Bell Canada International Inc.
NEX BOARD : BI.H

Bell Canada International Inc.

March 29, 2007 14:47 ET

BCI Announces 2006 Results

MONTREAL, QUEBEC--(CCNMatthews - March 29, 2007) - BCI (NEX:BI.H)

As a result of the adoption on July 17, 2002 of BCI's Plan of Arrangement, BCI's annual audited consolidated financial statements for 2006 reflect only the activities of BCI as a holding company. Such audited consolidated financial statements together with management's discussion and analysis (the "MD&A") thereon are attached hereto and readers are encouraged to refer to such documents for full details.

Results of Operations for 2006

Net earnings for 2006 were $3.9 million, or $0.10 per share reflecting the net gain of $3.5 million recorded on the sale of a non-operating subsidiary and interest income of $4.9 million, partially offset by administration expenses of $4.5 million. Administrative expenses are comprised of employee and office costs of $2.1 million, legal, tax and auditor fees of $0.8 million and other administrative expenses of $1.7 million. Other administrative expenses include costs associated with the windup of investee companies.

As at December 31, 2006, BCI's shareholders' equity was $26.9 million, down by $185.1 million from December 31, 2005. This decline was the result of the shareholder distribution of $250 million, offset by the early receipt of the tax monetization proceeds of $61.1 million, accounted for as contributed surplus, and net earnings of $3.9 million.

Cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2006, was $42.6 million down by $188.8 million from December 31, 2005. The decrease was due to the factors listed in the immediately preceding paragraph as well as the payment of various accounts payable and accrued liabilities as described below.

Accounts payable and accrued liabilities were $16.0 million at the end of 2006 and comprised mainly of employee related costs, such as pension and other post retirement benefits, typical for a company in a wind-down process. Accounts payable and accrued liabilities are down by $3.6 million from December 31, 2005, mainly as a result of the payment of a variety of accounts payable and accrued liabilities including a tax assessment of $1.8 million.

Early Settlement under Tax Monetization Plan

As previously announced, on February 28, 2007, BCI received $10 million from BCE Inc. ("BCE") as a final payment (the "Monetization Payment") under the previously announced tax monetization plan. The Monetization Payment represented an accelerated compensatory payout on a contingent additional payment under the tax monetization plan which might only have been available to BCI in mid 2012 at the earliest. The payment from BCE was approved on February 27, 2007 by the Ontario Superior Court of Justice (the "Court") under BCI's Plan of Arrangement.

Final Shareholder Distribution

BCI expects to be in a position to make a final distribution to shareholders, in the form of a return of capital, of approximately $1.00 per share no later than June 30, 2007. The assumptions that have been made in connection with the estimated amount and timing for the final distribution to shareholders are as follows: (i) no unforeseen claims are made against BCI; (ii) final tax clearance certificates are received early in the second quarter of 2007; (iii) all of BCI's investee companies will be dissolved by the middle of the second quarter of 2007; and (iv) Court approval for a final distribution is received by the middle of the second quarter of 2007. In the event that, amongst other factors, the above mentioned conditions/assumptions do not occur on the assumed dates, the final distribution may be delayed beyond the estimated date or vary in amount from the current estimate (See the attached MD&A under Risk Factors - "Timing of Distributions and Completion of the Plan of Arrangement" and "Future Costs").

Estimated Future Net Assets

Prior to the final shareholder distribution referred to above, estimated future net assets of BCI at June 30, 2007 are $40 million ($1.00 per share). The differences between shareholders' equity on the consolidated balance sheet at December 31, 2006 and the estimated future net assets at June 30, 2007 are: (i) the inclusion in estimated future net assets of the Monetization Payment of $10 million; (ii) the inclusion of the expected gain on the Corporation's investment in Canbras Communications Corp. ("Canbras") of $4.2 million; and (iii) the inclusion of estimated future net costs of $1.4 million from January 1, 2007 to June 30, 2007.

Expected future net costs of $1.4 million are comprised of administrative expenses of approximately $2.2 million which is partially offset by estimated interest income of approximately $0.8 million. The expected gain on the Canbras investment of approximately $4.2 million represents the excess over current carrying value that BCI expects to receive on its investment in Canbras.

Estimated future net costs exclude any amounts that may be required to deal with unforeseen claims against BCI. To the extent BCI remains in operation beyond June 30, 2007, interest income thereafter is not expected to be sufficient to cover operating expenses estimated at approximately $0.3 million per quarter. The extent of any shortfall would be dependent on a number of factors, including the level of interest rates and BCI's cash balances at the time.

The currently estimated future net assets of BCI at June 30, 2007 of approximately $40 million have increased by approximately $14 million from the estimate prepared on November 2, 2006 in connection with the Corporation's third quarter 2006 financial results principally due to (i) the Monetization Payment of $10 million referred to above; (ii) reduced costs; and (iii) an increase in the expected gain on BCI's investment in Canbras.

Delisting and Dissolution

Following its final distribution to shareholders, BCI intends to delist its shares from the NEX Exchange and to dissolve the Corporation which will result in the Corporation's website being no longer operative. After these steps are taken, shareholders will no longer have a means to trade their shares or to obtain information about the Corporation from its website. The only sources of information about BCI will be historical publications in your possession or such publications that may be accessible through websites such as www.sedar.com.

BCI is operating under a court supervised Plan of Arrangement, pursuant to which BCI intends to monetize its assets in an orderly fashion and resolve outstanding claims against it in an expeditious manner with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the company. BCI is listed on the NEX Exchange under the symbol BI.H. Visit our Web site at www.bci.ca.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS.

Certain statements made in this press release describing BCI's intentions, expectations or predictions are forward-looking and are subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. For additional information with respect to risk factors relevant to BCI, see the attached MD&A. BCI disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management's Discussion & Analysis

This management's discussion and analysis of financial condition and results of operations ("MD&A") for Bell Canada International Inc. ("BCI" or the "Corporation") for 2006 should be read in conjunction with BCI's audited consolidated financial statements for the year ended December 31, 2006 including related notes thereto. The audited consolidated financial statements, as well as information contained in this MD&A, are prepared in accordance with Canadian generally accepted accounting principles and reported in Canadian dollars. Information contained in this MD&A includes all material developments up to March 29, 2007, the date on which the audited consolidated financial statements were approved by the Board of Directors.

Certain sections of this MD&A contain forward-looking statements with respect to the Corporation. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors which could cause actual results to differ materially from current expectations are discussed under "Risk Factors".

Overview, Shareholder Distributions, NEX Delisting and BCI's Dissolution

BCI is operating under a plan of arrangement (the "Plan of Arrangement") approved by the Ontario Superior Court of Justice (the "Court") on July 17, 2002. Pursuant to the Plan of Arrangement, BCI has now monetized all of its assets and has resolved all outstanding claims against it and accordingly is now proceeding towards its ultimate objective of distributing the net proceeds to its shareholders and dissolving the Corporation, all with the assistance of the court-appointed monitor, Ernst & Young Inc., (the "Monitor"). Although BCI believes that a final distribution to shareholders of approximately $1.00 per share ($40 million in the aggregate) will be made no later than June 30, 2007, such distribution, which will be in the form of a return of capital, could be delayed (see Risk Factors -- "Timing of Distributions to Shareholders and Completion of the Plan of Arrangement" and "Future Costs"). No taxes will be withheld from this distribution.
In view of the purpose of the Plan of Arrangement, and in order to provide relevant information to shareholders, this MD&A does not provide a detailed analysis of the results of operations for the year ended December 31, 2006 compared to the previous year. Instead, this MD&A focuses on an analysis of BCI's balance sheet at December 31, 2006, and develops it into a statement of estimated future net assets at June 30, 2007, the date by which BCI believes it will make its final distribution to shareholders.

On May 25, 2006, BCI declared an initial distribution to shareholders of $6.25 per share ($250 million in the aggregate) which was paid on June 20, 2006 to shareholders of record on June 6, 2006. Combining the $250 million already distributed to shareholders in 2006 and the expected future distribution of approximately $40 million in 2007, total shareholder distributions are now expected to be approximately $290 million, an increase of $11 million from the estimate made at the time of the last annual MD&A. This increase is principally due to the receipt on February 28, 2007 of $10 million relative to a contingency under the loss monetization plan (see "Loss Monetization Plan") as well as the receipt of proceeds resulting from the sale of a non-operating subsidiary in 2006. Other factors influencing the amount of the final shareholder distribution are described in more detail under "Statement of Estimated Future Net Assets at June 30, 2007". The assumptions that have been made in connection with the estimated amount and timing for the final distribution to shareholders are as follows: (i) no unforeseen claims are made against BCI; (ii) final tax clearance certificates are received early in the second quarter of 2007; (iii) all of BCI's investee companies will be dissolved by the middle of the second quarter of 2007; and (iv) Court approval for a final distribution is received by the middle of the second quarter of 2007. In the event that, amongst other factors, the above mentioned conditions/assumptions do not occur on the assumed dates, the final distribution may be delayed beyond the estimated date or vary in amount from the current estimate (See Risk Factors -- "Timing of Distributions and Completion of the Plan of Arrangement" and "Future Costs").

Following its final distribution to shareholders, BCI intends to delist its shares from the NEX Exchange and to dissolve the Corporation which will result in the Corporation's website being no longer operative. After these steps are taken, shareholders will no longer have a means to trade their shares or to obtain information about the Corporation from its website. The only sources of information about BCI will be historical publications in your possession or such publications that may be accessible through websites such as www.sedar.com.

Highlights of 2006 Results

Net earnings for 2006 were $3.9 million and included a net gain of $3.5 million upon the disposition of a non-operating subsidiary. Interest income of $4.9 million was mostly offset by general and administrative expenses of $4.6 million.

BCI's cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2006 were $42.6 million down by $188.8 million from December 31, 2005. This decrease was due principally to the $250 million shareholder distribution made on June 20, 2006, offset by the early receipt of the tax monetization proceeds of $61.1 million (see "Loss Monetization Plan").

Loss Monetization Plan

As described in Note 7 to the audited consolidated financial statements, the Corporation entered into an agreement to monetize a portion of its non-capital tax losses (the "Loss Monetization Plan") which provided for a compensatory cash payment to BCI of approximately $63.057 million in the first quarter of 2007, although at BCI's request, and subject to the consent of BCE Inc., ("BCE") the proceeds could be received in 2006 at a reduced amount based on a discount rate to be mutually agreed upon at that time. On May 29, 2006, BCE consented to BCI's request for the compensatory payment to be made on June 19, 2006. The discount of $2.0 million was based on BCE's short term borrowing cost at the time of the payment for the term of the advanced payment. The compensatory cash payment was recorded as contributed surplus.

The amount of the compensatory cash payment under the Loss Monetization Plan was subject to an increase of $23.8 million under certain circumstances. Further certainty on the potential increase was considered unlikely to be available until mid 2012 at the earliest. BCE and BCI concluded an agreement on February 7, 2007, whereby BCE paid BCI $10 million on February 28, 2007 as a final payment (the "Monetization Payment") under the Loss Monetization Plan. As the Monetization Payment was to be implemented between BCI and its controlling shareholder, an Independent Committee of the Board of Directors of BCI was appointed to consider the transaction. The Independent Committee recommended that the Board approve the Monetization Payment based in part on a report received from the financial and legal advisors to the Independent Committee. After receiving the recommendation of the Independent Committee, the BCI Board of Directors approved the Monetization Payment. On February 27, 2007, the Court also approved the Monetization Payment which is being recorded as contributed surplus in the first quarter 2007 financial statements.

Sale of Non-Operating Subsidiary

On August 2, 2006, as part of the ongoing windup and dissolution of its subsidiaries, BCI disposed of an indirect, wholly-owned, foreign-based and non-operating subsidiary for gross proceeds of 2.5 million Euros (approximately Cdn $3.6 million). The value received in this transaction was based solely on the beneficial tax attributes of the subsidiary to the acquirer. After expenses incurred in connection with this transaction, a net gain in the amount of $3.5 million was recorded in the third quarter of 2006. With the exception of Canbras Communications Corp., ("Canbras") in which BCI continues to hold a 75.6% interest, no further proceeds are expected to be realized from the ongoing windup and dissolution of BCI's subsidiaries.

Tax Assessment

In July 2006, the Canada Revenue Agency ("CRA") completed an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit has resulted in a portion of the $1.9 million of input tax credits claimed during that period by the Corporation being disallowed and interest and penalties being assessed. The Corporation has settled the reassessment by paying $1.8 million (of which $1.4 million was for disallowed credits claimed and $0.4 million was for interest and penalties) and has charged this amount in its third quarter 2006 financial statements against a previously established provision included in "Accounts payable and accrued liabilities".

Pension and Other Liabilities Transfer

On January 15, 2007, BCI paid BCE $10.7 million to assume certain pension and other BCI liabilities that were recorded in the same amount on BCI's December 31, 2006 audited consolidated balance sheet in "Accounts payable and accrued liabilities" (the "Liability Transfer"). As the Liability Transfer was implemented between BCI and its controlling shareholder, an Independent Committee of the Board of Directors of BCI was appointed to consider the transaction. The Independent Committee recommended that the Board of Directors approve the Liability Transfer based in part on a report received from the financial and legal advisors to the Independent Committee. After receiving the recommendation of the Independent Committee, the BCI Board of Directors approved the Liability Transfer. On January 12, 2007, the Court also approved the Liability Transfer which will be recorded in the Corporation's first quarter 2007 financial statement as a decrease in "Temporary Investments" and in "Accounts payable and accrued liabilities".

Employee Litigation

In April 2006, the Corporation was released from any liability in respect of a $5.5 million lawsuit filed by a former employee of a BCI subsidiary, alleging failure to honor a promise of employment. The cost to BCI was less than 10% of the amount claimed. The amount paid was charged against a previously established provision included in "Accounts payable and accrued liabilities".

Statement of Estimated Future Net Assets at June 30, 2007

The following table summarizes the consolidated balance sheet of the Corporation as at December 31, 2006 in the form of a statement of estimated future net assets at June 30, 2007 (being the date by which the Corporation believes it will have made a final distribution to shareholders). The differences between the audited consolidated balance sheet and the statement of estimated future net assets at June 30, 2007 are the inclusion in estimated future net assets of the Monetization Payment of $10 million, estimated future net costs of $1,365 thousand from January 1, 2007 to June 30, 2007 and the gain that the Corporation expects to realize in connection with Canbras' liquidation process of approximately $4.2 million (see Risk Factors -- "Timing of Distributions to Shareholders and Completion of the Plan of Arrangement", and "Realization of BCI's Expected Gain on its Investment in Canbras").



STATEMENT OF ESTIMATED NET ASSETS AT JUNE 30, 2007
(thousands of Canadian dollars)

Assets at December 31, 2006

Cash and cash equivalents $494
Temporary investments 41,625
Other current assets 764
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Total assets 42,883

Liabilities at December 31, 2006

Accounts payable and accrued liabilities 15,996
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Net assets as at December 31, 2006 26,887

Items Affecting the Future Net Assets to June 30, 2007

Monetization Payment 10,000
Estimated future net costs until June 30, 2007 (1,365)
Expected gain on Canbras investment 4,158
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Estimated future net assets as at June 30, 2007 (1) $39,680
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(1) Before the final shareholder distribution and before material
unforeseen contingencies.


As at December 31, 2006, total assets were $42.9 million of which $42.6 million, or 99.3%, were in the form of cash and cash equivalents and temporary investments as well as accrued interest thereon.

Other current assets of $0.8 million consist of interest receivable of $0.6 million and $0.2 million of prepaid expenses and other current assets.

Total liabilities include accounts payable and accrued liabilities of $16.0 million. This amount includes employee related accruals, mainly pension and other post retirement benefit obligations typical for a company in a wind-down process as well as other accounts payable and accruals.

The Monetization Payment of $10 million was received under the Loss Monetization Plan on February 28, 2007.

The expected future net costs from January 1, 2007 until June 30, 2007, of $1.4 million includes estimated administrative expenses of approximately $2.2 million which is partially offset by estimated interest income on cash and cash equivalents and temporary investments of approximately $0.8 million. In calculating estimated interest income, it has been assumed that short-term investments will provide a 4.3% per annum return.

As at March 29, 2007, the future net assets of BCI at June 30, 2007, were estimated to be approximately $39.7 million, down substantially from the estimate at March 23, 2006, of $279.3 million principally due to the $250 million shareholder distribution made in June 2006. As the following table shows, other factors contributing to the decline in estimated future net assets at June 30, 2007 were the discount on the loss monetization payment of $2 million due to its early receipt (being the difference between $61,056 thousand and the $63,057 thousand in the table below) and lower interest income due to the $250 million shareholder distribution paid in 2006. Partially offsetting these items were the unplanned receipt of the $10 million Monetization Payment received in February 2007; the net gain on the sale of the non-operating subsidiary; the increase on the expected gain on Canbras; and lower incurred and expected administrative expenses. By way of further clarification, and focusing on the lines "All other income (costs) - net" which relates to the 2006 year and "Estimated future net income (loss) until June 30, 2007" which relates to the first six months of 2007, the previously expected total income over this 18 month period was $0.5 million versus a currently expected loss of $1.0 million. This negative variance of $1.5 million is due to foregone interest income attributable to the $250 million shareholder distribution in 2006 partially offset by increased interest income on the two Loss Monetization receipts as well as lower administrative expenses, particularly in 2007 where the implementation of an alternative corporate structure had been factored into future expenses.



Reported/
Estimated Estimated
as at as at
March 29, March 23,
(thousands of Canadian dollars) 2007 2006 Difference
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Net assets as reported at
December 31, 2005 $211,962 $211,962 $-

Contributed Surplus re Loss
Monetization 61,056 63,057 (2,001)
Net gain on sale of non-
operating 3,528 - 3,528
Shareholder distribution (250,000) - (250,000)
All other income (costs) - net 341 2,061 (1,720)
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Net assets reported/estimated
at December 31, 2006 26,887 277,080 (250,193)

Proceeds from Monetization
Payment 10,000 - 10,000

Expected gain on investment
in Canbras 4,158 3,763 395
Estimated future net income
(loss) until June 30, 2007 (1,365) (1,541) 176
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Estimated future net assets at
June 30, 2007 $39,680 $279,302 $(239,622)
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In accordance with Canadian GAAP, contingent liabilities are not included on a balance sheet unless the event giving rise to the liability is likely and the amount of the liability can be reasonably estimated. BCI had one such contingent liability at December 31, 2006 which is described in Note 10 to the audited consolidated financial statements. On February 5, 2007, BCI entered into a settlement agreement with respect to this contingency in an amount that was within the accrual that had been previously established in the audited consolidated financial statements in the line "Accounts payable and accrued liabilities".

Results of Operations for 2006

Net earnings for 2006 were $3.9 million, or $0.10 per share reflecting the net gain of $3.5 million recorded on the sale of non-operating subsidiary referred to above and interest income of $4.9 million, partially offset by administration expenses of $4.6 million. Administrative expenses are comprised of employee and office costs of $2.1 million, legal, tax and auditor fees of $0.8 million and other administrative expenses of $1.7 million. Other administrative expenses include costs associated with the windup of investee companies.

As at December 31, 2006, BCI's shareholders' equity was $26.9 million, down by $185.1 million from December 31, 2005. This decline was the result of the shareholder distribution of $250 million, offset by the early receipt of the tax monetization proceeds of $61.1 million, accounted for as contributed surplus, and net earnings of $3.9 million.

Cash and cash equivalents together with temporary investments and accrued interest thereon as at December 31, 2006, was $42.6 million down by $188.8 million from December 31, 2005. The decrease was due to the factors listed in the immediately preceding paragraph as well as the payment of various accounts payable and accrued liabilities as described below.

Accounts payable and accrued liabilities were $16.0 million at the end of 2006 and comprised mainly of employee related costs, such as pension and other post retirement benefits, typical for a company in a wind-down process. Accounts payable and accrued liabilities are down by $3.9 million from December 31, 2005, mainly as a result of the payment of a variety of accounts payable and accrued liabilities including the tax assessment of $1.8 million (see "Tax Assessment").

Results of Operations for the Fourth Quarter of 2006

Net loss from the fourth quarter was $0.3 million. During the quarter, BCI recorded administrative expenses of $0.7 million and interest income of $0.4 million.

Total assets at December 31, 2006 were down $0.2 million from September 30, 2006 due principally to the net loss incurred in the fourth quarter, partially offset by a $0.1 million increase in accounts payable and accrued liabilities.

Financial Instruments

The Corporation does not trade derivative financial instruments.

The Corporation's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents as well as temporary investments. Credit risk is minimized substantially by ensuring that these financial assets are invested in treasury bills, bankers' acceptances and commercial paper with investment grade credit ratings. In addition, dollar limits are established on a per entity basis. Interest rate risk is minimized by the Corporation purchasing financial assets with the intention of holding them until maturity.

Temporary Investments

As at December 31, 2006, the Corporation held investment grade commercial paper in the amount of $41.6 million. The commercial paper matures at varying dates from January 5, 2007 to March 15, 2007. The effective yields on the commercial paper range from 4.1% to 4.2% . At December 31, 2006 the estimated fair value (based on market values) of the commercial paper amounted to $42.1 million. During the year ended December 31, 2006, the Corporation recorded interest income of $4.9 million related to temporary investments and cash equivalents.

Stated Capital

An unlimited number of First Preferred Shares, issuable in series; an unlimited number of Second Preferred Shares issuable in series; and an unlimited number of Common Shares are authorized. All authorized classes of shares are without nominal or par value.



Number of
Common Shares Stated
Outstanding capital
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Balance, December 31, 2005 40,000,000 $10,000
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Balance, December 31, 2006 40,000,000 $10,000
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At December 31, 2006, 2,231 stock options were outstanding and exercisable. The stock options are exercisable on a one-for-one basis for common shares of the Corporation. The total stock options outstanding have exercise prices ranging from $2,396 to $5,037 per share over the remaining term of the options of between 0.8 to 3.4 years.

Transactions with Related Parties

In the normal course of business, the Corporation had transactions which were measured at exchange amounts with BCE, its affiliated companies and associated companies as follows:



BCE and affiliated companies (1) 2006 2005
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Administrative expenses(2) $153,000 $352,000

(1) Affiliated companies are companies under the control of BCE
(2) Various corporate services


As the Loss Monetization Plan, the Monetization Payment and the Liability Transfer were all between BCI and BCE or its affiliates, an Independent Committee of the Board of Directors of BCI was appointed to consider each of these transactions. In each case, the Independent Committee recommended that the Board of Directors approve the transaction based in part on opinions received from its advisors that each such transaction was fair, from a financial point of view, to BCI and BCI's shareholders other than BCE. After receiving the recommendations of the Independent Committee, the BCI Board of Directors approved each of these transactions.

Internal Control over Financial Reporting

As of December 31, 2006, an evaluation was carried out, under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial officer, of the effectiveness of the Corporation's disclosure controls and procedures as defined in Multilateral Instrument 52-109 pursuant to Canadian regulatory requirements. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

During 2006, the Corporation completed an evaluation of the design of internal controls over financial reporting as required under Multilateral Instrument 52-109. Based on the results of the evaluation, the Chief Executive Officer and the Chief Financial Officer have attested that the internal controls over financial reporting are designed to provide reasonable assurance that the Corporation's consolidated financial statements for external purposes in accordance with Canadian GAAP are reliable.

The Corporation has concluded that during the fiscal year ended December 31, 2006, there were no changes made to internal controls that would have materially affected these controls.

Risk Factors

The following are major risk factors facing the Corporation. Certain of these risk factors are also discussed in this MD&A under "Statement of Estimated Future Net Assets at June 30, 2007".

Timing of Distributions to Shareholders and Completion of the Plan of Arrangement

While BCI believes that a final distribution to shareholders will be made by June 30, 2007, this timing is dependent on the conditions and assumptions, discussed in this MD&A under "Overview, Shareholder Distributions, NEX Delisting and BCI's Dissolution" being realized.

In addition, unforeseen claims may be asserted against the Corporation that could be time consuming to resolve; delays are also possible in the receipt of tax clearance certificates, in winding up and dissolving all of BCI's investee companies and in obtaining Court approval to make a final distribution. Delays at any stage in the process of winding up and dissolving BCI could be lengthy and create a material delay in the timing of a final distribution to shareholders.

Realization of BCI's Expected Gain on its Investment in Canbras

BCI's estimated gain that it expects to realize in connection with Canbras' liquidation process of $4.2 million is shown in the Statement of Net Assets at June 30, 2007. BCI's estimates are based on disclosures made by Canbras in connection with the release of Canbras' 2006 third quarter unaudited financial results. However, if significant claims are successfully asserted against Canbras, or its estimated future costs have been significantly underestimated, then, the Corporation might not receive any future distributions from Canbras and not record a gain on this investment.

Cash and Cash Equivalents and Temporary Investments

As at December 31, 2006, BCI had approximately $42.6 million of cash and cash equivalents and temporary investments together with interest thereon. BCI had invested such funds in investment grade debt instruments with various maturities, not extending beyond March 15, 2007, in such a manner as to preserve the value of capital while also earning interest income. However, there can be no assurance that one or more issuers of such debt instruments might not default on such obligations.

Future Costs

BCI's actual future net costs after December 31, 2006, may be materially different than estimated in this MD&A. Moreover, there can be no assurance that BCI will be in a position to make a final distribution to its shareholders in the first half of 2007. To the extent that BCI has not completed its Plan of Arrangement by June 30, 2007, interest income from BCI's temporary investments is not expected to be sufficient to cover operating costs estimated at approximately $0.3 million per quarter.

Stock Exchange Listing and US Deregistration

BCI's common shares currently trade on the NEX, a separate board of the TSX Venture Exchange which provides a trading forum for listed companies that have low levels of business activity. Effective December 21, 2004, the Corporation voluntarily de-listed its common shares from the TSX and effective December 31, 2003, the Corporation voluntarily de-listed its common shares from the NASDAQ National market. Subject to TSX approval, BCI would be permitted to remain listed and trade on NEX, an open auction market on which trading takes place on the same electronic system as the TSX Venture Exchange, indefinitely. However, there can be no assurance that NEX will provide BCI's common shares with the same level of liquidity or visibility as the TSX.

In conjunction with the de-listing of its common shares from NASDAQ, on January 8, 2004 BCI filed the appropriate form with the United States Securities and Exchange Commission ("SEC") for the termination of the registration of BCI's common shares with the SEC and the suspension of all reporting obligations in the United States. Although BCI will remain a Canadian reporting issuer and, until BCI is delisted from the NEX and dissolved, all relevant documents will continue to be available through the company's web site (www.bci.ca) and through SEDAR (System Electronic Document Analysis and Retrieval, www.sedar.com), BCI shareholders in the United States can no longer access documents filed by BCI by means of the SEC, NASDAQ, or the EDGAR electronic reporting system. BCI believes that even after its dissolution certain of its documents will continue to be available through SEDAR.



Bell Canada International Inc.
Consolidated Balance Sheets

As at December 31,
(in thousands of Canadian dollars)

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Notes 2006 2005
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Current assets

Cash and cash equivalents $494 $611

Temporary investments 3 41,625 228,469

Interest receivable on cash
eequivalent and temporary
investments 535 2,295

Prepaid expenses and other
current assets 229 516
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$42,883 $231,891
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Current liabilities

Accounts payable and accrued
liabilities 5,11 $15,996 $19,929
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Contingencies and commitments 10

Shareholders' equity

Stated capital 6 10,000 10,000

Contributed surplus 6 1,752,616 1,941,560

Deficit (1,735,729) (1,739,598)
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26,887 211,962
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$42,883 $231,891
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On behalf of the Board of Directors

H. Brian Thompson

William D. Anderson


Bell Canada International Inc.
Consolidated Statements of Operations

Years ended December 31,
(in thousands of Canadian dollars, except per share amounts)

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Notes 2006 2005
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Employee and office costs $(2,070) $(5,819)

Legal, tax and auditor fees (784) (1,247)

Other administrative expenses (1,697) (1,494)

Interest income, net 4,913 5,101

Net gain on investments 4 3,528 1,237

Foreign exchange losses and
other (21) (1,248)
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Net earnings (loss) before
income taxes 3,869 (3,470)
Income tax provision 7 - (62,000)
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Net earnings (loss) $3,869 $(65,470)
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Net earnings (loss)per common
share -- basic and diluted 6 $0.10 $(1.64)
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Consolidated Statements of Deficit

Years ended December 31,
(in thousands of Canadian dollars)

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2006 2005
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Deficit, beginning of year $(1,739,598) $(1,674,128)

Net earnings (loss) 3,869 (65,470)
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Deficit, end of year $(1,735,729) $(1,739,598)
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Bell Canada International Inc.
Consolidated Statements of Cash Flows

Years ended December 31,
(in thousands of Canadian dollars)

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Notes 2006 2005
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Operations
Net earnings (loss) $3,869 $(65,470)
Items not affecting cash
Income tax provision 7 - 62,000
Gain on investment 4 (3,528) (1,237)
Foreign exchange losses 80 45
Changes in non-cash working
capital items 8 (1,966) 4,640
---------------------------------------------------------------------
Cash used in operations (1,545) (22)
---------------------------------------------------------------------

Investing activities
Decrease (increase) in temporary
investments 186,844 (7,908)
Net proceeds on sale of
non-operating subsidiary 4 3,528 -
---------------------------------------------------------------------
Distribution from Canbras 4 - 7,494
---------------------------------------------------------------------
Cash provided by (used in)
investing activities 190,372 (414)
---------------------------------------------------------------------

Financing activities
---------------------------------------------------------------------
Initial distribution to shareholders 6 (250,000) -

Proceeds from Loss Monetization Plan 7 61,056 -
---------------------------------------------------------------------
Cash used in financing activities (188,944) -
---------------------------------------------------------------------

Net decrease in cash and cash
equivalents (117) (436)
Cash and cash equivalents, beginning
of year 611 1,047
---------------------------------------------------------------------

Cash and cash equivalents, end of year $494 $611
---------------------------------------------------------------------

See Note 8 for supplementary cash flow information


Bell Canada International Inc.
Notes to the Consolidated Financial Statements

Years ended December 31, 2006 and 2005

(all tabular amounts are in thousands of Canadian dollars, unless otherwise noted and except per share amounts)

1. Description of business and basis of presentation

Bell Canada International Inc. ("BCI" or the "Corporation") is operating under a Plan of Arrangement (the "Plan of Arrangement") approved by the Ontario Superior Court of Justice (the "Court") pursuant to which, BCI intends to monetize its assets in an orderly fashion and resolve outstanding claims against it in an expeditious manner with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the Corporation. The consolidated balance sheet at December 31, 2006 reflects BCI's 75.6% interest in Canbras Communications Corp. ("Canbras") as an investment recorded at the lower of carrying value and net realizable value. BCI's 49.9% interest in Genesis Telecom S.A. ("Genesis"), which was previously written off, was disposed of on July 7, 2005 for a nominal amount. Since July 1, 2002, the consolidated statements of operations and cash flows have reflected only the activities of BCI as a holding company.

PLAN OF ARRANGEMENT

On July 12, 2002, the shareholders and noteholders of BCI approved a Plan of Arrangement under the Canada Business Corporations Act. Court approval for the Plan of Arrangement was received on July 17, 2002.

The principal elements of the Plan of Arrangement are as follows:

- Performance by BCI of all its obligations pursuant to the share purchase agreement to effect the disposition of its then held investment in Telecom Americas Ltd;

- A share consolidation that took place on July 12, 2002 pursuant to which the number of BCI common shares outstanding was reduced to 40 million;

- With the assistance of a court-appointed monitor, Ernst & Young Inc., (the "Monitor") and under the supervision of the Court, BCI's continued management of its remaining assets for purposes of disposing of such assets in an orderly manner;

- BCI's development, with the assistance of the Monitor, of recommendations to the Court with respect to the identification of claims against BCI and a process for adjudicating and determining such claims;

- Following the disposition of all the assets of BCI and the determination and adjudication of all claims against BCI, the liquidation of BCI and the final distribution to BCI's shareholders with the assistance of the Monitor and the approval of the Court; and

- Following the liquidation of BCI and the final distribution to BCI's shareholders, the dissolution of BCI.

BCI has discharged all of its obligations and monetized the entire consideration in connection with the Telecom Americas disposition. It has also completed the share consolidation and converted almost all of its assets into cash and cash equivalents and temporary investments together with interest thereon.

INITIAL CLAIMS PROCESS

On December 2, 2002, the Court approved a claims identification process for BCI (the "Initial Claims Process"). The Initial Claims Process established a procedure by which all claims against BCI would be identified within a specified period. This period began on May 31, 2003 and concluded on August 31, 2003 (September 30, 2003 for taxation authorities) (the "Initial Claims Bar Date"). A creditor that did not submit a proof of claim by the Initial Claims Bar Date is not entitled to receive any payment in respect of that claim and is barred from making that claim in the future against BCI (see Note 10).

The following parties (the "Initial Exempt Creditors") were not required to submit proofs of claim, and their claims are not barred:

- Members of the class action lawsuit (the "6.75% Debenture Class Action") seeking damages of $250 million against BCI, BCI's directors and BCE Inc. ("BCE"), BCI's parent company, on behalf of all persons that owned 6.75% Debentures on December 3, 2001, which action was certified as a class proceeding under the Class Proceedings Act by order of the Court dated December 2, 2002;

- The holders of BCI's $160 million 11% senior unsecured notes due September 29, 2004;

- Parties with claims relating to the supply of goods or services to BCI in the ordinary course, whether before or after May 31, 2003;

- The holders of the Vesper Guarantees; and

- Current or former employees of BCI in respect of employment-related claims for services provided to BCI, whether before or after May 31, 2003, other than employment-related claims in respect of which the current or former employee has initiated litigation against BCI.

As a result of the Initial Claims Process, the claims shown in the following table were filed by non-exempt creditors:



Amounts
Claims Filed Claimed
---------------------------------------------------------------------
Shareholder Class Action (Shaw) $1 Billion
Shareholder Class Action (Gillespie) $1 Billion
Caisse de depot et placement ("CDP") $110 Million
Other $19 Million


On September 2, 2005, the Court dismissed the 6.75% Debenture Class Action and the CDP Action and as all related appeal periods have expired these actions are effectively dismissed. The related cost of the dismissals to BCI of $3.2 million was charged to income in 2005, net of insurance proceeds of $2.6 million.

On September 29, 2004, BCI repaid its $160 million 11% senior unsecured notes.

On December 2, 2003, BCI paid US$12,000,000 as consideration for the absolute release of its obligation under the Vesper Guarantees. At the same time, BCI disposed of its remaining 1.5% equity interest in the Vespers for a nominal consideration, and BCI and Qualcomm (Vespers' then majority shareholder) provided each other with full releases with respect to all matters related to the Vespers.

On July 23, 2004, the Ontario Court of Appeal ("OCA") dismissed the two proposed class action lawsuits brought by Mr. Wilfred Shaw and Mr. Cameron Gillespie on behalf of BCI common shareholders and seeking $1 billion in damages against BCI and BCE (the "Shareholder Class Actions"). The OCA upheld the decision of the lower court dismissing the lawsuits as failing to disclose a reasonable cause of action. On September 29, 2004, the plaintiffs filed an application with the Supreme Court of Canada ("SCC") seeking leave to appeal the decision of the OCA and BCI filed materials with the SCC opposing the plaintiff's application. On March 3, 2005, the SCC refused leave to appeal the Shareholder Class Actions. No further appeal of these actions is available to the plaintiffs and the actions are effectively dismissed.

Of the $19 million in claims listed above under the heading "Other", approximately $4.5 million were filed by former holders of BCI's convertible debentures who either filed a claim but neglected to opt out of the 6.75% Debenture Class Action, in which case they still form part of the Class Action and cannot advance a separate claim, or who opted out but subsequently changed their mind. All of these claimants were bound by the dismissal of the 6.75% Debenture Class Action. In addition, approximately $9 million of the claims relate to litigation that has been dismissed or settled for the payment of a nominal amount. For the balance of the claims under the heading "Other", BCI believes that it has established adequate provisions.

SECOND CLAIMS PROCESS

In connection with preparations for an initial distribution to shareholders, on October 18, 2005 the Court approved a Second Claims Process for BCI. The Second Claims Process established a process by which all claims against BCI would be identified within a specified period. The Second Claims Process covers claims arising between June 1, 2003 and October 18, 2005 as well as contingent or unliquidated claims of any nature outstanding on October 18, 2005. The Second Claims Process had a claims identification period which ended on November 30, 2005, prior to which time any person believing they had a claim against BCI that arose between June 1, 2003 and October 18, 2005 needed to submit the appropriate forms or be forever barred from making such claims in the future against BCI. Following the period for the identification of claims, the Second Claims Process specified a process for the determination and resolution of identified claims. This process was administered by the Monitor under BCI's Plan of Arrangement, and, in the event of a disputed claim, might have required the intervention of the Court. Complete information relating to the Second Claims Process is provided in the October 18, 2005 Court order, which is available on BCI's website at www.bci.ca.

The following parties were not required to submit proofs of claim, and their claims will not be barred:

(a) Parties with claims relating solely to the supply of goods or services to BCI in the ordinary course of BCI's business within three (3) months before October 18, 2005, including for greater certainty personal services consultants to BCI.

(b) Canadian taxation authorities with respect to claims for income, withholding, capital, goods and services, sales and other taxes; and

(C) Parties who were employees of BCI on October 18, 2005 in respect of claims for unpaid wages, salaries, bonuses, pensions, benefits, vacation pay, severance pay or other contractual or statutory compensation related to services rendered to BCI during the three months prior to the October 18, 2005.

Pursuant to the Second Claims Process, a total of five claims were submitted for approximately $5.9 million. Three of the claims related to employment matters, one of which, in the amount of $5.5 million was settled in 2006. The other two employment related claims represent non- material amounts and have also been resolved. The other two claims, totalling approximately $185,000, were submitted by former holders of convertible debentures and the Monitor has disallowed these two claims.

2. Summary of significant accounting policies

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates made are for the net realizable value of the Corporation's investment in Canbras and provisions for claims.

a) Investments

As a result of the adoption of the Plan of Arrangement, the operations of the Corporation are limited to the execution of the Plan of Arrangement. As of December 31, 2002, BCI's 75.6% interest in Canbras was recorded at the lower of carrying value and net realizable value.

b) Translation of Foreign Currencies

Unrealized translation gains and losses on assets and liabilities denominated in foreign currencies are included in earnings for the year.

Assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates prevailing during the period.

c) Cash and Cash Equivalents

Cash and cash equivalents represent cash and highly-liquid short-term debt investments with an initial maturity of three months or less at the date of acquisition.

d) Temporary Investments

Temporary investments consist of debt instruments with an initial maturity date greater than three months but less than twelve months at the date of acquisition which the Corporation intends to hold to maturity. Temporary investments are carried at cost with discounts or premiums arising on purchase amortized to maturity.

e) Stock-Based Compensation Plans

Stock-based compensation cost is recorded using the fair value based method. This method consists of recording compensation cost to earnings over the vesting period of options granted. When stock options are exercised, any consideration paid by employees is credited to capital stock and the recorded fair value of the option is removed from contributed surplus and credited to capital stock.

f) Income Taxes

Future income taxes relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future tax assets are recognized only to the extent that it is more likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment.

g) Postretirement Benefits

BCI maintains non-contributory defined benefit plans that provide for pensions for substantially all its employees based on length of service and rate of pay, as well as other retirement benefits such as certain health care and life insurance benefits on retirement and various disability plans, workers' compensation and medical benefits to former or inactive employees, their beneficiaries and covered dependants after employment but before retirement, under specified circumstances.

BCI is responsible for adequately funding the postretirement benefits plans. BCI accrues its obligations under employee benefit plans and the related costs, net of plan assets. Pension costs and other retirement benefits earned by employees are actuarially determined using the projected benefit method pro rated on service and based on management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. Pension plan assets are valued at fair value, which is determined using current market values. For the purpose of calculating the expected return on plan assets and the amortization of actuarial gains and losses, a market-related value of assets recognizing fluctuations over a four-year period is used. Past service costs arising from plan amendments are amortized on a straight-line basis over the estimated average remaining service period of the employees active at the date of amendment. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the estimated average remaining service period of active employees.

h) Financial Instruments

On January 1, 2005, revisions came into effect with respect to CICA Handbook Section 3860 "Financial Instruments -- Disclosure and Presentation". The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equity. Because BCI does not have any instruments with these characteristics, adopting this section on January 1, 2005 did not affect the consolidated financial statements of the Corporation.

i) Future Accounting Changes

Future accounting changes are not expected to have an impact on the consolidated financial statements because the Corporation is winding up.
3. Temporary investments

As at December 31, 2006, the Corporation held investment grade commercial paper in the amount of $41,625,000. The commercial paper matures at varying dates to March 15, 2007. The effective yields on the commercial paper range from 4.1% to 4.2%. At December 31, 2006 the estimated fair value of the commercial paper amounted to $42,141,000.

4. Investment

The Corporation's 75.6% economic interest in Canbras is recorded at the lower of carrying value and estimated net realizable value of $4.2 million.

a) On October 8, 2003, Canbras announced that it had entered into agreements to sell all its operations which sale was completed on December 24, 2003, (the "Canbras Sale").

In connection with Canbras' winding up process which began as a result of the Canbras Sale, the Corporation received a preliminary distribution from Canbras of $8,743,000 in August 2004. As a result, as of that date, BCI reduced its carrying value for its investment in Canbras from $15,000,000 to $6,257,000.

On December 22, 2005, BCI received a second distribution from Canbras in the amount of $7,494,000 and recorded a gain of $1,237,000. While BCI's carrying value for its investment is now nil, BCI expects to receive a further distribution from Canbras of $4,158,000.

On November 14, 2006, Canbras released its third quarter 2006 financial results and disclosed that it expects to make a final distribution no earlier than April 30, 3007, totaling approximately $5,500,000 in aggregate.

b) Sale of non-operating subsidiary

On August 2, 2006, BCI disposed of an indirect, wholly-owned, foreign-based and non- operating subsidiary for proceeds of 2.5 million Euros (approximately Cdn $3.6 million). After related expense, a net gain of $3.5 million was recorded in the third quarter of 2006.

5. Accounts payable and accrued liabilities



2006 2005
---------------------------------------------------------------------
Third parties (1) $15,791 $19,768
Affiliated companies 205 161
---------------------------------------------------------------------
$15,996 $19,929
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Includes $10,159,000 ($10,249,000 in 2005) relating to post
retirement benefits described in Note 9.


6. Stated capital

AUTHORIZED

An unlimited number of First Preferred Shares, issuable in series; an unlimited number of Second Preferred Shares issuable in series; and an unlimited number of Common Shares are authorized for issuance. All authorized classes of shares are without nominal or par value.

ISSUED AND OUTSTANDING

There has been no issuance of First and Second Preferred Shares. Common shares for 2006 and 2005 are as follows:



Number of Stated
Shares Capital
---------------------------------------------------------------------
Balance, December 31, 2005 40,000,000 $10,000
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, December 31, 2006 40,000,000 $10,000
---------------------------------------------------------------------
---------------------------------------------------------------------


Contributed surplus for 2006 and 2005 is as follows:


Balance, December 31, 2005 $1,941,560
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, December 31, 2006 $1,752,616
---------------------------------------------------------------------
---------------------------------------------------------------------


On May 1, 2006, BCI announced its intention to make a $6.25 per share ($250 million in the aggregate) initial distribution to its shareholders in the first half of 2006, in the form of a return of capital. This proposed distribution was approved by the Court on May 23, 2006. On May 25, 2006, BCI's Board of Directors set a payment date of June 20, 2006 for the initial distribution and approved a resolution transferring an amount of $250 million from contributed surplus to stated capital. As a result, the stated capital was increased by the transfer from contributed surplus and was subsequently decreased by an amount of $250 million upon the initial distribution to shareholders.

On June 19, 2006, BCI received proceeds of the Loss Monetization Plan of $61.1 million, which were recorded as contributed surplus. See note 7.

STOCK-BASED COMPENSATION PLANS

a) Stock options (1997 Plan)

The Corporation implemented a stock option plan ("1997 Plan") in order to assist in attracting and retaining executives and other key employees. Options were granted based on the position of the incumbent and at a price equal to the market value of the Corporation's shares on the last trading day prior to the effective date of the grant. The right to exercise an award of options in its entirety, accrues over a period of four years unless otherwise determined by the Corporate Governance Committee at the time of grant, and options must be exercised during a period established by the Corporation but, in any event, within ten years of the grant date. 14,813 common shares were reserved for issuance under the stock option plan.

As at December 31, 2006, 2,231 options are outstanding to acquire common shares at prices ranging from $2,396 to $5,037 per share, representing the market value of such shares at the date of grant, expiring at various dates to July 24, 2010.

The following table summarizes information concerning stock options granted under the 1997 Plan:



2006 2005
---------------------------------------------------------------------
Weighted- Weighted-
average average
exercise exercise
Number price per Number price per
of share of share
options $ options $
---------------------------------------------------------------------
Outstanding
beginning of year 5,003 2,886 5,904 2,857
Forfeited during the year (2,772) 2,694 (901) 2,698
---------------------------------------------------------------------
Outstanding end of year 2,231 3,123 5,003 2,886
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable end of year 2,231 3,123 5,003 2,886
---------------------------------------------------------------------
---------------------------------------------------------------------

The following table presents additional information concerning stock
options granted under the 1997 Plan which were outstanding at December
31, 2006:

Options outstanding Options exercisable
-----------------------------------------------------------------------
Weighted- Weighted-
Range of average average
exercise Weighted- exercise exercise
prices per average price per price per
share Number remaining share Number share
$ outstanding life (years) $ exercisable $
-----------------------------------------------------------------------
2,396 233 2 2,396 233 2,396
2,686 to 2,698 1,562 1 2,698 1,562 2,698
5,037 436 3 5,037 436 5,037
-----------------------------------------------------------------------
2,231 1 3,123 2,231 3,123
-----------------------------------------------------------------------
-----------------------------------------------------------------------


b) Performance Share Units ("PSUs")

In prior years, certain executives of the Corporation were granted PSUs. PSUs are notional shares which fluctuate with the share price of the underlying security and vest over a period of four years. As at December 31, 2006, 1,471 PSUs were outstanding, and were vested. The compensation expense related to PSUs amounted to NIL in 2006 and 2005.

c) BCE Employees' Savings Plan ("ESP")

The ESP enables employees of BCI to acquire BCE common shares through regular payroll deductions plus employer contributions, if applicable. Under the terms of the ESP, employees can choose each year to have up to 10% of their annual salary and annual incentive plan ("AIP") bonus withheld to purchase common shares. BCI matches employees' contributions up to 2% of these earnings. Compensation expense related to the ESP amounted to $17,000 in 2006 ($25,000 in 2005).

d) BCE -- Stock options

Certain executives and key employees of the Corporation were granted options by BCE in connection with their employment with BCI. Under the terms of the plan, the subscription price for each share covered by an option is established at 100% of the market value of a share on the last trading day prior to the effective date of the grant. The options are exercisable during a period not to exceed ten years. The right to exercise the options generally accrues over a period of four years of continuous employment. Options are not generally exercisable during the first twelve months after the date of the grant. As a result of the distribution of common shares of Nortel Networks Inc., ("Nortel") to holders of BCE common shares by BCE in May 2000, each of the then outstanding BCE stock options was replaced by a new stock option which, in addition to the right to acquire one BCE common share, gave the holder the right to acquire approximately 1.57 post-split common shares of Nortel. Prior to 2000, simultaneously with the grant of an option, certain employees of the Corporation may have also been granted the right to a Special Compensation Payment ("SCP"). As a result of the distribution of Nortel common shares, the related SCPs were appropriately adjusted. The amount of any SCP is equal to the increase in market value of the number of the BCE and Nortel shares covered by SCPs from the date of grant of SCPs to the date of exercise of the option to which the SCP is related. Compensation expense related to SCPs amounted to NIL in 2006 (NIL in 2005).



The following table summarizes information concerning BCE stock
options granted on a post-split basis:

2006 2005
---------------------------------------------------------------------
Weighted- Weighted-
average average
exercise exercise
Number price per Number price per
of BCE share of BCE share
options $ options $
---------------------------------------------------------------------
Outstanding beginning
of year 19,902 8.01 47,444 7.90
Exercised during the year (7,102) 7.61 (27,542) 7.82
---------------------------------------------------------------------
Outstanding end of year 12,800 8.24 19,902 8.01
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable end of year 12,800 8.24 19,902 8.01
---------------------------------------------------------------------
---------------------------------------------------------------------

All of the options outstanding as at December 31, 2006 have an exercise
price of $8.24 per BCE share, and all have been exercised before the
expiry date of January 29, 2007.

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per share:

2006 2005
---------------------------------------------------------------------
Numerator:
Net earnings (loss) $3,869 $(65,470)
---------------------------------------------------------------------
Net earnings (loss) applicable to
common shares -- basic and diluted $3,869 $(65,470)
---------------------------------------------------------------------
---------------------------------------------------------------------
Denominator (in thousands):
Weighted-average number of common
shares -- basic and diluted 40,000 40,000
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted earnings (loss) per share $0.10 $(1.64)
---------------------------------------------------------------------
---------------------------------------------------------------------


For the years ended December 31, 2006 and 2005, the Corporation excluded all potential common share equivalents from the earnings (loss) per share calculation as they were anti-dilutive.

7. Income taxes

On August 4, 2004, the Corporation announced that it had entered into an agreement with BCE to monetize a portion of its non-capital tax losses (the "Loss Monetization Plan"). As further announced on March 21, 2005, the Loss Monetization Plan was expected to result in a compensatory cash payment to BCI of approximately $62,000,000, and this amount was recorded as a future income tax asset in the Corporation's financial statements for 2004. The Loss Monetization Plan, which is the subject of an advance income tax ruling received from the Canada Revenue Agency ("CRA") was approved by the Court pursuant to BCI's Plan of Arrangement on September 8, 2004.

In connection with the Loss Monetization Plan, BCI had requested that the CRA audit BCI's income tax returns for years up to December 31, 2004 for the purpose of making a final determination of BCI's losses. While the Corporation's income tax returns were filed using tax positions that were believed at the time to be appropriate, following the completion of the CRA audit, the Loss Monetization Plan was implemented on April 15, 2005 based on the monetization of $297,500,000 of losses and a compensatory payment of $62,475,000. Accordingly, in the second quarter of 2005, an additional amount of income tax recovery of $475,000 was recorded. In the fourth quarter of 2005, an additional amount of income tax recovery of $582,000 was recorded to more precisely reflect the terms of the Loss Monetization Plan. During the course of 2005, the total amount of the future income tax asset of $63,057,200 million was realized and accordingly the Corporation recorded this amount as income tax expense.

Although BCI originally expected to receive the proceeds of the Loss Monetization Plan in the first quarter of 2007, at BCI's request, and as agreed to by BCE, the proceeds were received on June 19, 2006 at a discounted amount of $61.1 million, with the discount being based on BCE's estimated cost of borrowing at that time. The proceeds of the Loss Monetization were recorded as contributed surplus.

The amount of the compensatory payment under the Loss Monetization Plan is subject to an increase of $23.8 million under certain circumstances. Further certainty on the potential increase is considered unlikely to be available until mid 2012 at the earliest. See Note 13.

The reconciliation of income taxes at Canadian statutory rates to income tax expense is as follows:



2006 2005
---------------------------------------------------------------------
Income tax provision (recovery) at
Canadian statutory rates $1,485 $(1,331)
Reduction (increase) of tax recovery
resulting from:
Gain on sale of investments not tax effected (1,354) (475)
Non deductible expenses 1,066 505
Losses not tax effected (1,197) 1,301
Monetization of prior years' losses - (1,057)
Expected compensatory payment - 63,057
---------------------------------------------------------------------
Income tax provision (recovery) $- $62,000
---------------------------------------------------------------------
---------------------------------------------------------------------


At December 31, 2006, the Corporation had non-capital tax losses carried forward available amounting to approximately $1.5 million, expiring in year 2014 and approximately $1 million expiring in year 2026. In addition, the Corporation had Canadian capital losses amounting to $977.5 million that can be carried forward indefinitely. The benefit of these losses has not been recorded in the financial statements.

8 Supplementary cash flow information


2006 2005
---------------------------------------------------------------------
Changes in working capital items
Decrease (increase) in current assets
Interest receivable $1,760 $85
Prepaid expenses and other current assets 287 566
Increase (decrease) in accounts payable
and accrued liabilities (4,013) 3,989
---------------------------------------------------------------------
Decrease (increase) in working capital items $(1,966) $4,640
---------------------------------------------------------------------
---------------------------------------------------------------------


No interest or income taxes have been paid during the year.

9 Postretirement benefits

BCI maintains non-contributory defined benefit plans that provide for pension, other retirement and post-employment benefits for all its current and most of its former employees based on length of service and rate of pay. Certain former employees participated in a defined contribution pension plan. BCI is responsible to adequately fund its registered pension fund as well as to meet commitments in excess of those provided for by such registered pension fund (the "Top-up Commitments"). BCI's funding policy is to make contributions to its registered pension fund based on actuarial cost methods as permitted by pension regulatory bodies. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Registered pension fund assets are represented primarily by Canadian and foreign equities, government and corporate bonds, debentures and secured mortgages. With respect to the funding of the Top-up Commitments, BCI has established an appropriate accrual on its financial statements which it can fund from its holdings of temporary investments.

The changes in the benefit obligations and in the fair value of assets and the funded status of the defined benefit plan as at December 31, were as follows:




Pension Other Pension Other
Benefits Benefits Benefits Benefits
2006 2006 2005 2005
---------------------------------------------------------------------
Change in benefit
obligations:

Benefit obligation,
beginning of year $23,828 $1,571 $21,164 $822
Current service cost 89 - 118 -
Interest cost 1,061 53 1,188 48
Actuarial losses (gains) (99) 150 5,295 733
Benefit payments (1,392) (23) (3,937) (32)
---------------------------------------------------------------------
Benefit obligation, end
of year $23,487 $1,751 $23,828 $1,571
---------------------------------------------------------------------
Change in fair value of
plan assets:
Fair value of plan
assets, beginning
of year $15,041 $- $16,545 $-
Actual return on plan
assets 1,869 - 2,039 -
Benefit payments (1,392) (23) (3,937) (32)
Employer contributions 477 23 394 32
---------------------------------------------------------------------
Fair value of plan
assets, end of year $15,995 $- $15,041 $-
---------------------------------------------------------------------
Plan deficit $(7,492) $(1,751) $(8,787) $(1,571)
Unamortized net actuarial
losses 4,243 - 5,819 -
Unamortized transitional
asset (2,570) - (2,998) -
Valuation allowance (2,589) - (2,712) -
---------------------------------------------------------------------
Accrued (liability)
included in accounts
payable and accrued
liabilities $(8,408) $(1,751) $(8,678) $(1,571)
---------------------------------------------------------------------
---------------------------------------------------------------------


The significant assumptions adopted in measuring the Corporation's
pension and other benefit obligations as at December 31, were as
follows:


Pension Other Pension Other
Benefits Benefits Benefits Benefits
2006 2006 2005 2005
---------------------------------------------------------------------
Weighted-average
discount rate (1) 5.3% 3.6% 5.2%(1) 3.4%
Expected long-term rate of
return on plan assets 7.5% - 7.5% -
Rate of compensation
increase (2) 3.0% 3.0% 3.0% 3.0%
Inflation 2.5% 2.5% 2.5% 2.5%


(1) Top-up Commitments are discounted at 3.6% in 2006 and 3.4% in 2005
(2) The rate of compensation increase for Top-up Commitments is 3.5%


For measurement purposes, a 10.5% (prescription medication) and 4.5% (other) annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend rate) was assumed for 2006. This prescription medication rate was assumed to gradually decline to 4.5% over six years and remain at that level thereafter.

The net benefit expenses for the years ended December 31, included the following components:



Pension Other Pension Other
Benefits Benefits Benefits Benefits
2006 2006 2005 2005
---------------------------------------------------------------------
Current service cost $89 $- $118 $-
Interest cost 1,061 53 1,188 48
Expected return on plan
assets (1) (1,041) - (1,103) -
Amortization of net
actuarial loss (gain) (1) (2) 649 150 3,117 733
Amortization of
transitional (asset)
obligation (428) - (428) -
Increase (decrease) in
valuation allowance (123) - 224 -
---------------------------------------------------------------------
Net benefit expense $207 $203 $3,116 $781
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) The market-related value of pension plan assets for purposes of
calculating expected returns on plan assets and the amortization of
net actuarial losses was $14,244,000 for 2006 and $16,472,000 for
2005.

(2) The amount of $3,117,000 includes an increase in the accrual for
pension benefits of $2,873,000, based on the estimated cost to
transfer the pension benefit liability to BCE. The amount of
$733,000 represents an increase in the accrual for other benefit
obligations based on the estimated cost to transfer the other
benefit liability to BCE.


On January 15, 2007, BCI entered into an agreement with BCE whereby BCE assumed BCI's obligations for Top-up Commitments, pension benefits, post-retirement benefits and certain other compensation arrangements in return for a payment by BCI to BCE of $10,733,000. The amount paid was the same as the amount at which these obligations were reported in BCI's 2006 audited consolidated balance sheet in "Accounts payable and other accrued liabilities". As this transaction was implemented between BCI and its controlling shareholder, an Independent Committee of the Board of Directors was appointed to consider the transaction. The Independent Committee recommended that the Board of Directors approve the transaction based in part on a report received from the financial and legal advisors to the Independent Committee. After receiving the recommendation of the Independent Committee, the Board of Directors approved the transaction. On January 12, 2007, the Court also approved this transaction.

10. Contingencies and Commitments

CONTINGENCIES

The Corporation has accrued amounts that, in management's best estimate, are sufficient to cover the Corporation's exposures with respect to the following contingencies at December 31, 2006 and 2005:

On September 23, 2005, the Quebec Superior Court rendered its decision in a lawsuit filed by a former employee of BCI and awarded the employee an amount of approximately $44,000. An estimated amount of BCI's exposure to this claim had previously been expensed and recorded in "Accounts payable and accrued liabilities". On October 21, 2005, the plaintiff in this action filed an appeal with the Quebec Court of Appeal seeking to have the amount awarded to him increased by an amount that the Corporation estimated to be less than $500,000, calculated on a present value basis. In a cross appeal which the Corporation filed in early November 2005, BCI was seeking to have the original damage assessment of approximately $44,000 reversed and was also contesting the plaintiff's argument that the amount originally awarded should be further increased. On February 5, 2007, BCI received a full release from any liability associated with this claim in return for an amount that had been accrued in the 2006 audited financial statements in "Accounts payable and accrued liabilities".

In July 2006, the CRA completed an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit resulted in a portion of the $1.9 million of input tax credits claimed during that period by the Corporation being disallowed and interest and penalties being assessed. The Corporation settled the assessment by paying $1.8 million (of which $1.4 million was for disallowed credits claimed and $0.4 million was for interest and penalties) and charged the amount in its third quarter financial statements for 2006 against a previously established provision included in "Accounts payable and accrued liabilities".

COMMITMENTS

At December 31, 2006, the Corporation is committed in the aggregate amount of $119,000 under an operating lease for office premises, expiring on June 30, 2007. The lease is renewable on a month-to-month basis for a period of 3 months.

Annual lease payments in 2006 amounted to $206,000 (2005 - $246,000).

11. Related party transactions (see also Notes 5, 7, 9 and 13)

In the normal course of business, the Corporation had transactions which were measured at exchange amounts with BCE, its affiliated companies and associated companies, and not otherwise disclosed elsewhere herein, as follows:



2006 2005
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BCE and affiliated companies (1):

Administrative expenses $153 $352

(1) Affiliated companies are companies under the control of the
Corporation's ultimate parent company.


12. Financial instruments

a) Currency Risk

The Corporation is exposed to market risks from changes in foreign currency rates. However, amounts held in foreign currencies are minimal and the Corporation does not enter into foreign currency contracts to mitigate such risk.

The Corporation does not trade derivative financial instruments.

b) Credit Risk

The Corporation's financial assets that are exposed to credit risk consist primarily of temporary investments. Credit risk is minimized substantially by ensuring that these financial assets are invested in treasury bills, bankers' acceptances, commercial paper and corporate bonds with investment grade credit ratings. In addition, dollar limits are established on a per investment basis.

c) Fair Value of Financial Instruments

As at December 31, 2006 the Corporation's financial instruments were comprised of cash and cash equivalents, temporary investments, interest receivable and accounts payable and accrued liabilities.

Fair values approximate amounts at which financial instruments could be exchanged for instruments of similar risk, principal and remaining features. Fair values are based on estimates using present value and other valuation techniques which are significantly affected by assumptions concerning future cash flows and discount rates and should not be interpreted as being realizable in an immediate settlement of the instruments.

Estimated fair value of the Corporation's financial instruments, where the fair value differs from the carrying amounts in the financial statements as at December 31, 2006 and 2005, are as follows:



2006 2005
--------------------------------------------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
--------------------------------------------------------------------
Temporary investments
(see Note 3) $41,625 $42,141 $228,469 $230,764
--------------------------------------------------------------------


The carrying amounts of cash and cash equivalents, interest receivable, and accounts payable, in the consolidated balance sheets, approximate their estimated fair values.

13. Subsequent event

On February 28, 2007, the Corporation received $10,000,000 from BCE as a final compensatory payment under the Loss Monetization Plan. As this transaction was implemented between BCI and its controlling shareholder, an Independent Committee of the Board of Directors was appointed to consider the transaction. The Independent Committee recommended that the Board of Directors approve the transaction in part based on a report received from the financial and legal advisors to the Independent Committee. After receiving the recommendation of the Independent Committee, the BCI Board of Directors approved the transaction. On February 27, 2007, the Court also approved the transaction.

Contact Information

  • Bell Canada International Inc.
    Howard N. Hendrick
    Executive Vice-President and Chief Financial Officer
    514-392-2260
    howard.hendrick@bci.ca