SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002 Commission File Number 1-8481
------------------
BCE Inc.
(Translation of Registrant's name into English)
1000, rue de La Gauchetiere Ouest,
Bureau 3700, Montreal, Quebec H3B 4Y7, (514) 397-7000
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F Form 40-F X
--------------------- ----------------------
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
----------------- ----------------
If "Yes" is marked, indicate below the file number assigned to the Registrant
in connection with Rule 12g3-2(b): 82- .
-----------
BCE Inc.'s Management's Discussion and Analysis for the quarter ended September
30, 2002 and BCE Inc.'s unaudited interim consolidated financial statements for
the quarter ended September 30, 2002, and the document entitled "Reconciliation
of earnings reported in accordance with Canadian generally accepted accounting
principles ("GAAP") with United States GAAP" attached hereto as Appendix A, are
incorporated by reference in the registration statements filed by BCE Inc. with
the Securities and Exchange Commission under Form F-3 on June 15, 2000
(Registration No. 333-12130), under Form S-8 filed October 16, 2000
(Registration No. 333-12780), under Form S-8 filed November 1, 2000
(Registration No. 333-12802) and under Form S-8 filed November 1, 2000
(Registration No. 333-12804). No other portions of this Form 6-K are
incorporated by reference in the above-mentioned registration statements.
Notwithstanding any reference to BCE Inc.'s Web site on the World Wide Web in
the documents attached hereto, the information contained in BCE Inc.'s Web site
or any other site on the World Wide Web referred to in BCE Inc.'s site is not a
part of this Form 6-K and, therefore, is not filed with the Securities and
Exchange Commission.
BCE Inc. - 2002 Third Quarter
Shareholder Report
NEWS RELEASE October 23, 2002
BCE Reports Third Quarter Results
o Revenues of $4.8 billion; EBITDA up 4%
o High-speed Internet (DSL) subscribers surpass 1 million
Montreal (Quebec), October 23, 2002 -- For the third quarter of 2002, BCE Inc.
(TSX, NYSE: BCE) reported total revenue of $4.8 billion, EBITDA(1) of $2.0
billion, and net earnings applicable to common shares of $368 million ($0.43
per common share). Net earnings before non-recurring items (2) were $393
million ($0.45 per common share).
"The communications industry continues to face many challenges, and in this
environment the prudent management of costs and the implementation of
productivity initiatives is essential", said Michael Sabia, President and Chief
Executive Officer of BCE Inc. "Although we have experienced weakness in the
business wholesale and enterprise retail data markets, our efforts in cost
management have resulted in EBITDA growth of 4% compared to the third quarter
of 2001."
Operational Highlights (Q3 2002 vs. Q3 2001 unless otherwise indicated)
Subscriber/
Revenue
Quarter Growth Total
High-speed Internet (DSL) 93,000 net additions 60% 1,002,000 subscribers
Cellular and PCS 62,000 net additions 16% 3,707,000 subscribers
Bell ExpressVu 45,000 net additions 31% 1,221,000 subscribers
Data revenue $926 million 5% n.a.
Bell Globemedia revenue $273 million 11% n.a.
Productivity initiatives $150 million n.a. Year to date: $515 million
"During the third quarter, we reached a significant milestone at Bell Canada
when we signed up our one millionth High-speed Internet subscriber", Mr.
Sabia said. "Our wireless and Direct-to-Home (DTH) satellite operations also
experienced sustained growth."
"Bell Globemedia had a strong third quarter with increased revenues primarily
from higher demand for advertising as well as improved EBITDA", Mr. Sabia
added. "We believe BCE Emergis is making progress in achieving disciplined
profitability."
Overview
Total revenue at BCE was $4.8 billion, essentially flat when compared to the
same period last year. Excluding the impact of regulatory changes, revenue
growth at BCE was at 2%. Local and access service revenues decreased as a
result of the impact of regulatory decisions while data revenue growth
weakened due to lower business wholesale and enterprise demand. Additionally,
BCE Emergis reported lower revenues due to a decline in non-recurring and
recurring revenues. These decreases were offset by the underlying growth in
key areas: a 14.5% increase in wireless revenues, increased DTH
(Direct-to-Home) satellite entertainment services revenues of 33% and an 11%
increase in revenues at Bell Globemedia.
(1) EBITDA is defined as operating revenues less operating expenses and
therefore reflects earnings before interest, taxes, depreciation and
amortization, as well as any non-recurring items. BCE uses EBITDA, amongst
other measures, to assess the operating performance of its on-going businesses.
The term EBITDA does not have a standardized meaning prescribed by Canadian
generally accepted accounting principles and therefore may not be comparable to
similarly titled measures presented by other publicly traded companies. EBITDA
should not be construed as the equivalent of net cashflows from operating
activities.
(2) Refer to the discussion under the caption "Overview" for further details.
1
EBITDA increased by $75 million or 4% compared to the same period last year,
mainly due to careful cost management across all areas.
Consolidated net earnings applicable to common shares were $368 million, a
significant improvement from the loss of $144 million reported last year.
During the third quarter, BCE recorded an after-tax charge of $37 million
relating to the pay equity settlement at Bell Canada as well as a $12 million
dilution gain from the issuance of common shares by BCE Emergis to third
parties. Excluding these items, net earnings applicable to common shares were
$0.45 for the quarter.
Outlook
On October 7, 2002, the Company confirmed the lower end of its financial
guidance for the full year 2002, excluding discontinued operations (Teleglobe
and BCI), at approximately $19.5 billion in revenue, $7.5billion in EBITDA and
net earnings per share (before non-recurring items) of $1.80.
Results by Business Group (unaudited)
BCE's core operations as at September 30, 2002, included the Bell Canada
segment, Bell Globemedia, and BCE Emergis. BCE Ventures consists of BCE's other
investments.
(Cdn$ millions, except per share amounts) Third quarter Nine months
For the period ended September 30 2002 2001 2002 2001
Revenue
Bell Canada 4,314 4,326 12,957 12,666
Bell Globemedia 273 246 911 849
BCE Emergis 135 173 409 475
BCE Ventures 258 262 782 757
Corporate and other, including inter-segment eliminations (158) (189) (463) (520)
Total revenue 4,822 4,818 14,596 14,227
EBITDA
Bell Canada 1,891 1,818 5,501 5,172
Bell Globemedia 17 (6) 108 65
BCE Emergis 19 35 10 92
BCE Ventures 67 73 217 202
Corporate and other, including inter-segment eliminations (42) (43) (127) (116)
Total EBITDA 1,952 1,877 5,709 5,415
Net earnings (loss)
Bell Canada 336 272 1,016 764
Bell Globemedia (11) (52) 1 (125)
BCE Emergis 19 (70) (58) (236)
BCE Ventures 16 137 99 229
Corporate and other, including inter-segment eliminations 24 50 5 3,029
Earnings from continuing operations 384 337 1,063 3,661
Discontinued operations - (465) (340) (2,862)
Dividends on preferred shares (16) (16) (43) (50)
Net earnings (loss) applicable to common shares 368 (144) 680 749
Net earnings (loss) per common share 0.43 (0.18) 0.82 0.93
Non-recurring items included in net earnings (loss)
per common share
Amortization of goodwill - (0.29) - (0.91)
Other items (3) (0.03) (0.33) (0.55) 0.52
(3) Other items for the third quarter of 2001 included discontinued operations
of $370 million (excluding goodwill amortization), after-tax gains on sale of
investments and dilution gains of $153 million, and other after-tax charges of
$48 million.
2
Third Quarter Review (Q3 2002 vs. Q3 2001, unless otherwise indicated)
Bell Canada
The Bell Canada segment includes Bell Canada, Aliant, Bell ExpressVu and Bell
Canada's interests in other Canadian telcos.
o Total revenue in the third quarter decreased slightly over last year mainly
as a result of the effects of recent CRTC decisions and slower data revenue
growth.
o Excluding the impact of the regulatory changes (see below), revenues for the
quarter increased by 2%.
o Reported local and access revenues decreased by 7% to $1.5 billion.
Excluding the effects of the 2001 CRTC local contribution and May 30, 2002
CRTC Price Caps decisions, local and access revenues decreased by 1%.
o Although long distance market share is stable, revenue decreased by $12
million. Competitive pressures more than offset the effects of a 6% increase
in conversation minutes.
o Wireless revenue was up 14.5% to $561 million due to continued growth in
cellular and PCS subscribers.
o Data revenue increased 5% to $926 million, due to higher IP/Broadband and
Sympatico ISP revenues. Data revenue growth has slowed when compared to the
growth of 14% in the first quarter and 8% in the second quarter as a result
of lower demand from business wholesale and enterprise retail data
customers.
o Total Internet (High-speed and dial-up) subscribers reached 1,987,000 as at
September 30.
o Bell ExpressVu revenue increased by 33% as a result of the increase in the
subscriber base.
o Bell Canada's EBITDA grew by $73 million or 4% in the third quarter to
reach $1.9 billion due to continued cost management.
o Productivity gains at Bell Canada were $145 million for the quarter.
o Year-to-date capex intensity (capital expenditures to revenue) improved
from 28% as of September 30, 2001 to 19% as of September 30, 2002.
Bell Globemedia
Bell Globemedia includes CTV, The Globe and Mail and Bell Globemedia
Interactive.
o Total revenue was $273 million in the quarter compared with revenue of $246
million for the same period last year. This increase includes organic
growth of 7% as well as the impact of the acquisitions of CFCF-TV, CKY-TV
and ROB TV, which were purchased in the latter part of 2001.
o Advertising revenue was $180 million in the quarter, an increase of 10%
compared to the third quarter of 2001. A stronger economic climate in the
advertising sector as well as higher interactive revenues contributed to the
increase.
o Subscriber revenues increased by 13% to reach $72 million due to higher
subscription to the new digital specialty channels and an increase in print
circulation revenues.
o EBITDA was $17 million in the third quarter compared with a shortfall of $6
million for the same period last year, reflecting the increase in revenues
and management's cost control efforts.
3
BCE Emergis
o BCE Emergis' sequential quarter over quarter revenues decreased by $7
million mainly due to lower recurring revenues. Revenue was $135 million in
the quarter, compared with $173 million for the same period in 2001.
o Third quarter EBITDA of $19 million compared favorably to the second quarter
EBITDA of $11 million. The improvement in sequential quarter over quarter
EBITDA was mainly related to cost savings resulting from the restructuring
plan BCE Emergis implemented in the second quarter. Year-over-year quarterly
EBITDA decreased by 46% to $19 million, reflecting the shortfall in
revenues.
o In the quarter, 43% of BCE Emergis' total revenue was from its U.S.
operations.
BCE Ventures
BCE Ventures includes the activities of CGI, Telesat and other investments.
o BCE Ventures' revenue was $258 million in the quarter, a decrease of 2%
when compared with the same period of 2001. Revenues at CGI were higher,
offset by lower revenues at the other Ventures' businesses.
o EBITDA was $67 million in the quarter compared with $73 million in the third
quarter of 2001.
Bell Canada Statutory Results
Bell Canada "statutory" includes Bell Canada, Bell Canada's interests in other
Canadian telcos, and Bell Canada's 39% interest in Aliant (equity-accounted).
Bell Canada's reported revenue was $3.6 billion in the third quarter, 2% lower
when compared to the same quarter of 2001. The net earnings applicable to
common shares were $478 million in the quarter, compared to $410 million for
the same period last year.
About BCE
BCE is Canada's largest communications company. It has 24 million customer
connections through thewireline, wireless, data/Internet and satellite
services it provides, largely under the Bell brand. BCE leverages those
connections with extensive content creation capabilities through Bell
Globemedia which features some of the strongest brands in the industry - CTV,
Canada's leading private broadcaster, TheGlobe and Mail, the leading Canadian
daily national newspaper and Sympatico.ca, a leading Canadian Internet portal.
As well, BCE has extensive e-commerce capabilities provided under the BCE
Emergis brand. BCE shares are listed in Canada, the United States and Europe.
Did you know?
As a BCE shareholder, you can enroll to receive shareholder communications
electronically. Contact BCE's Investor Relations department for more
information.
4
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 dispositions,
monetizations, mergers, acquisitions, other business combinations or other
transactions that may be announced after the date hereof.
Other factors which could cause results or events to differ materially from
current expectations include, among other things: the timing and extent of
economic expansion in Canada and of improvement in consumer confidence and
spending; the level of demand and prices for data, IP broadband and voice
services; BCE's ability to manage costs and generate productivity improvements;
the financial condition and credit risk of customers and uncertainties
regarding collectibility of receivables; uncertainty as to whether BCE's
strategies will yield the expected benefits, synergies and growth prospects;
the intensity of competitive activity, and its resulting impact on the ability
to retain existing, and attract new customers, and the consequent impact on
pricing strategies, revenues and network capacity; the level of capital
expenditures necessary to expand operations, increase the number of customers,
provide new services, build and update networks and maintain or improve
quality of service; the availability and cost of capital required to
implement BCE's financing plan and fund capital and other expenditures; the
Internet economy growing at a slower pace than is currently anticipated; the
ability to deploy new technologies and offer new products and services rapidly
and achieve market acceptance thereof; the ability to carryout cross selling of
the various services offered by the BCE group of companies; stock market
volatility; the risk of credit rating downgrades; the availability of, and
ability to retain, key personnel; the impact of adverse changes in laws or
regulations or of adverse regulatory initiatives or proceedings (including the
outcome of the appeal of the CRTC's price cap decision); the possibility of
further deterioration in the state of capital markets and the
telecommunications industry; BCE's ability to implement its financing plan in
order to finance the purchase of SBC Communications Inc.'s remaining minority
interest in BellCanada (including the risk of not completing the debt
offering); the risk that the closing of the Bell Canada directories sale may be
delayed or not occur; and the final outcome of pending or future litigation.
For additional information with respect to certain of these and other factors,
refer to BCE's 2002 quarterly MD&As filed by BCE 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 BCE's expectations as of October 23, 2002 and, accordingly, are
subject to change after such date. However, BCE disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
BCE's fourth quarter 2002 results will be announced in late January 2003
and the review will be made available via an audio webcast from our site
on the Internet. For more information, see details on our site at
www.bce.ca, after mid-December, 2002.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS - BCE INC.
October 23, 2002
This management's discussion and analysis of financial condition and results of
operations ("MD&A") for the third quarter of the year 2002 focuses on the
consolidated results of operations and financial situation of BCE Inc., its
subsidiaries, joint ventures and its investments in significantly influenced
companies (collectively, "BCE"), and should be read in conjunction with the
unaudited consolidated financial statements as at September 30, 2002 and for
the periods ended September 30, 2002 and 2001. Certain sections of
this MD&A contain forward-looking statements with respect to BCE. These
forward-looking statements, by their nature, necessarily involve risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the forward-looking statements. Factors that could cause
actual results or events to differ materially from current expectations are
discussed on pages o to o under "Forward-Looking Statements". BCE disclaims
any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information or otherwise.
BCE centers its activities around three core operating segments, based on
products and services, reflecting the way that management classifies its
operations for purposes of planning and performance management. The three core
operating segments are the Bell Canada segment, Bell Globemedia, and BCE
Emergis. All non-core businesses are combined, for management purposes, in
the BCE Ventures segment.
Recent Developments
BCE Acquisition of SBC's 20% interest in BCH
On June 28, 2002, BCE Inc., Bell Canada Holdings Inc. ("BCH") and entities
controlled by SBC Communications Inc. ("SBC") entered into agreements that
will lead to the repurchase by BCE Inc. of SBC's 20% indirect interest in BCH,
the holding company of Bell Canada, for $6.3 billion.
Pursuant to these agreements, on June 28, 2002, BCH purchased for
cancellation a portion of its outstanding shares from SBC for a purchase price
of $1.3 billion, resulting in an increase in BCE Inc.'s ownership in BCH to
83.5%. In addition, BCE Inc. has the option ("BCE option") to repurchase and
SBC has the option ("SBC option") to sell the remaining 16.5% interest in BCH,
in each case at an aggregate price of $4.99 billion. The BCE option can only
be exercised between October 15, 2002 and November 15, 2002, whereas the SBC
option can only be exercised between January 3, 2003 and February 3, 2003.
BCE Inc. will exercise the BCE option within the prescribed period, and the
transaction is expected to close on or before January 3, 2003, at BCE Inc.'s
discretion.
BCE Inc. has completed or intends to complete the following steps towards
raising the necessary funds to finance the $6.3 billion repurchase price of
SBC's indirect interest in Bell Canada:
o $1.1 billion drawn on July 15, 2002 under a $3.3 billion two-year
non-revolving credit agreement;
o proceeds from the issuance on July 15, 2002 of 9 million BCE Inc.
common shares for $250 million ($27.63 per share), by way of a
private placement to SBC;
o net proceeds from the public issuance on August 12, 2002 of
85 million BCE Inc. common shares for $2 billion ($24.45 per
share);
o net proceeds expected to be received from the proposed public
issuance by BCE Inc. of $1.5 to $2 billion of long-term notes,
expected to close by the end of October 2002;
o $1 to $1.5 billion expected to be accessed from Bell Canada,
representing a portion of the net after-tax proceeds expected
to flow to BCE Inc. from the sale of Bell Canada's and certain
affiliates' directories business (see "Sale of Directories
Business"); and
o a second private placement to SBC of up to $250 million, planned on
the second closing expected on or before January 3, 2003.
In the event BCE Inc. does not secure financing for all of the remaining
balance of the $6.3 billion repurchase price on or before January 3, 2003,
BCE Inc.'s current intention is to draw down on the remaining available
balance of the two-year non-revolving credit agreement. Although BCE Inc.
does not currently intend to do so, should amounts drawn under the two-year
non-revolving credit agreement together with the proceeds resulting from the
sources of financing referred to above be insufficient, BCE Inc. could pay
the remaining balance of the $6.3 billion repurchase price by issuing notes
to SBC.
As part of the agreements, BCE Inc. will also purchase, at face value, on or
before December 31, 2004, $314 million of BCH Convertible Series B Preferred
Securities held by SBC.
In connection with the arrangements described above, on June 28, 2002, BCH
granted to SBC an option ("BCH option") to purchase 20% of the then
outstanding common shares of BCH at an exercise price of approximately
$39.48 per share, representing an approximate 25% premium to the June 28, 2002
negotiated repurchase price of the BCH shares, exercisable no later than
April 24, 2003.
Sale of Directories Business
On September 13, 2002, BCE Inc. announced the sale by Bell Canada and certain
affiliates of their directories business for $3 billion cash (subject to
certain post-closing adjustments) to an entity ultimately controlled by
Kohlberg Kravis Roberts & Co. L.P. and the Ontario Teachers' Merchant Bank,
the private equity arm of the Ontario Teachers' Pension Plan Board
(collectively, the "Purchasers"). The sale includes 209 print White Pages and
Yellow Pages directories in Ontario and Quebec, the electronic yellowpages.ca,
canadatollfree.ca and Canada411.ca directories and Bell ActiMedia's 12.86%
interest in the Aliant ActiMedia General Partnership. $1 to $1.5 billion of
the net proceeds from the sale are expected to flow to BCE Inc. to finance part
of the repurchase of SBC's remaining indirect interest in Bell Canada, with
the remaining proceeds being used by Bell Canada for its ongoing financing
needs.
The Purchasers will own an approximate 90% equity interest of an acquisition
vehicle that will hold the directories business. Bell Canada or one of its
affiliates will acquire an approximate 10% equity interest in the acquisition
vehicle for approximately $80 million, which will give it the right to appoint
one member of such vehicle's Board of Directors. Bell Canada has entered into a
long-term, strategic working relationship with the entity operating the
directories business pursuant to operating agreements. The closing of the
sale of the directories business is expected to take place no later than
November 30, 2002. The Purchasers' obligation to complete the transaction is
subject to conditions precedent, including the obtaining of all requisite
regulatory approvals and the Purchasers obtaining the appropriate financing
required for the purposes of the transaction.
6
Settlement of Pay Equity Complaints
On September 27, 2002, the Canadian Telecommunications Employees' Association
("CTEA") ratified a settlement reached with Bell Canada with respect to the
1994 pay equity complaints filed by members of the CTEA before the Canadian
Human Rights Tribunal. The settlement includes a cash payout of $128 million
and related pension benefits of approximately $50 million. As a result of
such settlement, Bell Canada recorded a one-time charge of $79 million
(BCE's share is $37 million on an after-tax basis) in the third quarter of
2002. No settlement has yet been reached with members of the Communications,
Energy and Paperworkers ("CEP") union.
Results of Operations
Three months Nine months
For the period ended September 30 2002 2001 Change 2002 2001 Change
OPERATING REVENUES
Bell Canada (1) 4,314 4,326 (12) 12,957 12,666 291
Bell Globemedia 273 246 27 911 849 62
BCE Emergis 135 173 (38) 409 475 (66)
BCE Ventures 258 262 (4) 782 757 25
Corporate and other (including
inter-segment eliminations) (1) (158) (189) 31 (463) (520) 57
Total revenues 4,822 4,818 4 14,596 14,227 369
EBITDA (2)
Bell Canada 1,891 1,818 73 5,501 5,172 329
Bell Globemedia 17 (6) 23 108 65 43
BCE Emergis 19 35 (16) 10 92 (82)
BCE Ventures 67 73 (6) 217 202 15
Corporate and other (including
inter-segment eliminations) (42) (43) 1 (127) (116) (11)
Total EBITDA 1,952 1,877 75 5,709 5,415 294
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHARES
Bell Canada 336 272 64 1,016 764 252
Bell Globemedia (11) (52) 41 1 (125) 126
BCE Emergis 19 (70) 89 (58) (236) 178
BCE Ventures 16 137 (121) 99 229 (130)
Corporate and other (including
inter-segment eliminations) 24 50 (26) 5 3,029 (3,024)
Total net earnings (loss) - continuing operations 384 337 47 1,063 3,661 (2,598)
Discontinued operations - (465) 465 (340) (2,862) 2,522
Total net earnings (loss) 384 (128) 512 723 799 (76)
Dividends on preferred shares (16) (16) - (43) (50) 7
Net earnings (loss) applicable to common shares 368 (144) 512 680 749 (69)
Basic Earnings (Loss) Per Share (EPS)
Earnings (loss) from continuing operations 0.43 0.40 0.03 1.23 4.47 (3.24)
Net earnings (loss) 0.43 (0.18) 0.61 0.82 0.93 (0.11)
(1) Certain comparative figures have been reclassified to conform to the
current period presentation.
(2) EBITDA is defined as operating revenues less operating expenses and
therefore reflects earnings before interest, taxes, depreciation and
amortization, as well as any non-recurring items. BCE uses EBITDA, amongst
other measures, to assess the operating performance of its on-going
businesses. The term "EBITDA" does not have a standardized meaning
prescribed by Canadian generally accepted accounting principles
("Canadian GAAP") and therefore may not be comparable to similarly titled
measures presented by other publicly traded companies. EBITDA should not
be construed as the equivalent of net cash flows from operating
activities.
OVERVIEW
Operating revenues remain flat due to slower data growth and the negative
impact of recent regulatory decisions
o Bell Canada continues to generate revenue growth from its wireless, data
and Direct-to-home satellite ("DTH") services, driven primarily by an
increase in the subscriber base. Cellular and PCS subscribers grew 16% to
reach 3.7 million; DTH subscribers grew 31% to reach 1.2 million; and
High-speed Internet subscribers rose 60% to reach one million. Enterprise
data demand continues to be soft as enterprise customers in the key
segments that Bell Canada serves have not returned to the marketplace,
choosing instead to use existing capacity rather than expanding. Bell
Canada's market share, however, remains stable and growth continues to
move at or above market rates.
o The positive impact from Bell Canada's growth services was offset by a
decline in revenues from its traditional wireline services (local and
access and long distance services). The decline in local and access
revenues can be attributed to the impact of the recent Canadian
Radio-television and Telecommunications Commission ("CRTC") Decisions as
well as a 1.2% decrease in the network access service lines in service.
o At Bell Globemedia, the strong performance within the television division
complemented the impact of the CFCF-TV, CKY-TV and ROBTv acquisitions
made in 2001.
7
o BCE Emergis continues to show a decline in revenues, due to an uncertain
business environment, merger activities within its eHealth client base and
the difficulty of signing large projects.
Substantial productivity improvements were the key source for the 4% EBITDA
growth and the improvement in EBITDA margins from 39.0% in Q3-2001 to 40.5% in
Q3-2002
o BCE's continued focus on productivity has led to total improvements of
approximately $150 million for the third quarter of 2002 ($515 million on
a year-to-date basis), which were the key source for the growth in EBITDA.
o EBITDA margins were however negatively impacted by BCE's continued focus
on growth services and product offerings that generate lower margins than
the traditional wireline services. EBITDA margins for such products and
services have been increasing and are expected to continue to increase in
the long-term.
Net earnings per common share improved by $0.61 to reach $0.43 in Q3-2002
o Of the $0.61 per share improvement in net earnings, $0.38 can be
attributed to after-tax net losses from non-recurring items which, in the
third quarter of 2002, amounted to $25 million, compared to $331 million
for the same period last year.
o The after-tax non-recurring items in the third quarter of 2002 consisted
of a $37 million settlement of the pay equity complaints and a $12 million
dilution gain from the issuance of common shares by BCE Emergis to third
parties.
o The $331 million after-tax non-recurring items in the third quarter of
2001 consisted primarily of operating losses of $465 million from the
discontinued operations of Teleglobe and BCI, partially offset by a
dilution gain of $132 million from the reduction of BCE's ownership
interest in CGI.
o An additional $0.18 per share improvement resulted from the cessation of
amortization of goodwill effective January 1, 2002.
o The remaining $0.05 per share improvement in net earnings is driven
primarily by a higher consolidated EBITDA and favourable foreign exchange
variances. Net earnings were negatively impacted by an increase in
amortization expense resulting from the significant capital expenditures
incurred in 2001, higher interest expense as a result of higher
consolidated average debt levels and a lower pension credit, primarily
due to a reduction in the estimated long-term rate of return on plan
assets.
BELL CANADA SEGMENT
Three months Nine months
For the period ended September 30 2002 2001 Change 2002 2001 Change
Revenues
Local and access 1,526 1,635 (109) 4,581 4,706 (125)
Long distance 651 663 (12) 1,944 2,004 (60)
Wireless 561 490 71 1,597 1,346 251
Data 926 881 45 2,796 2,569 227
DTH 156 117 39 462 341 121
Terminal sales, directory advertising and other 494 540 (46) 1,577 1,700 (123)
Total revenues 4,314 4,326 (12) 12,957 12,666 291
EBITDA 1,891 1,818 73 5,501 5,172 329
Contribution to BCE's net earnings 336 272 64 1,016 764 252
Operating Revenues
Local and access
At September 30 2002 2001 Change
Network access services (thousands of lines in service)(1) 13,187 13,342 (155)
Local market share (Quebec and Ontario territory only) 94.2% 96.1% (1.9%)
(1) Certain comparative figures have been adjusted to conform to the current
period presentation.
(1) Certain comparative figures have been adjusted to conform to the current
period presentation.
The decrease in local and access revenues is mainly due to the impact of the
recent CRTC Decisions as well as a decline in the network access service lines
in service.
The impact of the CRTC Price Cap Decision 2002-34 is a reduction in the rates
charged to competitors for accessing Bell Canada's network, effective
June 1, 2002.
The impact of the CRTC local contribution Decision 2000-745 is a reduction in
subsidies provided to Bell Canada for servicing high-cost areas. The decision
also results in a corresponding reduction in subsidies paid by
telecommunication service providers (including Bell Canada and Bell Mobility)
to fund the local contribution regime and has an overall positive impact on
EBITDA.
The 1.5% decline in NAS lines in service is due to:
o a reduction in the number of second residential lines resulting from the
growth in high-speed Internet access, substitutions of residential local
and access services for wireless services and continued competitive
pressures; and
o a reduction in business lines that is attributable to the slower economy,
a shrinking marketplace and continued competitive pressures.
8
Long distance
For the period ended September 30 Three months Nine months
(except where otherwise noted) 2002 2001 Change 2002 2001 Change
Conversation minutes (millions) 4,660 4,400 260 14,034 13,396 638
Average long distance revenue per minute (cents) 13 14 (1) 12 14 (2)
Local market share (% based on revenues, at Sept. 30)
(Quebec and Ontario territory only) 64.6% 64.1% 0.5%
The decrease in long distance revenues was mainly attributable to a reduction
in overseas settlement revenues, resulting from lower rates. The decline in
average long distance revenue per minute in the third quarter of 2002, when
compared to the same period last year, is due to continued competitive pricing
pressures. However, the revenue impact of this decrease was offset by higher
service volumes, as measured in conversation minutes and long distance plan
network charges introduced in December 2001.
Wireless
For the period ended September 30 Three months Nine months
(except where otherwise noted) 2002 2001 Change 2002 2001 Change
Cellular & PCS subscribers (thousands, at September 30)
Prepaid 955 876 79
Postpaid 2,752 2,310 442
Total 3,707 3,186 521
Cellular & PCS net activations (thousands)
Prepaid (1) 48 (49) (9) 159 (168)
Postpaid 63 103 (40) 256 257 (1)
Total 62 151 (89) 247 416 (169)
Cellular & PCS average revenue per subscriber ($/month)
Prepaid 12 14 (2) 12 13 (1)
Postpaid 60 62 (2) 58 58 -
Total 47 49 (2) 46 46 -
Usage per subscriber (minutes/month) 206 184 22 199 179 20
Postpaid churn (average per month) 1.6% 1.5% 0.1% 1.5% 1.4% 0.1%
The growth in wireless revenues was primarily driven by a 16% increase in the
cellular and PCS subscriber base. The increase in usage reflects increased
customer migrations to larger minute bundle packages, which generally translate
into an increase in non-billable minutes of usage and therefore not impacting
revenues. The decline in net activations reflects the impact of a more
disciplined growth strategy. Specifically, decisions were taken to tighten
credit policies for new customers to minimize the credit risk on new
activations and to maintain higher handset prices.
Data
For the period ended September 30 Three months Nine months
(except where otherwise noted) 2002 2001 Change 2002 2001 Change
Data revenues
Legacy 461 546 (85) 1,403 1,620 (217)
Non-legacy 465 335 130 1,393 949 444
Total 926 881 45 2,796 2,569 227
Internet subscribers (thousands, at September 30)
DSL High-speed 1,002 625 377
Dial-up 985 1,002 (17)
Total 1,987 1,627 360
The increase in data revenues reflected growth in the non-legacy business
stemming from IP/Broadband and Internet services partially offset by a
decrease in legacy revenues from lower competitive network services. The
decline in competitive network services was driven by a weaker economy and
the consolidation of data services by wholesale customers.
The increase in IP/Broadband service revenues was due to a higher demand for
these types of services coupled with the impact of efforts made by Bell
Canada to increase its penetration of the IP/Broadband services market.
Contributing to the increase in Internet related revenues was the 22% growth
in Internet subscribers, which was mainly due to the launch of new product
offers in 2002 and an increase in market share. Bell Canada's consumer
high-speed market share in Ontario and Quebec grew to 42% at September 30, 2002
compared to 40% at September 30, 2001.
Although data revenues continue to grow in 2002, enterprise data demand
continues to be soft as enterprise customers in the key segments that Bell
Canada serves have not returned to the marketplace, choosing instead to use
existing capacity rather than expanding. In addition, the wholesale sector is
weak, given few players and largely underutilized capacity. Bell Canada's
market share remains stable and growth continues to move at or above market
rates.
9
DTH
For the period ended September 30 Three months Nine months
(except where otherwise noted) 2002 2001 Change 2002 2001 Change
DTH subscribers (thousands, at September 30) 1,221 930 291
DTH net activations (thousands) 45 83 (38) 152 208 (56)
Average revenue per subscriber ($) 43 44 (1) 44 45 (1)
Churn rate (per quarter) 3.6% 3.1% 0.5% 9.1% 8.1% 1.0%
The growth in DTH revenues was primarily driven by a significant growth in the
subscriber base. The decrease in net activations in 2002 reflects the impacts
of premium pricing compared to Bell ExpressVu's major competitor, higher
priced offers than the previous year and a softer electronics market. In
addition, the launch of the new digital channel line-up in September 2001 had
a positive impact on the prior year's net activations. The decrease in average
revenue per subscriber was mainly due to a higher penetration in lower priced
programming and lower pay-per-view activity.
EBITDA
The growth in EBITDA was mainly due to higher EBITDA margins resulting from:
o Bell Canada's productivity improvements of approximately $143 million in
the third quarter of 2002 ($494 million on a year-to-date basis) and
decreased compensation costs. Productivity savings are mainly due to
current year initiatives relating to load management, better sourcing
contracts and workforce management (call centers), as well as benefits
from the 2001 productivity initiatives;
o the impact of the CRTC local contribution Decision 2000-745, as described
under "Local and access"; partially offset by:
o Bell Canada's continued focus on growth services and product offerings
that generate lower margins than the traditional wireline services.
However, the EBITDA margins for such products and services have been
increasing and are expected to continue to increase in the long-term.
Contribution to BCE's net earnings
The increase in the contribution to BCE's net earnings in the third quarter of
2002 was mainly due to:
o a higher EBITDA contribution;
o lower amortization expense as the cessation of amortization of goodwill
and other intangible assets, effective January 1, 2002, more than offset
the increase resulting from the capital expenditures incurred since the
first quarter of 2001; and
o favourable foreign exchange variances; partially offset by:
o a non-recurring pay equity charge of $37 million net of tax (see "Recent
Developments - Settlement of Pay Equity Complaints");
o higher interest expense as average debt levels in the third quarter of
2002 were higher than those in the same period last year; and
o a lower net pension credit, primarily due to a reduction in the estimated
long-term rate of return on plan assets.
BELL GLOBEMEDIA
For the period ended September 30 Three months Nine months
(except where otherwise noted) 2002 2001 Change 2002 2001 Change
Revenues
Advertising 180 163 17 629 597 32
Subscriber 72 64 8 215 192 23
Production and sundry 21 19 2 67 60 7
Total revenues 273 246 27 911 849 62
EBITDA 17 (6) 23 108 65 43
Contribution to BCE's net earnings (11) (52) 41 1 (125) 126
Total revenues for the quarter were 11% higher than the same period last year
of which 4% represents growth from business acquisitions in 2001. Organic
growth of 7% represents improvements in advertising revenues as a result of
the strong performance within the television division, higher subscription
revenues driven by DTH penetration, the launch of five new digital channels and
higher circulation revenues in the print division as a result of rate
increases.
Third quarter EBITDA rose $23 million compared to the same period last year,
as a result of the growth in revenues and the continued productivity
improvements.
The improvement in Bell Globemedia's contribution to BCE's net earnings was
mainly attributable to the cessation of amortization of goodwill and other
intangible assets, effective January 1, 2002, as well as a higher EBITDA.
10
BCE EMERGIS
Three months Nine months
For the period ended September 30 2002 2001 Change 2002 2001 Change
Revenues eHealth Solutions Group 70 77 (7) 214 224 (10)
BCE Emergis - Canada 57 76 (19) 177 214 (37)
BCE Emergis - U.S.A. 8 20 (12) 18 37 (19)
Total revenues 135 173 (38) 409 475 (66)
EBITDA 19 35 (16) 10 92 (82)
Contribution to BCE's net earnings 19 (70) 89 (58) (236) 178
% of revenues generated in the United States 43% 43% 0% 41% 42% (1%)
BCE Emergis' revenues are derived from recurring and non-recurring sources.
Recurring revenues, which are mostly of a transactional nature, accounted
for $123 million (or 91%) of total revenues in the third quarter of 2002,
compared to approximately $134 million (or 77%) for the same period in 2001.
Non-recurring revenues are generated from professional services and initial
software license sales. The decrease in revenues was mainly attributable to a
drop in non-recurring revenues due to an uncertain business environment,
merger activities within BCE Emergis' eHealth client base and the difficulty
of signing large projects. The decrease in revenues is in line with BCE
Emergis' business strategy, which includes exiting activities that it no longer
considers core.
BCE Emergis generated approximately $33 million of revenues from BCE
affiliates in the third quarter of 2002 ($47 million for the same period in
2001), representing approximately 24% of its total revenues (27% for the
same period in 2001). In the third quarter of 2002, 91% of the revenues
generated from BCE affiliates were of a recurring nature, compared to 86% for
the same period in 2001.
The decrease in EBITDA was primarily attributable to the decrease in
revenues partially offset by the continued cost savings resulting from the
restructuring plan announced during the second quarter of 2002.
The improvement in BCE Emergis' contribution to BCE's net earnings was
primarily due to:
o a decrease in the amortization expense, due to the cessation of
amortization of goodwill effective January 1, 2002, partially offset by
an increase resulting from continued investments in capital assets;
partially offset by:
o a lower EBITDA contribution.
BCE VENTURES
Three months Nine months
For the period ended September 30 2002 2001 Change 2002 2001 Change
Revenues 258 262 (4) 782 757 25
EBITDA 67 73 (6) 217 202 15
Contribution to BCE's net earnings 16 137 (121) 99 229 (130)
BCE Ventures' revenues and EBITDA were $4 million and $6 million lower,
respectively, compared to the same period last year, mainly as a result of a
lower contribution from Other Ventures, partially offset by a greater
contribution from CGI. The lower contribution from Other Ventures is due to
the sale of the 1000 de la Gauchetiere Building during the first quarter of
2002. Proportionate revenues from CGI increased mainly due to recent
acquisitions and new outsourcing contracts, partially offset by a decrease
in BCE's ownership interest compared to last year.
The decrease in contribution to BCE's net earnings from BCE Ventures was
mainly due to the inclusion in 2001 of a $132 million dilution gain from a
reduction of BCE's ownership interest in CGI.
DISCONTINUED OPERATIONS
Three months Nine months
For the period ended September 30 2002 2001 Change 2002 2001 Change
Teleglobe - (205) 205 (149) (2,636) 2,487
BCI - (260) 260 (191) (226) 35
Total loss from discontinued operations - (465) 465 (340) (2,862) 2,522
Teleglobe
Teleglobe provides a range of international voice and data telecommunications
services. Until the second quarter of 2002, Teleglobe also provided, through
its investment in the Excel Communications group ("Excel"), retail
telecommunications services such as long distance, paging and Internet
services to residential and business customers in North America and the U.K.
The results of operations of Teleglobe include an impairment charge of $2,049
million recorded in the first quarter of 2001 after completion of an assessment
of the carrying value of Teleglobe's investment in Excel.
On April 24, 2002, BCE Inc. announced that it would cease further long-term
funding to Teleglobe. BCE Inc.'s decision was based on a number of factors,
including a revised business plan and outlook of the principal operating
segment of Teleglobe with associated funding requirements, a revised assessment
of its prospects, and a comprehensive analysis of the state of its industry.
In light of that decision, Teleglobe announced that it would pursue a range of
financial restructuring alternatives, potential partnerships and business
combinations. Also on April 24, 2002, all BCE Inc.-affiliated board members of
Teleglobe tendered their resignation from the Teleglobe board. The effective
result of these events was the exit by BCE of the Teleglobe business and the
eventual material reduction in BCE's approximate 96% economic and voting
interest in Teleglobe as a result of the ongoing restructuring of Teleglobe.
Accordingly, effective April 24, 2002, BCE reclassified the financial results
of Teleglobe as a discontinued operation. BCE's management completed its
assessment of the net realizable value of BCE's interest in the net assets of
Teleglobe and determined it to be nil, resulting in a loss from discontinued
operations of $73 million, which is in addition to the transitional goodwill
impairment charge of $7,516 million to opening retained earnings as at
January 1, 2002, as required by the transitional provisions of the new CICA
Handbook section 3062 (refer to Note1). A valuation allowance has been provided
against the entire amount of the tax benefit associated with the loss on this
investment.
11
On May 15, 2002 and thereafter, Teleglobe and certain of its subsidiaries filed
for court protection under insolvency statutes in Canada, the United States,
the United Kingdom and elsewhere. Operating under court protection and with the
assistance of a Monitor, appointed in the Canadian insolvency proceedings,
Teleglobe has sought and received court approval of its decision to discontinue
its hosting and certain other businesses, to proceed with the orderly shut-down
of its Globesystem network and to proceed with a process for the sale of its
remaining core telecommunications business. Such sale process is being
conducted by the Monitor under court supervision. On September 19, 2002,
Teleglobe announced the execution of an agreement for the sale to affiliates of
TenX Capital Partners and Cerberus Capital Management (the "Purchasers") of its
core telecommunications business for U.S. $155 million, subject to certain
adjustments. The parties also indicated that they intend to enter into an
agreement for the management by the Purchasers of the core telecommunications
business upon satisfaction of certain conditions, including the consent of Bell
Canada to the assignment of its contracts with Teleglobe to the Purchasers.
Subject to the foregoing and the granting of all regulatory approvals, closing
is expected to occur in early 2003. The foregoing transaction being subject to
a number of conditions, there can be no assurance that it will be completed on
the agreed terms or at all, so that service can continue to be provided to the
customers of BCE on an uninterrupted basis. The failure of the sale process
may result in a decision to proceed with a shutdown of Teleglobe's business and
a liquidation of its remaining assets. An affiliate of BCE Inc. has provided
Teleglobe with a borrowing facility of approximately U.S. $94 million on a
debtor-in-possession basis (the "DIP Facility") as well as a U.S. $25 million
facility to allow Teleglobe to meet its obligations under an Employee Severance
and Retention Plan (the "Employee Facility"). On September 20, 2002, following
the closing of the sale by Teleglobe of its equity interest in Intelsat, Ltd.
for U.S. $65 million, all outstanding borrowings under the DIP Facility (U.S.
$55 million) were repaid and the availability thereunder was reduced from U.S.
$93.6 million to U.S. $50 million. The revised DIP Facility provides that
Teleglobe will not be allowed to borrow thereunder until such time as all the
remaining proceeds of the Intelsat, Ltd. sale will have been used to fund
Teleglobe's operations. Effective September 30, 2002, the availability under
the DIP Facility was further reduced to U.S. $30 million and its maturity
extended to the earlier of the date of execution of the management agreement
referred to above and November 30, 2002. As of October 23, 2002, no amount is
outstanding under the DIP Facility and the Employee Facility (an aggregate of
U.S. $7.4 million previously advanced under the Employee Facility has been
repaid by way of set-off). There can be no assurance that Teleglobe will be
able to repay amounts advanced by BCE under the DIP Facility and the Employee
Facility or that realization of any security will be sufficient to repay BCE.
BCE does not expect to realize any material amount from its investment in
Teleglobe.
Since (i) BCE's management does not expect any future economic benefits from
its approximate 96% economic and voting interest in Teleglobe, (ii) BCE has
not guaranteed any of Teleglobe's obligations, and (iii) BCE has ceased further
long-term funding to Teleglobe, BCE deconsolidated Teleglobe's financial
results effective May 15, 2002, and now accounts for the investment at cost.
Therefore, all future financial results of Teleglobe will not affect BCE's
future financial results. The following are amounts relating to BCE's interest
in the net assets of Teleglobe on May 15, 2002: current assets of $1.4 billion,
non-current assets of $4.3 billion, current liabilities of $3.6 billion, and
non-current liabilities of $2.1 billion. Refer to "Legal Proceedings" for a
description of the lending syndicate lawsuit filed against BCE Inc.
BCI
BCI develops and operates advanced communications companies in markets outside
Canada, with a focus on Latin America. Effective January 1, 2002, BCE adopted
a formal plan of disposal of its operations in BCI. Consequently, the results
of BCI have been reported as discontinued operations.
On July 12, 2002, BCI shareholders and holders of BCI's 11% senior unsecured
notes due September 2004 ("the Noteholders") voted to approve a
court-supervised plan of arrangement of BCI pursuant to section 192 of the
Canada Business Corporations Act ("the Plan of Arrangement"). On July 17, 2002,
BCI obtained court approval of the Plan of Arrangement, which includes the sale
by BCI of its interest in Telecom Americas Ltd., through which BCI held the
majority of its investments, to America Movil S.A. de C.V. and, following the
disposition of all assets of BCI and the determination of all claims against
BCI, the liquidation of BCI and the final distribution to BCI's creditors and
shareholders with the approval of the court and ultimately the dissolution of
BCI. BCI completed the sale of its interest in Telecom Americas Ltd. in
July 2002, and is currently proceeding, under court supervision, to implement
the remaining elements of the Plan of Arrangement.
As a result of these events, BCE deconsolidated BCI's financial results
effective June 30, 2002, and now accounts for the investment at cost.
Therefore, all future financial results of BCI will not affect BCE's future
financial results. BCE recorded a charge of $191 million in the second quarter
of 2002 representing a write-down of its investment in BCI to its net
realizable value, which was reported as a loss from discontinued operations.
12
Liquidity and Capital Resources
Three months Nine months
For the period ended September 30 ($ millions) 2002 2001 Change 2002 2001 Change
Cash flows from operating activities 1,486 1,247 239 3,340 2,974 366
Cash flows from investing activities (2,271) (1,235) (1,036) (3,730) 373 (4,103)
Cash flows from financing activities 2,664 (73) 2,737 3,626 (1,563) 5,189
Effect of exchange rate changes on cash
and cash equivalents 1 (1) 2 1 (1) 2
Cash flows used in discontinued operations - (643) 643 (936) (955) 19
Net increase (decrease) in cash and cash equivalents 1,880 (705) 2,585 2,301 828 1,473
13
ANALYSIS OF CASH SOURCES AND CASH USES
BCE Consolidated
Three months Nine months
For the period ended September 30 ($ millions) 2002 2001 2002 2001
Cash flows relating to the repurchase of SBC's 20% interest in Bell Canada
Investment (1,326) (1,326) -
Net issuance of debt instruments 1,076 1,076 -
Net issuance of equity instruments 2,328 2,328 -
2,078 2,078 -
Cash flows relating to regular operations
Cash flows from operating activities 1,486 1,247 3,340 2,974
Capital expenditures (904) (1,034) (2,697) (3,803)
Dividends (389) (376) (1,079) (1,045)
Free cash flow 193 (163) (436) (1,874)
Investments (73) (253) (181) (383)
Divestitures 14 14 469 4,608
Net issuance (repayment) of debt instruments (330) 307 948 (1,434)
Net issuance (repayment) of equity instruments 53 10 266 (125)
Financing activities of subsidiaries to non-controlling interest 44 3 201 1,024
Other (99) 20 (108) (33)
Discontinued operations - (643) (936) (955)
(198) (705) 223 828
Net increase (decrease) in cash and cash equivalents 1,880 (705) 2,301 828
Overview
During the third quarter of 2002, excluding the impact on cash flows of the
financing alternatives relating to the repurchase of SBC's 20% interest in Bell
Canada, BCE generated positive free cash flow of $193 million which were used
for the repayment of $330 million in debt instruments. On a year-to-date basis,
BCE generated negative free cash flow of $436 million, required $181 million
for investments and $936 million for discontinued operations, which were
financed mainly from the net issuance of debt and equity instruments totalling
$1.2 billion and divestitures of $469 million.
14
BCE Acquisition of SBC's 20% interest in BCH
On June 28, 2002, BCE Inc., BCH and SBC reached a negotiated agreement that
will lead to the repurchase, by BCE Inc., of SBC's 20% indirect interest in
BCH, for $6.3 billion. This transaction has a significant impact on the future
liquidity of BCE. BCE Inc. has completed or intends to complete the following
steps towards raising the necessary funds to finance the $6.3 billion
repurchase price of SBC's indirect interest in Bell Canada:
o $1.1 billion drawn on July 15, 2002 under a $3.3 billion two-year
non-revolving credit agreement;
o proceeds from the issuance on July 15, 2002 of nine million BCE Inc. common
shares for $250 million ($27.63 per share), by way of a private placement
to SBC;
o net proceeds from the public issuance on August 12, 2002 of 85 million
BCE Inc. common shares for $2 billion ($24.45 per share);
o net proceeds expected to be received from the proposed public issuance by
BCE Inc. of $1.5 to $2 billion of long-term notes, expected to close by the
end of October 2002;
o $1 to $1.5 billion expected to be accessed from Bell Canada, representing a
portion of the net after-tax proceeds expected to flow to BCE Inc. from the
sale of Bell Canada's and certain affiliates' directories business (see
"Sale of Directories Business"); and
o a second private placement to SBC of up to $250 million, planned on the
second closing expected on or before January 3, 2003.
In the event BCE Inc. does not secure financing for all of the remaining
balance of the $6.3 billion repurchase price on or before January 3, 2003,
BCE Inc.'s current intention is to draw down on the remaining available balance
of the two-year non-revolving credit agreement. Although BCE Inc. does not
currently intend to do so, should amounts drawn under the two-year
non-revolving credit agreement together with the proceeds resulting from the
sources of financing referred to above be insufficient, BCE Inc. could pay
the remaining balance of the $6.3 billion repurchase price by issuing notes
to SBC.
On October 22, 2002, BCE Inc. announced that it has initiated a Canadian public
offering of debt securities to raise approximately $1.5 billion. A draft
prospectus supplement to the short form base shelf prospectus dated August 1,
2002 was filed on October 21, 2002 with all Canadian provincial securities
regulatory authorities. The proceeds will be used to finance part of the
repurchase of SBC's remaining indirect interest in Bell Canada (refer to
"Recent Developments - BCE Acquisition of SBC's 20% interest in BCH").
Free Cash Flow
Free cash flow represents cash flows from operating activities less capital
expenditures and total dividends paid. BCE's positive free cash flow of $193
million for the third quarter of 2002 reflects an improvement when compared to
negative free cash flow of $163 million for the third quarter of 2001. On a
year-to-date basis, BCE's negative free cash flow of $436 million for 2002 also
reflects an improvement when compared to negative free cash flow of $1.9
billion for 2001. The improvement is attributable to a combination of
higher cash flows from operating activities and a reduction in the level of
capital expenditures, as discussed below.
15
Cash flows from operating activities
The increase in BCE's consolidated cash flows from operating activities during
the third quarter of 2002, when compared to the same period in 2001, was mainly
attributable to lower non-cash working capital requirements, partially offset
by lower cash earnings from continuing operations. On a year-to-date basis,
the increase in BCE's consolidated cash flows from operating activities, when
compared to the same period in 2001, was mainly attributable to higher cash
earnings from continuing operations, partially offset by higher non-cash
working capital requirements (refer to discussion under "Results by Operating
Group").
Capital expenditures
Capital expenditures of $904 million for the third quarter of 2002 were lower
than the $1 billion incurred in the third quarter of 2001 as a result of the
continued focus at Bell Canada on lowering capital spending as a percentage of
revenues by better exploiting existing capital across a more integrated
organization, redesigning network operations and management and by allocating
capital to simultaneously benefit strategic opportunities and the core
business. Additionally, on a year-to-date basis, capital expenditures of
$2.7 billion for 2002 were lower than the $3.8 billion incurred in 2001 mainly
due to the purchase of $720 million in spectrum licenses by Bell Mobility in
the first quarter of 2001. In 2002 and 2001, capital expenditures related
mainly to growth initiatives within Bell Canada, including IP/Broadband,
increased digitalisation of the wireless network, national expansion and
continued deployment of the high-speed access infrastructure.
Dividends paid
Total dividends paid during 2002 were comparable to those paid in 2001, and
consisted of dividends paid by BCE to its common shareholders ($0.30 per
common share), dividends paid to its preferred shareholders and dividends paid
by subsidiaries to non-controlling interest.
Investments
In the third quarter of 2002, investments of $1.4 billion related mainly to the
repurchase from SBC of a 3.5% indirect interest in Bell Canada for $1.3
billion. In the third quarter of 2001, investments of $253 million included
Bell Globemedia's acquisitions of CFCF-TV and CKY-TV for a total aggregate
amount of $182 million. During the first nine months of 2002, total investments
of $1.5 billion also included Bell Globemedia's investment of $73 million in
cash for a 40% interest in a newly created company that holds a 99% interest
in the TQS network as well as other television stations, and Bell Globemedia's
purchase of the remaining 5% of the Comedy Network.
Divestitures
There were no significant divestitures in the third quarter of 2002 or 2001.
During the first nine months of 2002, divestitures of $469 million included:
o the partial disposal of Telebec Limited Partnership and Northern Telephone
Limited Partnership through the creation of the Bell Nordiq Income Fund; and
o BCE's sale of its interest in the 1000 de la Gauchetiere West building as
well as Bell Globemedia's sale of its 12% interest in the History channel.
Divestitures in the first nine months of 2001 included BCE's sale of 47.9
million Nortel Networks common shares and the settlement of short-term forward
contracts on those shares for $4.4 billion.
Issuance and Purchase of Common Shares and Preferred Shares
During the third quarter of 2002, BCE Inc. publicly issued 85 million common
shares for total proceeds of $2.1 billion. Additionally, BCE Inc. issued
approximately 9 million common shares, by way of private placement to SBC, for
$250 million. The proceeds from these transactions will be used to pay for part
of the repurchase price of SBC's indirect minority interest in Bell Canada.
In the first nine months of 2002, BCE Inc. generated $266 million from the net
issuance of equity instruments.
o BCE Inc. issued 2.5 million common shares for $62 million under BCE Inc.'s
and Teleglobe's stock option plans and BCE Inc.'s employee savings plan (2.7
million shares for $66 million for the same period in 2001). In the first
nine months of 2001, BCE Inc. also purchased and cancelled 4.5 million of its
common shares under its Normal Course Issuer Bid program for an aggregate
price of $191 million.
o BCE Inc. issued twenty million Cumulative Redeemable First Preferred Shares,
Series AA for aggregate proceeds of $510 million.
o BCE Inc. also repurchased 12 million Series W Preferred Shares for $306
million.
16
Bell Canada
Three months Nine months
For the period ended September 30 ($ millions) 2002 2001 2002 2001
Cash flows from operating activities 1,395 1,124 3,553 2,765
Capital expenditures (712) (777) (2,088) (3,149)
Dividends and interest on equity-settled notes (443) (324) (1,406) (920)
Free cash flow 240 23 59 (1,304)
Investments (44) (7) (53) (110)
Divestitures 9 - 315 510
Net issuance (repayment) of debt instruments (306) 104 290 1,150
Net repayment of equity instruments - - - (65)
Other 24 8 70 50
Net increase (decrease) in cash and cash equivalents (77) 128 681 231
Bell Canada, BCE's most significant subsidiary, generated positive free cash
flow of $240 million in the third quarter of 2002, an improvement over the
$23 million generated in the third quarter of 2001. On a year-to-date basis,
positive free cash flow of $59 million for 2002 also reflects an improvement
when compared to negative free cash flow of $1.3 billion in 2001. During the
third quarter of 2002, in addition to opening liquidity, free cash flow of
$240 million were used for the net repayment of $306 million in debt
instruments. On a year-to-date basis, Bell Canada generated positive free cash
flow of $59 million, $315 million from the creation of the Bell Nordiq Income
Fund and $290 million from the net issuance of debt instruments.
On October 17, 2002, Bell Canada announced the offering of $500 million of
floating rate MTN debentures pursuant to its medium term debenture program.
The closing of the offering is scheduled to occur on October 30, 2002, with
the net proceeds to be used for the repayment of $500 million of existing
floating rate debentures.
BCE Corporate
Three months Nine months
For the period ended September 30 ($ millions) 2002 2001 2002 2001
Cash flows relating to the repurchase of SBC's 20% interest in Bell Canada
Investment (1,326) (1,326) -
Net issuance of debt instruments 1,076 1,076 -
Net issuance of equity instruments 2,328 2,328 -
2,078 2,078 -
Cash flows relating to regular operations
Dividends received 322 232 952 737
Dividends paid (287) (259) (800) (777)
Investments in subsidiaries (40) (105) (655) (367)
Net issuance (repayment) of debt instruments (23) (2) 144 (2,356)
Net issuance (repayment) of equity instruments 53 10 266 (125)
Divestitures - - 130 4,825
Other (148) 55 (280) (289)
Discontinued operations (Investment in Teleglobe) - (529) - (1,038)
(123) (598) (243) 610
Net increase (decrease) in cash 1,955 (598) 1,835 610
During the third quarter of 2002, excluding the impact on cash flows of the
financing alternatives relating to the repurchase of SBC's 20% indirect
interest in Bell Canada, BCE Inc., at the corporate level, generated cash from
dividends of $322 million received from its subsidiaries (primarily Bell
Canada), which was used to pay dividends of $287 million to BCE Inc's
shareholders, inject $40 million in Bell ExpressVu, as well as for corporate
overhead expenses. During the first nine months of 2002, BCE Inc. generated
cash from dividends of $952 million received from its subsidiaries (primarily
Bell Canada), $410 million from the net issuance of debt and equity
instruments, and $130 million from the sale of investments, which in addition
to opening liquidity of $250 million, were used to pay dividends of $800
million to BCE Inc.'s shareholders, inject $98 million in Teleglobe, $392
million in BCI and $165 million in Bell ExpressVu, as well as for corporate
overhead expenses.
COMMERCIAL PAPER PROGRAMS
The commercial paper programs of BCE Inc., Bell Canada and Aliant (excluding
BCE Inc.'s and Bell Canada's extendable Class E Notes) are supported by lines
of credit, extended by several banks, totalling $1.9 billion at September 30,
2002, under which a total of $627 million in commercial paper was outstanding
at such date. In addition, Bell Canada had $20 million of Class E Notes
outstanding (nil at BCE) at September 30, 2002. Under their commercial paper
programs, BCE Inc. and Bell Canada may issue Class E Notes that are not
supported by any committed lines of credit but are extendable, at BCE Inc.'s
and Bell Canada's option, in certain circumstances. The maximum principal
amount of Class E Notes outstanding at any one time may not exceed $360 million
in the case of BCE Inc. and $400 million in the case of Bell Canada.
17
BCE INC. CREDIT RATINGS
S&P (1) DBRS (2) Moody's (3)
Commercial Paper A-1 (mid) R-1 (low) P-2
Extendable Commercial Notes A-1 (mid) R-1 (low) -
Long-term debt A- A (negative) Baa-1 (negative)
Preferred shares P-2 Pfd-2 (negative) -
(1)Standard & Poor's ("S&P") (a division of The McGraw-Hill Companies Inc.)
confirmed BCE Inc.'s ratings on October 22, 2002.
(2)Dominion Bond Rating Service Limited ("DBRS") confirmed BCE Inc.'s ratings
on October 22, 2002.
(3)Moody's Investors Service confirmed BCE Inc.'s ratings on October 22, 2002.
Regulatory Decisions
On May 30, 2002, the CRTC issued Decision 2002-34 "Regulatory Framework For
Second Price Cap Period", making a number of changes to the rules which govern
Canada's telecommunications industry. The main highlights of the decision
include a reduction in the rates the incumbent telephone companies charge their
competitors for certain services, a restriction on local service rate increases
for business customers to the rate of inflation, and for the majority of
residential customers, there is a commitment to provide for future rate
reductions, rate rebates or initiatives that would benefit residential
customers in other ways. The total amount available each year for such
initiatives will be determined on the basis of a formula that depends on the
rate of inflation and certain other factors. BCE may apply at any time for
approval of such initiatives; however, the CRTC has indicated its intention to
dispose each year of any amounts that are outstanding, beginning no sooner
than the middle of 2003. The effects of this decision will therefore be
recognized in the financial statements in accordance with its accounting
policies as the revenues are earned or the costs of service are incurred. It
is anticipated that, in order to comply with the decision, various expenses
and capital expenditures will be incurred. The impact of the CRTC decision is
expected to result in a reduction of approximately $93 million in Bell Canada's
EBITDA for 2002, with a cumulative financial impact thereafter of approximately
$1,095 million for the remaining period covered by the decision (2003 to 2006).
On August 27, 2002, AT&T Canada Corp. ("AT&T Canada") petitioned the Governor
in Council to modify portions of CRTC Decision 2002-34. For further details,
refer to "Risk Factors - Risks Affecting the Bell Canada Segment - Wireline
Regulation".
Recent Pronouncements
Business Combinations, Goodwill and Other Intangible Assets
The CICA issued new Handbook Sections 1581, Business Combinations, and 3062,
Goodwill and Other Intangible Assets. Effective July 1, 2001, the standards
require that all business combinations be accounted for using the purchase
method. Additionally, effective January 1, 2002, goodwill and intangible assets
with an indefinite life are no longer being amortized to earnings and will be
assessed for impairment on an annual basis in accordance with the new
standards, including a transitional impairment test whereby any resulting
impairment was charged to opening retained earnings. BCE's management allocated
its existing goodwill and intangible assets with an indefinite life to its
reporting units and completed the assessment of the quantitative impact of the
transitional impairment test on its financial statements. In 2002, an
impairment of $8,180 million was charged to opening retained earnings as of
January 1, 2002, as required by the transitional provisions of the new CICA
Handbook section 3062, relating to impaired goodwill of reporting units within
Teleglobe ($7,516 million), Bell Globemedia ($545 million) and BCE Emergis
($119 million).
Foreign Currency Translation
Effective January 1, 2002, BCE also adopted the revised recommendations of CICA
Handbook Section 1650, Foreign Currency Translation. The standards require that
all unrealized translation gains and losses on assets and liabilities
denominated in foreign currencies be included in earnings for the year,
including gains and losses on long-term monetary assets and liabilities, such
as long-term debt, which were previously deferred and amortized on a
straight-line basis over the remaining lives of the related items. These
amendments were applied retroactively with restatement of prior periods. The
cumulative effect as at January 1, 2002 was to decrease other long-term assets
by $288 million, increase future income taxes by $27 million, decrease
non-controlling interest by $70 million and decrease retained earnings by $191
million.
Stock-Based Compensation and Other Stock-Based Payments
BCE also adopted the new recommendations of CICA Handbook Section 3870,
Stock-based compensation and other stock-based payments, effective January 1,
2002. This Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services. The standard requires that all stock-based
awards made to non-employees be measured and recognized using a fair value
based method. The standard encourages the use of a fair value based method for
all awards granted to employees, but only requires the use of a fair value
based method for direct awards of stock, stock appreciation rights, and awards
that call for settlement in cash or other assets. Awards that a company has the
ability to settle in stock are recorded as equity, whereas awards that the
entity is required to or has a practice of settling in cash are recorded as
liabilities. For BCE, this Section applies to all awards granted on or after
January 1, 2002. BCE has elected to account for employee stock options by
measuring compensation cost for options as the excess, if any, of the quoted
market price of BCE Inc.'s common shares at the date of grant over the amount
an employee must pay to acquire the common shares.
Legal Proceedings
WAGE PRACTICES INVESTIGATION
On August 30, 2002, Bell Canada reached a settlement with the CTEA with respect
to the 1994 pay equity complaints filed by members of the CTEA before the
Canadian Human Rights Tribunal. The settlement includes a cash payout of
$128 million and related pension benefits of approximately $50 million.
The settlement was ratified by the CTEA members on September 27, 2002. No
settlement has yet been reached with members of the CEP union.
18
TELEGLOBE LENDING SYNDICATE LAWSUIT
A Statement of Claim was issued on July 12, 2002 in the Ontario Superior
Court of Justice by ABN AMRO Bank N.V., Bank of Montreal, Bank of Tokyo-
Mitsubishi (Canada), Bayerische Landesbank Girozentrale, BNP Paribas
(Canada), La Caisse Centrale Desjardins du Quebec, Canadian Imperial Bank of
Commerce, Canadian Imperial Bank of Commerce, N.Y. Agency, Citibank,
N.A., Credit Suisse First Boston Canada, Credit Suisse First Boston, Export
Development Canada, HSBC Bank Canada, JPMorgan Chase Bank, Laurentian Bank
of Canada, Merrill Lynch Capital (Canada) Inc., Merrill Lynch Capital
Corporation, National Bank of Canada, Royal Bank of Canada, Societe
Generale, The Bank of Nova Scotia, and The Toronto-Dominion Bank
(collectively referred to in this paragraph as the "Plaintiffs") against BCE
Inc. The Plaintiffs seek damages from BCE Inc. in the aggregate amount of
US$1.19 billion (together with interests and costs), which they allege is
equal to the amount they advanced as members of the Teleglobe Inc. and
Teleglobe Holdings (U.S.) Corporation lending syndicate. The Plaintiffs
represent approximately 95.2% of the US$1.25 billion advanced by the members
of such lending syndicate. The Plaintiffs' claim is based on several
allegations, including that the actions and representations of BCE Inc.
and its management in effect constituted a legal commitment of BCE Inc. that
the advances would be repaid. On September 10, 2002, BCE Inc. filed a motion
to stay or dismiss the action on the basis that the Ontario Superior Court
of Justice does not have jurisdiction and that Quebec is the convenient forum
for the adjudication of the Plaintiffs' claims. On September 27, 2002,
BCE Inc. filed another motion for a declaration that the Plaintiffs' legal
counsel is in a position of conflict of interest acting as counsel to the
Plaintiffs and for an order removing the Plaintiffs' legal counsel as the
solicitors of record for the Plaintiffs in this lawsuit. These motions are
expected to be heard by the Ontario Superior Court of Justice on or about
November 28, 2002. While the final outcome of any legal proceeding cannot
be predicted with certainty, based upon information currently available
BCE Inc. is of the view that it has strong defences and it intends to
vigorously defend its position.
BELL CANADA INTERNATIONAL INC. LAWSUITS
On September 27, 2002, BCE Inc. announced that a lawsuit had been filed with
the Ontario Superior Court of Justice by Wilfred Shaw, a common shareholder
of BCI. The plaintiff is seeking the Court's approval to proceed by way of
class action on behalf of all persons who owned BCI common shares on
December 3, 2001. The lawsuit seeks $1 billion in damages from BCI and
BCE Inc. in connection with the issuance of BCI common shares on
February 15, 2002 pursuant to BCI's recapitalization plan announced on
December 3, 2001 ("Recapitalization Plan") and the implementation of BCI's
plan of arrangement approved by the Ontario Superior Court of Justice on
July 17, 2002. While the final outcome of any legal proceeding cannot be
predicted with certainty, based upon information currently available,
BCE Inc. is of the view that it has strong defences and it intends to
vigorously defend its position.
On April 29, 2002, BCI announced that a lawsuit had been filed with the
Ontario Superior Court of Justice by certain former holders of BCI's $250
million 6.75% convertible unsecured subordinated debentures (the "Debentures")
and that the plaintiffs were seeking the Court's approval to proceed by way of
class action on behalf of all holders of the Debentures on December 3, 2001.
The plaintiffs seek damages from BCI and its directors, BCE Inc. and BMO
Nesbitt Burns Inc. up to an amount of $250 million plus punitive damages
and other amounts totaling $35 million in connection with the settlement,
on February 15, 2002, of the Debentures through the issuance of common
shares, in accordance with BCI's Recapitalization Plan. While the final
outcome of any legal proceeding cannot be predicted with certainty, BCE Inc.
is of the view that it has strong defences and it intends to vigorously defend
its position.
BELL GLOBEMEDIA CLASS ACTION LAWSUITS
On February 5, 2001, Bell Globemedia Publishing Inc., a subsidiary of Bell
Globemedia, was added as a defendant to a class action lawsuit in respect
of copyright infringement. The claim is that The Globe and Mail newspaper
and magazines (as well as Bell Globemedia Interactive) 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, because
allegedly only print rights were originally obtained with respect to that
material. The relief claimed includes damages of $100 million as well as
injunctive relief. The Ontario Superior Court of Justice rendered a decision
on October 3, 2001, rejecting the plaintiff's motion for partial summary
judgment (including the rejection of a requested injunction at this stage)
on certain proposed common issues. The Ontario Superior Court of Justice
declared that The Globe and Mail was legally entitled to publish the newspaper
on microfilm, microfiche and in the Internet edition, but reserved for trial
the question of whether The Globe and Mail had, over the years, acquired
implied rights from freelancers to archive and make available the
freelancer's written contents of the newspaper on electronic databases and
CD-ROMS. The plaintiffs have filed a notice of appeal of this decision,
and the defendants have filed a notice of cross-appeal, all of which will
be heard together at some undetermined time in the future.
IRIDIUM LITIGATION
Iridium LLC ("Iridium") developed a global wireless system designed to
enable customers to send and receive telephone calls virtually anywhere in
the world. Iridium has initiated proceedings under the United States
Chapter 11 Bankruptcy Code which are ongoing. Iridium Canada Inc.
("Iridium Canada"), a wholly-owned subsidiary of Bell Mobility, is a
shareholder of Iridium. A group of banks and financial institutions led by
the Chase Manhattan Bank are creditors in the bankruptcy proceedings and
have asserted claims in connection with a U.S. $800 million syndicated loan
to an Iridium subsidiary. In June 2000, the Chase Manhattan Bank, on behalf
of itself and this group (collectively referred to in this paragraph as
the "Plaintiffs"), instituted an action in the United States District Court,
District of Delaware, against 16 shareholders of Iridium, including Iridium
Canada, alleging failure to make capital contributions. The amount of the
claim against Iridium Canada was U.S. $10 million and Iridium Canada has
filed an Answer to the claim. The Plaintiffs have amended their action against
a number of shareholders of Iridium, including Iridium Canada, alleging
fraudulent and negligent misrepresentation and claiming that each are jointly
and severally liable for U.S. $800 million. In January 2002, the Plaintiffs
moved for summary judgment of liability against all defendants on their
claim relating to failure to make capital contributions which includes the
U.S. $10 million claim against Iridium Canada. On the same day, all
defendants cross-moved for summary judgment against the Plaintiffs to have
dismissed all of their claims. On April 23, 2002, the court granted the
defendants' motion for summary judgment to dismiss the Plaintiffs' U.S.
$800 million fraud and negligent misrepresentation claims.
The Plaintiffs have filed an appeal of this decision. Also, on April 23, 2002,
the court denied the defendants' motion for summary judgment to dismiss the
Plaintiffs' capital contributions claim. The defendants have filed an appeal of
this decision. The district judge who will decide the appeals has not given
any indication of when his decision will be rendered.
In addition to the legal proceedings disclosed herein, BCE Inc. and its
subsidiaries and associated companies are involved in various other claims and
legal proceedings, the most significant of which are described in BCE Inc.'s
Annual Information Form for the year ended December 31, 2001 ("Annual
Information Form"). While the final outcome of the legal proceedings
disclosed herein and in the Annual Information Form and of any other pending
claims or legal proceedings cannot be predicted with certainty, it is the
opinion of management that their resolution will not have a material
adverse effect on BCE's consolidated financial position or results of
operations except as set forth in "Risk Factors -- Risks Affecting
BCE -- Potential Adverse Impact of Teleglobe Creditors Litigation". BCE
intends to vigorously defend itself against all such claims and in all such
proceedings.
19
Forward-Looking Statements
Certain statements contained in this MD&A constitute forward-looking
statements. In addition, other written or oral statements which constitute
forward-looking statements may be made from time to time by or on behalf of
BCE. These forward-looking statements relate to the future financial
condition, results of operations or business of BCE. These statements may be
based on current expectations and estimates about the markets in which BCE
operates and management's beliefs and assumptions regarding these markets.
In some cases, forward-looking statements may be identified by words such as
"anticipate", "could", "expect", "seek", "may", "intend", "will", and similar
expressions. These statements are subject to important risks and uncertainties
which are difficult to predict and assumptions which may prove to be
inaccurate. The results or events predicted in the forward-looking statements
contained in this MD&A and in such other written or oral statements which may
subsequently be made may differ materially from actual results or events. Some
of the factors which could cause results or events to differ materially from
current expectations are discussed below under the heading "Risk Factors". In
addition, other risk factors relating to forward-looking statements contained
herein are outlined in this MD&A. Forward-looking statements contained in this
MD&A represent BCE's expectations and intentions as of the date hereof. BCE
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise. In particular, forward-looking statements do not reflect the
potential impact of any divestitures, monetizations, mergers, acquisitions,
other business combinations, or other transactions that may be announced after
such statements are made.
RISK FACTORS
Risks Affecting BCE
Dependence on Bell Canada
The Bell Canada segment is the largest segment of BCE. The financial
performance of BCE depends in large measure on the Bell Canada segment. For the
year ended December 31, 2001, the Bell Canada segment accounted for 89% of the
operating revenues, 95% of EBITDA and 147% of the net earnings applicable to
common shares of BCE Inc. on a consolidated basis.
Economic and Market Conditions
BCE is affected by general economic conditions as demand for the services and
products provided by BCE tends to decline when economic growth and retail and
commercial activity decline. The recent slowdown in global economic activity
has had an adverse impact on the demand for products and services and on the
financial performance of BCE in the first nine months of 2002. Industry-wide
lower demand for data and IP broadband services has reduced Bell Canada's
expected data revenue growth for 2002. Negative economic conditions have
an adverse effect on demand by enterprise and consumer subscribers in the
Bell Canada segment, discretionary spending on networks and other
communications initiatives by enterprise customers of BCE and advertising
spending by customers of Bell Globemedia. Weak economic conditions may also
adversely affect the financial condition and credit risk of subscribers and
customers which would, in turn, increase uncertainties regarding BCE's ability
to collect receivables. Improvements in business and consumer spending
generally lag improvements in the economy. A delay or weakness in economic
expansion or a longer lag on improvement in consumer confidence and spending
may have a material adverse effect on the operating results of BCE in the last
quarter of 2002.
Capital Intensive Business and Turmoil in Capital Markets
BCE requires large amounts of capital to finance on-going capital expenditures
to provide telecommunications services, to finance new product and service
initiatives, and to refinance its outstanding indebtedness. In 2002, BCE
expects to spend $3.7 billion on capital expenditures within the Bell Canada
segment, of which $2.4 billion had been spent as at September 30, 2002, in
addition to the repurchase of SBC's minority interest in Bell Canada and
refinancing outstanding indebtedness that matures during the year. The level
of capital expenditures depends on a number of factors, including the cost of
network updates and expansion, the costs of maintaining or improving the
quality of services and products and the cost of subscriber acquisition. BCE
funds its capital needs from cash generated by operations, borrowings from
commercial banks and debt and equity offerings in the capital markets. The
ability of BCE to finance its operations and its cost of funding will depend
on its ability to access the capital markets, the syndicated commercial
loan market and on market conditions. As a consequence of several events,
including the September 11, 2001 terrorist attacks on the United States,
accounting scandals relating to major North American companies, bandwidth
overcapacity in the telecommunications industry and loss of investor
confidence in the capital markets generally and particularly in the
telecommunications industry, the capital available to the telecommunications
industry generally has been constrained. If BCE cannot raise adequate capital,
BCE may need to curtail its ongoing capital expenditures, limit its investment
in new businesses or seek to raise additional capital through asset sales or
monetization transactions. Equity financing may lead to dilution of existing
equity investors, while increased levels of debt financing may lead to higher
debt service costs, reduction of credit ratings and reduced flexibility to take
advantage of business opportunities.
Financing of the Acquisition of SBC's Minority Interest in Bell Canada
BCE Inc. has arranged for interim financing consisting of a $3.3 billion bridge
facility (the "Bridge Facility"), under which approximately $1.135 billion was
drawn as at September 30, 2002, and up to $3.192 billion (subject to reductions
in accordance with the relevant agreements) which may be borrowed from SBC
pursuant to the financing made available by SBC (the "SBC Financing") to
finance BCE Inc.'s repurchase of SBC's indirect minority interest in Bell
Canada. The Bridge Facility will mature in June 2004 and, if drawn upon, the
SBC Financing will mature up to 18 months from the borrowing date. BCE Inc.
currently intends to draw only temporarily on the Bridge Facility and not to
borrow from SBC, except to the extent amounts drawn under the Bridge Facility
together with other sources of financing are insufficient to pay, on or before
January 3, 2003, all or part of the remaining $4.99 billion purchase price for
SBC's remaining indirect minority interest in Bell Canada. BCE Inc. plans to
finance the remaining $4.99 billion purchase price through a combination of the
issuance of BCE Inc. common shares to the public (which issuance closed on
August 12, 2002 and generated net proceeds of approximately $2.0 billion to
BCE Inc.), $500 million from private placements of common shares to SBC, the
issuance of BCE Inc. debt securities to the public and the use of a portion of
the net proceeds from the previously announced sale of Bell Canada's
directories business expected to close, subject to certain conditions, no later
than the end of November 2002. To the extent BCE is unsuccessful in closing the
Bell Canada directories sale transaction, BCE Inc. will need to rely on the
interim financing facilities which in turn may lead to a decline in BCE Inc.'s
credit ratings and increased borrowing costs. To the extent BCE Inc. is
unsuccessful in closing its proposed public debt offering, it will need to rely
on the interim financing facilities which will increase BCE Inc.'s borrowing
costs. In such cases, BCE Inc. would have to refinance such borrowings by June
2004 and, if such borrowings were refinanced with the issuance of additional
equity securities, existing equity investors would incur dilution. There can be
no assurance that BCE Inc. will be able to complete the proposed public
offering of debt securities or that it will raise all or part of the expected
proceeds from such offering.
20
Credit Ratings
BCE Inc. will increase its level of consolidated debt in connection with its
repurchase of SBC's 20% indirect minority interest in Bell Canada. In addition,
the closing of the sale of Bell Canada's directories business is expected to
take place no later than the end of November 2002, followed by a portion of the
net proceeds flowing to BCE Inc. The increased debt load or a withdrawal of
assets for other than fair value from Bell Canada may lead the credit rating
agencies to downgrade the credit rating of BCE Inc. or Bell Canada which would
increase the funding costs of BCE Inc. and may preclude BCE Inc. from drawing
funds under the Bridge Facility. On June 28, 2002, after BCE Inc. announced the
acquisition of SBC's indirect minority interest in Bell Canada, DBRS confirmed
BCE Inc.'s long term debt rating at A with a negative trend and S&P downgraded
BCE Inc.'s long term debt rating from A+ to A- with a stable outlook. On
July 12, 2002, Moody's downgraded BCE Inc.'s long term debt from A3 to Baa1
with a negative outlook. On October 22, 2002, S&P, DBRS and Moody's all
confirmed BCE Inc.'s long term debt ratings.
Monetization of Non Core Assets/Businesses
BCE Inc. intends to use a portion of the net proceeds from the sale of the Bell
Canada directories business to finance its repurchase of SBC's indirect
minority interest in Bell Canada. The sale of the directories business is
subject to a number of conditions precedent. Therefore, there can be no
assurance that the closing of the transaction will take place or will not be
delayed beyond November 2002. In addition, BCE may also sell or monetize other
non-strategic businesses and assets. There can be no assurance that BCE will be
able to conclude other monetization transactions at satisfactory pricing
levels, if at all. If BCE is unable to sell or monetize these assets, BCE may
need to find alternatives and potentially more expensive sources of capital and
continue to operate businesses that are ancillary to its core businesses.
Teleglobe
Teleglobe and certain of its subsidiaries initiated bankruptcy proceedings
seeking protection from their respective creditors in Canada, the United
States, the United Kingdom and in certain other jurisdictions. At the time the
bankruptcy proceedings were initiated, Teleglobe owed approximately U.S. $5.1
billion to its unsecured creditors, including approximately U.S. $1.3 billion
to bank creditors and approximately U.S. $1.2 billion to public debenture
holders. An affiliate of BCE Inc. has provided Teleglobe with a borrowing
facility of approximately U.S. $94 million on a debtor-in-possession basis
(the "DIP Facility") as well as a U.S. $25 million facility to allow Teleglobe
to meet its obligations under an Employee Severance and Retention Plan (the
"Employee Facility"). On September 20, 2002, following the closing of the sale
by Teleglobe of its equity interest in Intelsat, Ltd. for U.S. $65 million,
all outstanding borrowings under the DIP Facility (U.S. $55 million) were
repaid and the availability thereunder was reduced from
U.S. $93.6 million to U.S. $50 million. The revised DIP Facility provides that
Teleglobe will not be allowed to borrow until such time as all the remaining
proceeds of the Intelsat, Ltd. sale will have been used to fund Teleglobe's
operations. Effective September 30, 2002, the availability under the DIP
Facility was further reduced to U.S. $30 million and its maturity extended to
the earlier of the date of execution of the management agreement referred to
below and November 30, 2002. As of October 23, 2002, no amount is outstanding
under the DIP Facility and the Employee Facility (an aggregate of U.S. $7.4
million previously advanced under the Employee Facility has been repaid by way
of set-off). There can be no assurance that Teleglobe will be able to repay
amounts advanced by BCE under the DIP Facility and the Employee Facility or
that realization of any security will be sufficient to repay BCE. If
Teleglobe is unable to repay any amounts borrowed, BCE may be required to write
off all or a portion of the loans.
On September 19, 2002, Teleglobe announced the execution of an agreement for
the sale to affiliates of TenX Capital Partners and Cerberus Capital Management
(the "Purchasers") of its core telecommunications business for US$155 million,
subject to certain adjustments. The parties also indicated that they intend
to enter into an agreement for the management by the Purchasers of the core
telecommunications business upon satisfaction of certain conditions, including
the consent of Bell Canada to the assignment of its contracts with Teleglobe
to the Purchasers. Closing is expected to occur in early 2003 upon granting of
all regulatory and other approvals. The foregoing transaction being subject
to a number of conditions, there can be no assurance that it will be completed
on the agreed terms or at all, so that service can continue to be provided to
the customers of BCE on an uninterrupted basis. The failure of the sale process
may result in a decision to proceed with a shutdown of Teleglobe's business and
a liquidation of its remaining assets. While BCE will make every effort to
protect customers, there can be no assurance that the customers of BCE could
not encounter temporary service disruptions or reduced quality of service
should BCE encounter delays in migrating its customers to other carriers. Some
customers of BCE who rely on Teleglobe for international private line
connectivity have already requested to be migrated to other carriers.
Arrangements with other carriers to ensure service continuity to these
customers are currently being made.
BCE Inc.'s decision to cease long term funding to Teleglobe may affect the
future willingness of creditors and other investors to provide funds to BCE and
the terms on which future funds may be provided. For example, creditors and
investors may seek pricing to reflect the possible withdrawal of BCE Inc.
support, financial covenants imposed on the borrower or covenants to assure the
financial support of BCE Inc., as a condition of funding.
Potential Adverse Impact of Teleglobe Creditors Litigation
Certain members of the Teleglobe lending syndicate (the "Plaintiffs") filed a
lawsuit against BCE Inc. in the Ontario Superior Court of Justice on July 12,
2002. The Plaintiffs seek damages from BCE Inc. in the aggregate amount of
US$1.19 billion (together with interests and costs), which they allege is
equal to the amount they advanced as members of the Teleglobe Inc. and
Teleglobe Holdings (U.S.) Corporation lending syndicate. The Plaintiffs
represent approximately 95.2% of the US$1.25 billion advanced by the members
of such lending syndicate. The Plaintiffs' claim is based on several
allegations, including that the actions and representations of BCE Inc. and
its management in effect constituted a legal commitment of BCE Inc. that the
advances would be repaid.
While the final outcome of any legal proceeding cannot be predicted with
certainty, based upon information currently available, BCE Inc. is of the view
that it has strong defences and it intends to vigorously defend its position.
There is no assurance other creditors of Teleglobe Inc. or its subsidiaries
(including Teleglobe Inc. bondholders) may not also attempt to assert claims
against BCE Inc. In the event that a final court determination awards
significant damages in favour of the Plaintiffs in any such claims, the
effect of such a determination could materially adversely affect the financial
condition of BCE Inc. For more details, refer to the description of this
proceeding under "Legal Proceedings - Teleglobe Lending Syndicate Lawsuit".
Productivity Initiatives
BCE has implemented, and plans to implement, additional cost containment
initiatives. These initiatives include improvements in call center order entry
and customer service software, Web applications enabling increased levels of
customer self service and improved workforce management tools and the
integration and standardization of various business processes. A majority of
these initiatives are expected to deliver on-going productivity benefits. If
BCE does not successfully implement these initiatives on a timely basis, BCE's
profitability and return on capital could be adversely affected.
21
Revenue Initiatives
BCE seeks to increase its revenues by cross selling additional services to its
existing customer base, making its services more compelling through value added
content and applications and providing its business customers with data and
network management services. If BCE is unable to realize these goals, BCE's
growth prospects will be adversely affected which could have a material
adverse effect on its revenues and results of operations. Demand for BCE's
products and services are affected by factors such as technology development
and innovation, sociodemographic trends, levels of business investment and
general macro economic conditions.
Competition
The markets in which BCE carries on business are characterized by vigorous
competition. BCE faces many competitors with substantial financial, marketing,
personnel and technological resources. In some cases, competition results from
competitors within the same market segment, as well as from other businesses
and industries. In addition, while competitors of BCE already include both
domestic and foreign entities, the number of foreign-based competitors with
large resources may increase in the future.
Some industries in which BCE competes are consolidating. Mergers and
acquisitions, as well as strategic alliances, restructurings, partnerships and
joint ventures can create new and larger participants. Such transactions may
result in stronger competitors with broad skills and significant resources.
Furthermore, new competitors of BCE may emerge from time to time through the
development of new technologies, products and services, and other factors.
Product pricing and customer service are under continued pressure while the
necessity to reduce costs, manage expenses and generate productivity savings
is ongoing. Competition may impact BCE's ability to retain existing and attract
new customers, as well as affect revenues and network capacity. BCE must not
only try to anticipate, but also respond promptly to, continuous and rapid
developments in its businesses and markets.
Rapid Technological Change; New Services
The markets in which BCE operates are characterized by rapid technological
change, evolving industry standards, changing client needs, frequent new
product and service introductions and short product life cycles. The future
success of BCE will depend in significant part on its ability to anticipate
industry standards, successfully introduce new technologies, products and
services and upgrade current products and services, and comply with emerging
industry standards. Furthermore, as BCE seeks to deploy new products, services
and technologies and update its networks to remain competitive, it may be
exposed to incremental financial risks associated with newer technologies that
are subject to accelerated obsolescence, or may be required to inject more
capital than anticipated. The proposed deployment of new technologies, products
and services may also be delayed due to factors beyond BCE's control. In
addition, new technological innovations generally require a substantial
financial investment before any assurance is available as to their commercial
viability. There can be no assurance that BCE will be successful in developing
and marketing new products and services or enhancements that will respond to
technological change and achieve market acceptance. Furthermore, the
introduction of new products or services employing new or evolving technologies
could render existing products or services unmarketable, or cause prices of
existing products or services to decrease.
Internet Growth
The prospects for growth in BCE revenues may be affected by the level of
increases in Internet traffic. Internet traffic is driven by residential and
business Internet usage and has overtaken the volume of voice telephony traffic
on many routes. Growth in Internet traffic will depend on the development of
bandwidth intensive applications that achieve market acceptance and the
increasing use of the Internet as a medium for commerce and communications.
Rapid growth in the use of the Internet and on-line services is a recent
phenomenon, and may not continue. If Internet traffic does not grow or grows
more slowly than expected, BCE's financial condition and results of operations
could be materially adversely affected.
Network Failures
Network failures or mistakes in the provision of services could materially harm
the business of BCE Inc., including customer relationships and operating
results. The operations of BCE are dependent upon its ability to protect its
networks and equipment and the information stored in its data centers against
damages that may be caused by fire, natural disaster, power loss, unauthorized
intrusion, computer viruses, disabling devices, acts of war or terrorism and
other similar events. There can be no assurance that such events would not
result in a prolonged outage of the operations of BCE.
Holding Company Structure
BCE Inc. is a holding company with no material sources of income or assets of
its own other than the interests that it has in its subsidiaries and associated
companies. Substantially all of BCE Inc.'s operations are conducted through its
subsidiaries and associated companies. BCE Inc.'s cash flow and, consequently,
its ability to service its indebtedness and to pay dividends on its equity
securities are dependent upon the ability of its subsidiaries and associated
companies to pay dividends or otherwise make distributions to it. BCE Inc.'s
subsidiaries and associated companies are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any dividends or make
any other distributions to BCE Inc. In addition, any right of BCE Inc. to
receive assets of its subsidiaries or associated companies upon their
liquidation or reorganization will be structurally subordinated to the prior
claims of creditors of such subsidiaries and associated companies.
Skilled Personnel
The success of BCE is largely dependent upon its ability to attract and retain
highly skilled personnel and the loss of the services of key persons could
materially harm its businesses and operating results.
Collective Bargaining Arrangements
A significant number of employees of BCE are represented by unions and covered
by collective bargaining agreements. Renegotiation of existing collective
agreements with unionized employees could lead to higher labour costs or work
stoppages. Renegotiation difficulties or other labour unrest could have a
material adverse effect on the businesses, operating results and financial
condition of BCE. The collective agreements between Bell Canada and the CEP
representing approximately 400 operator service employees and approximately
7,000 craft and service employees expire in November 2003. The collective
agreement between Bell Canada and the CTEA representing approximately 1,000
communication sales employees expires on December 31, 2003.
Litigation and Changes in Laws
BCE is subject to risks related to pending or future litigation or regulatory
initiatives or proceedings. In addition, changes in laws or regulations, or the
adoption of new laws or regulations, could also have a material adverse effect
on BCE's businesses, operating results and financial condition.
22
Pension Fund Contributions
The value of the assets of the pension funds of BCE Inc. and of certain of its
subsidiaries (including Bell Canada) currently exceeds the amount of the
pension benefit obligation. This surplus has not only dispensed BCE Inc. and
certain of such subsidiaries from having to make regular contributions to their
employees' pension funds but has also resulted in BCE recording pension credits
which have had a positive impact on BCE's net earnings. The recent state of
capital markets combined with historically low interest rate levels have caused
a substantial decrease in such companies' pension funds' surplus and pension
credits and have adversely affected BCE's net earnings. Should capital markets
continue to provide lower than expected returns and should interest rates
remain at low levels, the surplus in BCE Inc.'s and such subsidiaries' pension
funds could continue to decrease and potentially be entirely eliminated.
Accordingly, BCE Inc. and such subsidiaries could be required to start
contributing, or increase their contributions, to their employees' pension fund
and BCE's net earnings could be materially adversely affected.
Risks Affecting the Bell Canada Segment
Ongoing Competition
With the advent of competition in the local service market in 1998, virtually
all the businesses conducted by Bell Canada, Aliant Inc. and their subsidiaries
and associated companies (collectively referred to as "Bell Canada" in this
section) face ongoing competition. Bell Canada's competitors include major
telecommunications companies, cable television companies, Internet companies,
wireless service providers, competitive local exchange carriers and a variety
of other companies that offer network services, such as providers of business
information systems and systems integrators, as well as other companies that
deal with, or have access to, customers through various communications
networks. Long distance rates continue to be under pressure.
Cable television companies and a significant number of independent Internet
service providers have created especially competitive conditions for Internet
access services. Competitive pressure has led to Internet access pricing in
Canada that is among the lowest in the world and largely independent of usage
patterns. Costs to Bell Canada, however, are driven by the amount of network
traffic a user generates and the location of the server that stores the Web
site the user visits. Such costs are largely beyond Bell Canada's control and
cannot be accurately predicted.
The Canadian wireless telecommunications industry is also highly competitive.
Bell Mobility competes directly with other wireless service providers with
aggressive product and service introductions, pricing and marketing. Bell
Mobility expects competition to intensify through the development of new
technologies, products and services, and through consolidations in the Canadian
telecommunications industry.
Wireline Regulation
Bell Canada is subject to evolving regulatory policies in the form of decisions
by various regulatory agencies including the CRTC. Many of these decisions
balance competitor requests for access to the essential facilities and other
network infrastructure of incumbent local exchange carriers ("ILECs") such as
Bell Canada with the rights of the ILECs to compete on a reasonably
unencumbered basis. Also, Canadian telecommunications carriers and broadcast
distribution enterprises seeking physical access to customers' facilities on
reasonable terms have increasingly found themselves in disputes with property
owners regarding access to private property or with municipalities with respect
to access to public rights-of-way. On January 25, 2001, the CRTC issued Telecom
Decision 2001-23 regarding the terms and conditions of access by a Canadian
carrier to municipal property in the City of Vancouver, as well as the
entitlement of the municipality to compensation for allowing the carrier to
occupy municipal rights-of way. In its decision, the CRTC limited the
municipality to recovery of incremental costs (as opposed to license fees) and
thereby has significantly reduced the potential charges applicable to Bell
Canada and other carriers. The CRTC's decision is currently under appeal. At
this point in time, it is impossible to assess the financial implications of
any final judicial decision.
23
In addition, the CRTC recently completed its review of the price cap regime
which has been in force since January 1998 for the major incumbent telephone
companies. The price cap decision includes a reduction in the rates that
incumbent telephone companies charge their competitors for certain services.
The new price cap regime recently introduced by the CRTC raises certain risks
for Bell Canada. For example, the CRTC has established a deferral account as
part of the new regulatory framework. The use of the deferral account is not
yet determined thereby creating the risk of some unanticipated use that could
have a negative impact on Bell Canada. On August 27, 2002, AT&T Canada
petitioned the Governor in Council to modify portions of the price cap
decision. Among other things, AT&T Canada requests that the prices of certain
network facilities and services purchased by competitors be reduced, effective
June 1, 2002, to a level that reflects recovery only of the incumbents' costs,
that such costs be determined in a new manner in a follow-up proceeding by the
CRTC to be completed by the end of June 2003, and that prices be reduced by
50%, effective June 1, 2002 pending completion of such proceeding. On
September 19, 2002, Aliant, Bell Canada, Manitoba Telecom and SaskTel filed
their response to the petition. The response points out that AT&T Canada is
making essentially the same proposal that it made in the public hearing
conducted by the CRTC, a proposal which the CRTC rejected on the basis that it
would not foster facilities-based competition, would introduce disincentives
for the construction of facilities, would undermine the development of a
wholesale market and likely lead to significant distortions in the retail
market, and would not lead to just and reasonable rates. The response requests
that the Governor in Council reject the petition categorically. Of the
numerous parties, including competitors, that participated in the CRTC
proceeding which led to the price cap decision, AT&T Canada is the only party
that has petitioned the Governor in Council for changes to the decision. The
time period stipulated in the Telecommunications Act for any party to file a
petition expired on August 28, 2002. Other parties may file submissions in
response to the AT&T Canada petition. The Governor in Council must render a
decision by May 30, 2003.
Wireless Regulation
The operation of cellular, personal communications service ("PCS") and other
radio-telecommunications systems in Canada is subject to initial licensing
requirements and the oversight of Industry Canada, including caps on spectrum
ownership and the conduct of wireless spectrum auctions. Spectrum licenses are
issued at the discretion of the Minister of Industry pursuant to the
Radiocommunication Act. Bell Mobility's current cellular and PCS licenses will
expire on March 31, 2006. The recently awarded PCS spectrum auction licenses
will expire on November 29, 2011. Industry Canada has the authority at any time
to modify the license conditions applicable to the provision of such services
in Canada to the extent necessary to ensure the efficient and orderly
development of radiocommunication facilities and services in Canada. Industry
Canada can revoke a license at any time for failure to comply with its terms.
In early June 2002, Industry Canada released a public notice which announced
the department's intent to initiate a process, with public consultation, that
will lead to the development over the next few years of a renewed spectrum
policy framework. It is expected that all aspects of the framework will be
open to review. It is anticipated that Industry Canada will, at the end of
this consultation period, give effect to its conclusions by making suitable
amendments to existing license conditions. All Bell Mobility licenses are
subject to the spectrum policy framework and therefore subject to the
consultative process. The discussion of license fees will be specific to those
licenses assigned to Bell Mobility outside of the auction process. This
includes the original cellular license in Ontario and Quebec and the original
PCS license in Ontario and Quebec.
New Wireless License Acquisitions; Wireless Network Expansion
Bell Mobility and certain of its competitors have successfully bid for
additional spectrum licenses in early 2001. Some of the awarded licenses have
enabled Bell Mobility to roll out wireless services in British Columbia and
Alberta. The initial network built for Vancouver, Victoria, Edmonton, and
Calgary is now complete. Bell Mobility expects to substantially complete the
expansion of its western networks by the end of 2002. The expected level of
operating expenditures associated with this network expansion could increase as
Bell Mobility will seek to secure new customers. Some of Bell Mobility's
competitors were awarded additional spectrum licenses in Bell Mobility's
current operating regions thereby increasing their overall spectrum capacity
that has the potential for increasing competition and market share losses in
such regions. Although the new licenses awarded to Bell Mobility provide it
with the possibility to launch new technologies, services and applications and
to geographically expand its operations, there can be no assurance that such
additional licenses will result in the successful deployment of such new
technologies, services and applications, a successful geographical expansion
and, in general, in an improvement in Bell Mobility's financial condition and
results of operations.
Use of Handsets in Vehicles
Media reports have suggested that the use of hand held cellular units by
drivers in vehicles may, in certain circumstances, result in an increased rate
of accidents on the road. It is possible that new legislation or regulations
may be adopted in order to address these concerns. Any such legislation or
regulations could adversely affect Bell Mobility and other wireless service
providers through reduced network usage by subscribers in motor vehicles.
24
Radio Frequency Emission Concerns
Media reports have suggested that certain radio frequency emissions from
cellular telephones may be linked to certain medical conditions such as cancer.
In addition, certain interest groups have requested investigations into claims
that digital transmissions from handsets used in connection with digital
wireless technologies pose health concerns and cause interference with hearing
aids and other medical devices. There can be no assurance that the findings of
such studies will not have a material adverse effect on the business of Bell
Mobility or will not lead to governmental regulation. The actual or perceived
health risks of wireless communications devices could adversely affect wireless
service providers through reduced subscriber growth, reduced network usage per
subscriber, threat of product liability lawsuits or reduced availability of
external financing to the wireless communications industry.
Bell ExpressVu
To date, Bell ExpressVu has funded operating losses through capital injections
from BCE Inc. Bell ExpressVu may access external funding from other sources to
achieve its business plan, thereby reducing the capital injections needed from
BCE Inc. or any other BCE group entity. However, such access is based on a
business plan that is subject to various assumptions and estimates, including
subscriber base, average revenue per subscriber and costs for acquiring new
subscribers. Bell ExpressVu also faces a risk associated
with the possible loss of revenue resulting from theft of its services which,
while mitigated through technical and legal action, may require additional
capital and operating expenditures. If the business plan is not achieved,
greater losses than planned would occur, requiring Bell ExpressVu to seek
additional financing. There is no assurance that Bell ExpressVu will be
successful in obtaining such financing on favourable terms and conditions.
The success of Bell ExpressVu's DTH business strategy is subject to factors
that are beyond its control and impossible to predict due, in part, to the
limited history of digital DTH services in Canada. Consequently, the size of
the Canadian market for digital DTH services, the rates of penetration of that
market, the churn rate, the extent and nature of the competitive environment
and the ability of Bell ExpressVu to meet revenue and cost expectations are
uncertain. There is no assurance that Bell ExpressVu will be profitable in
delivering its DTH services. In addition, Bell ExpressVu's DTH services are
provided solely through the Nimiq Direct Broadcast Satellite operated by
Telesat. Satellites are subject to significant risks, including manufacturing
defects, destruction or damage that may prevent proper commercial use, or
result in the loss of the satellite. Any such loss, manufacturing defects,
damage or destruction of the satellite would have a material adverse impact on
Bell ExpressVu's results of operations and financial condition. Bell ExpressVu
is subject to regulation under programming and carriage requirements under the
Broadcasting Act. Changes in such regulation could adversely affect the
competitive posture of the services provided by Bell ExpressVu or its costs of
providing services.
Bell ExpressVu's competitors have pursued, and may continue to pursue,
aggressive marketing campaigns and pricing policies targeting the existing
customers of Bell ExpressVu. In addition, Bell ExpressVu has recently faced
increased competition from unregulated US DTH services sold illegally in
Canada. Although Bell ExpressVu has, to date, been successful in increasing
market share in the face of such competition, there is no assurance that such
success will continue nor that Bell ExpressVu will be able to increase average
revenue per subscriber, or maintain or reduce subscriber acquisition costs. In
order to clarify the threat posed by competition from unregulated US DTH
services, Bell ExpressVu has initiated, or is participating in, a number of
legal actions which are challenging any potential legitimate basis for the sale
of US DTH equipment in Canada.
Risks Affecting Bell Globemedia
Dependence on Advertising
Advertising is related to economic growth and tends to follow Canadian gross
domestic product. Accordingly, economic downturns may adversely impact Bell
Globemedia's ability to maintain or generate revenue growth since its revenue
base from the television, print and interactive sectors is largely dependent on
advertising revenues.
Market Fragmentation
Market fragmentation in television broadcasting has increased over the last
decade as a result of the introduction of additional television services, the
extended reach of existing signals and the launch of new digital broadcasting
services in the fall of 2001. Furthermore, new Web-based services available
over the Internet are expected to provide alternative niche services to
consumers, continuing the fragmentation of the viewing market. There can be no
assurance that Bell Globemedia will be able to maintain or increase its current
ability to reach television viewers with programming content that is
satisfactory to the public, or that Bell Globemedia will be able to maintain
or increase its current advertising revenues since advertising revenues depend
in part on the reach and attractiveness of programming content.
25
New Print Competitors
Competition has intensified in the print sector, with the launch of the
National Post in 1998 and the launch of several commuter papers in the Toronto
market. Increased print competition has led to increased circulation and other
costs and price competition on advertising, resulting in a decline in profit
margins at The Globe and Mail. There can be no assurance that The Globe and
Mail will revert to the level of profit margins which existed before such
increased competition was introduced.
Broadcast Regulation
Each of CTV's conventional and specialty services operates under a license
issued by the CRTC for a fixed term, up to seven years. These licenses are
subject to the requirements of the Broadcasting Act, the regulations enacted
thereunder, the policies and decisions of the CRTC, and the conditions and
expectations established in each licensing or renewal decision. These
requirements may change or be amended from time to time. License renewals are
typically granted by the CRTC, although conditions of license and expectations
are often varied or amended at the time of renewal. There can be no assurance
that any such licenses will be renewed. In addition, any renewals, changes or
amendments may have a material adverse effect on Bell Globemedia.
Risks Affecting BCE Emergis
Adoption of E-Commerce
In order for BCE Emergis to be successful, e-commerce must continue to be
widely adopted in a timely manner. Because e-commerce, and transactions over
the Internet in general, are new and evolving, it is difficult to predict the
size of this market and its sustainable growth rate. Adoption of e-commerce has
not been as fast as originally anticipated.
In order to build its recurring revenue base, the number of transactions that
BCE Emergis processes must increase. This increase will depend on the rate at
which its solutions are adopted by its customers and by its channel partners'
customers (i.e. customers of its distributors). It will also depend on its
ability to stimulate its channel partners, such as large financial institutions
and insurance companies, in being pro-active and successful in selling BCE
Emergis' solutions to their customers.
Operating Results
On April 5, 2002, BCE Emergis announced a plan to focus on key growth areas,
drive recurring revenue growth and streamline its service offering and
operating costs. Should BCE Emergis fail to successfully implement such plan,
the results of operations of BCE Emergis could be materially adversely
affected.
BCE Emergis' quarterly revenue is difficult to forecast since the market for
e-commerce is rapidly evolving. The level of non-recurring revenue in any
period is significantly affected by the economic environment and its impact on
sales cycles, its ability to enter into new sales agreements, and by the
announcements and product offerings of its competitors as well as alternative
technologies.
Quarterly operating results of BCE Emergis have fluctuated in the past and BCE
Emergis expects them to continue to fluctuate in the future. Volatility in
quarterly results is mainly due to the level of non-recurring revenue.
Success of U.S. Operations
BCE Emergis is expanding its operations in the United States. BCE Emergis has
limited experience in marketing, selling and supporting its services in other
countries, including the United States. BCE Emergis may not be able to
successfully market, sell, deliver and support its services in the United
States. BCE Emergis will need to devote significant management and financial
resources to its expansion in the United States. In particular, BCE Emergis
will have to attract and retain experienced management and other personnel.
Competition for such personnel is intense, particularly in the United States,
and BCE Emergis may be unable to attract and retain qualified staff. If BCE
Emergis is unable to expand its international operations successfully and in a
timely manner, its business and operating results could be materially harmed.
Risks Affecting BCE Ventures
Telesat
In August 2001, Boeing Satellite Systems ("Boeing"), the manufacturer of the
Anik F1 satellite, advised Telesat of a gradual decrease in available power
on-board the satellite and on July 19, 2002, advised Telesat that the amount
of available power onboard the satellite continues to decline. Boeing is now
postulating that the available power could decline beyond levels previously
expected and is investigating the cause of the power loss but, at this time,
cannot accurately quantify the eventual extent of the degradation. If the
situation does not change, at current observed rates of power degradation,
certain core services on the satellite could be affected starting in mid 2005.
Telesat has begun the planning required to take the appropriate action to
provide its customers with continuous service. Telesat has insurance in place
to cover such occurrences and intends to file a claim at the appropriate time.
Although management believes that any claim it makes in connection with the
power anomaly will be resolved successfully, there can be no assurances on the
ultimate timing, amount or success of the settlement of such claim.
26
CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
---------------------------------------------
($ millions, except share amounts) (unaudited) 2002 2001(1) 2002 2001(1)
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues 4,822 4,818 14,596 14,227
---------------------------------------------
Operating expenses 2,870 2,941 8,887 8,812
Amortization expense 771 963 2,352 2,878
Net benefit plans credit (7) (26) (25) (90)
Restructuring and other charges (Note 4) 79 492 239
-
---------------------------------------------
Total operating expenses 3,713 3,878 11,706 11,839
---------------------------------------------
Operating income 1,109 940 2,890 2,388
Other income (expense) (Note 5) (4) 69 226 4,026
---------------------------------------------
Earnings from continuing operations before the under-noted items 1,105 1,009 3,116 6,414
---------------------------------------------
Interest expense - long-term debt 269 235 763 709
- other debt 19 20 49 92
---------------------------------------------
Total interest expense 288 255 812 801
---------------------------------------------
Earnings from continuing operations before
income taxes and non-controlling interest 817 754 2,304 5,613
Income taxes 303 368 840 1,728
Non-controlling interest 130 49 401 224
---------------------------------------------
Earnings from continuing operations 384 337 1,063 3,661
Discontinued operations (Note 6) (465) (340) (2,862)
-
---------------------------------------------
Net earnings (loss) 384 (128) 723 799
Dividends on preferred shares (16) (16) (43) (50)
---------------------------------------------
Net earnings (loss) applicable to common shares 368 (144) 680 749
--------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share - basic (Note 7)
Continuing operations 0.43 0.40 1.23 4.47
Net earnings (loss) 0.43 (0.18) 0.82 0.93
Net earnings (loss) per common share - diluted (Note 7)
Continuing operations 0.42 0.39 1.22 4.43
Net earnings (loss) 0.42 (0.18) 0.82 0.92
Dividends per common share 0.30 0.30 0.90 0.90
Average number of common shares outstanding (millions) 864.1 807.9 827.3 807.8
--------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of net earnings to reflect the comparative
impact of the non-amortization of goodwill and indefinite-life intangible
assets effective January 1, 2002 (Refer to Note 1):
Adjusted net earnings (loss)
Net earnings (loss), as reported 384 (128) 723 799
Amortization expense on goodwill and indefinite-life intangible assets 237 737
- -
---------------------------------------------
Net earnings, adjusted 384 109 723 1,536
--------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings per common share
Basic 0.43 0.12 0.82 1.84
Diluted 0.42 0.11 0.82 1.82
--------------------------------------------------------------------------------------------------------------------------------
(1) Refer to Note 1 "Significant accounting policies" for basis of
presentation.
27
CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
-------------------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
----------------------------------------------
($ millions) (unaudited) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period, as previously reported (7,649) 1,627 712 1,339
(8,180)
Adjustment for change in accounting policy (Note 1) - - -
----------------------------------------------
Balance at beginning of period, as restated (7,649) 1,627 (7,468) 1,339
Net earnings 384 (128) 723 799
Dividends - Preferred shares (16) (16) (43) (50)
- Common shares (272) (243) (757) (727)
----------------------------------------------
(288) (259) (800) (777)
osts relating to the issuance of common shares (62) (62)
C - -
remium on redemption of common and preferred shares
P - - (6) (108)
Other 10 (2) 8 (15)
----------------------------------------------
Balance at end of period (7,605) 1,238 (7,605) 1,238
-------------------------------------------------------------------------------------------------------------------------
28
CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------------------
September 30 December 31
($ millions) (unaudited) 2002(1) 2001
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents(2) 2,870 569
Accounts receivable 2,547 4,118
Other current assets 871 1,213
--------------------------------
Total current assets 6,288 5,900
Investments 987 1,106
Capital assets 20,158 25,861
Future income taxes 728 1,031
Other long-term assets 3,266 3,363
Indefinite-life intangible assets 879 866
Goodwill 6,677 15,947
--------------------------------
Total assets 38,983 54,074
-------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 3,722 5,792
Income and other taxes payable 33 681
Debt due within one year 2,780 5,263
--------------------------------
Total current liabilities 6,535 11,736
Long-term debt 12,470 14,861
Future income taxes 922 924
Other long-term liabilities 2,998 4,129
--------------------------------
Total liabilities 22,925 31,650
--------------------------------
Non-controlling interest 4,937 5,625
--------------------------------
SHAREHOLDERS' EQUITY
Preferred shares 1,510 1,300
--------------------------------
Common shareholders' equity
Common shares(3) 16,217 13,827
Contributed surplus 980 980
Retained earnings (deficit) (7,605) 712
Currency translation adjustment 19 (20)
--------------------------------
Total common shareholders' equity 9,611 15,499
--------------------------------
Total shareholders' equity 11,121 16,799
--------------------------------
Total liabilities and shareholders' equity 38,983 54,074
-------------------------------------------------------------------------------------------------------------------------------
(1) Refer to Note 1 "Significant accounting policies" for basis of
presentation.
(2) At December 31, 2001, cash and cash equivalents include $233 million of
restricted cash (nil at September 30, 2002). This amount represented BCE's
share of Telecom Americas Ltd.'s cash used by it to collaterallize short-term
bank loans of certain of its subsidiaries.
(3) At September 30, 2002, 905,025,009 (808,514,211 at December 31, 2001)
BCE Inc. common shares and 22,027,936 (18,527,376 at December 31, 2001)
BCE Inc. stock options were outstanding. 94 million common shares were issued
during the third quarter of 2002 in connection with the repurchase by BCE Inc.
of SBC Communications Inc.'s indirect minority interest in Bell Canada (refer
to Note 3 "Business acquisitions and dispositions"). The stock options were
issued under BCE's Long-Term Incentive Stock Option Programs and are
exercisable on a one-for-one basis for common shares of BCE Inc. Additionally,
Teleglobe stock option holders will receive, upon exercise of their stock
options, 0.91 of a BCE Inc. common share for each Teleglobe stock option held.
At September 30, 2002, the Teleglobe stock options outstanding were exercisable
into 6,073,878 BCE Inc. common shares (10,204,966 at December 31, 2001).
29
CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
----------------------------------------------
($ millions) (unaudited) 2002 2001(1) 2002 2001(1)
------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Earnings from continuing operations 384 337 1,063 3,661
Adjustments to reconcile earnings from continuing operations to
cash flows from operating activities:
Amortization expense 771 963 2,352 2,878
Restructuring and other charges 67 (19) 472 184
Net gains on investments (11) (147) (175) (4,038)
Future income taxes 109 160 (10) 503
Other items 14 280 134 (103)
Changes in non-cash working capital components 152 (327) (496) (111)
----------------------------------------------
1,486 1,247 3,340 2,974
----------------------------------------------
Cash flows from investing activities
Capital expenditures (904) (1,034) (2,697) (3,803)
Investments (1,399) (253) (1,507) (383)
Divestitures 14 14 469 4,608
Other items 18 38 5 (49)
----------------------------------------------
(2,271) (1,235) (3,730) 373
----------------------------------------------
Cash flows from financing activities
Increase (decrease) in notes payable and bank advances (60) (238) 426 (2,527)
Issue of long-term debt 1,105 780 2,400 2,056
Repayment of long-term debt (299) (235) (802) (963)
Issue of common shares 2,381 10 2,390 66
(78) (78)
Costs relating to the issuance of common shares - -
Purchase of common shares for cancellation - - - (191)
510
Issue of preferred shares - - -
(306)
Redemption of preferred shares - - -
Dividends paid on common and preferred shares (255) (259) (758) (777)
Issue of common shares, preferred shares, convertible debentures
and equity-settled notes by subsidiaries to non-controlling interest 44 3 201 1,370
Redemption of preferred shares by subsidiaries - - - (346)
Dividends paid by subsidiaries to non-controlling interest (134) (117) (321) (268)
Other items (40) (17) (36) 17
----------------------------------------------
2,664 (73) 3,626 (1,563)
----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1 (1) 1 (1)
----------------------------------------------
Cash provided by (used in) continuing operations 1,880 (62) 3,237 1,783
Cash used in discontinued operations - (643) (936) (955)
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,880 (705) 2,301 828
Cash and cash equivalents at beginning of period 990 1,793 569 260
----------------------------------------------
Cash and cash equivalents at end of period 2,870 1,088 2,870 1,088
------------------------------------------------------------------------------------------------------------------------------
(1) Refer to Note 1 "Significant accounting policies" for basis of
presentation.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
The interim consolidated financial statements should be read in conjunction
with the annual consolidated financial statements as at December 31, 2001 and
2000 and for each of the years in the three-year period ended December 31,
2001, dated July 23, 2002.
1. SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"), using
the same accounting policies as outlined in Note 1 of the annual consolidated
financial statements as at December 31, 2001 and 2000 and for each of the years
in the three-year period ended December 31, 2001, dated July 23, 2002 except as
noted below. Certain comparative figures in the consolidated financial
statements have been reclassified to conform to the current period
presentation.
Basis of presentation
All financial information for periods prior to the second quarter of 2002 were
restated to reflect the accounting treatment of BCE's investments in Teleglobe
Inc. ("Teleglobe") and Bell Canada International Inc. ("BCI") as discontinued
operations (refer to Note 6 "Discontinued operations"), and the adoption of the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1650
regarding the accounting treatment of foreign currency translation (refer to
"Recent pronouncements") effective in the first quarter of 2002. In addition,
effective in the second quarter of 2002, BCE ceased to consolidate the
financial results of Teleglobe and BCI, and now holds these investments at
cost. (refer to Note 6 "Discontinued operations").
Recent pronouncements
Business Combinations, Goodwill and Other Intangible Assets
The CICA issued new Handbook Sections 1581, Business Combinations, and 3062,
Goodwill and Other Intangible Assets. Effective July 1, 2001, the standards
require that all business combinations be accounted for using the purchase
method. Additionally, effective January 1, 2002, goodwill and intangible assets
with an indefinite life are no longer being amortized to earnings and will be
assessed for impairment on an annual basis in accordance with the new
standards, including a transitional impairment test whereby any resulting
impairment was charged to opening retained earnings. BCE's management allocated
its existing goodwill and intangible assets with an indefinite life to its
reporting units and completed the assessment of the quantitative impact of the
transitional impairment test on its financial statements. In 2002, an
impairment of $8,180 million was charged to opening retained earnings as of
January 1, 2002, as required by the transitional provisions of the new CICA
Handbook section 3062, relating to impaired goodwill of reporting units within
Teleglobe ($7,516 million), Bell Globemedia ($545 million) and BCE Emergis
($119 million).
The following represents a reconciliation of the stated goodwill as at
September 30, 2002:
----------------------------------------------------------------------------
($ millions)
----------------------------------------------------------------------------
Goodwill, January 1, 2002 15,947
Transitional goodwill impairment charge (8,652)
Goodwill acquired during the year (1) 1,065
Deconsolidation of Teleglobe and BCI (1,754)
Other 71
----------------
Goodwill, September 30, 2002 6,677
----------------------------------------------------------------------------
(1) The goodwill acquired during 2002 relates primarily to the repurchase
by Bell Canada Holdings Inc. ("BCH") for cancellation of a portion of its
outstanding shares from SBC Communications Inc.("SBC") for a purchase price of
$1.3 billion, resulting in an increase in BCE Inc.'s ownership in BCH to 83.5%.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
Effective January 1, 2002, BCE also adopted the revised recommendations of CICA
Handbook Section 1650, Foreign Currency Translation. The standards require that
all unrealized translation gains and losses on assets and liabilities
denominated in foreign currencies be included in earnings for the year,
including gains and losses on long-term monetary assets and liabilities, such
as long-term debt, which were previously deferred and amortized on a
straight-line basis over the remaining lives of the related items. These
amendments were applied retroactively with restatement of prior periods. The
cumulative effect as at January 1, 2002 was to decrease other long-term assets
by $288 million, increase future income taxes by $27 million, decrease
non-controlling interest by $70 million and decrease retained earnings by
$191 million.
Stock-Based Compensation and Other Stock-Based Payments
BCE also adopted the new recommendations of CICA Handbook Section 3870,
Stock-based compensation and other stock-based payments, effective January 1,
2002. This Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services. The standard requires that all stock-based
awards made to non-employees be measured and recognized using a fair value
based method. The standard encourages the use of a fair value based method for
all awards granted to employees, but only requires the use of a fair value
based method for direct awards of stock, stock appreciation rights, and awards
that call for settlement in cash or other assets. Awards that a company has the
ability to settle in stock are recorded as equity, whereas awards that the
entity is required to or has a practice of settling in cash are recorded
as liabilities. For BCE, this Section applies to all awards granted on or after
January 1, 2002. BCE has elected to account for employee stock options by
measuring compensation cost for options as the excess, if any, of the quoted
market price of BCE Inc.'s common shares at the date of grant over the amount
an employee must pay to acquire the common shares. The following outlines the
impact and assumptions used if the compensation cost for BCE's stock options
was determined under the fair value based method of accounting for awards
granted on or after January 1, 2002.
For the period ended September 30, 2002 Three Months Nine Months
---------------------------------------------------------------------------------------------
Net earnings, as reported ($ millions) 384 723
Pro forma impact ($ millions) (15) (21)
-------------------------------
Pro forma net earnings ($ millions) 369 702
Pro forma net earnings per common share (basic) ($) 0.41 0.80
Pro forma net earnings per common share (diluted) ($) 0.41 0.79
Assumptions used in Black Scholes option princing model:
Dividend yield 3.6% 3.3%
Expected volatility 30% 30%
Risk-free interest rate 3.9% 4.6%
Expected life (years) 4.2 4.5
Number of options granted 1,119,845 7,946,979
Weighted average fair value of options granted ($) $5 $7
---------------------------------------------------------------------------------------------
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
2. SEGMENTED INFORMATION
Effective April 24, 2002, BCE centers its activities around three core
operating segments, based on products and services, reflecting the way that
management classifies its operations for purposes of planning and performance
management. The three core operating segments are the Bell Canada segment,
Bell Globemedia and BCE Emergis. All other businesses are combined, for
management purposes, in the BCE Ventures segment.
------------------------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
----------------------------------------------
($ millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Operating revenues
Bell Canada External 4,260 4,289 12,819 12,570
Inter-segment (1) 54 37 138 96
----------------------------------------------
4,314 4,326 12,957 12,666
Bell Globemedia External 263 240 880 831
Inter-segment 10 6 31 18
----------------------------------------------
273 246 911 849
BCE Emergis External 102 126 299 346
Inter-segment 33 47 110 129
----------------------------------------------
135 173 409 475
BCE Ventures External 197 162 594 474
Inter-segment 61 100 188 283
----------------------------------------------
258 262 782 757
Corporate and other External 1 4 6
-
Inter-segment 39 10 121 55
----------------------------------------------
39 11 125 61
----------------------------------------------
Less: Inter-segment eliminations (1) (197) (200) (588) (581)
----------------------------------------------
Total operating revenues 4,822 4,818 14,596 14,227
------------------------------------------------------------------------------------------------------------------------------
EBITDA (2)
Bell Canada 1,891 1,818 5,501 5,172
Bell Globemedia 17 (6) 108 65
BCE Emergis 19 35 10 92
BCE Ventures 67 73 217 202
Corporate and other, including inter-segment eliminations (42) (43) (127) (116)
----------------------------------------------
Total EBITDA 1,952 1,877 5,709 5,415
------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common shares
Bell Canada 336 272 1,016 764
Bell Globemedia (11) (52) 1 (125)
BCE Emergis 19 (70) (58) (236)
BCE Ventures 16 137 99 229
Corporate and other, including inter-segment eliminations 24 50 5 3,029
----------------------------------------------
Total earnings from continuing operations 384 337 1,063 3,661
Discontinued operations (465) (340) (2,862)
-
Dividends on preferred shares (16) (16) (43) (50)
----------------------------------------------
Total net earnings (loss) applicable to common shares 368 (144) 680 749
------------------------------------------------------------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current period presentation.
(2) "EBITDA" is defined as operating revenues less operating expenses and
therefore reflects earnings before interest, taxes, depreciation and
amortization, as well as any non-recurring items. BCE uses "EBITDA",
amongst other measures, to assess the operating performance of its
on-going businesses. The term "EBITDA" does not have a standardized
meaning prescribed by Canadian GAAP and therefore may not be comparable
to similarly titled measures presented by other publicly traded
companies. EBITDA should not be construed as the equivalent of net cash
flows from operating activities.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
BCE Acquisition of SBC's 20% interest in BCH
On June 28, 2002, BCE Inc., BCH and entities controlled by SBC entered into
agreements that will lead to the repurchase by BCE Inc. of SBC's 20% indirect
interest in BCH, the holding company of Bell Canada, for $6.3 billion.
Pursuant to these agreements, on June 28, 2002, BCH purchased for cancellation
a portion of its outstanding shares from SBC for a purchase price of $1.3
billion, resulting in an increase in BCE Inc.'s ownership in BCH to 83.5%. In
addition, BCE Inc. has the option ("BCE option") to repurchase and SBC has the
option ("SBC option") to sell the remaining 16.5% interest in BCH, in each case
at an aggregate price of $4.99 billion. The BCE option can only be exercised
between October 15, 2002 and November 15, 2002, whereas the SBC option can only
be exercised between January 3, 2003 and February 3, 2003. BCE Inc. will
exercise the BCE option within the prescribed period, and the transaction is
expected to close on or before January 3, 2003, at BCE Inc.'s discretion.
BCE Inc. has completed or intends to complete the following steps towards
raising the necessary funds to finance the $6.3 billion repurchase price of
SBC's indirect interest in Bell Canada:
o $1.1 billion drawn on July 15, 2002 under a $3.3 billion two-year
non-revolving credit agreement;
o proceeds from the issuance on July 15, 2002 of nine million BCE Inc. common
shares for $250 million ($27.63 per share), by way of a private placement to
SBC;
o net proceeds from the public issuance on August 12, 2002 of 85 million
common shares of BCE Inc. for $2 billion ($24.45 per share);
o net proceeds expected to be received from the proposed public issuance by
BCE Inc. of $1.5 to $2 billion of long-term notes, expected to close by the
end of October 2002;
o $1 to $1.5 billion expected to be accessed from Bell Canada, representing a
portion of the net after-tax proceeds expected to flow to BCE Inc. from the
sale of Bell Canada's and certain affiliates' directories business (see
"Sale of Directories Business"); and
o a second private placement to SBC of up to $250 million, planned on the
second closing expected on or before January 3, 2003.
In the event BCE Inc. does not secure financing for all of the remaining
balance of the $6.3 billion repurchase price on or before January 3, 2003,
BCE Inc.'s current intention is to draw down on the remaining available balance
of the two-year non-revolving credit agreement. Although BCE Inc. does not
currently intend to do so, should amounts drawn under the two-year non-
revolving credit agreement together with the proceeds resulting from the
sources of financing referred to above be insufficient, BCE Inc. could pay the
remaining balance of the $6.3 billion repurchase price by issuing notes to SBC.
As part of the agreements, BCE Inc. will also purchase, at face value, on or
before December 31, 2004, $314 million of BCH Convertible Series B Preferred
Securities held by SBC.
In connection with the arrangements described above, on June 28, 2002, BCH
granted to SBC an option ("BCH option") to purchase 20% of the then outstanding
common shares of BCH at an exercise price of approximately $39.48 per share,
representing an approximate 25% premium to the June 28, 2002 negotiated
repurchase price of the BCH shares, exercisable no later than April 24, 2003.
Sale of Directories Business
On September 13, 2002, BCE Inc. announced the sale by Bell Canada and certain
affiliates of their directories business for $3 billion cash (subject to
certain post-closing adjustments) to an entity ultimately controlled by
Kohlberg Kravis Roberts & Co. L.P. and the Ontario Teachers' Merchant Bank,
the private equity arm of the Ontario Teachers' Pension Plan Board
(collectively, the "Purchasers"). The sale includes 209 print White Pages and
Yellow Pages directories in Ontario and Quebec, the electronic yellowpages.ca,
canadatollfree.ca and Canada411.ca directories and Bell ActiMedia's 12.86%
interest in the Aliant ActiMedia General Partnership. $1 to $1.5 billion of the
net proceeds from the sale are expected to flow to BCE Inc. to finance part of
the repurchase of SBC's remaining indirect interest in Bell Canada, with the
remaining proceeds being used by Bell Canada for its ongoing financing needs.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (Continued)
The Purchasers will own an approximate 90% equity interest of an acquisition
vehicle that will hold the directories business. Bell Canada or one of its
affiliates will acquire an approximate 10% equity interest in the acquisition
vehicle for approximately $80 million, which will give it the right to appoint
one member of such vehicle's Board of Directors. Bell Canada has entered into a
long-term, strategic working relationship with the entity operating the
directories business pursuant to operating agreements. The closing of the sale
of the directories business is expected to take place no later than
November 30, 2002. The Purchasers' obligation to complete the transaction is
subject to conditions precedent,including the obtaining of all requisite
regulatory approvals and the Purchasers obtaining the appropriate financing
required for the purposes of the transaction.
Creation of Bell West Inc. ("Bell West")
In April 2002, Bell Canada and Manitoba Telecom Services Inc. ("MTS"), a
related party, combined their interests of the wireline assets of BCE Nexxia
Inc. in Alberta and British Columbia with Bell Intrigna Inc. to create Bell
West, a company providing telecommunications services in those two provinces.
Bell West operates under the Bell brand and is owned 60% by Bell Canada and
40% by MTS. The terms of the agreement between Bell Canada and MTS also
include certain put and call options with respect to MTS 40% ownership of
Bell West.
The put options for MTS are as follows:
o In February 2004, MTS can sell its interest in Bell West to Bell Canada at
a guaranteed floor value of $458 million plus incremental funding
(including an 8% return on that incremental funding) invested by MTS going
forward (floor value). In January 2007, MTS can sell its interest in Bell
West to Bell Canada at fair market value less 12.5%. MTS can also sell
its interest in Bell West to Bell Canada at fair market value less 12.5%
upon the occurrence of certain change events affecting Bell West.
The call options for Bell Canada should MTS not exercise its put options are as
follows:
o In March 2004, Bell Canada has the option to purchase MTS interest at the
greater of the floor value and fair market value. In February 2007, Bell
Canada has the option to purchase MTS interest at fair market value. Bell
Canada can also purchase MTS interest at fair market value upon a change
of control of MTS to a party other than Bell Canada or its affiliates.
Creation of the Bell Nordiq Income Fund
In April 2002, Bell Canada announced the completion of an initial public
offering of units of a newly created income fund (the "Bell Nordiq Income
Fund"). The Fund acquired from Bell Canada a 36% interest in each of Telebec
Limited Partnership and Northern Telephone Limited Partnership. Bell Canada
retains management control over both partnerships and holds a 64% interest in
the partnerships. Bell Canada received gross proceeds of $324 million and
recorded a gain on sale of $222 million.
4. RESTRUCTURING AND OTHER CHARGES
Settlement of Pay Equity Complaints
On September 27, 2002, the Canadian Telecommunications Employees' Association
("CTEA") ratified a settlement reached with Bell Canada with respect to the
1994 pay equity complaints filed by members of the CTEA before the Canadian
Human Rights Tribunal. The settlement includes a cash payout of $128 million
and related pension benefits of approximately $50 million. As a result of the
settlement, Bell Canada recorded a one-time charge of $79 million (BCE's share
is $37 million on an after-tax basis) in the third quarter of 2002, which
corresponds to the $128 million cash payout, net of a previously recorded
provision. The pension benefits will be deferred and amortized into earnings
over the estimated average remaining service life of active employees and
average remaining life of retired employees.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
4. RESTRUCTURING AND OTHER CHARGES (Continued)
Write-down of Bell Canada's accounts receivable
Coincident with the development of a new billing platform, Bell Canada has
adopted a new and more precise methodology to analyze the amount of receivables
by customer as well as by service line and which permits a more accurate
determination of the validity of customer balances to Bell Canada. This
analysis indicated that as at June 30, 2002, a write-down of accounts
receivable amounting to $272 million (BCE's share is $142 million on an
after-tax basis) is appropriate. As these amounts arose from legacy billing
systems and processes, Bell Canada has carried out a detailed review of
billings and adjustments for the period from 1997 to 2002. This review
determined that these amounts arose as the cumulative result of a series of
individually immaterial events and transactions pertaining to its legacy
accounts receivable systems dating back to the early 1990's.
BCE Emergis restructuring plan
BCE Emergis recorded a pre-tax charge of $119 million (BCE's share is $63
million on an after-tax basis) in the second quarter of 2002, representing
restructuring and other charges of $100 million and $19 million, respectively,
related to the write-off of certain assets, employee severance and other
employee costs, contract settlements and costs of leased properties no longer
in use, which resulted primarily from the streamlining of BCE Emergis' service
offerings and reduction in its operating cost structure. The restructuring
program is expected to be substantially complete in 2002, and as at
September 30, 2002, the remaining unpaid balance of this restructuring
provision was $37 million.
5. OTHER INCOME (EXPENSE)
------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
---------------------------------------------------
($ millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------
Gains (losses) on investments (a) 12 147 181 4,037
Foreign currency gains (losses) (18) (61) 37 (75)
Other 2 (17) 8 64
------------------------------------------------------------------------------------------------------
Other income (expense) (4) 69 226 4,026
------------------------------------------------------------------------------------------------------
(a) During the first nine months of 2002, other income included: (i) net gains
on investments of $256 million, primarily from the creation of the Bell Nordiq
Income Fund (refer to Note 3); (ii) a $103 million loss, primarily on the
write-down of BCE's remaining portfolio investment in Nortel Networks
Corporation; and (iii) a gain of $28 million resulting from the
reorganization of BCE's investment in TMI Communications and Company Limited
Partnership.
6. DISCONTINUED OPERATIONS
------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
--------------------------------------------------
($ millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------
Teleglobe (a) - (205) (149) (2,636)
BCI (b) - (260) (191) (226)
------------------------------------------------------------------------------------------------
Net loss from discontinued operations - (465) (340) (2,862)
------------------------------------------------------------------------------------------------
(a) Teleglobe provides a range of international voice and data
telecommunications services. Until the second quarter of 2002, Teleglobe also
provided, through its investment in the Excel Communications group ("Excel"),
retail telecommunications services such as long distance, paging and Internet
services to residential and business customers in North America and the U.K.
The results of operations of Teleglobe include an impairment charge of $2,049
million recorded in the first quarter of 2001 after completion of an assessment
of the carrying value of Teleglobe's investment in Excel.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
6. DISCONTINUED OPERATIONS (Continued)
On April 24, 2002, BCE Inc. announced that it would cease further long-term
funding to Teleglobe. BCE Inc.'s decision was based on a number of factors,
including a revised business plan and outlook of the principal operating
segment of Teleglobe with associated funding requirements, a revised assessment
of its prospects, and a comprehensive analysis of the state of its industry.
In light of that decision, Teleglobe announced that it would pursue a range of
financial restructuring alternatives, potential partnerships and business
combinations. Also on April 24, 2002, all BCE Inc.-affiliated board members of
Teleglobe tendered their resignation from the Teleglobe board. The effective
result of these events was the exit by BCE of the Teleglobe business and the
eventual material reduction in BCE's approximate 96% economic and voting
interest in Teleglobe as a result of the ongoing restructuring of Teleglobe.
Accordingly, effective April 24, 2002, BCE reclassified the financial results
of Teleglobe as a discontinued operation. BCE's management completed its
assessment of the net realizable value of BCE's interest in the net assets of
Teleglobe and determined it to be nil, resulting in a loss from discontinued
operations of $73 million, which is in addition to the transitional impairment
charge of $7,516 million to opening retained earnings as at January 1, 2002,
as required by the transitional provisions of the new CICA Handbook section
3062 (refer to Note 1). A valuation allowance has been provided against the
entire amount of the tax benefit associated with the loss on this investment.
On May 15, 2002 and thereafter, Teleglobe and certain of its subsidiaries filed
for court protection under insolvency statutes in Canada, the United States,
the United Kingdom and elsewhere. Operating under court protection and with the
assistance of a Monitor, appointed in the Canadian insolvency proceedings,
Teleglobe has sought and received court approval of its decision to discontinue
its hosting and certain other businesses, to proceed with the orderly shut-down
of its Globesystem network and to proceed with a process for the sale of its
remaining core telecommunications business. Such sale process is being
conducted by the Monitor under court supervision. On September 19, 2002,
Teleglobe announced the execution of an agreement for the sale to affiliates of
TenX Capital Partners and Cerberus Capital Management (the "Purchasers") of its
core telecommunications business for U.S. $155 million, subject to certain
adjustments. The parties also indicated that they intend to enter into an
agreement for the management by the Purchasers of the core telecommunications
business upon satisfaction of certain conditions, including the consent of
Bell Canada to the assignment of its contracts with Teleglobe to the
Purchasers. Subject to the foregoing and the granting of all regulatory
approvals, closing is expected to occur in early 2003. The foregoing
transaction being subject to a number of conditions, there can be no assurance
that it will be completed on the agreed terms or at all, so that service can
continue to be provided to the customers of BCE on an uninterrupted basis. The
failure of the sale process may result in a decision to proceed with a
shutdown of Teleglobe's business and a liquidation of its remaining assets.
An affiliate of BCE Inc. has provided Teleglobe with a borrowing facility of
approximately U.S. $94 million on a debtor-in-possession basis (the "DIP
Facility") as well as a U.S. $25 million facility to allow Teleglobe to meet
its obligations under an Employee Severance and Retention Plan (the "Employee
acility"). On September 20, 2002, following the closing of the sale by
Teleglobe of its equity interest in Intelsat, Ltd. for U.S. $65 million, all
outstanding borrowings under the DIP Facility (U.S. $55 million) were repaid
and the availability thereunder was reduced from U.S. $93.6 million to U.S.
$50 million. The revised DIP Facility provides that Teleglobe will not be
allowed to borrow thereunder until such time as all the remaining proceeds of
the Intelsat, Ltd. sale will have been used to fund Teleglobe's operations.
Effective September 30, 2002, the availability under the DIP Facility was
further reduced to U.S. $30 million and its maturity extended to the earlier of
the date of execution of the management agreement referred to above and
November 30, 2002. As of October 23, 2002, no amount is outstanding under the
DIP Facility and the Employee Facility (an aggregate of U.S. $7.4 million
previously advanced under the Employee Facility has been repaid by way of
set-off). There can be no assurance that Teleglobe will be able to repay
amounts advanced by BCE under the DIP Facility and the Employee Facility or
that realization of any security will be sufficient to repay BCE. BCE does not
expect to realize any material amount from its investment in Teleglobe.
Since (i) BCE's management does not expect any future economic benefits from
its approximate 96% economic and voting interest in Teleglobe, (ii) BCE has not
guaranteed any of Teleglobe's obligations, and (iii) BCE has ceased further
long-term funding to Teleglobe, BCE deconsolidated Teleglobe's financial
results effective May 15, 2002, and now accounts for the investment at cost.
Therefore, all future financial results of Teleglobe will not affect BCE's
future financial results. The following are amounts relating to BCE's interest
in the net assets of Teleglobe on May 15, 2002: current assets of $1.4 billion,
non-current assets of $4.3 billion, current liabilities of $3.6 billion, and
non-current liabilities of $2.1 billion. Refer to Note 8 "Contingencies" for a
description of the lending syndicate lawsuit filed against BCE Inc.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
6. DISCONTINUED OPERATIONS (Continued)
(b) BCI develops and operates advanced communications companies in markets
outside Canada, with a focus on Latin America. Effective January 1, 2002, BCE
adopted a formal plan of disposal of its operations in BCI. Consequently,
the results of BCI have been reported as discontinued operations.
On July 12, 2002, BCI shareholders and holders of BCI's 11% senior unsecured
notes due September 2004 (the "Noteholders") voted to approve a
court-supervised plan of arrangement of BCI pursuant to section 192 of the
Canada Business Corporations Act (the "Plan of Arrangement"). On July 17, 2002,
BCI obtained court approval of the Plan of Arrangement, which includes the sale
by BCI of its interest in Telecom Americas Ltd., through which BCI held the
majority of its investments, to America Movil S.A. de C.V. and, following the
disposition of all assets of BCI and the determination of all claims against
BCI, the liquidation of BCI and the final distribution to BCI's creditors and
shareholders with the approval of the court and ultimately the dissolution of
BCI. BCI completed the sale of its interest in Telecom Americas Ltd. in July
2002, and is currently proceeding, under court supervision, to implement the
remaining elements of the Plan of Arrangement. As a result of these events,
BCE deconsolidated BCI's financial results effective June 30, 2002, and now
accounts for the investment at cost. Therefore, all future financial results of
BCI will not affect BCE's future financial results. BCE recorded a charge of
$191 million in the second quarter of 2002 representing a write-down of its
investment in BCI to its net realizable value, which was reported as a loss
from discontinued operations.
Amounts included in the consolidated balance sheets relating to discontinued
operations are as follows:
-------------------------------------------------------------------------------------------
September 30 December 31
($ millions) 2002 2001
-------------------------------------------------------------------------------------------
Current assets - 1,957
Non-current assets 175 16,576
Current liabilities - (5,855)
Non-current liabilities - (5,250)
-------------------------------------------------------------------------------------------
Net assets of discontinued operations 175 7,428
-------------------------------------------------------------------------------------------
The summarized statements of operations for the discontinued operations are as
follows:
----------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
--------------------------------------------------
($ millions) 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
Revenue - 854 681 2,711
--------------------------------------------------
Operating loss from discontinued operations, before tax (375) (123) (3,156)
-
Gain (loss) on discontinued operations, before tax - (86) (282) 461
Income tax recovery on operating loss - 69 40 134
Income tax recovery (expense) on gain (loss) - - 18 (45)
Non-controlling interest - (73) 7 (256)
----------------------------------------------------------------------------------------------------------------
Net loss from discontinued operations - (465) (340) (2,862)
----------------------------------------------------------------------------------------------------------------
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - BCE INC.
7. EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and the denominators of the
basic and diluted earnings per common share computations for earnings from
continuing operations:
-----------------------------------------------------------------------------------------------------------------------
For the period ended September 30 Three months Nine months
---------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations (numerator) ($ millions)
Earnings from continuing operations 384 337 1,063 3,661
Dividends on preferred shares (16) (16) (43) (50)
---------------------------------------------------
Earnings from continuing operations - basic 368 321 1,020 3,611
3
Exercise of put options by CGI shareholders - 9 (1)
-----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations - diluted 371 321 1,029 3,610
-----------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
(denominator) (millions)
Weighted average number of common shares outstanding - basic 864.1 807.9 827.3 807.8
Exercise of stock options 1.9 2.2 2.1 2.3
Exercise of put options by CGI shareholders 13.0 5.6 13.0 5.6
-----------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding - diluted 879.0 815.7 842.4 815.7
-----------------------------------------------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
Teleglobe Lending Syndicate Lawsuit
Certain members of the Teleglobe lending syndicate (the "Plaintiffs") filed a
lawsuit against BCE Inc. in the Ontario Superior Court of Justice on
July 12, 2002. The Plaintiffs seek damages from BCE Inc. in the aggregate
amount of US$1.19 billion (together with interests and costs), which they
allege is equal to the amount they advanced as members of the Teleglobe Inc.
and Teleglobe Holdings (U.S.) Corporation lending syndicate. The Plaintiffs'
claim is based on several allegations, including that the actions and
representations of BCE Inc. and its management in effect constituted a legal
commitment of BCE Inc. that the advances would be repaid. The Plaintiffs
represent approximately 95.2% of the US$1.25 billion advanced by the members
of such lending syndicate. While the final outcome of any legal proceeding
cannot be predicted with certainty, based upon information currently available,
BCE Inc. is of the view that it has strong defences and it intends to
vigorously defend its position. CRTC Second Price Cap Decision 2002-34
On May 30, 2002, the CRTC released Decision 2002-34, "Second Price Cap
Decision", making a number of changes to the rules governing Canada's
telecommunications industry with respect to local service for the next four
years. One of the changes resulting from this Decision is that there be a
mechanism (referred to in the Decision as the "deferral account") to provide to
the majority of residential customers a combination of certain enhanced
services, reduced rates and/or rebates, and certain other adjustments. Bell
Canada will propose the manner in which it will implement these directives to
the CRTC in March 2003. As at September 30, 2002, Bell Canada's commitment
associated with this Decision is estimated at $40 million.
9. SUBSEQUENT EVENTS
Launch of Public Debt Offering
On October 22, 2002, BCE Inc. announced that it has initiated a Canadian public
offering of debt securities to raise approximately $1.5 billion. A draft
prospectus supplement to the short form base shelf prospectus dated August 1,
2002 was filed on October 21, 2002 with all Canadian provincial securities
regulatory authorities. The proceeds will be used to finance part of the
repurchase of SBC's remaining indirect interest in Bell Canada (refer to
Note 3).
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BCE Inc.
(Michael T. Boychuk)
-------------------------------------------------
Michael T. Boychuk
Senior Vice-President and Corporate Treasurer
Date: October 30, 2002