##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 20-F
 REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934   For the fiscal year ended December 31, 2003 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from            to COMMISSION FILE NUMBER: 0-25626 COUNSEL CORPORATION
  PROVINCE OF ONTARIO, CANADA  EXCHANGE TOWER, SUITE 1300
130 KING STREET WEST, TORONTO, ONTARIO M5X 1E3
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Securities registered or to be registered pursuant to Section 12 (b) of the
Act: None Securities registered or to be registered or to be registered pursuant to
Section 12 (g) of the Act: Common Shares without par value
(Title of Class) Securities for which there is a reporting obligation pursuant to section 15 (d)
of the Act: None The number of outstanding shares of each of the issuers classes of capital or
common stock as of December 31, 2003 was 48,587,262 Common Shares. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
    
    X
    
    No
 Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17
    
    Item 18 X
 Page 1




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TABLE OF CONTENTS PagePART I
    
    
    3Item 1: Identity of Directors, Senior Management and
Advisers
    
    
    3Item 2: Offer Statistics and Expected
Timetable
    
    
    3Item 3: Key
Information
    
    
    3Item 4: Information on the Company
    
    
    11Item 5: Operating and Financial Review and Prospects
    
    
    24Item 6: Directors, Senior Management and Employees
    
    
    45Item 7: Major Shareholders and Related Party
Transactions
    
    
    55Item 8: Financial
Information
    
    
    57Item 9: The Offer and
Listing
    
    
    59Item 10: Additional
Information
    
    
    60Item 11: Quantitative and Qualitative Disclosures about Market
Risk
    
    
    67Item 12: Description of Securities Other than Equity
Securities
    
    
    68PART II
    
    
    69Item 13: Defaults, Dividend Arrearages and
Delinquencies
    
    
    69Item 14: Material Modifications to the Rights of Security Holders and Use of
Proceeds
    
    
    69Item 15: Controls and
Procedures
    
    
    69Item 16A: Audit Committee Financial
Expert
    
    
    73Item 16B: Code of
Ethics
    
    
    73Item 16C: Principal Accountant Fees and
Services
    
    
    74PART III
    
    
    80Item 17: Financial Statements
    
    
    80Item 18: Financial Statements
    
    
    80Item 19: Exhibits
    
    
    80
 Page 2




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PART I Unless the context otherwise requires, references herein to the Company, the
Corporation or to Counsel are to Counsel Corporation and its consolidated
subsidiaries. All amounts are indicated in thousands of US dollars, except for per share
information, unless otherwise indicated. NOTE REGARDING FORWARD LOOKING STATEMENTS This document contains forward-looking statements that involve risks and
uncertainties. These statements can be identified by the use of forward-looking
terminology such as may, will, expect, anticipate, estimate,
plans, continue, or the negative thereof or other variations thereon or
comparable terminology referring to future events or results. The Companys
actual results could differ materially from those anticipated in these
forward-looking statements as a result of numerous factors. These factors
include, without limitation, the timing of acquisitions and expansion
opportunities, technological change and changes to the business environment
that may impact the Companys capital expenditures and competitive factors that
may impact revenue and operating costs and alter the timing and amount of the
Companys capital expenditures. Any of these factors could cause actual results
to vary materially from current results or the Companys currently anticipated
future results and financial position. The Company wishes to caution readers
not to place undue reliance on such forward-looking statements that speak only
as of the date this annual report was first filed with the Securities and
Exchange Commission. Additional information concerning factors that may cause
actual results to materially differ from those in such forward-looking
statements is contained in Item 3. Key Information  Risk Factors. ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3: KEY INFORMATION A. SELECTED FINANCIAL DATA The following table presents selected financial data for the Company for
the years ended, or as at, December 31 indicated below. The Companys reporting
currency is the US dollar. This data is derived from the consolidated financial
statements of the Company included in this annual report under Item 18, as well
as from previously published annual reports, which are prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) and
which are reconciled to accounting principles generally accepted in the United
States (U.S. GAAP) in note 26 of the Companys consolidated financial
statements. The selected financial data should be read in conjunction with the
Companys consolidated financial statements and notes thereto and the Companys
Operating and Financial Review and Prospects set forth under Item 5. Page 3




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2003
    
    2002
    
    2001
    
    2000
    
    1999$
     
    $
     
    $
     
    $
     
    $Operating revenues
    
    
    143,711
    
    
    
    91,432
    
    
    
    54,030
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )
    
    
    (7,791
    )
    
    
    (88,253
    )Earnings (loss) from discontinued operations
    
    
    (636
    )
    
    
    (18,949
    )
    
    
    (23,889
    )
    
    
    (37,642
    )
    
    
    136,451Net earnings (loss)
    
    
    (22,260
    )
    
    
    (28,931
    )
    
    
    (62,213
    )
    
    
    (45,433
    )
    
    
    48,198Earnings (loss) per common share  basic and dilutedLoss from continuing operations
    
    
    (0.94
    )
    
    
    (0.59
    )
    
    
    (1.80
    )
    
    
    (0.43
    )
    
    
    (3.47
    )Earnings (loss) from discontinued operations
    
    
    (0.02
    )
    
    
    (0.85
    )
    
    
    (1.04
    )
    
    
    (1.52
    )
    
    
    5.21Net earnings (loss)
    
    
    (0.96
    )
    
    
    (1.44
    )
    
    
    (2.84
    )
    
    
    (1.95
    )
    
    
    1.74Total assets
    
    
    143,589
    
    
    
    134,714
    
    
    
    142,322
    
    
    
    228,863
    
    
    
    278,890Net assets
    
    
    (13,084
    )
    
    
    4,884
    
    
    
    35,494
    
    
    
    104,503
    
    
    
    156,725Capital stock
    
    
    134,142
    
    
    
    99,434
    
    
    
    102,852
    
    
    
    109,452
    
    
    
    116,251Number of common shares outstanding (in thousands)
    
    
    48,587
    
    
    
    21,745
    
    
    
    22,493
    
    
    
    23,937
    
    
    
    25,533Dividends per share
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.07
    
    
    
    1.01
 B. CAPITALIZATION AND INDEBTEDNESS: Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS: Not applicable. D. RISK FACTORS The following important factors, among others, could cause the Companys
actual results to differ materially from those anticipated in forward-looking
statements made in this annual report or presented elsewhere by management from
time to time. To fully appreciate the risk factors, the reader is encouraged to
read this document in full. Keep Well for Acceris (91% held investment; 100% consolidated) Counsel has agreed to fund through long-term inter-company advances or
equity contributions, all capital investment, working capital or other
operational cash requirements of a major subsidiary, Acceris Communications
Inc. (Acceris), (the Keep Well). The Keep Well obligates Counsel to
continue its financial support of Acceris through June 30, 2005. During 2003,
Counsel advanced Acceris approximately $7,896 under its Keep Well, converted
approximately $5,667 of accrued interest into principal and converted $40,673
of existing loans receivable from Acceris into equity in Acceris, increasing
its ownership of Acceris from 70% to 91%. In 2004, Acceris intends to approach
the capital markets directly to raise funds. Should this not occur, Acceris
will call upon the Keep Well. At December 31, 2003, Counsel had $19,377 in
cash and equivalents and short-term investments to support any requirements
under the Keep Well. Counsel also has the ability to obtain additional
financing on its existing assets, including but not limited to its 91% equity
interest in Acceris and loans receivable from Acceris, as well as its long-term
care, real estate and other corporate assets. While management believes that
the Company will be able to meet its commitments, the possibility exists that
unforeseen events, adverse business conditions, or other factors could affect
the Companys liquidity. If such events or conditions occur, management
believes the Company could pursue alternative plans. However, there can be no
assurance that such alternatives will be available or that management will be
successful in their implementation. Page 4




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Credit risk The Companys financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, accounts receivable and loans
receivable. Cash and cash equivalents are on deposit at major financial
institutions. The Companys communications customers are generally concentrated
in areas of highest population in the United States, more specifically
California, Florida, New York, Texas and Illinois. No single customer accounted
for over 10% of revenues in 2003 or 2002. An allowance for doubtful accounts is
established based upon the overall credit worthiness of specific customers. Interest rate risk Interest rate risk arises due to the exposure to the effects of future
changes in the prevailing level of interest rates. The Company is exposed to
interest rate risk arising from fluctuations in interest rates primarily on its
revolving credit facility, and on its mortgages, which are dependent on
prevailing rates at renewal. Market value risk The Companys business model for the real estate segment involves the
leveraging of acquired assets with third party debt, normally in the form of
mortgages. The debt level attributed to a particular property is normally
determined as a percentage of market value for the asset at the time the asset
is leveraged up. Should market values decline for a particular property, the
ability of the Company to replace the debt at renewal at previous levels and on
favourable terms could be in doubt. Foreign exchange risk Foreign exchange risk arises to the extent of net assets invested in
Canadian dollars and operations derived from those Canadian dollar investments.
The Company does not attempt to hedge its net asset investment in Canadian
dollars. The consolidated financial statements are expressed in U.S. dollars as
it is the currency of the primary economic environment in which the Company
conducts its operations. In addition, Counsel has a number of self-sustaining operations, the
disposal of which could result in the recognition of deferred exchange gains or
losses. Acquisitions and integration Counsel pursues a strategy of acquiring businesses in order to achieve
growth, scale and, ultimately, profitability. If Counsel is unable to find
suitable acquisitions or the funding to complete them, the Company may not
realize its strategic goals. Likewise, the speed and effectiveness with which
the Company is able to integrate acquired companies into existing businesses
and realize anticipated synergies could have a significant short-term impact on
profitability. Disposition of investments An integral part of Counsels strategy is the ability to sell acquired
businesses once a targeted level of growth has been achieved. There can be no
guarantee that Counsel will be able to find a buyer once a decision to sell has
been made. Changes in capital markets, economic environments and other factors
could delay a sale or substantially reduce the planned selling price, thereby
reducing profitability and planned sources of future funding. Volatile telecommunications market During the last several years, the telecommunications industry has been
very volatile as a result of over capacity, which has led to price erosion and
bankruptcies. If the Company cannot control subscriber and customer attrition
through maintaining competitive services and pricing, revenue could decrease
significantly. Likewise, by maintaining competitive pricing policies, the
revenue per minute earned by the Company may decrease significantly. Both
scenarios could result in the Company not meeting profitability targets. Page 5




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Telecommunications growth Acceris is a growing business that faces several challenges, especially
when compared to larger companies in the same business, including:  
    
    a small management team  
    
    limited capital and financial resources  
    
    its small size  
    
    a small market share All these factors might make Acceris unable to compete with larger, older,
better capitalized businesses. In order to increase Acceris subscribers, Acceris must be able to replace
terminating subscribers and attract new subscribers. However, the sales and
marketing expenses and other subscriber costs associated with attracting new
subscribers are substantial. Acceris ability to improve or maintain operating
margins will depend on the ability to retain and attract new subscribers. While
Acceris continues to invest resources in the telecommunications infrastructure,
customer support resources, sales and marketing expenses and subscriber
acquisition costs, Acceris future efforts might not improve subscriber
retention or acquisition. Telecommunications expansion strategy Acceris ability to develop and implement an expansion strategy, manage
the same and respond to growth will be critical to Acceris success. To
accomplish growth strategy, Acceris will be required to invest additional
capital and resources and expand its geographic markets. Acceris cannot provide
assurance that they will be successful in developing, implementing or managing
any such growth strategies. If Acceris is successful in its growth strategy,
there will be additional demands on their customer support, marketing,
administrative and other resources. There can be no assurance Acceris will be
able to manage expanding operations effectively or that Acceris will be able to
maintain or accelerate the rate of growth. New telecommunications product and service offerings as well as new markets From time to time the Company introduces new products and services or
expands previous product and service offerings to the existing and target
markets. For instance, in the fourth quarter of 2003 Acceris announced the
introduction of local exchange service under the terms of the Unbundled Network
Element Platform authorized by the Telecommunications Act of 1996. Acceris
prospects must therefore be considered in light of the risks, expenses,
problems and delays inherent in establishing new lines of business in a rapidly
changing industry. Although the Company believes it can successfully
differentiate its product and service offerings from others in the marketplace,
the Company must be able to compete against other companies who may already be
established in the marketplace and have greater resources. There can be no
assurance the Company will be successful in adding products or services or
expanding into new markets or that its administrative, operational,
infrastructure and financial resources and systems will be adequate to
accommodate such offerings or expansion. Telecommunications independent agents The Companys market penetration primarily reflects the marketing, sales
and customer service activities of its independent agents, who market Acceris
products and services on a commission basis. The use of these agents exposes
the Company to significant risks, including the fact that the Company depends
on the continued viability, loyalty and financial stability of these agents.
The Companys future success depends in large part on the ability to recruit,
maintain and motivate these agents. The Company is subject to competition in
the recruiting of agents from other organizations that use agents to market
their products and services, including those that market telecommunications
services. Because of the number of factors that affect the recruiting,
performance and viability of these agents and Acceris relationship with the
agents, the Company cannot predict when or to what extent Acceris will be able
to continue to recruit, maintain and motivate agents effectively, nor can the Company predict the
difficulties or costs associated with terminating any of these agency
relationships. Page 6




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Telecommunications lines The Company uses other companies to provide data communications capacity
via leased telecommunications lines and services to and from geographic areas
that are not covered by our own network. MCI, Verizon, AT&T, Global Crossing,
Qwest and other regional companies provide significant portions of the leased
telecommunications lines and services that Acceris uses. If any of these
suppliers were unable or unwilling to provide or expand their current levels of
service to Acceris in the future, the services the Company offers to its
subscribers would be affected. Although leased telecommunications lines are
available from several alternative suppliers, the Company might not be able to
obtain substitute services from other providers at reasonable or comparable
prices or in a timely fashion. Significant interruptions of its
telecommunications services might occur in the future, and it might not be able
to provide the level of service it currently offers. Changes in tariffs,
regulations, or policies by any of its telecommunications providers might limit
or eliminate its ability to continue to offer long-distance or local dial tone
service on commercially reasonable or profitable terms. Telecommunications billing, collection and network services The Company utilizes the services of certain competitive local exchange
carriers (CLECs) to bill and collect from customers for a significant portion
of its revenues. If the CLECs were unwilling or unable to provide such services
in the future, the Company would be required to significantly enhance its
billing and collection capabilities in a short amount of time and the Companys
collection experience could be adversely affected during this transition
period. If the CLECs were unable to remit payments received from their
customers relating to Acceris billings, the Companys operations and cash
position could be adversely affected. Management believes the Company has
strong business relationships with the CLECs. The Company depends on certain large telecommunications carriers to
provide network services for significant portions of Acceris
telecommunications traffic. If these carriers were unwilling or unable to
provide such services in the future, the Companys ability to provide services
to customers would be adversely affected and the Company might not be able to
obtain similar services from alternative carriers on a timely basis. Management
believes the Company has strong business relationships with its important
carriers. Telecommunications enterprise billing The retail segment of Acceris relies on an enterprise billing solution to
bill customers. If that technology failed to operate as expected, there is a
risk that revenue could be lost or customers could be billed incorrectly. Telecommunications trends The market for telecommunications services is extremely competitive. To
be competitive and meet changing customer requirements, the Company must be
attentive and responsive to rapidly changing technology, evolving industry
standards, emerging competition and frequent new software and services
introductions. Technology changes A portion of the communications business is built on the licensing of
certain technology. New technologies may emerge that would make the Companys
product offering obsolete without the pursuit of technological advances that
would require substantial time and expense and may not succeed in adapting the
Companys technology offering to new or alternate technologies. In addition,
there may be other businesses that are attempting to introduce products similar
to those the Company offers or plans to offer for the transmission of business
information over the Internet. The Company might not be able to successfully
compete with these market participants. The Company must continue to have up to date technology and be attentive
to general economic trends in order to compete in the communications services
industry. Page 7




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Government regulation The telecommunications industry is subject to government regulation at
federal, state and local levels. Any change in current government regulation
regarding telecommunications pricing, system access, consumer protection, or
other relevant legislation could have a material impact on the results of
operations. Most of the Companys current operations are subject to regulation
by the Federal Communications Commission FCC under the Communications Act of
1934. In addition, certain of the Companys operations are subject to
regulation by state public service commissions. Changes in the regulation of,
or the enactment of changes in interpretation of, legislation affecting the
Company could damage its operations and lower the price of its common stock. Through the Telecommunications Act of 1996, Congress sought to establish a
competitive and deregulated national policy framework for advanced
telecommunications and information technologies. To date, local exchange
competition has not progressed to a point where significant regulatory
intervention is no longer required. Regulators believed that a hands-off
policy would drive local exchange service into an adequately competitive
market, but there continues to be a strong need for policy issue clarification
and construction. Some policy changes have been addressed through the court
system, not the regulatory system. For instance, the FCC has attempted several
times to develop a list of Unbundled Network Elements (UNEs), which are
portions of the incumbent local exchange carriers (ILECs) networks and
services that must be sold separately to competitors. On several occasions,
the courts have rejected the FCCs approach to defining UNEs. The FCCs most
recent attempt to develop rules, the Triennial Review Order, was vacated by the
U.S. Circuit Court of Appeals in Washington D.C. on March 4, 2004. The
inability to purchase UNEs could increase the Companys costs for providing
local service, or prevent the Company from providing the service altogether. The Telecommunications Act, among other things, allows the Regional Bell
Operating Companies and others to enter the long-distance business. Entry of
the Regional Bell Operating Companies and other entities, such as electric
utilities and cable television companies, into the long-distance business may
have a negative impact on the Company or its customers. The Company
anticipates that some of these entrants will prove to be strong competitors
because they are better capitalized, already have substantial customer bases,
and enjoy cost advantages relating to local telecom lines and access charges.
This could adversely impact the results of the Companys operations, which
could have a negative impact on the Companys common stock. In addition, the
Telecommunications Act provides that state proceedings may, in certain
instances, determine access charges that the Company is required to pay to the
local exchange carriers. If the proceedings occur, rates could increase, which
could lead to a loss of customers, weaker operating results and a lower price
of the Companys common stock. Recent legislation in the U.S. (the Sarbanes-Oxley Act of 2002) is
increasing the scope and cost of work provided to the Company by its auditors
and legal advisors. Many guidelines have not yet been finalized and there is a
risk that the Company will incur significant costs in the future in order to
comply with legislative requirements, thereby reducing profitability. Real Property Ownership All real property investments are subject to elements of risk. Such
investments are affected by general economic conditions, local real estate
markets, supply and demand for commercial premises, competition from other
available premises and various other factors. The value of real property and any improvements thereto may also depend on
the credit and financial stability of the tenants. The Companys cash flow
from operating activities would be adversely affected if a significant number
of tenants were to become unable to meet their obligations under their leases
or if a significant amount of available space in the properties in which the
Company were to have an interest were not able to be leased on economically
favourable lease terms. Upon the expiry of any lease, there can be no
assurance that the lease will be renewed or the tenant replaced. The terms of
any subsequent lease may be less favourable to the Company than the existing
lease. In the event of default or limitations in enforcing rights as lessor
may be experienced and substantial costs may be incurred in protecting the
Companys investment. Furthermore, at any time, a tenant of any of the
Companys properties may seek the protection of bankruptcy, insolvency or similar laws that could result
in the rejection and termination of such tenants lease and thereby cause a
reduction in the cash flow available to the Company. The ability to rent
unleased space in the properties in which the Company has an interest will be
affected by many factors. Costs may be incurred in making improvements or
repairs to property required by a new tenant. The failure to rent unleased
space on a timely basis or at all would likely have an adverse effect on the
Companys financial condition. The Companys income Page 8




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producing properties have a
relatively high level of occupancy with exposure to lease expiries in the near
term being low. As such, the Company believes that the net rental income from
its income producing properties, absent any bankruptcy of a tenant, is stable
in the near term. Certain significant expenditures, including property taxes, maintenance
costs, mortgage payments, insurance costs and related charges must be made
throughout the period of ownership of real property regardless of whether the
property is producing income. As well, if the Company is unable to meet
mortgage payments on any property, losses could be sustained as a result of the
mortgagees exercise of its right of foreclosure or sale. The Company is
subject to the risks associated with debt financing, including the risk that
its mortgages will not be refinanced or that the terms of such refinancing will
not be as favourable as the terms of existing indebtedness The real estate business is competitive. Numerous other developers,
managers and owners of commercial properties compete with the Company in
seeking tenants and prospective purchasers for its non-strategic properties.
Some of the properties owned by the Companys competitors are newer or better
located or less leveraged than the Companys properties. Some of the Companys
competitors are better capitalized and stronger financially and hence better
able to withstand an economic downturn. The existence of competing developers
and owners and competition for the Companys tenants could have an adverse
effect the Companys revenues and its ability to meet its debt obligations. Key employees The Company has certain employees that it considers to be key. Many of
these employees are involved in executing the strategy for the planned results
discussed above. If these key employees cease to be employed with Counsel,
planned results could be delayed or might not materialize. The Company
mitigates this risk through the use of employment contracts, the formalization
of the Companys strategy and business plans, and by ensuring the existence of
timely knowledge exchange and collaboration. Income tax loss carry forwards Restrictions in the Companys ability to utilize income tax loss carry
forwards have occurred in the past due to the application of certain change in
ownership tax rules in the United States. There is no certainty that the
application of these rules may not reoccur resulting in further restrictions on
its income tax loss carry forwards existing at a particular time. Any such
additional limitations could require the Company to pay income taxes in the
future and record an income tax expense to the extent of such liability. The Company could be liable for income taxes on an overall basis while
having unutilized tax loss carry forwards since these losses may be applicable
to one jurisdiction and or particular line of business while earnings may be
applicable to a different jurisdiction and or line of business. Additionally,
income tax loss carry forwards may expire before the Company has the ability to
utilize such losses in a particular jurisdiction and there is no certainty that
current income tax rates will remain in effect at the time when the Company has
the opportunity to utilize reported tax loss carry forwards. Litigation and insurance The Company, from time to time, is involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. The
Company is not aware of any pending or threatened proceedings that would have a
material adverse effect on the consolidated financial condition or future
results of the Company. Counsel maintains insurance coverage that includes liability coverage to
protect the Company from claims made against it. Recent events have made
liability insurance more expensive while at the same time have reduced the
scope of coverage. The Companys ability to maintain adequate insurance
coverage at a reasonable cost may be impacted by market conditions beyond the
control of the Company. Terrorist attacks or acts of war Page 9




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##### 



Terrorist attacks or acts of war may cause damage or disruption to the
Companys operations, its employees, its facilities and its customers, which
could significantly impact its revenues, costs and expenses, and financial
condition. The terrorist attacks that took place in the United States on
September 11, 2001 were unprecedented events that have created many economic
and political uncertainties, some of which may materially adversely affect the
Companys business, results of operations, and financial condition. The
potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility have created
many economic and political uncertainties, which could materially adversely
affect the Companys business, results of operations, and financial condition
in ways that management currently cannot predict. Page 10




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ITEM 4: INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY 421367 Ontario Limited, the predecessor to Counsel Corporation, was
incorporated under the laws of the province of Ontario by Articles of
Incorporation dated August 2, 1979. It changed its name to Counsel Financial
Services Limited by Articles of Amendment effective October 26, 1979, and
changed its name to Counsel Trustco Corporation by Articles of Amendment
effective July 15, 1982. The corporation amalgamated with its wholly owned
subsidiary, 475848 Ontario Limited (formerly Counsel Management Limited), by
Articles of Amalgamation effective December 31, 1984. By Articles of
Amendment, effective May 22, 1986, the Corporation changed its name to Counsel
Corporation. By Articles of Amendment, effective May 5, 1987, the Corporation
subdivided each of its issued and unissued common shares on a 3 for 2 basis.
The corporation amalgamated with its wholly owned subsidiary, Counsel
Healthcare Assets Inc., by Articles of Amalgamation effective December 31, 1998
(the amalgamated corporation is hereinafter referred to as Counsel or  the
Company or the Corporation). By Articles of Amendment effective June 9,
1999, the Corporation simplified its capital structure by replacing its
authorized classes and series of preferred shares with one class of preferred
shares, none of which are currently outstanding, and by changing the authorized
number of its common shares to an unlimited number. By Articles of Amendment
effective December 19, 2003, the Corporation was authorized to issue, as a
series of preferred shares, 12 million shares designated as Preferred Shares,
Series A, which are convertible into common shares on a one-for-one basis and
are entitled to vote on an as converted basis, together with the holders of
common shares, on all matters submitted to a vote of shareholders. The registered and principal office of the Corporation is located at
Exchange Tower, Suite 1300, 130 King Street West, Toronto, Ontario, M5X 1E3,
and its telephone number is (416) 866-3000. The following chart indicates the principal subsidiaries of the
Corporation, their jurisdiction of incorporation and the percentage of voting
securities thereof which are owned directly or indirectly by the Corporation as
at December 31, 2003: (Counsel Corporation Chart) The Corporation is a diversified company engaged primarily in the
ownership and development of companies that provide services and products in
the United States and Canada. In 2003 and 2002, the Corporation focused on Page 11




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acquiring and building businesses in two specific sectors: communications in
the United States and real estate in Canada. In 2001, the Corporation was also
engaged in the medical products, technology services and long-term care
sectors. In June 1998, the Corporation acquired a 61% interest in Sage BioPharma,
Inc. (Sage), which was engaged in providing hormonal therapy products in the
United States. In November 1998, the Corporation completed the acquisition of
an 82.5% interest in FARO Pharmaceuticals, Inc. (FARO), which was focused on
the market for below threshold drugs  specific drugs with less than
approximately US$50 million in annual sales that larger drug companies do not
have the inclination to promote. Sage and FARO were merged on December 31,
1999. The merged company was continued as FARO Pharmaceuticals, Inc. with
Counsel owning 78.3% of the combined company. In the second quarter of 2000
Counsel adopted a plan to dispose of FAROs pharmaceutical products business,
and this was accomplished on April 30, 2001 with the sale of the assets related
to this business. In November 2001, the Corporation acquired the FARO shares
held by FAROs minority shareholders, which resulted in its interest in Sage
increasing to 90.4%. During the third quarter of 2002, the Corporation adopted
a formal plan of disposal for its medical products business segment and,
effective October 4, 2002, disposed of its interest in Sage. In October 1999, Counsel entered the technology sector through the
acquisition of a 25.2% interest in Impower, Inc. (Impower), which was
increased to 33.6% during 2000. Impower, a private company, provides
transaction-based Internet direct marketing and electronic database management
products and services. In 2000 Counsel continued to expand in the technology
sector with the acquisition of: a 28.5% interest in Proscape Technologies, Inc.
(Proscape), which was increased to 36% during that year; a 26% interest in
IBT Technologies, Inc. (IBT) which was increased to 27.7% during that year;
and a 22.5% interest in Core Communications Corporation (Core), which was
diluted to 12.9% during that year, and which has subsequently been diluted to
approximately 5%. Proscape, a private company, develops, markets and supports
marketing and sales information software systems for middle market and Fortune
1000 companies. IBT, a private company, is an application service provider that
developed, deployed and supported media-rich e-learning products and services
delivered over the Internet for business training and post-secondary
educational applications. Core, a private company, provides managed network
services for high-speed data communications in hotel and convention meeting
spaces. In February 2001, the Corporation increased its ownership of Proscape
from 36.0% to 56.5% for US$2.9 million. In the fourth quarter of 2001 the
Corporation decided to cease further funding of Proscape and, consequently,
Proscape has made alternative arrangements for funding which has reduced the
Companys interest to below 20% (currently approximately 9%). In August 2001,
Impower made a voluntary filing under Chapter 11 of the U.S. bankruptcy
legislation to seek protection from its creditors. Impower was reorganized and
emerged from Chapter 11 in 2002, resulting in the Corporation receiving a 17.5%
fully diluted interest in Impower as well as US$550,000 of preferred stock.
The Company disposed of its interest in Impower in 2003. The Corporation
increased its interest in IBT from 27.7% to 49.5% as a result of investments of
US$1.8 million and US$0.7 million in May and September 2001, respectively. In
December 2001, IBT made a voluntary filing under Chapter 7 of the U.S.
bankruptcy legislation and the Corporation has written off its entire equity
investment in IBT. In 2002, the Corporation decided to cease further
investment in the technology sector and no longer has any significant influence
with respect to Core, Proscape and Impower. Consequently, its interests in
these companies are classified as portfolio investments on its consolidated
balance sheet. In the long-term care sector as of December 31, 2003, the Corporation
leased and operated seven nursing homes in Canada and owned three (six in 2000)
nursing homes in the United States and five retirement centres in Canada. In
September 2001, the Corporations three nursing homes in Florida were sold for
gross proceeds of US$7.0 million, resulting in a pre-tax gain of US$3.4
million. During the fourth quarter of 2002, the Corporation adopted a formal
plan of disposal for its long-term care facilities. In October 2003, the
Company received notices of intent from the lessee of its five retirement
centers in Canada to exercise options to purchase the centers. The total
purchase price pursuant to the options is Cdn $30.0 million, before costs of
disposition, and the transaction closed in the second quarter of 2004. At
December 31, 2003, the centres had a net asset value of Cdn $22.2 million and
were subject to mortgages aggregating Cdn $18.2 million. The remaining seniors
living facilities are expected to be sold by the fourth quarter of 2004. In February 2000, Counsel formed Counsel Communications LLC (Counsel
Communications) to focus on acquiring, consolidating and operating Internet
telephony and other telecommunications-related businesses. In February
2001, Counsel Communications acquired Nexbell Communications Inc.
(Nexbell), a packet telephony infrastructure provider that deployed a network
of points of presence to deliver Internet protocol (IP) voice and fax
services. On March 1, 2001, Counsel Communications acquired a 65% interest in
I-Link Incorporated (I-Link), a publicly traded Page 12




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provider of enhanced IP voice
and data communications services. On April 17, 2001, this interest was
increased to approximately 70% when I-Link acquired Nexbell in a stock for
stock transaction. In December 2001, Nexbell was sold to an unrelated party.
I-Link changed its name to Acceris Communications Inc. (Acceris) in 2003. In June 2001, Acceris entered the dial-around long distance business
through WorldxChange Corp. (WorldxChange), a wholly owned subsidiary.
WorldxChange purchased certain assets and assumed certain liabilities of
WorldxChange Communications, Inc. from a bankruptcy proceeding. WorldxChange
is a facilities-based telecommunications carrier that provides international
and domestic long-distance service to retail customers. Telecommunication
services provided by WorldxChange initially consisted primarily of a
dial-around product that allows a customer to make a call from any phone by
dialing a 10-10-XXX prefix. Historically, WorldxChange marketed its services
through consumer mass marketing techniques, including direct mail and direct
response television and radio. In 2002, WorldxChange amended its channel
strategy, de-emphasized the direct mail channel and devoted its efforts to
pursuing more profitable methods of attracting and retaining customers.
Currently, WorldxChange utilizes commercial agents, as well as a network of
independent commission agents recruited through its multi-level marketing
(MLM) programs, to attract and retain customers. Independent agents are
non-employee sales people who market and sell Acceris products and services and
are compensated through commissions and other incentives. MLM programs provide
incentives to current customers who sign up new subscribers. Effective November 1, 2001, Counsel Communications acquired Springwell
Capital Partners, LLC, a merchant banking firm specializing in the
communications industry, which reduced the Companys interest in Counsel
Communications to 88.3%. At the same time, Counsel Communications was renamed
Counsel Springwell Communications, LLC (Counsel Springwell). In the fourth
quarter of 2002 the Corporation ended its affiliation with Springwell Capital
Partners, LLC and, effective January 2, 2003, acquired the minority interest in
Counsel Springwell, which was renamed Counsel Communications LLC. On December 6, 2002, Acceris entered into an agreement to sell
substantially all of the assets and customer base of I-Link Communications Inc.
(ILC), a wholly owned subsidiary, to Buyers United Inc (BUI). The sale
included the physical assets required to operate Acceris nationwide network
using patented voice over IP (VoIP) technology (constituting the core
business of ILC) and a non-exclusive license in perpetuity to use Acceris
proprietary software platform. The sale closed on May 1, 2003. The sale of the
ILC business removed essentially all of Acceris technology-based operations
that did not pertain to the Companys proprietary software-based convergence
solution for voice and data. This sale marked the final stage of the
transformation of Acceris technology-based operations into a business
principally based, on the licensing of its proprietary software. On December 10, 2002, Acceris completed the purchase of the Enterprise and
Agent business of RSL Com U.S.A. Inc. (RSL) from a bankruptcy proceeding. The
acquisition included the assets used by RSL to provide long distance voice and
data services, including frame relay, to small and medium size businesses
(Direct business), and the assets used to provide long distance and other
voice services to small businesses and the consumer/residential market (A&R
business), together with the existing customer base of the Enterprise and Agent
business. In July 2003, Acceris acquired all of the outstanding shares of Transpoint
Communications, LLC and Local Telecom Holdings, LLC (collectively
Transpoint). The acquisition of Transpoint provided Acceris with further
penetration into the commercial agent channel and a larger commercial customer
base. Starting the fourth quarter of 2003, Acceris also began to offer local
communications products to its residential and small business customers. The
service will be provided under the terms of the Unbundled Network Element
Platform (UNE-P) authorized by the Telecommunications Act of 1996 and will be
available in New York and New Jersey initially, expanding to other markets
throughout the United States. In the second quarter of 2004, Acceris entered
the Pennsylvania, Massachusetts and Florida markets. Acceris anticipates adding
additional states in Version, BC and BellSouth territories in the second half
of 2004. Today, Acceris technology-based segment remains focused on delivering
solutions for voice and data services to its partners and customers. With over
nine years experience developing VoIP technologies, Acceris continues to offer
a solution for companies to reduce telecommunication costs and/or to enter the
enhanced communications market. Acceris continues to actively market its voice and data services and
solutions, and to license its enhanced services platform, domestically and
internationally, to organizations that wish to offer voice services without
incurring high development costs. Acceris is pursuing opportunities to leverage
its patents through a strategy to license the technology Page 13




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to carriers,
equipment/soft switch manufacturers and customers who are deploying IP for
phone-to  phone communications. Technology licensing revenues are
project-based and, as such, these revenues vary from period to period based on
timing and size of technology licensing projects and payments. The Corporation entered the real estate sector in 2002 when it completed
the acquisition of five income producing properties, consisting of
approximately 730,000 square feet of leaseable area. The Company has property
under development in Brampton, Guelph and Peterborough, Ontario. Over the past three years, the following major events influenced the
development of the Corporations business: Corporate  
    
    The Company settled its outstanding 6% convertible debentures
at maturity (October 31, 2003) by delivering 690 common shares for
each thousand dollars of principal, resulting in the issuance of 28.2
million common shares.  
    
    Counsel increased its ownership interest in Acceris, from 70%
to 91%, on November 30, 2003 when Counsel converted US$40.7 million
of its loans receivable from Acceris to common shares.  
    
    The Company raised US$15 million through the issuance of 10
million convertible preferred Class A shares in December 2003. Communications  
    
    On March 1, 2001, the Corporation acquired a 65.2% interest in
I-Link, an enhanced Internet Protocol voice and data communications
services provider, for cash consideration of US$5.113 million, and
agreed to invest US$10 million in the form of three-year debt
convertible into common shares at a conversion rate of US$0.56 per
share.  
    
    On April 17, 2001, I-Link acquired Nexbell in exchange for the
issuance of 17,500,000 shares of I-Link to the Corporation, thereby
increasing the Corporations interest in I-Link to 70.5% on a primary
basis.  
    
    On June 4, 2001, I-Link acquired certain net assets of
WorldxChange, a 10-10-XXX dial-around business, for cash
consideration of US$13 million.  
    
    On September 6, 2001, all outstanding shares of I-Links Class
C, preferred stock automatically converted into shares of common
stock in accordance with their terms. I-Link issued additional common
stock in satisfaction of this conversion and its obligations to pay
dividends to the conversion date, resulting in the dilution of the
Corporations interest to 68.1%.  
    
    Effective November 1, 2001, Counsel Communications acquired
Springwell Capital Partners, LLC, a merchant banking firm
specializing in the communications industry, in exchange for an 11.7%
interest in Counsel Communications, at which time Counsel
Communications was renamed Counsel Springwell Communications. This
had the effect of reducing the Corporations interest in I-Link to
60.2%.  
    
    During the quarter ended September 30, 2001, I-Link performed a
recoverability analysis, based on undiscounted cash flows, with
respect to the goodwill recorded on its acquisition of Nexbell. This
analysis resulted in an impairment charge of US$8.04 million as a
consequence of projected losses associated with Nexbells prime
product, and the decision was made to adopt a plan to discontinue
this product. Subsequently, in December 2001, Nexbell was sold to an
unrelated party for a gain of US$589 thousand. Page 14




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
    
    In the fourth quarter of 2002 the Corporation ended its
affiliation with Springwell Capital Partners and, effective January
2, 2003, acquired the minority interest in Counsel Springwell, which
was renamed Counsel Communications LLC.  
    
    On December 6, 2002, I-Link entered into a definitive purchase
and sale agreement to sell substantially all of the assets and
customer base of ILC, to BUI, which closed on May 1, 2003. The sale
included the physical assets required to operate Acceris nationwide
network using patented VoIP technology (constituting the core
business of ILC business) and a fully paid perpetual license to
Acceris proprietary software based network convergence solution for
voice and data. The sale of the ILC business removed essentially all
operations that did not pertain to our proprietary software-based
convergence solution for voice and data. The sale price consisted of
US$3 million of convertible preferred shares of BUI, a public
company, which, subject to adjustment in certain circumstances, were
convertible into 1.5 million common shares  
    
    On December 10, 2002, Acceris through WorldxChange completed
the purchase of the Enterprise and Agent business of RSL in order to
advance its commercial agent business, increase network utilization,
and provide an entry into the management of information technology
services for enterprise clients. Acceris paid a purchase price of
US$7.5 million in cash plus a non-interest bearing note for US$1.0
million, which matures on March 31, 2004 and is subject to certain
closing balance sheet adjustments, and agreed to pay up to an
additional US$2.0 million in consideration due on March 31, 2004,
contingent upon the achievement of certain revenue levels by the
Direct business for the year 2003.  
    
    In July 2002, the Company, through its controlling interest in
Acceris, agreed to purchase certain assets and related liabilities of
Transpoint. The acquisition closed on July 28, 2003. The intent of
this acquisition was primarily to increase the Companys customer
base in the Companys agent business and improve network utilization.  
    
    In 2003, the Company introduced a new name and brand for its
communications business, Acceris, and organized its operations into
three strategic business units: Telecommunications-Retail, which
provides discounted long distance services to both residential and
small business customers, primarily through MLM and commercial agent
programs; Telecommunications-Enterprise, which offers voice services
and fully integrated, fully managed data services to enterprise
customers; and Telecommunications-Technologies, a software provider,
focused on providing convergence solutions for medium to large-sized
voice and data networks, and pursuing the licensing of its patents.  
    
    Acceris purchased US patent no. 6,243,373 in the fourth quarter
of 2003. The acquisition of this patent, along with Acceris
ownership of US patent no. 6,438,124, provides the Company with a
foundational patent portfolio in VoIP.  
    
    Acceris started offering local dial tone products to its
residential and small business customers in the fourth quarter of
2003. Real Estate  
    
    On July 3 and July 10, 2002, The Corporation completed the
acquisition of five income producing properties comprising
approximately 730,000 square feet of leaseable area and approximately
13 acres of vacant land zoned for retail development in Canada. The
purchase price amounted to the Canadian dollar equivalent of US$35.5
million, including closing costs of US$1.0 million. These
acquisitions were funded by the assumption of US$20.0 million of
first mortgage debt on the properties and US$15.5 million of cash. Page 15




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
    
    During 2003, the Company assembled a team of experienced
property management professionals and implemented an enterprise-wide
financial system, which enabled it to bring its property management
services in-house. The Company expects that this will improve
service to tenants and lower costs.  
    
    In 2003, the Company acquired and commenced development of the
14.5 acre Imperial Square retail development site located in Guelph,
Ontario. When completed, the centre will contain approximately
55,000 square feet of leaseable area. Portfolio Investments  
    
    On October 22, 1999, the Corporation acquired a 25.2% interest
in Impower, an Internet direct marketing company, for US$10 million.
On June 22, 2000, the Corporation increased its interest in Impower
to 33.6% for cash consideration of US$5.109 million.  
    
    On January 20, 2000, the Corporation acquired a 28.5% interest
in Proscape, a provider of business-to-business fact-based,
enterprise sales and marketing information software systems, for US$4
million. On October 24, 2000 the Corporation increased its interest
in Proscape to 36% for US$1.14 million and on February 16, 2001 this
was further increased to 56.5% for cash consideration of US$2.859
million.  
    
    On March 28, 2000, the Corporation acquired a 26% interest in
IBT, which delivers media-rich course content over the Internet for
business training and post-secondary educational applications, for
US$4 million and a further 1% interest was acquired on August 15,
2000 for US$222 thousand.  
    
    On March 28, 2000, the Corporation acquired a 22.5% interest in
Core, which provides high speed Internet access solutions and other
communication services to trade shows, convention, seminars and
conferences, for US$1.5 million. On December 29, 2000 Core
successfully completed an equity financing in which the Corporation
did not participate, resulting in the dilution of the Corporations
interest in Core to 12.9%.  
    
    On August 3, 2001, Impower made a voluntary filing under
Chapter 11 of the U.S. bankruptcy legislation to seek protection from
its creditors, which resulted in the Corporation determining that its
investment in Impower was impaired and writing off its entire equity
investment.  
    
    On May 31 and September 6, 2001, the Corporation acquired
additional interests in IBT for cash consideration of US$1.817
million and US$684 thousand, respectively, thereby increasing its
interest in IBT to 49.5%. In December 2001 IBT made a voluntary
filing under Chapter 7 of the U.S. bankruptcy legislation, which
resulted in the Corporation determining that its investment in IBT
was impaired and writing off its entire equity investment.  
    
    In the fourth quarter of 2001 the Corporation decided to cease
further funding of Proscape and, consequently, Proscape has made
alternative arrangements for funding which has reduced the
Corporations interest in Proscape to approximately 9% on a diluted
basis.  
    
    In 2002, Impower was reorganized and emerged from Chapter 11.
Pursuant to the reorganization, the Corporation received a 17.5%
fully diluted equity interest in Impower as well as US$550 thousand
of preferred shares. In 2003, the Corporation disposed of its
interest in Impower. Discontinued Operations  
    
    On April 30, 2001, FARO completed the sale of the rights and
other assets related to its pharmaceutical products for proceeds of
US$67 million, consisting of US$54 million paid on closing,
US$8 million paid 60 days subsequent to the closing and a further
US$5 million payable within 30 Page 16




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days of the first anniversary of the
closing, subject to specified levels of inventories on hand at the
date of closing and sales returns and rebates relating to operations
prior to the closing.  
    
    In November 2001 the Corporation acquired the minority interest
in FARO for US$6.8 million. The cost of this acquisition was provided
in the estimated loss set up in 2000 in connection with the
discontinuation of the Corporations pharmaceutical products
business.  
    
    In the third quarter of 2002, the Corporation adopted a formal
plan of disposal for its medical products business and, accordingly,
disposed of its interest in Sage, effective October 4, 2002. It
incurred a loss on disposition of US$463 thousand.  
    
    In October 2003, the Company received notices of intent from
the lessee of five retirement centers in Ontario and British Columbia
to exercise options to purchase the centers. The total purchase
price was Cdn $30.0 million, and the transaction closed in the second
quarter of 2004. After settling debt on these assets the Company
realized net proceeds of Cdn $11.0 million. Further details of material acquisitions and dispositions may be found in notes
4 and 21 accompanying the audited consolidated financial statements for the
year ended December 31, 2003. B. BUSINESS OVERVIEW Counsel is a diversified company focused on acquiring and building
businesses in two specific sectors: communications in the United States and
real estate in Canada. In 2003, 94.6% (2002  96.3%) of the Corporations revenues from
continuing operations were generated by its communications segments. The
communications sector has undergone a period of unprecedented dislocation and
change over the past few years, creating opportunities perfectly suited to the
Corporations value-added financial and operating skills. In addition, industry
challenges have produced a number of well-valued acquisition candidates with
which the Corporation can build its existing communications platform. As a
result, management believes that the Corporations communications business
presents a compelling prospect to create and increase value and has taken a
number of steps to capitalize on these opportunities. During 2002, the Corporation worked on restructuring its communications
business to provide more operating and financial control while reducing costs
through more streamlined and integrated processes. Besides the ILC divestiture
and the RSL acquisition, new and experienced leadership teams were installed
who possessed proven track records of building successful telecommunications
companies. A highly focused marketing program was launched, with an emphasis
on meeting the communications needs of carefully targeted business and consumer
markets in specific regions. Systems platforms were upgraded and
under-performing assets and operations were sold or curtailed. During 2003, Acceris continued to consolidate functions. Acceris is
focused on streamlining its internal processes, eliminating duplicate efforts
of staff serving similar roles in multiple locations and making the integration
of additional companies into its operations more cost effective and less risky.
Upon the acquisition of RSL and disposition of ILC in December 2002, the
Company was organized into three operating segments: Telecommunications-Retail,
Telecommunications-Enterprise and Telecommunications-Technologies. These
segments have been described in previous filings as Acceris Communications
Partners, Acceris Communications Solutions and Acceris Communications
Technologies, respectively. Counsels goal is to become a pre-eminent builder of communications
businesses in North America. The vision for Acceris is to be the preferred
supplier of high-quality communications products and services to targeted
markets that will deliver profitable growth while creating value for all its
stockholders. The mission of Acceris is to provide businesses and consumers
with competitively priced voice, data and enhanced communications services via
direct and indirect channels. Through the dedication of its employees, the
Company delivers industry-leading customer care, customized product solutions
and full back office support, building long-term loyalty and trust with all of
its customers. Acceris continuing communications operations are: Page 17




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Telecommunications-Retailis a combination of the WorldxChange assets
acquired in June 2001 and the Agent business of RSL, which was acquired in
December 2002. The core business is a facilities-based telecommunications
provider in the retail long distance market. Telecommunications-Retail also
provided a network service offering that commenced in the fourth quarter of
2002 and was discontinued in the third quarter of 2003.
Telecommunications-Retail started offering local dial tone products to its
residential and small business customers in the fourth quarter of 2003. The
retail segment accounted for approximately 80% of the communications revenue
from continuing operations in 2003 and is expected to be the largest
contributor to revenue in 2004. There were no customers in 2003 that accounted
for over 10% of this segments revenues, which revenues were generated in the
United States of America. Telecommunications-Enterpriseis the Enterprise business of RSL, which was
acquired in December 2002. The Companys Enterprise channel is targeted at
medium-sized companies where the Company can compete on service and price. The
Company believes its customer service is second to none, as clients are
assigned a dedicated Acceris representative responsible for ensuring the
customers needs are met. The Company has also established strong
relationships with all major telecommunications carriers, and is thus able to
design a fully managed system for its customers utilizing a combination of
carriers that best suits their objectives. In 2003, this segment accounted for
approximately 19% of the communications revenue from continuing operations. The
Company expects that in 2004 its customer attraction/retention initiatives,
coupled with its back office integration initiatives, will lead to improved
contributions from this segment. Telecommunications-Technologiesis the former technology licensing and
development business of I-Link. Telecommunications-Technologies licenses a
fully developed technology platform to third party users that facilitates the
convergence of traditional telecommunications equipment and Internet Protocol
technologies. Technology licensing revenues and contributions are project
based and, as such, these amounts will vary from period to period based on the
timing and size of technology licensing projects and payments. This segment
accounted for approximately 2% of the communications revenue from continuing
operations in 2003. One of the Companys most exciting developments in 2003
was the acquisition of a second patent related to VoIP. Utilizing the patented
technology, VoIP enables telecommunications customers to originate a phone call
on a traditional handset, transmit any part of that call via the Internet, and
then terminate the call over the traditional telephone network. This new
patent acquisition, combined with the Companys existing VoIP patent, creates
an international patent portfolio covering the basic process and technology
that enables VoIP communications, and transforms Acceris into a major
participant in the provision of VoIP solutions. Going forward, the Company
intends to aggressively pursue recognition of its intellectual property in the
marketplace through a focused licensing program. Acceris owns four patents and utilizes the technology supported by those
patents in providing its proprietary software solutions. The Company believes
that it holds the foundational patents for voice internet transmission system
in its VoIP Patents. To date, the Company has licensed portions of that
technology to third parties. In addition, Acceris also has several patent
applications pending before United States Patent and Trademark Office and other
such authorities internationally. The Companys real estate business, Counsel Real Estate Inc., is in the
business of investing in and developing income-producing commercial properties,
primarily retail shopping centers, and receives fees for its participation in a
variety of real estate ventures and from property management activities. The
Real Estate business is comprised of six income-producing properties, five of
which were purchased in the third quarter of 2002. The leaseable area of these
properties is 729,722 square feet. As at December 31, 2003, income-producing
properties were 94.81% leased. Competition Acceris long-term success will be founded in its ability to provide
quality service, enhanced features and new product offerings, which offer
greater convenience to the Retail and Enterprise markets. These products must
be offered at value pricing, through its selected distribution channels. The Retail and Enterprise businesses face competition from numerous
telecommunications organizations offering service in the United States.
Providers include large organizations such as AT&T, Sprint, Primus, MCI
WorldCom and Verizon, as well as numerous small and lesser-known service
providers. The Retail business, consistent with its competitors, sees significant
attrition in its customer base over short periods of time, particularly with
dial-around products. In order to compete with other providers such as Talk
America Page 18




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and Ztel, Acceris has focused on developing and delivering a bundled
product including local (which began in 2003), long-distance and enhanced
services to targeted niche markets in the residential and small business
marketplace. Recognizing that customers are highly mobile, Acceris is migrating
away from dial-around products and instead is focusing its efforts on
developing and marketing product offerings that appeal to higher quality,
longer-term customers. Factors that influence the highly mobile customer base
include, among other things, quality of service, enhanced features offerings
and value pricing. Long-term success in this market is sustained by attracting
new customers and developing customer loyalty. The Enterprise business differs significantly from the Retail business.
In this business, customers generally enter into agreements that extend from 1
to 3 years, which results in a recurring and more predictable revenue stream.
The Enterprise business experiences longer term customer relationships as a
result of the Companys ability to offer specific solutions to each individual
customer. The Enterprise channel differentiates itself from its competitors by
offering engineered solutions that are customized and fully managed and by
providing high quality, personalized customer care. The key challenge in this
business is to improve cross-selling with new or enhanced product offerings. Technologies offers an internally developed patent-based technology
solution that operates in both a convergence and IP world. Technologies
provides a 100% software solution for VoIP deployment. The solution, unlike
that of some of its competitors, does not rely on hardware to provide
switching, conference or enhanced services. Additionally, the solution
provides an open Application Programming Interface (API), to enable
development of a wide variety of voice applications and services. Commencing in
late 2002, Acceris made the decision to pursue the development of the domestic
market by providing software-based IP solutions to domestic carriers, which
assist those companies by reducing their internal costs and/or allowing them to
offer enhanced service products to their own retail customers. Prior to the
sale of its IP network operations based in Draper, Utah (ILC) to BUI, Acceris
had offered these products internationally and marketed its enhanced service
products to customers on a retail basis. Acceris does not currently experience
any direct competition to its current technology. There are many competitors
with certain portions of its technology, but none have the entire package. Its
competition would include the traditional switched telephony infrastructure
providers, such as Nortel and Lucent, which this technology displaces. While
the competition offers products with similar features, Acceris competitive
product is software versus hardware based and as such can be deployed at a
significantly lower cost. Also, the software nature of its product makes it
easier and more economically feasible to develop additional features and
services to meet ever-changing customer needs. Government Regulation Acceris offers business and residential consumers a broad suite of voice
and data telecommunications products and services, including local exchange,
long-distance (1+ or 10-10-XXX dial-around) and international calling services.
Acceris various business segments operate in both regulated and non-regulated
environments. Many of the services that Acceris provides are subject to the
provisions of the U.S. Telecommunications Act of 1996 (the 1996 Act), the
regulations promulgated thereunder, as well as the applicable laws and
regulations of the various states administered by the relevant state
authorities. While the recent trend in the U.S. for both federal and state
regulation of telecommunication service providers has been toward less
regulation rather than more, the FCC and relevant state authorities continue to
regulate telecommunication carriers and the terms and conditions under which
telecommunication services are provided. Federal and state governing authorities regulate Acceris local and
long-distance services. Acceris long-distance business is regulated as a
non-dominant interexchange carrier (IXC). Federal and state authorities have
been reducing their regulatory requirements as the industry faces robust
competition. The local exchange services are regulated as a competitive local
exchange carrier (CLEC). Additionally, Acceris offers a variety of enhanced services, including an
open API that enables development of a variety of voice applications using its
patented VoIP software as well as data services. Overview of Federal Regulation A carrier offering telecommunications services to the public is subject to
the provisions of the Communications Act of 1934, as amended, and FCC
regulations issued thereunder. These regulations require Acceris, among other
things, to offer regulated services to the public on a non-discriminatory basis
at just and reasonable rates. Acceris is subject to FCC requirements that it obtain prior FCC approval
for transactions that would cause a transfer of control of one or more
regulated subsidiaries. Such approval requirements may delay, prevent or deter
transactions that Page 19




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##### 



could result in a transfer of control of the company. International Service Regulation:Acceris possesses authority from the
FCC, granted pursuant to Section 214 of the Communications Act of 1934, to
provide international telecommunications service. The FCC has streamlined
regulation of competitive international services and has removed certain
restrictions against providing certain services. Presently, the FCC is
considering a number of international service issues that may further alter the
regulatory regime applicable to Acceris. For instance, the FCC is considering
revisions to the rules regarding the rates that international carriers pay for
termination of calls to mobile phones located abroad. Pursuant to FCC rules, Acceris has cancelled its international and
domestic FCC tariffs and replaced them with a general service agreement and
price lists. As required by FCC rules, Acceris has posted these materials on
its Internet web site. The detariffing of its services has given Acceris
greater pricing flexibility for its services, but it is not entitled to the
legal protection provided by the filed rate doctrine, which generally
provides protections to carriers from legal actions by customers that challenge
the terms and conditions of service. Interstate Service Regulation:As an IXC, Acceris interstate
telecommunications services are regulated by the FCC. While Acceris was not
required to obtain FCC approval to begin or expand its interstate operations,
Acceris was required to obtain FCC approvals for certain transactions that
would affect its ownership or the services it provides. Additionally, Acceris
must file various reports and pay certain fees and assessments. Acceris was
subject to the FCCs complaint jurisdiction and must contribute to the federal
Universal Service Fund (USF). Acceris must also comply with the
Communications Assistance for Law Enforcement Act (CALEA), and certain FCC
regulations, which require telecommunications common carriers to modify their
networks to allow law enforcement authorities to perform electronic
surveillance. Overview of State Regulation Through certain of Acceris subsidiaries, Acceris was authorized to
provide intrastate interexchange telecommunications services and, in certain
states, is authorized to provide competitive local exchange services by virtue
of certificates granted by state public service commissions. Acceris
regulated subsidiaries must comply with state laws applicable to all similarly
certified carriers, including the regulation of services, payment of regulatory
fees, and preparation and submission of reports. The adoption of new
regulations or changes to existing regulations may adversely affect Acceris
ability to provide telecommunications services. Consumers may file complaints
against Acceris at the public service commissions. The certificates of
authority Acceris holds can be generally conditioned, modified, cancelled,
terminated or revoked by state public service commissions. Further, many
states require prior approval or notification for certain stock or asset
transactions, or in some states, for the issuance of securities, debts,
guarantees, or other financial transactions. Such approvals can delay or
prevent certain transactions. Overview of Ongoing Policy Issues Local Service:Through the 1996 Act, the U.S. Congress sought to
establish a competitive and deregulated national policy framework for advanced
telecommunications and information technologies. To date, local exchange
competition has not progressed to a point where significant regulatory
intervention is no longer required. Regulators believed that a hands-off
policy would drive local exchange service into an adequately competitive
market, but there continues to be a strong need for policy issue clarification
and construction. Some policy changes have been addressed through the court
system, not the regulatory system. For instance, the FCC has attempted several
times to develop a list of UNEs which are portions of the ILECs networks and
services that must be sold separately to competitors. On several occasions,
the courts have rejected the FCCs approach to defining UNEs. The FCCs most
recent attempt to develop rules, the Triennial Review Order, was vacated by the
U.S. Circuit Court of Appeals in Washington D.C. on March 4, 2004. The
inability to purchase UNEs could increase the costs for providing local
service, or prevent Acceris from providing the service altogether. Universal Service Fund:In 1997, the FCC issued an order implementing
Section 254 of the 1996 Act, regarding the preservation of universal telephone
service. Section 254 and related regulations require all interstate and
certain international telecommunications carriers to contribute toward the USF,
a fund that provides subsidies for the provision of service to schools and libraries, rural health care
providers, low income consumers, and consumers in high cost areas. Page 20




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##### 



Quarterly, the Universal Service Administrative Company (USAC), which
oversees the USF, reviews the need for program funding and determines the
applicable USF contribution percentage that interstate telecommunications
carriers must contribute. While carriers are permitted to pass through the USF
charges to consumers, the FCC has strictly limited the amounts passed through
to consumers in excess of a carriers determined contribution percentage. As is discussed below, the industry is moving from traditional
circuit-switched telephone service to digitized IP-based communications. It is
possible that this trend could threaten the amount of revenues USAC can collect
through the USF system, and that the resulting revenue shortfall could prevent
the system from meeting its funding demands. Separately from the FCCs inquiry
into the regulation of IP-based voice service, the FCC could exercise its so
called permissive authority under the 1996 Act and assess USF contribution on
VoIP providers. To date, only some VoIP providers contribute to the USF. If
VoIP providers were exempted from USF contributions, telecommunications
carriers would likely pay significantly more USF contributions; conversely, if
VoIP providers were required to contribute, traditional telecommunications
carriers would contribute less. In addition to the FCC, Congress is
considering this issue. Current Congressional debates are divided over whether
IP-based telephony service providers should be required to contribute to the
USF. A decision to require VoIP providers to contribute to the USF may
adversely affect Acceris provision of VoIP services. VoIP Notice of Proposed Rule Making: In March 2004, the FCC issued the
VoIP Notice of Proposed Rulemaking to solicit comments on many aspects of the
regulatory treatment of VoIP services (the VoIP NPRM). The FCC continues to
consider the possibility of regulating access to IP-based services, but has not
yet decided on the appropriate level of regulatory intervention for IP-based
service applications. Should the FCC rule that Acceris software-based
solution for VoIP deployment and other similar service applications should be
regulated, Acceris VoIP services may be adversely affected. Further, the VoIP NPRM will likely address the applicability of access
charges to VoIP services. Access charges provide compensation to local
exchange carriers (LECs) for traffic that originates or terminates on their
networks. Certain LECs have argued that certain types of VoIP carriers provide
the same basic functionality as traditional telephone service carriers, in that
they carry a customers call from an origination point to a termination
destination. Any ruling or decision from the FCC requiring VoIP carriers to
pay access charges to ILECs for local loop use may adversely affect Acceris
VoIP services. The VoIP NPRM is also expected to address the extent to which CALEA will
be applicable to VoIP services. Recently, in a separate proceeding, the
Federal Bureau of Investigation and other federal agencies have asked the FCC
to clarify that VoIP is a telecommunications service, for the purpose of
subjecting VoIP to CALEAs wiretapping requirements. Broadband Deployment:Broadband refers to any platform capable of
providing high bandwidth-intensive content and advanced telecommunications
capability. The FCCs stated goal for broadband services is to establish
regulatory policies that promote competition, innovation, and investment in
broadband services and facilities. Broadband technologies encompass evolving
high-speed digital technologies that offer integrated access to voice,
high-speed data, video-on-demand or interactive delivery services. The FCC is
seeking to 1) encourage the ubiquitous availability of broadband access to the
Internet, 2) promote competition across different platforms for broadband
services, 3) ensure that broadband services exist in a minimal regulatory
environment that promotes investment and innovation, and 4) develop an
analytical framework that is consistent, to the extent possible, across
multiple platforms. The FCC has opened several inquiries to determine how to
promote the availability of advanced telecommunications capability with the
goal of removing barriers to deployment, encouraging competition and promoting
broadband infrastructure investment. For instance, the FCC is considering the
appropriate regulatory requirements for ILEC provision of domestic broadband
telecommunications services. The FCCs concern is whether the application of
traditional common carrier regulations to ILEC-provided broadband
telecommunications services is appropriate. Under existing regulations, ILECs
are treated as dominant carriers absent a specific finding to the contrary for
a particular market and, as dominant carriers, are subject to numerous
regulations, such as tariff filing and pricing requirements. On February 7, 2002, the FCC released its third biennial report on the
availability of broadband, in which it concluded that broadband is being deployed in a reasonable and timely
manner. The report showed that the advanced telecommunications services market
continues to grow, and that the availability of and subscribership to
high-speed Page 21




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##### 



services increased significantly since the last report.
Additionally, the report noted that investment in infrastructure for advanced
telecommunications remains strong. The data in the report is gathered largely
from standardized information from providers of advanced telecommunications
capability including wireline telephone companies, cable providers, wireless
providers, satellite providers, and any other facilities-based providers of 250
or more high-speed service lines (or wireless channels) in a given state. Internet Service Regulation: The demand for high-speed Internet access
has increased significantly over the past several years as consumers increase
their Internet use. The FCC is active in reviewing the need for regulatory
oversight of Internet services and to date has advocated less regulation and
more market-based competition for broadband providers. The FCCs stated policy
is to promote the continued development of the Internet and other interactive
computer-based communications services. Acceris cannot be certain that the FCC
will continue to take a deregulatory approach to the Internet. Should the FCC
increase regulatory oversight of Internet services, the costs for providing
those services could increase. Segment Information from Continuing and Discontinued Operations The following table illustrates the revenue and approximate percentage of
total revenue recognized by the Company in each of its principal business
categories included in continuing operations for each of the last three
completed fiscal years: Principal Business Category - Continuing Operations
    
    Consolidated Revenues2003
    
    2002
    
    2001$
    
    %
    
    $
    
    %
    
    $
    
    %Acceris Telecommunications- Retail
    
    
    108,150
    
    
    
    75.3
    
    
    
    83,705
    
    
    
    91.5
    
    
    
    49,289
    
    
    
    91.2Acceris Telecommunications-Enterprise
    
    
    25,598
    
    
    
    17.8
    
    
    
    1,547
    
    
    
    1.7
    
    
    
    
    
    
    
    Acceris Telecommunications-Technologies
    
    
    2,164
    
    
    
    1.5
    
    
    
    2,837
    
    
    
    3.1
    
    
    
    4,730
    
    
    
    8.8Real Estate
    
    
    7,799
    
    
    
    5.4
    
    
    
    3,343
    
    
    
    3.7
    
    
    
    11
    
    
    
    
 All of the Corporations consolidated revenues from its communications
segments were generated in the United States. All of the revenues from real
estate were generated in Canada. The following table illustrates the revenue and approximate percentage of
total revenue recognized by the Company in each of its principal business
categories included in discontinued operations for each of the last three
completed fiscal years: Principal Business Category - Discontinued Operations
    
    Consolidated Revenues2003
    
    2002
    
    2001$
    
    %
    
    $
    
    %
    
    $
    
    %Long-term care operations
    
    
    38,397
    
    
    
    94.8
    
    
    
    32,629
    
    
    
    75.0
    
    
    
    31,604
    
    
    
    60.7Communications operations
    
    
    2,109
    
    
    
    5.2
    
    
    
    7,806
    
    
    
    18.0
    
    
    
    16,803
    
    
    
    32.3Medical products and services
    
    
    
    
    
    
    
    
    
    
    3,051
    
    
    
    7.0
    
    
    
    3,641
    
    
    
    7.0
 The Corporations long-term care revenue is primarily generated in Canada,
while the communications and medical products and services revenue was
generated in the United States. C. ORGANIZATIONAL STRUCTURE: Page 22




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See A. HISTORY AND DEVELOPMENT OF THE COMPANY above. D. PROPERTY, PLANT AND EQUIPMENT The Company has commitments under long term operating leases that
approximate $11,200 over the next five years (see note 14 to the audited
consolidated annual financial statements). Most of this amount relates to the
communications equipment leased at Acceris and leased office premises,
primarily the head office location in Toronto, Ontario, and subsidiary offices
in San Diego, California; Pittsburgh, Pennsylvania and Somerset, New Jersey.
The balance relates primarily to seven nursing homes in Ontario, Canada,
containing 1,127 licensed beds, which it leases from an unrelated partnership. Acceris rents approximately 31,000 square feet of office space in San
Diego, California under 2 commercial leases which terminate on May 31, 2004 and
April 30, 2006. The combined rental fee is approximately $45 per month.
Acceris uses this space primarily for its sales and marketing team, certain
network resources and certain administrative staff. Acceris rents approximately 46,000 square feet of office space in
Pittsburgh, Pennsylvania under a lease expiring on June 30, 2005, at a cost of
approximately $54 per month. Acceris uses this space primarily for its network
operations center, administrative staff and other employees. Acceris rents approximately 12,000 square feet of office space in
Somerset, New Jersey under a lease expiring September 30, 2008, at a cost of
approximately $11 per month. Acceris uses this space to operate its local
service offering as well as for certain of its information technology and other
employees. Acceris also leases several other co-location facilities throughout the
United States to house its network equipment, as well some additional office
space. Such spaces vary in size and length of term. The total combined square
footage of the spaces under these agreements is no greater than 29,000 square
feet at a cost of approximately $95 per month. Included in assets of discontinued operations is the long-term care
business. The long-term care business consists of four retirement homes with
297 assisted living units in southern Ontario, a retirement home with 128
assisted living facilities in Kelowna, British Columbia, and three nursing
homes with 484 beds in Texas. All of these properties are leased under
long-term leases to Advocat Inc., a company which provides long-term care
services to nursing home patients and residents of assisted living facilities
in the United States and Canada. The retirement homes are subject to mortgages
totaling $14.1 million, bearing interest at rates from 7.9% to 8.6% and
maturing on various dates through 2006. The Texas properties are unencumbered.
The Company has no material plans to construct, expand or improve these
facilities. The real estate business consists of six real estate properties with
approximately 776,000 square feet of leasable area, which are encumbered by
approximately $25,900 of debt. The Company may construct, expand or improve
these facilities to maximize returns on its investment in real estate. The
Company owns land held for development and expects to acquire additional land
that it intends to develop in the near term. Costs associated with these
developments are unknown at this time. The Company is not aware of any environmental issues that may affect its
utilization of these assets. Page 23




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##### 



ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis should be read in conjunction with
the audited consolidated financial statements of the Company and notes thereto.
See Item 18: Financial Statements. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
Canada and the guidance of the Canadian Institute of Public and Private Real
Estate companies (CIPREC). Note 26 of the financial statements includes a
reconciliation of the Canadian GAAP net loss to the net loss determined under
U.S. GAAP. Definitions The Companys analysis of financial results focuses on operating income
(loss) and net earnings (loss). Operating income (loss) and net earnings (loss)
are set out in the Companys audited consolidated statement of operations.
Operating income (loss) is defined as earnings from continuing operations
before other gains, other losses and impairments, interest, taxes, equity in
losses and minority interests. It is important to note that operating income
(loss) is not a measure of performance under Canadian or U.S. GAAP. Operating
income (loss) should not be considered in isolation or as a substitute for net
earnings (loss) prepared in accordance with Canadian or U.S. GAAP or as a
measure of operating performance or profitability. Operating income does not
have a standardized meaning prescribed by generally accepted accounting
principles and is not necessarily comparable to similar measures presented by
other companies. Operating income/loss is reconciled to net earnings/loss in
the body of the Companys financial statement. Certain comparative figures have been reclassified to conform to the
current years presentation. Overview Counsel is a diversified company focused on acquiring and building
businesses in two specific sectors: communications in the United States and
real estate in Canada. The Company entered the communications sector in March 2001 when it
acquired a controlling interest in Acceris. Acceris is a supplier of voice,
data and enhanced communications products and services. Acceris operates a
facilities-based telecommunications carrier providing long distance voice
services to retail customers in the United States, and long distance voice and
data services to small to medium-sized businesses in the United States.
Acceris also licenses a fully developed network convergence solution for voice
and data based on its Internet Protocol communications technology. The Company entered the real estate sector in 2002, when it completed the
acquisition of five income-producing properties, consisting of approximately
730,000 square feet of leaseable area and 13 acres of vacant land zoned for
retail development in Canada. A summary of significant events during 2003: Communications  
    
    The Company introduced a new name and brand for its
communications business, Acceris, and organized its operations into
three strategic business units: Telecommunications-Retail, which
provides discounted long distance services to both residential and
small business customers, primarily through MLM and commercial agent
programs; Telecommunications-Enterprise, which offers voice services
and fully integrated, fully managed data services to enterprise
customers; and Telecommunications-Technologies, a software provider,
focused on providing convergence solutions for medium to large-sized
voice and data networks, and pursuing the licensing of its patents.  
    
    Acceris completed the sale of the assets and customer base of
ILC, a wholly-owned subsidiary that operated its VoIP network, to
BUI, on May 1. As part of the transaction, BUI also licensed
Acceris proprietary software platform and VoIP patent, on a
non-exclusive basis.  
    
    Acceris completed the acquisition of Transpoint on July 30.
Transpoint offers voice and data services through commercial agents.  
    
    Counsel increased its ownership interest in Acceris, from 70%
to 91%, on November 30, when Counsel Page 24




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##### 



converted $40.7 million of its loans receivable from Acceris to equity.
    
    Acceris purchased US patent no. 6,243,373 in the fourth quarter
of 2003. The acquisition of this patent along with Acceris
ownership of US patent no. 6,438,124 provides the Company with a
foundational patent portfolio in VoIP.  
    
    Acceris started offering local dial tone products to its
residential and small business customers in the fourth quarter. Real Estate  
    
    The Company assembled a team of experienced property management
professionals and implemented an enterprise-wide financial system,
which enabled it to bring its property management services in-house.
The Company expects that this will improve service to tenants and
lower costs.  
    
    The Company acquired and commenced development of the 14.5 acre
Imperial Square retail development site located in Guelph, Ontario.
When completed, the centre will contain just over 55,000 square feet
of leaseable area. Corporate  
    
    The Company settled its outstanding 6% convertible debentures
at maturity (October 31, 2003) by delivering 690 common shares for
each thousand dollars of principal, resulting in the issuance of 28.2
million common shares.  
    
    In October, the Company received notices of intent from the
lessee of five retirement centers in Ontario and British Columbia to
exercise options to purchase the centers. The total purchase price
was Cdn $30 million, and the transaction closed in the second quarter
of 2004. After settling debt on these assets the Company realized
net proceeds of Cdn $11.0 million.  
    
    The Company raised $15 million through the issuance of 10
million convertible preferred shares in December. Page 25




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##### 



A. OPERATING RESULTS Consolidated Results of Operations The following table sets out the Companys consolidated results of
operations for each of the three years and eight quarters ended December 31,
2003 under the basis of presentation utilized in its Canadian GAAP financial
statements. AuditedUnaudited
    
    Twelve months endedDecember 312002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesUnited StatesTelecommunications-Retail
    
    
    22,811
    
    
    
    20,984
    
    
    
    19,834
    
    
    
    20,076
    
    
    
    23,272
    
    
    
    29,505
    
    
    
    29,149
    
    
    
    26,224
    
    
    
    49,289
    
    
    
    83,705
    
    
    
    108,150Telecommunications-Enterprise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,547
    
    
    
    7,095
    
    
    
    6,747
    
    
    
    5,854
    
    
    
    5,902
    
    
    
    
    
    
    
    1,547
    
    
    
    25,598Telecommunications-Technologies
    
    
    1,581
    
    
    
    888
    
    
    
    321
    
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    4,730
    
    
    
    2,837
    
    
    
    2,16424,392
    
    
    
    21,872
    
    
    
    20,155
    
    
    
    21,670
    
    
    
    30,367
    
    
    
    37,302
    
    
    
    36,052
    
    
    
    32,191
    
    
    
    54,019
    
    
    
    88,089
    
    
    
    135,912CanadaReal estate
    
    
    75
    
    
    
    78
    
    
    
    1,486
    
    
    
    1,704
    
    
    
    1,783
    
    
    
    1,988
    
    
    
    1,901
    
    
    
    2,127
    
    
    
    11
    
    
    
    3,343
    
    
    
    7,79924,467
    
    
    
    21,950
    
    
    
    21,641
    
    
    
    23,374
    
    
    
    32,150
    
    
    
    39,290
    
    
    
    37,953
    
    
    
    34,318
    
    
    
    54,030
    
    
    
    91,432
    
    
    
    143,711Operating
costs and expenses:Telecommunication costs
    
    
    13,273
    
    
    
    12,237
    
    
    
    10,973
    
    
    
    14,453
    
    
    
    25,748
    
    
    
    21,319
    
    
    
    20,072
    
    
    
    18,867
    
    
    
    35,546
    
    
    
    50,936
    
    
    
    86,006Income producing properties
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    946
    
    
    
    944
    
    
    
    1,047
    
    
    
    882
    
    
    
    999
    
    
    
    
    
    
    
    1,448
    
    
    
    3,872Selling, general and administrative
    
    
    12,392
    
    
    
    9,865
    
    
    
    10,675
    
    
    
    12,805
    
    
    
    15,529
    
    
    
    15,904
    
    
    
    14,777
    
    
    
    15,198
    
    
    
    44,350
    
    
    
    45,737
    
    
    
    61,408Research and development
    
    
    382
    
    
    
    465
    
    
    
    317
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,162
    
    
    
    1,399
    
    
    
    Provision for doubtful accounts
    
    
    1,357
    
    
    
    1,251
    
    
    
    1,118
    
    
    
    2,273
    
    
    
    1,175
    
    
    
    1,131
    
    
    
    1,465
    
    
    
    1,667
    
    
    
    839
    
    
    
    5,999
    
    
    
    5,438Depreciation
and amortization
    
    
    1,684
    
    
    
    1,592
    
    
    
    1,760
    
    
    
    2,079
    
    
    
    2,569
    
    
    
    2,362
    
    
    
    2,597
    
    
    
    2,326
    
    
    
    8,849
    
    
    
    7,115
    
    
    
    9,854Operating
loss before undernoted items
    
    
    (4,621
    )
    
    
    (3,460
    )
    
    
    (3,704
    )
    
    
    (9,417
    )
    
    
    (13,815
    )
    
    
    (2,473
    )
    
    
    (1,840
    )
    
    
    (4,739
    )
    
    
    (37,716
    )
    
    
    (21,202
    )
    
    
    (22,867
    )Gains and
other income:Short-term investments
    
    
    26,621
    
    
    
    879
    
    
    
    162
    
    
    
    405
    
    
    
    448
    
    
    
    1,929
    
    
    
    1,617
    
    
    
    1,224
    
    
    
    42,760
    
    
    
    28,067
    
    
    
    5,218Portfolio investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    Sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    Retirement
of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,093
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    2,578
    
    
    
    1,079
    
    
    
    
    
    
    
    782
    
    
    
    3,657Impairments
and other losses:Write-down
of short-term investments
    
    
    (136
    )
    
    
    (2,656
    )
    
    
    (1,139
    )
    
    
    (80
    )
    
    
    (98
    )
    
    
    (35
    )
    
    
    
    
    
    
    (6
    )
    
    
    (1,957
    )
    
    
    (4,011
    )
    
    
    (139
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    (640
    )
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    
    
    
    
    (19,340
    )
    
    
    (640
    )
    
    
    (650
    )Other
    
    
    
    
    
    
    (64
    )
    
    
    501
    
    
    
    (1,159
    )
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (368
    )
    
    
    (5,582
    )
    
    
    (722
    )
    
    
    (1,025
    )Interest income
    
    
    123
    
    
    
    146
    
    
    
    83
    
    
    
    49
    
    
    
    38
    
    
    
    114
    
    
    
    395
    
    
    
    73
    
    
    
    2,645
    
    
    
    401
    
    
    
    620Interest expense
    
    
    (654
    )
    
    
    (713
    )
    
    
    (834
    )
    
    
    (801
    )
    
    
    (871
    )
    
    
    (1,071
    )
    
    
    (804
    )
    
    
    (755
    )
    
    
    (2,517
    )
    
    
    (3,002
    )
    
    
    (3,501
    )Earnings
(loss) before income taxes, non-controlling
interest and discontinued operations
    
    
    21,333
    
    
    
    (5,868
    )
    
    
    (5,571
    )
    
    
    (10,221
    )
    
    
    (14,298
    )
    
    
    (2,186
    )
    
    
    1,289
    
    
    
    (3,492
    )
    
    
    (19,961
    )
    
    
    (327
    )
    
    
    (18,687
    )Income taxes
    
    
    11,005
    
    
    
    465
    
    
    
    438
    
    
    
    (2,253
    )
    
    
    
    
    
    
    14
    
    
    
    882
    
    
    
    2,041
    
    
    
    19,901
    
    
    
    9,655
    
    
    
    2,937Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,538
    )
    
    
    
    
    
    
    Earnings
(loss) from continuing operations
    
    
    10,328
    
    
    
    (6,333
    )
    
    
    (6,009
    )
    
    
    (7,968
    )
    
    
    (14,298
    )
    
    
    (2,200
    )
    
    
    407
    
    
    
    (5,533
    )
    
    
    (38,324
    )
    
    
    (9,982
    )
    
    
    (21,624
    )Discontinued operations:Medical
products and servicesMedical products
    
    
    (843
    )
    
    
    3
    
    
    
    (799
    )
    
    
    (1,213
    )
    
    
    211
    
    
    
    10
    
    
    
    29
    
    
    
    70
    
    
    
    (5,319
    )
    
    
    (2,852
    )
    
    
    320Pharmaceutical products
    
    
    
    
    
    
    (410
    )
    
    
    (88
    )
    
    
    (209
    )
    
    
    (17
    )
    
    
    145
    
    
    
    (6
    )
    
    
    137
    
    
    
    4,519
    
    
    
    (707
    )
    
    
    259Pharmacy services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,958
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,716
    )
    
    
    (1,958
    )
    
    
    Communications
    
    
    (3,099
    )
    
    
    (4,580
    )
    
    
    (1,463
    )
    
    
    (3,366
    )
    
    
    (277
    )
    
    
    371
    
    
    
    213
    
    
    
    223
    
    
    
    (23,430
    )
    
    
    (12,508
    )
    
    
    530Long-term care
    
    
    4
    
    
    
    76
    
    
    
    3
    
    
    
    (1,007
    )
    
    
    (904
    )
    
    
    (1,067
    )
    
    
    140
    
    
    
    86
    
    
    
    2,057
    
    
    
    (924
    )
    
    
    (1,745
    )Net
earnings (loss)
    
    
    6,390
    
    
    
    (11,244
    )
    
    
    (8,356
    )
    
    
    (15,721
    )
    
    
    (15,285
    )
    
    
    (2,741
    )
    
    
    783
    
    
    
    (5,017
    )
    
    
    (62,213
    )
    
    
    (28,931
    )
    
    
    (22,260
    )Weighted
average number of common shares outstanding (in thousands)
    
    
    22,411
    
    
    
    22,312
    
    
    
    22,131
    
    
    
    21,928
    
    
    
    21,491
    
    
    
    21,060
    
    
    
    20,593
    
    
    
    39,102
    
    
    
    23,030
    
    
    
    22,195
    
    
    
    25,596Basic net
earnings(loss) per share from:Continuing operations
    
    
    0.43
    
    
    
    (0.32
    )
    
    
    (0.31
    )
    
    
    (0.40
    )
    
    
    (0.70
    )
    
    
    (0.14
    )
    
    
    (0.01
    )
    
    
    (0.15
    )
    
    
    (1.80
    )
    
    
    (0.59
    )
    
    
    (0.94
    )Discontinued operations
    
    
    (0.18
    )
    
    
    (0.20
    )
    
    
    (0.11
    )
    
    
    (0.35
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.01
    
    
    
    (1.04
    )
    
    
    (0.85
    )
    
    
    (0.02
    )Basic net earnings (loss) per share
    
    
    0.25
    
    
    
    (0.52
    )
    
    
    (0.42
    )
    
    
    (0.75
    )
    
    
    (0.75
    )
    
    
    (0.16
    )
    
    
    0.01
    
    
    
    (0.14
    )
    
    
    (2.84
    )
    
    
    (1.44
    )
    
    
    (0.96
    )Diluted
net earnings(loss) per share from:Continuing operations
    
    
    0.21
    
    
    
    (0.32
    )
    
    
    (0.31
    )
    
    
    (0.40
    )
    
    
    (0.70
    )
    
    
    (0.14
    )
    
    
    (0.01
    )
    
    
    (0.15
    )
    
    
    (1.80
    )
    
    
    (0.59
    )
    
    
    (0.94
    )Discontinued operations
    
    
    (0.08
    )
    
    
    (0.20
    )
    
    
    (0.11
    )
    
    
    (0.35
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.01
    
    
    
    (1.04
    )
    
    
    (0.85
    )
    
    
    (0.02
    )Diluted net earnings (loss) per share
    
    
    0.13
    
    
    
    (0.52
    )
    
    
    (0.42
    )
    
    
    (0.75
    )
    
    
    (0.75
    )
    
    
    (0.16
    )
    
    
    0.01
    
    
    
    (0.14
    )
    
    
    (2.84
    )
    
    
    (1.44
    )
    
    
    (0.96
    )
 Page 26




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##### 



2003 Compared to 2002 When considering the review of the results of continuing operations for 2003
compared to 2002, it is important to note the following significant changes in
the Companys operations that occurred in 2003 and 2002, namely:  1.
    
    In July 2003, the Company acquired Transpoint. The operations of
Transpoint from July 28, 2003 to December 31, 2003 have been included in
the statement of operations for 2003. There were no such operations in
2002.2.
    
    On December 10, 2002, the Company acquired the Enterprise and Agent
business of RSL, including the assumption of certain liabilities. The
RSL operations from January 1, 2003 to December 31, 2003 have been
included in the statement of operations for the entire fiscal year. The
operations of RSL were included in the statement of operations in 2002
from the date of acquisition.3.
    
    On December 6, 2002, the Company entered into an agreement to sell
substantially all of the assets and customer base of ILC to BUI. The
sale closed on May 1, 2003. As a result of the agreement, the
operational results related to ILC have been reclassified as
discontinued operations in the current and prior years and accordingly
are not included in the following analysis of continuing operations for
2003 or 2002.4.
    
    In November 2002, the Company began to sell a network service
offering provided by a new supplier. The sale of that service offering
ceased in late July 2003. While this product has been discontinued,
revenue is recognized only as cash receipts become unencumbered and,
accordingly, revenue will continue to be recognized in 2004.5.
    
    In July 2002, the Company entered into the real estate sector with
the purchase of five income-producing properties. Revenues: The increase in telecommunications revenue to $135,912 in 2003, from $88,089 in
2002, is primarily related to the following events:  
    
    In December 2002, the Company acquired the Enterprise and Agent
business of RSL from bankruptcy. The acquisition has been accounted for
under the purchase method of accounting and accordingly, revenue
subsequent to the acquisition has been included in the Companys
revenue. A full year of RSL revenue is included in 2003, versus less
than one month included in 2002. The operations of RSL provided
approximately $15,300 in telecommunications revenues in 2003, compared
to approximately $2,500 for 2002. Additionally, the operations of
Transpoint from July provided $2,055 in telecommunications revenue
during 2003, which was not present in 2002.  
    
    The Company has continued to experience a decline in revenue from
10-10-XXX dial around services and from a related direct mail program
launched in 2001 and curtailed in early 2002. In 2003, revenues from
the dial around product were approximately $54,900 versus approximately
$66,800 in 2002.  
    
    The Company has experienced growth in its revenue from customers
acquiring 1+ services through the growing commercial, ethnic and
multi-level marketing channels on which it began to focus in early 2002.
Revenues from the 1+ product were approximately $44,400 in 2003 versus
approximately $15,800 in 2002.  
    
    The Company launched a network service offering in 2002, which it
ceased in July 2003. The Company recognized revenues of $7,629 in 2003
as cash receipts became unencumbered, compared to recognizing no network
service offering revenue in 2002. At December 31, 2003, $4,011 in cash
receipts remain encumbered and are accounted for as unearned revenue on
the balance sheet. The Company anticipates that these receipts will
become unencumbered and will be recognized as revenue in 2004.  
    
    Although the Company continued to experience price erosion in 2003 in
a very competitive long-distance market, customer and traffic growth is outpacing this compression. The
increase in the number of subscribers, Page 27




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##### 



from 279,532 at December 31, 2002
to 354,248 at December 31, 2003, coupled with the increase in traffic per
user, has driven the remainder of the increase in revenue, year over year.
In 2003, the Company recognized $97,756 of domestic and international
long distance revenues (including monthly recurring charges and USF fees
on approximately 907,000,000 minutes, resulting in a blended rate of
approximately $0.11 per minute. In 2002, the Company recognized $82,466
of domestic and international long distance revenues on approximately
680,480,000 minutes, resulting in a blended rate of approximately $0.12
per minute.  
    
    Technology licensing and development revenues decreased $673 to
$2,164 in 2003 from $2,837 in 2002. The decrease was related to having
revenue from two contracts outstanding in 2003 compared to three in
2002. Technology licensing revenues are project-based and, as such,
these revenues will vary from year to year based on the timing and size
of the projects and related payments. Real estate revenue increased $4,456 to $7,799 in 2003 from $3,343 in 2002.
This was the first full year of revenues for the real estate division. Operating costs and expenses: The changes in operating costs and expenses are primarily related to the
following: Telecommunications costs  The $35,070 increase relates primarily to the
inclusion of a full year of the operations of RSL in 2003 as opposed to only
three weeks in 2002. In 2003, the operations of RSLs Enterprise business
incurred $15,279 in telecommunications network expense versus $1,190 in
December of 2002. The inclusion of a full year of activity for the Agent
business of RSL resulted in an increase of $8,734. Additionally, the Company
incurred an increase of $7,112 in telecommunications network expense associated
with its network service offering in 2003 compared with 2002. Income producing properties expense  The $2,424 increase relates primarily to
the inclusion of a full year of operations for the real estate division. Selling, general and administrative expense (SG&A)  The $15,671 increase
relates primarily to the inclusion of a full year of the operations of RSL and
real estate in 2003. In 2003, the operations of RSLs Enterprise business
incurred $10,361 in SG&A versus $810 in 2002. Provision for doubtful accounts  The $561 decrease is primarily due to lower
bad debt experience levels for direct billed customers because of the Companys
implementation of a dedicated collection team in 2003. The provision for
doubtful accounts as a percentage of total revenue was 4.0% in 2003, compared
to 6.8% in 2002. This percentage decrease was also due to the revenue from the
network service offering being recognized on an unencumbered cash receipts
method, totaling $7,629 in 2003 and $nil in 2002. Additionally, in 2003 the
Company recognized $25,598, versus $1,547 in 2002, in revenues from the
Enterprise segment. The revenues for the Enterprise segment have a
significantly lower bad debt experience than Retail revenues. Depreciation and amortization  The increase relates primarily to tangible and
intangible assets acquired pursuant to the RSL and Transpoint acquisitions, and
a full year of depreciation on income producing properties in real estate. Research and development costs (R&D)  The Company suspended its R&D
activities in 2002, and will resume investing in R&D when it becomes necessary
to supplement its existing technology platform. Gains and other income: Gains on short-term investments  The Company makes investments in equities of
publicly traded companies, categorized as short-term investments. During 2003,
the Company reduced its short-term investment portfolio, resulting in a gain on
the sale of securities of $5,218 in 2003, compared to $28,067 in 2002. In
2002, the Company completed the disposition of its shares of AmeriSource Bergen Corp. (Bergen)
and realized a gain of $26,573. These Page 28




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##### 



shares were received as partial
consideration for the sale of the Companys pharmacy services operations in
January 1999, for which the Company recorded an impairment charge of $142,084
in 1999 and $21,888 in 2000. Other income  The $3,657 of other income in 2003 includes a $2,578 gain
recognized in the third quarter of 2003. This relates to the assignment of
certain liabilities of Acceris, owed to Winter Harbor LLC (WH), the former
controlling shareholder of Acceris, to Counsel, pursuant to a settlement
agreement between the Company and WH. In the fourth quarter of 2003, the
Company recorded a $1,143 gain recognized on the discharge of certain Acceris
network carrier obligations. Impairments and other losses: Impairment on investments  The Company recorded impairments on short-term
investments of $139 in 2003 and $4,011 in 2002. In 2003, the Company recorded
impairments on certain portfolio investments of $650 compared to $640 in 2002. Other losses  In 2003, the Company recorded other losses of $1,025 compared to
$722 in 2002. The $1,025 of other losses in 2003 were costs incurred by the
Company related to its unsuccessful offer to acquire its then outstanding $40.8
million, 6% convertible unsecured subordinated debentures, and to defend its
right to settle the obligation with shares. The other losses in 2002 are due
to a $722 loss on the termination of the Companys affiliation with Springwell
Capital Partners, LLC. Interest income and expense: Interest income  Interest income increased $219 to $620 in 2003. Interest expense  The $499 increase in interest expense primarily relates to
interest on amounts owed on the Companys asset-based facility and on mortgages
and loans. The increase year over year relates primarily to higher average
outstanding loan and mortgage amounts with asset-based lenders. The balance of
the Companys revolving credit facility was $12,127 and $9,086 at December 31,
2003 and 2002, respectively. This facility had an average interest rate of 6%
during both years. The Companys convertible debentures were accounted for as a hybrid financial
instrument, which contained both debt and equity elements. Under Canadian
GAAP, the majority of the interest expense associated with the debentures was
recorded as a charge to equity and thus excluded from interest expense reported
by the Company (see note 13 (d) to the consolidated financial statements). The convertible preferred shares issued in December 2003 are also accounted for
as a hybrid financial instrument, containing both debt and equity elements.
Under Canadian GAAP, the Company recorded the majority of the dividend
associated with the convertible preferred shares as interest expense (see note
13 (d) to the consolidated financial statements). Income taxes: Income tax expense  The income tax expense for the Company was $2,937 in 2003,
compared to $9,655 in 2002. The Company has significant operating and capital losses available to reduce
future income tax expense. However, a substantial portion of the Companys tax
losses in the United States are subject to restrictions as to usage against
future taxable income as a result of the application of the change in
ownership rules in Section 382 of the Internal Revenue Code. These rules
provide that an ownership change occurs when the percentage shareholdings of 5%
direct or indirect shareholders of a loss corporation have in aggregate
increased by more than 50 percentage points during the immediately preceding
three years. Pre-existing tax losses in the United States are restricted as a
result of previous acquisitions of new subsidiaries and may be further
restricted as a result of subsequent changes in the shareholding and capital
structure of the Company and/or the particular subsidiary. Accordingly, given
the large losses incurred by the Company in recent years and the uncertainties
associated with their future usage, a large portion of the future income tax
assets resulting from tax losses have been reduced by a valuation allowance.
There is also significant uncertainty as to when the Companys estimated future
income tax liabilities will become payable or will be determined to be no
longer required by the Company. Page 29




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##### 



Discontinued operations: On May 1, 2003, the Company sold its VoIP network operations to BUI, pursuant
to an agreement signed in December 2002. During the fourth quarter of 2002, the Company adopted a formal plan of
disposal of its long-term care facilities. In October 2003, the Company
received notices of intent, from the lessee, to exercise their options to
purchase five retirement centers. The total purchase price pursuant to the
options was Cdn $30,000, before costs of disposition, and the transaction
closed in the second quarter of 2004. At December 31, 2003, the centers had a
net asset value of Cdn $22,200 and were subject to mortgages aggregating Cdn
$18,234. The remaining seniors living facilities are expected to be sold by
the fourth quarter of 2004. 2002 Compared to 2001 When considering the review of the results of continuing operations for 2002
compared to 2001, it is important to note the following significant changes in
the Companys operations that occurred in 2002 and 2001, namely:  1.
    
    On June 4, 2001, the Company completed the purchase from a bankruptcy
proceeding, of certain assets of WorldxChange, which offered a
dial-around telecommunications product. The Company did not offer a
comparable product prior to June 4, 2001.2.
    
    On December 10, 2002, the Company acquired the Enterprise and Agent
business of RSL, including the assumption of certain liabilities. RSL
offers voice services to residential and small business customers
through an indirect sales channel. RSL also offers voice and data
solutions to small and medium-size enterprise customers through a direct
sales channel. The RSL operations from December 10, 2002 to December
31, 2002 have been included in the statement of operations for 2002.3.
    
    On December 6, 2002, the Company entered into an agreement to sell
substantially all of the assets and customer base of ILC. The sale
closed in the second quarter of 2003. As a result of the sale, the
operational results related to ILC were reclassified as discontinued
operations in 2002 and 2001 and accordingly are not included in the
following analysis of continuing operations.4.
    
    In July 2002, the Company entered the real estate sector with the
purchase of five income-producing properties. Revenues: The increase in telecommunications revenue of $34,070, to $88,089 in 2002 from
$54,019 in 2001, was primarily related to the following events:  
    
    In June 2001, the Company acquired the long-distance operations of
WorldxChange from bankruptcy. The purchase was accounted for under the
purchase method of accounting. Accordingly, revenue in 2001 was limited
to revenue from the date of acquisition in June 2001 through the end of
2001 (approximately seven months) compared to twelve months of
operations in 2002. The revenues from WorldxChange accounted for
$82,752 in 2002, and all of the telecommunications revenues in 2001.  
    
    In December 2002, the Company acquired the assets of the Enterprise
and Agent business of RSL from bankruptcy. The acquisition was
accounted for under the purchase method of accounting and, accordingly,
revenue of approximately $2,500 was recognized subsequent to the
acquisition.  
    
    The primary reason for the decrease of $1,893 in revenues for the
technologies segment, to $2,837 in 2002 from $4,730 in 2001, was the
reduction in revenue relating to a two-year licensing agreement that
ended in May 2002.Real estate revenue increased to $3,343 in 2002, from $11 in 2001, due to the
Company entering the real estate sector with the purchase of five
income-producing properties in July 2002. Page 30




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##### 



Operating costs and expenses: The changes in operating costs and expenses are primarily related to the
following: Telecommunications costs  The $15,390 increase related primarily to the
inclusion of a full year of the operations of WorldxChange in 2002, compared to
only seven months in 2001. On an annualized basis, telecommunications network
expense decreased from 2001 to 2002. The decrease on an annualized basis
correlated with a 14% increase in telecommunications services revenue margin
(telecommunications services revenue less telecommunications network expense)
in 2002 over 2001, primarily relating to improved network efficiency derived
from reductions in operating costs and efficiencies relating to more scaled
utilization of the Companys network. Partially offsetting the improvement, in
2002, was the expensing of approximately $2,000 of network service offering
costs for which no revenue was recognized. This expense was not present in
2001. SG&A  The $1,387 increase related primarily to the inclusion of a full year of
the operations of WorldxChange in 2002 compared to only seven months in 2001.
This increase included $7,124 from the Retail segment and $777 from the
Enterprise segment. The overall increase was partially offset by a decrease of
$5,676 in advertising costs associated with the curtailment of a direct
advertising program in the first quarter of 2002 that had commenced in 2001. Provision for doubtful accounts  The $5,160 increase related primarily to the
inclusion of a full year of operations of WorldxChange in 2002 compared to only
seven months in 2001. Additionally, in 2002, the Company experienced a shift
in sales channels, resulting in more direct billing of customers, which tends
to incur a larger percentage of uncollectible accounts. Depreciation and amortization  The $1,734 decline in depreciation and
amortization was related to the decrease in amortization of the Companys
intangible assets of $2,350, as certain intangible assets associated with the
purchase of WorldxChange became fully amortized. This decrease was partially
offset by a full year of depreciation and amortization on the acquired tangible
assets of WorldxChange, the acquired tangible and intangible assets of RSL and
the depreciation of the five-income producing properties for half a year in the
real estate segment. R&D  Over the past several years the Company has consolidated its research
operations and curtailed research and development activities in order to
concentrate its financial resources on sales and marketing of existing
products. With the sale of the ILC business in December 2002, the Company has
suspended its research and development activities. Gains and other income: Gains on sale of investments  The Company makes investments in equities of
publicly traded companies, categorized as short-term investments. During 2002,
the Company recognized a gain on the sale of securities of $28,067 (2001 -
$42,760). In 2002, the Company completed the disposition of its shares of
Bergen and realized a gain of $26,573 (2001  $42,578). These shares were
received as partial consideration for the sale of the Companys pharmacy
services operations in January 1999, for which the Company recorded an
impairment charge of $142,084 in 1999 and $21,888 in 2000. Other income  Other income in 2002 was primarily related to WorldxChange. In
the fourth quarter, WorldxChange learned that it had funds on deposit with
certain carriers that it had not previously known existed. Upon verification
of such deposits, the Company recorded the asset and recognized other income of
approximately $200. The Company did not have similar transactions in 2001.
The other changes from 2001 relate to various items that do not recur from year
to year, and a decrease in interest earned in 2002 compared to 2001. This
corresponds to the decrease in average cash balances on hand during the
respective years and the reduction in interest rates during 2002. In December 2001, the Company sold its subsidiary, Nexbell, to an unrelated
party. Accordingly, the assets and liabilities of Nexbell were assumed by the
purchaser with no further financial obligation on the Companys part. At the
time of the Page 31




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##### 



sale the liabilities exceeded the assets of Nexbell. The Company
recorded a gain on sale of the subsidiary in the amount of $589. Impairments and other losses: Impairments on investments  The Company recorded impairments on short-term
investments of $4,011 in 2002 (2001  $1,957). In 2002, the Company recorded
impairments of certain portfolio investments of $640 (2001  $19,340). The
majority of the impairments incurred in 2001 resulted from the write down of
investments in early stage technology and internet companies. Other losses  In 2002, the Company recorded other losses of $722 (2001 -
$5,582). The other losses in 2002 are due to a $722 loss on the termination of
the affiliation with Springwell Capital Partners, LLC. Interest income and expense: Interest income  Interest income was $401 in 2002 (2001  $2,645). Interest expense  Interest expense was $3,002 in 2002 (2001  $2,517). The
$485 increase primarily relates to interest expense of approximately $447 on
the Companys revolving credit facility, which originated in December 2001, the
inclusion of interest on WorldxChanges capital leases for twelve months in
2002 as compared to seven months in 2001, and interest on mortgages payable on
the five income-producing properties in the real estate segment. The Companys convertible debentures were accounted for as a hybrid financial
instrument, which contained both debt and equity elements. Under Canadian
GAAP, the majority of the interest expense associated with the debentures was
recorded as a charge to equity and thus excluded from interest expense reported
by the Company (see note 13 (d) to the consolidated financial statements). Income taxes: Income tax expense  The income tax expense for the Company was $9,655 in 2002,
compared to $19,901 in 2001. Page 32




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##### 



Supplemental Statistical and Financial Data The following data is provided for additional information about the Companys
telecommunications operations. It should be read in conjunction with the
quarterly segment analysis provided herein. All amounts below are unaudited. 2003Q1
    
    Q2
    
    Q3
    
    Q4(In millions of dollars, except where indicated)
    
    $
    
    $
    
    $
    
    $Gross revenues  product mixDomestic long distance
    
    
    7.8
    
    
    
    7.8
    
    
    
    7.4
    
    
    
    7.5International long distance
    
    
    12.8
    
    
    
        14.4
    
    
    
    15.3
    
    
    
        15.1Total retail voice traffic revenues
    
    
    20.6
    
    
    
        22.2
    
    
    
    22.7
    
    
    
        22.6MRC/USF (1)
    
    
    2.3
    
    
    
    2.4
    
    
    
    2.8
    
    
    
    3.0Dedicated voice
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4Total retail revenues
    
    
    23.3
    
    
    
        24.9
    
    
    
    25.9
    
    
    
        26.0Enterprise revenues
    
    
    7.1
    
    
    
    6.8
    
    
    
    5.9
    
    
    
    5.9Other
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    Total telecommunications revenue
    
    
    30.4
    
    
    
        31.8
    
    
    
    32.0
    
    
    
        31.9Network service offering
    
    

    
    
    
    
    4.1
    
    
    
    3.1
    
    
    
    0.4Technology revenues
    
    
    
    
    
    
    1.1
    
    
    
    1.0
    
    
    
    0.1Total revenues
    
    
    30.4
    
    
    
        37.0
    
    
    
    36.1
    
    
    
        32.4Gross revenues  product mix (in number of minutes)Domestic long distance
    
    
    135,236,248
    
    
    
    140,798,912
    
    
    
    134,198,098
    
    
    
    121,880,023International long distance
    
    
    83,191,655
    
    
    
    93,896,850
    
    
    
    98,873,877
    
    
    
    98,978,290Dedicated voice
    
    
    9,571,155
    
    
    
    7,772,277
    
    
    
    9,364,583
    
    
    
    8,653,038Retail subscribers (in number of people):Dial around (2)
    
    
    228,330
    
    
    
    215,187
    
    
    
    206,937
    
    
    
    192,6781+ (3)
    
    
    136,896
    
    
    
    174,486
    
    
    
    168,242
    
    
    
    161,570Total subscribers
    

    
    365,226
    
    
    
    389,673
    
    
    
    375,179
    
    
    
    354,248$
    
    $
    
    $
    
    $Average monthly revenues per user (retail): (4)Dial around
    
    
        21.5
    
    
    
        19.9
    
    
    
        20.7
    
    
    
        21.81+
    
    
        23.3
    
    
    
        23.8
    
    
    
        25.2
    
    
    
        25.6$
    
    $
    
    $
    
    $Telecommunications revenue by customer type:Dial around
    
    
    14.8
    
    
    
        13.3
    
    
    
    13.7
    
    
    
        13.31+
    

    
    8.5
    
    
    
    11.6
    
    
    
    12.2
    
    
    
    12.7Enterprise
    

    
    7.1
    
    
    
    6.8
    
    
    
    5.9
    
    
    
    5.9Other
    

    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    Total telecommunications revenues
    

    
    30.4
    
    
    
        31.8
    
    
    
    32.0
    
    
    
        31.9%
    
    %
    
    %
    
    %Gross revenue  product mix (%):Domestic long distance
    
    
    33.5
    
    
    
    31.4
    
    
    
    28.6
    
    
    
    28.9International long distance
    
    
    54.9
    
    
    
    57.8
    
    
    
    59.1
    
    
    
    58.1MRC/USF
    
    
        9.9
    
    
    
        9.6
    
    
    
    10.8
    
    
    
    11.5Dedicated voice
    
    
        1.7
    
    
    
        1.2
    
    
    
        1.5
    
    
    
        1.5Total retail revenues
    

    
        100.0
    
    
    
        100.0
    
    
    
        100.0
    
    
    
        100.0%
    
    %
    
    %
    
    %Total enterprise revenues (%):Voice
    
    
    51.4
    
    
    
    51.2
    
    
    
    50.1
    
    
    
    48.4Data
    
    
    43.4
    
    
    
    41.6
    
    
    
    44.2
    
    
    
    44.9Other
    
    
    5.2
    
    
    
    7.2
    
    
    
    5.7
    
    
    
    6.7Total enterprise
    

    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
  (1)
    
    MRC/USF represents Monthly Recurring Charges and Universal Service
Fund fees charged to the customers.  (2)
    
    Dial around refers to a product that allows a customer to make a
call from any phone by dialing a 10-10-XXX prefix.  (3)
    
    1+ refers to a product that allows a retail customer to directly
make a long distance call from their own phone by dialing 1 plus the
destination number.  (4)
    
    Average revenues per user is calculated as the revenues for the last
month of the quarter divided by the number of users at the end of the
quarter. Page 33




---



##### 



The following data is provided for additional information about the Companys
real estate operations. It should be read in conjunction with the quarterly
segment analysis provided herein. All amounts below are unaudited. Income producing properties
    
    
     
    December 31, 2003Occupancy
    
    Net BookValue
    
    Mortgage
    
    NetEquity
    
    Net
OperatingIncome(NOI)
    
    InterestExpense
    
    NOI lessInterest
    
    Return onEquity
    
    Non-leveredReturnProperty
    
    Location
    
    Rates
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    %
    
    %Portage Place
    
    Peterborough, Ontario
    
    
    97.03
    %
    
    
    19,068
    
    
    
    10,034
    
    
    
    9,034
    
    
    
    1,939
    
    
    
    662
    
    
    
    1,277
    
    
    
    14
    %
    
    
    10
    %Southland Mall
    
    Winkler, Manitoba
    
    
    95.77
    %
    
    
    7,200
    
    
    
    5,295
    
    
    
    1,905
    
    
    
    909
    
    
    
    348
    
    
    
    561
    
    
    
    29
    %
    
    
    13
    %Suncoast Mall
    
    Goderich, Ontario
    
    
    95.38
    %
    
    
    7,707
    
    
    
    4,521
    
    
    
    3,186
    
    
    
    791
    
    
    
    303
    
    
    
    488
    
    
    
    15
    %
    
    
    10
    %Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    98.26
    %
    
    
    4,610
    
    
    
    3,976
    
    
    
    634
    
    
    
    518
    
    
    
    263
    (ii)
    
    
    255
    
    
    
    40
    %
    
    
    11
    %Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    85.60
    %
    
    
    1,153
    
    
    
    
    
    
    
    1,153
    
    
    
    147
    
    
    
    
    
    
    
    147
    
    
    
    13
    %
    
    
    13
    %1250 Steeles Ave. West
    
    Brampton, Ontario
    
    
    100.00
    %
    
    
    2,487
    
    
    
    2,089
    
    
    
    398
    
    
    
    292
    
    
    
    90
    
    
    
    202
    
    
    
    51
    %
    
    
    12
    %42,225
    
    
    
    25,915
    
    
    
    16,310
    
    
    
    4,596
    
    
    
    1,666
    
    
    
    2,930
    
    
    
    18
    %
    
    
    11
    %Less: Internal management fees (i)
    
    
    (175
    )Less: Interest capitalized (ii)
    
    
    
    
    
    
    (216
    )Other corporate costs
    
    
    (494)3,927
    
    
    
    1,450
  (i)
    
    Income producing properties are internally managed and
management fees are eliminated on consolidation(ii)
    
    $216 of interest was capitalized to properties under
development Segment Analysis The Company believes that providing the results of business segments on a
rolling eight-quarter basis, supplemented by commentary, provides meaningful
information for users of the consolidated financial statements. The Companys
continuing communications operations are: Telecommunications-Retail,
Telecommunications-Enterprise and Telecommunications-Technologies. Its other
reportable segments are Real Estate and Corporate. Telecommunications-Retail Unaudited
    
    AuditedTwelve months endedDecember 312002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesRetail
    
    
    22,811
    
    
    
    20,984
    
    
    
    19,834
    
    
    
    20,076
    
    
    
    23,272
    
    
    
    25,363
    
    
    
    26,070
    
    
    
    25,816
    
    
    
    49,289
    
    
    
    83,705
    
    
    
    100,521Network services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142
    
    
    
    3,079
    
    
    
    408
    
    
    
    
    
    
    
    
    
    
    
    7,62922,811
    
    
    
    20,984
    
    
    
    19,834
    
    
    
    20,076
    
    
    
    23,272
    
    
    
    29,505
    
    
    
    29,149
    
    
    
    26,224
    
    
    
    49,289
    
    
    
    83,705
    
    
    
    108,150Operating costs and expenses:Telecommunication costs (exclusive of network
services, depreciation and amortization shown below)
    
    
    13,273
    
    
    
    12,237
    
    
    
    10,973
    
    
    
    11,267
    
    
    
    14,715
    
    
    
    15,209
    
    
    
    16,032
    
    
    
    15,668
    
    
    
    35,546
    
    
    
    47,750
    
    
    
    61,624Telecommunication costs  network services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,995
    
    
    
    6,205
    
    
    
    2,165
    
    
    
    807
    
    
    
    (70
    )
    
    
    
    
    
    
    1,995
    
    
    
    9,107Selling, general and administrative
    
    
    7,698
    
    
    
    6,179
    
    
    
    5,717
    
    
    
    7,890
    
    
    
    10,788
    
    
    
    10,434
    
    
    
    10,804
    
    
    
    10,354
    
    
    
    20,558
    
    
    
    27,484
    
    
    
    42,380Provision for doubtful accounts
    
    
    1,357
    
    
    
    1,251
    
    
    
    1,118
    
    
    
    2,240
    
    
    
    1,175
    
    
    
    1,131
    
    
    
    1,465
    
    
    
    1,661
    
    
    
    839
    
    
    
    5,966
    
    
    
    5,432Depreciation and amortization
    
    
    980
    
    
    
    977
    
    
    
    966
    
    
    
    1,133
    
    
    
    1,164
    
    
    
    1,162
    
    
    
    1,453
    
    
    
    1,088
    
    
    
    2,286
    
    
    
    4,056
    
    
    
    4,867Operating income (loss)
    
    
    (497
    )
    
    
    340
    
    
    
    1,060
    
    
    
    (4,449
    )
    
    
    (10,775
    )
    
    
    (596
    )
    
    
    (1,412
    )
    
    
    (2,477
    )
    
    
    (9,940
    )
    
    
    (3,546
    )
    
    
    (15,260
    )
 Telecommunications-Retail business includes the operations of
WorldxChange, acquired in June 2001, and the Agent business of RSL acquired in
December 2002. The core business is as a facilities-based telecommunications
provider in the retail long distance market. Telecommunications-Retail also
provided a network service offering that commenced in the fourth quarter of
2002 and was discontinued in the third quarter of 2003.
Telecommunications-Retail started offering local dial tone products to its
residential and small business customers in the fourth quarter of 2003. In Page 34




---



##### 



2003, integration costs of $1,255 (included in selling, general and
administrative expenses) were incurred as the Company worked to complete the
integration of the acquired businesses. Telecommunications-Retail accounted for $108,150 of telecommunication
services revenue in 2003 (2002  $83,705; 2001 -$49,289). The increase over
2002 resulted from the recognition of revenue under the unencumbered cash basis
of accounting relating to a network service offering, and from the inclusion of
revenue from the Agent business of RSL. It is anticipated that
Telecommunications-Retail revenue will continue to increase in 2004. Telecommunications-Retails telecommunication network expense was $70,731
in 2003 (2002  $49,745; 2001  $35,546). The increase over 2002 relates
primarily to the acquisition of the former Agent business of RSL in December
2002 and the inclusion of network expenses related to the network service
offering. Many factors affect the predictability of margins. These include pricing
and cost attributes associated with over 700 long distance programs,
fluctuations in the number of minutes carried over the Companys frame relay
and voice network, changes in the contribution rate to the USF, and other
regulatory changes associated with the USF. Telecommunications-Retails selling, general and administrative expense
was $42,380 in 2003 (2002  $27,484; 2001  $20,558). The increase in 2003
resulted from the acquisition of the former Agent business of RSL, an increase
in commission costs related to the sales channel strategy (commissions paid to
commercial agents and MLM channels), an increase in personnel costs and an
increase in professional fees. Telecommunications-Retails provision for doubtful accounts was $5,432 in
2003 (2002  $5,966; 2001  $839). In 2004, the Company expects to bundle its competitive long-distance rates
with the recently launched local service and other enhanced products to offer a
unique, in-language suite of integrated services targeted at specific ethnic
markets. From the first voice a customer hears, through to the receipt of an
invoice, all communications with customers will now be in their own language.
Currently, the Company is targeting telecommunications traffic originating in
the United States with destinations in India, China, Brazil, Latin America and
Eastern Europe, and this scope will be expanded going forward. The Companys commercial agent channel will continue to focus on providing
the highest levels of service at the most competitive price, helping the
Companys agent customers become more successful. The Company also recently
launched a loyalty program to reward those agents who increase their business
with the Company by providing incremental revenue. The Company expects that
this will lead to a significant increase in revenue. As the Companys revenue mix changes in 2004, the contribution from this
business will improve for three primary reasons:  1.
    
    The Company expects to increase the revenue per customer by
converting existing customers to its bundled offering while attracting
new customers at higher average revenue rates due to the expanded
service offering, i.e. local and long-distance versus only long-distance
in 2003 and prior.2.
    
    The Company has commenced the roll out of its internally developed
VoIP and enhanced services, complemented by deploying the latest
solutions available from Nortel. This will be coupled with the
consolidation of its network operating centres from two to one, and the
reduction of the unprofitable parts of its network as traffic in these
parts of the United States will be carried off-net.3.
    
    The continued deployment of technology and standard processes and
consolidation of the Companys back office functions, teamed with the
Companys shift toward increased direct billing and the attraction of a
customer base with a longer average life will improve the return on
investment from each customer. Page 35




---



##### 



Telecommunications-Enterprise Unaudited
    
    AuditedTwelve months ended2001
    
    2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003
    
    December 31Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesEnterprise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,547
    
    
    
    7,095
    
    
    
    6,747
    
    
    
    5,854
    
    
    
    5,902
    
    
    
    
    
    
    
    1,547
    
    
    
    25,598
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,547
    
    
    
    7,095
    
    
    
    6,747
    
    
    
    5,854
    
    
    
    5,902
    
    
    
    
    
    
    
    1,547
    
    
    
    25,598Operating costs and expenses:Telecommunication costs (exclusive of depreciation
and amortization shown below)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191
    
    
    
    4,828
    
    
    
    3,945
    
    
    
    3,233
    
    
    
    3,273
    
    
    
    
    
    
    
    1,191
    
    
    
    15,279Selling, general and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    777
    
    
    
    2,768
    
    
    
    2,724
    
    
    
    2,223
    
    
    
    2,646
    
    
    
    
    
    
    
    777
    
    
    
    10,361Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    662
    
    
    
    595
    
    
    
    541
    
    
    
    440
    
    
    
    
    
    
    
    158
    
    
    
    2,238Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (612
    )
    
    
    (1,163
    )
    
    
    (517
    )
    
    
    (143
    )
    
    
    (457
    )
    
    
    
    
    
    
    (612
    )
    
    
    (2,280
    )
 Telecommunications-Enterprise is comprised of the operations of the former
Enterprise business of RSL acquired in December 2002. The Companys Enterprise channel is targeted at medium-sized companies
where the Company can compete on service and price. The Company believes its
customer service is second to none, as clients are assigned a dedicated Acceris
representative responsible for ensuring the customers needs are met. The
Company has also established strong relationships with all major
telecommunications carriers, and is thus able to design a fully managed system
for its customers utilizing a combination of carriers that best suits their
objectives. Following the acquisition of the Enterprise business of RSL, the Company
continues to deliver the high level of service that RSL has historically
brought to the market place, and which has been the hallmark of its reputation.
The revenue decline experienced during the year was due to the loss of several
customers who made the decision to change providers while the business was in a
bankruptcy proceeding, as well as to normal turnover. Following the
acquisition, the Company began to implement customer attraction strategies in
this business, which has a lengthy sales cycle. The Company expects that in
2004 its customer attraction/retention initiatives, coupled with its back
office integration initiatives, will lead to improved contributions from this
segment. The comparative figures in 2002 are for the period of December 11, 2002
through December 31, 2002. Page 36




---



##### 



Telecommunications-Technologies Unaudited
    
    AuditedTwelve months ended2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003
    
    December 31Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $

    
    $
    
    $
    
    $RevenuesTechnology and patents
    
    
    1,581
    
    
    
    888
    
    
    
    321
    
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    4,730
    
    
    
    2,837
    
    
    
    2,1641,581
    
    
    
    888
    
    
    
    321
    
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    4,730
    
    
    
    2,837
    
    
    
    2,164Operating costs and expenses:Telecommunication costs (exclusive
of depreciation
and amortization shown below)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Selling, general and administrative
    
    
    1,002
    
    
    
    968
    
    
    
    942
    
    
    
    1,350
    
    
    
    669
    
    
    
    1,652
    
    
    
    954
    
    
    
    962
    
    
    
    8,922
    
    
    
    4,262
    
    
    
    4,237Research and development
    
    
    382
    
    
    
    465
    
    
    
    317
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,162
    
    
    
    1,399
    
    
    
    Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Depreciation and amortization
    
    
    558
    
    
    
    559
    
    
    
    536
    
    
    
    470
    
    
    
    517
    
    
    
    517
    
    
    
    517
    
    
    
    528
    
    
    
    5,072
    
    
    
    2,123
    
    
    
    2,079Operating loss
    
    
    (361
    )
    
    
    (1,104
    )
    
    
    (1,474
    )
    
    
    (2,008
    )
    
    
    (1,186
    )
    
    
    (1,119
    )
    
    
    (422
    )
    
    
    (1,427
    )
    
    
    (11,426
    )
    
    
    (4,947
    )
    
    
    (4,154
    )
 Telecommunications-Technologies licenses a fully developed technology
platform to third party users that facilitates the convergence of traditional
telecommunications equipment and Internet Protocol technologies. Technology
licensing revenues and contributions are project based and, as such, these
amounts will vary from period to period based on the timing and size of
technology licensing projects and payments. One of the Companys most exciting developments in 2003 was the
acquisition of a second patent related to VoIP. Utilizing the patented
technology, VoIP enables telecommunications customers to originate a phone call
on a traditional handset, transmit any part of that call via the Internet, and
then terminate the call over the traditional telephone network. This new
patent acquisition, combined with the Companys existing VoIP patent, creates
an international patent portfolio covering the basic process and technology
that enables VoIP communications, and transforms Acceris into a major
participant in the provision of VoIP solutions. Going forward, the Company
intends to aggressively pursue recognition of its intellectual property in the
marketplace through a focused licensing program. Telecommunications-Technologies reported revenue of $2,164 in 2003 (2002 -
$2,837; 2001 -  $4,730). The revenues in 2003 relate to two contracts. The
first contract was entered into during the first quarter of 2003, with
acceptance of the technology being obtained in the second quarter of 2003. The
second contract, with an overseas customer, was entered into during the third
quarter of 2003 and is expected to continue into 2004/2005. Revenue in 2002
and 2001 was largely from a $10 million licensing agreement with a single
customer that was recognized over a twenty-four month period ending in May
2002. In 2003, Telecommunications-Technologies S,G&A expense was $4,237 (2002 -
$4,262; 2001 -$8,922). It is anticipated that S,G&A expense will change from
year to year and quarter-to-quarter, based on the business volumes in the
segment. Telecommunications-Technologies did not incur any R&D costs in 2003 (2002
- $1,399; 2001 -  $2,162). The maturity of the product offering and advancement
of the technology does not require the business to invest in R&D at this time.
However, investment in this segment may be required in the future to ensure
that the technology continues to meet the expanding needs of the customer base. Page 37




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##### 



Real Estate Unaudited
    
    AuditedTwelve months ended2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003
    
    December 31Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesCanada
    
    
    75
    
    
    
    78
    
    
    
    1,486
    
    
    
    1,704
    
    
    
    1,783
    
    
    
    1,988
    
    
    
    1,901
    
    
    
    2,127
    
    
    
    11
    
    
    
    3,343
    
    
    
    7,79975
    
    
    
    78
    
    
    
    1,486
    
    
    
    1,704
    
    
    
    1,783
    
    
    
    1,988
    
    
    
    1,901
    
    
    
    2,127
    
    
    
    11
    
    
    
    3,343
    
    
    
    7,799Operating costs and expenses:Income producing properties
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    946
    
    
    
    944
    
    
    
    1,047
    
    
    
    882
    
    
    
    999
    
    
    
    
    
    
    
    1,448
    
    
    
    3,872Depreciation and amortization
    
    
    16
    
    
    
    16
    
    
    
    107
    
    
    
    60
    
    
    
    102
    
    
    
    63
    
    
    
    68
    
    
    
    253
    
    
    
    3
    
    
    
    199
    
    
    
    486Operating income
    
    
    59
    
    
    
    62
    
    
    
    877
    
    
    
    698
    
    
    
    737
    
    
    
    878
    
    
    
    951
    
    
    
    875
    
    
    
    8
    
    
    
    1,696
    
    
    
    3,441
 The Companys real estate business, Counsel Real Estate Inc., invests in
and develops income-producing commercial properties, primarily retail shopping
centres, and receives fees for its participation in a variety of real estate
ventures and from property management activities. The Real Estate business is comprised of six income-producing properties,
five of which were purchased in the third quarter of 2002. The leasable area
of these properties is 729,722 square feet. The Real Estate segment has generated positive operating and net income
since inception and is self-funding. The Company anticipates that it will
acquire additional properties. As at December 31, 2003, income-producing
properties were 94.81% leased. The Company has two active development projects, Imperial Square and 1250
Steeles. Imperial Square, an approximately 57,000 sq. ft. retail center, is
located in Guelph, Ontario. The Imperial Square property development is
expected to cost $6,844, and will be completed in 2004. The Company expects to
fund this development through a non-revolving construction loan of up to
$4,179, bearing interest at the greater of 9.25% or prime plus 3%. The other development project, 1250 Steeles Avenue West, is located in
Brampton, Ontario. Construction is expected to begin in second quarter 2004.
The project is due to be completed by third quarter 2004. Corporate Unaudited
    
    AuditedTwelve months ended2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003
    
    December 31Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Operating
costs and expenses:Selling,
general and administrative
    
    
    3,692
    
    
    
    2,718
    
    
    
    4,016
    
    
    
    2,788
    
    
    
    1,304
    
    
    
    1,094
    
    
    
    796
    
    
    
    1,236
    
    
    
    14,780
    
    
    
    13,214
    
    
    
    4,430Depreciation
and amortization
    
    
    130
    
    
    
    40
    
    
    
    151
    
    
    
    258
    
    
    
    124
    
    
    
    25
    
    
    
    18
    
    
    
    17
    
    
    
    1,488
    
    
    
    579
    
    
    
    184Operating loss
    
    
    (3,822
    )
    
    
    (2,758
    )
    
    
    (4,167
    )
    
    
    (3,046
    )
    
    
    (1,428
    )
    
    
    (1,119
    )
    
    
    (814
    )
    
    
    (1,253
    )
    
    
    (16,268
    )
    
    
    (13,793
    )
    
    
    (4,614
    )
 Head office costs in 2003 amounted to $4,430 (2002 -  $13,214; 2001 -
$14,780). The decrease is primarily due to the reduction of overhead costs
resulting from closing the Companys New York office and the termination of the
Companys affiliation with Springwell Capital Partners, LLC. Page 38




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##### 



B. LIQUIDITY AND CAPITAL RESOURCES Summary of Consolidated Balance Sheet Data December 31,
    
    December 31,2003
    
    2002$
    
    $Total assets
    
    
    143,589
    
    
    
    134,714Working capital
    
    
    (21,933
    )
    
    
    (14,896
    )Long-term financial liabilities
    
    
    88,693
    
    
    
    75,041
 Working capital The Company has experienced a reduction of $7,037 in working capital in
2003 resulting in a working capital deficit of $21,933 at December 31, 2003
(2002  -  $14,896; 2001 -  ($12,690)). The primary changes in working capital
have resulted from a $4,787 increase in accounts payable and accrued
liabilities, a $3,053 increase in unearned revenue relating to a discontinued
network service offering, and a $3,041 increase in the revolving credit
facility. These are partially offset by an increase in current assets, due to
the reclassification of the Companys investment in preferred stock of BUI from
long term to current at December 31, 2003. The Company expects working capital to improve in 2004 as it recognizes
amounts from unearned revenue, disposes of long-term care assets and earns
operating income. Sources of funding The Company remains financially sound with $19,377 in cash and cash
equivalents and short-term investments on December 31, 2003 (2002 -  $12,075;
2001 -  $31,998). Management expects the Company to generate positive operating
income and net earnings in 2004. In 2003, included in sources of cash were existing cash reserves, proceeds
from convertible preferred shares, proceeds on the liquidation of short-term
investments and positive operating cash flow from real estate. In 2004, the
Company expects to monetize its investment in long-term care facilities on
favourable terms, and Acceris plans to obtain funds in the public market,
obtain additional financing from revolving credit facility as revenue grows and
to liquidate its equity interest in BUI. Uses of funding In 2003, funds were primarily used to fund operations, to make capital
expenditures, to make scheduled payments on mortgages and capital leases, to
acquire Transpoint and Imperial Square, and to develop Imperial Square. In 2002, funds were used to purchase five income-producing properties, to
acquire the Enterprise and Agent business of RSL from bankruptcy, and to fund
operating losses of the Companys telecommunications business. In 2001, significant outflows included funding of acquisitions to expand
the telecommunications business and to fund operating losses. Convertible debentures On October 31, 2003, the Company repaid its outstanding 6% convertible
debentures at maturity by delivering 690 common shares for each thousand
dollars of principal, resulting in the issuance of 28.2 million common shares.
A significant debenture holder filed a lawsuit to restrain the Company from
satisfying its obligation to repay the debentures at maturity by delivering
common shares. On October 28, the Ontario Superior Court of Justice dismissed
the lawsuit. The debenture holder has appealed this decision. The Company
incurred $1,025 in costs in 2003 primarily Page 39




---



##### 



related to its offer to purchase the
debentures prior to maturity, as well as in its defense of the lawsuit. At December 31, 2002, the Companys convertible debentures had an
outstanding face value of $42,561, and a fair value of $27,882. Convertible preferred shares On December 19, 2003, the Company completed a private placement of a new
series of convertible preferred shares for proceeds of $15,000. The proceeds
from the private placement will be used for working capital purposes. The
preferred shares are entitled to a dividend of 6% per annum, payable
semi-annually on January 1 and July 1 of each year, commencing July 1, 2004.
If cash dividends are not paid when due, the Company must pay the dividend via
the issuance of additional preferred shares, subject to an aggregate maximum of
2,000,000 Series A preferred shares. The preferred shares are convertible on a
one-for-one basis into common shares, by the holder and the Company, contingent
on certain conversion factors. The preferred shares are redeemable at the
option of the holder, commencing on January 1, 2009, at their original price
plus all accrued and unpaid dividends. Under Canadian GAAP, the Company accounts for such a financial instrument
as a hybrid because of its debt and equity components. At December 31, 2003,
$11,200 of the instrument is included in liabilities, while $3,800 of the
instrument is included in shareholders equity. Acquisition of securities On December 12, 2003, the Company renewed its normal course issuer bid to
purchase up to 2,430,113 common shares or 5% of the outstanding common shares
of the Company, during the 12-month period beginning December 16, 2003 and
ending on December 15, 2004. During 2003 the Company acquired 1,352,200 (2002 -  748,000; 2001 -
1,444,000) common shares for cancellation for $2,525 (2002 -  $1,532; 2001 -
$2,722). The excess of the average issue price over the repurchase price was
credited to contributed surplus. During 2003, $3,628 was credited to
contributed surplus (2002 -  $1,886; 2001 -  $3,878). 250,000 of the common
shares acquired in 2003 were from former employees. During 2003, pursuant to normal course issuer bids, the Company purchased
for cancellation $1,700 (2002 -  $200; 2001 -  $5,740) of debentures for cash
consideration of $1,161 (2002 -  $141; 2001 -  $3,180), reducing the liability
component of the debentures payable by $22 (2002 -  $9; 2001 -  $720). As a
result of the redemption and the cancellation of repurchased convertible
debentures, the outstanding face amount as at December 31, 2003 was $nil (2002
-$42,561; 2001 -  $42,761). The fair value of the debentures as at December 31,
2003 was $nil (2002 -  $27,882; 2001 -  $23,519). Property, plant and equipment Investment in property, plant and equipment for the year ended December
31, 2003 was $2,333 (2002 -  $1,739; 2001 -  $1,163). The Company expects to
invest approximately $4,000 in property, plant and equipment during fiscal
2004. Funding for these investments is expected to come from cash on hand and
short-term investments, operating cash flows, and from capital raised by
Acceris. Obligations The following table summarizes all the outstanding obligations of the
Companys continuing operations by the year in which they become due. The
Company expects to fund these obligations from operating income, cash on hand,
the renewal of mortgages and loans and the capital raised by Acceris. Page 40




---



##### 



2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Mortgages and loans
    
    
    4,377
    
    
    
    1,055
    
    
    
    1,479
    
    
    
    1,210
    
    
    
    16,714
    
    
    
    3,599
    
    
    
    28,434Convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000Revolving credit facility
    
    
    
    
    
    
    12,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,127Operating leases
    
    
    5,861
    
    
    
    2,140
    
    
    
    1,410
    
    
    
    922
    
    
    
    492
    
    
    
    374
    
    
    
    11,199Capital leases
    
    
    2,948
    
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,614Total
    
    
    13,186
    
    
    
    16,988
    
    
    
    2,889
    
    
    
    2,132
    
    
    
    17,206
    
    
    
    18,973
    
    
    
    71,374Cdn$ denominated debt
    
    
    6,611
    
    
    
    1,045
    
    
    
    1,114
    
    
    
    1,189
    
    
    
    16,685
    
    
    
    3,615
    
    
    
    30,259US$ denominated debt
    
    
    6,575
    
    
    
    15,943
    
    
    
    1,775
    
    
    
    943
    
    
    
    521
    
    
    
    15,358
    
    
    
    41,11513,186
    
    
    
    16,988
    
    
    
    2,889
    
    
    
    2,132
    
    
    
    17,206
    
    
    
    18,973
    
    
    
    71,374
 The Company expects to renew loans and mortgages as they become due, and
is subject to volatility in interest rates and property valuations at the time
of renewal. In addition, the Company has provided its Keep Well to its subsidiary,
Acceris. Under the Keep Well, the Company is obligated to fund the ongoing
operations of Acceris through June 30, 2005. In 2003, the Company funded
Acceris in the amount of $7,896 (2002 -  $13,823; 2001 -  $41,420). Related party transactions The holder of the non-controlling equity interest in the Imperial Square
retail development site, in Guelph, which was acquired in 2003, is affiliated
with a member of the board of directors of the Company. Dividends The Company did not pay any cash dividends in 2003, 2002 and 2001. The Company does not intend to pay dividends to its common shareholders.
Pursuant to the private placement of preferred shares noted below, the Company
has agreed that dividends on its common shares shall not exceed $0.09 per share
per annum, on a non-cumulative basis, as long as any Series A preferred shares
are outstanding. On December 19, 2003, the Company completed a private placement of a new
series (Series A) of convertible preferred shares. Under this agreement, the
Series A preferred shares are entitled to a dividend of 6% per annum, payable
semi-annually on January 1 and July 1 of each year, commencing on July 1, 2004.
If cash dividends are not paid when due, Counsel must issue additional Series
A preferred shares as a stock dividend (subject to an aggregate maximum of
2,000,000 Series A preferred shares). There are certain restrictions on the payment of dividends by some of the
Companys subsidiaries, due to compliance with certain business corporations
acts and covenants of its revolving credit facility. Subsequent Events Subsequent to year-end, the Company received confirmation that certain
indefeasible rights of usage (IRUs) acquired by the Company have been
reclaimed by the IRUs consortium, which is the group that owns and operates
the cable. As a result of this reclamation of the IRU by the consortium, the
Company has been discharged of approximately $767 of obligations payable to the
consortium existing at December 31, 2003. The Company recorded the discharge of
this obligation as other income for the first quarter of 2004. Subsequent to year-end, the Company converted its preferred stock in BUI
to shares of common stock. In a private placement, the Company sold 50% of the
shares of common stock for approximately $1,600, which proceeds will be used to
fund operations, capital expenditures and to improve working capital. The
Company recorded a gain of approximately $566 in the first quarter of 2004
relating to the sale of these shares. These shares were included in short-term
investments at December 31, 2003. Page 41




---



##### 



On April 16, 2004, certain shareholders of the Acceris (the Plaintiffs)
filed a putative derivative complaint in the Superior Court of the State of
California in and for the County of San Diego, (the Complaint) against
Acceris, WorldxChange Corporation, Counsel Communications LLC, and Counsel as
well as certain present and former officers and directors of Acceris, some of
whom also are or were directors and/or officers of the other corporate
defendants (collectively, the Defendants). The Complaint alleges, inter
alia, that the Defendants, in their respective roles as controlling shareholder
and directors and officers of Acceris committed breaches of the fiduciary
duties of care, loyalty and good faith and were unjustly enriched, and that the
individual Defendants committed waste of corporate assets, abuse of control and
gross mismanagement. The Plaintiffs seek compensatory damages, restitution,
disgorgement of allegedly unlawful profits, benefits and other compensation,
attorneys fees and expenses in connection with the Complaint. In addition,
the Defendants in the Complaint were named in a complaint for damages filed in
the Superior Court of the State of California in and for the County of San
Diego on April 16, 2004, in which the plaintiffs, who include the Plaintiffs in
the Complaint as well as additional plaintiffs, made claims nearly identical to
those set forth in the Complaint. The Company believes that these claims in
their entirety are without, merit and intend to vigorously defend these
actions. There is no assurance that this matter will be resolved in the
Companys favor and an unfavorable outcome of this matter could have a material
adverse impact on the business, results of operations, financial position or
liquidity. In connection with Acceris efforts to enforce it patent rights, Acceris
Communications Technologies Inc., a wholly-owned subsidiary of Acceris, filed a
patent infringement lawsuit against ITXC Corp. (ITXC) in the United Stated
District Court of the District of New Jersey on April 14, 2004. The complaint
alleges that ITXCs VoIP services and systems infringe Acceris U.S. Patent No.
6,243,373, entitled Method and Apparatus of Implementing a Computer
Network/Internet Telephone System. On May 7, 2004, ITXC filed a lawsuit
against Acceris Communications Technologies Inc., and Acceris, in the United
States District Court for the District of New Jersey for infringement of five
ITXC patents relating to VoIP technology, directed generally to the
transmission of telephone calls over the Internet and the completion of
telephone calls by switching them off the Internet and onto a public switched
telephone network. The Company strongly believes that the allegations
contained in the ITXC complaint are, in their entirely, without merit and it
intends to provide a vigorous defense to the ITXC claims. On October 31, 2003, the Company repaid all of its outstanding convertible
debentures by delivering 690 common shares for each $1,000 of principal,
resulting in the issuance of 28.2 million common shares. A significant
debenture holder filed a lawsuit to restrain the Company from satisfying its
obligation to repay the debentures at maturity by delivering common shares. On
October 28, 2003 the Ontario Superior Court of Justice dismissed the lawsuit.
The former debenture holder appealed this decision to the Ontario Court of
Appeal. On May 20, 2004, the Court of Appeal ruled that the appeal was
improperly brought before the Court of Appeal, and ordered that the appeal be
transferred to the Ontario Divisional Court. The appeal is presently scheduled
for November, 2004. On May 31, 2004, Counsel sold its five retirement centers in Canada to the
lessee, pursuant to exercise options in the lease agreement. The total purchase
price pursuant to the options is Cdn $30 million, before costs of disposition.
The properties had a net book value of Cdn $22 million and were subject to
mortgages aggregating approximately Cdn $18 million. On June 11, 2004, Counsel received a NASDAQ Staff Determination indication
that Counsel fails to comply with the market value of listed shares
requirements for continued listing set forth in Marketplace Rule
4310(c)(2)(B)(ii), and that its Common Stock will be delisted from the NASDAQ
Smallcap Market at the opening of business on June 21, 2004, unless the Company
requests a hearing before a NASDAQ Listing Qualifications Panel before the end
of business on June 17, 2004. A hearing has been requested and is scheduled
for July 8, 2004. Under applicable rules, the hearing will stay the delisting
of the Companys Common Stock, pending a decision by the NASDAQ Panel. There
can be no assurance that the decision of the NASDAQ Panel will be favourable to
Counsel. If Counsels Common Stock is delisted following the hearing,
Counsels Common Stock may be eligible for listing on the Over the Counter
Bulletin Board. It should be noted, however, that Counsels primary exchange
listing is The Toronto Stock Exchange and that it
is fully compliant with the listing requirements of that exchange. Page 42




---



##### 



C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. The Company suspended its research and development activities in 2002, and
will resume investing in research and development when it becomes necessary to
supplement Acceris technology platform. Acceris owns four patents and utilizes the technology supported by those
patents in providing its proprietary software solutions. The Company believes
that it holds the foundational patents for voice internet transmission system
in its VoIP Patents. To date, the Company has licensed portions of that
technology to third parties. In addition, Acceris also has several patent
applications pending before United States Patent and Trademark Office and other
such authorities internationally. D. TREND INFORMATION The Company does not know of any significant trends, uncertainties,
demands, commitments, or events that would have a material effect on the
Companys financial condition, other than those disclosed in this report. E. OFF-BALANCE SHEET ARRANGEMENTS The Company has guaranteed the repayment of certain mortgages amounting to
$40,236. Seven of these mortgages, amounting to $30,900, are payable by a
limited partnership in which the Company has a 50% equity interest. The
Companys investment in this limited partnership has a carrying value of $nil.
In 1984 the Company sold seven long-term care facilities to the limited
partnership, and the Company continues to act as guarantor for the repayment of
the first mortgages on the facilities, which were assumed by the limited
partnership. The limited partnership is in compliance with the terms of the
mortgages and, accordingly, the Company has not recognized any liability that
may arise under the guarantees provided. The Company believes that the value
of the facilities, which have been provided as collateral for the guarantee, is
in excess of the amount of the mortgages and, on a sale or liquidation, would
be sufficient to reimburse the Company for any payments that became due under
these guarantees. In addition, the Company has provided a guarantee for the repayment of a
mortgage of $9,336 payable by another limited partnership. In 1985 the Company
sold a long-term care facility to the limited partnership. The mortgage on the
facility was assumed by the partnership and continues to be guaranteed by the
Company. The Company receives a fee for this guarantee. The Company has no
equity interest in the partnership; however, it does receive an annual
incentive fee from the partnership based on the partnerships financial
performance, and is entitled to participate in the proceeds of a sale or
refinancing of the facility. The limited partnership is in compliance with the
terms of the mortgage and, accordingly, the Company has not recognized any
liability that may arise under this guarantee. The Company believes that the
value of the facility, which has been provided as collateral for the guarantee,
is in excess of the amount of the mortgage and, on a sale or liquidation, would
be sufficient to reimburse the Company for any payment that became due under
this guarantee. Counsel has agreed to fund through long-term inter-company advances or
equity contributions, all capital investment, working capital or other
operational cash requirements of its major subsidiary, Acceris. The Keep Well
obligates Counsel to continue its financial support of Acceris through June 30,
2005. During 2003, Counsel advanced Acceris approximately $7,896 under its
Keep Well, converted approximately $5,667 of accrued interest into principal
and converted $40,673 of existing loans receivable from Acceris into equity in
Acceris, increasing its ownership of Acceris from 70% to 91%. In 2004, Acceris
intends to approach the capital markets directly to raise funds. Should this
not occur, Acceris will call upon the Keep Well. At December 31, 2003,
Counsel had $19,377 in cash and equivalents and short-term investments to
support any requirements under the Keep Well. Counsel also has the ability to
obtain additional financing on its existing assets, including but not limited
to its 91% equity interest in Acceris and loans receivable from Acceris, as
well as its long-term care, real estate and other corporate assets. While
management believes that the Company will be able to meet its commitments, the
possibility exists that unforeseen events, adverse
business conditions, or other factors could affect the Companys
liquidity. If such events or conditions occur, management believes the Company
could pursue alternative plans. However, there can be no assurance that such
alternatives will be available or that management will be successful in their
implementation. Page 43




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F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes all of the outstanding obligations of the
Companys continuing and discontinued operations by year that they become due.
The Company expects to fund these obligations from operating income, cash on
hand, the renewal of mortgages and loans, and the monetization of existing
assets. Contractual obligations
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Mortgages
and loans - continuing operations
    
    
    4,377
    
    
    
    1,055
    
    
    
    1,479
    
    
    
    1,210
    
    
    
    16,714
    
    
    
    3,599
    
    
    
    28,434Mortgages
and loans - discontinued operations (i)
    
    
    238
    
    
    
    8,288
    
    
    
    5,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,109Convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000Revolving credit facility
    
    
    
    
    
    
    12,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,127Operating leases
    
    
    5,861
    
    
    
    2,140
    
    
    
    1,410
    
    
    
    922
    
    
    
    492
    
    
    
    374
    
    
    
    11,199Capital leases
    
    
    2,948
    
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,614Total
    
    
    13,424
    
    
    
    25,276
    
    
    
    8,472
    
    
    
    2,132
    
    
    
    17,206
    
    
    
    18,973
    
    
    
    85,483
 (i) These obligations were eliminated on May 31, 2004 as a result of the sale of the related assets. In addition, the Company has provided the Keep Well to its communications
platform company, Acceris. Under the Keep Well, the Company is obligated to
fund the ongoing operations of Acceris through June 2005. G. SAFE HARBOUR See Note Regarding Forward Looking Statements on page 3. Page 44




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ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT NAME
    
    POSITIONAllan C. Silber
    
    Chairman, President and Chief Executive OfficerFrank Anderson
    
    DirectorAnthony F. Griffiths
    
    DirectorNorman Hill
    
    DirectorWilliam H. Lomicka
    
    DirectorPhilip Reichmann
    
    DirectorGary M. Clifford
    
    Chief Financial OfficerKelly D. Murumets
    
    Executive Vice PresidentStephen A. Weintraub
    
    Senior Vice President and SecretaryCatherine A. Moran
    
    Vice President of Accounting and Corporate ControllerGary Taylor
    
    Director of TaxationJoshua M. Silber
    
    President of Counsel Real Estate Inc.Howard Wortzman
    
    Chief Financial Officer, Counsel Real Estate Inc.James G. Ducay
    
    Executive Vice President and Chief Operating Officer, AccerisKenneth L. Hilton
    
    Executive Vice President, Sales and Marketing, Acceris
 The terms of office of all directors expire at the next annual meeting or
until their successors are elected or appointed. Allan C. Silber, 55, was one of the founders of the Company in 1979. He
has been Chairman and Chief Executive Officer since that time. Mr. Silber
attended McMaster University and received a Bachelor of Science degree from the
University of Toronto. Frank Anderson, 61, became a director of the Company in July 2003. Mr.
Anderson is the President of LIN Solutions Inc. Mr. Anderson serves as a
Trustee of InnVest REIT and O&Y REIT, both publicly traded real estate
investment trusts. He is also a Director of Dundee Wealth Management Inc. Mr.
Anderson was a senior partner in the Toronto office of a major accounting firm
until his retirement in 1999. He specialized in the consumer products, real
estate, hospitality and advertising industries. Mr. Anderson obtained an
undergraduate degree in Economics from the University of Glasgow, his C.A.
designation from the Institute of Chartered Accountants of Scotland and was
elected a Fellow of the Institute of Chartered Accountants of Ontario in 1997. Anthony F. Griffiths, 73 has been a director of the Company since June
2002. He has been an independent consultant and corporate director since 1993.
He is a director and Chairman of Slater Steel Inc., Russel Metals Inc. and
Brazilian Resources, Inc. He is also a director of a number of other public
companies including ShawCor Ltd., Vitran Corporation, Calian Technologies Ltd.,
Fairfax Financial Holdings Limited, Leitch Technology Corp., Lindsey Morden
Group Inc., IMI International Medical Innovations Inc., Alliance Atlantis
Communications Inc., The Hub Group Limited, Trojan Technologies Inc. and
Odyssey Re Holdings Corp. Norman Hill, 77, has been a director of the Company since March 1984. He
has been President of Norman Hill Realty Inc., a real estate broker, for more
than ten years. William H. Lomicka, 67, has been a director of the Company since June
2002. Mr. Lomicka is Chairman of Coulter Ridge Capital, Inc. a private
investment firm, a position he has held since 1999. Between 1989 and 1999 he
was President of Mayfair Capital, Inc., a private investment firm. Mr. Lomicka
is a director of Pomeroy IT Solutions and is also on the board of advisors of
Valley Ventures, an Arizona venture capital fund. Mr. Lomicka is a graduate of
the College of Wooster in Wooster, Ohio, and has a Masters of Business
Administration degree from Wharton School of the University of Pennsylvania. Page 45




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Philip Reichmann, 46, has been a director of the Company since November
1984. He has been Chief Executive Officer of O&Y Properties Corporation,
focused on the ownership, management and development of office buildings, since
February 1997. He is also Chief Executive Officer of O&Y REIT, a real estate
investment trust. Gary M. Clifford, 35, joined the Company in November 2002. Prior to his
involvement with Counsel, Mr. Clifford was employed by Leitch Technology
Corporation as Director of Finance/Controller (1998 to 2000), Vice President
Corporate Development (2000 to 2001) and Vice President Operations (2001 to
2002). From 1996 to 1998, Mr. Clifford worked for Netstar Communications Inc.
Mr. Clifford is a Chartered Accountant, who articled with Coopers & Lybrand,
and a graduate of the University of Toronto, with a Bachelors degree in
Management. Kelly D. Murumets, 40, joined the Company in February 2002. Prior to her
involvement with Counsel, Ms. Murumets was a Vice President with Managerial
Design where she was a valued advisor to clients throughout North America
giving leaders the insight and guidance required to implement change, achieve
results and improve profitability. Ms. Murumets received her BA from Bishops
University, her MBA from University of Western Ontarios Ivey School of
Business and her MSW from Wilfrid Laurier University in 1996, where she was the
recipient of the Gold Medal and Governor Generals Award. Stephen A. Weintraub, 56, joined the Company in June 1983 as Vice
President, Finance and Chief Financial Officer. He has been Secretary since
February 1987 and Senior Vice President since September 1989. Mr. Weintraub
received a Bachelors degree in Commerce from the University of Toronto in
1969, qualified as a Chartered Accountant with Clarkson, Gordon (now Ernst &
Young LLP) in 1972 and received his law degree (LL.B.) from Osgoode Hall Law
School, York University in 1975. Catherine A. Moran, 37, joined the Company in February 2004 as Vice
President of Accounting and Corporate Controller. Prior to her involvement
with Counsel, Ms. Moran was employed by Alliance Atlantis Communications Inc.
as Vice President of Finance, Entertainment Group (2003-2004), Director of
Finance, Entertainment Group, (2000-2003) and Controller, Production
(1999-2000). From 1996 to 1999, Ms. Moran worked for Discovery Channel, a
Netstar Communications Inc. company. Ms. Moran is a Chartered Accountant, who
articled with Coopers & Lybrand, Rosenberg, Smith and Partners and Doane
Raymond. Ms. Moran received her Bachelor of Commerce degree from the
University of Toronto in 1990. Gary Taylor, 34, joined the Company as Director of Taxation in October
2002. Prior to joining Counsel, Mr. Taylor worked as a Senior Manager in the
tax consulting practice of PricewaterhouseCoopers LLP in Toronto where, in
particular, he obtained extensive experience working with medium-sized and
large multinational corporations with real estate interests in and outside
Canada. Mr. Taylor is originally from South Africa where he qualified as a
Chartered Accountant before moving to Canada in 1995 and obtaining his Canadian
CA designation. Joshua M. Silber, 31, joined Counsel Corporation in 2001 as Vice
President, responsible for its real estate activities. In 2002 Josh took the
role of President of Counsel Real Estate Inc. a wholly owned subsidiary of
Counsel Corporation. Prior to joining Counsel Corporation Josh founded Silvest
Developments in 1998, a commercial real estate company. He began his real
estate career at Ballantry Homes where his duties included customer service and
business development. Mr. Silber graduated from Concordia University in 1995
and holds a BA in Social Science. Howard Wortzman, 54, joined Counsel Corporation as a controller for
Counsel Corporations real estate division in 1986 and within one year was
promoted to a VP responsible for financial reporting, tax planning and
compliance and treasury for Counsels entire real estate operations. In 1993
he became CFO of Counsel Corporation providing similar line functionality and
joined Counsels top executive team. In October of 2002 upon Counsels
re-entrance into the real estate sector, he was delighted to accept the role of
CFO for Counsel Real Estate Inc., while remaining as a member of Counsels top
executive team. Prior to joining Counsel, he was an accountant with Arthur
Andersen from 1975 to 1980, and with Soberman Isenbaum & Colomby from 1981
until his joining Counsel. Mr. Wortzman is a Chartered Accountant and
received his MBA from York University in 1975 and his Honours BA from the
University of Toronto in 1973. James G. Ducay, 45, was named Executive Vice President and Chief Operating
Officer of Acceris in October 2003. From December 2002 until October 2003, Mr.
Ducay served a President of the Acceris enterprise business. Previously, From
April 2000 to December 2002, Mr. Ducay was Executive Vice President and Chief
Operating Officer Page 46




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##### 



of RSL with responsibilities for Marketing, Sales and Account Services,
Engineering and Operations and Information Technology. Before joining RSL, Mr.
Ducay was Vice President of Marketing and Sales for Ameritech Interactive Media
Services from February 1998 to April 2000. He also served as Managing Director
and Vice President for Bell Atlantic/NYNEX. Mr. Ducay has a Masters Degree in
Engineering from the University of Illinois and a Masters Degree in Business
Administration from the University of Chicago. Kenneth L. Hilton, 51, was named Acceris Executive Vice President, Sales
and Marketing in October 2003. Previously, he was Chief Executive Officer of
WorldxChange Corporation from May 2002. From June 1999 to December 2001, Mr.
Hilton served as the Chief Executive Officer of Handtech.com, an internet based
start-up company in Austin, TX that provided customized E-commerce storefronts,
supply chain management and back office services to value-added sellers. From
October 1995 to May 1999, he was the Executive Vice President of North American
Consumer Sales for Excel Communications, where he also served as Chairman of
the Board for Excel Canada. Prior to Excel, he ran the North America
operations for PageMart Wireless where he launched the Canadian business and
also served as the Chairman of the Canadian Board. Prior to PageMart, Mr.
Hilton held numerous sales and management positions with IBM. Page 47




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B. COMPENSATION The following table sets forth information concerning the annual and long
term compensation earned for services rendered to the Corporation and its
subsidiaries during 2003 in respect of each of the individuals who were at any
time during the fiscal year ending December 31, 2003, the Chief Executive
Officer and the other four most highly compensated executive officers of the
Corporation (the named executive officers): (In Canadian dollars) Long TermCompensationAnnual Compensation
    
    AwardsOther Annual
    
    Securities UnderSalary
    
    Bonus
    
    Compensation
    
    Options Granted
    
    All OtherName and Principal Position
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    CompensationALLAN SILBER
Chairman and Chief
Executive Officer
    
    
    580,000
    
    
    
    696,000
    
    
    
    48,781
    (1)
    
    
    
    
    
    
    133,000
    (2)SAMUEL SHIMER
Senior Vice President,
M&A, Acceris
Communications Inc.
    
    
    382,690
    
    
    
    
    
    
    
    24,678
    (1)
    
    
    
    
    
    
    66,700
    (2)GARY WASSERSON (3)
President, Acceris 
Communications
Technologies Inc.
    
    
    584,472
    
    
    
    
    
    
    
    11,986
    (1)
    
    
    
    
    
    KEN HILTON
Executive Vice President,
Sales & Marketing,Acceris
Communications Inc.
    
    
    382,690
    
    
    
    76,538
    
    
    
    
    
    
    
    150,000
    (4)
    
    JAMES DUCAY 
Executive Vice President,
Chief Operating Officer,
Acceris Communications
Inc.
    
    
    382,690
    
    
    
    
    
    
    
    
    
    
    
    150,000
    (4)
    
    
 During the year ended December 31, 2003, the company paid its directors and
executive officers, as a group, for services in all capacities, C$5,328,345.   (1)
    
    This amount reflects imputed interest on interest free loans provided
under the Corporations securities purchase programs described under Item
7B -  Related Party Transactions.(2)
    
    Mr. Silber was appointed interim Chief Executive Officer and President of
Acceris Communications Inc. as of December 19, 2002 at which time the
board of directors of Acceris determined that Mr. Silber should be
entitled to an annual salary of US$275,000 and a discretionary bonus equal
to 100% of his base salary. For 2003, no bonus was awarded. Mr. Silber
elected to assign his salary payable at December 31,2003 to the
Corporation with the intention that it be allocated to the executive
officers of the Corporation who were directly involved in the operations
and management of Acceris. Of this amount US$100,000 was subsequently
allocated to Mr. Silber and US$50,000 was allocated to Mr. Shimer.(3)
    
    Gary Wasserson ceased to be an officer of the Corporation at the end of
December 2003.(4)
    
    Options to purchase common shares of Acceris Communications Inc. Page 48




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Options Securities Under
    
    % of Total Options Granted
    
    Exercise or Base
    
    Market Value of Securities UnderlyingName
    
    Options Granted (#)
    
    To Employees in 2003
    
    Price ($/Security)
    
    Options on the Date if Grant ($/Security)
    
    Expiration DateKenneth Hilton
    
    
    150,000
    (1)
    
    
    11.6
    %
    
    US$
    3.00
    
    
    US$
    3.00
    
    
    December 21, 2011James Ducay
    
    
    150,000
    (1)
    
    
    11.6
    %
    
    US$
    3.00
    
    
    US$
    3.00
    
    
    December 21, 2011
  (1)
    
    Options to purchase common shares of Acceris Communications Inc. Employment Agreements The Corporation entered into an employment agreement with Allan Silber
dated as of February 1, 1994. This agreement was amended by an amendment
agreement dated as of January 3, 1997. Under this employment agreement, as
amended, Mr. Silber was entitled to receive in 1997, and each of the two
following financial years, a predetermined base salary of C$575,000 and an
annual bonus in an amount determined by the Compensation Committee. After
1999, the base salary shall be reviewed annually and may be increased at the
discretion of the Compensation Committee. The bonus is calculated with
reference to the satisfaction of certain objectives to be determined, provided
the bonus for any year shall not exceed Mr. Silbers base salary for that year.
Pursuant to the employment agreement, as amended, in the event of his
termination by the Corporation, Mr. Silber shall be paid an amount equal to the
aggregate of the base salary and any bonuses paid to Mr. Silber in respect of
the two full calendar years immediately preceding the date of termination. Mr.
Silber has the option of terminating his agreement and receiving the
termination payment if any person, other than Allan Silber or a person who does
not deal at arms length with Allan Silber, acquires control of the
Corporation. The Corporation may terminate the employment of Mr. Silber for
cause without the requirement to pay the prescribed termination amount. Effective October 31, 2001, Counsel Corporation (US), a wholly owned
subsidiary of the Corporation, entered into an employment agreement with Gary
Wasserson whereby Mr. Wasserson became a Managing Director of Counsel
Corporation (US). The agreement expired on December 31, 2003 and was not
extended. Mr. Wasserson is entitled to an annualized base salary of US$550,000
until June 30, 2003 and US$275,000 thereafter. For the calendar year ended
December 31, 2003, Mr. Wasserson was eligible to receive bonus compensation in
an amount up to US$137,500. Mr. Wasserson also had the right to participate in
the Corporations 2001 Executive Stock Purchase Plan. On May 1, 2002, Acceris Communications Corp. (formerly, WorldxChange
Corp.), a wholly owned subsidiary of Acceris, and Kenneth L. Hilton entered
into a four-year employment agreement pursuant to which Mr. Hilton became Chief
Executive Officer of Acceris Communications Corp. Mr. Hiltons annual salary is
US$275,000, and he is eligible for a discretionary bonus in an amount to be
determined by the board of Acceris up to 100% of his annual salary. Counsel
Communications LLC (Counsel Communications), a wholly owned subsidiary of the
Corporation, and the Corporation also entered into an agreement with Mr. Hilton
dated May 1, 2002, under which agreement, Mr. Hilton was issued approximately
0.2% of the common units of Counsel Communications, which common units were to
vest over a four-year period commencing on May 1, 2003. On July 1, 2002, Acceris and James G. Ducay entered into an employment
agreement, which became effective on December 10, 2002, the date on which
Acceris Communications Corp. completed its acquisition of certain assets of RSL
COM U.S.A., Inc., and expired on December 10, 2003. Mr, Ducays annual salary
is US$275,000, and he is eligible for a discretionary bonus in an amount to be
determined by the board of Acceris of up to 100% of his annual salary. On
January 1, 2004, Mr. Ducay entered into a new employment agreement with the
Corporation which is effective until January 1, 2005, under substantially the
same material terms and provisions. C. BOARD PRACTICES Compensation Committee Decisions on compensation of the Corporations senior executives are made
by the compensation committee of the Corporations board of directors (the
Compensation Committee). All members of the Compensation Committee are
non-employee directors. It is the responsibility of the Compensation Committee
to assure the Board that the executive compensation programs are reasonable and
appropriate, meet their stated purpose and effectively serve the Page 49




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needs of the
Corporations shareholders and the Corporation. For 2003, directors William
Lomicka, Norman Hill and Philip Reichmann comprised the Boards Compensation
Committee. The Corporation believes that the executive compensation program should
align the interests of shareholders and executives. The Corporations primary
objective is to maximize shareholder value. The Compensation Committee seeks to
forge a strong link between the Corporations strategic business goals and its
compensation goals. The Corporations executive compensation program is consistent with the
Corporations overall philosophy for all management levels. The Corporation
believes that the more employees are aligned with the Corporations strategic
objectives, as stated below, the greater the Corporations success on both a
short term and long term basis. The Corporations executive compensation program has been designed to
support the overall Corporation strategy and objective of creating shareholder
value by:  
    
    emphasizing pay for performance by having a significant portion
of executive compensation at risk
    
    directly aligning the interest of executives with the long term
interest of shareholders by awarding stock options at current market
prices which have value to the executives only through stock
appreciation over the long run
    
    providing compensation opportunities that attract and retain
talented and committed executives on a long term basis
    
    appropriately balancing the Corporations short term and long
term business, financial and strategic goals The Corporations strategic goals are:  
    
    profitability: to maximize financial returns to its shareholders
    
    growth: to expand the operations of the Corporation in such a
manner as not to imperil the achievement of other objectives
    
    stability: to be seen as a desirable employer and a responsible
corporate citizen Currently, the Corporations executive compensation program is comprised
of three components: base salary, annual cash incentive (bonus) and long term
incentive opportunity through stock options and share purchase loans. The
annual executive pay targets (base salary plus incentive) are intended to be
market competitive with similar companies when the Corporation or the
individual business units meet or exceed their respective annual operating
goals. Additional compensation may be awarded based on achievement of specific
extraordinary projects or assignments. Base Salary -  Unless determined pursuant to their employment agreements,
the base salaries of the Corporations executive officers are evaluated
annually. In evaluating appropriate pay levels and salary increases for
Corporation executives, the Compensation Committee considers achievement of the
Corporations strategic goals, level of responsibility, individual performance,
internal equity and external pay practices. Annual Incentives -  Annual incentive (bonus) awards are designed to focus
management attention on key operational goals for the current fiscal year.
Corporation executives may earn a bonus based upon achievement of their
specific operational goals and achievement by the Corporation or business unit
of its financial targets. Long Term Incentives -  The Corporations long term incentive compensation
program consists of stock options and share purchase loans which are related to
improvement in long term shareholder value. Stock option grants and share
purchase loans provide an incentive that focuses the executives attention on
managing the Corporation from the perspective of an owner with an equity stake
in the business. These grants and loans also focus operating decisions on long
term results that benefit the Corporation and long term shareholders. As a
result of the Sarbanes-Oxley Act of 2002, the Corporation no longer provides
share purchase loans to its employees. The option grants to executive officers offer the right to purchase common
shares at their fair market value on the date of the grant. These options will
have value only if the Corporations share price increases. The number of
shares covered by each grant is intended to reflect the executives level of
responsibility and past and anticipated contributions to the Corporation. Page 50




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Pursuant to the former Corporations Employee Share Purchase Loan Plan,
designated employees are eligible to receive an interest free loan from the
Corporation of 80% of the cost of acquisition of the shares purchased by the
employee on the open market. The shares purchased by the employee are pledged
to the Corporation as security for the loan. The maximum number of shares that
may be purchased by an individual employee is equal to 125% of the employees
outstanding stock options of the Corporation subject to a maximum loan amount
of US$600,000 per employee. Each loan is repayable on the earliest (1) of five
years from the date it is advanced, (2) the date the shares purchased are sold,
and (3) the date the employment of the employee with the Corporation or its
affiliates is terminated. If the employee sells the shares purchased with the
loan before the third anniversary of their acquisition, the employee is
required to pay the Corporation an amount equal to 10% per annum of the loan
for the period during which it was outstanding, plus 50% of the gain realized
by the employee on the sale of the shares. Pursuant to the Corporations 2001 Executive Stock Purchase Plan (the
2001 Plan) designated executive employees were eligible to receive an interest
free loan from the Corporation of 80% of the cost of acquisition of the shares
purchased by the employee on the open market, provided that the maximum
aggregate amount lent under the 2001 Plan did not exceed US$4,000,000. The
shares were pledged to the Corporation as security for the loan. Each loan is
repayable on the earliest of (1) ten years from the date it is advanced, (2)
the date the shares purchased are sold, and (3) 30 days following the date the
employment of the employee with the Corporation or its affiliates is
terminated, provided that 20% of each loan shall payable on each of the sixth,
seventh, eighth, ninth and tenth anniversaries of the date of advance. If the
employee sells the shares purchased with the loan before the third anniversary
of their acquisition, the employee is required to pay the Corporation an amount
equal to 10% per annum of the loan for the period during which it was
outstanding, plus 50% of the gain realized by the employee on the sale of the
shares. For each share purchased by an executive employee pursuant to the 2001
Plan, the Corporation awarded the employee one-half of an option pursuant to
the Corporations 1997 Stock Option Plan. As a result of the implementation of the Sarbanes-Oxley Act of 2002, no
new loans may be made pursuant to the Employee Share Purchase Loan Plan or the
2001 Executive Stock Purchase Plan. In addition, executive officers of the Corporation may be granted options
to acquire shares of the Corporations subsidiaries and significantly
influenced companies. The rationale for such grants is similar to that for
option grants of the Corporations shares and the quantum reflects the
executives expected level of involvement in the particular subsidiary or
significantly influenced company. Audit Committee During 2003, the Audit Committee was comprised of three directors: Frank
Anderson. Anthony F. Griffiths, and William Lomicka, all of whom were unrelated
directors. Each member of the committee is financially literate. Annual
financial statements of the Corporation are reviewed by the Audit Committee and
form the basis of a report thereon to the entire Board. The Audit Committee is
also responsible for monitoring the Corporations internal accounting controls
and for reviewing the performance and the remuneration of the Corporations
independent auditors. The Audit Committee has unrestricted access to the
Corporations auditors without the presence of management. The Audit Committee operated pursuant to a written charter that was
approved and adopted by the Board on November 16, 2000 and amended on May 13,
2004. Governance Committee During 2001, the Corporation established a Governance Committee to oversee
governance matters, to report thereon and to make recommendations to the full
Board. During 2003, the members of the committee consisted of Philip Reichman,
Anthony F. Griffiths and William H. Lomicka, all of whom are unrelated
directors. Specifically, the Corporations Governance Committee has been given responsibility for:  
    
    Ensuring compliance with and a response to the TSX Guidelines
    
    Monitoring and assessing the performance of management as a
whole and the individual members of management Page 51




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
    
    Monitoring and assessing the individual and collective
performance of the Board
    
    Seeking and obtaining comment (whether by way of written
questionnaires or through private discussions) on the adequacy of the
Corporations approach to corporate governance form the remaining
members of the Board and from management, and development responses
to the concerns raised, if any. Compensation of Directors The Corporation pays fees to directors (stated in absolute dollars) who
are not officers of the Corporation or its subsidiaries. Effective January 1,
1992 such fees were established at $1,000 per board meeting, $500 per committee
meeting and an annual retainer of $12,000. Effective July 1, 2002, these fees
were increased to $1,500 per board meeting, $750 per committee meeting and an
annual retainer of $15,000. In addition, in 2002, each outside director was
granted 25,000 options pursuant to the Corporations 1992 Stock Option Plan and
in 2003 Frank Anderson was granted 25,000 options pursuant to the Corporations
1997 Stock Option Plan. The compensation for outside directors is currently
under review by the Compensation Committee. D. EMPLOYEES As at December 31, 2003, the Corporation and its subsidiaries employed
approximately 1,470 employees, of which approximately 340 were employed by
Acceris and its subsidiaries, approximately 1,100 were employed at the seven
Canadian nursing homes leased by the Corporation, which form part of the
Corporations discontinued long-term care operations, and 30 were employed by
the Corporation in its real estate operations and at its head office. Page 52




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E. SHARE OWNERSHIP The following table sets out the approximate number of shares of the
Company beneficially owned or over which control or direction is exercised by
the directors and named executive officers as of April 30, 2004. The table does
not reflect shares which may be acquired pursuant to the exercise of options. Number of
    
    Percentage of OutstandingName
    
    Common Shares
    
    Common SharesAllan C. Silber
    
    
    4,531,261
    (1)
    
    
    9.3
    %Anthony F. Griffiths
    
    
    40,000
    
    
    
    *Norman Hill
    
    
    231,550
    
    
    
    *William H. Lomicka
    
    
    36,700
    
    
    
    *Philip Reichmann
    
    
    28,100
    (2)
    
    
    *Sam Shimer
    
    
    653,011
    
    
    
    1.3
    %Gary Wasserson
    
    
    330,000
    
    
    
    *Gary M. Clifford
    
    Nil
    
    
    *Kelly D. Murumets
    
    
    250,000
    
    
    
    *Stephen A. Weintraub
    
    
    216,901
    
    
    
    *Catherine A. Moran
    
    Nil
    
    
    *Gary Taylor
    
    Nil
    
    
    *Joshua M. Silber
    
    
    807,542
    
    
    
    1.7
    %Howard Wortzman
    
    
    185,500
    
    
    
    *Kenneth L. Hilton
    
    Nil
    
    
    *James G. Ducay
    
    Nil
    
    
    *
   *
    
    Less than 1%.(1)
    
    Allan Silber owns 1,432,069 common shares and CXS Holdings Inc., a
company controlled by Allan Silber, owns 3,099,192 shares. In addition,
Allan Silbers spouse and children own 2,557,218 shares.(2)
    
    Philip Reichmann is a member of the Albert Reichmann family, which
directly and beneficially owns PF&R Holdings Inc., a private
corporation, which owns 1,000,000 common shares in the capital of the
Corporation. Page 53




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##### 



STOCK OPTIONS Under the 1992 Director, Officer and Employee Stock Option Plan, the
Company may grant options to its directors, officers and employees for up to
2,700,000 Common Shares. Under the 1997 Stock Option Plan, the Company may
grant options to its directors, officers, employees and any other person or
company engaged to provide ongoing management or consulting services for the
Company, for up to 4,200,000 Common Shares. Under both plans, the exercise
price of each option equals the market price of the Companys Common Shares on
the date of grant. The maximum term of the grant is six years from the date of
initial vesting of any portion of the grant unless otherwise provided. Unless
otherwise provided, options vest 20% on the date of grant and 20% on each of
the first through fourth anniversaries of the grant date. All unvested options
vest upon a change of control of the Company. At April 30, 2004, a total of
1,590,125 shares were subject to options and 2,737,875 shares were available
for grant. The following table sets out details of the options granted to the
directors and named executive officers as at April 30, 2004. Prices are in Canadian dollars Name
    
    under Options
    
    Price/Share
    
    Expiry DateAllan C. Silber
    
    Nil
    
    
    
    
    
    
    Frank Anderson
    
    
    25,000
    
    
    
    2.22
    
    
    July 18, 2009Anthony F. Griffiths
    
    
    25,000
    
    
    
    3.00
    
    
    Sep. 30, 2008Norman Hill
    
    
    3,000
    
    
    
    16.90
    
    
    June 9, 20043,000
    
    
    
    8.00
    
    
    June 8, 20053,000
    
    
    
    5.60
    
    
    June 13,20063,000
    
    
    
    4.73
    
    
    June 19, 200725,000
    
    
    
    3.00
    
    
    Sep. 30, 2008William H. Lomicka
    
    
    25,000
    
    
    
    3.00
    
    
    Sep. 30, 2008Philip Reichmann
    
    
    3,000
    
    
    
    16.90
    
    
    June 9, 20043,000
    
    
    
    8.00
    
    
    June 8, 20053,000
    
    
    
    5.60
    
    
    June 13,20063,000
    
    
    
    4.73
    
    
    June 19, 200725,000
    
    
    
    3.00
    
    
    Sep. 30, 2008Gary M. Clifford
    
    
    112,500
    
    
    
    2.60
    
    
    Nov. 1, 2008Kelly D. Murumets
    
    
    50,000
    
    
    
    3.03
    
    
    Feb. 18,2008125,000
    
    
    
    3.00
    
    
    Feb. 25, 2012Stephen A. Weintraub
    
    
    50,000
    
    
    
    12.00
    
    
    Jan. 4, 200575,000
    
    
    
    2.42
    
    
    Mar. 3, 2009Catherine A. Moran
    
    
    30,000
    
    
    
    1.54
    
    
    Feb. 2, 2010Gary Taylor
    
    
    20,000
    
    
    
    2.65
    
    
    Oct. 7, 2008Joshua M. Silber
    
    
    75,000
    
    
    
    3.00
    
    
    Mar. 18, 2009158,270
    
    
    
    2.95
    
    
    Dec. 21,2011Howard Wortzman
    
    
    50,000
    
    
    
    12.00
    
    
    Jan. 4,2005100,000
    
    
    
    2.39
    
    
    Dec 18, 200810,000
    
    
    
    2.95
    
    
    Dec. 21,2011Kenneth L. Hilton
    
    Nil
    
    
    
    
    
    
    James G. Ducay
    
    Nil
    
    
    
    
    
    
    
 Page 54




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##### 



ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS To the knowledge of the Company, the only shareholders beneficially owning
or exercising control or direction over more than 5% of the voting rights
attached to any class of outstanding voting securities of the Corporation as at
April 30, 2004, are: Voting Shares Beneficially Owned,
    
    ApproximateDirectly or Indirectly, Controlled or
    
    Percentage of OutstandingName of Shareholder
    
    Directed at April 30, 2004
    
    Voting SharesAmaranth L.L.C.(1)
    
    15,445,395 common shares
    
    
    26.4
    %Bernard Sherman (1)(2)
    
    2,413,700 common shares and
    
    
    21.2
    %10,000,000 Series A preferred sharesAllan C.
Silber(3)
    
    4,531,261 common shares
    
    
    7.7
    %
 (1)

The information as to shares owned by Amaranth LLC
and Bernard Sherman is based on public filings only.(2)

Bernard Sherman owns an aggregate of 2,413,700
common shares directly and through controlled entities and controls
Sherfam Inc., the registered holder of 10,000,000 Series A preferred
shares.(3)

Allan Silber owns 1,432,069 common shares and CXS
Holdings Inc., a company controlled by Allan Silber, owns 3,099,192
shares. In addition, Allan Silbers spouse and children own
2,557,218 shares.
 There has been no significant change in ownership by any major shareholder
during the past three years, except Amaranth and Mr. Sherman, who became major
shareholders in 2003. All shareholders of the common and Series A preferred shares have
identical voting rights. At April 30, 2004, 18.81% of the Common Shares outstanding were held by 68
record holders in the U.S. To the best of the Companys knowledge, the Company is not owned or
controlled by another corporation, by any foreign government or by any other
natural or legal person(s) severally or jointly. There are no arrangements,
known to the Company, the operation of which may at a subsequent date result in
a change in control of the Company. B. RELATED PARTY TRANSACTIONS To the best of the Companys knowledge, there are no proposed material
transactions or material transactions that have occurred in the previous three
financial years in which directors, executive officers, holders of ten percent
of the Companys outstanding shares, or any associate or affiliate of such
person have had a material interest, direct or indirect, except the holder of
the non-controlling equity interest in the Imperial Square retail development
site, in Guelph, Ontario, which was acquired in 2003, is affiliated with a
member of the board of directors of the Company. None of the officers or directors of the Company is indebted to the
Company or was indebted to the Company during the past three financial years,
or any of its subsidiaries, except for non-interest bearing indebtedness under
securities purchase programs and relocation loans. The following table sets
forth information relating to the current and former directors, executive
officers and senior officers or associates of directors, executive officers and
senior officers of the Corporation, who are, or during the most recently
completed financial year were, indebted to the Corporation (other than routine
indebtedness) or to any subsidiaries under such securities programs and
relocation loans: Page 55




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##### 



(In Canadian dollars)FinanciallyLargest Amount
    
    Amount Outstanding
    
    Assisted SecuritiesName and
    
    Involvement of
    
    Outstanding During
    
    as of
    
    Purchased DuringPrincipal
    
    Corporation or
    
    2003
    
    April 30, 2004
    
    2003
    
    Security forPosition
    
    Subsidiary
    
    ($)
    
    ($)
    
    (#)
    
    IndebtednessALLAN SILBER
    
    Lender
    
    $
    1,500,000
    
    
    $
    1,500,000
    
    
    NIL
    
    300,000 common sharesChairman, President and
Chief Executive OfficerKELLY MURUMETS
    
    Lender
    
    
    605,119
    
    
    
    605,119
    
    
    NIL
    
    250,000 commonExecutive Vice President
    
    
    
    
    
    
    
    
    
    
    
    
    
    sharesJOSHUA SILBER
    
    Lender
    
    
    945,468
    
    
    
    945,468
    
    
    NIL
    
    317,500 commonPresident, Counsel Real
    
    
    
    
    
    
    
    
    
    
    
    
    
    sharesEstate Inc.STEPHEN WEINTRAUB
    
    Lender
    
    
    411,559
    
    
    
    411,559
    
    
    NIL
    
    162,500 commonSenior Vice President
    
    
    
    
    
    
    
    
    
    
    
    
    
    sharesand SecretaryHOWARD WORTZMAN
    
    Lender
    
    
    407,806
    
    
    
    407,806
    
    
    NIL
    
    157,500 commonChief Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    sharesCounsel Real
Estate Inc.NORMAN CHIRITE(1)
    
    Lender
    
    
    1,395,293
    
    
    
    1,395,293
    
    
    NIL
    
    537,750 common sharesSAMUEL SHIMER(2)
    
    Lender
    
    
    1,599,621
    
    
    
    1,599,621
    
    
    NIL
    
    653,011 commonsharesGARY WASSERSON(3)
    
    Lender
    
    
    776,961
    
    
    
    776,961
    
    
    NIL
    
    300,000 commonsharesKENNETH HILTON(4)
    
    Lender
    
    
    139,160
    
    
    
    139,160
    
    
    NIL
    
    residence
  (1)
    
    Norman Chirite ceased to be a director of the Corporation in June
2003.  (2)
    
    Samuel Shimer ceased to be an officer of the Corporation in February
2004.  (3)
    
    Gary Wasserson ceased to be an officer of the Corporation at the end
of December 2003.  (4)
    
    In June 2002, the Company made a relocation loan (non-interest
bearing) to Kenneth Hilton. The loan is due on the earlier of June 2007
or upon the sale of his former residence. While the loan is
outstanding, payments are required, equal to 20% of any incentives
awards (after the first $50,000US) paid to Mr. Hilton. As at December
31, 2003, no payments on the loan had been made. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. Page 56




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##### 



ITEM 8: FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Reference is made to ITEM 18: FINANCIAL STATEMENTS for the consolidated
financial statements included in this annual report. The Company has no fixed policy on dividend distributions. Regular
dividends were last paid on June 30, 1993. There exists no restriction on the
Companys ability to declare dividends. The declaration and payment of
dividends is decided by the Companys board of directors from time to time
based upon and subject to the Companys earnings, financial requirements and
other conditions prevailing at the time. Pursuant to the private placement of
preferred shares noted below, the Company has agreed that dividends on its
common shares shall not exceed $0.09 per share per annum, on a non-cumulative
basis, as long as Series A preferred shares are outstanding. On December 19, 2003, the Company completed a private placement of a new
series (Series A) of convertible preferred shares. The Series A preferred
shares are entitled to a dividend of 6% per annum, payable semi-annually on
January 1 and July 1 of each year, commencing on July 1, 2004. If cash
dividends are not paid when due, Counsel must issue additional Series A
preferred shares as a stock dividend (subject to an aggregate maximum of
2,000,000 Series A preferred shares). On April 16, 2004, certain shareholders of the Acceris (the Plaintiffs)
filed a putative derivative complaint in the Superior Court of the State of
California in and for the County of San Diego, (the Complaint) against
Acceris, WorldxChange Corporation, Counsel Communications LLC, and Counsel as
well as certain present and former officers and directors of Acceris, some of
whom also are or were directors and/or officers of the other corporate
defendants (collectively, the Defendants). The Complaint alleges, inter
alia, that the Defendants, in their respective roles as controlling shareholder
and directors and officers of Acceris committed breaches of the fiduciary
duties of care, loyalty and good faith and were unjustly enriched, and that the
individual Defendants committed waste of corporate assets, abuse of control and
gross mismanagement. The Plaintiffs seek compensatory damages, restitution,
disgorgement of allegedly unlawful profits, benefits and other compensation,
attorneys fees and expenses in connection with the Complaint. In addition,
the Defendants in the Complaint were named in a complaint for damages filed in
the Superior Court of the State of California in and for the County of San
Diego on April 16, 2004, in which the plaintiffs, who include the Plaintiffs in
the Complaint as well as additional plaintiffs, made claims nearly identical to
those set forth in the Complaint. The Company believes that these claims in
their entirety are without, merit and intend to vigorously defend these
actions. There is no assurance that this matter will be resolved in the
Companys favor and an unfavorable outcome of this matter could have a material
adverse impact on the business, results of operations, financial position or
liquidity. In connection with Acceris efforts to enforce it patent rights, Acceris
Communications Technologies Inc., a wholly-owned subsidiary of Acceris, filed a
patent infringement lawsuit against ITXC Corp. (ITXC) in the United Stated
District Court of the District of New Jersey on April 14, 2004. The complaint
alleges that ITXCs VoIP services and systems infringe Acceris U.S. Patent No.
6,243,373, entitled Method and Apparatus of Implementing a Computer
Network/Internet Telephone System. On May 7, 2004, ITXC filed a lawsuit
against Acceris Communications Technologies Inc., and Acceris, in the United
States District Court for the District of New Jersey for infringement of five
ITXC patents relating to VoIP technology, directed generally to the
transmission of telephone calls over the Internet and the completion of
telephone calls by switching them off the Internet and onto a public switched
telephone network. The Company strongly believes that the allegations
contained in the ITXC complaint are, in their entirely, without merit and it
intends to provide a vigorous defense to the ITXC claims. On October 31, 2003, the Company repaid all of its outstanding convertible
debentures by delivering 690 common shares for each $1,000 of principal,
resulting in the issuance of 28.2 million common shares. A significant
debenture holder filed a lawsuit to restrain the Company from satisfying its
obligation to repay the debentures at maturity by delivering common shares. On
October 28, 2003 the Ontario Superior Court of Justice dismissed the lawsuit.
The former debenture holder appealed this decision to the Ontario Court of
Appeal. On May 20, 2004, the Court of Appeal ruled that the appeal was
improperly brought before the Court of Appeal, and ordered that the appeal be
transferred to the Ontario Divisional Court. The appeal is presently scheduled
for November, 2004. Page 57




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##### 



On May 31, 2004, Counsel sold its five retirement centers in Canada to the
lessee, pursuant to exercise options in the lease agreement. The total purchase
price pursuant to the options is Cdn $30 million, before costs of disposition.
The properties had a net book value of Cdn $22 million and were subject to
mortgages aggregating approximately Cdn $18 million. On June 11, 2004, Counsel received a NASDAQ Staff Determination indication
that Counsel fails to comply with the market value of listed shares
requirements for continued listing set forth in Marketplace Rule
4310(c)(2)(B)(ii), and that its Common Stock will be delisted from the NASDAQ
Smallcap Market at the opening of business on June 21, 2004, unless the Company
requests a hearing before a NASDAQ Listing Qualifications Panel before the end
of business on June 17, 2004. A hearing has been requested and is scheduled
for July 8, 2004. Under applicable rules, the hearing will stay the delisting
of the Companys Common Stock, pending a decision by the NASDAQ Panel. There
can be no assurance that the decision of the NASDAQ Panel will be favourable to
Counsel. If Counsels Common Stock is delisted following the hearing,
Counsels Common Stock may be eligible for listing on the Over the Counter
Bulletin Board. It should be noted, however, that Counsels primary exchange
listing is The Toronto Stock Exchange and that it is fully compliant with the
listing requirements of that exchange. B. SIGNIFICANT CHANGES There have not been any significant changes since the December 31, 2003
annual financial statements, except as set out in Item 8A, above. Page 58




---



##### 



ITEM 9: THE OFFER AND LISTING A. OFFER AND LISTING DETAILS The Common Shares of the Company are listed and posted for trading on The
Toronto Stock Exchange under the symbol CXS and are quoted and traded on The
NASDAQ SmallCap Market under the symbol CXSN. The Common Shares of the
Company were listed and posted for trading on The Toronto Stock Exchange on
June 20, 1986. The Common shares of the Company commenced trading on the NASDAQ
National Market on April 24, 1995. The following table sets forth the high and low sale prices per share of
the Common Shares of the Company as reported on The Toronto Stock Exchange
(TSX) and The NASDAQ Stock Market (NASDAQ) for the periods indicated: TSX
    
    NASDAQHIGH
    
    LOW
    
    HIGH
    
    LOWCdn$
    
    Cdn$
    
    US$
    
    US$1999
    
    
    
    
    13.90
    
    
    
    2.05
    
    
    
    9.38
    
    
    
    1.442000
    
    
    
    
    10.40
    
    
    
    2.50
    
    
    
    9.38
    
    
    
    1.632001
    
    
    
    
    4.95
    
    
    
    2.25
    
    
    
    3.26
    
    
    
    1.462002First quarter
    
    
    3.98
    
    
    
    2.70
    
    
    
    2.58
    
    
    
    1.76Second quarter
    
    
    3.84
    
    
    
    2.80
    
    
    
    2.50
    
    
    
    1.80Third quarter
    
    
    3.01
    
    
    
    2.35
    
    
    
    2.00
    
    
    
    1.44Fourth quarter
    
    
    2.90
    
    
    
    2.15
    
    
    
    1.90
    
    
    
    1.362003First quarter
    
    
    2.76
    
    
    
    1.96
    
    
    
    1.80
    
    
    
    1.34Second quarter
    
    
    2.53
    
    
    
    2.20
    
    
    
    1.78
    
    
    
    1.30Third quarter
    
    
    2.45
    
    
    
    1.11
    
    
    
    2.08
    
    
    
    0.75Fourth quarter
    
    
    1.89
    
    
    
    1.08
    
    
    
    1.50
    
    
    
    0.812004January
    
    
    1.70
    
    
    
    1.14
    
    
    
    1.30
    
    
    
    0.86February
    
    
    1.63
    
    
    
    1.30
    
    
    
    1.25
    
    
    
    0.93March
    
    
    1.48
    
    
    
    1.08
    
    
    
    1.14
    
    
    
    0.83April
    
    
    1.24
    
    
    
    0.75
    
    
    
    0.99
    
    
    
    0.54May
    
    
    0.95
    
    
    
    0.65
    
    
    
    0.73
    
    
    
    0.47
 B. PLAN OF DISTRIBUTION: Not applicable. C. MARKETS See A. above. D. SELLING SHAREHOLDERS: Not applicable. E. DILUTION: Page 59




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##### 



Not applicable. F. EXPENSES OF THE ISSUE: Not applicable. ITEM 10: ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. ARTICLES OF INCORPORATION AND BY-LAWS Counsel is a corporation amalgamated under the Business Corporations Act
(Ontario). There are no restrictions on the business that the Company may carry
on. The Companys articles provide that the Board of Directors shall consist
of such number of directors, being a minimum of five and a maximum of twenty,
as may be from time to time determined by resolution of the Board of Directors.
Directors who have any interest, directly or indirectly, in any contract in
which the Company is or is to be a party, other than a contract or transaction
limited solely to his remuneration as a director, officer or employee, must
declare his interest. A quorum of four directors is required to transact
business. The board may exercise all powers and do all acts and things as may
be exercised or done by the Company and are not by the By-Laws or statute
expressly required to be done by the Company at meetings of shareholders. The
board may borrow money upon credit, issue, sell or pledge debt obligations and
charge, mortgage or pledge the assets of the Company. Directors must be over
18, and not an undischarged bankrupt or mentally incompetent person. There is
no retirement age or shareholding qualification for directors. A majority of
the directors must be Canadian citizens. Directors terms are for one year and
are not staggered. The authorized share capital of the Company consists of an unlimited
number of Common Shares and an unlimited number of Preferred Shares issuable in
series. The holders of Common Shares are entitled to dividends, if as and when
declared by the directors, to one vote per Common Share at meetings of the
holders of Common Shares of the Company and, upon liquidation, to receive such
assets of the Company as are distributable to the holders of the Common Shares.
The Preferred Shares may be issued in one or more series, and the directors are
authorized to fix the number of Preferred Shares in each series and to
determine the designation, rights, privileges, restrictions and conditions
attached to the Preferred Shares of each series. The Preferred Shares are
entitled to a priority over the Common Shares in respect of the payment of
dividends and distribution of assets upon liquidation of the Company. Under the
Business Corporations Act (Ontario) a special resolution of the shareholders is
required to amend the rights of any class of shares. There is no limitation on
who may be a shareholder. By Articles of Amendment effective December 19, 2003,
the Corporation was authorized to issue, as a series of preferred shares,
12,000,000 shares designated as Preferred Shares, Series A, which are
convertible into common shares on a one-to-one basis and are entitled to vote
on an as converted basis together with the holders of common shares on all
matters submitted to a vote of shareholders. The directors of the Company must call an annual meeting of shareholders
not later than 15 months after holding the last preceding annual meeting and
may at any time call a special meeting of shareholders. In addition, the
holders of not less than 5% of the issued shares of the Company may requisition
the Board of Directors to call a meeting of shareholders. For the purpose of
determining shareholders entitled to receive notice of the meeting of
shareholders, the directors may fix in advance a date as the record date for
that determination of shareholders, but that record date shall not precede by
more than 50 days or less than 21 days the date on which the meeting is to be
held. If a shareholder becomes a shareholder after the setting of the record
date, such person will be entitled to vote at the meeting if he can produce a
properly endorsed share certificate, or can otherwise establish that he owns
the shares, and demands, not later than 10 days before the meeting, that his
name be included among those eligible to vote at the meeting. C. MATERIAL CONTRACTS Page 60




---



##### 



The Company does not have any material contracts, other than contracts
entered into in the ordinary course of business, that are required to be
disclosed other than those set out in this document. D. EXCHANGE CONTROLS Canada has no system of exchange controls. There are no laws, governmental
decrees or regulations in Canada that restrict the export or import of capital
or which affect the remittance of dividends, interest, royalties or similar
payments to non-resident holders of the Companys Shares, other than specific
embargoes enacted by regulations under the United Nations Act(Canada) and
withholding tax requirements. See Item 10  Taxation. The Investment Canada Act(Canada) (the Investment Act) is Canadas
general foreign investment screening legislation. It imposes notification and
review obligations on non-Canadians who acquire control of an existing Canadian
business. Depending on the size and type of the proposed investment, a
non-Canadian may be required to obtain approval from the minister responsible
for administering the Investment Act (the Minister). A reviewable investment
under the Investment Act is characterized as an investment for control of a
Canadian business with assets valued at Cdn$5,000,000 or more, or in the case
where the total assets of the Canadian business are less than half of the total
assets acquired, the Canadian business assets are Cdn$50,000,000 or more.
Notwithstanding the above limits, an investment can become a reviewable
investment if an order for review is made by the Federal cabinet on the grounds
that the investment is related to Canadas cultural heritage or national
identity. An investment in Common Shares of the Company by a World Trade
Organization investor would only be reviewable under the Investment Act if it
was an investment to acquire control of the Company and the value of the assets
of the Company equals or exceeds an amount determined annually by the Minister
pursuant to a formula specified in the Investment Act (Cdn$237,000,000 for
2004). The Investment Act further contains provisions which require notification
to be given under the Investment Act in circumstances where a non-Canadian
(as defined in the Investment Act) acquires control of the Company
notwithstanding that such investment is not a reviewable investment as
described above. In addition to the foregoing, certain transactions involving the Company
and its security holders may be subject to notification and review under the
Competition Act(Canada). In general, in order for a transaction to be
notifiable two size thresholds must be met. Firstly, the parties together with
their affiliates (defined to include parent, subsidiary and sister companies)
must have total assets in Canada or gross revenues from sales in, from or into
Canada that exceed Cdn$400,000,000. Secondly, the transaction itself must be of
a minimum size. Share transactions are subject to pre-notification where the
value of the Canadian assets or sales derived from the corporation whose shares
are acquired and all other corporations controlled by that corporation would
exceed Cdn$50,000,000. Also, a minimum percentage of shares must be acquired
for the pre-notification rules to apply. If a transaction is ultimately
notifiable, the parties must provide the Commissioner of Competition (the
Commissioner) with detailed information about the transaction and the parties,
and observe a waiting period prior to closing the transaction. However, in the
event that the Commissioner determines that a proposed transaction may result
in a substantial lessening of competition, the Commissioner may bring a
proceeding before the Competition Tribunal to enjoin the transaction or to seek
other remedies. E. TAXATION The following is a general summary only and should not be considered as
income tax advice or relied upon for tax planning purposes. CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES The following is a general summary of certain Canadian federal income tax
considerations generally applicable to a holder of the Companys Shares who is
not a resident of Canada for the purposes of the Income Tax Act (Canada) (the
Act) and who holds the Companys shares as capital property. Specifically,
this summary deals with a U.S. resident shareholder of the Companys Shares.
The discussion does not address all potentially relevant federal income tax
matters and it does not address consequences peculiar to persons subject to
special provisions of federal income tax law. Page 61




---



##### 



The summary is based on the current provisions of the Act and the
regulations there under and the Companys understanding of the current
published administrative practices of the Canada Revenue Agency (CRA), and
press announcements released by CRA. This summary takes into account proposals
to amend the Act announced prior to May 31, 2004 (although no assurances can be
given that such changes will be enacted in the form presented or at all), but
does not otherwise take into account or anticipate any other changes in law,
whether by judicial, governmental or legislative action or decision nor does it
take into account any provincial, territorial, local or foreign tax
considerations. Accordingly, holders and prospective holders of the Companys
Shares should consult their own tax advisors about the federal, provincial,
territorial, local and foreign tax consequences of purchasing, owning and
disposing of such Shares. Finally this summary does not consider the tax
implications to certain categories of taxpayers including, but not limited to,
tax-exempt organizations, qualified retirement plans, individual retirement
accounts and other tax-deferred accounts, financial institutions, insurance
companies and real estate investment trusts. The Act provides in subsection 212(2) that dividends and other
distributions which are deemed to be dividends and which are paid or credited
or are deemed to be paid or credited by a Canadian resident company to a
non-resident of Canada shall be subject to non-resident withholding tax equal
to 25 percent of the gross amount of the dividend or deemed dividend. Provisions in the Act relating to dividend and deemed dividend payments
and gains realized by non-residents of Canada who are residents of the United
States are subject to the Canada-United States Income Tax Convention (1980), as
amended (the 1980 Convention). Article X of the 1980 Convention as amended by the Third Protocol to the
1980 Convention provides that the rate of Canadian non-resident withholding tax
on dividends paid to a U.S. company that beneficially owns at least 10% of the
voting stock of the Company shall not exceed 5 percent of the dividends.
Otherwise, and except in the case of dividends received by a resident of the
United States who carries on business in Canada through a Canadian permanent
establishment and the shares in respect of which the dividends are paid are
effectively connected with that permanent establishment, the rate of
non-resident withholding tax shall not exceed 15 percent of the dividend. Where
the dividends are received by a United States person carrying on business in
Canada through a Canadian permanent establishment and the shares in respect of
which the dividends are paid are effectively connected with that permanent
establishment the dividends are generally subject to Canadian tax as business
profits, generally without limitation under the 1980 Convention. In respect of any dividend payments, the Company appoints a disbursing
agent to make distributions to a holder of the Companys Shares. To the extent
that a holder of the Companys Shares in not a resident of Canada for tax
purposes, subsection 215(3) of the Act provides that where an amount on which
withholding tax is payable was paid or credited to an agent on behalf of the
person (the Holder of the Companys Shares) entitled to payment without the
appropriate withholding tax having been deducted, the agent shall deduct and
remit the appropriate amount of the tax to the tax authorities on behalf of
such person. Subsections 2(3) and 115(1) of the Act provide that a non-resident person
is subject to tax in Canada at the rates generally applicable to residents of
Canada on any taxable capital gain arising on the disposition of taxable
Canadian properties other than treaty-protected properties. Taxable
Canadian property of a taxpayer includes shares of a company which are listed
on a prescribed stock exchange if such non-resident, persons with whom the
non-resident did not deal at arms length, or the non-resident together with
such persons, owned 25 percent or more of the issued shares of any class of the
capital stock of the Company at any time in the 60 month period immediately
preceding the date of disposition of the shares. For purposes of this
computation, such holders (or non-arms length persons) are considered to own
shares which they have an interest in or an option to acquire. Subsections 2(3)
and 115(1) also provide that a non-resident person is subject to tax in Canada
on taxable capital gains arising on the disposition of shares that constitute
capital property used in carrying on a business in Canada. The taxable portion
of a capital gain is equal to one-half of the amount by which the proceeds of
disposition of such shares, net of any reasonable costs associated with the
disposition of such shares, exceeds the adjusted cost base to the holder of the
shares. A taxpayers treaty-protected property at any time means property any
income or gain from the disposition of which by the taxpayer at that time
would, because of a tax treaty with another country, be exempt from Canadian
income tax. Article XIII of the 1980 Convention provides that gains realized by a
United States resident on the disposition of shares of a Canadian company may
not generally be taxed in Canada unless the value of those shares is derived
principally from real property situated in Canada or the shares form part of
the business property of a permanent Page 62




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establishment which the United States shareholder has or had in Canada
within the 12 month period preceding the date of disposition. Subject to
certain exceptions, where a U.S. shareholder who is an individual ceases to be
a resident of Canada, a deemed disposition for proceeds equal to the fair
market value of the property at that time may arise at the time of the
cessation of Canadian residence where the U.S. shareholder was during the 20
consecutive years preceding the disposition a resident in Canada for at least
120 months and the particular property was owned at the time the individual
ceased to be a resident of Canada. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of certain possible United States
federal income tax consequences, under current law, generally applicable to a
U.S. Holder (as defined below) of the Companys Shares. This discussion does
not address all potentially relevant federal income tax matters, such as, for
example, the alternate minimum tax, and it does not address consequences
peculiar to persons subject to special provisions of federal income tax law,
such as those described below as excluded from the definition of a U.S. Holder.
In addition, this discussion does not cover any state, local or foreign tax
consequences. (See  Taxation  Certain Canadian Federal Income Tax
Consequences above.) The following discussion is based upon the Internal Revenue Code of 1986,
as amended (the Code), Treasury Regulations, published Internal Revenue
Service (IRS) rulings, published administrative positions of the IRS and
court decisions as of May 31, 2004 that are currently applicable, any or all of
which could be materially and adversely changed, possibly on a retroactive
basis, at any time. This discussion does not consider the potential effects,
both adverse and beneficial, of any recently proposed legislation which, if
enacted, could be applied, possibly on a retroactive basis, at any time. This
discussion is for general information only and it is not intended to be, nor
should it be construed to be, legal or tax advice to any holder or prospective
holder of the Companys Shares and no opinion or representation with respect to
the United States federal income tax consequences to any such holder or
prospective holder is made. Accordingly, holders and prospective holders of the
Companys Shares should consult their own tax advisors about the federal,
state, local, and foreign tax consequences of purchasing, owning and disposing
of the Companys Shares. U.S. HOLDERS As used herein, a U.S. Holder means a holder of the Companys Shares who
is a citizen or individual resident of the United States, a corporation created
or organized in or under the laws of the United States or of any political
subdivision thereof or a trust or estate whose income is taxable in the United
States irrespective of source. This summary does not address the tax
consequences to, and U.S. Holder does not include, persons subject to specific
provisions of federal income tax law, such as tax-exempt organizations,
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, nonresident
alien individuals, persons or entities that have a functional currency other
than the U.S. dollar, shareholders who hold the Companys Shares as part of a
straddle, hedging or a conversion transaction, and shareholders who acquired
their stock through the exercise of employee stock options or otherwise as
compensation for services. This summary is limited to U.S. Holders who own the
Companys Shares as capital assets. This summary does not address the
consequences to a person or entity holding an interest in a shareholder or the
consequences to a person of the ownership, exercise or disposition of any
options, warrants or other rights to acquire the Companys Shares. DISTRIBUTIONS ON THE COMPANYS SHARES U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to the Companys Shares are required to include in
gross income for United States federal income tax purposes the gross amount of
such distributions equal to the U.S. dollar value of such dividends on the date
of receipt (based on the exchange rate on such date) to the extent that the
Company has current or accumulated earnings and profits, without reduction for
any Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be credited, subject to certain limitations, against the U.S.
Holders United States federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holders United States federal taxable income by
those who itemize deductions. (See more detailed discussion at Foreign Tax
Credit, below.) To the extent that distributions exceed current or accumulated
earnings and profits of the Company, they will be treated first as a return of
capital up to the U.S. Holders adjusted basis in the Companys Shares and
thereafter as gain from the sale or exchange of the Companys Shares.
Preferential tax rates for long-term capital gains are applicable to a U.S.
Holder which is an individual, estate or trust (see further discussion Page 63




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under Disposition of Companys Shares, below). There are currently no
preferential tax rates for long-term capital gains for a U.S. Holder which is a
corporation. In the case of foreign currency received as a dividend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss. Dividends paid on the Companys Shares will not generally be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations. A U.S. Holder which is a corporation
may, under certain circumstances, be entitled to a 70% deduction of the United
States source portion of dividends received from the Company (unless the
Company qualifies as a foreign personal holding company or a passive foreign
investment company, as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations which
are beyond the scope of this discussion. Individuals who receive qualified dividend income (excluding dividends
from a foreign personal holding company and a passive foreign investment
company as defined below) for years 2003 through 2008 generally will be taxed
at a maximum U.S. federal rate of 15% (rather than the higher tax rates
generally applicable to items of ordinary income) provided certain holding
period requirements are met. Dividends paid, and the proceeds of a sale of the Companys Shares, in the
U.S. through a U.S. or U.S. related paying agent (including a broker) will be
subject to U.S. information reporting requirements and may also be subject to
U.S. backup withholding tax, unless the paying agent is furnished with a duly
completed and signed Form W-9 or the U.S. Holder is otherwise exempt. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a refund or a credit against the U.S. Holders U.S. federal income tax
liability, provided the required information is furnished to the IRS. FOREIGN TAX CREDIT A U.S. Holder who pays (or has withheld from distributions) Canadian
income tax with respect to the ownership of the Companys Shares may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayers income subject to tax. This election is made on a year-by-year basis
and applies to all foreign taxes paid by (or withheld from) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holders United States income tax liability
that the U.S. Holders foreign source taxable income bears to his / her or its
worldwide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
In addition, this limitation is calculated separately with respect to specific
classes of income such as passive income, high withholding tax interest,
financial services income, shipping income, and certain other
classifications of income. Dividends distributed by the Company will generally
constitute passive income or, in the case of certain U.S. Holders, financial
services income for these purposes. The availability of the foreign tax credit
and the application of the limitations on the credit are fact specific, and
holders and prospective holders of the Companys Shares should consult their
own tax advisors regarding their individual circumstances. DISPOSITION OF COMPANYS SHARES A U.S. Holder will recognize a gain or loss upon the sale of the Companys
Shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received, and (ii) the shareholders tax
basis in the Companys Shares. This gain or loss will be a capital gain or loss
if the Companys Shares are a capital asset in the hands of the U.S. Holder,
which will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. A capital gain from the sale, exchange or
other disposition of shares held more than one year is a long-term capital gain
and is eligible for a maximum 15% rate of taxation for non-corporate taxpayers.
Gains and losses are netted and combined according to special rules in
arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations. For
U.S. Holders which are individuals, any unused portion of such net capital loss
may be carried over to be used in later tax years until such net capital loss
is Page 64




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##### 



thereby exhausted. For U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), an unused net capital loss
may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted. OTHER CONSIDERATIONS In the following circumstances, the above sections of this discussion may
not describe the United States federal income tax consequences resulting from
the holding and disposition of the Companys Shares: FOREIGN PERSONAL HOLDING COMPANY If at any time during a taxable year more than 50% of the total combined
voting power or the total value of the Companys outstanding shares is owned,
directly or indirectly, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of the Companys gross income
for such year was derived from certain passive sources, the Company may be
treated as a foreign personal holding company. In that event, U.S. Holders
that hold the Companys Shares would be required to include in gross income for
such year their allocable portions of such passive income to the extent the
Company does not actually distribute such income. PASSIVE FOREIGN INVESTMENT COMPANY As a foreign corporation with U.S. Holders, the Company could potentially
be treated as a passive foreign investment company (PFIC), as defined in
Section 1297 of the Code, depending upon the percentage of the Companys income
which is passive, or the percentage of the Companys assets which produce
passive income. Under the applicable rules of the Code, the Company will be treated as a
PFIC for any taxable year during which either (i) 75% or more of its gross
income is passive income or (ii) 50% or more of the average quarterly value of
its assets consists of assets that produce, or are held for the production of,
passive income. For this purpose, passive income generally includes dividends,
interest, royalties, rent (other than rents and royalties derived in the active
conduct of a trade or business) and gains from the sale or exchange of assets
that produce passive income. In determining whether or not it is a PFIC, the
Company will be treated as owning its proportionate share of the assets, and as
receiving directly its proportionate share of the income, of any corporation
(US or foreign) in which it owns, directly or indirectly, at least 25% of the
capital stock by value. U.S. Holders owning shares of a PFIC are required to allocate any excess
distribution or gain realized on the sale or other disposition of the PFIC pro
rata over such U.S. holders entire holding period for such shares. An excess
distribution generally is defined as the excess of the distribution with
respect to the shares of the PFIC in any taxable year over 125% of the average
annual distributions a U.S. shareholder has received from the PFIC during the
shorter of the three preceding years, or such shareholders holding period for
the shares. For purposes of the foregoing rules, a U.S. shareholder that uses
the shares of a PFIC as security for a loan will be treated as having disposed
of such shares. Any gain or excess distribution allocated to a prior taxable
year (other than a year prior to the first post-1986 year for which a
particular company became a PFIC) will effectively be taxed at the highest
federal income tax rate in effect for such prior year with respect to ordinary
income subject to an interest charge based on the value of deferral of tax for
the period during which the shares of the PFIC are owned. The balance of any
gain, or excess distribution, recognized by a US shareholder of the PFIC will
be treated as ordinary income for the current year. However, if the U.S. Holder makes a timely election to treat a PFIC as a
qualified electing fund (QEF) with respect to such shareholders interest
therein, the above-described rules generally will not apply. Instead, the
electing U.S. Holder would include annually in his gross income his pro rata
share of the PFICs ordinary earnings and net capital gain regardless of
whether such income or gain was actually distributed. A U.S. Holder of a QEF
can, however, elect to defer the payment of United States federal income tax on
such income inclusions although an interest charge will be imposed. In addition, taxpayers owning (actually or constructively) marketable
stock in a PFIC will be permitted to elect to mark that stock to market
annually, rather than be subject to the rules described above. Amounts included
in or deducted from income under this regime (and actual gains and losses
realized upon disposition, subject to certain limitations) will be treated as
ordinary. Special rules apply to U.S. Holders who own their interests in a PFIC
through intermediate entities or persons. Page 65




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The Company believes that it was not a PFIC for its fiscal years ended on
or before December 31, 2003. Because of the subjective nature of the above
tests, there can be no assurance that the IRS will not challenge the Companys
determination concerning PFIC status, or that it will be able to satisfy the
record-keeping requirements, which are imposed on QEFs. Furthermore, the
Company can provide no assurance that it will not otherwise become a PFIC in
respect of any future taxable year. CONTROLLED FOREIGN CORPORATION If more than 50% of the voting power of all classes of stock or the total
value of the stock of the Company is owned, directly or indirectly, by citizens
or residents of the United States, United States domestic partnerships and
corporations or estates or trusts other than foreign estates or trusts, each of
whom owns 10% or more of the total combined voting power of all classes of
stock of the Company (United States shareholders), the Company could be
treated as a controlled foreign corporation (CFC) under subpart F of the
Code. This classification would result in many complex tax consequences one of
which is the inclusion of certain income of a CFC in the gross income of its
United States shareholders. The United States generally taxes the United States
shareholders of a CFC currently on their pro rata shares of the subpart F
income of the CFC. In effect, the Code treats those United States shareholders
as having received a current distribution out of the CFCs subpart F income.
Such shareholders also are subject to current U.S. tax on their pro rata shares
of the CFCs earnings invested in U.S. property. The foreign tax credit may
reduce the U.S. tax on these amounts. In addition, under Section 1248 of the
Code, a gain from the sale or exchange of stock by a holder of the Companys
Shares who is or was a United States shareholder at any time during the five
year period ending with the sale or exchange is treated as ordinary dividend
income to the extent of earnings and profits of the Company attributable to the
stock sold or exchanged. Note that the overlap between the PFIC and CFC rules
is generally eliminated for United States shareholders of a CFC. Where a
foreign corporation is both a PFIC and a CFC, the foreign corporation is
generally treated as a non-PFIC with respect to United States shareholders of
the CFC. Because of the complexity of subpart F, and because it is not clear
that subpart F would apply to the holders of the Companys Shares, a more
detailed review of these rules is outside of the scope of this discussion. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENTS BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY The documents concerning the Company referred to in this annual report may
be inspected at the Companys office in Toronto, Ontario. The Companys
Investor Relations and Corporate Communications Department may be reached at
(416) 866-3000. Documents filed with the Securities and Exchange Commission
(SEC) may also be read and copied at the SECs public reference room at Room
1024, Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Page 66




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ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2003, the Company had continuing operations cash and cash
equivalents, being short-term market investments with original maturities of
three months or less, of $16,996. In addition, the Company had loans
receivable of $6,700. Included in the $6,700 is $6,000 of share purchase loans
with a fair market value of $4,900 at the end of 2003. The Company holds such
financial instruments for investment purposes only and not for trading or
speculative purposes. The Companys risks relative to these securities are credit risk and
interest rate risk. Regarding credit risk, the Company mitigates such risk by
investing cash and cash equivalents only in federal or provincial government
securities or investment grade corporate obligations in the form of commercial
paper or bankers acceptances. The Company assesses the credit status of the
entities to which mortgages and other advances are made to minimize credit
risk. Regarding interest rate risk, exposure results from changes in short term
interest rates. These risks are mitigated for cash and cash equivalents by the
short-term nature of the portfolio. The Company also holds short-term investments with a carrying value of
$2,400 and a fair market value of approximately $4,500 as at December 31, 2003.
Short-term investments represent temporary holdings in marketable securities
of publicly traded companies. These investments are carried at the lower of
cost and market. For U.S. GAAP, these investments are recorded as marketable
securities  available for sale. The majority of the Companys debt has fixed interest rates that extend
over multiple years. In assessing the variable component of the debt, a 1%
increase in the interest rates would affect cash flows and interest expense by
$112. The Company has no derivative financial instruments. The following table sets out information about the Companys debt
obligations from continuing and discontinued operations as at December 31,

2003: Expected Maturity Date2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair Value$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Fixed
rate instrumentsMortgages and loans -
continuing operations
    
    
    2,288
    
    
    
    1,055
    
    
    
    1,479
    
    
    
    1,210
    
    
    
    16,714
    
    
    
    3,599
    
    
    
    26,345
    
    
    
    26,925Weighted average interest rate
    
    
    8.89
    %
    
    
    7.56
    %
    
    
    7.70
    %
    
    
    7.26
    %
    
    
    7.28
    %
    
    
    8.26
    %
    
    
    7.59
    %Mortgages and loans -
discontinued operations
    
    
    238
    
    
    
    8,288
    
    
    
    5,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,109
    
    
    
    16,463Weighted average interest rate
    
    
    8.28
    %
    
    
    8.54
    %
    
    
    7.93
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.29
    %Convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000Weighted average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.00
    %
    
    
    6.00
    %Capital leases
    
    
    2,948
    
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,614
    
    
    
    4,614Weighted average interest rate
    
    
    7.03
    %
    
    
    6.23
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.74
    %Variable
rate instrumentsMortgages and loans -
continuing operations
    
    
    2,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,089
    
    
    
    2,089Weighted average interest rate
    
    
    5.50
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.50
    %Revolving credit facility
    
    
    
    
    
    
    12,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,127
    
    
    
    12,127Weighted average interest
rate
    
    
    
    
    
    
    6.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.00
    %Total
    
    
    7,563
    
    
    
    23,136
    
    
    
    7,062
    
    
    
    1,210
    
    
    
    16,714
    
    
    
    18,599
    
    
    
    74,284
    
    
    
    77,219
 Foreign currency exposure The Companys reporting currency is the US dollar because it is the
currency of the primary economic environment in which the Company conducts its
operations. The Company does not actively engage in hedging or other
activities to control the risk of its foreign currency exposure to fluctuations
in the value of the Canadian dollar. Page 67




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Included within loans and mortageges from continuing and discontinued operations are amounts repayable in
Canadian dollars. These amounts are reported below in U.S. dollars equivalents, at this is the reporting currency of the
Company: Continuing
    
    
    
    
    
    Weighted average
    
    Discontinued
    
    
    
    
    
    Weighted averageOperations
    
    US$
    
    interest rate
    
    Operations
    
    US$
    
    interest rate2004
    
    
    3,123
    
    
    
    6.22
    %
    
    
    2004
    
    
    
    238
    
    
    
    8.28
    %2005
    
    
    903
    
    
    
    7.30
    %
    
    
    2005
    
    
    
    8,288
    
    
    
    8.54
    %2006
    
    
    969
    
    
    
    7.30
    %
    
    
    2006
    
    
    
    5,583
    
    
    
    7.93
    %2007
    
    
    1,041
    
    
    
    7.31
    %
    
    
    2007
    
    
    
    
    
    
    
    2008
    
    
    16,533
    
    
    
    7.29
    %
    
    
    2008
    
    
    
    
    
    
    
    Thereafter
    
    
    3,539
    
    
    
    8.28
    %
    
    
    Thereafter
    
    
    
    
    
    
    
    Total
    
    
    26,108
    
    
    
    7.29
    %
    
    
    Total
    
    
    
    14,109
    
    
    
    8.29
    %
 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES: Not applicable Page 68




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PART II

ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

As of the date of this report there has not been a material default in the
payment of principal, interest, a sinking or purchase fund installment or any
other material default made by the Company.

ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

Not applicable.

ITEM 15: CONTROLS AND PROCEDURES

As of the end of the period covered by this report, under the supervision
and with the participation of the Companys management, including the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the
Company carried out an evaluation of the effectiveness of its disclosure
controls and procedures (as the term is defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and
CFO have concluded that the Companys disclosure controls and procedures are
effective to ensure that material information is recorded, processed,
summarized and reported by management of the Company on a timely basis in order
to comply with the Companys disclosure obligations under the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.

Significant Changes to Internal Controls Over Financial Reporting

Commencing in 2001, the Company has been operating its telecommunications
business through Acceris Communications Inc. (OTC:BB  ACRS) (Acceris), a
publicly traded, controlled subsidiary. During this period, Acceris experienced
significant changes in its business as it acquired, reorganized, consolidated,
sold, curtailed and built a number of operational functions, resulting in the
development of a single integrated business. This reorganization was intended
to increase back office efficiency and effectiveness and to facilitate a more
targeted approach to the markets in which Acceris competes. These changes are
also designed to improve profitability. In conjunction with these operational
changes a number of internal control changes occurred, the most significant of
which are as follows:



| |  | Management has been reorganized to become more centralized to
ensure that the particular skills and backgrounds of management
personnel are aligned to functions under their supervision, based on
the integration of the four telecommunications businesses acquired from
2001 to 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Implemented a number of corporate governance changes to
substantially achieve compliance levels of NASDAQ listed organizations.                                                                                                                                                         
| 
| |  | Finance function has been reorganized into a single group at a
single location in Pittsburgh, PA.                                                                                                                                                                                       
| 
| |  | Accounting and reporting staff have been upgraded to reflect the
growing complexity of the business and to address previous financial
reporting deficiencies at Acceris.                                                                                                                
| 
| |  | Implemented a new enterprise wide accounting and reporting system
in January 2004.                                                                                                                                                                                                      
| 
| |  | Consolidated various billing systems, and expect to make further
billing platform consolidations in 2004 and beyond. Processes around
these billing system changes have and will continue to be modified as
the billing function becomes more unified.                                  

During times of significant changes to processes, controls and systems, the
risk that material errors may not be detected on a timely basis may increase.
The Company believes that adequate steps are being taken by management to
reduce this risk.

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Reportable Events

Between 2001 and 2003, Acceris had three reportable events where the Certifying
Officers of Acceris concluded that the disclosure controls and procedures in
place were not effective.



|1. |  | In the Acceris Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002, the Certifying Officers of Acceris indicated
that a deficiency existed in the flow of information to the senior
management of Acceris from one of its subsidiaries. Specifically, the
subsidiary did not provide for the timely distribution of information
relating to the assignment by Counsel, of a right related to a potential
acquisition by the subsidiary, which also involved a related party
transaction. Executives of the subsidiary did not promptly inform the
senior management of Acceris before consummating the assignment.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Audit Committee of Acceris, working with management at Acceris
and its subsidiaries, modified the disclosure controls and procedures
applicable to Acceris and its subsidiaries as they relate to (i) the
internal disclosure and transaction approval process applicable to
material transactions not in the ordinary course of business and to
related party transactions; and (ii) communications between Acceris and
its subsidiaries and Counsel. Those changes were completed by November
15, 2002.

Except for adjustments to periods that have already been reflected
in filed restated financial statements, no adjustments to the financial
statements or related disclosures were required due to this control
deficiency.



|2. |  | In Acceris amended Annual Report on Form 10-K/A#2 for the year ended
December 31, 2002, the Certifying Officers of Acceris concluded that three
control deficiencies, constituting a material weakness, existed at
Acceris. They were as follows:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|1. |  | An ineffective process for calculating the allowance for
doubtful accounts;                     
|-- |  | ------------------------------------------------------------------------------------------------
|  
|2. |  | A lack of timeliness of general ledger account
reconciliations and lack of related analysis; and
|  
|3. |  | A lack of financial reporting expertise of the accounting
team.                                 

Allowance For Doubtful Accounts: Acceris information systems necessary
to analyze its reserves for uncollectible accounts receivable were not
effective. The affected information systems became ineffective during
the year 2002 due to the rapid growth of the revenue base and related
accounts receivable during the year. The fundamental problem creating the
ineffectiveness was the lack of a reliable aging analysis. The systems
used to track the receivables became inadequate as a result of increasing
volume of business and what was ultimately determined to be the
inadequacy of the personnel that had responsibility to manage the aging
process. As a result, the aging reports were prepared manually. To
correct this situation, management implemented a system to
generate reports addressing the aging and collectibility of accounts
receivable to assist management in the timely and accurate analysis of
accounts receivable, and management increased the monitoring of that
information. These improvements to Acceris disclosure controls were
completed on or about March 31, 2003. Since that time, Acceris has also
commenced the implementation of a new billing system and, during 2004, it
expects to move many of its customers onto that system.

General Ledger Account Reconciliation and Analysis:Certain Acceris
general ledger accounts were not reconciled on a timely basis. Acceris
has implemented procedures that require the timely preparation and review
of reconciliations and analyses of these general ledger accounts on a
monthly basis. Those procedures were put in place on or about March 31,
2003.

Financial Reporting Expertise:Following the acquisition of certain
assets of RSL COM USA Inc. from bankruptcy on December 10, 2002, Acceris
management concluded that it did not have adequate financial reporting
and accounting expertise. This conclusion was based upon Acceris
growth, as well as the accounting and financial reporting complexities
that arose by virtue of the integration, consolidation and reorganization
of Acceris. In order to address this deficiency, Acceris commenced a
search for a qualified CFO and a qualified Corporate Controller. A new
CFO was appointed in February 2003 and a new Corporate Controller was
hired in March 2003. Moreover, Acceris commenced a process of building a
skilled finance team to meet the evolving needs of the business.

Page 70



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|3. |  | In the Acceris Form 10-Q for the quarter ended September 30, 2003, the
Certifying Officers of Acceris concluded that a significant disclosure
control deficiency existed at the time of the certification relating to
their ability to produce accurate financial information on a timely basis.
This situation resulted in the late filing of their Quarterly Report on
Form 10-Q for September 30, 2003. Acceris addressed this deficiency by
deploying corporate accounting staff into a subsidiary on an interim basis
while new personnel with greater expertise in accounting, controls and
financial reporting were hired. Acceris efforts to rectify this
deficiency were completed in January 2004.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Acceris Financial Statement Restatements

In addition to the reportable events noted above, Acceris restated its
financial results covering three reporting periods. In all situations where
adjustments were identified, such adjustments to the accounts were recorded
and, to the extent that prior periods were affected in a material manner,
Acceris made appropriate restatements.

Form 10-Q  September 30, 2002

On April 30, 2003, subsequent to the issuance of its financial statements
for the quarter ended September 30, 2002 and the filing of its Quarterly Report
on Form 10-Q for the period ended September 30, 2002, Acceris filed an amended
Form 10-Q to correct errors subsequently discovered during the audit of the
year-end financial statements (and discussed above). An excerpt from that
report addressing the restatement is recited below:

The accompanying consolidated financial statements as of
September 30, 2002 and for the three and nine months then ended
have been restated from those previously issued to (i) correct the
reversal of certain liabilities and (ii) eliminate the Companys
recognition of other income from the establishment of long term
deposit assets and the recognition of an impairment loss on
certain long-lived assets, both related to the June 2001 purchase
of certain assets of WorldxChange Communications, Inc (the
WorldxChange Acquisition). The restatement had no effect on net
loss per share for the three and nine months ended September 30,
2002 and 2001. The restatement increased the net loss for the
three and nine months ended September 30, 2002 by $576,944.

In the quarter ended September 30, 2002, as originally filed,
the Company removed from its financial records certain obligations
for which the Company has now determined it did not have
sufficient evidence of legal discharge. Accordingly, the Company
is reinstating those obligations, totaling $473,000, of which
$248,000 had been recorded as other income for recognition of long
term deposits and $225,000 had been recorded as a reduction to
telecommunications network expense.

In the quarter ended September 30, 2002, the Company
recognized other income from establishment of long term deposits
and a loss related to impairment of certain long-lived assets.
The Company believes that the establishment of the long term
deposit assets should have been accomplished through the
allocation of purchase price related to the WorldxChange
Acquisition. Additionally, the Company no longer believes that
it was appropriate to establish certain long-lived assets
initially recorded in the 2001 WorldxChange Acquisition. To
correct the above errors, the Company has determined it is
appropriate to amend its original presentation to reflect the
impact of these errors, the effect of which is a reduction in
income from recognition of long-term deposits of $1,174,459 and a
reduction in impairment of long-lived assets of $1,070,515.
Additionally, certain minor balance sheet reclassifications were
made and the Company reclassified $145,930 from income from
recognition of long-term deposits to other income.

Page 71



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The following sets forth the effect of these restatements on
the net loss for the three and nine months ended September 30,
2002.

Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,2002
    
    September 30, 2002Net loss as originally reported
    
    $
    (3,361,864
    )
    
    $
    (15,842,581
    )Elimination of income from recognition of long
term deposits
    
    
    (1,568,389
    )
    
    
    (1,568,389
    )Elimination of impairment of long-lived assets
    
    
    1,070,515
    
    
    
    1,070,515Adjustment to telecommunication network expense
    
    
    (225,000
    )
    
    
    (225,000
    )Adjustment to other income
    
    
    145,930
    
    
    
    145,930Net loss as restated
    
    $
    (3,938,808
    )
    
    $
    (16,419,525
    )


Form 10-K  December 31, 2002 and Form 10-Q  March 31, 2003

On September 4, 2003, subsequent to the issuance of its Annual Report on
Form 10-K for the year ended December 31, 2002 and its Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, Acceris restated its financials
statements as follows:

The Form 10-K for the year ended December 31, 2002 was restated from
that previously issued to recognize revenues from Acceris network
service offering when the actual cash collections become unencumbered.
The restatement had no effect on loss from discontinued operations or net
loss per share from discontinued operations. The restatement increased
the net loss for the fourth quarter and year ended December 31, 2002 by
$3,505,043, and the net loss per share by $0.03.

Acceris similarly restated its consolidated financial statements as
of March 31, 2003 and for the three months then ended from those
originally issued to recognize revenues from Acceris network service
offering when the actual cash collections become unencumbered. The
restatement had no effect on loss from discontinued operations or net
loss per share from discontinued operations. The restatement had the
effect of increasing the net loss for the first quarter ending March 31,
2003 by approximately $11,972,000 and the net loss per share by $0.10.

As noted above, all adjustments relating to the ineffectiveness of the
controls and procedures at Acceris have been made, and have been made in the
proper period. Since all appropriate adjustments have been made to the prior
periods to which they relate, Acceris does not intend, nor does it anticipate a
need, to restate any further reports.

Page 72



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ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT The Company has determined that at least one member of its audit committee
is a financial expert as that term is defined in Section 407 of the
Sarbanes-Oxley Act of 2002 and is an independent director as the term is
defined under the continuing listing requirements of the Nasdaq SmallCap
market. As a financial expert, Mr. Frank Anderson has an understanding of GAAP
and financial statements, experience in preparing or auditing financial
statements of generally comparable companies; has applied such principles in
connection with accounting for estimates, accruals and reserves; and has
experience with internal control over financing, reporting and an understanding
of Audit Committee functions. Safe Harbor A person who is determined to be an audit committee financial expert will
not be deemed an expert for any purpose, including without limitation for
purposes of section 11 of the Securities Act of 1933 (15 U.S.C. 77k), as a
result of being designated or identified as an audit committee financial expert
pursuant to this Item 16A. The designation or identification of a person as an audit committee
financial expert pursuant to this Item 16A does not impose on such person any
duties, obligations or liability that are greater than the duties, obligations
and liability imposed on such person as a member of the audit committee and
board of directors in the absence of such designation or identification. The designation or identification of a person as an audit committee
financial expert pursuant to this Item 16A does not affect the duties,
obligations or liability of any other member of the audit committee or board of
directors. ITEM 16B: CODE OF ETHICS The Company has adopted a code of conduct that applies to the Chief
Executive Officer and all other officers and employees. A copy of the code of
conduct has been included as Exhibit B to this annual report. Page 73




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ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES Following is the aggregate fees billed in each of the last two fiscal
years for professional services rendered by PricewaterhouseCoopers, the
principal accountant for the audit of the Companys annual consolidated
financial statements: 2003
    
    2002$
    
    $Audit fees
    
    
    1,123
    
    
    
    1,065Audit related fees
    
    
    277
    
    
    
    137Tax fees
    
    
    314
    
    
    
    107Total
    
    
    1,714
    
    
    
    1,309
 Audit feesare defined as the standard audit work that needs to be
performed each year in order to issue an opinion on our consolidated financial
statements and to issue reports on our statutory financial statements. It also
includes services that can only be provided by the auditor signing the audit
report such as auditing of non-recurring transactions and applications of new
accounting policies, reviews of quarterly financial results, consents and
comfort letters and any other audit services required for U.S. Securities and
Exchange Commission or other regulatory filings. Audit related feesinclude those other assurance services provided by
auditors but not restricted to those that can only be provided by the auditor
signing the audit report. They include amounts for services such as research
of accounting for special transactions during the year and consultation
regarding new accounting pronouncements. Tax feesrepresent tax compliance and other tax services. Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors  I.
    
    Statement of PrinciplesUnder the Sarbanes-Oxley Act of 2002 (the Act), the Audit Committee of
the Board of Directors is responsible for the appointment, compensation
and oversight of the work of the independent auditor. As part of this
responsibility, the Audit Committee is required to pre-approve the audit
and non-audit services performed by Counsel Corporations independent
auditor in order to assure that they do not
impair the auditors independence. To implement the provisions of the
Act, the Securities and Exchange Commission (the SEC) has issued rules
specifying the types of services that an independent auditor may not
provide to its audit client, as well as the Audit Committees
administration of the engagement of the independent auditor. Accordingly,
the Audit Committee has adopted this Audit and Non-Audit Services
Pre-Approval Policy (the Policy), which sets forth the procedures and
the conditions pursuant to which services to be performed by the
independent auditor are to be pre-approved.The SECs rules establish two different approaches to pre-approving
services, which the SEC considers to be equally valid. Proposed services
either may be pre-approved by agreeing to a framework with descriptions of
allowable services with the Audit Committee (general pre-approval), or
require the specific pre-approval of the Audit Committee (specific
pre-approval). The Audit Committee believes that the combination of
these two approaches in this Policy will result in an effective and
efficient procedure to pre-approve services performed by the independent
auditor. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by
the Audit Committee if it is to be provided by the independent auditor.Exhibit I to this Policy describes the Audit, Audit-related, Tax and All
Other Services that will be subject to the general pre-approval of the
Audit Committee. The Audit Committee will annually review and pre-approve
the Page 74




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services that may be provided by the independent auditor that are subject
to general pre-approval. It is expected that such general pre-approval
will occur at the regularly scheduled Audit Committee meeting to review the year end financial statements or at such other opportune time. The
Audit Committee will add to or subtract from the list of general
pre-approved services from time to time, based on subsequent
determinations. Updates to the level of fees associated with the
services, subject to general pre-approval, will be provided to the Audit

Committee at regularly scheduled Audit Committee meetings.The purpose of this Policy is to set forth the procedures by which the
Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committees responsibilities to pre-approve services
performed by the independent auditor to management.II.
    
    DelegationAs provided in the Act, the SECs rules and the Audit Committee Charter,
the Audit Committee may delegate either type of pre-approval authority to
its chairperson or any other member or members of the Audit Committee. The member to whom such
authority is delegated must report, for informational purposes only, any
pre-approval decisions to the Audit Committee at its next meeting.III.
    
    Audit ServicesThe annual Audit services engagement scope and terms will be subject to the
general pre-approval of the Audit Committee. Audit services include the
annual financial statement audit (including required quarterly reviews) and
other procedures required to be performed by the independent auditor to be
able to form an opinion on the Companys consolidated financial statements.
Audit services also include the required engagement for the independent
auditors report on managements assertion on internal controls for
financial reporting for all jurisdictions of the company. The Audit Committee will monitor the Audit services
engagement throughout the year and will also approve, if necessary, any
changes in terms and conditions resulting from changes in audit scope,
Company structure or other items. The Audit Committee will pre-approve the
Audit services in Exhibit I.IV.
    
    Audit-related ServicesAudit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the
Companys financial statements or that are traditionally performed by the
independent auditor. Because the Audit Committee believes that the
provision of Audit-related services does not impair the independence of the
auditor and is consistent with the SECs rules on auditor independence, the
Audit Committee will grant general pre-approval to Audit-related services.The Audit Committee will pre-approve the Audit-related services in Exhibit
I. All other Audit-related services not listed in Exhibit I must be
specifically pre-approved by the Audit Committee.V.
    
    Tax ServicesThe Audit Committee believes that the independent auditor can generally provide Tax
services to the Company such as tax compliance, tax planning and tax advice
without impairing the auditors independence, and the SEC has stated that
the independent auditor may generally provide such tax services since they do not
impair independence. Hence, the Audit Committee will grant general
pre-approval to those Tax services that have historically been provided by
the auditor, that the Audit Committee has reviewed and believes would not
impair the independence of the auditor, and that are consistent with the
SECs rules on auditor independence.The Audit Committee will pre-approve the Tax services in Exhibit I.VI.
    
    All Other ServicesThe Audit Committee believes, based on the SECs rules prohibiting the
independent auditor from providing specific non-audit services, that certain other
types of non-audit services are permitted. Accordingly, the Audit
Committee believes it may grant general pre-approval to those permissible
non-audit services classified as All Other Services that it believes are
routine and recurring services, would not impair the independence of the
auditor and are consistent with the SECs rules on auditor independence. Page 75




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The Audit Committee will approve the All Other Services in Exhibit I, with
the exception of Internal Investigations. Permissible other Services not
listed in Exhibit I must be specifically pre-approved by the Audit
Committee.The independent auditor is permitted to assist management with internal investigations
and fact-finding into alleged improprieties; however, these services are
subject to specific approval and engagement by the Audit Committee or its
delegate (Chairperson).VII.
    
    ProceduresFrom time to time, the Chief Financial Officer and the independent auditor shall jointly
submit to the Audit Committee a schedule of audit, audit-related and tax
services that are subject to general pre-approval.This schedule, referred to as EXHIBIT I, provides a description of each
type of service that is subject to general pre-approval and, where
possible, will provide projected fees (or a range of projected fees) for
each service. The Audit Committee will review and approve the types of
services and review the projected fees for the period up to and including the
meeting to review the subsequent years year-end financial statements.
This approval acknowledges that the
Audit Committee is in agreement with the specific types of services that
the independent auditor will be permitted to perform. The fee amounts listed on EXHIBIT I
will be updated to the extent necessary at each of the other three
regularly scheduled meetings of the Audit Committee (May, August, and
November).If subsequent to the approval of EXHIBIT I by the Audit Committee, the
Company or one of its affiliates determines that it would like to engage
the independent auditor to perform a service not included on the EXHIBIT I list, the
affiliate should submit its request to the Chief Financial Officer and if
the service fits within the independence guidelines, the Chief Financial
Officer will arrange for a discussion of the service to be included on the
agenda for the next regularly scheduled Audit Committee meeting so that
specific approval can be obtained. If the timing of the project is
critical and the project needs to commence before the regularly scheduled
meeting, the specific pre-approval by the chairperson of the Audit
Committee must be obtained before any services are provided. This will be
arranged by the Chief Financial Officer. The independent auditor must not commence
any such project until specific approval has been given. Page 76




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EXHIBIT I Schedule of Audit, Audit-Related and Tax Services Service
    
    
    
    Summary of serviceAudit ServicesAudit
    

Recurring audit of consolidated financial
statements including statutory auditsAccounting Consultations and Tax
Services
    
    Those services required to perform an
audit in accordance with Generally
Accepted Auditing Standards.Regulatory Financial Filings
    
    Services relating to 1933 and 1934
filings with the SEC including issuance
of comfort lettersSection 404 Attestation Report on
Internal Controls
    
    Services relating to the attestation
report on the entitys internal controls
as specified in Section 404 of the
Sarbanes-Oxley Act.Type A
    
    Audit Related Services
 A-1
    
    Other audit reports
and special reports
    
    Includes, among others:

    Issuance of comfort letters (debt
offerings).

    Separate audit reports on subsidiaries
adjusted net income, DPS plans, net worth
compliance letters, operating income
under contracts, businesses sold and
other miscellaneous statutory reports
(not included in recurring audit fees.)
 A-2
    
    Other audit-related services
    
    Generally includes discussions, review
and testing of impact of new
pronouncements, acquisition accounting,
and other topics.A-3
    
    Compliance services
    
    Review of compliance programs and
recommendations for improvement.A-4
    
    Control reviews  IT
    
    Reviews of IT controls relating to
e-business, IT security and other general
IT areas.A-5
    
    General control reviews
    
    Review of controls and recommendations.Type B
    
    Tax ServicesB-1
    
    Domestic Tax Services (including
tax planning)
    
    Tax return preparation and review.
Assistance with tax examinations. Advice
on various matters including, among
others, income tax, capital taxes, tax
accounting, GST, provincial sales taxes,
excise taxes, payroll taxes and other
miscellaneous matters. Tax advice and
implementation assistance with
acquisitions, dispositions,
restructurings, M&A matters and other tax
strategies (including any special tax
projects). Advice on changes to Canadian tax laws.B-2
    
    U.S. Federal, State and Local Tax
Services (including tax planning)
    
    Tax return preparation and review.
Assistance with tax examinations. Advice
on various matters including, among
others, U.S. income tax (federal, state
income and franchise, and local), tax
accounting, sales/use taxes, excise
taxes, telecommunication taxes, payroll
taxes, property taxes and other
miscellaneous matters. Tax advice and
implementation assistance with
acquisitions,
 Page 77




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##### 



Summary of servicedispositions,
restructurings, M&A matters and other tax
strategies (including any special tax
projects). Advice on the U.S. changes to
tax laws and consequences of changes in
compensation programs or practices.B-4
    
    Transfer Pricing
    
    Advice and assistance with respect to
transfer pricing matters, including
preparation of reports used by the
Company to comply with taxing authority
documentation requirements (in Canada,
U.S. and other foreign jurisdictions)
regarding sales, royalties, interest,
management fees, cost recovery charges
etc. and assistance with tax
examinations.B-5
    
    International Tax Services
(including tax planning)
    
    Tax return preparation and review in
various international locations.
Assistance with tax examinations. Advice
on various matters including, among
others, foreign income tax, tax
accounting, foreign commodity taxes and
other miscellaneous matters. Tax advice
and implementation assistance with
acquisitions, dispositions,
restructurings, M&A matters and other tax
strategies (including any special tax
projects). Advice on changes to foreign
tax laws.B-6
    
    Indirect Tax
    
    Compliance reviews, advice and
implementation assistance with strategies
to minimize risk and local, U.S. and
foreign indirect tax reduction.B-7
    
    Expatriate Tax Services
    
    Preparation of Canadian and foreign
individual income tax returns, advice on
impact of changes in local tax laws and
consequences of changes in compensation
programs or practicesB-8
    
    Tax technology Services
    
    Assistance and advice on tax related IT
Systems and software including tax
compliance and tracking software and tax
documentation software. Only IT and
software that does not provide
information into the general ledger or
financial statement is permitted.Type C
    
    Other Non-Audit ServicesC-1
    
    Audits or reviews of third parties
to assess compliance with contract
    
    Review to assess contractual complianceC-2
    
    Risk management reviews and
assessments
    
    Compliance review in connection with
privacy standards and government
healthcare regulations, IT Security and
other operational reviews, including
development of process maps to identify
inefficiencies or weaknesses in internal
controlC-3
    
    Internal Investigations
    
    Conducting internal investigations and
fact finding in connection with alleged
improprieties. Projects are usually
performed on behalf of management or
internal audit; however, specific
approval by project is required by the
Audit Committee.C-4
    
    Dispute Analysis
    
    Limited support provided in connection
with dispute
 Page 78




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##### 



Summary of serviceC-5
    
    Non-financial systems
    
    Advisory services with respect to
non-financial systems such as support
services, project management risk
assessments and business continuity
planningC-6
    
    French Translation
    
    Provide translation services for
published financial information
 Page 79




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##### 



PART III ITEM 17: FINANCIAL STATEMENTS Not applicable. ITEM 18: FINANCIAL STATEMENTS Counsel Corporation Consolidated Financial Statements
    
    
    F-1
 ITEM 19: EXHIBITS The list of Exhibits filed as part of this annual report are set forth
below, and are incorporated herein by this reference. Exhibit Number
    
    Description8.1
    
    Counsel Corporation List of Subsidiaries11.1
    
    Counsel Corporation Code of Conduct12.1
    
    Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)13.1
    
    Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(b)13.2
    
    Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(b)
 SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. COUNSEL CORPORATIONBy:
    /s/  Stephen WeintraubStephen WeintraubSenior Vice President & Secretary Page 80




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COUNSEL CORPORATION
INDEX TO FINANCIAL STATEMENTS PageReport of PricewaterhouseCoopers LLP, Chartered Accountants
    
    
    F-2Consolidated Balance Sheet
    
    
    F-3Consolidated Statement of Shareholders Equity
    
    
    F-4Consolidated Statement of Operations
    
    
    F-5Consolidated Statement of Cash Flows
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




---



##### 



Auditors Report To the Shareholders of Counsel Corporation We have audited the consolidated balance sheets of Counsel Corporation as at
December 31, 2003 and 2002 and the consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in Canada and the United States of America. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Counsel Corporation as at December
31, 2003 and 2002 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles. (signed) PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
April 14, 2004 Comments by Auditor on Canada-United States Reporting Differences In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when there is a change in accounting principles that
has a material effect on the comparability of the companys financial
statements, such as the change in accounting for goodwill and other intangible
assets described in Note 2 to the consolidated financial statements. In
addition, as described in Note 1, the operations of the Companys subsidiary,
Acceris Communications Inc., expose the Company to certain uncertainties
related to the impact of intercompany funding guarantees. Our report is
expressed in accordance with Canadian reporting standards, which do not require
a reference to the information set out herein in the auditors report when it
is properly accounted for and adequately disclosed in the financial statements. (signed) PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
April 14, 2004 F-2




---



##### 



COUNSEL CORPORATION
CONSOLIDATED BALANCE SHEETS
As at December 31(In thousands of U.S. dollars) 2003
    
    2002$
    
    $AssetsCurrent assetsCash and cash equivalents
    
    
    16,996
    
    
    
    9,004Short-term investments (note 5)
    
    
    2,381
    
    
    
    3,071Accounts receivable (net of allowance for doubtful
accounts of $1,900; 2002 - $1,704)
    
    
    18,719
    
    
    
    17,357Loans receivable (note 8)
    
    
    2,773
    
    
    
    Income taxes recoverable
    
    
    
    
    
    
    3,329Future income tax assets (note 20)
    
    
    
    
    
    
    274Prepaid expenses and deposits
    
    
    2,863
    
    
    
    4,619Assets of discontinued operations (note 21)
    
    
    2,315
    
    
    
    2,23946,047
    
    
    
    39,893Long-term assetsIncome producing properties (note 6)
    
    
    42,225
    
    
    
    34,919Properties under development (note 7)
    
    
    7,600
    
    
    
    3,063Loans receivable (note 8)
    
    
    3,894
    
    
    
    6,573Portfolio investments (note 9)
    
    
    4,745
    
    
    
    4,420Property, plant and equipment, net (note 10)
    
    
    7,787
    
    
    
    12,657Intangible assets, net (note 11)
    
    
    8,546
    
    
    
    9,318Goodwill
    
    
    947
    
    
    
    Other assets
    
    
    896
    
    
    
    2,273Assets of discontinued operations (note 21)
    
    
    20,902
    
    
    
    21,598143,589
    
    
    
    134,714LiabilitiesCurrent liabilitiesRevolving credit facility (note 13 (b))
    
    
    12,127
    
    
    
    9,086Accounts payable and accrued liabilities (note 12)
    
    
    33,404
    
    
    
    28,617Unearned revenue
    
    
    4,011
    
    
    
    958Current portion of mortgages and loans payable (note 13 (a))
    
    
    4,377
    
    
    
    3,630Current portion of capital leases (note 14)
    
    
    2,715
    
    
    
    2,714Convertible debentures payable (note 15)
    
    
    
    
    
    
    2,515Future income tax liabilities (note 20)
    
    
    1,110
    
    
    
    Income tax payable
    
    
    524
    
    
    
    Liabilities of discontinued operations (note 21)
    
    
    9,712
    
    
    
    7,26967,980
    
    
    
    54,789Long-term liabilitiesMortgages and loans payable (note 13 (a))
    
    
    24,057
    
    
    
    22,529Capital leases (note 14)
    
    
    1,631
    
    
    
    4,146Convertible preferred shares (note 16)
    
    
    11,200
    
    
    
    Future income tax liabilities (note 20)
    
    
    37,934
    
    
    
    36,550Liabilities of discontinued operations (note 21)
    
    
    13,871
    
    
    
    11,816156,673
    
    
    
    129,830Non-controlling interest
    
    
    1,066
    
    
    
    Commitments, contingencies, guarantees and concentrations (note 14)Shareholders equity (deficit)
    
    
    (14,150
    )
    
    
    4,884143,589
    
    
    
    134,714
 The accompanying notes are an
integral part of these consolidated financial statements. On behalf of the Board of Directors: Allen C. Silber, Director
    
    Frank Anderson, Director
 F-3




---



##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
For the years ended December 31 (In thousands of U.S. dollars) Equity
    
    EquityCapital Stock
    
    
    
    
    
    component
    
    component
    
    Foreign
    
    
    
    
    
    Totalof convertible
    
    of convertible
    
    currency
    
    Retained
    
    ShareholdersNo. of common
    
    
    
    
    
    Contributed
    
    preferred
    
    debentures
    
    translation
    
    earnings
    
    equityshares
    
    Amount
    
    surplus
    
    shares
    
    payable
    
    adjustment
    
    (deficit)
    
    (deficit)(In 000s)
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $(Note 17)
    
    
    
    
    
    
    (Note 16)
    
    (Note 15)Balance - December 31, 2000
    
    
    23,937
    
    
    $
    109,452
    
    
    
    2,711
    
    
    
    
    
    
    
    44,042
    
    
    
    
    
    
    
    (51,702
    )
    
    
    104,503Common shares purchased for cancellation
    
    
    (1,444
    )
    
    
    (6,600
    )
    
    
    3,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,722
    )Accretion of equity component of convertible
debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,159
    
    
    
    
    
    
    
    (3,159
    )
    
    
    Gain on retirement of convertible debentures
payable, net of income taxes of $325
    
    
    
    
    
    
    
    
    
    
    2,294
    
    
    
    
    
    
    
    (5,368
    )
    
    
    
    
    
    
    
    
    
    
    (3,074
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,213
    )
    
    
    (62,213
    )Adjustment related to the adoption of
new accounting pronouncement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    (1,000
    )Balance - December 31, 2001
    
    
    22,493
    
    
    
    102,852
    
    
    
    8,883
    
    
    
    
    
    
    
    41,833
    
    
    
    
    
    
    
    (118,074
    )
    
    
    35,494Common shares purchased for cancellation
    
    
    (748
    )
    
    
    (3,418
    )
    
    
    1,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,532
    )Accretion of equity component of convertible
debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,029
    
    
    
    
    
    
    
    (3,029
    )
    
    
    Gain on retirement of convertible debentures
payable, net of income taxes of $15
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    (147
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,931
    )
    
    
    (28,931
    )Balance - December 31, 2002
    
    
    21,745
    
    
    
    99,434
    
    
    
    10,832
    
    
    
    
    
    
    
    44,652
    
    
    
    
    
    
    
    (150,034
    )
    
    
    4,884Common shares purchased for cancellation
    
    
    (1,352
    )
    
    
    (6,153
    )
    
    
    3,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,525
    )Equity component of convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800Debentures converted to common shares
    
    
    28,194
    
    
    
    40,861
    
    
    
    4,474
    
    
    
    
    
    
    
    (45,335
    )
    
    
    
    
    
    
    
    
    
    
    Dividend on convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Accretion of equity component of convertible
debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,515
    
    
    
    
    
    
    
    (2,515
    )
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,121
    
    
    
    
    
    
    
    3,121Gain on retirement of convertible debentures
payable, net of income taxes of $66
    
    
    
    
    
    
    
    
    
    
    671
    
    
    
    
    
    
    
    (1,832
    )
    
    
    
    
    
    
    
    
    
    
    (1,161
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,260
    )
    
    
    (22,260
    )Balance - December 31, 2003
    
    
    48,587
    
    
    
    134,142
    
    
    
    19,605
    
    
    
    3,800
    
    
    
    
    
    
    
    3,121
    
    
    
    (174,818
    )
    
    
    (14,150
    )
 The accompanying notes are an
integral part of these consolidated financial statements. F-4




---



##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31 (in thousands of U.S. dollars) 2003
    
    2002
    
    2001$
    
    $
    
    $RevenuesTelecommunication services
    
    
    133,748
    
    
    
    85,252
    
    
    
    49,289Communication technology licensing
    
    
    2,164
    
    
    
    2,837
    
    
    
    4,730Income producing properties
    
    
    7,799
    
    
    
    3,343
    
    
    
    11143,711
    
    
    
    91,432
    
    
    
    54,030Operating costs and expensesTelecommunication costs (exclusive of depreciation
and amortization shown below)
    
    
    86,006
    
    
    
    50,936
    
    
    
    35,546Income producing properties (exclusive of depreciation
and amortization shown below)
    
    
    3,872
    
    
    
    1,448
    
    
    
    Selling, general and administrative
    
    
    61,408
    
    
    
    45,737
    
    
    
    44,350Research and development
    
    
    
    
    
    
    1,399
    
    
    
    2,162Provision for doubtful accounts
    
    
    5,438
    
    
    
    5,999
    
    
    
    839Depreciation and amortization
    
    
    9,854
    
    
    
    7,115
    
    
    
    8,849166,578
    
    
    
    112,634
    
    
    
    91,746Operating loss before undernoted items
    
    
    (22,867
    )
    
    
    (21,202
    )
    
    
    (37,716
    )Gains and other incomeGain on sale of short-term investments
    
    
    5,218
    
    
    
    28,067
    
    
    
    42,760Other
    
    
    3,657
    
    
    
    782
    
    
    
    1,746Impairments and other lossesWrite-down of short-term investments
    
    
    (139
    )
    
    
    (4,011
    )
    
    
    (1,957
    )Write-down of portfolio investments
    
    
    (650
    )
    
    
    (640
    )
    
    
    (19,340
    )Other
    
    
    (1,025
    )
    
    
    (722
    )
    
    
    (5,582
    )Earnings (loss) before the undernoted
    
    
    (15,806
    )
    
    
    2,274
    
    
    
    (20,089
    )Interest income
    
    
    620
    
    
    
    401
    
    
    
    2,645Interest expense (note 13 (d))
    
    
    (3,501
    )
    
    
    (3,002
    )
    
    
    (2,517
    )Loss before income taxes, non-controlling interest and
discontinued operations
    
    
    (18,687
    )
    
    
    (327
    )
    
    
    (19,961
    )Provision for income taxes (note 20)
    
    
    (2,937
    )
    
    
    (9,655
    )
    
    
    (19,901
    )Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    1,538Loss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )Loss from discontinued operations (note 21)
    
    
    (636
    )
    
    
    (18,949
    )
    
    
    (23,889
    )Net loss
    
    
    (22,260
    )
    
    
    (28,931
    )
    
    
    (62,213
    )Basic and diluted net loss per share (note 18):Continuing operations
    
    
    (0.94
    )
    
    
    (0.59
    )
    
    
    (1.80
    )Discontinued operations
    
    
    (0.02
    )
    
    
    (0.85
    )
    
    
    (1.04
    )Basic and diluted net loss per share
    
    
    (0.96
    )
    
    
    (1.44
    )
    
    
    (2.84
    )Weighted average number of common shares
outstanding (in thousands)  Basic and diluted
    
    
    25,596
    
    
    
    22,195
    
    
    
    23,030
 The accompanying notes are an
integral part of these consolidated financial statements. F-5




---



##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31 (in thousands of U.S. dollars) 2003
    
    2002
    
    2001$
    
    $
    
    $Cash provided by (used in)Operating activitiesLoss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )Non-cash itemsFuture income taxes
    
    
    2,813
    
    
    
    10,701
    
    
    
    19,154Depreciation of property, plant and equipment
    
    
    6,140
    
    
    
    3,910
    
    
    
    4,119Depreciation of income producing properties
    
    
    460
    
    
    
    200
    
    
    
    Amortization of intangible assets
    
    
    3,196
    
    
    
    3,005
    
    
    
    4,730Other amortization
    
    
    58
    
    
    
    
    
    
    
    Gain on sale of short-term investments
    
    
    (5,218
    )
    
    
    (28,067
    )
    
    
    (42,760
    )Write-down of short-term investments
    
    
    139
    
    
    
    4,011
    
    
    
    1,957Gain on sale of portfolio investments
    
    
    
    
    
    
    
    
    
    
    (64
    )Write-down of portfolio investments
    
    
    650
    
    
    
    640
    
    
    
    19,340Sale of other assets
    
    
    
    
    
    
    (782
    )
    
    
    (589
    )Other impairments or losses
    
    
    24
    
    
    
    722
    
    
    
    Accretion of liability component of convertible debentures payable
    
    
    (27
    )
    
    
    289
    
    
    
    528Stock received on sale of technology license
    
    
    (1,100
    )
    
    
    
    
    
    
    Gain on settlement of note payable
    
    
    (1,107
    )
    
    
    
    
    
    
    Gain on settlement of debt
    
    
    (2,578
    )
    
    
    
    
    
    
    (1,093
    )Dividend on preferred shares
    
    
    (9
    )
    
    
    
    
    
    
    Equity in significantly influenced corporation
    
    
    
    
    
    
    
    
    
    
    5,582Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (1,538
    )Changes in non-cash working capital related to operations(Increase) decrease in accounts receivable
    
    
    (587
    )
    
    
    10,720
    
    
    
    (3,102
    )(Increase) decrease in income taxes recoverable
    
    
    3,853
    
    
    
    (1,127
    )
    
    
    379(Increase) decrease in other assets
    
    
    (320
    )
    
    
    (3,523
    )
    
    
    (13,465
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    3,748
    
    
    
    (591
    )
    
    
    4,425Increase (decrease) in unearned revenue
    
    
    4,720
    
    
    
    (1,643
    )
    
    
    (3,197
    )Cash provided by (used in) continuing operations
    
    
    (6,769
    )
    
    
    (11,517
    )
    
    
    (43,918
    )Cash provided by (used in) discontinued operations
    
    
    (751
    )
    
    
    280
    
    
    
    (18,904
    )(7,520
    )
    
    
    (11,237
    )
    
    
    (62,822
    )Investing activitiesPurchase of short-term investments
    
    
    (136
    )
    
    
    (9,748
    )
    
    
    (3,183
    )Purchase of portfolio investments
    
    
    
    
    
    
    (503
    )
    
    
    (50
    )Purchase of property, plant and equipment
    
    
    (2,333
    )
    
    
    (1,739
    )
    
    
    (1,163
    )Purchase of patent
    
    
    (100
    )
    
    
    
    
    
    
    Investment in property under development
    
    
    (3,705
    )
    
    
    (87
    )
    
    
    Investment in significantly influenced corporations
    
    
    
    
    
    
    
    
    
    
    (2,516
    )Proceeds on sale of short-term investments
    
    
    8,251
    
    
    
    40,767
    
    
    
    58,885Proceeds on sale of portfolio investments
    
    
    125
    
    
    
    
    
    
    
    Proceeds on sale of property under development
    
    
    1,179
    
    
    
    
    
    
    
    Proceeds on sale of property, plant and equipment
    
    
    160
    
    
    
    692
    
    
    
    Acquisition of communication businesses
    
    
    
    
    
    
    (8,275
    )
    
    
    (18,842
    )Acquisition of income producing properties
    
    
    
    
    
    
    (15,505
    )
    
    
    (737
    )Discontinued operations
    
    
    
    
    
    
    (2,105
    )
    
    
    70,7803,441
    
    
    
    3,497
    
    
    
    103,174Financing activitiesNet draws on revolving credit facility
    
    
    3,041
    
    
    
    2,090
    
    
    
    6,997Repayment of mortgages and loans payable
    
    
    (2,259
    )
    
    
    (989
    )
    
    
    Borrowing of mortgages and loans payable
    
    
    1,448
    
    
    
    
    
    
    
    Repayment of note payable
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Capital lease repayments
    
    
    (2,514
    )
    
    
    (3,160
    )
    
    
    (1,043
    )Common shares purchased for cancellation
    
    
    (2,525
    )
    
    
    (1,532
    )
    
    
    (2,722
    )Issuance of convertible preferred shares
    
    
    15,000
    
    
    
    
    
    
    
    Retirement of convertible debentures payable
    
    
    (1,161
    )
    
    
    (141
    )
    
    
    (3,180
    )Repayment of liability component of convertible debenture payable
    
    
    (2,488
    )
    
    
    (2,566
    )
    
    
    (2,749
    )Non-controlling interest
    
    
    1,035
    
    
    
    
    
    
    
    Discontinued operations
    
    
    2,387
    
    
    
    (1,269
    )
    
    
    (29,645
    )11,964
    
    
    
    (7,567
    )
    
    
    (72,342
    )Increase (decrease) in cash and cash equivalents
    
    
    7,885
    
    
    
    (15,307
    )
    
    
    (31,990
    )Cash and
cash equivalents - beginning of period
    
    
    10,050
    
    
    
    25,357
    
    
    
    57,347Cash and
cash equivalents - end of period
    
    
    17,935
    
    
    
    10,050
    
    
    
    25,357Less:
cash and cash equivalents - discontinued operations
    
    
    939
    
    
    
    1,046
    
    
    
    2,291Cash and
cash equivalents - continuing operations
    
    
    16,996
    
    
    
    9,004
    
    
    
    23,066Supplementary information (note 24)
 The accompanying notes are an integral part of these consolidated financial statements F-6




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##### 

'

COUNSEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003(In thousands of U.S. dollars, except per share amounts) 1. Description of the business Counsel Corporation (Counsel or the Company) is a diversified company
focused on acquiring and building businesses in two specific sectors:
communications in the United States and real estate in Canada. The Company engages in the communications sector through its investment in
Acceris Communications Inc. (Acceris). Acceris is a supplier of voice, data
and enhanced communications products and services. Through direct and indirect
subsidiaries in the United States, Acceris operates a facilities-based
telecommunications carrier providing long distance voice services to retail
customers, and long distance voice and data services to small- to medium-sized
businesses. Acceris also licenses a fully developed network convergence
solution for voice and data based on its Internet Protocol communications
technology. Acceris has incurred substantial operating losses and negative cash flows from
operations since inception and had a shareholders deficit of $49,309 and
negative working capital of $26,576 at December 31, 2003. Acceris is financing
its operations through amounts provided by Counsel with an outstanding loan
balance of $35,219 and a revolving credit facility with an outstanding balance
of $12,127 respectively as of December 31, 2003. Counsel has agreed to fund
through long-term inter-company advances or equity contributions, all capital
investment, working capital or other operational cash requirements of Acceris
(the Keep Well). The Keep Well obligates Counsel to continue its financial
support of Acceris through June 30, 2005. During 2003, Counsel advanced Acceris
approximately $7,896 under its Keep Well, converted approximately $5,667 of
accrued interest into principal and converted $40,673 of existing loans
receivable from Acceris into equity in Acceris, increasing its ownership of
Acceris from 70% to 91%. In 2004, Acceris intends to approach the capital
markets directly to raise funds. Should this not occur or should it not occur
on terms acceptable to Acceris and Counsel, Acceris will call upon the Keep
Well. At December 31, 2003, Counsel has $19,377 in cash and equivalents and
short-term investments to support any requirements under the Keep Well. Counsel
also has the ability to obtain additional financing on its existing assets,
including but not limited to its 91% equity interest in Acceris and loans
receivable from Acceris, as well as its long-term care, real estate and other
corporate assets. While management believes that the Company will be able to
meet its commitments, the possibility exists that unforeseen events, adverse
business conditions, or other factors could affect the Companys liquidity. If
such events or conditions occur, management believes the Company could pursue
alternative plans. However, there can be no assurance that such alternatives
will be available or that management will be successful in their
implementation. The Company entered the real estate sector during the third quarter of 2002
through the acquisition of five retail shopping centres in Canada. The Company
has property under development in Brampton, Guelph and Peterborough, Ontario. To gain a full appreciation of all the assets currently under management, a
review of discontinued operations is required. In 2002, formal plans of
disposal were adopted for the Companys long-term care business, medical
products business segment and communications network segment (see Note 21). 2. Summary of significant accounting policies Basis of presentation The consolidated financial statements of the Company are prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) and
are presented in U.S. dollars. In the case of the Company, these principals
conform in all material respects with United States generally accepted
accounting principles (U.S. GAAP), except as described in note 26. The Companys accounting policies and its financial disclosures related to its
real estate operating segment are in accordance with the recommendations of the
Canadian Institute of Public and Private Real Estate Companies (CIPREC). F-7




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##### 



These consolidated financial statements include the accounts of the Company and
all companies that it controls. The Companys principal operating subsidiaries
comprising continuing operations and its respective ownership interest in each
subsidiary as at December 31, 2003, 2002 and 2001, are as follows: 2003
    
    2002
    
    2001%
    
    %
    
    %Counsel Corporation (US)
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Counsel Communications LLC(i)
    
    
    100.0
    
    
    
    88.4
    
    
    
    88.4Acceris Communications Inc. (Acceris)(i)(ii)(iii)
    
    
    90.9
    
    
    
    60.2
    
    
    
    60.2Proscape Technologies Inc. (Proscape)
    
    (iv)
    
    (iv)
    
    
    56.5
  (i)
    
    On January 2, 2003, the Company acquired the minority interest of Counsel
Communications LLC, which owns all of the Companys shares of Acceris. As
a result, the Companys ownership in Counsel Communications LLC and its
effective ownership in Acceris increased to 100% and 68.1% respectively.(ii)
    
    On August 29, 2003, the Company received 2% of the total issued and
outstanding shares of Acceris and the assignment of certain liabilities of
Acceris, owed to Winter Harbor LLC, to Counsel Communications LLC pursuant
to a settlement agreement between Winter Harbor LLC and the Company. This
resulted in a gain of $2,578 that has been recorded in other income on the
income statement.(iii)
    
    On November 30, 2003, Counsel converted $40,673 of its loans receivable
from Acceris into equity. The conversion increased Counsels ownership in
Acceris from 70.1% to 90.9%.(iv)
    
    On March 15, 2002, the Companys ownership percentage in Proscape was
significantly diluted as a result of Proscape completing a financing in
which the Company did not participate. As a result, Proscape has been
accounted for as a portfolio investment (note 9) since that date, and the
Company ceased consolidating Proscape as of that date. The Companys
interest in Proscape was approximately 9% and 12% for the years ended
December 31, 2003 and 2002 respectively. Intercompany balances and transactions among the Company and its subsidiaries
are eliminated on consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates made by management relate to the application of
purchase accounting, the assessment of recoverability of customer and loans
receivables, portfolio investments, and the cash-flows expected to be derived
from long lived assets including property under development, income producing
properties, property, plant and equipment, intangible assets and goodwill.
Management makes significant estimates related to the measurement of
obligations and the timing of the related cash flows, particularly as it
relates to accrued liabilities and future income tax liabilities. Such timing
and measurement uncertainty could have a material affect on the reported
results of operations and the financial position of the Company. Actual results could differ materially from those estimates in the near term. Comparative figures Certain comparative figures have been reclassified to conform to the 2003
presentation. Non-controlling interest F-8




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##### 



The Company owns less than 100% of some of its subsidiaries. Non-controlling
interest is the accounting mechanism that eliminates, from the Companys
earnings, the profit or loss attributable to holders of non-controlling equity
interests. Despite owning less than 100% of Acceris, consolidated net loss and
loss from continuing operations reports 100% of the net losses of Acceris for
the three years ended December 31, 2003 as the losses attributable to the
minority shareholders exceeds the minority shareholders investment in Acceris. Revenue recognition Telecommunication services Revenue is generally recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Companys
price to the customer is fixed or determinable, and collection of the resulting
receivable is reasonably determinable. Revenue is derived from
telecommunications usage, based on minutes of use. Revenue derived from usage
is recognized as services are provided, based on agreed upon usage rates.
Revenue is recorded net of estimated customer credits and billing errors, which
are recorded at the same time the corresponding revenue is recognized.
Revenues from billings for services rendered where collectibility is not
determinable are recognized when the final cash collections to be retained by
the Company are finalized. Revenues for the Companys network service offering, which it began to sell in
November 2002 and subsequently ceased selling in July 2003, are accounted for
using the unencumbered cash model. The Company determined that collectibility
of the amounts billed to customers was not reasonably assured at the time of
the billing. Under its agreements with the Local Exchange Carriers (LECs),
cash collections remitted to the Company are subject to adjustment, generally
over several months. Accordingly, the Company recognizes revenue when the
actual cash collections to be retained by the Company are finalized and
unencumbered. There is no further billing of customers for the network service
offering subsequent to the programs termination. Also, at December 31, 2003,
the Company had approximately $4,011 (2002  $958; 2001  $nil) in cash
receipts that were still subject to adjustment by the LECs and therefore
encumbered. This amount is included in unearned revenue at December 31, 2003.
The Company expects that a portion of these amounts will become unencumbered
during 2004, and will record revenues at such times that the Company finalizes
cash collection amounts with the LECs. The Company will not receive any further
cash payments associated with this network service offering. Technology licensing Revenue from the sale of software licenses is recognized when a non-cancellable
agreement is in force, the license fee is fixed or determinable, acceptance has
occurred and collectibility is reasonably assured. Maintenance and support
revenues are recognized ratably over the term of the related agreements. When a
license of Acceris technology requires continued support or involvement of the
Company, contract revenues are spread over the period of the required support
or involvement. In the event that collectibility is in question, revenue
(unearned or recognized) is recorded only to the extent of cash receipts. Real estate Revenue from real estate rentals is recognized when due and collection is
reasonably assured. Leases with tenants have been accounted for by the Company
as operating leases as substantially all of the risks and benefits of ownership
have been retained by the Company. Income producing property revenue includes
percentage participating rent and recoveries of operating expenses. Long-term care Revenue from long-term care includes revenue from the Companys nursing and
retirement facilities and revenue from operating leases for certain facilities.
Revenue from the Companys retirement and nursing facilities is recognized when
services are provided or when rent becomes due. Revenue from operating
leases is recognized on a straight-line basis over the term of the lease. All
long-term care revenue is included in the results of discontinued operations. Medical products Revenue from the sale of medical products is recognized upon shipment and
transfer of title. All medical product revenue is included in the results of
discontinued operations. F-9




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##### 



Cash and cash equivalents Cash and cash equivalents comprise cash and highly liquid investments with
original maturities of three months or less. Short-term investments Short-term investments represent temporary holdings in marketable securities of
publicly traded companies. These investments are carried at the lower of cost
and market value, and accordingly, unrealized gains are not reflected in these
consolidated financial statements. Unrealized losses in value are charged to
operations as a write-down of investments. Any subsequent recoveries are not
reflected in the Companys financial statements until the short-term investment
is sold. Portfolio investments Portfolio investments represent long-term investments in publicly traded and
privately held companies. These investments are accounted for using the cost
method. Under the cost method, the investment is initially recorded at cost;
earnings from such investments are only recognized to the extent received.
Provisions for loss in value are recorded if a decline in value is considered
to be other than temporary. Neither unrealized gains nor recoveries in
valuation, if any, are reflected in these consolidated financial statements. Property, plant and equipment Property, plant and equipment are recorded at cost with depreciation being
provided over their estimated useful lives as follows: Furniture, fixtures and office equipment
    
    straight-line or accelerated
method over periods from 3 to 10 years and declining balance method
at 20% per annumLeasehold Improvements
    
    straight-line over the shorter of the term of the lease
or estimated useful life of the assetTelecommunications network equipment
    
    straight-line over 3 to 5 yearsSoftware and information systems
    
    straight-line over 1 to 3 years
 Assets held under capital leases are depreciated using the above rates. Property, plant and equipment are carried at the lower of depreciated cost and
net recoverable amount. A write-down to net recoverable amount is recognized
when projected undiscounted cash flows are less than the carrying value. Long-term care facilities, now included in assets of discontinued operations,
are recorded at the lower of cost and estimated net recoverable amount. Income producing properties Income producing properties are recorded at cost. Depreciation is provided on
the sinking fund basis over the estimated useful lives of the properties to a
maximum of 30 years. The sinking fund method provides for a depreciation charge
of an annual amount increasing on a compounded basis of 5% per annum.
Depreciation is determined in relation to each propertys carrying value,
remaining estimated useful life and residual value. Income producing properties are carried at the lower of depreciated cost and
net recoverable amount. A write-down to net recoverable amount is recognized
when a propertys projected undiscounted cash flows are less than its carrying
value. Projections of future cash flows take into account the specific business
plan for each property and managements best estimate of the most probable set
of economic conditions anticipated to prevail in the market. The use of net
recoverable amount to assess the amount at which a property is carried in the
accounts assumes the property will be held for the long term. F-10




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##### 



Properties under development Properties under development are recorded at cost and reduced for impairment
where applicable. Impairment is determined when the carrying value of the
property exceeds its estimated net realizable value. Estimated net realizable
value represents the estimated net selling price reduced by any costs expected
until final disposition. Properties are classified as properties under
development until the properties are substantially completed and available for
immediate sale, at which time they are classified as properties held for sale
or as income producing properties, should the Company decide to retain the
property as a long lived asset. The cost of real estate under development
includes the acquisition cost of land, pre-development and development
expenses, interest, realty taxes and other expenses directly related to the
property. Tenant improvements and inducements Tenant improvements and inducements are deferred and amortized on a
straight-line basis over the term of the respective lease. Maintenance and repair costs Maintenance and repair costs are charged to operations as incurred. Major
maintenance activities, significant building improvements, replacements and
major renovations, all of which extend the useful life of the properties, are
capitalized and amortized over their estimated useful lives. Goodwill and intangible assets Effective January 1, 2002, the Company adopted the new provisions of the
Canadian Institute of Chartered Accountants Handbook Section 3062 Goodwill and
Other Intangible Assets (CICA HB 3062). Under CICA HB 3062, goodwill is no
longer amortized but is reviewed at least annually for impairment. Under CICA
HB 3062, goodwill is required to be tested for impairment within six months of
the beginning of the fiscal year of adoption. As of June 30, 2002, the Company
completed the assessment of the quantitative impact of the transitional
impairment test on its goodwill and other intangible assets. An impairment of
$1,000 was charged to retained earnings as of January 1, 2002 relating to the
impaired goodwill of Sage BioPharma Inc. (Sage). The table below discloses the pro forma effect had the year ended December 31,
2001 been subject to CICA HB 3062: 2003
    
    2002
    
    2001$
    
    $
    
    $Loss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )Goodwill amortization expense
    
    
    
    
    
    
    
    
    
    
    (2,385
    )Adjusted loss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (35,939
    )Adjusted basic and diluted loss from continuing operations per share
    
    
    (0.94
    )
    
    
    (0.59
    )
    
    
    (1.70
    )Net loss as reported
    
    
    (22,260
    )
    
    
    (28,931
    )
    
    
    (62,213
    )Goodwill amortization expense
    
    
    
    
    
    
    
    
    
    
    (3,791
    )Adjusted net loss
    
    
    (22,260
    )
    
    
    (28,931
    )
    
    
    (58,422
    )Adjusted basic and diluted loss per share
    
    
    (0.96
    )
    
    
    (1.44
    )
    
    
    (2.67
    )
 Goodwill represents the excess of the purchase consideration over the fair
value of net identifiable assets of businesses acquired. Prior to the adoption
of CICA HB 3062, goodwill was being amortized on a straight-line basis over its
estimated useful life, which ranged from five to forty years. F-11




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##### 



Intangible assets are recorded at fair value upon acquisition and are amortized
on a straight-line basis over their estimated useful life of one to five years
(Note 11). On an ongoing basis, management reviews the carrying value and amortization of
intangible assets taking into consideration any events and circumstances that
might have impaired their carrying value. The Company assesses impairment by
determining whether the carrying value exceeds the fair value, determined as
the consideration that would be agreed upon in an arms length transaction. If
the fair value is determined to be less than the net book value, the excess of
the net book value over the fair value is charged to operations in the period
in which such impairment is determined by management. Software development expenditures Costs incurred in the research, design and development of software for sale are
expensed until technological feasibility is established, after which the
remaining software development costs are capitalized. Amortization commences
when the product is available for general release to customers. Amortization is
computed using the straight-line method over the estimated remaining useful
life of the product, which generally does not exceed two years. The Company
periodically compares the unamortized portion of capitalized software
development costs to the undiscounted net recoverable amount of the related
product. The undiscounted net recoverable amount is the estimated future gross
revenues from that product reduced by the estimated future costs of completing
and disposing of that product. The amount by which the unamortized capitalized
costs exceed the net recoverable amount is reflected as an impairment loss. Research and development expenditures Research costs are expensed as incurred. Development costs are expensed as
incurred unless they meet the criteria under Canadian generally accepted
accounting principles for deferral and amortization. The Company has not
deferred any such development costs to date. Advertising costs Advertising production costs are expensed the first time the advertisement is
run. Media (television and print) placement costs are expensed in the month the
advertising appears. The Company incurred $127, $1,590 and $7,270 in
advertising costs in the years ended December 31, 2003, 2002 and 2001,
respectively. Foreign currency translation Monetary assets and liabilities denominated in currencies other than the U.S.
dollar are translated at year-end exchange rates. Revenues and expenses
denominated in foreign currencies are translated at average exchange rates
during the year. The resulting gains and losses are included in the results of
operations, except exchange gains and losses arising from the translation of
the Companys self-sustaining Canadian operations. Assets and liabilities of self-sustaining Canadian entities are translated into
U.S. dollars at the exchange rates prevailing at the year-end. Revenues and
expenses for these operations are translated at average exchange rates during
the year. Net exchange adjustments arising on translation of self-sustaining
Canadian entities are charged or credited directly to shareholders equity and
shown as cumulative translation adjustments. Effective January 1, 2002, the Company adopted CICA revised Handbook section
1650, Foreign Currency Translation which requires the immediate recognition
in income of the unrealized foreign currency exchange gains and losses on
long-term monetary items with a fixed or ascertainable life as opposed to
unrealized gains and losses being deferred and amortized over the remaining
term of the long-term monetary items. The adoption of CICA HB 1650 did not have
an effect on the Companys consolidated financial statements. Loans receivable Loans receivable are written down to net realizable value when, in the opinion
of management, there is reasonable doubt as to the ultimate collectibility of a
portion of principal and interest. Accrual of interest income is suspended if
collection of a loan becomes doubtful. F-12




---



##### 



Debt issue costs Costs incurred in connection with obtaining debt financing are deferred and
amortized as a component of interest expense, over the term to maturity of the
related debt obligation. Income taxes The Company follows the liability method of accounting for income taxes. Under
this method, future income tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of assets and
liabilities, and are measured using the substantially enacted tax rates for
years when the differences are expected to reverse. The Company provides a
valuation allowance to reduce future income tax assets when it appears more
likely than not that some or all of the future income tax assets will not be
realized. Stock-based compensation plans Effective January 1, 2002, the Company adopted Section 3870 of the CICA
Handbook, Stock-based Compensation and Other Stock-based Payments (CICA HB
3870). CICA HB 3870 addresses the recognition, measurement and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services. It sets out a fair value based method of accounting that is
required for certain, but not all, stock-based transactions. The adoption of
CICA HB 3870 did not have an impact on the Companys consolidated financial
statements. The Company and its subsidiary, Acceris, have stock-based compensation plans
that are described in Note 19. No compensation expense is recognized for these
plans when stock options are granted to employees and directors. Any
consideration paid by employees and directors on exercising of stock options or
purchase of common shares is credited to capital stock. Financial instruments The Companys convertible debentures and convertible preferred shares have been
presented in these consolidated financial statements in their component parts.
The liability component was calculated as the present value of the required
interest payments discounted at a rate approximating the interest rate that
would have been applicable to non-convertible debt at the time the instruments
were issued. The difference between the liability component and the face value
of the financial instrument at the date of issuance was classified as equity.
The equity component of the convertible debentures, net of the value ascribed
to the holders conversion option, was increased over the term to the full face
value by charges to retained earnings (deficit). The carrying amounts reported on the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values because of the immediate or short-term maturity
of these financial instruments. The fair values of other financial instruments
are disclosed in notes 5, 8, 9, 13, 15 and 16. The fair values of short-term
investments are estimated based on quoted market values at year-end. Other fair
value amounts are estimated based upon discounted future cash flows using
discount rates that reflect current market conditions for financial instruments
with similar terms and risks. Fair value estimates are not necessarily
indicative of the amounts the Company might pay or receive in actual market
transactions. Credit risk The Companys financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, accounts receivable, and loans
receivable. Cash and cash equivalents are on deposit at major financial
institutions. The Companys communications customers are generally concentrated
in areas of highest population in the United States, more specifically
California, Florida, New York, Texas and Illinois. No single customer accounted
for over 10% of revenues in 2003 or 2002. An allowance for doubtful accounts is
established based upon the overall credit worthiness of specific customers.
Revenues of the Companys network service offering are accounted for using the
unencumbered cash model, and therefore no allowance is required. The Company evaluates the collectibility of its accounts receivable on an
ongoing basis, based upon various factors including the financial condition and
payment history of major customers, an overall review of collections experience
on other accounts and economic factors or events expected to affect the
Companys future collections. F-13




---



##### 



Interest rate risk Interest rate risk arises due to the exposure to the effects of future changes
in the prevailing level of interest rates. The Company is exposed to interest
rate risk arising from fluctuations in interest rates primarily on its
revolving credit facility, and on its mortgages depending on prevailing rates
at renewal. Market value risk The Companys business model for real estate involves the leveraging of
acquired assets with third party debt, normally in the form of mortgages. This
debt level attributed to a particular property is normally determined as a
percentage of market value for the asset at the time the mortgage proceeds are
received. Should market values decline for a particular property, the ability
of the Company to replace the debt at renewal, at previous levels and on
favourable terms, could be in doubt. Foreign exchange risk Foreign exchange risk arises to the extent of net assets invested in Canadian
dollars and operations derived from those Canadian dollar investments. Discontinued operations In 2002, the Company adopted the new provisions of the CICA Handbook Section
3475 Disposal of Long-lived Assets and Discontinued Operations (CICA HB
3475). Under CICA HB 3475, the accrual of future losses on the date that the
criteria for recognition as a discontinued operation are met is not permitted.
In compliance with CICA HB 3475, the Company has not applied the new provisions
retroactively to operations that were discontinued in prior periods. Earnings per share Diluted earnings per share is calculated using the treasury stock method. Under
the treasury stock method, earnings per share data are computed as if the
options were exercised at the beginning of the year (or at the time of
issuance, if later) and as if the funds obtained from exercise were used to
purchase common shares of the Company at the average market price during the
year. 3. Recent accounting pronouncements Consolidation of variable interest entities The CICA issued accounting guideline AcG-15, Consolidation of Variable Interest
Entities(VIEs), which will be effective for all fiscal periods beginning on
or after November 1, 2004. The guideline requires the Company to identify VIEs
in which the Company have an interest, determine whether the Company is the
primary beneficiary of such entities, and if so, to consolidate the VIE. A VIE
is an entity that is structured such that either (a) the equity is not
sufficient to permit the entity to finance its activities without external
support, or (b) equity investors lack either direct or indirect ability to make
decisions about the entitys activities, an obligation to absorb expected
losses or the right to receive expected residual
returns. A primary beneficiary is an enterprise that will absorb a majority of
a VIEs expected losses, receive a majority of its expected residual returns, or
both. The Company is currently in the process of identifying any potential
impact on its financial statements and is planning to implement this standard
in 2005. Generally accepted accounting principles In July 2003, the CICA issued handbook section 1100, Generally Accepted
Accounting Principles. The section establishes standards for financial
reporting in accordance with Canadian generally accepted accounting principles
(GAAP), and provides guidance on sources to consult when selecting accounting
policies and determining appropriate disclosures when a matter is not dealt
with explicitly in the primary sources of Canadian GAAP. The Company will
implement the new section prospectively beginning on January 1, 2004. Due to
the prospective nature of this change, there is no impact on the Companys
consolidated financial statements as of the implementation date; however, the
standard will require the Company to record income arising from tenant leases
and depreciation on buildings on a straight-line basis. Stock-based compensation The CICA handbook section 3870, Stock-Based Compensation and Other Stock-Based
Paymentswas amended to F-14




---



##### 



require an expense to be recognized in the financial statements for all forms
of employee stock-based compensation, including stock options, effective for
periods beginning on or after January 1, 2004 for public companies. The Company
will be adopting the standard retroactively on January 1, 2004. The impact on
the financial statements will be consistent with the proforma results disclosed
in note 19. Asset retirement obligations In December 2002, the CICA issued Handbook Section 3110, Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This standard requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently amortized over the
assets useful life. The standard is effective for years beginning on or after
January 1, 2004. The Company does not expect the adoption of the standard to
have a material impact on the financial position and results of operations. Hedging transactions In December 2001, the CICA issued Accounting Guideline 13 (AcG 13) Hedging
Relationships, which will be effective for years beginning on or after July 1,
2003. AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying, and deals with the
discontinuance of hedge accounting. The adoption of this guideline is not
expected to have an impact on the Companys financial statements. Impairment of long-lived assets In November 2002, the CICA issued Handbook Section 3063, Impairment of
long-lived assets(CICA HB 3063). The new section provides guidance on the
recognition, measurement, and disclosure of the impairment of long-lived
assets. It replaces the write-down provision in Handbook Section 3061
Property, Plant and Equipment. The section requires an impairment loss for a
long-lived asset (to be held and used) to be recognized when its carrying
amount exceeds the sum of the undiscounted cash flows expected from its use and
eventual disposition; requires an impairment loss for a long-lived asset (to be
held and used) to be measured as the amount by which its carrying amount
exceeds its fair value; and provides guidance on determining fair value. CICA
HB 3063 is effective for years beginning on or after April 1, 2003. The
Company does not expect the adoption of the standard to have a material impact
on the financial position and results of the Company. 4. Acquisitions and dispositions During 2003 and 2002, the Company completed several acquisitions, which were
accounted for using the purchase method. The results of operations of these
acquisitions have been included in the consolidated statements from the
acquisition dates. 2003 Acquisitions Acceris On November 30, 2003, the Company converted $40,673 of debt into 13,428,492
post reverse stock split common shares of Acceris. The conversion increased
Counsels ownership interest in Acceris from 70.1% to 90.9%. The Company has
accounted for the increase in ownership as a step acquisition. Prior to the
acquisition, the Company had reflected all losses in excess of the
non-controlling interests in the subsidiary and accordingly, no non-controlling
interest had been reflected in the consolidated financial statements. The impact of the step acquisition of the Companys proportionate increase in
ownership of Acceris on
the Companys balance sheet is as follows: F-15




---



##### 



$Short-term investments
    
    
    288Intangible assets
    
    
    588Property, plant and equipment
    
    
    (1,805
    )Other assets
    
    
    (676
    )Accounts payable and accrued liabilities
    
    
    (62
    )Unearned revenue
    
    
    1,667
 Components for the acquired intangibles are as follows: $
    
    Amortization PeriodTelecommunications technology
    
    
    21
    
    

 60 monthsCustomer contracts and relationships
    
    
    211
    
    
    
    12-60 monthsAgent relationships
    
    
    353
    
    
    
    36 monthsAgent contracts
    
    
    3
    
    
    
    12 months588
 Transpoint In July 2002, the Company, through its controlling interest in Acceris, agreed
to purchase certain assets and related liabilities of Transpoint
Communications, LLC (Transpoint) and Local Telecom Holdings, LLC (Local
Telecom). The acquisition closed on July 28, 2003. As of the closing date,
the Company had an asset (which has been included in other assets) from Local
Telecom of $2,836 that represented uncollected revenues from Local Telecom
prior to the closing plus costs and expenses paid to Local Telecom, less
collections on accounts receivable of Local Telecom. At closing, the $2,836 was
applied to the total purchase price of $2,882. The intent of this acquisition
was primarily to increase the Companys customer base in the Companys agent
business and improve network utilization. The final allocation of the purchase price to the fair values of assets
acquired and liabilities assumed is summarized below. $Accounts receivable and other current assets
    
    
    685Furniture, fixtures and equipment
    
    
    5Intangible assets and goodwill
    
    
    2,864Accounts payable and accrued liabilities
    
    
    (672
    )2,882
 Components of the acquired intangibles are as follows: $
    
    Amortization PeriodCustomer contracts and relationships
    
    
    367
    
    
    60 monthsAgent relationships
    
    
    1,550
    
    
    36 monthsGoodwill ( Acceris Telecommunications- Retail)
    
    
    9472,864
 Imperial Square During the second quarter of 2003, the Company acquired the Imperial Square
retail development site located in Guelph, Ontario. The purchase price amounted
to $2,134, including closing adjustments of $89. This acquisition was
funded by the assumption of $1,328 of first mortgage debt at 9.25% maturing
December 2004 and with funds from the
Company and an investment partner that acquired a 35% equity interest in the
property, but shares in 25% of the profits. The investment partner is
affiliated with a member of the board of directors of the Company. F-16




---



##### 



2002 Acquisitions Real Estate In July 2002, the Company completed the acquisition of five income-producing
properties and approximately 13 acres of vacant land zoned for retail
development in Canada. The purchase price amounted to $35,512 including closing
costs of $1,040. These acquisitions were funded by the assumption of $20,007 of
first mortgage financing and $15,505 in cash. Real estate represented a new
reportable segment in 2002. RSL On December 10, 2002, Acceris, through its subsidiary WorldxChange, completed
the purchase of the Enterprise and Agent business of RSL COM USA Inc., (RSL).
The purchase of RSL was to advance the Companys commercial agent business, to
increase network utilization and to provide an entry into the management of
information technology services for enterprise clients. Acceris paid a
purchase price of $7,500 in cash, which was financed by a loan from Counsel to
Acceris and assumed a non-interest bearing note for $1,000 that matures on
March 31, 2004. The purchase contract provided for additional purchase
consideration to be paid contingent on the achievement of certain revenue
levels by the Direct business during 2003. At December 31, 2003, the Company
has accrued an obligation of approximately $123 in connection with this
earn-out provision. The Company also incurred $1,090 of transaction costs
related to the purchase. The $123 contingent adjustment resulted in an
adjustment to furniture, fixtures and equipment and intangible assets included
in the purchase price at December 31, 2003. The Company does not expect any
further adjustments to the purchase price, as the contingency period has ended. The allocation of fair values of assets acquired and liabilities assumed is as
follows: $Accounts receivable and other current assets
    
    
    6,444Furniture, fixtures and equipment
    
    
    3,307Intangible assets
    
    
    2,444Accounts payable and accrued liabilities
    
    
    (2,558
    )Net cash paid
    
    
    9,637
 Components of the acquired intangible assets are as follows: $
    
    Amortization PeriodCustomer contracts and relationships
    
    
    1,638
    
    
    60 monthsAgent relationships
    
    
    564
    
    
    36 monthsAgent contracts
    
    
    242
    
    
    12 months2,444
 2001 Acquisitions and
dispositions Nexbell Communications Inc. On February 22, 2001, the Company acquired a 97.5% interest in Nexbell
Communications Inc. (Nexbell), a packet telephony network company, for cash
consideration of $1,540. The cost of the Companys acquisition was allocated
on the basis of the fair market value of the assets acquired of $1,814 and the
liabilities assumed of $9,410. These valuations gave rise to $9,136 of
goodwill, which was initially being amortized over a period of five years.
During the quarter ended September 30, 2001, the Company performed a
recoverability analysis, based on undiscounted cash flows, with respect to the
goodwill recorded on its acquisition of Nexbell. The analysis resulted in an
impairment charge of $8,040, which is classified as discontinued operations, as a consequence of projected
losses associated with Nexbells prime product and the decision to adopt a plan
to discontinue this product. Nexbell was sold to a third party in December 2001. The sale was a sale of
Nexbells common stock and accordingly, the assets and liabilities of Nexbell
were assumed by the purchaser with no further financial obligation to the
Company. At the time of the sale, the liabilities exceeded the assets of
Nexbell and accordingly a gain on sale of subsidiary in the amount of $589 (the
amount by which the liabilities of Nexbell exceeded the assets) was recorded. F-17




---



##### 



Acceris On March 1, 2001, the Company acquired a 65.2% interest in Acceris, an enhanced
Internet Protocol voice and data communications services provider, for cash
consideration of $5,113. The cost was allocated on the basis of the fair market
value of the assets acquired of $27,695 and the liabilities assumed of $22,582.
Included in the fair market value of the assets acquired was $13,898 of
communications technology, which is being amortized over a period of five
years. On April 17, 2001, as a result of a merger between Acceris and Nexbell, the
Companys interest in Nexbell was exchanged for an additional 5.3% interest in
Acceris, resulting in an overall interest in Acceris of 70.5% as at that date. On September 6, 2001, all outstanding shares of Acceriss Class C, preferred
stock automatically converted into shares of common stock in accordance with
the terms of the Class C, preferred stock. Accordingly, Acceris issued
additional common stock in satisfaction of this conversion and its obligation
to pay dividends to the conversion date. This issuance diluted the Companys
interest to 68.1% as at that date. The Companys interest in Acceris was further reduced to 60.2% on October 31,
2001. WorldxChange On June 4, 2001, through its wholly owned subsidiary Acceris Communication
Corp. (ACC, formerly known as WorldxChange Corp.), Acceris purchased certain
assets and assumed certain liabilities of WorldxChange Communications Inc.
(Debtor) from a bankruptcy proceeding. The purchased assets included all of
the assets employed in the Debtors operations in the United States and
consisted of the Debtors equipment, inventory, retail long-distance business,
accounts receivable, deposits, licenses, permits, authorizations, software
programs and related technology. On June 4, 2001, the Debtor transferred the
purchased assets to ACC in exchange for $13,000. The purchase price was allocated to the fair values of assets acquired and
liabilities assumed as follows: $Accounts receivable and other current assets
    
    
    12,387Furniture, fixtures and equipment
    
    
    4,580Accounts payable and accrued liabilities
    
    
    (2,062
    )Obligations under capital lease
    
    
    (1,224
    )Net cash paid
    
    
    13,681
 Also, in connection with the acquisition, ACC agreed to pay $727 to a supplier
for services rendered prior to the acquisition to continue services with that
vendor. The Company incurred $681 of transaction costs related to the purchase. 5. Short-term investments The Company holds a portfolio of short-term investments comprised of marketable
public company stocks. 2003
    
    2002$
    
    $Beginning balance
    
    
    3,071
    
    
    
    1,249Purchases
    
    
    136
    
    
    
    9,748Shares acquired on sale of discontinued assets
    
    
    2,346
    
    
    
    Reclassified from portfolio investments
    
    
    
    
    
    
    1,102Impairments
    
    
    (139
    )
    
    
    (4,011
    )Dispositions
    
    
    (3,033
    )
    
    
    (5,017
    )2,381
    
    
    
    3,071
 F-18




---



##### 



During 2003, the Company recorded gains on the sale of short-term investments
of $5,218 (2002  $28,067; 2001  $42,760). During 2003, the Company recorded
losses on the impairment of investments of $139 (2002  $4,011; 2001  $1,957)
and as at December 31, 2003, had unrealized gains of $2,144 (2002  $1,591;
2001  $577). At December 31, 2003, the market value of the Companys
short-term investments is $4,525 (2002  $4,662; 2001  $34,581). 6. Income producing properties Income producing properties are as follows at December 31: 2003AccumulatedCost
    
    deprecation
    
    NetProperty
    
    Location
    
    $
    
    $
    
    $Portage Place
    
    Peterborough, Ontario
    
    
    19,384
    
    
    
    (316
    )
    
    
    19,068Southland Mall
    
    Winkler, Manitoba
    
    
    7,316
    
    
    
    (116
    )
    
    
    7,200Suncoast Mall
    
    Goderich, Ontario
    
    
    7,833
    
    
    
    (126
    )
    
    
    7,707Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    4,686
    
    
    
    (76
    )
    
    
    4,610Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    1,171
    
    
    
    (18
    )
    
    
    1,1531250 Steeles Ave. West I
    
    Brampton, Ontario
    
    
    2,564
    
    
    
    (77
    )
    
    
    2,48742,954
    
    
    
    (729
    )
    
    
    42,225
 2002AccumulatedCost
    
    deprecation
    
    NetProperty
    
    Location
    
    $
    
    $
    
    $Portage Place
    
    Peterborough, Ontario
    
    
    15,855
    
    
    
    (83
    )
    
    

    15,772Southland Mall
    
    Winkler, Manitoba
    
    
    5,983
    
    
    
    (30
    )
    
    
    5,953Suncoast Mall
    
    Goderich, Ontario
    
    
    6,393
    
    
    
    (33
    )
    
    
    6,360Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    3,834
    
    
    
    (20
    )
    
    
    3,814Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    958
    
    
    
    (5
    )
    
    
    9531250 Steeles Ave. West I
    
    Brampton, Ontario
    
    
    2,098
    
    
    
    (31
    )
    
    
    2,06735,121
    
    
    
    (202
    )
    
    
    34,919
 Income producing properties are encumbered by mortgages as outlined in note 13. Depreciation for income producing properties for 2003 was $460 (2002  $200;
2001  $2). 7. Properties under development Properties under development are as follows at December 31: 2003
    
    2002Property
    
    Location
    
    $
    
    $Imperial Square
    
    Guelph, Ontario
    
    
    3,411
    
    
    
    -Willowcreek II
    
    Peterborough, Ontario
    
    
    3,511
    
    
    
    2,6241250 Steeles Ave. West II
    
    Brampton, Ontario
    
    
    678
    
    
    
    4397,600
    
    
    
    3,063
 In the third quarter of 2003, the Company commenced development of the Imperial
Square property. The development is expected to cost $6,844 and be completed in
2004. The Company expects to fund this development through a non-revolving
construction loan of up to $4,179 bearing interest at the greater of 9.25% or
prime plus 3%. F-19




---



##### 



Properties under development are encumbered by mortgages as outlined in note
13. 8. Loans receivable Loans receivable are as follows at December 31: 2003
    
    2002$
    
    $Share purchase loans
    
    
    5,967
    
    
    
    5,873Other
    
    
    700
    
    
    
    7006,667
    
    
    
    6,573Less current portion
    
    
    (2,773
    )
    
    
    3,894
    
    
    
    6,573
 The share purchase loans have been granted to certain key employees and former
employees. The loans are non-interest bearing and are collateralized by the
shares purchased and personal guarantees. At December 31, 2003, share purchase
loans outstanding are for the purchase of 2,866,761 (2002  3,131,761) common
shares of the Company having a market value of $2,867 (2002  $5,543). These
loans have various maturity dates ranging from December 17, 2004 to February
25, 2012. All the loans are non-interest bearing, except for one loan for $221,
which bears interest at 6% effective January 1, 2004. The fair value of these
loans is $4,864 (2002- $4,393). 9. Portfolio investments Portfolio investments are as follows at December 31: 2003
    
    2002$
    
    $AccessLine Communications Corporation
    
    
    1,100
    
    
    
    Core Communications Corporation
    
    
    1,094
    
    
    
    1,094DBP Group Holdings Inc.
    
    
    400
    
    
    
    400Proscape Technologies Inc.
    
    
    901
    
    
    
    901Systeam Holdings LLC
    
    
    1,000
    
    
    
    1,000Other
    
    
    250
    
    
    
    1,0254,745
    
    
    
    4,420
 AccessLine Communications Corporationprovides hosted communications and
managed voice services for Fortune 100 corporations and technology services
partners. On January 25, 2003, the Company received 7,121,585 shares of Series
D preferred stock valued at $0.15446 per share or $1,100 in total, in exchange
for a paid-up, perpetual license under Acceris patents and the right to use
Acceris licensed technology for the sole purpose of providing enhanced
telecommunications services to its customers and resellers. Core Communications Corporationprovides internet and data communications
solutions for the meetings and hospitality industries. DBP Group Holdings Inc. provides Internet infrastructure technologies and
operational and management resources. Proscape Technologies Inc. develops, markets and supports marketing and sales
information systems for middle market and Fortune 100 companies. On March 15,
2002, the Companys ownership percentage in Proscape was significantly diluted
as a result of Proscape completing a financing in which the Company did not
participate. As a result, Proscape has been accounted for as a portfolio
investment since that date, and the Company ceased consolidating Proscape as of
that date. Systeam Holdings LLCowns an Italian software development and consulting firm. F-20




---



##### 



During 2003, the Company recognized an impairment of $650 (2002  $640; 2001 -
$19,340) on its portfolio investments where the decline in value was considered
other then temporary in nature. The estimated fair value of the Companys
portfolio investments approximates its carrying value as at December 31, 2003
and 2002. 10. Property, plant and equipment Property, plant and equipment are as follows at December 31: 2003
    
    2002Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    deprecation
    
    Net
    
    Cost
    
    deprecation
    
    Net$
    
    $
    
    $
    
    $
    
    $
    
    $Telecommunications network equipment
    
    
    12,948
    
    
    
    (8,881
    )
    
    
    4,067
    
    
    
    14,432
    
    
    
    (5,015
    )
    
    
    9,417Furniture, fixtures and office equipment
    
    
    4,900
    
    
    
    (2,872
    )
    
    
    2,028
    
    
    
    4,281
    
    
    
    (1,615
    )
    
    
    2,666Leasehold improvements
    
    
    262
    
    
    
    (95
    )
    
    
    167
    
    
    
    343
    
    
    
    (128
    )
    
    
    215Software and information systems
    
    
    1,823
    
    
    
    (298
    )
    
    
    1,525
    
    
    
    682
    
    
    
    (323
    )
    
    
    35919,933
    
    
    
    (12,146
    )
    
    
    7,787
    
    
    
    19,738
    
    
    
    (7,081
    )
    
    
    12,657
 Depreciation expense for 2003 was $6,140 (2002  $3,910; 2001  $4,117). Included in telecommunications network equipment is $8,894 in assets under
capital leases as at December 31, 2003 (2002  $9,781). Accumulated
depreciation on these leased assets was $6,367 as at December 31, 2003 (2002 -
$3,932). 11. Intangible assets Details of acquired intangible assets at December 31 are as follows: 2003AccumulatedAmortization
    
    Cost
    
    amortization
    
    Netperiod
    
    $
    
    $
    
    $Intangible assets subject to amortization:Telecommunications technology
    
    60 months
    
    
    10,538
    
    
    
    (5,843
    )
    
    
    4,695Customer contracts and relationships
    
    12-60 months
    
    
    2,216
    
    
    
    (513
    )
    
    
    1,703Agent relationships
    
    36 months
    
    
    2,467
    
    
    
    (423
    )
    
    
    2,044Agent contracts
    
    12 months
    
    
    245
    
    
    
    (241
    )
    
    
    4Patent acquired
    
    60 months
    
    
    100
    
    
    
    
    
    
    
    10015,566
    
    
    
    (7,020
    )
    
    
    8,546
 2002AccumulatedAmortization
    
    Cost
    
    amortization
    
    Netperiod
    
    $
    
    $
    
    $Telecommunications technology
    
    60 months
    
    
    10,518
    
    
    
    (3,774
    )
    
    
    6,744Customer contracts and relationships
    
    60 months
    
    
    1,786
    
    
    
    (20
    )
    
    
    1,766Agent relationships
    
    36 months
    
    
    588
    
    
    
    (15
    )
    
    
    573Agent contracts
    
    12 months
    
    
    250
    
    
    
    (15
    )
    
    
    23513,142
    
    
    
    (3,824
    )
    
    
    9,318
 Amortization expense for intangible assets for 2003 was $3,196 (2002  $3,005;
2001  $4,730). F-21




---



##### 



In 2003, the aggregate intangible assets acquired in the year were $2,605 (2002
- $2,624; 2001  $10,345). 12. Accounts payable and accrued liabilities Details of accounts payable and accrued liabilities at December 31 are as
follows: 2003
    
    2002$
    
    $Accounts payable
    
    
    5,320
    
    
    
    7,465Telecommunications and related costs
    
    
    9,840
    
    
    
    6,866Regulatory fees and taxes
    
    
    7,222
    
    
    
    4,324Other
    
    
    11,022
    
    
    
    9,96233,404
    
    
    
    28,617
 13. Debt (a) Mortgages and loans payable Details of mortgages and loans payable as at December 31 are as follows: 2003
    
    2002Effective
    
    
    
    
    
    Current
    
    Long- term
    
    
    
    
    
    Current
    
    Long- termMaturity
    
    interest
    
    Total
    
    portion
    
    portion
    
    Total
    
    portion
    
    portiondate
    
    rate
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Portage Place
    
    Mar. 1/08
    
    
    7.04
    %
    
    
    10,034
    
    
    
    428
    
    
    
    9,606
    
    
    
    8,536
    
    
    
    327
    
    
    
    8,209Southland Mall
    
    Sept. 1/08
    
    
    7.84
    %
    
    
    5,295
    
    
    
    146
    
    
    
    5,149
    
    
    
    4,440
    
    
    
    110
    
    
    
    4,330Suncoast Mall
    
    Feb. 1/08
    
    
    7.10
    %
    
    
    4,521
    
    
    
    193
    
    
    
    4,328
    
    
    
    3,844
    
    
    
    148
    
    
    
    3,696Willowcreek Centre I and II
    
    Dec. 1/09
    
    
    8.28
    %
    
    
    3,976
    
    
    
    74
    
    
    
    3,902
    
    
    
    3,308
    
    
    
    57
    
    
    
    3,2511250 Steeles Ave. West I and II (i)
    
    Demand
    
    Prime+1%
    
    
    2,089
    
    
    
    2,089
    
    
    
    
    
    
    
    1,709
    
    
    
    
    
    
    
    1,709Imperial Square (ii)
    
    Interim
    
    
    9.25
    %
    
    
    193
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canadian $ denominated debt
    
    
    
    
    
    
    
    
    
    
    26,108
    
    
    
    3,123
    
    
    
    22,985
    
    
    
    21,837
    
    
    
    642
    
    
    
    21,195Note payable to network service provider (iii)
    
    Demand
    
    
    7.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747
    
    
    
    747
    
    
    
    Note payable to network service provider
    
    Jul. 1/04
    
    
    10.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396
    
    
    
    242
    
    
    
    154Note payable, Winter Harbor (iv)
    
    Demand
    
    Prime+9%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,999
    
    
    
    1,999
    
    
    
    Note payable to Estate of RSL
    
    Mar. 31/04
    
    10% imputed
    
    
    1,105
    
    
    
    1,105
    
    
    
    
    
    
    
    882
    
    
    
    
    
    
    
    882Corporate debenture
    
    Nov. 15/06
    
    
    8.50
    %
    
    
    298
    
    
    
    
    
    
    
    298
    
    
    
    298
    
    
    
    
    
    
    
    298Note payable to equipment supplier
    
    Apr. 30/09
    
    
    7.00
    %
    
    
    751
    
    
    
    90
    
    
    
    661
    
    
    
    
    
    
    
    
    
    
    
    Note payable to equipment supplier
    
    Oct. 31/06
    
    
    12.50
    %
    
    
    172
    
    
    
    59
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    US $ denominated debt
    
    
    
    
    
    
    
    
    
    
    2,326
    
    
    
    1,254
    
    
    
    1,072
    
    
    
    4,322
    
    
    
    2,988
    
    
    
    1,334Total  Mortgages and loans payable
    
    
    
    
    
    
    
    
    
    
    28,434
    
    
    
    4,377
    
    
    
    24,057
    
    
    
    26,159
    
    
    
    3,630
    
    
    
    22,529
 The Canadian value of the Canadian $ denominated debt was $33,740 in 2003 (2002
- $34,502).  (i)
    
    On April 8, 2003, the Company entered into an agreement to extend the
maturity date with the lender to April 1, 2004, under the same terms.  (ii)
    
    This amount represents the outstanding balance on the land loan at
acquisition. It will be added to the non-revolving loan facility
described in note 7. It will be repaid out of the proceeds on the
long-term financing upon completion of development.  (iii)
    
    Acceris was discharged of obligations amounting to $1,141 owed to a
network service provider. The discharge of this obligation is reported as
other income for the year ended December 31, 2003. F-22




---



##### 



(iv)
    
    As of September 30, 2001, Acceris was in default on an equipment lease.
This lease was collateralized by a letter of credit issued by an affiliate
of Winter Harbor LLC, a former majority shareholder of Acceris. On October
11, 2001, the leasing company drew against the letter of credit in the
amount of $1,999. At that time, the Company recorded the liability related
to this draw on the letter of credit in the consolidated financial
statements. On October 26, 2001, Acceris received a demand for payment
from Winter Harbor LLC for the amount of the draw on the letter of credit
and interest (at prime plus 9%) since October 11, 2001. In the third
quarter of 2003, the Company received 2% of the total shares of Acceris
and the assignment of certain liabilities of Acceris, owed to Winter
Harbor LLC, pursuant to a settlement agreement between Winter Harbor LLC
and the Company. This resulted in a gain of $2,578 that was recorded in
Other Income on the income statement. (b) Revolving credit facility Acceris has a facility that enables Acceris to borrow up to a maximum of
$18,000 subject to certain restrictions and borrowing base limitations. The
maximum available borrowing base is determined as a specific percentage of
eligible accounts receivable in ACC. The balance outstanding is reduced by the
application of payments received on collection of accounts receivable on a
daily basis. The facility bears interest at United States prime + 1.75% with a
minimum interest rate of 6%. Outstanding balances under the loan are
collateralized by substantially all the assets and shares of ACC. The loan
contains certain financial covenants related to ACC for 2003 and 2004, which
Acceris is in compliance with at December 31, 2003. At December 31, 2003 borrowings under this facility
are $12,127 (2002  $9,086) with $nil of unused availability under the
facility. The facility expires in June 2005. (c) Principal repayments Principal repayments of debt are due as follows: Canadian dollar
    
    US dollar
    
    Totaldenominated debt
    
    denominated debt
    
    debt$
    
    $
    
    $2004
    
    
    3,123
    
    
    
    1,254
    
    
    
    4,3772005
    
    
    903
    
    
    
    152
    
    
    
    1,0552006
    
    
    969
    
    
    
    510
    
    
    
    1,4792007
    
    
    1,041
    
    
    
    169
    
    
    
    1,2102008
    
    
    16,534
    
    
    
    180
    
    
    
    16,714Thereafter
    
    
    3,538
    
    
    
    61
    
    
    
    3,59926,108
    
    
    
    2,326
    
    
    
    28,434
 The estimated fair value of the Companys mortgages and loans payable is
$29,272 at December 31, 2003. At December 31, 2002, the estimated fair value
of the Companys debt approximated its carrying value. (d) Interest expense Interest charges consist of: F-23




---



##### 



2003
    
    2002
    
    2001$
    
    $
    
    $Interest costs:Mortgages and loans on income producing
properties and properties under development
    
    
    1,756
    
    
    
    783
    
    
    
    4Convertible debentures
    
    
    2,543
    
    
    
    3,317
    
    
    
    3,688Capital leases
    
    
    440
    
    
    
    635
    
    
    
    329Revolving credit line
    
    
    830
    
    
    
    447
    
    
    
    25Other
    
    
    753
    
    
    
    956
    
    
    
    1,631Less:Interest capitalized to properties under development
    
    
    (306
    )
    
    
    (107
    )
    
    
    (1
    )Interest on convertible debentures charged to equity
    
    
    (2,515
    )
    
    
    (3,029
    )
    
    
    (3,159
    )Interest expense
    
    
    3,501
    
    
    
    3,002
    
    
    
    2,517
 14. Commitments, contingencies, guarantees and concentrations (a) Commitments Future minimum payments required under capital leases, operating leases and
usage commitments consist of the following as at December 31: Capital
    
    Operatingleases
    
    leases$
    
    $2004
    
    
    2,948
    
    
    
    5,8612005
    
    
    1,666
    
    
    
    2,1402006
    
    
    
    
    
    
    1,4102007
    
    
    
    
    
    
    9222008
    
    
    
    
    
    
    492Thereafter
    
    
    
    
    
    
    3744,614
    
    
    
    11,199Less: Amount representing interest rates of
approximately 8% to 12%
    
    
    268Present value of net minimum lease payments
    
    
    4,346Less: current portion
    
    
    2,715Long-term obligation under capital leases
    
    
    1,631
 (b) Contingencies The Company, from time to time, is involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. Other
than set out below, the Company is not aware of any pending or threatened
proceedings that would have a material adverse effect on the consolidated
financial condition or future results of the Company. A significant debenture holder filed a lawsuit to restrain the Company from
satisfying its obligation to repay the debentures at maturity by delivering
common shares. On October 28, 2003 the Ontario Superior Court of Justice
dismissed the lawsuit. The debenture holder has appealed this decision. (Note
15). (c) Guarantees F-24




---



##### 



The Company has guaranteed the repayment of certain mortgages amounting to
$40,236. Seven of these mortgages, amounting to $30,900, are payable by a
limited partnership in which the Company has a 50% equity interest. The
Companys investment in this limited partnership has a carrying value of $nil.
In 1984 the Company sold seven long-term care facilities to the limited
partnership. The Company continues to act as guarantor for the repayment of
the first mortgages on the facilities, which were assumed by the limited
partnership. The limited partnership is in compliance with the terms of the
mortgages and, accordingly, the Company has not recognized any liability that
may arise under the guarantees provided. The Company believes that the value of
the facilities, which have been provided as collateral for the guarantee, is in
excess of the amount of the mortgages and, on a sale or liquidation, would be
sufficient to reimburse the Company for any payments that become due under
these guarantees. In addition, the Company has provided a guarantee for the repayment of a
mortgage of $9,336 payable by another limited partnership. In 1985 the Company
sold a long-term care facility to the limited partnership. The mortgage on the
facility was assumed by the partnership and continues to be guaranteed by the
Company. The Company receives a fee for this guarantee. The Company has no
equity interest in the partnership; however, it does receive an annual
incentive fee from the partnership based on the partnerships financial
performance and is entitled to participate in the proceeds of a sale or
refinancing of the facility. The limited partnership is in compliance with the
terms of the mortgage and, accordingly, the Company has not recognized any
liability that may arise under this guarantee. The Company believes that the
value of the facility, which has been provided as collateral for the guarantee,
is in excess of the amount of the mortgage and, on a sale or liquidation, would
be sufficient to reimburse the Company for any payment that becomes due under
this guarantee. (d) Concentrations The Companys subsidiary utilizes the services of certain competitive local
exchange carriers (CLECs) to bill and collect from customers for a
significant portion of its revenues. Approximately 64% and 93% of Acceris
revenues in the years ended December 31, 2003 and 2002 were derived from
customers billed by CLECs. If the CLECs were to refuse to provide such services
in the future, the Company would be required to significantly enhance its
billing and collection capabilities in a short amount of time and its
collection experience could be adversely affected during this transition
period. If the CLECs were unable to remit payments received from their
customers relating to the Companys billings, its operations and cash position
could be adversely affected. The Company depends on certain large telecommunications carriers to provide
network services for significant portions of the Companys telecommunications
traffic. If these carriers were to refuse to provide such services in the
future, the Companys ability to provide services to its customers would be
adversely affected and the Company might not be able to obtain similar services
from alternative carriers on a timely basis. 15. Convertible debenture payable 2003
    
    2002$
    
    $Liability component of convertible debenture payable
    
    
    
    
    
    
    2,515
 On October 31, 1996, the Company issued $50,000 of convertible, unsecured,
subordinated debentures bearing interest at 6% per annum payable semi-annually
on April 30 and October 31 and maturing on October 31, 2003. The Company had
the option to redeem the debentures at any time on or after November 1, 2001 at
par, plus accrued interest. As a result of the debentures being convertible
into common shares of the Company at the option of the holder and the Companys
option to satisfy its obligations to pay principal upon redemption or maturity
by the issuance of its own common shares, the debentures had both a liability
and equity component. Upon issuance on October 31, 1996, these components were as follows: F-25




---



##### 



$Financial liability component  present value of future interest obligations
at a discount rate of 8.15%
    
    
    15,852Principal equity component  present value of principal obligation at
maturity at a discount rate of 8.15%
    
    
    28,868Holder option equity component
    
    
    5,280Face amount
    
    
    50,000
 On October 31, 2003, the Company repaid all of its outstanding convertible
debentures by delivering 690 common shares for each $1,000 of principal,
resulting in the issuance of 28.2 million common shares. A significant
debenture holder filed alawsuit to restrain the Company from satisfying its
obligation to repay the debentures at maturity by delivering common shares.
On October 28, 2003 the Ontario Superior Court of Justice dismissed the
lawsuit. The former debenture holder has appealed this decision. During 2003, pursuant to normal course issuer bids, the Company purchased for
cancellation $1,700 (2002  $200) of debentures for cash consideration
aggregate of $1,161 (2002  $141) which reduced the liability component of the
debentures payable by $22 (2002  $9). As a result of the October 31, 2003
redemption, and the cancellation of repurchased debentures, the outstanding
face amount as at December 31, 2003 is $nil (2002  $42,561). The fair value
of the debentures as at December 31, 2002 was $27,882. 16. Convertible preferred shares 2003
    
    2002$
    
    $Liability component of convertible preferred shares
    
    
    11,200
    
    
    
    
 On December 19, 2003, the Company completed a private placement of a new
series of convertible preferred shares for proceeds of $15,000. The proceeds
from the private placement will be used for working capital purposes. The private placement consisted of an issuance of 10 million Series A
preferred shares at a price of $1.50 per share. The Series A preferred shares
are convertible into common shares on a one-to-one basis, subject to certain
anti-dilution adjustments. Holders of Series A preferred shares will be
entitled to vote on an as converted basis together with the holders of
common shares on all matters submitted to a vote of shareholders. The Series A
preferred shares are entitled to a dividend of 6% per annum, payable
semi-annually on January 1 and July 1 of each year, commencing on July 1,
2004. If cash dividends are not paid when due, Counsel must issue additional
Series A preferred shares as a stock dividend subject to an aggregate maximum
of 2,000,000 Series A preferred shares. The Series A preferred shares are
redeemable at the option of the holder commencing on January 1, 2009 at their
original issue price plus accrued and unpaid dividends. Commencing on the
first anniversary of closing, Counsel may force the conversion of the Series A
preferred shares as follows:  (a)
    
    Counsel may require the conversion of 25% of the
Series A shares into common shares if the common shares
have not traded at or below the Canadian dollar equivalent of US$3.00
on The Toronto Stock Exchange
(TSX) for 30 consecutive trading days.(b)
    
    Counsel may require the conversion of an additional 25% of the
Series A shares into common shares if the
common shares have not traded at or below the Canadian dollar
equivalent of US$3.50 on the TSX for 30
consecutive trading days.(c)
    
    Counsel may require the conversion of an additional 25% of the
Series A shares into common shares if the
common shares have not traded at or below the Canadian dollar
equivalent of US$3.75 on the TSX for 30
consecutive trading days.(d)
    
    Counsel may require the conversion of an additional 25% of the
Series A shares into common shares if the
common shares have not traded at or below the Canadian dollar
equivalent of US$4.00 on the TSX for 30
consecutive trading days. F-26




---



##### 



The Company has agreed not to issue any common shares or securities
convertible into common shares, other than employee stock options, at less
than US$1.50 per share as long as any Series A preferred shares remain
outstanding. The Series A preferred shareholder will have the right to
nominate one director of Counsel, which right it has not exercised to date.
Counsel has agreed that dividends on its common shares shall not exceed
US$0.09 per share per annum, on a non-cumulative basis, as long as any Series
A preferred shares are outstanding. Certain piggy-back registration rights
have been granted with respect to the common shares underlying the Series A
preferred shares for any underwritten offering of common shares in the United
States that Counsel may effect in the future. The fair value of the convertible preferred shares approximates its carrying
value at December 31, 2003. 17. Capital stock The authorized capital stock consists of an unlimited number of common and
preferred shares. During 2003, the Company acquired 1,352,200 (2002 - 748,000) common shares
for cancellation for cash of $2,525 (2002 - $1,532). The excess of the
average issue price over the repurchase price is credited to contributed
surplus. During 2003, $3,628 was credited to contributed surplus (2002 -
$1,886). 250,000 of the common shares acquired in 2003 were from former
employees. On December 12, 2003, the Company renewed its normal course issuer bid
through the facilities of TSX to purchase up to 2,430,113 common shares, or
5% of the outstanding common shares, from December 16, 2003 through to
December 15, 2004. 18. Supplemental information The following is a reconciliation of the numerators and denominators used in
computing basic and diluted loss per share. 2003
    
    2002
    
    2001$
    
    $
    
    $Basic and diluted net loss per share:Numerator:Loss from continuing operations
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )Accretion of equity component of debentures payable
    
    
    (2,515
    )
    
    
    (3,029
    )
    
    
    (3,159
    )Loss available to common shareholders - continuing operations
    
    
    (24,139
    )
    
    
    (13,011
    )
    
    
    (41,483
    )Loss from discontinued operations
    
    
    (636
    )
    
    
    (18,949
    )
    
    
    (23,889
    )Denominator:Weighted average common shares outstanding (000s)
    
    
    25,596
    
    
    
    22,195
    
    
    
    23,030Basic and diluted loss par share from continuing operations
    
    
    (0.94
    )
    
    
    (0.59
    )
    
    
    (1.80
    )Basic and diluted loss per share from discontinued operations
    
    
    (0.02
    )
    
    
    (0.85
    )
    
    
    (1.04
    )Basic and diluted net loss per share
    
    
    (0.96
    )
    
    
    (1.44
    )
    
    
    (2.84
    )
 For the years ended December 31, 2003, 2002 and 2001, the Company excluded
potential common share equivalents, incremental shares from stock options,
and shares issuable upon conversion of convertible debentures and the
convertible preferred shares from the loss per share calculation, as they
were anti-dilutive. 19. Stock-based compensation plans Counsel plans Under the 1992 Director, Officer and Employee Stock Option Plan, the Company
may grant options to its directors, officers and employees for up to
2,700,000 common shares. Under the 1997 Stock Option Plan, the Company may
grant options to its directors, officers, employees and any other person or
company engaged to provide ongoing management F-27




---



##### 



or consulting services for the Company for up to 4,200,000 common shares. Under
both plans, the exercise price of each option equals the market price of the
Companys common shares on the date of grant. Unless otherwise provided, the
maximum term of the grant is six years from the date of initial vesting of any
portion of the grant and options vest 20% on the date of grant and 20% on each
of the first through fourth anniversaries of the grant date. All unvested
options vest upon a change of control of the Company. A summary of the status of the Companys stock option plans and changes during
the years is as follows: 2003
    
    2002
    
    2001WeightedNumber of
    
    Weighted average
    
    Number of
    
    average
    
    Number of
    
    Weighted averageshares
    
    exercise price
    
    shares
    
    exercise price
    
    shares
    
    exercise price(in thousands)
    
    Cdn$
    
    (in thousands)
    
    Cdn$
    
    (in thousands)
    
    Cdn$Outstanding
- beginning
of year
    
    
    3,695
    
    
    
    8.87
    
    
    
    3,181
    
    
    
    10.03
    
    
    
    3,192
    
    
    
    13.04Granted
    
    
    150
    
    
    
    2.36
    
    
    
    608
    
    
    
    2.81
    
    
    
    1,045
    
    
    
    3.20Expired
    
    
    (1,861
    )
    
    
    14.77
    
    
    
    (94
    )
    
    
    9.05
    
    
    
    (1,056
    )
    
    
    12.38Outstanding- end of year
    
    
    1,984
    
    
    
    4.17
    
    
    
    3,695
    
    
    
    8.87
    
    
    
    3,181
    
    
    
    10.03Options - exercisable -
end of year
    
    
    660
    
    
    
    6.61
    
    
    
    2,072
    
    
    
    13.21
    
    
    
    1,922
    
    
    
    13.80
 The weighted average fair value of the options granted during the year was
$1.08 (2002 - $1.11; 2001 - $1.30) The following table summarizes the stock options outstanding and exercisable as
at December 31, 2003: Options outstanding
    
    Options exercisableNumber
    
    Weighted average
    
    Weighted
    
    Number
    
    WeightedRange of exercise prices
    
    outstanding
    
    remaining
    
    average
    
    exercisable
    
    averageCdn$
    
    (in thousands)
    
    contractual life (yrs)
    
    exercise price
    
    (in thousands)
    
    exercise price2.20 to 5.60
    
    
    1,520
    
    
    
    6.61
    
    
    
    2.86
    
    
    
    237
    
    
    
    2.865.70 to 10.40
    
    
    458
    
    
    
    1.52
    
    
    
    8.59
    
    
    
    417
    
    
    
    8.5916.40 to 18.50
    
    
    6
    
    
    
    0.44
    
    
    
    16.90
    
    
    
    6
    
    
    
    16.91,984
    
    
    
    5.42
    
    
    
    4.17
    
    
    
    660
    
    
    
    6.61
 The Company applies the intrinsic value based method of accounting for its
fixed employee stock compensation plans. Options are granted with an exercise
price that is equal to the market value of the underlying stock at the date of
grant and accordingly, no compensation expense has been recognized. As the Company has elected to use the intrinsic value based method, the
following disclosures are required to give pro forma effects as if the fair
value based method of accounting had been used to account for employee stock
compensation plans. 2003
    
    2002
    
    2001$
    
    $
    
    $Net loss, as reported
    
    
    (22,260
    )
    
    
    (28,931
    )
    
    
    (62,213
    )Pro forma adjustments
    
    
    (1,572
    )
    
    
    (1,995
    )
    
    
    (4,249
    )Pro forma net loss for the period
    
    
    (23,832
    )
    
    
    (30,926
    )
    
    
    (66,462
    )Pro forma
basic and diluted net loss
per share
    
    
    (1.03
    )
    
    
    (1.53
    )
    
    
    (3.02
    )
 For purposes of these pro forma disclosures, the fair value of each option of
the Company was estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 2003, 2002 and 2001, respectively: risk-free interest rate of 5.0%;
expected dividend yield of nil%; expected life of six years; and expected
volatility of 60%, 60% and 65.5%, respectively. The pro forma disclosures
include the effects of options issued by Acceris. The Black-Scholes model requires highly subjective assumptions, including
volatility and the expected time until exercise, which greatly affect the
calculated values. Accordingly, management believes that the model does not
necessarily provide a reliable single measure of the fair value of the
Companys stock option awards. The Company plans to grant additional stock options each year and as a result,
the above pro forma amounts are not F-28




---



##### 



likely to be representative of the effects on reported earnings for future years. Acceris plans At December 31, 2003, Acceris has several stock-based compensation plans.
Acceris applies the intrinsic value method of APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed option plans. A summary of the status of Acceriss stock option plans and warrants and
changes during the years it was controlled by Counsel is as follows: 2003
    
    2002
    
    2001WeightedOptions and
    
    Weighted average
    
    Options and
    
    average
    
    Options and
    
    Weighted averagewarrants
    
    exercise price
    
    warrants
    
    exercise price
    
    warrants
    
    exercise price(in thousands)
    
    US$
    
    (in thousands)
    
    US$
    
    (in thousands)
    
    US$Outstanding
- beginning
of year
    
    
    1,258
    
    
    
    36.40
    
    
    
    1,402
    
    
    
    45.40
    
    
    
    2,268
    
    
    
    51.40Granted
    
    
    1,378
    
    
    
    3.00
    
    
    
    5
    
    
    
    1.40
    
    
    
    1,025
    
    
    
    15.20Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (828
    )
    
    
    20.46
    
    
    
    (131
    )
    
    
    126.80
    
    
    
    (82
    )
    
    
    68.60Forfeited
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    85.40
    
    
    
    (1,809
    )
    
    
    28.40Outstanding - end of year
    
    
    1,808
    
    
    
    18.20
    
    
    
    1,258
    
    
    
    36.40
    
    
    
    1,402
    
    
    
    45.40Options -exercisable -
end of year
    
    
    436
    
    
    
    
    
    
    
    1,257
    
    
    
    
    
    
    
    1,355
 The weighted average fair value of the options granted during the year was
$2.07 (2002 - $0.60; 2001 - $11.40) The following table summarizes the stock options and warrants outstanding and
exercisable as at December 31, 2003: Options and warrants outstanding
    
    Options and warrants exercisableNumber
    
    Weighted average
    
    Weighted
    
    Number
    
    WeightedRange of exercise prices
    
    outstanding
    
    remaining
    
    average
    
    exercisable
    
    averageUS$
    
    (in thousands)
    
    contractual life (yrs)
    
    exercise price
    
    (in thousands)
    
    exercise price1.40 to 3. 00
    
    
    1,382
    
    
    
    9.96
    
    
    
    2.99
    
    
    
    10
    
    
    
    1.985.40 to 25.00
    
    
    20
    
    
    
    4.97
    
    
    
    16.68
    
    
    
    20
    
    
    
    16.6842 .50 to 7 1.26
    
    
    168
    
    
    
    5.47
    
    
    
    56.88
    
    
    
    168
    
    
    
    56.8877.50 to 127.50
    
    
    238
    
    
    
    3.23
    
    
    
    79.22
    
    
    
    238
    
    
    
    79.221,808
    
    
    
    8.60
    
    
    
    18.20
    
    
    
    436
    
    
    
    66.05
 F-29




---



##### 



20. Income taxes The Companys income tax provision (recovery) differs from the recovery
computed at statutory rates as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $Loss before income taxes, non-controlling Interest
and discontinued operations
    
    
    (18,687
    )
    
    
    (327
    )
    
    
    (19,961
    )Income tax expense (recovery), based on a statutory income
tax rate of 36.62% ( 2002 - 38.62%; 2001 - 41 .74%)
    
    
    (6,843
    )
    
    
    (126
    )
    
    
    (8,331
    )Increase
(decrease) in income taxes resulting from:Change in valuation allowance relating to
continuing operations
    
    
    2,728
    
    
    
    9,178
    
    
    
    10,067Effect of change in income tax rates
    
    
    (130
    )
    
    
    190
    
    
    
    5,932Non-taxable items
    
    
    
    
    
    
    
    
    
    
    5,242Unrealized foreign exchange gains (losses) from
transactions with subsidiaries
    
    
    4,375
    
    
    
    (151
    )
    
    
    745Non-deductible items
    
    
    3,328
    
    
    
    3,023
    
    
    
    3,790Lower/higher effective tax rate of foreign
subsidiaries
    
    
    202
    
    
    
    (636
    )
    
    
    267Large corporation tax provision and other taxes
    
    
    163
    
    
    
    160
    
    
    
    64Other
    
    
    (886
    )
    
    
    (1,983
    )
    
    
    2,125Actual income tax provision
    
    
    2,937
    
    
    
    9,655
    
    
    
    19,901Represented by:Current income tax provision (recovery)
    
    
    (39
    )
    
    
    (1,206
    )
    
    
    683Future income tax provision
    
    
    2,813
    
    
    
    10,701
    
    
    
    19,154Large corporation tax provision
    
    
    163
    
    
    
    160
    
    
    
    642,937
    
    
    
    9,655
    
    
    
    19,901
 An analysis of earnings (loss) before income taxes, non-controlling interest
and discontinued operations by country is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $Canada
    
    
    3,611
    
    
    
    (9,488
    )
    
    
    (14,085
    )United States
    
    
    (22,298
    )
    
    
    9,161
    
    
    
    (5,876
    )(18,687
    )
    
    
    (327
    )
    
    
    (19,961
    )
 F-30




---



##### 



The Companys income tax provision (recovery) by country is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $CanadaCurrent provision (recovery)
    
    
    173
    
    
    
    160
    
    
    
    740Future provision, (recovery)
    
    
    398
    
    
    
    (1,190
    )
    
    
    3,389571
    
    
    
    (1,030
    )
    
    
    4,129United StatesCurrent provision (recovery)
    
    
    (49
    )
    
    
    (1,206
    )
    
    
    7Future provision (recovery)
    
    
    2,415
    
    
    
    11,891
    
    
    
    15,7652,366
    
    
    
    10,685
    
    
    
    15,772TotalCurrent provision (recovery)
    
    
    124
    
    
    
    (1,046
    )
    
    
    747Future provision (recovery)
    
    
    2,813
    
    
    
    10,701
    
    
    
    19,1542,937
    
    
    
    9,655
    
    
    
    19,901
 The composition of the Companys net future income tax assets and liabilities
as at December 31 is as follows: 2003
    
    2002$
    
    $Future income tax assetsAcquired intangible assets
    
    
    3,441
    
    
    
    3,435Amortization of deferred compensation
    
    
    
    
    
    
    1,933Deferred revenue
    
    
    2,707
    
    
    
    2,144Cost basis differences of investments
    
    
    2,181
    
    
    
    2,823Cost basis differences of property,
plant and equipment
    
    
    
    
    
    
    1,708Accrued charges and reserves
currently not deductible for income
taxes
    
    
    3,269
    
    
    
    1,680Other
    
    
    
    
    
    
    150Net losses available for carry-forward
    
    
    58,074
    
    
    
    58,157Valuation allowance
    
    
    (69,672
    )
    
    
    (71,756
    )Total future income tax assets
    
    
    
    
    
    
    274Future income tax liabilities:Cost basis differences of investments
    
    
    (32,461
    )
    
    
    (33,045
    )Cost basis differences of property,
plant and equipment
    
    
    (1,334
    )
    
    
    (1,638
    )Other
    
    
    (5,249
    )
    
    
    (1,867
    )(39,044
    )
    
    
    (36,550
    )Net future income tax liability
    
    
    (39,044
    )
    
    
    (36,276
    )
 The amount recognized in the consolidated financial statements for long-term
future income tax liabilities includes estimates made by management. It is
reasonably possible that the amounts recognized could change by a material
amount in the near term. At December 31, 2003, the Company through its subsidiaries in the United States
had federal net operating tax loss carry forwards of approximately $157,000 in
aggregate available to reduce future income taxes. These tax loss carry
forwards expire between 2006 and 2023. In the United States, the Companys utilization against future taxable income
of approximately $154,000 of its federal net operating loss carry forwards
associated with its interest in Acceris, is restricted pursuant to the change
in F-31




---



##### 



ownership rules in Section 382 of the Internal Revenue Code. These rules in
general provide that an ownership change
occurs when the percentage shareholdings of 5% direct or indirect shareholders
of a loss corporation have in aggregate increased by more than 50 percentage
points during the immediately preceding three years. Restrictions in net operating loss carry forwards occurred as a result of the
initial acquisition of shares of Acceris in 2001. Further restrictions may have
occurred as a result of subsequent acquisitions of shares of Acceris and
changes in the share ownership and capital structure of the Company. Net
operating loss carry forwards of Acceris arising prior to such a change in
ownership would be available for usage against future taxable income subject
to usage limitations of approximately $6,000 per annum until 2008 and
thereafter $1,550 per annum. Due to the expiration of the Companys net operating loss carry forwards and
the above usage restrictions, it is most likely that only $53,000 of the total
$157,000 of net operating loss carry forwards otherwise available will be able
to be utilized against future taxable income. In the United States, the Company, through its interest in Acceris, also has
net operating loss carry forwards for state income tax purposes in those states
where it has conducted business. However, such state tax loss carry forwards
may differ substantially by jurisdiction and in general are subject to the same
or similar restrictions as to expiry and usage described above. Acceris is
subject to state income tax in multiple jurisdictions. 21. Discontinued operations The Company has a number of discontinued operations. Long-term care is subject
to a formal plan of disposal while medical products and services (MPS) and
communications operations have been sold. During third quarter 2003, the Company adopted a formal plan of disposal for an
income producing property. In the fourth quarter 2003, the plan was terminated
and accordingly, the income producing property is reflected in continuing
operations. Discontinued operations have been presented on a segmented basis to enhance the
readers understanding of the financial information presented. A summary of the carrying value of the assets and liabilities for discontinued
operations as at December 31 is as follows: F-32




---



##### 



2003
    
    2002Long-termcare
    
    Communications
    
    Total
    
    Total$
    
    $
    
    $
    
    $AssetsCurrentCash and cash equivalents
    
    
    848
    
    
    
    91
    
    
    
    939
    
    
    
    1,046Accounts receivable
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    543Other assets
    
    
    876
    
    
    
    
    
    
    
    876
    
    
    
    6502,224
    
    
    
    91
    
    
    
    2,315
    
    
    
    2,239Long-termMortgage receivable
    
    
    1,952
    
    
    
    
    
    
    
    1,952
    
    
    
    1,528Property, plant and
equipment, net
    
    
    18,665
    
    
    
    
    
    
    
    18,665
    
    
    
    19,554Intangibles, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Goodwill
    
    
    285
    
    
    
    
    
    
    
    285
    
    
    
    24620,902
    
    
    
    
    
    
    
    20,902
    
    
    
    21,598Total assets
    
    
    23,126
    
    
    
    91
    
    
    
    23,217
    
    
    
    23,837LiabilitiesCurrentAccounts payable and
accrued liabilities
    
    
    8,421
    
    
    
    841
    
    
    
    9,262
    
    
    
    6,512Mortgages and loans payable
    
    
    238
    
    
    
    
    
    
    
    238
    
    
    
    181Unearned revenue
    
    
    212
    
    
    
    
    
    
    
    212
    
    
    
    5768,871
    
    
    
    841
    
    
    
    9,712
    
    
    
    7,269Long-termUnearned revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Mortgages and loans payable
    
    
    13,871
    
    
    
    
    
    
    
    13,871
    
    
    
    11,540Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16113,871
    
    
    
    
    
    
    
    13,871
    
    
    
    11,816Total liabilities
    
    
    22,742
    
    
    
    841
    
    
    
    23,583
    
    
    
    19,085
 F-33




---



##### 



The composition of earnings (loss) from discontinued operations for the years
ended December 31, is as follows: 2003Long-termcare
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    38,397
    
    
    
    2,109
    
    
    
    
    
    
    
    40,506Earnings
(loss) before income taxes
    
    
    (1,589
    )
    
    
    529
    
    
    
    509
    
    
    
    (551
    )Income taxes (credit)
    
    
    155
    
    
    
    
    
    
    
    (70
    )
    
    
    85Net earnings (loss)
    
    
    (1,744
    )
    
    
    529
    
    
    
    579
    
    
    
    (636
    )
 2002Long-termcare
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    32,629
    
    
    
    7,806
    
    
    
    3,051
    
    
    
    43,486Earnings
(loss) before income taxes
    
    
    (847
    )
    
    
    (12,508
    )
    
    
    (1,771
    )
    
    
    (15,126
    )Gain
(loss) subsequent to measurement date
    
    
    
    
    
    
    
    
    
    
    (2,665
    )
    
    
    (2,665
    )Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    148Income taxes (credit)
    
    
    (77
    )
    
    
    
    
    
    
    (1,229
    )
    
    
    (1,306
    )Net earnings (loss)
    
    
    (924
    )
    
    
    (12,508
    )
    
    
    (5,517
    )
    
    
    (18,949
    )
 2001Long-termcare
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    31,604
    
    
    
    16,803
    
    
    
    3,641
    
    
    
    52,048Earnings (loss) before income taxes
    
    
    3,147
    
    
    
    (23,430
    )
    
    
    (5,407
    )
    
    
    (25,690
    )Gain
(loss) subsequent to measurement date
    
    
    
    
    
    
    
    
    
    
    2,803
    
    
    
    2,803Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    88Income taxes (credit)
    
    
    (1,090
    )
    
    
    
    
    
    
    
    
    
    
    (1,090
    )Net earnings (loss)
    
    
    2,057
    
    
    
    (23,430
    )
    
    
    (2,516
    )
    
    
    (23,889
    )
   F-34




---



##### 



(i) Long-term care During the fourth quarter of 2002, the Company adopted a formal plan of
disposal for its long-term care facilities, due to a strategic decision to exit
the business. In October 2003, the Company received notices of intent from the lessee of five
retirement centres in Ontario and British Columbia to exercise options to
purchase the centres. The total purchase price pursuant to the options is Cdn
$30,000, before cost of disposition, and the transaction is expected to close
in the second quarter of 2004. At December 31, 2003, the centres had a net
asset value of Cdn $22,200 and were subject to mortgages aggregating Cdn
$18,234. The remaining seniors living facilities are expected to be sold by
the fourth quarter of 2004. (ii) Communications During the fourth quarter 2002, the Companys subsidiary, Acceris, adopted a
formal plan of disposal for its VoIP network and customers. On December 6, 2002, the Company entered into an agreement to sell
substantially all of the assets and customer base of I-Link Communications Inc.
(ILC), a wholly owned subsidiary, to Buyers United, Inc. (BUI). The sale
includes the physical assets required to operate Acceris nationwide network
using its patented VoIP technology (constituting the core business of ILC) and
a license in perpetuity to use Acceris proprietary software platform. The sale
closed on May 1, 2003 and provides for a post closing cash settlement between
the parties. The sale price consists of 300,000 shares of Series B convertible
preferred stock (8% dividend) of BUI, subject to adjustment in certain
circumstances, of which 75,000 shares are subject to an earn-out provision
(contingent consideration) based on future events related to ILCs single
largest customer. The earn-out takes place on a monthly basis over a
fourteen-month period that began January 2003. The Company recognizes the
value of the earn-out shares as additional sales proceeds when and if earned.
During the twelve months ending December 31, 2003, 64,286 shares of the
contingent consideration were earned and are included as a component of gain
(loss) from discontinued operations. The fair value of the 225,000 shares
(non-contingent consideration to be received) of BUI convertible preferred
stock was determined to be $1,350 as of December 31, 2002. As of December 31,
2003, the combined fair value of the original shares (225,000) and the shares
earned from the contingent consideration (64,286 shares) was determined to be
$1,916, which increase is included in the calculation of gain (loss) from
discontinued operation for the year ended December 31, 2003. As additional
contingent consideration is received, it will be recorded as a gain from
discontinued operations. (iii) MPS Medical products and services (MPS) represents the discontinued medical
products operations, pharmaceutical products operations, pharmacy services
operations, and home health care operations. During the third quarter of 2002, the Company adopted a formal plan of disposal
for its medical products business segment. Effective October 4, 2002, the
Company disposed of its interest in Sage BioPharma, Inc., through a sale that
raised net proceeds of $1,400. The Company incurred a loss on disposition of
$463 in 2002. Effective May 23, 2000, the Company adopted a formal plan of disposal for the
pharmaceutical products business of FARO Pharmaceuticals Inc. through the
disposition of its rights, including trademarks, copyrights and regulatory
filings in certain pharmaceutical products. On May 1, 2001, the Company
completed its disposition for proceeds of $67,000, consisting of $54,000 paid
on closing, $8,000 paid 60 days subsequent to the closing and a further $5,000
payable within 30 days of the first anniversary of the closing, subject to
specified levels of inventories on hand at the date of closing and sales
returns and rebates relating to operations prior to the closing. Accordingly,
the Company reflected the results of operations to May 23, 2000 from this
business as discontinued operations and adjusted the carrying value of its
investment in the pharmaceutical products business to reflect both the
estimated losses from operations subsequent to the measurement date and the
estimated net realizable value of its investment. During 2001, the Company
successfully reduced certain costs related to these discontinued operations.
This resulted in a recovery of $4,519, net of related costs of $2,494 and
income taxes of $4,487. In May 2002, the Company settled the final payment due
under the definitive agreement with the purchaser regarding its disposal of its
pharmaceutical products business in 2001. During the course of the settlement,
it became known that the purchaser disputed certain payments regarding
inventories as set out in the agreement. The Company assessed the impact of
this dispute and wrote down its receivable from the purchaser to reflect the
related collection risk. The loss from discontinued operations includes
expenses totalling $707 in 2002. F-35




---



##### 



Effective November 6, 1998, the Company adopted a formal plan of disposal for
its pharmacy services operations through the disposition of its interest in
Stadtlander Drug Company, Inc. (Stadtlander). Discontinued pharmacy services
operations include the specialty retail pharmacy business of Stadtlander. The
Company sold Stadtlander in January 1999. Subsequent to the measurement date,
the Company has recorded losses of $nil in 2003 (2002  $1,958; 2001  $1,716)
after income tax benefits. These losses are due to the cost of the litigation
settlement pertaining to this disposition. 22. SEGMENTED INFORMATION The Company currently operates in two sectors, communications and real estate. The communications sector consists of the Companys subsidiary, Acceris.
Acceris operates in three reportable segments, Telecommunications-Retail,
Telecommunications-Enterprise and Telecommunications-Technologies:  
    
    Telecommunications-Retail includes the operations of ACC, acquired in
June 2001, and the former agent and residential business of RSL, which
was acquired in December 2002. This segment offers dial-around
telecommunications product and 1+ product through two channels, namely,
multi-level marketing (MLM) and commercial agents.
    
    Telecommunications-Enterprise is the former enterprise business of
RSL, acquired in December 2002. This segment offers voice and data
solutions to enterprise customers through an in-house sales force.
    
    Telecommunications-Technologies is the former technology services
segment, acquired in March 2001, which offers a fully developed network
convergence software solution for voice and data. The Company licenses
certain developed technology to third party users. The real estate segment, which commenced operations in 2002, is comprised of
the Companys investment in six income-producing properties in Canada, five of
which were acquired in 2002 and three properties under development. Each segment operates as a strategic business unit with separate operating
management. The Company assesses performance based on operating income. The
accounting policies for the segments are the same as those described in note 2
to these consolidated financial statements. F-36




---



##### 



2003Telecommunications
    
    RealRetail
    
    Enterprise
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,799
    
    
    
    
    
    
    
    7,799United States
    
    
    108,150
    
    
    
    25,598
    
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    135,912108,150
    
    
    
    25,598
    
    
    
    2,164
    
    
    
    7,799
    
    
    
    
    
    
    
    143,711Operating costs and expensesTelecommunication costs
    
    
    70,731
    
    
    
    15,279
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    86,006Income producing properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,872
    
    
    
    
    
    
    
    3,872Selling, general and administrative
    
    
    42,380
    
    
    
    10,361
    
    
    
    4,237
    
    
    
    
    
    
    
    4,430
    
    
    
    61,408Provision for doubtful accounts
    
    
    5,432
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    5,438Depreciation and amortization
    
    
    4,867
    
    
    
    2,238
    
    
    
    2,079
    
    
    
    486
    
    
    
    184
    
    
    
    9,854Operating income (loss) before under noted items
    
    
    (15,260
    )
    
    
    (2,280
    )
    
    
    (4,154
    )
    
    
    3,441
    
    
    
    (4,614
    )
    
    
    (22,867
    )Gain and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,218
    
    
    
    5,218Other
    
    
    
    
    
    
    
    
    
    
    1,107
    
    
    
    
    
    
    
    2,550
    
    
    
    3,657Impairments and other losses:Write-down and loss on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (139
    )
    
    
    (139
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    (650
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,025
    )
    
    
    (1,025
    )Interest income
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    507
    
    
    
    620Interest expense
    
    
    (1,246
    )
    
    
    (291
    )
    
    
    (287
    )
    
    
    (1,451
    )
    
    
    (226
    )
    
    
    (3,501
    )Earnings (loss) before income taxes
    
    
    (16,506
    )
    
    
    (2,571
    )
    
    
    (3,221
    )
    
    
    1,990
    
    
    
    1,621
    
    
    
    (18,687
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,937
    )
    
    
    (2,937
    )Segment earnings (loss) from continuing operations
    
    
    (16,506
    )
    
    
    (2,571
    )
    
    
    (3,221
    )
    
    
    1,990
    
    
    
    (1,316
    )
    
    
    (21,624
    )Segment assets as at December 31Continuing operations
    
    
    27,917
    
    
    
    6,319
    
    
    
    8,320
    
    
    
    51,961
    
    
    
    25,855
    
    
    
    120,372Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,21727,917
    
    
    
    6,319
    
    
    
    8,320
    
    
    
    51,961
    
    
    
    25,855
    
    
    
    143,589Segment long-lived assets as at December 31(Income producing property, property under
development, property, plant & equipment, intangibles)Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,861
    
    
    
    921
    
    
    
    50,782United States
    
    
    7,796
    
    
    
    2,661
    
    
    
    4,800
    
    
    
    
    
    
    
    119
    
    
    
    15,3767,796
    
    
    
    2,661
    
    
    
    4,800
    
    
    
    49,861
    
    
    
    1,040
    
    
    
    66,158Goodwill as of December 31
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947Capital expenditures
    
    
    (2,665
    )
    
    
    (268
    )
    
    
    (5
    )
    
    
    (44
    )
    
    
    (83
    )
    
    
    (3,065
    )Other significant non-cash items:Amortization of unearned revenue
    
    
    (14,328
    )
    
    
    (3,559
    )
    
    
    (496
    )
    
    
    
    
    
    
    
    
    
    
    (18,383
    )Future income tax liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,812
    
    
    
    2,812Accretion of liability component
of convertible debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    36


F-37




---



##### 



2002Telecommunications
    
    
    
    
    
    RealRetail
    
    Enterprise
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,343
    
    
    
    
    
    
    
    3,343United States
    
    
    83,705
    
    
    
    1,547
    
    
    
    2,837
    
    
    
    
    
    
    
    
    
    
    
    88,08983,705
    
    
    
    1,547
    
    
    
    2,837
    
    
    
    3,343
    
    
    
    
    
    
    
    91,432Operating costs and expensesTelecommunication costs
    
    
    49,745
    
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,936Income producing properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,448
    
    
    
    
    
    
    
    1,448Selling
general and administrative
    
    
    27,484
    
    
    
    777
    
    
    
    4,262
    
    
    
    
    
    
    
    13,214
    
    
    
    45,737Research and development
    
    
    
    
    
    
    
    
    
    
    1,399
    
    
    
    
    
    
    
    
    
    
    
    1,399Provision for doubtful accounts
    
    
    5,966
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,999Depreciation and amortization
    
    
    4,056
    
    
    
    158
    
    
    
    2,123
    
    
    
    199
    
    
    
    579
    
    
    
    7,115Operating income (loss) before undernoted items
    
    
    (3,546
    )
    
    
    (612
    )
    
    
    (4,947
    )
    
    
    1,696
    
    
    
    (13,793
    )
    
    
    (21,202
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,067
    
    
    
    28,067Other
    
    
    356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426
    
    
    
    782Impairments
and other losses:Write-down and loss on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,011
    )
    
    
    (4,011
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (640
    )
    
    
    (640
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (722
    )
    
    
    (722
    )Interest income
    
    
    
    
    
    
    1
    
    
    
    38
    
    
    
    
    
    
    
    362
    
    
    
    401Interest expense
    
    
    (1,160
    )
    
    
    (19
    )
    
    
    (579
    )
    
    
    (676
    )
    
    
    (568
    )
    
    
    (3,002
    )Earnings (loss) before income taxes
    
    
    (4,350
    )
    
    
    (630
    )
    
    
    (5,488
    )
    
    
    1,020
    
    
    
    9,121
    
    
    
    (327
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,655
    )
    
    
    (9,655
    )Segment earnings (loss) from continuing operations
    
    
    (4,350
    )
    
    
    (630
    )
    
    
    (5,488
    )
    
    
    1,020
    
    
    
    (534
    )
    
    
    (9,982
    )Segment
assets as at December 31Continuing operations
    
    
    27,777
    
    
    
    9,678
    
    
    
    10,309
    
    
    
    38,886
    
    
    
    24,227
    
    
    
    110,877Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,83727,777
    
    
    
    9,678
    
    
    
    10,309
    
    
    
    38,886
    
    
    
    24,227
    
    
    
    134,714Segment long-lived assets as at December 31(Income producing property, property under development,
property, plant & equipment, intangibles)Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,982
    
    
    
    883
    
    
    
    38,865United States
    
    
    9,325
    
    
    
    4,730
    
    
    
    6,743
    
    
    
    
    
    
    
    294
    
    
    
    21,0929,325
    
    
    
    4,730
    
    
    
    6,743
    
    
    
    37,982
    
    
    
    1,177
    
    
    
    59,957Capital expenditures
    
    
    1,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    1,739Other significant non-cash items:Amortization of unearned revenue
    
    
    
    
    
    
    (1,643
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,643
    )Future income tax liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,701
    
    
    
    10,701Accretion of liability component
of convertible debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    289
 F-38




---



##### 



2001Telecommunications
    
    
    
    
    
    RealRetail
    
    Enterprise
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11United States
    
    
    49,289
    
    
    
    
    
    
    
    4,730
    
    
    
    
    
    
    
    
    
    
    
    54,01949,289
    
    
    
    
    
    
    
    4,730
    
    
    
    11
    
    
    
    
    
    
    
    54,030Operating costs and expensesTelecommunication costs
    
    
    35,546
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,546Income producing properties

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling,
general and administrative
    
    
    20,558
    
    
    
    
    
    
    
    8,922
    
    
    
    
    
    
    
    14,870
    
    
    
    44,350Research and development
    
    
    
    
    
    
    
    
    
    
    2,162
    
    
    
    
    
    
    
    
    
    
    
    2,162Provision for doubtful accounts
    
    
    839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839Depreciation and amortization
    
    
    2,286
    
    
    
    
    
    
    
    5,072
    
    
    
    3
    
    
    
    1,488
    
    
    
    8,849Operating income (loss) before undernoted items
    
    
    (9,940
    )
    
    
    
    
    
    
    (11,426
    )
    
    
    8
    
    
    
    (16,358
    )
    
    
    (37,716
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,760
    
    
    
    42,760Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    64Sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    
    
    
    
    589Retirement of debt
    
    
    
    
    
    
    
    
    
    
    1,093
    
    
    
    
    
    
    
    
    
    
    
    1,093Impairments and other losses:Write-down and loss on sale of short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,957
    )
    
    
    (1,957
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,340
    )
    
    
    (19,340
    )Equity interests in significantly influenced companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,582
    )
    
    
    (5,582
    )Interest income
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    2,564
    
    
    
    2,645Interest expense
    
    
    (383
    )
    
    
    
    
    
    
    (475
    )
    
    
    (3
    )
    
    
    (1,655
    )
    
    
    (2,517
    )Earnings
(loss) before income taxes
    
    
    (10,323
    )
    
    
    
    
    
    
    (10,139
    )
    
    
    5
    
    
    
    496
    
    
    
    (19,961
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,901
    )
    
    
    (19,901
    )Segment earnings (loss) from continuing operations
    
    
    (10,323
    )
    
    
    
    
    
    
    (10,139
    )
    
    
    5
    
    
    
    (19,405
    )
    
    
    (39,862
    )Segment assets as at December 31Continuing operations
    
    
    32,899
    
    
    
    
    
    
    
    17,578
    
    
    
    2,433
    
    
    
    48,944
    
    
    
    101,854Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,47832,899
    
    
    
    
    
    
    
    17,578
    
    
    
    2,433
    
    
    
    48,944
    
    
    
    142,332Segment long-lived assets as at December 31(Income producing property, property under
development, property, plant & equipment, intangbles)Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,433
    
    
    
    818
    
    
    
    3,251United States
    
    
    12,470
    
    
    
    
    
    
    
    9,699
    
    
    
    
    
    
    
    2,105
    
    
    
    24,27412,470
    
    
    
    
    
    
    
    9,699
    
    
    
    2,433
    
    
    
    2,923
    
    
    
    27,525Goodwill as of December 31
    
    
    
    
    
    
    
    
    
    
    3,434
    
    
    
    
    
    
    
    
    
    
    
    3,434Capital expenditures
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    1,163Other significant non-cash items:Amortization of unearned revenue
    
    
    
    
    
    
    
    
    
    
    (3,197
    )
    
    
    
    
    
    
    
    
    
    
    (3,197
    )Future income tax liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,154
    
    
    
    19,154Accretion of liability component
of convertible debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    528
    
    
    
    528
 F-39




---



##### 



23. Related party transaction As discussed in note 4, the holder of the non-controlling equity interest in
the Imperial Square retail development is affiliated with a member of the board
of directors of the Company. 24. Consolidated statement of cash flows information Supplementary information with respect to the consolidated statements of cash
flows is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $Cash paid (received) during the period:Interest
    
    
    5,918
    
    
    
    5,401
    
    
    
    5,564Income tax
    
    
    (4,031
    )
    
    
    (334
    )
    
    
    (541
    )Non-cash investing and financing activities:Debentures converted to common shares
    
    
    45,335
    
    
    
    
    
    
    
    Mortgages and loans assumed on
acquisition of income
producing properties
    
    
    1,328
    
    
    
    20,007
    
    
    
    1,700Preferred stock received in exchange
for assets of discontinued operations
    
    
    2,058
    
    
    
    
    
    
    
    Assets acquired on purchase transaction
    
    
    2,882
    
    
    
    
    
    
    
    Equipment acquired under capital lease
    
    
    
    
    
    
    
    
    
    
    9,535Notes payable incurred for the
purchase of software and software
licenses
    
    
    921
    
    
    
    
    
    
    
    
 25. Subsequent events Subsequent to year-end, the Company received confirmation that certain
indefeasible rights of usage (IRUs) acquired by the Company have been
reclaimed by the IRUs consortium, which is the group that owns and operates
the cable. As a result of this reclamation of the IRUs by the consortium, the
Company has been discharged of approximately $767 of obligations payable to the
consortium as at December 31, 2003. The Company expects to record the discharge
of this obligation as other income for the first quarter of 2004. Subsequent to year-end, the Company converted its preferred stock in BUI to
shares of common stock. In a private placement, the Company sold 50% of the
shares of common stock for approximately $1,600, which proceeds will be used to
fund operations, capital expenditures and to improve working capital. The
Company will record a gain of approximately $566 in the first quarter of 2004
relating to the sale of these shares. These shares were included in short-term
investments at December 31, 2003. F-40




---



##### 



26. Reconciliation to United States generally accepted accounting principles The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP. The following adjustments would be required in
order to present the consolidated statements of operations in accordance with
U.S. GAAP: 2003
    
    2002
    
    2001Notes
    
    $
    
    $
    
    $Loss from continuing operations  Canadian GAAP
    
    
    
    
    
    
    (21,624
    )
    
    
    (9,982
    )
    
    
    (38,324
    )Market value adjustment on trading securities  net
    
    
    (a
    )
    
    
    699
    
    
    
    (23,481
    )
    
    
    (18,417
    )Depreciation on income producing properties
    
    
    (b
    )
    
    
    (516
    )
    
    
    (250
    )
    
    
    Future income taxes
    
    
    
    
    
    
    36
    
    
    
    8,688
    
    
    
    5,666Revenue from income producing properties
    
    
    (c
    )
    
    
    66
    
    
    
    61
    
    
    
    Interest on equity portion of convertible debentures
    
    
    (d
    )
    
    
    (2,493
    )
    
    
    (2,277
    )
    
    
    (2,339
    )Amortization of deferred financing costs on
convertible debentures
    
    
    (d
    )
    
    
    (546
    )
    
    
    
    
    
    
    Interest on liability portion of convertible
preferred shares
    
    
    (d
    )
    
    
    9
    
    
    
    
    
    
    
    Gain on retirement of convertible debentures
    
    
    (g
    )
    
    
    671
    
    
    
    63
    
    
    
    2,019Loss from continuing operations  U.S. GAAP
    
    
    
    
    
    
    (23,698
    )
    
    
    (27,178
    )
    
    
    (51,395
    )Loss from discontinued operations  Canadian GAAP
    
    
    
    
    
    
    (636
    )
    
    
    (18,949
    )
    
    
    (23,889
    )Transitional impairment amount of goodwill
    
    
    (e
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    Long-term care facilities:
    
    
    (f
    )Depreciation
    
    
    
    
    
    
    
    
    
    
    (904
    )
    
    
    (1,052
    )Gain on adjustment as a result of
amortization methods
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,002Interest on financing obligation
    
    
    
    
    
    
    (1,883
    )
    
    
    (1,694
    )
    
    
    (1,742
    )Adjustment to lease expense
    
    
    
    
    
    
    3,094
    
    
    
    3,248
    
    
    
    2,697Loss from discontinued operations  U.S. GAAP
    
    
    
    
    
    
    575
    
    
    
    (19,299
    )
    
    
    (20,984
    )Net loss -U.S. GAAP
    
    
    
    
    
    
    (23,123
    )
    
    
    (46,477
    )
    
    
    (72,379
    )Other comprehensive income (loss) items
    
    
    (h
    )
    
    
    (1,246
    )
    
    
    (37
    )
    
    
    793Comprehensive loss  U.S. GAAP
    
    
    
    
    
    
    (24,369
    )
    
    
    (46,514
    )
    
    
    (71,586
    )Net loss per share  U.S. GAAP
    
    
    
    
    
    
    (0.95
    )
    
    
    (2.10
    )
    
    
    (3.14
    )
 The following adjustments would be required in order to present the
consolidated statements of shareholders equity in accordance with U.S. GAAP: 2003
    
    2002Notes
    
    $
    
    $Shareholders equity (deficit)  Canadian GAAP
    
    
    
    
    
    
    (14,150
    )
    
    
    4,884Share purchase loans
    
    
    (i
    )
    
    
    (5,967
    )
    
    
    (5,873
    )Convertible debentures classified as debt and
interest
    
    
    (d
    )
    
    
    
    
    
    
    (40,046
    )Convertible preferred shares reclassified
    
    
    (d
    )
    
    
    (3,800
    )Sales of
long- term care facilities as a
financing obligation
    
    
    (f
    )
    
    
    (19,402
    )
    
    
    (16,566
    )Unrealized gains on short-term investments net of
tax of $36(2002-$588)
    
    
    (a
    )
    
    
    2,323
    
    
    
    1,003Difference in depreciation methods
    
    
    (b
    )
    
    
    (8,306
    )
    
    
    (7,790
    )Deferred financing costs on convertible debentures
    
    
    (d
    )
    
    
    
    
    
    
    546Difference in method of revenue recognition for
income producing properties
    
    
    (c
    )
    
    
    66
    
    
    
    (61
    )Shareholders equity (deficit)  U.S. GAAP
    
    
    
    
    
    
    (49,236
    )
    
    
    (63,903
    )
 The following is a restatement of balance sheet categories to reflect the
application of U.S. GAAP: F-41




---



##### 



2003
    
    2002$
    
    $AssetsCurrent assetsCash and cash equivalents
    
    
    16,996
    
    
    
    9,004Marketable securities  available for sale
    
    
    4,668
    
    
    
    4,662Accounts receivable
    
    
    18,719
    
    
    
    17,357Income taxes recoverable
    
    
    
    
    
    
    3,329Future income tax assets
    
    
    
    
    
    
    274Prepaid expenses and deposits
    
    
    2,929
    
    
    
    5,264Assets of discontinued operations
    
    
    2,315
    
    
    
    2,28945,627
    
    
    
    42,179Long-term assetsIncome producing properties
    
    
    41,709
    
    
    
    34,669Properties under development
    
    
    7,600
    
    
    
    3,063Loans receivable
    
    
    700
    
    
    
    600Portfolio investments
    
    
    4,745
    
    
    
    4,420Property, plant and equipment, net
    
    
    7,787
    
    
    
    12,657Intangible assets, net
    
    
    8,546
    
    
    
    9,318Goodwill
    
    
    947
    
    
    
    Other assets
    
    
    896
    
    
    
    2,273Assets of discontinued operations
    
    
    24,041
    
    
    
    22,709142,598
    
    
    
    131,388LiabilitiesCurrent liabilitiesRevolving credit facility
    
    
    12,127
    
    
    
    9,086Accounts
payable and accrued liabilities
    
    
    33,404
    
    
    
    28,617Unearned revenue
    
    
    4,011
    
    
    
    1,019Current portion of mortgages and loans
payable
    
    
    4,377
    
    
    
    3,630Current portion of capital leases
    
    
    2,715
    
    
    
    2,714Convertible debentures payable
    
    
    
    
    
    
    42,561Income tax liabilities
    
    
    524
    
    
    
    Future income taxes
    
    
    1,110
    
    
    
    Liabilities of discontinued operations
    
    
    10,803
    
    
    
    8,51769,071
    
    
    
    96,144Long-term liabilitiesMortgages and loans payable
    
    
    24,057
    
    
    
    22,528Capital leases
    
    
    1,631
    
    
    
    4,146Convertible debentures payable
    
    
    
    
    
    
    Income tax liabilities
    
    
    37,898
    
    
    
    35,422Liabilities of discontinued operations
    
    
    43,111
    
    
    
    37,551175,768
    
    
    
    195,791Non-controlling interest
    
    
    1,066
    
    
    
    Convertible preferred shares
    
    
    15,000
    
    
    
    Shareholders equity (deficit)Capital stock
    
    
    123,702
    
    
    
    89,088Additional paid-up capital
    
    
    12,414
    
    
    
    7,983Accumulated
comprehensive income
    
    
    2,830
    
    
    
    4,076Accumulated deficit
    
    
    (188,182
    )
    
    
    (165,050
    )(49,236
    )
    
    
    (63,903
    )142,598
    
    
    
    131,888
 F-42




---



##### 



Accumulated comprehensive income for the Company includes the cumulative
unrealized gains or losses on securities available for sale and cumulative
foreign currency translation adjustments. The effect on the Companys results
is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $Accumulated comprehensive income  beginning of the year
    
    
    4,076
    
    
    
    4,113
    
    
    
    3,320Unrealized gains (losses) on available for sale securities
    
    
    
    
    
    
    196
    
    
    
    (411
    )Foreign currency translation
    
    
    (1,246
    )
    
    
    (233
    )
    
    
    1,204Other comprehensive income items
    
    
    (1,246
    )
    
    
    (37
    )
    
    
    793Accumulated comprehensive income (loss)  end of year
    
    
    2,830
    
    
    
    4,076
    
    
    
    4,113
 The composition of accumulated comprehensive income is as follows: 2003
    
    2002
    
    2001$
    
    $
    
    $Unrealized gains (losses) on available for sale securities
    
    
    
    
    
    
    
    
    
    
    (196
    )Cumulative foreign currency translation account
    
    
    2,830
    
    
    
    4,076
    
    
    
    4,309Accumulated comprehensive income (loss)  end of year
    
    
    2,830
    
    
    
    4,076
    
    
    
    4,113
 Summary of accounting policy differences: (a) Short-term investments Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that trading securities
(short-term investments) be carried at market value with unrealized gains and
losses included in results of operations. Under Canadian GAAP, short-term
investments are recorded at the lower of cost and market value. (b) Depreciation of income producing properties Accounting Research Bulletin No. 43 requires that the Company depreciate
income-producing properties using the straight-line method. Under Canadian
GAAP, the Company has chosen to depreciate income-producing properties using
the sinking fund method. (c) Revenue from income producing properties U.S. GAAP requires the Company to recognize rental revenue on a straight-line
basis, whereby the known amount of cash to be received under a lease is
recognized into income over the term of the respective lease. The amount by
which straight-line rental revenue exceeds minimum rents collected in
accordance with the lease agreement is recorded as deferred rent. Under
Canadian GAAP, the Company recognized rental revenue based on the minimum rents
collected in accordance with the lease agreement. (d) Convertible debentures and convertible preferred shares Under Canadian GAAP, CICA HB Section 3860, Financial Instruments, requires the
separate presentation of the debt and equity components of a financial
instrument. Interest related to the equity component of the convertible
debenture was charged to retained earnings through the accretion of equity
component of debentures payable. Under Accounting Principles Board (APB) 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
the allocation of the proceeds of convertible debt is not allowed. Also, under
U.S.GAAP, contingently redeemable preferred stock is not allocated into
liability and equity components. (e) Goodwill and intangible assets Commencing January 1, 2002, new generally accepted accounting principles in
Canada and the United States for intangible assets with an indefinite life and
goodwill applied to the Company. U.S. GAAP pronouncement Statement of
Financial Accounting Standards 142, Goodwill and Other Intangible Assets(FAS
142), requires the effect of adoption to be recorded as a change in accounting
principles, charged to earnings, in the period the change is effected. Under F-43




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Canadian GAAP (note 2), the transitional amount is charged to retained earnings
(CICA HB 3062). As of June 30, 2002, the Company completed the assessment of the quantitative
impact of the transitional impairment test on its goodwill and other intangible
assets. An impairment of $1,000 was determined relating to the impaired
goodwill of SageBiopharma Inc. The table below discloses the pro-forma effect had the year ended December 31,
2001 been subject to FAS 142: 2003
    
    2002
    
    2001$
    
    $
    
    $Loss from continuing operations  U.S. GAAP
    
    
    (23,698
    )
    
    
    (27,241
    )
    
    
    (54,507
    )Goodwill amortization expense
    
    
    
    
    
    
    
    
    
    
    (2,385
    )Adjusted loss from continuing operations -
U.S. GAAP
    
    
    (23,698
    )
    
    
    (27,241
    )
    
    
    (52,122
    )Adjusted basic and diluted net loss per
share from continuing operations
    
    
    (0.93
    )
    
    
    (1.23
    )
    
    
    (2.26
    )
 2003
    
    2002
    
    2001$
    
    $
    
    $Net loss as reported  U.S. GAAP
    
    
    (23,123
    )
    
    
    (46,477
    )
    
    
    (72,104
    )Goodwill amortization expense
    
    
    
    
    
    
    
    
    
    
    (3,791
    )Adjusted net
loss - U.S. GAAP
    
    
    (23,123
    )
    
    
    (46,477
    )
    
    
    (68,313
    )Adjusted basic and diluted net loss per
share  U.S. GAAP
    
    
    (0.90
    )
    
    
    (2.10
    )
    
    
    (2.97
    )
 (f) Discontinued operations The disposition of certain long-term care facilities by the Company in a
previous year was recorded as a sale for Canadian GAAP purposes. This
transaction is accounted for as a financing rather than a sale for U.S. GAAP
purposes due to the Companys continuing involvement in the properties. U.S. GAAP requires that the Company depreciate long-term care facilities using
the straight-line method. Under Canadian GAAP, the Company has chosen to
depreciate the facilities using the sinking fund method. (g) Retirement of convertible debentures Under CICA HB 3860, Financial Instruments, when the company retired its
convertible debentures for less than face value, the equity component was
included in contributed surplus. Under U.S. GAAP, gains and losses on
retirement of convertible debentures are recorded in earnings. (h) Comprehensive income Under Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, all changes in shareholders equity other than
transactions with shareholders are included in comprehensive income regardless
of whether they are considered to be results of operations for the period.
Under Canadian GAAP, there is no concept of comprehensive income. Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that available for sale
securities, which include any security for which the Company has no immediate
plans to sell but which may be sold in the future (portfolio investments), be
carried at market value based on quoted market prices. Realized gains and
losses, net of income taxes, including declines in value judged to be
non-temporary are included in the determination of earnings. Unrealized gains
and losses are recorded, net of income taxes, as a separate component of
comprehensive income. Under U.S. GAAP, changes in the cumulative translation account are included in
other comprehensive income. F-44




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(i) Share purchase loans EITF 85-1, Classifying Notes Received for Capital Stock, requires that employee
share purchase loans be presented as a deduction from capital stock. (j) Stock-based compensation As the Company has elected to use the intrinsic value based method, the
following disclosures are required to give pro forma effects as if the fair
value based method of accounting had been used to account for employee stock
compensation plans. 2003
    
    2002
    
    2001$
    
    $
    
    $Net loss - U.S. GAAP
    
    
    (23,123
    )
    
    
    (46,477
    )
    
    
    (72,104
    )Adjustment for SFAS 123
    
    
    (1,549
    )
    
    
    (1,995
    )
    
    
    (4,249
    )Pro forma net loss for the year -
U.S. GAAP
    
    
    (24,672
    )
    
    
    (48,472
    )
    
    
    (76,353
    )Pro forma net loss per share  U.S.
GAAP
    
    
    (0.96
    )
    
    
    (2.19
    )
    
    
    (3.32
    )
 The Company plans to grant additional stock options each year. As a result, the
above pro forma adjustments for SFAS 123 are not likely to be representative of
the effects on reported net loss for future years. (k) Impact of recently issued accounting pronouncements Under the U.S. Securities and Exchange Commission Staff Accounting Bulletin 74
(SAB 74), the Company is required to disclose information related to new
accounting standards that have not yet been adopted. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS 150).
SFAS 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. It requires the classification of a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS 150 on July 1, 2003 and
the adoption did not have any effect on its financial statements or results of
operations. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities(SFAS 149). This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003 and did not have any effect on the Companys financial statements or
results of operations. In May 2003, the Emerging Issues Task Force (EITF) issued No. 01-08,
Determining Whether an Arrangement Contains a Lease(EITF 01-08) which
provides guidance on how to determine whether an arrangement contains a lease
that is within the scope of SFAS No. 13, Accounting for Leases. The guidance in
EITF No. 01-08 is based on whether the arrangement conveys to the purchaser
(lessee) the right to use a specific asset. The Company adopted EITF No. 01-08
on July 1, 2003 and the adoption did not have any effect on its financial
condition or results of operations. In December 2003, the Securities and Exchange Commissions (the SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition(SAB 104),
which supersedes portions of SAB 101. The primary purpose of SAB 104 is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, which was superseded as a result of the issuance of EITF
00-21. While the wording of SAB 104 changed to reflect the issuance of EITF
00-21, the revenue recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104. The adoption of SAB 104 did not have a material
impact on the Companys financial statements. In June 2002, FASB issued No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 will F-45




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##### 



be effective for exit or disposal
activities initiated after December 31, 2002. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The principal difference between SFAS 146
and EITF No. 94-3 relates to the requirements for recognition of a liability.
SFAS requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Previously, EITF No.
94-3 required the recognition of liabilities at the date of an entitys
commitment to an exit plan. The adoption of SFAS 146 did not have any effect on
the Companys financial statements or results of operations. In January 2003, the FASB issued Financial Interpretation (FIN) 46,
Consolidation of Variable Interest Entities(VIEs) in an effort to expand and
clarify existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. For U.S. GAAP, FIN 46 is effective immediately for all
enterprises with variable interests in VIEs created after January 31, 2003 and
January 1, 2004 for all previously existing variable interest entities. Under
FIN 46, if an entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur, receives a majority of the entitys expected
losses if they occur, or both. On December 24, 2003, the FASB issued a
revised FIN 46, defined as FIN 46R. The CICA has issued a standard similar to
FIN 46, except that it applies to annual and interim periods beginning on or
after November 1, 2004. The Company is currently evaluating the impact of FIN
46R and its related interpretations. F-46