##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K/A#1 Amendment
No. 1 x ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003 Commission File No. 0-17973   ACCERIS COMMUNICATIONS INC.  Florida
(State or Other Jurisdiction
of Incorporation or Organization)
    
    52-2291344
(I.R.S. Employer
Identification No.)9775 Businesspark Avenue, San Diego, California
(Address of Principal Executive Offices)
    
    92131
(Zip Code)
 (858) 547-5700
(Registrants Telephone Number, Including Area Code) Securities to be registered pursuant to Section 12(b) of the Exchange Act:
None. Securities to be registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value. 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 ü No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filed (as
defined in Exchange Act Rule 12b-2).
Yes o No ü The aggregate market value of Common Stock held by non-affiliates based upon
the closing price of $5.70 per share on June 30, 2003, as reported by the OTC -
Bulletin Board, was approximately $10,621,665. As of April 9, 2004, there were 19,262,095 shares of Common Stock, $0.01 par
value, outstanding.




---



##### 



TABLE OF CONTENTS PAGEPART IItem 1.
    
    Business.
    1Item 2.
    
    Properties.
    6Item 3.
    
    Legal Proceedings.
    7Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    7PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
    8Item 6.
    
    Selected Financial Data.
    10Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    12Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    32Item 8.
    
    Financial Statements and Supplementary Data.
    32Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
    32Item 9A.
    
    Controls and Procedures.
    32PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant.
    33Item 11.
    
    Executive Compensation.
    36Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
    40Item 13.
    
    Certain Relationships and Related Transactions.
    42Item 14.
    
    Principal Accountant Fees and Services.
    44PART IVItem 15.
    
    Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
    46




---



---



##### 



PART I Explanatory Note This Amendment No. 1 to Form 10-K (this Amendment)
amends our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed on April
14, 2004. Acceris (the Company) has filed this Amendment
No. 1 to 1) recognize deemed interest expense for a beneficial
conversion feature (BCF) embedded in certain of its indebtedness as
required by Emerging Issues Task Force
Issue No. 00-27 (EITF 00-27), as fully outlined in Note 3 to these
Consolidated Financial Statements and to 2) revise Part II  Item 9A 
Controls and Procedures. The BCF-related error affects 2001, 2002 and
2003. The cumulative effect on earnings through the third quarter of
2002 is immaterial and has been recorded in the fourth quarter of 2002 as
a charge to interest expense. Although we have revised our previously
filed Form 10-K for fiscal year 2003 to give
effect to these matters, other information contained therein has not been
updated. (All dollar amounts are presented in thousands USD, except per share amounts) 
 Item 1. Business. Overview The vision for Acceris Communications Inc. (Acceris or the Company),
formerly I-Link Incorporated, 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 its customers.
Acceris telecommunications division (Telecommunications) operates through
two specific marketing channels: Retail, which offers a broad selection of
voice and data telecommunications products and services to residential and
commercial customers through a network of independent agents, primarily via
multi-level marketing (MLM) and commercial agent programs (this segment has
been referred to in previous reports as Acceris Communications Partners) and
Enterprise, which offers voice services and fully integrated, fully managed
data services (this segment has been referred to in previous reports as Acceris
Communications Solutions). Acceris other division, referred to as
Technologies, offers a proven network convergence solution for voice and data
in Voice over Internet Protocol (VoIP) communications technology and holds
two foundational patents in the VoIP space (US Patent Nos. 6,243,373 and
6,438,124, the VoIP Patents). In 2004, Technologies intends to pursue
efforts to license the technology supported by its patents to carriers and
equipment manufacturers and suppliers in the IP telephony market. History and Development of the Business Acceris was incorporated in Florida in 1983 under the name MedCross, Inc.,
which was changed to I-Link Incorporated in 1997, and to Acceris Communications
Inc. in 2003. Acceris has been growing through the acquisition of predecessor
businesses, which have been and are continuing to be integrated, consolidated
and reorganized. These predecessor businesses are organized into two
categories: Telecommunications and Technologies. Telecommunications has been
assembled through the acquisition from bankruptcy of certain assets of
WorldxChange Communications, Inc. in June 2001 (this business is referred to as
WorldxChange) and certain assets of RSL COM U.S.A. Inc., (RSL) in December 2002. Added to these was the acquisition of
all of the outstanding shares of Transpoint Communications, LLC (Transpoint)
in July 2003. On March 1, 2001, Acceris became a majority-owned subsidiary of Counsel
Communications, LLC, an indirect wholly owned subsidiary of Counsel
Corporation, (collectively, Counsel). Since taking a controlling position
in Acceris, Counsel has advanced approximately $75,900 to Acceris, consisting
of notes, equity, accrued interest and other advances, ( net of approximately
$8,200 in repayments to Counsel.) Of this amount, approximately $22,500 was
utilized to complete the WorldxChange and RSL acquisitions, while the remaining
approximately $53,400 has been used directly in operations, principally to
fund the building of its Telecommunications and Technologies divisions. The development and transition of the Company has been as follows: Telecommunications: Telecommunications, comprised of WorldxChange, certain assets of RSL and Transpoint, has
been built primarily through three transactions, described more fully below. In June 2001, Acceris acquired WorldxChange from a debtor in a bankruptcy
proceeding. WorldxChange is a facilities-based telecommunications carrier that
provides international and domestic long-distance service to retail customers.
WorldxChange initially consisted primarily of a dial-around product that
allowed 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 revamped its channel strategy by de-emphasizing
the direct mail channel and devoting its efforts to pursuing more profitable
methods of attracting and retaining customers. Today, it uses commercial
agents as well as a network of independent commission agents recruited through
its MLM programs to attract and retain new 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. 1




---



##### 



In December 2002, Acceris completed the purchase of the assets used in the
Enterprise and Agent business of RSL from a debtor in a bankruptcy
proceeding. The purchase included the assets used by RSL
to provide long-distance voice and data services, including frame relay, to
small and medium size businesses (Enterprise business), and the assets used to
provide long-distance and other voice services to small businesses and
consumers in the residential market (Agent 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. The
acquisition of Transpoint provided Acceris with further penetration into the
commercial agent channel and a larger commercial customer base. Starting in the fourth quarter of 2003, Telecommunications has also begun 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. Technologies: In 1994, Technologies began operating as an Internet service provider and
quickly identified that the emerging IP environment was a promising basis for
enhanced service delivery. The Company soon turned to designing and building
an IP telecommunications platform consisting of Acceris proprietary software,
hardware and leased telecommunications lines. The goal was to create a
platform with the quality and reliability necessary for voice transmission. By
1996, Acceris released its first IP-based service called Fax-4-Less, which
provided users an efficient and cost-effective way to distribute facsimile
information. In 1997, Technologies started offering enhanced services over a mixed
IP-and-circuit-switched network platform. These services offered a blend of
traditional and enhanced communication services and combined the inherent cost
advantages of an IP-based network with the reliability of the existing Public
Switched Telephone Network (PSTN). The suite of services included a one
number follow me service, long-distance calling, unified messaging,
conference calling, message broadcasting and web-based interface to manage
messages and maintain personal account settings. In August 1997, Technologies acquired MiBridge, Inc. (MiBridge), a New
Jersey-based communications technology company engaged in the design,
development, integration and marketing of a range of software
telecommunications products that supported multimedia communications over the
PSTN, local area networks (LAN) and IP networks. Historically, MiBridge
concentrated its development efforts on compression systems such as VoIP. As
part of Acceris, MiBridge continued to develop patent-pending technologies
which combined sophisticated compression capabilities with IP telephony
technology. The acquisition of MiBridge permitted the Company to accelerate
the development and deployment of IP technology across its network platform. In 1998, Technologies deployed its real-time IP communications network
platform. With this new platform, all core operating functions such as
switching, routing and media control became software-driven. This new platform
represented the first nationwide, commercially viable VoIP platform of its
kind. Following the launch of its software-defined VoIP platform in 1998,
Technologies continued to refine and enhance the platform to make it even
more efficient and capable for its partners and customers. In February 2000, Technologies transitioned its direct-sales marketing
program to Big Planet, Inc. (Big Planet), a subsidiary of Nu Skin
Enterprises, Inc., whereupon Big Planet became one of the Companys wholesale
customers. The transition of the network marketing sales channel to Big Planet
allowed Acceris to focus on the expansion of the VoIP platform and the
development and deployment of new enhanced services and products, while at the
same time maintaining existing channels for retail sales. In April 2001, Acceris acquired WebToTel, Inc. (WebToTel) and Nexbell
Communications, Inc. (Nexbell), both previously subsidiaries of Counsel, in a
stock-for-stock transaction. Nexbell was sold to a third party in December
2001 (see Notes 9 and 13 to the Consolidated Financial Statements included in
Item 15 hereof). On December 6, 2002, Technologies entered into a definitive purchase and
sale agreement to sell substantially all of the assets and customer base of
I-Link Communications, Inc. (ILC), a wholly owned subsidiary of Acceris, to
Buyers United, Inc. (BUI). The sale closed on May 1, 2003. The sale included
the physical assets required to operate Acceris nationwide network using its
patented VoIP technology (constituting the core business of ILC) and a fully
paid perpetual license to its proprietary software-based network convergence
solution for voice and data. The sale of the ILC business removed essentially all of
Technologies 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 Technologies operations into a business
based principally on the licensing of its proprietary software. Technologies 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 VoIP in its VoIP Patents.
To date, the Company has licensed portions of that technology to
third parties on a non-exclusive basis.
In addition, Acceris also has several patent applications pending before the United
States Patent and Trademark Office (USPTO) and other such authorities
internationally. 2




---



##### 



Today, Technologies remains focused on delivering solutions for voice and
data services to its partners and customers, while launching a strategy to
realize value from its patents through licensing. With over nine years
experience developing VoIP technologies, Acceris continues to offer a solution
for companies to reduce telecommunications costs and/or to enter the enhanced
communications market. Acceris continues to market its voice and data services
and solutions and to license its enhanced services platform domestically and
internationally to organizations who wish to offer voice services without
incurring high development costs. The Company is pursuing opportunities to
leverage its patents through a strategy to license the technology to carriers,
equipment/softswitch manufacturers and customers who are deploying IP for
phone-to-phone communication. 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. Employees As of December 31, 2003, Acceris had approximately 340 employees with whom
the Company feels it has a good relationship. The Company is not subject to
any collective bargaining agreements. Business Reorganization During 2003, Acceris continued to consolidate functions across the
Company. The Company 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 the ILC business in December 2002, the Company was organized into three
operating segments, Retail, Enterprise and Technologies. These segments have
been described in previous filings as Acceris Communications Partners, Acceris
Communications Solutions and Acceris Communications Technologies, respectively. 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 services in the United States.
Providers include large organizations such as AT&T, Sprint, Primus, MCI
WorldCom and Verizon, as well as numerous small, 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 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 feature 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, Enterprise 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. A key
challenge in this business is to improve cross-sell 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 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 although there are many
competitors with certain portions of its technology, but not as an entire
package. Its competition would include the traditional switched telephony
infrastructure providers, such as Nortel and Lucent, which this technology
displaces. While its
competition offers products with similar features, its 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. 3




---



##### 



Government Regulation Overview of Products We offer 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. Our various business segments operate in both regulated
and non-regulated environments. Federal and state governing authorities regulate our local and
long-distance services. For our long-distance business, we are regulated
as a non-dominant interexchange carrier (IXC). Federal and state
authorities have been reducing their regulatory requirements as the
industry faces robust competition. For our local exchange services, we
are regulated as a competitive local exchange carrier (CLEC). Additionally, we offer 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 As a carrier offering telecommunications services to the public, we
are subject to the provisions of the Communications Act of 1934, as
amended, and Federal Communications Commission (FCC) regulations issued
thereunder. These regulations require us, among other things, to offer
our regulated services to the public on a non-discriminatory basis at just
and reasonable rates. We are subject to FCC requirements that we 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 could result in a transfer of
control of our company. International Service Regulation.We possess 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 us. For instance, the FCC is
considering revisions to the rules regarding the rates that international
carriers like us pay for termination of calls to mobile phones located
abroad. Pursuant to FCC rules, we have cancelled our international and
domestic FCC tariffs and replaced them with a general service agreement
and price lists. As required by FCC rules, we have posted these materials
on our Internet web site. The detariffing of our services has given us
greater pricing flexibility for our services, but we are 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, our interstate
telecommunications services are regulated by the FCC. While we are not
required to obtain FCC approval to begin or expand our interstate
operations, we are required to obtain FCC approvals for certain
transactions that would affect our ownership or the services we provide.
Additionally, we must file various reports and pay certain fees and
assessments. We are subject to the FCCs complaint jurisdiction and must
contribute to the federal Universal Service Fund (USF). We 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 our subsidiaries, we are authorized to provide
intrastate interexchange telecommunications services and, in certain
states, are authorized to provide competitive local exchange services by
virtue of certificates granted by state public service commissions. Our
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
our ability to provide telecommunications services. Consumers
may file complaints against us at the public service commissions. The
certificates of authority we hold 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. 4




---



##### 



Overview of Ongoing Policy Issues Local Service. Through the Telecommunications Act of 1996 (the 1996 Act), 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 carrier (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 Courts ruling
is scheduled to go into effect 60 days after decision but will likely be appealed to the U.S. Supreme Court. If the U.S. Supreme Court agrees
to review the decision, the effective date of this ruling could be
delayed. We are unable to determine the outcome of these proceedings;
however, the inability to purchase UNEs could increase our costs for
providing local service, or prevent us 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 Universal Service Fund (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. 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
amounts passed through to consumers in excess of a carriers determined
contribution percentage. As 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 higher 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 our 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
our software-based solution for VoIP deployment, and other similar service
applications should be regulated, our 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 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 our 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. 5




---



##### 



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 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. We 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, our costs could increase for
providing those services. Available Information Acceris is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the Exchange Act), which requires that
Acceris file reports, proxy statements and other information with the
Securities and Exchange Commission (SEC). The SEC maintains a website on the
Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, including
Acceris, that file electronically with the SEC. In addition, Acceris Exchange
Act filings may be inspected and copied at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. The Company has made available
free of charge through its Internet web site, http://www.acceris.com
(follow Investor Relations tab to link to SEC Filings) its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after such material
was electronically filed with, or furnished to, the SEC. 
 Item 2. Properties. The Company rents approximately 31,000 square feet of office space in San
Diego, California under 2 commercial leases which terminate in May 31, 2004 and
April 30, 2006. The combined rental fee is approximately $45 per month. The
Company uses this space primarily for its sales and marketing team, certain
network resources and certain administrative staff. The Company 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. The Company uses this space primarily for its
network operations center, administrative staff and other employees. The Company 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. The Company uses this space to operate its local
service offering as well as for certain of its information technology and other
employees. The Company 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. The Company owns four issued patents and utilizes the technology supported
by those patents in providing its products and services. It has also licensed
certain portions of that technology to third parties on a non-exclusive basis.
In December 2003, Acceris purchased US Patent No. 6,243,373, including a
corresponding foreign patent and related international patent applications. In
August 2002, Acceris voice Internet transmission system patent was issued (US
Patent No. 6,438,124). This patent, together with US Patent No. 6,243,373 and
its related patent applications comprise our VoIP Patents and form an
international patent portfolio that covers the basic process and technology
that enables VoIP communications as it is used in the market today. Acceris
also has two other IP patents, US Patent Nos. 5,898,675 and 5,754,534 issued
in 1999 and 1998, respectively, which are related to the delivery of high
quality conference calls with compressed signals. Together, these patented
technologies have been successfully deployed and commercially proven in a
nationwide IP network and in Acceris unified messaging service,
API and software licensing businesses. Acceris plans to
further leverage these patents as it packages an IP solution for the growing
Enterprise segment. While the Company is using the technology supported by the
VoIP Patents in its business, it is also investigating whether and to what
extent the VoIP Patents may be able to be licensed to third parties. The
Company also has several patent applications that are currently pending before
USPTO. 6




---



##### 



Item 3. Legal Proceedings. The Company is involved in various legal matters arising out of its
operations in the normal course of business. None of these matters are
expected, individually or in the aggregate, to have a material adverse effect
on the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders. On November 26, 2003, the Company held its Annual Meeting of Stockholders
(the Annual Meeting). The following is a tabulation of the voting on the
proposals presented at the Annual Meeting. The voting on Proposal 3 was
adjourned until December 30, 2003 in order to allow the Company to distribute
to its stockholders amended statutory sections of the state of Floridas
corporate statutes. Proposal 3 was voted on at an Adjourned Meeting of
Stockholders on December 30, 2003.  PROPOSAL 1.
    The following two nominees were elected as Class I directors,
each to serve for three years and until his successor has been duly
elected and qualified. Shares Voted For
    
    Shares Withheld
    
    Broker Non-VotesSamuel L. Shimer
    
    
    107,079,096
    
    
    zero
    
    
    20,861,603Stephen A. Weintraub
    
    
    107,078,796
    
    
    zero
    
    
    20,861,603
  Terms of office for Allan C. Silber, Kelly D.
Murumets, Hal B. Heaton, Albert Reichmann, Henry Y.L. Toh
and John R. Walter continued after the meeting. Mr.
Reichmann resigned his position on March 23, 2004, and the
Board appointed Mr. William H. Lomicka to fill the vacancy
left by Mr. Reichmann. Mr. Walter resigned his position on April 5, 2004 and as of
the date of this filing, the vacancy left by Mr. Walter has
not been filled.  See Item 10 for further discussion.   PROPOSAL 2.
    The name of the Company was changed to Acceris Communications
Inc. Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes107,635,391
    
    
    1,044,170
    
    
    
    139,324
    
    
    
    20,861,603
  PROPOSAL 3.
    An amendment to the Companys Articles of Incorporation
deleting Article VI thereto was approved. Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes84,298,855
    
    
    2,498,343
    
    
    
    277,934
    
    
    
    N/A
  PROPOSAL 4.
    A 1-for-20 reverse stock split of the Companys common stock
was approved. Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes26,026,024
    
    
    3,264,320
    
    
    
    127,995
    
    
    
    20,861,603
  PROPOSAL 5.
    The 2003 Stock Option and Appreciation Rights Plan was
approved and adopted. Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes82,065,674
    
    
    2,965,167
    
    
    
    593,838
    
    
    
    N/A
 7




---



##### 



PART II 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities. Price Range of Common Stock Shares of Acceris common stock, $0.01 par value per share, are traded on
the OTC Bulletin Board (OTC-BB) under the symbol ACRS.OB. The following table sets forth the high and low prices for the Companys
common stock for the period as quoted on the OTC-BB from January 1, 2002 to
December 31, 2003 (adjusted for a 1-for-20 reverse stock split that was
approved on November 26, 2003) based on
interdealer quotations, without retail markup, markdown, commissions or
adjustments and may not represent actual transactions: Quarter Ended
    
    High
    
    LowMarch 31, 2002
    
    $
    10.00
    
    
    $
    1.40June 30, 2002
    
    
    5.80
    
    
    
    2.60September 30, 2002
    
    
    4.80
    
    
    
    1.80December 31, 2002
    
    
    3.40
    
    
    
    1.40March 31, 2003
    
    $
    3.40
    
    
    $
    2.00June 30, 2003
    
    
    5.60
    
    
    
    2.00September 30, 2003
    
    
    6.00
    
    
    
    3.00December 31, 2003
    
    
    4.80
    
    
    
    1.20
 On
April 8, 2004, the closing price for a share of the Companys common
stock was $3.45. Holders As of March 15, 2004, the Company had approximately 898 stockholders of
common stock of record and there were approximately 9,783 beneficial owners of
the Companys common stock. Dividends To date, the Company has not paid dividends on its common stock nor does
it anticipate that it will pay dividends in the foreseeable future. As of
December 31, 2003, the Company does not have any preferred stock outstanding
which has any preferential dividends. The Loan and Security Agreement with
Foothill Capital Corporation restricts the ability of one of the Companys
subsidiaries from making distributions or declaring or paying any dividends to
the Company. Dissenters Appraisal Rights At the Companys Adjourned Meeting of Stockholders held on December 30,
2003, stockholders of the Company approved an amendment to the Companys
Articles of Incorporation, deleting Article VI thereof (regarding liquidations,
reorganizations, mergers and the like). Stockholders who were entitled to vote
at the meeting and advised the Company in writing prior to the vote on the
amendment, that they dissented and intended to demand payment for their shares
if the amendment was effectuated, were entitled to exercise their appraisal
rights and obtain payment in cash for their shares under Sections 607.1301 
607.1333 of the Florida Business Corporation Act, provided their shares were
not voted in favor of the amendment. In January 2004, appraisal notices in compliance with Florida corporate
statutes were sent to all stockholders who had advised the Company of their
intention to exercise their appraisal rights. The appraisal notices included
the Companys estimate of fair value of the Companys shares, at $4.00 per
share on a post-split basis. These stockholders had until February 29, 2004 to
return their completed appraisal notices along with certificates for the shares
for which they were exercising their appraisal rights. Approximately 33
stockholders holding approximately 74,000 shares of the Companys stock have
returned completed appraisal notices by February 29, 2004. A stockholder of
20 shares notified the Company of his acceptance of the Companys offer of
$4.00 per share, while the stockholders of the remaining shares did not accept
the Companys offer. Subject to the qualification that the Company may not
make any payment to a stockholder seeking appraisal rights if, at the time of
payment, the Companys total assets are less than its total liabilities,
stockholders who accepted the Companys offer to purchase their shares at the
estimated fair value will be paid for their shares within 90 days of the
Companys receipt of a duly executed appraisal notice. If the Company should
be required to make any payments to dissenting stockholders, Counsel will fund
any such amounts through the purchase of shares of the Companys common stock.
Stockholders who did not accept the Companys offer were required to indicate
their own estimate of fair value, and if the Company does not agree with such
estimates, the parties are required to go to court for an appraisal
proceeding on an individual basis, establishing a fair market value for the
shares in question. To date, no payments have been made and no appraisal
proceeding has commenced. 8




---



##### 



Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities. On November 30, 2003, the Company entered into an Amended Debt
Restructuring Agreement with Counsel whereby approximately $32,721 of notes
payable was converted into 8,681,096 shares of the Companys common stock at a
conversion rate of approximately $3.77 per share. On that same date, Counsel
also exercised its voluntary conversion right on an additional $7,952 of debt
owed to Counsel into 4,747,396 at a conversion rate of $1.68 per share. No
cash consideration was received in the transactions. The Company relied on an
exemption from registration under Section 4(2) of the Securities Exchange Act
of 1933. 9




---



##### 



Item 6. Selected Financial Data. The following selected consolidated financial information was derived from
the audited consolidated financial statements and notes thereto. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with Item 7, entitled
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K. All amounts below are in thousands, except share
and per share amounts. 1999
    
    2000
    
    2001
    
    2002
    
    2003(as restated)
    
    (as restated)Statement of Operations Data
:Revenues:Telecommunications services
    
    $
    
    
    
    $
    
    
    
    $
    50,289
    
    
    $
    85,252
    
    
    $
    133,765Marketing services
    
    
    3,673
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    Technology licensing and development
    
    
    2,507
    
    
    
    8,972
    
    
    
    5,697
    
    
    
    2,837
    
    
    
    2,164Other
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    Net sales
    
    
    6,180
    
    
    
    9,836
    
    
    
    55,986
    
    
    
    88,089
    
    
    
    135,929Operating costs and expenses:Telecommunications network expense
(exclusive of depreciation below)
    
    
    
    
    
    
    
    
    
    
    35,546
    
    
    
    50,936
    
    
    
    86,006Marketing services costs
    
    
    5,400
    
    
    
    456
    
    
    
    
    
    
    
    
    
    
    
    Selling, general, administrative and other
    
    
    10,148
    
    
    
    14,683
    
    
    
    30,790
    
    
    
    33,015
    
    
    
    57,264Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    2,861
    
    
    
    5,999
    
    
    
    5,438Research and development
    
    
    2,636
    
    
    
    4,220
    
    
    
    2,332
    
    
    
    1,399
    
    
    
    Depreciation and amortization
    
    
    5,482
    
    
    
    3,991
    
    
    
    6,409
    
    
    
    4,270
    
    
    
    7,125Total operating expenses
    
    
    23,666
    
    
    
    23,350
    
    
    
    77,938
    
    
    
    95,619
    
    
    
    155,833Operating loss
    
    
    (17,486
    )
    
    
    (13,514
    )
    
    
    (21,952
    )
    
    
    (7,530
    )
    
    
    (19,904
    )Other expense, net
    
    
    (4,856
    )
    
    
    (1,639
    )
    
    
    (4,023
    )
    
    
    (7,800
    )
    
    
    (12,053
    )Loss from continuing operations
    
    
    (22,342
    )
    
    
    (15,153
    )
    
    
    (25,975
    )
    
    
    (15,330
    )
    
    
    (31,957
    )Income (loss) from discontinued operations
    
    
    (2,317
    )
    
    
    (10,599
    )
    
    
    (18,522
    )
    
    
    (12,508
    )
    
    
    529Net loss
    
    $
    (24,659
    )
    
    $
    (25,752
    )
    
    $
    (44,497
    )
    
    $
    (27,838
    )
    
    $
    (31,428
    )Loss from continuing operations applicable
to common stockholders
    
    $
    (31,269
    )
    
    $
    (16,800
    )
    
    $
    (10,759
    )
    
    $
    (15,330
    )
    
    $
    (31,957
    )Net income (loss) per common share - basic
and diluted:Loss from continuing operations
    
    $
    (29.21
    )
    
    $
    (12.60
    )
    
    $
    (2.17
    )
    
    $
    (2.63
    )
    
    $
    (4.56
    )Income (loss) from discontinued operations
    
    
    (2.16
    )
    
    
    (7.95
    )
    
    
    (3.73
    )
    
    
    (2.15
    )
    
    
    0.08Net loss per common share
    
    $
    (31.37
    )
    
    $
    (20.55
    )
    
    $
    (5.90
    )
    
    $
    (4.78
    )
    
    $
    (4.48
    )Balance Sheet Data:Working capital deficit
    
    $
    (1,319
    )
    
    $
    (30,061
    )
    
    $
    (40,812
    )
    
    $
    (17,244
    )
    
    $
    (26,576
    )Furniture, fixtures, equipment and software,
net
    
    
    7,019
    
    
    
    10,983
    
    
    
    21,024
    
    
    
    11,479
    
    
    
    8,483Intangible assets, net
    
    
    6,551
    
    
    
    3,939
    
    
    
    1,331
    
    
    
    2,747
    
    
    
    4,417Total assets
    
    
    21,658
    
    
    
    21,657
    
    
    
    46,780
    
    
    
    41,446
    
    
    
    39,054Total current liabilities
    
    
    8,976
    
    
    
    35,960
    
    
    
    64,117
    
    
    
    40,852
    
    
    
    50,887Total long-term obligations:
    
    
    9,659
    
    
    
    2,802
    
    
    
    19,661
    
    
    
    58,410
    
    
    
    31,120Related party
    
    
    
    
    
    
    
    
    
    
    8,133
    
    
    
    53,231
    
    
    
    28,717Other
    
    
    9,659
    
    
    
    2,802
    
    
    
    11,528
    
    
    
    5,179
    
    
    
    2,403Stockholders deficit
    
    
    (11,050
    )
    
    
    (28,839
    )
    
    
    (36,998
    )
    
    
    (57,816
    )
    
    
    (42,953
    )
  10




---



##### 



Significant Acquisitions and Dispositions: On April 17, 2001, the Company
acquired WebToTel and its subsidiaries (including Nexbell) in a stock for
stock transaction. However, as WebToTel (which was a subsidiary of Counsel)
and Acceris were under common control as of March 1, 2001 (the date Counsel
obtained its ownership in Acceris), the Company has accounted for the
acquisition using the pooling-of-interests method of accounting as of March 1,
2001. Accordingly, the financial results of WebToTel and its subsidiaries
(including Nexbell which was sold in December 2001) are included herein
subsequent to March 1, 2001. On June 4, 2001, Acceris purchased WorldxChange from a debtor in a
bankruptcy proceeding. WorldxChange is a facilities-based telecommunications
carrier that provides international and domestic long-distance service to
residential and commercial customers. WorldxChanges operations are part of
the Retail segment. On December 6, 2002, Acceris entered into an agreement, which closed on
May 1, 2003, to sell substantially all of the assets of ILC. The sale included
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. Additionally,
Acceris sold its customer base that was serviced by ILC. Pursuant to Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, operating results of ILC have been reclassified
in the years from 1998 to 2002 to discontinued operations. On December 10, 2002, Acceris completed the purchase of the Enterprise and
Agent business of RSL. The acquisition included the Enterprise business assets used
by RSL to provide long-distance voice and data services, including frame relay,
to small and medium size businesses and the Agent business assets used to
provide long-distance and other voice services to small businesses and the
consumer/residential market, together with the existing customer base of the
Enterprise and Agent business. The Agent business is included in
the Retail segment while the Enterprise business is included in the Enterprise
segment. On July 28, 2003, the Company completed the purchase of all of the
outstanding stock of Transpoint. The acquisition provided the Company with
further penetration into the commercial agent channel, as well as a larger
residential customer base. Debt Restructuring In order to reduce the cash requirements to pay the related party debt,
the Company entered into an Amended Debt Restructuring Agreement with Counsel
whereby approximately $32,721 was converted into common stock on November 30,
2003, reducing Acceris debt obligation and related interest charges without
expending cash. On that same date, Counsel also exercised its voluntary
conversion right on an additional $7,952 of debt owed by Counsel (see Item 13
for further discussion). Additionally, during 2003, Counsel extended the due
date on the remaining related party debt to June 30, 2005. The balance due to
Counsel for the related party debt was approximately $28,717 at December 31,
2003. Reverse Stock Split On November 26, 2003, Acceris stockholders approved a 1-for-20 reverse
stock split. Accordingly, the earnings per share for years prior to 2003 have been restated
to reflect the reverse split. All references to share numbers reflect the
reverse stock split unless otherwise noted. In connection with the reverse
stock split, the par value of the Companys common stock changed from $0.007 to
$0.01. Adoption of Significant Accounting Pronouncements In 2003, Acceris adopted Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of
April 2002(SFAS 145). SFAS
145 requires the modification of the Companys 2001 financial statement to reclassify the
previously reported gain on debt extinguishment from extraordinary item to
discontinued operations. In May 2003, the Financial Accounting Standards Board
(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 the Companys
financial position or results of operations. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and HedgingActivities (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, except as
stated below and for hedging relationships designated after June 30, 2003 and
did not have any effect on the Companys financial position 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 the FASBs Emerging Issues Task Force Issue No.
00-21,Accounting for Revenue Arrangements with Multiple
Deliverables (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 position or results of operations. Significant Risks and Material Uncertainties There are significant risks and material uncertainties that exist in Acceris
business model and environment that may cause the data reflected herein to not
be indicative of the Companys future financial condition. These risks and
uncertainties include, but are not limited to those presented below in Item 7,
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations. 11




---



##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations. Forward-Looking Information This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section
21E of the Exchange Act, as amended, and information relating to Acceris
that are based on managements exercise of business judgment as well as
assumptions made by and information currently available to management. When
used in this document, the words may,  will,  anticipate, believe,
estimate, expect, intend and words of similar import, are intended to
identify any forward-looking statements. You should not place undue
reliance on these forward-looking statements. These statements reflect our
current view of future events and are subject to certain risks and
uncertainties as noted below under Risk Factors. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, our actual results could differ materially from those
anticipated in these forward-looking statements. We undertake no obligation
and do not intend to update, revise or otherwise publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of any
unanticipated events. Although we believe that our expectations are based
on reasonable assumptions, we can give no assurance that our expectations
will materialize. Many factors could cause actual results to differ
materially from our forward-looking statements. Restatement The consolidated financial statements of the Company have been restated in each
reporting period from the fourth quarter of 2002 through to the first quarter
of 2004 to record additional deemed interest expense for
beneficial conversion features (BCF) embedded in certain
of the Companys indebtedness as required by Emerging Issues Task Force Issue No. 00-27 (EITF 00-27) as fully outlined in
Note 3 to these consolidated financial statements. On September 20, 2004, management of the Company concluded that the accounting
principles as set forth in EITF 00-27, regarding BCF, had not been properly applied in current and prior
periods to its convertible debentures issued under a March 2001 loan agreement
for which the Company had previously determined BCF of $1.1 million. The
initial determination of the BCF in 2001 at the respective issue dates of such
debt was correct. However, adjustments to the conversion price and the number
of conversion shares were made under the debentures anti-dilution provisions.
The various anti-dilution events and their respective impacts on the number of
shares and the conversion price were disclosed in the Companys previous public
filings. However, the principles under EITF 00-27 also require a
redetermination of the BCF at each date an anti-dilution event occurred. This
redetermination was not completed in prior reporting periods. Additionally, the
accumulation of unpaid interest costs which are required by the debt terms to
be added to principal and which are payable at maturity on these same
convertible debentures has been deemed to be interest paid in kind (PIK);
such interest also contains a conversion feature, and the payment of such
interest in the form of PIK interest is non-discretionary requiring the
determination of a BCF in the PIK interest. This determination was not made by
the Company in its prior reportings. The Companys management has now concluded that a restatement is required and
has brought these matters for consideration before the Audit Committee and the
full Board of Directors of the Company. Having considered the circumstances
underlying the accounting errors and their effects upon the Companys prior
filings, and having discussed these matters with the Companys management, the
Audit Committee concluded that the previously issued financial statements
should not be relied upon and approved and authorized the Companys management
to amend certain previously filed public reports to reflect deemed interest
expense from such BCF. Although
the error affects 2001, 2002 and 2003, the $23 cumulative effect on
earnings through the third quarter of 2002 was recorded in the fourth
quarter of 2002 as a charge to interest expense. Therefore, the correction is an increase in deemed interest expense and net loss, in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004, and a reduction in reported liabilities and stockholders deficit in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004. The effect of these errors is detailed, by reporting period, below. The
restatement had no
effect on loss from discontinued operations or net loss per share from
discontinued operations. Effect of the restatements on the consolidated statements of operations
(in thousands of dollars except per share amounts)
(per share information reported on a post 20:1 stock consolidation basis for all periods shown. Stock consolidation enacted in the fourth quarter of 2003) Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Net income
(loss) as previously reported
on Form 10-K or 10-Q
    
    $
    (11,117
    )
    
    $
    (14,895
    )
    
    $
    (3,713
    )
    
    $
    (3,257
    )
    
    $
    (4,456
    )
    
    $
    594Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (902
    )
    
    
    (1,089
    )
    
    
    (1,337
    )
    
    
    (1,779
    )
    
    
    (1,801
    )Net loss as
currently reported on
revised Form 10-K or 10-Q
    
    $
    (11,418
    )
    
    $
    (15,797
    )
    
    $
    (4,802
    )
    
    $
    (4,594
    )
    
    $
    (6,235
    )
    
    $
    (1,207
    )Net income
(loss) per share as previously
reported on Form 10-K or 10-Q
    
    $
    (1.92
    )
    
    $
    (2.55
    )
    
    $
    (0.64
    )
    
    $
    (0.56
    )
    
    $
    (0.44
    )
    
    $
    0.03Net loss per
share as currently reported on revised Form 10-K or
10-Q
    
    $
    (1.96
    )
    
    $
    (2.71
    )
    
    $
    (0.82
    )
    
    $
    (0.79
    )
    
    $
    (0.59
    )
    
    $
    (0.06
    )
 Effect of the restatements on the consolidated balance sheets
(in thousands of dollars) As at
    
    As at
    
    As at
    
    As at
    
    As at
    
    As atDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Notes payable to a related party:As previously reported on
Form 10-K or 10-Q
    
    $
    30,058
    
    
    $
    30,496
    
    
    $
    30,985
    
    
    $
    33,483
    
    
    $
    35,073
    
    
    $
    41,060Correction of EITF 00-27 errors
    
    
    (6,109
    )
    
    
    (5,364
    )
    
    
    (4,437
    )
    
    
    (3,265
    )
    
    
    (6,356
    )
    
    
    (4,834
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    23,949
    
    
    $
    25,132
    
    
    $
    26,548
    
    
    $
    30,218
    
    
    $
    28,717
    
    
    $
    36,226Additional paid-in capital:As previously reported on
Form 10-K or 10-Q
    
    $
    129,553
    
    
    $
    129,553
    
    
    $
    129,618
    
    
    $
    129,618
    
    
    $
    171,115
    
    
    $
    171,192Correction of EITF 00-27 errors
    
    
    6,410
    
    
    
    6,567
    
    
    
    6,729
    
    
    
    6,894
    
    
    
    11,764
    
    
    
    12,043As currently reported on
revised Form 10-K or 10-Q
    
    $
    135,963
    
    
    $
    136,120
    
    
    $
    136,347
    
    
    $
    136,512
    
    
    $
    182,879
    
    
    $
    183,235Accumulated deficit
As previously reported on
Form 10-K or 10-Q
    
    $
    (194,301
    )
    
    $
    (209,196
    )
    
    $
    (212,909
    )
    
    $
    (216,166
    )
    
    $
    (220,622
    )
    
    $
    (220,028
    )Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (1,203
    )
    
    
    (2,292
    )
    
    
    (3,629
    )
    
    
    (5,408
    )
    
    
    (7,209
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    (194,602
    )
    
    $
    (210,399
    )
    
    $
    (215,201
    )
    
    $
    (219,795
    )
    
    $
    (226,030
    )
    
    $
    (227,237
    )Stockholders equity (deficit):As previously reported on
Form 10-K or 10-Q
    
    $
    (63,925
    )
    
    $
    (78,820
    )
    
    $
    (82,468
    )
    
    $
    (85,725
    )
    
    $
    (49,309
    )
    
    $
    (47,292
    )Correction of EITF 00-27 errors
    
    
    6,109
    
    
    
    5,364
    
    
    
    4,437
    
    
    
    3,265
    
    
    
    6,356
    
    
    
    4,834As currently reported on
revised Form 10-K or 10-Q
    
    $
    (57,816
    )
    
    $
    (73,456
    )
    
    $
    (78,031
    )
    
    $
    (82,460
    )
    
    $
    (42,953
    )
    
    $
    (42,458
    )
 Overview and Recent Developments Our vision 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 stockholders. Our mission is to provide
businesses and consumers with competitively priced voice, data and enhanced
communications services via direct and indirect channels. Through the
dedication of our employees, we deliver industry-leading customer care,
customized product solutions and full back office support, building long-term
loyalty and trust with our customers. Our Telecommunicationsdivision
operates primarily through two specific marketing channels: (1) Retail, which
offers a broad selection of voice and data telecommunications products and
services to residential and commercial customers through a network of
independent agents, primarily via MLM and commercial agent programs;
and (2) Enterprise, which offers voice services and fully integrated, fully managed
data services . Our Technologiesdivision offers a proven network convergence
solution for voice and data in VoIP communications technology and holds two
foundational patents in the VoIP space (US Patent Nos. 6,243,373 and
6,438,124). In 2004, we intend to pursue efforts to license the technology
supported by our patents to carriers and equipment manufacturers and suppliers
in the IP telephony market. Acceris has been built through the acquisition of predecessor businesses,
which have been and are continuing to be integrated, consolidated and
reorganized. These predecessor businesses are organized into two categories:
Telecommunications and Technologies. Telecommunications has been assembled
through the acquisition of WorldxChange in 2001 and certain assets of RSL in 2002. Added to
this was the acquisition of all the outstanding stock of Transpoint, which
closed in 2003. Our development and transition is articulated below: Telecommunications: WorldxChange is a facilities-based telecommunications carrier which
provides international and domestic long-distance service to retail customers.
At the time we purchased the business, WorldxChange consisted primarily of a
dial-around product that allowed 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, we revamped our channel strategy by
de-emphasizing the direct mail channel and devoting our efforts to pursuing
more profitable methods of attracting and retaining customers. We now use
commercial agents as well as a network of independent commission agents
recruited through the WorldxChange MLM program to attract and retain new
customers. In 2004 we launched the Agent Warrant Program which awards warrants
to certain of our agents based on performance criteria as a means to attract
and incentivize new independent agents. In December 2002, we completed the purchase of certain assets of RSL from a bankruptcy
proceeding. The purchase included the assets used by RSL to provide
long-distance voice and data services, including frame relay, to their Enterprise
customers and the assets used to provide long-distance and other voice
services to small businesses and the consumer/residential market, which they
referred to as their Agent business. In July 2003, we completed the purchase of all the outstanding stock of
Transpoint. The acquisition of Transpoint provided us with further penetration
into the commercial agent channel and a larger commercial customer base. Technologies: In 1994, we began operating as an Internet service provider and quickly
identified that the emerging IP environment was a
promising basis for enhanced service delivery. We soon turned to
designing and building an IP telecommunications platform consisting of our
proprietary software, hardware and leased telecommunications lines. The goal
was to create a platform with the quality and reliability necessary for voice
transmission. 12




---



##### 



In 1997, we started offering enhanced services over a mixed
IP-and-circuit-switched network platform. These services offered a blend of
traditional and enhanced communication services and combined the inherent cost
advantages of the IP-based network with the reliability of the existing PSTN.
Our suite of services included a one number follow me service, long-distance
calling, unified messaging, conference calling, message broadcasting and
web-based interface to manage messages and maintain personal account settings. In August 1997, we acquired MiBridge, a communications technology company
engaged in the design, development, integration and marketing of a range of
software telecommunications products that support multimedia communications
over the PSTN, LANs and IP networks. Historically, MiBridge concentrated its
development efforts on compression systems such as VoIP. As part of Acceris,
MiBridge continued to develop patent-pending technologies combining
sophisticated compression capabilities with IP telephony technology. The
acquisition of MiBridge permitted us to accelerate the development and
deployment of IP technology across our network platform. In 1998, we first deployed our real-time IP communications network
platform. With this new platform, all core operating functions such as
switching, routing, and media control, became software-driven. This new
platform represented the first nationwide, commercially viable VoIP platform of
its kind. Following the launch of our software-defined VoIP platform in 1998,
we continued to refine and enhance the platform to make it even more
efficient and capable for our partners and customers. In February 2000, we transitioned our direct-sales marketing program to
Big Planet, whereupon they became one of our wholesale customers. The
transition of the network marketing sales channel to Big Planet allowed us to
focus on the expansion of our VoIP platform and the development and deployment
of new enhanced services and products, while at the same time maintaining
existing channels for retail sales. In April 2001, we acquired WebToTel and Nexbell, both previously
subsidiaries of Counsel, in a stock-for-stock transaction. We sold Nexbell to
a third party in December 2001 (see Notes 9 and 13 to the Consolidated
Financial Statements included in Item 15 hereof). On December 6, 2002, we 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 our nationwide network using our patented VoIP technology
(constituting the core business of the ILC business) and a fully paid perpetual license to
our 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. This sale
marked the final stage of the transformation of our Technologies operations
into a business based principally on the licensing of our proprietary software. We
own four patents and utilize the technology supported by
those patents in providing our proprietary software solutions. We
believe that we hold the foundational patents for VoIP in our VoIP
Patents. To date, we have licensed portions of that technology
to third parties on a non-exclusive basis. In addition, we also have several patent applications pending
before the USPTO and other such authorities internationally. Today, our Technologies segment remains focused on delivering solutions for
voice and data services to our partners and customers, while launching a strategy to realize value from our patents through licensing. With over nine years experience
developing VoIP technologies, we continue to offer a proven and time-tested
solution for companies to reduce telecommunications costs and/or to enter the
enhanced communications market. We continue to market our voice and data
services and solutions and to license our enhanced services platform
domestically and internationally to organizations who wish to offer voice services
without incurring high development costs. We are evaluating opportunities to
leverage our patents through a strategy to license our technology to
carriers, equipment/softswitch manufacturers and customers who are deploying IP
for phone-to-phone communication. 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. Liquidity and Capital Resources We have incurred substantial operating losses and negative cash flows from
operations since inception and had a stockholders deficit of $42,953 and
negative working capital of $26,576 at December 31, 2003. We had a
stockholders deficit of $57,816 and negative working capital of $17,244 at
December 31, 2002. We continued to finance our operations during 2003 through
related party debt with an outstanding balance of $28,717 and a revolving
credit facility with an unrelated third party with an outstanding balance of
$12,127 as of December 31, 2003. At December 31, 2002, the balance of our
related party debt and a third party revolving credit facility was
$53,231 and $9,086, respectively. While there can be no assurance, we
 expect that once the streamlining of our operations is complete and the
strategy changes we have implemented over the last two years have matured, the
acquired businesses comprising our Telecommunications division will begin
deriving positive cash flows during 2004. Our Technologies business achieved
positive earnings and cash flows during 2003. 13




---



##### 



At
December 31, 2003, we have debt of $28,717 owed to Counsel, which
matures on June 30, 2005 (subject to certain contingent acceleration clauses).
This debt is supplemented by an agreement from Counsel to fund through
long-term intercompany advances or equity contributions, all capital
investment, working capital or other operational cash requirements (the Keep
Well). The Keep Well obligates Counsel to continue its financial support of
Acceris at least until June 30, 2005. In 2003, Counsel advanced us
approximately $7,896 under the Keep Well and converted approximately $5,667 of
accrued interest into principal. See Item 13 for further discussion
of the Keep Well. During 2003, Counsel acquired a debt we owed to Winter Harbor LLC of
$2,557 and converted $40,673 of its convertible debt into Acceris common stock.
This combination of events significantly reduced our liabilities, particularly
to Counsel. During 2004, our intention is to approach the capital markets to raise
funds, however there can be no assurance that such fund raising will be
successful. Since December 31, 2003, Counsel has advanced us approximately
$4,050 in additional funding for general operating needs. Subsequent to
December 31, 2003, we have sold approximately 50% of the shares we hold of BUI
for approximately $1,600, which proceeds will be used to fund operations,
capital expenditures and to improve working capital. We intend to sell the
remainder of these shares during 2004. These shares are shown in current
assets as investments in preferred stock at December 31, 2003. We expect that if we improve our operational results throughout 2004 and
complete additional third party financing, our dependence on Counsel to
support our ongoing operational, capital and debt needs will be reduced. The majority of the Companys debt matures on June 30, 2005. This includes
amounts due on our three-year asset-based credit facility, under which we owed
$12,127 at December 31, 2003 and amounts owed to Counsel of
$28,717 (plus additional interest accrued prior to June 2005). While there is no assurance, we expect that we will be able
to refinance or replace these debt facilities on acceptable terms. While managements plans and expectations are clear, there is no assurance
that we will be able to improve our cash flow from operations, obtain
additional third party financing, extend, repay or refinance our debt with
Counsel or our asset-based lender on acceptable terms, or obtain an extension
of the existing funding commitment from Counsel beyond June 30, 2005, should it
be required. If we are unable to accomplish the above, we may have to evaluate
opportunities to sell assets or obtain alternative financing with terms that
are not favorable to us. Cash Position Cash and cash equivalents as of December 31, 2003 were $2,033 compared to
$3,620 in 2002 and $4,663 in 2001. Cash flow from operating activities Our working capital deficit increased to $26,576 as of December 31, 2003,
from $17,244 as of December 31, 2002. The increase in our working capital
deficit is primarily related to (1) the $4,720 increase in our deferred
revenues from December 31, 2002 to 2003 due to our network service offering,
(2) the increase to our asset-backed credit facility of $3,041 from December
31, 2002 to 2003 due to new borrowings in 2003, (3) the increase in accounts
payable of $3,165 from December 31, 2002 to 2003 and (4) partially offset by
the increase in our current assets of $2,058 due to the reclassification of our
investment in the preferred stock of BUI from long term to current as of December 31,
2003. Cash used by operating activities during 2003 was $8,315 as compared to
$4,871 during 2002. The net increase in cash used in 2003 was primarily due to
the increase in 2003 of $5,944 in our accounts receivable resulting from the
acquisition of RSL at the end of 2002 and Transpoint in 2003 compared to an
increase in 2002 of $1,269, the existence of an impairment of long-lived assets
in 2002 of $3,609, the receipt in 2003 of $1,100 in stock as consideration for one of
our technology licenses and offset by an increase in deferred revenue of $4,720
in 2003 compared to a decrease of $1,643 in 2002. The change in deferred
revenue is related to our network service offering which we ceased in July
2003. Cash used in operating activities during 2001 was $29,283. The decrease
from 2001 to 2002 is primarily due to a decrease in our net loss which resulted
from improved operating performance by our Retail segment in 2002 as compared
to 2001 and continued downsizing of Acceris network and development
operations. Cash utilized in investing activities Net cash used in investing activities in 2003 was $1,827 as compared to
net cash used of $9,233 in 2002 and $15,410 in 2001. In 2003, cash used by
investing activities relates to the purchase of equipment in the amount of
$2,036 and a payment of $100 for the purchase of US Patent No. 6,243,373. This
was offset by cash received from the sale of assets in the amount of $160. The
decrease from 2002 to 2003 relates primarily to the purchase of RSL in 2002 for
approximately $8,276. The purchase of Transpoint in 2003 was accomplished by
converting trade payables due to Acceris (which were paid over time by Acceris
on behalf of Transpoint) into equity of Transpoint in accordance with the
purchase agreement. The payment of trade payables by Acceris on behalf of
Transpoint has been accounted for in cash flows from operating activities in
2002 and 2003 and amounted to approximately $2,882 paid from the period July
2002 through July 2003. Also in 2002, we acquired $1,649 in furniture,
fixtures, equipment and software as we expanded our operations and continued to
improve
our network in order to reduce its overall operating cost, offset by
proceeds of $692 on the sale of a building. 14




---



##### 



In 2001, cash used by investing activities was primarily due to the
$13,447 purchase of WorldxChange assets and the purchase of approximately
$1,963 of furniture, fixtures, equipment and software. Cash provided by financing activities Financing activities provided net cash of $8,555 in 2003 as compared to
cash provided of $13,061 in 2002 and $47,200 in 2001. The decrease from 2002
to 2003 primarily relates to the fact that in 2003 we received $7,896 in
funding from Counsel, which included cash to fund ongoing operations and
continue the reorganization of the business, while in 2002 we received $16,823
in funding from Counsel (offset by principal repayments of $3,000 during 2002).
The cash received from Counsel in 2002 was primarily for the purchase
of certain assets of RSL
and to fund operations. In 2001, Counsel provided advances of $43,920 (offset by principal
repayments of $2,500) to fund the purchase of WorldxChange and general
operating costs. Additionally, we made net borrowings from our revolving line
of credit of $6,996. Contractual Obligations We have various commitments in addition to our debt. The following table
summarizes our contractual obligations at December 31, 2003: Payment due by periodLess than 1
    
    1-3
    
    3-5
    
    More than 5Contractual obligations:
    
    Total
    
    year
    
    years
    
    years
    
    yearsLong term debt obligations
    
    $
    43,263
    
    
    $
    13,381
    
    
    $
    29,474
    
    
    $
    349
    
    
    $
    59Capital lease obligations
    
    $
    4,346
    
    
    $
    2,715
    
    
    $
    1,631
    
    
    $
    
    
    
    $
    Operating leases for
office space and
equipment
    
    $
    7,047
    
    
    $
    2,373
    
    
    $
    3,263
    
    
    $
    1,115
    
    
    $
    296Purchase commitments for
telecommunications
services (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 (1) From time to time, Acceris has various agreements with national carriers
to lease local access spans and to purchase carrier services. The agreements
include minimum usage commitments with termination penalties up to 100% of the
remaining commitment. At December 31, 2003 all of our minimum usage commitments
have been met. Consolidated Results of Operations We have provided consolidated
and segmented
reporting on an annual and rolling quarter basis as we believe
that this is an appropriate way to review the financial results of the
business. The following consolidated discussion and analysis should be read
in conjunction with results by segment below. 15




---



##### 



Key selected financial data for the three years ended December 31, 2003, 2002
and 2001 are as follows: Percent Change(in 000s)
    
    2003
    
    2002
    
    2001
    
    2003 vs 2002
    
    2002 vs 2001(as restated)
    
    (as restated)
    
    
    
    (as restated)
    
    (as restated)Revenues:Telecommunications services
    
    $
    133,765
    
    
    $
    85,252
    
    
    $
    50,289
    
    
    
    57
    
    
    
    70Technology licensing and development
    
    
    2,164
    
    
    
    2,837
    
    
    
    5,697
    
    
    
    (24
    )
    
    
    (50
    )Total revenues
    
    
    135,929
    
    
    
    88,089
    
    
    
    55,986
    
    
    
    54
    
    
    
    57Operating costs and expenses:Telecommunications network expense
(exclusive of depreciation shown below)
    
    
    86,006
    
    
    
    50,936
    
    
    
    35,546
    
    
    
    69
    
    
    
    43Selling, general, administrative and other
    
    
    57,264
    
    
    
    33,015
    
    
    
    30,790
    
    
    
    73
    
    
    
    7Provision for doubtful accounts
    
    
    5,438
    
    
    
    5,999
    
    
    
    2,861
    
    
    
    (9
    )
    
    
    110Research and development
    
    
    
    
    
    
    1,399
    
    
    
    2,332
    
    
    
    *
    
    
    
    (40
    )Depreciation and amortization
    
    
    7,125
    
    
    
    4,270
    
    
    
    6,409
    
    
    
    67
    
    
    
    (33
    )Total operating costs and expenses
    
    
    155,833
    
    
    
    95,619
    
    
    
    77,938
    
    
    
    63
    
    
    
    23Operating loss
    
    
    (19,904
    )
    
    
    (7,530
    )
    
    
    (21,952
    )
    
    
    164
    
    
    
    (66
    )Other income (expense):Interest expense
    
    
    (13,269
    )
    
    
    (8,195
    )
    
    
    (4,693
    )
    
    
    62
    
    
    
    75Interest and other income
    
    
    1,216
    
    
    
    395
    
    
    
    81
    
    
    
    208
    
    
    
    388Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    *
    
    
    
    *Total other income (expense)
    
    
    (12,053
    )
    
    
    (7,800
    )
    
    
    (4,023
    )
    
    
    55
    
    
    
    94Loss from continuing operations
    
    
    (31,957
    )
    
    
    (15,330
    )
    
    
    (25,975
    )
    
    
    108
    
    
    
    (41
    )Loss from discontinued operations, net of $0 tax
    
    
    529
    
    
    
    (12,508
    )
    
    
    (18,522
    )
    
    
    (104
    )
    
    
    (32
    )Net loss
    
    $
    (31,428
    )
    
    $
    (27,838
    )
    
    $
    (44,497
    )
    
    
    13
    
    
    
    (37
    )
 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 our operations that occurred in 2003 and 2002.
Namely:  1.
    
    In July 2003, we acquired Transpoint. The operations of
Transpoint from July 28, 2003 to December 31, 2003 have been included
in the statement of operations for 2003. However, there were no such
operations in 2002.2.
    
    On December 10, 2002, we purchased the assets 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. In 2002, the operations of RSL were included for
the period December 10, 2002 to December 31, 2002.3.
    
    On December 6, 2002, we entered into an agreement to sell
substantially all of the assets and customer base of ILC. 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, we 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 as cash receipts become unencumbered, and we expect this
to continue in 2004. See further discussion below, as well as in the
section entitled Critical Accounting Estimates. Revenues: The increase in Telecommunications services revenue to $133,765 in 2003
from $85,252 in 2002 is primarily related to the following events:  (1)
    
    In December 2002, we acquired certain assets of RSL from a
bankruptcy proceeding. The
acquisition has been accounted for under the purchase method of
accounting and accordingly, revenue subsequent to the acquisition has
been included in our revenue. There is a full year of RSL revenue
included in 2003, versus less than one month in 2002. The operations
of RSL provided approximately $15,300 in Telecommunications revenues
in 2003, compared to approximately $2,500 for December 2002.
Additionally, the operations of Transpoint which began in July provided
approximately $2,055 in Telecommunications revenue during 2003, which
was not present in 2002. 16




---



##### 



(2)
    
    We have 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
our dial around product were approximately $54,900 versus
approximately $66,800 in 2002.(3)
    
    We have experienced growth in our revenue from customers
acquiring 1+ services through our growing commercial, ethnic
and MLM channels on which we began to focus in early
2002. Revenues from our 1+ product were approximately $44,400 in 2003
versus approximately $15,791 in 2002.(4)
    
    We launched a network service offering in 2002, which we
curtailed in July 2003. We recognized revenues of approximately
$7,629 in 2003 as cash receipts became unencumbered, compared to
recognizing no revenues in 2002. At December 31, 2003, $4,621 in
cash receipts remain encumbered and are accounted for as deferred
revenues on our balance sheet. We anticipate that these receipts
will become unencumbered and recognized as revenue in 2004.(5)
    
    Although we continued to experience price erosion in 2003 in a
very competitive long-distance market, our customer and traffic
growth is outpacing this compression. The increase in number of
subscribers 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 our increase in revenue, year-over-year. In 2003,
we recognized approximately $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, we recognized
approximately $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. Operating costs and expenses: The changes in operating costs and expenses are primarily related to the
following:  (1)
    
    Telecommunications network expense  The $35,070 increase
relates primarily to the inclusion of a full year of the operations
of the RSL assets in 2003 as opposed to less than one month in 2002. In 2003, the
operations of RSLs Enterprise business incurred approximately
$15,279 in telecommunications network expense versus approximately
$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 approximately
$8,734. Additionally, we recognized an increase of approximately
$7,112 in telecommunications network expense associated with our
network service offering in 2003 over 2002.(2)
    
    Selling, general, administrative and other (SG&A)- The
$24,249 increase relates primarily to the inclusion of a full year of
the operations of RSL in 2003 as opposed to less than one month in 2002.
In 2003, the operations of RSLs Enterprise business incurred
approximately $10,378 in SG&A versus approximately $810 in December
of 2002. The inclusion of a full year of activity for the Agent
business of RSL combined with our existing Retail segment resulted in
an increase in SG&A from 2002 to 2003 of approximately $13,471.(3)
    
    Provision for doubtful accounts The $561 decrease is primarily
due to lower bad debt experience levels for our direct billed
customers because of 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 our
network service offering being recognized on an unemcumbered cash
receipts method, which was $7,629 in 2003 and none in 2002.
Additionally, in 2003 we recognized $25,615, versus $1,547 in 2002 in
revenues from our Enterprise segment. The revenues for our
Enterprise segment has a significantly lower bad debt experience than
our Retail revenues.(4)
    
    Depreciation and amortization  The increase relates primarily
to tangible and intangible assets acquired pursuant to the RSL and
Transpoint acquisitions. Depreciation and amortization on the assets
purchased from RSL was approximately $1,800 for all of 2003, which
was present for less than one month in 2002. Additionally, the
intangible assets associated with the Transpoint purchase incurred
additional amortization of approximately $245 during 2003, which was
not present in 2002. The remainder of the increase is associated
with depreciation on the purchase of new furniture, fixtures,
equipment and software during the year.(5)
    
    Research and development costs (R&D)  We ceased our R&D
activities in 2002. We will commence investing in R&D when it becomes
necessary to supplement our existing technology platform. 17




---



##### 



Other income (expense): The changes in other income (expense) are primarily related to the
following:  (1)
    
    Interest expense - The $5,074 increase in interest expense
primarily relates to interest on amounts owed to Counsel and on
amounts owed on our asset-based facility. The increase year over year
relates primarily to higher average outstanding loan amounts to both
Counsel and our asset-based lender. The balance of our 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 increased average loan
balance created additional interest expense year-over-year of
approximately $154. Counsel advanced us an additional $7,896 during
2003, which created additional interest expense from 2002 to 2003 of
approximately $69.(2)
    
    In November 2003, $40,673 of Counsel debt was converted into
equity. We expect that in 2004, our interest expense will be
significantly lower than 2003 due to the conversion. The Counsel debt
carried an interest rate of 10%, therefore the conversion will lead
to approximately $4,000 in annual interest savings. Such savings
would be reduced by any future increases in debt.(3)
    
    Other income - The $821 increase to other income is primarily
related to the discharge of obligations from two settlement
agreements completed during 2003 with network carriers, which totaled
$1,141. In 2002, other income represents approximately $200 in
income recorded when we were informed that we had funds on deposit
with vendors that we had not known previously existed. The changes
year to year in other income relate to items which are non recurring
and we do not anticipate similar events to occur in 2004. 2002 Compared to 2001 When considering the results of continuing operations for
2002 compared to 2001, it is important to note the following significant
changes in our operations that occurred in 2002 and 2001, namely:  1.
    
    On June 4, 2001, we completed the purchase of WorldxChange,
which offered a dial-around telecommunications product. We did not
offer a comparable product prior to June 4, 2001.2.
    
    On December 10, 2002, we purchased the assets 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 11, 2002 to December 31, 2002 have been included in the
statement of operations for 2002.3.
    
    On December 6, 2002, we 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 agreement,
the operational results related to ILC have been reclassified as
discontinued operations in 2002 and 2001 and accordingly are not
included in the following analysis of continuing operations. Revenues: The increase in Telecommunications services revenue of $34,963 to $85,252
in 2002 from $50,289 in 2001 was primarily related to the following events:  (1)
    
    In June 2001, we acquired the long-distance operations of
WorldxChange Communications Inc. 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 approximately $82,752 in 2002 and all of
the Telecommunications revenues in 2001.(2)
    
    In December 2002, we acquired the assets of the Agent and the
Enterprise Direct 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, which was not present in 2001. The primary reason for the decrease of $2,860 in revenues for the
Technology segment to $2,837 in 2002 from $5,697 in 2001 was due to the
reduction in revenue recorded relating to a two-year licensing agreement which
ended in May 2002. In 2002, we recorded revenue of approximately $1,667 on
this contract, compared to approximately $5,000 in 2001. 18




---



##### 



Operating costs and expenses: The changes in operating costs and expenses are primarily related to the
following:  (1)
    
    Telecommunications network expense  The $15,390 increase related
primarily to the inclusion of a full year of the operations of
WorldxChange in 2002 as opposed 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 compared to 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 our network.
Further, in 2002, we expensed approximately $2,000 of network service
offering costs for which no revenue was recognized. This expense was
not present in 2001.(2)
    
    SG&A  The $2,225 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 our Retail
segment and $777 from our 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 commenced in 2001.(3)
    
    Provision for doubtful accounts  The $3,138 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,
we experienced a shift in channels resulting in more direct billing of
customers, which incurs a larger percentage of uncollectible accounts.(4)
    
    Depreciation and amortization  The $2,139 decline in depreciation
and amortization was related to the decrease in amortization on our
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 and the acquired tangible
and intangible assets of RSL.(5)
    
    R&D  Over the past several years we have consolidated our research
operations and curtailed research and development activities in order to
concentrate our financial resources on sales and marketing of existing
products. With the sale of the ILC business in December 2002, we have
stopped our research and development activities, as evidenced by no
expenses being incurred in 2003. Other income (expense): Overall
the $3,777 increase in expense was directly related to interest
expense on our increased debt from loans from Counsel (necessary to fund our
continued cash operating requirements and acquisitions) of approximately
$3,052, interest expense on our revolving credit facility which originated in
December 2001 of approximately $447 and the inclusion of interest from
WorldxChange capital leases for twelve months in 2002 as compared to seven
months in 2001. Other income in 2002 was primarily related to WorldxChange, who in the
fourth quarter was informed that it had funds on deposit with certain carriers
that it had not previously known existed. Upon verification of such deposits,
we recorded the asset and recognized other income of approximately $200. We did
not have similar transactions in 2001. The other changes from year to year
relate to various items which do not recur from year to year and a decrease in
interest earned in 2002 compared to 2001 which corresponds to the decrease in
average cash balances on hand during the respective years and the reduction in
interest rates during the same periods. In December 2001, we sold our subsidiary Nexbell to an unrelated party.
The sale was a sale of Nexbells stock and accordingly the assets and
liabilities of Nexbell were assumed by the purchaser with no further financial
obligation on our part. At the time of the sale, the liabilities exceeded the
assets of Nexbell and accordingly, we have recorded a gain on sale of
subsidiary in the amount of approximately $589 (the amount by which the
liabilities of Nexbell exceeded its assets). Quarterly Analysis Management believes that the most appropriate way to analyze Acceris is to
examine the changes in the business quarter over quarter. Accordingly, we have
presented the consolidated and segmented viewpoint on this basis. 19




---



##### 



2002
    
    2003
    
    Full Year(unaudited)
    
    (unaudited)
    
    (audited)Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2001
    
    2002
    
    2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)
    
    (as restated)Revenues:Retail
    
    $
    22,811
    
    
    $
    20,984
    
    
    $
    19,835
    
    
    $
    20,075
    
    
    $
    23,272
    
    
    $
    25,106
    
    
    $
    26,069
    
    
    $
    26,074
    
    
    $
    50,289
    
    
    $
    83,705
    
    
    $
    100,521Enterprise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,547
    
    
    
    7,095
    
    
    
    6,747
    
    
    
    5,854
    
    
    
    5,919
    
    
    
    
    
    
    
    1,547
    
    
    
    25,615Network service offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142
    
    
    
    3,079
    
    
    
    408
    
    
    
    
    
    
    
    
    
    
    
    7,629Technologies
    
    
    1,581
    
    
    
    888
    
    
    
    321
    
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    5,697
    
    
    
    2,837
    
    
    
    2,164Total
revenues
    
    
    24,392
    
    
    
    21,872
    
    
    
    20,156
    
    
    
    21,669
    
    
    
    30,367
    
    
    
    37,045
    
    
    
    36,051
    
    
    
    32,466
    
    
    
    55,986
    
    
    
    88,089
    
    
    
    135,929Operating costs and expenses:Telecommunications network expense (exclusive of depreciation shown below)
    
    
    13,272
    
    
    
    12,237
    
    
    
    11,197
    
    
    
    12,235
    
    
    
    19,543
    
    
    
    19,154
    
    
    
    19,266
    
    
    
    18,936
    
    
    
    35,546
    
    
    
    48,941
    
    
    
    76,899Network service offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,995
    
    
    
    6,205
    
    
    
    2,165
    
    
    
    807
    
    
    
    (70
    )
    
    
    
    
    
    
    1,995
    
    
    
    9,107Selling, general, administrative and other
    
    
    8,700
    
    
    
    7,147
    
    
    
    7,389
    
    
    
    9,779
    
    
    
    14,225
    
    
    
    14,617
    
    
    
    13,981
    
    
    
    14,441
    
    
    
    30,790
    
    
    
    33,015
    
    
    
    57,264Provision for doubtful accounts
    
    
    1,356
    
    
    
    1,250
    
    
    
    1,119
    
    
    
    2,274
    
    
    
    1,175
    
    
    
    1,131
    
    
    
    1,466
    
    
    
    1,666
    
    
    
    2,861
    
    
    
    5,999
    
    
    
    5,438Research and development
    
    
    383
    
    
    
    465
    
    
    
    317
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,332
    
    
    
    1,399
    
    
    
    Depreciation and amortization
    
    
    1,021
    
    
    
    1,019
    
    
    
    985
    
    
    
    1,245
    
    
    
    1,826
    
    
    
    1,758
    
    
    
    1,993
    
    
    
    1,548
    
    
    
    6,409
    
    
    
    4,270
    
    
    
    7,125Total operating costs and expenses
    
    
    24,732
    
    
    
    22,118
    
    
    
    21,007
    
    
    
    27,762
    
    
    
    42,974
    
    
    
    38,825
    
    
    
    37,513
    
    
    
    36,521
    
    
    
    77,938
    
    
    
    95,619
    
    
    
    155,833Operating loss
    
    
    (340
    )
    
    
    (246
    )
    
    
    (851
    )
    
    
    (6,093
    )
    
    
    (12,607
    )
    
    
    (1,780
    )
    
    
    (1,462
    )
    
    
    (4,055
    )
    
    
    (21,952
    )
    
    
    (7,530
    )
    
    
    (19,904
    )Other income (expense):Interest expense
    
    
    (2,173
    )
    
    
    (2,061
    )
    
    
    (1,777
    )
    
    
    (2,184
    )
    
    
    (2,915
    )
    
    
    (3,394
    )
    
    
    (3,398
    )
    
    
    (3,562
    )
    
    
    (4,693
    )
    
    
    (8,195
    )
    
    
    (13,269
    )Interest and other income
    
    
    9
    
    
    
    10
    
    
    
    152
    
    
    
    224
    
    
    
    2
    
    
    
    1
    
    
    
    53
    
    
    
    1,160
    
    
    
    81
    
    
    
    395
    
    
    
    1,216Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    589
    
    
    
    
    
    
    
    Total other income (expense)
    
    
    (2,164
    )
    
    
    (2,051
    )
    
    
    (1,625
    )
    
    
    (1,960
    )
    
    
    (2,913
    )
    
    
    (3,393
    )
    
    
    (3,345
    )
    
    
    (2,402
    )
    
    
    (4,023
    )
    
    
    (7,800
    )
    
    
    (12,053
    )Loss from continuing operations
    
    
    (2,504
    )
    
    
    (2,297
    )
    
    
    (2,476
    )
    
    
    (8,053
    )
    
    
    (15,520
    )
    
    
    (5,173
    )
    
    
    (4,807
    )
    
    
    (6,457
    )
    
    
    (25,975
    )
    
    
    (15,330
    )
    
    
    (31,957
    )Gain (loss) from discontinued operations, net of $0 tax
    
    
    (3,099
    )
    
    
    (4,581
    )
    
    
    (1,463
    )
    
    
    (3,365
    )
    
    
    (277
    )
    
    
    371
    
    
    
    213
    
    
    
    222
    
    
    
    (18,522
    )
    
    
    (12,508
    )
    
    
    529Net loss
    
    $
    (5,603
    )
    
    $
    (6,878
    )
    
    $
    (3,939
    )
    
    $
    (11,418
    )
    
    $
    (15,797
    )
    
    $
    (4,802
    )
    
    $
    (4,594
    )
    
    $
    (6,235
    )
    
    $
    (44,497
    )
    
    $
    (27,838
    )
    
    $
    (31,428
    )
 Revenues:  (1)
    
    Retail revenue grew in 2003 over 2002 due primarily to the
inclusion of the Agent business of RSL, which we acquired on December
10, 2002. In the Retail market we experienced an increase in the
volume of business, based on approximately 907,000,000 minutes
carried over our network and over lines we lease from third parties
during 2003 versus approximately 680,400,000 in 2002. Additionally,
our number of customers grew from approximately 279,532 at December
31, 2002 to approximately 354,248 at the end of 2003. However, the
average blended rate per minute (including domestic and international
calls) declined throughout 2003, from approximately $0.12 per minute
in 2002 to approximately $0.11 per minute in 2003. The ratio of
international long-distance business to domestic long-distance
continued at an approximately 65:35 ratio for 2002 and 2003.(2)
    
    Enterprise revenues grew in 2003 due primarily to the inclusion
of the Enterprise business of RSL, which was acquired on December 10,
2002. In 2003, the Enterprise business provided $25,615 in revenues,
compared to $1,547 in 2002.(3)
    
    Network service offering - We introduced a product in November
2002 which we ceased offering in July 2003. We recognized revenues of
approximately $7,629 in 2003 as cash receipts became unencumbered and
recognized no such revenue in 2002. Beginning in the second quarter
of 2003, amounts collected from this offering were considered
unencumbered and recognized as revenue. At December 31, 2003, $4,621
in cash receipts remains encumbered and is accounted for as deferred
revenues on our balance sheet. We anticipate that the remainder of
these receipts will become unencumbered and recognized as revenue in
2004.(4)
    
    Technologies revenue is made up of several project-based
contracts. Revenue in this business is volatile between reporting
periods. In 2003, revenue reported is from two contracts and totals
$2,164 in 2003, compared to $2,837 from three contracts in 2002.(5)
    
    We expect that Retail revenue will increase in 2004 as we
continue to offer local telephone services to additional markets
throughout the United States. Telecommunications network expense:  (1)
    
    Costs grew in 2003 over 2002 in line with the level of revenue,
due to increased traffic on our network and on the lines we lease
from third parties. The increase in volume is directly related to
the inclusion of a full year of activity for the Agent business of RSL,
which resulted in an increase in telecommunications network expense
of approximately $8,734. Additionally, we recognized an increase of
approximately $7,112 in telecommunications network expense associated
with our network service offering in 2003 over 2002. 20




---



##### 



(2)
    
    Our networks continued to operate in 2003 below 50%
utilization, which is consistent with 2002. The operation of the network has many fixed
cost elements and changes in network utilization affects the
Telecommunications divisions operating loss. In 2004, we expect
network utilization to improve due to anticipated increases in network
traffic and by taking traffic on low volume parts of the network
off-net and removing under performing parts of the network.
Off-net traffic refers to that which we transport on network lines
leased from third parties.(3)
    
    We acquire telecommunications services from a number of carriers
and pricing obtained from those carriers affects Telecommunications
operating loss.(4)
    
    We are subject to telecommunications taxes, and the calculation
and mandated contribution rates change from time to time which
affects our costs from period to period.(5)
    
    The destination of customers long-distance calls, particularly
international calls, affects the Telecommunications network expense and overall
profitability.  We expect that Telecommunications operating loss will
decrease in 2004 over 2003 as we increase network utilization by adding traffic and taking
traffic off-net in low or negative contribution parts of the United
States. Operating costs and
expenses:  (1)
    
    SG&A  Costs increased primarily due to the
acquisition of certain assets of RSL
in December 2002 and the acquisition of Transpoint in July 2003.
Throughout 2003, we have been integrating these two businesses, as
well as WorldxChange, and have been developing an infrastructure that
allowed us to enter the local business. As our integration continues,
we expect SG&A as a percent of revenue to decline during 2004. The
inclusion of a full year of activity for the Agent business of RSL
combined with our existing Retail segment resulted in an increase in
SG&A from 2002 to 2003 of approximately $13,343, while the inclusion
of a full year of activity of the Enterprise business of RSL
accounted for an increase of approximately $9,568.(2)
    
    Provision for doubtful accounts  Improvement as a percent of
revenue from 6.8% in 2002 to 4.0% in 2003 has occurred due to improved credit and collection processes
and due to the use of the unencumbered cash receipts method of
revenue recognition for our network service offering. We recognized
approximately $7,629 in revenue during 2003 associated with this
product which, due to the unencumbered cash method of accounting,
experiences significantly less bad debt.(3)
    
    Research & development  We ceased our R&D activities in 2002.
We will commence investing in R&D when it becomes necessary to
supplement our existing technology platform.(4)
    
    Depreciation and amortization  Pursuant to the acquisition of
RSL and Transpoint we acquired certain tangible and intangible
assets, which are being amortized over one to five years.
Depreciation and amortization on the assets purchased from RSL was
approximately $1,800 for all of 2003, which was present for less than
one month in 2002. Additionally, the intangible assets associated
with the Transpoint purchase accumulated additional amortization of
approximately $245 during 2003, which was not present in 2002. The
remainder of the increase is associated with depreciation on new
furniture, fixtures, equipment and software purchased during the
year. 21




---



##### 



Supplemental Statistical and Financial Data The following data is provided for additional information about our operations.
It should be read in conjunction with the quarterly segment analysis provided
herein. All amounts below are unaudited. 2003(In millions of dollars, except where indicated)
    
    Q1
    
    Q2
    
    Q3
    
    Q4Gross
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
    
    
    
    354,248Average revenues per user (retail): (4)Dial-around
    
    $
    21.51
    
    
    $
    19.94
    
    
    $
    20.71
    
    
    $
    21.751+
    
    $
    23.27
    
    
    $
    23.84
    
    
    $
    25.16
    
    
    $
    25.61Telecommunications 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
    
    
    $
    31.9Gross
revenue - product mix (%):Domestic
long-distance
    
    
    33.5
    %
    
    
    31.4
    %
    
    
    28.6
    %
    
    
    28.9
    %International 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
    %
    
    
    48.4
    %Data
    
    
    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 which allows a customer to make a
call from any phone by dialing a 10-10-XXXX prefix.(3)
    
    1+ refers to a product which 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. 22




---



##### 



Segmented Analysis: Telecommunications
- Retail
     (all amounts in thousands) 2002
    
    2003
    
    Full YearQ1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2002
    
    2003Revenues:Retail
    
    $
    22,811
    
    
    $
    20,985
    
    

    $
    19,834
    
    
    $
    20,076
    
    
    $
    23,272
    
    
    $
    25,106
    
    
    $
    26,069
    
    
    $
        26,074
    
    
    $
    83,706
    
    
    $
        100,521Network service offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142
    
    
    
    3,079
    
    
    
    408
    
    
    
    
    
    
    
    7,629Total
    
    
    22,811
    
    
    
    20,985
    
    
    
    19,834
    
    
    
    20,076
    
    
    
    23,272
    
    
    
    29,248
    
    
    
    29,148
    
    
    
        26,482
    
    
    
    83,706
    
    
    
        108,150Operating costs and expenses:Telecommunications network expense (exclusive of depreciation
shown below)
    
    
    13,272
    
    
    
    12,237
    
    
    
    11,198
    
    
    
    10,272
    
    
    
    14,714
    
    
    
    15,210
    
    
    
    16,034
    
    
    
    15,666
    
    
    
    46,979
    
    
    
    61,624Network service offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,995
    
    
    
    6,205
    
    
    
    2,165
    
    
    
    807
    
    
    
    (70
    )
    
    
    1,995
    
    
    
    9,107Selling, general, administrative and other
    
    
    8,828
    
    
    
    7,430
    
    
    
    7,554
    
    
    
    10,656
    
    
    
    11,940
    
    
    
    11,345
    
    
    
    12,271
    
    
    
    12,385
    
    
    
    34,468
    
    
    
    47,941Depreciation and amortization
    
    
    980
    
    
    
    977
    
    
    
    966
    
    
    
    1,133
    
    
    
    1,164
    
    
    
    1,163
    
    
    
    1,452
    
    
    
    1,104
    
    
    
    4,056
    
    
    
    4,883Total operating costs and expenses
    
    
    23,080
    
    
    
    20,644
    
    
    
    19,718
    
    
    
    24,056
    
    
    
    34,023
    
    
    
    29,883
    
    
    
    30,564
    
    
    
    29,085
    
    
    
    87,498
    
    
    
    123,555Operating loss
    
    
    (269
    )
    
    
    341
    
    
    
    116
    
    
    
    (3,980
    )
    
    
    (10,751
    )
    
    
    (635
    )
    
    
    (1,416
    )
    
    
        (2,603
    )
    
    
    (3,792
    )
    
    
        (15,405
    )Interest and other income (expense), net
    
    
    (1,168
    )
    
    
    (926
    )
    
    
    (574
    )
    
    
    (255
    )
    
    
    (632
    )
    
    
    (852
    )
    
    
    (673
    )
    
    
    (259
    )
    
    
    (2,923
    )
    
    
    (2,416
    )Segment loss
    
    
    (1,437
    )
    
    
    (585
    )
    
    
    (458
    )
    
    
    (4,235
    )
    
    
    (11,383
    )
    
    
    (1,487
    )
    
    
    (2,089
    )
    
    
        (2,862
    )
    
    
    (6,715
    )
    
    
        (17,821
    )
 Revenues Retail
    revenues increased $24,444 to $108,150 for 2003 as compared to $83,706 for
    2002. The increase was primarily due to:  
    
    incremental revenue of approximately $14,855 associated with
growth in the subscriber base primarily due to the December 2002
acquisition of the Agent business of RSL and the July 2003 acquisition
of Transpoint.
    
    revenues of $7,629 representing actual cash collections from
our network service offering that have been finalized during the
first nine months of 2003 from billings prior to December 31, 2003.
Revenue from this product is accounted for when the actual cash
collections to be retained by the company are finalized. There was no
comparable source of revenue in 2002. Operating costs and expenses Retails telecommunications network expense and network service offering
expense for 2003 and 2002 totaled $70,731 and $48,974, respectively. The
increase in 2003 over 2002 relates primarily to:  
    
    inclusion of approximately $10,095 in network expenses
associated with growth in the subscriber base primarily due to the
December 2002 acquisition of the Agent business of RSL and the July
2003 acquisition of Transpoint.
    
    inclusion of network expenses of $9,107 related to the sale of
a network service offering in 2003 versus $1,995 in 2002. Retails SG&A was $47,941 in 2003, up from $34,468 in 2002. The increase
in 2003 over 2002 primarily relates to:  
    
    an increase in personnel costs of approximately $2,800 from
2002 to 2003 primarily relating to the increase in number of
employees,
    
    an increase of $9,650 in billing and collection charges and
outside agent commissions when compared to 2002 relating primarily to
the increase in Retail revenue,
    
    an increase in professional fees in 2003 of approximately
$4,020 compared to 2002 and
    
    partially offset by a decrease of $1,463 in advertising costs
from 2002 to 2003, which decrease relates to the curtailment of a
direct advertising program in the first quarter of 2002. In the first quarter of 2003, we negotiated and received a concession from
one new significant supplier of a network product. We negotiated a reduction
in costs payable to the supplier of approximately $4,463 of which $2,999 was
recovered in the first quarter by reduction of commissions otherwise payable to
the supplier. During the second quarter of 2003 we recovered an additional
$1,150 by reduction of commissions otherwise payable. The balance of
approximately $314 was recovered in the third quarter by withholding
commissions that would otherwise be payable to the supplier. Retails depreciation and amortization was $4,883 in 2003 compared to
$4,056 in 2002. The increase in 2003 over 2002 primarily relates to the
inclusion of the Agent business of RSL (acquired in December 2002) and the
Transpoint business (acquired in July 2003) for 23




---



##### 



which there was no comparable
expense in the same period of 2002. Assets subject to depreciation and
amortization totaling approximately $7,673 were acquired in connection with
these purchases. Retails interest and other expense was $2,416 in 2003 compared to $2,923
in 2002. The decrease in 2003 over 2002 primarily relates to a decrease of
$519 in amortization of debt discount related to the value of warrants issued
to Counsel in 2002 which did not recur in 2003. The Retail business approaches
the market through the MLM ethnic and commercial agent channels. In 2004, we expect to bundle our 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 our customers will now be in their own language. Currently,
we are targeting customers who frequently call India, China, Brazil, Latin
America and Eastern Europe, and we intend to expand this scope going forward. Our commercial agent channel will continue to focus on providing the
highest levels of service at the most competitive price, helping our agent
customers become more successful. In 2004, we launched a loyalty program to
reward those agents who increase their
business with us with warrants to purchase common stock. As
our revenue mix changes in 2004, our contribution from this business is
expected to improve for three primary reasons:  1)
    
    We expect to increase the revenue per customer by
converting existing customers to our 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)
    
    We have commenced the roll out of our internally developed
VoIP and enhanced services complemented by deploying the latest
solutions available from Nortel. This will be coupled with the
consolidation of our network operating centers from two to one and
the reduction of the unprofitable parts of our network.3)
    
    The continued deployment of technology and standard process
and consolidation of our back office functions, teamed with our
shift toward increased direct billing and the attraction of a
customer base with a longer average life will improve our return on
investment for each customer. Telecommunications  Enterprise 2002
    
    2003
    
    Full Year(unaudited)
    
    (unaudited)
    
    (audited)Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2002
    
    2003Revenues:Enterprise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,547
    
    
    
    7,095
    
    
    
    6,747
    
    
    
    5,854
    
    
    
    5,919
    
    
    
    1,547
    
    
    
    25,615Operating costs and expenses:Telecommunications network expense (exclusive of depreciation shown below)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,190
    
    
    
    4,829
    
    
    
    3,944
    
    
    
    3,233
    
    
    
    3,273
    
    
    
    1,190
    
    
    
    15,279Selling, general, administrative and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810
    
    
    
    2,793
    
    
    
    2,685
    
    
    
    2,222
    
    
    
    2,678
    
    
    
    810
    
    
    
    10,378Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    661
    
    
    
    596
    
    
    
    540
    
    
    
    444
    
    
    
    158
    
    
    
    2,241Total operating costs and expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,158
    
    
    
    8,283
    
    
    
    7,225
    
    
    
    5,995
    
    
    
    6,395
    
    
    
    2,158
    
    
    
    27,898Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    (1,188
    )
    
    
    (478
    )
    
    
    (141
    )
    
    
    (476
    )
    
    
    (611
    )
    
    
    (2,283
    )Interest and other income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (89
    )
    
    
    (90
    )
    
    
    (89
    )
    
    
    (24
    )
    
    
    (18
    )
    
    
    (292
    )Segment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (629
    )
    
    
    (1,277
    )
    
    
    (568
    )
    
    
    (230
    )
    
    
    (500
    )
    
    
    (629
    )
    
    
    (2,575
    )
 Revenues Revenues from Enterprise in 2003 came from the Enterprise business of RSL,
which we acquired in December 2002. Accordingly, the Enterprise segment had no
revenues in the first eleven months of 2002. Revenues of $25,615 have been
included in 2003, compared to $1,547 in 2002. Operating costs and expenses  
    
    Enterprise accounted for $15,279 of the total network expense
in 2003, compared to $1,190 in 2002, as Enterprise was only a part of
operations for less than one month during 2002.
    
    Enterprise accounted for $9,568 of our overall increase in selling, general, administrative and other expense in 2003.
    
    Enterprise recorded $2,241 in depreciation and amortization in 2003. 24




---



##### 




    
    Enterprise recorded $292 in interest and other expense (net of other income) in 2003. Our Enterprise channel is targeted at medium-sized companies where we can
be more competitive on level of service and price. We believe our customer
service is second to none as clients are assigned a dedicated Acceris
representative responsible for ensuring the customers needs are met. We have
also established strong relationships with all major telecommunications
carriers, and are thus able to design a fully managed system for our customers
utilizing a combination of carriers that best suits their objectives. Following our acquisition of the Enterprise business of RSL, we continue
to deliver the high level of service that RSL has historically brought to
the market place, 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 normal turnover. Following the acquisition, we
started to implement customer attraction strategies in this business, which has
a lengthy sales cycle. This strategy involved putting a new sales team in
place. We expect in 2004 that our customer attraction/retention initiatives,
coupled with our back office integration initiatives, will lead to improved
results of operations from the Enterprise segment. Technologies 2002
    
    2003
    
    Full Year(unaudited)
    
    (unaudited)
    
    (audited)Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    2002
    
    2003Revenues:Technology
    
    $
    1,580
    
    
    $
    888
    
    
    $
    322
    
    
    $
    47
    
    
    $
    
    
    
    $
    1,050
    
    
    $
    1,049
    
    
    $
        65
    
    
    $
    2,837
    
    
    $
        2,164Operating costs and expenses:Selling, general, administrative and other
    
    
    625
    
    
    
    684
    
    
    
    491
    
    
    
    50
    
    
    
    73
    
    
    
    575
    
    
    
    282
    
    
    
    220
    
    
    
    1,850
    
    
    
    1,150Depreciation and amortization
    
    
    36
    
    
    
    19
    
    
    
    19
    
    
    
    (63
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    Total operating costs and expenses
    
    
    661
    
    
    
    703
    
    
    
    510
    
    
    
    (13
    )
    
    
    73
    
    
    
    575
    
    
    
    282
    
    
    
    220
    
    
    
    1,861
    
    
    
    1,150Operating loss
    
    
    919
    
    
    
    185
    
    
    
    (188
    )
    
    
    60
    
    
    
    (73
    )
    
    
    475
    
    
    
    767
    
    
    
        (155
    )
    
    
    976
    
    
    
        1,014Interest and other income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Segment income (loss)
    
    $

    919
    
    
    $
    185
    
    
    $
    (188
    )
    
    $
    60
    
    
    $
    (73
    )
    
    $
    475
    
    
    $
    767
    
    
    $
        (155
    )
    
    $
    976
    
    
    $
        1,014
 Revenues Technologies
    is the segment responsible for licensing and related services revenue. Technologies
    had revenues of $2,164 in 2003 as compared to $2,837 in 2002. The revenues
    in 2003 relate to two contracts. The first contract was entered into in the
    first quarter of 2003 for which acceptance was obtained in the second quarter.
    The contract involves both technology licensing and the provision of services.
    Revenues from the contract are being recognized over the service period starting
    with acceptance in the second quarter and will continue during the period
    of our continued involvement. During 2003 we recognized $1,563 in revenue
    from this customer. The second contract was entered into with a Japanese company
    in the third quarter of 2003 when delivery, acceptance and payment were all
    completed resulting in the recognition of $600 during the third quarter of
    2003. The contract allows for additional future revenues of up to $1,250,
    contingent upon future events including the issuance of patents in Japan consistent
    with our existing United States patents. Subsequent to year end, the Company
    recognized approximately $750 in revenues pursuant to a cash receipt in March 2004.
    If and when the future events occur, the Company will recognize the additional
    revenues. The Company has no continuing obligation related to this contract.
    Revenues in 2002 related to three contracts no longer in effect in 2003. Technology
    licensing revenues are project-based and, as such, these revenues will vary
    from period to period based on timing and size of technology licensing projects
    and payments. Technologies SG&A was $1,150 in 2003 as compared to $1,850 in 2002. The
decrease is directly related to a decrease in R&D in 2002 to 2003 of
approximately $1,399. Offsetting this decrease, was an increase associated
with our addition of employees to this division in 2003, principally a
president and an independent sales agent. The president of this division
resigned at the end of 2003 and we expect to see a decrease in SG&A costs in
2004. Technologies recorded no depreciation expense in 2003 and minimal
depreciation in 2002. One of our most exciting developments in 2003 was the acquisition of a
second patent related to VoIP. Utilizing our 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 our existing Acceris 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, we intend to aggressively pursue
recognition of our intellectual property in the marketplace through a focused
licensing program. 25




---



##### 



Revenue and contributions from this business to date have been based on
the sales and deployments of our VoIP solutions, which will continue. The
timing and sizing of various projects will result in a continued pattern of
mixed quarterly results. Risk Factors Operational Risks  We are dependent upon outside financing to meet our ongoing capital
requirements.  We have incurred substantial operating losses and negative cash flows from
operations since inception and have a net capital deficiency and negative
working capital. We have historically financed our operations through
related party debt with our controlling stockholder and a revolving credit
facility with an outside party.  We are primarily dependent upon an ongoing commitment from Counsel to fund,
through long-term intercompany advances or equity contributions, all
of our
capital investment, working capital or other operational cash requirements
through June 30, 2005.  While Counsel did convert approximately $40,673 of its debt
into 13,428,492 shares of our common stock on November 26, 2003, thereby remaining the
single largest stockholder of Acceris, there remains significant debt to
Counsel of $28,646 at December 31, 2003. The remaining debt matures on
June 30, 2005 and the commitment from Counsel to fund us also terminates on
June 30, 2005. Subsequent to June 30, 2005, should Counsel not extend its
commitment to provide us financial support, and in the event cash flow from
operations is insufficient to cover the maturing debt, we would be required
to restructure our debt with Counsel and/or further extend payments of
principal or interest or find alternative funding to replace the related
party debt and funding commitment. There can be no assurance that we will
be able to do so. If we are not, we may have to evaluate opportunities to
sell assets or obtain alternative financing with terms that are not
favourable to us. Even if we were able to do so, such restructuring may be
done on terms and conditions that are not favorable to the Company.  Our operations are dependent on leased telecommunications lines.  We use 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 we use. If any of these
suppliers were unable or unwilling to provide or expand their current
levels of service to us in the future, the services we offer our
subscribers would be affected. Although leased telecommunications lines are
available from several alternative suppliers, we might not be able to
obtain substitute services from other providers at reasonable or comparable
prices or in a timely fashion. Significant interruptions of our
telecommunications services might occur in the future, and we might not be
able to provide the level of service we currently offer. Changes in
tariffs, regulations, or policies by any of our telecommunications
providers might limit or eliminate our ability to continue to offer
long-distance service on commercially reasonable or profitable terms.  We are dependent upon the services of others for billing, collection and
network services.  We utilize the services of certain CLECs to bill and collect from customers
for a significant portion of our revenues. If the CLECs were
unwilling or unable to
provide such services in the future, we would be required to significantly
enhance our billing and collection capabilities in a short amount of time
and our collection experience could be adversely affected during this
transition period. If the CLECs were unable to remit payments received
from their customers relating to our billings, our operations and cash
position could be adversely affected. Management believes we have strong
business relationships with the CLECs.  We depend on certain large telecommunications carriers to provide network
services for significant portions of our telecommunications traffic. If
these carriers were unwilling or unable to provide such services in the future our
ability to provide services to our customers would be adversely affected
and we might not be able to obtain similar services from alternative
carriers on a timely basis. Management believes we have strong business
relationships with our important carriers.  We are a growing company that must attract new subscribers and minimize the
rate of customer attrition in an industry with larger and better
capitalized competitors.  We are 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; - our small size; and - a small market share. 26




---



##### 



All these factors might make us unable to compete with larger, older,
better capitalized businesses.  In order to increase our subscribers, we 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. Our ability to improve or
maintain operating margins will depend on the ability to retain and attract
new subscribers. While we continue to invest resources in the
telecommunications infrastructure, customer support resources, sales and
marketing expenses and subscriber acquisition costs, our future efforts
might not improve subscriber retention or acquisition.  We may not be able to utilize income tax loss carry forwards.  Restrictions in our 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 our
income tax loss carry forwards existing at a particular time. Any such
additional limitations could require us to pay income taxes in the future
and record an income tax expense to the extent of such liability.  We 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 we have 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 we have the opportunity to utilize reported tax loss carry forwards.  Acquisition of companies, products or technologies may result in
disruptions in business and diversion of management attention, adversely
impacting our business, results of operations and financial condition and
make period to period comparisons difficult.  Acquisitions of complementary companies, products or technologies which we
have recently made or which we may make in the future will require the
assimilation of the operations, products and personnel of the acquired
businesses and the training and motivation of these individuals.
Acquisitions may therefore cause disruptions in operations and divert
managements attention from day to day operations, which could impair our
relationships with current employees, customers and strategic partners.
Although we currently have no understandings, commitments or agreements
with respect to any additional acquisitions, any such acquisitions may be
accompanied by the risks commonly encountered in such transactions. We may
also have to, or choose to, incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities for an
acquisition could be substantially dilutive to our stockholders holdings.
In addition, our profitability may suffer because of such
acquisition-related costs or amortization costs for acquired goodwill and
other intangible assets. Our inability to address such risks or fulfill
expectations regarding revenues from acquired businesses, products and
technologies could have a material adverse effect on our business,
operating results and financial condition. We have completed several
acquisitions over the past three years and may complete acquisitions in the
future which make it difficult to compare our financial results on a period
to period basis.  We must be able to develop and implement an expansion strategy and manage
our growth.  Our ability to develop and implement an expansion strategy, manage the same
and respond to growth will be critical to our success. To accomplish our
growth strategy, we will be required to invest additional capital and
resources and expand our geographic markets. We cannot assure you that we
will be successful in developing, implementing or managing any such growth
strategies. If we are successful in our growth strategy, there will be
additional demands on our customer support, marketing, administrative and
other resources. There can be no assurance we will be able to manage
expanding operations effectively or that we will be able to maintain or
accelerate our rate of growth.  We face risks inherent in new product and service offerings as well as new
markets.  From time to time we introduce new products and services or expand our
previous product and service offerings to our existing and target markets.
For instance, in the fourth quarter of 2003 we announced the introduction
of local exchange service under the terms of the Unbundled Network Element
Platform authorized by the 1996 Act (for further discussion of the 1996
Act, see the heading Government Regulation in Item 1 entitled, Business).
Our 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 we believe we can
successfully differentiate our product and service offerings from others in
the marketplace, we 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 we will be successful in adding products or
services or expanding into new markets or that our administrative,
operational, infrastructure and financial resources and systems will be
adequate to accommodate such offerings or expansion. 27




---



##### 



We are dependent upon the services of independent agents.  Our market penetration primarily reflects the marketing, sales and customer
service activities of our independent agents, who market our products and
services on a commission basis. The use of these agents exposes us to
significant risks, including the fact that we depend on the continued
viability, loyalty and financial stability of our agents. Our future
success depends in large part on our ability to recruit, maintain and
motivate our agents. We are subject to competition in the recruiting of
agents from other organizations that use the 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 our agents and our relationship with our
agents, we cannot predict when or to what extent we will be able to
continue to recruit, maintain and motivate agents effectively, nor can we
predict the difficulties or costs associated with terminating any of our
agency relationships.  We are reliant on our enterprise billing solution.  We rely on an enterprise billing solution to bill customers. If that
technology fails to operate as expected, there is a risk that revenue could
be lost or customers could be billed incorrectly.  Our principal stockholder has voting control over the Company.  As of December 31, 2003, Counsel owned over 90% of our outstanding common
stock. As a result, Counsel controls all matters requiring approval by the
stockholders including the election of the Board of Directors and
significant corporate transactions. The Board of Directors establishes
corporate policies and has the sole authority to nominate and elect our
officers to carry out those policies. The control by Counsel could delay
or prevent a change in control of Acceris, impede a merger, consolidation,
takeover or other business combination involving Acceris and discourage a
potential acquirer from making a tender offer or otherwise attempting to
obtain control of Acceris. Other stockholders therefore will have limited
participation in our affairs.  Our future performance relies on attracting and retaining key employees.  We have certain employees that we consider to be key. Many of these
employees are involved in executing the strategy that will impact our
planned results. If these key employees cease to be employed with us,
planned results could be delayed or might not materialize. We mitigate this
risk through the use of employment contracts, the formalization of our
strategy and business plans and by ensuring the existence of timely
knowledge exchange and collaboration.  Our Board of Directors may issue additional shares of preferred stock
without stockholder approval.  Our Articles of Incorporation authorize the issuance of up to
10,000,000 shares of preferred stock, $10.00 par value per share. The Board of
Directors is authorized to determine the rights and preferences of any
additional series or class of preferred stock. The Board of Directors may,
without stockholder approval, issue shares of preferred stock with
dividend, liquidation, conversion, voting or other rights which are senior
to our shares of common stock or which could adversely affect the voting
power or other rights of the existing holders of outstanding shares of preferred
stock or common stock. The issuance of additional shares of preferred
stock may also hamper or discourage an acquisition or change in control of
Acceris.  We are subject to litigation.  We, from time to time, are involved in various claims, legal proceedings
and complaints arising in the ordinary course of business. We are not aware
of any pending or threatened proceedings that would have a material adverse
effect on our consolidated financial condition or future results.  We may be unable to maintain adequate insurance coverage.  We maintain insurance that includes liability coverage to protect us from
claims made against us. Recent events have made liability insurance more
expensive while at the same time reducing the scope of coverage. Our
ability to maintain adequate insurance coverage at a reasonable cost may be
impacted by market conditions beyond our control.  We have not declared any dividends on our common stock to date and have no
intention of doing so in the foreseeable future.  The payment of cash dividends on our common stock rests within the
discretion of our Board of Directors and will depend, among other things,
upon our earnings, unencumbered cash, capital requirements and our
financial condition, as well as other relevant factors. Payments of
dividends on our outstanding shares of preferred stock must be paid prior
to the payment of dividends on our common stock. We do not anticipate
making any cash distributions on the common stock in the foreseeable future
and investors in our common stock cannot rely on dividend income therefrom.
Further, the terms of our operating subsidiarys revolving line of credit
restricts the distribution to or payment of dividends to us. 28




---



##### 



We may fail to adequately protect our proprietary technology and processes,
which would allow competitors to take advantage of our development efforts.  We own four patents and have several patent applications on file. The value of
these patents has yet to be determined. If we fail to obtain or maintain
adequate protections, we may not be able to prevent third parties from
using our proprietary rights. Any currently pending or future patent
applications may not result in issued patents. In addition, any issued
patents may not have priority over any patent applications of others or may
not contain claims sufficiently broad to protect us against third parties
with similar technologies, products or processes. We also rely upon trade
secrets, proprietary know-how and continuing technological innovation to
remain competitive. We protect this information with reasonable security
measures, including the use of confidentiality agreements with our
employees, consultants and corporate collaborators. It is possible that
these individuals will breach these agreements and that any remedies for a
breach will be insufficient to allow us to recover our costs. Furthermore,
our trade secrets, know-how and other technology may otherwise become known
or be independently discovered by our competitors. Industry Risks  The telecommunications industry in which we operate is subject to
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
our results of operations. Most of our current operations are subject to
regulation by the FCC under the Communications Act of 1934. In addition,
certain of our operations are subject to regulation by state public utility
or public service commissions. Changes in the regulation of, or the
enactment or changes in interpretation of legislation affecting us could
damage our operations and lower the price of our common stock.  The 1996 Act, among other things, allows the Regional Bell
Operating Companies (RBOC) and others to enter the long-distance
business. Entry of the RBOCs or other entities, such as electric utilities
and cable television companies, into the long-distance business may have a
negative impact on our business or our customers. We anticipate 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 our operations, which could have a negative
effect on the price of our common stock. In addition, the
1996 Act provides that state proceedings may in certain
instances determine access charges we are required to pay to the local
exchange carriers. If these proceedings occur, rates could increase which
could lead to a loss of customers, weaker operating results and lower the
price of our common stock.  Recent legislation in the United States (including the Sarbanes-Oxley Act
of 2002) is increasing the scope and cost of work provided to us by our
independent auditors and legal advisors. Many guidelines have not yet been
finalized and there is a risk that we will incur significant costs in the
future to comply with legislative requirements, thereby reducing
profitability.  We must continue to have up to date technology and be attentive to general
economic trends to compete in the communications services industry.  The market for telecommunications services is extremely competitive. To be
competitive and meet changing customer requirements, we must be attentive
to rapidly changing technology, evolving industry standards, emerging
competition and frequent new software and service introductions.  We believe that our ability to compete successfully will depend upon a
number of factors including, but not limited to: the pricing policies of our competitors and suppliers; the capacity, reliability, availability and security of our
real-time IP network; the publics recognition of our name and products; the timing of our introductions of new products and services; our ease of access to and navigation of the Internet or other types
of data communication networks; our ability in the future to support existing and emerging industry
standards; our ability to balance network demand with the fixed expenses
associated with network capacity; and our ability to deal with trends toward increasing wireless and
decreasing wire line usage.  Many companies offer business communications services and compete with us
at some level. These range from large telecommunications carriers such as AT&T, MCI, WorldCom and Sprint, to smaller, regional
resellers of telephone line access. These companies, as well as
others, including manufacturers of hardware and software used in the business
communications industry, could in the future develop products and services
that may directly compete with ours. These entities are far better
capitalized than us and enjoy a significant market share in their industry
segments. These entities also enjoy certain competitive advantages such as
extensive nationwide networks, name recognition, operating histories and
substantial advertising resources. 29




---



##### 



Our technology- related service revenues are derived from the licensing of
our proprietary technology. New technologies may emerge that would make
our product offering obsolete. This would require the pursuit of
technological advances which would require substantial time and expense and
may not succeed in adapting our technology offering to new or alternate
technologies. In addition, there may be other companies attempting to
introduce products similar to those we offer or plan to offer for the
transmission of information over the Internet. We might not be able to
successfully compete with these market participants.  The telecommunications market is volatile.  During the last several years, the telecommunications industry has been
very volatile as a result of overcapacity, which has led to price erosion
and bankruptcies. If we 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 we earn may decrease significantly. Both
scenarios could result in us not meeting profitability targets.  Terrorist attacks or acts of war may seriously harm our business.  Terrorist attacks or acts of war may cause damage or disruption to our
operations, employees, facilities and our customers, which could
significantly impact our 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 have a material
adverse effect on our 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 also have a material adverse effect on our business, results of
operations and financial condition in ways that management currently cannot
predict. Critical Accounting Estimates Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principals generally accepted in the
United States (GAAP). The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to intangible assets, contingencies, collectibility of
receivables and litigation. Management bases its estimates and judgments on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. This discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes thereto included in Item 15 of this
report. To aid in the understanding of our financial reporting, our most
critical accounting policies are described below. These policies have the
potential to have a more significant impact on our financial statements, either
because of the significance of the financial statement item to which they
relate, or because they require judgment and estimation due to the uncertainty
involved in measuring, at a specific point in time, events which are continuous
in nature. We have identified our most critical accounting estimates to be the
following: Revenue recognition: Telecommunications
- We recognize revenue for telecommunications services
when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, our price to the customer is fixed and
determinable and collection of the resulting receivable is reasonably assured.
Revenue is derived from telecommunications usage based on minutes of use.
Revenue derived from usage is recognized as services are provided,
based upon agreed usage rates and is net of estimated bad debts, customer credits and
billing errors, which are recorded at the same time the corresponding revenue
is recognized. Revenue for a period is calculated from information received
through our network switches. Bad debts, customer credits and billing errors
are significant estimates made by management based on a number of factors
including historical experience and current trends. See below for further
discussion of our provision for bad debt. Revenues from billings for services
rendered where collectibility is not assured are recognized when the final cash
collections to be retained by the Company are finalized. Network
service offering - We began to sell a network service offering in
November 2002, which we subsequently ceased selling in July 2003. We
determined that collectibility of the amounts billed to customers was not
reasonably assured at the time of billing. Under our agreements with the LECs,
cash collections remitted to us are subject to adjustment, generally over
several months. Accordingly, we recognize revenue when the actual cash
collections to be retained by us 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, we had approximately $4,621
in cash receipts that were still subject to adjustment by the LECs and
therefore encumbered. This amount is included in deferred revenue at December
31, 2003. We expect that a portion of these amounts will become unencumbered
during 2004, and we will record revenues at such time that we finalize cash
collection amounts with the LECs. 30




---



##### 



Technologies
- Revenue from the sale of software licenses is recognized
when a non-cancelable 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 our technology requires our
continued support or involvement, contract revenues are spread over the period
of the required support or involvement. Telecommunications network costs: Costs associated with carrying telecommunications traffic over our network
and over leased lines are expensed when incurred, based on invoices received
from the service providers. If invoices are not available in a timely fashion,
estimates are utilized to accrue for these telecommunications network costs.
These estimates are based on the understanding of variable and fixed costs in
our service agreements with these vendors in conjunction with the traffic
volumes that has passed over the network and circuits provisioned at the
contracted rates. Traffic volumes for a period are calculated from information
received through our network switches. From time to time, we have disputes
with our vendors relating to telecommunications network services provided and
invoiced to us. In the event of such disputes, we record an expense based on
our understanding of the agreement with that particular vendor, traffic
information received from our network switches and other factors. Provision for doubtful accounts: Allowances for doubtful accounts are maintained for estimated losses
resulting from the failure of customers to make required payments on their
accounts. We evaluate our provision for doubtful accounts at least quarterly
based on various factors, including the financial condition and payment history
of major customers and an overall review of collections experience on other
accounts and economic factors or events expected to affect our future
collections experience. Due to the large number of customers that we serve, it
is impractical to review the creditworthiness of each of our customers,
although a credit review is performed for larger carrier and retail business
customers. We consider a number of factors in determining the proper level of
the allowance, including historical collection experience, current economic
trends, the aging of the accounts receivable portfolio and changes in the
creditworthiness of our customers. Purchase accounting and intangible assets: We account for intangible assets in accordance with SFAS
No. 141, Business Combinations (SFAS 141) and
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). All
business combinations are accounted for using the purchase method and goodwill
and intangible assets with indefinite useful lives are not amortized, but are
tested for impairment at least annually. Intangible assets are
initially recorded based on estimates of fair value at the time of the
acquisition. We
assess the fair value of our segments for goodwill
impairment based upon a discounted cash flow methodology. If the
carrying amount of the segment assets exceed the estimated fair value
determined through the discounted cash flow analysis, goodwill impairment may
be present. We would measure the goodwill impairment loss based upon
the fair value of the underlying assets and liabilities of the segment,
including any unrecognized intangible assets and estimate the implied fair
value of goodwill. An impairment loss would be recognized to the extent that a
reporting units recorded goodwill exceeded the implied fair value of goodwill. We
performed our annual impairment test in the fourth quarters of
2003 and 2002. No impairment was present upon performing these tests.
We cannot predict the occurrence of certain events that might adversely
affect the reported value of goodwill. Such events may include, but are not
limited to, strategic decisions made in response to economic and competitive
conditions, the impact of the economic environment on our customer
base or a material negative change in its relationships with significant
customers. We regularly evaluate whether events or circumstances have occurred that
indicate the carrying value of our other amortizable intangible assets may not
be recoverable. When factors indicate the asset may not be recoverable, we
compare the related future net cash flows to the carrying value of the asset to
determine if impairment exists. If the expected future net cash flows are less
than carrying value, impairment is recognized to the extent that the carrying
value exceeds the fair value of the asset. Deferred tax asset: We perform a valuation on our deferred tax asset, which has been generated
by a history of net operating loss carryforwards, at least annually, and
determine the necessity for a valuation allowance. We evaluate which portion,
if any, will more likely than not be realized by offsetting future taxable
income. The determination of that allowance includes a projection of our
future taxable income, as well as consideration of any limitations that may
exist on our use of our net operating loss or credit carryforwards. Litigation: We are involved from time to time in various legal matters arising out of
our operations in the normal course of business. On a case by case basis, we
evaluate the likelihood of possible outcomes for this litigation. Based on
this evaluation, we determine whether a liability is appropriate.
If the likelihood of a negative outcome is probable, and the amount
is estimable, we account for the liability in the current period. A
change in the circumstances surrounding any current litigation could
have a material impact on the financial statements. 31




---



##### 



Recent Accounting Pronouncements See Note 4 to the Consolidated Financial Statements for a discussion of
recent accounting pronouncements and their impact on our financial statements. 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Our exposure to market risk is limited to interest rate sensitivity, which
is affected by changes in the general level of US interest rates. Our cash
equivalents are invested with high quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of the cash
equivalents, we believe that we are not subject to any material interest rate
risk as it relates to interest income. As to interest expense, we
have one debt instrument that has variable interest rates based on the prime rate of
interest. Assuming the debt amount on our asset-backed facility at December 31, 2003 were constant during the
next twelve-month period, the impact of a one percent increase in the prime
interest rate would be an increase in interest expense of approximately $122
for the next twelve-month period. However, the debt instrument is subject
to an interest rate floor of 6.0%, a one percent decrease in the prime interest
rate would have no impact on interest expense during the next twelve-month
period. We do not believe that we are subject to material market risk on our
fixed rate debt with Counsel in the near term. We did not have any foreign currency hedges or other derivative financial
instruments as of December 31, 2003. We do not enter into financial
instruments for trading or speculative purposes and do not currently utilize
derivative financial instruments. Our operations are conducted primarily in the
United States and as such are not subject to material foreign currency exchange
rate risk. 
 Item 8. Financial Statements and Supplementary Data. See Consolidated Financial Statements and supplementary data beginning on pages F-1 and S-1. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 
 Item 9A. Controls and Procedures. As of the end of the period covered by this annual report, the Company
carried out, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial
Officer (the Certifying Officers), an evaluation of the effectiveness of its
disclosure controls and procedures (as the term is defined under Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the Exchange Act)). Based on this evaluation, the Certifying
Officers have concluded that the Companys disclosure controls and procedures
were 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 Exchange Act, and
the rules and regulations promulgated thereunder. 32




---



##### 



In the Companys Form 10-Q for the quarter ended September 30, 2003, the
Certifying Officers of the Company concluded that a 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. The
Certifying Officers conclusion that the Companys disclosure controls
and procedures were not effective was based upon a determination that a
deficiency existed at the time of the evaluation in the Companys ability to
produce accurate financial information on a timely basis. Namely, the
Companys finance function experienced significant staff turnover, resulting in
the loss of process knowledge and the use of corporate finance staff to assist
in the preparation of the financial records. This resulted in delays in
completing the preparation of the financial statements on a timely basis. The
Company 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. The Companys efforts
to rectify this deficiency were completed by January 2004. The Companys
inability at that time to complete its financial statements on a timely basis
indicated to the Certifying Officers that the disclosure controls were not
effective. The Companys response timeline to the foregoing deficiency was as
follows: the material weakness was detected on or about October 31, 2003; the
Company commenced its efforts to address the deficiency on or about October 31,
2003; and it completed its remedial changes in controls and procedures in
January 2004. The Companys independent auditors have confirmed the Certifying
Officers conclusion relating to the period in question. Commencing in 2001, the Company 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. The reorganization referenced above was intended to increase back office
efficiency and effectiveness and to facilitate a more targeted approach to the
markets in which the Company competes. Those changes were also designed to
improve profitability and to centralize the Companys information processing
capabilities on a single informational platform to translate this effort into a
set of information control, processing and disclosure capabilities for the
Company and its Rule 13a-15 Certifying Officers. 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 on a
going-forward basis. However during 2002 and part of 2003, those changes
resulted in a number of disclosure control deficiencies.




---



##### 



In
conjunction with these operational changes a number of disclosure
control improvements occurred, which have enabled the Company to analyze and
review the accounts and reconciliations on a timely basis since the last of the
disclosure control deficiencies was identified. The most significant of the
disclosure control improvements were as follows:  
    
    Management has been reorganized to become more centralized and 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.
    
    Management implemented a number of corporate governance changes to
substantially achieve compliance levels of NASDAQ listed
organizations. These changes included (but were not limited to)
updates and revisions to the Enhanced Roles, Responsibilities, and
Practicesmemorandum for the companys Board of Directors, which
includes standing committee charters that reflect current and proposed
governance guidelines and clearly define the roles and
responsibilities of the board and its standing committees; and adoption of
a Code of Conduct for the companys employees; deployment of a
comprehensive disclosure policy to all employees.
    
    The finance function has been reorganized into a single group at a
single location in Pittsburgh, PA.
    
    The accounting and reporting staff have been upgraded to reflect the
growing complexity of the business and to address previous financial
reporting deficiencies at the Company.
    
    Management implemented a new enterprise-wide accounting and reporting
system in January 2004. Specifically, the Company implemented a new
general ledger, new accounts payable and capital asset systems, as
well as a new chart of accounts on a company-wide basis. The
foregoing changes took effect on January 1, 2004. In March 2004, the
Company completed an interface from its payroll system into the
general ledger system.
    
    Management consolidated various billing systems, and expects to make
further billing platform consolidations in 2004 and 2005. Processes
around these billing system changes have and will continue to be
modified as the billing function becomes more unified. In connection with the filing of the Companys Form 10-Q for the quarter
ended June 30, 2004, the Company carried out, under the supervision of
and with the participation of the Companys management, including the Companys
Certifying
Officers, an evaluation of the effectiveness of its disclosure controls and
procedures (as the term is defined under Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as those controls existed as of June 30,
2004, the end of the period covered by the subject quarterly report. Based on this evaluation, the
Certifying Officers concluded that the Companys disclosure controls and procedures were not
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 Exchange Act, and
the rules and regulations promulgated thereunder. This deficiency constitutes
a material weakness, and detailed below are the facts surrounding this matter. On September 20, 2004, management of the Company concluded that the
requirements of Emerging Issues Task Force Issue No. 00-27 (EITF 00-27),
regarding the accounting for Beneficial Conversion Features (BCF) present on
convertible debt and preferred stock instruments had not been properly applied
in current and prior years to its convertible debentures issued in March 2001.
While the initial accounting for the BCF at the time of the issuance of the
debentures was correct, the Company failed to remeasure the BCF as required by
EITF 00-27 when at subsequent dates the number of shares and effective
conversion prices changes as the result of the debentures anti-dilution
provisions. These anti-dilution events and their respective impacts on the
number of shares and the conversion price were disclosed in the Companys
previous public filings. However, under EITF 00-27 the BCF should also have
been remeasured at the date of each anti-dilution event. Additionally, the
debentures called for the addition of accruing interest to the debentures, as a
result of which such accruing interest is deemed to have been paid in kind
(PIK) and the Company failed, as required by EITF 00-27, to measure the BCF
upon the deemed issuance of the PIK convertible debentures. This matter was raised by the Companys recently appointed independent
auditors, BDO Seidman, LLP (BDO), in the course of their review of the
Companys prior public filings. After discussions among the Companys
management, BDO, and the Companys prior auditors, PricewaterhouseCoopers, LLP
(PwC), the Companys management concluded that a correction of the prior
accounting on this matter was required. The Companys management brought the
matter for consideration before the Audit Committee and the full Board of
Directors of the Company. Having considered the circumstances underlying the
accounting errors and their effects upon the Companys prior filings, and
having discussed the matter with the BDO and PwC representatives as well as the
Companys management, the Audit Committee concluded that the previously issued
financial statements should not be relied upon and approved and authorized the
Companys management to amend certain previously filed public reports. Additionally, management and the Audit Committee considered what changes,
if any, were necessary to the Companys disclosure controls and procedures to
ensure that the errors described above would not reoccur and to provide 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 Exchange Act, and the rules and regulations promulgated
thereunder. In its review the Audit Committee noted that the errors described
above (i) related principally to periods that preceded changes the Company has
already made to consolidate and upgrade its accounting staff and function, and
(ii) that the errors described above did not result from the failure of the
Companys disclosure controls and procedures to make known to the appropriate
officials and auditors the facts concerning the Companys convertible
debentures or the occurrence of the anti-dilution events. As a result
management and the Audit Committee determined that education and professional
development of accounting staff on the complications of EITF 00-27 and its
application would be sufficient to prevent a reoccurrence. These educational
steps and development have been completed as of September 2004. No
additional changes to the Companys disclosure controls and procedures were
needed in response to the discovery of the errors described above.




---



##### 



PART III (All dollar amounts are presented in USD) 
 Item 10. Directors and Executive Officers of the Registrant. Acceris Articles of Incorporation, as amended, provide that the Board of
Directors shall be divided into three classes, and that the total number of
directors shall not be less than five and not more than nine. Each director
shall serve a term of three years. At its February 12, 2003 meeting, the Board
of Directors appointed Ms. Kelly D. Murumets to fill the vacancy created by the
resignation of Mr. Norman Chirite, a Class II director, and on March 23, 2004,
the Board appointed William H. Lomicka to fill a vacancy created by the
resignation of Mr. Albert Reichmann. Mr. Walter resigned his position on April
5, 2004 and as of the date of this filing, the vacancy left by Mr. Walter has
not been filled. As of April 5, 2004, the Board of Directors consists of
seven members: two Class I directors (Messrs. Shimer and Weintraub), three
Class II directors (Messrs. Toh, Heaton and Silber) and two Class III directors
(Messrs. Lomicka and Ms. Murumets). Messrs. Shimer and Weintraub, the Class I
directors, were elected at the November 2003 Annual Meeting of the Companys
stockholders. The following table sets forth the names, ages and positions with Acceris
of the persons who currently serve as our directors and executive officers.
There are no family relationships between any
present executive officers and directors. AgeName
    
    (1)
    
    TitleAllan C. Silber
    
    
    55
    
    
    Chairman of the Board of Directors and Chief Executive OfficerKelly D. Murumets
    
    
    40
    
    
    Director and PresidentHal B. Heaton
    
    
    53
    
    
    DirectorHenry Y.L. Toh
    
    
    46
    
    
    DirectorSamuel L. Shimer
    
    
    40
    
    
    DirectorWilliam H. Lomicka
    
    
    67
    
    
    DirectorStephen A. Weintraub
    
    
    56
    
    
    Director and Senior Vice President and SecretaryGary M. Clifford
    
    
    35
    
    
    Vice President of Finance and Chief Financial OfficerJames G. Ducay
    
    
    45
    
    
    Executive Vice President and Chief Operating OfficerKenneth L. Hilton
    
    
    51
    
    
    Executive Vice President, Sales and Marketing
  (1)
    
    As of April 5, 2004 Allan C. Silber, Chairman of the Board of Directors and Chief Executive
Officer. Mr. Silber was elected to the Board of Directors as a Class II
director in September 2001 and appointed as Chairman of the Board in November
2001. Mr. Silber is the chairman and CEO of Counsel Corporation, which he
founded in 1979. Mr. Silber attended McMaster University and received a
Bachelor of Science degree from the University of Toronto. Kelly D. Murumets, Director and President. Ms. Murumets became a Class
III director in February 2003. Ms. Murumets joined Counsel Corporation as
Executive Vice President in February 2002 and was appointed President of
Acceris in November 2003. Prior to joining Counsel and Acceris,
Ms. Murumets was a Vice President with Managerial Design where, during her
15-year tenure, 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 the 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. Hal B. Heaton, Director. Dr. Heaton was appointed by the Board of
Directors as a Class II director on June 14, 2000 to fill a board vacancy.
From 1982 to present he has been a professor of Finance at Brigham Young
University and between 1988 and 1990 was a visiting professor of Finance at
Harvard University. Dr. Heaton is a director of MITY Enterprises, Inc., a
publicly traded manufacturer of furniture in Orem, Utah. Dr. Heaton holds a
Bachelors degree in Computer Science/Mathematics and a Masters in Business
Administration from Brigham Young University, as well as a Masters degree in
Economics and a Ph.D. in Finance from Stanford University. Henry Y.L. Toh, Director. The Board of Directors elected Mr. Toh as a
Class II director and as Vice Chairman of the Board of Directors in April 1992.
Mr. Toh became President of Acceris in May 1993, Acting Chief Financial
Officer in September 1995 and Chairman of the Board in May 1996, and served as
such through September 1996. Mr. Toh serves as a director of: National Auto
Credit, Inc. (previously an originator of sub-prime automobile financing that
is transitioning into new lines of business) from 1998 through the present;
Teletouch Communications, Inc., a retail provider of Internet, cellular and
paging services, beginning in November 2001; and Isolagen, Inc., a
biotechnology company, since 2003. He is also a director of Four M
International Inc., a private investment firm. He is a graduate of Rice
University. 33




---



##### 



Samuel L. Shimer, Director. Mr. Shimer was appointed by the Board of
Directors as a Class I director on April 15, 2001 to fill a board vacancy and
was appointed Senior Vice President, Mergers & Acquisitions and Business
Development on February 12, 2003. From 1997 to February 2003 he was
employed by Counsel Corporation, serving as a Managing Director since 1998.
Mr. Shimer is currently serving as a director of Counsel Communications, the
parent of Acceris. From 1991 to 1997, Mr. Shimer worked at two merchant
banking funds affiliated with Lazard Frères & Co., Center Partners and
Corporate Partners, ultimately serving as a Principal. Mr. Shimer earned a
Bachelor of Science in Economics degree from The Wharton School of the
University of Pennsylvania, and a Masters of Business Administration degree
from Harvard Business School. Mr. Shimer terminated his employment with the
Company on February 27, 2004 to join Whitney & Co., an asset management company.  He remains a member of the Board. William
    H. Lomicka, Director. Mr. Lomicka was appointed by the Board of Directors
    as a Class III director on March 23, 2004 to fill a board vacancy
    left by the resignation of Mr. Albert Reichmann. Mr. Lomicka has been
    a director of Counsel since June 26, 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 the Wharton School of the University of Pennsylvania. Stephen A. Weintraub, Director and Senior Vice President and Secretary.
Mr. Weintraub was elected as a Class I director on
November 26, 2003, pursuant to a vote of the Companys stockholders. Mr.
Weintraub joined Counsel in June 1983 as Vice President, Finance and Chief
Financial Officer. He has been and is an officer and director of various
Counsel subsidiaries. He has been Secretary of Counsel since 1987 and Senior
Vice President since 1989. From 1980 to 1983 he was Secretary-Treasurer of
Pinetree Development Co. Limited, a private real estate developer and investor.
From 1975 to 1980 he was Treasurer and CFO of Unicorp Financial Corporation, a
public financial management and holding company. 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. Gary M. Clifford, Vice President of Finance and Chief Financial Officer. Mr.
Clifford joined Counsel Corporation in November 2002 as, and presently is, its
Chief Financial Officer. From June 1998 to October 2002, Mr. Clifford has held
various senior roles at Leitch Technology Corporation in Finance, Operations
and Corporate Development. From February 1996 to June 1998, Mr. Clifford
worked for NetStar Communications Inc. Mr. Clifford is a Chartered Accountant,
who articled with Coopers & Lybrand. A graduate of the University of Toronto,
with a Bachelors degree in Management, he has also lectured at Ryerson
Polytechnic University in Toronto, Canada. Mr. Clifford was appointed as Vice
President of Finance of Acceris on December 6, 2002 and Chief Financial Officer
on February 12, 2003. James G. Ducay, Executive Vice President and Chief Operating Officer. Mr.
Ducay was named Executive Vice President and Chief Operating Officer of Acceris
in October 2003. From December 2002 until October 2003, Mr. Ducay served as
President of the Companys Enterprise business. Previously, from April 2000 to
December 2002, Mr. Ducay was Executive Vice President and Chief Operating
Officer of RSL COM USA (RSL COM) with responsibility for Marketing, Sales and
Account Services, Engineering and Operations and Information Technology. RSL
COM filed for bankruptcy protection under Chapter 11 in March 2001. Before
joining RSL COM, Mr. Ducay was Vice President of Marketing and Sales for
Ameritech Interactive Media Services from February 1998 to April 2000 where he
was responsible for managing Ameritechs Internet products and related sales
channels. 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, Executive Vice President, Sales and Marketing. Mr.
Hilton was named Executive Vice President, Sales and Marketing of Acceris in
October 2003. Previously, he was appointed Chief Executive Officer of
WorldxChange Corporation in 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
resellers. Prior to Handtech.com, 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 the Chairman of the Board for Excel
Canada. Prior to his 5 years at Excel, he ran 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. His 14-year career with IBM included
sales, sales management, branch management and regional management positions. Each officer of Acceris is appointed by the Board of Directors and holds
his office at the pleasure and direction of the Board of Directors or until
such time of his/her resignation or death. There are no material proceedings to which any director, officer or
affiliate of Acceris, any owner of record or beneficially of more that five
percent of any class of voting securities of Acceris, or any associate of any
such director, officer, affiliate of Acceris or security holder is a party
adverse to Acceris or any of its subsidiaries or has a material interest
adverse to Acceris or any of its subsidiaries. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered
class of our equity
securities, to file reports of ownership and changes in ownership of equity
securities of Acceris with the SEC. Officers, directors, and greater than ten
percent stockholders are required by the SEC regulation to furnish us with
copies of all Section 16(a) forms that they file. 34




---



##### 



Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant
to Rule 16a-3 under the Exchange Act during our most recent fiscal year, to
Acceris knowledge, all reporting persons complied with all applicable filing
requirements of Section 16(a) of the Securities Exchange Act of 1934, as
amended, with the following exceptions: J. Ducay failed to
timely file a Form 4 in December 2003, with respect to one transaction.
K. Hilton failed to file a Form 4 in December 2003, with respect to
two transactions.
As of the date of this Annual Report,
the foregoing reporting persons have regained compliance with Section 16(a)
reporting requirements. The Board of Directors The Board of Directors oversees the business affairs of the Company and
monitors the performance of management. The Board of Directors held 5 meetings
during the fiscal year ended December 31, 2003. No incumbent director attended
less than 75% of the Board meetings during 2003. The Board of Directors has designated two standing committees: the Audit
Committee and the Compensation Committee. We do not have a nominating or a
corporate governance committee or any committees serving similar functions.
However, corporate governance functions are included in the Audit Committee
Charter. At the February 12, 2003 Board meeting, the Board of Directors
resolved to eliminate Acceris Finance Committee. Committees of the Board of Directors Audit Committee. On June 9, 2000, the Board of
Directors approved Acceris Audit Committee Charter, which was subsequently
revised and amended on July 10, 2001 and again on February 12, 2003 in order to
incorporate certain updates in light of the most recent regulatory
developments, including the Sarbanes-Oxley Act of 2002. A copy of the current
Audit Committee Charter was attached to the Companys Definitive Proxy
Statement filed in October 2003 in connection with the 2003 Annual Meeting of
Stockholders. The Audit Committee is responsible for making recommendations to
the Board of Directors concerning the selection and engagement of independent
auditors and for reviewing the scope of the annual audit, audit fees, results
of the audit and auditor independence. The Audit Committee also reviews and
discusses with management and the Board of Directors such matters as accounting
policies, internal accounting controls and procedures for preparation of
financial statements. Its membership is currently comprised of Mr. Heaton
(chairman) and Mr. Toh. The Audit Committee held 6 meetings during the last
fiscal year. Compensation Committee. The Compensation Committee
reviews and approves the compensation for executive employees. Its membership
is currently comprised of Messrs. Heaton, Toh and Lomicka. The Compensation
Committee held 1 meeting during the last fiscal year. Audit Committee Financial Expert The Board of Directors has determined that Mr. Henry Y.L. Toh, a member of
the Audit Committee, is an audit committee financial expert as defined by Item
401(h) of Regulation S-K under the Exchange Act and is independent within the
meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Code of Ethics Acceris has adopted a code of ethics that applies to its principal
executive, financial and accounting officers. The Acceris Communications Inc.,
Code of Conduct (the Code) is attached as Exhibit 14 hereto. A copy of the
Code can also be found on the Companys website at
http://www.acceris.com
(follow Corporate Governance link to Governance Documents tab). The Company
intends to satisfy the disclosure requirements under Item 10 of Form 8-K
regarding any amendments to, or waivers from, a provision of the Code that
applies to its principal executive, financial and accounting officers by
posting such information on its website at the website address set forth above. 35




---



##### 



Item 11. Executive Compensation. The following table sets forth the aggregate cash compensation paid for
services rendered during the last three years by each person serving as our
Chief Executive Officer during the last year and our other most highly
compensated executive officers during the year ended December 31, 2003 whose
compensation was in excess of $100,000 (Named Officers). Annual Compensation
    
    Long-Term CompensationAwards
    
    PayoutsOther
    
    Restricted
    
    SecuritiesName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    Stock
    
        Underlying
    
    LTIP
    
    All OtherPrincipal Position
    
    Year
    
    Salary($)
    
    Bonus($)
    
    Compensation($)
    
    Awards($)
    
    Options(#)
    
    Payouts($)
    
    Compensation($)Allan Silber(1)
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kenneth L. Hilton (2)
    
    
    2003
    
    
    $
    275,000
    
    
    $
    55,000
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    Executive
Vice President,
    
    
    2002
    
    
    
    183,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales and
Marketing
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Barbara Jamaleddin (3)
    
    
    2003
    
    
    $
    211,000
    
    
    $
    67,750
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    Senior Vice
President of
    
    
    2002
    
    
    
    205,500
    
    
    
    10,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Network Operations
    
    
    2001
    
    
    
    115,256
    
    
    
    7,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James G. Ducay (4)
    
    
    2003
    
    
    $
    275,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    Executive
Vice President,
    
    
    2002
    
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief
Operating Officer
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bobby Vannoy (5)
    
    
    2003
    
    
    $
    211,211
    
    
    $
    57,750
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    Senior Vice
President of
    
    
    2002
    
    
    
    205,705
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business Operations
    
    
    2001
    
    
    
    115,371
    
    
    
    7,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gary Wasserson (6)
    
    
    2003
    
    
    $
    420,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President (Acceris
    
    
    2002
    
    
    
    126,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Communications Technologies,
            Inc.)
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Samuel N. Shimer (7)
    
    
    2003
    
    
    $
    276,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice President,
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mergers and
Acquisitions and Business Development
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
      
      Mr. Silber was appointed interim Chief Executive Officer
        and President of Acceris as of December 19, 2002. In November 2003,
        Kelly D. Murumets was appointed President. Mr. Silber is entitled to an
        annual salary of $275,000 and a discretionary bonus equal to 100% of his
        base salary. For 2003, no bonus was awarded. Mr. Silber has elected
        to assign his salary payable at December 31, 2003 of $275,000 to
        Counsel. This amount is recorded as a liability to Counsel in the financial
        statements of Acceris at December 31, 2003.(2)
      
      Mr. Hilton became the Chief Executive Officer of WorldxChange
        on May 1, 2002.(3)
      
      Ms. Jamaleddin became a Senior Vice President of WorldxChange
        on June 4, 2001.(4)
      
      Mr. Ducay became the President of the Enterprise segment
        of Acceris on December 10, 2002.(5)
      
      Mr. Vannoy became a Senior Vice President of WorldxChange
          on June 4, 2001. Mr. Vannoy resigned from the Company in March
          2004.(6)
      
      Mr. Wasserson became the President of Acceris Communications
        Technoligies, Inc, a wholly owned subsidiary of the Company, in December 2002
        and served as such until December 31, 2003. Mr. Wassersons
        employment with the Company ceased as of December 31, 2003. Prior
        to December 2002, Mr. Wasserson was an employee of Counsel and
        was not paid a salary by Acceris.(7)
      
      Mr. Shimer became the Senior Vice President, Mergers
        and Acquisitions and Business Development beginning January 1, 2003.
        Prior to 2003, Mr. Shimer was an employee of Counsel and was not
        paid a salary by Acceris. In February 2004, Mr. Shimer resigned
        from employment with the Company, but remains a member of the Board of
        Directors. Option Grants in Last Fiscal Year (2003) The following table shows information about stock option grants to the
Named Officers during fiscal 2003. These options are included in the Summary
Compensation Table above. These gains are calculated assuming annual compound
stock price appreciation of 5% and 10% from the date the option was originally
granted to the end of the option term. The 5% and 10% assumed annual compound
rates of stock price appreciation are required by SEC rules, and are not the
Companys estimate or projection of future stock prices. 36




---



##### 



The following table sets forth certain information concerning grants of
stock options to each of the Named Officers during 2003: Individual GrantsNumber of
    
    Percent of Total
    
    
    
    
    
    Potential Realizable Value at AssumedSecurities
    
    Options
    
    
    
    
    
    Annual Rates Of Stock PriceUnderlying
    
    Granted to
    
    Exercise Of
    
    
    
    Appreciation For Option TermOptions
    
    Employees in
    
    Base PriceName
    
    Granted (#)
    
    Fiscal Year
    
    ($/Sh)
    
    Expiration Date
    
    5% ($)
    
    10% ($)Kenneth L. Hilton
    
    
    150,000
    
    
    
    11.6
    %
    
    $
    3.00
    
    
    December 20, 2013
    
    $
    283,003
    
    
    $
    717,184Barbara Jamaleddin
    
    
    30,000
    
    
    
    2.3
    %
    
    $
    3.00
    
    
    December 20, 2013
    
    $
    56,601
    
    
    $
    143,437James G. Ducay
    
    
    150,000
    
    
    
    11.6
    %
    
    $
    3.00
    
    
    December 20, 2013
    
    $
    283,003
    
    
    $
    717,184Bobby Vannoy
    
    
    30,000
    
    
    
    2.3
    %
    
    $
    3.00
    
    
    December 20, 2013
    
    $
    56,601
    
    
    $
    143,437Allan C. Silber
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gary Wasserson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Samuel N. Shimer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values: The following table shows information about the value realized on option
exercises for each of the Named Officers during fiscal 2003, and the value of
their unexercised options at the end of fiscal 2003. Value realized, or gain,
is measured as the difference between the exercise price and market value or
the price at which the shares were sold on the date of exercise. Number of Securities
    
    Value of Unexercised In-Underlying Unexercised
    
    The-Money Options AtOptions At Fiscal Year-
    
    Fiscal Year-End ($)Shares Acquired On
    
    
    
    
    
    End (#)
    
    Exercisable/UnexercisableName
    
    Exercise (#)
    
    Value Realized ($)
    
    Exercisable/Unexercisable
    
    (1)Allan C. Silber
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    Kenneth L. Hilton
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    150,000
    
    
    
    
    
    
    
    /
    
    
    
    Barbara Jamaleddin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    30,000
    
    
    
    
    
    
    
    /
    
    
    
    James G. Ducay
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    150,000
    
    
    
    
    
    
    
    /
    
    
    
    Bobby Vannoy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    30,000
    
    
    
    
    
    
    
    /
    
    
    
    Gary Wasserson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    Samuel N. Shimer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    
    
    
    
    
    
    
    
    /
    
    
    
    
 (1) None of the unexercised options above are in the money, based on the
closing price of the Companys common stock on December 31, 2003, which was
$2.18 per share. Director Compensation Each year subsequent
to 2002, all directors then serving who are not employed by Acceris or Counsel other than in their capacity
as directors are to receive an
option to purchase 1,000 shares of common stock and for each committee on which
the director serves, an option to purchase 250 shares of common stock. The
exercise price of such options is equal to the fair market value of the common
stock on the date of grant. The directors are also eligible to receive options
under our stock option plans at the discretion of the Board of Directors. No
discretionary stock options were awarded to directors during 2003. In addition, each independent director is compensated $1,000 for each
in-person board meeting attended and $500 for each telephonic board meeting
attended. During 2003, Messrs. Heaton and Walter received $18,000 and $7,000,
respectively, in connection with the services that they rendered and $1,181 and
$10,330, respectively, for reimbursement of expenses paid to attend various
meetings. Employment Contracts and Termination of Employment and Change-in-Control
Arrangements Kenneth L. Hilton Employment Contract.On May 1, 2002, Acceris and Kenneth L. Hilton entered into a four-year employment agreement pursuant to
which Mr. Hilton became the Chief Executive Officer of WorldxChange Corp.,
Acceris wholly-owned subsidiary. Mr. Hiltons annual salary is $275,000, and
he is eligible for a discretionary bonus in an amount to be determined by the
Board of Directors up to 100% of his annual salary.
Counsel Communications and Counsel 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. For additional disclosure of a loan to Mr. Hilton see Item 13. 37




---



##### 



James G. Ducay Employment Contract.On July 1, 2002, Acceris
and James G. Ducay each entered into an employment agreement, which became
effective on December 10, 2002, the date on which WorldxChange completed its
acquisition of the assets of RSL, and expires on December 10, 2003. Mr.
Ducays annual salary is $275,000, and he is eligible for a discretionary bonus
in an amount to be determined by the Board of Directors up to 100% of his annual salary. On January 1,
2004, Mr. Ducay entered into another employment agreement with the Company
which is effective until January 1, 2005, under substantially the same material
terms and provisions. Stock Option Plans At December 31, 2003, the Company has several stock-based employee
compensation plans. All share amounts disclosed below reflect the effect of
the 1-for-20 reverse stock split which was approved by the
stockholders on November 26, 2003. Director Stock Option Plan The Companys Director Stock Option Plan authorizes the grant of stock
options to directors of the Company. Options granted under the Director Stock Option Plan are
non-qualified stock options exercisable at a price equal to the fair market
value per share of common stock on the date of any such grant. Options granted
under the Director Stock Option Plan are exercisable not less than six months or more than ten years
after the date of grant. As of December 31, 2003, options for the purchase of 233 shares of common
stock at prices ranging from $17.50 to $77.50 per share were outstanding, all
of which are exercisable. In connection with the adoption of the 1995 Director
Plan, the Board of Directors authorized the termination of future grants of
options under the Director Stock Option Plan; however, outstanding options
will continue to be governed by the terms thereof until exercise or expiration
of such options. In 2003, no options were exercised or expired. 1995 Director Stock Option and Appreciation Rights Plan The 1995 Director Stock Option and Appreciation Rights Plan (the 1995
Director Plan) provides for the issuance of incentive stock options,
non-qualified stock options and stock appreciation rights (SARs) to directors
of the Company up to 12,500 shares of common stock (subject to adjustment in
the event of stock dividends, stock splits, and other similar events). The 1995 Director Plan also provides for the grant of non-qualified
options on a discretionary basis to each member of the Board of Directors then
serving to purchase 500 shares of common stock at an exercise price equal to
the fair market value per share of the common stock on that date. Each option
is immediately exercisable for a period of ten years from the date of grant.
The Company has 9,500 shares of common stock reserved for issuance under the
1995 Director Plan. As of December 31, 2003, options to purchase 8,500 shares
of common stock at prices ranging from $20.00 to $25.00 per share are
outstanding and exercisable. No options were granted or exercised under this
plan in 2003, 2002 or 2001. 1995 Employee Stock Option and Appreciation Rights Plan The 1995 Employee Stock Option and Appreciation Rights Plan (the 1995
Employee Plan) provides for the issuance of incentive stock options,
non-qualified stock options, and SARs. Directors of the Company are not
eligible to participate in the 1995 Employee Plan. The 1995 Employee Plan
provides for the grant of stock options which qualify as incentive stock
options under Section 422 of the Internal Revenue Code, to be issued to
officers who are employees and other employees, as well as non-qualified
options to be issued to officers, employees and consultants. In addition, SARs
may be granted in conjunction with the grant of incentive and non-qualified
options. The 1995 Employee Plan provides for the grant of incentive options,
non-qualified options and SARs of up to 20,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an incentive option or non-qualified option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any incentive option, non-qualified
option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares or both. The Company
has 20,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 2003, there were no options outstanding under the
1995 Employee Plan. During 2003, 2002 and 2001, options to purchase 6,763, 500
and 1,875, respectively, of common stock were forfeited or expired. No options
were granted or exercised in 2003 under the 1995 Employee Plan. 1997 Recruitment Stock Option Plan In October 2000, the stockholders of the Company approved an amendment of
the 1997 Recruitment Stock Option Plan (the 1997 Plan) which provides for the issuance of
incentive stock options, non-qualified stock options and SARs up to an
aggregate of 370,000 shares of common
stock (subject to adjustment in the event
of stock dividends, stock splits, and other similar events). The price at
which shares of common stock covered by the option can be purchased is
determined by the Companys Board of Directors; however, in all instances the
exercise price is never less than the fair market value of the Companys common
stock on the date the option is granted. 38




---



##### 



As of December 31, 2003, there were options to purchase 60,480 shares of
the Companys common stock outstanding under the 1997 Plan. The outstanding options vest over
three years at exercise prices of $1.40 to $127.50 per share. Options issued
under the 1997 Plan must be exercised within ten years of grant and can only be
exercised while the option holder is an employee of the Company. The Company
has not awarded any SARs under the 1997 Plan. During 2003, 2002 and 2001, options
to purchase 45,067, 42,968 and 130,022 shares of common stock, respectively,
were forfeited or expired. There were no exercises during 2003. 2000 Employee Stock Purchase Plan In October 2000, the stockholders of Acceris approved adoption of Acceris
2000 Employee Stock Purchase Plan which plan provides for the purchase and
issuance of common stock to all eligible employees (the Stock Purchase Plan). The purpose of the Stock Purchase Plan is to induce all eligible employees
of Acceris (or any of its subsidiaries) who have been employees for at least
three months to encourage stock ownership of Acceris by acquiring or increasing
their proprietary interest in Acceris. The Stock Purchase Plan is designed to
encourage employees to remain in the employ of Acceris. It is the intention of
Acceris to have the Stock Purchase Plan qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code,
as amended to issue shares of common stock to all eligible employees of
Acceris (or any of Acceris subsidiaries) who have been employees for at least
three months. The Stock Purchase Plan provides for the purchase of common stock in the
aggregate, up to 125,000 shares of common stock. As of December 31, 2003, 2,900
shares of common stock had been purchased under the Stock Purchase Plan. 2003 Stock Option and Appreciation Rights Plan In November 2003, the stockholders of the Company approved the 2003 Stock
Option and Appreciation Rights Plan (the 2003 Plan) which provides for the issuance of
incentive stock options, non-qualified stock options and SARs up to an
aggregate of 2,000,000 shares of common stock (subject to adjustment in the
event of stock dividends, stock splits, and other similar events). The price
at which shares of common stock covered by the option can be purchased is
determined by the Companys Board of Directors or its committee; however, in
the case of incentive stock options the exercise price shall not be less than
the fair market value of the Companys common stock on the date the option is
granted. There were stock options granted for 1,372,000 (and outstanding at
December 31, 2003) under the 2003 Plan in 2003. The outstanding options vest over
four years at an exercise price of $3.00 per share. No SARs have been issued
under the 2003 Plan . Compensation Committee Interlocks and Insider Participation Mr. Toh was formerly an officer of the Company, as described above. No
Compensation Committee members or other directors served as a member of the
compensation committee of another entity, whose executive officers
served as a director of Acceris. 39




---



##### 



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table shows, as of April 5, 2004, the common stock and any
preferred stock owned by each current director, Named Officer, other executive
officers, all executive officers and current directors a group and, to the best
of our knowledge, all other parties known to be beneficial owners of more than
5% of the common stock. As of the same date, there were 19,262,095 shares of
common stock and 619 shares of Class N preferred stock issued and outstanding.
The Class N preferred stock votes with the common stock on an as converted
basis estimated to be 24,760 shares as of April 5, 2004. Name and Address of Beneficial
    
    Number of Shares
    
    % of Common StockOwner (1)
    
    Beneficially Owned
    
    Beneficially Owned(2)Allan C. Silber
    
    
    0
    (3)
    
    
    *
    %Kelly D. Murumets
    
    
    0
    (4)
    
    
    *
    %Hal B. Heaton
    
    
    7,948
    (5)
    
    
    *
    %Henry Y.L. Toh
    
    
    18,575
    (6)
    
    
    *
    %William H. Lomicka
    
    
    0
    (7)
    
    
    *
    %Stephen A. Weintraub
    
    
    0
    (8)
    
    
    *
    %Samuel L. Shimer
    
    
    0
    (9)
    
    
    *
    %Gary J. Wasserson
    
    
    0
    (10)
    
    
    *
    %Gary M. Clifford
    
    
    0
    (11)
    
    
    *
    %James G. Ducay
    
    
    0
    (12)
    
    
    *
    %Kenneth L. Hilton
    
    
    1,000
    (12)
    
    
    *
    %Barbara Jamaleddin
    
    
    0
    (13)
    
    
    *
    %Bobby Vannoy
    
    
    0
    (14)
    
    
    *
    %Counsel Corporation 130 King Street
West, Exchange Tower, Suite 1300,
Toronto, Ontario M5X1E3
    
    
    20,052,228
    (15)
    
    
    92
    %All Executive Officers and Directors as
a Group (13 people)
    
    
    27,523
    
    
    
    *
    %
 *
    
    Indicates less than one percent(1)
    
    Unless otherwise noted, all listed shares of common stock are owned of record by each person or entity named as beneficial
owner and that person or entity has sole voting and dispositive power with respect to the shares of common stock owned by
each of them. All addresses are c/o Acceris Communications Inc. unless otherwise indicated.(2)
    
    As to each person or entity named as beneficial owners, that persons or entitys percentage of ownership is determined
based on the assumption that any options or convertible securities held by such person or entity which are exercisable or
convertible within 60 days have been exercised or converted, as the case may be.(3)
    
    Mr. Silber is the Chairman, Chief Executive Officer and a beneficial owner of approximately 4,631,361 shares in Counsel,
which represents beneficial ownership of 9.5%. Mr. Silber was appointed Chief Executive Officer and Interim President of
Acceris in December 2002 and served as such until November 2003
when the Board
appointed Ms. Murumets to succeed Mr. Silber. Mr. Silber disclaims beneficial
ownership of the shares of Acceris common stock beneficially owned by Counsel.(4)
    
    Ms. Murumets is Executive Vice President of Counsel and a beneficial owner of approximately 280,000 shares in Counsel,
which represents beneficial ownership of less than 1%. At the December 6, 2002 meeting of the Board of Directors of
Acceris, Ms. Murumets was appointed to the office of Executive Vice President of Acceris. At the February 12, 2003 meeting
of the Board of Directors of Acceris, Ms. Murumets was appointed a director of Acceris. At the November 26, 2003 meeting
of the Board of Directors of Acceris, Ms. Murumets was appointed President of Acceris. Ms. Murumets disclaims beneficial
ownership of the shares of Acceris common stock beneficially owned by Counsel.(5)
    
    Represents shares of common stock issuable pursuant to options.(6)
    
    Represents shares of common stock issuable pursuant to options. Does not include shares held of record by Four M
International, Ltd., of which Mr. Toh is a director. Mr. Toh disclaims any beneficial ownership of such shares.(7)
    
    Mr. Lomicka is a director of Counsel and a beneficial owner of approximately 46,700 shares in Counsel, which represents
beneficial ownership of less than 1%. Mr. Lomicka disclaims beneficial ownerships of the shares of Acceris common stock
beneficially owned by Counsel.(8)
    
    Mr. Weintraub is Senior Vice President and Secretary of Counsel and a beneficial owner of approximately 306,102 shares in
Counsel, which represents beneficial ownership of less than 1%. At the December 6, 2002 meeting of the Board of Directors
of Acceris, Mr. Weintraub was appointed to the office of Senior Vice President and Secretary of Acceris. At the November
26, 2003 meeting of the Stockholders of Acceris, Mr. Weintraub was elected director of Acceris. Mr. Weintraub
disclaims beneficial ownership of the shares of Acceris common stock beneficially owned by Counsel.
 40




---



##### 



(9)
    
    Mr. Shimer is not an employee at April 5, 2004, however he is a member of the Board of Directors. He was previously a
managing director of Counsel. He is a beneficial owner of approximately 819,011 shares in Counsel, which
represents beneficial ownership of 1.7%.(10)
    
    Mr. Wasserson is not an employee or director of Acceris as of April 5, 2004. He was previously a managing director of Counsel and
currently is a beneficial owner of approximately 330,000 shares in Counsel, which represents beneficial ownership of less
than 1%.(11)
    
    Mr. Clifford is the Chief Financial Officer of Counsel. He is a beneficial owner of approximately 45,000 shares in
Counsel, which represents beneficial ownership of less than 1%. At the December 6, 2002 meeting of the Board of Directors of
Acceris, Mr. Clifford was appointed Vice President of Finance of Acceris. At the February 16, 2003 meeting of the Board
of Directors of Acceris, Mr. Clifford was appointed Chief Financial Officer of Acceris. Mr. Clifford disclaims beneficial
ownership of the shares of Acceris common stock beneficially owned by Counsel.(12)
    
    Does not include options to purchase 150,000 shares of common stock granted on December 20, 2003.(13)
    
    Does not include options to purchase 30,000 shares of common stock granted on December 20, 2003.(14)
    
    Mr. Vannoy is not an employee of Acceris at April 5, 2004, and does not beneficially own any shares of Acceris common
stock.(15)
    
    Includes 3,098,303 shares of Acceris common stock issued upon conversion of Series M and N redeemable preferred stock in
March 2001 which were obtained from Winter Harbor LLC (Winter Harbor) on March 7, 2001, based on information included in
a Schedule 13D filed by Counsel on March 13, 2001 and amended by Counsel and filed with the SEC on May 2, 2001. Also
includes 2,534,959 shares of Acceris common stock issuable upon conversion of a convertible promissory note in the
principal amount (and including accrued interest) of approximately $15,590,000 as of April 5, 2004, at the conversion
price of $6.15 per share, under the terms of the Senior Convertible Loan and Security Agreement, dated March 1, 2001, as
amended on May 8, 2001 (Loan Agreement). Also includes 871,724 shares of Acceris common stock issued on April 17, 2001 to
Counsel under the terms of the Agreement and Plan of Merger, dated April 17, 2001. Also includes 8,681,096 shares of
Acceris common stock issued in connection with the Amended Debt Restructuring conversion of a certain convertible promissory note on November 30, 2003. Also
includes approximately 4,747,396 shares of Acceris common stock issued in connection with the conversion of a certain convertible promissory note on November 30, 2003. Also includes 118,750 shares received from Winter Harbor which were previously held in
escrow in accordance with the terms and provisions of a certain Securities Purchase Agreement by and between Counsel and
Winter Harbor dated March 1, 2001, and released to Counsel in accordance with the terms and provisions of certain release
agreement between Counsel and Winter Harbor dated August 29, 2003.
 Securities Authorized
for Issuance Under Equity Compensation Plans The following table sets forth, as of December 31, 2003 information with
respect to equity compensation plans (including individual compensation
arrangements) under which the Companys securities are authorized for issuance. Number of securitiesremaining availablefor future issuanceunder equityNumber of securities to
    
    Weighted-average
    
    compensation plansbe issued upon exercise
    
    exercise price of
    
    (excluding securitiesof outstanding options,
    
    outstanding options,
    
    reflected in columnPlan category
    
    warrants and rights
    
    warrants and rights
    
    (a))(a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holders:2003 Stock Option and Appreciation Rights Plan
    
    
    1,372,000
    
    
    $
    3.00
    
    
    
    628,0001997 Recruitment Stock Option Plan
    
    
    60,480
    
    
        
    42.30
    
    
    
    288,9421995 Directors Stock Option and Appreciation
Rights Plan
    
    
    8,500
    
    
        
    22.50
    
    
    
    1,0001995 Employee Stock Option and Appreciation
Rights Plan
    
    
    
    
    
    
    
    
    
    
    14,037Director Stock Option Plan
    
    
    233
    
    
        
    47.50
    
    
    
    Equity compensation plans not approved by
security holders:Issuance of non-qualified options to
employees and outside consultants (1)
    
    
    366,667
    
    
        
    70.99
    
    
    
    Total (2)
    
    
    1,807,880
    
    
    $
    18.20
    
    
    
    931,979
   (1)
    
    For a description of the material terms of these
options, see Note 18 to the Consolidated Financial Statements
provided in Item 15 hereto.(2)
    
    Does not include the Acceris Communications Inc. Platinum Agent Program
(the Agent Warrant Program), which awards warrants to
certain of the Companys agents based on performance criteria. This program
did not commence until 2004, and as of the date of this filing, warrants to
purchase approximately 225,000 shares of common stock have been issued under
the Agent Warrant Program. Warrants to purchase up to 1,000,000 shares are
available for issuance under the Agent Warrant Program. 41




---



##### 



Item 13. Certain Relationships and Related Transactions. Transactions with Management and Others See Item 11 hereof for descriptions of the terms of employment, consulting
and other agreements between the Company and certain officers, directors and
other related parties. Additionally, in June 2002, the Company made a
relocation loan of $100,000 (non-interest bearing) to Mr. Hilton. The loan is
due on the earlier of June 2007 or upon sale of his former residence. While
the loan is outstanding, payments are required, equal to 20% of any incentive
awards (after the first $50,000) paid to Mr. Hilton. As of December 31, 2003,
no payments on the loan had been made. Transactions with Counsel
(all amounts are in thousands, except share and per share amounts) Initial Acquisition of Acceris and Senior Convertible Loan On March 1, 2001, Acceris entered into a Senior Convertible Loan and
Security Agreement, (the Senior Loan Agreement) with Counsel. Pursuant to
the terms and provisions of the Senior Loan Agreement, Counsel agreed to make
periodic loans to Acceris in the aggregate principal amount not to exceed
$10,000, which was subsequently increased to $12,000 through amendment on May
8, 2001. Advances against the Senior Loan Agreement were structured as a 3-year
convertible note with interest at 9% per annum, compounded quarterly. Counsel
initially could convert the loan into shares of common stock of Acceris at a
conversion price of $11.20 per common share. The terms of the Senior Loan
Agreement also provide that at any time after September 1, 2002, the
outstanding debt including accrued interest will automatically be converted
into common stock using the then current conversion rate, on the first date
that is the twentieth consecutive trading day that the common stock has closed
at a price per share that is equal to or greater than $20.00 per share. The
Senior Loan Agreement also provides that the conversion price is in certain
cases subject to adjustment and includes traditional anti-dilution protection
for the lender and is subject to certain events of default, which may
accelerate the repayment of principal plus accrued interest. Total proceeds
available to the Company were $12,000, less debt issuance costs of $600, which
are being amortized over three years. The Senior Loan Agreement has been
amended several times and the maturity date of the loan plus accrued interest
has been extended to June 30, 2005. As a result of the application of the
anti-dilution provisions of the Senior Loan Agreement, the conversion price has
been adjusted to $6.15 per common share. As of December 31, 2003, the total
outstanding debt under the Note (including principal and accrued interest) was
$15,291 which is convertible into approximately 2,486,299 shares of common
stock. In connection with the above Senior Loan Agreement, Acceris granted
Counsel a security interest in all of Acceris assets owned at the time of
execution of the Senior Loan Agreement or subsequently acquired, including but
not limited to Acceris accounts receivable, intangibles, inventory, equipment,
books and records, and negotiable instruments held by the Company
(collectively, the Collateral). In addition to the foregoing agreements, Acceris and Counsel executed a
Securities Support Agreement, dated March 1, 2001 (the Support Agreement) for
the purpose of providing certain representations and commitments by Acceris to
Counsel, including demand registration rights for common stock issuable upon
conversion of the related loan. Counsel relied on these representations and
commitments in its decision to enter a separate agreement (the Securities
Purchase Agreement) with Winter Harbor and First Media L.P., a limited
partnership and the parent company of Winter Harbor (collectively the Winter
Harbor Parties), Counsel agreed to purchase from the Winter Harbor Parties all
of their equity securities in Acceris, including shares of Class M and Class N
preferred stock of Acceris, beneficially owned by the Winter Harbor Parties for
aggregate consideration of $5,000 in cash. On March 7, 2001, as part of the agreements discussed above, Counsel
converted all of the Class M and N convertible preferred stock it obtained from
Winter Harbor into 3,098,303 shares of Acceris common stock. The Class N
shares were converted at $25.00 per common share and Class M at $11.20 per
common share, in accordance with their respective conversion rights. Pursuant
to the Securities Purchase Agreement, certain shares of common stock owned by
the Winter Harbor Parties were held in escrow pending resolution of certain
events. Under the Support Agreement of March 1, 2001, Acceris also agreed to
engage appropriate advisors and proceed to take all steps necessary to merge
Nexbell Communications, Inc. (a subsidiary of Counsel) into Acceris. The
merger was completed on April 17, 2001 and Counsel received 871,724 shares of
common stock in Acceris as consideration. Assignment of Winter Harbor Common Stock and Debt Interests Pursuant to the terms of a settlement between Counsel and the Winter
Harbor Parties effective August 29, 2003, the Winter Harbor Parties
relinquished their right to 118,750 shares of the common stock of Acceris to
Counsel. These shares were released from escrow and
delivered to Counsel. 42




---



##### 



The Winter Harbor Parties further assigned to Counsel all of their rights
with respect to a note payable by Acceris of $1,999 drawn down pursuant to a
Letter of Credit issued November 3, 1998 to secure certain obligations of
Acceris together with any accrued interest thereon. The assigned amount
together with accrued interest amounted to $2,577 on August 29, 2003. As a
result of the settlement and assignment, Acceris entered into a new loan
agreement with Counsel the terms of which provide that from August 29, 2003 the
loan balance of $2,577 shall bear interest at 10% per annum compounded
quarterly with the aggregate balance of principal and accrued interest payable
on maturity of the loan on June 30, 2005. This loan agreement was subsequently
amended and restated to increase the principal of the loan by a further $100
for funding provided by Counsel to enable Acceris to acquire a VoIP patent in
December 2003 and to allow for the making of further periodic advances
thereunder at Counsels discretion. The loan amount has been further increased
by $1,546 at December 31, 2003 representing operating advances
from Counsel to Acceris in the period since the initial
acquisition of the Acceris common stock by Counsel in March 2001. As of
December 31, 2003, the total outstanding debt under the Note (including
principal and accrued interest) was $4,311. Loan and Security Agreement and Amended Debt Restructuring On June 6, 2001, Acceris and Counsel entered into a Loan and Security
Agreement (the Loan Agreement). Any funds advanced to Acceris between June
6, 2001 and April 15, 2002, (not to exceed $10,000) were governed by the Loan
Agreement and due on June 6, 2002. The loan was secured by all of the assets
of Acceris. As of December 31, 2001, advances under this loan agreement totaled
$10,000. On June 27, 2002 the Loan Agreement was amended to an amount of
$24,307, which included additional capital advances from Counsel to Acceris
made from December 31, 2001 through June 6, 2002. The amended agreement also further provided for additional advances as needed to Acceris, which
advances totaled $2,087 through December 31, 2002 and $650 through November 30,
2003. On July 25, 2002 Acceris and Counsel entered into a Debt Restructuring
Agreement (Debt Restructuring Agreement) which was amended on October 15,
2002 pursuant to an Amended and Restated Debt Restructuring Agreement (Amended
Agreement). The Amended Agreement included the following terms:  1.
    
    Principal ($24,307) and associated accrued interest ($2,284), as of
October 15, 2002, under the Loan Agreement, as amended, would be
exchanged for common stock of Acceris at $3.77 per share (representing
the average closing price of Acceris common stock during May 2002).2.
    
    Funding provided by Counsel pursuant to the Loan Agreement, as
amended, ($2,087) and associated accrued interest ($1,996) from October
15, 2002 to December 31, 2002, would be exchanged for common stock of
Acceris at $3.77 per share (representing the average closing price of
Acceris common stock during May 2002).3.
    
    Counsel would, (a) fund the operations of Acceris through June 30,
2005 and the operating cash flow deficit, if any, (b) advance to Acceris
all amounts paid or payable by Acceris to its stockholders that
exercised their dissenters rights in connection with the transactions
subject to the debt restructuring transactions and (c) advance the
amount of the annual premium to renew the existing directors and
officers insurance coverage through November 2003.4.
    
    Counsel would reimburse Acceris for all costs, fees and expenses, in
connection with the Debt Restructuring Agreement and the Amended
Agreement and transactions contemplated thereby including all expenses
incurred and yet to be incurred, including the Special Committees costs
to negotiate these agreements and costs related to obtaining stockholder
approval. During 2003 and 2002, Counsel reimbursed Acceris $132 and
$499, respectively, for certain reimbursable expenses, which have been
recorded as additional paid-in capital.5.
    
    The issuance of common stock by Acceris pursuant to this Agreement
would result in a weighted average conversion price adjustment pursuant
to the provisions of the March 1, 2002 Loan Agreement. Whereas the
conversion price for the March 1, 2002 Loan Agreement had initially been
$11.20, the new conversion price would be adjusted as a result of the
anti-dilution provisions of the Senior Loan Agreement. At December 31,
2003, the new conversion price is $6.15 per common share. Effective November 30, 2003, 8,681,096 shares of common stock were issued
to Counsel in settlement of the underlying debt and accrued interest totaling
$32,721 on the date of the conversion. Convertible Promissory Note to Fund RSL Acquisition In connection with the acquisition of certain assets of RSL in December 2002, Acceris issued
a $7,500 convertible note payable (the Convertible Note) to Counsel, bearing
interest at 10% per annum compounded quarterly which, as amended, matured on
June 30, 2005. The Convertible Note was convertible into common stock of
Acceris at a conversion rate of $1.68 per share. Effective November 30, 2003
Counsel exercised its right to convert the Convertible Note plus accrued
interest to that date totaling $7,952 into common stock of Acceris. This
resulted in the issuance of 4,747,396 shares of Acceris common stock. 43




---



##### 



Collateralized Promissory Note and Loan Agreement During the third quarter of 2003, Counsel advanced the sum of $5,600 to
Acceris evidenced by a promissory note effective October 1, 2003. In January
2004 Acceris and Counsel entered into a loan agreement and an amended and
restated promissory note pursuant to which an additional $2,000 was loaned to
Acceris and pursuant to which additional periodic loans may be made from time
to time (collectively and as amended, the Promissory Note). The Promissory
Note matures on June 30, 2005 and accrues interest at 10% per annum compounded
quarterly from the date funds are advanced. The Promissory Note is
collateralized by certain shares of Series B Convertible Preferred Stock (the
Preferred Stock) of Buyers United, Inc. (a third party), which are held by
Acceris. In the event of the sale of the Preferred Stock (or the common stock
to which the Preferred Stock is convertible) by Acceris or an equity investment
or investments in Acceris by a third party through the capital markets and
subject to certain limitations, the maturity date of the Promissory Note will
accelerate to the date 10 calendar days following either such event. As of the
date of this filing, subsequent to year end, Counsel has provided an aggregate
of $4,050 of funds in 2004 pursuant to this loan agreement. There are no
conversion features associated with the Promissory Note. Secured Loan to Acceris To fund the acquisition of the WorldxChange assets purchased and
liabilities assumed by Acceris, on June 4, 2001 Counsel provided a loan (the
Initial Loan) to Acceris in the aggregate amount of $15,000. The loan was
subordinated to a revolving credit facility with Foothill Capital Corporation
(Foothill), was collateralized by all assets of the Company and matures on
June 30, 2005. On October 1, 2003 Counsel assigned the balance owed in
connection with the Initial Loan of $9,743 including accrued interest (the
Assigned Loan) to Acceris in exchange for a new loan bearing interest at 10%
per annum compounded quarterly maturing on June 30, 2005 (the New Loan).
Consistent with the terms of the Initial Loan, subject to certain conditions,
the New Loan provides for certain mandatory prepayments upon written notice
from Counsel including an event resulting in the issuance of new shares
by Acceris to a party unrelated to Counsel where the funds are not used for an
approved expanded business plan or where Acceris has sold material assets in
excess of cash proceeds of $1,000. Pursuant to a Stock Pledge Agreement as
amended, the New Loan is secured by the common stock held by Acceris in its
subsidiary subject to the priority security interests of Foothill, the
Companys asset-based lender. There are no conversion features associated with
the New Loan. Counsel Keep Well As a result of Counsels purchase of Winter Harbors security holdings in
Acceris, Counsel became the single largest stockholder of the Company. In
addition to the above transactions, Counsel has committed to fund, through
long-term inter company advances or equity contribution, all capital
investment, working capital or other operational cash requirements of Acceris
through June 30, 2005 (the Keep Well). Any default and loan repayment
accelerator provisions with respect to the above loan agreements are subject to
funding by Counsel pursuant to the terms of the Keep Well. Counsel Management Services In addition to Mr. Silbers services (described in Item 11 entitled,
Executive Compensation), Counsel provides other management services to
Acceris through time spent by Counsel executives serving roles at Acceris.
Accordingly, Acceris has valued the services of these other employees at
approximately $130 for the year ending December 31, 2003. The expense has been
reflected in SG&A, offset by an increase to additional paid-in capital.
Acceris anticipates these services to continue in 2004. 
 Item 14. Principal Accountant Fees and Services. Fees paid to PriceWaterhouseCoopers LLP, our independent auditors for each of
the past two years are set forth below. All fees paid to our
independent auditor were pre approved by the Audit Committee. Year Ended December 31,(in thousands)2002
    
    2003Audit fees
    
    $
    530
    
    
    $
    767Audit-related fees
    
    
    342
    
    
    
    176Tax fees
    
    
    91
    
    
    
    182All other fees
    
    
    
    
    
    
    Total
    
    $
    963
    
    
    $
    1,125
 Audit Fees Audit fees were for professional services rendered for the audit of our annual
financial statements for the years ended December 31, 2002 and 2003, the
reviews of the financial statements included in our quarterly reports on Form
10-Q for the years ended December 31, 2002 and
2003 and services in connection with our statutory and regulatory filings for
the years ended December 31, 2002 and 2003 and amounted to $530 and $767 for
2002 and 2003, respectively. 44




---



##### 



Audit-Related Fees Audit related fees were for assurance and related services rendered that are
reasonably related to the audit and reviews of our financial statements for the
years ended December 31, 2002 and 2003, exclusive of the fees disclosed as
Audit Fees above. These fees include benefit plan audits, accounting consultations and audits in connection with acquisitions, which amounted to $342 and $176 for 2002 and 2003,
respectively. Tax Fees Tax fees were for services related to tax compliance, consulting and planning
services rendered during the years ended December 31, 2002 and 2003 and
included preparation of tax returns, review of restrictions on net operating
loss carryforwards and other general tax services. Tax fees paid amounted to
$91 and $182 for 2002 and 2003, respectively. All Other Fees We did not incur fees for any services, other than the fees disclosed above
relating to audit, audit-related and tax services, rendered during the years
ended December 31, 2002 and 2003. Audit and Non-Audit Service Pre-Approval Policy In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the
rules and regulations promulgated thereunder, the Audit Committee has adopted
an informal approval policy that it believes will result in an effective and
efficient procedure to pre-approve services performed by the independent
auditor.  Audit Services.Audit services include the annual financial statement audit
(including quarterly reviews) and other procedures required to be performed
by the independent auditor to be able to form an opinion on our financial
statements. The Audit Committee may pre-approve specified annual audit
services engagement terms and fees and other specified audit fees. All
other audit services must be specifically pre-approved by the Audit
Committee. The Audit Committee monitors the audit services engagement and
may approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope or other items.Audit-Related Services.Audit-related services are assurance and related
services that are reasonably related to the performance of the audit or
review of our financial statements which historically have been provided to
us by the independent auditor and are consistent with the SECs rules on
auditor independence. The Audit Committee may pre-approve specified
audit-related services within pre-approved fee levels. All other
audit-related services must be pre-approved by the Audit Committee.Tax Services.The Audit Committee may pre-approve specified tax services
that the Audit Committee believes would not impair the independence of the
auditor and that are consistent with SEC rules and guidance. All other tax
services must be specifically approved by the Audit Committee.All Other Services.Other services are services provided by the independent
auditor that do not fall within the established audit, audit-related and
tax services categories. The Audit Committee may pre-approve specified
other services that do not fall within any of the specified prohibited
categories of services. Procedures. All requests for services to be provided by the independent
auditor, which must include a detailed description of the services to be
rendered and the amount of corresponding fees, are submitted to the Chief
Financial Officer. The Chief Financial Officer authorizes services that have
been pre-approved by the Audit Committee. If there is any question as to
whether a proposed service fits within a pre-approved service, the Audit
Committee chair is consulted for a determination. The Chief Financial Officer
submits requests or applications to provide services that have not been
pre-approved by the Audit Committee, which must include an affirmation by the
Chief Financial Officer and the independent auditor that the request or
application is consistent with the SECs rules on auditor independence, to the
Audit Committee (or its chair or any of its other members pursuant to delegated
authority) for approval. 45




---



##### 



PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    
    The following financial statements and those financial
statement schedules required by Item 8 hereof are filed as part of
this report:  1.
    
    Financial Statements:Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statement of Changes in Stockholders Deficit for
the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements  2.
    
    Financial Statement Schedule:Schedule II  Valuation and Qualifying AccountsAll other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is presented in the Financial Statements or Notes
thereto.  (b)
    
    Reports on Form 8-K during the fourth quarter of 2003.None.(c)
    
    The following exhibits are filed as part of this Annual Report: Number
    
    Title of Exhibit3.1(i)
    
    Amended and Restated Articles of Incorporation (6).4.2
    
    Securities Purchase Agreement by and between Acceris and
Winter Harbor, LLC dated as of September 30, 1997 (3).4.3
    
    Amended and Restated Registration Rights Agreement by and
between Acceris and Winter Harbor, LLC dated as of January 15,
1999, amending Registration Rights Agreement dated October 10,
1997 (7).4.4
    
    Form of Stockholders Agreement by and among Acceris, Winter
Harbor, LLC and certain holders of Acceris securities
(Exhibit D to the Purchase Agreement) (3).4.5
    
    Form of Warrant Agreement by and between MedCross, Inc. and
Winter Harbor, LLC (Exhibit F to the Purchase Agreement) (3).4.6
    
    Senior Convertible Loan and Security Agreement by and between
Acceris and Counsel Communications LLC, dated March 1, 2001
(10).4.7
    
    Loan Note by and between Counsel Communications LLC and
Acceris dated as of March 1, 2001 (10).4.8
    
    Security Agreement by and between Acceris, MiBridge Inc and
Counsel Communications, LLC., dated March 1, 2001 (10).10.1*
    
    1997 Recruitment Stock Option Plan (1).10.2*
    
    2001 Stock Option and Appreciation Rights Plan (2).10.2.1*
    
    2003 Stock Option and Appreciation Rights Plan (15).10.3
    
    Agreement by and between Acceris and Winter Harbor, LLC, dated
April 14, 1998 (5).10.4
    
    Pledge Agreement by and between Acceris and Winter Harbor,
LLC, dated April 14, 1998 (5).10.5
    
    Security Agreement by and among certain of Acceris
subsidiaries and Winter Harbor, LLC, dated April 14, 1998 (5).10.6
    
    Form of Promissory Notes issued to Winter Harbor, LLC (5).10.7
    
    Warrant to purchase 250,000 shares of Acceris common stock
issued to JNC, dated June 30, 1998 (5).10.8
    
    Warrant to purchase 100,000 shares of Acceris common stock
issued to JNC, dated July 28, 1998 (5).
 46




---



##### 



Number
    
    Title of Exhibit10.9
    
    Loan Agreement by and between Acceris and Winter Harbor, LLC,
dated as of January 15, 1999 (7).10.10
    
    First Amendment to Loan Agreement by and between Acceris and
Winter Harbor, LLC, dated March 4, 1999 (7).10.11
    
    Promissory Note in principal amount of $8,000,000 executed by
Acceris in favor of Winter Harbor, LLC, dated November 10,
1998 (7).10.12
    
    Series K Warrant Agreement by and between Acceris and Winter
Harbor, LLC and form of Series K Warrant, dated as of January
15, 1999 (7).10.13
    
    Agreement by and between Acceris and Winter Harbor, LLC, dated
as of January 15, 1999 (7).10.14
    
    First Amendment to Security Agreement dated as of January 15,
1999, by and among Acceris, five of its wholly-owned subsidiaries and Winter Harbor, LLC, amending Security
Agreement dated April 14, 1997 (7).10.15
    
    First Amendment to Pledge Agreement dated as of January 15,
1999, by and among Acceris and Winter Harbor, LLC, amending
Pledge Agreement dated April 14, 1997 (7).10.16
    
    Series D, E, F, G, H, I and J Warrant Agreement dated as of
January 15, 1999 by and between Acceris and Winter Harbor,
LLC, and related forms of warrant certificates (7).10.17
    
    Amended and Restated Employment Agreement with Helen Seltzer,
dated January 3, 2002 (4).10.18
    
    Form of Wholesale Service Provider and Distribution Agreement
between Acceris and Big Planet, Inc., dated February 1, 2000
(8).10.19
    
    Form of Cooperation and Framework Agreement between Acceris
and CyberOffice International AG, dated May 8, 2000 (9).10.20
    
    Form of Revenue Sharing Agreement between Acceris and Red Cube
International AG (formerly known as CyberOffice International
AG.) dated June 30, 2000 (9).10.21
    
    Form of Letter dated June 30, 2000, clarifying a Cooperation
and Framework Agreement issue (9).10.22
    
    Loan and Security Agreement by and among WorldxChange Corp.
and Foothill Capital Corporation, dated December 10, 2001
(11).10.23*
    
    Employment agreement with James Ducay, dated January 1, 2004
(14).10.24*
    
    Employment agreement with Kenneth Hilton, dated May 1, 2002
(13).10.25
    
    Form of Asset Purchase Agreement by and between Counsel
Springwell Communications LLC and RSL COM U.S.A. Inc. (12).10.26
    
    Form of Amendment No. 1 to Asset Purchase Agreement between
Counsel Springwell Communications LLC and RSL U.S.A., Inc.
(12).10.27
    
    Amended and Restated Debt Restructuring Agreement, dated
October 15, 2002 (13).10.28
    
    Form of Asset Purchase Agreement between Buyers United Inc.,
I-Link Communications Inc., and Acceris, dated December 6,
2002 (13).10.29
    
    Acceris Convertible Promissory Note for $7,500,000 between
Acceris and Counsel Corporation (US) dated December 10, 2002
(13).10.30
    
    Warrant Exchange Agreement by and between Winter Harbor, LLC
and Acceris dated as of March 1, 2001 (10).10.31
    
    Securities Support Agreement by and between Counsel
Communications, LLC and Acceris dated as of March 1, 2001
(10).10.32
    
    Promissory note dated as of
August 29, 2003, for $2,577,070 issued to Counsel Corporation. (14)10.33
    
    Promissory
note dated March 10, 2004 for $1,546,532 issued to Counsel
Corporation (US). (14)10.34
    
    Loan Agreement dated as of January 26, 2004 between Acceris
and Counsel Corporation. (14) 47




---



##### 



10.35
    
    Loan Agreement dated as of October 1, 2003, between Acceris
and Counsel Corporation (US). (14)10.36
    
    Amended and Restated Stock Pledge Agreement dated as of
January 30, 2004 between Acceris and Counsel Corporation (US).
(14)10.37
    
    Amended and Restated Secured Promissory Note dated as of
October 1, 2003, for $9,743,479 issued to Counsel
Corporation (US). (14)10.38
    
    Amended and Restated Promissory Note dated January 26, 2004
for $7,600,000 issued to Counsel Corporation. (14)10.39
    
    Amended and Restated Loan Agreement dated as of January 30,
2004 between Acceris and Counsel Corporation (US). (14)10.40
    
    Third Amendment to Senior Convertible Loan and Security
Agreement dated as of November 1, 2003 between Acceris and
Counsel Corporation. (14)14
    
    Acceris Communications Inc. Code of
Conduct (14).21
    
    List of subsidiaries (14).23.1
    
    Consent of Independent auditors (14).31.1
    
    Certification pursuant to Rule 13a-14(a) and 15d-14(a)
required under Section 302 of the Sarbanes-Oxley Act of 2002
(14).31.2
    
    Certification pursuant to Rule 13a-14(a) and 15d-14(a)
required under Section 302 of the Sarbanes-Oxley Act of 2002
(14).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(14).32.2
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(14).




---

|    
|----
|*   
|    
|(1) 
|    
|(2) 
|    
|(3) 
|    
|(4) 
|    
|(5) 
|    
|(6) 
|    
|(7) 
|    
|(8) 
|    
|(9) 
|    
|(10)
|    
|(11)
|    
|(12)
|    
|(13)
|    
|(14)
|    
|(15)



---

48



---



##### 



SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on our behalf by
the undersigned, hereunto duly authorized. ACCERIS COMMUNICATIONS INC.
(Registrant)Dated: October 25, 2004
    By:

/s/ Allan C. SilberAllan C. Silber,  Chairman of the Board of Directors and Chief
Executive Officer In accordance with Section 13 of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Allan C. Silber

Allan C. Silber
    
    Chairman of the Board of Directors and
Chief Executive Officer
    
        October 25, 2004/s/ Gary M. Clifford

Gary M. Clifford
    
    Chief Financial Officer and VP of
Finance
    
        October 25, 2004/s/ Kelly D. Murumets

Kelly Murumets
    
    Director and President
    
        October 25, 2004/s/ Stephen A. Weintraub

Stephen A. Weintraub
    
    Director and Senior Vice President
and Secretary
    
        October 25, 2004/s/ Hal B. Heaton

Hal B. Heaton
    
    Director
    
        October 25, 2004/s/ William H. Lomicka

William H. Lomicka
    
    Director
    
        October 25, 2004/s/ Henry Y. L. Toh

Henry Y.L. Toh
    
    Director
    
        October 25, 2004/s/ Samuel L. Shimer

Samuel L. Shimer
    
    Director
    
        October 25, 2004
 49




---



##### 



INDEX OF FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULE Title of Document  PageReport of Independent Auditors
    
    F-1Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    F-2Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
    
    F-3Consolidated Statement of Changes in Stockholders Deficit for the years ended December 31, 2003, 2002 and 2001
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    F-6Notes to Consolidated Financial Statements
    
    F-8Schedule of Valuation and Qualifying Accounts
    
    S-1




---



##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of
Acceris Communications Inc.: In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Acceris Communications Inc. and its subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. 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 of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses and negative cash flows from operations and has a net capital
deficiency. These matters raise substantial doubt about the Companys ability
to continue as a going concern. Managements plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty. As explained in Note 3 to the consolidated financial statements, the Company
has restated its financial statements for the year ended December 31, 2003. San Diego, California
April 14, 2004, except for Note 3 as to
   which the date is September 28, 2004 F-1




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 2003 and 2002
(in thousands, except share amounts) 2003
    
    2002(as restated)
    
    (as restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,033
    
    
    $
    3,620Accounts receivable, less allowance for doubtful
accounts of $1,764 and $1,704 as of December 31,
2003 and 2002, respectively
    
    
    18,018
    
    
    
    16,924Investments in convertible preferred and common stock
    
    
    2,058
    
    
    
    Other current assets
    
    
    2,111
    
    
    
    3,064Net assets of discontinued operations
    
    
    91
    
    
    
    Total current assets
    
    
    24,311
    
    
    
    23,608Furniture, fixtures, equipment and software, net
    
    
    8,483
    
    
    
    11,479Other assets:Intangible assets, net
    
    
    3,297
    
    
    
    2,574Goodwill
    
    
    1,120
    
    
    
    173Investments
    
    
    1,100
    
    
    
    Net assets of discontinued operations
    
    
    
    
    
    
    1,350Other assets
    
    
    743
    
    
    
    2,262Total assets
    
    $
    39,054
    
    
    $
    41,446LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    28,272
    
    
    $
    25,107Unearned revenue
    
    
    5,678
    
    
    
    958Revolving credit facility
    
    
    12,127
    
    
    
    9,086Current portion of notes payable
    
    
    1,254
    
    
    
    2,987Current portion of obligations under capital leases
    
    
    2,715
    
    
    
    2,714Net liabilities of discontinued operations
    
    
    841
    
    
    
    Total current liabilities
    
    
    50,887
    
    
    
    40,852Notes payable, less current portion
    
    
    772
    
    
    
    1,033Obligations under capital leases, less current portion
    
    
    1,631
    
    
    
    4,146Notes
payable to a related party, net of unamortized beneficial
conversion features
    
    
    28,717
    
    
    
    53,231Total liabilities
    
    
    82,007
    
    
    
    99,262Commitments and contingencies (Notes 12 and 16)Stockholders deficit:Preferred stock, $10.00 par value, authorized
10,000,000 shares, issued and outstanding 619 and
769 as of December 31, 2003 and 2002, respectively;
liquidation preference of $613 and $761 at December
31, 2003 and 2002, respectively
    
    
    6
    
    
    
    7Common stock, $0.01 par value, authorized
300,000,000 shares, issued and outstanding
19,262,095 and 5,827,477 at December 31, 2003 and
2002, respectively
    
    
    192
    
    
    
    58Additional paid-in capital
    
    
    182,879
    
    
    
    136,721Accumulated deficit
    
    
    (226,030
    )
    
    
    (194,602
    )Total stockholders deficit
    
    
    (42,953
    )
    
    
    (57,816
    )Total
liabilities and stockholders deficit
    
    $
    39,054
    
    
    $
    41,446
 The accompanying notes are an integral part of these consolidated financial statements F-2




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2003, 2002 and 2001
(in thousands) 2003
    
    2002
    
    2001(as restated)
    
    (as restated)Revenues:Telecommunications services
    
    $
    133,765
    
    
    $
    85,252
    
    
    $
    50,289Technology licensing and development
    
    
    2,164
    
    
    
    2,837
    
    
    
    5,697Total revenues
    
    
    135,929
    
    
    
    88,089
    
    
    
    55,986Operating costs and expenses:Telecommunications network expense (exclusive of
depreciation shown below)
    
    
    86,006
    
    
    
    50,936
    
    
    
    35,546Selling, general, administrative and other
    
    
    57,264
    
    
    
    33,015
    
    
    
    30,790Provision for doubtful accounts
    
    
    5,438
    
    
    
    5,999
    
    
    
    2,861Research and development
    
    
    
    
    
    
    1,399
    
    
    
    2,332Depreciation and amortization
    
    
    7,125
    
    
    
    4,270
    
    
    
    6,409Total operating costs and expenses
    
    
    155,833
    
    
    
    95,619
    
    
    
    77,938Operating loss
    
    
    (19,904
    )
    
    
    (7,530
    )
    
    
    (21,952
    )Other income (expense):Interest expense
    
    
    (13,269
    )
    
    
    (8,195
    )
    
    
    (4,693
    )Interest and other income
    
    
    1,216
    
    
    
    395
    
    
    
    81Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    589Total other expense
    
    
    (12,053
    )
    
    
    (7,800
    )
    
    
    (4,023
    )Loss from continuing operations
    
    
    (31,957
    )
    
    
    (15,330
    )
    
    
    (25,975
    )Gain (loss) from discontinued operations (net of $0 tax):
    
    
    529
    
    
    
    (12,508
    )
    
    
    (18,522
    )Net loss
    
    $
    (31,428
    )
    
    $
    (27,838
    )
    
    $
    (44,497
    )
 The accompanying notes are an integral part of these consolidated financial statements F-3




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, continued
for the years ended December 31, 2003, 2002 and 2001
(in thousands) (in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001(as restated)
    
    (as restated)Calculation of net loss per common share:Loss from continuing operations
    
    $
    (31,957
    )
    
    $
    (15,330
    )
    
    $
    (25,975
    )Cumulative preferred stock dividends not paid in current year
    
    
    
    
    
    
    
    
    
    
    (27
    )Dividends accrued and paid on Class M redeemable preferred stock.
    
    
    
    
    
    
    
    
    
    
    (269
    )Net effect on retained earnings of redemption and reissuance of
Class M and N preferred stock, including beneficial conversion
features
    
    
    
    
    
    
    
    
    
    
    15,512Loss from continuing operations applicable to common stockholders
    
    $
    (31,957
    )
    
    $
    (15,330
    )
    
    $
    (10,759
    )Basic and diluted weighted average shares outstanding
    
    
    7,011
    
    
    
    5,828
    
    
    
    4,959Net loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (4.56
    )
    
    $
    (2.63
    )
    
    $
    (2.17
    )Gain (loss) from discontinued operations
    
    
    0.08
    
    
    
    (2.15
    )
    
    
    (3.73
    )Net loss per common share
    
    $
    (4.48
    )
    
    $
    (4.78
    )
    
    $
    (5.90
    )
 The accompanying notes are an integral part of these consolidated financial statements F-4




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS DEFICIT 

for the years ended December 31, 2003, 2002 and 2001
 (in thousands, except share amounts)(1)
 Preferred stock
        
        Common stockAdditional paid-
        
        AccumulatedShares
        
        Amount
        
        Shares
        
        Amount
        
        in capital
        
        deficit(as restated)
        
        (as restated)Balance at December 31,
            2000
        
        
        24,435
        
        
        $
        244
        
        
        
        1,406,825
        
        
        $
        14
        
        
        $
        106,805
        
        
        $
        (135,902
        )Conversion of convertible
            debt and accrued interest into Class M mezzanine preferred stock
            and common warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        6,378
        
        
        
        Common stock issued
            and accumulated deficit acquired as a result of WebToTel acquisition
            and conversion of notes payable
        
        
        
        
        
        
        
        
        
        
        872,717
        
        
        
        9
        
        
        
        11,935
        
        
        
        (1,246
        )Stock issued - employee
            stock purchase plan
        
        
        
        
        
        
        
        
        
        
        1,726
        
        
        
        
        
        
        
        15Repurchase of Class N
            preferred stock
        
        
        (14,404
        )
        
        
        (144
        )
        
        
        
        
        
        
        
        
        
        
        (14,164
        )
        
        
        Net contribution
            from repurchase / settlement with stockholders of Class M and
            N preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (5,000
        )
        
        
        30,292Contingent beneficial
            conversion feature on Class N preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        9,780
        
        
        
        (9,780
        )Issuance of common
            shares to related party to repurchase warrants outstanding
        
        
        
        
        
        
        
        
        
        
        250,000
        
        
        
        2
        
        
        
        (2
        )
        
        
        Reussuance and conversion
            of Class M redeemable preferred stock into common stock
        
        
        
        
        
        
        
        
        
        
        2,522,142
        
        
        
        25
        
        
        
        4,025
        
        
        
        Reussuance and conversion
            of Class N preferred stock into common stock
        
        
        
        
        
        
        
        
        
        
        576,158
        
        
        
        6
        
        
        
        944
        
        
        
        Beneficial conversion
            feature on the reissuance of Class M and N preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        5,000
        
        
        
        (5,000
        )Other conversions
            of Class N preferred stock into common stock
        
        
        (13
        )
        
        
        (1
        )
        
        
        457
        
        
        
        
        
        
        
        
        
        
        
        Warrants issued in
            connection with notes payable to related party
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        2,170
        
        
        
        Beneficial conversion
            feature on certain convertible notes payable to related party
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,092
        
        
        
        Conversion of Class C
            preferred stock into common stock
        
        
        (9,249
        )
        
        
        (92
        )
        
        
        170,751
        
        
        
        2
        
        
        
        91
        
        
        
        Dividend on Class C
            preferred stock paid in the form of common stock
        
        
        
        
        
        
        
        
        
        
        26,701
        
        
        
        
        
        
        
        631
        
        
        
        (631
        )Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (44,497
        )Balance at December 31,
            2001
        
        
        769
        
        
        
        7
        
        
        
        5,827,477
        
        
        
        58
        
        
        
        129,700
        
        
        
        (166,764
        )Beneficial conversion
            feature on certain convertible notes payable to related party
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        6,522
        
        
        
        Acceris costs paid
            by majority stockholder
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        499
        
        
        
        Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (27,838
        )Balance at December 31,
            2002
        
        
        769
        
        
        
        7
        
        
        
        5,827,477
        
        
        
        58
        
        
        
        136,721
        
        
        
        (194,602
        )Conversion of related
            party debt to common stock
        
        
        
        
        
        
        
        
        
        
        13,428,618
        
        
        
        134
        
        
        
        40,539
        
        
        
        Conversion of Class C
            preferred stock to common stock
        
        
        (150
        )
        
        
        (1
        )
        
        
        6,000
        
        
        
        
        
        
        
        1
        
        
        
        Beneficial conversion feature on
certain convertible notes payable to related party
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        5,354
        
        
        
        Acceris costs paid
            by majority stockholder
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        132
        
        
        
        Management expense
            from majority stockholder
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        130
        
        
        
        Issuance of options
            to purchase common stock to non-employee
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        2
        
        
        
        Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (31,428
        )Balance at December 31,
            2003
        
        
        619
        
        
        $
        6
        
        
        
        19,262,095
        
        
        $
        192
        
        
        $
        182,879
        
        
        $
        (226,030
        )
  (1)
    
    All amounts shown as if the reverse stock split described more fully in
Note 5 below had occurred on January 1, 2001. The accompanying notes are
an integral part of these consolidated financial statements F-5




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2003, 2002 and 2001(in thousands)
  2003
        
        2002
        
        2001(as restated)
        
        (as restated)Cash flows from operating
            activities:Net loss
        
        $
        (31,428
        )
        
        $
        (27,838
        )
        
        $
        (44,497
        )Adjustments to reconcile
            net loss to net cash used in operating activities:Depreciation and
            amortization
        
        
        7,125
        
        
        
        8,135
        
        
        
        10,167Provision for doubtful
            accounts
        
        
        5,438
        
        
        
        6,110
        
        
        
        4,067Decrease in allowance for impairment of net assets of discontinued
          operations
        
        
        (169
        )
        
        
        
        
        
        
        Impairment of long-lived
            assets
        
        
        
        
        
        
        3,609
        
        
        
        8,040Amortization of discount
            and debt issuance costs on notes payable and capital leases
        
        
        6,052
        
        
        
        1,765
        
        
        
        1,518Stock received on
            sale of technology license
        
        
        (1,100
        )
        
        
        
        
        
        
        Accrued interest
            added to loan principal
        
        
        5,667
        
        
        
        3,651
        
        
        
        1,267Expense associated
            with stock options issued to non-employee for services
        
        
        2
        
        
        
        
        
        
        
        Loss on disposal
            of assets
        
        
        
        
        
        
        266
        
        
        
        Gain on settlement
            of note payable
        
        
        (1,141
        )
        
        
        
        
        
        
        (1,093
        )Management expense
            to controlling shareholder
        
        
        130
        
        
        
        
        
        
        
        Gain on sale of subsidiary
        
        
        
        
        
        
        
        
        
        
        (589
        )Increase (decrease) from
            changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
        
        
        (5,944
        )
        
        
        (1,269
        )
        
        
        (4,528
        )Other assets
        
        
        (1,003
        )
        
        
        (1,164
        )
        
        
        (1,127
        )Net assets and liabilities
            of discontinued operations
        
        
        750
        
        
        
        
        
        
        
        Accounts payable,
            accrued liabilities and interest payable
        
        
        2,586
        
        
        
        3,507
        
        
        
        12,058Unearned revenue
        
        
        4,720
        
        
        
        (1,643
        )
        
        
        (14,566
        )Net cash used in
            operating activities
        
        
        (8,315
        )
        
        
        (4,871
        )
        
        
        (29,283
        )Cash flows from investing
            activities:Purchases of furniture,
            fixtures, equipment and software
        
        
        (2,036
        )
        
        
        (1,649
        )
        
        
        (1,963
        )Purchase of patent
        
        
        (100
        )
        
        
        
        
        
        
        Business acquisitions,
            net of acquisition costs and cash acquired
        
        
        149
        
        
        
        (8,276
        )
        
        
        (13,447
        )Cash received from
            sale of assets
        
        
        160
        
        
        
        692
        
        
        
        Net cash used in
            investing activities
        
        
        (1,827
        )
        
        
        (9,233
        )
        
        
        (15,410
        )Cash flows from financing
            activities:Proceeds from issuance
            of notes payable to a related party
        
        
        7,896
        
        
        
        16,823
        
        
        
        43,920Payment of notes
            payable to related party
        
        
        
        
        
        
        (3,000
        )
        
        
        (2,500
        )Proceeds from revolving
            credit facility, net
        
        
        3,041
        
        
        
        2,089
        
        
        
        6,996Payment of capital
            lease obligations
        
        
        (2,514
        )
        
        
        (2,544
        )
        
        
        (1,052
        )Acceris costs paid
            by majority stockholder
        
        
        132
        
        
        
        498
        
        
        
        Payment of long-term
            debt
        
        
        
        
        
        
        (805
        )
        
        
        (180
        )Proceeds from exercise
            of stock options and warrants and issuances under stock purchase plan
        
        
        
        
        
        
        
        
        
        
        16Net cash provided
            by financing activities
        
        
        8,555
        
        
        
        13,061
        
        
        
        47,200Increase (decrease) in
            cash and cash equivalents
        
        
        (1,587
        )
        
        
        (1,043
        )
        
        
        2,507Cash and cash equivalents
            at beginning of year
        
        
        3,620
        
        
        
        4,663
        
        
        
        2,156Cash and cash equivalents
            at end of year
        
        $
        2,033
        
        
        $
        3,620
        
        
        $
        4,663
 The accompanying notes are an integral part of these consolidated financial statements F-6




---



##### 



ACCERIS COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended December 31, 2003, 2002 and 2001
(in thousands)  2003
    
    2002
    
    2001Supplemental schedule of non-cash investing and financing activities:RSL acquisition costs financed through note payable to seller
    
    
    
    
    
    $
    875
    
    
    
    Warrants issued in connection with notes payable to related party
    
    
    
    
    
    
    
    
    
    $
    2,170Conversion of notes payable to a related party and associated accrued
interest to Class M redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    10,305Reclassification of Class M redeemable preferred stock from Mezzanine
    
    
    
    
    
    
    
    
    
    
    22,040Conversion of notes payable to a related party and associated accrued
interest to common stock
    
    $
    40,673
    
    
    
    
    
    
    
    10,327Preferred stock received in exchange for assets of discontinued operations
    
    
    1,691
    
    
    
    
    
    
    
    Assets included in the purchase price of Transpoint acquisition, net
    
    
    2,882
    
    
    
    
    
    
    
    Stock options issued for services
    
    
    142
    
    
    
    
    
    
    
    Notes payable incurred for the purchase of software and software licenses
    
    
    921
    
    
    
    
    
    
    
    Equipment acquired under capital lease obligations and note payable
    
    
    
    
    
    
    
    
    
    
    9,888Supplemental cash flow information:Taxes paid
    
    
    
    
    
    
    
    
    
    
    Interest paid
    
    $
    787
    
    
    $
    2,164
    
    
    $
    1,270
 The accompanying notes are an integral part of these consolidated financial statements F-7




---



##### 



ACCERIS COMMUNICATIONS INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Description of Business and Principles of Consolidation The consolidated financial statements include the accounts of Acceris
Communications Inc. (formerly I-Link Incorporated) and its wholly-owned subsidiaries WorldxChange
Communications Corp. (WorldxChange), I-Link
Communications Inc., (ILC),
which is included in discontinued operations; the Enterprise and Agent business
of RSL COM USA Inc., (RSL), which the Company purchased in December, 2002 and
Transpoint Communications, LLC (Transpoint), which the Company purchased in
July 2003 (see Note 9). These entities combined are referred to as Acceris
or the Company in these consolidated financial statements. For the past six years, Acceris has developed and marketed enhanced
communications products and services utilizing its own private intranet and
both owned and leased network switching and transmission facilities. The
communications products and services are delivered through Acceris proprietary
technologies. Enhanced communications products and services were marketed
through master agent and other wholesale distributor arrangements with licensed
long-distance carriers. The Company developed and licensed communications
applications products and software that support multimedia communications
(voice, fax and audio) over the public switched network, local area networks
and the Internet. In
June 2001, Acceris, through its subsidiary WorldxChange, purchased
certain assets and assumed certain liabilities of WorldxChange Communications,
Inc. from a bankruptcy proceeding. WorldxChange was a facilities-based
telecommunications carrier that provided international and domestic
long-distance service to retail customers. Telecommunications services
provided by WorldXChange consisted primarily of a dial-around product, which
allowed a customer to make a call from any phone by dialing a 10-10-XXX prefix.
Since the acquisition, the Company has commenced offering a 1+ product (1+
products are those with which a customer directly dials a long-distance number
from their telephone by dialing 1-area code-phone number). WorldxChange has
also begun 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 December 2002, Acceris, through its subsidiary WorldxChange, completed
the purchase of certain assets of RSL (see Note 9). 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 (Enterprise business), and the assets used to
provide long-distance and other voice services to small businesses and the
consumer/residential market (Agent business). In May 2003, Acceris completed the sale of its domestic
Voice-over-Internet-Protocol (VoIP) network business, which represented the
core business of its subsidiary ILC along with a fully paid license to use its
patented technology, to Buyers United, Inc. (BUI). This allowed the Company
to focus on the licensing of its technology and the pursuit of a patent
enforcement strategy. In December 2003, Acceris acquired US Patent No. 6,243,373. The
acquisition of this patent combined with the Companys US Patent No. 6,438,124
form the foundational patents for VoIP communication. In July 2003, Acceris, through its subsidiary WorldxChange, completed the
purchase of all the outstanding shares of Transpoint (see Note 9). The acquisition allowed the Company to
increase its penetration in the commercial agent channel. All significant intercompany accounts and transactions have been
eliminated in consolidation. Note  2 Liquidity and Capital Resources The Company has incurred
substantial operating losses and negative cash
flows from operations since inception and had a stockholders deficit of
$42,953 and negative working capital of $26,576 at December 31, 2003. The
Company continued to finance its operations during 2003 through related party
debt with an outstanding balance of $28,717 and a revolving credit facility
with an outstanding balance of $12,127 as of December 31, 2003. At
December 31, 2003, the Company has debt of $28,717 owed to its
controlling stockholder, Counsel Corporation (collectively with all of
its subsidiaries, Counsel), which matures on June 30, 2005 (subject to
certain contingent acceleration clauses). This debt is supplemented by an
agreement from Counsel to fund through long-term inter-company advances or
equity contributions, all capital investment, working capital or other
operational cash requirements of the Company (the Keep Well). During 2003,
Counsel advanced the Company approximately $7,896 under its Keep Well and
converted accrued interest of $5,070 into principal. During 2003, Counsel acquired a debt which the Company owed to Winter
Harbor LLC (Winter Harbor) of $1,999 and converted $40,673 of its convertible
debt into common stock of the Company. These events significantly reduced the
Companys liabilities.


F-8



---



##### 



The majority of the Companys debt matures on June 30, 2005. This includes
amounts due on its three-year asset-based credit facility, under which it owed
$12,127 at December 31, 2003 and $28,717 owed to Counsel (plus additional
interest accrued prior to June 2005). In 2004, management intends to raise capital to support the growth
strategy of the business. Use of funds from such offering(s) will be detailed
at the time and may include such uses as to fund operations, improve working
capital, repay obligations of the business and to fund future acquisition
activities. There can be no assurance that the Companys capital raising efforts will be successful. There is no assurance that the Company will be able to improve its cash
flow from operations, obtain additional third party financing, extend, repay or
refinance its debt with Counsel or its asset-based lender on acceptable terms,
or obtain an extension of the existing funding commitment from Counsel or its
asset-based lender beyond June 30, 2005, should it be required. If the Company
is unable to accomplish the above, it may need to evaluate opportunities to
sell assets or obtain alternative financing with terms that are not favorable
to the Company. These matters raise substantial doubt about the
Companys ability to continue as a going concern. The
accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability of assets and liquidation of liabilities that may
result from this uncertainty. Note 3  Restatement The consolidated financial statements as of December 31, 2002
and for the year then ended have been restated on the Companys
Annual Report on Form 10-K/A#3  from
those previously issued to record additional deemed interest expense for
beneficial conversion features (BCF) embedded in certain
of the Companys indebtedness as required by Emerging Issues Task Force Issue No. 00-27 (EITF
00-27). 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 year ended December
31, 2002 by $301, or $0.05 per share. The accompanying consolidated financial statements as of December 31, 2003 and
for the year then ended have also been restated from those previously issued to
record additional deemed interest expense for
BCF embedded in certain
of the Companys indebtedness as required by EITF 00-27. 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 year ended December 31, 2003 by $5,107 or $0.73 per share. On September 20, 2004, management of the Company concluded that the accounting
principles as set forth in EITF 00-27, regarding BCF, had not been properly applied in current and prior
periods to its convertible debentures issued under a March 2001 loan agreement
for which the Company had previously determined BCF of $1.1 million. The
initial determination of the BCF in 2001 at the respective issue dates of such
debt was correct. However, adjustments to the conversion price and the number
of conversion shares were made under the debentures anti-dilution provisions.
The various anti-dilution events and their respective impacts on the number of
shares and the conversion price were disclosed in the Companys previous public
filings. However, the principles under EITF 00-27 also require a
redetermination of the BCF at each date an anti-dilution event occurred. This
redetermination was not completed in prior reporting periods. Additionally, the
accumulation of unpaid interest costs which are required by the debt terms to
be added to principal and which are payable at maturity on these same
convertible debentures has been deemed to be interest paid in kind (PIK);
such interest also contains a conversion feature, and the payment of such
interest in the form of PIK interest is non-discretionary requiring the
determination of a BCF in the PIK interest. This determination was not made by
the Company in its prior reportings. The Companys management has now concluded that a restatement is required and
has brought these matters for consideration before the Audit Committee and the
full Board of Directors of the Company. Having considered the circumstances
underlying the accounting errors and their effects upon the Companys prior
filings, and having discussed these matters with the Companys management, the
Audit Committee concluded that the previously issued financial statements
should not be relied upon and approved and authorized the Companys management
to amend certain previously filed public reports to reflect deemed interest
expense from such BCF. Although
the error affects 2001, 2002 and 2003, the $23 cumulative effect on
earnings through the third quarter of 2002 was recorded in the fourth
quarter of 2002 as a charge to interest expense. Therefore, the correction is an increase in deemed interest expense and net loss, in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004, and a reduction in reported liabilities and stockholders deficit in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004. The effect of these errors is detailed, by reporting period, below. The
restatement had no
effect on loss from discontinued operations or net loss per share from
discontinued operations. Effect of the restatements on the consolidated statements of operations
(in thousands of dollars except per share amounts)
(per share information reported on a post 20:1 stock consolidation basis for all periods shown. Stock consolidation enacted in the fourth quarter of 2003) Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Net income (loss) as previously reported
on Form 10-K or 10-Q
    
    $
    (11,117
    )
    
    $
    (14,895
    )
    
    $
    (3,713
    )
    
    $
    (3,257
    )
    
    $
    (4,456
    )
    
    $
    594Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (902
    )
    
    
    (1,089
    )
    
    
    (1,337
    )
    
    
    (1,779
    )
    
    
    (1,801
    )Net loss as currently reported on
revised Form 10-K or 10-Q
    
    $
    (11,418
    )
    
    $
    (15,797
    )
    
    $
    (4,802
    )
    
    $
    (4,594
    )
    
    $
    (6,235
    )
    
    $
    (1,207
    )Net income (loss) per share as previously
reported on Form 10-K or 10-Q
    
    $
    (1.92
    )
    
    $
    (2.55
    )
    
    $
    (0.64
    )
    
    $
    (0.56
    )
    
    $
    (0.44
    )
    
    $
    0.03Net loss per share as currently
reported on revised Form 10-K or
10-Q
    
    $
    (1.96
    )
    
    $
    (2.71
    )
    
    $
    (0.82
    )
    
    $
    (0.79
    )
    
    $
    (0.59
    )
    
    $
    (0.06
    )
 Effect of the restatements on the consolidated balance sheets
(in thousands of dollars) As at
    
    As at
    
    As at
    
    As at
    
    As at
    
    As atDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Notes payable to a related party:As previously reported on
Form 10-K or 10-Q
    
    $
    30,058
    
    
    $
    30,496
    
    
    $
    30,985
    
    
    $
    33,483
    
    
    $
    35,073
    
    
    $
    41,060Correction of EITF 00-27 errors
    
    
    (6,109
    )
    
    
    (5,364
    )
    
    
    (4,437
    )
    
    
    (3,265
    )
    
    
    (6,356
    )
    
    
    (4,834
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    23,949
    
    
    $
    25,132
    
    
    $
    26,548
    
    
    $
    30,218
    
    
    $
    28,717
    
    
    $
    36,226Additional paid-in capital:As previously reported on
Form 10-K or 10-Q
    
    $
    129,553
    
    
    $
    129,553
    
    
    $
    129,618
    
    
    $
    129,618
    
    
    $
    171,115
    
    
    $
    171,192Correction of EITF 00-27 errors
    
    
    6,410
    
    
    
    6,567
    
    
    
    6,729
    
    
    
    6,894
    
    
    
    11,764
    
    
    
    12,043As  currently reported on
revised Form 10-K or 10-Q
    
    $
    135,963
    
    
    $
    136,120
    
    
    $
    136,347
    
    
    $
    136,512
    
    
    $
    182,879
    
    
    $
    183,235Accumulated deficit
As previously reported on
Form 10-K or 10-Q
    
    $
    (194,301
    )
    
    $
    (209,196
    )
    
    $
    (212,909
    )
    
    $
    (216,166
    )
    
    $
    (220,622
    )
    
    $
    (220,028
    )Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (1,203
    )
    
    
    (2,292
    )
    
    
    (3,629
    )
    
    
    (5,408
    )
    
    
    (7,209
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    (194,602
    )
    
    $
    (210,399
    )
    
    $
    (215,201
    )
    
    $
    (219,795
    )
    
    $
    (226,030
    )
    
    $
    (227,237
    )Stockholders equity (deficit):As previously reported on
Form 10-K or 10-Q
    
    $
    (63,925
    )
    
    $
    (78,820
    )
    
    $
    (82,468
    )
    
    $
    (85,725
    )
    
    $
    (49,309
    )
    
    $
    (47,292
    )Correction of EITF 00-27 errors
    
    
    6,109
    
    
    
    5,364
    
    
    
    4,437
    
    
    
    3,265
    
    
    
    6,356
    
    
    
    4,834As currently reported on
revised Form 10-K or 10-Q
    
    $
    (57,816
    )
    
    $
    (73,456
    )
    
    $
    (78,031
    )
    
    $
    (82,460
    )
    
    $
    (42,953
    )
    
    $
    (42,458
    )
 Note 4  Summary of Significant Accounting Policies Revenue recognition Revenue is 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 and determinable, and collection of the resulting
receivable is reasonably assured. 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 assured 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 method. The Company determined that
collectibility of the amounts billed to customers was not reasonably assured at
the time of 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. At December 31,
2003, the Company had approximately $4,621 in cash receipts that were still
subject to adjustment by the LECs and therefore encumbered. This amount is
included in deferred 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 time that the Company finalizes cash collection amounts with
the LECs. Revenue from the sale of software licenses is recognized when a
non-cancelable 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 Acceris, contract revenues are spread over the period of the
required support or involvement. In the event that collectibility is in
question, revenue (deferred or recognized) is recorded only to the extent of
cash receipts. Use of estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant
estimates include revenue recognition (see above), accruals for
telecommunications network cost, the allowance for doubtful accounts, purchase
accounting (including the ultimate recoverability of intangibles and other
long-lived assets), valuation of deferred tax assets and contingencies
surrounding litigation. These policies have the potential to have a more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature. F-9




---



##### 



Costs associated with carrying telecommunications traffic over our network
and over the Companys leased lines are expensed when incurred, based on invoices received
from the service providers. If invoices are not available in a timely fashion,
estimates are utilized to accrue for these telecommunications network costs.
These estimates are based on the understanding of variable and fixed costs in
the Companys service agreements with these vendors in conjunction with the traffic
volumes that has passed over the network and circuits provisioned at the
contracted rates. Traffic volumes for a period are calculated from information
received through the Companys network switches. From time to
time, the Company has disputes
with its vendors relating to telecommunications network services. In
the event of such disputes, the Company records an expense based on
its understanding of the agreement with that particular vendor, traffic
information received from its network switches and other factors. Allowances for doubtful accounts are maintained for estimated losses
resulting from the failure of customers to make required payments on their
accounts. The Company evaluates its provision for doubtful accounts at least quarterly
based on various factors, including the financial condition and payment history
of major customers and an overall review of collections experience on other
accounts and economic factors or events expected to affect its future
collections experience. Due to the large number of customers that the
Company serves, it
is impractical to review the creditworthiness of each of its customers,
although a credit review is performed for larger carrier and retail business
customers. The Company considers a number of factors in determining the proper level of
the allowance, including historical collection experience, current economic
trends, the aging of the accounts receivable portfolio and changes in the
creditworthiness of its customers. The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). All
business combinations are accounted for using the purchase method and goodwill
and intangible assets with indefinite useful lives are not amortized, but are
tested for impairment at least annually. Intangible assets are intially recorded based on estimates of fair value at the time of the acquisition The
Company
assesses the fair value of its segments for goodwill
impairment based upon a discounted cash flow methodology. If the
carrying amount of the segment assets exceed the estimated fair value
determined through the discounted cash flow analysis, goodwill impairment may
be present. The Company would measure the goodwill impairment loss based upon
the fair value of the underlying assets and liabilities of the segment,
including any unrecognized intangible assets and estimate the implied fair
value of goodwill. An impairment loss would be recognized to the extent that a
reporting units recorded goodwill exceeded the implied fair value of goodwill. The Company
performed its annual impairment test in the fourth quarters of
2003 and 2002. No impairment was present upon performing these tests.
We cannot predict the occurrence of certain events that might adversely
affect the reported value of goodwill. Such events may include, but are not
limited to, strategic decisions made in response to economic and competitive
conditions, the impact of the economic environment on its customer
base or a material negative change in its relationships with significant
customers. Regularly,
the Company evaluates whether events or circumstances have occurred that
indicate the carrying value of its other amortizable intangible assets may not
be recoverable. When factors indicate the asset may not be
recoverable, the Company
compares the related future net cash flows to the carrying value of the asset to
determine if impairment exists. If the expected future net cash flows are less
than carrying value, impairment is recognized to the extent that the carrying
value exceeds the fair value of the asset. The
Company performs a valuation on its deferred tax asset, which has been generated
by a history of net operating loss carryforwards, at least annually, and
determine the necessity for a valuation allowance. The Company
evaluates which portion,
if any, will more likely than not be realized by offsetting future taxable
income. The determination of that allowance includes a projection of
its
future taxable income, as well as consideration of any limitations that may
exist on its use of its net operating loss or credit carryforwards. The
Company is involved from time to time in various legal matters arising out of
its operations in the normal course of business. On a case by case
basis, the Company
evaluates the likelihood of possible outcomes for this litigation. Based on
this evaluation, the Company determines whether a liability is appropriate.
If the likelihood of a negative outcome is probable, and the amount
is estimable, the Company accounts for the liability in the current period.
A change in the circumstances surrounding any current litigation could have a material impact on the financial statements.


F-10



---



##### 



Cash and cash equivalents The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company maintains
its cash and cash equivalents primarily with financial institutions in
California and Pennsylvania. These accounts may from time to time exceed
federally insured limits. The Company has not experienced any losses on such
accounts. Provision for doubtful accounts The Company evaluates the collectibility of its receivables at least
quarterly, based upon various factors including the financial condition and
payment history of major customers, and overall review of collections
experience on other accounts and economic factors or events expected to affect
the Companys future collections experience. Due to the large number of
customers that the Company serves, it is impractical to review the
creditworthiness of each of its customers, although a credit review is
performed for larger carrier and retail business customers. The Company
considers a number of factors in determining the proper level of the allowance,
including historical collection experience, current economic trends, the aging
of the accounts receivable portfolio and changes in the creditworthiness of its
customers. Furniture, fixtures, equipment and software Furniture, fixtures, equipment and software are stated at cost.
Depreciation is calculated using the straight-line method over the following
estimated useful lives: Telecommunications network equipment
    
    3-5 yearsFurniture, fixtures and office equipment
    
    3-10 yearsSoftware and information systems
    
    3 years
 Long-lived assets that are to be disposed of by sale are carried at the
lower of book value or estimated net realizable value less costs to sell. Betterments and renewals that extend the life of the assets are
capitalized. Other repairs and maintenance charges are expensed as incurred.
The cost and related accumulated depreciation applicable to assets retired are
removed from the accounts and the gain or loss on disposition is recognized in
operations. The Company regularly evaluates whether events or circumstances
have occurred that indicate the carrying value of its furniture, fixtures,
equipment and software may not be recoverable. When factors indicate the asset
may not be recoverable, the Company compares the related future net cash flows
to the carrying value of the asset to determine if impairment exists. If the
expected future net cash flows are less than the carrying value, impairment is
recognized to the extent that the carrying value exceeds the fair value of the
asset. Investments Dividends and realized gains and losses on securities are included in
other income in the consolidated statements of operations. The Company holds investments in two
companies. These investments are accounted for under the cost method, as the
securities or the underlying common stock are not readily marketable and the
Companys ownership interests do not allow it to exercise significant influence
over these entities. The Company monitors these investments for impairment by
considering current factors including economic environment, market conditions
and operational performance and other specific factors relating to the business
underlying the investment, and will record impairments in carrying values when
necessary. The fair value of the securities are estimated using the best
available information as of the evaluation date, including the quoted market
prices of comparable public companies, market price of the common stock
underlying the preferred stock, recent financing rounds of the investee and
other investee specific information. Intangible assets Effective January 1, 2002, the Company accounts for intangible assets in
accordance with SFAS No. 141,
Business Combinations (SFAS 141) and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142). The adoption of SFAS 141 and 142 did not
materially impact the results of operations or financial condition of the
Company. All business combinations are accounted for using the purchase method
and goodwill and intangible assets with indefinite useful lives are not
amortized, but are tested for impairment at least annually. F-11




---



##### 



The Company regularly evaluates whether events or circumstances have
occurred that indicate the carrying value of its intangible assets may not be recoverable. When factors indicate the asset may not be
recoverable, the Company compares the related future net cash flows to the
carrying value of the asset to determine if impairment exists. If the expected
future net cash flows are less than carrying value, impairment is recognized to
the extent that the carrying value exceeds the fair value of the asset. The
Company recorded a charge of approximately $8,040 in 2001, representing the
remaining balance of the goodwill associated with the WebToTel acquisition.
Amortization of intangible assets is calculated using the straight-line method
over the following periods: Enterprise customer contracts and relationships
    
    60 monthsRetail customer contracts and relationships
    
    12 monthsAgent relationships
    
    36 monthsAcquired patents
    
    60 monthsAgent contracts
    
    12 months
 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. Research and development costs The Company expenses internal research and development costs, which
primarily consist of salaries, when they are incurred. Computer software costs The Company capitalizes qualified costs associated with developing
computer software for internal use. Such costs are amortized over the expected
useful life, usually three years. During 2003, the Company capitalized
approximately $128 in costs associated with the development and installation of
a new billing system to launch a local product offering. No such costs were
capitalized during 2002 or 2001. Concentrations of credit risk The Companys retail telecommunications subscribers are primarily
residential and small business subscribers in the United States. The Companys
customers are generally concentrated in the 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. The only customer that accounted for over 10% of revenues for 2001 was
Red Cube International AG (Red Cube), which accounted for approximately 18%
of revenues. The Company performs ongoing credit evaluations of its larger
carrier and retail business customers but generally does not require collateral
to support customer receivables. Concentration of third party service providers Acceris utilizes the services of certain Competitive Local Exchange
Carriers (CLECs) to bill and collect from customers. A significant portion
of revenues in the years ended December 31, 2003, 2002 and 2001 were derived
from customers billed by CLECs. 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 its collection experience could be adversely affected during this
transition period. 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 unwilling or unable 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. Income taxes The Company records deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes(SFAS 109). The statement
requires recognition of deferred tax assets and liabilities for temporary
differences between the tax bases of assets and liabilities and the amounts at
which they are carried in the financial statements, based upon the enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company establishes a valuation allowance when necessary to reduce deferred
tax assets to the amount expected to be realized. The determination of that
allowance includes a projection of the Companys future taxable income, as well
as consideration of any limitations that may exist on the Companys use of its
net operating loss or credit carryforwards.


F-12



---



##### 



Stock-based compensation At December 31,
    2003, the Company has several stock-based compensation plans, which are described
    more fully in Note 18. The Company accounts for those plans under the recognition
    and measurement principles of Accounting Principles Board Opinion No. 25,
    Accounting for Stock Issued to Employees, and related Interpretations
    (collectively, APB 25). Stock-based employee compensation cost
    is not reflected in net loss, as all options granted under those plans had
    an exercise price equal to the market value of the underlying common stock
    on the date of grant. In accordance with FASB SFAS No. 123, Accounting
    for Stock-Based Compensation(SFAS 123), as amended by FASB
    SFAS No. 148, *Accounting for Stock-Based Compensation  Transition
    and Disclosure,* see below for a tabular presentation of the pro forma
    stock-based compensation cost, net loss and loss per share as if the fair
    value-based method of expense recognition and measurement prescribed by SFAS
    123 had been applied to all employee options. Options granted to non-employees
    (excluding non-employee members of the Companys Board of Directors)
    are recognized and measured using the fair value-based method prescribed by
    SFAS 123. Year ended December 31,2003(as restated)
    

2002(as restated)
    

2001Net loss as reported
    
    $
        (31,428
    )
    
    $
    (27,838
    )
    
    $
    (44,497
    )Deduct:Total compensation cost
            determined under fair value based method for all awards, net of $0
            tax
    
    
    (92
    )
    
    
    (1,300
    )
    
    
    (2,933
    )Pro forma net loss
    
    $
        (31,520
    )
    
    $
    (29,138
    )
    
    $
    (47,430
    )Loss per shareBasic and diluted  as reported
    
    $
        (4.48
    )
    
    $
    (4.78
    )
    
    $
    (5.90
    )Basic and diluted  pro forma
    
    $
        (4.50
    )
    
    $
    (5.00
    )
    
    $
    (6.49
    )
 The fair
    value of each option grant is estimated on the date of the grant using the
    Black-Scholes option pricing model with the following weighted average assumptions:
    expected volatility of 98%, 150% and 120% in 2003, 2002 and 2001, respectively,
    risk free rates ranging from 2.76% to 3.00%, 2.02% to 4.40% and 3.17% to 6.62%
    in 2003, 2002 and 2001, respectively, expected lives of 4 years in 2003
    and 3 years in 2002 and 2001, and dividend yield of zero for each year. Segment reporting The Company reports its segment information based upon the internal
organization that is used by management for making operating decisions and
assessing the Companys performance. In late 2002, Acceris was reorganized
into three operating segments, Retail, Enterprise and Technologies. These
segments were previously referred to as Acceris Communications Partners,
Acceris Communications Solutions and Acceris Technologies, respectively. See
Note 19 for a more detailed discussion of the segments. Reclassifications Certain
    balances in the consolidated financial statements as of and for the years
    ended December 31, 2002 and 2001 have been reclassified to conform to
    current year presentation. These changes had no effect on previously reported
    net loss, total assets, liabilities or stockholders deficit. In 2003,
    the Company adopted SFAS No. 145, *Rescission of FASB Statements No. 4,
    44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
    as of April 2002* (SFAS 145). SFAS 145 requires the modification
    of the Companys 2001 financial statement to reclassify the previously
    reported gain on debt extinguishment from an extraordinary item to discontinued
    operations. Recent accounting pronouncements 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 the Companys
financial position or results of operations.


F-13



---



##### 



In May 2003,
    the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
    Instruments and HedgingActivities (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 SFAS No. 133,
    *Accounting for Derivative Instruments and Hedging Activities.* This
    Statement is effective for contracts entered into or modified after June 30,
    2003, except as stated below and for hedging relationships designated after
    June 30, 2003 and did not have any effect on the Companys financial
    position 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 the FASB's Emerging Issues Task Force Issue
    No. 00-21, *Accounting for Revenue Arrangements with Multiple Deliverables* ("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 position or results of operations. Note 5  Net Loss per Share and Reverse Stock Split Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Options, warrants, convertible
preferred stock and convertible debt are included in the calculation of diluted
earnings per share, except when their effect would be anti-dilutive. As the
Company had a net loss from continuing operations for 2003, 2002 and 2001,
basic and diluted loss per share are the same. On December 6,
    2002, the Board of Directors approved a 1-for-20 reverse split of Acceris
    common stock (the Stock Split). The stockholders of Acceris
    approved the Stock Split by stockholder vote on November 26, 2003.  In connection with the
    Stock Split the par value of the common stock was changed from $0.007 to $0.01 per share.
    The Stock Split reduced the shares of common stock outstanding by 365,977,409 shares. The basic and diluted
    net loss per common share and all other share amounts in these financial statements
    are presented as if the reverse stock split had occurred on January 1,
    2001. Contemporaneous with the Stock Split, Counsel exercised its right to
    convert certain debt instruments into shares of the Companys common
    stock. As a result of the conversion, the Company issued to Counsel 13,428,492
    shares of common stock on a post-split basis. In January 2003,
    150 shares of the Companys Class N preferred stock held by an unrelated
    third party were converted into 6,000 shares of common stock. The basic and diluted net loss per common share for the year ended
December 31, 2001 includes a net increase to retained earnings of approximately
$30,292 attributable to the redemption on March 1, 2001 of the Class M
redeemable preferred stock and all Class N preferred stock owned by Winter
Harbor, including redemption of the beneficial conversion feature related to
such preferred stock. In addition, there was a charge to retained earnings in
2001 of approximately $9,780 representing a contingent beneficial conversion
feature on the Class N preferred stock resulting from the reset of the
conversion price. The basic and diluted net loss per common share in 2001 also
reflects a $5,000 charge to retained earnings for the beneficial conversion
feature related to the reissuance on March 1, 2001 of the Class M and Class N
preferred stock to Counsel. The net effect of these transactions was a
benefit included in the net loss per common share of approximately $15,512 for
the year ended December 31, 2001. On September 6, 2001, all outstanding shares of the Companys Class C
preferred stock automatically converted into shares of common stock according
to the terms of the designation of the Class C preferred stock. Accordingly,
9,249 shares of Class C preferred stock were converted into 170,751 shares of
common stock. In addition to the conversion of the preferred stock, the
Company was obligated to pay dividends declared but unpaid and other dividends
not paid on the preferred stock through the conversion date. Accordingly,
dividends in the amount of approximately $630 were satisfied through the
issuance of 26,701 shares of common stock. Potential
    common shares that were not included in the computation of diluted earnings
    per share because they would have been anti-dilutive are as follows as of December 31: 2003
    
    2002
    
    2001(as restated)Assumed conversion of Class N preferred stock
    
    
    24,760
    
    
    
    30,760
    
    
    
    30,760Assumed conversion of convertible debt
    
    
    2,486,299
    
    
    
    6,272,030
    
    
    
    1,142,625Assumed exercise of options and warrants to
purchase shares of common stock
    
    
    1,807,880
    
    
    
    1,258,464
    
    
    
    1,401,6734,318,939
    
    
    
    7,561,254
    
    
    
    2,575,058


F-14



---



##### 



Note 6  Investments The Companys investments as of December 31, 2003 consist of convertible
preferred stock and common stock holdings in one company and convertible
preferred stock holdings in another. The first investment is in BUI which
investment was consideration received related to the sale of the ILC business. This
investment has been recorded at its estimated fair value as of the closing date
of the sale of ILC. The carrying value of the investment as of closing
(May 1, 2003) was $1,624 and as of December 31, 2003 was $2,058 due to
additional shares of common stock received subsequent to May 1, 2003 as
earn-out shares (see Note 7). Subsequent to December 31, 2003, but prior to
the issuance of the Companys financial statements, the Company converted its
preferred stock into shares of common stock of BUI and sold a portion of the
common stock in a private placement (see Note 21). Accordingly, this
investment in shares of preferred and common stock is classified as a current asset at
December 31, 2003. The second investment in convertible preferred stock is in Accessline
Communications Corporation. This stock was received as consideration for a
licensing agreement (reflected in technology licensing and related services
revenues) in the second quarter of 2003, the estimated fair value of which was
determined to be $1,100. Note 7  Discontinued Operations 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
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 provided for a post closing cash settlement between
the parties. The sale price consisted 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 which began January 2003. The Company recognizes the
value of the earn-out shares as additional sales proceeds when and if earned.
During the year 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 Buyers United 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. The
value of the shares earned from the contingent consideration is included in the
calculation of gain from discontinued operation for the year ended December 31,
2003. As additional contingent consideration is earned, it is recorded as a
gain from discontinued operations. Upon closing of the sale, BUI assumed all operational losses since
December 6, 2002. Accordingly, the gain of $529 for the year ended December
31, 2003, includes the increase in the sales price for the losses incurred
since December 6, 2002. In the year ended December 31, 2002, the Company
recorded a loss from discontinued operations related to ILC of $12,508. Net assets and liabilities of the discontinued operations are as follows: 2003
    
    2002Accounts receivable
    
    $
    91
    
    
    $
    Furniture, fixtures equipment and software
    
    
    
    
    
    
    2,667Intangible assets
    
    
    
    
    
    
    270Impairment charge
    
    
    
    
    
    
    (1,587
    )Accrued expenses
    
        (
    841
        )
    
    
    Net assets (liabilities) of discontinued operations
    
    $
    750
    
    
    $
    1,350
 Revenues of the discontinued operation were $2,108, $7,806 and $26,624 in
2003, 2002 and 2001, respectively. Note 8  Composition of Certain Financial Statements Captions Furniture, fixtures, equipment and software consisted of the following at
December 31: 2003
    
    2002Telecommunications network equipment
    
    $
    14,196
    
    
    $
    14,361Furniture, fixtures and office equipment
    
    
    4,059
    
    
    
    2,939Building /leasehold improvements
    
    
    305
    
    
    
    219Software and information systems
    
    
    1,986
    
    
    
    29620,546
    
    
    
    17,815Less accumulated depreciation and amortization
    
    
    (12,063
    )
    
    
    (6,336
    )$
    8,483
    
    
    $
    11,479
 Included
in telecommunications network equipment is $9,739 in assets
acquired under capital leases at December 31, 2003 and 2002. Accumulated
amortization on these leased assets was $6,382 and $3,930 at December 31, 2003
and 2002, respectively.


F-15



---



##### 



Accounts payable and accrued liabilities consisted of the following at
December 31: 2003
    
    2002Accounts payable
    
    $
    3,370
    
    
    $
    7,017Telecommunications and related costs
    
    
    9,840
    
    
    
    6,866Regulatory fees
    
    
    6,790
    
    
    
    3,124Other
    
    
    8,272
    
    
    
    8,100$
    28,272
    
    
    $
    25,107
 Note 9  Acquisitions Acquisition of WebToTel On April 17, 2001, the Company completed its acquisition of WebToTel, Inc.
(WebToTel) and Nexbell Communications, Inc. (Nexbell), both previously
subsidiaries of Counsel for 872,717 shares of the Companys common stock issued
to Counsel. The acquisition of WebToTel was accounted for similar to a
pooling-of-interests using Counsels book values of the WebToTel assets and
liabilities, effective March 1, 2001, the earliest date that all three entities
were under common control of Counsel. 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. Purchase of certain assets and assumption of certain liabilities of
WorldxChange Communications, Inc. On June 4, 2001, Acceris purchased certain assets and assumed certain
liabilities of WorldxChange Communications, Inc. (the Debtor) from a
bankruptcy proceeding, creating WorldxChange. 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 WorldxChange in exchange for $13,000. To fund the acquisition of the assets and provide working capital, Counsel
agreed to provide a collateralized loan to Acceris in the aggregate amount of
$15,000 (of which $13,000 was used for the purchase) as more fully described in
Note 15. 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, equipment and other long term assets
    
    
    4,580Accounts payable and accrued liabilities
    
    
    (2,062
    )Obligations under capital leases
    
    
    (1,224
    )Net cash paid
    
    $
    13,681
 Also, in connection with the acquisition, WorldxChange agreed to pay $727
to a supplier for services rendered prior to the acquisition to continue
services with that vendor. The Company also incurred $681 of transaction costs
related to the purchase. Purchase of the Enterprise and Agent business of RSL COM USA Inc. On December 10, 2002, Acceris through its subsidiary, WorldxChange,
completed the purchase of the Enterprise and Agent business of RSL COM USA
Inc., (previously defined as 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 which 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 Enterprise 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 $1,014
of transaction costs related to the purchase. The $123 contingent payout
resulted in an adjustment to the 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
    )$
    9,637


F-16



---



##### 



Components of the acquired intangible assets are as follows: Amount
    
    Amortization PeriodIntangible assets subject to amortization:Customer contracts and relationships
    
    $
    1,638
    
    
    60 monthsAgent relationships
    
    
    564
    
    
    36 monthsAgent contracts
    
    
    242
    
    
    12 months$
    2,444
 Purchase of Transpoint Holdings, LLC. In July 2002,
    the Company agreed to purchase certain assets and related liabilities of Transpoint
    Communications, LLC (previously defined as 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
    had 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 for Local Telecom, less collections on accounts receivable of
    Local Telecom. At closing, the $2,836 was applied as part of the total purchase
    price of $2,882. The intent of this acquisition was primarily to increase
    the Companys agent relationships in the Companys commercial agent
    business, increase its customer base and improve network utilization. The final allocation of the purchase price to the fair values of assets
acquired and liabilities assumed is summarized below. The allocation of the
preliminary purchase has changed since September 30, 2003 based on completion
of a valuation analysis. Accounts receivable
            and other current assets
        
        $
        685Furniture, fixtures,
            and equipment
        
        
        5Intangible assets
        
        
        1,917Goodwill
        
        
        947Accounts payable
            and accrued liabilities
        
        
        (672
        )$
        2,882
 Components of the acquired intangible assets are as follows: Amount
    
    Amortization PeriodIntangible assets:Customer contracts and relationships
    
    $
    367
    
    
    60 monthsAgent relationships
    
    
    1,550
    
    
    36 months$
    1,917
 Pro forma results of operations for the years ended December 31, 2003 and
2002 as if the acquisitions of certain assets of RSL and Transpoint had been completed as of the
beginning of each year presented are shown below. The pro forma results do not
include any anticipated cost savings or other effects of the planned
integration of the operations, and are not necessarily indicative of the
results which would have occurred if the business combination had occurred on
the dates indicated, or which may result in the future. Year ended December 31,2003
    
    2002(as restated)
    
    (as restated)Revenues
    
    $
    140,995
    
    
    $
    148,404Loss from continuing operations
    
    $
    (32,999
    )
    
    $
    (20,915
    )Net loss
    
    $
    (32,470
    )
    
    $
    (33,424
    )Loss per share from continuing operations
    
    $
    (4.71
    )
    
    $
    (3.59
    )Net loss per share
    
    $
    (4.63
    )
    
    $
    (5.74
    )


F-17



---



##### 



Note 10  Intangible Assets and Goodwill Intangible assets consisted of the following at December 31: December 31, 2003Amortization
    
    
    
    
    
    Accumulatedperiod
    
    Cost
    
    amortization
    
    NetIntangible assets subject to amortization:Customer contracts and relationships
    
    12 - 60 months
    
    
    2,006
    
    
    
    (510
    )
    
    
    1,496Agent relationships
    
    36 months
    
    
    2,116
    
    
    
    (415
    )
    
    
    1,701Agent contracts
    
    12 months
    
    
    242
    
    
    
    (242
    )
    
    
    Patents
    
    60 months
    
    
    100
    
    
    
    
    
    
    
    100Goodwill
    
    
    
    
    
    
    1,120
    
    
    
    
    
    
    
    1,120Total intangible assets and goodwill
    
    
    
    
    
    $
    5,584
    
    
    $
    (1,167
    )
    
    $
    4,417
 December 31, 2003Amortization
    
    
    
    
    
    Accumulatedperiod
    
    Cost
    
    amortization
    
    NetIntangible assets subject to amortization:Customer contracts and relationships
    
    60 months
    
    
    1,786
    
    
    
    (20
    )
    
    
    1,766Agent relationships
    
    36 months
    
    
    588
    
    
    
    (15
    )
    
    
    573Agent contracts
    
    12 months
    
    
    250
    
    
    
    (15
    )
    
    
    235Goodwill
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    173Total intangible assets and goodwill
    
    
    
    
    
    $
    2,797
    
    
    $
    (50
    )
    
    $
    2,747
 Aggregate amortization expense of intangibles for the years ended December
31, 2003, 2002 and 2001 was $1,117 , $937 and $3,287 respectively. Note 11  Debt Debt, the carrying value of which approximates market, consists of the
following at December 31: 2003
    
    2002(as restated)
    
    (as restated)Note payable to a network service provider, interest at 10.0%, $23 per month
    
    
    
    
    
    $
    394Note payable to a network service provider, interest at 7.0%
    
    
    
    
    
    
    747Note payable, Winter Harbor LLC, interest at prime plus 9.0%
    
    
    
    
    
    
    1,999Note payable, RSL estate, 10.0% imputed interest, due March 31, 2004
    
    $
    1,105
    
    
    
    881Note payable to equipment supplier 7.0%, $11 per month until December 2005,
then $16 per month thereafter
    
    
    750
    
    
    
    Note payable to equipment supplier, 12.5%, $6 per month until October 2006
    
    
    171
    
    
    
    Revolving credit facility, greater of 6% or prime rate plus 1.75%
    
    
    12,127
    
    
    
    9,086Notes payable to Counsel, interest at 10.0%
    
    
    19,928
    
    
    
    9,350Note payable to Counsel and convertible to common stock, interest at 9.0%
    
    
    8,789
    
    
    
    7,162Notes payable convertible to common stock, interest at 10.0%
    
    
    
    
    
    
    36,71842,870
    
    
    
    66,337Less current portion
    
    
    (13,381
    )
    
    
    (12,073
    )Long-term debt, less current portion
    
    $
    29,489
    
    
    $
    54,264
 F-18




---



##### 



The Company was discharged of obligations amounting to $1,141 owed to a
network service provider. The discharge of these obligations is reported as
interest and other income in the accompanying consolidated statements of
operations for the year ended December 31, 2003. Counsel acquired a liability of the Company that it owed to Winter Harbor
LLC. Counsel replaced the loan with a 10% loan maturing on June 30, 2005. See
Note 15 below for further discussion. The maturity date of the revolving credit facility has been extended from
December 2004 to June 2005. The asset-based lender has first priority over
all the assets and shares of common stock of WorldxChange. The asset-based
facility provides the Company advances based on outstanding billings at rates
of 65% on direct billings and 85% of other receivables of WorldxChange, subject
to certain restrictions. The facility has certain covenants with which the
Company is in compliance at December 31, 2003. Counsel has a priority interest in the assets of Acceris and its
subsidiaries, with the exception of the assets of WorldxChange, wherein Counsel
has subordinated its position in favor of the priority interest of the
asset-based lender. The amounts owed to Counsel pursuant to its various notes
payable mature on June 30, 2005, with the exception of $5,600 of these notes,
which is subject to certain acceleration provisions triggered by events
including the sale of certain investments which Acceris holds at December 31,
2003 or a cash raise in the capital markets. In the fourth quarter of 2003, Counsel exercised its conversion rights,
and converted $40,673 of notes payable into shares of common stock of the
Company. Pursuant to this conversion, Counsel received 13,428,492 shares of
common stock, increasing its ownership in Acceris from 70% to approximately
91%. For further discussion of notes payable and other transactions with
Counsel, see Note 15, below. Note 12  Commitments Agreements classified as operating leases have terms ranging from one to
six years. The Companys rental expense, which is recognized on a straight
line basis, for operating leases was approximately $2,148, $4,547, and $13,547
for 2003, 2002 and 2001, respectively. Future minimum rental payments required under non-cancelable capital and
operating leases with initial or remaining terms in excess of one year consist
of the following at December 31, 2003: Capital
    
    OperatingLeases
    
    LeasesYear ended December 31:2004
    
    $
    2,948
    
    
    $
    2,3732005
    
    
    1,665
    
    
    
    1,9982006
    
    
    
    
    
    
    1,2652007
    
    
    
    
    
    
    7742008 and beyond
    
    
    
    
    
    
    637Total minimum payments
    
    
    4,613
    
    
    $
    7,047Less amount representing interest
    
    
    (267
    )Present value of net minimum lease payments
    
    
    4,346Less current portion
    
    
    (2,715
    )Long-term obligations under capital leases
    
    $
    1,631
 From time to time, Acceris has various agreements with national carriers
to lease local access spans and to purchase carrier services. The agreements
include minimum usage commitments with termination penalties up to 100% of the
remaining commitment. At December 31, 2003 all of the Companys minimum usage
commitments have been met. Note 13  Gain on Extinguishment of Debt During the third quarter of 2001, Nexbell was in default on two leases and
at the time of settlement Nexbell was liable for $1,273. The debt was settled
during the fourth quarter of 2001 for a one-time payment of $180 and
accordingly the Company recorded a gain in the amount of $1,093. In accordance
with SFAS 145, the Company has reclassified this gain to be included in the
results from discontinued operations for the year ended December 31, 2001.
Originally, the amount was recorded as an extraordinary gain. F-19




---



##### 



Note 14  Income Taxes The Company recognized no income tax benefit from its losses in 2003, 2002
and 2001. The reported benefit from income taxes varies from the amount that
would be provided by applying the statutory U.S. Federal income tax rate to the
loss from continuing operations before taxes for the following reasons: 2003
    
    2002
    
    2001(as restated)
    
    (as restated)Expected federal statutory tax benefit
    
    $
    (10,865
    )
    
    $
    (5,212
    )
    
    $
    (8,831
    )Increase (reduction) in taxes resulting from:State income taxes
    
    
    (728
    )
    
    
    (430
    )
    
    
    (506
    )Foreign loss not subject to domestic tax
    
    
    5
    
    
    
    1
    
    
    
    234Non-deductible interest on certain notes
    
    
    3,364
    
    
    
    774
    
    
    
    357Non-deductible goodwill
    
    
    
    
    
    
    
    
    
    
    3,096Change in valuation allowance
attributable to continuing operations
    
    
    8,208
    
    
    
    4,859
    
    
    
    7,457Other
    
    
    16
    
    
    
    8
    
    
    
    (1,807
    )$
    
    
    
    $
    
    
    
    $
    
 The change in the valuation allowance, including discontinued operations, was
$6,076, $9,523 and $14,356 for the years ended 2003, 2002 and 2001
respectively. At December 31, 2003, the Company had total net operating loss carryforwards
for federal income tax purposes of approximately $157,000. These net operating
loss carryforwards expire between 2006 and 2023. The Companys utilization of approximately $154,000 of its available net
operating loss carryforwards against future taxable income is restricted
pursuant to the change in 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 carryforwards occurred in 2001 as a result
of the acquisition of the Company by Counsel. Further restrictions likely have
occurred as a result of subsequent changes in the share ownership and capital
structure of the Company and Counsel. Net operating loss carryforwards arising
prior to such a change in ownership would be available for usage against
future taxable income subject to an annual usage limitation of approximately
$6,000 per annum until 2008 and thereafter $1,550 per annum respectively. Due to the expiration of the Companys net operating loss carryforwards and the
above possible usage restrictions, it is most likely that only $53,000 of the
total $157,000 of net operating loss carryforwards otherwise available will be
able to be utilized against future taxable income. The Company also has net operating loss carryforwards for state income tax
purposes in those states where it has conducted business. Available state tax
loss carryforwards however may differ substantially by jurisdiction and in
general are subject to the same or similar restrictions as to expiry and usage
described above. The Company is subject to state income tax in multiple
jurisdictions. The components of the deferred tax asset and liability of continuing and
discontinued operations as of December 31, 2003 and 2002 are as follows: 2003
    
    2002Deferred tax assets:Tax net operating loss carryforwards
    
    $
    58,386
    
    
    $
    51,690Acquired in-process research and development and intangible assets
    
    
    3,441
    
    
    
    3,435Investments
    
    
    405
    
    
    
    Amortization of deferred compensation on stock options
    
    
    
    
    
    
    1,933Reserve for loss on disposal of discontinued operations
    
    
    
    
    
    
    304Reserve for accounts receivable
    
    
    1,368
    
    
    
    659Accrued officers wages
    
    
    121
    
    
    
    75Accrued vacation
    
    
    275
    
    
    
    80Accrued interest
    
    
    11
    
    
    
    Unearned revenue
    
    
    2,579
    
    
    
    1,924Other
    
    
    594
    
    
    
    150Depreciation and amortization
    
    
    854
    
    
    
    1,708Valuation allowance
    
    
    (68,034
    )
    
    
    (61,958
    )Total deferred tax asset
    
    
    
    
    
    
    Deferred tax liabilities:Total deferred tax liability
    
    
    
    
    
    
    Net deferred tax asset
    
    $
    
    
    
    $
    
 F-20




---



##### 



As the Company has not generated taxable income from its communications
services in the past, a valuation allowance has been provided at December 31,
2003 and 2002 to reduce the total deferred tax asset to nil, the amount
considered more likely than not to be realized. The
change in the valuation allowance in the year is due primarily to an increase
in the Companys net operating loss carryforwards. Note 15  Transactions with Significant Owners Transactions with Counsel: Initial Acquisition of Acceris and Senior Convertible Loan On March 1, 2001, Acceris entered into a Senior Convertible Loan and
Security Agreement, (the Senior Loan Agreement) with Counsel. Pursuant to
the terms and provisions of the Senior Loan Agreement, Counsel agreed to make
periodic loans to Acceris in the aggregate principal amount not to exceed
$10,000, which was subsequently increased to $12,000 through amendment on May
8, 2001. Advances against the Senior Loan Agreement were structured as a 3-year
convertible note with interest at 9% per annum, compounded quarterly. Counsel
initially could convert the loan into shares of common stock of Acceris at a
conversion price of $11.20 per common share. The terms of the Senior Loan
Agreement also provide that at any time after September 1, 2002, the
outstanding debt including accrued interest would automatically be converted
into common stock using the then current conversion rate, on the first date
that is the twentieth consecutive trading day that the common stock has closed
at a price per share that is equal to or greater than $20.00 per share. The
Senior Loan Agreement also provides that the conversion price is in certain
cases subject to adjustment and includes traditional anti-dilution protection
for the lender and is subject to certain events of default, which could
accelerate the repayment of principal plus accrued interest. Total proceeds
available to the Company were $12,000, less debt issuance costs of $600, which
are being amortized over three years. The Senior Loan Agreement has been
amended several times and the maturity date of the loan plus accrued interest
has been extended to June 30, 2005. As a result of the application of the
anti-dilution provisions of the Senior Loan Agreement, the conversion price has
been adjusted to $6.15 per common share. As of December 31, 2003, the total
outstanding debt under the Note (including principal and accrued interest) was
$15,291 which is convertible into 2,486,299 shares of common stock. In connection with the above Senior Loan Agreement, Acceris granted
Counsel a security interest in all of Acceris assets owned at the time of
execution of the Senior Loan Agreement or subsequently acquired, including but
not limited to Acceris accounts receivable, intangibles, inventory, equipment,
books and records, and negotiable instruments held by the Company
(collectively, the Collateral). The Senior Loan Agreement also includes
demand registration rights for common stock issuable upon conversion of the
related loan. In addition to the foregoing agreements, Acceris and Counsel executed a
Securities Support Agreement, dated March 1, 2001 (the Support Agreement) for
the purpose of providing certain representations and commitments by Acceris to
Counsel. Counsel relied on these representations and commitments in its
decision to enter a separate agreement (the Securities Purchase Agreement)
with Winter Harbor and First Media L.P., a limited partnership and the parent
company of Winter Harbor (collectively the Winter Harbor Parties), Counsel
agreed to purchase from the Winter Harbor Parties all of their equity
securities in Acceris, including shares of Class M and Class N preferred stock
of Acceris, beneficially owned by the Winter Harbor Parties for aggregate
consideration of $5,000 in cash. On March 7, 2001, as part of the agreements discussed above, Counsel
converted all of the Class M and N convertible preferred stock it obtained from
Winter Harbor into 3,098,303 shares of Acceris common stock. The Class N
shares were converted at $25.00 per common share and Class M at $11.20 per
common share, in accordance with their respective conversion rights. Pursuant
to the Securities Purchase Agreement, certain shares of common stock owned by
the Winter Harbor Parties were held in escrow pending resolution of certain
events. Under the Support Agreement of March 1, 2001, Acceris also agreed to
engage appropriate advisors and proceed to take all steps necessary to merge
Nexbell Communications, Inc. (a subsidiary of Counsel) into Acceris. The
merger was completed on April 17, 2001 and Counsel received 871,724 shares of
common stock in Acceris as consideration. Assignment of Winter Harbor Common Stock and Debt Interests Pursuant to the terms of a settlement agreed between Counsel and the
Winter Harbor Parties effective August 29, 2003, the Winter Harbor Parties
relinquished their right to 118,750 shares of the common stock of Acceris to
Counsel. These shares were released from escrow and delivered to Counsel. The Winter Harbor Parties further assigned to Counsel all of their rights
with respect to a note payable by Acceris of $1,999 drawn down pursuant to a
Letter of Credit issued November 3, 1998 to secure certain obligations of
Acceris together with any accrued interest thereon. The assigned amount
together with accrued interest amounted to $2,577 on August 29, 2003. As a
result of the settlement and assignment, Acceris entered into a new loan
agreement with Counsel the terms of which provide that from August 29, 2003 the
loan balance of $2,577 shall bear interest at 10% per annum compounded
quarterly with the aggregate balance of principal and accrued interest payable
on maturity of the loan on June 30, 2005. This loan agreement was subsequently
amended and restated to increase the principal of the loan by a further $100
for funding provided by Counsel to enable Acceris to acquire a VoIP patent in
December 2003 and to allow for the making of further periodic advances
thereunder at Counsels discretion. The loan amount has been further increased
by $1,546 at December 31, 2003 representing operating advances from Counsel to  Acceris in the period since the initial
acquisition of the Acceris common stock by Counsel in March 2001, which had
previously been recorded as an intercompany payable to Counsel. As of
December 31, 2003, the total outstanding debt under the Note (including
principal and accrued interest) was $4,311. F-21




---



##### 



Loan and Security Agreement and Amended Debt Restructuring On June 6, 2001, Acceris and Counsel entered into a Loan and Security
Agreement (the Loan Agreement). Any funds advanced to Acceris between June
6, 2001 and April 15, 2002, (not to exceed $10,000) were governed by the Loan
Agreement and due on June 6, 2002. The loan was secured by all of the assets
of Acceris. As of December 31, 2001, advances under this loan agreement totaled
$10,000. On June 27, 2002 the Loan Agreement was amended to an amount of
$24,307, which included additional capital advances from Counsel to Acceris
made from December 31, 2001 through June 6, 2002. The amended agreement also
further provided for additional advances as needed to Acceris, which advances
totaled $2,087 through December 31, 2002 and $650 through November 30, 2003. On July 25, 2002, Acceris and Counsel entered into a Debt Restructuring
Agreement (Debt Restructuring Agreement), which was amended on October 15,
2002 pursuant to an Amended and Restated Debt Restructuring Agreement (Amended
Agreement). The Amended Agreement included the following terms:  1.
    
    Principal ($24,307) and associated accrued interest ($2,284), as of
October 15, 2002, under the Loan Agreement, as amended, would be
exchanged for common stock of Acceris at $3.77 per share (representing
the average closing price of Acceris common stock during May 2002).2.
    
    Funding provided by Counsel pursuant to the Loan Agreement, as
amended, ($2,087) and associated accrued interest ($1,996) from October
15, 2002 to December 31, 2002, would be exchanged for common stock of
Acceris at $3.77 per share (representing the average closing price of
Acceris common stock during May 2002).3.
    
    Counsel would advance to Acceris all amounts paid or payable by
Acceris to its stockholders that exercised their dissenters rights in
connection with the transactions subject to the debt restructuring
transactions and the amount of the annual premium to renew the existing
directors and officers insurance coverage through November 2003.4.
    
    Counsel would reimburse Acceris for all costs, fees and expenses, in
connection with the Debt Restructuring Agreement and the Amended
Agreement and transactions contemplated thereby including all expenses
incurred and yet to be incurred, including the Special Committees costs
to negotiate these agreements and costs related to obtaining stockholder
approval. During 2003 and 2002, Counsel reimbursed Acceris $132 and
$499, respectively, for certain reimbursable expenses, which have been
recorded as additional paid-in capital.5.
    
    The issuance of common stock by Acceris pursuant to this Agreement
would result in a weighted average conversion price adjustment pursuant
to the provisions of the March 1, 2002 Loan Agreement. Whereas the
conversion price for the March 1, 2002 Loan Agreement had initially been
$11.20, the new conversion price would be adjusted as a result of the
anti-dilution provisions of the Senior Loan Agreement. At December 31,
2003, the new conversion price is $6.15 per common share.Effective November 30, 2003, 8,681,096 shares of common stock were issued
to Counsel in settlement of the underlying debt and accrued interest. Convertible Promissory Note to Fund RSL Acquisition In connection with the acquisition of RSL in December 2002, Acceris issued
a $7,500 convertible note payable (the Convertible Note) to Counsel, bearing
interest at 10% per annum compounded quarterly which matured on March 1, 2004.
The Convertible Note was convertible into common stock of Acceris at a
conversion rate of $1.68 per share. On November 30, 2003, Counsel exercised
its right to convert the Convertible Note plus accrued interest to that date
totaling $7,952 into common stock of Acceris. This resulted in the issuance of
4,747,396 shares of Acceris common stock. Collateralized Promissory Note and Loan Agreement During the third quarter of 2003, Counsel advanced the sum of $5,600 to
Acceris evidenced by a promissory note effective October 1, 2003. In January
2004, Acceris and Counsel entered into a loan agreement and an amended and
restated promissory note pursuant to which an additional $2,000 was loaned to
Acceris and pursuant to which additional periodic loans may be made from time
to time (collectively and as amended, the Promissory Note). The Promissory
Note matures on June 30, 2005 and accrues interest at 10% per annum compounded
quarterly from the date funds are advanced. The Promissory Note is
collateralized by certain shares of Series B Convertible Preferred Stock (the
Preferred Stock) of Buyers United, Inc. (a third party), which are held by
Acceris. In the event of the sale of the Preferred Stock (or the common stock
to which the Preferred Stock is convertible) by Acceris or an equity investment
or investments in Acceris by a third party through the capital markets and
subject to certain limitations, the maturity date of the Promissory Note will
accelerate to the date 10 calendar days following either such event. As of the
date of this filing, subsequent to year end, Counsel has provided an aggregate
of $4,050 of funds in 2004 pursuant to this loan agreement. There are no
conversion features associated with the Promissory Note. F-22




---



##### 



Secured Loan to Acceris To fund the acquisition of the assets purchased and liabilities assumed by
WorldxChange, on June 4, 2001 Counsel provided a loan (the Initial Loan) to
WorldxChange in the aggregate amount of $15,000. The loan was subordinated to
a revolving credit facility with Foothill Capital Corporation (Foothill) and
was collateralized against all assets of WorldxChange. On October 1, 2003, Counsel assigned the balance owing in connection with
this loan of $9,743 including accrued interest (the Assigned Loan) to Acceris
in exchange for a new loan bearing interest at 10% per annum compounded
quarterly maturing on June 30, 2005 (the New Loan). Consistent with the terms
of the Initial Loan, subject to certain conditions, the New Loan provides for
certain mandatory prepayments upon written notice from Counsel including an
event resulting in the issuance of new shares by Acceris to a party
unrelated to Counsel where the funds are not used for an approved expanded
business plan or where Acceris has sold material assets in excess of cash
proceeds of $1,000. Pursuant to a Stock Pledge Agreement as amended, the New
Loan is secured by the common stock held by Acceris in WorldxChange subject to
the priority security interests of Foothill, the Companys asset-based lender. Counsel Keep Well As a result of Counsels purchase of Winter Harbors security holdings in
Acceris, Counsel became the single largest stockholder of the Company. In
addition to the above transactions, Counsel has committed to fund, through
long-term inter company advances or equity contribution, all capital
investment, working capital or other operational cash requirements of Acceris
through June 30, 2005 (the Keep Well). By virtue of the Keep Well any default
and loan repayment accelerator provisions in respect of the above loans
agreements are also indirectly subject to funding by Counsel under the terms of
the Keep Well. Accounting treatment of Counsel and Winter Harbor transactions The repurchase on March 1, 2001 by Acceris of Winter Harbors 1,677,000
warrants for 250,000 common shares was recorded at market value of the common
stock issued in the exchange amounting to $3,750. The repurchase was accounted
for similar to the repurchase of treasury stock. Accordingly, common stock and
additional paid in capital was increased by $3,750 which was offset by a charge
to additional paid in capital of $3,715 to reflect the warrant repurchase. The
net effect of this transaction was the recording of additional par value of $35
for the 250,000 shares issued during the year ended December 31, 2001. As the conversion price for Class M preferred stock had dropped to $25 per
share (from its original conversion price of $55.60), an amount reflecting the
increase in the beneficial conversion feature was recorded in connection with
the March 1, 2001 transaction as an increase in additional paid in capital and
a charge to accumulated deficit for $9,780. The purchase and sale of the Class
M and Class N preferred stock between Winter Harbor and Counsel, as described
above, have been imputed in Acceris financial statements as if the
transactions had been effected through Acceris as a repurchase of the preferred
stock from Winter Harbor and a reissuance to Counsel. Accordingly, the
transaction was considered a repurchase of Winter Harbors Class M and N
preferred stock in exchange for $5,000. The difference between the carrying
value of the Class M and N preferred stock and the $5,000 paid was recorded as
an adjustment to retained earnings reflected in the form of a $30,292
contribution from settlement of these transactions between stockholders and has
been reflected as such in the statement of changes in stockholders deficit for
the year ended December 31, 2001. In addition, the transaction considered that
Acceris resold the Class M and N preferred stock to Counsel for $5,000
(Counsels payment to Winter Harbor). However, since the conversion price on
the Class M shares was below the market price on the day the transaction
closed, a beneficial conversion feature was recorded as the difference between
the market price of the common shares and the conversion price per share
multiplied by the number of common shares into which the Class M and Class N
could convert. This amount was limited to the proceeds. The Company has also recorded a beneficial conversion feature (debt
discount) in the aggregate amount of $12,856 on the convertible debt funded by Counsel
that was received through June 30, 2001. The amount of the initial discount, if
applicable, is calculated as the difference between the initial conversion
price ($11.20) and the market price of the common stock (if higher than the
conversion price on the date funds are drawn on the loan), multiplied by the
number of shares of common stock into which the note can be converted. Further debt discounts have been recorded resulting from dilutionary adjustments to the
conversion price from the issuance of new convertible securities. Additionally, the
accumulation of unpaid interest costs on the convertible debt is deemed to be interest paid
in kind (PIK) containing a conversion feature which once assessed as PIK interest
requires the determination of a debt discount. The beneficial conversion feature is being amortized over the life of the convertible note. Counsel
Management Services The
Chief Executive Officer (CEO) of Acceris is an employee
of Counsel. As CEO, he is entitled to an annual salary of $275 and a
discretionary bonus equal to 100% of his base salary. For 2003, no
bonus was awarded. The CEO has elected to assign his salary payable
at December 31, 2003 of $275 to Counsel. This amount is recorded
as a liability to Counsel in the accompanying Consolidated Balance
Sheets. Counsel also provides other management services to
Acceris through time spent by Counsel executives serving roles at Acceris.
Accordingly, Acceris has valued the services of these other employees at
approximately $130 for the year ended December 31, 2003. The expense has been
reflected in selling, general, administrative and other expense for the year ended December 31, 2003, offset by an increase to additional paid-in capital. Note 16  Legal Proceedings The Company is involved in various legal matters arising out of its
operations in the normal course of business, none of which matters are
expected, individually or in the aggregate, to have a material adverse effect
on the Company. F-23




---



##### 



Note 17  Class N Preferred Stock On July 23, 1999, the Company completed its offering of 20,000 shares of
Class N preferred stock. The offering was fully subscribed through cash
subscriptions and the Company exercised its rights to exchange notes payable to
Winter Harbor of $8,000 and $4,000, plus accrued interest. In total the
Company received $7,281 in cash (before expenses of $487) and exchanged $12,719
in debt and accrued interest. The Class N conversion price was initially set
at $2.78 per share. The conversion rate was adjusted to $29.60 per share as of
December 31, 2000 and $25.00 per share in January 2001 based on 110% of the
average trading price for any 20 day period following the date that Class N
preferred stock is first issued subject to a floor of $25.00. The Class N
preferred stock votes with the common stock on an as converted basis and is
senior to all other preferred stock of the Company. Dividends, if any, will be
paid on an as converted basis equal to common stock dividends. During 2003, holders of the Class N preferred stock converted 150 of those
shares into 6,000 shares of common stock. As of December 31, 2003 and 2002,
there were 619 and 769 shares of Class N preferred stock outstanding,
respectively. At December 31, 2003 and 2002, of the 10,000,000 shares of preferred stock
authorized, 9,486,500 remain undesignated and unissued. Note 18  Stock-Based Compensation Plans In November 2003, the Companys stockholders approved a 1-for-20 reverse
stock split. Accordingly, all information presented below has been adjusted to
reflect the reverse split. 2003 Stock Option and Appreciation Rights Plan In November 2003, the stockholders of the Company approved the 2003 Stock
Option and Appreciation Rights Plan (the 2003 Plan) which provides for the
issuance of incentive stock options, non-qualified stock options and stock
appreciation rights (SARs) up to an aggregate of 2,000,000 shares of common
stock (subject to adjustment in the event of stock dividends, stock splits, and
other similar events). The price at which shares of common stock covered by
the option can be purchased is determined by the Companys Board of Directors
or its committee; however, in the case of incentive stock options the exercise
price shall not be less than the fair market value of the Companys common
stock on the date the option is granted. There were 1,372,000 options granted
(and outstanding at December 31, 2003) under the 2003 Plan in 2003. The
outstanding options vest over four years at exercise prices of $3.00 per share.  No SARs have been issued under the 2003 Plan. 1997 Recruitment Stock Option Plan In October 2000, the stockholders of the Company approved an amendment of
the 1997 Recruitment Stock Option Plan (the 1997 Plan)which provides for the issuance of
incentive stock options, non-qualified stock options and SARs up to an
aggregate of 370,000 shares of common stock (subject to adjustment in the event
of stock dividends, stock splits, and other similar events). The price at
which shares of common stock covered by the option can be purchased is
determined by the Companys Board of Directors; however, in all instances the
exercise price is never less than the fair market value of the Companys common
stock on the date the option is granted. As of December 31, 2003, there were options to purchase 60,480 shares of
the Companys common stock outstanding under the 1997 Plan. The outstanding options vest over
three years at exercise prices ranging from $1.40 to $127.50 per share.
Options issued under the 1997 Plan must be exercised within ten years of grant and
can only be exercised while the option holder is an employee of the Company.
The Company has not awarded any SARs under the 1997 Plan. During 2003, 2002 and
2001, options to purchase 45,067, 42,968 and 130,022 shares of common stock,
respectively, were forfeited or expired. There were no exercises during 2003. Director Stock Option Plan The Companys Director Stock Option Plan authorizes the grant of stock
options to directors of the Company. Options granted under the Plan are
non-qualified stock options exercisable at a price equal to the fair market
value per share of common stock on the date of any such grant. Options granted
under the Plan are exercisable not less than six months or more than ten years
after the date of grant. F-24




---



##### 



As of December 31, 2003, options for the purchase of 233 shares of common
stock at prices ranging from $17.50 to $77.50 per share were outstanding, all
of which are exercisable. In connection with the adoption of the 1995 Director
Plan, the Board of Directors authorized the
termination of future grants of options under the plan; however, outstanding
options granted under the plan will continue to be governed by the terms
thereof until exercise or expiration of such options. In 2003, no options were
exercised or expired. 1995 Director Stock Option and Appreciation Rights Plan The 1995 Director Stock Option and Appreciation Rights Plan (the 1995
Director Plan) provides for the issuance of incentive options, non-qualified
options and SARs to directors of the Company up to 12,500 shares of common
stock (subject to adjustment in the event of stock dividends, stock splits, and
other similar events). The 1995 Director Plan also provides for the grant of non-qualified
options on a discretionary basis to each member of the Board of Directors then
serving to purchase 500 shares of common stock at an exercise price equal to
the fair market value per share of the common stock on that date. Each option
is immediately exercisable for a period of ten years from the date of grant.
The Company has 9,500 shares of common stock reserved for issuance under the
1995 Director Plan. As of December 31, 2003, options to purchase 8,500 shares
of common stock at prices ranging from $20.00 to $25.00 per share are
outstanding and exercisable. No options were granted or exercised under this
plan in 2003, 2002 or 2001. 1995 Employee Stock Option and Appreciation Rights Plan The 1995 Employee Stock Option and Appreciation Rights Plan (the 1995
Employee Plan) provides for the issuance of incentive options, non-qualified
options, and SARs. Directors of the Company are not eligible to participate in
the 1995 Employee Plan. The 1995 Employee Plan provides for the grant of stock
options which qualify as incentive stock options under Section 422 of the
Internal Revenue Code, to be issued to officers who are employees and other
employees, as well as non-qualified options to be issued to officers, employees
and consultants. In addition, SARs may be granted in conjunction with the
grant of incentive options and non-qualified options. The 1995 Employee Plan provides for the grant of incentive options,
non-qualified options and SARs of up to 20,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an incentive option or non-qualified option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any incentive option, non-qualified
option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares or both. The Company
has 20,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 2003, there were no options outstanding under the
1995 Employee Plan. During 2003, 2002 and 2001, options to purchase 6,763, 500
and 1,875, respectively, of common stock were forfeited or expired. No options
were granted or exercised in 2003. Other warrants and options In 1996, the Company approved the issuance of 87,500 options to executives
of the Company, as part of their employment agreements, and 3,200 options to a
consultant. The options expire in 2006 and have an option price of $78.00. No
options expired, were exercised or forfeited during 2003. As of December 31,
2003, there remained 78,200 options outstanding. During 1997, the Company issued options to purchase 60,500 shares of
common stock (10,500 of which were issued under the 1997 recruitment stock
option plan) to consultants at exercise prices ranging from $97.50 to $168.75
(repriced to $78.00 on December 13, 1998), which was based on the closing price
of the stock at the grant date. No options expired, were exercised or
forfeited during 2003. The remaining options must be exercised within ten
years of the grant date. As of December 31, 2003 there remained 44,500 options
outstanding. During 1997, the Company issued non-qualified options to purchase 114,750
shares of common stock to certain executive employees. The options must be
exercised within ten years of the grant date and have an exercise price of
$78.00. There were no options forfeited in 2003, 2002 or 2001. No options
expired or were exercised during 2003. As of December 31, 2003 there remained
105,915 options outstanding. During 1998, the Company issued non-qualified options to purchase 46,750
shares of common stock to certain executive employees at exercise prices
ranging from $51.26 to $62.50, which price was based on the closing price of
the stock at the grant date. The options must be exercised within ten years of
the grant date. No options expired, were exercised or forfeited during 2003.
As of December 31, 2003 there remained 40,470 options outstanding. During 1999, the Company issued non-qualified options to purchase 32,750
shares of common stock to certain executive employees at exercise prices
ranging from $50.00 to 71.26, which price was based on the closing price of the
stock at the grant date. The options must be exercised within ten years of the
grant date. No options were exercised during 2003 or 2002. During 2001, 2,500
of these options were forfeited. During 2000, options to purchase 11,500
shares of common stock were exercised. As of December 31, 2003, there remained
18,750 options outstanding. During 1999, the Company issued non-qualified options to purchase 10,000
shares of common stock to a consultant at an exercise price
of $60.00, which was based on the closing price of the stock at the grant
date. The fair value of the options issued was recorded as deferred
compensation of $300,000 to be amortized over the expected period the services
were to be provided. As of December 31, 2003 there remained 10,000 options
outstanding. F-25




---



##### 



During 2000, the Company issued non-qualified options to purchase 129,250
shares of common stock to certain executive employees at exercise prices
ranging from $55.00 to $127.50, which price was based on the closing price of
the stock at the grant date. The options must be exercised within ten years of
the grant date. During 2001, 60,417 of these options were forfeited. As of
December 31, 2003, there remained 68,833 options outstanding. During 2000 the Company obtained approval from its stockholders to
establish the 2000 Employee Stock Purchase Plan. This plan allows all eligible
employees of the Company to have payroll withholding of 1 to 15 percent of
their wages. The amounts withheld during a calendar quarter are then used to
purchase common stock at a 15 percent discount off the lower of the closing
sale price of the Companys stock on the first or last day of each quarter.
This plan was approved by the Board of Directors, subject to stockholder
approval, and was effective beginning the third quarter of 2000. The Company
issued 1,726 shares to employees based upon payroll withholdings during 2001,
respectively. There were no issuances in 2002 or 2003. The following table summarizes the changes in common stock options for the
common stock option plans described above: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    Options
    
    AverageOptions
    
    Exercise
    
    Options and
    
    Exercise
    
    and
    
    Exerciseand Warrants
    
    Price
    
    Warrants
    
    Price
    
    Warrants
    
    PriceOutstanding at beginning of year
    
    
    1,258,463
    
    
    $
    36.40
    
    
    
    1,401,673
    
    
    $
    45.40
    
    
    
    2,267,750
    
    
    $
    51.40Granted
    
    
    1,377,662
    
    
    
    3.00
    
    
    
    4,750
    
    
    
    1.40
    
    
    
    1,025,478
    
    
    
    15.20Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (828,246
    )
    
    
    20.46
    
    
    
    (130,271
    )
    
    
    126.80
    
    
    
    (82,159
    )
    
    
    68.60Forfeited
    
    
    
    
    
    
    
    
    
    
    (17,689
    )
    
    
    85.40
    
    
    
    (1,809,396
    )
    
    
    28.40Outstanding at end of year
    
    
    1,807,879
    
    
    $
    18.20
    
    
    
    1,258,463
    
    
    $
    36.40
    
    
    
    1,401,673
    
    
    $
    45.40Options and warrants exercisable
at year end
    
    
    435,880
    
    
    
    
    
    
    
    1,256,828
    
    
    
    
    
    
    
    1,354,510Weighted-average fair value of
options
and warrants granted during
the year
    
    
    
    
    
    $
    2.07
    
    
    
    
    
    
    $
    0.60
    
    
    
    
    
    
    $
    11.40
 The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 2003: Weighted
    
    Weighted
    
    Number
    
    WeightedOptions and
    
    Average
    
    Average
    
    Exercisable
    
    AverageWarrants
    
    Remaining
    
    Exercise
    
    at December
    
    ExerciseExercise price
    
    Outstanding
    
    Life (years)
    
    Price
    
    31, 2003
    
    Price$  1.40 to $    3.00
    
    
    1,381,662
    
    
    
    9.96
    
    
    $
    2.99
    
    
    
    9,662
    
    
    $
    1.98$  5.40 to $  25.00
    
    
    19,861
    
    
    
    4.97
    
    
    
    16.68
    
    
    
    19,861
    
    
    
    16.68$42.50 to $  71.26
    
    
    167,931
    
    
    
    5.47
    
    
    
    56.88
    
    
    
    167,931
    
    
    
    56.88$77.50 to $127.50
    
    
    238,425
    
    
    
    3.23
    
    
    
    79.22
    
    
    
    238,426
    
    
    
    79.221,807,879
    
    
    
    8.60
    
    
    $
    18.20
    
    
    
    435,880
    
    
    $
    66.05
 Note 19  Segment of Business Reporting The Companys reportable segments are as follows:  
    
    Enterprise  is comprised of the enterprise business of RSL which was
acquired in December 2002. This segment offers voice and data
solutions to enterprise customers through an in-house sales force.  
    
    Retail  includes operations of WorldxChange (began operations in June
2001 and was formerly reported as the dial-around segment) and the
agent and residential business of RSL which was acquired in December
2002. This segment offers a dial around telecommunications product
and a 1+ product through two channels, namely, multi-level marketing
(MLM) and commercial agents.  
    
    Technologies  is the former technology licensing and development
segment, which segment offers a fully developed network convergence
solution for voice and data. The Company licenses certain developed
technology to third party users. F-26




---



##### 



There are no material inter-segment revenues. The Companys business is
conducted principally in the U.S.; foreign operations are not significant.
The table below presents information about net loss and segment assets used by
the Company as of and for the three years ended December 31, 2003. For the Year ended December 31, 2003TotalReportableEnterprise
    
    Retail
    
    Technologies
    
    SegmentsRevenues from external customers
    
    $
    25,615
    
    
    $
        108,150
    
    
    $
        2,164
    
    
    $
    135,929Interest and other income
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Interest expense
    
    
    294
    
    
    
    2,416
    
    
    
    
    
    
    
    2,710Depreciation and amortization expense
    
    
    2,241
    
    
    
    4,883
    
    
    
    
    
    
    
    7,124Segment income (loss) from continuing operations
    
    
    (2,575
    )
    
    
        (17,821
    )
    
    
        1,014
    
    
    
    (19,382
    )Other significant non-cash items:Provision for doubtful accounts
    
    
    
    
    
    
    5,432
    
    
    
    6
    
    
    
    5,438Expenditures for long-lived assets
    
    
    265
    
    
    
    2,535
    
    
    
    
    
    
    
    2,800Segment assets
    
    
    6,462
    
    
    
    28,992
    
    
    
    1,215
    
    
    
    36,669
 For the Year ended December 31, 2002TotalReportableEnterprise
    
    Retail
    
    Technologies
    
    SegmentsRevenues from external customers
    
    $
    1,547
    
    
    $
    83,706
    
    
    $
    2,837
    
    
    $
    88,090Interest and other income
    
    
    1
    
    
    
    356
    
    
    
    
    
    
    
    357Interest expense
    
    
    19
    
    
    
    3,279
    
    
    
    
    
    
    
    3,298Depreciation and amortization expense
    
    
    158
    
    
    
    4,056
    
    
    
    11
    
    
    
    4,225Segment income (loss) from operations
    
    
    (629
    )
    
    
    (6,715
    )
    
    
    976
    
    
    
    (6,368
    )Other significant non-cash items:Provision for doubtful accounts
    
    
    33
    
    
    
    5,966
    
    
    
    
    
    
    
    5,999Expenditures for long-lived assets
    
    
    3,102
    
    
    
    3,747
    
    
    
    
    
    
    
    6,849Segment assets
    
    
    9,573
    
    
    
    27,877
    
    
    
    173
    
    
    
    37,623
 For the Year ended December 31, 2001TotalReportableRetail
    
    Technologies
    
    SegmentsRevenues from external customers
    
    $
    50,289
    
    
    $
    5,697
    
    
    $
    55,986Interest revenue
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    2,499
    
    
    
    
    
    
    
    2,499Depreciation and amortization expense
    
    
    2,286
    
    
    
    126
    
    
    
    2,412Segment income (loss) from operations
    
    
    (13,927
    )
    
    
    1,611
    
    
    
    (12,316
    )Other significant non-cash items:Provision for doubtful accounts
    
    
    2,861
    
    
    
    
    
    
    
    2,861Expenditures for long-lived assets
    
    
    14,797
    
    
    
    8
    
    
    
    14,805Segment assets
    
    
    32,206
    
    
    
    137
    
    
    
    32,343
 F-27




---



##### 



The following table reconciles reportable segment information to the
consolidated financial statements of the Company: 2003
    
    2002
    
    2001(as restated)
    
    (as restated)Total interest and other income for reportable segments
    
    $
    2
    
    
    $
    357
    
    
    $
    Unallocated interest revenue from corporate accounts
    
    
    1,214
    
    
    
    38
    
    
    
    81$
    1,216
    
    
    $
    395
    
    
    $
    81Total interest expense for reportable segments
    
    $
    2,710
    
    
    $
    3,298
    
    
    $
    2,499Unallocated interest expense from related party debt
    
    
    9,337
    
    
    
    4,512
    
    
    
    1,556Other unallocated interest expense from corporate debt
    
    
    1,222
    
    
    
    385
    
    
    
    638$
    13,269
    
    
    $
    8,195
    
    
    $
    4,693Total depreciation and amortization for reportable segments
    
    $
    7,124
    
    
    $
    4,225
    
    
    $
    2,412Unallocated amortization expense from intangible assets
    
    
    
    
    
    
    
    
    
    
    2,608Other unallocated depreciation from corporate assets
    
    
    1
    
    
    
    45
    
    
    
    1,389$
    7,125
    
    
    $
    4,270
    
    
    $
    6,409Total segment loss
    
    $
    (19,382
    )
    
    $
    (6,368
    )
    
    $
    (12,316
    )Unallocated non-cash amounts in consolidated net loss:Amortization of discount on notes payable
    
    
    (676
    )
    
    
    (560
    )
    
    
    (253
    )Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    589Other income (primarily gain on extinguishment of debt)
    
    
    1,220Amortization of deferred compensation on stock options issued for services
    
    
    
    
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    (2,608
    )Other corporate expenses (primarily corporate level interest, general and
administrative expenses)
    
    
    (13,119
    )
    
    
    (8,402
    )
    
    
    (11,387
    )Net loss from continuing operations
    
    $
    (31,957
    )
    
    $
    (15,330
    )
    
    $
    (25,975
    )Total amortization of deferred compensation for reportable segments
    
    
    2
    
    
    
    
    
    
    
    Unallocated amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Expenditures for segment long-lived assets
    
    $
    2,800
    
    
    $
    6,849
    
    
    $
    14,805Other unallocated expenditures for corporate assets
    
    
    2,844
    
    
    
    309
    
    
    
    1,274$
    5,644
    
    
    $
    7,158
    
    
    $
    16,079Segment assets
    
    $
    36,669
    
    
    $
    37,623
    
    
    $
    32,343Intangible assets not allocated to segments
    
    
    
    
    
    
    
    
    
    
    1,331Other assets not allocated to segments*
    
    
    2,385
    
    
    
    3,823
    
    
    
    13,106$
    39,054
    
    
    $
    41,446
    
    
    $
    46,780
   *
    
    Other assets not allocated to segments includes assets associated with
segments reported in previous periods which are no longer classified as
reportable segments, primarily assets of and related to the discontinued
operations of ILC (former telecommunications services segment). Note 20  Summarized Quarterly Data (unaudited) Following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002. The amounts for the 2002 and the first
quarter of 2003 have been restated to reclassify amounts as discontinued
operations related to the sale of ILC in December 2002, which had previously
been reported in continuing operations. The amounts for the fourth
quarter of 2002 and for all of 2003 have been restated to correct the
application of EITF 00-27, as discussed in Note 3. F-28




---



##### 



(in thousands of dollars, except pershare amounts)
    
    
    
    
    
    March 31
    
    June 30
    
    September 30
    
    December 31Net sales:
    
    
    2003
    
    
    $
    30,367
    
    
    $
    37,045
    
    
    $
    36,051
    
    
    $
    32,4662002
    
    
    
    24,392
    
    
    
    21,872
    
    
    
    20,156
    
    
    
    21,669Operating loss:
    
    
    2003
    
    
    $
    (12,607
    )
    
    $
    (1,780
    )
    
    $
    (1,462
    )
    
    $
    (4,055
    )2002
    
    
    
    (340
    )
    
    
    (246
    )
    
    
    (851
    )
    
    
    (6,093
    )Net loss from continuing operations
    
    
    2003
    
    
    $
    (15,520
    )
    
    $
    (5,173
    )
    
    $
    (4,807
    )
    
    $
    (6,457
    )2002
    
    
    
    (2,504
    )
    
    
    (2,297
    )
    
    
    (2,476
    )
    
    
    (8,053
    )Gain (loss) from discontinued operations
    
    
    2003
    
    
    $
    (277
    )
    
    $
    371
    
    
    $
    213
    
    
    $
    2222002
    
    
    
    (3,099
    )
    
    
    (4,581
    )
    
    
    (1,463
    )
    
    
    (3,365
    )Net loss: (1) (2)
    
    
    2003
    
    
    $
    (15,797
    )
    
    $
    (4,802
    )
    
    $
    (4,594
    )
    
    $
    (6,235
    )2002
    
    
    
    (5,603
    )
    
    
    (6,878
    )
    
    
    (3,939
    )
    
    
    (11,418
    )Basic and diluted income (loss) from
continuing operations per common share:
    
    
    2003
    
    
    $
    (2.66
    )
    
    $
    (0.88
    )
    
    $
    (0.82
    )
    
    $
    (0.60
    )2002
    
    
    
    (0.43
    )
    
    
    (0.39
    )
    
    
    (0.42
    )
    
    
    (1.37
    )Basic and diluted income (loss) per
common share:
    
    
    2003
    
    
    $
    (2.71
    )
    
    $
    (0.82
    )
    
    $
    (0.79
    )
    
    $
    (0.59
    )2002
    
    
    
    (0.96
    )
    
    
    (1.18
    )
    
    
    (0.68
    )
    
    
    (1.96
    )
 (1) In the first quarter of 2003, the Company restated earnings from those
originally issued to account for revenues from the Companys network service
offering when the actual cash collections to be retained by the Company are
finalized. 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 first quarter ending March 31, 2003 by $11,972 and the net
loss per share by $0.10. The restatement increased the net loss for
the fourth quarter of 2002 by $3,505 and the net loss per share by
$0.60. In the fourth quarter of 2003, the Company was
discharged of obligations amounting to $1,141 owed to a network service
provider. The discharge of this obligation is reported as interest and other
income in the above summary for the three months ended December 31, 2003. (2) On September 20, 2004, management of the Company concluded that the accounting
principles as set forth in EITF 00-27, regarding BCF, had not been properly applied in current and prior
periods to its convertible debentures issued under a March 2001 loan agreement
for which the Company had previously determined BCF of $1.1 million. The
initial determination of the BCF in 2001 at the respective issue dates of such
debt was correct. However, adjustments to the conversion price and the number
of conversion shares were made under the debentures anti-dilution provisions.
The various anti-dilution events and their respective impacts on the number of
shares and the conversion price were disclosed in the Companys previous public
filings. However, the principles under EITF 00-27 also require a
redetermination of the BCF at each date an anti-dilution event occurred. This
redetermination was not completed in prior reporting periods. Additionally, the
accumulation of unpaid interest costs which are required by the debt terms to
be added to principal and which are payable at maturity on these same
convertible debentures has been deemed to be interest paid in kind (PIK);
such interest also contains a conversion feature, and the payment of such
interest in the form of PIK interest is non-discretionary requiring the
determination of a BCF in the PIK interest. This determination was not made by
the Company in its prior reportings. The Companys management has now concluded that a restatement is required and
has brought these matters for consideration before the Audit Committee and the
full Board of Directors of the Company. Having considered the circumstances
underlying the accounting errors and their effects upon the Companys prior
filings, and having discussed these matters with the Companys management, the
Audit Committee concluded that the previously issued financial statements
should not be relied upon and approved and authorized the Companys management
to amend certain previously filed public reports to reflect deemed interest
expense from such BCF. Although
the error affects 2001, 2002 and 2003, the $23 cumulative effect on
earnings through the third quarter of 2002 was recorded in the fourth
quarter of 2002 as a charge to interest expense. Therefore, the correction is an increase in deemed interest expense and net loss, in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004, and a reduction in reported liabilities and stockholders deficit in all
reporting periods from the fourth quarter of 2002 through the first quarter of
2004. The effect of these errors is detailed, by reporting period, below. The
restatement had no
effect on loss from discontinued operations or net loss per share from
discontinued operations. Effect of the restatements on the consolidated statements of operations
(in thousands of dollars except per share amounts)
(per share information reported on a post 20:1 stock consolidation basis for all periods shown. Stock consolidation enacted in the fourth quarter of 2003) Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Net income (loss) as previously reported
on Form 10-K or 10-Q
    
    $
    (11,117
    )
    
    $
    (14,895
    )
    
    $
    (3,713
    )
    
    $
    (3,257
    )
    
    $
    (4,456
    )
    
    $
    594Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (902
    )
    
    
    (1,089
    )
    
    
    (1,337
    )
    
    
    (1,779
    )
    
    
    (1,801
    )Net loss as currently reported on
revised Form 10-K or 10-Q
    
    $
    (11,418
    )
    
    $
    (15,797
    )
    
    $
    (4,802
    )
    
    $
    (4,594
    )
    
    $
    (6,235
    )
    
    $
    (1,207
    )Net income (loss) per share as previously
reported on Form 10-K or 10-Q
    
    $
    (1.92
    )
    
    $
    (2.55
    )
    
    $
    (0.64
    )
    
    $
    (0.56
    )
    
    $
    (0.44
    )
    
    $
    0.03Net loss per share as currently
reported on revised Form 10-K or
10-Q
    
    $
    (1.96
    )
    
    $
    (2.71
    )
    
    $
    (0.82
    )
    
    $
    (0.79
    )
    
    $
    (0.59
    )
    
    $
    (0.06
    )
 Effect of the restatements on the consolidated balance sheets
(in thousands of dollars) As at
    
    As at
    
    As at
    
    As at
    
    As at
    
    As atDec. 31, 2002
    
    March 31, 2003
    
    June 30, 2003
    
    Sept. 30, 2003
    
    Dec. 31, 2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Notes payable to a related party:As previously reported on
Form 10-K or 10-Q
    
    $
    30,058
    
    
    $
    30,496
    
    
    $
    30,985
    
    
    $
    33,483
    
    
    $
    35,073
    
    
    $
    41,060Correction of EITF 00-27 errors
    
    
    (6,109
    )
    
    
    (5,364
    )
    
    
    (4,437
    )
    
    
    (3,265
    )
    
    
    (6,356
    )
    
    
    (4,834
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    23,949
    
    
    $
    25,132
    
    
    $
    26,548
    
    
    $
    30,218
    
    
    $
    28,717
    
    
    $
    36,226Additional paid-in capital:As previously reported on
Form 10-K or 10-Q
    
    $
    129,553
    
    
    $
    129,553
    
    
    $
    129,618
    
    
    $
    129,618
    
    
    $
    171,115
    
    
    $
    171,192Correction of EITF 00-27 errors
    
    
    6,410
    
    
    
    6,567
    
    
    
    6,729
    
    
    
    6,894
    
    
    
    11,764
    
    
    
    12,043As  currently reported on
revised Form 10-K or 10-Q
    
    $
    135,963
    
    
    $
    136,120
    
    
    $
    136,347
    
    
    $
    136,512
    
    
    $
    182,879
    
    
    $
    183,235Accumulated deficit
As previously reported on
Form 10-K or 10-Q
    
    $
    (194,301
    )
    
    $
    (209,196
    )
    
    $
    (212,909
    )
    
    $
    (216,166
    )
    
    $
    (220,622
    )
    
    $
    (220,028
    )Correction of EITF 00-27 errors
    
    
    (301
    )
    
    
    (1,203
    )
    
    
    (2,292
    )
    
    
    (3,629
    )
    
    
    (5,408
    )
    
    
    (7,209
    )As currently reported on
revised Form 10-K or 10-Q
    
    $
    (194,602
    )
    
    $
    (210,399
    )
    
    $
    (215,201
    )
    
    $
    (219,795
    )
    
    $
    (226,030
    )
    
    $
    (227,237
    )Stockholders equity (deficit):As previously reported on
Form 10-K or 10-Q
    
    $
    (63,925
    )
    
    $
    (78,820
    )
    
    $
    (82,468
    )
    
    $
    (85,725
    )
    
    $
    (49,309
    )
    
    $
    (47,292
    )Correction of EITF 00-27 errors
    
    
    6,109
    
    
    
    5,364
    
    
    
    4,437
    
    
    
    3,265
    
    
    
    6,356
    
    
    
    4,834As currently reported on
revised Form 10-K or 10-Q
    
    $
    (57,816
    )
    
    $
    (73,456
    )
    
    $
    (78,031
    )
    
    $
    (82,460
    )
    
    $
    (42,953
    )
    
    $
    (42,458
    )
 Note 21  Subsequent Event Subsequent to December 31, 2003, the Company received confirmation that certain
indefeasible rights of usage (IRUs) acquired by the Company have been
reclaimed by the IRU consortium, which is the group that owns and operates the
cable. As a result, the Company has been discharged of approximately $775 of
obligations payable to the consortium existing at December 31, 2003. The
Company expects to record the discharge of this obligation as other income for
the three months ending March 31, 2004. Subsequent to December 31, 2003, the Company has 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. The Company intends to sell the
remainder of these shares during 2004. These shares are shown as a current
asset at December 31, 2003. F-29




---



##### 



ACCERIS COMMUNICATIONS INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands) Balance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Deductions
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    (a)
    
    Other
    
    PeriodAllowance for doubtful accounts:December 31, 2001
    
    $
    101
    
    
    $
    4,066
    
    
    $
    (2,304
    )
    
    
    
    
    
    $
    1,863December 31, 2002
    
    
    1,863
    
    
    
    5,999
    (b)
    
    
    (6,112
    )
    
    
    (46
    )(c)
    
    
    1,704December 31, 2003
    
    $
    1,704
    
    
    $
    5,438
    
    
    $
    (5,570
    )
    
    $
    192
    (d)
    
    $
    1,764
   (a)
    
    Deductions represents allowance amounts written off as uncollectible and
recoveries of previously reserved amounts.(b)
    
    Amounts include charges and deductions related to continuing operations
only.(c)
    
    Other includes an increase of $1,019 for the beginning allowance acquired
in the acquisition of RSL in December 2002 and a decrease of $1,065 for
the net change in discontinued operations during the year which are not
included in charged to costs and expenses or deductions.(d)
    
    Amount relates to the stock purchase of Transpoint in July 2003, which
was accounted for using the purchase method. S-1