- Revenue of $124.0 million - EBITDA of $19.9 million; margin at 16 per cent - Net income of $5.9 million; EPS of $0.06 - Reiterating EBITDA, EPS target ranges for 2003 - Revising revenue target range for 2003
BCE Emergis Inc. (TSX: IFM), a leading North American eBusiness company, today announced its quarterly financial results for the three-month period ended June 30, 2003. The Company reported sequential growth in both EBITDA and earnings.
Total revenue for the second quarter came in at $124.0 million compared to $124.1 million for the first quarter 2003 and with $141.9 million for the second quarter 2002. On a sequential quarterly basis, growth in both eFinance and eHealth operations was offset by the impact of foreign exchange translation of U.S.-sourced revenue and by decreases in revenue from non-core products. Excluding the impact of the appreciation of the Canadian dollar since the end of 2002, the Company estimates that revenue for the quarter would have been $128.5 million or $4.5 million higher than that reported. The year-over-year decrease in revenue was due to lower non-core revenue, and to lower core revenue mainly as a result of the negative impact of foreign exchange.
Core revenue (which excludes revenue from the distribution agreement with Bell Canada for legacy products (Bell legacy contract) and other non-core and exited products) for the current period was $95.8 million compared with $94.4 million in the first quarter of 2003 and to $103.5 million in the second quarter of 2002.
Strong profit performance during the quarter more than offset the impact of foreign exchange on both EBITDA(i) and earnings. EBITDA came in at $19.9 million (16 per cent of revenue) compared to $18.3 million (15 per cent of revenue) in the first quarter of 2003 and with $11.4 million (8 per cent of revenue) in the corresponding period in 2002 (before restructuring and other charges). Net income for the second quarter 2003 was $5.9 million compared with $4.8 million in the first quarter 2003 and to $1.3 million in the second quarter 2002 (before restructuring and other charges). EPS was $0.06 per share compared to $0.05 in the first quarter 2003 and with $0.01 in the second quarter 2002 (before restructuring and other charges). Reported net loss and LPS in the second quarter of 2002 were $(95.8) million and $(0.94), respectively.
"We continued to deliver solid financial results at the EBITDA and earnings level. And, we made progress in growing our core revenue base in both our eFinance and eHealth operations, though this growth is being masked by the strengthening Canadian dollar," declared Tony Gaffney, BCE Emergis chief executive officer. "Since my arrival in May, I have been impressed by the efforts on all fronts to drive core revenue growth and tightly control costs. We are continuing to see the results of these efforts."
REVENUE HIGHLIGHTS FOR THE QUARTER
Effective January 2003, the Company reorganized into two reporting units: eHealth Solutions, North America and eFinance Solutions. The objective of this reorganization was to align the operating structure with its major lines of business and the North American target market segments in which the Company operates. eHealth Solutions, North America includes the Company's American and Canadian eHealth businesses; eFinance Solutions regroups what had been previously defined as U.S. and Canadian business-unit activities (BCE Emergis-Canada and BCE Emergis-U.S.). Lines of business within eFinance Solutions are eBusiness Solutions, ePayment Solutions and eLending Solutions.
Three-month periods ended June 30, 2003, March 31, 2003 and June 30,
2002 in millions of Canadian dollars:
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Q2 2003 Q1 2003 Q2 2002
---------------------------------------------------------------------
---------------------------------------------------------------------
Core eHealth Solutions 56.4 59.0 71.5
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Core eFinance Solutions 39.4 35.4 32.0
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Total core revenue 95.8 94.4 103.5
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Non-core revenue 28.2 29.7 38.4
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Total revenue 124.0 124.1 141.9
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Following is an overview of revenue for the current quarter:
- Revenue totalled $124.0 million in the second quarter compared to
$124.1 million in the first quarter of 2003 and with $141.9 million
in the second quarter of 2002.
- Recurring revenue stood at $110.3 million or 89 per cent of total
revenue compared with $128.1 million or 90 per cent of total
revenue in the second quarter of 2002. Non-recurring revenue was
$13.7 million compared to $13.8 million last year.
- U.S.-sourced revenue was 45 per cent of total revenue in the
current quarter compared with 40 per cent in the corresponding
quarter of 2002.
- Related party revenue was $25.6 million, or 21 per cent of total
revenue, compared with $37.7 million, or 27 per cent of total
revenue, in the second quarter of 2002.
- Core revenue for the period was $95.8 million compared with $94.4
million in the first quarter of 2003 due to a higher contribution
from eFinance Solutions and from the Canadian operations of the
eHealth Solutions group, partly offset by lower revenue from
eHealth Solutions (U.S.) due to the impact of foreign exchange.
Excluding the impact of the appreciation of the Canadian dollar
since the end of last year, total core revenue would have reached
approximately $100.3 million.
On a year-over-year basis, core revenue decreased from $103.5
million in the second quarter of 2002. The decrease was due mainly
to the impact of a stronger Canadian dollar.
- Core recurring revenue was $83.1 million in the second quarter of
2003, compared to $83.7 million for the first quarter of 2003 and
with $90.6 million for the second quarter of 2002. In the
sequential quarterly comparison, increases in contributions from
both business units were mostly offset by the impact of foreign
exchange. The year-over-year decrease was due to a lower
contribution from both eHealth Solutions and eFinance Solutions,
with the impact of foreign exchange being the primary reason for
decrease in both contributions.
- Total non-core revenue for the second quarter of 2003 was $28.2
million compared with $38.4 million in the second quarter of 2002,
representing a decrease in overall revenue of $10.3 million year
over year, of which $6.5 million related to the Bell legacy
contract.
FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS
Six-month periods ended June 30, 2003 and 2002 in millions of
Canadian dollars:
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6 months 2003 6 months 2002
---------------------------------------------------------------------
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Core eHealth Solutions 115.4 133.7
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Core eFinance Solutions 74.8 59.4
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Total core revenue 190.2 193.1
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Non-core revenue 57.9 80.8
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Total revenue 248.1 273.9
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- Revenue totalled $248.1 million in the first half of 2003 compared
with $273.9 million in the corresponding period in 2002, reflecting
lower non-core revenue.
- Core revenue for the period was $190.2 million compared to $193.1
million in 2002. Increases in core eFinance Solutions revenue from
all lines of business were offset by lower eHealth Solutions
revenue due mainly to lower non-recurring revenue and to the impact
of a stronger Canadian dollar.
- Core recurring revenue was $166.8 million in the first half of 2003
compared with $171.9 million in 2002. The year-over-year decrease
was due to a lower contribution from eHealth Solutions, partly
offset by higher eFinance Solutions revenue.
- EBITDA in the first half of 2003 was $38.2 million or 15 per cent
of revenue, compared to negative EBITDA of $(9.1) million (before
restructuring and other charges) in the prior year or negative 3
per cent of revenue. As a result of the streamlining of the
Company's lines of business and a cost reduction program initiated
in the second quarter of 2002, operating costs for the first half
of 2003 were some $60.5 million lower than those reported in the
first half of 2002 excluding restructuring and other charges.
- Net income for the six months was $10.7 million ($0.10 per share)
compared to a net loss of $26.6 million ($(0.26) per share) before
restructuring and other charges. Reported net loss for the first
half of 2002 was $123.7 million ($(1.22) per share).
FINANCIAL POSITION AT JUNE 30
The Company continued to maintain a sound financial position with $102.9 million cash on hand as at June 30, 2003. In the last 12 months, the Company has generated $53.4 million in cash flow from operations.
OPERATING HIGHLIGHTS FOR THE QUARTER
"Gains were made in important areas of business this quarter while maintaining strict cost controls" stated Christian Trudeau, president and chief operating officer. "We will continue to review our product lines to ensure they continue to meet our operating performance targets and strategic objectives."
eFinance Solutions business unit
The unit saw 11 per cent sequential quarterly and 23 per cent year-over-year increases in core revenue as a result of higher contributions for its three main lines of business.
In ePayment Solutions, three new customers were signed on for Emergis(R) e-Invoicing for Receivables solution, bringing the total to 31. Also during the quarter, the Company launched a new solution, called Emergis(R) e-Invoicing for Payables, which targets large businesses seeking to streamline accounts payable cycles, reduce costs, improve vendor relationships and enhance cash management practices. The buyer-focused electronic invoice presentment and payment solution (EIPP) complements customers' existing EDI (Electronic Data Interchange) or ERP (Enterprise Resource Planning) investments, offering companies a means to not only receive invoices electronically, but also to facilitate dispute resolution and provide suppliers with a self-service view into the status of their invoices and payments. BCE Emergis is uniquely positioned to offer a comprehensive suite of EIPP solutions that addresses both sides of the buy and sell equation with a focus on adoption and that delivers a quick return on investment.
During the quarter, BCE Emergis delivered the next generation of functionality to the Visa Commerce global solution. The ePayment Solutions team is currently engaged in initial implementations in the United States.
In eLending Solutions, the Company continued to add new vendors of mortgage services and lenders to its Emergis(R) Vendor Services Exchange a secure, Web-based solution for real-time placement, receipt and management of settlement services, bringing the total to 11 national vendors and 30 lenders. The exchange was launched as a featured tool on Freddie Mac's loanprospector.com portal in December 2002. It is the first of a suite of solutions that leverage the company's eLending Solutions platform for end-to-end paperless loan fulfillment, closing and storage. Electronic closing services and electronic vault services, are moving into the pilot phase, completing our suite of eLending solutions and making the all-electronic mortgage a reality.
The eBusiness Solutions line of business was successful on a number of fronts in the e-government market during the quarter, delivering additional functionality to the Secure Channel initiative of the Government of Canada and making significant progress in developing provincial government opportunities.
eHealth Solutions business unit
In Canada, more than 200 clinics in Ontario that are connected to HealthLink Technologies' InTouch Practice Management System now have direct access to the electronic claims platform developed by BCE Emergis for Ontario's Workplace Safety and Insurance Board. BCE Emergis' agreement with HealthLink signed during the quarter and a similar arrangement announced earlier in the year with the Ontario Chiropractic Association have allowed the Company to gain significant traction, connecting providers to the WSIB platform and making it widely available and easily adoptable for them. eHealth Solutions (Canada) is looking to market its workers' compensation board platform to other provinces in Canada and to selected states south of the border.
In the United States, the unit strengthened its management team with the addition of two new executives in the medical management and network operations areas. Gregory Dykes becomes president of the Company's medical management subsidiary, National Health Services and David (Wally) Ward becomes senior vice-president of network operations and project management. Together, these two executives bring more than 50 years' experience in the managed care industry to BCE Emergis' leadership.
The Carpenters Health and Welfare Trust for Southern California joined the 38 other unions with access to health provider discounts through the Company's shared savings program and fee negotiation services. One of the largest unions in the United States, Carpenters adds some 22,000 eligible lives to BCE Emergis' cost containment network. In addition, the Company's network operations in Wisconsin significantly expanded with the addition of two major provider groups in the state.
BCE Emergis' eHealth Solutions (U.S.) unit became one of the first organizations earn the HIPAA Privacy Accreditation by URAC, a leading health care accrediting organization. This accreditation encompasses all of BCE Emergis' cost containment solutions in the United States. The Company proactively implemented HIPAA privacy compliance because it believes in the importance of safeguarding clients' personal health information and the ability of its solutions to meet national standards. HIPAA is The Health Insurance Portability and Accountability Act of 1996, U.S. Federal Government legislation that regulates the rights individuals have over their personal health information and how that information should be protected. HIPAA also provides for standardization of electronic health care transactions.
REVISED REVENUE TARGET RANGE FOR 2003
BCE Emergis is maintaining its 2003 annual financial target ranges for EBITDA at $71 million to $85 million and for EPS at $0.20 to $0.28 per share. However, owing to the significant strengthening of the Canadian dollar relative to its U.S. counterpart since its financial targets were set in late 2002, and to lower revenue expectations in our eHealth (U.S.) business, the Company has revised its revenue target range for 2003 of $510 million to $550 million to $470 million to $490 million. As part of its business planning process for 2004 and beyond, the Company will review the impact of the revised revenue target range on its target revenue growth rates for 2003 to 2005.
The impact of the stronger Canadian dollar has had a significantly lesser impact on EBITDA and EPS than it has had on revenue or operating expenses, since the Company's revenue and related operating expenses are for the most part geographically aligned. For each one-cent increase in the Canadian dollar relative to its U.S. counterpart, the Company estimates that its revenue decreases by approximately $1.5 million on an annual basis. In contrast, the estimated equivalent annual impact of a one-cent increase in the dollar on EBITDA is a decrease of approximately $0.3 million. If the dollar remains at recently experienced levels for the rest of the year, the overall impact of the stronger Canadian dollar since the end of last year will have reduced revenue for the year by some $26 million and EBITDA by some $6 million.
Concluded Gaffney: "We remain encouraged by our EBITDA and earnings performance so far this year and are redoubling our efforts to grow our core revenue base to mitigate the impacts of the stronger dollar."
TONY GAFFNEY APPOINTED TO THE BCE EMERGIS BOARD
As previously announced, Tony Gaffney, BCE Emergis' chief executive officer joined the Board of Directors on July 7, replacing Pierre Blouin. Blouin stepped down as CEO of BCE Emergis in May to become Group President, Consumer Markets at Bell Canada.
JULY 22, 2003 CONFERENCE CALL AND WEBCAST
The Company will hold a conference call and live webcast today, July 22, 2003, at 5:30 p.m., to discuss its financial results for the second quarter 2003. To participate, interested stakeholders can dial the following toll-free number, 1 800 273-9672; in Toronto, (416) 695-5806. The second quarter 2003 news release, as well as an additional information package, will be posted on www.emergis.com after 4:00 p.m. on Tuesday, July 22, 2003. The news release will also be available through CCNMatthews.
The instant replay of the webcast will begin at 7:30 p.m. on July 22, 2003 and be available during 48 hours. To listen, interested participants should dial the following toll-free number, 1 800 408-3053; in Toronto, (416) 695-5800. The access code is 1354508.
ABOUT BCE EMERGIS
BCE Emergis supplies eBusiness solutions to the financial services and health industries in North America, automating transactions between companies and allowing them to interact and transact electronically. The Company also provides cost containment services for medical claims, mainly through its preferred provider network. Its leading technologies are centred on claims and loan-related document processing, electronic bill presentment and payment solutions.
BCE Emergis customers include leading North American health insurers, top U.S. banks, the top six Canadian banks and a number of North America's largest enterprises. The Company's shares (TSX: IFM) are included in the S&P/TSX Composite Index.
For more information, visit the Company's web site at www.emergis.com.
Certain statements made in this press release are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring items or of any dispositions, monetizations, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. Other factors that could cause results or events to differ materially from current expectations include, among other things: general and economic factors; adoption of eBusiness, the adoption rate of our solutions by customers; response to industry's rapid pace of change; competition; operating results; success of U.S.-based operations; control by BCE; integration of past acquisitions; strategic relationships; dependence on contracting medical service providers; exposure to professional liability; defects in software or failures in the processing of transactions; security and privacy breaches; key personnel; protection of intellectual property; intellectual property infringement claims; integrity of public key cryptography technology; and industry and government regulation. For additional information with respect to certain of these and other factors, refer to BCE Emergis Inc.'s Annual Report (Management Discussion and Analysis) and the BCE Emergis Inc. Annual Information Form (Risks and Uncertainties) filed with the Canadian securities commissions.
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PRESS RELEASE REPRESENT THE EXPECTATIONS OF BCE EMERGIS INC. AND ITS SUBSIDIARIES AS AT JULY 22, 2003 AND, ACCORDINGLY, ARE SUBJECT TO CHANGE AFTER SUCH DATE. HOWEVER, BCE EMERGIS INC. AND ITS SUBSIDIARIES DISCLAIM ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
(i) EBITDA used in this quarterly report does not have a meaning under Canadian Generally Accepted Accounting Principles (GAAP) and therefore may not be comparable to similar measures presented by other publicly traded companies. It is defined as earnings before depreciation, amortization of intangibles, interest, write-down of assets, other expenses or income and income taxes. No reconciliation is provided in the Interim Consolidated Statement of Earnings.
Consolidated Statements of Earnings
---------------------------------------------------------------------
(millions of For the For the For the For the
Canadian three month three month six month six month
dollars, except period ended period ended period ended period ended
income (loss) June 30, June 30, June 30, June 30,
per share and 2003 2002 2003 2002
number of shares) (unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------
Revenue 124.0 141.9 248.1 273.9
Direct costs 27.2 32.8 52.7 65.3
---------------------------------------------------------------------
Gross margin 96.8 109.1 195.4 208.6
---------------------------------------------------------------------
Expenses
Operations 41.5 45.9 84.3 99.0
Sales and marketing 12.1 16.1 24.0 38.6
Research and
development, net 9.7 19.1 24.0 47.5
General and
administrative 13.6 16.6 24.9 32.6
Restructuring and
other charges
(note 4) - 119.0 - 119.0
---------------------------------------------------------------------
76.9 216.7 157.2 336.7
---------------------------------------------------------------------
Earnings (loss)
before under
noted items 19.9 (107.6) 38.2 (128.1)
Depreciation 5.4 6.3 11.1 13.1
Amortization
of intangibles 8.0 8.4 16.0 24.4
Interest income (4.8) (1.0) (8.5) (1.8)
Interest on
long-term debt 1.2 1.0 2.3 2.1
(Gain) loss on sale
of marketable
securities and
other assets (1.2) 0.2 (1.2) 0.2
Loss (gain) on
foreign exchange 0.7 (0.2) 0.7 -
Other 0.1 - (0.2) 0.1
---------------------------------------------------------------------
Income (loss)
before income taxes 10.5 (122.3) 18.0 (166.2)
Income taxes
Current 0.9 (0.8) 1.6 2.0
Future 3.7 (25.7) 5.7 (44.5)
---------------------------------------------------------------------
4.6 (26.5) 7.3 (42.5)
Net income (loss) 5.9 (95.8) 10.7 (123.7)
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic income (loss)
per share ($) 0.06 (0.94) 0.10 (1.22)
Diluted income
(loss) per share
($) (note 3) 0.06 (0.94) 0.10 (1.22)
Weighted average
number of shares
outstanding
used in computing
basic income
(loss) per
share 101,978,223 101,391,021 101,943,164 101,364,799
Weighted average
number of shares
outstanding
used in computing
diluted income
(loss) per
share 104,835,135 101,391,021 104,815,216 101,364,799
The accompanying notes are an integral part of the Interim
Consolidated Financial Statements.
Consolidated Statements of Deficit
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For the six For the six
month period month period
ended ended
(millions of Canadian dollars) June 30, 2003 June 30, 2002
---------------------------------------------------------------------
(unaudited) (unaudited)
Deficit - beginning of period (1,080.1) (786.4)
Adjustment related to the adoption
of new accounting recommendations
relating to goodwill and other
intangible assets (183.4)
Net income (loss) 10.7 (123.7)
---------------------------------------------------------------------
Deficit - end of period (1,069.4) (1,093.5)
---------------------------------------------------------------------
The accompanying notes are an integral part of the Interim
Consolidated Financial Statements.
Consolidated Balance Sheets
---------------------------------------------------------------------
As at As at
June 30, December 31,
(millions of Canadian dollars) 2003 2002
---------------------------------------------------------------------
(unaudited) (audited)
ASSETS
Current
Cash and cash equivalents 102.9 107.0
Accounts receivable 44.5 57.8
Future income taxes (note 7) 5.3 7.5
Other current assets 20.6 10.4
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173.3 182.7
Fixed assets 46.1 46.9
Intangible assets 65.2 87.0
Goodwill 253.1 291.2
Future income taxes 120.3 131.4
Other long-term assets 64.7 74.0
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722.7 813.2
---------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued
liabilities 101.2 120.2
Deferred revenue 11.9 22.1
Current portion of long-term debt 26.0 26.1
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139.1 168.4
Deferred credits and other 5.9 7.0
Long-term debt 32.8 35.9
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177.8 211.3
---------------------------------------------------------------------
SHAREHOLDERS' EQUITY (note 5)
Capital stock 1,562.6 1,562.6
Contributed surplus 64.2 64.2
Deficit (1,069.4) (1,080.1)
Foreign currency translation
adjustment (12.5) 55.2
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544.9 601.9
---------------------------------------------------------------------
722.7 813.2
---------------------------------------------------------------------
The accompanying notes are an integral part of the Interim
Consolidated Financial Statements.
Consolidated Statements of Cash Flows
---------------------------------------------------------------------
For the For the For the For the
three three six six
month month month month
period period period period
ended ended ended ended
(millions of Canadian June 30, June 30, June 30, June 30,
dollars) 2003 2002 2003 2002
---------------------------------------------------------------------
(unaudited)(unaudited)(unaudited)(unaudited)
Operating activities
Net income (loss) 5.9 (95.8) 10.7 (123.7)
Depreciation and
amortization 13.4 14.7 27.1 37.5
(Gain) loss on sale of
marketable securities and
other assets (1.2) 0.2 (1.2) 0.2
Future income taxes 3.7 (25.7) 5.7 (44.5)
Non-cash portion of
restructuring and other
charges (note 4) 0.4 67.2 0.4 67.2
Other (1.2) (0.7) (0.4) 0.1
Changes in working capital (14.9) 49.3 (24.0) 43.3
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Cash flows from (used for)
operating activities 6.1 9.2 18.3 (19.9)
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Investing activities
Additions to capital
assets (1.9) (3.3) (5.4) (8.4)
Acquisitions - (24.2) - (24.9)
Proceeds on sale of
marketable securities and
other assets 1.2 - 1.2 2.1
Loan receivable - 0.4 - 0.7
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Cash flows used for
investing activities (0.7) (27.1) (4.2) (30.5)
---------------------------------------------------------------------
Financing activities
Repayment of long-term
debt (6.6) (5.9) (12.7) (11.9)
Issue of common shares - - - 0.4
---------------------------------------------------------------------
Cash flows used for
financing activities (6.6) (5.9) (12.7) (11.5)
---------------------------------------------------------------------
Foreign exchange loss on
cash held in foreign
currencies (2.8) (0.4) (5.5) (0.4)
Cash and cash equivalents
Decrease (4.0) (24.2) (4.1) (62.3)
Balance, beginning of
period 106.9 145.2 107.0 183.3
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Balance, end of period 102.9 121.0 102.9 121.0
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Supplemental disclosure of
cash flow information
Interest paid 1.4 1.0 2.1 2.1
Income taxes paid 1.7 3.0 2.2 7.3
Non-cash investing and
financing activities
Additions to fixed and
intangible assets
financed 7.6 1.1 9.0 4.7
Common shares issued 2.5 - 2.5 -
The accompanying notes are an integral part of the Interim
Consolidated Financial Statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
As at June 30, 2003
(In millions of Canadian dollars except share data) (unaudited)
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, using the same accounting policies as were used for the consolidated financial statements for the year ended December 31, 2002, except as discussed below. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2002, as set out in the 2002 Annual Report.
1. Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements of BCE Emergis have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of all its subsidiaries. Certain prior period figures have been reclassified to conform with the current period's presentation.
Fixed assets
The Company reviewed the useful lives of certain of its fixed assets. As a result, effective January 1, 2003, the useful life of certain computer equipment and assets under capital lease have been extended from three years to a maximum of five years. This change in estimate has been accounted for prospectively since January 1, 2003 with no restatement of prior period amounts. The impact of this change in estimate resulted in a $0.5 million and $1.0 million reduction in depreciation expense for the three-month and six-month periods ended June 30, 2003, respectively.
Disclosure of Guarantees
Effective January 1, 2003, the Company adopted Accounting Guideline 14 (AcG-14) Disclosure of guarantees. The purpose of this Guideline is to improve the transparency of the guarantor's disclosures relating to obligations and risks arising from guarantees given regardless of whether it will have to make payments under the guarantees. Disclosure of this new accounting guideline has been provided in note 8 to the interim financial statements.
Disposal of long-lived assets and discontinued operations
Effective May 1, 2003, the Company adopted the requirements of the Canadian Institute of Chartered Accountants (CICA) Handbook, section 3475, Disposal of long-lived assets and discontinued operations. This section provides guidance on recognizing, measuring, presenting, and disclosing long-lived assets to be disposed of. This section also replaces the disposal provisions in Section 3061, Property, plant and equipment, and Section 3475, Discontinued operations. This section provides criteria for classifying assets as held for sale. It requires an asset classified as held for sale to be measured at its fair value less disposal costs. The section also provides criteria for classifying a disposal as a discontinued operation and specifies the presentation of and disclosures for discontinued operations and other disposals of long-lived assets. This section came into effect for disposal activities started on or after May 1, 2003. The adoption of these requirements had no impact on the interim financial statements.
Future accounting changes
The CICA issued new Handbook Section 3063, Impairment of long-lived assets. This section provides guidance on recognizing, measuring and disclosing the impairment of long-lived assets. This section also replaces the write-down provisions in Section 3061, Property, plant and equipment. Effective January 1, 2004, the Company will adopt the standard requiring the recognition of an impairment loss for a long-lived asset to be held and used when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. Management does not expect the adoption of this new standard to have a significant impact on the financial statements.
2. Stock-based Compensation
Effective January 1, 2002, the Company adopted the recommendations of CICA Handbook Section 3870, Stock-based compensation and other stock-based payments. This Section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services and applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock, stock options, or other equity instruments, or incurs liabilities based on the price of common stock or other equity instruments. This Section sets out a fair value based method of accounting and is required for certain stock-based transactions and applied to awards granted on or after January 1, 2002. In accordance with Handbook Section 3870, the Company has elected to continue to account for employee stock options by measuring compensation cost for these options as the excess, if any, of the quoted market price of the Company's common shares at the date of grant over the amount an employee must pay to acquire the common shares. The total number of outstanding stock options granted to employees and included in note 5 was 6,076,138 as at June 30, 2003.
The following outlines the impact and underlying assumptions had the Company used the fair value based method of accounting for awards granted on or after January 1, 2002 to determine the compensation cost for the Company's stock-based employee compensation plans.
For the three-month For the six-month
period period
ended June 30 ended June 30
2003 2002 2003 2002
-----------------------------------------------------------------
Net income (loss),
as reported ($ millions) 5.9 (95.8) 10.7 (123.7)
Adjustment to net income
(loss) ($ millions) (1.8) (3.7) (3.6) (4.1)
Pro forma net income (loss)
($ millions) 4.1 (99.5) 7.1 (127.8)
Pro forma basic and diluted
income (loss)
per share ($) 0.04 (0.98) 0.07 (1.26)
Assumptions used in the
Black-Scholes option
pricing model for
awards granted during
the period:
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected volatility 75.0% 89.4% 75.0% 96.7%
Risk-free interest rate 3.75% 4.11% 3.92% 4.46%
Expected life (years) 4 4 4 4
Weighted-average grant
date fair value ($) 4.35 17.42 4.39 20.12
3. Net income per share
The reconciliation of diluted income per share in the current
period is presented below:
For the three-month period
ended June 30, 2003
Net income Number of
($ millions) shares Per share
(numerator) (denominator) amount ($)
-----------------------------------------------------------------
Net income attributable to
common shareholders 5.9 101,978,223 0.06
Dilutive options 59,300
Dilutive common shares to be
issued related to acquisitions 2,797,612
Net income attributable to
common shareholders and
assumed conversions 5.9 104,835,135 0.06
For the six-month period
ended June 30, 2003
Net income Number of
($ millions) shares Per share
(numerator) (denominator) amount ($)
-----------------------------------------------------------------
Net income attributable to
common shareholders 10.7 101,943,164 0.10
Dilutive options 74,440
Dilutive common shares to be
issued related to acquisitions 2,797,612
Net income attributable to
common shareholders and
assumed conversions 10.7 104,815,216 0.10
For the following periods, no dilution impact was calculated due to
the net loss incurred in the period. The following securities were
excluded from the computation of dilutive net loss per share as
their effect would have been antidilutive. Such securities consist
of the following:
(number of shares) For the three-month For the six-month
period period
ended June 30, 2002 ended June 30, 2002
-------------------------------------------------------------------
Options 7,072,033 7,072,033
Warrants 1,650,000 1,650,000
Common shares to be issued
related to acquisitions 10,211,194 10,211,194
4. Restructuring and Other Charges
In April 2002, the Company announced its plan to focus on key growth areas, drive recurring revenue growth and streamline its service offerings and operating costs. Concurrent with the focus on key areas of growth, the Company developed a restructuring program to streamline its service offerings and reduce its operating cost structure. A review of the product suite identified services that were considered non-core and that the Company has exited or plans to exit. In addition, in light of the announcement, the Company re-evaluated the carrying value of certain assets. As at June 30, 2003 this restructuring process is complete. This review and evaluation resulted in a pre-tax charge to earnings totaling $116.8 million for the year ended December 31, 2002. The charge included restructuring charges totaling $92.5 million, and other charges (asset write-downs) totaling $24.3 million. Included in other charges was a write-down of the intangible asset related to the e-route acquisition in April, 2002. The restructuring charge included cash charges totaling $44.2 million and asset write-downs related to exited product lines in the amount of $48.3 million. The cash charge includes employee severance and other employee costs, contract settlements and costs related to leased premises no longer in use, net of recoveries.
As part of the restructuring, the net proceeds received from the sale of the assets of its news wire services (eNews) and proceeds received upon the liquidation of a company accounted for as a portfolio investment were recorded against restructuring charges.
Also, as part of the restructuring, the proceeds receivable on the sale of the assets of its Canadian medical management business (Assure Health Management) were recorded against the restructuring charge in June 2003. No gain or loss was recorded on the sale of these assets.
At June 30, 2003, the remaining unpaid balance of the restructuring provision was $12.9 million of which $8.3 million is included in accounts payable and accrued liabilities, and $4.6 million in deferred credits and other.
5. Equity Components
The stated capital stock as at June 30, 2003 is detailed as follows:
Options
Not issued issued
Issued and and not as part of
Number of fully paid fully paid acquisition
shares ($ millions) ($ millions) ($ millions)
--------------------------------------------------------------------
Balance at
January 1, 2003 101,896,418 1,514.0 34.0 14.6
Issue of common
shares (a) 2,938 - - -
Issue of common
shares (b) 319,672 2.5 (2.5) -
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--------------------------------------------------------------------
Balance at
June 30, 2003 102,219,028 1,516.5 31.5 14.6
(a) 2,938 stock options were exercised to purchase 2,938 common
shares for cash consideration of $21,888 thousand.
(b) During the period 319,672 common shares for a value of $2.5
million were issued representing the first instalment in
relation to the second of three anniversary payments relating
to the AHC acquisition in June 2001 as per a new agreement
entered into in June 2003. This new agreement splits the
second anniversary payment into 4 equal monthly instalments
which commenced in June 2003. All other conditions pertaining
to this new agreement have remained unchanged.
Stock option plans:
Stock option plans for common shares at
prices ranging from $0.44 to $172.80 per
share and expiry dates up to 2010 6,206,138 options
Warrants:
From time to time, the Company enters into formal business
arrangements for the use and distribution of certain technology
solutions with strategic partners. Under the terms of such
arrangements, the partners may acquire warrants to purchase shares of
the Company.
The following table summarizes warrant activity:
June 30, 2003 Number of Number of Exercise price of
warrants warrants warrants
outstanding(1) exercisable(1) exercisable
---------------------------------------------------------------------
Outstanding -
January 1, 2003 900,000 550,000 $59.20
Expiration of
Warrants (2) (250,000) (250,000) $73.55
Outstanding -
June 30, 2003 650,000 300,000 $47.24
(1) Warrants are convertible into common shares of the Company
on a 1:1 basis.
(2) The warrants granted to shareholders of a company in which BCE
Emergis had an investment accounted for as a portfolio
investment were extinguished due to the liquidation of this
company in 2002. The remaining 250,000 warrants expired during
the first quarter as a result of the termination of contractual
relationships with that company.
The non-exercised warrants will become exercisable upon the
attainment of certain contractual arrangements and the exercise price
will be determined at this time and expire on December 31, 2006. No
amount has been recorded in the financial statements as a result of
these arrangements.
6. Operating Segment Information
The Company focuses its activities in two business units (eHealth
Solutions and eFinance Solutions), offering a full suite of products
to companies in transaction-intensive, financial services and health
sectors. The following table shows the activities of each of the two
business units:
For the three-month period ended June 30 ($ millions)
eFinance Solutions eHealth Solutions Total
2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------
Revenues 64.4 65.5 59.6 76.4 124.0 141.9
Direct costs 17.9 22.9 9.3 9.9 27.2 32.8
---------------------------------------------------------------------
Gross margin 46.5 42.6 50.3 66.5 96.8 109.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as
at June 30 15.6 17.2 237.5 263.9 253.1 281.1
For the six-month period ended June 30 ($ millions)
eFinance Solutions eHealth Solutions Total
2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------
Revenues 126.0 130.4 122.1 143.5 248.1 273.9
Direct costs 33.9 46.7 18.8 18.6 52.7 65.3
---------------------------------------------------------------------
Gross margin 92.1 83.7 103.3 124.9 195.4 208.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill as
at June 30 15.6 17.2 237.5 263.9 253.1 281.1
The goodwill in 2002 was restated due to the transitional impairment
of $183.4 million charged to opening retained earnings in 2002.
There are no inter-segment transactions or significant differences
between segment and corporate accounting policies.
All of the Company's business units share in the use of its capital
asset infrastructure. As a result, the Company does not disclose a
measure of total assets by business unit. In addition, the asset
allocation is not used by the Company in its management reporting for
decision-making purposes.
Geographic information
The following table sets out certain geographical information
relative to the Company which differs from the business units of the
Company:
Three-month period ended Six-month period ended
June 30 June 30
Revenue ($ millions) 2003 2002 2003 2002
---------------------------------------------------------------------
Canada 68.1 84.8 135.7 163.1
United States 55.9 57.1 112.4 110.8
---------------------------------------------------------------------
Total 124.0 141.9 248.1 273.9
7. Related Party Information
The following transactions occurred in the normal course of
operations with BCE Inc., the parent company, and other companies in
the BCE group subject to common control during the respective periods
and were measured at the exchange value, which is the amount
established and agreed to by the related parties:
Three-month period ended Six-month period ended
June 30 ($ millions) June 30 ($ millions)
2003 2002 2003 2002
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue (a) 25.6 37.7 50.0 76.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Direct costs 16.7 21.2 33.3 44.7
Expenses 13.9 13.8 28.3 29.0
Interest income 4.2 - 7.3 -
(a) Includes services for resale to third parties and for internal
use.
As part of the extended exclusive distribution agreement signed in
2001 with Bell Canada, the Company derives revenue from Bell Canada
and directly from other customers with Bell Canada acting as an
agent. Included in related party revenue is the amount derived
directly from Bell Canada in the amount of $12.8 million
$(14.5 million) and $24.4 million $(33.6 million) for the three and
six-month periods ended June 30, 2003 (2002), respectively. Under
the distribution agreement the amount derived from other customers
with Bell Canada acting as an agent is $12.3 million $(17.1 million)
and $26.5 million $(33.1 million) for the three and six-month periods
ended June 30, 2003 (2002).
Included in direct costs and expenses is $20.9 million
$(26.4 million) and $42.5 $(55.3 million) for the three and six-month
periods ended June 30, 2003 (2002) related to the extended service
agreement signed with BCE Nexxia in 2001.
The balance sheet includes the following balances with BCE Inc. and
other companies in the BCE group subject to common control:
As at June 30, 2003 As at December 31, 2002
($ millions) ($ millions)
--------------------------------------------------------------------
Accounts receivable 12.6 28.1
Other current assets 7.3 -
Accounts payable and
accrued liabilities 51.1 53.7
Deferred revenue 8.1 6.2
Long term debt - 0.1
From time to time the Company undertakes short-term investments with BCE Inc., and other companies in the BCE group, in order to benefit from preferential interest rates. As at June 30, 2003 the Company had no amount invested with the BCE Group ($90.0 million, repayable on demand and bearing interest of Canadian prime less 1.85% as at June 30, 2002).
Tax loss monetization structure
As part of a tax loss consolidation strategy, the Company recorded accrued interest income of $13.9 million and $24.1 million for the three and six-month periods ended June 30, 2003. The Company also incurred accrued interest expense of $9.7 million and $16.8 million for the three and six-month periods ended June 30, 2003. For income tax purposes, the $13.9 million and $24.1 million of interest income for the three and six-month periods ended June 30, 2003 increase the taxable income of the Company and accelerate the use of the Company's tax attributes resulting in $4.3 million and $7.4 million reductions in future income tax assets in Canada for the three and six-month periods ended June 30, 2003.
The net interest amounts of $4.2 million and $7.3 million for the three and six-month periods ended June 30, 2003 have been recorded as interest revenue and are included in other current assets on the balance sheet. The accrued interest income and accrued interest expense are to be received and paid, respectively, on the last business day of February 2004.
The capital arrangements associated with the tax structure were initiated by the Company with a temporary loan of $1.0 billion from its banker. The funds were then advanced to Bell Canada through a subordinated demand loan at a rate of interest equal to 5.567%. The loan is unsecured and subordinated, is payable on demand and may be repaid at any time.
A wholly owned subsidiary of the Company then issued preferred shares to Bell Canada in exchange for $1.0 billion in cash. The preferred shares are non-voting, cumulative, redeemable and retractable at any time. They currently pay a dividend of 3.870% per annum. The interest rate on the loan to Bell Canada and the dividend rate on the preferred shares are reset at the beginning of each year. Subsequently, the wholly owned subsidiary loaned the preferred share issue proceeds of $1.0 billion to its parent company, on an interest-free basis. This loan is payable on demand and may be repaid at any time. The Company then repaid the temporary loan of $1.0 billion to its banker. Either party may terminate these agreements at any time.
The Company has the legal right to offset the demand loan receivable from Bell Canada against the preferred shares issued to Bell Canada and intends to do so. As a result, these items, as well as the related interest income and interest expense representing the dividend payable on the preferred shares have been presented on a net basis.
8. Guarantees
In the normal course of business, the Company enters into numerous agreements that may contain features that meet the AcG-14 definition of an indemnification and guarantees to counterparties in transactions such as business dispositions, the sale of assets, the sale of services and licenses.
These indemnification undertakings and guarantees may require the Company to compensate the counterparties for costs and losses incurred as a result of various events, including breaches of representations and warranties, intellectual property right infringement, valuation differences, claims that may arise while providing services, or as a result of litigation that may be suffered by the counterparties.
In the context of business dispositions or the sale of assets, the Company may from time to time agree to compensate the purchaser for the resolution of contingent liabilities of the disposed businesses or assets or the reassessment of prior tax filings of the corporations carrying on the business. The term and amount of such indemnification will generally be limited by the agreement. The maximum potential exposure, under these guarantees represented a cumulative amount of approximately $121.0 million. However, based on the Company's experience, the Company believes that any potential payment will not be significant.
During the course of our operations, the Company provides indemnification agreements to counterparties in transactions such as the sale of services, purchase and licenses. These indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of litigation claims or statutory sanctions or damages that may be suffered by the counterparty as a consequence of the agreement. The term of these indemnification agreements will vary based upon the contract. The nature of the indemnification agreements prevent the Company from making a reasonable estimate of the maximum potential amounts that the Company could be required to pay the counterparties. The amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant payments under such indemnification agreements.
FOR FURTHER INFORMATION PLEASE CONTACT:
BCE Emergis Inc. John Gutpell Investor Relations (514) 868-2232 john.gutpell@emergis.com
