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Management’s Discussion and AnalysisFinancial and Capital Management Recent Developments in Legal Proceedings In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we, us, our and BCE mean BCE Inc., its subsidiaries, joint ventures and investments in significantly influenced companies. Bell Canada, Aliant Inc. (Aliant), Bell ExpressVu Limited Partnership (Bell ExpressVu) and their subsidiaries and investments in significantly influenced companies are referred to as the Bell Canada Segment. This MD&A comments on BCE’s operations, performance and financial condition for the three months (Q4) and twelve months (full year or FY) ended December 31, 2003 and 2002. Please refer to the unaudited consolidated financial statements when reading the MD&A. Additional information relating to BCE, including our Annual Information Form for the year ended December 31, 2002, can be found on our website at www.bce.ca and on SEDAR at www.sedar.com. All amounts in this MD&A are in millions of Canadian dollars, except where otherwise noted.
SEGMENTED INFORMATION
BUSINESS DISPOSITIONS
All of these business dispositions have been treated as discontinued operations, except for the sale of the directories business.
CRTC PRICE CAP DECISION
Non-GAAP Financial MeasuresEBITDA
FREE CASH FLOW Financial Results AnalysisOperating Revenues
BCE'S REVENUES DECLINED BY 2.7%; EXCLUDING DIRECTORIES BUSINESS REVENUES WOULD DECLINE BY 0.9%
Bell Canada Segment
LOCAL AND ACCESS REVENUES ESSENTIALLY FLAT
WIRELESS REVENUES GREW 16% WITH STRONG POST-PAID ADDS Revenue and subscriber growth
Churn
Wireless data
STRONG CONSUMER DATA REVENUE GROWTH OUTWEIGHED BY CONTINUED SOFTNESS IN ENTERPRISE AND WHOLESALE MARKETS Revenue growth
Revenue and subscriber growth
Average revenue per subscriber (ARPS)
Churn
TERMINAL SALES AND OTHER
STRONG TV AD REVENUES IN Q4 OFFSET BY SLOWER PRINT ADVERTISING MARKET
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| See Note 7 to the consolidated financial statements for a description of the discontinued operations. |
Teleglobe
We recorded a loss of $73 million in the second quarter of 2002 on the write-down of our interest in Teleglobe to its net realizable value, which we determined to be zero. This loss is in addition to the transitional goodwill impairment charge of $7,516 million to opening retained earnings as of January 1, 2002.
Effective May 15, 2002, we stopped consolidating Teleglobe’s financial results and started accounting for the investment at cost.
On December 31, 2002, after obtaining court approval, we sold all of our common and preferred shares in Teleglobe to the court-approved monitor for a nominal amount. The sale triggered approximately $10 billion of capital losses for tax purposes. We recorded a gain of $1,042 million, relating primarily to the tax benefit from:
The net earnings of $39 million in Q4 2003 relate mainly to the use of available loss carryforwards which were applied against the taxes payable relating to Bell Canada’s sale of a 3.66% interest in YPG General Partner Inc. and Aliant’s sale of Stratos.
BCI
We recorded a charge of $316 million in 2002, which represented a write-down of the investment in BCI to our estimate of its net realizable value.
Aliant’s emerging business segment
Aliant’s emerging business segment consisted mainly of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc.
Virtually all of the assets of Aliant’s emerging business segment were sold at December 31, 2003.
Aliant’s remote communications segment
Aliant’s remote communications segment consisted of Aliant’s investment in Stratos. In December 2003, Aliant completed the sale of its 53.2% interest in Stratos, after receiving the required regulatory approvals.
Aliant received $340 million ($320 million net of selling costs) in cash for the sale. The carrying value of Stratos’ net assets was $215 million at the time of sale. Stratos had total assets of $696 million, including $52 million in cash and cash equivalents, and total liabilities of $372 million.
The transaction resulted in a gain on sale of $105 million ($48 million after taxes and non-controlling interest).
BCE Emergis’ U.S. Health Operations (US Health)
In December 2003, BCE Emergis’ board of directors approved the sale of US Health for a total of U.S.$213 million in cash. The total price is subject to adjustments set out in the purchase agreement. The sale is expected to close in March 2004. The sale of US Health excludes its National Health Services, Inc. subsidiary (NHS) which carries on care management operations in the United States. BCE Emergis intends to dispose of NHS in a separate transaction.
At December 31, 2003, the carrying value of US Health’s net assets was $247 million. It had total assets of $254 million (including $9 million in cash and cash equivalents) and total liabilities of $7 million.
The expected loss on the transaction is $87 million ($160 million after non-controlling interest and BCE Inc.’s incremental goodwill in US Health), which was recorded in December 2003.
This section tells you how we manage our cash and capital resources to carry out our strategy and deliver financial results. It provides an analysis of BCE’s financial condition, cash flows and liquidity.
| (1) | Following BCE Inc.’s announcement on December 8, 2003 that it would redeem all of its outstanding Series P retractable preferred shares on January 15, 2004 for $351 million, the balance at December 31, 2003 was transferred to debt due within one year. |
Our net debt to capitalization ratio was 43.8% at the end of 2003, a significant improvement from 48.4% at the end of 2002. This reflected improvements in net debt and total shareholders’ equity.
Net debt improved $1,950 million, mainly from:
$1,626 million of free cash flow after paying all dividends and capital expenditures for the full year of 2003
Bell Canada’s sale of its 89.9% ownership in Certen, resulting in an overall net debt reduction of $135 million
cash proceeds on the sale of Aliant’s 53.2% interest in Stratos of $340 million.
These were partly offset by:
the completion of the purchase price allocation relating to the repurchase of SBC’s 20% indirect interest in Bell Canada. This resulted in an increase in long-term debt of $165 million
the consolidation of $122 million of debt relating to a newly consolidated shared services entity, effective July 1, 2003.
Total shareholders’ equity increased $965 million for the full year of 2003. This was primarily a result of $647 million of net earnings in excess of the dividends declared on common and preferred shares for the full year of 2003 and an increase of $389 million in common and preferred
shares.
The table below is a summary of the flow of cash into and out of BCE for Q4 and the full year for 2003 and 2002.
CASH FROM OPERATING ACTIVITIES
Cash from operating activities increased 41% or $472 million in Q4 2003, compared to Q4 2002. This was mainly a result of the positive effect of changes in working capital and cash tax savings in 2003. We realized these tax savings through the use of strategies to consolidate tax losses of BCE Inc., BCE Emergis and Bell Canada Holdings Inc. (BCH) with Bell Canada’s current earnings.
For the full year of 2003, cash from operating activities increased 37% or $1,637 million compared to 2002, which is further explained by cash tax refunds of $440 million received in 2003 and $288 million of taxes paid on capital gains in 2002.
CAPITAL EXPENDITURES
We continue to make investments to expand our networks, to meet customer demand and for replacement purposes. The rigorous programs we have in place to manage capital spending resulted in similar levels of capital expenditures in Q4 2003, compared to Q4 2002, and a reduction of 14.8% for the full year of 2003, compared to last year.
This resulted in only a slight increase in our capital intensity ratio to 22.1% in Q4 2003 from 21.1% in Q4 2002, and a reduction to 16.7% for the full year from 19.4% in 2002. The slight increase in our capital intensity ratio in Q4 2003 also reflects that our capital spending programs in 2003 were more heavily weighed towards the end of the year. Capital intensity is defined as capital expenditures divided by operating revenues.
The Bell Canada Segment’s capital intensity ratio increased to 23.1% in Q4 2003 from 21.9% in Q4 2002 but fell to 17.3% for the full year from 19.8% in 2002. The Bell Canada Segment accounted for 92% of our capital expenditures in Q4 2003 and 91% for the full year.
OTHER INVESTING ACTIVITIES
Cash from other investing activities of $64 million for the full year of 2003 included:
These were partly offset by $87 million relating mainly to changes in long-term notes receivable and payments by Bell Globemedia relating to CRTC benefits owing on previous business combinations.
DIVIDENDS
We declared a common share dividend of $0.30 per share in Q4 2003. This was the same as the dividend we declared in Q4 2002.
We paid cash dividends on common shares of $259 million in Q4 2003, relatively stable compared to the $271 million paid in Q4 2002. Total dividends paid on common shares increased to $1,029 million for the full year of 2003 from $999 million in the same period in 2002. This was the result of an increase in the average number of common shares outstanding to 920.3 million for the full year of 2003 from 847.9 million in 2002.
The average number of common shares outstanding for the full year of 2003 increased because BCE Inc. issued equity in 2002 to fund part of the repurchase price of SBC’s 20% indirect interest in Bell Canada.
We realized a cash benefit of approximately $18 million in Q4 2003 ($73 million for the full year) because we issued treasury shares to fund BCE Inc.’s dividend reinvestment plan, instead of buying shares on the open market. Effective Q1 2004, all shares required to satisfy the dividend reinvestment plan are expected to be bought on the open market, thereby eliminating any further cash benefits associated with issuing treasury shares.
Dividends paid on preferred shares were $22 million in Q4 2003, up $9 million compared to Q4 2002, and $61 million for the full year, up from $43 million paid in the same period in 2002. In both cases, this was a result of the increase in the number of preferred shares outstanding. It was partly offset by the savings we realized from the dividend rate swap agreements we had in place. These swaps converted the fixed-rate dividends on some of our preferred shares to floating-rate dividends.
Bell Canada stopped paying a dividend to SBC when BCE Inc. repurchased SBC’s 20% indirect interest in Bell Canada in 2002. As a result, dividends paid by subsidiaries to third parties decreased $100 million to $47 million in Q4 2003 and decreased $284 million to $184 million for the full year, compared to the same periods in 2002.
BUSINESS ACQUISITIONS
We spent $42 million in business acquisitions in Q4 2003, which consisted mainly of Bell Canada’s purchase of an additional 30% interest in Connexim Limited Partnership, bringing its total interest to 100%. Business acquisitions of $77 million in the remainder of the year consisted mainly of our proportionate share of the cash consideration for CGI’s acquisition of Cognicase Inc.
We spent $6.5 billion in business acquisitions for the full year of 2002, which consisted mainly of the repurchase of SBC’s 20% indirect interest in Bell Canada for $6.3 billion ($1.3 billion in Q3 2002 and $5 billion in Q4 2002).
BUSINESS DISPOSITIONS
We had no business dispositions in Q4 2003. We received $55 million for business dispositions for the full year of 2003, which related to Bell Canada’s sale of its 89.9% ownership interest in Certen. Bell Canada received $89 million in cash proceeds, which was reduced by $34 million of Certen’s cash and cash equivalents at the time of sale.
We received $2.8 billion for business dispositions in Q4 2002, which consisted of the net proceeds from the sale of our print and electronic directories business. Business dispositions of $432 million in the remainder of the year included Bell Canada’s sale of a 37% interest in each of Télébec Limited Partnership and Northern Telephone Limited Partnership to the Bell Nordiq Income Fund, and the sale of an office building in Montreal.
CHANGE IN INVESTMENTS ACCOUNTED FOR UNDER THE COST AND EQUITY METHODS
In Q4 2003, Bell Canada sold a 3.66% interest in YPG General Partner Inc. for net cash proceeds of $135 million. Bell Globemedia also sold its 14.5% interest in Artisan Entertainment Inc. for cash proceeds of $24 million. There were no other significant changes to investments accounted for under the cost and equity methods during the remainder of the year.
In 2002, Bell Globemedia bought a 40% interest in the TQS network and other television stations for $72 million and sold its 12% interest in the History Channel for $18 million.
EQUITY INSTRUMENTS
We issued and redeemed the following shares in 2003 and 2002:
In Q1 2003, we:
In Q4 2002, we:
In Q3 2002, we:
In Q1 2002, we:
DEBT INSTRUMENTS
We made $1.5 billion of debt repayments (net of issuances) in Q4 2003 and $1.8 billion for the full year of 2003. These were mainly at Bell Canada, Bell Globemedia and BCE Inc. and were financed primarily by free cash flow generated for the full year of $1.6 billion and cash proceeds from the sale of Stratos of $340 million. BCE Inc. used a portion of the cash on hand of $714 million at December 31, 2003 to redeem all of its outstanding Series P retractable preferred shares on January 15, 2004 for $351 million. On January 28, 2004, Bell Canada announced that it will redeem all of its outstanding Series DU debentures on March 1, 2004 for $126 million. These debentures were to mature on March 1, 2011.
We use a combination of long-term and short-term debt to finance our operations. Our short-term debt consists primarily of bank facilities and notes payable under commercial paper programs. We usually pay fixed rates of interest on our long-term debt and floating rates on our short-term debt.
The combined debt of BCE Inc. and Bell Canada makes up 95% of our total debt portfolio. The average annual interest rate on our total debt was between 7.0% and 8.0% in both 2003 and 2002.
CASH RELATING TO DISCONTINUED OPERATIONS
Cash provided by discontinued operations of $342 million in Q4 2003 consisted mainly of cash proceeds of $340 million on Aliant’s sale of its 53.2% interest in Stratos. Cash used in discontinued operations of $889 million for the full year of 2002 consisted mainly of significant cash injections into Teleglobe and BCI during the first quarter of 2002.
CREDIT RATINGS
The interest rates we pay are partly based on the quality of our credit ratings, all of which were investment grade at February 3, 2004. Investment grade ratings usually mean that we qualify for lower interest rates than companies that have lower than investment grade ratings when we borrow money.
On May 13, 2003, Dominion Bond Rating Service (DBRS) removed the negative trend on BCE Inc.’s long-term debt and preferred share credit ratings. On May 15, 2003, Moody’s removed the negative trend on Bell Canada’s and BCE Inc.’s commercial paper and long-term debt credit ratings.
Our ability to generate cash in the short term and in the long term, when needed, and to provide for planned growth, depends on our sources of liquidity and on our cash requirements.
Our plan is to generate enough cash from our operating activities to pay for capital expenditures and dividends. In other words, we expect to have positive free cash flow in the short term and in the long term. We expect to repay contractual obligations (which include maturing long-term debt) maturing in 2004 and in the long term from cash on hand and from cash generated from our operations or financed by issuing new debt.
CASH REQUIREMENTS
In 2004, we will need cash mainly for capital expenditures, dividend payments, the payment of contractual obligations and other cash requirements, including the financing of approximately $645 million for the acquisition of Manitoba Telecom Services Inc.’s (MTS) 40% interest in Bell West.
Capital expenditures
We spent $3.2 billion for capital expenditures for the full year of 2003. This equals 16.7% of our full year revenues. We expect that capital expenditures will equal 17%-18% of total revenues for the full year of 2004.
Dividends
We expect to pay quarterly dividends of approximately $280 million, according to the current dividend policy of the board of directors and assuming no significant change to the number of outstanding common shares. This equals $0.30 per common share, based on approximately 924 million common shares outstanding at December 31, 2003.
Contractual obligations
The table below is a summary of our contractual obligations at December 31, 2003 that are due in each of the next five years and thereafter.
Long-term debt and notes payable and bank advances include $194 million drawn under our committed credit facilities and exclude $361 million of letters of credit. The total amount available under these committed credit facilities and under our commercial paper programs, including the amount currently drawn, is $2,841 million.
The imputed interest to be paid on capital leases is $396 million.
Purchase obligations consist mainly of contractual obligations under service contracts, as well as commitments for capital expenditures.
Other long-term liabilities included in the table relate to:
At December 31, 2003, we had other long-term liabilities not included in the table above. These liabilities consisted of an accrued employee benefit liability, future income tax liabilities, deferred revenue and gains on assets and various other long-term liabilities.
We did not include the accrued employee benefit liability and future income tax liabilities in the table because we cannot accurately determine the timing and amount of cash needed for them. This is because:
We did not include deferred revenue and gains on assets in the table because they do not represent future cash payments.
OTHER CASH REQUIREMENTS
Our cash requirements may also be affected by the liquidity risks related to our contingencies, off-balance sheet arrangements and derivative instruments. We may not be able to quantify all of these risks.
Agreement with MTS
The agreement between Bell Canada and MTS to create Bell West included put and call options relating to MTS’ 40% interest in Bell West.
On February 2, 2004, MTS exercised its put option. As a result, Bell Canada will buy MTS’ 40% interest in Bell West for approximately $645 million in cash, payable by August 2, 2004.
Bell Canada will finance the purchase of MTS’ 40% interest in Bell West with cash on hand, cash raised from operations or through the issuance of new debt.
Guarantees
As a regular part of our business, we enter into agreements that provide for indemnification and guarantees to counterparties in transactions involving business dispositions, sales of assets, sales of services, purchases and development of assets, securitization agreements and operating leases. The nature of almost all of these indemnifications prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay counterparties. As a result, we cannot determine how they could affect our future liquidity, capital resources or credit risk profile. We have not made any significant payments under these indemnifications in the past. See Note 15 to the consolidated financial statements for more information.
Securitization of accounts receivable
Bell Canada and Aliant have agreements in place under which they sold interests in pools of accounts receivable to securitization trusts for a total of $1,030 million. The main purpose of these agreements is to provide us with another, less expensive form of financing. As a result, they are an important part of our capital structure and liquidity. If we did not have these agreements, we would have had to finance approximately $1,030 million by issuing debt or equity, either of which would have been more expensive for us.
The total accounts receivable that were sold must meet minimum performance targets. These are based on specific delinquency, default and receivable turnover ratio calculations as well as minimum credit ratings. If these accounts receivable go into default, the full purchase price will have to be returned to the buyers. See Note 15 to the consolidated financial statements for more information.
Derivative instruments
We periodically use derivative instruments to manage our exposure to interest rate risk, foreign currency risk and changes in the price of BCE Inc. shares. We do not use derivative instruments for speculative purposes. Since we do not actively trade in derivative instruments, we are not exposed to any significant liquidity risks relating to them. The carrying value of the outstanding derivative instruments was a net liability of $138 million at December 31, 2003. Their fair values amounted to a net liability of $163 million. See Note 13 to the consolidated financial statements for more information.
Litigation
We become involved in various claims and litigation as a regular part of our business.
While we cannot predict the final outcome of claims and litigation that were pending at December 31, 2003, management believes that the resolution of these claims and litigation will not have a material and negative effect on our consolidated financial position or results of operation. You will find a more detailed description of the material claims and litigation pending at December 31, 2003 in the Recent Developments in Legal Proceedings section of this MD&A, updating the disclosure provided in BCE Inc.’s Annual Information Form for the year ended December 31, 2002 (BCE 2002 AIF) and in BCE Inc.’s previous 2003 quarterly shareholder reports, and in Note 14 to the consolidated financial
statements.
Canadian Radio-Television and Telecommunications Commission (CRTC) Price Cap decision
The price cap decision in May 2002 made a number of changes to the rules governing local service in Canada’s telecommunications industry. These rules will be in effect for four years. The CRTC has stated that it will initiate a price cap review in the final year of the regime and make modifications to the regulatory framework, as necessary. One of the changes was a new mechanism, called the deferral account, which will be used to fund initiatives, such as service improvements, reduced rates and/or rebates. We estimated our commitment relating to the deferral account to be approximately $160 million at December 31, 2003, which we expect to clear substantially in 2004 by implementing various initiatives.
SOURCES OF LIQUIDITY
While we do not expect any cash shortfall in the foreseeable future, we believe that we could cover a shortfall through the financing facilities we have in place at this time.
These financing facilities, along with our strengthening balance sheet, give us flexibility in carrying out our plans for future growth. We can supplement our liquidity sources, if necessary, such as in connection with business acquisitions or for contingency purposes, by issuing additional debt or equity, or selling non-core assets.
The table below is a summary of our outstanding lines of credit, bank facilities and commercial paper programs at December 31, 2003.
BCE Inc., Bell Canada and Aliant may issue notes under their commercial paper programs up to the amount of their supporting committed lines of credit. The total amount of these supporting committed lines of credit was $1.3 billion at December 31, 2003. BCE Inc., Bell Canada and Aliant had no amounts outstanding under their commercial paper programs at December 31, 2003.
BCE Inc. and Bell Canada can issue Class E notes under their commercial paper programs. These notes are not supported by committed lines of credit and may be extended in certain circumstances. BCE Inc. may issue up to $360 million of Class E Notes and Bell Canada may issue up to $400 million. Bell Canada and BCE Inc. had no Class E Notes outstanding at December 31, 2003.
The drawn portion of our total credit facilities includes issued letters of credit of $361 million under our committed facilities.
This section provides a description of recent material developments in certain of the legal proceedings involving BCE described in the BCE 2002 AIF, as updated in BCE Inc.’s previous 2003 quarterly shareholder reports.
BCI-related lawsuits
BCI common shareholders lawsuit
As indicated in BCE Inc.’s 2003 Third Quarter Shareholder Report, on June 27, 2003, the plaintiff filed an amended statement of claim against BCE Inc. and BCI, again seeking to have the action certified as a class action. On August 31, 2003, another BCI common shareholder filed a statement of claim which was substantially identical to the first shareholder’s amended statement of claim. Following the hearing of motions to dismiss both these actions brought by BCE Inc. and BCI, on January 5, 2004 the Ontario Superior Court of Justice issued an order dismissing both actions on the grounds that the actions abused the process of the Court and disclosed no reasonable cause of action against BCE Inc. or BCI, and ordered that neither plaintiff may amend his statement of claim to bring these suits before the Court again. On February 3, 2004, both plaintiffs filed a notice of appeal of the Court’s decision with the Ontario Court of Appeal. No hearing date has been set for the appeal.
6.50% debentureholders lawsuit
As indicated in BCE Inc.’s 2003 Third Quarter Shareholder Report, on September 9, 2003, the parties to this action entered into an agreement (modified on November 28, 2003) with respect to the procedure to be followed in connection with this action. Pursuant to this agreement, the defendants agreed with the plaintiff, Caisse de dépôt et placement du Québec, after limited examinations of the plaintiff in October 2003 to determine whether this action raises factual or legal issues or defences different from those in the 6.75% debentureholders lawsuit described in the BCE 2002 AIF, that (subject to the approval of the Ontario Superior Court of Justice, in accordance with the BCI plan of arrangement) the prosecution of this action should be stayed pending final adjudication or settlement of the 6.75% debentureholders lawsuit, and that the resolution of the 6.75% debentureholders lawsuit shall form the basis for the final resolution of this action. By order dated December 19, 2003, the agreement was approved by the Ontario Superior Court of Justice and the action was stayed until final disposition of the 6.75% debentureholders lawsuit.
The following section describes general risks that could affect the BCE group of companies and specific risks that could affect BCE Inc. and each of our business segments.
A risk is the possibility that an event might happen in the future that could have a negative effect on the financial condition, results of operations or business of one or more BCE companies. Part of managing our business is to understand what these potential risks could be and working to minimize them where we can.
Because no one can predict whether an event will happen or its consequences, the actual effect of any such event on our business could be materially different from what we currently anticipate. In addition, this description of risks does not include all possible risks, and there may be other risks that we are currently not aware of.
OUR DEPENDENCE ON THE BELL CANADA SEGMENT
The Bell Canada Segment is our largest segment, which means our financial performance depends in large part on how well the Bell Canada Segment performs financially. The risks that could affect the Bell Canada Segment are more likely to have a significant impact on our financial condition, results of operations and business than the risks that affect our other segments.
STRATEGIES AND PLANS
We plan to achieve our business objectives through various strategies and plans. For the Bell Canada Segment, the strategy is to lead change in the industry and set the standard in the IP world while continuing to deliver on our goals of innovation, simplicity, service and financial discipline. The key elements of the Bell Canada Segment’s strategies and plans include:
Our strategic direction involves significant changes in processes, in how we approach our markets, and in products and services. These changes will require a shift in employee skills.
If we are unable to achieve our business objectives, our growth prospects could be hurt. This could have a material and negative effect on our results of operations. In addition, the impact on our results of operations of the planned migration of our multiple service-specific networks to a single IP-based network is uncertain.
ECONOMIC AND MARKET CONDITIONS
Our business is affected by general economic conditions, consumer confidence and spending, and the demand for, and the prices of, our products and services. When there is a decline in economic growth, and in retail and commercial activity, there tends to be a lower demand for our products and services. During these periods, customers may delay buying our products and services, or reduce or discontinue using them.
The slower pace of growth and the uncertainty in the global economy have reduced demand for some of our products and services, which has negatively affected our financial performance and may continue to negatively affect it in the future. In particular, weak economic conditions have led to:
Weak economic conditions may also negatively affect our profitability and cash flows from operations. They could also negatively affect the financial condition and credit risk of our customers, which could increase uncertainty about our ability to collect receivables and potentially increase our bad debt expenses.
INCREASING COMPETITION
We face intense competition from traditional competitors, as well as from new entrants to the markets we operate in. We compete not only with other telecommunications, media, satellite television and e-commerce companies, but also with other businesses and industries. These include cable, software and Internet companies, a variety of companies that offer network services, such as providers of business information systems and system integrators, and other companies that deal with, or have access to, customers through various communications networks.
Many of our competitors have substantial financial, marketing, personnel and technological resources. Other competitors have recently emerged, or may in the future emerge, from restructurings with reduced debt and a stronger financial position. This means that they have more financial flexibility to price their products and services at very competitive rates.
Competition could affect our pricing strategies and reduce our revenues and profitability. It could also affect our ability to retain existing customers and attract new ones. Competition puts us under constant pressure to improve customer service and to keep our prices competitive. It forces us to continue to reduce costs, manage expenses and increase productivity. This means that we need to be able to anticipate and respond quickly to the constant changes in our businesses and markets.
We already have several domestic and foreign competitors, but the number of foreign competitors with a presence in Canada and large resources could increase in the future. In 2003, the Canadian government started a review of the foreign ownership restrictions that apply to telecommunications carriers and to Broadcasting Distribution Undertakings (BDUs). Removing or easing the limits on foreign ownership could result in foreign communications or other companies entering the Canadian market by making acquisitions or investments. This could result in greater access to capital for our competitors or the arrival of new competitors, which would increase competitive pressure. Since the government’s review has not been completed, it is impossible to predict the outcome of this initiative or to assess how any recommendations may affect us.
Wireline and long distance
We experience significant competition in long distance from dial-around resellers, pre-paid card providers and others, and from traditional competitors, such as inter-exchange carriers and resellers.
We also face increasing cross-platform competition, as customers substitute traditional services for new technologies. For example, our wireline business competes with wireless and Internet services, including chat services, instant messaging and e-mail. We expect to face competitive pressure from cable companies as they implement their plans to roll out voice services over their network and from other emerging competitors, including municipal electrical utilities and VoIP providers. We expect these kinds of competition to intensify as growth in Internet and wireless services continues and new technologies are developed.
Cross-platform competition will be increasingly intense as technologies, such as VoIP, improve and gain market acceptance. We have announced our intention to launch our own VoIP initiative, but there is no assurance that it will have a sustainable market. VoIP services could take business away from our other products and services. If significant VoIP competition develops, it could reduce our existing market share in local and long distance services, and could have a material and negative effect on our future revenues and profitability. VoIP technology does not require service providers to own or rent physical networks, which increases access to this market by other competitors. If competition from these service providers further develops, it could have a material and negative effect on our future revenues and profitability.
Technology substitution and VoIP in particular, has reduced barriers to entry that existed in the industry. This has allowed competitors with limited access to financial, marketing, personnel and technological resources to rapidly launch new products and services and to gain market share. This trend is expected to accelerate in the future, which could materially and negatively affect our financial performance.
Internet access
Cable companies and independent Internet service providers have increased competition in the broadband and Internet access services business. Competition has led to pricing for Internet access in Canada that is among the lowest in the world.
Wireless
The Canadian wireless telecommunications industry is also highly competitive. We compete directly with other wireless service providers that have aggressive product and service introductions, pricing and marketing and with wireline service providers. We expect competition to intensify as new technologies, products and services are developed.
Satellite television
Bell ExpressVu competes directly with other satellite television providers and with cable companies across Canada. These cable companies have recently upgraded their networks, operational systems and services, which could improve their competitiveness. This could materially and negatively affect the financial performance of Bell ExpressVu.
IMPROVING PRODUCTIVITY AND CONTAINING CAPITAL INTENSITY
We continue to implement several productivity improvements while containing our capital intensity.
There could be a material and negative effect on our profitability if we do not continue to successfully implement these productivity improvements and manage capital intensity while maintaining the quality of our service. For example, we must reduce the price of certain services offered by the Bell Canada Segment that are subject to regulatory “price caps” by a 3.5% productivity factor, excluding inflation, each year between 2002 and 2006. The Bell Canada Segment’s profits will decline if it cannot lower its expenses at the same rate. There could also be a material and negative effect on our profitability if market factors or other regulatory actions result in lower revenues and we cannot reduce our expenses at the same rate.
ANTICIPATING TECHNOLOGICAL CHANGE
We operate in markets that are experiencing constant technological change, evolving industry standards, changing client needs, frequent new product and service introductions, and short product life cycles.
Our success will depend in large part on how well we can anticipate and respond to changes in industry standards, and how quickly and efficiently we can introduce new products, services and technologies, and upgrade existing ones.
We may face additional financial risks as we develop new products, services and technologies, and update our networks to stay competitive. Newer technologies, for example, may quickly become obsolete or may need more capital than expected. Development could be delayed for reasons beyond our control. Substantial investments usually need to be made before new technologies prove to be commercially viable.
Bell Canada is in the process of migrating its core circuit-based infrastructure to Internet Protocol (IP) technology. This may allow Bell Canada to:
There is no assurance that these services will be available or that there will be customer demand, or that the efficiencies will increase as expected.
There is no assurance that we will be successful in developing, implementing and marketing other new technologies, products, services or enhancements within a reasonable time, or that they will have a market. New products or services that use new or evolving technologies could make our existing ones unmarketable or cause their prices to fall.
LIQUIDITY
Our ability to generate cash and to maintain capacity to meet our financial obligations and provide for planned growth depends on our cash requirements and on our sources of liquidity. Our cash requirements may be affected by the risks associated with our contingencies, off-balance sheet arrangements and derivative instruments.
In general, we finance our capital needs in four ways:
Financing through equity offerings would dilute the holdings of existing equity investors. An increased level of debt financing could lower our credit ratings, increase our borrowing costs, and give us less flexibility to take advantage of business opportunities.
Our ability to raise financing depends on our ability to access the capital markets and the syndicated commercial loan market. The cost of funding depends largely on market conditions, and the outlook for our business and our credit ratings at the time capital is raised. If our credit ratings are downgraded, our cost of funding could significantly increase. In addition, participants in the capital and syndicated commercial loan markets have internal policies limiting their ability to invest in, or extend credit to, any single borrower or group of borrowers or to a particular industry.
BCE Inc. and certain of its subsidiaries have entered into renewable credit facilities with various financial institutions. They include facilities serving as back-up facilities for issuing commercial paper. There is no assurance that these facilities will be renewed at favourable terms.
We need significant amounts of cash to implement our business plan. This includes cash for capital expenditures to provide our services, dividend payments and payment of our contractual obligations, including refinancing our outstanding debt.
Our plan in 2004 is to generate enough cash from our operating activities to pay for capital expenditures and dividends. We expect to repay contractual obligations maturing in 2004 from cash on hand and from cash generated from our operations or financed by issuing debt. If actual results are different from our business plan or if the assumptions in our business plan change, we may have to raise more funds than expected from issuing debt or equity.
If we cannot raise the capital we need, we may have to:
Any of these possibilities could have a material and negative effect on our growth prospects in the long term.
RELIANCE ON MAJOR CUSTOMERS
An important amount of revenue earned by the Bell Canada Segment and BCE Emergis comes from a small number of major customers. If they lose a contract with a major customer and cannot replace it, it could have a material and negative effect on their results.
MAKING ACQUISITIONS
Our growth strategy includes making strategic acquisitions. There is no assurance that we will find suitable companies to acquire or that we will have the financial resources needed to complete any acquisition. There could also be difficulties in integrating the operations of recently acquired companies with our existing operations.
LITIGATION, REGULATORY MATTERS AND CHANGES IN LAWS
Pending or future litigation, regulatory initiatives or regulatory proceedings could have a material and negative effect on our businesses, operating results and financial condition. Changes in laws or regulations or in how they are interpreted, and the adoption of new laws or regulations, including changes in, or the adoption of, new tax laws that result in higher tax rates or new taxes, could also materially and negatively affect us. Any claim by a third party, with or without merit, that a significant part of our business infringes on that third party’s intellectual property could also materially and negatively affect us.
Please see BCE Inc.’s Annual Information Form for the year ended December 31, 2002 (BCE 2002 AIF), as updated in BCE Inc.’s 2003 first, second and third quarter shareholder reports, for a detailed description of:
Please also see Recent Developments in Legal Proceedings and Risks That Could Affect Our Business – Bell Canada Segment in this MD&A for a description of recent material developments, since BCE Inc.’s most recent quarterly shareholder report, in the principal legal proceedings and the principal regulatory initiatives and proceedings, respectively, involving us.
FUNDING AND CONTROL OF SUBSIDIARIES
BCE Inc. is currently funding, and may continue to fund, the operating losses of some of its subsidiaries in the future, but it is under no obligation to continue doing so. If BCE Inc. decides to stop funding any of its subsidiaries and that subsidiary does not have other sources of funding, this would have a material and negative effect on the subsidiary’s results of operations and financial condition.
In addition, BCE Inc. does not have to remain the majority holder of, or maintain its current level or nature of ownership in, any subsidiary, unless it has agreed otherwise. The announcement of a decision by BCE Inc. to change the nature of its investment in a subsidiary, to sell some or all of its interest in a subsidiary, or any other similar decision could have a material and negative effect on the subsidiary’s results of operations and financial condition and on the value of the subsidiary’s securities.
If BCE Inc. stops funding a subsidiary, changes the nature of its investment or disposes of all or part of its interest in a subsidiary, stakeholders or creditors of the subsidiary might decide to take legal action against BCE Inc. For example, certain members of the lending syndicate of Teleglobe Inc., a former subsidiary of BCE Inc., and other creditors of Teleglobe Inc. have launched lawsuits against BCE Inc. following its decision to stop funding Teleglobe Inc. You will find a description of these lawsuits in the BCE 2002 AIF as updated in BCE Inc.’s 2003 quarterly shareholder reports. While we believe that these kinds of claims have no legal foundation, they could negatively affect the market price of BCE Inc.’s securities. BCE Inc. could have to devote considerable management time and resources in responding to any such claim.
PENSION FUND CONTRIBUTIONS
Most of our pension plans had pension fund surpluses as of our most recent actuarial valuation. As a result, we have not had to make regular contributions to the pension funds in the past few years. It also means that we have reported pension credits, which have had a positive effect on our net earnings.
The decline in the capital markets in 2001 and 2002, combined with historically low interest rates, however, has significantly reduced the pension fund surpluses and the pension credits. This has negatively affected our net earnings.
Our pension plan assets had positive returns for the twelve months ending December 31, 2003. There is no assurance that positive returns will continue. If returns on pension plan assets decline again in the future, the surpluses could also continue to decline. If this happens, we might have to start making cash contributions to the pension funds. This could have a material and negative effect on our results of operations.
RETAINING EMPLOYEES
Our success depends in large part on our ability to attract and retain key employees. The exercise price of most of the stock options that our key employees hold is higher than the current trading price of BCE Inc.’s common shares. As a result, our stock option programs may not be effective in retaining these employees. While we do not expect that we will lose key people, if it happens, this could materially hurt our businesses and operating results.
RENEGOTIATING LABOUR AGREEMENTS
Approximately 52% of our employees are represented by unions and are covered by collective bargaining agreements. The following material collective agreements have expired:
The following collective agreements will expire in the next 12 months:
Renegotiating collective agreements could result in higher labour costs and work disruptions, including work stoppages or work slowdowns. Difficulties in renegotiations or other labour unrest could significantly hurt our businesses, operating results and financial condition.
EVENTS AFFECTING OUR NETWORKS
Network failures could materially hurt our business, including our customer relationships and operating results. Our operations depend on how well we protect our networks, our equipment, our applications and the information stored in our data centres against damage from fire, natural disaster, power loss, hacking, computer viruses, disabling devices, acts of war or terrorism, and other events. Any of these events could cause our operations to be shut down indefinitely.
Our network is interconnected with the networks of other telecommunications carriers. Therefore, any of the events mentioned in the previous paragraph, as well as strikes or other work disruptions, bankruptcies, technical difficulties or other events affecting the functionality of the networks of other carriers on which we rely to provide our own services could also hurt our business, including our customer relationships and operating results.
HOLDING COMPANY STRUCTURE
BCE Inc. is a holding company. That means it does not carry on any significant operations and has no major sources of income or assets of its own, other than the interests it has in its subsidiaries, joint ventures and significantly influenced companies. BCE Inc.’s cash flow and its ability to service its debt and to pay dividends on its shares all depend on dividends or other distributions it receives from its subsidiaries, joint ventures and significantly influenced companies and, in particular, from Bell Canada. BCE Inc.’s subsidiaries, joint ventures and significantly influenced companies are separate legal entities. They do not have to pay dividends or make any other distributions to BCE Inc.
STOCK MARKET VOLATILITY
The stock markets have experienced significant volatility over the last few years, which affected the market price and trading volumes of the shares of many telecommunications companies, in particular. Differences between BCE Inc.’s actual or anticipated financial results and the published expectations of financial analysts may also contribute to volatility in BCE Inc.’s common shares. A major decline in the capital markets in general, or an adjustment in the market price or trading volumes of BCE Inc.’s common shares or other securities, may materially and negatively impact our ability to raise capital, issue debt, retain employees or make future strategic acquisitions.
Decisions of regulatory agencies
The Bell Canada Segment’s business is affected by decisions made by various regulatory agencies, including the Canadian Radio-television and Telecommunications Commission (CRTC). Many of these decisions balance requests from competitors for access to facilities, such as the telecommunications networks, switching and transmission facilities, and other network infrastructure of incumbent telephone companies, with the rights of the incumbent telephone companies to compete reasonably freely.
Second Price Cap decision
In May 2002, the CRTC issued decisions relating to new price cap rules that govern incumbent telephone companies for a four-year period starting in June 2002. These decisions:
The CRTC also established a deferral account, but has not yet determined how the account balance will be cleared. There is a risk that the account could be used in a way that could have a negative financial effect on the Bell Canada Segment.
The balance in Bell Canada’s and Aliant’s deferral accounts at the end of 2003 estimated at approximately $160 million is expected to be substantially cleared in 2004. On December 2, 2003, Bell Canada filed an application with the CRTC requesting approval for the use of some of the funds in its deferral account for expanding Bell Canada’s broadband services to areas that meet specific criteria. On December 24, 2003, the CRTC indicated that it intends to address this proposal as part of the proceeding it will initiate in 2004 to address issues related to the deferral accounts of incumbent telephone companies.
In addition, other follow-up issues to the Price Cap decisions are expected to be resolved in 2004, the outcome of which could result in an additional negative effect on the results of the Bell Canada Segment.
Decision on incumbent affiliates
On December 12, 2002, the CRTC released its decision on incumbent affiliates, which requires Bell Canada and its carrier affiliates to receive CRTC approval on contracts that bundle tariffed and non-tariffed products and services. This means that:
On September 23, 2003, the CRTC issued a decision that requires Bell Canada and its carrier affiliates to include a detailed description of the bundled services they provide to customers when they make their filings of tariffs with the CRTC. The customer’s name will be kept confidential, but the pricing and service arrangements it has with the Bell Canada Segment will be available on the public record.
These decisions increase the Bell Canada Segment’s regulatory burden at both the wholesale and retail levels. They could also cause some large customers of the Bell Canada Segment to choose another preferred supplier, which could have a material and negative effect on its results of operations.
On October 23, 2003, Bell Canada sought from the Federal Court of Canada leave to appeal certain aspects of this decision. On November 5, 2003, Bell Canada filed an application with the CRTC requesting it to issue a stay of certain aspects of the decision pending a review of the decision. These applications raise important issues about public disclosure of customer-specific commercial information that could compromise the competitiveness of these customers and could negatively reflect on Bell Canada as a future service provider. On December 18, 2003, the Federal Court granted Bell Canada’s request for leave to appeal. However, leave to appeal was only granted with respect to the issue of whether the CRTC failed to provide reasonable means to obtain the views of interested parties regarding the disclosure of information.
Allstream application concerning customer specific arrangements
On January 23, 2004, Allstream Inc. (Allstream) filed an application requesting the CRTC to order Bell Canada to discontinue providing service under any customer specific arrangements (CSAs) that are currently filed with the CRTC but which are not yet approved. Allstream has proposed that service for such customers should be provided only in accordance with Bell Canada’s General Tariff. Allstream has also proposed a moratorium on the approval of any new CSAs for customers pending the disposition of Bell Canada’s appeal in the Federal Court, which is noted under Decision on incumbent affiliates above.
While Bell Canada will be opposing all aspects of Allstream’s application, a ruling by the CRTC granting Allstream’s request to migrate customers to standard offerings under the General Tariff would require Bell Canada to reprice certain services provided to such customers. Similarly, a moratorium on approval of any new CSAs could have a material and negative effect on Bell Canada’s ability to offer new services to the large business customer market at competitive terms and conditions.
Public notice on changes to price floor
On October 23, 2003, the CRTC issued a public notice asking for comments on its preliminary view that revised rules may be needed for how incumbent telephone companies price their services, service bundles and customer contracts. It issued an amended public notice on December 8, 2003.
It is too early to determine how the proposals could affect the Bell Canada Segment’s pricing of new retail services and its ability to provide service bundles. Bell Canada provided its comments on January 30, 2004.
Application seeking consistent regulation
On November 6, 2003, Bell Canada filed an application requesting that the CRTC start a public hearing to review how similar services offered by cable companies and telephone companies are regulated so that consistent rules may be developed to recognize and support the growing competition between these converging sectors. Bell Canada also requested that this proceeding address any rules that might be needed to govern VoIP services provided by cable companies and others. This proceeding could determine the rules for competition with other service providers and could affect our ability to compete in the future.
LICENSES AND CHANGES TO WIRELESS REGULATION
Companies must have a spectrum licence to operate cellular, personal communications service (PCS) and other radio-telecommunications systems in Canada. The Minister of Industry awards spectrum licences, through a variety of methods, at his or her discretion under the Radiocommunication Act.
As a result of a recent Industry Canada decision, Bell Mobility’s cellular and PCS licences, which would have expired on March 31, 2006, will now expire in 2011 coincident with the PCS licences acquired through the 2001 PCS Auction. The PCS licences that were awarded in the 2001 PCS Auction will expire on November 29, 2011. All of Bell Mobility’s cellular and PCS licences are now classified as spectrum licences with ten-year licence terms and an expectation of renewal, although there is no assurance that this will happen. Industry Canada can revoke a company’s licence at any time if the company does not comply with the licence’s conditions. While we believe that we comply with the terms of our licences, there is no assurance that Industry Canada will agree, which could have a material and negative effect on us.
In December 2003, Industry Canada issued its decision with regards to changing the terms and the method of calculating the fees of cellular and PCS licences. The new fees are based on the amount of spectrum a carrier holds, in a given geographic area, and are no longer based on the degree of deployment or the number of radio sites in operation. The changes come into effect on April 1, 2004 and will be implemented over seven years. The changes are not expected to have a material impact on the amount of fees paid by Bell Mobility.
In October 2001, the Minister of Industry announced plans for a national review of Industry Canada’s procedures for approving and placing wireless and radio towers in Canada, including a review of the role of municipal authorities in the approval process. If the consultation process results in more municipal involvement in the approval process, there is a risk that it could significantly slow the expansion of wireless networks in Canada. This could have a material and negative effect on the operations of all of Canada’s wireless carriers, including the Bell Canada Segment. The final report is expected in April 2004.
INCREASED ACCIDENTS FROM USING CELLPHONES
Some studies suggest that using handheld cellphones while driving may result in more accidents. It is possible that this could lead to new regulations or legislation banning the use of handheld cellphones while driving, as it has in Newfoundland and Labrador and in several U.S. states. If this happens, cellphone use in vehicles could decline, which would negatively affect the Bell Canada Segment and other wireless service providers.
HEALTH CONCERNS ABOUT RADIO FREQUENCY EMISSIONS
It has been suggested that some radio frequency emissions from cellphones may be linked to medical conditions, such as cancer. In addition, some interest groups have requested investigations into claims that digital transmissions from handsets used with digital wireless technologies pose health concerns and cause interference with hearing aids and other medical devices. This could lead to additional government regulation, which could have a material and negative effect on the Bell Canada Segment’s business and other wireless services providers. In addition, actual or perceived health risks of wireless communications devices could result in fewer new network subscribers, lower network usage per subscriber, higher churn rates, product liability lawsuits or less outside financing available to the wireless communications industry. Any of these would have a negative effect on the Bell Canada Segment and other wireless service providers.
BELL EXPRESSVU
Bell ExpressVu currently uses two satellites, Nimiq 1 and Nimiq 2, for its Direct-to-home satellite television (DTH) services. Telesat operates these satellites. Satellites are subject to significant risks. Any loss, manufacturing defects, damage or destruction of these satellites could have a material and negative effect on Bell ExpressVu’s results of operations and financial condition. Please see Risks That Could Affect Our Business – BCE Ventures –Telesat for more information.
Bell ExpressVu is subject to programming and carriage requirements under its CRTC licence. Changes to the regulations that govern broadcasting or to its licence could negatively affect Bell ExpressVu’s competitive position or the cost of providing its services. Bell ExpressVu’s existing DTH distribution undertaking licence was scheduled to be renewed in August 2003, but was extended to February 2004 so that the CRTC could review Bell ExpressVu’s application. The CRTC held the hearings on the renewal application in October 2003. Although we expect that this licence will be renewed when it expires, there is no assurance that this will happen or that the terms will be the same.
Bell ExpressVu continues to face competition from unregulated U.S. DTH services that are illegally sold in Canada. In response, it has started or is participating in several legal actions that are challenging the sale of U.S. DTH equipment in Canada. While Bell ExpressVu has been successful in increasing its share of the satellite television market despite this competition, there is no assurance that it will continue to do so.
Finally, Bell ExpressVu faces a loss of revenue resulting from the theft of its services. Bell ExpressVu is taking numerous actions to reduce these losses, including legal action, investigations, implementing electronic countermeasures targeted at illegal devices, leading information campaigns and developing new technology. Implementing these measures, however, could increase Bell ExpressVu’s capital and operating expenses, reduce subscriber growth and increase churn.
DEPENDENCE ON ADVERTISING
A large part of Bell Globemedia’s revenue from its television and print businesses comes from advertising revenues. Bell Globemedia’s advertising revenues are affected by competitive pressures, including its ability to attract and retain viewers and readers. In addition, the amount companies spend on advertising is directly related to economic growth. An economic downturn tends to make it more difficult for Bell Globemedia to maintain or increase revenues. Advertisers have historically been sensitive to general economic cycles and, as a result, Bell Globemedia’s business, financial condition and results of operations could be materially and negatively affected by a downturn in the economy. In addition, most of Bell Globemedia’s advertising contracts are short-term contracts that the advertiser can cancel on short notice.
INCREASING FRAGMENTATION IN TELEVISION MARKETS
Television advertising revenue largely depends on the number of viewers and the attractiveness of programming in a given market. The viewing market has become increasingly fragmented over the past decade because 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. We expect fragmentation to continue as new web-based and other services increase the choices available to consumers. As a result, there is no assurance that Bell Globemedia will be able to maintain or increase its advertising revenues or its ability to reach viewers with attractive programming.
REVENUES FROM DISTRIBUTING TELEVISION SERVICES
A significant portion of revenues from CTV’s specialty television operations comes from contractual arrangements with distributors, primarily cable and DTH operators. Many of these contracts have expired. In addition, competition has increased in the specialty television market. As a result, there is no assurance that contracts with distributors will be renewed on equally favourable terms.
INCREASED COMPETITION FOR FEWER PRINT CUSTOMERS
Print advertising revenue largely depends on circulation and readership. The existence of a competing national newspaper and a commuter paper in Toronto has increased competition, while the total circulation and readership of Canadian newspapers has continued to decline. This has resulted in higher costs, more competition in advertising rates and lower profit margins at The Globe and Mail.
BROADCAST LICENSES
Each of CTV’s conventional and specialty services operates under licences issued by the CRTC for a fixed term of up to seven years. These licences are subject to the requirements of the Broadcasting Act, the policies and decisions of the CRTC, and the conditions of each licensing or renewal decision, all of which may change. There is no assurance that any of CTV’s licences will be renewed. Any renewals, changes or amendments may have a material and negative effect on Bell Globemedia.
SALE OF U.S. HEALTH OPERATIONS
In December 2003, the board of directors of BCE Emergis approved the sale of BCE Emergis’ U.S. health operations (US Health) for a total of U.S.$ 213 million in cash. The transaction is expected to close in March 2004. The total price is subject to adjustments and the closing is subject to shareholder and regulatory approval and customary closing conditions. There is a risk that the closing of the transaction might be delayed or not occur. In the latter case, there is no assurance that BCE Emergis could dispose of US Health for the same price or that another purchaser could be found.
CHANGES IN CURRENCY EXCHANGE RATES
BCE Emergis is affected by changes in the currency exchange rates between the Canadian and U.S. dollars. The stronger Canadian dollar has had, and could continue to have, a material and negative effect on BCE Emergis’ revenues and net earnings.
ADOPTION OF E-BUSINESS
The success of BCE Emergis depends on widespread use of the Internet and other electronic networks as a way to do business. Because eBusiness and related activities, such as online transactions, are relatively new and evolving, it is difficult to predict the size of this market and its sustainable rate of growth. Businesses and customers have not adopted eBusiness as quickly as originally expected.
BCE Emergis must increase the number of transactions it processes to build recurring revenue. This depends on how quickly its customers and its distributors’ customers adopt its services. It also depends on BCE Emergis’ ability to build an effective sales force, stimulate sales from distributors and influence their marketing plans. A significant decrease in the number of transactions BCE Emergis processes could have a material and negative effect on its
results.
STRATEGIC PLANS
BCE Emergis has announced plans to focus on key growth areas, drive recurring revenue growth, streamline its service offerings and operating costs, and add new services. It will also review its various product lines and businesses to ensure they continue to meet its goals. If these plans are unsuccessful, BCE Emergis’ results of operations could be materially and negatively affected.
SUCCESS OF U.S. BASED OPERATIONS
Success in the U.S. market involves significant management and financial resources. If BCE Emergis is unsuccessful, this could have a material and negative effect on its business and operating results.
RELIANCE ON STRATEGIC RELATIONSHIPS
BCE Emergis relies on strategic relationships to increase its customer base. This includes its relationships with Bell Canada, VISA and the Federal Home Loan Mortgage Corporation (Freddie Mac). If these relationships fail, its business and operating results could be materially and negatively affected.
DEPENDENCE ON CONTRACTING MEDICAL SERVICE PROVIDERS
The growth of BCE Emergis’ eHealth Solutions Group, North America business unit depends on its ability to:
In addition, the results of BCE Emergis could be materially and negatively affected if:
EXPOSURE TO PROFESSIONAL LIABILITY
BCE Emergis uses medical treatment guidelines in its utilization review and case management services. That means it could be subject to claims relating to:
These claims could have a material and negative effect on the business and operating results of BCE Emergis.
DEFECTS IN SOFTWARE OR FAILURES IN PROCESSING TRANSACTIONS
Defects in software products that BCE Emergis owns or licenses, delays in delivery, and failures or mistakes in processing electronic transactions could materially and negatively affect its business, including its customer relationships and operating results.
SECURITY AND PRIVACY BREACHES
If BCE Emergis is unable to protect the physical and electronic security, and privacy, of applications, databases and transactions, its business, including customer relationships, could be materially and negatively affected.
INTELLECTUAL PROPERTY
BCE Emergis depends on its ability to develop and maintain the proprietary aspects of its technology. It may not be able to enforce
its rights or prevent other parties from developing similar technology, duplicating its intellectual property or designing around its intellectual
property. Any of these could materially and negatively affect its business.
INTEGRITY OF PUBLIC KEY CRYPTOGRAPHY TECHNOLOGY
BCE Emergis’ security solutions depend on public key cryptography technology. Any major advance in ways to attack cryptographic systems could make some or all of its security solutions obsolete or unmarketable. This could reduce its revenues from security solutions and could materially and negatively affect its business and operating results.
Launch and in-orbit risks
There is a risk that Telesat’s satellites currently under construction, or satellites built in the future, may not be successfully launched. Telesat normally buys insurance to protect itself against this risk, but there is no assurance that it will be able to get launch coverage for the full value of any satellite proposed to be launched or at a favourable rate.
Once Telesat’s satellites are in orbit, there is a risk that a failure could prevent them from completing their commercial mission. Telesat has a number of measures in place to protect itself against this risk. These include engineering satellites with on-board redundancies by including spare equipment on the satellite and buying in-orbit insurance. However, there is no assurance that Telesat will be able to renew its in-orbit insurance with enough coverage or at a favourable rate.
Anik F1 and Anik F1R
In August 2001, the manufacturer of the Anik F1 satellite advised Telesat of a gradual decline in power on the satellite. It indicated that power will continue to decline at the rates observed to date. Telesat believes that this will affect some of the satellite’s core services in mid-2005. Telesat has a satellite under construction, Anik F1R, which is expected to replace Anik F1 in time to ensure that service to its customers will not be interrupted. There is no assurance that Telesat will be able to get launch and in-orbit coverage for the Anik F1R satellite, or that if it does get coverage, that it will be for the full value of the satellite or at a favourable rate.
Telesat has insurance in place to cover the power loss on Anik F1 and filed a claim with its insurers in December 2002. Telesat has had discussions with insurers about settlement of this claim and has reached an agreement with a small number of insurers. Telesat has been unable to reach an agreement with a majority of insurers and if continued discussions do not result in a satisfactory settlement in the near future, Telesat will resort to legal measures to enforce its rights under the insurance. There is no assurance of how much Telesat will receive in either a settlement agreement or through legal measures or when it will receive it.
Anik F2
Telesat has another satellite under construction, Anik F2. The manufacturer has delayed delivery of this satellite. Telesat has made arrangements to lease a satellite that is already in orbit during this delay. This delay could require Telesat to refund prepayments to customers. In addition, a further delay could affect Telesat’s ability to provide service and result in additional costs.
Telesat already has part of the insurance coverage for Anik F2, but there is no assurance that it will be able to get launch and in-orbit coverage for the full value of the satellite or at a favourable rate.
Nimiq 1 and Nimiq 2
Telesat carries in-orbit insurance on Nimiq 1 and Nimiq 2. Nimiq 1 is insured for its book value. Following a partial failure and a successful insurance claim on Nimiq 2 in 2003, Telesat arranged for in-orbit insurance for approximately 50% of the residual value of Nimiq 2. Telesat expects to renew the in-orbit insurance for Nimiq 1 in 2004 but there is no assurance that it will be able to get coverage or that, if it does get coverage, that it will be for the full value of the satellite or at a favourable rate.
We have prepared our consolidated financial statements according to Canadian GAAP.
This section discusses key estimates and assumptions that management has made under these principles and how they affect the amounts reported in the financial statements and notes.
Please see Note 1 to the consolidated financial statements for more information about the accounting principles we use to prepare our financial statements, a description of the changes in accounting standards and policies and how they affect our financial statements.
Under Canadian GAAP, we are required to make estimates and assumptions when we account for and report assets, liabilities, revenues and expenses, and disclose contingent assets and liabilities in our financial statements. We are also required to continually evaluate the estimates and assumptions we use.
We base our estimates and assumptions on past experience and on other factors that we believe are reasonable under the circumstances. Because this involves varying degrees of judgment and uncertainty, the amounts currently reported in the financial statements could, in the future, prove to be inaccurate.
We consider the estimates and assumptions described in this section to be an important part of understanding our financial statements because they rely heavily on management’s judgment and are based on factors that are inherently uncertain.
Our senior management has discussed the development and selection of the key estimates and assumptions described in this section with the Audit Committee of the Board of Directors. The Audit Committee has reviewed these key estimates and assumptions.
EMPLOYEE BENEFIT PLANS
We maintain defined benefit plans that provide pension, other retirement and post-employment benefits for almost all of our employees. The amounts reported in the financial statements relating to these benefits are determined using actuarial calculations that are based on several assumptions.
We perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The valuation uses management’s assumptions for the discount rate, expected long-term rate of return on plan assets, rate of compensation increase, health-care cost trend and expected average remaining years of service of employees.
While we believe that these assumptions are appropriate, differences in actual results or changes in assumptions could materially affect employee benefit obligations and future net benefit plans credits or costs.
We account for differences between actual and assumed results by recognizing differences in benefit obligations and plan performance over the working lives of the employees who benefit from the plans.
The two most significant assumptions used to calculate the net employee benefit plans credit or cost are:
Discount rate
The discount rate is the interest rate used to determine the present value of the future cash flows that we expect will be needed to settle employee benefit obligations. It is usually based on the yield on long-term high-quality corporate fixed income investments, with maturities matching the estimated cash flows from the plan.
We determine the appropriate discount rate at the end of every year. Our discount rate was 6.5% at December 31, 2003, unchanged from 2002 and 2001. Changes in the discount rate do not have a significant effect on our earnings. They do, however, have a significant effect on the accrued benefit obligation. A lower discount rate results in a higher obligation and a lower pension surplus, which means that we may have to increase our cash contributions to the plan.
Expected long-term rate of return
In 2003, we assumed an expected long-term rate of return on plan assets of 7.5%. We lowered our assumption from a rate of return of 8.3% for 2002 to 7.5% for 2003 because we expect lower long-term rates of return in the financial markets. This change reduced pre-tax earnings by about $80 million in 2003. Over the long term, the actual rate of return has been substantially more than the rates we assumed, on average. In the two years before 2003, however, it has been substantially less than 7.5%, resulting in a significant accumulated actuarial loss. This accumulated actuarial loss negatively affected pre-tax earnings by about $120 million in 2003.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
We maintain allowances for losses that we expect will result from customers who do not make payments owed to us.
We estimate the allowances based on the likelihood of recovering our accounts receivable. This is based on past experience, taking into account current and expected collection trends.
If economic conditions or specific industry trends become worse than we have anticipated, we will increase our allowances for doubtful accounts by recording an additional expense.
USEFUL LIFE OF LONG-LIVED ASSETS
The estimated useful life of long-lived assets is used to determine amortization expense.
We estimate an asset’s useful life when we acquire the asset. We base our estimate on past experience with similar assets, taking into account expected technological or other changes.
If technological changes happen more quickly or in a different way than we have anticipated, we might have to shorten the asset’s estimated useful life. This could result in:
IMPAIRMENT
We assess the possible impairment of long-lived assets when events or changes in circumstances indicate that we may not be able to recover their carrying value. We measure impairment using a projected undiscounted cash flow method. If the asset’s carrying value is more than its recoverable value, we record the difference as an impairment charge.
We assess the value of goodwill and intangible assets with indefinite lives every year and when events or changes in circumstances indicate that they might be impaired. We measure for impairment using a projected discounted cash flow method. If the asset’s carrying value is more than its fair value, we record the difference as an impairment charge.
We believe that our estimates of future cash flows and fair value are reasonable. The assumptions we have used are consistent with our internal planning and reflect our best estimates, but they have inherent uncertainties that management may not be able to control. As a result, the amounts reported for these items could be different if we used different assumptions or if conditions change in the future.
We cannot predict whether an event that triggers an impairment will occur, when it will occur or how it will affect the asset values we have reported.
CONTINGENCIES
We become involved in various litigation and regulatory matters as a part of our business. Pending litigation, regulatory initiatives or regulatory proceedings represent potential financial loss to our business.
We accrue a potential loss if we believe the loss is probable and it can be reasonably estimated. We base our decision on information that is available at the time.
We estimate the amount of the loss by consulting with outside legal counsel who is handling our defence. This involves analyzing potential outcomes and assuming various litigation and settlement strategies.
If the final resolution of a legal or regulatory matter results in a judgment against us or the payment of a large settlement by us, it could have a material and negative effect on our results of operations, cash flows and financial position in the period that the judgment or settlement occurs.
INCOME TAXES
Although management believes it has adequately provided for income taxes based on all information currently available, the calculation of income taxes in many cases requires significant judgment involving interpretation of tax rules and regulations that are continually changing. Our tax filings are also subject to audits, the outcome of which may change the amount of current and future income tax assets and liabilities.
RESTRUCTURING AND OTHER CHARGES
We develop formal plans for exiting businesses and activities as part of the restructuring initiatives we have been carrying out for the past several years.
The costs of these plans include estimates of the salvage value of assets that are made redundant or obsolete. We also report estimated expenses for severance and other employee costs and other exit costs.
Because exiting a business or activity is a complex process that can take several months to complete, it involves reassessing estimates that were made when the original decision to exit the business or activity was made. In addition, we constantly evaluate whether the estimates of the remaining liabilities under our restructuring programs are adequate.
As a result, we may have to change previously reported estimates when payments are made or the activities are complete. There may also be additional charges for new restructuring initiatives.
Bell Globemedia
BCE Emergis
Bell Canada’s EBITDA increased by 2.4%; excluding directories business would yield a 6.1% increase
Strong EBITDA growth at Bell Globemedia 
BCE Emergis EBITDA declines 
