Bell Canada Enterprises Reports its Third Quarter 2003 Results


	Bell Canada Enterprises Reports its Third Quarter 2003 Results (All figures are in Cdn$, unless otherwise indicated) - Cellular and PCS: 124,000 net additions in the quarter - High speed Internet: 104,000 net additions in the quarter - Bell ExpressVu: 17,000 net additions in the quarter - Revenue of $4.9 billion; EBITDA of $1.9 billion; EPS at $0.49 MONTREAL, Quebec, Oct. 29 2003 -- /CNW Telbec/ - For the third quarter of 2003, BCE Inc. (TSX, NYSE: BCE) reported earnings per share of $0.49 (total earnings applicable to common shares of $446 million), compared to $0.40 per common share (total earnings applicable to common shares of $349 million) last year. Earnings per share in the third quarter of 2002 included net losses of $0.04 per share. Total revenue for the quarter was $4.88 billion compared to $4.86 billion last year. Total EBITDA(1) for the quarter was $1.94 billion compared to $1.93 billion last year. Revenue and EBITDA growth from continuing businesses (excluding the impact of the sale of Bell Canada's directories business in November 2002) were 3.5% and 5.7% respectively. "We continue to focus on simplifying and innovating for our customers while pursuing disciplined financial management," said Michael Sabia, President and CEO of Bell Canada Enterprises. "Our consumer segment posted strong growth in many key areas. We added 104,000 new DSL subscribers, grew our Cellular and PCS subscriber base to 4.2 million and maintained post-paid churn at a low 1.3%. And, with 'The Bundle from Bell', we have made it simpler for our customers to receive our key services through one point of contact." "Market conditions continue to have an impact on our business segment, and we face challenges in wholesale and enterprise. Hence, our continued efforts on productivity and on carefully managing operating and capital costs. As a result, we have significantly improved free cash flow." "During the quarter, we made several strategic investments in innovation to better position us for the future," continued Mr. Sabia. "We established an Innovation Centre with Nortel Networks to develop new multimedia Internet Protocol based applications, began a trial with Microsoft for IPTV and initiated the expansion of our DSL footprint using Lucent's high density remotes." Operational Highlights ------------------------------------------------------------------------- Growth 3rd Quarter (Q3 03 vs. Q3 02) Total ------------------------------------------------------------------------- Cellular and PCS subscribers 124,000 net additions 15% 4,244,000 ------------------------------------------------------------------------- High-speed Internet (DSL) subscribers 104,000 net additions 39% 1,391,000 ------------------------------------------------------------------------- Bell ExpressVu subscribers 17,000 net additions 11% 1,352,000 ------------------------------------------------------------------------- Data revenue $931 million 2.5% n.a. ------------------------------------------------------------------------- Bell Globemedia revenue $296 million 8.4% n.a. ------------------------------------------------------------------------- ------------------------------------------------------------------------- - BCE's revenue from its continuing businesses for the third quarter of 2003 grew by $167 million due to higher Wireless, DSL High-Speed Internet, Satellite T.V. and business data services revenues at Bell Canada, and increased revenues from CGI, due mainly to its acquisition of Cognicase Inc. Continued strong television advertising revenues as a result of top rated programming at Bell Globemedia also contributed to BCE's revenue growth. - EBITDA from BCE's continuing businesses grew by $104 million as a result of higher revenues and cost control initiatives. As a percentage of revenues, EBITDA margin from continuing businesses was at 39.8% in the third quarter of 2003 compared to 39.0% for the same period last year. - Operating income (operating revenues less operating expenses, amortization expense, net benefit plans expense and restructuring and other charges) remained stable at $1.1 billion. Operating income from BCE's continuing businesses increased by $69 million. - Earnings per share were $0.49 compared to $0.40 last year. Third quarter 2002 earnings per share included net losses of $29 million or $0.04 per share mainly relating to the pay equity settlement at Bell Canada. Net growth in operating earnings contributed an increase of $0.05 per share. - BCE's quarter-end capital expenditures as a percentage of revenues (CAPEX intensity) were 16.4%, down from 18.6% in the third quarter of 2002. - Free cash flow (after dividend payments and capital expenditures) of $947 million for the third quarter of 2003 improved significantly from the $216 million reported for the same period last year. This resulted mainly from increased cash from operations, reduced capital expenditures, and the realization of one-time cash proceeds of $180 million. - BCE's net debt to capitalization ratio improved from 48.8% at December 31, 2002 to 45.3% at September 30, 2003, reflecting management's success in driving free cash flow generation and reducing overall net debt levels. 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. The company now expects that its full year 2003 CAPEX intensity will not exceed 17%. Aliant recently announced an agreement to sell its 53% interest in Stratos Global, pending U.S. regulatory approval. The sale is expected to be completed by December 31. Aliant and BCE anticipate reclassifying the business as discontinued operations in the fourth quarter. In 2003, Stratos Global was expected to contribute revenues of $530 to $550 million, and EBITDA of $110 million to $120 million. BCE's revenue and EBITDA guidance do not reflect anticipated fourth quarter accounting changes relating to this transaction. RESULTS BY BUSINESS GROUP (unaudited) BCE operated under four segments as at September 30, 2003: Bell Canada, Bell Globemedia, BCE Emergis and BCE Ventures (which consists of BCE's other investments). ------------------------------------------------------------------------- (Cdn$ millions, except per share amounts) ----------------------------------------- Third Quarter Nine months For the period ended September 30 2003 2002 2003 2002 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue Bell Canada 4,306 4,349 12,849 13,034 Bell Globemedia 296 273 988 911 BCE Emergis 117 135 365 409 BCE Ventures 300 258 917 782 Corporate and other, including inter-segment eliminations (136) (159) (400) (464) -------- --------- --------- --------- Total revenue 4,883 4,856 14,719 14,672 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA Bell Canada 1,846 1,876 5,364 5,470 Bell Globemedia 36 17 150 108 BCE Emergis 18 12 53 3 BCE Ventures 86 66 258 216 Corporate and other, including inter-segment eliminations (43) (44) (113) (126) -------- --------- --------- --------- Total EBITDA 1,943 1,927 5,712 5,671 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings (loss) Bell Canada 442 328 1,290 1,004 Bell Globemedia (1) (11) 12 1 BCE Emergis 11 15 23 (62) BCE Ventures 30 15 107 98 Corporate and other, including inter-segment eliminations (15) 22 (13) 7 ------------------------------------------------------------------------- Earnings from continuing operations 467 369 1,419 1,048 ------------------------------------------------------------------------- Discontinued operations (3) (4) (4) (353) Dividends on preferred shares (18) (16) (50) (43) ------------------------------------------------------------------------- Net earnings applicable to common shares 446 349 1,365 652 ------------------------------------------------------------------------- Net earnings per common share 0.49 0.40 1.49 0.78 ------------------------------------------------------------------------- THIRD QUARTER REVIEW (Q3 2003 vs. Q3 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) ----------------------------------------- Third quarter Nine months For the period ended September 30 2003 2002 2003 2002 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Bell Canada Revenue Local and access 1,530 1,519 4,542 4,565 Long distance 631 651 1,885 1,944 Wireless 661 570 1,852 1,622 Data 931 908 2,819 2,746 DTH Satellite T.V. Services 192 156 560 462 Terminal sales & other 361 405 1,191 1,285 Directory advertising - 140 - 410 ------------------------------------------------------------------------- Total Bell Canada revenue 4,306 4,349 12,849 13,034 ------------------------------------------------------------------------- - Revenues from Bell Canada's continuing businesses (excluding the impact of the sale of Bell's directories business in November 2002) increased by $97 million or 2.3% and were driven by the strong growth in the consumer segment. Local and Access/Long Distance - Local and access revenues increased by 0.7% due mainly to higher SmartTouch and WireCare/PhoneCare maintenance plans revenues. - Residential and business local access lines declined by 0.8% and primarily reflected losses to competition. - Long distance revenues decreased by 3.1% due mainly to competitive pressures. Wireless - Wireless revenues were up 16% due to strong growth in cellular and PCS subscribers across the country and higher average revenues per unit (ARPU). - The 6.4% increase in ARPU to $50 reflected higher revenues from increased usage, post-paid value added services such as Message Centre and Call Display, long distance and data services, an increase in post- paid subscribers as a percentage of the total base, and higher prepaid ARPU. - Wireless postpaid net additions were at 101,000 or 81% of the total net activations in the quarter, bringing the total postpaid customers to 3,197,000 as at September 30. - Total postpaid wireless churn remained at a low of 1.3%, down from 1.6% last year, and continued to reflect our priority on customer service. - Wireless EBITDA increased by 15% to reach $251 million, reflecting the higher revenues. Data - Consumer data revenues increased by 21% due to continued high demand for consumer Sympatico ISP services. - Total Internet (High-speed and dial-up) subscribers reached 2,283,000 as at September 30. - Business data revenue increased by 4.8% due to modest data volume growth and the impact of a weaker third quarter of 2002. - Wholesale data revenues decreased by 23% and reflected the continued softness in underlying demand from wholesale customers. DTH (Direct to Home) Satellite T.V. Services - An 11% increase in the subscriber base and higher pricing contributed to a 23% improvement in revenues. - Net additions totaled 17,000 for the quarter, down from the 45,000 achieved in the third quarter of 2002. The decrease resulted mainly from a general slowdown in the digital T.V. market. EBITDA and CAPEX - EBITDA at Bell Canada was $1.8 billion. Bell Canada's EBITDA from continuing businesses increased by $58 million or 3.2% due mainly to the increased revenues and productivity gains. - Bell's quarter-end CAPEX intensity was 16.6%, down from 19.3% in the third quarter of 2002, due to the focus on capital efficiency. BELL GLOBEMEDIA Bell Globemedia includes CTV and The Globe and Mail. - Total revenue increased by 8.4% to $296 million. - Television advertising revenues improved significantly by 22% as a result of strength in the television advertising market and high ratings at CTV. - CTV had 19 of the top 20 most watched shows of the summer season. In addition, Canadian Idol was the highest ever rated CTV produced television series. - Print advertising revenues were 7.2% higher than last year. Demand in the print advertising market, while still soft, improved over the second quarter of 2003. - Initiatives to improve print advertising revenues in the third quarter included the introduction of a new Saturday "Toronto" section in The Globe & Mail. - EBITDA more than doubled to $36 million. The increased revenues, particularly from Canadian Idol, and management's continued cost control efforts in its interactive operations partially offset the impact of higher programming expenditures. BCE EMERGIS - Revenue was $117 million, a decrease of 13% compared with the same period in 2002. Revenue continued to be negatively affected by lower non-core revenues, particularly from decreased Bell Canada inter- company revenues, and a weakened U.S. dollar. - Despite the revenue decline, year-over-year quarterly EBITDA increased by 50% to $18 million, mainly due to lower stock compensation expense and management's continued success in containing costs. - Revenue decreased by 5.6% compared to the second quarter of 2003. The weakened U.S. dollar contributed to the decrease. - EBITDA was $2 million lower compared to the second quarter 2003 EBITDA of $20 million and mainly reflected increased stock compensation expense. BCE VENTURES BCE Ventures includes the activities of CGI, Telesat and other investments. - BCE Ventures' revenue was $300 million in the quarter, an increase of 16% when compared with the same period of 2002. This was driven by revenue growth at CGI of 19%, due mainly to its January 2003 acquisition of Cognicase, as well as increased revenues at Telesat. - EBITDA was $86 million compared with $66 million last year, largely due to CGI's acquisition of Cognicase and improved EBITDA at Telesat. 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 third quarter of 2003, up 20% due to the consolidation of Aliant and Bell ExpressVu effective January 1, 2003. Net earnings applicable to common shares were $550 million in the third quarter of 2003, compared to $471 million for the same period last year. 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 Third Quarter Financial Information: --------------------------------------------- BCE's 2003 Third Quarter Shareholder Report (which contains BCE's 2003 third 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 Third 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 Third Quarter Shareholder Report will be sent to BCE's shareholders who have requested to receive it on or about November 3, 2003. Call with Financial Analysts: ----------------------------- BCE will hold a teleconference / Webcast (audio only) for financial analysts to discuss its third quarter results on Wednesday, October 29, 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, October 29, 2003 and 12:00 PM on Wednesday, November 5, 2003. To access the replay facility, please dial (416) 695-5800 and enter access code 1484050(pound sign). 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 third quarter results on Wednesday, October 29, 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 and market conditions and the level of consumer confidence and spending; 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 our products and services; the impact of Bell ExpressVu's measures against signal theft; the risk of low returns on pension plan assets resulting in the erosion of our pension fund surpluses which could require us to commence making pension fund contributions and/or recognize pension expenses; 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 anticipate, and respond to, changes in technology and industry standards and 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 certain BCE group companies; the ability of the BCE group companies' strategies to produce the expected benefits and growth prospects; the financial condition and credit risk of customers and uncertainties regarding collectibility of receivables; 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 2003 Third Quarter Shareholder Report 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 October 29, 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- Segment media Emergis Ventures other dated ------------------------------------------------------------------------- Q3 2003 EBITDA 1,846 36 18 86 (43) 1,943 Amortization expense (768) (15) (13) (34) 5 (825) Net benefit plans credit (expense) (46) (1) - - 3 (44) Restructuring and other charges (1) - - - - (1) ------------------------------------------------------------------------- Operating income (loss) 1,031 20 5 52 (35) 1,073 ------------------------------------------------------------------------- Q3 2002 EBITDA 1,876 17 12 66 (44) 1,927 Amortization expense (723) (18) (14) (28) 14 (769) Net benefit plans credit (expense) 10 (1) - - (2) 7 Restructuring and other charges (79) - - - - (79) ------------------------------------------------------------------------- Operating income (loss) 1,084 (2) (2) 38 (32) 1,086 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Bell Bell Corpo- BCE Canada Globe- BCE BCE rate and Consoli- Segment media Emergis Ventures other dated ------------------------------------------------------------------------- YTD 2003 EBITDA 5,364 150 53 258 (113) 5,712 Amortization expense (2,259) (46) (40) (93) 41 (2,397) Net benefit plans credit (expense) (135) (3) - - 9 (129) Restructuring and other charges (1) - - - - (1) ------------------------------------------------------------------------- Operating income (loss) 2,969 101 13 165 (63) 3,185 ------------------------------------------------------------------------- YTD 2002 EBITDA 5,470 108 3 216 (126) 5,671 Amortization expense (2,192) (51) (52) (92) 40 (2,347) Net benefit plans credit (expense) 29 (3) - - (1) 25 Restructuring and other charges (373) - (119) - - (492) ------------------------------------------------------------------------- Operating income (loss) 2,934 54 (168) 124 (87) 2,857 ------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS - BCE INC. CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions, except share ------------------------------------- amounts) (unaudited) 2003 2002(1) 2003 2002(1) ------------------------------------------------------------------------- Operating revenues 4,883 4,856 14,719 14,672 ------------------------------------- Operating expenses 2,940 2,929 9,007 9,001 Amortization expense 825 769 2,397 2,347 Net benefit plans expense (credit) 44 (7) 129 (25) Restructuring and other charges (Note 4) 1 79 1 492 ------------------------------------- Total operating expenses 3,810 3,770 11,534 11,815 ------------------------------------- Operating income 1,073 1,086 3,185 2,857 Other (income) expense (Note 5) (18) 3 (76) (245) Interest expense (Note 6) 272 288 847 812 ------------------------------------- Earnings from continuing operations before income taxes and non-controlling interest 819 795 2,414 2,290 Income taxes 292 298 814 837 Non-controlling interest 60 128 181 405 ------------------------------------- Earnings from continuing operations 467 369 1,419 1,048 Discontinued operations (Note 7) (3) (4) (4) (353) ------------------------------------- Net earnings 464 365 1,415 695 Dividends on preferred shares (18) (16) (50) (43) ------------------------------------------------------------------------- Net earnings applicable to common shares 446 349 1,365 652 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings per common share - basic (Note 8) Continuing operations 0.49 0.41 1.49 1.21 Discontinued operations - (0.01) - (0.43) Net earnings 0.49 0.40 1.49 0.78 Net earnings per common share - diluted (Note 8) Continuing operations 0.49 0.41 1.49 1.21 Discontinued operations - (0.01) - (0.44) Net earnings 0.49 0.40 1.49 0.77 Dividends per common share 0.30 0.30 0.90 0.90 Average number of common shares outstanding - basic (millions) 921.5 864.1 919.3 827.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF DEFICIT ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) (unaudited) ------------------------------------- 2003 2002(1) 2003 2002(1) ------------------------------------------------------------------------- Balance at beginning of period, as previously reported (6,079) (7,649) (6,149) (7,468) Adjustment for change in accounting policies (Note 1) - (227) (286) (218) ------------------------------------- Balance at beginning of period, as restated (6,079) (7,876) (6,435) (7,686) Consolidation of variable interest entity (Note 1) (25) - (25) - Net earnings 464 365 1,415 695 Dividends - Preferred shares (18) (16) (50) (43) - Common shares (277) (272) (828) (757) ------------------------------------- (295) (288) (878) (800) Costs relating to the issuance of common shares - (62) - (62) Premium on redemption of preferred shares (Note 11) - - (7) (6) Other (2) 10 (7) 8 ------------------------------------------------------------------------- Balance at end of period (5,937) (7,851) (5,937) (7,851) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------- September December 30 31 (in $ millions) (unaudited) 2003 2002(1) ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 1,617 304 Accounts receivable (net of allowance for doubtful accounts of $220 million and $207 million for 2003 and 2002, respectively) 2,417 2,328 Other current assets 828 774 Current assets of discontinued operations 3 26 ----------------------- Total current assets 4,865 3,432 Capital assets 21,183 20,633 Other long-term assets 3,641 3,941 Indefinite-life intangible assets (Note 9) 2,904 900 Goodwill (Note 10) 8,402 10,118 Non-current assets of discontinued operations 51 82 ------------------------------------------------------------------------- Total assets 41,046 39,106 ------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities 3,799 3,820 Debt due within one year 1,600 2,021 Current liabilities of discontinued operations 2 19 ----------------------- Total current liabilities 5,401 5,860 Long-term debt 13,711 13,391 Other long-term liabilities 4,954 3,652 Non-current liabilities of discontinued operations 3 4 ----------------------- Total liabilities 24,069 22,907 ----------------------- Non-controlling interest 3,576 3,584 ----------------------- Commitments and contingencies (Note 14) SHAREHOLDERS' EQUITY Preferred shares (Note 11) 1,670 1,510 ----------------------- Common shareholders' equity Common shares (Note 11) 16,703 16,520 Contributed surplus 1,035 1,010 Deficit (5,937) (6,435) Currency translation adjustment (70) 10 ----------------------- Total common shareholders' equity 11,731 11,105 ----------------------- Total shareholders' equity 13,401 12,615 ------------------------------------------------------------------------- Total liabilities and shareholders' equity 41,046 39,106 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) (unaudited) ------------------------------------- 2003 2002(1) 2003 2002(1) ------------------------------------------------------------------------- Cash flows from operating activities Earnings from continuing operations 467 369 1,419 1,048 Adjustments to reconcile earnings from continuing operations to cash flows from operating activities: Amortization expense 825 769 2,397 2,347 Net benefit plans expense (credit) 44 (7) 129 (25) Restructuring and other charges (non-cash portion) (5) 67 (5) 472 Net gains on investments - (11) - (186) Future income taxes 156 106 275 (16) Non-controlling interest 60 128 181 405 Other items (71) (89) (227) (202) Changes in non-cash working capital 428 152 335 (501) ------------------------------------- 1,904 1,484 4,504 3,342 ------------------------------------- Cash flows from investing activities Capital expenditures (800) (904) (2,114) (2,696) Business acquisitions (7) (1,378) (77) (1,407) Business dispositions 55 - 55 432 Decrease (increase) in investments accounted for under the cost and equity methods 1 (7) 8 (63) Other items 154 25 72 12 ------------------------------------- (597) (2,264) (2,056) (3,722) ------------------------------------- Cash flows from financing activities Increase (decrease) in notes payable and bank advances (73) (58) (242) 420 Issue of long-term debt 17 1,104 1,881 2,399 Repayment of long-term debt (161) (307) (2,035) (809) Issue of common shares 5 2,381 14 2,390 Costs relating to the issuance of common shares - (78) - (78) 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 22 44 109 201 Redemption of equity securities by subsidiaries (39) - (74) - Cash dividends paid on common and preferred shares (273) (255) (809) (758) Cash dividends paid by subsidiaries to non-controlling interest (38) (134) (137) (321) Other items 56 (40) (6) (36) ------------------------------------- (484) 2,657 (1,146) 3,612 ------------------------------------- Effect of exchange rate changes on cash and cash equivalents (1) 2 (6) 2 ------------------------------------- Cash provided by continuing operations 822 1,879 1,296 3,234 Cash provided by (used in) discontinued operations (1) 1 15 (933) ------------------------------------- Net increase in cash and cash equivalents 821 1,880 1,311 2,301 Cash and cash equivalents at beginning of period 796 990 306 569 ------------------------------------- Cash and cash equivalents at end of period 1,617 2,870 1,617 2,870 ------------------------------------- Consists of: Cash and cash equivalents of continuing operations 1,617 2,866 1,617 2,866 Cash and cash equivalents of discontinued operations - 4 - 4 ------------------------------------- Total 1,617 2,870 1,617 2,870 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. BASIS OF PRESENTATION 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 POLICIES 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 can be 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 $15 million and $21 million for the three months and nine months ended September 30, 2002, respectively. The effect as at December 31, 2002 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 12, 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 against earnings over three years - we deferred and amortized the costs of acquiring wireless subscribers against 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 nine months ended September 30, 2002: - operating revenues increased by $51 million and $130 million, respectively - operating expenses increased by $60 million and $146 million, respectively - income taxes decreased by $3 million and $6 million, respectively - non-controlling interest decreased by $2 million and $3 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. As a result of applying the accounting policy changes relating to stock- based compensation and subscriber acquisition costs, the total deficit as at January 1, 2003 increased by $286 million. 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 15, Off balance sheet arrangements, for more information. The adoption of this guideline did not have an impact on our consolidated financial statements. 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 the lower of its carrying value amount or 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 consolidated financial statements. Consolidation of variable interest entities Effective July 1, 2003, we early adopted Accounting Guideline 15, Consolidation of variable interest entities, on a prospective basis as permitted by the guideline. The effective date of the guideline is January 1, 2004. 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. We performed a review and concluded that the entity with which Bell Canada entered into a 10-year shared services agreement effective June 22, 2001 met the criteria for consolidation set out in this guideline. This entity, which is a corporation owned by a third party, provides Bell Canada with systems and administrative services. Prior to consolidation, we reported operating expenses relating to the fees charged to Bell Canada for the services provided by this entity. The effect on our consolidated balance sheet as at July 1, 2003 was to: - increase total assets by $102 million (of which $88 million are capital assets) - increase total liabilities by $127 million (of which $122 million is long-term debt) - increase deficit by $25 million. The net effect on our consolidated statement of operations for the three months ended September 30, 2003 was to: - decrease operating revenues by $2 million - decrease operating expenses by $8 million - increase amortization expense by $11 million - increase interest expense by $2 million - decrease net earnings by $7 million. The net effect on our consolidated statement of cash flows for the three months ended September 30, 2003 was to: - increase cash flows from operating activities by $2 million - increase cash flows from investing activities by $8 million - decrease cash flows from financing activities by $3 million. FUTURE CHANGES TO ACCOUNTING POLICIES 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 determination of when to recognize an impairment loss for a long- lived asset to be held and used is made when its carrying value exceeds the total undiscounted cash flows expected from its use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the amount over 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 resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. 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 consolidated financial statements. Hedging relationships The CICA recently issued Accounting Guideline 13, Hedging relationships. The guideline establishes the following 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 meet certain effectiveness criteria 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 on January 1, 2004, 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, 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 consolidated financial statements. Please see Note 13, Derivative instruments, for a list of our outstanding hedging relationships at September 30, 2003. 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 September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002(1) 2003 2002(1) ------------------------------------------------------------------------- Operating revenues Bell Canada Segment External 4,264 4,294 12,734 12,895 Inter-segment 42 55 115 139 ------------------------------------------------------------------------- 4,306 4,349 12,849 13,034 Bell Globemedia External 287 263 961 880 Inter-segment 9 10 27 31 ------------------------------------------------------------------------- 296 273 988 911 BCE Emergis External 98 102 296 299 Inter-segment 19 33 69 110 ------------------------------------------------------------------------- 117 135 365 409 BCE Ventures External 231 197 723 594 Inter-segment 69 61 194 188 ------------------------------------------------------------------------- 300 258 917 782 Corporate and other External 3 - 5 4 Inter-segment 4 7 13 18 ------------------------------------------------------------------------- 7 7 18 22 ------------------------------------------------------------------------- Less: Inter-segment eliminations (143) (166) (418) (486) ------------------------------------------------------------------------- Total operating revenues 4,883 4,856 14,719 14,672 ------------------------------------------------------------------------- Net earnings applicable to common shares Bell Canada Segment 442 328 1,290 1,004 Bell Globemedia (1) (11) 12 1 BCE Emergis 11 15 23 (62) BCE Ventures 30 15 107 98 Corporate and other, including inter-segment eliminations (15) 22 (13) 7 ------------------------------------------------------------------------- Total earnings from continuing operations 467 369 1,419 1,048 Discontinued operations (3) (4) (4) (353) Dividends on preferred shares (18) (16) (50) (43) ------------------------------------------------------------------------- Total net earnings applicable to common shares 446 349 1,365 652 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. 3. BUSINESS ACQUISITIONS AND DISPOSITIONS Repurchase of SBC's 20% interest in BCH On June 28, 2002, BCE Inc., BCH and entities controlled by SBC Communications Inc. (SBC) entered into agreements that ultimately led to BCE Inc.'s repurchase of SBC's 20% interest in BCH for $6.32 billion and at the time, preliminarily allocated $5,430 million of the purchase price to goodwill. During the third quarter of 2003, we completed the purchase price allocation relating to this repurchase, which resulted in the reallocation of $1,758 million from goodwill to other net assets of BCH, based on their fair values on the date of repurchase. The effect on our consolidated balance sheet was to: - increase investments by $18 million which are classified in other long term assets - decrease accrued benefit asset by $456 million which is classified in other long term assets - increase brand name by $1,986 million which is classified as an indefinite-life intangible (see note 9) - increase customer relationships by $603 million which are classified in capital assets and are amortized over the remaining useful life of the customer relationships, which range from 5 to 40 years - increase long-term debt by $165 million - increase future income tax liability by $228 million which is classified in other long-term liabilities. The goodwill is not deductible for tax purposes. CGI Group Inc.'s (CGI) 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, application services provider (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 upon and announced. Sale of Certen Inc. (Certen) On July 2, 2003, Bell Canada sold its 89.9% ownership interest in Certen to a subsidiary of Amdocs Limited (Amdocs). Concurrently with the sale, Bell Canada extended by three years its arrangement with Certen and Amdocs relating to billing operations outsourcing, customer care and billing solutions development. The remaining term of the arrangement is 7 years. The consideration Bell Canada received for the sale was $89 million in cash and the right to use and modify the intellectual property relating to the billing system platform in perpetuity. As a result, Bell Canada recorded an intangible asset of $494 million (classified under capital assets) representing the value of the right to use and modify the intellectual property relating to the billing system platform in perpetuity, which will be amortized against earnings over the remaining life of the contract. At the time of the sale, the net carrying value of Certen's net assets was $159 million. Certen had total assets amounting to $450 million (including $34 million in cash and cash equivalents) and total liabilities of $291 million. At the time of the sale, Bell Canada also recorded a liability of $392 million representing the future payments that will be made to Certen over the remaining life of the contract relating to the development of the billing system, which was substantially completed at the time of the sale. The future income tax liability relating to the intangible assets and long-term liability amounted to $32 million. The transaction did not result in any gain or loss for Bell Canada. Prior to the sale, the results of operations of Certen were presented in the Bell Canada Segment. 4. RESTRUCTURING AND OTHER CHARGES During the third quarter of 2003, Aliant recorded a pre-tax restructuring charge of $16 million ($4 million after taxes and non-controlling interest) as a result of a comprehensive restructuring plan of its subsidiary Xwave Solutions Inc. Costs associated with the restructuring plan include severance and related benefits, technology lease cancellation penalties and real estate rationalization costs. As at September 30, 2003, $10 million of the restructuring provision remained unpaid and is expected to be paid by the end of 2003.This charge was substantially offset by a credit relating to the reversal of previously recorded restructuring provisions at Bell Canada that were no longer considered necessary. 5. OTHER (INCOME) EXPENSE ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Net gains on investments - (12) - (192) Foreign currency (gains) losses 6 18 (30) (37) Other (24) (3) (46) (16) ------------------------------------------------------------------------- Other (income) expense (18) 3 (76) (245) ------------------------------------------------------------------------- 6. INTEREST EXPENSE ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Interest expense on long-term debt 256 269 810 763 Interest expense on other debt 16 19 37 49 ------------------------------------------------------------------------- Total interest expense 272 288 847 812 ------------------------------------------------------------------------- 7. DISCONTINUED OPERATIONS ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Teleglobe Inc. (Teleglobe) - - - (149) Bell Canada International Inc. (BCI) - - - (191) Aliant's Emerging business segment (3) (4) (4) (13) ------------------------------------------------------------------------- Net loss from discontinued operations (3) (4) (4) (353) ------------------------------------------------------------------------- The financial results of Teleglobe and BCI were reclassified as discontinued operations effective April 24, 2002 and January 1, 2002, respectively. At September 30, 2003, virtually all of the assets of Aliant's Emerging business segment had been sold. iMagicTV Inc. (iMagic TV) was sold in April 2003, Prexar LLC (Prexar) was sold in May 2003, and the significant subsidiaries of AMI Offshore Inc. (AMI Offshore) were sold in August 2003. Effective May 1, 2003, the results of these operations, which were previously presented in the Bell Canada Segment, have now been presented as discontinued operations. 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. The table below provides a summarized statement of operations for the discontinued operations. ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Revenue 6 17 29 735 ------------------------------------------------------------------------- Operating loss from discontinued operations, before tax (5) (5) (19) (149) Gain (loss) on discontinued operations, before tax (1) - 10 (282) Income tax recovery (expense) on operating loss (gain) (3) (2) 1 43 Income tax recovery (expense) on loss (gain) 2 - (1) 18 Non-controlling interest 4 3 5 17 ------------------------------------------------------------------------- Net loss from discontinued operations (3) (4) (4) (353) ------------------------------------------------------------------------- 8. 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 September 30 Three months Nine months ------------------------------------- 2003 2002(1) 2003 2002(1) ------------------------------------------------------------------------- Earnings from continuing operations (numerator) (in $ millions) Earnings from continuing operations 467 369 1,419 1,048 Dividends on preferred shares (18) (16) (50) (43) ------------------------------------------------------------------------- Earnings from continuing operations - basic 449 353 1,369 1,005 Assumed exercise of put options by CGI shareholders (2) - 3 - 9 ------------------------------------------------------------------------- Earnings from continuing operations - diluted 449 356 1,369 1,014 ------------------------------------------------------------------------- Weighted average number of common shares outstanding (denominator) (in millions) Weighted average number of common shares outstanding - basic 921.5 864.1 919.3 827.3 Assumed exercise of stock options (3) 1.7 1.9 1.6 2.1 Assumed exercise of put options by CGI shareholders (2) - 13.0 - 13.0 ------------------------------------------------------------------------- Weighted average number of common shares outstanding - diluted 923.2 879.0 920.9 842.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to Note 1, Significant accounting policies, for changes in accounting policies. (2) Refer to Note 14, Commitments and Contingencies, for developments relating to the termination of these put options. (3) 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 the options which are dilutive. The number of options that were excluded amounts to 22,514,837 and 23,152,156 for the three months and nine months ended September 30, 2003, and 23,488,748 and 22,302,987 for the three months and nine months ended September 30, 2002. 9. INDEFINITE-LIFE INTANGIBLE ASSETS ------------------------------------------------------------------------- (in $ millions) 2003 ------------------------------------------------------------------------- Intangible assets, January 1 900 Goodwill reallocated to indefinite-life intangible assets (Note 3) 1,986 Capitalized interest on spectrum licences ($12 million for the nine months ended September 30, 2002) 18 ------------------------------------------------------------------------- Intangible assets, September 30 2,904 ------------------------------------------------------------------------- Consisting of: Brand name 1,986 Spectrum licences 772 Television licences 128 Cable licences 18 ------------------------------------------------------------------------- Total 2,904 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. GOODWILL ------------------------------------------------------------------------- (in $ millions) 2003 ------------------------------------------------------------------------- Goodwill, January 1 10,118 Goodwill acquired during the period 85 Goodwill reallocated to other net assets (Note 3) (1,758) Foreign exchange on goodwill of self-sustaining foreign operations (43) ------------------------------------------------------------------------- Goodwill, September 30 8,402 ------------------------------------------------------------------------- 11. 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 September 30, 2003. ------------------------------------------------------------------------- Stated Number capital of shares (in $ millions) ------------------------------------------------------------------------- Outstanding, January 1, 2003 915,867,928 16,520 Shares issued (under employee stock option, employee savings and dividend reinvestment plans) 6,400,898 183 ------------------------------------------------------------------------- Outstanding, September 30, 2003 922,268,826 16,703 ------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION PLANS BCE Inc. stock options The table below provides a summary of the status of BCE Inc.'s stock option programs. ------------------------------------------------------------------------- Weighted average Number exercise of shares price ------------------------------------------------------------------------- Outstanding, January 1, 2003 20,470,700 $33 Granted 5,928,051 $28 Exercised (336,658) $16 Expired/forfeited (1,075,533) $33 ------------------------------------------------------------------------- Outstanding, September 30, 2003 24,986,560 $32 ------------------------------------------------------------------------- Exercisable, September 30, 2003 9,597,312 $34 ------------------------------------------------------------------------- Teleglobe stock options When 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 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. ------------------------------------------------------------------------- Weighted Number of average BCE Inc. exercise shares price ------------------------------------------------------------------------- Outstanding, January 1, 2003 4,266,723 $37 Exercised (113,579) $20 Expired/forfeited (2,375,178) $36 ------------------------------------------------------------------------- Outstanding, September 30, 2003 1,777,966 $28 ------------------------------------------------------------------------- Exercisable, September 30, 2003 1,777,966 $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 September 30 Three months Nine months ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Compensation cost (in $ millions) 8 15 22 21 Dividend yield 3.7% 3.6% 3.6% 3.3% Expected volatility 30% 30% 30% 30% Risk-free interest rate 3.6% 3.9% 4.0% 4.6% Expected life (years) 4.5 4.2 4.5 4.5 Number of stock options granted 410,000 1,119,845 5,928,051 7,946,979 Weighted average fair value option granted ($) 7 5 6 7 ------------------------------------------------------------------------- 13. DERIVATIVE INSTRUMENTS We periodically use derivative instruments to manage our exposure to interest rate risk, foreign currency risk and BCE Inc. share price movements. We do not use derivative instruments for speculative purposes. Because we do not actively trade in derivative instruments, we are not exposed to any significant liquidity risks relating to such instruments. The following derivative instruments were outstanding at September 30, 2003: - 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. During the third quarter of 2003, we elected to unwind the existing dividend rate swaps used to hedge dividend payments on $510 million of BCE Inc. Series AA preferred shares and $510 million of BCE Inc. Series AC preferred shares. These dividend rate swaps were to mature in 2007 and in effect converted the fixed-rate dividends on these preferred shares to floating-rate dividends. As a result of the unwind, we received total cash proceeds of $83 million, which is being deferred and amortized against the dividends on these preferred shares over the remaining original terms of the swaps. In April 2003, we entered into forward contracts to hedge U.S.$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 September 30, 2003, the carrying value of the outstanding derivative instruments was a net liability of $105 million. Their fair value amounted to a net liability of $136 million. Please see Note 1 to the consolidated financial statements for the year ended December 31, 2002 for a description of the significant accounting policies relating to derivative financial instruments. 14. COMMITMENTS AND CONTINGENCIES Contractual obligations The table below provides a summary of our contractual obligations at September 30, 2003 and for the full years ended thereafter. ------------------------------------------------------------------------- ($ millions) 2003 2004 2005 2006 2007 Thereafter Total ------------------------------------------------------------------------- Long-term debt (excluding capital leases) 633 1,188 1,301 1,212 1,926 8,418 14,678 Notes payable and bank advances 81 - - - - - 81 Capital leases 35 120 86 80 58 173 552 Operating leases 171 384 322 282 254 1,677 3,090 Purchase obligations 814 793 369 276 239 421 2,912 Other long-term liabilities - 29 93 94 101 138 455 ------------------------------------------------------------------------- Total 1,734 2,514 2,171 1,944 2,578 10,827 21,768 ------------------------------------------------------------------------- The total amounts for long-term debt and notes payable and bank advances include an amount of $673 million (excluding $279 million of letters of credit) drawn under our committed credit facilities. The total amount available under these committed credit facilities and under our commercial paper programs, including the amount currently drawn, is $2,778 million. The imputed interest to be paid in connection with the capital leases amounts to $157 million. Purchase obligations consist primarily of contractual obligations under service contracts as well as commitments for capital expenditures. The other long-term liabilities included in the table above relate to the following: - Bell Canada's future payments to Certen over the remaining life of the 7-year contract for the development of the billing system (refer to Note 3, Business acquisitions and dispositions for more details). This represents an aggregate outstanding amount of $313 million - Bell Globemedia's remaining obligations with respect to CRTC benefits owing on prior change of control transactions. This, along with other long-term liabilities, represents an aggregate amount of $142 million. At September 30, 2003, our other long-term liabilities also consisted of an accrued benefit liability, future income tax liabilities, BCE Inc. Series P retractable preferred shares, deferred revenue and gains on assets and various other long-term liabilities. The table above does not include these items due to the reasons outlined below: - the timing and extent of the cash outlay of the accrued benefit liability cannot be determined with certainty, since future contributions depend primarily on the funding status of the pension plans, which varies based on the results of actuarial valuations that are performed periodically as well as the investment performance of the pension fund assets - the timing and extent of the cash outlay of future income taxes cannot be determined with certainty, since future payments of income taxes depend on the levels of taxable earnings and on the availability of tax loss carryforwards which can be used to reduce income tax liabilities - the timing of the potential cash outlay cannot be determined for the BCE Inc. Series P retractable preferred shares, since the shareholders have the option to redeem them at any time on a quarterly basis and BCE Inc. has the option to cause BCE Inc. to redeem them at any time - deferred revenue and gains on assets are excluded from the table as they do not represent cash outlays. 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 was 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 as of September 30, 2003, to be in the order of $137 million per year going forward. 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 in Bell West. Under the terms of the put option, MTS can require Bell Canada to buy MTS' interest in Bell West by giving it notice: - 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 $613 million at September 30, 2003 - in January 2007 at fair market value less 12.5% - at fair market value less 12.5%, under certain circumstances. The closing must occur within 180 days after receipt of the notice. If MTS does not exercise its put option, Bell Canada can exercise its call option. Under the terms of the call option, Bell Canada can buy MTS' interest in Bell West by giving it notice: - 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 a change of control of MTS to a party other than Bell Canada or its affiliates. The closing must occur within 90 days after receipt of the notice. Agreement with 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 were 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, on July 24, 2003, BCE owned a total of 120,028,400 CGI Class A shares, which represented 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. continues to proportionately consolidate CGI's results. 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 we cannot predict the final outcome of claims and litigation that were pending at September 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. 15. OFF BALANCE SHEET ARRANGEMENTS 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, sales of assets, sales 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. However, certain agreements do contain a specified maximum potential exposure representing a cumulative amount of approximately $4 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. However, historically, we have not made any significant payments under such indemnifications. As at September 30, 2003, an aggregate amount of $19 million has been accrued in the consolidated balance sheet with respect to these indemnification undertakings, relating mainly to environmental liabilities. Securitization 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 September 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 September 30, 2003. Bell Canada and Aliant continue to service their respective 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. 16. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) ------------------------------------- 2003 2002 2003 2002 ------------------------------------------------------------------------- Interest paid on long-term debt 133 115 738 654 Income taxes paid (received) 244 194 (12) 992 ------------------------------------------------------------------------- 17. SUBSEQUENT EVENTS Sale of Stratos Global Corporation (Stratos) On October 6, 2003, Aliant announced that it had completed the sale of 26,141,024 Subscription Receipts, each of which entitles the holder to acquire one common share of Stratos upon receipt of the U.S. Federal Communications Commission's (FCC) approval. This approval is anticipated on or before December 31, 2003. Upon completion of this transaction, Aliant will have sold its entire 53.2% ownership in Stratos. The Subscription Receipts were sold to a syndicate of underwriters at a price of $13.00 each. The purchase price is payable on an instalment basis, with the first instalment having been paid on October 6, 2003, and the remainder being payable shortly following approval from FCC. Instalment Receipts evidencing ownership of the Subscription Receipts commenced trading on the Toronto Stock Exchange on October 6, 2003. The Subscription Receipts will be automatically exchanged for common shares of Stratos upon receipt of FCC approval. If approval is not granted on or before February 1, 2004, the first instalment will be returned to the purchasers of the Subscription Receipts, along with interest earned thereon, and Aliant will retain its investment in Stratos. For the three months and nine months ended September 30, 2003, Stratos contributed to BCE total operating revenues of $137 million and $432 million and net earnings of $3 million and $9 million, respectively. For further information: Nick Kaminaris, Communications, (514) 786-3908; Sophie Argiriou, Investor Relations, (514) 786-8145; Web Site: www.bce.ca

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