Notes to Consolidated Financial Statements – BCE Inc.
The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2002, as set out on pages 54 to 81 of BCE Inc.’s 2002 Annual Report. Figures in these notes are unaudited. All amounts are in Canadian dollars, except where noted.
1. SIGNIFICANT ACCOUNTING POLICIES
We have prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP) using the same accounting policies as outlined in Note 1 to the annual consolidated financial statements for the year ended December 31, 2002, except as noted below.
BASIS OF PRESENTATION
We have reclassified some of the figures for previous periods in the consolidated financial statements to make them consistent with the presentation in the current period.
We have restated financial information for previous periods to reflect:
- the change in accounting treatment to discontinued operations for:
- Aliant Inc.’s (Aliant) emerging business segment, which consists of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc., effective May 2003
- Aliant’s remote communications segment, which consists of Aliant’s investment in Stratos Global Corporation (Stratos), effective December 2003
- BCE Emergis Inc.’s (Emergis) U.S. Health operations (US Health), effective December 2003
- other minor business dispositions
- the adoption of the fair value-based method of accounting for employee stock options effective January 1, 2003
- the change in the method of accounting for subscriber acquisition costs from a deferral and amortization method to an expense as incurred method effective January 1, 2003.
RECENT CHANGES TO ACCOUNTING STANDARDS AND POLICIES
Stock-based compensation and other stock-based payments
Effective January 1, 2002, we adopted the recommendations in section 3870 of the CICA Handbook, Stock-based compensation and other stock-based payments, on a prospective basis. It sets standards for recognizing, measuring and disclosing stock-based compensation and other stock-based payments made in exchange for goods and services. The standards require us to use a fair value-based method for:
- all stock-based awards to non-employees
- direct awards of stock and stock appreciation rights to employees
- awards to employees that can be settled in cash or other assets.
The standards also encourage companies to use a fair value-based method for all other awards granted to employees. Awards that are settled in stock are recorded as equity. Awards that are required to be, or are usually, settled in cash are recorded as liabilities.
Before adopting the new standard, we recognized the expense when the option was exercised. We measured the cost of employee stock options as the amount that the quoted market price of BCE Inc.’s common shares on the day of the grant exceeded the exercise price an employee had to pay to buy the common shares multiplied by the number of options exercised.
Effective January 1, 2003, we changed our accounting to the fair value-based method. We now recognize and measure the compensation cost of options granted on or after January 1, 2002 using a Black-Scholes option pricing model.
As a result of applying this change, we restated the comparative figures for 2002. We recorded a compensation expense of $6 million and $27 million for the three months and twelve months ended December 31, 2002, respectively. At December 31, 2002, this resulted in:
- an increase of $27 million in the deficit
- a decrease of $3 million in non-controlling interest
- an increase of $30 million in contributed surplus.
Subscriber acquisition costs
Before 2003, we accounted for the costs of acquiring subscribers by:
- deferring and amortizing the costs of acquiring Direct-to-Home (DTH) satellite television service subscribers against earnings over three years
- deferring and amortizing the costs of acquiring wireless subscribers against earnings over the terms of the contracts, normally up to 24 months and expensing all other subscriber acquisition costs when services were activated.
The costs we deferred and amortized consisted mainly of hardware subsidies, net of revenues from the sale of wireless handsets.
Effective January 1, 2003, we changed our accounting method. We started expensing all subscriber acquisition costs when services were activated. We also started presenting the revenues generated from the sale of wireless handsets.
As a result of applying this change, we restated the comparative figures for the three months and twelve months ended December 31, 2002:
- operating revenues increased by $65 million and $195 million, respectively
- operating expenses increased by $129 million and $275 million, respectively
- income taxes decreased by $26 million and $32 million, respectively
- non-controlling interest decreased by $4 million and $7 million respectively.
At December 31, 2002, this resulted in:
- a decrease of $133 million in other current assets
- a decrease of $339 million in other long-term assets
- an increase of $15 million in goodwill
- a decrease of $189 million in future income tax liabilities
- a decrease of $9 million in non-controlling interest
- an increase of $259 million in the deficit.
As a result of applying the accounting policy changes relating to stock-based compensation and subscriber acquisition costs, the total deficit as at January 1, 2003 increased by $286 million.
Disclosure of guarantees
Effective January 1, 2003, we adopted Accounting Guideline 14, Disclosure of guarantees. The guideline:
- describes how to identify guarantees
- requires guarantors to disclose the significant details about guarantees they make, whether or not they will have to make payments under the guarantees.
See Note 15, Off balance sheet arrangements, for more information.
Disposal of long-lived assets and discontinued operations
Effective May 1, 2003, we adopted the recommendations in section 3475 of the CICA Handbook, Disposal of long-lived assets and discontinued operations.
The new section describes:
- how to recognize, measure, present and disclose long-lived assets that will be sold
- criteria for classifying assets as held for sale. This section requires an asset held for sale to be measured at its carrying value amount or fair value less disposal costs, whichever is lower
- criteria for classifying a disposal of a business as a discontinued operation and how to present and disclose discontinued operations and other disposals of long-lived assets.
We followed the recommendations in this section for all business dispositions after May 1, 2003.
Consolidation of variable interest entities
Effective July 1, 2003, we adopted Accounting Guideline 15, Consolidation of variable interest entities, on a prospective basis.
The guideline clarifies the consolidation of variable interest entities, when equity investors are not considered to have a controlling financial interest, or they have not invested enough equity to allow the entity to finance its activities without additional subordinated financial support from other parties.
We performed a review and concluded that the entity with which Bell Canada entered into a 10-year shared services agreement on June 22, 2001 met the criteria for consolidation under this guideline. This entity, which is a corporation owned by a third party, provides Bell Canada with accounting systems and administrative services. Before the consolidation, we reported as operating expenses the fees that the entity charged Bell Canada for its services.
The consolidation of this entity resulted in the following changes to our consolidated balance sheet as at July 1, 2003:
- an increase of $102 million in total assets, of which $88 million is capital assets
- an increase of $127 million in total liabilities, of which $122 million is long-term debt
- an increase of $25 million in the deficit.
Changes to our consolidated statement of operations for the three months and twelve months ended December 31, 2003 were:
- a decrease of $2 million and $4 million, respectively, in operating revenues
- a decrease of $3 million and $11 million, respectively, in operating expenses
- an increase of $11 million and $22 million, respectively, in amortization expense
- an increase of $2 million and $4 million, respectively, in interest expense
- a decrease of $12 million and $19 million, respectively, in net earnings.
Changes to our consolidated statement of cash flows for the three months and twelve months ended December 31, 2003 were:
- an increase of nil and $2 million, respectively, in cash flows from operating activities
- a decrease of $1 million and an increase $7 million, respectively, in cash flows from investing activities
- a decrease of $4 million and $7 million, respectively, in cash flows from financing activities.
FUTURE CHANGES TO ACCOUNTING STANDARDS
Impairment of long-lived assets
Effective January 1, 2004, we will adopt section 3063 of the CICA Handbook, Impairment of long-lived assets. Adopting this section will affect our future consolidated financial statements in the way we recognize, measure and disclose the impairment of long-lived assets.
An impairment loss is recognized on a long-lived asset to be held and used when its carrying value exceeds the total undiscounted cash flows expected from its use and disposition.
Before January 1, 2004, the amount of the loss was determined by deducting the asset’s net recoverable amount (based on undiscounted cash flows expected from its use and disposition) from its carrying value.
After January 1, 2004, the amount of the loss is determined by deducting the asset’s fair value (based on discounted cash flows expected from its use and disposition) from its carrying value.
Asset retirement obligations
Effective January 1, 2004, we will adopt section 3110 of the CICA Handbook, Asset retirement obligations. It describes how to recognize and measure liabilities related to the legal obligations of retiring property, plant and equipment.
These obligations are initially measured at fair value and are adjusted for any changes resulting from the passage of time and any changes to the timing or the amount of the original estimate of undiscounted cash flows. The asset retirement cost is capitalized as part of the related asset and amortized into earnings over time.
Adopting this section will not significantly affect our consolidated financial statements since we do not have any significant asset retirement obligations.
Hedging relationships
Effective January 1, 2004, we will adopt Accounting Guideline 13, Hedging relationships. The guideline sets the following criteria for applying hedge accounting in a hedging transaction:
- the specific risk being hedged that is consistent with the company’s risk management objective and strategy is identified when the hedge is put in
place
- the application of hedge accounting is designated when the hedge is put in place
- the hedge is formally documented when it is put in place and includes the:
- risk management objective and strategy for using the hedge
- specific asset or liability being hedged
- risk that is being hedged
- intended term of the hedge
- kind of derivative used
- method for assessing the effectiveness of the hedge
- related accounting treatment
- the derivative meets certain criteria for offsetting changes in the fair value or cash flows attributable to the risk being hedged, when the hedge is put in place and throughout its term.
Adopting this guideline will not affect our consolidated financial statements. All outstanding hedges that previously qualified for hedge accounting continue to qualify for hedge accounting under this guideline.
Financial instruments
The CICA recently issued revisions to section 3860 of the CICA Handbook, Financial instruments – Disclosure and presentation. The section now clarifies how to account for certain financial instruments that have liability characteristics and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities in the balance sheet. Many of these financial instruments were previously classified as equities.
These revisions come into effect on January 1, 2005. Because we do not currently have any instruments with these characteristics, adopting this section is not expected to affect our future consolidated financial statements.
2. SEGMENTED INFORMATION
We operate under four segments, Bell Canada, Bell Globemedia, BCE Emergis and BCE Ventures. Our segments are organized by products and services, and reflect how we manage our operations for planning and measuring performance.
Effective January 1, 2003, the results of Bell Canada Holdings Inc. (BCH), Bell Canada’s holding company, are now classified under Corporate and other, whereas previously they were classified under Bell Canada.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
The consolidated statements of operations include the results of acquired businesses from the day they were acquired.
Repurchase of SBC’s 20% interest in BCH
On June 28, 2002, BCE Inc., BCH and entities controlled by SBC Communications Inc. (SBC) entered into agreements that ultimately led to BCE Inc.’s repurchase of SBC’s 20% share interest in BCH for $6,316 million. The initial purchase price allocation resulted in $5,430 million of goodwill. The goodwill is not deductible for tax purposes.
We completed the purchase price allocation in the third quarter of 2003, which resulted in reallocating $1,758 million from goodwill to other net assets of BCH, based on their fair values on the day of the repurchase.
This resulted in the following on our consolidated balance sheet:
- an increase of $18 million in investments, which are classified as other long-term assets
- a decrease of $456 million in accrued benefit asset, which is classified as other long-term assets
- an increase of $1,986 million in indefinite-life intangibles
- an increase of $603 million in customer relationships, which are classified as capital assets and are amortized over the remaining useful life of the customer relationships, which range from 5 to 40 years
- an increase of $165 million in long-term debt
- an increase of $228 million in future income tax liability, which is classified as other long-term liabilities.
CGI Group Inc.’s (CGI) acquisition of Cognicase Inc.
CGI acquired 100% of the outstanding common shares of Cognicase Inc. in the first quarter of 2003. It issued common shares to pay for part of the purchase price, which reduced BCE’s equity interest in CGI to 29.9% from 31.5%. BCE recognized a dilution gain of $5 million.
Cognicase Inc. provides services, such as implementing e-business solutions, application services provider (ASP) services, re-engineering existing applications for e-business, technology configuration management, as well as project management and business process improvement consulting services.
The table below shows the final purchase price allocation.
Sale of Certen Inc. (Certen)
On July 2, 2003, Bell Canada sold its 89.9% ownership interest in Certen Inc. to a subsidiary of Amdocs Limited for $89 million in cash.
The carrying value of Certen’s net assets was $159 million at the time of the sale. Certen had total assets of $450 million, including $34 million in cash and cash equivalents, and total liabilities of $291 million.
At the time of the sale, Bell Canada extended the remaining term of its contract with Certen and Amdocs Limited for billing operations outsourcing, customer care and billing solutions development from four years to seven years.
Bell Canada received a perpetual right to use and modify the intellectual property relating to the billing system. It recorded the perpetual right as an intangible asset of $494 million that will be amortized against earnings over the remaining life of the contract.
Bell Canada recorded a liability of $392 million. This represented its future payments to Certen over the remaining life of the contract for the development of Bell Canada’s billing system. The development of the billing system was largely completed at the time of the sale. This liability will be reduced as Bell Canada makes payments to Certen.
The future income tax liability relating to the intangible asset and long-term liability was $32 million.
The transaction did not result in any gain or loss for Bell Canada. Before the sale, Certen’s results of operations were presented in the Bell Canada segment.
4. RESTRUCTURING AND OTHER CHARGES
Streamlining and other charges at BCE Emergis
BCE Emergis recorded a pre-tax charge of $38 million ($21 million after taxes and non-controlling interest) in the fourth quarter of 2003. This charge represented restructuring charges of $22 million and other charges of $16 million.
The restructuring charges will be incurred to streamline BCE Emergis’ organizational structure. They include employee severance and other employee costs. At December 31, 2003, the unpaid balance of this restructuring provision was $21 million. The restructuring is expected to be complete in 2004.
Other charges consisted of asset write-downs in BCE Emergis’ remaining businesses.
Restructuring of Xwave Solutions Inc.
Aliant recorded a pre-tax restructuring charge of $15 million ($4 million after taxes and non-controlling interest) in 2003.
This was a result of a restructuring plan of its subsidiary, Xwave Solutions Inc. Costs associated with the restructuring plan included severance and related benefits, technology lease cancellation penalties and real estate rationalization costs. At December 31, 2003, the unpaid balance of this restructuring provision was $6 million. The restructuring is expected to be complete in 2004.
Bell Canada charges
In 2003, Bell Canada recorded other charges of $65 million relating to various asset write-downs and other provisions. These charges were offset by a credit of $66 million relating to the reversal of previously recorded restructuring charges at Bell Canada that are no longer necessary, due to a lower than anticipated number of employee terminations.
5. OTHER INCOME
In the fourth quarter of 2003, net gains on investments of $101 million were primarily from:
- a $120 million gain from the sale of a 3.66% interest in YPG General Partner Inc. for net cash proceeds of $135 million. Bell Canada’s retained interest in YPG General Partner Inc. is 3.24%
- a $19 million loss from the write-down of our portfolio investments.
6. INTEREST EXPENSE
7. DISCONTINUED OPERATIONS
The table below provides a summarized statement of operations for the discontinued operations.
Teleglobe Inc. and Bell Canada International Inc.
Effective April 24, 2002 and January 1, 2002, we started presenting the financial results of Teleglobe Inc. and Bell Canada International Inc., respectively, as discontinued operations.
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.
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. iMagicTV Inc. is a software development company that provides broadband TV software and solutions to service providers around the world. Prexar LLC is an Internet services provider. AMI Offshore Inc. provides process and systems control technical services, and contracts manufacturing solutions to offshore oil and gas and other industries.
Effective May 2003, we started presenting the financial results of Aliant’s emerging business segment as discontinued operations. They were previously presented in the Bell Canada segment.
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. Stratos offers Internet Protocol, data and voice access services through a range of newly emerging and established technologies, including satellite and microwave, to customers in remote locations.
Effective December 2003, we started presenting the financial results of Aliant’s remote communications segment as discontinued operations. They were previously presented in the Bell Canada segment.
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 the 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)
US Health operates cost containment networks (shared savings and preferred provider organizations) which process medical claims for the benefit of heath care payers, including insurance companies and self-insured entities.
Effective December 2003, we started presenting the financial results of US Health as discontinued operations. They were previously presented in the BCE Emergis segment.
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.
8. EARNINGS PER SHARE
The following is a reconciliation of the numerator and the denominator used in the calculation of basic and diluted earnings per common share from continuing operations.
9. INDEFINITE-LIFE INTANGIBLE ASSETS
10. GOODWILL
11. SHARE CAPITAL
Preferred shares
On February 28, 2003, BCE Inc. issued 20 million Series AC shares for total proceeds of $510 million. Of the 20 million Series AC shares, 6 million were issued by a public offering for a subscription price of $153 million. The remaining 14 million Series AC shares were issued to the holders of BCE Inc.’s Series U shares.
BCE Inc. elected to exercise its option to buy all of the Series U shares for $357 million (including a $7 million premium on redemption). The holders of the Series U shares then used the proceeds from the sale of their shares to buy the 14 million Series AC shares for the subscription price of $357 million.
Before February 28, 2003, the Series U shares were convertible at the holder’s option into Series V shares. On February 28, 2003, all Series U and V shares were cancelled.
Common shares
The table below provides details about the outstanding common shares of BCE Inc.
12. STOCK-BASED COMPENSATION PLANS
BCE Inc. stock options
The table below is a summary of the status of BCE Inc.’s stock option programs.
Teleglobe stock options
When we acquired a controlling interest in Teleglobe in November 2000, holders of Teleglobe stock options were allowed to exercise their options under their original terms, except that when they exercise their options, they receive 0.91 of one BCE Inc. common share for each Teleglobe stock option exercised.
All of the outstanding Teleglobe stock options vested when Teleglobe was sold on December 31, 2002.
The table below is a summary of the status of Teleglobe’s stock option programs.
Assumptions used in stock option pricing model
The table below shows the assumptions used in determining stock-based compensation expense under the Black-Scholes option pricing model.
13. 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 following derivative instruments were outstanding at December 31, 2003:
- cross-currency swaps and forward contracts that hedge foreign currency risk on a portion of our long-term debt
- forward contracts on BCE Inc. common shares that hedge the fair value exposure related to special compensation payments
(SCPs).
During the third quarter of 2003, we settled the existing dividend rate swaps used to hedge dividend payments on $510 million of BCE Inc. Series AA preferred shares and $510 million of BCE Inc. Series AC preferred shares. These dividend rate swaps converted the fixed-rate dividends on these preferred shares to floating-rate dividends and were to mature in 2007. We received total cash proceeds of $83 million, which is being deferred and amortized against the cost of the dividends on these preferred shares over the original terms of the swaps.
In April 2003, we entered into forward contracts to hedge US$200 million of long-term debt at Bell Canada that had not been previously hedged, thereby removing the foreign currency risk on the principal portion of that debt.
At December 31, 2003, the carrying values of the outstanding derivative instruments was a net liability of $138 million. Their fair values amounted to a net liability of $163 million.
14. COMMITMENTS AND CONTINGENCIES
Contractual obligations
The table below provides a summary of our contractual obligations at December 31, 2003.
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:
- Bell Canada’s future payments over the remaining life of its contract with Certen for the development of Bell Canada’s billing system. The total amount was $301 million at December 31, 2003
- Bell Globemedia’s remaining obligations relating to CRTC benefits owing on previous business combinations. These and other long-term liabilities totalled $130 million at December 31, 2003.
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:
- future contributions to the pension plans depend largely on how well they are funded, which varies based on the results of actuarial valuations that are performed periodically, and on the investment performance of the pension fund assets
- future payments of income taxes depend on the levels of taxable earnings and on whether there are tax loss carryforwards available to reduce income tax liabilities.
We did not include deferred revenue and gains on assets in the table because they do not represent future cash payments.
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.
Contingencies
AGREEMENT WITH MANITOBA TELECOM SERVICES INC. (MTS)
The agreement between Bell Canada and MTS to create Bell West Inc. (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.
AGREEMENT WITH CGI
On July 24, 2003, BCE and CGI signed a new agreement relating to BCE’s ownership in CGI. It replaced the shareholders’ agreement entered into on July 1, 1998. As a result:
- the put rights of CGI’s three majority individual shareholders relating to the CGI shares they hold were cancelled
- BCE’s call rights relating to the CGI shares held by these majority shareholders were cancelled
- BCE converted all of its 7,027,606 CGI Class B multiple voting shares into CGI Class A single voting shares on a one-for-one basis.
BCE has customary shareholder’s rights under the new agreement. These include pre-emptive rights relating to CGI’s equity shares, right of representation on CGI’s board of directors and certain veto rights. In addition, there are no restrictions on BCE selling its shares of CGI. We continue to proportionately consolidate CGI’s results.
LITIGATION
Teleglobe lending syndicate lawsuit
On July 12, 2002, some members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate (the plaintiffs) filed a lawsuit against BCE Inc. in the Ontario Superior Court of Justice.
The claim makes several allegations, including that BCE Inc. and its management, in effect, made a legal commitment to repay the advances the plaintiffs made as members of the lending syndicate, and that the court should disregard Teleglobe as a corporate entity and hold BCE Inc. responsible to repay the advances as Teleglobe’s alter ego.
The plaintiffs claim damages of U.S.$1.19 billion, plus interest and costs, which they allege is equal to the amount they advanced. This represents approximately 95.2% of the total U.S.$1.25 billion that the lending syndicate advanced.
While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that it has strong defences, and it intends to vigorously defend its position.
Kroll Restructuring lawsuit
In February 2003, a lawsuit was filed in the Ontario Superior Court of Justice by Kroll Restructuring Ltd., in its capacity as interim receiver of Teleglobe, against five former directors of Teleglobe. This lawsuit was filed in connection with Teleglobe’s redemption of its third series preferred shares in April 2001 and the retraction of its fifth series preferred shares in March 2001.
The plaintiff is seeking a declaration that such redemption and retraction were prohibited under the Canada Business Corporations Act and that the five former directors should be held jointly and severally liable to restore to Teleglobe all amounts paid or distributed on such redemption and retraction, being an aggregate of approximately $661 million, plus interest.
While BCE Inc. is not a defendant in this lawsuit, Teleglobe was at the relevant time a subsidiary of BCE Inc. Pursuant to standard policies and subject to applicable law, the five former Teleglobe directors are entitled to seek indemnification from BCE Inc. in connection with this lawsuit.
While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that the defendants have strong defences and that the claims of the plaintiffs will be vigorously defended against.
Other litigation
We become involved in various other claims and litigation as a regular part of our business.
While we cannot predict the final outcome of claims and litigation that were pending at 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 operations.
15. OFF BALANCE SHEET ARRANGEMENTS
Guarantees
As a regular part of our business, we enter into agreements that provide for indemnification and guarantees to counterparties that may require us to pay for costs and losses incurred in various types of transactions, which we describe below.
Sales of assets and businesses
As part of transactions involving business dispositions and sales of assets, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, intellectual property right infringement, loss or damages to property, environmental liabilities, changes in or in the interpretation of laws and regulations (including tax legislation), valuation differences, litigation against the counterparties, earn-out guarantees if the disposed business does not meet specific targets, contingent liabilities of a disposed business, or reassessments of previous tax filings of the corporation that carries on the business.
We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $2.1 billion in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. A total of $16 million has been accrued in the consolidated balance sheet relating to this type of indemnifications or guarantees at December 31, 2003.
Sales of services
As part of transactions involving sales of services, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, changes in or in the interpretation of laws and regulations (including tax legislation) or litigation against the counterparties.
We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $261 million in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnifications or guarantees at December 31, 2003.
Purchases and development of assets
As part of transactions involving purchases and development of assets, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, loss or damages to property, changes in or in the interpretation of laws and regulations (including tax legislation), or litigation against the counterparties.
We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $1.5 billion in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnifications or guarantees at December 31, 2003.
Other transactions
As part of various other transactions, such as securitization agreements and operating leases, we may be required to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, loss or damages to property, changes in or in the interpretation of laws and regulations (including tax legislation) or litigation against the counterparties.
We are unable to make a reasonable estimate of the maximum potential amount we could be required to pay counterparties. While some of the agreements specify a maximum potential exposure of $26 million in total, many do not specify a maximum amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. No amount has been accrued in the consolidated balance sheet relating to this type of indemnifications or guarantees at December 31, 2003.
Securitization of accounts receivable
Bell Canada sold an interest in a pool of accounts receivable to a securitization trust for a total of $900 million in cash, under an agreement that came into effect on December 12, 2001. The agreement expires on December 12, 2006. Bell Canada had a retained interest of $128 million in that pool of accounts receivable at December 31, 2003. This was equal to the amount of overcollateralization in the receivables transferred.
Aliant sold an interest in a pool of accounts receivable to a securitization trust for a total of $130 million in cash, under an agreement that came into effect on December 13, 2001. The agreement expires on December 13, 2006. Aliant had a retained interest of $29 million in that pool of accounts receivable at December 31, 2003.
Bell Canada and Aliant continue to service these accounts receivable. The buyers’ interest in the collections of these accounts receivable ranks ahead of the interest of Bell Canada and Aliant. Bell Canada and Aliant remain exposed to certain risks of default on the amount of receivables that is securitized. They have provided various credit enhancements in the form of overcollateralization and subordination of their retained interests.
The buyers will reinvest the amounts collected by buying additional interests in the Bell Canada and Aliant accounts receivable until the agreements expire. The buyers and their investors have no claim on Bell Canada’s and Aliant’s other assets if customers do not pay amounts owed on time.
16. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS
17. SUBSEQUENT EVENTS
Redemption of Series P retractable preferred shares
On January 15, 2004, BCE Inc. redeemed all of its 14 million outstanding Series P retractable preferred shares for $351 million. The amount was paid from cash on hand.
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BCE Inc.
1000, rue de La Gauchetière Ouest
Bureau 3700
Montréal (Québec)
H3B 4Y7
www.bce.ca
Communications
e-mail: bcecomms@bce.ca
tel: 1 888 932-6666
fax: (514) 870-4385
This document has been filed by BCE Inc. with Canadian securities commissions and the U.S. Securities and Exchange Commission. It can also be found on BCE Inc.’s Web site at www.bce.ca or is available upon request from:
Investor Relations
e-mail: investor.relations@bce.ca
tel: 1 800 339-6353
fax: (514) 786-3970
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For further information concerning the Dividend Reinvestment and Stock Purchase Plan (DRP), direct deposit of dividend payments, the elimination of multiple mailings or the receipt of quarterly reports, please contact:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor,
Toronto, Ontario M5J 2Y1
tel: (514) 982-7555
or 1 800 561-0934
fax: (416) 263-9394
or1 888 453-0330
e-mail: bce@computershare.com
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