Bell Canada International Inc.
NEX BOARD : BI.H

Bell Canada International Inc.

May 26, 2005 12:38 ET

BCI Announces First Quarter Results

MONTREAL, QUEBEC--(CCNMatthews - May 26, 2005) - BCI (NEX:BI.H) - As a result of the adoption on July 17, 2002 of BCI's Plan of Arrangement, BCI's annual unaudited interim consolidated financial statements for the first quarter of 2005 reflect only the activities of BCI as a holding company. Such unaudited interim consolidated financial statements are attached hereto and readers are encouraged to refer to them for additional details.

First Quarter Results

Net income for the first quarter of 2005 was $0.2 million, as a result of accrued interest income of $1.4 million partially offset by administrative expenses totaling $1.2 million comprised of employee and office costs of $0.6 million, legal, tax and auditor fees of $0.3 million and other administrative expenses of $0.3 million. BCI's shareholders' equity increased by $0.2 million in the quarter to reach $277.6 million at March 31, 2005.

BCI's cash and cash equivalents together with temporary investments and interest thereon as at March 31, 2005 were $223.9 million down slightly from $224.0 million at December 31, 2004. This decline was due principally to working capital requirements exceeding net income in the quarter.

Accrued liabilities were $15.4 million at the end of the first quarter of 2005, down $0.5 million from December 31, 2004 mainly as a result of the payment of certain employee related items in the first quarter of 2005.

Estimated Future Net Assets

Estimated future net assets of BCI at June 30, 2007 are $279.3 million ($6.98 per share). The difference between shareholders' equity on the consolidated balance sheet at March 31, 2005 and the estimated future net assets at June 30, 2007 is the inclusion in estimated future net assets of the expected gain on the Canbras investment of $5.0 million, partially offset by the deduction of estimated future net costs from April 1, 2005 to June 30, 2007.

The future net costs estimated at approximately $3.3 million are comprised of administrative expenses of approximately $14.8 million partially offset by interest income of approximately $11.5 million. The expected gain on the Canbras investment of approximately $5.0 million represents the excess over current carrying value that BCI expects to receive on its investment in Canbras.

The future net costs exclude any amounts that may be required to settle contingent liabilities such as lawsuits. To the extent BCI remains in operation beyond June 30, 2007, interest income thereafter may not be sufficient to cover operating expenses estimated at approximately $1.5 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 $279.3 million have not changed from the estimate of future net assets prepared on March 21, 2005, in connection with BCI's 2004 results.

Litigation Update

On April 29, 2005, amended statements of defence were filed by the Corporation and BCE Inc. in connection with the class action proceeding on behalf of certain former holders of BCI's 6.75% convertible unsecured subordinated debentures (the "Class Action"). A trial of the Class Action is expected to be held in the fourth quarter of 2005.

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 http://www.bci.ca.

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 Management's Discussion and Analysis included in BCI's Interim Report for the First Quarter of 2005. 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.




BELL CANADA INTERNATIONAL INC.

Consolidated Financial Statements

March 31, 2005

(Unaudited)


Consolidated Balance Sheets
(In thousands of Canadian dollars)

Unaudited
As at As at
March 31, December 31,
2005 2004
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Current assets

Cash and cash equivalents $205,412 $1,047
Temporary investments (Note 3) 17,980 220,561
Interest receivable on cash equivalents and
temporary investments 460 2,380
Investment in Canbras (Note 4) 6,257 6,257
Prepaid expenses and other current assets 940 1,082
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231,049 231,327
Future income tax assets (Notes 6 and 9) 62,000 62,000
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$293,049 $293,327
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Current liabilities

Accounts payable and accrued liabilities $15,431 $15,895
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Contingencies (Note 7)
Shareholder's equity
Stated capital (Note 5) 10,000 10,000
Contributed surplus 1,941,560 1,941,560
Deficit (1,673,942) (1,674,128)
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277,618 277,432
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$293,049 $293,327
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Consolidated Statements of Operations (Unaudited)
(In thousands of Canadian dollars except per share amounts)

Three months ended
March 31,
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2005 2004
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Interest on long-term debt $- $(4,621)
Employee and office costs (597) (1,028)
Legal, tax and auditor fees (291) (285)
Other administrative expenses (247) (346)
Interest income 1,363 2,455
Foreign exchange losses and other (42) (8)
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Net earnings (loss) 186 (3,833)
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Net earnings (loss) applicable to common
shares - basic and diluted $186 $(3,833)
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Net earnings (loss) per common share - basic
and diluted (Note 5) $- $(0.10)
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Consolidated Statements of Deficit (Unaudited)
(In thousands of Canadian dollars)

Three months ended
March 31,
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---------------------------------------------------------------------
2005 2004
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Deficit, beginning of period $(1,674,128) $(1,725,909)
Net earnings (loss) 186 (3,833)
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Deficit, end of period $(1,673,942) $(1,729,742)
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Consolidated Statements of Cash Flows (Unaudited)
(In thousands of Canadian dollars)

Three months ended
March 31,
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Operations 2005 2004
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Net earnings (loss) $186 $(3,833)
Items not affecting cash
Foreign exchange losses 27 19
Amortization of deferred financing costs - 221
Amortization of premium on temporary
investments - 35
Changes in working capital items 1,570 (636)
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Cash used in operations 1,783 (4,194)
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Investing activities
Decrease (Increase) in temporary investments 202,581 338,866
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Cash provided by investing activities 202,581 338,866
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Foreign exchange loss on cash held in
foreign currencies 1 39
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Net increase in cash and cash equivalents 204,365 334,711

Cash and cash equivalents, beginning of period 1,047 1,408
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Cash and cash equivalents, end of period $205,412 $336,119
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See Note 8 for supplementary cash flow information


Notes to the Consolidated Financial Statements (unaudited)
(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

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004 as set out in Bell Canada International Inc.'s ("BCI" or the "Corporation") 2004 Annual Report, prepared in accordance with generally accepted accounting principles in Canada ("GAAP").

Capitalized terms used herein, and not otherwise defined, have the meanings defined in the 2004 Annual Report.

Bell Canada International Inc. 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. Accordingly, these financial statements have been prepared on a basis which in the opinion of management provides useful and relevant information to users of BCI's financial statements. The consolidated balance sheet at March 31, 2005 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") was previously written off. Since July 1, 2002, the consolidated statements of earnings and cash flows have reflected only the activities of BCI as a holding company.

2. Summary of significant accounting policies

In the opinion of the management of BCI, the unaudited interim consolidated financial statements have been prepared on a basis consistent with the annual audited consolidated financial statements. The unaudited interim consolidated financial statements contain all adjustments necessary for a fair presentation of the financial position as at March 31, 2005 and the results of operations and cash flows for the three months ended March 31, 2005 and 2004, respectively.

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.

Temporary Investments

Temporary investments consist of debt investments with an initial maturity 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.

Use of Estimates

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The significant estimates made are for the net realizable value of the Corporation's investment in Canbras, the future income tax asset and provisions for claims.

Financial Instruments

Effective January 1, 2005, the Corporation adopted the amended Section 3860 "Financial Instruments - Disclosure and Presentation" of the Canadian Institute of Chartered Accountants. The amended standards 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 equities.

Because BCI does not have any instruments with these characteristics, adopting this section on January 1, 2005 did not affect the unaudited interim consolidated financial statements of the Corporation.

For a complete description of the Corporation's significant accounting policies, refer to BCI's financial statements for the year ended December 31, 2004.

3. Temporary investments

As at March 31, 2005, the Corporation held investment grade commercial paper in the amount of $17,980,000. The commercial paper matures at varying dates to April 20, 2005. The effective yields on the commercial paper range from 2.56% to 2.57%. At March 31, 2005 the estimated fair value of the commercial paper amounted to $18,080,000.

4. Investment

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

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"). Canbras received gross proceeds of $32,600,000, comprised of $22,168,000 in cash and a one-year promissory note bearing interest at 10% in the original principal amount of $10,432,000 (subject to reduction in the event indemnification obligations of Canbras arise under the terms of the sale transaction).

On December 21, 2004, Canbras provided details of claims made against it under the Canbras Sale. Canbras' potential exposure to such claims is limited to the amount of the Note together with accrued interest thereon. Canbras believes that less than R$2 million of the total amount claimed of R$58 million is potentially subject to indemnification under the Canbras Sale in which case the Corporation will likely recover from Canbras an amount in excess of the Corporation's current carrying value. However, there can be no assurance that the full amount of the claims will not be successfully asserted, in which case, Canbras may not collect any amounts due to it under the Note. Furthermore, even if such claims are not indemnifiable under the Canbras Sale, there can be no assurances that the issuer of the Note or its guarantor will be able to pay amounts due under the Note. As a result, BCI's ability to receive future distributions from Canbras and the Corporation's net realizable value for its investment in Canbras may be limited to BCI's approximate 75.6% share of Canbras' cash on hand and temporary investments totalling $7.3 million at December 31, 2004 less the costs that Canbras will incur to contest the claims against it as well as in the ordinary course of maintaining its corporate existence until such time as it is wound up and liquidated.



5.Stated capital

a) Common shares as at March 31, 2005


Number of Stated
Shares Capital
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Balance, December 31, 2004 40,000,000 $10,000
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Balance, March 31, 2005 40,000,000 $10,000
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b) Stock Options

At March 31, 2005, 5,169 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 $2,213 to $5,037 per
share over a remaining contract life of between 1 to 5 years.

c) Earnings (Loss) Per Share

Three months ended
March 31,
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2005 2004
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Numerator:

Net earnings (loss) applicable to common shares
- basic and diluted $186 $(3,833)
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Denominator (in thousands):

Weighted-average number of shares - basic and
diluted 40,000 40,000
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Basic and diluted earnings (loss) per share $- $(0.10)
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The Corporation excluded potential common share equivalents from the
computation of diluted loss per share computed above, as they were
anti-dilutive.


6. Income taxes

At December 31, 2004, the Corporation's income tax returns contained Canadian non-capital tax losses carried forward amounting to approximately $440,722,000, expiring at various dates to the year 2014. In addition, the Corporation had Canadian capital losses amounting to approximately $279,782,000 that can be carried forward indefinitely.

On August 4, 2004, the Corporation announced that it had entered into an agreement 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 is expected to result in a compensatory cash payment to BCI of approximately $62,000,000 (based on the monetization of $297,600,000 of losses as described below), 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. BCI expects to receive the proceeds of the Loss Monetization Plan in the first quarter of 2007, although at BCI's request, and subject to the consent of BCE, the proceeds may be received in 2006 at a reduced amount based on a discount rate to be mutually agreed at that time.

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, based on more recent discussions with the CRA, the Corporation believes that the maximum amount available for use under the Loss Monetization Plan will be less than the amounts filed. Following the completion of the CRA audit, the Loss Monetization Plan is now estimated to be based on the monetization of $297,600,000 of losses. Discussions are ongoing with certain government officials that could result in an increase in the compensatory payment under the Loss Monetization Plan. Such discussions are expected to be resolved before the end of 2005. There can be no assurance that these discussions will result in any increase of the amount to be received by BCI under the Loss Monetization Plan.

As the Loss Monetization Plan is to be implemented between BCI and related parties (see Note 9), 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 Loss Monetization Plan based in part on an opinion received from its financial advisors that the transaction is fair, from a financial point of view, to BCI and BCI's shareholders other than BCE. After receiving the recommendation of the Independent Committee, the BCI Board approved the Loss Monetization Plan. In addition, because the Loss Monetization Plan was to be entered into with BCI's majority shareholder, BCE Inc., and Bell Canada (or their affiliates), the transaction would be subject to the approval of a majority of BCI's shareholders other than BCE; however, an exemption from such requirement was granted to BCI by securities regulators on September 7, 2004.

7. Contingencies

With the exception of employee litigation, the Corporation has not accrued any amounts with respect to the following contingencies:

a) On April 29, 2002, BCI announced that a lawsuit had been filed with the Court by certain former holders of BCI's $250 million 6.75% convertible unsecured subordinated debentures, (the "6.75% Debenture Class Action"). The plaintiffs seek damages from BCI, BCE and certain current and former members of BCI's Board of Directors, for up to an amount of $250 million plus $5 million in costs in connection with the settlement, on February 15, 2002, of the debentures through the issuance of common shares, in accordance with BCI's recapitalization plan (the "Recapitalization Plan") completed on February 15, 2002. In accordance with an agreement reached among the parties to this lawsuit in December 2002, the Court has ordered that this lawsuit be certified as a class action within the meaning of applicable legislation. The certification order does not constitute a decision on the merits of the class action, and BCI continues to be of the view that the allegations contained in the lawsuit are without merit and intends to vigorously defend its position.

As part of the agreement among the parties, the plaintiffs in the class action have abandoned their claim for punitive damages (the statement of claim originating the lawsuit sought $30 million in punitive damages). The plaintiffs have also agreed to the dismissal of the class action against BMO Nesbitt Burns Inc., one of the original defendants in the proceeding.

All of the defendants filed statements of defence with respect to the 6.75% Debenture Class Action in the third quarter of 2003 while amended statements of defence were filed in the second quarter of 2005. A trial is expected to take place in the fourth quarter of 2005.

BCI is of the view that the allegations are without merit and intends to take all appropriate actions in order to vigorously defend its position.

b) In August 2003, La Caisse de depot et placement du Quebec (CDP) filed a proof of claim with the Monitor and a Notice of Action in the Court in connection with CDP's former holdings of a portion of BCI's 6.5% convertible unsecured subordinated debentures (the "CDP Action") CDP is seeking up to $110 million in damages, together with interest and costs, against BCI, BCE and certain current and former members of BCI's board of directors. CDP's claim contains allegations that are substantially similar to those contained in the 6.75% Debenture Class Action.

On September 9, 2003, BCI, BCE and the other defendants in the CDP Action entered into an agreement (modified November 28, 2003) with CDP with respect to the procedure to be followed in connection with the CDP action. Pursuant to the agreement, the defendants agreed with CDP that the prosecution of the CDP Action should be stayed pending a final adjudication or settlement of the 6.75% Debenture Class Action, and the resolution of the 6.75% Debenture Class Action shall form the basis for the final resolution of the CDP Action. CDP has also agreed not to advance any claims as a holder of 6.75% debentures outside of the 6.75% Debenture Class Action, nor any claims as a common shareholder of BCI outside of any certified common shareholder class action of which it may be found to be a member.

By order dated December 19, 2003, this agreement was approved by the Court and the action was stayed until final disposition of the 6.75% Debenture Class Action.

BCI is of the view that the allegations are without merit and intends to take all appropriate actions in order to vigorously defend its position.

c) Communicacion Celular S.A. - Comcel S.A. ("Comcel") is currently involved in litigation before the Superintendent of Industry and Commerce ("SIC") in Colombia wherein plaintiffs are claiming damages of approximately US$70 million relating to the provision by Comcel of long-distance services through voice-over internet protocol ("VOIP") between December 1998 and September 1999. During the fourth quarter of 2003, Comcel's attempt to have the SIC's initial finding that it improperly provided services appealed to a judicial tribunal was dismissed and the action has returned to a damages determination phase before the SIC. Comcel's Colombian counsel believes that the damage allegations will be subject to defenses on the merits and that substantially all of the claims lack a sufficient evidentiary basis.

BCI had agreed to indemnify Comcel and its affiliates for the initial US$5 million of damages and for any damages Comcel may suffer in excess of US$7.5 million. Comcel is responsible for any damages incurred in excess of US$5 million and up to US$7.5 million. However, in connection with BCI's claims identification process, Comcel did not file a claim with BCI's court-appointed Monitor with respect to the Comcel VOIP indemnity. As a result, pursuant to the order of the Court approving the claims identification process, Comcel is now barred from asserting any claim against BCI in connection with this lawsuit.

d) Former employees of BCI have filed claims against it totaling $8.6 million. These claims contain allegations of a failure to honour a promise of employment, breaches of an employee agreement and inaccurate pension calculations. A provision has been included in accounts payable and accrued liabilities in the amount of BCI's estimated exposure to such claims.

8. Supplementary cash flow information



Three months ended
March 31,
2005 2004
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Interest paid - $8,800
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9. Subsequent Event

Pursuant to the Loss Monetization Plan (see Note 6), on April 15, 2005, the Corporation entered into agreements with BCE and Bell Canada in order to monetize non-capital tax losses which will result in a compensatory payment to the Corporation of approximately $62 million. Pursuant to these agreements, a wholly-owned subsidiary of BCI ("BCI Subco") issued preferred shares (the "BCI Subco Preferred Shares") to a wholly-owned subsidiary of Bell Canada ("Bell Subco") in exchange for cash of $17 billion. The BCI Subco Preferred Shares are non-participating, non-voting, cumulative, redeemable and retractable at any time and currently pay dividends at a per annum rate of 5.12%. BCI Subco then purchased for $17 billion in cash an interest free note from BCI (the "BCI Note") and BCI purchased for $17 billion in cash a subordinated note from Bell Subco (the "Bell Subco Note"). The Bell Subco Note bears interest at a rate of 5.11% per annum, is unsecured and is payable on demand and may be repaid at anytime. All of the foregoing transactions occurred on April 15, 2005.

The BCI Subco Preferred Shares may be repaid by delivering to Bell Subco the BCI Note. Furthermore, the Bell Subco Note may be repaid by delivering to BCI the BCI Note. The parties intend to avail themselves of these rights of set off. As a result, BCI's consolidated financial statements will reflect the BCI Subco Preferred Shares and Bell Subco Note, together with the related preferred dividends and interest, on a net basis. The Corporation will be recording income tax expense based on the amount of interest income earned. The income tax expense will be offset against the Future income tax assets.

10. Comparative figures

Certain comparative figures have been reclassified in order to conform with the presentation adopted in 2005.

Contact Information

  • BCI
    Howard N. Hendrick
    Executive Vice-President and Chief Financial Officer
    (514) 392-2260
    howard.hendrick@bci.ca