Bell Canada International Inc.
NEX BOARD : BI.H

Bell Canada International Inc.

May 25, 2006 14:39 ET

BCI Announces Record and Payment Dates for $6.25 per Share Distribution to Shareholders and First Quarter 2006 Results

MONTREAL, QUEBEC--(CCNMatthews - May 25, 2006) - (NEX:BI.H) As a result of the adoption on July 17, 2002 of BCI's Plan of Arrangement, BCI's unaudited interim consolidated financial statements for the first quarter of 2006 reflect only the activities of BCI as a holding company. Such unaudited interim 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.

SHAREHOLDER DISTRIBUTION PAYMENT DATE TO BE JUNE 20, 2006

On May 1, 2006, BCI announced that it intended 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 has now been approved by the Ontario Superior Court of Justice (the "Court") in the context of BCI's Plan of Arrangement. In connection with this initial distribution, the Court also approved an agreement between BCI and BCE Inc. ("BCE") whereby, BCE will prepay the gross proceeds under the previously announced tax monetization agreement with BCI of $63.1 million at a discounted amount based on BCE's short term borrowing rate on the date the prepayment is made.

Consequentially, subject to the continued applicability of tax clearance certificates, BCI's Board of Directors has confirmed the initial distribution of $6.25 per share ($250 million in the aggregate) and set a record date of June 6, 2006 and a payment date of June 20, 2006.

The attached MD&A includes a summary description of the Canadian tax consequences to the recipients of such distribution. Shareholders should be prepared to consult their own tax advisors in this regard.

First Quarter Operating Results

Net earnings for the first quarter of 2006 were $0.6 million, or $0.02 per share reflecting interest income of $1.9 million, partially offset by administrative expenses of $1.2 million and foreign exchange losses and other expenses of $0.1 million. Administrative expenses are comprised of employee and office costs of $0.5 million, legal, tax and auditor fees of $0.2 million and other administrative expenses of $0.5 million. Other administrative expenses include costs associated with the windup of investee companies.

Cash and cash equivalents were $222.6 million at March 31, 2006 up substantially from $0.6 million at December 31, 2005. The increase reflects a shortening of the maturity profile of BCI's investments in view of the proposed shareholder distribution on June 20, 2006.

Accounts payable and accrued liabilities were $ 19.4 million at the end of the first quarter 2006 and were 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 $0.5 million from December 31, 2005, mainly as a result of the payment of a variety of accounts payable and accrued liabilities.

As at March 31, 2006, BCI's shareholders' equity was $212.6 million, up by $0.6 million from December 31, 2005. This was the result of the net earnings realized during the quarter.

Estimated Future Net Assets and Final Distribution to Shareholders

Prior to making a final distribution to shareholders, BCI will need to carry out a final claims bar process, resolve all remaining contingencies, receive final tax clearance certificates, dissolve all of its remaining investee companies and obtain Court approval in the context of the Plan of Arrangement. While it is currently anticipated that these steps can be completed by June 30, 2007, readers are encouraged to refer to the attached MD&A and other filings with Canadian securities commissions to more fully understand the risks that could cause such date to be delayed and/or the amount of the final distribution to be less than anticipated.

Estimated future net assets of BCI at June 30, 2007 are $22.3 million ($0.56 per share). The differences between shareholders' equity on the consolidated balance sheet at March 31, 2006 and the estimated future net assets at June 30, 2007 are: (i) the deduction from shareholders equity of the net amount of the planned initial distribution to shareholders of $250 million, partially offset by the early receipt of the tax monetization proceeds in the estimated discounted amount of $61 million (the "Loss Monetization Plan"); (ii) the inclusion of the expected gain on the Canbras investment of $3.8 million; and (iii) the inclusion of estimated future net costs of $5.0 million from April 1, 2006 to June 30, 2007.

Future net costs estimated at approximately $5.0 million are comprised of administrative expenses of approximately $7.8 million which is partially offset by interest income of approximately $2.8 million. The expected gain on the Canbras investment of approximately $3.8 million represents the excess over current carrying value that BCI expects to receive on its investment in Canbras.

Estimated future net costs exclude amounts that may be required to settle material unforeseen contingent liabilities. 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 $0.75 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 $22.3 million have declined from the $279.3 million estimate prepared on March 23, 2006 in connection with the Corporation's 2005 results, due principally to the planned distribution of $250 million in the first half of 2006, the early receipt of the tax monetization proceeds in a discounted amount and a net reduction in future interest income to June 30, 2007.

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. Factors that could cause actual events to differ materially from current expectations include, among other things and in addition to the factors referred in this release; whether any unforeseen claims are asserted against BCI (or its directors or officers) in connection with the winding-up and liquidation of BCI pursuant to the Plan of Arrangement or otherwise; the timing of and costs associated with the final winding-up and liquidation of BCI pursuant to the Plan of Arrangement; and certain other factors set forth in the attached MD&A and BCI's other filings with Canadian securities commissions. In addition, forward looking statements do not reflect the potential impact of any legal or regulatory proceedings that may be announced after the statements are made. 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 the first quarter of 2006 should be read in conjunction with BCI's unaudited interim consolidated financial statements for such period including related notes thereto. The unaudited interim 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 May 25, 2006, the date on which the unaudited interim 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".

Capitalized terms used herein, and not otherwise defined, have meanings defined in the annual MD&A contained in BCI's Annual Report for 2005 and in the unaudited interim consolidated statements contained herein.

Overview and Shareholder Distributions

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 a significant portion of its assets and is in the process of resolving outstanding claims against it in an expeditious manner with the 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 the earliest date at which a final distribution to shareholders could be made is June 30, 2007, such distribution may be delayed (see Risk Factors - "Timing of Distributions to Shareholders and Completion of the Plan of Arrangement" and "Future Costs").

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 quarter ended March 31, 2006 compared to the previous year. Instead, this MD&A focuses on an analysis of BCI's balance sheet at March 31, 2006, and develops it into a statement of estimated future net assets at June 30, 2007, the earliest date that BCI believes it may be in a position to 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) payable on June 20, 2006 to shareholders of record on June 6, 2006. Having obtained Court approval on May 23, 2006 for such a distribution, the only remaining condition that needs to be met for such payment to be made is that initial tax clearance certificates that have already been received from all requisite tax authorities remain in effect through to the distribution date.

The assumptions that have been made in connection with the estimated timing for the final distribution to shareholders are as follows: (i) all remaining contingencies are resolved by the first half of 2007 as part of a final claims bar process, or otherwise; (ii) final tax clearance certificates are received by the second quarter of 2007; (iii) all of BCI's investee companies will be dissolved by June 30, 2007; and (iv) court approval for a final distribution is received in 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 initial and/or final distributions may be delayed beyond the estimated dates (See Risk Factors - "Timing of Distributions and Completion of the Plan of Arrangement" and "Future Costs").

Canadian Federal Income Tax Considerations of the Distribution of $6.25 per share Payable

June 20, 2006 (the "Distribution")

The following summary is of a general nature only and is not meant to be legal or tax advice to shareholders of BCI. Shareholders should consult their own tax advisors with respect to the impact of the Distribution.

Residents of Canada

The Distribution to shareholders of BCI who, for purposes of the Income Tax Act (Canada) ("the ITA"), are residents of Canada ("a Resident Shareholder"), represents a reduction in the paid-up capital of the BCI common shares ("the Common Shares"). As a result, Resident Shareholders receiving the Distribution will be required to reduce the adjusted cost base of the Common Shares by an amount equal to the Distribution. To the extent that the Distribution on the Common Shares exceeds the adjusted cost base of such shares the Resident Shareholder will realize a capital gain for tax purposes. No dividend or benefit will be deemed to have been paid to such Resident Shareholder as part of the Distribution. Resident Shareholders should consult the Management Proxy Circular dated June 10, 2002 with respect to the Arrangement of BCI and contact their own tax advisors in this regard.

Non-Residents of Canada

Subject to the following comments, the summary of Canadian federal income tax consequences discussed above under "Residents of Canada" will generally apply to holders of the Common Shares who, for the purposes of the ITA and any applicable tax treaty, and at all relevant times, are not residents of Canada (a "Non-Resident Shareholder").

As the Distribution is not considered a dividend or deemed dividend paid to a Non-Resident Shareholder no Canadian tax will be required to be withheld from the Distribution.

The Common Shares are listed on the NEX board of the TSX Venture Exchange. The NEX is not considered a prescribed stock exchange for purposes of the ITA and, consequently, the Common Shares held by a Non-Resident Shareholder constitute "taxable Canadian property" to such a shareholder. As a result, any capital gain resulting from the Distribution will be subject to Canadian tax to a Non-Resident Shareholder unless the resulting capital gain is exempt from Canadian tax if the recipient of the Distribution is resident in a country with which Canada has a bilateral tax convention; such as the Canada-United States Tax Convention. Non-Resident Shareholders should consult the Management Proxy Circular dated June 10, 2002 with respect to the Arrangement of BCI and contact their own tax advisors in this regard.

Loss Monetization Plan

As described in Note 6 to the unaudited interim consolidated financial statements, the Corporation has 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 may be received in 2006 at a reduced amount based on a discount rate to be mutually agreed upon at that time. On May 1, 2006, BCE consented to BCI's request for the compensatory payment to be made in 2006 on 10 business days notice from BCI and this agreement between BCI and BCE was approved by the Court on May 23, 2006. The discount is to be based on BCE's short term borrowing costs at the time of the payment for the term of the advanced payment. For the purposes of this MD&A, BCI has assumed that the discount will be approximately $2.1 million. When the compensatory cash payment is received, it will be recorded as a contributed surplus.

Although it is considered unlikely, the amount of the compensatory cash payment could be increased in certain circumstances by $23.8 million (down from a previously disclosed maximum increase of $46.9 million due to developments which occurred in the first half of 2006). Further certainty on the potential increase is unlikely to be available until mid 2012 at the earliest. If prior to the time certainty is provided on such amount, BCI could otherwise be wound up and dissolved, and having received the minimum amount payable under the Loss Monetization Plan, there exists a significant potential upside benefit, relating to the results of certain tax filings, to be realized from the Loss Monetization Plan, then a structure to substantially eliminate BCI's ongoing administrative expenses would need to be implemented pending resolution of such taxation matters. The ability to implement such a structure would depend upon a variety of external factors, including the receipt of favorable regulatory and court rulings. It is unlikely that the amount to be realized under the Loss Monetization Plan will exceed the amount expected to be received from BCE in 2006.

Statement of Estimated Future Net Assets at June 30, 2007

The following table summarizes the consolidated balance sheet of the Corporation as at March 31, 2006 in the form of a statement of estimated future net assets at June 30, 2007 (being the earliest date by which the Corporation believes it may be in a position to make a final distribution to shareholders). The differences between the consolidated balance sheet and the statement of estimated future net assets at June 30, 2007 are the inclusion in estimated future net assets of: (i) the estimated discounted amount that BCI expects to receive in June 2006 under Loss Monetization Plan of $61.0 million ; (ii) a $250 million distribution to shareholders in June 2006; (iii) the expected gain on the Canbras Communications Corp. ("Canbras") investment of approximately $3.8 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"); and (iv) estimated future net costs of $5.0 million from April 1, 2006 to June 30, 2007.



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

Assets at March 31, 2006
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Cash and cash equivalents $222,627
Temporary investments 8,598
Other current assets 827
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Total assets 232,052


Liabilities at March 31, 2006
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Accounts payable and accrued
liabilities 19,456
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Net assets as at March 31, 2006 212,596

Items Affecting the Future Net Assets to June 30, 2007
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Estimated discounted amount under the Loss
Monetization Plan 61,000
Initial Distribution to shareholders (250,000)
Estimated future net costs until June 30, 2007 (5,045)
Expected gain on Canbras investment 3,763
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Estimated future net assets as at June 30, 2007 1 $22,314
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(1) Before material unforeseen contingencies.


As at March 31, 2006, total assets were $232.1 million of which $231.2 million, or 99.6%, were in the form of cash and cash equivalents as well as temporary investments.

Other current assets of $0.8 million consist of $0.3 million of accrued interest on cash and cash equivalents as well as on temporary investments, prepaid expenses and other current assets.

Total liabilities include accounts payable and accrued liabilities of $19.5 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 expected future net costs from April 1, 2006 until June 30, 2007, of $5.0 million includes estimated administrative expenses of approximately $7.8 million which is partially offset by estimated interest income on cash and cash equivalents and temporary investments of approximately $2.8 million. In calculating estimated interest income, it has been assumed that short-term investments will provide a 3.25% per annum return and that a $250 million distribution to shareholders will be made on June 20, 2006, the same date that the discounted amount of the Loss Monetization proceeds are assumed to be received.

The future net assets of BCI at June 30, 2007 are now estimated to be approximately $22.3 million, down from the $279.3 million estimate at March 23, 2006, due to the planned initial distribution to shareholders of $250 million in June 2006 and the resulting decline in interest income to June 30, 2007. Also contributing to the decline is the discount on the early receipt of the proceeds under the Loss Monetization Plan. Partially offsetting these factors is increased interest income attributable to the early receipt of the proceeds under the Loss Monetization Plan as well as a reduction in future administrative cost estimates.

The following is a discussion of all contingencies of which the Corporation is currently aware. BCI has accrued amounts in the unaudited interim consolidated financial statements that it believes are sufficient to cover the Corporation's estimated exposures with respect to these contingencies.

Contingencies

As described in Note 7 to the unaudited interim consolidated financial statements, a former employee of a BCI subsidiary filed a claim against BCI and two of its affiliates totaling $5.5 million alleging failure to honour a promise of employment. In April 2006, BCI received a full release from any liability associated with this claim in return for a payment that had been accrued in the 2005 audited consolidated financial statements.

On September 23, 2005, the Quebec Superior Court rendered its decision in a lawsuit filed by a former employee of the Corporation and awarded the employee an amount of approximately $44 thousand. An estimated amount of the Corporation's exposure to this claim had previously been expensed. 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 estimates to be less than $500 thousand, calculated on a present value basis. In a cross appeal which the Corporation filed in early November 2005, BCI is seeking to have the original damage assessment of approximately $44 thousand reversed and has also contested the plaintiff's argument that the amount originally awarded should be further increased. A decision on this matter is expected no sooner than the second quarter of 2007.

During 2005, the Canada Revenue Agency ("CRA") began an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit may result in all or some 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 GST audit is expected to be completed during the first half of 2006.

Results of Operations for the First Quarter of 2006

Net earnings for the first quarter of 2006 were $0.6 million, or $0.02 per share reflecting interest income of $1.9 million, partially offset by administrative expenses of $1.2 million and foreign exchange losses and other expenses of $0.1 million. Administrative expenses are comprised of employee and office costs of $0.5 million, legal, tax and auditor fees of $0.2 million and other administrative expenses of $0.5 million. Other administrative expenses include costs associated with the windup of investee companies.

Cash and cash equivalents were $222.6 million at March 31, 2006 up substantially from $0.6 million at December 31, 2005. The increase reflects a shortening of the maturity profile of its investments in view of the proposed shareholder distribution in the second quarter of 2006.

Accounts payable and accrued liabilities were $ 19.4 million at the end of the first quarter 2006 and were 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 $0.5 million from December 31, 2005, mainly as a result of the payment of a variety of accounts payable and accrued liabilities.

As at March 31, 2006, BCI's shareholders' equity was $212.6 million, up by $0.6 million from December 31, 2005. This was the result of the net earnings realized during the quarter.

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, commercial paper and corporate bonds and debentures 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 March 31, 2006, the Corporation held investment grade commercial paper in the amount of $8.6 million. The commercial paper matured at varying dates from April 24, 2006 to May 4, 2006. The effective yields on the commercial paper range from 3.29% to 3.30%. At March 31, 2006 the estimated fair value (based on market values) of the commercial paper amounted to $8.7 million. During the quarter ended March 31, 2006, the Corporation recorded interest income of $1.9 million related to temporary investments.

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, March 31, 2006 40,000,000 $10,000
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At March 31, 2006, 4,599 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 0.5 to 3.5 years.

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 has announced that an initial distribution to shareholders will be made on June 20, 2006 and 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 and Shareholder Distributions", being realized.

Delays are possible in resolving the Corporation's existing contingencies; unforeseen claims may be asserted against the Corporation in future claims bar processes or otherwise 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, in obtaining court approval to make distributions as well as in receiving the proceeds under the Loss Monetization Plan. 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 distributions to shareholders.

Employee Litigation

As described in Note 7 to the unaudited interim consolidated financial statements, a former employee is appealing a September 23, 2005 decision from the Quebec Superior Court and seeking an increase in the damage award from $44 thousand to approximately $500 thousand. While BCI believes that this claim is without merit, there can be no assurances BCI's ultimate liability to such claim will not have an adverse impact on BCI's financial position.

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

BCI's estimated gain on its Canbras investment of $3.8 milllion 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' 2005 audited financial results. However, if significant additional 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 March 31, 2006, BCI had approximately $231.5 million of cash and cash equivalents together with temporary investments and interest thereon. BCI has invested such funds in investment grade debt instruments with various maturities, not extending beyond May 4, 2006, 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 March 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 $0.75 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 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.



BELL CANADA INTERNATIONAL INC.

Consolidated Financial Statements

March 31, 2006

(Unaudited)



Bell Canada International Inc.
Consolidated Balance Sheets
(In thousands of Canadian dollars)

Unaudited
As at As at
March 31, December 31,
2006 2005
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Current assets
Cash and cash equivalents $222,627 $611
Temporary investments (Note 3) 8,598 228,469
Interest receivable on cash equivalents and
temporary investments 299 2,295
Prepaid expenses and other current assets 528 516
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$232,052 $231,891
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Current liabilities
Accounts payable and accrued liabilities $19,456 $19,929
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Contingencies (Note 7)
Shareholder's equity
Stated capital (Notes 5 and 8) 10,000 10,000
Contributed surplus 1,941,560 1,941,560
Deficit (1,738,964) (1,739,598)
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212,596 211,962
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$232,052 $231,891
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The accompanying notes are an integral part of these consolidated
financial statements.



Bell Canada International Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands of Canadian dollars except per share amounts)
Three months ended
March 31,
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2006 2005
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Employee and office costs $(483) $(597)
Legal, tax and auditor fees (216) (291)
Other administrative expenses (515) (247)
Interest income 1,921 1,363
Unrealized foreign exchange losses and other (73) (42)
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Net earnings 634 186
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Net earnings applicable to common shares
- basic and diluted $634 $186
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Net earnings per common share - basic and
diluted (Note 5) $0.02 $-
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Consolidated Statements of Deficit (Unaudited)
(In thousands of Canadian dollars)
Three months ended
March 31,
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2006 2005
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Deficit, beginning of period $(1,739,598) $(1,674,128)
Net earnings 634 186
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Deficit, end of period $(1,738,964) $(1,673,942)
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The accompanying notes are an integral part of these consolidated
financial statements.



Bell Canada International Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands of Canadian dollars)

Three months ended
March 31,
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Operations 2006 2005
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Net earnings $634 $186
Items not affecting cash
Unrealized foreign exchange losses 50 27
Changes in working capital items 1,467 1,570
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Cash provided by operations 2,151 1,783
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Investing activities
Decrease in temporary investments 219,871 202,581
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Cash provided by investing activities 219,871 202,581
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Foreign exchange (gain) loss on cash
held in foreign currencies (6) 1
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Net increase in cash and cash equivalents 222,016 204,365

Cash and cash equivalents, beginning of period 611 1,047
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Cash and cash equivalents, end of period $222,627 $205,412
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The accompanying notes are an integral part of these consolidated
financial statements.


Bell Canada International Inc.
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 interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005 as set out in Bell Canada International Inc.'s ("BCI" or the "Corporation") 2005 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 2005 Annual Report.

BCI 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, 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. 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, 2006 and the results of operations and cash flows for the three months ended March 31, 2006 and 2005, 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, post retirement benefit obligation and provisions for claims.

For a complete description of the Corporation's significant accounting policies, refer to BCI's financial statements for the year ended December 31, 2005.

3. Temporary investments

As at March 31, 2006, the Corporation held investment grade commercial paper in the amount of $8,598,000. The commercial paper matures at varying dates to May 4, 2006. The effective yields on the commercial paper range from 3.29% to 3.30%. At March 31, 2006 the estimated fair value of the commercial paper amounted to $8,675,000.

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 (the "Note") bearing interest at 10% in the original principal amount of $10,432,000 (subject to reduction in the event indemnification obligations of Canbras were to arise under the terms of the sale transaction). On December 21, 2004, Canbras provided details of claims made against it under the Canbras Sale amounting to R$58 million (C$30 million). Canbras' potential exposure to such claims was limited to the amount of the Note together with accrued interest thereon. Canbras believed that less than R$2 million (C$1 million) of the total amount claimed of R$58 million was potentially subject to indemnification under the Canbras Sale. On July 21, 2005, Canbras announced that it had accepted a payment of $9,500,000 in full settlement of the Note and received a release from all present and future indemnification claims in connection with 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 $3,763,000.

On April 20, 2006, Canbras released its 2005 financial results and disclosed that it expects to make a final distribution to shareholders no sooner than December 31, 2006, totaling approximately $5,500,000 in aggregate.



5. Stated capital

a) Common shares as at March 31, 2006

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

Balance, March 31, 2006 40,000,000 $10,000
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See Note 8

b) Stock Options

At March 31, 2006, 4,599 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 0.5 to 3.5
years.

c) Earnings Per Share

Three months ended
March 31,
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Numerator:
Net earnings applicable to common shares
- basic and diluted $634 $186
---------------------------------------------------------------------
---------------------------------------------------------------------
Denominator (in thousands):
Weighted-average number of shares - basic and
diluted 40,000 40,000
---------------------------------------------------------------------
Basic and diluted earnings per share $0.02 $-
---------------------------------------------------------------------
---------------------------------------------------------------------


The Corporation excluded potential common share equivalents from the computation of diluted earnings per share computed above, as they were anti-dilutive.

6. Income taxes

At December 31, 2005, the Corporation's income tax returns contained Canadian non-capital tax losses carried forward amounting to approximately $1,563,000, expiring in 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 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. When the proceeds of the Loss Monetization are received, they will be recorded as contributed surplus. (See Note 8).

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 million was realized and accordingly the Corporation recorded this amount as income tax expense.

To effect the implementation, the Corporation entered into agreements with BCE and Bell Canada pursuant to which 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. BCI Subco then lent $17 billion to BCI on the basis of an interest free subordinated demand loan from BCI (the "BCI Note") and BCI lent $17 billion to Bell Subco on the basis of an interest bearing demand loan to Bell Subco (the "Bell Subco Note"). All of the foregoing transactions occurred on April 15, 2005. The BCI Subco Preferred Shares were non-participating, non-voting, cumulative, redeemable and retractable at any time and paid dividends at a per annum rate of 5.12%. The Bell Subco Note bore interest at a rate of 5.11% per annum, was unsecured and was payable on demand and could be repaid at anytime.

The BCI Subco Preferred Shares could be repaid by delivering to Bell Subco the BCI Note. Furthermore, the Bell Subco Note could be redeemed by delivering to BCI the BCI Note. On August 17, 2005, the parties availed themselves of these rights of set off such that the BCI Subco Preferred Shares, the BCI Note and the Bell Subco Note were retired on such date.

7. Contingencies

The Corporation has accrued amounts that are in management's best estimate sufficient to cover the Corporation's exposures with respect to the following contingencies.

A former employee of a BCI subsidiary filed a claim against BCI and two of its affiliates totaling $5.5 million alleging failure to honour a promise of employment. In April 2006, the Corporation was released from any liability in respect of this lawsuit at a cost to BCI of less than 10% of the amount claimed.

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. 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 estimates 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 is seeking to have the original damage assessment of approximately $44,000 reversed and is also contesting the plaintiff's argument that the amount originally awarded should be further increased. A decision in this matter is expected no sooner than the second quarter of 2007.

During 2005, the CRA began an audit of the Corporation's Goods and Services Tax ("GST") filings from November 2001 to October 2005. This GST audit may result in all or some 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. It is expected that the GST audit will be completed during the first half of 2006.

8. Subsequent Event

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 but remains subject to the continued applicability of tax clearance certificates. In connection with this initial distribution, the Court also approved an agreement between BCI and BCE whereby BCE will prepay the Loss Monetization Plan proceeds during 2006 upon 10 business days notice from BCI and at a discounted amount based on BCE's short term borrowing rate on the date the prepayment is made. BCI will request the prepayment be made prior to BCI's initial distribution to shareholders. 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.

Contact Information

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