preferred shares (17) (14) (32) (27) _________________________________________________________________________ Total net earnings applicable to common shares 461 6 919 303 _________________________________________________________________________ _________________________________________________________________________ (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. 3. BUSINESS ACQUISITIONS AND DISPOSITIONS CGI Group Inc. (CGI)'s acquisition of Cognicase Inc. (Cognicase) During the first quarter of 2003, CGI acquired 100% of the outstanding common shares of Cognicase. As a result of the acquisition, BCE Inc.'s equity ownership interest in CGI was reduced from 31.5% to 29.9%, and a dilution gain of $5 million was recognized. Cognicase provides solutions including the implementation of e-business solutions, ASP services, re-engineering of existing applications for e-business, technology configuration management, as well as project management and business process improvement consulting services. The acquisition has been accounted for using the purchase method of accounting. The consolidated statements of operations include the results of Cognicase from the date of acquisition. The table below shows the preliminary purchase price allocation which is based on estimates. The final purchase price allocation is expected to be completed within 12 months from the acquisition date. _________________________________________________________________________ (in $ millions) BCE's proportionate CGI share _________________________________________________________________________ Non-cash working capital items (103) (31) Capital assets 39 12 Contract costs and other long-term assets 149 45 Future income taxes (20) (6) Goodwill (1) 300 89 Long-term debt (41) (12) ______________________ 324 97 Cash position at acquisition 23 7 ______________________ Net assets aquired 347 104 ______________________ Consideration Cash 180 Acquisition costs 7 Balance of purchase price 18 Issuance of 19,850,245 CGI Class A subordinate shares (2) 142 ___________ 347 _________________________________________________________________________ _________________________________________________________________________ (1) The goodwill is not deductible for tax purposes. (2) The value of the CGI shares issued as consideration was determined using the weighted average closing share price on the Toronto Stock Exchange for the period of ten days before the terms of the business combination were agreed to and announced. 4. OTHER INCOME _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Net gains on investments - (180) - (180) Foreign currency gains (3) (55) (36) (55) Other (5) (11) (22) (13) _________________________________________________________________________ Other income (8) (246) (58) (248) _________________________________________________________________________ _________________________________________________________________________ 5. INTEREST EXPENSE _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Interest expense on long-term debt 282 249 554 494 Interest expense on other debt 9 14 21 30 _________________________________________________________________________ Total interest expense 291 263 575 524 _________________________________________________________________________ _________________________________________________________________________ 6. DISCONTINUED OPERATIONS _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Teleglobe (a) - (104) - (149) BCI (a) - (191) - (191) Aliant (b) 1 (8) (1) (9) _________________________________________________________________________ Net loss from discontinued operations 1 (303) (1) (349) _________________________________________________________________________ (a) The financial results of Teleglobe and BCI were reclassified as discontinued operations effective April 24, 2002 and January 1, 2002, respectively. (b) At June 30, 2003, the assets of Aliant's Emerging business segment, which include AMI Offshore Inc. (AMI Offshore), Prexar LLC (Prexar), and iMagicTV Inc. (iMagicTV), were either sold or being held for sale. Prexar is an Internet services provider. iMagicTV is a software development company, providing broadband TV software and solutions to service providers around the globe. AMI Offshore provides process and systems control technical services and contracts manufacturing solutions to offshore oil and gas and other industries. iMagicTV was sold in April 2003. Prexar was sold in May 2003. The sale of AMI Offshore is expected to be completed by the end of 2003. Accordingly, the results of these operations, which were previously presented in the Bell Canada Segment, have now been presented as discontinued operations. The table below provides a summarized statement of operations for the discontinued operations. _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Revenue 11 287 23 718 _________________________________________________________________________ Operating loss from discontinued operations, before tax (9) (66) (14) (144) Gain (loss) on discontinued operations, before tax 11 (282) 11 (282) Income tax recovery on operating loss 4 24 4 45 Income tax recovery (expense) on loss (gain) (3) 18 (3) 18 Non-controlling interest (2) 3 1 14 _________________________________________________________________________ Net gain (loss) from discontinued operations 1 (303) (1) (349) _________________________________________________________________________ _________________________________________________________________________ 7. EARNINGS PER SHARE DISCLOSURES The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per common share computations for earnings from continuing operations: _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ 2003 2002(1) 2003 2002(1) _________________________________________________________________________ _________________________________________________________________________ Earnings from continuing operations (numerator) (in $ millions) Earnings from continuing operations 477 323 952 679 Dividends on preferred shares (17) (14) (32) (27) _________________________________________________________________________ Earnings from continuing operations - basic 460 309 920 652 Assumed exercise of put options by CGI shareholders 3 3 7 6 _________________________________________________________________________ Earnings from continuing operations - diluted 463 312 927 658 _________________________________________________________________________ Weighted average number of common shares outstanding (denominator) (in millions) Weighted average number of common shares outstanding - basic 919.3 808.7 918.2 808.6 Assumed exercise of stock options (2) 1.7 1.8 1.7 2.1 Assumed exercise of put options by CGI shareholders 9.1 13.0 9.1 13.0 _________________________________________________________________________ Weighted average number of common shares outstanding - diluted 930.1 823.5 929.0 823.7 _________________________________________________________________________ _________________________________________________________________________ (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. (2) The calculation of the assumed exercise of stock options excludes all options with an exercise price that is greater than the average market value of a BCE Inc. common share for each of the periods presented in the table above as their effect would have been anti- dilutive and includes the impact of the average unrecognized future compensation cost of these options. The number of options that were excluded amounts to 23,048,408 and 23,236,436 for the three months and six months ended June 30, 2003, and 26,817,872 and 23,452,093 for the three months and six months ended June 30, 2002. 8. INDEFINITE-LIFE INTANGIBLE ASSETS _________________________________________________________________________ (in $ millions) 2003 _________________________________________________________________________ Intangible assets, January 1 900 Capitalized interest on spectrum licences ($8 million for the six months ended June 30, 2002) 12 _________________________________________________________________________ Intangible assets, June 30 912 _________________________________________________________________________ Consisting of: Spectrum licences 766 Television licences 128 Cable licences 18 _________________________________________________________________________ Total 912 _________________________________________________________________________ _________________________________________________________________________ 9. GOODWILL _________________________________________________________________________ (in $ millions) 2003 _________________________________________________________________________ Goodwill, January 1 10,118 Goodwill acquired during the period 85 Foreign exchange on goodwill of self-sustaining foreign operations (59) _________________________________________________________________________ Goodwill, June 30 10,144 _________________________________________________________________________ 10. SHARE CAPITAL (i) Preferred shares On February 28, 2003, BCE Inc. issued 20 million Series AC preferred shares for total proceeds of $510 million. 6 million of the 20 million Series AC preferred shares were issued under a public offering for a subscription price of $153 million. The remaining 14 million Series AC preferred shares were issued to the holders of BCE Inc.'s 14 million Series U preferred shares. BCE Inc. elected to exercise its option to buy all of the Series U preferred shares for $357 million (including a $7 million premium on redemption). The holders of the Series U preferred shares then used the proceeds from the sale of their shares to buy the 14 million Series AC preferred shares for the subscription price of $357 million. ii) Common shares and Class B shares The table below provides details about the outstanding common shares of BCE Inc. No Class B Shares were outstanding at June 30, 2003. _________________________________________________________________________ Number Stated of shares capital (in $ millions) _________________________________________________________________________ Outstanding, January 1, 2003 915,867,928 16,520 Shares issued (under employee stock option, employee savings and dividend reinvestment plans) 4,412,784 123 _________________________________________________________________________ Outstanding, June 30, 2003 920,280,712 16,643 _________________________________________________________________________ _________________________________________________________________________ 11. STOCK-BASED COMPENSATION PLANS BCE Inc. stock options The table below provides a summary of the status of BCE Inc.'s stock option programs. _________________________________________________________________________ Number Weighted of shares average exercise price _________________________________________________________________________ Outstanding, January 1, 2003 20,470,700 $33 Granted 5,518,051 $28 Exercised (200,762) $14 Expired/forfeited (745,654) $33 _________________________________________________________________________ Outstanding, June 30, 2003 25,042,335 $32 _________________________________________________________________________ Exercisable, June 30, 2003 9,614,353 $34 _________________________________________________________________________ _________________________________________________________________________ Teleglobe stock options Since we acquired a controlling interest in Teleglobe in November 2000, holders of Teleglobe stock options have been allowed to exercise their options under their original terms, except that when they exercise their options, they will receive 0.91 of one BCE Inc. common share for every Teleglobe stock option they hold. The table below provides a summary of the status of Teleglobe's stock option programs, which are incremental to BCE Inc.'s stock option programs. _________________________________________________________________________ Number Weighted of BCE Inc. average shares exercise price _________________________________________________________________________ Outstanding, January 1, 2003 4,266,723 $37 Exercised (104,987) $20 Expired/forfeited (2,375,178) $36 _________________________________________________________________________ Outstanding, June 30, 2003 1,786,558 $28 _________________________________________________________________________ Exercisable, June 30, 2003 1,786,558 $28 _________________________________________________________________________ _________________________________________________________________________ Assumptions used in stock option pricing model The table below shows the assumptions used in determining stock-based compensation expense under the Black-Scholes option pricing model. _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Compensation cost (in $ millions) 6 4 14 6 Dividend yield 3.7% 3.6% 3.6% 3.2% Expected volatility 30% 30% 30% 30% Risk-free interest rate 3.5% 5.2% 4.1% 4.7% Expected life (years) 4.5 4.5 4.5 4.5 Number of stock options granted 167,000 108,000 5,518,051 6,827,134 Weighted average fair value option granted ($) 6 8 6 8 _________________________________________________________________________ 12. FINANCIAL INSTRUMENTS We periodically use derivative instruments to manage our exposure to interest rate, foreign currency and BCE Inc. share price movements. We do not use derivative instruments to speculate. Because we do not actively trade in derivative instruments, we are not exposed to any significant liquidity risks relating to such investments. The following derivative instruments were outstanding at June 30, 2003: - dividend rate swaps that, in effect, convert the fixed-rate dividends on some of our preferred shares to floating-rate dividends. We pay less when the floating rates are below the fixed rates, which has been the case in recent years - cross-currency swaps and forward contracts used to hedge foreign currency risk on a portion of our long-term debt - forward contracts on BCE Inc. common shares to hedge the fair value exposure related to stock compensation payments. In April 2003 we entered into a forward contract to hedge US $200 million of long-term debt at Bell Canada that had not been previously hedged, thereby removing the foreign currency exposure risk on the principal portion of that debt. At June 30, 2003, the carrying value of these derivative instruments was a net liability of $99 million. Their fair value amounted to a net liability of $27 million. Please see Note 1 to the consolidated financial statements for the year ended December 31, 2002 for a description of the significant accounting policies relating to financial instruments. 13. CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES Contractual obligations The table below provides a summary of our contractual obligations at June 30, 2003 and for the full years ended thereafter. _________________________________________________________________________ ($ millions) 2003 2004 2005 2006 2007 Thereafter Total _________________________________________________________________________ Long-term debt (excluding capital leases) 681 1,599 1,284 1,250 1,990 7,749 14,553 Capital leases (a) 66 111 65 47 32 151 472 Notes payable and bank advances 154 - - - - - 154 Operating leases 273 400 361 306 280 1,678 3,298 Purchase obligations 517 417 240 227 200 408 2,009 Other contractual obligations 266 136 101 34 33 11 581 _________________________________________________________________________ Total 1,957 2,663 2,051 1,864 2,535 9,997 21,067 _________________________________________________________________________ _________________________________________________________________________ (a) The imputed interest to be paid in connection with the capital leases amounts to $73 million. Commercial commitments _________________________________________________________________________ At June 30, 2003 ($ millions) Non- Committed Committed Total _________________________________________________________________________ Commercial paper credit lines 1,501 2,000 3,501 Other credit facilities 1,359 435 1,794 _________________________________________________________________________ Total 2,860 2,435 5,295 _________________________________________________________________________ Drawn 1,084 90 1,174 Undrawn 1,776 2,345 4,121 _________________________________________________________________________ _________________________________________________________________________ >> BCE Inc., Bell Canada and Aliant may issue notes under their commercial paper programs in an amount that cannot exceed the amount of supporting committed lines of credit. As at June 30, 2003, the aggregate amount of such supporting committed lines of credit was $1.5 billion. In addition, BCE Inc. and Bell Canada can, under their commercial paper programs, issue Class E Notes which may be extended in certain circumstances and are not supported by committed lines of credit. The maximum principal amount of Class E Notes that BCE Inc. may issue is $360 million and that Bell Canada may issue is $400 million. At June 30, 2003, Bell Canada and BCE Inc. had no Class E Notes outstanding. Included in the drawn portion of our commercial commitments are issued letters of credit of $263 million under our committed facilities and $83 million under our non-committed facilities. At June 30, 2003, BCE Inc., Bell Canada and Aliant had no amounts outstanding under their commercial paper programs. "Canadian Radio-Television and Telecommunications Commission (CRTC) Price Cap decision" The Price Cap decision of May 2002 made a number of changes to the rules governing local service in Canada's telecommunications industry for the next four years. One of the changes is a new mechanism, called the deferral account, which will be used to fund initiatives such as service improvement or reduced rates and/or rebates. We estimate our commitment relating to this decision to be $104 million at June 30, 2003. Guarantees In the normal course of our operations, we execute agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, the sale of assets, the sale of services, securitization agreements and operating leases. These indemnification undertakings and guarantees may require us to compensate the counterparties for costs and losses incurred as a result of various events including breaches of representations and warranties, intellectual property right infringement, loss of or damages to property, environmental liabilities, changes in or in the interpretation of laws and regulations (including tax legislation), valuation differences, claims that may arise while providing services, or as a result of litigation that may be suffered by the counterparties. Also, in the context of the sale of all or a part of a business, we may from time to time agree to compensate the purchaser for certain costs that may result from certain future events such as the failure of the disposed business to reach certain operational thresholds (earn- out guarantees), the resolution of contingent liabilities of the disposed businesses or the reassessment of prior tax filings of the corporations carrying on the business. Certain indemnification undertakings can extend for an unlimited period and generally do not provide for any limit on the maximum potential amount, although certain agreements do contain a specified maximum potential exposure representing a cumulative amount of approximately $4.3 billion. The nature of substantially all of the indemnification undertakings prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay counterparties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, we have not made any significant payments under such indemnifications. As at June 30, 2003, an aggregate amount of $42 million has been accrued in the consolidated balance sheet with respect to these indemnification undertakings, relating mainly to environmental liabilities. Off-balance sheet arrangements Sale of accounts receivable Bell Canada sold accounts receivable to a securitization trust for a total of $900 million in cash, under an agreement that came into effect on December 12, 2001 and expires on December 12, 2006. Bell Canada carried a retained interest in the transferred accounts receivable of $124 million at June 30, 2003, which equalled the amount of overcollateralization in the receivables transferred. Aliant sold accounts receivable to a securitization trust for a total of $130 million in cash, under an agreement that came into effect on December 13, 2001 and expires on December 13, 2006. Aliant carried a retained interest in the transferred accounts receivable of $29 million at June 30, 2003. Bell Canada and Aliant continue to service the accounts receivable. The buyers' interest in collections of these accounts receivable ranks ahead of the interest of Bell Canada and Aliant. Bell Canada and Aliant remain exposed to certain risks of default on the amount of receivables under securitization and have provided various credit enhancements in the form of overcollateralization and subordination of their retained interests. The buyers will reinvest the amounts collected by buying additional interests in the Bell Canada and Aliant accounts receivable until the agreements expire. The buyers and their investors have no claim on Bell Canada's and Aliant's other assets if customers fail to pay amounts owed on time. Shared services agreement Effective June 22, 2001, Bell Canada entered into a 10-year service contract with a special purpose entity. This contract will allow Bell Canada to reduce systems and administrative costs over time by streamlining and enhancing its systems and processes. Bell Canada is committed to paying approximately $150 million in service fees over the first three years of the agreement. In 2004, Bell Canada may: - exercise an option to buy the special purpose entity at fair market value, or - maintain the service contract for the remaining seven years and commit to paying at least $420 million in service fees to the special purpose entity during such remaining years. As at June 30, 2003, the special purpose entity had $102 million of total assets, of which $88 million are capital assets, and $123 million of total liabilities, of which $118 million is long-term debt. Sale leaseback transactions In our long-term debt balance at June 30, 2003, we had capital lease obligations of $73 million net of loans receivable of $313 million. These obligations were from agreements that Bell Canada entered into in 1999 and 2001 to sell and lease back telecommunication equipment for total proceeds of $399 million. Some of the proceeds were invested in interest-bearing loans receivable. Contingencies Agreement with Manitoba Telecom Services Inc. (MTS) The agreement between Bell Canada and MTS to create Bell West Inc. (Bell West) includes put and call options relating to MTS' 40% ownership of Bell West. Under the terms of the put option, MTS can require Bell Canada to buy its interest in Bell West: - in February 2004 at a guaranteed floor value of $458 million plus ongoing incremental funding invested by MTS. The put price includes an 8% return on the incremental funding. The guaranteed floor value was $591 million at June 30, 2003 - in January 2007 at fair market value less 12.5% - at fair market value less 12.5%, under certain circumstances. If MTS does not exercise its put option, Bell Canada can exercise its call option. Under the terms of the call option, Bell Canada has the option to buy MTS' interest: - in March 2004 at the greater of the guaranteed floor value described above and fair market value - in February 2007 at fair market value - at fair market value if there is change of control of MTS to a party other than Bell Canada or its affiliates. Bell Canada has not received any formal notice from MTS that it plans to exercise the put option. Agreement with CGI We entered into an agreement on July 1, 1998 with CGI's three majority individual shareholders. The agreement included put and call options, and rights of first refusal, on the CGI shares held by these shareholders. In connection with new agreements entered into between CGI and BCE, this agreement was terminated effective July 24, 2003. Refer to Note 15, Subsequent Events, for more details on these new agreements. Litigation "Teleglobe lending syndicate lawsuit" On July 12, 2002, some members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate (the plaintiffs) filed a lawsuit against BCE Inc. in the Ontario Superior Court of Justice. The claim makes several allegations, including that BCE Inc. and its management, in effect, made a legal commitment to repay the advances the plaintiffs made as members of the lending syndicate, and that the court should disregard Teleglobe as a corporate entity and hold BCE Inc. responsible to repay the advances as Teleglobe's alter ego. The plaintiffs claim damages of US$1.19 billion, plus interest and costs, which they allege is equal to the amount they advanced. This represents approximately 95.2% of the total US$1.25 billion that the lending syndicate advanced. While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that it has strong defences, and it intends to vigorously defend its position. Kroll Restructuring lawsuit In February 2003, a lawsuit was filed in the Ontario Superior Court of Justice by Kroll Restructuring Ltd., in its capacity as interim receiver of Teleglobe, against five former directors of Teleglobe. This lawsuit was filed in connection with Teleglobe's redemption of its third series preferred shares in April 2001 and the retraction of its fifth series preferred shares in March 2001. The plaintiff is seeking a declaration that such redemption and retraction were prohibited under the Canada Business Corporations Act and that the five former directors should be held jointly and severally liable to restore to Teleglobe all amounts paid or distributed on such redemption and retraction, being an aggregate of approximately $661 million, plus interest. While BCE Inc. is not a defendant in this lawsuit, Teleglobe was at the relevant time a subsidiary of BCE Inc. Pursuant to standard policies and subject to applicable law, the five former Teleglobe directors are entitled to seek indemnification from BCE Inc. in connection with this lawsuit. While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that the defendants have strong defences and that the claims of the plaintiffs will be vigorously defended against. Other litigation We become involved in various other claims and litigation as a regular part of our business. While no one can predict the final outcome of claims and litigation that were pending at June 30, 2003, management believes that the resolution of these claims and litigation will not have a material and negative effect on our consolidated financial position or results of operations. << 14. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS _________________________________________________________________________ _________________________________________________________________________ For the period ended June 30 Three months Six months ____________________________________________ (in $ millions) 2003 2002 2003 2002 _________________________________________________________________________ _________________________________________________________________________ Interest paid on long-term debt 417 356 605 539 Income taxes paid (received) 78 325 (256) 798 _________________________________________________________________________ >> 15. SUBSEQUENT EVENTS Sale of Certen Inc. (Certen) On July 2, 2003, Bell Canada sold its ownership interest in Certen to a subsidiary of Amdocs Limited (Amdocs) for $89 million and concurrently extended by three years its arrangement with Certen and Amdocs relating to billing operations outsourcing and customer care and billing solutions development. Under the terms of the new arrangement, Bell Canada will assume responsibility for the future evolution of its billing systems in areas such as business analysis and requirements definition, architecture and project management. We will record an intangible asset (estimated at $500 million) representing the value of the right to use and modify the intellectual property in perpetuity, which will be amortized over the remaining life of the 7-year contract. Amdocs and Certen will assume a more operational role, and will continue to implement Bell Canada's current billing modernization programs as well as handle day to day billing functions such as invoice production and distribution. We will record a liability (estimated at $400 million) representing the future payments that will be made to Certen over the remaining life of the 7-year contract for the development of the billing system. The transaction will not result in any significant gain or loss for Bell Canada. New Shareholders' Agreement for CGI, and Renewed Agreements between Bell Canada and CGI On July 24, 2003, BCE and CGI signed a new agreement with respect to BCE's ownership in CGI, and the existing shareholders' agreement entered into on July 1, 1998 was terminated. Consequently, the put rights of CGI's three majority individual shareholders and BCE's call rights with regard to the CGI shares held by these majority shareholders, have been cancelled. BCE converted all of its 7,027,606 CGI Class B multiple voting shares into CGI Class A single voting shares on a one-for-one basis. Therefore, as of the date hereof, BCE owns a total of 120,028,400 CGI Class A shares, which represents 29.87% of the outstanding CGI equity (outstanding Class A shares and Class B shares). BCE has undertaken that, on January 5, 2004, its interest in CGI's outstanding equity will be below 30%. As a result, the automatic conversion of all CGI Class B shares into Class A shares (which was to occur on January 5, 2004 under the terms of CGI's articles of incorporation on the condition that on such date, BCE's direct and indirect equity ownership in CGI were to be 30% or more) will not occur. Under the new agreement, BCE has been provided customary shareholder's agreement rights. These include pre-emptive rights with respect to CGI's equity shares, right of representation on CGI's Board of Directors, and certain veto rights. In addition, under the new agreement, there are no restrictions on any future sale by BCE of its shares in CGI. BCE Inc. will continue to proportionately consolidate CGI's results. Concurrently with the entering into of this new agreement between BCE and CGI, Bell Canada entered into certain agreements with CGI. These include certain amendments to the IS/IT outsourcing agreement between Bell Canada and CGI, and an extension of the term of such agreement to June 30, 2012. Bell Mobility also entered into an amendment to its existing IS/IT outsourcing agreement with CGI, which also includes an extension of the term to June 30, 2012. In addition, Bell Canada entered into a renewed and expanded commercial alliance agreement with CGI which designates Bell Canada as CGI's preferred telecom services provider, and a new network management agreement under which CGI will outsource to Bell Canada the management of the telecommunications network used by CGI to provide services to its customers. Both the alliance agreement and the network management agreement extend to June 30, 2012. -30- For further information: Nick Kaminaris, Communications, (514) 786-3908, Web Site: www.bce.ca ; Sophie Argiriou Investor Relations (514) 786-8145

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