Management’s Discussion and Analysis Financial and Capital Management Financial and Capital Management This section tells you how we manage our cash and  capital resources to carry  out our strategy and deliver financial results. It provides an analysis of our financial condition, cash flows  and liquidity on a consoli- dated basis. Our capital structure  shows how much of our  net assets are financed by debt and equity. Capital Structure Outstanding Share Data Cash Flows 60 Bell Canada Enterprises  2004 Annual Report We generated free cash flow for the year totalling  $898 million or $1,092 million before restructuring and other items. Compared to 2003, free cash flow was down $691 million, mainly reflecting the $449 million decline in cash from operating activities and higher capital expenditures of $197 million. We are targeting positive free cash flow generation in 2005, mainly from recurring sources. Beyond 2005, we anticipate generating higher sustainable free cash flow as we anticipate realizing the full benefit from our expected cost savings and reducing capital spending levels. the disposition of our 15.96% interest in MTS ($584 mil- lion), our 63.9% interest in Emergis ($315 million) and our remaining 3.24% interest in YPG ($123 million). These were partly offset by the $1.3 billion invested in business acquisitions in 2004. Non-controlling interest declined $489 million in 2004 due to Bell Canada’s purchase of MTS’ 40% interest in Bell West and the sale of our investment in Emergis. Net debt improved by $610 million to $12,705 mil- lion in 2004. This was mainly from: • $898 million of free cash flow in 2004 • approximately $1 billion of net cash proceeds from Our net debt to capitalization ratio was 42.8% at the end of 2004, an improvement from 44.0% at the end of 2003. This was a result of improvements in net debt and total shareholders’ equity, which was partly offset by lower non-controlling interest. Starting in 2004, most of the stock options granted contain specific performance targets that must be met before the option can be exercised. The number of stock options outstanding at the end of 2004 was 28.5 million, an increase of 2.7 mil- lion over 2003. The weighted average exercise price of the stock options outstanding at December 31, 2004 was $32. Of the total outstanding stock options at December 31, 2004, 14.6 million were exercisable at a weighted average exercise price of $34. In 2004: We had 925.9 million common shares outstanding at the end of 2004, an increase of 1.9 million over 2003. The increase was entirely from the exercise of stock options in 2004. Total shareholders’ equity increased $459 million  to $14,032 million in 2004. This was mainly due to the $413 million of net earnings remaining after the dividends we declared on common and preferred shares in 2004. Capital Structure AT DECEMBER 31 2004 2003 Debt due within one year 1,276  1,519  Long-term debt 11,809  12,381  Less: cash and cash equivalents (380) (585) Total net debt 12,705  13,315  Non-controlling interest 2,914  3,403  Total shareholders’ equity 14,032  13,573  Total capitalization 29,651  30,291  Net debt to capitalization 42.8% 44.0% Outstanding share data (in millions) Common shares 925.9 924.0  Stock options 28.5 25.8 Net Debt to Capitalization Ratio 03 04 0 12,705 13,315 44.0% 42.8% Net debt Net debt to capitalization ratio NET DEBT • 5.9 million stock options were granted • 2 million of previously granted options were exercised • 1.2 million of previously granted options expired or were forfeited. 03 04 0 1,589 5,968 5,519 Free cash flow Cash from operating activities FREE CASH FLOW 898