Bell Canada International Inc.
NEX BOARD : BI.H

Bell Canada International Inc.

July 29, 2005 12:02 ET

BCI Announces Second Quarter Results

MONTREAL, QUEBEC--(CCNMatthews - July 29, 2005) - 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 second 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.

Second Quarter Results

Net loss for the second quarter of 2005 was $38.1 million, as a result of income tax expense of $38.0 million recorded in connection with the Corporation's tax loss monetization plan which was implemented on April 15, 2005 (the "Loss Monetization Plan"). Pursuant to the Loss Monetization Plan, the Corporation expects to receive a compensatory cash payment from BCE Inc. ("BCE") in the first quarter of 2007 of $62.475 million. This amount had previously been recorded as an income tax recovery on the Corporation's income statement as well as a future income asset on the balance sheet. The full amount of the future income tax asset is expected to be realized prior to September 30, 2005, as additional income tax expense is incurred. When the cash is received from BCE, it will be recorded as a contribution of capital. During the second quarter, the Corporation recorded 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, as well as net interest income of $1.0 million. BCI's shareholders' equity decreased by $38.1 million in the quarter to reach $239.5 million at June 30, 2005.

BCI's cash and cash equivalents together with temporary investments and interest thereon as at June 30, 2005 were $223.6 million down slightly from $223.9 million at March 31, 2005. This decline was due principally to administrative expenses exceeding net interest income in the quarter.

Accrued liabilities were $15.2 million at the end of the second quarter of 2005, down $0.2 million from March 31, 2005 mainly as a result of the payment of accrued expenses in the second 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 June 30, 2005 and the estimated future net assets at June 30, 2007 is the inclusion in estimated future net assets of the realized amount of the benefit expected to be received pursuant to the Monetization Plan of $38.5 million, the expected gain on the Canbras investment of $5.0 million, partially offset by the deduction of estimated future net costs from July 1, 2005 to June 30, 2007.

The future net costs estimated at approximately $3.7 million are comprised of administrative expenses of approximately $13.8 million partially offset by interest income of approximately $10.1 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 amounts that may be required to settle material 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 May 26, 2005, in connection with BCI's first quarter 2005 results.

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.

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 Second 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

June 30, 2005

(Unaudited)


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

Unaudited
As at As at
June 30, December 31,
2005 2004
-----------------------------
Current assets

Cash and cash equivalents $154,671 $1,047

Temporary investments (Note 3) 68,617 220,561

Interest receivable on cash equivalents
and temporary investments 335 2,380

Investment in Canbras (Note 4) 6,257 6,257

Prepaid expenses and other current assets 864 1,082

-----------------------------
230,744 231,327

Future income tax assets (Note 6) 23,990 62,000
-----------------------------

$254,734 $293,327
-----------------------------
-----------------------------

Current liabilities
Accounts payable and accrued
liabilities $15,228 $15,895
-----------------------------

Contingencies (Note 7)

Shareholder's equity

Stated capital (Note 5) 10,000 10,000

Contributed surplus 1,941,560 1,941,560

Deficit (1,712,054) (1,674,128)
-----------------------------

239,506 277,432
-----------------------------

$254,734 $293,327
-----------------------------
-----------------------------




Bell Canada International Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands of Canadian dollars except per share amounts)


Three Months ended Six Months ended
June 30 June 30
---------------------------------------

2005 2004 2005 2004
---------------------------------------

Interest on long-term debt $- $(4,622) $- $(9,243)

Employee and office costs (644) (872) (1,241) (1,900)

Legal, tax and auditor fees (246) (888) (537) (1,173)

Other administrative expenses (267) (368) (514) (714)

Interest income, net (Note 6) 1,050 1,981 2,413 4,436

Foreign exchange gains
(losses) and other 5 (39) (37) (47)
---------------------------------------

Net (loss) earnings before
income taxes (102) (4,808) 84 (8,641)

Income tax provision
(Note 6) (38,010) - (38,010) -
---------------------------------------

Net loss $(38,112) $(4,808) $(37,926) $(8,641)
---------------------------------------
---------------------------------------

Net loss applicable to
common shares - basic and
diluted $(38,112) $(4,808) $(37,926) $(8,641)
---------------------------------------
---------------------------------------

Net loss per common share
- basic and diluted
(Note 5) $(0.95) $(0.12) $(0.95) $(0.22)
---------------------------------------
---------------------------------------


Consolidated Statements of Deficit (Unaudited)
(In thousands of Canadian dollars)



Three Months ended Six Months ended
June 30 June 30
----------------------------------------------
2005 2004 2005 2004
----------------------------------------------
Deficit, beginning
of period $(1,673,942) $(1,729,742) $(1,674,128) $(1,725,909)
---------------------------------------------------
Net loss (38,112) (4,808) (37,926) (8,641)
----------------------------------------------
Deficit, end of
period $(1,712,054) $(1,734,550) $(1,712,054) $(1,734,550)
---------------------------------------------------
---------------------------------------------------


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


Three Months ended Six Months ended
June 30, June 30,
------------------------------------------
2005 2004 2005 2004
------------------------------------------

Operations
Net loss $(38,112) $(4,808) $(37,926) $(8,641)
Items not affecting cash
Future income tax 38,010 - 38,010
Foreign exchange (gains)
losses (9) 2 18 21
Amortization of deferred
financing costs - 239 - 460
Amortization of premium on
temporary investments - - - 35
Changes in working
capital items 13 5,257 1,583 4,621
------------------------------------------
Cash (used in) provided by
operations (98) 690 1,685 (3,504)
------------------------------------------
Investing activities
(Increase) decrease in
temporary investments (50,637) (39,231) 151,944 299,635
------------------------------------------

Cash (used in) provided by
investing activities (50,637) (39,231) 151,944 299,635
------------------------------------------

Foreign exchange (gain) loss
on cash held in
foreign currencies (6) 15 (5) 54
------------------------------------------

Net (decrease) increase in
cash and cash equivalents (50,741) (38,526) 153,624 296,185

Cash and cash equivalents,
beginning of period 205,412 336,119 1,047 1,408
------------------------------------------

Cash and cash equivalents,
end of period $154,671 $297,593 $154,671 $297,593
------------------------------------------
------------------------------------------

See Note 8 for supplementary cash flow information


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 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 June 30, 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") which was previously written off, was disposed of on July 7, 2005 for a nominal amount. 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 June 30, 2005 and the results of operations and cash flows for the three and six months ended June 30, 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 assets 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 June 30, 2005, the Corporation held investment grade commercial paper in the amount of $68,617,000. The commercial paper matures at varying dates to January 26, 2006. The effective yields on the commercial paper range from 2.41% to 2.54%. At June 30, 2005 the estimated fair value of the commercial paper amounted to $68,766,000.

4. Investment

The Corporation's 75.6% economic interest in Canbras is recorded at the lower of carrying value of $6.3 million and estimated net realizable value of $11.3 million (as detailed below).

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 and subject to reduction in the event indemnification obligations of Canbras arose 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 were 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. As a result, BCI has estimated that the amount of future distributions that BCI will receive from Canbras will be approximately equal to BCI's 75.6% share of Canbras' cash on hand and temporary investments totalling approximately $7.2 million at March 31, 2005, plus the $9,500,000 settlement amount for the Note, less the costs that Canbras has estimated that it will incur to contest the remaining 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 June 30, 2005

Number of Stated
Shares Capital
--------------------------------
Balance, December 31, 2004 40,000,000 $ 10,000
--------------------------------
Balance, June 30, 2005 40,000,000 $ 10,000
--------------------------------
--------------------------------


b) Stock Options

At June 30, 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 Six months ended
June 30, June 30,
---------------------------------------------

2005 2004 2005 2004
---------------------------------------------
Numerator:

Net loss applicable to
common shares -
basic and diluted $(38,112) $(4,808) $(37,926) $(8,641)
---------------------------------------------
---------------------------------------------

Denominator (in thousands):

Weighted-average number
of shares -
basic and diluted 40,000 40,000 40,000 40,000
---------------------------------------------
Basic and diluted
loss per share $(0.95) $(0.12) $(0.95) $(0.22)


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 had for Canadian purposes 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 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. 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, 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, an additional amount of income tax recovery of $475,000 was recorded.

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. 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 lent $17 billion to BCI on the basis of an interest free note from BCI (the "BCI Note") and BCI lent $17 billion to Bell Subco on the basis of 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, which for accounting purposes are classified as a liability, may be repaid by delivering to Bell Subco the BCI Note. Furthermore, the Bell Subco Note may be redeemed by delivering to BCI the BCI Note. The parties intend to avail themselves of these rights of set off and it is expected that these offsetting transactions will occur during the third quarter of 2005. As a result, BCI's consolidated balance sheet reflects the BCI Subco Preferred Shares and Bell Subco Note, each in the amount of $17 billion, on a net basis. Similarly, the consolidated statements of operations reflect the related preferred dividends of $183,619,000 and interest income of $183,260,000, on a net basis (included in the interest income line). The Corporation recorded income tax expense of $38,484,000 in the second quarter of 2005 based on the amount of interest income earned during the period.

While discussions are ongoing with certain government officials and also with BCE that could result in an increase in the compensatory payment under the Loss Monetization Plan, it is unlikely that any such increase will occur.

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. However, BCI understands that Comcel may dispute that its claim is so barred and there can be no assurance that if the order of the Court were to be appealed that such appeal would be denied.

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 Six months ended
June 30, June 30,
--------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------

Interest paid $ - $ - $ - $ 8,800
--------------------------------------------------


9. 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