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/FIRST AND FINAL ADD - MO287 - BCE INC. EARNINGS/ CASH FROM OPERATING ACTIVITIESCash from operating activities increased 0.6% or $10 million to $1,828 million in Q3 2004, compared to Q3 2003, with the receipt of a $75 million settlement payment from MTS being almost entirely offset by unfavourable changes in working capital. Working capital in Q3 2004 has been impacted by the new billing platform which resulted in anticipated delays in invoicing at quarter-end. Working capital is expected to return to a more normalized level by year end. CAPITAL EXPENDITURES We continue to make investments to expand and update our networks and to meet customer demand for new services. Capital expenditures were $811 million in Q3 2004, or 17.0% of revenues. This was relatively stable compared with capital expenditures of $791 million, or 17.1% of revenues, for the same period last year. In the first nine months of 2004, capital expenditures were $2.3 billion, or 16.3% of revenues, up from $2.1 billion, or 15.0% of revenues, for the same period last year. The increase reflects a mix of higher spending in the growth businesses and reduced spending in the legacy areas. In addition, the increase in capital expenditures for the quarter reflected construction of Telesat's new satellites, the main one being Anik F2. Declines in capital spending at Aliant resulted from the work disruption. Bell Canada's consolidated capital intensity ratio increased to 17.5% in Q3 2004 (16.3% in the first nine months of 2004), compared to 17.0% in Q3 2003 (15.4% in the first nine months of 2003). Bell Canada's consolidated capital expenditures accounted for over 85% of our consolidated capital expenditures in the first nine months of 2004 and over 90% of our consolidated capital expenditures in the first nine months of 2003. OTHER INVESTING ACTIVITIES Cash from other investing activities of $133 million in the first nine months of 2004 included $179 million of insurance proceeds that Telesat received for a malfunction on the Anik F1 satellite. Cash from other investing activities of $155 million in Q3 2003 included: - $83 million of proceeds from the settlement of dividend rate swaps. These swaps hedged dividend payments on some of BCE Inc.'s preferred shares. - $62 million of insurance proceeds that Telesat and ExpressVu received for a malfunction on the Nimiq 2 satellite. COMMON DIVIDENDS We paid a dividend of $0.30 per common share in Q3 2004. This was the same as the dividend we paid in Q3 2003. We realized a cash benefit of $16 million in Q3 2003 ($55 million in the first nine months of 2003) because we issued treasury shares to fund BCE Inc.'s dividend reinvestment plan instead of buying shares on the open market. Effective Q1 2004, we started buying all of the shares needed for the dividend reinvestment plan on the open market to avoid dilution. This removed any further cash benefits related to issuing treasury shares. As a result, total dividends paid on common shares increased 6.9% or $18 million to $277 million in Q3 2004, compared to Q3 2003 and 7.9% or $61 million to $831 million in the first nine months of 2004, compared to 2003. BUSINESS ACQUISITIONS We invested $646 million in business acquisitions in Q3 2004. This consisted entirely of Bell Canada's acquisition of MTS's 40% interest in Bell West. Bell Canada now owns 100% of Bell West. Investments of $306 million in the first half of 2004 consisted of: - business acquisitions at Bell Canada of $138 million, which included purchases in the Enterprise and SMB business units - our 28.9% proportionate share of the cash paid for CGI's acquisition of AMS of $168 million. We invested $73 million in business acquisitions during the first nine months of 2003. This consisted mainly of our proportionate share of the cash paid for CGI's acquisition of Cognicase Inc. BUSINESS DISPOSITIONS We received $55 million for business dispositions during the first nine months of 2003 for Bell Canada's sale of its 89.9% ownership interest in Certen Inc. (Certen). Bell Canada received $89 million in cash, which was reduced by $34 million of Certen's cash and cash equivalents at the time of sale. CHANGE IN INVESTMENTS ACCOUNTED FOR UNDER THE COST AND EQUITY METHODS In Q3 2004, we sold our remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million and our 15.96% interest in MTS for net cash proceeds of $584 million. EQUITY INSTRUMENTS During the first nine months of 2003, BCE Inc. issued 20 million Series AC preferred shares for $510 million and redeemed 14 million Series U preferred shares for $357 million, which included a $7 million premium on redemption. DEBT INSTRUMENTS We issued $85 million of debt (net of repayments) in Q3 2004. We made $217 million of debt repayments (net of issues) in the first nine months of 2004. The repayments were mainly at Bell Canada, BCE Inc. and Bell Globemedia. At Bell Canada, the repayments included the Series M-15 debentures for $500 million and the Series DU debentures for $126 million. In addition, in 2004, BCE Inc. redeemed all of its outstanding Series P retractable preferred shares for $351 million. The issuances were mainly at Bell Canada and Bell Globemedia. At Bell Canada, the issuances included the Series M-17 debentures for $450 million. At Bell Globemedia, the issuances included $300 million of senior notes. At September 30, 2004, BCE had approximately $1.4 billion of cash on hand. A portion of this cash will be used to repay $425 million of debt maturing at Bell Canada in Q4 2004, all of which was paid in October 2004. The remaining cash on hand will be used primarily for capital expenditures, dividend payments and the payment of contractual obligations in 2005. CASH RELATING TO DISCONTINUED OPERATIONS In the first nine months of 2004, cash provided by discontinued operations of $196 million consisted mainly of the net cash proceeds of $315 million from the sale of our investment in Emergis which were partly offset by the deconsolidation of Emergis' cash on hand of $137 million at December 31, 2003. CREDIT RATINGS In June 2004 Standard & Poor's (S&P) upgraded BCE Inc.'s preferred shares rating. The table below lists BCE Inc.'s and Bell Canada's key credit ratings at November 2, 2004. << ------------------------------------------------------------------------- BCE Inc. Bell Canada ------------------------------------------------------------------------- S&P DBRS Moody's S&P DBRS Moody's ------------------------------------------------------------------------- Commercial A-1(mid)/ R-1(low)/ P-2/ A-1(mid)/ R-1(mid)/ P-2/ paper stable stable stable stable stable stable Extendable commercial notes A-1(mid)/ R-1(low)/ - A-1(mid)/ R-1(mid)/ - stable stable stable stable Long-term debt A- / A / Baa-1/ A / A(high)/ A-3 / stable stable stable stable stable stable Preferred shares P-2(high)/ Pfd-2/ - P-2(high)/ Pfd-2 - stable stable stable (high)/ stable ------------------------------------------------------------------------- >> LIQUIDITY Our ability to generate cash in the short term and in the long term, when needed, and to provide for planned growth and to fund development activities, depends on our sources of liquidity and on our cash requirements. Our sources of liquidity and cash requirements remain substantially unchanged from those described in the BCE 2003 MD&A, except for those listed below. Commitment under deferral account The deferral account is a new mechanism resulting from the CRTC's price cap decision of May 2002, which will be used to fund initiatives such as service improvements, reduced rates and/or rebates. We estimate our commitment relating to the deferral account to be approximately $195 million at September 30, 2004. Employee departure program Under both phases of the program, employees are entitled to receive a special cash allowance. This will result in total cash payments of approximately $314 million which we expect to pay in the coming months. The program will reduce Bell Canada's pension plan surpluses, which may, subject to plan returns and the next periodic actuarial valuation, affect future funding requirements. Provision for contract loss In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. This contract is accounted for using the percentage of completion method. During the second quarter of 2004, as part of our regular update of the estimated costs to complete construction of the network, potential cost overruns were identified. Construction is to be complete in late 2004. The costs of this last phase of construction are higher than previously estimated, due to changes necessitated in construction methods to connect individual government buildings to the network and higher average costs of construction. We recorded a provision of $110 million for this contract in the second quarter of 2004. Our estimated costs to complete are unchanged at September 30, 2004. Agreement to purchase Canadian operations of 360networks Corporation In May 2004, Bell Canada announced an agreement to purchase the Canadian operations of 360networks Corporation for $275 million in cash. The purchase includes the shares of 360networks' subsidiary GT Group Telecom Services Corporation, and certain related U.S. interconnect assets. Bell Canada plans to retain all of 360networks' business, facilities and customer base in western Canada, and has an agreement to sell the retail customer operations and certain assets in central and eastern Canada to Call-Net Enterprises Inc. while continuing to provide network and other services to the central and eastern customer base for a share of future revenues. All regulatory approvals have been obtained and we expect to close the transaction in November 2004, subject to usual closing conditions. RECENT DEVELOPMENTS IN LEGAL PROCEEDINGS This section provides a description of new legal proceedings involving BCE and of recent developments in certain of the legal proceedings involving BCE described in the BCE 2003 AIF as subsequently updated in BCE Inc.'s 2004 First Quarter MD&A dated May 4, 2004 (BCE 2004 First Quarter MD&A) and BCE Inc.'s 2004 Second Quarter MD&A dated August 3, 2004 (BCE 2004 Second Quarter MD&A). LAWSUITS RELATED TO BELL CANADA Potential Class Action Concerning Wireless Access Charges On August 9, 2004, a statement of claim was filed under the Class Actions Act (Saskatchewan) in the Court of Queen's Bench, Judicial Centre of Regina, Saskatchewan by certain alleged customers or former customers of Bell Canada and other Canadian telecommunications providers ("Canadian Telcos") for wireless and cellular services. The lawsuit has not been certified as a class action and it is too early to determine whether it will qualify for certification. The statement of claim alleges breach of contract and duty to inform, breach of warranties and covenants, deceit, misrepresentation, negligence, wrongful acts and omissions, collusion, and breach of statutory duty or obligation under the Competition Act (Canada), in connection with certain "system access fees" and "system licensing charges" invoiced by Bell Canada and the other Canadian Telcos to their customers. The plaintiffs seek unspecified damages and punitive damages from Bell Canada and the other Canadian Telcos. While no one can predict the outcome of any legal proceeding, based on information currently available, we believe that we have strong defences and we intend to vigorously defend our position. Potential Class Action Concerning Bell Mobility Billing System On October 28, 2004, a motion seeking certification to proceed as a class action against Bell Mobility, a wholly-owned subsidiary of Bell Canada, was filed with the Quebec Superior Court. The lawsuit has not been certified to proceed as a class action and it is too early to determine whether it will qualify for certification. The lawsuit was filed on behalf of all physical persons residing in the Province of Quebec, who entered into a contract with Bell Mobility for the provision of wireless telephone services, and alleges that such persons have unjustly incurred expenses as a result of billing errors made by Bell Mobility or as a result of Bell Mobility wrongfully disconnecting service to such customers. In addition to the reimbursement of such expenses, the class action would, if authorized, also seek payment of damages by Bell Mobility in the amount of $100 per class member of inconvenience as well as punitive damages in the amount of $200 per class member. While no one can predict the outcome of any legal proceeding, based on information currently available, we believe that we have strong defences and we intend to vigorously defend our position. Bell Distribution Inc. lawsuit On September 1, 2004, Bell Distribution Inc.'s franchisees and Bell Canada entered into an agreement for the settlement of this action. LAWSUITS RELATED TO TELEGLOBE INC. (TELEGLOBE) Teleglobe lending syndicate lawsuit As indicated in the BCE 2003 AIF, a lawsuit was filed in the Ontario Superior Court of Justice on July 12, 2002 against BCE Inc. by certain of the members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate. On November 2, 2004, two of the plaintiffs, Canadian Imperial Bank of Commerce and Canadian Imperial Bank of Commerce, N.Y. Agency, which had advanced approximately U.S.$104 million to Teleglobe and Teleglobe Holdings (U.S.) Corporation, filed a notice of discontinuance with the Court and are therefore no longer plaintiffs in this action. The damages sought by the remaining plaintiffs now amount to approximately U.S.$1.09 billion (down from approximately U.S.$1.19 billion), plus interest and costs, representing approximately 87% (down from approximately 95%) of the U.S.$1.25 billion that the members of that lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation. Teleglobe unsecured creditors lawsuit As indicated in the BCE 2004 Second Quarter MD&A, a lawsuit was filed in the United States Bankruptcy Court for the District of Delaware against BCE Inc. and ten former directors and officers of Teleglobe and certain of its subsidiaries on May 26, 2004. The plaintiffs are comprised of Teleglobe Communications Corporation, certain of its affiliated debtors and debtors in possession, and the Official Committee of Unsecured Creditors of these debtors. The lawsuit alleges breach of an alleged funding commitment of BCE Inc. towards the debtors, promissory estoppel, misrepresentation by BCE Inc., and breach and aiding and abetting breaches of fiduciary duty by the defendants. By order dated September 8, 2004, the automatic reference of this action to the Bankruptcy Court was withdrawn and the action is now pending in the District Court for the District of Delaware. On September 15, 2004, BCE Inc. and the other defendants filed a motion to dismiss the action for lack of standing and for failure to state a claim. BCE Inc. and the other defendants also contend that plaintiffs should not be allowed to transform a contract claim into tort claims. On October 14, 2004, the Court denied defendants' motion to stay discovery pending disposition of defendants' motion to dismiss. LAWSUITS RELATED TO BELL CANADA INTERNATIONAL INC. (BCI) BCI common shareholders lawsuits As indicated in the BCE 2003 AIF, an appeal to the Ontario Court of Appeal was filed in March 2004 by the plaintiffs in two lawsuits seeking damages from BCE Inc. and BCI in connection with the issue of BCI common shares under BCI's recapitalization plan and the implementation of BCI's plan of arrangement. These lawsuits had been dismissed on January 5, 2004 by the Ontario Superior Court of Justice as failing to disclose a reasonable cause of action against BCE Inc. or BCI, and abused the process of the court, and ordering that neither of the two plaintiffs may amend his statement of claim to bring these lawsuits before the court again. As indicated in the BCE 2004 Second Quarter MD&A, the appeal was heard on July 12, 2004, and on July 23, 2004 the Ontario Court of Appeal issued its decision and reasons, upholding the lower court's decision and dismissing the lawsuits as failing to disclose a reasonable cause of action. On September 29, 2004, the plaintiffs filed an application with the Supreme Court of Canada seeking leave to appeal the decision of the Court of Appeal for Ontario, and indicated, in their application, that if the appeal court decision is reversed, they intend to proceed with only one of the actions. The defendants have filed joint responding materials. LAWSUITS RELATED TO BELL GLOBEMEDIA As indicated in the BCE 2003 AIF, on February 5, 2001, Bell Globemedia Publishing Inc., a subsidiary of Bell Globemedia, was added as a defendant to a $100 million class action lawsuit relating to copyright infringement. The claim is that the defendants (which include The Globe and Mail newspaper and magazines it publishes) do not have the right to archive and publish certain freelanced and employee material from the newspaper or magazines in any format other than print. On October 3, 2001, the Ontario Superior Court of Justice rejected the plaintiff's motion for partial summary judgment (including the rejection of a requested injunction at this stage) on certain proposed common issues. The plaintiff appealed this decision, and the defendants cross- appealed some issues. The Ontario Court of Appeal provided its majority decision on October 6, 2004, and affirmed the initial refusal of summary judgement. Both the plaintiff and the defendants have 60 days from October 6, 2004 to apply for leave to appeal to the Supreme Court of Canada. Risks That Could Affect Our Business A risk is the possibility that an event might happen in the future that could have a negative effect on the financial condition, results of operations, cash flows or business of one or more BCE group companies. Part of managing our business is to understand what these potential risks could be and to minimize them where we can. Because no one can predict whether an event will happen or its consequences, the actual effect of any event on our business could be materially different from what we currently anticipate. In addition, the risks described below and elsewhere in this MD&A do not include all possible risks, and there may be other risks that we are currently not aware of. In the BCE 2004 First Quarter MD&A, we provided a detailed review of the risks that could affect our financial condition, results of operations, cash flows or business and that could cause actual results to differ materially from those expressed in our forward-looking statements. This detailed description of risks was updated in the BCE 2004 Second Quarter MD&A and is further updated in this MD&A. These risks include risks associated with: - our ability to complete within our targeted timeframe, and the impact on our financial results of, the migration of our multiple service- specific networks to a single IP-based network; - our ability to implement our strategies and plans in order to produce the expected benefits and growth prospects, including meeting targets for revenue, earnings per share, free cash flow and capital intensity; - general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services; - the intensity of competitive activity from both traditional and new competitors, Canadian or foreign, including cross-platform competition, which is increasing following the introduction of new technologies such as Voice over Internet Protocol (VoIP) which have reduced barriers to entry that existed in the industry, and its resulting impact on the ability to retain existing, and attract new, customers, and on pricing strategies and financial results; - the ability to improve productivity and contain capital intensity while maintaining quality of services; - the ability to anticipate, and respond to, changes in technology, industry standards and client needs and migrate to and deploy new technologies, including VoIP, and offer new products and services rapidly and achieve market acceptance thereof; - the availability and cost of capital required to implement our financing plans and fund capital and other expenditures; - our ability to retain major customers; - our ability to find suitable companies to acquire or to partner with; - the impact of pending or future litigation and of adverse changes in laws or regulations, including tax laws, or in how they are interpreted, or of adverse regulatory initiatives or proceedings, including decisions by the CRTC affecting our ability to compete effectively, including, more specifically, decisions concerning the regulation of VoIP services; - the risk of litigation should BCE stop funding a subsidiary or change the nature of its investment, or dispose of all or part of its interest, in a subsidiary; - the risk of increased pension plan contributions resulting from Bell Canada's recent early retirement program and from the risk of low returns on pension plan assets; - our ability to manage effectively labour relations, negotiate satisfactory labour agreements, including new agreements replacing expired labour agreements, while avoiding work stoppages, and maintain service to customers and minimize disruptions during strikes and other work stoppages; - events affecting the functionality of our networks or of the networks of other telecommunications carriers on which we rely to provide our services; - stock market volatility; - our ability to increase the number of customers who buy multiple products; - our ability to implement the significant changes in processes, in how we approach our markets, and in products and services, required by our strategic direction; - Canadian government action in respect of the foreign ownership restrictions that apply to telecommunications carriers and to broadcasting distribution undertakings; - the risk that the amount of the expected annual savings relating to Bell Canada's recent employee voluntary departure program will be lower than anticipated due to various factors including the incurrence of outsourcing, replacement and other costs; and - launch and in-orbit risks, including the ability to obtain appropriate insurance coverage at favourable rates, concerning Telesat's satellites, certain of which are used by Bell ExpressVu to provide services. For a more complete description of the risks that could affect our business, please see the BCE 2004 First Quarter MD&A, as updated in the BCE 2004 Second Quarter MD&A and this MD&A, filed by BCE Inc. with the Canadian securities commissions ( available on BCE Inc.'s site at http://www.bce.ca/ and on SEDAR at http://www.sedar.com/ ) and with the U.S. Securities and Exchange Commission (SEC) under Form 6-K ( available on EDGAR at http://www.sec.gov/ ). Please refer to the BCE 2003 AIF filed by BCE Inc. with the Canadian securities commissions and with the SEC under Form 40-F for a detailed description of: - the principal legal proceedings involving BCE; - certain regulatory initiatives and proceedings concerning the Bell Canada companies. Please see Recent Developments in Legal Proceedings in this MD&A, in the BCE 2004 First Quarter MD&A and in the BCE 2004 Second Quarter MD&A for a description of new legal proceedings involving us and of recent developments, since the BCE 2003 AIF, in the principal legal proceedings involving us. In addition, please see Updates to the Description of Risks below, Updates to the Description of Risks in the BCE 2004 Second Quarter MD&A and Risks that could affect certain BCE group companies - Bell Canada companies - Changes to wireline regulations in the BCE 2004 First Quarter MD&A, for a description of recent developments, since the BCE 2003 AIF, in the principal regulatory initiatives and proceedings concerning the Bell Canada companies. UPDATES TO THE DESCRIPTION OF RISKS The following are updates to the description of risks contained in the section entitled Risks That Could Affect Our Business set out on pages 18 to 31 of the BCE 2004 First Quarter MD&A as updated in the BCE 2004 Second Quarter MD&A. For ease of reference, the updates to the description of risks below have been presented under the same headings and in the same order contained in the section entitled Risks That Could Affect Our Business set out in the BCE 2004 First Quarter MD&A. RISKS THAT COULD AFFECT ALL BCE GROUP COMPANIES RENEGOTIATING LABOUR AGREEMENTS A new collective agreement between Bell Canada and the CEP, representing approximately 7,100 craft and services employees, was signed on August 19, 2004 and will expire in November 2007. As well, a collective agreement between Aliant Telecom Inc. (a wholly-owned subsidiary of Aliant) and the CATU, representing approximately 4,300 employees, was signed on September 16, 2004 and will expire on December 31, 2007. Accordingly, the actual or potential adverse effects of the events preceding the execution of these collective agreements have now ceased to exist. RISKS THAT COULD AFFECT CERTAIN BCE GROUP COMPANIES BELL CANADA COMPANIES Contract with the Government of Alberta In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. Construction is to be completed in late 2004. However, the final costs to complete the network will not be known until completion of the network and final acceptance by the Government of Alberta which is expected to occur during 2005. Changes to Wireline Regulations Decision on Incumbent Affiliates On September 23, 2003, the CRTC issued a decision that requires Bell Canada and its carrier affiliates to include a detailed description of the bundled services they provide to customers when they file tariffs with the CRTC. Bell Canada's appeal of this decision to the Federal Court of Canada was dismissed on September 14, 2004. As a result, Bell Canada is now re-filing tariffs for those contracts with bundles that have not yet expired in order to provide more detailed descriptions of the bundled services. Application seeking consistent regulation On November 6, 2003, Bell Canada filed an application requesting that the CRTC start a public hearing to review how similar services offered by cable companies and telephone companies are regulated. On April 7, 2004, the CRTC invited comments on its preliminary views regarding the regulation of VoIP services and invited interested parties to participate in a public consultation relating to the regulatory framework for VoIP. Bell Canada provided its comments to the CRTC on June 18, 2004. Between September 21 and September 23, 2004, the CRTC held the public consultation relating to the regulatory framework for VoIP. Bell Canada filed reply comments on October 13, 2004. A decision is expected in the first quarter of 2005. There is a risk that the CRTC might decide to regulate VoIP services provided by the Bell Canada companies and other Incumbent Local Exchange Carriers but not by certain other competitors. Accordingly, these proceedings could determine the rules for competition with other service providers, could affect the flexibility of the Bell Canada companies when competing in the future and could result in delays for launching new services as well as restrictions on our marketing flexibility (such as pricing rules, bundling restrictions, etc.) for such services. Licences for Broadcasting As indicated in the BCE 2004 Second Quarter MD&A, Bell Canada has applied to the CRTC for licences to operate broadcasting distribution undertakings, using its wireline facilities, to serve large cities in Southern Ontario and Quebec. The CRTC held a public hearing, as required under the Broadcasting Act, in August 2004. Cable operators were seeking delays to the licensing and other conditions that would inhibit Bell Canada's ability to compete with them. A decision is expected in November 2004. TELESAT Anik F2 As indicated in the BCE 2004 Second Quarter MD&A, on July 17, 2004, Telesat launched the Anik F2 satellite. It successfully entered commercial service, following commissioning and testing, in October 2004. Accordingly, the risks described in the BCE 2004 Second Quarter MD&A relating to Anik F2's construction, launch and commissioning no longer apply. Our Accounting Policies We have prepared our consolidated financial statements according to Canadian GAAP. See Note 1 to the consolidated financial statements for more information about the accounting policies we used to prepare our financial statements. The key estimates and assumptions that management has made and their impact on the amounts reported in the financial statements and notes remain substantially unchanged from those described in the BCE 2003 MD&A. We have not changed our accounting policies other than those described in the BCE 2003 MD&A and in Note 1 to the consolidated financial statements. << Supplementary Financial Information The table below shows selected consolidated financial data for the eight most recently completed quarters. ------------------------------------------------------------------------- 2004 2003 2002 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 ------------------------------------------------------------------------- Operating revenues 4,781 4,782 4,641 4,818 4,627 4,673 4,619 4,974 Operating income 25 1,105 1,011 1,013 1,049 1,078 981 649 Earnings from continuing operations 102 544 485 486 453 466 466 790 Discontinued operations (2) 27 3 (86) 11 12 7 922 Net earnings 100 571 488 400 464 478 473 1,712 Net earnings applicable to common shares 82 554 470 386 446 461 451 1,696 Included in net earnings: Net gains on investments Continuing operations 325 - - 84 - - - 1,230 Discontinued operations (2) 31 7 (94) 8 - - 911 Restructuring and other items (725) 16 (1) (9) 6 - - (251) Impairment charge - - - - - - - (527) Net earnings per common share: Continuing operations - basic 0.09 0.57 0.51 0.50 0.48 0.49 0.49 0.87 Continuing operations - diluted 0.08 0.57 0.51 0.50 0.47 0.49 0.49 0.86 Net earnings - basic 0.09 0.60 0.51 0.41 0.49 0.50 0.50 1.88 Net earnings - diluted 0.08 0.60 0.51 0.41 0.48 0.50 0.50 1.85 Average number of common shares outstanding (millions) 924.6 924.3 924.1 923.4 921.5 919.3 917.1 909.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Financial Statements Consolidated Statements of Operations ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions, except share amounts) (unaudited) 2004 2003 2004 2003 ------------------------------------------------------------------------- Operating revenues 4,781 4,627 14,204 13,919 ------------------------------------------------------------------------- Operating expenses (2,845) (2,732) (8,471) (8,356) Amortization expense (769) (801) (2,305) (2,325) Net benefit plans cost (Note 4) (61) (44) (189) (129) Restructuring and other items (Note 5) (1,081) (1) (1,098) (1) ------------------------------------------------------------------------- Total operating expenses (4,756) (3,578) (12,063) (10,811) ------------------------------------------------------------------------- Operating income 25 1,049 2,141 3,108 Other income (Note 6) 333 1 393 48 Interest expense (253) (270) (758) (839) ------------------------------------------------------------------------- Pre-tax earnings from continuing operations 105 780 1,776 2,317 Income taxes 44 (282) (511) (788) Non-controlling interest (47) (45) (134) (144) ------------------------------------------------------------------------- Earnings from continuing operations 102 453 1,131 1,385 Discontinued operations (Note 7) (2) 11 28 30 ------------------------------------------------------------------------- Net earnings 100 464 1,159 1,415 Dividends on preferred shares (18) (18) (53) (50) Premium on redemption of preferred shares - - - (7) ------------------------------------------------------------------------- Net earnings applicable to common shares 82 446 1,106 1,358 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings per common share - basic Continuing operations 0.09 0.48 1.17 1.46 Discontinued operations - 0.01 0.03 0.03 Net earnings 0.09 0.49 1.20 1.49 Net earnings per common share - diluted Continuing operations 0.08 0.47 1.16 1.45 Discontinued operations - 0.01 0.03 0.03 Net earnings 0.08 0.48 1.19 1.48 Dividends per common share 0.30 0.30 0.90 0.90 Average number of common shares outstanding - basic (millions) 924.6 921.5 924.4 919.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Deficit ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) (unaudited) 2004 2003 2004 2003 ------------------------------------------------------------------------- Balance at beginning of period, as previously reported (5,368) (6,079) (5,830) (6,435) Accounting policy change for asset retirement obligations (Note 1) - (7) (7) (7) ------------------------------------------------------------------------- Balance at beginning of period, as restated (5,368) (6,086) (5,837) (6,442) Consolidation of variable interest entity - (25) - (25) Net earnings 100 464 1,159 1,415 Dividends declared on common shares (277) (277) (832) (828) Dividends declared on preferred shares (18) (18) (53) (50) Premium on redemption of preferred shares - - - (7) Other - (2) - (7) ------------------------------------------------------------------------- Balance at end of period (5,563) (5,944) (5,563) (5,944) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Balance Sheets ------------------------------------------------------------------------- September December 30 31 (in $ millions) (unaudited) 2004 2003 ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 1,386 585 Accounts receivable 2,491 2,061 Other current assets 892 739 Current assets of discontinued operations - 280 ------------------------------------------------------------------------- Total current assets 4,769 3,665 Capital assets 21,111 21,114 Other long-term assets 2,494 3,459 Indefinite-life intangible assets 2,910 2,910 Goodwill 8,368 7,761 Non-current assets of discontinued operations 50 511 ------------------------------------------------------------------------- Total assets 39,702 39,420 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities 4,537 3,534 Debt due within one year 1,516 1,519 Current liabilities of discontinued operations - 285 ------------------------------------------------------------------------- Total current liabilities 6,053 5,338 Long-term debt 12,076 12,381 Other long-term liabilities 4,790 4,705 Non-current liabilities of discontinued operations - 20 ------------------------------------------------------------------------- Total liabilities 22,919 22,444 ------------------------------------------------------------------------- Non-controlling interest 2,904 3,403 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred shares 1,670 1,670 ------------------------------------------------------------------------- Common shareholders' equity Common shares 16,765 16,749 Contributed surplus 1,052 1,037 Deficit (5,563) (5,837) Currency translation adjustment (45) (46) ------------------------------------------------------------------------- Total common shareholders' equity 12,209 11,903 ------------------------------------------------------------------------- Total shareholders' equity 13,879 13,573 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total liabilities and shareholders' equity 39,702 39,420 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Cash Flows ------------------------------------------------------------------------- For the period ended September 30 Three months Nine months (in $ millions) (unaudited) 2004 2003 2004 2003 ------------------------------------------------------------------------- Cash flows from operating activities Earnings from continuing operations 102 453 1,131 1,385 Adjustments to reconcile earnings from continuing operations to cash flows from operating activities: Amortization expense 769 801 2,305 2,325 Net benefit plans cost 61 44 189 129 Restructuring and other items (non-cash portion) 1,149 (4) 1,164 (4) Net gains on investments (325) - (331) - Future income taxes (183) 134 (96) 211 Non-controlling interest 47 45 134 144 Contributions to employee pension plans (32) (46) (88) (73) Other employee future benefit plan payments (13) (22) (59) (64) Other (27) 26 (3) (10) Changes in non-cash working capital 280 387 (134) 327 ------------------------------------------------------------------------- Cash from operating activities 1,828 1,818 4,212 4,370 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures (811) (791) (2,318) (2,088) Business acquisitions (646) (3) (952) (73) Business dispositions 4 55 20 55 Decrease in investments accounted for under the cost and equity methods 695 1 693 7 Other (2) 155 133 69 ------------------------------------------------------------------------- Cash used in investing activities (760) (583) (2,424) (2,030) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from financing activities Increase (decrease) in notes payable and bank advances 173 (73) 123 (242) Issue of long-term debt 10 17 1,410 1,881 Repayment of long-term debt (98) (123) (1,750) (1,940) Issue of common shares 8 5 16 14 Issue of preferred shares - - - 510 Redemption of preferred shares - - - (357) Issue of equity securities by subsidiaries to non-controlling interest - 24 7 113 Redemption of equity securities by subsidiaries from non-controlling interest (4) (39) (64) (74) Cash dividends paid on common shares (277) (259) (831) (770) Cash dividends paid on preferred shares (21) (14) (64) (39) Cash dividends paid by subsidiaries to non-controlling interest (44) (38) (133) (137) Other (18) 56 (34) (5) ------------------------------------------------------------------------- Cash used in financing activities (271) (444) (1,320) (1,046) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash provided by continuing operations 797 791 468 1,294 Cash provided by discontinued operations 12 30 196 17 ------------------------------------------------------------------------- Net increase in cash and cash equivalents 809 821 664 1,311 Cash and cash equivalents at beginning of period 577 796 722 306 ------------------------------------------------------------------------- Cash and cash equivalents at end of period 1,386 1,617 1,386 1,617 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consists of: Cash and cash equivalents of continuing operations 1,386 1,476 1,386 1,476 Cash and cash equivalents of discontinued operations - 141 - 141 ------------------------------------------------------------------------- Total 1,386 1,617 1,386 1,617 ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------------------------------- Notes to Consolidated Financial Statements The interim consolidated financial statements should be read in conjunction with BCE Inc.'s annual consolidated financial statements for the year ended December 31, 2003, on pages 64 to 101 of BCE Inc.'s 2003 annual report. These notes are unaudited. All amounts are in millions of Canadian dollars, except where noted. We, us, our and BCE mean BCE Inc., its subsidiaries and joint ventures. NOTE 1 SIGNIFICANT ACCOUNTING POLICIES We have prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP) using the same basis of presentation and accounting policies as outlined in Note 1 to the annual consolidated financial statements for the year ended December 31, 2003, except as noted below. Comparative figures We have reclassified some of the figures for the comparative periods in the consolidated financial statements to make them consistent with the current period's presentation. We have restated financial information for previous periods to reflect: - the adoption of section 3110 of the CICA Handbook, Asset retirement obligations, effective January 2004, as described below - the change in classification to discontinued operations for BCE Emergis Inc. (Emergis) and other minor business dispositions. Change in accounting policy Effective January 1, 2004, we retroactively adopted section 3110 of the CICA Handbook, Asset retirement obligations. The impact on our consolidated statements of operations for the three months and nine months ended September 30, 2004 and the comparative periods was negligible. At December 31, 2003 and 2002, this resulted in: - an increase of $6 million in capital assets - an increase of $17 million in other long-term liabilities - a decrease of $4 million in future income tax liabilities - an increase of $7 million in the deficit. Stock-based compensation plans Starting in 2004, we made a number of prospective changes to the key features in our stock-based compensation plans, which included transferring approximately 50% of the value of the long-term incentive plan, under which stock options are granted, into a new mid-term plan which uses restricted share units (RSUs). We record compensation expense for each RSU granted equal to the market value of a BCE Inc. common share at the date of grant prorated over the vesting period. The compensation expense is adjusted for future changes in the market value of BCE Inc. common shares until the vesting date. The cumulative effect of the change in value is recognized in the period of the change. Subject to compliance with individual minimum share ownership requirements set out in BCE's policies, vested RSUs will be paid in BCE Inc. common shares purchased on the open market or in cash at the option of the holder. NOTE 2 SEGMENTED INFORMATION Starting in the first quarter of 2004, we report our results of operations under five segments: Consumer, Business, Aliant, Other Bell Canada and Other BCE. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. The Consumer segment provides local telephone, long distance, wireless, Internet access, video and other services to Bell Canada's residential customers mainly in Ontario and Quebec. Wireless services are also offered in Western Canada and video services are provided nationwide. The Business segment provides local telephone, long distance, wireless, data, including Internet access, and other services to Bell Canada's small and medium-sized businesses (SMB) and large enterprise customers in Ontario and Quebec, as well as business customers in Western Canada through Bell West Inc. (Bell West). The Aliant segment provides local telephone, long distance, wireless, data, including Internet access, and other services to residential and business customers in Atlantic Canada and represents the operations of our subsidiary, Aliant Inc. (Aliant). The Other Bell Canada segment includes Bell Canada's wholesale business, and the financial results of Telebec Limited Partnership (Telebec), NorthernTel Limited Partnership (NorthernTel) and Northwestel Inc. (Northwestel). Our wholesale business provides local telephone, long distance, data and other services to competitors who resell these services. Telebec, NorthernTel and Northwestel provide telecommunications services to less populated areas in Quebec, Ontario and Canada's northern territories. The Other BCE segment includes the financial results of our media, satellite and information technology (IT) activities as well as the costs incurred by our corporate office. This segment includes Bell Globemedia Inc. (Bell Globemedia), Telesat Canada (Telesat) and CGI Group Inc. (CGI). In classifying our operations for planning and measuring performance, all restructuring and other items at Bell Canada and its subsidiaries (excluding Aliant) are included in the Other Bell Canada segment and not allocated to the Consumer and Business segments. ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Operating revenues Consumer External 1,893 1,821 5,552 5,296 Inter-segment 15 17 39 39 ------------------------------------------------------------------------- 1,908 1,838 5,591 5,335 ------------------------------------------------------------------------- Business External 1,400 1,373 4,139 4,099 Inter-segment 40 67 177 212 ------------------------------------------------------------------------- 1,440 1,440 4,316 4,311 ------------------------------------------------------------------------- Aliant External 467 478 1,421 1,422 Inter-segment 30 36 106 110 ------------------------------------------------------------------------- 497 514 1,527 1,532 ------------------------------------------------------------------------- Other Bell Canada External 435 442 1,294 1,439 Inter-segment 51 36 134 108 ------------------------------------------------------------------------- 486 478 1,428 1,547 ------------------------------------------------------------------------- Inter-segment eliminations - Bell Canada (125) (115) (378) (357) ------------------------------------------------------------------------- Bell Canada 4,206 4,155 12,484 12,368 ------------------------------------------------------------------------- Other BCE External 586 513 1,798 1,663 Inter-segment 96 83 263 237 ------------------------------------------------------------------------- 682 596 2,061 1,900 ------------------------------------------------------------------------- Inter-segment eliminations - Other (107) (124) (341) (349) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total operating revenues 4,781 4,627 14,204 13,919 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income Consumer 569 552 1,655 1,548 Business 245 193 713 582 Aliant 71 104 245 307 Other Bell Canada (898) 163 (649) 469 ------------------------------------------------------------------------- Bell Canada (13) 1,012 1,964 2,906 Other BCE 38 37 177 202 ------------------------------------------------------------------------- Total operating income 25 1,049 2,141 3,108 Other income 333 1 393 48 Interest expense (253) (270) (758) (839) Income taxes 44 (282) (511) (788) Non-controlling interest (47) (45) (134) (144) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings from continuing operations 102 453 1,131 1,385 ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------------------------------- NOTE 3 BUSINESS ACQUISITIONS The consolidated statements of operations include the results of acquired businesses from the date they were acquired. During the first nine months of 2004, we made a number of business acquisitions, which included: - Bell West - In August 2004, Bell Canada acquired Manitoba Telecom Services Inc.'s (MTS) 40% interest in Bell West. Bell Canada now owns 100% of Bell West. - Infostream Technologies Inc. (Infostream) - In May 2004, Bell Canada acquired 100% of the outstanding common shares of Infostream, a systems and storage technology firm providing networking solutions for Voice over Internet Protocol (VoIP), storage area networks and network management. - Charon Systems Inc. (Charon) - In May 2004, Bell Canada acquired 100% of the assets of Charon, a full-service information technology (IT) solutions provider specializing in server-based computing, systems integration, IT security, software development and IT consulting. - Our 28.9% proportionate share of CGI's acquisition of American Management Systems Incorporated (AMS) - In May 2004, CGI acquired 100% of the outstanding common shares of AMS. AMS is a business and technology consulting firm to government, healthcare, financial services and telecommunications industries. - Elix Inc. (Elix) - In March 2004, Bell Canada acquired 75.8% of the outstanding shares of Elix which offers technology consulting, integration and implementation of call routing and management systems, IT application integration and design and implementation of electronic voice-driven response systems. - Accutel Conferencing Systems Inc. (Canada) and Accutel Conferencing Systems Corp (U.S.) (collectively Accutel) - In February 2004, Bell Canada acquired 100% of the outstanding common shares of Accutel, which provides teleconferencing services. The table below provides a summary of the consideration received and the consideration given for all business acquisitions. In all cases, the purchase price allocation is based on estimates. The final purchase price allocation for each business acquisition is expected to be complete within twelve months from the acquisition date. Of the goodwill acquired: - $511 million relates to the Business segment and $150 million relates to the Other BCE segment - $18 million is deductible for tax purposes. ------------------------------------------------------------------------- BCE's All 40% propor- other interest tionate business in Bell share of acquisi- West AMS tions Total ------------------------------------------------------------------------- Consideration received: Non-cash working capital - (70) 5 (65) Capital assets - 101 13 114 Goodwill 385 150 126 661 Long-term debt - - (2) (2) Other long-term liabilities - (13) - (13) Non-controlling interest 261 - - 261 ------------------------------------------------------------------------- 646 168 142 956 Cash and cash equivalents (bank indebtedness) at acquisition - 20 (3) 17 ------------------------------------------------------------------------- Net assets acquired 646 188 139 973 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consideration given: Cash 645 182 134 961 Acquisition costs 1 6 1 8 Future cash payment - - 4 4 ------------------------------------------------------------------------- 646 188 139 973 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 4 EMPLOYEE BENEFIT PLANS The table below shows the components of the net benefit plans cost. ------------------------------------------------------------------------- Three months Nine months Pension Other Pension Other benefits benefits benefits benefits For the period ended September 30 2004 2003 2004 2003 2004 2003 2004 2003 ------------------------------------------------------------------------- Current service cost 58 55 7 8 182 166 23 23 Interest cost on accrued benefit obligation 201 190 26 26 604 568 78 78 Expected return on plan assets (237) (233) (2) (2) (714) (701) (7) (7) Amortization of past service costs 2 2 - - 7 7 - - Amortization of net actuarial losses 8 6 1 - 24 17 1 - Amortization of transitional (asset) obligation (11) (11) 7 7 (33) (33) 22 22 Increase (decrease) in valuation allowance 1 (3) - - 2 (9) - - Other - (1) - - - (2) - - ------------------------------------------------------------------------- Net benefit plans cost 22 5 39 39 72 13 117 116 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The table below shows the amounts we contributed to the pension plans and the post-employment benefit payments made to beneficiaries. ------------------------------------------------------------------------- Three months Nine months Pension Other Pension Other benefits benefits benefits benefits For the period ended September 30 2004 2003 2004 2003 2004 2003 2004 2003 ------------------------------------------------------------------------- Aliant 16 34 1 1 54 51 3 3 Bell Canada 5 4 12 21 14 9 56 61 Bell Globemedia 8 6 - - 13 8 - - BCE Inc. 3 2 - - 7 5 - - ------------------------------------------------------------------------- Total 32 46 13 22 88 73 59 64 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 5 RESTRUCTURING AND OTHER ITEMS ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Employee departure program (985) - (985) - Settlement with MTS - - 75 - Provision for contract loss - - (110) - Other charges (96) (1) (78) (1) ------------------------------------------------------------------------- Restructuring and other items (1,081) (1) (1,098) (1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Employee departure program During the third quarter of 2004, we recorded a pre-tax charge of $985 million ($647 million after taxes) in the Other Bell Canada segment. The charge relates to the two-phase employee departure program, which was announced by Bell Canada in June 2004. The first phase was an early retirement plan and in the third quarter of 2004, 3,965 employees elected to receive a package that included a cash allowance, immediate pension benefits, an additional guaranteed pension payable up to 65 years of age, career transition services and post-employment benefits. The second phase was a departure plan and in the third quarter of 2004, 1,087 employees elected to receive a special cash allowance. An additional charge of approximately $75 million is expected to be incurred in the future for the relocation of employees and closure of excess real estate facilities. These costs are not eligible for recognition at September 30, 2004 and will be expensed as incurred. The employee departure program is expected to be substantially complete by the end of 2004. The table below provides a summary of the costs recognized in the third quarter of 2004, as well as the corresponding liability at September 30, 2004. ------------------------------------------------------------------------- Employee departure program costs 985 Less: Cash payments (5) Pension and other post-retirement benefits reclassified to: Other long-term assets (660) Other long-term liabilities (11) ------------------------------------------------------------------------- Balance in accounts payable and accrued liabilities at September 30, 2004 309 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Settlement with MTS On May 20, 2004, Bell Canada filed a lawsuit against MTS seeking damages from MTS and an injunction to prevent MTS from breaching the terms and conditions of the commercial agreements between the two companies as a result of the announcement by MTS to purchase Allstream Inc. (Allstream). On June 3, 2004, Bell Canada also filed a lawsuit against Allstream seeking damages in connection with the same announcement. On June 30, 2004, BCE Inc. reached an agreement with MTS to settle the lawsuits. The terms of the settlement included: - a payment of $75 million by MTS to Bell Canada, recorded in the second quarter of 2004 and received on August 3, 2004, for unwinding various commercial agreements - the removal of contractual competitive restrictions thereby allowing Bell Canada and MTS to compete freely with each other, effective June 30, 2004 - the orderly disposition of our interest in MTS. Our voting rights in MTS were waived after the receipt of the $75 million payment. We sold our interest in MTS in September 2004. See Note 6, Other income, for more information. - a premium payment by MTS to us, in the event a change of control of MTS occurs before 2006, in an amount equal to the appreciation in MTS's share price from the time of our divestiture to the time of any takeover transaction - the provision of wholesale services between Bell Canada and MTS on a preferred supplier basis. Provision for contract loss In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. This contract is accounted for using the percentage of completion method. During the second quarter of 2004, as part of our regular update of the estimated costs to complete construction of the network, potential cost overruns were identified. Construction is to be complete in late 2004. The costs of this last phase of construction are higher than previously estimated, due to changes necessitated in construction methods to connect individual government buildings to the network and higher average costs of construction. We recorded a provision of $110 million for this contract in the second quarter of 2004. Our estimated costs to complete are unchanged at September 30, 2004. Other charges During the third quarter of 2004, we recorded other pre-tax charges totalling $96 million ($78 million after taxes), which consisted primarily of future lease costs for excess facilities, asset write-downs and other provisions. Prior to the third quarter of 2004, we recorded a credit of $18 million which related primarily to the reversal of previously recorded restructuring charges, which were no longer necessary given the introduction of a new voluntary employee departure program. NOTE 6 OTHER INCOME ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Net gains on investments 325 - 331 - Foreign currency gains (losses) (2) (6) (4) 32 Other 10 7 66 16 ------------------------------------------------------------------------- Other income 333 1 393 48 ------------------------------------------------------------------------- ------------------------------------------------------------------------- In the third quarter of 2004, net gains on investments of $325 million included: - a gain of $108 million from the sale of Bell Canada's remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million - a gain of $217 million realized from the sale of BCE Inc.'s 15.96% interest in MTS for net cash proceeds of $584 million. On August 1, 2004, as a result of a corporate reorganization, the MTS shares were transferred from Bell Canada to BCE Inc. The purpose of this reorganization was to ensure that capital loss carryforwards at BCE Inc. would be available to be utilized against the gain on the sale of the MTS shares. Capital loss carryforwards were available to be utilized against the gains realized on these sales. NOTE 7 DISCONTINUED OPERATIONS ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Emergis (2) 11 25 24 Other - - 3 6 ------------------------------------------------------------------------- Net gain (loss) from discontinued operations (2) 11 28 30 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The table below provides a summarized statement of operations for the discontinued operations. ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Revenue - 244 128 765 ------------------------------------------------------------------------- Operating gain (loss) from discontinued operations, before tax - 33 (52) 76 Gain (loss) from discontinued operations, before tax (2) (1) 72 10 Income tax expense on operating gain (loss) - (12) (11) (23) Income tax recovery (expense) on gain (loss) - 2 (3) (1) Non-controlling interest - (11) 22 (32) ------------------------------------------------------------------------- Net gain (loss) from discontinued operations (2) 11 28 30 ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------------------------------- Sale of Emergis Emergis provides eBusiness solutions to the financial services industry in North America and the health industry in Canada. It automates transactions between companies and allows them to interact and transact electronically. The Security business provides organizations with the security infrastructure for their electronic service delivery. In May 2004, our board of directors approved the sale of our 63.9% interest in Emergis. In June 2004, BCE completed the sale of its interest in Emergis by way of a secondary public offering. In June 2004, Bell Canada paid $49 million to Emergis for the purchase of Emergis' Security business and the early termination of the Bell Legacy Contract on June 30, 2004 rather than December 31, 2004, as well as the transfer of related intellectual property to Bell Canada. These transactions were recorded on a net basis. The net proceeds from the sale of Emergis were $285 million (net of $22 million of selling costs and $49 million consideration given to Emergis). The gain on the transaction was $60 million. The operating loss includes a future income tax asset impairment charge of $56 million ($36 million after non-controlling interest), which Emergis recorded before the sale as a result of the unwinding of tax loss utilization strategies between Emergis, 4122780 Canada Inc. (a wholly-owned subsidiary of Emergis) and Bell Canada. Emergis was presented previously in the Other BCE segment. NOTE 8 STOCK-BASED COMPENSATION PLANS Restricted share units (RSUs) ------------------------------------------------------------------------- Number of RSUs ------------------------------------------------------------------------- Outstanding, January 1, 2004 - Granted 1,944,735 Expired/forfeited (30,437) ------------------------------------------------------------------------- Outstanding, September 30, 2004 1,914,298 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months and nine months ended September 30, 2004, we recorded compensation expense for RSUs of $7 million and $17 million, respectively. BCE Inc. stock options The table below is a summary of the status of BCE Inc.'s stock option programs. ------------------------------------------------------------------------- Weighted average Number exercise of shares price ------------------------------------------------------------------------- Outstanding, January 1, 2004 24,795,545 $ 32 Granted 5,589,476 $ 30 Exercised (828,659) $ 17 Expired/forfeited (918,373) $ 34 ------------------------------------------------------------------------- Outstanding, September 30, 2004 28,637,989 $ 32 ------------------------------------------------------------------------- Exercisable, September 30, 2004 14,404,039 $ 33 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Teleglobe stock options The table below is a summary of the status of Teleglobe's stock option programs. ------------------------------------------------------------------------- Weighted Number of average BCE Inc. exercise shares price ------------------------------------------------------------------------- Outstanding, January 1, 2004 955,175 $ 21 Exercised (102,828) $ 18 Expired/forfeited (24,685) $ 43 ------------------------------------------------------------------------- Outstanding and exercisable, September 30, 2004 827,662 $ 21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Assumptions used in stock option pricing model The table below shows the assumptions used to determine stock-based compensation expense using the Black-Scholes option pricing model. ------------------------------------------------------------------------- Three months Nine months For the period ended September 30 2004 2003 2004 2003 ------------------------------------------------------------------------- Compensation expense ($ millions) 9 7 23 19 Number of stock options granted 139,700 410,000 5,589,476 5,928,051 Weighted average fair value per option granted ($) 3 7 3 6 Weighted average assumptions Dividend yield 4.3% 3.7% 4.0% 3.6% Expected volatility 26% 30% 27% 30% Risk-free interest rate 3.7% 3.6% 3.1% 4.0% Expected life (years) 3.5 4.5 3.5 4.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Starting in 2004, most of the stock options granted contain specific performance targets that must be met before the option can be exercised. This is reflected in the calculation of the weighted average fair value per option granted. NOTE 9 COMMITMENTS AND CONTINGENCIES Agreement to purchase Canadian operations of 360networks Corporation In May 2004, Bell Canada announced an agreement to purchase the Canadian operations of 360networks Corporation for $275 million in cash. The purchase includes the shares of 360networks' subsidiary GT Group Telecom Services Corporation, and certain related U.S. interconnect assets. Bell Canada plans to retain all of 360networks' business, facilities and customer base in western Canada, and has an agreement to sell the retail customer operations and certain assets in central and eastern Canada to Call-Net Enterprises Inc. while continuing to provide network and other services to the central and eastern customer base for a share of future revenues. All regulatory approvals have been obtained and we expect to close the transaction in November 2004, subject to usual closing conditions. Litigation Teleglobe unsecured creditors lawsuit On May 26, 2004, a lawsuit was filed in the United States Bankruptcy Court for the District of Delaware. The United States District Court for the District of Delaware subsequently withdrew the reference from the Bankruptcy Court and the matter is now pending in the District Court for the District of Delaware. The lawsuit is against BCE Inc. and ten former directors and officers of Teleglobe Inc. and certain of its subsidiaries. The plaintiffs are comprised of Teleglobe Communications Corporation, certain of its affiliated debtors and debtors in possession, and the Official Committee of Unsecured Creditors of these debtors. The lawsuit alleges breach of an alleged funding commitment of BCE Inc. towards the debtors, promissory estoppel, misrepresentation by BCE Inc. and breach and aiding and abetting breaches of fiduciary duty by the defendants. The plaintiffs seek an unspecified amount of damages against the defendants. While no one can 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. >> END FIRST AND FINAL ADD BCE INC. CONTACT: PRNewswire - Nov. 3 |