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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    FORM 20-F (Mark One) [  ]
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934OR[X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: December 31, 2003OR[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from      to
 Commission file number 000-29502 MICROCELL TELECOMMUNICATIONS INC. (Exact name of Registrant as specified in its charter)
 (Translation of Registrants name into English) CANADA(Jurisdiction of incorporation or organization) 800 de La Gauchetière Street West
Suite 4000
Montreal, Quebec, Canada H5A 1K3(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered or to be registered pursuant to Section 12(g) of the Act. Class A Restricted Voting Shares
Class B Non-Voting Shares
 Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. None
 Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. 252,296 First Preferred Voting Shares
11,415,204 First Preferred Non-Voting Shares
14,782 Second Preferred Voting Shares
6,979,528 Second Preferred Non-Voting Shares
30,038 Class A Restricted Voting Shares
3,906,336 Class B Non-Voting Shares
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. 1




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[X] Yes
          
[  ] No Indicate by check mark which financial statement item the registrant has
elected to follow. [  ] Item 17
           [X] Item 18 2




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TABLE OF CONTENTS EXPLANATORY NOTES
EXCHANGE RATE INFORMATION PART IITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    5ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    5ITEM 3  KEY INFORMATION
    
    
    6ITEM 4  INFORMATION ON THE COMPANY
    
    
    15ITEM 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    38ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    76ITEM 8  FINANCIAL INFORMATION
    
    
    78ITEM 9  THE OFFER AND LISTING
    
    
    80ITEM 10  ADDITIONAL INFORMATION
    
    
    87ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    102ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    103ITEM 13  DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
    
    
    106ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    106ITEM 15 - CONTROLS AND PROCEDURES
    
    
    106ITEM 16 [RESERVED]
    
    
    107ITEM 17  FINANCIAL STATEMENTS
    
    
    113ITEM 18  FINANCIAL STATEMENTS
    
    
    114ITEM 19  EXHIBITS
    
    
    115Certification of the Chief Executive OfficerCertification of the Chief Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350
  3




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EXPLANATORY NOTES References herein to the Company, we, us or our are references to
Microcell Telecommunications Inc., a Canadian corporation, and, where the
context requires, its subsidiaries and operating companies. We are the
successor corporation of another corporation, which we refer to in this
prospectus as Old Microcell when we need to differentiate it from the current
Microcell. All dollar amounts set forth in this prospectus are expressed in Canadian
dollars, and all references to $ refer to Canadian dollars, except where
otherwise indicated. On June 28, 2004, the inverse of the noon buying rate as
reported by the Federal Reserve Bank of New York equaled U.S.$0.7443 per Cdn.$1.00. All financial statements and financial information derived therefrom
presented herein have been prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP). For a discussion of the
principal differences between Canadian GAAP and U.S. generally accepted
accounting principles (U.S. GAAP), see Note 18 to the consolidated financial
statements. Information contained in this document concerning the wireless
telecommunications industry, our general expectations concerning this industry
and our market positions and market shares are based on estimates we prepared
using data from publicly available industry sources as well as from various
research analysts reports, market research and industry analyses, and on
assumptions made, based on our knowledge of this industry, which we believe to
be reasonable. We believe, however, that this data is inherently imprecise,
although generally indicative of relative market positions and market shares. Unless otherwise indicated, all operating data presented herein is as of
December 31, 2003. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, that are based on
expectations and estimates. Forward-looking statements may be identified by the
use of forward-looking terminology such as believe, intend, may, will, expect,
estimate, anticipate, continue or similar terms, variations of those terms or
the negative of those terms. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. These statements contain potential risks and uncertainties, and
actual results may therefore differ materially. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or otherwise. Important factors that may affect these expectations include, but are not
limited to: changes in the Canadian economy and in Canadian and U.S. capital
markets; changes in competition in our markets; advances in telecommunications
technology; changes in the telecommunications regulatory environment; future
litigation; availability of future financing; unanticipated changes in expected
growth of the number of subscribers; radio emission concerns; exchange rate
fluctuations; penetration and churn rates; the mix of products and services
offered in our markets; the outcome of our announced consideration of
strategic and financial alternatives following the unsolicited
offers by TELUS Corporation, known as TELUS, to purchase all of our outstanding publicly-traded
shares and warrants; and the other factors discussed under Risk Factors. You
should evaluate any statements in light of these important factors. 4




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PART I 
 ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 5




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ITEM 3  KEY INFORMATION SELECTED FINANCIAL DATA Our selected consolidated financial data set forth below for the fiscal
years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from
our consolidated financial statements, which have been audited by Ernst & Young
LLP. The information set forth below should be read in conjunction with our
audited annual consolidated financial statements, and the notes thereto,
included elsewhere in this document. Our consolidated financial statements have
been prepared in accordance with Canadian GAAP. For a discussion of the
principal differences between Canadian GAAP and U.S. GAAP, see Note 18 to our
consolidated financial statements which are included elsewhere in this
document. As a result of fresh start accounting, certain financial results have
been presented on a pre- and post-reorganization basis, where appropriate. Our
financial results for the periods indicated herein are not necessarily
indicative of our future operating results given the context in which we
operated before the reorganization. With respect to our year-to-date 2003
results presentation, the eight-month period ended December 31, 2003 represents
the post-reorganization results, while the four-month period ended April 30,
2003 represents the pre-reorganization results. (in thousands of dollars, except for the data relating to shares) Pre-reorganizationEight
    
    Fourmonths
    
    months
    
    Years ended December 31ended
    
    endedDecember 31
    
    April 302003
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Income
(Loss) Data:Revenues
    
    
    393,093
    
    
    
    177,694
    
    
    
    591,062
    
    
    
    541,490
    
    
    
    405,986
    
    
    
    260,466Operating income (loss)
    
    
    1,250
    
    
    
    (20,832
    )
    
    
    (382,297
    )
    
    
    (193,019
    )
    
    
    (243,636
    )
    
    
    (270,426
    )Net income (loss)
    
    
    4,959
    
    
    
    45,517
    
    
    
    (570,501
    )
    
    
    (498,485
    )
    
    
    (268,427
    )
    
    
    (393,637
    )Net loss applicable to
Class A and Class B
non-voting shares
    
    
    (12,146
    )
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.Basic and diluted
earnings (loss) per
share
    
    $
    (3.22
    )
    
    $
    0.19
    
    
    $
    (2.37
    )
    
    $
    (4.56
    )
    
    $
    (2.79
    )
    
    $
    (4.78
    )Revenues (U.S. GAAP)
    
    
    393,093
    
    
    
    177,694
    
    
    
    591,062
    
    
    
    541,490
    
    
    
    405,986
    
    
    
    260,466Operating income
(loss) (U.S. GAAP)
    
    
    1,250
    
    
    
    (20,832
    )
    
    
    (401,482
    )
    
    
    (196,999
    )
    
    
    (246,242
    )
    
    
    (270,426
    )Net income (loss)
(U.S. GAAP)
    
    
    4,959
    
    
    
    1,298,677
    
    
    
    (584,914
    )
    
    
    (498,167
    )
    
    
    (250,116
    )
    
    
    (396,166
    )Comprehensive income
(loss) (U.S. GAAP)
    
    
    4,959
    
    
    
    1,298,532
    
    
    
    (586,766
    )
    
    
    (495,270
    )
    
    
    (251,016
    )
    
    
    (396,166
    )Net loss applicable to
Class A and Class B
non-voting shares
(U.S. GAAP)
    
    
    (12,146
    )
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.Basic and diluted
earnings (loss) per
share (U.S. GAAP)
    
    $
    (3.22
    )
    
    $
    5.40
    
    
    $
    (2.43
    )
    
    $
    (4.56
    )
    
    $
    (2.60
    )
    
    $
    (4.81
    )
 6




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(in thousands of dollars, except for the data relating to shares) Pre-reorganizationAs at
    
    As atDecember 31
    
    May 1
    
    As at December 312003
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance Sheet
Data:Total assets
    
    
    808,706
    
    
    
    788,208
    
    
    
    912,854
    
    
    
    1,395,259
    
    
    
    1,209,226
    
    
    
    817,850Long-term debt
(including current
portion)
    
    
    324,462
    
    
    
    350,000
    
    
    
    2,040,178
    
    
    
    1,903,571
    
    
    
    1,680,699
    
    
    
    1,499,456Shareholders equity
(deficiency)
    
    
    343,934
    
    
    
    338,975
    
    
    
    (1,297,226
    )
    
    
    (726,725
    )
    
    
    (667,561
    )
    
    
    (796,037
    )Share capital
    
    
    338,154
    
    
    
    321,049
    
    
    
    1,167,678
    
    
    
    1,167,371
    
    
    
    728,050
    
    
    
    327,599Warrants
    
    
    17,926
    
    
    
    17,926
    
    
    
    1,770
    
    
    
    2,077
    
    
    
    2,077
    
    
    
    5,625Deficit
    
    
    (12,146
    )
    
    
    
    
    
    
    (2,466,674
    )
    
    
    (1,896,173
    )
    
    
    (1,397,688
    )
    
    
    (1,129,261
    )Total assets (U.S. GAAP)
    
    
    808,706
    
    
    
    788,208
    
    
    
    911,548
    
    
    
    1,410,696
    
    
    
    1,220,970
    
    
    
    812,183Long-term debt (U.S.
GAAP)
    
    
    324,462
    
    
    
    350,000
    
    
    
    2,040,178
    
    
    
    1,903,571
    
    
    
    1,680,699
    
    
    
    1,499,456Preferred shares (U.S.
GAAP)
    
    
    296,912
    
    
    
    284,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
(deficiency) (U.S.
GAAP)
    
    
    47,022
    
    
    
    54,469
    
    
    
    (1,298,677
    )
    
    
    (713,763
    )
    
    
    (654,917
    )
    
    
    (801,704
    )Share capital (U.S.
GAAP)
    
    
    29,096
    
    
    
    36,543
    
    
    
    1,228,401
    
    
    
    1,228,094
    
    
    
    788,773
    
    
    
    388,322Warrants (U.S. GAAP)
    
    
    17,926
    
    
    
    17,926
    
    
    
    1,770
    
    
    
    2,077
    
    
    
    2,077
    
    
    
    5,625Deficit (U.S. GAAP)
    
    
    
    
    
    
    
    
    
    
    (2,528,848
    )
    
    
    (1,943,934
    )
    
    
    (1,445,767
    )
    
    
    (1,195,651
    )Accumulated other
comprehensive income
(loss), end of period
(U.S. GAAP)
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    1,997
    
    
    
    (900
    )
    
    
    Other Data:Class A restricted
voting shares
    
    
    30,038
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class B non-voting
shares
    
    
    3,906,336
    
    
    
    3,601,145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    First preferred voting
shares
    
    
    252,296
    
    
    
    544,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    First preferred
non-voting shares
    
    
    11,415,204
    
    
    
    11,221,839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Second preferred voting
shares
    
    
    14,782
    
    
    
    106,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Second preferred non-
voting shares
    
    
    6,979,528
    
    
    
    7,093,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common Shares
    
    
    
    
    
    
    
    
    
    
    27,631,537
    
    
    
    27,631,537
    
    
    
    31,665,275
    
    
    
    32,780,071Class A Non-Voting
Shares
    
    
    
    
    
    
    
    
    
    
    9,590,000
    
    
    
    9,590,000
    
    
    
    9,590,000
    
    
    
    Class B Non-Voting
Shares
    
    
    
    
    
    
    
    
    
    
    202,994,911
    
    
    
    202,951,539
    
    
    
    24,160,642
    
    
    
    22,141,195Number of shares
outstanding at the end
of the period
    
    
    22,598,184
    
    
    
    22,598,184
    
    
    
    240,216,448
    
    
    
    240,173,076
    
    
    
    65,415,917
    
    
    
    54,921,266
 EXCHANGE RATE DATA The following tables show, for the periods and
dates indicated, certain information regarding the
U.S. dollar/Canadian dollar exchange rate. The information
is based on the inverse of the noon buying rate in the City of
New York for cable transfers in Canadian dollars as certified
for United States customs purposes by the Federal Reserve Bank
of New York. On June 28, 2004, the exchange rate was
U.S.$0.7443 per Cdn.$1.00. Year ended December 31,
    
    Average Rate(1)(per Cdn.$1.00)1999
    
    
    0.67462000
    
    
    0.67262001
    
    
    0.64462002
    
    
    0.63702003
    
    
    0.7136 Three months ended March 31,
    
    Average Rate(1)(per Cdn.$1.00)2003
    
    
    0.66262004
    
    
    0.7622 Previous six months
    
    High
    
    Low(per Cdn.$1.00)December 2003
    
    
    0.7738
    
    
    
    0.7460January 2004
    
    
    0.7880
    
    
    
    0.7496February 2004
    
    
    0.7629
    
    
    
    0.7439March 2004
    
    
    0.7645
    
    
    
    0.7418April 2004
    
    
    0.7637
    
    
    
    0.7293May 2004
    
    
    0.7364
    
    
    
    0.7158    (1)
    The average rate is calculated as the average of
    the noon buying rate on the last day of each month during the
    period. CAPITALIZATION AND INDEBTEDNESS Not applicable. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. RISK FACTORS Although there is an outstanding tender offer for our shares and warrants, this
may not result in a sale of Microcell. On
May 13, 2004, we were informed that TELUS intends to make an
unsolicited all-cash offer to purchase all of our outstanding publicly traded
shares and warrants. On May 17, 2004, TELUS filed its offers with the Canadian
Securities Administrators and the SEC. On May 31, 2004, we announced the
mailing of our directors circular containing the previously announced
recommendation of the board of directors that holders of our class A restricted
voting shares, class B non-voting shares, Warrants 2005 and Warrants 2008 not
tender into the unsolicited offers from TELUS. On June 22, 2004 TELUS
announced that it would extend the TELUS Offers until July 22,
2004. On June 29, 2004, we issued a press release confirming the
recommendation in our directors circular. We are actively considering strategic and
financial alternatives to the TELUS Offers. To that end, we and
our advisors have entered into discussions with a number of
parties, including TELUS. This process is ongoing and may result
in additional discussions or negotiations regarding a sale of
our company to TELUS or another party, an equity investment in
our company by a strategic or financial investor, the separation
of certain of our assets, or some combination of these
alternatives. However, there can be no assurance that the
process we have initiated, or the TELUS Offers themselves, will
lead to any transaction. This process is subject to numerous
uncertainties, including:  
    
    TELUS may choose to withdraw its Offers or change them;  
    
    The numerous conditions to closing the TELUS Offers may not be
satisfied;  
    
    we may not locate another appropriate buyer or investor through our
strategic review process;  
    
    any bids we receive may have insufficient value or contain terms which
we are unable to agree to;  
    
    even if a buyer or investor is located, we may be unable to negotiate a
definitive agreement with such buyer or investor; and  
    
    the sale or investment may be delayed or prevented by the need to obtain
approvals from regulatory authorities, including the Canadian Competition
Bureau. Therefore, although the TELUS Offers were made at a premium to the trading
prices of our equity securities immediately before the TELUS Offers were announced,
you should not assume that you will receive this premium or that any
transaction involving us will occur with a third party. If a
transaction does not occur, the trading prices of our equity
securities may decline. If we need to obtain additional financing, that could increase our operating
risk due to increased leverage. 7




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In the event that our actual results vary from our projections or if the
assumptions underlying our projections were to change, we may need additional
funds. Sources of funding for our further financing requirements may include
additional bank financing, vendor financing, public offerings or private
placements of equity or debt securities, capital contributions from
shareholders and disposition of assets. There can be no assurance that additional financing will be available to
us or, if available, that we will be able to obtain it on a timely basis and on
terms acceptable to us and within the limitations contained in our existing or
new credit facilities. Failure to do so could result in the delay or
modification of our network level of services or in the delay or failure to
meet license conditions, which could result in a loss of the Personal
Communication Services, or PCS, license and/or the Multipoint Communications
Systems, or MCS, licenses. Any of these events could impair our ability to meet
our debt service requirements and could have a material effect on our business,
including our ability to continue as a going concern. Failure to comply with our bank covenants could affect our financial
flexibility or could result in default under our credit agreements. Our existing or new credit facilities contain restrictive covenants which
affect, and in some cases significantly limit or prohibit, among other things,
our ability to:  
    
    incur indebtedness;  
    
    make prepayments of certain indebtedness;  
    
    create liens;  
    
    sell assets;  
    
    make capital expenditures; and  
    
    engage in acquisitions, mergers, amalgamations and consolidations. In addition, our existing or new credit facilities require us to maintain
certain financial ratios, which include levels of operating income excluding
certain specified items, average revenue per subscriber, or ARPU, liquidity
levels, subscribers and maximum levels of capital expenditures. If we fail to
comply with the various covenants of our indebtedness, we will be in default
under the terms of that indebtedness, which would permit holders of the
indebtedness to accelerate the maturity of that indebtedness and could cause
defaults under other indebtedness or agreements. In these circumstances, the
lenders under our new credit facilities could foreclose upon all or
substantially all of our assets and our subsidiaries, excluding Inukshuk
Internet Inc.. Our current debt level may limit our financial flexibility and make us
vulnerable to economic downturns. As of March 31, 2004, our indebtedness totaled $393.2 million, including a
current portion of $12 million. The level of our indebtedness could have
consequences, such as:  (1)
    
    our ability to obtain additional financing in the future for
capital expenditures, working capital, operating losses, debt service
requirements or other purposes;(2)
    
    our flexibility in planning for, or reacting to, changes to our
business and market conditions;(3)
    
    our ability to compete; and(4)
    
    our vulnerability in the event of a downturn in our business. We may not be able to maintain our operations if the sources of funding on
which we are relying become unavailable. Our ability to meet our near term funding requirements is dependent upon a
number of factors, including the revenue generated by Solutions, our existing
cash balances, the continued availability of, and our ability to obtain and to
draw upon our credit facilities 8




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or any alternative financing. The construction of an MCS network requires significant capital
investment. The capital market conditions for telecommunications companies in a
start-up mode with nominal capital resources are challenging. This has made
fund-raising difficult, and as a result Inukshuk has suspended building the MCS
network on its own. Our existing and new credit facilities limit the amount
that we can invest in Inukshuk, and Inukshuks cash requirements may exceed
such limits. There is no assurance that Inuksuk will be able to obtain the
financing necessary to build an MCS network and/or fund its operations. If
Inukshuk is not successful, we may lose our entire investment in Inukshuk.
Although Inukshuk announced arrangements with third parties for the build-out
of an MCS network on November 19, 2003, there can be no certainty any such
arrangements will be successfully concluded. We may incur operating losses in the future, which may limit our ability to
service our debt. We may experience growth-related capital requirements arising from the
funding of network capacity and maintenance and the cost of acquiring new PCS
customers. The ability to generate positive net income and cash flow from
operations in the future will be dependent upon various factors, including the
level of market acceptance of our services, the degree of competition we
encounter, the cost of acquiring new customers, technology risks and general
economic conditions and regulatory requirements. There can be no assurance that
we will achieve or sustain operating profitability or positive cash flow from
operating activities. If we cannot achieve operating profitability or positive
cash flow from operating activities, we may not be able to meet our debt
service or working capital requirements or obtain additional capital required
to meet all of our cash requirements. In addition, we are required to make
interest and principal payments under our new credit facilities. Our future performance will depend on our ability to succeed in intensely
competitive markets. Competition in the Canadian wireless communications industry is intense.
The success of our PCS business depends upon our ability to compete with other
wireless telecommunications service providers in Canada with respect to new
products and services, features and devices offered, the technical quality of
the wireless system, customer service, system coverage, capacity and price.
Microcell competes with other cellular, enhanced specialized mobile radio and
PCS providers, such as Rogers and its affiliated entities, TELUS and
its affiliated entities and Bell Mobility Inc. and its
former Mobility Canada Partners (excluding TELUS), known as Bell Mobility or
the Bell Mobility Partners. These competitors currently have greater financial
resources than we do. In addition, the number of competitors could increase
through the licensing to new competitors of additional spectrum, through
reselling or wholesaling of services and products, such as what we offer, or
through a relaxation on the restrictions to foreign participation in the
Canadian telecommunications sector. There can be no assurance that we will be able to compete successfully in
this environment, or that our new products and services, which we expect will
differentiate us in the marketplace, will be widely accepted by consumers, or
that other technologies and products that are more commercially effective than
our technologies and products will not be developed. Our financial information will not be comparable to the historical financial
information of Old Microcell. As a result of the consummation of the plan of reorganization, we operate
under a new capital structure and have adopted fresh start accounting rules. In
accordance with fresh start accounting rules, all our assets and liabilities
were revalued at estimated fair values and our deficit was eliminated. We
determined that our enterprise value was $689 million as at May 1, 2003, of
which $350 million has been allocated to our long-term debt and $339 million to
equity. A comprehensive revaluation of our assets and liabilities has been done
based on this enterprise value. Accordingly, our financial condition and
results of operations after May 1, 2003 will not be comparable to our financial
condition or results of operations reflected in our historical financial
statements, including those included elsewhere in this prospectus. More
specifically, our depreciation and amortization expense and our interest
expense have significantly decreased as a result of fresh start accounting. The comparability of future results may be affected due to our restrained
operations during our capital restructuring period. During our capital restructuring, we focused on cash preservation and
careful management of our costs, resulting in a reduction of some variable and
discretionary costs such as cost of acquisition. For example, our costs and
operating expenses, excluding restructuring charges, depreciation and
amortization, decreased by $51.2 million in 2002 when compared to 2001, and
decreased a further $15.8 million in 2003 when compared to 2002. Since resuming
subscriber growth, our cost of operations have begun to increase and will
therefore not be completely comparable with costs incurred during our capital
restructuring period. 9




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Our broadband access subsidiary may not be able to compete successfully against
larger competitors. Competition in the broadband access sector in Canada is also intense. The
incumbent local exchange carriers and licensed cable operators are currently
the dominant players in the provision of broadband access to the Internet in
Canada. There can be no assurance that Inukshuk, with its current and planned
MCS services, will be able to compete successfully in this environment or that
other technologies and products that are more commercially effective than MCS
technologies and products will not be developed. The choice of technology for our MCS network presents certain technological and
market risks. The Canadian Minister for the Department of Industry, known as Industry
Canada, has not mandated any technology protocols for MCS operators, leaving
each licensee free to select among several competing technologies. The MCS technology and equipment suppliers have been selected for
Inukshuks MCS network deployment. However, MCS technologies are still in an
early stage of development, which poses certain technological and market risks
with respect to MCS deployment, performance and ongoing availability. Rapid technology changes in our business could make our networks or equipment
obsolete or less profitable. The wireless telecommunications industry is experiencing significant
technological change. There are evolving industry standards, improvements in
digital technology, shorter development cycles for new products and changes in
end-user preferences. These changes make it difficult to predict the extent of
future competition with cellular, PCS, paging and other services. As a result,
there can be no assurance that existing, proposed or as yet undeveloped
technologies will not become dominant in the future and render PCS or MCS less
profitable or even obsolete. We may be required to make more capital expenditures than currently
expected if suppliers fail to meet anticipated schedules, if a technology
performance falls short of expectations, or if commercial success is not
achieved. Actual or perceived health risks of wireless technology could have a material
adverse effect on our business. Reports have suggested that certain radio frequency emissions from
wireless transmitters, customer equipment and handsets may be linked to certain
medical conditions, including cancer. Scientific research continues to review
whether radio emissions from equipment used in connection with wireless
technologies pose health concerns. There can be no assurance that the findings
from such studies will not have a material adverse effect on our business or
will not lead to changes in government regulation. The actual or perceived
health risks of wireless communications devices could adversely affect wireless
communications service providers, including us, through reduced subscriber
growth, reduced network usage per subscriber, product liability lawsuits or
reduced availability of financing to the wireless communications industry. We are subject to government regulation, and this can increase our operating
costs and affect our ownership structure. The use of radio spectrum is regulated by Industry Canada pursuant to the
Radiocommunication Act (Canada). Radio and spectrum licenses are issued for a
term. They are renewed at Industry Canadas discretion. Licenses may be
suspended or revoked for cause, including failure to comply with the conditions
of license. License revocation is rare, and there is a high expectation of
license renewal at the end of a license term. Industry Canada regulation and
license fees can materially affect our costs and operations. As a PCS network operator, Microcell Solutions Inc. is a Canadian
carrier under the Telecommunications Act (Canada), and subject to regulation
by the Canadian Radio-television and Telecommunications Commission, which is
also known as the CRTC. Inukshuk, as an MCS network operator, is also expected
to be a Canadian carrier. CRTC regulation can materially affect our services
and activities. Solutions and Inukshuk are required to comply with Canadian ownership and
control rules set out in the Telecommunications Act and the Radiocommunication
Act. Microcell, as the parent corporation of Solutions and Inukshuk, must also
comply with the Canadian ownership and control provisions, and failure to do so
may affect the ability of Solutions and Inukshuk to operate as Canadian
carriers and to hold and renew the PCS license and the MCS licenses. We believe
that we and our subsidiaries currently comply with the Canadian ownership and
control provisions. 10




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The Canadian government is currently reviewing the Canadian ownership and
control provisions. Although there are yet no conclusions from the review, if
greater foreign participation is allowed in the Canadian telecommunications
sector, this could lead to the opportunity for further foreign investment in
us, as well as more and stronger competitors entering the market with us. Future decisions and policies of the CRTC, Industry Canada and other
governmental departments and agencies may have an influence on our strategies,
and may have a material impact on us, including on our costs of operations and
our capital structure. Our PCS license may be modified or revoked if we do not pay license fees and
comply with conditions of operation. The PCS license may not be renewed at the
end of its term. Our PCS license term runs to March 31, 2011. At the end of this term, our
PCS license conditions provide that we have a ...high expectation of renewal
for a ten-year term unless a breach of license condition has occurred, a
fundamental reallocation of spectrum to a new service is required, or an
overriding policy need arises but our PCS License does not renew
automatically. We believe we are currently in compliance with the terms and
conditions of our PCS license, and we have fully paid all our PCS license fees. Industry Canada has the authority to modify the terms and conditions of a
license, but such power is to be exercised on an exceptional basis and only
after full consultation. Industry Canada also has the authority to suspend or
revoke a license if the license holder has contravened the Radiocommunication
Act or terms and conditions of its license, but only after giving the holder of
the license a reasonable opportunity to make representations. A public
consultation regarding the renewal of a PCS license is to occur no later than
two years prior to the end of a PCS license term if Industry Canada foresees
the possibility of not renewing the license. In order to operate our PCS
network we have to maintain our PCS license, and any failure by us to pay our
license fees or to comply with its conditions could result in the revocation of
our PCS license or in its non-renewal at the end of its term. If Inukshuk does not meet the conditions of the MCS licenses, there could be
penalties, including the modification or revocation of the MCS licenses. The Inukshuk MCS licenses have terms that run to March 31, 2011 for each
of the twelve MCS license service areas. At the end of this term, Industry
Canadas MCS Policy provides that the MCS licenses are to have a high
expectancy of renewal for a subsequent ten-year term unless:  
    
    a breach of license conditions has occurred,  
    
    a fundamental reallocation of spectrum to a new service is required,  
    
    or an overriding policy need arises. We believe that Inukshuk was in compliance with the terms and conditions
of the MCS licenses through March 31, 2004, and Inukshuk has fully paid all its
MCS license fees. Inukshuk must obtain prior approval from Industry Canada for any
application to transfer or assign the MCS licenses that would have a material
effect on the ownership or control in fact of the licensee. The transactions
described in the plan of reorganization, which have led to a change of control
of Inukshuk, received interim approval by Industry Canada on April 7, 2003.
Industry Canadas final approval is subject to completion of a review
demonstrating compliance with the Canadian ownership and control provisions.
We believe Inukshuk is in compliance with the Canadian ownership and control
provisions. Industry Canada has the authority to suspend or revoke a license if the
license holder has contravened the Radiocommunication Act or the terms and
conditions of its license, after giving the licensee a reasonable opportunity
to make representations. The MCS licenses require Inukshuk to fund certain learning activities and
deploy its network in accordance with commitments made to Industry Canada.
Inukshuk was unable to meet the original deadline for these activities, and
Industry Canada extended the timeline for meeting the license conditions
relating to MCS network deployment and the learning activities to March 31,
2004. Inukshuk resumed making payments to fund learning activities in November
of 2003, and by March 31, 2004, the MCS network had been deployed in a number
of Canadian communities. Also on March 31, 2004, Inukshuk filed a revised MCS
network deployment plan with Industry Canada. Inukshuk is currently awaiting
the outcome of Industry Canadas review of the proposed 11




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revised deployment plan. As mentioned above, the failure to meet
conditions of the MCS licenses  which include meeting the network deployment
plan - may result in the application of penalties, including suspension or
revocation of the MCS licenses, but only after giving the licensee a reasonable
opportunity to make representations. If Inukshuk does not meet the
requirements of the MCS licenses, we may lose these licenses. The buildout of Inukshuks network will require significant capital, and we
could lose our entire investment in Inukshuk. Inukshuk intends to build an MCS network across Canada. The building of
this network will require significant capital investment. Inukshuk is a
start-up operation with nominal capital resources. The new credit facilities
limit the amount that Microcell can invest in Inukshuk. The cash requirements
of Inukshuk may exceed such limits. In such an event, Inukshuk may not be able
to raise sufficient capital to fund its operations. There can be no assurance
that Inukshuk will be successful in building the data network or that Inukshuk
will be profitable. If Inukshuk is not successful, we may lose our entire
investment in Inukshuk. We may not be able to retain a significant portion of our existing customer
base, which could impair our future performance. Our future success will depend, in large part, on our ability to retain a
significant portion of our existing customer base, expand the business
relationships with these customers, and attract and retain new customers.
During our capital restructuring, we focused on cash preservation and careful
management of our costs, which resulted, among other things, in a loss of
subscribers. There can be no assurance that we will be able to maintain a
significant portion of the current customer base, increase the amount of
business done with some or all these customers, or grow the existing customer
base. Our failure to maintain a significant portion of our existing customer
base and to grow that base would have a material adverse effect on our business
given that these elements are the main drivers of a wireless operator in
Canada. If we cannot limit customer churn, we would be forced to incur additional
expenses to recruit new customers. We have experienced rapid growth and development in a relatively short
period. One of our biggest challenges, as we have grown and more recently, has
been to limit customer churn. The results of operations of telecommunications
service providers can be significantly affected by subscriber cancellations.
The sales and marketing costs associated with attracting new subscribers are
substantial relative to the costs of providing service to existing customers.
Because the telecommunications business is characterized by high fixed costs,
disconnections directly and adversely affect operating income. An increase in
the subscriber cancellation rate could have a material adverse effect on us. Factors contributing to the increase in customer churn experienced during
2002 and 2003 included the negative publicity surrounding us and our financial
condition, the decision to disconnect some of our delinquent customers and our
limited advertising in order to preserve cash during the restructuring process.
The successful implementation of our business plan depends, among other things,
upon a reduction in our rate of customer churn. There can be no assurance,
however, that we will successfully accomplish this or that churn will not
increase. Churn has a direct impact on our revenues and earnings. Therefore, if
we are not able to limit the increase of the churn, this could have a material
adverse effect on our revenues and earnings. We are subject to currency exchange risks, which may negatively impact our
financial results and may increase our costs to repay our debts. As most of our revenues are expected to be received in Canadian dollars,
we are exposed to foreign exchange risk on payments of interest and repayment
of principal under any U.S. dollar denominated portion of our indebtedness. Although we may enter into transactions to hedge, up to a certain limit,
the exchange rate risk with respect to our other U.S. dollar-denominated debt
and transactions, there can be no assurance that we will engage in such
transactions or, if we decide to engage in any such transaction, that we will
be successful and that changes in exchange rates will not have a material
adverse effect on our ability to make payments in respect of its U.S.
dollar-denominated debt. Such transactions may require that we provide cash or
other collateral to secure our obligations. For the purposes of financial reporting, any change in the value of the
Canadian dollar against the U.S. dollar during a given financial reporting
period would result in a foreign exchange loss or gain on the translation of
any U.S. cash and cash equivalents or U.S. dollar-denominated debt into
Canadian currency. Such foreign exchange gain or loss on the translation of
U.S. dollar-denominated long-term debt is included in income as it arises.
Consequently, our reported earnings could fluctuate materially as a 12




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result of foreign exchange translation gains or losses. Changes in the
exchange rate may have a material adverse effect on us or on our ability to
make payments in respect of our U.S. dollar-denominated debt. Our holding company structure may make it difficult to access cash flow from
the operating companies and subordinates our shareholders rights to our assets
to the claims of our subsidiaries creditors. We are a holding company with no material external sources of income.
Substantially all of our operations are conducted through Solutions. Our cash
flow and, consequently, our ability to meet our dividend payment obligations or
interest payment obligations, as the case may be, are dependent upon the cash
flow of Solutions and the payment of funds by Solutions to us in the form of
payment of management fees, reimbursement of loans, interest, dividends,
advances or otherwise. Our subsidiaries, including Solutions, are separate and
distinct legal entities and have no obligation, contingent or otherwise, to
make any funds available to us, whether in the form of loans, dividends or
otherwise except for their obligation to pay for the services we render, and to
reimburse the loans made to them by us, if any, and the interest thereon. Any
right we may have to receive assets of our subsidiaries upon their liquidation
or reorganization will be structurally subordinated to the claims of such
subsidiaries creditors (including tax authorities, trade creditors and
lenders). We may not be able to attract and retain key personnel and adequately staff our
operations, which could impair the execution of our business plan. The successful execution of our business plan is dependent in part on our
ability to retain and motivate our executive officers and key personnel. We may
not be able to retain or employ qualified management and technical personnel.
Although we have entered into employment agreements with certain members of our
senior management, should any of these persons be unable or unwilling to
continue their employment with us, aspects of our business could be materially
and adversely affected by the lack of human resources to implement our business
plan and manage our business. Any development or growth on our part could increase our indebtedness and our
expenses. We expect to experience growth and development under the new business
strategy described under the heading PCS Business Strategy elsewhere in this
prospectus. Any future growth of our business would require, among other things  
    
    the development and introduction of new products,  
    
    control of expenses related to the expansion of our telecommunication
network and customer base, and  
    
    the management of additional demands on our customer support, sales
and marketing, administrative resources and network infrastructure. If we are unable to satisfy these requirements, or if we are otherwise
unable to manage growth effectively, our revenues and operating results could
be materially and adversely affected and as a result we may need to obtain
additional financing and there is no assurance that such additional financing
will be available. If the companies in which we hold a minority interest require additional
financing, the value of our investment in these companies could be reduced or
our ownership interest could be diluted. We have minority or non-controlling investments in certain entities. Some
of these investee companies may require substantial amounts of additional
capital, and their ability to obtain that financing will depend, in part, on
their ability to access the capital or lending markets, which will be subject
not only to the performance of their business and prospects, but to conditions
in the capital markets generally. If such capital is not available or is not
forthcoming on acceptable terms, the value of our investments in those
companies could decrease. Further, if such companies were to issue additional
equity securities, it is likely that we will not be able to participate in such
issuance, which could lead to substantial dilution of the value of our
investments. We are subject to change of control provisions which could limit our ability to
enter into transactions which could benefit our shareholders. Certain provisions of our credit facilities, that require repayment or
give the lenders or holders thereunder the option to require repayment upon
certain change of control transactions, could have the effect of delaying or
preventing transactions involving a 13




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change of control of our company and our subsidiaries, including
transactions in which shareholders might otherwise receive a substantial
premium for their shares over the then current market prices, and may limit the
ability of our shareholders to approve transactions that they may deem to be in
their best interest. Our articles of incorporation contain provisions to reflect restrictions
which may have the effect of preventing or making transactions involving a
change of control of our company more difficult. Our articles of incorporation
also contain provisions to reflect the powers of our company to ensure that we
and our subsidiaries remain compliant with the Canadian ownership and control
provisions. Our shareholders rights plan implemented pursuant to the plan, may have a
significant anti-takeover effect. The shareholders rights plan has the
potential to significantly dilute the ownership interests of an acquiror of our
shares, and therefore may have the effect of delaying, deterring or preventing
a change in control of our company. The class A restricted voting shares and class B non-voting shares may be
diluted by further issuances. The issuance of additional shares of class A restricted voting shares and
class B non-voting shares upon exercise of the Warrants will dilute the holders
of our current outstanding class A restricted voting shares and class B
non-voting shares as well as holders of our equity as a whole. In addition,
issuance of class A restricted voting shares or class B non-voting shares to
our management and employees and those of our subsidiaries pursuant to the
stock option plan and equity issuances under the employee stock purchase plan
will result in further dilution to holders of our equity. 14




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ITEM 4  INFORMATION ON THE COMPANY HISTORY AND DEVELOPMENT OF THE COMPANY Microcell Telecommunications Inc. was incorporated in Canada pursuant to the
Canada Business Corporations Act on April 28, 2003 under the name 4130910
Canada Inc. We changed our name on May 1, 2003 to Microcell Telecommunications
Inc./Microcell Télécommunications Inc. We are the successor corporation of
another corporation, which we refer to in this document as Old Microcell when
we need to differentiate it from the current Microcell. Old Microcell was
incorporated pursuant to the CBCA on October 16, 1992 and liquidated into
Microcell as of December 31, 2003. We were formed as a holding company for Old
Microcell pursuant to a Plan of Reorganization and of Compromise and
Arrangement under the Companies Creditors Arrangement Act (Canada) and the
CBCA. As at December 31, 2003, we had 1,245,146 customers, an increase of 7%
compared with 2002, shareholders equity of $343.9 million and deficit of $12.1
million. For full-year 2003, we also had total revenues of $570.8 million,
operating loss of $19.6 million and net income of $50.5 million. As at March
31, 2004, we had 1,257,512 customers, shareholders equity of $329.9 million
and deficit of $33.4 million. Total revenues for the three months ended March
31, 2004 were $145.3 million, our operating loss was $1.6 million and our net
loss was $14.7 million. Our principal place of business is located at 800 de La Gauchetière Street
West, Suite 4000, Montreal, Quebec, Canada H5A 1K3 and our registered office is
located at 1250 René-Lévesque Blvd. West, 38th floor, Montreal, Quebec, Canada
H3B 4W8. Our telephone number is (514) 937-2121. CT Corporation System, located
at 111 Eighth Avenue, New York, NY 10011, (212) 894-8940, acts as our agent for
service of process in the United States. TELUS unsolicited Offers On May 13, 2004, we were informed that TELUS Corporation intends to make
an unsolicited all-cash offer to purchase all of the outstanding publicly
traded shares and warrants of Microcell. On May 17, 2004, TELUS Corporation
filed its offer with the Canadian Securities Administrators and the SEC. On May
19, 2004, the board of directors of Microcell met with its financial advisors
and legal advisors to review the TELUS Offers, and all relevant financial and
legal considerations surrounding the TELUS Offers. At the May 19, 2004 meeting,
the financial advisors informed the board of directors of their opinions to the
effect that, as of such date and based upon and subject to the matters stated
in their respective opinions, the consideration being offered to the holders of
securities under the TELUS Offers was inadequate, from a financial point of
view, to such holders of securities. After careful review and analysis of the
TELUS Offers, the board of directors resolved to recommend that holders of
securities not tender their securities into the TELUS Offers and, should any of
their securities have been tendered, to withdraw them. On May 19, 2004, the board of directors also resolved to form a special
committee of the board of directors in order to consider, evaluate and
negotiate alternatives to the TELUS Offers (including any amendment to the
TELUS Offers) and make recommendations to the board of directors for its
approval. The special committee is composed of Messrs. André Bureau, James
Continenza, Christian Dubé, Gary W. Goertz, Robert F. Latham, Paul McFarlane,
Steven D. Scheiwe and Lorie Waisberg. On May 20, 2004, we issued a news release stating that our board of
directors recommended, after careful review and analysis of the TELUS Offers
performed with the assistance of the financial advisors and legal advisors,
that holders of securities not tender into the TELUS Offers. On the same date,
we filed a Schedule 14D-9 with the SEC, pursuant to U.S tender offer rules. We are actively considering strategic and
financial alternatives to the TELUS Offers. To that end, we and
our advisors have entered into discussions with a number of
parties, including TELUS. This process is ongoing and may result
in additional discussions or negotiations regarding a sale of
our company to TELUS or another party, an equity investment in
our company by a strategic or financial investor, the separation
of certain of our assets, or some combination of these
alternatives. However, there can be no assurance that the
process we have initiated, or the TELUS Offers themselves, will
lead to any transaction. 15




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On May 31, 2004, we announced the mailing of our directors circular
containing the previously announced recommendation of the board of directors
that holders of Microcells class A restricted voting shares, class B
non-voting shares, warrants 2005 and warrants 2008 not tender into the
unsolicited offers from TELUS Corporation commenced on May 17, 2004. On June
22, 2004 TELUS announced that it would extend the TELUS Offers until July 22,
2004. On June 29, 2004, we issued a press release confirming the
recommendation in our directors circular. Capital Restructuring At the time of the release of our second quarter 2002 results on August 9,
2002, we announced that there was significant uncertainty regarding our ability
to continue as a going concern, such ability being dependent, among other
factors, on our ability to reduce our financing costs and improve our liquidity
and operating performance. We also announced on that date that we had retained
the services of Rothschild Inc. and NM Rothschild & Sons Canada Limited, which
we refer to collectively as Rothschild, as financial advisor, and formed, in
August 2002, a special committee of the board of directors of Old Microcell, or
the Old Board, composed of three independent directors with a view to
evaluating various strategic options in the circumstances. The alternatives
considered by the financial advisor and the special committee were a debt
restructuring, recapitalization, potential capital infusion, sale of the
business and other type of transactions including a court supervised
reorganization. The special committee determined that the capital
reorganization was the most favourable alternative for all the stakeholders.
Three independent directors, Messrs. Michael Cytrynbaum, Noel R. Bambrough and
Pierre Laurin, composed the special committee. In light of the going concern
uncertainty, the mandate of the special committee was to review and evaluate
our alternatives with a view to reducing our financing costs and improving our
liquidity. To that end, the special committee obtained the advice and
recommendations of Rothschild. The significant uncertainty resulted from the
fact that we disclosed that we believed we would be in default of certain
covenants in our long-term debt agreements within a twelve-month period, unless
we could successfully renegotiate some of these covenants. With such default,
the senior secured lenders could have chosen not to provide us with further
access to funds under the senior secured revolving credit facility and could
also accelerate debt repayment. On October 31, 2002, we entered into a forbearance and amending agreement
with our secured bank lenders in which the lenders agreed to forbear until
December 23, 2002, subject to certain conditions, the exercise of any rights
with respect to certain possible defaults. The covenants to which the
forbearance agreement applied related to the non-payment of interest on the
2006 Notes and the possibility of the non- payment to a supplier under a
material contract. On December 2, 2002, we announced that we would not make our
interest payment on our 2006 Notes due on that day. Before the end of the
forbearance period, we reached an agreement with the supplier on the amount due
and settled such amount. On December 23, 2002 we announced that our secured lenders, holding
approximately 74% of the outstanding secured debt, had agreed on the terms of a
recapitalization plan. In this regard, our secured lenders agreed to forbear,
until January 6, 2003, the exercise of any rights with respect to a default
resulting from the non-payment of interest on the 2006 Notes. Old Microcell
also continued to have constructive discussions regarding the recapitalization
plan with the informal ad hoc committee of noteholders, which we refer to as
the AHB Committee, formed to pursue discussions with us regarding our proposed
recapitalization. On January 3, 2003, we announced that we had received signed commitments
from certain of our secured lenders and noteholders, representing approximately
75% and 55%, respectively, of the estimated aggregate voting claims that may be
represented at the secured creditors meeting and the affected unsecured
creditors meeting. In view of our then current and anticipated financial
position, the status of our discussions with financial and strategic investors,
the non-payment of U.S.$29.3 million of interest due on the 2006 Notes in
December 2002 and the options available to us under the circumstances, we
elected to restructure our operations under the protection of the Companies
Creditors Arrangement Act (Canada). We filed for and received protection under
the Companies Creditors Arrangement Act (Canada) on January 3, 2003, in the
form of an initial order granted January 3, 2003 by the Superior Court of the
Province of Québec in the Judicial District of Montreal, which we refer to as
the Court, in respect of Old Microcell and certain of our subsidiaries. We
refer to this as the Initial Order. On February 19, 2003, we filed our circular, which included the plan of
reorganization, with the Canadian Securities Administrators and the SEC.
Subsequently, on March 17, 2003 the plan of reorganization was voted upon and
approved by 98% of the secured creditors and 100% of the affected unsecured
creditors, representing 93% and 100%, respectively, of the total value of the
secured claims and affected unsecured claims that were voted. On March 18,
2003, the Court issued a sanction order sanctioning the plan of reorganization
and it became effective on May 1, 2003. The restructuring of our operation mainly consisted of a reduction of our
workforce and of our debt obligations by approximately 16




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$1.6 billion and our annual interest payment obligations by a range of
$140 to $180 million. The court protection that we received under the
Companies Creditors Arrangement Act (Canada) ensured that the negotiated plan
of reorganization would be implemented in an orderly fashion and for the
benefit of all stakeholders. Capital Expenditures Our PCS network, based on the GSM technology, represents our main capital
expenditure and covers approximately 19 million people, or 61% of the Canadian
population. We have designed our PCS network to operate exclusively in the 1900
MHz frequency range. With 30 MHz of contiguous spectrum, we have been able to
design our PCS network so that its base station sites are appropriately spaced
and located to provide optimal cost-effectiveness and continuous service
throughout coverage areas. We believe that this design permits our PCS network
to provide high quality service even at cell edges. In addition, we are using
mini and micro-base stations, off-air repeaters and in-building distributed
repeaters to cost-effectively improve the quality of outdoor and in-building
coverage. In 2001, we upgraded our entire GSM network to offer GPRS technology, an
over-the-air system for transmitting data on GSM networks. GPRS is a wireless
technology standard that supports data communication through devices that
enable always on Internet connectivity. GPRS technology converts wireless
data into standard Internet packets, enabling interoperability between the
Internet and a mobile wireless network. The GPRS method of transporting data
optimizes network capacity by using bandwidth only when it is needed. In
addition, several data transmissions from different users can share the same
channel. The end result is next-generation technology that will allow end-users
to cost-effectively remain constantly connected, and to send and receive data
much faster. We invested approximately $73 million, $125 million and $277 million in
capital expenditures for the years ended December 31, 2003, 2002 and 2001
respectively. In addition, we invested $130 million and $20 million in 2001 and
2000, respectively, for the total acquisition of Inukshuk. The principal asset
in Inukshuk is represented by the MCS licenses. The MCS licenses were written
down to nil in 2002, as a result of uncertainty regarding financing at that
time. With effective implementation of our capital restructuring plan on May 1,
2003, we have strengthened our financial position. Now that this process is
completed, our goal is to re-establish our company as a strong competitor in
the Canadian PCS wireless market, providing affordable and innovative PCS
services and positioning us as the preferred access network for the mass
market. Our strategic direction is to focus primarily on our core PCS
operations within the retail consumer and individual business user market
segments. With our network buildout substantially completed, capital expenditures
for 2003 are projected to be between $70 and $80 million. The expenditures will
be concentrated on maintenance and capacity improvements to allow for continued
service quality, subscriber and usage growth, as well as on enhancement of the
PCS coverage and signal strength in markets already being served. BUSINESS OVERVIEW From our inception, we have been involved in the design and deployment of
wireless communications services. In September 1994, we were issued an
experimental license from Industry Canada to test PCS technologies operating in
the 1900 MHz frequency range. The experimental license was used to deploy a
pilot network in Montreal. At the end of 1995, we were awarded our PCS license
and began commercial deployment of our PCS network across Canada in 1996. In
2001, our PCS license was renewed for a second five-year term and in December
2003, this was extended a further five years, to 2011. We offer a wide range of voice and high-speed data communications products
and services to over 1.2 million customers. We operate a GSM network across
Canada and market PCS and GPRS under the Fido brand name. PCS consists of
wireless telecommunications services that use advanced and secure digital
technology. We are the only wireless competitive local exchange carrier in
Canada, which provides us with the ability to port landline numbers to wireless
phones. This enables us to differentiate ourselves in the Canadian wireless
industry by allowing us to actively pursue a local wireline substitution
strategy. We also offer access to our PCS network to third-party
telecommunications providers on a wholesale basis, including Sprint Canada Inc.
with whom we have an agreement whereby Sprint Canada offers their home phone
and long distance service along with our Fido wireless service. Since May 1, 2003, we have carried on our operations through two principal
wholly-owned subsidiaries: 17




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
    
    Solutions, which
    
    serves both consumer and corporate customers;
    
    is the holder of our personal communication services license;
    
    owns our personal communication services network;
    
    operates our wholesale personal communication services business; and
    
    operates our retail personal communication services business under
the Fido brand name; and
    
    Inukshuk, a company selected to be awarded MCS licenses by Industry
Canada in the spring of 2000 that cover some 30 million people in
Canada; MCS spectrum allows for the deployment and operation of
broadband wireless access networks. On November 19, 2003, Inukshuk
announced arrangements for a venture with third parties to build an MCS
network to provide for high-speed Internet, IP-based voice and local
networking services using broadband wireless technology. Since February
11, 2004 Inukshuk operates as a wholesaler in Yellowknife and works with
retailer SSI Micro Ltd. to bring high-speed Internet services to that
market. PCS PCS Business Strategy PCS is a generation of wireless telecommunications services based on
advanced, secure, digital technology. we currently offer a range of simply
priced, affordable packages of feature-rich PCS, including secure digital voice
transmission, prepaid services and enhanced customized value-added data
services. Since our inception, we have been pursuing a mass-market strategy to
position our company as the customers preferred source of access for everyday
communications needs. We commercially launched our PCS services in the greater Montreal area in
November 1996 under the Fido brand name. We currently provide PCS coverage in a
number of other census metropolitan areas and other communities and regions in
Canada, including: St. Johns, Halifax, Québec City, Trois-Rivières,
Sherbrooke, Ottawa-Hull, Oshawa, Toronto, Hamilton, St. Catharines-Niagara,
Kitchener, London, Windsor, Winnipeg, Regina, Saskatoon, Edmonton, Calgary,
Vancouver and Victoria. In addition, our PCS network provides digital network
coverage along certain Canadian highway corridors between urban areas and
weekend destinations. We estimate that our PCS network covers some 19 million
people, or 61% of the Canadian population. We believe that our strong branding,
customer segmentation strategy, service innovation and product differentiation
has fuelled high rates of customer acceptance and subscriber growth in a
relatively short period of time. We had 1,245,146 customers as at December 31,
2003, consisting of 592,180 Fido postpaid service subscribers and 652,966 Fido
prepaid service subscribers, compared with a retail customer base of 1,164,521
at the end of 2002 of which 545,062 were postpaid and 619,459 prepaid. This
represents an approximate 9% market share of the total number of wireless
subscribers in Canada. We are using the GSM technology for our PCS network. Having been in
successful operation for approximately twelve years, GSM has achieved
substantial market acceptance. It is the most widely deployed digital wireless
voice and data technology in the world, accounting for 72% of the worlds
digital market and 70% of the worlds wireless market. It is currently used by
510 on-air networks in 174 countries and territories, providing commercial
service to more than 987 million customers, including over 22 million GSM
customers in North America. We also believe that GSM network equipment prices
and GSM handset prices benefit from greater economies of scale than other
digital technologies. We also benefit when GSM subscribers from other networks
roam onto our PCS network. Similarly, our customers enjoy the benefits of
global roaming on the networks of our GSM roaming partners around the world. We
have operational roaming agreements with almost all of the GSM operators in the
United States and with 281 GSM operators in 148 countries worldwide. We have deployed a PCS network in each of our markets that is designed
specifically to provide the coverage needs of our targeted market segments and
the capacity necessary to satisfy the usage requirements of our subscribers. We
were the first wireless operator in Canada to deploy an all-digital data
network based on next generation infrastructure. Our PCS license, consisting of
30 MHz of continuous spectrum nationwide, currently allows us to rapidly and
cost-effectively add network capacity with minimal cell splitting. We believe
that the combination of our network technology, network design and spectrum
depth makes us uniquely suited 18




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to efficiently serve the usage demands of our subscribers and provides us
with a competitive advantage. Beyond our PCS network coverage, we provide analog roaming capabilities
through the networks of other wireless operators in Canada. This increases the
effective wireless coverage area available to our customers to approximately
94% of the Canadian population. Access to analog cellular coverage requires the
use of dual-mode (analog-GSM) handsets. In order to strengthen our competitive position in the Canadian wireless
market, we underwent a thorough revision of our business plan during 2002 in
response to difficult financial market conditions and certain operating
realities, primarily the slower-than-expected emergence and adoption of
data-related services, and the competitive and operating challenges we faced in
acquiring and supporting business accounts. Accordingly, we adjusted our
strategic direction to focus primarily on core PCS voice operations and low
bandwidth data services within the retail consumer and individual business user
market segments. In order to competitively position our wireless service as a
preferred means of communication in the mass market, we designed our postpaid
service marketing strategy around specific product attributes, such as
big-minute bundles, per-second billing, worldwide roaming and competitive
long-distance rates, while our prepaid service marketing strategy is centered
on product features such as flexibility, spending control, simple and
convenient mobile airtime replenishment, postpaid-type per-minute rates and
bundled value-added services. Some key elements of our business strategy, already or in the process of
being implemented, include the following: (1) focus primarily on the retail consumer and individual business users
market segments; (2) allocate resources primarily to PCS activities with a high impact on
the customer base; (3) target mass-market retail consumer segments with the highest growth
potential, such as the youth, young adult and urban professional markets, as
well as individual/business users/small office/home office business users
located in major metropolitan areas using direct-to-consumer distribution
channels, including corporate-owned stores, third-party retailers, and a
direct sales force; (4) offer simple, affordable and relevant PCS products, services and
devices that meet the everyday personal and business needs of customers,
while minimizing operating costs; (5) lead in terms of innovation by designing strongly differentiated
products and services for profitable market niches that address the lifestyle
and usage habits of the highest-growth market segments; (6) spearhead local wireline substitution in Canada; (7) adopt a fast-follower approach or a network partner approach
with respect to the emerging data market in order to reduce the costs and
business risks associated with new product and service development; (8) provide a superior level of customer service, invest in customer
retention programs, and ensure customers are matched to the right payment
method to optimize satisfaction and foster loyalty; (9) focus network improvements primarily on capacity and maintenance; (10) increase network capacity on a timely basis to support customer
growth requirements resulting from new product launches or existing services
and enhance existing network coverage through improvements to signal strength
in markets already being served; and (11) continue to support existing third-party service providers and
considering new wholesale proposals. Our goal is to remain a leading provider of affordable and innovative PCS
services in Canada and to position our company as the preferred access network
for the mass market. Key elements of our positioning are:  
    
    Build Awareness of PCS and the Fido Brand Name.We are targeting
mass-market consumers, individual business users and small- to
medium-sized businesses on a segmented basis. We are marketing Fido®
as the wireless communications service that provides superior customer
value. Our newest product, City Fido, is another avenue that we are
taking to raise the profile 19




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of wireless telephony in Canada by leading the movement towards wireline
displacement through offering a monthly, flat-rate, unlimited local usage
package.  
    
    Offer Superior Products and Services at Affordable Prices.We offer
simple packages of affordable, innovative and value- added PCS products
and services that meet the everyday personal and business needs of
customers. Through our position as one of the lowest cost providers in
the wireless industry, we are able to offer better pricing to consumers.
Our services have been made available on a postpaid basis and, for
customers seeking an alternative form of payment with added flexibility,
on a prepaid basis. We currently offer secure digital voice
transmission, two-way e-mail and text messaging, enhanced voice and fax
messaging, and a range of call management services. We also offer
higher-speed mobile data services based on GPRS technology.  
    
    Offer Enhanced and Customized Value-Added Services.We believe that
we can improve future revenue growth by offering a wide range of
enhanced customized value-added voice-related services and data-related
services on any existing or future handheld device, as well as by
offering service bundles that will include high-speed Internet.  
    
    Differentiate from the Competition.We use the strength of our Fido
brand name to attract new customers by distinguishing ourselves from the
competition. We intend to continue growing the wireless market in Canada
by designing innovative products and services that specifically address
the lifestyle and usage habits of our target market segments and that
support the key pillars of our marketing strategy: affordability of
service, predictability of billing and fair pricing.  
    
    Provide Superior Customer Service to Build Loyalty.In order to
enhance the level of customer service and to maintain a high level of
customer loyalty, we have established our own internal customer service
and call center, available seven days a week. Our one point of contact
service includes the handling of customer inquiries concerning
activation, services, billing and collections, and network performance.
We also offer on-line activation and billing to our customers. We use a
customer segmentation approach at our call center in order to provide an
optimal level of service to our highest value customers.  
    
    Network Enhancements.We have built our PCS network in a
cost-effective manner, which has been purposefully designed to meet the
requirements of a mass-market strategy. Our choice of the GSM standard
allows us to benefit from a proven technology that is currently
commercially available from multiple equipment vendors. We have
concentrated our network build-out in Canadas densely populated urban
areas, popular weekend destinations and certain highway corridors
between the urban areas to ensure optimal network coverage for our
target market segments. Our future capital spending is expected to be
concentrated on ongoing maintenance, increasing capacity to support
subscriber and usage growth, as well as on improving signal strength in
the markets already served.  
    
    Wholesale PCS.In order to increase the utilization of our PCS
network, we have entered into wholesale service arrangements with
non-affiliated companies to use our network to offer bundled wireless
services to their customers. We expect the Canadian wireless market to grow by another 50% over the
next four years, as the penetration rate is expected to increase from
approximately 43% today to over 60% by 2008. The Canadian wireless industry has
enjoyed penetration gains of approximately 4 percentage points per year since
1996. Based on this trend, we expect that the penetration rate will increase by
another 20 percentage points by the end of 2008 from 43% as at the end of 2003
to over 60% by the end of 2008. Also, given the increase in competitive
activity and proliferation of new services, particularly since Microcells
return as a fully active competitor after its recapitalization in 2003,
industry subscriber growth has begun to improve, which could push the annual
penetration gain beyond the average 4 percentage points per year. Historically,
Canada has lagged the U.S. and other developed European countries in terms of
wireless penetration by several years. The U.S. penetration rate was
approximately 54% at the end of 2003 and it is expected to reach 70% by the end
of 2008, while the average European wireless penetration rate is over 80%. As a
result, there is still ample room for wireless voice services to grow in
Canada, especially given the proliferation of new handsets with high-end
features, the introduction of bundled offers, and the launch of new services
that encourage the creation of user communities and stimulate wireline
displacement. Moreover, in our view, the enterprise market for wireless in
Canada is increasingly mature. Accordingly, the greater growth opportunity
exists in the retail consumer market, particularly within the youth and young
adult market segments, which is coherent with our customer segmentation
approach and the wireless industrys evolution in Canada. Given this context,
we intend to focus our marketing efforts on stimulating this incremental growth
by distinguishing ourselves from the competition. We believe our market
positioning should enable us to acquire our fair share of new subscribers and
to maximize our cash flow through focusing on certain higher-growth market
segments and leveraging existing network infrastructure to offer enhanced voice
and certain short messaging service- based data services. 20




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City Fido In keeping with our business strategy of market differentiation and our
objective to continue raising the profile of wireless telephony in Canada
through product evolution and innovative service design, we commercially
introduced the industrys first home and mobile service in the Greater
Vancouver area, branded under the City Fido name, in October 2003. This
service, which uniquely embraces the concept of person-to-person communication
by integrating the features of traditional wireline service with the benefits
of wireless mobility, is being positioned as an alternative to local wireline
telephone service. The service allows customers to place unlimited wireless
calls within a local calling area and to receive unlimited calls from any area
for a flat monthly rate of $45. We also provide roaming and long distance
service, caller ID, text messaging and other value-added services for
additional fees, which has resulted in ARPU in excess of $50 per City Fido
subscriber. Due to the unlimited calling feature of the service, average usage
among our City Fido subscribers is currently more than double the average
monthly usage of our regular postpaid subscribers at approximately 421 minutes
per month (based on fourth quarter 2003 results). Because of our competitive
local exchange carrier status in Canada, most customers have the option of
transferring their existing home or single-line business phone number to their
City Fido plan, while keeping their white pages directory listing. We believe that we are well-positioned, both operationally and
strategically, to spearhead the movement towards wireline displacement. This
unique opportunity to establish a differentiated market strategy is supported
by the findings of recent studies that indicate a growing trend among
consumers, particularly young urban adults, to use a wireless device as their
primary means of communication, as well as by the strong customer response to
City Fido experienced to date in Vancouver. We believe that City Fido will
enable us to grow our subscriber base and service revenues at a significantly
faster rate than planned. In May 2004 we launched City Fido in the
greater Toronto area. We expect to rollout City Fido progressively over the
next three years to additional Canadian cities. The success of City Fido presents Microcell with a unique value creation
opportunity. As of December 31, 2003, the Vancouver rollout of City Fido
produced the following results in the fourth quarter of 2003: City Fido gross additions
    
    
    44,286% of gross additions (switchers)
    
    
    45
    %% of gross additions (newcomers)
    
    
    55
    %Migration of Fido subscribers
    
    
    28,770End of year City FIDO subscribers
    
    
    72,428City Fido as % of aggregate total gross additions
    
    
    57
    %City Fido as % of aggregate postpaid gross additions
    
    
    73
    %Monthly City Fido ARPU(1)
    
    $
    53
   (1)
    
    Based on monthly introductory price of $40. We believe that City Fido has many compelling advantages and sustainable
competitive strengths that strongly reinforce our overall market positioning
and that support our objective of further expanding the wireless market in
Canada. We can group these benefits into three broad categories: 1. Strategic benefits for Microcell Differentiated Service Offering.City Fido enables us to provide our
subscribers with unlimited local wireless services at an affordable, fixed
price, without the requirement for a long-term contract. We believe that this
represents a unique value proposition for our subscribers that differs from
offerings of the traditional wireless carriers. We also believe that our
ability to attract approximately 72,000 City Fido subscribers in just under
three months of service in the Vancouver area alone demonstrates the demand for
such a product in Canada. Creates Competitive Barrier.We believe that City Fido creates a
competitive barrier by allowing us to offer customers a strongly differentiated
product that the other three national Canadian wireless operators would be
reluctant to match given the significant loss of recurring service revenue they
would experience from the likely migration of their high-ARPU postpaid
subscribers. Moreover, we believe that our competitors would have a high
incremental capital spending requirement for network capacity in order to
accommodate increased usage from the migration of a large number of postpaid
customers. On average, as at the end of 2003, the proportion of postpaid
subscribers in our competitors customer bases was approximately 75% to 80%,
compared with only 48% for us. 21




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Less Vulnerable To Churn.We believe that City Fidos unique value and
service structure, as well as the difficulty that our competitors would face in
replicating this product, given the attendant cannibalization costs to them in
terms of lost revenues and incremental capital expenditures, makes us less
vulnerable to churn. Attract Switchers.We believe that the differentiated nature of our City
Fido product leaves room for us to capture incremental market share by
distinctively positioning Fido in what is increasingly becoming a switchers
market in the Canadian wireless industry. We estimate that over 50% of all new
gross industry additions are current wireless subscribers who churn from their
existing service providers. Furthermore, based on an internal survey of new
City Fido users, approximately 45% of City Fido gross additions in the fourth
quarter of 2003 were switchers from other service providers. Rapid, Profitable Growth.The City Fido service adapts particularly well
to the needs and lifestyles of single urbanites, young professionals, students,
small-office home offices, or SOHOs, and to anyone who wants to add the benefit
of mobility and a larger local calling area to their local phone service. As a
result, we believe that we could capture a greater market share of the
industrys new gross customer additions. Offering City Fido should increase our
overall operating margin faster than without this service, due to the positive
impact on customer mix and revenue from having both a larger number of
customers and a higher proportion of postpaid subscribers in the subscriber
base. Establish Strong Positioning for a Service Platform.We believe that City
Fido will help us to establish a more stable and committed customer base to
whom we can market a host of additional wireline-type services through a
platform that includes high-speed Internet, long-distance bundles and family
plan options. 2. Operational benefits for Microcell No Significant Cannibalization of Revenues.Given the absence of a large
business user segment or a significant number of corporate accounts in our
current customer base, as well as no traditional local wireline franchise to
protect, we do not face significant service revenue erosion from the
introduction of a service that offers larger buckets of minutes at a fixed
price. Rebalance the Customer Mix.In our view, City Fido should help us to
increase the proportion of postpaid customers in our subscriber base and,
therefore, improve our blended ARPU (blended ARPU is a non-GAAP measure and is
defined on page 43 in the Management Discussion and Analysis of Financial
Conditions and Results of Operations). As a direct result of our City Fido
service launch, we increased the proportion of postpaid subscribers in our
Vancouver area customer base during the fourth quarter of 2003. On October 1,
2003, our subscriber base in Vancouver was 50% postpaid, compared with
approximately 58% at December 31, 2003. Postpaid subscriber additions in the
fourth quarter of 2003 represented 78% of our total gross additions in
Vancouver (of which 73% were City Fido), compared with an average of 40% for
the first nine months of 2003. Achieve a Lower Cost Structure.Our mass-market operating strategy,
network design, concentrated network coverage and spectrum position has allowed
us to become one of the lowest cost providers of wireless service in Canada. As
a result of our ability to keep costs down, we are able to offer better pricing
to consumers. Due to the our current suite of products and customer profile,
network usage is distributed fairly evenly throughout the day, resulting in
very low peak-time usage and substantial off-peak capacity. The cost of network
infrastructure and the cost of backhaul have decreased dramatically over the
last few years, which has enabled us to reduce our cost per incremental minute.
This ability to add network capacity cheaply, as well as the introduction of
handset vocoders with better compression ability over the next year, should
allow us to address the unlimited local usage market in a profitable and
financially sound manner. Moreover, City Fido is a product that is easy to sell
and service. Therefore, it brings added simplicity to our operations, which
should contribute to further improving our cost structure and result in a
higher operating margin over time. 3. Benefits for the Canadian wireless industry Drive Incremental Penetration.We believe there is substantial demand for
larger-bucket wireless services at a fixed, affordable price in Canada and that
many prospective customers currently refrain from subscribing to or extensively
using wireless communications services due to a lack of perceived value with
their traditional wireless calling plans. We also believe that City Fido
reduces the gap between existing wireless and wireline pricing, which
stimulates wireless usage and encourages wireline substitution. In a recent
survey among City Fido users conducted in November 2003, 14% indicated that
they would cancel their residential wireline service. The percentage among
wireless service newcomers was much higher at 25%. As a result, we believe that
products such as City Fido could contribute to driving Canadian penetration
rates in our markets to levels comparable to those 22




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experienced in the United States, Europe and Asia. PCS Products and Services Monthly airtime packages.We offer two types of monthly price plans to
customers who choose to subscribe to our postpaid PCS service, with the option
of a 24-month customer agreement, which provides new subscribers with a
significant discount on a wireless device of their choice:  (1)
    
    Payable upon receipt of an invoice: (a) Anytime  
    
    200 minutes of airtime for a flat rate of $20; or  
    
    400 minutes of airtime for a flat rate of $40; or  
    
    700 minutes of airtime for a flat rate of $70; or  
    
    1,000 minutes of airtime for a flat rate of $100. (b) 1,000 Plus:  
    
    1,000 minutes of airtime during evenings and weekends, 150 weekday
minutes of airtime and minute tracker feature, for a flat rate of $30;
or  
    
    1,000 minutes of airtime during evenings and weekends, 300 weekday
minutes of airtime and minute tracker feature for a flat rate of $45; or  
    
    1,000 weekday minutes of airtime, 150 minutes of airtime during
evenings and weekends and minute tracker feature, for a flat rate of
$50. (c) Bundles:  
    
    300 minutes of airtime, 100 text messages, voice messaging and call
display features, for a flat rate of $30; or  
    
    400 minutes of airtime, 200 minutes of long distance within Canada
and to the U.S., 50% discount on the rates for international calls,
voice messaging and call display features, for a flat rate of $45; or  
    
    1,000 minutes of airtime, unlimited airtime during evenings and
weekends, minute tracker, voice messaging with Instant Reply and call
display features, for a flat rate of $100; or  
    
    400 minutes of airtime, 5 megabytes of mobile Internet access, voice
messaging and call display, for a flat rate of $45. Customers can add the following options to their anytime or bundles
monthly package: (A) unlimited local and long-distance calls, text messages and chatting
between Fido customers anywhere in Canada for $10 per month; (B) unlimited airtime during evenings and weekends for $25 per month; (C) unlimited airtime during weekends for $15 per month; (D) 250 minutes of long distance within Canada and to the U.S. for $10
per month; (E) 850 minutes of long distance within Canada and to the U.S. for $25
per month; and 23




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(F) a 50% discount on the rates on international calls for $5 per month. (d) City Fido: Currently, this service includes unlimited local calling on our digital
network throughout the entire Lower Mainland of British Columbia, which covers
a larger local calling area than the incumbent telephone company. Many
customers will have the option of transferring their existing home or
single-line business phone number to their City Fido service and keeping their
white pages directory listing. For $45 per month and a $50 one-time activation fee, City Fido customers
can:  
    
    make and receive an unlimited number of calls on our digital network
in their designated zone;  
    
    use their Fido at home as a traditional phone;  
    
    make calls while roaming outside their designated zone. Customers can add the following options to their City Fido monthly
service: (1) 250 minutes of long distance within Canada and to the United States
any time for $10 per month; (2) 850 minutes of long distance within Canada and to the United States
any time for $25 per month; (3) 50% off international long-distance calls made from within Canada
any time for $5 per month; (4) 500 kilobytes of mobile Internet access and data transmission for $5
per month; (5) 5 megabytes of mobile Internet access and data transmission for $25
per month; (6) unlimited mobile Internet access and data transmission for $50 per
month. All monthly airtime packages include call waiting, call forwarding,
conference call features, and a minute tracker feature upon request, unless
specifically included. Pay per usage services are also available: text, e-mail
and instant messaging at $0.10 per message sent or received, as well as
information and entertainment messaging and mobile Internet. Other optional
services that can be combined with one of our monthly service packages,
including City Fido, unless otherwise specifically included, consist of: (1) call display for $3 per month; (2) voice messaging for $3 per month; (3) call display and voice messaging for $5 per month; (4) business messaging (includes call display, voice messaging and fax
messaging) for $9 per month; (5) 50 text or e-mail messages for $3 per month; (6) 100 text or e-mail messages for $5 per month; (7) 1,000 text or e-mail messages for $10 per month. We also offer, from time to time, promotional monthly airtime packages. As
of January 31, 2004, the following promotional monthly airtime packages were
available:  
    
    the Anywhere in Canada package, offering unlimited local and
long-distance calls, text messages and chatting between Fido
subscribers, 150 weekday minutes of airtime, and unlimited evenings and
weekends for a flat rate of $30. 24




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
    
    the Fido-to-Fido package, offering unlimited local calls, text
messages and chatting between Fido subscribers, 100 weekday minutes of
airtime, and 1,000 minutes of airtime during evenings and weekends for a
flat rate of $25.  
    
    the Voice and Data package, offering 100 weekday minutes, 1,000
evening and weekend minutes, 5 megabytes of mobile Internet access, 50
text messages, and three months of free data transmission for a flat
rate of $45.  
    
    the Unlimited 30 package, offering 150 weekday minutes, unlimited
airtime during evenings and weekends, and minute tracker for a flat rate
of $30.  
    
    the Unlimited 45 package, offering 350 weekday minutes, unlimited
airtime during evenings and weekends, 250 minutes of long distance
within Canada and to the United States, and minute tracker for a flat
rate of $45.  
    
    the All-in-one Fido-to-Fido kit at $150, offering a Siemens A56
handset plus four months of the Fido-to-Fido package with system access
fee included.  (2)
    
    Payable before receipt of an invoice: In line with our objective to make wireless telephony accessible to all
Canadians, we launched a new payment option that allows more customers to enjoy
the benefits of monthly airtime packages by paying for them in advance. This
service platform gives first-time wireless customers with little or no credit
history access to a postpaid rate plan, but without the working capital risk
for us. Customers seeking greater flexibility and control over their wireless
spending now have a practical alternative to prepaid service that offers
per-second billing and real-time account tracking on-line. Our full control
package, referred to as the FCP package, also includes the minute tracker
feature that sends customers free text messages to advise them of their airtime
usage and inform them of their account balance. Payment can be made through
pre-authorized debit of a credit card or bank account, or by telephone or in
person at one of our points of sale. When customers activate their Fido FCP
service, we deposit $5 in the customers account for extras such as long
distance, text messages, e-mail messages, and additional minutes. A $50
management fee applies when service is activated. The following FCP packages
are currently available:  
    
    200 minutes of airtime for a flat rate of $20; or  
    
    the Fido-to-Fido package for a flat rate of $25; or  
    
    150 weekday minutes, 1,000 evening and weekend minutes for a flat
rate of $30. All monthly airtime packages are billed on a per second basis, do not
require a contract, and include call waiting, call forwarding, conference
calling, and minute tracker feature upon request, unless specifically included.
Pay per usage services are also available: text, e-mail and instant messaging
at $0.10 per message sent or received, as well as information and entertainment
messaging and mobile Internet. Beyond the bundled minutes, additional airtime is charged at the rate of
$0.20 per minute for all monthly price plans, except for the Anytime and
Bundles 1,000 minutes price plans where additional airtime is charged at a rate
of $0.10 per minute. Long distance calls made from Canada to anywhere in Canada
and the United States are billed at $0.10 per minute, while overseas rates are
priced competitively with those of incumbent wireline telephone and alternative
long-distance carriers. We charge a single roaming rate of U.S.$0.20 per minute
for our customers roaming in the United States. We regularly bundle our airtime
packages with selected service options to deliver superior value to our
targeted customer segments. Per-minute Prepaid PCS Voice Service.In 1998, we introduced a prepaid
wireless service whereby customers can purchase in advance of their usage
airtime vouchers for a fixed validity period. We currently offer various
airtime vouchers:  
    
    $15 with a 15 day validity period and a per minute rate of 15 cents;  
    
    $20 with a 20 day validity period and a per minute rate of 5 cents
during evenings and weekends and 40 cents weekdays;  
    
    $30 with a 30 day validity period and a per minute rate of 15 cents;  
    
    $10 with a 30 day validity period and a per minute rate of 30 cents; 25




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
    
    $40 with a 40 day validity period and a per minute rate of 5 cents
during evenings and weekends and 40 cents weekdays; and  
    
    $25 with a 60 day validity period and a per minute rate of 30 cents. All prepaid airtime is usable any time of the day or week, and has been
charged on a per-minute basis since September 16, 2002. Prepaid service
includes call waiting, call forwarding, standard voice messaging and call
display as well as text and e-mail messaging at $0.10 per message sent and
received. Information and entertainment messaging are also available on a pay
per use basis. The flexible nature of our prepaid pricing options has been
designed to enable the two main prepaid customer target segments, the youth and
young adults, to better control their monthly expenditures and benefit from
greater perceived value. In recognition of the prepaid customers need for simple, convenient, and
mobile airtime replenishment, we introduced a new service in October 2002
called InstantRefill. This is a text message-based payment service that alerts
Fido prepaid customers when their account balance is low and allows them to use
their wireless handset to purchase additional airtime instantly by a
pre-authorized bank account debit or by credit card. Customers can also
purchase additional prepaid airtime at any of our retail points of purchase by
credit card directly through the customer service center, or through most
Canadian Imperial Bank of Commerce banking machines. Long-distance calls made
by prepaid customers are charged at the same rate as for monthly postpaid price
plans. PCS Data Service.We completed deployment of our GPRS network in 2001.
Once fully optimized, according to our GPRS suppliers, the technology is
expected to allow for throughput data rates of up to 115 kilobytes per second.
As a result, we have defined a host of new services and products that enable
customers to gain access to wireless data applications. In September 2001, we
became the first Canadian wireless provider to provide the next generation of
mobile data services based on GPRS wireless technology, and the first to
introduce, in conjunction with T-Mobile USA Inc., data roaming capabilities in
the North American market. Our data-capable devices enable mobile access to the
Internet, e-mail, and personal information management tools at various speeds.
The following data-only GPRS usage plans are currently available:  
    
    $50 per month for unlimited usage;  
    
    $25 per month for 5 megabytes, with each additional megabyte at $10;
and  
    
    $5 per month for 500 kilobytes. GPRS-based data services are also available on a pay-per-use basis charged
at 3¢ per kilobyte. In addition, we have identified a number of market-specific
mobile data applications beyond the basic offering of always on Internet
connectivity. The focus for business users is e-mail access and personal
information management tools, while interactive services such as gaming and
instant messaging are projected to be attractive to the consumer market. We believe that, as data transmission technologies develop, a number of
additional potential uses for such services will emerge. GSM Technology Features.Our choice of GSM digital technology enables us
to offer the following services and features:  
    
    Secure Communications.Sophisticated GSM encryption algorithms that
vary with each call provide increased call security to protect users
against eavesdropping and significantly reduce the risk of cloning of
subscriber information.  
    
    Call Management.Our PCS network offers call management services
including call display, call waiting, call forwarding, call blocking,
caller identification blocking and call conferencing.  
    
    Enhanced Battery Performance.GSM handsets consume, on average, less
power than analog handsets. In contrast to analog handsets, which
transmit at a constant rate of power, GSM handsets are able, for
example, to determine the distance between a handset and a cell site and
vary the wattage of the handset accordingly. This extends the amount of
time a battery can be used on GSM networks without having to be
recharged. According to manufacturers, some GSM handsets can deliver up
to four hours of talk time and six days of standby time without
recharging.  
    
    Enhanced Wireless Data Transmission.Digital networks are capable of
simultaneous voice and data communications. We currently offer basic
enhanced wireless data transmission services, such as two-way
alphanumeric short messaging service, GPRS and fax messaging. 26




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
    
    Subscriber Identification Module.Our GSM handsets hold a subscriber
identification module, or SIM card, that contains a microprocessor which
protects against fraudulent use by identifying and authenticating each
subscriber. The SIM card can also store details of the users services
subscribed, telephone number, personalized directory and notifications
of voice and data messages received. In addition, the SIM card will
enable a subscriber roaming on another GSM network to have access to
comparable services. However, certain of these features are not
available while customers are roaming on other GSM networks or on an
analog cellular network.  
    
    Ease of Use.We provide easy to use, intuitive, menu-driven handsets
from different manufacturers, such as Sony Ericsson Mobile
Communications AB, Nokia Products Limited, Siemens Canada Ltd. and
Motorola Canada Limited, that enable customers to make full use of the
features available on GSM. Microcell also provides over-the-air service
activation or subscriber profile management by transmitting changes in a
subscribers feature package of services, including mobile number
assignment, directly to the SIM card in the subscribers
handset.  
    
    Worldwide Roaming.Our subscribers are able to roam on to other GSM
networks, operating either at the same 1900 MHz frequency, or on a
different frequency through the use of a multi-band GSM handset. This
roaming capability gives subscribers access to PCS service when
traveling around the world. Access to roaming service requires us to
enter into roaming agreements with other GSM operators. We have
operational roaming agreements in place with almost all of the GSM
operators in the United States and with more than 281 GSM operators in
148 countries worldwide. Subscriber Base Our strong branding, customer segmentation strategy, service innovation
and product differentiation has fuelled high rates of customer acceptance and
subscriber growth since inception, as reflected by our reaching the one million
subscriber mark faster than any other wireless operator in Canada. During our
recapitalization process, which began in the third quarter of 2002, we imposed
a growth slowdown on our operations in order to preserve liquidity. This
resulted in fewer new gross additions, which in combination with higher churn
due partly to increased competitive activity, gave rise to subscriber losses.
Following the successful completion of our capital reorganization, we returned
to the wireless market as a fully active competitor and resumed subscriber
growth. As a result, for the third and fourth quarters combined, which were our
first two full quarters of operation following completion of our restructuring,
we added 148,714 new net subscribers. As at December 31, 2003, we had 1,245,146
retail subscribers, representing an increase of 7% over 2002. In addition, as
at December 31, 2003, we provided PCS network access to 33,042 wholesale
subscribers. The chart below provides an annual summary of our PCS subscribers and
annual subscriber growth since 1997: Year Ended December 31st
    
    Retail Subscribers
    
    Net Increase
    
    % Increase1997
    
    
    65,667
    
    
    
    63,637
    
    
    
    3,134.8
    %1998
    
    
    282,174
    
    
    
    216,507
    
    
    
    329.7
    %1999
    
    
    584,487
    
    
    
    302,313
    
    
    
    107.1
    %2000
    
    
    922,527
    
    
    
    338,040
    
    
    
    57.8
    %2001
    
    
    1,209,210
    
    
    
    286,683
    
    
    
    31.1
    %2002
    
    
    1,164,521
    (1)
    
    
    (44,689
    )(1)
    
    
    (3.7
    %)(1)2003
    
    
    1,245,146
    
    
    
    80,625
    
    
    
    6.9
    %As of March 31, 2004
    
    
    1,257,512
    
    
    
    12,366
    
    
    
    1.0
    %
   (1)
    
    During the second quarter of 2002, we removed 90,000 inactive prepaid
customers from our retail customer base. We define inactive prepaid
customers as those who have not made or received a call for a period of
more than 30 days. The 90,000 figure represented approximately the average
monthly number of inactive accounts in our prepaid customer base in the
last twelve months preceding the second quarter of 2002. By excluding
these inactive accounts from the reported customer base, we believe that
we are providing a more accurate representation of our quarterly prepaid
operating statistics for average revenue per user and average monthly
usage. Sales and Marketing The guiding principle driving our marketing strategy is that Fido
simplifies life. We offer an array of innovatively-designed and affordable
wireless services that meet the everyday personal and business needs of our
customers. The Fido brand plays a key 27




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role in product positioning, having differentiated itself in the Canadian
wireless market by being perceived as savvy and trendy, yet at the same time
trustworthy, customer-friendly, and innovative. We use market-wide research to
identify our best potential and most profitable, high-growth market segments,
and to understand consumers needs and preferences in developing and delivering
the right products and services in the most cost efficient manner. We engage in
mass-market advertising in order to maintain our brand and support our indirect
and direct distribution channels. We advertise primarily through local print
media, television and billboards. We also use in-store media, as well as the
Internet, to capture the attention of prospective customers. Products and services that are simple and easy to use reduce the need for
customer service and optimize customer satisfaction. As a result, we enjoy a
low cost of customer maintenance and a high level of efficiency in our call
center operations. We also provide a 15-day satisfaction guarantee, bill our
monthly airtime (postpaid) service by the second, and offer big-minute airtime
bundles at affordable per-minute rates that can be used anytime and anywhere
Fido PCS service is available. We use a segmented approach in acquiring and servicing customers. This
approach is intended to support the growth of our core wireless voice business,
as well as our entry into the emerging wireless data market. As wireless
penetration increases beyond the current penetration rate, the mass-market
retail consumer is expected to make up a higher percentage of new net
additions. We believe that Canadas urban and suburban markets, where more than
two-thirds of the Canadian population lives, are likely to be the most
receptive markets for PCS going forward. Given this context, we are well
positioned with the strength and positioning of our Fido brand, combined with
attractive monthly packages and per-minute prepaid offers, which have allowed
us to achieve strong positions within the youth and young adult market  age
15-24  and the young professionals market  age 25-34  two of the segments
with the highest growth potential in Canada. In order to make PCS more affordable, we subsidize the sale of handsets 
a practice also used by other Canadian wireless operators. Research has shown
that a key driver of customer acquisition is handset selection and style. This
factor is taking on greater importance as handset life cycles shorten. The Fido
handset and device portfolio includes some leading-edge handsets, some launched
as exclusive to Fido. Our current handset and device line-up consists mainly of
devices from Sony Ericsson, Nokia, Siemens, Motorola and Danger. By establishing preferred business relationships with certain handset
suppliers, we are able to obtain good pricing and limited-time exclusivity on
some of their newest devices. We have positioned our postpaid service among
high-value customers as a preferred means of communication, providing them with
the added benefits of mobility, personalization of service, and Internet
connectivity. We do this in part through an attractive handset line-up with
high functionality that is fairly priced. We have positioned our per-minute
prepaid service to allow an alternative means of payment with comparable value
and services to the monthly plans, yet with greater control over expenditures.
By segmenting Fido service in this manner, we expect to better match potential
customers to the most appropriate method of payment. We expect this to result
in improved customer satisfaction and retention. With a relatively lower penetration rate of voice-based wireless service
in Canada than in many other markets around the world, for example Europe and
the United States, we believe there remains good growth potential for wireless
services in Canada, including for wireless data services. Data-services revenue
in the wireless market has been slow to materialize due to a lack of
consumer-oriented applications and devices. We believe that the penetration
rate of data-related services will increase concurrently with the increase in
the penetration rate of wireless services in Canada as awareness of
data-related services grows with the commercial availability of a larger and
wider variety of new and affordable devices. Short messaging services, instant messaging services, gaming applications,
and the introduction of feature-rich, highly functional and affordable handsets
are all projected to increase the level of wireless data- services traffic and
usage. Customer Service We recognize that superior customer service is vital in contributing to
the long-term success of our business by helping to establish a loyal base of
satisfied customers. Accordingly, we have made customer service and
satisfaction essential elements of our operating philosophy. Providing timely
and accurate information concerning services, network coverage, billing and
customer account information, as well as responding to general inquiries and
correspondence, are important elements of a comprehensive customer service
program that promotes customer goodwill. We maintain a highly sophisticated monitoring and control system, a staff
of customer service personnel and a well-trained technical staff to handle both
routine and complex questions as they arise. These resources are available to
customers seven days a week. Since 2002, we have offered on-line billing
services whereby our customers have access to billing information and have the 28




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ability to pay their invoices via the Internet. Our trained staff is
located in stores and kiosks to promote our PCS products and services and
provide information to customers. Each sales and customer service
representative participates in a customized training program. Customer Retention As the Canadian wireless market reaches maturity, customer retention is
becoming increasingly important for wireless service providers. As a result, we
are pro-actively addressing this issue by designing retention programs aimed at
increasing our customers level of satisfaction and loyalty. In February 2004,
we launched a loyalty program called Fido Treats, whereby our customers can
accumulate reward points based on spending that can be redeemed toward the
purchase of a handset of their choice. One of our key objectives with this
program is to position Fido as the only Canadian wireless service provider to
offer all of its customers the opportunity to replace their handsets at a low
cost on a periodic basis. We also implemented a customer lifetime value scoring and segmentation
system within our customer service operations, which has permitted us to align
the cost of retaining a specific customer with the value that customer has
generated over time. This system facilitates the identification of long-time
and high-value subscribers, which allows us to implement specific initiatives
in order to minimize customer deactivation within these segments. Specifically,
in December 2003, we began a handset replacement/upgrade program through a
telemarketing and direct mail campaign targeted at our high-value subscribers.
We have found this tool to be useful in our retention efforts, particularly in
the wake of the competitive attacks launched by the competition directly at our
customers in central and eastern Canada in response to City Fido in Vancouver. We introduced an optional 24-month customer contract in February 2004.
Upon activation, customers who opt for a 24-month agreement will receive a
significant discount on any handset in our portfolio of devices. We believe
this will allow us not only to leverage our position as the industrys lowest
cost provider of handsets by offering more attractive prices on sought-after,
feature-rich devices, but also to become less vulnerable to competitors
attacks, while addressing the rapidly growing switchers market. Distribution Network We develop and maintain a distribution network that allows us to exert
significant influence over the message delivered to our customers in order to
set the right expectations for the customer and to control the cost of
acquisition. We have more than 5,500 points of sale at the retail level. These
points of sale include corporate-owned stores and kiosks as well as third-party
outlets. Our retail distribution network is also comprised of
voucher-replenishment-only outlets through more than 3,000 automated teller
machines of a Schedule I bank under the Bank Act(Canada). In 2003,
approximately 50% of our gross subscriber additions were added through our
indirect distribution outlets. We believe our mix of indirect and direct
distribution provides us with the ability to reach the largest number of
potential customers in our markets at a low relative cost. GSM Network Our PCS network, based on the GSM technology, covers approximately 19
million people, or 61% of the Canadian population. We have completed the
greater part of our digital PCS network deployment plans and, going forward,
will analyze, on a case-by-case basis, the merits of further deployment of the
network. Future network deployment plans will focus on enhancing capacity and
coverage, as well as improving signal strength in the markets already being
served in order to support subscriber growth and current service level
parameters. We have already deployed our GSM network along certain Canadian highway
corridors between urban areas and weekend destinations. However, due to the
high cost of PCS network build-out and the lack of necessary scale economies,
we generally do not build our PCS network in sparsely-populated areas or in
low- traffic density areas. Analog cellular networks currently serve many of
these areas. We have an analog roaming agreement with the former members of
Mobility Canada, whose analog cellular networks are estimated to cover
approximately 94% of the Canadian population, which permits us to extend
coverage to areas outside the PCS network range. We expect that cellular
providers will continue to offer analog cellular coverage for the foreseeable
future. PCS customers using dual-mode handsets providing both analog and GSM
service do not, however, have access to certain of the features and functions
of PCS while operating on an analog cellular network. We have designed our PCS network to operate exclusively in the 1900 MHz
frequency range. With 30 MHz of contiguous spectrum, we have been able to
design our PCS network so that its base station sites are appropriately spaced
and located to provide optimal cost-effectiveness and continuous service
throughout coverage areas. We believe that this design permits our PCS network 29




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to provide high quality service even at cell edges. In addition, we are
using mini- and micro-base stations, off-air repeaters and in building
distributed repeaters to cost-effectively improve the quality of outdoor and
in-building coverage. Moreover, frequency re-use is permitting us to carry up
to three times more traffic from each cell point. This is being facilitated
through software and hardware upgrades to our cell sites. Our network consists of switches and cell sites. A switching center serves
several purposes, including routing calls, managing call handoffs, managing
access to the public telephone network and providing access to voicemail and
other value-added services. Currently, the majority of our cell sites are
co-located, meaning our equipment is located on leased facilities that are
owned by third parties who retain the right to lease these facilities to other
carriers as well. We utilize our switching centers capabilities for
around-the-clock monitoring of our network base stations and switches. Our
network connects to the public telephone network through local exchange
carriers, which facilitates the origination and termination of traffic between
our network and both local exchange and long distance carriers. We have
negotiated interconnection agreements with our local exchange carriers. We also
use third-party providers for long distance services and for backhaul services.
Backhaul services are the telecommunications services that other carriers
provide to carry our traffic from our cell sites to our switching facilities. In 2001, we upgraded our entire GSM network to offer GPRS, an over-the-air
system for transmitting data on GSM networks. GPRS is a wireless technology
standard that supports data communication through devices that enable always
on Internet connectivity. GPRS technology converts wireless data into standard
Internet packets, enabling interoperability between the Internet and a mobile
wireless network. The GPRS method of transporting data optimizes network
capacity by using bandwidth only when it is needed. In addition, several data
transmissions from different users can share the same channel. The end result
is next-generation technology that will allow end-users to cost-effectively
remain constantly connected, and to send and receive data much faster. Suppliers Network Equipment Vendors.We entered into a supply agreement with Nortel
Networks Corporation dated as of December 20, 2001, for the purchase by
Solutions of GSM products and eligible services from Nortel. On January 16,
2004 we entered into an amendment to the Nortel agreement whereby Nortel became
our exclusive supplier for GSM and UMTS (Universal Mobile Telecommunications
System) core wireless network equipment until December 31, 2006. The amendment
gives Nortel exclusivity for provisioning us with GSM MSC (Mobile Switching
Centre), HLR (Home Location Register) and call server products. We also entered into an agreement with Ericsson Canada Inc. for the
purchase by Solutions of PCS products and services from Ericsson. This Ericsson
agreement, containing no purchasing commitment, generally provides for our
purchase of hardware, software and services related to our PCS network. Handset Suppliers.We do not manufacture any of the handsets used in our
operations. The high degree of compatibility among different manufacturers
models of handsets allows us not to be dependent upon any single source of
handsets. The handsets used in our operations are available for purchase from
multiple sources, and we anticipate that such equipment will continue to be
available in the foreseeable future. We are purchasing handsets primarily from
Nokia, Siemens, Sony Ericsson, Motorola and Danger. Intellectual Property We
have registered Fido(R), Microcell Solutions(R) and Microcell(R) as
trademarks in Canada with the Registrar of Trademarks. We file applications for
registration of the trademarks that we intend to use in our business such as
City Fido. We intend to take appropriate measures to protect intellectual
property that we develop. Under the Trade-Marks Act (Canada), the registration
of a trademark takes effect on the date the certificate of registration is
issued and continues to be in effect for a period of 15 years; such
registration is renewable. Broadband Wireless Internet Inukshuk is a wholly owned subsidiary of Solutions. Inukshuk has been
issued MCS licenses from Industry Canada in the 2500 MHz frequency range. Our
MCS licenses cover some 30 million Canadians, in all provinces and territories,
except Manitoba and Saskatchewan. The serving territory encompasses densely
populated urban areas, but also some of the most rural and remote parts of the
country, where there is often no wireline network infrastructure in place to
support broadband services. On December 21, 2001, Industry Canada confirmed
Inukshuks licenses for a 10-year term, with a renewal date in March of 2011. 30




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The licenses allow Inukshuk to build a unique, last mile broadband
wireless access, or BWA, network, to offer high speed Internet, IP-based voice
and local networking services. A unique feature is self-installed customer
premises equipment that allows for portability, giving customers access to BWA
service across the MCS network. The portability feature provides an advantage
over fixed Internet offerings that limit a customers access to service to a
single location. Inukshuks MCS license conditions require it, among other things, to meet
deployment commitments and to expend annually for each license area the greater
of two times license fees (totaling across all license areas approximately $2.8
million), 4% of adjusted gross revenues, or $50,000 on Learning Plan
commitments, unless otherwise agreed to by the learning community. Inukshuks
Learning Plan is intended to promote deployment of MCS in outlying areas, and
to develop on-line learning content. Inukshuks objective is to become Canadas premier wholesaler of broadband
wireless services. In Canada, high-speed Internet and other broadband services
are currently provided by incumbent telephone companies with DSL technology,
cable television operators and some new entrant telecommunications companies.
Broadband service is principally available in Canadas urban markets.
Approximately 35% of Canadian households received high-speed Internet services
in 2003, and the market is projected to continue to grow. Given this context,
Inukshuk is projected to provide an attractive and competitive alternative to
cable and DSL networks, as well as to extend broadband access to areas not
currently served by wireline systems. We had planned to build the MCS network directly through Inukshuk, but
challenging capital market conditions in the telecommunications industry made
fund raising difficult. As a result, in 2002 Inukshuk suspended efforts to
build the MCS network on its own. However, Inukshuk continued to seek partners
to assist in the build-out of the MCS network. In Canadas north, for example,
Inukshuk is working with regional partners, Nunanet Worldwide Communications
Ltd. and SSI Micro Ltd. to bring MCS services to the Northwest Territories and
Nunavut Territory. On November 19, 2003, Inukshuk announced the creation of a new venture
with Allstream Inc. and NR Communications, LLC. Each party owns one-third of
the new venture, which will operate as an independent entity, with its own
identity and brand, offering BWA services on a wholesale basis to service
providers, including Solutions and Allstream Inc. Each party will contribute a
combination of cash and assets or services to the venture. Contributions are being made in two phases. During a first phase, which
started on November 19, 2003, Allstream Inc. committed to inject $5 million in
cash and services, NR Communications committed to contribute the equivalent of
$5 million in network equipment, and Inukshuk contributed the use of 60 MHz of
its MCS licensed spectrum. During the first phase, MCS network roll out began,
initial commercial launches of the new venture took place, we validated
technological and commercial acceptance of the service, and completed a
detailed business plan. The parties are working to complete, in the near term, the conditions for
the second phase and more extensive network deployment. During this second
phase, the parties are projected to invest additional cash, assets, services
and equipment, as the case may be. In two markets, Richmond, B.C. and Cumberland, Ontario, Solutions began
retailing iFido services in March of 2004. iFido is a consumer offering of
BWA service delivered from the ventures MCS network. We believe iFido
represents an attractive opportunity to offer our Fido PCS subscribers an
integrated package of mobile, local, long distance and broadband services
across our network. This provides us access to a broader range of market
segments within the Canadian telecommunications industry. Competition PCS Business.Competition in the wireless communications industry is
intense. Competition for subscribers among wireless providers is based
principally upon effective branding and marketing, the services and features
offered, the technical quality of the wireless system, customer service, system
coverage, capacity, handset selection and functionality, and price. The
wireless communications industry is experiencing significant technological
change, as evidenced by the increasing pace of upgrades of existing wireless
networks from analog to digital, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. The Canadian wireless industry is comprised effectively of four national
players:  
    
    Microcell, our PCS license, has an approximate 9% market share of the
total number of wireless subscribers in Canada; 31




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
    
    Rogers, with a national 25 MHz cellular license and national PCS
licenses, has an approximate 28% market share of the total number of
wireless subscribers in Canada;  
    
    the Bell Mobility Partners, with 25 MHz cellular licenses in their
incumbent serving territories, covering essentially all of Canada,
excluding British Columbia, Alberta and Eastern Québec, and a further
10-30 MHz of PCS licenses nation-wide, has an approximate 37% market
share of the total number of wireless subscribers in Canada; and  
    
    TELUS, with 25 MHz cellular licenses in its incumbent serving
territories, covering essentially British Columbia, Alberta and Eastern
Québec, and a further 10-40 MHz of PCS licenses nation-wide. TELUS also
currently operates an analog specialized mobile radio wireless
communications network and a digital enhanced specialized mobile radio
network at 800 MHz, and has an approximate 26% market share of the total
number of wireless subscribers in Canada. Rogers first launched its digital services using time division multiple
access technology. It has since completed an overlay of the time division
multiple access network with GSM technology. Rogers continues to operate an
analog cellular network across Canada. The Bell Mobility Partners and TELUS are using code division multiple
access technologies for their digital cellular and PCS networks. The Bell
Mobility Partners and TELUS both also continue to operate analog cellular
networks in their incumbent serving territories. On October 17, 2001, TELUS,
Bell Mobility and Aliant Telecom Wireless, a Bell Mobility partner in Atlantic
Canada, concluded digital roaming arrangements for code division multiple
access technologies in their respective licensed service areas. We believe that our 30 MHz allotment of contiguous PCS spectrum enables us
to provide customers with bandwidth-intensive applications, including
high-speed data transmission services. We believe that our PCS handsets are
competitively priced as compared to digital and dual-mode handsets of
comparable size, weight and features. In order to compete effectively with our
competitors who subsidize the sale of their analog cellular and digital
handsets, we subsidize the sale of our PCS handsets. Our return to the wireless
market as a revitalized competitor following our successful capital
reorganization, along with our recent introduction of City Fido, has resulted
in an intensification of advertising, increased promotional activity and swift
competitive reaction by our competitors. Certain of our competitors introduced
specific advertisings which were targeting Fido customers only. For example,
they offered to our customers free handsets upon signing a long-term contract.
Certain of them also used our Fido brand name and/or dogs in their advertising.
These actions did have minimal impact on our business. However, this could have
an adverse effect on both the cost of acquiring subscribers and pricing, which
could put downward pressure on future revenue growth and profit margins for the
industry as a whole. Additional Competition.New spectrum may be licensed, and new
technologies may be developed, which could provide additional competition to
us. For example, mobile satellite systems, with transmissions from mobile units
to satellites, could augment or replace transmissions to land-based stations.
Even though such systems are designed primarily to serve remote areas, a mobile
satellite system could possibly augment or replace communications within
segments of land-based wireless systems. In addition, PCS is increasingly seen as competing with local wireline
telephone services for voice and data traffic. Wireline substitution, whereby
PCS customers use wireless for their principal or only telephony needs, is
becoming increasingly common. Wireless Internet Business.The incumbent local exchange carriers,
through use of DSL technology, and licensed cable operators are currently the
dominant players in the provision of broadband access to the Internet in
Canada. Research & Development As a condition of its PCS license, Solutions is to invest at least 2% of
adjusted gross revenues derived from its 2 GHz PCS operations, on PCS-related
research and development averaged over the current PCS license term, which
Industry Canada recently announced will run for ten years until March 31, 2011.
Our research and development activities are focused on planned investigation
undertaken with the hope of gaining new scientific or technical knowledge in
the field of wireless telecommunication. They are also oriented on the
translation of knowledge into a plan or design for new or substantially
improved material, devices, products, processes, systems or services related to
PCS. As at December 31, 2003, 2% of our adjusted gross revenues represented a
cumulative amount of $26.7 million and up to December 31, 2003, we spent
approximately $15.9 million (approximately $3.3 million in 2003 and $5.6
million and $7.0 million in 2002 and 2001 respectively). We expect to meet the
condition of our PCS license in term of investment on PCS-related research and
development at the end of the current PCS license term, in March 2011. 32




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Regulation Radiocommunication Act.The use of radio spectrum for our PCS and
Inukshuks MCS network operations is subject to regulation and licensing by
Industry Canada pursuant to the Radiocommunication Act and the ownership and
operation of cellular, PCS, MCS and other radiocommunication systems in Canada
are subject to ongoing oversight of Industry Canada. The Radiocommunication Act provides Industry Canada with wide discretion
to, among other things, issue spectrum licenses and establish technical
standards in relation to radio equipment. Industry Canada also has the
discretion to amend the terms and conditions of licenses to ensure the orderly
development and efficient operation of radiocommunications in Canada. Radio and spectrum licenses are issued for a term and may be renewed at
Industry Canadas discretion. They may be suspended or revoked for cause, on
notice, where Industry Canada determines the holder has contravened the
Radiocommunication Act, the regulations or the terms or conditions of its
licenses. Revocation is rare and licensees have a high expectation of renewal
unless a breach of a licence condition has occurred, a fundamental reallocation
of spectrum to a new service is required, or an overriding policy need arises.
Despite this, there can be no guarantee that our PCS license and our MCS
licenses will be renewed upon their expiry. PCS License Conditions and Fees.On April 15, 1996, Solutions was
informed of the conditions attached to its PCS license, which had an initial
term of five years. On March 29, 2001, Industry Canada renewed our PCS license
for a second five-year term, commencing on April 1, 2001. On December 12, 2003,
Industry Canada issued Canada Gazette Notice DGRB-006-03 announcing that the
license terms of existing cellular and PCS licensees, including Solutions, will
be extended to March 31, 2011. Industry Canada also announced that it would
make certain changes to the cellular and PCS license conditions, the most
significant of which will be to grant licensees the power to divide and
transfer their spectrum licenses both by quantity of spectrum and geographic
location. Beyond the ten-year license term and the new power to divide and transfer
spectrum licenses, other license conditions detailed in Gazette Notice
DGRB-006-03 that apply to Solutions include: (1) to comply with applicable spectrum aggregation limits (discussed in
more detail below); (2) to comply with the Canadian ownership and control provisions
(discussed in more detail below); (3) to ensure that radio stations are installed and operated in
compliance with applicable regulations from Health Canada (electromagnetic
field exposure) and Transport Canada (air navigation), and only after
meaningful consultations have taken place with applicable local land use
authorities; (4) to invest a minimum of 2% of adjusted gross revenues resulting from
operations in the spectrum, over the term of the license, in eligible
research and development activities; (5) to provide for and maintain lawful interception activities as
authorized by law; and (6) to offer PCS resale to other PCS licensees on a non-discriminatory
basis. Also in Canada Gazette Notice DGRB-005-003, Industry Canada announced a
new license fee regime for cellular and PCS licenses not won at auction. PCS
licenses won in Canadas 2001 spectrum auction do not carry annual license
fees. Under the new regime, license fees will no longer be payable on an
infrastructure basis, that is, a site-by-site basis, but instead will be
payable on a geographic area basis. In 2011, all cellular and PCS licensees
will pay a flat rate of approximately $0.035/MHz/population/year. Between now
and then, all licensees will see their annual fees increase on a straight line
basis from their 2004 actual payment amount to the 2011 standard payment
amount. For Solutions, this means fees will increase from approximately $24.4
million in 2004 to $31.6 million in 2011. Industry Canada has the power to make amendments to the existing license
conditions and fees. As a result, there can be no assurance that these will
remain unchanged for the full duration of Solutions existing license term.
Furthermore, there can be no assurance that these same license conditions and
fees will apply in any future renewal terms. 33




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Spectrum Aggregation Limit.As part of the PCS licensing policy
established by Industry Canada in 1995, a spectrum aggregation limit, or
spectrum cap was put in place, restricting to 40 MHz the amount of mobile
spectrum any one licensee and its affiliates could hold in a specific
geographic area. In 1999, the mobile spectrum cap was raised to 55 MHz. In
2003, the cap was modified to allow enhanced specialized mobile radio spectrum
to count for no more than 10 MHz under the spectrum cap. In October of 2003,
Industry Canada initiated a consultation to review the spectrum cap rules
which, if altered, could allow existing operators, including Microcell, to
access new spectrum bands for advanced wireless services. MCS Licenses Conditions and Fees.In March of 2000, following a
comparative selection process, Inukshuk was selected by Industry Canada to be
licensed for MCS in twelve license service areas across Canada. On December 21, 2001, Inukshuk was issued ten-year MCS licenses running to
March 31, 2011, for the twelve license service areas. The MCS licenses cover
territory that encompasses the provinces of Alberta, British Columbia, Ontario,
Québec, Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New
Brunswick and the Nunavut, Yukon and Northwest Territories. MCS license
conditions that apply to Inukshuk include: (1) to adhere to the rollout plans made in its initial detailed license
application, as amended by Inukshuks letter to Industry Canada dated
December 5, 2001; (2) to adhere to the learning plan as contained in its detailed
application, or as agreed to in writing by the committees made up of
representatives of the learning community and Inukshuk; (3) to comply with the Canadian ownership and control provisions
(discussed in more detail below); (4) to ensure that radio apparatus are installed and operated in
compliance with applicable regulations from Health Canada (electromagnetic
field exposure) and Transport Canada (air navigation), and only after
meaningful consultations have taken place with applicable land use
authorities; and (5) to obtain approval from Industry Canada, following full review by
Industry Canada, for any application to transfer or assign the licenses,
including any disposition of the rights and obligations of the licenses and
any change which would have a material effect on the ownership or control in
fact of the licensee. Annual MCS license fees are $1.30/MHz per 1,000 households for each
licensed service area. For all twelve MCS licenses, Inukshuk paid annual
license fees of $1,276,867 in 2003. In November 2001, Industry Canada announced, consistent with an earlier
determination by the Federal Communications Commission of the United States,
that Canada would allow both fixed and mobile applications in the MCS spectrum
band. Industry Canada plans to initiate a public consultation in the future on
licensing considerations arising from this change. There can be no assurance
that conditions of the MCS licenses, including the license fee structure
following any follow-up consultation, will not change materially, which could
affect Inukshuks operations or costs. Inukshuk in the past had difficulties
raising adequate financing, which in turn led to delays in MCS network
deployment. This also led to Inukshuk temporarily suspending payments to fund
learning activities committed to in the MCS license applications to Industry
Canada. Recognizing extenuating circumstances, on April 2, 2003, Industry
Canada extended the timeline on license conditions relating to MCS network
deployment and the learning activities to March 31, 2004. The payments to fund learning activities started again in November of
2003, and by March 31, 2004, the MCS network had been deployed in a number of
Canadian communities. Also on March 31, 2004, Inukshuk filed a revised MCS
network deployment plan with Industry Canada. Inukshuk is currently awaiting
the outcome of Industry Canadas review of the proposed revised deployment
plan. As mentioned above, the failure to meet conditions of the MCS licenses 
which include meeting the network deployment plan - may result in the
application of penalties, including suspension or revocation of the MCS
licenses, but only after giving the licensee a reasonable opportunity to make
representations. If Inukshuk does not meet the requirements of the MCS
licenses, we may lose these licenses. Telecommunications Act.As a telecommunications common carrier operating
in Canada, Solutions is a Canadian carrier as defined by the
Telecommunications Act and is therefore subject to regulation by the CRTC.
Inukshuk is also expected to be a Canadian carrier. The CRTC has the authority
to regulate, among other things, the rates, terms and conditions of services
provided by carriers, the rules of competitive entry into new
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between carriers. The CRTC also has the power to exempt classes of
carriers from the application of the Telecommunications Act and to forbear
(i.e. refrain) from exercising certain regulatory powers with respect to
certain classes of services if the CRTC is satisfied that competition is
sufficient to protect the interest of users. Exemption or forbearance may be
subject to conditions. For example, in most of its forbearance decisions, the
CRTC has eliminated the requirement for carriers to file tariffs and
inter-carrier agreements for approval, but has retained its powers to rule on
complaints of undue preference or anti-competitive behavior. Under the current rules established by the CRTC, a wireless carrier may
carry on business as a wireless service provider, or it may take advantage of
the regulatory framework for local service operators by electing to become a
competitive local exchange carrier. Certain obligations and benefits are
brought about by becoming a competitive local exchange carrier including
co-carrier status with the incumbent local exchange carriers. It is also
possible for a wireless carrier to operate as a wireless service provider in
some areas and as a competitive local exchange carrier in others, as Solutions
is currently doing. Regulatory Framework for Wireless Service Providers.In December 1996,
the CRTC issued Telecom Decision 96-14 regarding the regulation of wireless
service providers. The CRTC decided, subject to certain conditions, to forbear
from exercising many of its regulatory powers, including its rate-setting
powers, with respect to wireless service providers. The CRTC considered it
necessary to retain the power to impose certain conditions such as
confidentiality of customer information, and to ensure that wireless service
providers do not unjustly discriminate against other service providers or
subscribers. Regulatory Framework for Competitive Local Exchange Carriers.In May
1997, the CRTC issued Telecom Decision 97-8 which set out the initial terms and
conditions for competition in the local telecommunication services market.
Decision 97-8 establishes a technology neutral regulatory framework that
permits wireless carriers to become competitive local exchange carriers
provided they satisfy all the applicable terms and conditions Decision 97-8 has
been modified from time to time by subsequent CRTC decisions and orders. The
following is a summary of the major features of Decision 97-8 as it is expected
to have an impact on our business. In the local services market, the CRTC considers competitive local
exchange carriers to be carriers of equal stature with, and not merely
customers of, the incumbent local exchange carriers. Accordingly, the CRTC
mandated that incumbent local exchange carriers and competitive local exchange
carriers terminate each others traffic originating within the same incumbent
telephone exchange based on mutual compensation bill and keep arrangements.
These arrangements do not require the originating carrier to compensate the
terminating carrier for terminating its local traffic unless there is a
substantial traffic imbalance. In areas where there is a substantial imbalance,
local exchange carriers charge each other for traffic termination at cost-
justified rate levels approved by the CRTC. The CRTC also directed that local exchange carriers should share the cost
of this interconnection equally. This is accomplished through the terms of
interconnection agreements between the carriers. In addition, in order to
provide service, the CRTC has determined that competitive local exchange
carriers require access to certain essential and near essential elements of
the incumbent local exchange carriers local exchange network, referred to as
unbundled facilities. The CRTC directed the incumbent local exchange carriers
to make these facilities available to competitive local exchange carriers at
cost-based rates. The CRTC considers competitive local exchange carriers to be non-dominant
carriers. As such, they are not subject to the same degree of regulation as
incumbent local exchange carriers and are not required to file tariffs for
their rates for end-customer services. However, the CRTC requires competitive
local exchange carriers to assume certain regulatory obligations, including
obtaining CRTC approval of interconnection agreements and tariffs for services
provided to other carriers (as opposed to end-customers). In addition,
competitive local exchange carriers must permit long distance providers to
interconnect with them, on request, for the purpose of providing alternative
long distance services to the competitive local exchange carriers end-
customers. Competitive local exchange carriers are also required to:  
    
    implement local number portability, which permits an end-customer to
move from one local exchange carrier to another without changing
telephone numbers;  
    
    provide emergency 911 service;  
    
    provide message relay service for the hearing impaired; and  
    
    satisfy various other regulatory requirements designed to protect
customers privacy and ensure that customers receive adequate service
information. 35




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Solutions received interim CRTC approval of its competitive local exchange
carrier tariffs on September 8, 2000, a condition precedent necessary to
achieving competitive local exchange carrier status. Since then, Solutions has
converted to competitive local exchange carrier status from wireless service
provider status in all of our principal operating exchanges across the country.
On March 7, 2003, the CRTC granted final approval to the terms and conditions
of our tariffs, and interim approval of the rates therein. Contribution Obligations.Under a CRTC-administered regime referred to as
the contribution regime, all telecommunications service providers operating
in Canada, including wireless service providers and resellers, are required to
pay a percentage of their Canadian telecommunications service revenues, less
certain deductions, such as inter-carrier payments, into a fund to subsidize
the cost of local telecommunications service in certain high-cost regions of
the country. In its December 19, 2003 Telecom Decision 2003-84, the CRTC
approved a final contribution rate for 2003 of 1.1%, and also set the interim
rate for 2004 at 1.1%. Foreign Ownership Restrictions.Solutions and Inukshuk are required, as
radiocommunication carriers and by the conditions of their respective licenses,
to comply with the Canadian ownership and control provisions. The Canadian
ownership and control provisions must also be respected by Solutions and
Inukshuk to maintain their eligibility to operate as Canadian carriers under
the Telecommunications Act and to hold and have renewed our PCS license and MCS
licenses. The Canadian ownership and control provisions require Solutions and
Inukshuk to be Canadian-owned and controlled corporations incorporated or
continued under the laws of Canada or a province of Canada. Solutions and
Inukshuk are deemed to be Canadian-owned and controlled as long as: (1) not less than 80% of the members of their respective boards of
directors are individual Canadians; (2) Canadians beneficially own not less than 80% of their respective
issued and outstanding voting shares; and (3) they are not otherwise controlled in fact by non-Canadians. A Canadian is defined to include a Canadian citizen who is ordinarily
resident in Canada, a permanent resident of Canada, various Canadian government
agencies, various qualified trusts, mutual insurance companies, and
corporations in which Canadians beneficially own and control in the aggregate
not less than 66 2/3% of the issued and outstanding voting shares and which are
not otherwise controlled in fact by non-Canadians. In our case, as the ultimate parent corporation of both Solutions and
Inukshuk, the Canadian ownership and control provisions require, for Solutions
and Inukshuk to be considered eligible thereunder, that not less than 66 2/3%
of our issued and outstanding voting shares be owned by Canadians, and that we
not otherwise be controlled in fact by non-Canadians. A voting share for
purposes of the Canadian ownership and control provisions means a share or
class of shares of a corporation carrying voting rights under all circumstances
or by reason of an event that has occurred and is continuing or by reason of a
condition that has been fulfilled and includes a security that is convertible
into such a share at the time that a calculation referred to in that clause is
made. We may restrict the issue, transfer and ownership of shares, if necessary,
to ensure that we remain in conformity with the Canadian ownership and control
provisions. For such purposes, in particular but without limitation, we may, in
accordance with the provisions of the Canadian ownership and control
provisions, to the extent applicable: (1) refuse to accept any subscription for any voting shares; (2) refuse to allow any transfer of voting shares to be recorded in our
share register; (3) suspend the rights of a holder of voting shares to vote at a meeting
of our shareholders; and (4) sell, repurchase or redeem any voting shares. Our articles of incorporation provide that we may, in connection with the
issue, or transfer of ownership, of voting shares in our capital, take any
action, or refuse to take any action, as the case may be, to the extent
necessary to ensure that any of our subsidiaries is and continues to be
eligible to operate as a Canadian carrier under the Telecommunications Act or
to be issued, to hold and to renew radio authorizations or radio licenses under
the Radiocommunication Act, if and only to the extent that the business
activities of such subsidiary require such eligibility. 36




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Solutions, Inukshuk and Microcell may not otherwise be controlled by
non-Canadians. In other words, non-Canadians cannot exercise control in fact
over these companies. The test for determining control has been applied in a
negative fashion. That is, reviews have focused on whether non-Canadians have
control, not whether Canadians control, the carrier in question. Any one
determinant may not necessarily amount to control, but the cumulative effect of
several determinants may influence whether de facto control is being exercised
by non-Canadians. Our failure to comply with the requirements relating to the Canadian
ownership and control provisions may affect the ability of Solutions and
Inukshuk to operate as Canadian carriers and to hold and have renewed our PCS
license and the MCS licenses. We believe that we and our subsidiaries currently
comply with the Canadian ownership and control provisions. In November 2002, Industry Canada initiated a review of the Canadian
ownership and control provisions. The review was conducted by the House of
Commons Standing Committee on Industry, Science and Technology, and it
determined that the restrictions on foreign participation in the
telecommunications sector set out in the Canadian ownership and control
provisions are no longer appropriate, and their removal is needed. Industry
Canada has proposed that the Government of Canada respond to the
recommendations in the Spring of 2004. There is no assurance that the Standing
Committee recommendations will lead to modifications to the Canadian ownership
and control provisions. ORGANIZATIONAL STRUCTURE The following chart illustrates, as of May 31, 2004 the intercorporate
relationship among Microcell and our subsidiaries, and the percentage of voting
rights held or controlled by us. All these companies were incorporated under
the Canada Business Corporations Act, except for Telcom Investments Inc., which
was incorporated under the laws of the State of Delaware. (ORGANIZATIONAL STRUCTURE FLOW CHART) Properties and Equipment We lease approximately 511,806 square feet of office space in Montreal,
which houses staff of our principal office, switching office, computer rooms
and national network operations center; of the 511,806 square feet that we
lease in Montreal, approximately 83,407 square feet of office space is
currently subleased to third parties. We also lease 1,340 square feet of space
in Quebec city, 2,161 square feet for warehouse in Ottawa, 34,433 square feet
of space in Toronto, 17,225 square feet of space in Vancouver, 18,536 square
feet in Calgary, 1,508 square feet of space in St. Catherines-Niagara, 1,216
square feet in Kitchener, 726 square feet of space in Edmonton, 1,859 square
feet of space in Saskatoon, 820 square feet of space in Victoria, 2,269 square
feet of space in Windsor, 4,440 square feet of space in Winnipeg, 5,921 square
feet of space in Halifax, 10,627 square feet of space in Mississauga, 2,270
square feet of space in Regina, 10,795 square feet in New Westminster and 200
square feet of space in St. Johns, Newfoundland for business offices and
switching offices. In addition, we lease approximately 1,850 antenna sites and
own six antenna sites. In most instances, we own the assets essential to our operations,
including transmitters, microwave systems, antennae, electronic transmission
receiving and processing accessories and other network equipment, including
switches, radio channels, base station equipment, microwave facilities and PCS
equipment. We generally lease land and space on buildings for the placement of
antenna towers and also lease the premises on which our switches are located,
principally under long term leases. We either own the operating systems and
software related to these assets or use them under license. Substantially all
of our assets are subject to various security interests in favor of our
lenders. Environmental protection requirements applicable to our operations are not
expected to have a significant effect on our capital expenditures, earnings or
our competitive position in the current or future fiscal years. 37




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ITEM 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Forward-looking statements This managements discussion and analysis, contains forward-looking
statements, within the meaning of the securities laws, which are based on
expectations and estimates. Forward-looking statements may be identified by
the use of forward-looking terminology such as believe, intend, may,
will, expect, estimate, anticipate, continue, consider, or similar
terms, variations of those terms or the negative of those terms. Statements
that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. These statements contain
potential risks and uncertainties, and actual results may therefore differ
materially. We undertake no obligation to publicly update any forward-looking
statements whether as a result of new information, future events or otherwise. Important factors that may affect these expectations include, but are not
limited to: changes in the Canadian economy and in Canadian and U.S. capital
markets; changes in competition in our market; advances in telecommunications
technology; changes in the telecommunications regulatory environment; future
litigation; availability of future financing; unanticipated changes in expected
growth of the number of subscribers; radiofrequency emission concerns; and
exchange rate fluctuations. You should evaluate any statements in light of
these important factors. Basis of presentation and financial reorganization The following is a discussion of the consolidated financial condition of
Microcell Telecommunications Inc. (Microcell) and its subsidiaries as at
December 31, 2003 and results of operations for years ended December 31, 2003,
2002 and 2001. You should read it in conjunction with our Consolidated
Financial Statements as of and for the twelve-month period ended December 31,
2003. Such Consolidated Financial Statements, and the notes thereto, have been
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP), which differ in certain material respects from accounting
principles generally accepted in the United States (U.S. GAAP) and have been
reconciled with U.S. GAAP in note 18 to the audited Consolidated Financial
Statements as at December 31, 2003. All amounts are in Canadian dollars except
otherwise indicated. On May 1, 2003, Old Microcell, and certain subsidiaries of Old Microcell,
emerged from a restructuring plan under the CCAA and CBCA. As a result, at that
date, we have accounted for our financial reorganization by using the
principles of fresh start accounting. Accordingly, all assets and liabilities
were comprehensively revalued at estimated fair values and our deficit of $2.4
billion was eliminated and long-term debt obligations decreased by
approximately $1.6 billion. We determined that our enterprise value was $689
million, of which $350 million were allocated to long-term debt and $339
million to equity. This enterprise value was determined based on several
traditional valuation methodologies, utilizing projections developed by
management including discounted cash flow analysis and comparable company
trading analysis. A comprehensive revaluation of our assets and liabilities has
been done based on this enterprise value. This resulted in a reduction of
current assets [mainly consisting of the deferred charges incurred during the
recapitalization process], property, plant and equipment, long-term investments
and accrued liabilities. We also assigned a value, calculated at managements
best estimate of fair value, to our intangible assets, which are the PCS
license at $188 million, determined using the replacement cost based on
comparable transactions, the Fido brand name at $28.5 million, determined using
the replacement cost method, and the customer list at $24.7 million, determined
using the discounted future cash flows method. Comparative financial information for periods prior to May 1, 2003 has
been presented pursuant to regulatory requirements. In reviewing this
comparative financial information, readers should remember that prior period
results of operations do not reflect the effects of the plan of reorganization
and the application of fresh start accounting. We may continue to experience growth-related capital requirements arising
from the need to fund network capacity improvements and ongoing maintenance and
to fund the cost of acquiring new PCS customers. Our ability to generate
positive net income and cash flow in the future is dependent upon various
factors, including the level of market acceptance of our services, the 38




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degree of competition encountered by the Company, the cost of acquiring
new customers, technology risks, general economic conditions and regulatory
requirements. As at December 31, 2003, we conducted our wireless communications business
through two wholly-owned subsidiaries, which were: Solutions and Inukshuk. Up
to May 1, 2003, we conducted our wireless communications business through five
wholly-owned subsidiaries, which were: Microcell Capital II Inc., Microcell
Connexions Inc., Microcell Labs Inc., Solutions and Inukshuk. Up to December 31, 2002, we carried out our operations through three
strategic business segments: PCS, wireless Internet and investments. As a
result of the restructuring process, the Company realigned its cash flows to
concentrate on the PCS activities. Consequently, the Company has determined
that it operates in one segment since January 1, 2003, as the wireless Internet
and investments operations were no longer significant. Critical accounting policies and estimates The preparation of our Consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The critical accounting policies
and estimates used in the preparation of our financial statements include the
following: Revenue recognition Monthly access charges are billed in advance and recognized when the
services are provided and collection is reasonably assured. Airtime charges
are recognized as revenue when provided. City Fidos activation fees are
deferred and recognized as revenue over the estimated life of a subscriber.
Sales of products such as handsets and related equipment are recognized when
goods and services are delivered and collection is reasonably assured. Prepaid
service revenues are deferred and recognized when services are provided. When
prepaid airtime vouchers are sold to retailers, the revenue for airtime is
measured at the amount paid by the subscriber and is recorded when services are
provided to the subscriber. Commissions paid on prepaid airtime vouchers to
third-party retailers are classified within cost of products and cost of
services. Allowance for doubtful accounts We maintain allowances for doubtful accounts for estimated losses
resulting from our inability to collect balances due from our customers. We
base our estimates on the aging of our accounts receivable balances and
historical write-off experience, net of recoveries. If collections are lower
or more customers elect to terminate their service than expected, actual
write-offs may be different than that expected. Property, plant and equipment Our property, plant and equipment is recorded at cost [except for the
opening balance as at May 1, 2003, which was determined under the rules of
fresh start accounting]. The PCS network includes direct costs such as
equipment, materials, labor, engineering, site development, interest incurred
during the network buildout, and overhead costs. The costs of PCS network
construction in progress are transferred to the PCS network in service as
construction projects are completed and put into commercial service. Intangible assets Our intangible assets consist of our PCS license issued by Industry
Canada, our Fido brand name and our customer list. The customer list is
amortized over 30 months. The PCS license and the Fido brand name were
determined to have an indefinite useful life and are not being amortized. We
have determined that our Fido brand name has an indefinite life because there
are no legal, regulatory, contractual or other factors that limit the useful
life of the brand name, we consider the brand name to be effective in the
marketplace and we anticipate generating sales and cash flows under this brand
name for an indefinite period of time. Radio and spectrum licenses are issued for a term and may be renewed at
Industry Canadas discretion. Revocation is rare and licenses have a high
expectation of renewal unless a breach of a license condition has occurred, a
fundamental reallocation of spectrum to a new service is required, or an
overriding policy need arises. We intend to renew the PCS license indefinitely,
and expect to be able to do so. The technology used in wireless
telecommunications is not expected to be replaced by another technology in the
foreseeable future. In December of 2003, Industry Canada issued its Spectrum
Licensing Policy for Cellular and Incumbent 39




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Personal Communications Services, in which it announced the results of its
review of the PCS terms, fees and conditions, as well as its intention to renew
our PCS license up to March 31, 2011. Industry Canada also announced its
intention to renew the PCS license every 10 years instead of every 5 years.
Therefore, we anticipate generating sales and cash flows under our PCS license
for an indefinite period of time and as a result, has classified the PCS
license under this basis. Impairment of long-lived assets When events or changes in circumstances indicate the carrying amount of a
long-lived asset or group of assets held for use, including property, plant and
equipment and intangible assets subject to amortization, may not be
recoverable, an impairment loss is recognized when the carrying amount of those
assets exceeds the sum of the undiscounted future cash flows related to them.
The impairment loss is included in our statement of operations and the carrying
value of the asset or group of assets is reduced to its fair value as
determined by the sum of the discounted future cash flows related to those
assets. Intangible assets that are not subject to amortization are tested for
impairment on an annual basis, or more frequently if events or changes in
circumstances indicate that the assets might be impaired. The impairment test
consists of a comparison of the fair value of the intangible asset with its
carrying amount. When the carrying amount of the intangible asset exceeds its
fair value, an impairment loss is recognized in an amount equal to the excess. Impairment charge, if any, is presented within depreciation and
amortization expense of the related long-lived assets in the statement of
income (loss) Derivative instruments Derivative financial instruments are accounted for at fair value with
changes in fair value affecting income unless designated as effective hedges in
which case the gains (losses) on these instruments are recognized in the income
statement when the hedged item affects earnings. As at December 31, 2003, we
have not designated our financial instruments as hedges. Accounting developments The Canadian Institute of Chartered Accountants (CICA) recently amended
Section 3870, Stock-based compensation and other stock-based payments, to
require the expensing of all stock-based compensation awards for fiscal years
beginning on or after January 1, 2004. As permitted by this amendment, we
chose to apply this new standard retroactively, without restatement, beginning
January 1, 2004, for all options granted under the new stock option plan since
May 1, 2003. Consequently, our opening deficit as at January 1, 2004 will be
adjusted to reflect an expense of $1.3 million relating to options granted
since May 1, 2003. The CICA also modified Section 3860, Financial instruments  disclosure and
presentation. This section has been amended to provide guidance for
classifying certain financial instruments that embody obligations that may be
settled by the issuance of the issuers equity shares when the instrument that
embodies the obligations does not establish an ownership relationship. The new
standard is effective for fiscal years beginning on or after November 1, 2004.
Initial application should be recognized on a retroactive basis and disclosed
as an accounting policy change. As a result, the Company assesses that its
Preferred Shares having an accretion value of $296.9 million and $284.5 million
as at December 31, 2003 and May 1, 2003 respectively, which are classified as
equity instruments under current rules, would have to be reclassified as
liabilities. The accreted of their redemption price of $17.1 million during the
eight month period ended December 31, 2003 presented as an adjustment to the
retained earnings (deficit) would have to be presented as an interest expenses
in the determination of the net income (loss). There would be no impact on the
net loss attributable to Class A and B Shares and on the earnings per share. In March 2004, we received a comment letter from the SEC in connection with its
review of our registration statement filed on March 3, 2004 for the
registration of our class A restricted voting shares and class B non-voting
shares issuable upon exercise of the Warrants 2005 and the Warrants 2008. SEC
staff, among other things, have questioned whether our Fido brand name has an
indefinite useful life and, consequently, whether it should be subject to
periodic amortization. We believe such brand name should be considered to have
an indefinite life. However, were such periodic amortization to be applied,
assuming hypothetically a useful life of ten years, this would reduce our net
income by $1.9 million, increase basic and diluted loss per share by $0.50 but
would have no effect on cash flows for the eight months ended December 31,
2003. Company overview 40




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We are a provider of wireless telecommunications services in Canada. We
offer a wide range of voice and high-speed data communications products and
services to over 1.2 million customers. We operate a GSM network across Canada
and market our PCS and GPRS under the Fido brand name. Moreover, we are the
only wireless competitive local exchange carrier in Canada, which provides us
with the ability to transfer telephone numbers from the incumbent local service
providers to our wireless PCS service. PCS consists of wireless
telecommunications services that use advanced and secure digital technology. We
provide retail PCS to end-users under our PCS license, which was renewed for a
second five-year term commencing on April 1, 2001. On December 12, 2003, Industry Canada issued Gazette Notice DGRB-006-03
announcing that the license terms of existing cellular and PCS licensees,
including us, will be extended to March 31, 2011. The terms and conditions for
the renewal of the PCS license are briefly described in note 15 of our audited
Consolidated financial statements for the year ended December 31, 2003. In
addition to offering access to our PCS network to third-party
telecommunications providers on a wholesale basis, we provide data and other
wireless Internet services to our end-users based on the GPRS technology. Our wholly-owned subsidiary, Inukshuk, was awarded MCS licenses to deploy
a high-speed Internet Protocol-based data network using MCS technology in the
2500 MHz range. Inukshuk entered into phase 1 of a new venture with two
partners to build an MCS network in order to offer high-speed Internet,
IP-based voice and local networking services to selected markets across Canada.
Inukshuks commitment for phase 1 is to permit the utilization of its MCS
licenses. As of December 31, 2003, phase 1 of this project was not yet
completed. The second phase of this venture is planned for mid 2004. As at December 31, 2003, we offered PCS in most census metropolitan areas
in Canada. In addition, we have deployed our GSM network in smaller communities
and along major highway corridors. We estimate that our PCS network reaches
some 19 million people or 61% of the Canadian population. Beyond this network
footprint, we provide analog cellular roaming capabilities on the networks of
other carriers, which effectively increase our service area to 94% of the total
Canadian population. In addition, we have initiated seamless voice and text
message roaming services with all the major GSM operators in the United States,
covering more than 6,000 cities and towns in 46 states. We also have
operational roaming agreements with 281 international GSM operators in 148
countries, covering most of Europe as well as a number of countries in the
Pacific Rim, the Middle East, Africa and Australia. Additional information relating to our company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. 2004 Corporate developments  
    
    On January 22, 2004, we announced that we would begin holding
lenders meetings with a view to voluntarily refinancing, on more
favorable terms, our existing senior credit facilities with up to $450
million of new secured debt. We announced on March 17, 2004 the
successful closing of new senior secured credit facilities in an
aggregate principal amount equivalent to $450 million for our
wholly-owned subsidiary, Solutions, with a syndicate of lenders. The
proceeds have been used mainly to refinance our previous senior secured
credit facilities in an aggregate amount of approximately $334 million.
Our new credit facilities provide us with greater financial flexibility
by adding approximately $80 million of incremental cash availability,
which will be used to fund capital expenditures as well as for general
corporate purposes.The new facilities consist of an undrawn six-year $50 million first lien
revolving credit facility, of a seven-year first lien term loan, and of a
seven-and-a-half-year second lien term loan, each in an amount equivalent
to $200 million. The revolving credit facility is denominated in Canadian
dollars and both term loans are denominated in U.S. dollars. We have the
ability, subject to certain conditions, to increase, at a later date, our
first lien term loan facility or revolving credit facility by an
additional $25 million, and our second lien term loan facility by an
additional $50 million. Loan pricing is LIBOR plus 4% for the revolving
credit facility and the first lien term loan and LIBOR plus 7% for the
second lien term loan. The loan pricing for the second lien term loan
includes a LIBOR floor of 2%. The credit facilities are guaranteed by
Microcell, and are secured by a pledge on substantially all of our assets.  
    
    On February 27, 2004, we announced that we filed a preliminary
prospectus with the securities authorities in each province of Canada
for a rights offering to holders of our class A restricted voting
shares, class B non-voting shares, first preferred voting and non-voting
shares, and second preferred voting and non-voting shares for minimum
gross proceeds to Microcell of approximately $100 million. In addition,
we were entitled to receive up to an additional $50 million from COM, a
private holding company of Craig O. McCaw, which acted as standby
purchaser for the rights offering. On March 24, 2004 we filed a final
prospectus in connection with the rights offering with the securities
authorities in each province of Canada. 41




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Shareholders received one right for every share held on April 2, 2004.
Every five rights entitled the holder to purchase one class B non-voting
share at a price of $22.00 per share prior to April 28, 2004. The rights
offering was fully subscribed and generated approximately $97 million in
net proceeds. We received a further $50 million from the purchase of
class B non-voting shares under a standby agreement with COM. As a result
of these transactions, we issued 6,792,363 additional class B non-voting
shares. Furthermore, pursuant to the standby purchase agreement, we
issued 3,977,272 warrants to COM to acquire, at a price of $22.00 per
share, additional class B non-voting shares for exercise at a later date.
Approximately $1.2 million of the net proceeds from the rights offering
and private placement to COM has been used to redeem our preferred shares
(as described below), and the balance will be used to fund capital
expenditures, including the expansion of our City Fido product in the
Toronto area and other Canadian market thereafter, and for general
corporate purposes.  
    
    On April 7, 2004, we gave a notice of redemption pursuant to which we
stated that we would redeem, as of May 1, 2004, all our outstanding
preferred shares as at 5:00 p.m. (Montreal time) on April 30, 2004, in
accordance with the provisions of our restated articles of
incorporation. Such redemption was subject to the right of the holders
of preferred shares to convert such shares into class A restricted
voting shares or class B non-voting shares prior to their redemption.
The redemption price of each preferred share was $16.39 per share,
representing the first preferred share redemption price, or FPS
Redemption Price, and second preferred share redemption price, or SPS
Redemption Price, as the case may be, as computed pursuant to our
restated articles of incorporation as of that date. Up to May 1, 2004,
190,647 First Preferred Voting Shares, 5,782,980 First Preferred
Non-Voting Shares, 14,602 Second Preferred Voting Shares and 3,309,989
Second Preferred Non-Voting Shares were converted into 146,708 class A
restricted voting shares and 9,151,510 class B non-voting shares. As of
May 3, 2004 we redeemed the 75,233 preferred shares outstanding as at
April 30, 2004.  
    
    On May 13, 2004, Microcell was informed that TELUS Corporation
intends to make an unsolicited all-cash offer to purchase all of the
outstanding publicly traded shares and warrants of Microcell. On May 17,
2004, TELUS Corporation filed its offer with the Canadian Securities
Administrators and the SEC. On May 20, 2004, the board of directors of
Microcell announced its response to TELUS Corporations unsolicited
offers to purchase Microcells Class A restricted voting shares for
C$29.00 per share, Class B non-voting shares for C$29.00, 2005 Warrants
for C$9.67, and 2008 Warrants for C$8.89, which we refer to as the TELUS
Offers. After careful review and analysis of the Offers performed with
the assistance of its legal and financial advisors, the board
recommended that holders of the Class A restricted voting shares, Class
B non-voting shares, 2005 Warrants and 2008 Warrants not tender into the
Offers. Our board of directors retained the services of two financial
advisors, one of which has affiliates which are shareholders, lenders or
agent of our lenders. The terms of the agreements provide for advisory
services to be rendered up to May 2005 with minimum fees of $6.5
million. Such fees will be recognized over the estimated period for
which the services are rendered. On May 31, 2004, Microcell announced
the mailing of its Directors Circular containing the previously
announced recommendation of the board of directors that holders of
Microcells Class A Restricted Voting Shares, Class B Non-Voting Shares,
Warrants 2005 and Warrants 2008 not tender into the unsolicited offers
from TELUS Corporation commenced on May 17, 2004. On June 22, 2004,
TELUS announced that it would extend the TELUS Offers until July 22,
2004. On June 29, 2004, we issued a press release confirming the
recommendation in our Directors Circular. 2003 Corporate developments  
    
    During the first half of the year, we self-imposed a growth slowdown
in order to preserve cash as we focused on completing our financial
reorganization. On May 1, 2003, we successfully emerged from this
process;  
    
    We launched Canadas first home and mobile service in the Greater
Vancouver area under the name City FidoTM. This service, which is
positioned as an alternative to traditional wireline telephone service,
includes unlimited local calling throughout the entire lower mainland of
British Columbia, which covers a larger local calling area than that of
the incumbent telephone company. Many customers will have the option of
transferring their existing home or single-line business phone number to
their City Fido service and keeping their white pages directory listing.
Microcell is the first and currently the only wireless company in Canada
to offer local number portability;  
    
    During the year, we introduced 11 new handsets, bringing the total
number of wireless devices offered to 16 as at the end of 2003;  
    
    We launched mobile Internet services for prepaid customers; 42




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##### Table of Contents




    
    We introduced a new airtime package that offers unlimited local
calls, text messages and chatting between Fido customers;  
    
    We launched international GPRS roaming with seven GSM operators
covering four countries, including the United States, for Fido customers
who want to access fast mobile Internet services while traveling abroad.
Subsequent to the end of the year, this number has grown to 46 carriers
in 31 countries;  
    
    With AOL Canada Inc., we commercially introduced AOL Instant
MessengerTM [AIMTM] and
ICQ® [I Seek You] services on the Fido wireless
network, allowing Fido customers to chat with friends and contacts
around the world using AIM and ICQ services on their wireless handset or
Personal Digital Assistant;  
    
    Pursuant to an agreement between Microcell and Sprint Canada Inc.,
Sprint Canada began offering a residential wireline-long
distance-wireless bundled service that combines Sprint Canadas home
phone service with Microcells Fido brand wireless service;  
    
    We launched a brand new on-line store for our customers. This new
element in our integrated distribution strategy ensures optimal
diversification of our channels and better access to our products;  
    
    Inukshuk announced the creation of a new venture with Allstream Inc.
and NR Communications, LLC. The new company plans to build an MCS
network to offer high-speed Internet, IP-based voice and local
networking services using broadband wireless access technology. Each
party owns one-third of the new company, which will operate as an
independent entity. Inukshuk will contribute the use of its MCS
spectrum. The first commercial service launches were in early 2004.  
    
    We implemented a handset replacement and upgrade program through a
telemarketing and direct mail campaign targeted at our high-value
subscribers. Non-GAAP measures The following are not measures or indicators that are governed or defined
by generally accepted accounting principles [GAAP]. All of these non-GAAP
measures may not be identical to similarly titled measures reported by other
companies. We believe these measures are useful to investors because they
include the same meaningful information that is used by our management to
assess the companys performance as well as our success in acquiring, retaining
and servicing customers. We believe these measures reflect our ability to
generate and grow revenues while providing a high level of customer service in
a cost-effective manner. We also use these measures as a method of comparing
our performance with the other players in the wireless industry. In addition,
our short-term and long-term incentive compensation offers bonuses tied to our
financial performance and the achievement of strategic corporate and business
unit objectives established on a yearly and cumulative basis. Our financial
performance is mainly measured by the level of our revenues and our OIBDA. Our
strategic corporate business objective consists of ARPU levels, churn levels
and COA levels [all these terms are defined below]. Finally, we are committed
to respect certain covenants under our credit agreements, which include certain
of these measures. For instance, we are committed to maintain, on a quarterly
basis, a certain level of OIBDA [labeled as EBITDA in our credit agreement] at
each reporting date. As of December 31, 2003, the OIBDA covenant level was $60
million. We also use these non-GAAP measures for planning purposes, in
presentations to our board of directors and in our undiscounted and discounted
cash flow models.  
    
    Cancellation of service [churn or blended churn"], is expressed on
a percentage basis for a given period and is calculated as the aggregate
of the postpaid churn and the prepaid churn;  
    
    Postpaid churn is expressed on a percentage basis for a given period
and is calculated as the number of deactivated postpaid subscribers
divided by the average number of postpaid subscribers during such
period;  
    
    Prepaid churn is expressed on a percentage basis for a given period
and is calculated as the number of deactivated prepaid subscribers
divided by the average number of prepaid subscribers during such period;  
    
    Average revenue per user for a given period is referred to as ARPU;  
    
    Blended ARPU for a given period, is calculated as the aggregate of the Postpaid ARPU and the Prepaid ARPU; 43




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##### Table of Contents




    
    Postpaid ARPU for a given period, is calculated as the postpaid
service revenues plus the roaming-in revenues (roaming-in revenues are
wireless service revenues generated by foreign GSM customers using their
wireless phone on Microcells GSM network while roaming in Canada) ,
plus or minus the effect of promotions, deferred revenues, and any
retroactive adjustments accounted for in the period, divided by the
average number of postpaid subscribers during such period. By
retroactive adjustments, we mean any correction of service revenues of a
prior quarter or year that is made in the current period;  
    
    Prepaid ARPU for a given period, is calculated as the prepaid service
revenues plus the effect of promotions, and plus or minus any
retroactive adjustments accounted for in the period, divided by the
average number of prepaid subscribers during such period. By retroactive
adjustments, we mean any correction of service revenues of a prior
quarter or year that is made in the current period;  
    
    The cost of acquisition [COA] of a retail subscriber for a given
period is calculated as the handset subsidy and selling and marketing
expenses related to the acquisition of subscribers divided by the number
of gross retail subscriber additions during such period. The handset
subsidy of a retail subscriber for a given period is calculated as the
product sales presented in the financial statements [excluding
non-retail sales and retention sales] minus the cost of products
presented in the financial statements but excluding non-retail costs of
products, equipment costs related to retention sales and voucher costs,
and plus or minus adjustments for equipment cost devaluation, as well as
any other retroactive adjustments accounted for in the period. The
selling and marketing expenses for a given period are calculated based
on the selling and marketing expenses presented in the financial
statements and include promotion expenses from service revenues and
expenses of the activation department, but exclude non-retail related
costs, retention expenses for programs and departmental activities, and
after sales service expenses;  
    
    Operating income before depreciation and amortization [OIBDA] is
defined as operating income (loss) calculated in accordance with GAAP
except that it excludes depreciation and amortization expenses. OIBDA
differs from EBITDA in that the non-GAAP measures calculation starts
with the GAAP measure operating income (loss) for OIBDA, while the
non-GAAP measures calculation starts with the GAAP measure net income
(loss), in the case of EBITDA.  
    
    OIBDA margin is defined as OIBDA divided by total revenues. 44




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SELECTED ANNUAL INFORMATION
[In thousands of Canadian dollars, unless otherwise indicated] Post-reorganization
    
    Pre-reorganization
    
    
    
    
    
    Pre-reorganizationEight
    
    Four
    
    Twelve
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    months
    
    monthsended
    
    ended
    
    ended
    
    ended
    
    endedDecember 31
    
    April 30
    
    December 31
    
    December 31
    
    December 312003
    
    2003
    
    2003
    
    2002
    
    2001$
    
    $
    
    $
    
    $
    
    $Revenues
    
    
    393,093
    
    
    
    177,694
    
    
    
    570,787
    
    
    
    591,062
    
    
    
    541,490Operating income (loss)
    
    
    1,250
    
    
    
    (20,832
    )
    
    
    (19,582
    )
    
    
    (382,297
    )
    
    
    (193,019
    )Income (loss) before income taxes
    
    
    5,546
    
    
    
    47,313
    
    
    
    52,859
    
    
    
    (642,396
    )
    
    
    (500,207
    )Net income (loss)
    
    
    4,959
    
    
    
    45,517
    
    
    
    50,476
    
    
    
    (570,501
    )
    
    
    (498,485
    )Net income (loss) applicable to
Class A and class B non-voting
shares
    
    
    (12,146
    )
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aBasic and diluted earnings
(loss) per share [in dollars]
    
    $
    (3.22
    )
    
    $
    0.19
    
    
    
    n/a
    
    
    $
    (2.37
    )
    
    $
    (4.56
    )OIBDA
[1]
    
    
    48,021
    
    
    
    38,556
    
    
    
    86,577
    
    
    
    83,518
    
    
    
    (15,029
    )Capital expenditures
    
    
    67,318
    
    
    
    5,500
    
    
    
    72,818
    
    
    
    124,683
    
    
    
    277,395Total assets [end of period]
    
    
    808,706
    
    
    
    902,614
    
    
    
    808,706
    
    
    
    912,854
    
    
    
    1,395,259Long-term debt [end of period]
    
    
    315,164
    
    
    
    1,913,615
    
    
    
    315,164
    
    
    
    2,032,678
    
    
    
    1,887,048Cash dividends declared
    
    
    nil
    
    
    
    nil
    
    
    
    nil
    
    
    
    nil
    
    
    
    nilOther data:ARPU [in dollars]Postpaid
    
    $
    61.86
    
    
    $
    58.16
    
    
    $
    60.63
    
    
    $
    59.12
    
    
    $
    60.56Prepaid
    
    $
    19.61
    [3]
    
    $
    18.78
    [3]
    
    $
    19.32
    [3]
    
    $
    18.64
    [3]
    
    $
    21.02Blended
[1]
    
    $
    39.04
    [3]
    
    $
    36.88
    [3]
    
    $
    38.32
    [3]
    
    $
    39.73
    [3]
    
    $
    41.14COA [in
dollars] [2]
    
    $
    244
    
    
    $
    291
    
    
    $
    255
    
    
    $
    287
    
    
    $
    325Churn rate
    
    
    3.1
    %[3]
    
    
    3.3
    %[3]
    
    
    3.2
    %[3]
    
    
    3.4
    %[3]
    
    
    2.6
    %Net retail subscriber additionsPostpaid
    
    
    84,304
    
    
    
    (37,186
    )
    
    
    47,118
    
    
    
    (92,636
    )
    
    
    169,880Prepaid
    
    
    49,575
    
    
    
    (16,068
    )
    
    
    33,507
    
    
    
    137,947
    
    
    
    116,803Total
    
    
    133,879
    
    
    
    (53,254
    )
    
    
    80,625
    
    
    
    45,311
    
    
    
    286,683Total retail
subscribers, end of periodPostpaid
    
    
    592,180
    
    
    
    507,876
    
    
    
    592,180
    
    
    
    545,062
    
    
    
    637,698Prepaid
    
    
    652,966
    
    
    
    603,391
    
    
    
    652,966
    
    
    
    619,459
    
    
    
    571,512Total
    
    
    1,245,146
    
    
    
    1,111,267
    
    
    
    1,245,146
    
    
    
    1,164,521
    
    
    
    1,209,210
 45




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[1] Reconciliation of OIBDA and blended ARPU Eight
    
    Four
    
    Twelve
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    months
    
    monthsended
    
    ended
    
    ended
    
    ended
    
    endedDecember 31
    
    April 30
    
    December 31
    
    December 31
    
    December 312003
    
    2003
    
    2003
    
    2002
    
    2001$
    
    $
    
    $
    
    $
    
    $Operating income (loss)
    
    
    1,250
    
    
    
    (20,832
    )
    
    
    (19,582
    )
    
    
    (382,297
    )
    
    
    (193,019
    )Depreciation and amortization
    
    
    46,771
    
    
    
    59,388
    
    
    
    106,159
    
    
    
    465,815
    
    
    
    177,990OIBDA
    
    
    48,021
    
    
    
    38,556
    
    
    
    86,577
    
    
    
    83,518
    
    
    
    (15,029
    )Service revenues for the period
    
    
    357,483
    
    
    
    170,196
    
    
    
    527,679
    
    
    
    566,706
    
    
    
    509,082Average number of subscribers
[in thousands] [4]
    
    
    9,076
    
    
    
    4,546
    
    
    
    13,622
    
    
    
    14,277
    
    
    
    12,391Average monthly service
revenue per user [in dollars]
    
    $
    39.39
    
    
    $
    37.43
    
    
    $
    38.74
    
    
    $
    39.69
    
    
    $
    41.08Net impact of promotions,
non-retail revenues and
other
    
    $
    (0.35
    )
    
    $
    (0.55
    )
    
    $
    (0.42
    )
    
    $
    0.04
    
    
    $
    0.06Blended ARPU
    
    $
    39.04
    
    
    $
    36.88
    
    
    $
    38.32
    
    
    $
    39.73
    
    
    $
    41.14
  [2] Beginning with the second quarter of 2003, we adjusted our calculation of COA to include shrinkage and obsolescence. All
comparative figures were adjusted accordingly.[3] Calculation excludes 50,000 inactive prepaid service customers accounted for in Q2-2002.[4] The average number of subscribers for the period is equal to the sum of the average postpaid subscribers for each month
covered by the period. Results of operations Year ended December 31, 2003 compared with year ended December 31, 2002. As a
result of fresh start accounting, certain financial and operating results
have also been presented on a pre- and post-reorganization basis, where
appropriate. Our operating and financial results for the periods described herein are
not necessarily indicative of our future operating results given the context in
which we operated during the first four months of 2003. With respect to the
presentation of our 2003 results, the eight-month period ended December 31,
2003 represents our post-reorganization results, while the four-month period
ended April 30, 2003 represents our pre-reorganization results. In 2003, gross activations were 529,466, compared with 548,079 in 2002.
The decrease in yearly gross activations can be attributed primarily to our
self-imposed growth slowdown throughout most of the first half of 2003. During
this time we limited our advertising, as well as the introduction of new sales
initiatives, handsets and services in order to preserve cash both as a
contingency to any delay in the completion of our financial restructuring
process and to prepare for the re-launch of our post-restructuring marketing
program. Although the restructuring process effectively ended on May 1, 2003,
subscriber growth resumed gradually because of the time required for our new
promotional campaigns, sales channel re-stimulation, and other marketing
tactics to take effect. The result of these efforts began to materialize in the
third quarter of 2003. Consequently, we activated over 68% of our total gross
activations for the year in the second half of 2003. Postpaid subscriber
additions represented 250,531, or 47%, of our total gross activations for 2003,
up slightly from 248,209, or 45%, in 2002, while prepaid accounted for the
residual 278,935, or 53%, gross customer additions, compared with 299,870, or
55% of the total, for the previous year. This postpaid-to-prepaid split of new
gross activations for 2003 exceeded our objective of approximately 45% postpaid
and 55% prepaid. Our blended churn improved to 3.2% for 2003 from 3.4% in the previous
year, and was the result of lower postpaid churn. Postpaid churn was 2.3% in
2003 compared with 3.0% in 2002. The significant improvement to our postpaid
churn rate was brought about by a reduction in the number of Company-initiated
deactivations for non-payment. The relatively lower number of Company-initiated
deactivations for non-payment in 2003 resulted mainly from the termination of
certain programs and policies, in particular, a special plan that had been
devised to provide customers with low credit ratings access to a postpaid plan.
In addition, the improvement to postpaid churn resulted from the positive
effects of certain customer lifecycle initiatives. Among these lifecycle
management initiatives is a Welcome Program for all our new customers to help
familiarize them with all aspects of our wireless service [such as billing and
handset functionality], and a handset upgrade and replacement program for our
high-value postpaid 46




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##### Table of Contents



customers. Although our prepaid churn rate remained
unchanged at 3.8% for 2003, this rate was notably higher in the first half of
the year at 4.2%, compared with 3.5% for the last two quarters of 2003. The
higher prepaid churn in the first six months of 2003 was due mainly to seasonal
factors arising from customers who received phones as gifts during the holiday
season, but who subsequently abandoned their service voluntarily or failed to
purchase additional airtime, which resulted in their accounts being
deactivated. Prepaid churn for the first two quarters was also higher due to
increased deactivation among occasional, security-type users, brought about by
certain changes to our pricing late in the third quarter of 2002 that shortened
the expiry period and increased the price per minute on certain airtime
vouchers, and to a higher level of prepaid account inactivity. We pursued
several programs during the second half of 2003 to address account inactivity,
which included an initiative to educate customers about the basic business
rules of our prepaid service. For 2003, despite a decrease in the number of new gross activations, we
acquired 80,625 new net retail customers [consisting of 47,118 postpaid and
33,507 prepaid subscribers], compared with 45,311 for 2002 [composed of the
loss of 92,636 postpaid subscribers and the addition of 137,947 new prepaid
customers], due primarily to a substantially lower postpaid churn rate.
Accordingly, as at December 31, 2003, we provided wireless service to 1,245,146
retail PCS customers, 592,180 of which were postpaid and 652,966 prepaid,
compared with a retail customer base of 1,164,521 at the end of 2002 consisting
of 545,062 postpaid subscribers and 619,459 prepaid customers. In addition, as
at December 31, 2003, we provided PCS network access to 33,042 wholesale
subscribers, compared with 22,712 at the end of the third quarter of 2003 and
20,845 at the end of 2002. The increases were due mainly to Sprint Canadas new
combined home, long distance and Fido wireless bundled service offering
introduced commercially on September 10, 2003. Quarterly data[In millions of Canadian dollars, except for per-share data] Pre-reorganization
    
    Post-reorganizationQ1
    
    Q2
    
    Q3
    
    Q4Year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    May &[unaudited]
    
    
    
    
    
    April
    
    June$
    
    $
    
    $
    
    $
    
    $Revenues
    
    
    133.5
    
    
    
    44.2
    
    
    
    95.5
    
    
    
    146.2
    
    
    
    151.4Net income (loss) applicable to
Class A and class B non-voting
shares
    
    
    35.3
    
    
    
    10.3
    
    
    
    10.7
    
    
    
    (5.1
    )
    
    
    (17.8
    )Basic earnings (loss) per share
    
    
    0.15
    
    
    
    0.04
    
    
    
    2.92
    
    
    
    (1.35
    )
    
    
    (4.42
    )Diluted earnings (loss) per share
    
    
    0.15
    
    
    
    0.04
    
    
    
    0.66
    
    
    
    (1.35
    )
    
    
    (4.42
    )
 Pre-reorganizationYear ended December 31, 2002
    
    Q1
    
    Q2
    
    Q3
    
    Q4[unaudited]
    
    $
    
    $
    
    $
    
    $Revenues
    
    
    140.1
    
    
    
    145.7
    
    
    
    154.5
    
    
    
    150.8Net loss
    

    
    (95.3
    )
    
    
    (199.2
    )
    
    
    (152.3
    )
    
    
    (123.7
    )Basic and diluted loss per share
    
    
    (0.40
    )
    
    
    (0.83
    )
    
    
    (0.63
    )
    
    
    (0.51
    )
 Revenues[In millions of Canadian dollars] Eight
    
    Four
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    monthsended
    
    ended
    
    ended
    
    endedDecember 31
    
    April 30
    
    December 31
    
    December 312003
    
    2003
    
    2003
    
    2002$
    
    $
    
    $
    
    $Services
    
    
    357.5
    
    
    
    170.2
    
    
    
    527.7
    
    
    
    566.7Equipment sales
    
    
    35.6
    
    
    
    7.5
    
    
    
    43.1
    
    
    
    24.4Revenues
    
    
    393.1
    
    
    
    177.7
    
    
    
    570.8
    
    
    
    591.1
 Our revenues consist primarily of retail PCS subscriber service revenues,
which are generated from monthly billings for access fees, incremental airtime
charges, prepaid time consumed or expired, roaming, fees for value-added
services, and revenues from equipment sales. 47




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Service revenues for the year ended December 31, 2003 decreased to $527.7
million from $566.7 million for 2002. The decrease was composed of a $53.7
million decrease in postpaid revenues brought about by a lower average number
of subscribers in our postpaid customer base [particularly during the first
nine months of 2003], compared with the prior year, despite comparatively
higher postpaid ARPU, and a $1.1 million reduction in roaming revenues,
resulting primarily from reduced international travel. This was offset
partially by a $15.5 million increase in prepaid revenues generated by both a
higher average volume of prepaid customers and a higher prepaid ARPU, as well
as by a $0.3 million year-over-year improvement in wholesale revenues. Despite a lower number of handsets sold due to fewer new gross
activations, equipment sales almost doubled in 2003 to $43.1 million from $24.4
million in 2002. The increase was mainly the result of higher handset prices in
the first three quarters of 2003 and a reduced volume of retention and
satisfaction discounts. Postpaid ARPU improved 3% in 2003 to $60.63 from $59.12 in 2002. The
increase was attributable primarily to higher roaming revenues per user,
greater long distance usage per user, and increased value-added service and
data-related revenues per user, offset slightly by a reduction in extra airtime
revenue per user as a result of greater in-bucket usage. Average monthly usage
by our postpaid subscribers was higher at 372 minutes for the year, compared
with 361 minutes for 2002, due mainly to the proliferation of price plan
packages offering bigger minute buckets particularly during off-peak periods.
Our prepaid ARPU also increased in 2003 to $19.32 from $18.64 in 2002. The
improvement was due primarily to higher expired airtime due to shorter validity
periods on certain prepaid airtime cards, a larger number of text messages sent
by our customers, and higher revenues per user from increased usage of
value-added services, such as pay-per-use voice mail and caller ID. Airtime
usage by our prepaid customers averaged 62 minutes per month in 2003, compared
with 57 minutes per month in 2002. Although both postpaid and prepaid ARPU
increased individually year-over-year, our blended ARPU for the year ended
December 31, 2003 was $38.32, compared with $39.73 for 2002. The decrease was
due to the proportionately higher number of prepaid customers in our retail
customer base particularly during the first three quarters of 2003 relative to
one year earlier. Our Fido postpaid and prepaid customers sent approximately 58.9 million
text messages in 2003, representing an increase of 39% compared with the
previous year. The higher number was due primarily to a number of initiatives
launched in 2003, including inter-carrier short-code and text messaging
capabilities, our partnership with AOL to provide our Fido customers with
instant messaging services through AIM and ICQ, the bundling of PCS voice and
text messaging services into a single monthly service package, and, on the GPRS
side, our launch of mobile Internet for prepaid. Moreover, most of our newest
wireless devices are data-capable with features such as enhanced text messaging
and mobile chat, which we believe appeals largely to the youth and young
adults two key market segments for data. Costs and operating expenses[in millions of Canadian dollars] Eight
    
    Four
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    Monthsended
    
    ended
    
    ended
    
    endedDecember 31
    
    April 30
    
    December 31
    
    December 312003
    
    2003
    
    2003
    
    2002$
    
    $
    
    $
    
    $Cost of services
    
    
    123.0
    
    
    
    59.1
    
    
    
    182.1
    
    
    
    187.0Cost of products
    
    
    93.6
    
    
    
    23.4
    
    
    
    117.0
    
    
    
    102.1Selling and marketing
    
    
    73.2
    
    
    
    24.6
    
    
    
    97.8
    
    
    
    104.0General and administrative
    
    
    55.3
    
    
    
    32.0
    
    
    
    87.3
    
    
    
    106.9Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.5Depreciation and amortization
    
    
    46.8
    
    
    
    59.4
    
    
    
    106.2
    
    
    
    465.8Costs and operating expenses
    
    
    391.9
    
    
    
    198.5
    
    
    
    590.4
    
    
    
    973.3
 During the first half of 2003, we closely tracked expenses in order to
preserve liquidity and grow operating income, while we worked on completing our
financial reorganization. Following the successful completion of this
reorganization on May 1, 2003, cash management and profitability continued to
be a priority for us, despite increased costs associated with the launch of our
post-restructuring marketing program and a resumption of subscriber
acquisition. Costs and operating expenses [excluding restructuring charges,
depreciation and amortization] for the year ended December 31, 2003 decreased
by 3% to $484.2 million from $500.0 million in 2002. The improvement was
realized mainly from decreased general and administrative expenses [G&A],
lower cost of services and reduced selling and marketing expenses, offset
partially by an increase in the cost of products. 48




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Cost of services consists of site-related expenses, transmission costs,
spectrum license fees, contribution revenue taxes, customer care costs, and
other direct costs related to network operations. We decreased cost of services
by 3% in 2003 to $182.1 million from $187.0 million in 2002. The $4.9 million
improvement was composed of: $1.3 million in network operating cost savings
that resulted primarily from reduced interconnection, long distance and
maintenance costs; a $2.2 million decrease in customer care, training and
billing expenses, due mainly to a reduced volume of calls at our call center
and a lower subscriber base for most of the year; and a $1.4 million reduction
in the contribution revenue charges paid to the Canadian Radio-television and
Telecommunications Commission [CRTC] because of lower service revenues and a
lower contribution rate. During the fourth quarter of 2003, the CRTC finalized
the 2003 contribution rate at 1.1% of eligible revenues, retroactive to January
1, 2003, which compared favorably to the rate of 1.3% for 2002. Our cost of products for 2003 was $117.0 million, up $14.9 million from
$102.1 million for 2002. The cost of products for 2002 was affected positively
by the reversal of a $13.8 million handset subsidy tax provision during the
second quarter of 2002. Excluding this one-time event, the cost of products was
only $1.1 million higher year-over-year. This increase was attributable
primarily to higher per-unit handset costs due to a higher-cost mix of handsets
sold, resulting in an incremental expense of $7.2 million; higher obsolescence
and increased inventory devaluation of $0.7 million; and a slight $0.4 million
increase in the cost of producing prepaid vouchers. These cost increases were
offset partially by a reduced volume of handsets and accessories sold, due to a
lower number of new gross activations, which resulted in direct savings of $7.2
million. Selling and marketing costs include compensation expenses and other
distribution channel costs, as well as advertising expenses. Despite increased
spending on new advertising campaigns and promotional incentives during the
second half of 2003 in order to re-establish our market presence and improve
our competitiveness, as well as higher costs associated with customer retention
programs, our selling and marketing expenses for 2003 decreased 6% to $97.8
million from $104.0 million for 2002. The lower costs reflected a decrease in
retail partner compensation as a result of fewer new gross customer
activations, a reduction in promotional discounts and advertising expenses
during the financial restructuring process, and lower salaries and benefits due
to a reduced direct sales force. Our COA in 2003 decreased 11% to $255 per gross addition, compared with
$287 per gross addition in 2002, despite both a lower number of new gross
additions and a higher proportion of postpaid activations. The improvement can
be explained mainly by reduced spending on advertising and promotions, higher
handset prices and lower channel compensation during our financial
restructuring process. G&A consist of employee compensation and benefits, client services, bad
debt and various other expenses. G&A expenses were $87.3 million for 2003,
compared with $106.9 million one year earlier. The improvement of $19.6
million was due primarily to lower bad debt expense stemming from the
relatively higher credit worthiness of our customer base in 2003, and to
reduced salaries and benefits as a result of a decrease in the average number
of full-time equivalent employees during the year. Due to the realignment of our equity interest and capital structure under
our recapitalization plan, we were required to perform as at May 1, 2003 a
comprehensive revaluation of our balance sheet referred to as fresh start
accounting, which included an adjustment to the historical carrying value of
our assets and liabilities to their fair values. As a result, and in order not
to surpass the fair value of the enterprise as a whole, the carrying value of
our property, plant and equipment was reduced from $602.1 million to $289.7
million as at May 1, 2003. Accordingly, depreciation and amortization decreased
to $106.2 million for the year ended December 31, 2003 from $242.4 million for
the same periods in 2002 [excluding an impairment charge of $223.4 million]. Our operating loss for the four-month pre-reorganization period ended
April 30, 2003 was $20.8 million. This, when combined with operating income of
$1.2 million for the eight-month post-reorganization period ended December 31,
2003, resulted in a total operating loss of $19.6 million for 2003, compared
with $382.3 million for 2002. The decrease in operating loss, year-over-year,
was mainly due to a decrease in depreciation and amortization expense of $359.6
million due to the reduction in property, plant and equipment as a result of
fresh start accounting [$136.2 million] and to an impairment charge [$223.4
million] recognized in 2002 in order to write down the value of our MCS
licenses to nil. An impairment test was required due to the uncertain
likelihood, at that time, of finding potential business partners to secure
financing for our MCS project to be carried out by Inukshuk. Subsequent to this
event, in November 2003, we announced the creation of a new venture with
Allstream Inc. and NR Communications, LLC to build an MCS network using
wireless access technology. OIBDA for the four-month pre-reorganization period ended April 30, 2003
was $38.6 million. This, when combined with OIBDA of $48.0 million for the
eight-month post-reorganization period ended December 31, 2003, resulted in
OIBDA of $86.6 49




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million for 2003, compared with $83.5 million for 2002. The
increase was brought about by a $23.3 million improvement in total
operating costs and expenses before depreciation and amortization, offset
partially by a $20.3 million decline in total revenues. While slower customer
growth, and therefore lower selling and marketing expenses, can explain part of
the reduction in costs, the decline was also related to improved operating cost
efficiencies and restructuring charges of $7.5 million recorded in 2002 which
related primarily to severance payments made to approximately 350 employees to
adjust our workforce to the requirements of our 2002-2003 operating plan. As a
result of strict financial discipline, particularly during the financial
restructuring process, we maintained OIBDA as a percentage of total revenues
stable at 15%, year-over-year. Other[In millions of Canadian dollars] Eight
    
    Four
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    Monthsended
    
    ended
    
    ended
    
    endedDecember 31
    
    April 30
    
    December 31
    
    December 312003
    
    2003
    
    2003
    
    2002$
    
    $
    
    $
    
    $Net interest expense and
financing charges
    
    
    (12.2
    )
    
    
    (68.7
    )
    
    
    (80.9
    )
    
    
    (221.4
    )Foreign exchange gain
    
    
    13.9
    
    
    
    136.6
    
    
    
    150.5
    
    
    
    0.9Gain on financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.6Write-down of deferred
financing costs and deferred
gain and loss on financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.9
    )Gain (loss) in value of
investments, marketable
securities and other assets
    
    
    2.6
    
    
    
    0.3
    
    
    
    2.9
    
    
    
    (16.1
    )Share of net loss in investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13.2
    )Income tax benefit (provision)
    
    
    (0.6
    )
    
    
    (1.8
    )
    
    
    (2.4
    )
    
    
    71.9Net income (loss)
    
    
    5.0
    
    
    
    45.5
    
    
    
    50.5
    
    
    
    (570.5
    )Net loss applicable to Class
A and Class B Shares
    
    
    (12.1
    )
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
 For 2003, interest expense and financing charges [net of interest income]
were $80.9 million, compared with $221.4 million for 2002. The decrease was the
direct result of the reduction in long-term debt following the implementation
of our recapitalization plan on May 1, 2003, the appreciation of the Canadian
dollar relative to the U.S. dollar, and the absence of amortizable deferred
financing costs in 2003 following their complete write-off at the end of 2002
due to the impending financial reorganization. Interest expense for the first
four months of 2003 consisted primarily of accreted and accrued interest on
approximately $2.0 billion of secured and unsecured debt, while interest
expense for the last eight months of 2003 consisted of interest charges on the
Companys post-recapitalization $350 million face amount of bank debt. Cash
interest of $12.7 million and debt principal repayments of $7.3 million were
paid during 2003. For 2003, we recorded a foreign exchange gain of $150.5 million, compared
with a gain of only $0.9 million in 2002. This substantial increase was due
primarily to the impact on the value of our pre-reorganization long-term U.S.
dollar-denominated debt from the greater appreciation of the Canadian dollar
relative to the U.S. dollar during the first four months of 2003. As a result
of certain swap transactions that we entered into post-recapitalization on
approximately half of our total U.S. dollar-denominated debt [approximately
$100 million [$72.2 million U.S.] of the total Tranche B Debt], we are less
vulnerable to foreign exchange fluctuations. Currently, the U.S.
dollar-denominated portion of debt represents two-thirds of the total, or
approximately $200 million of the $300 million of face amount Tranche B Debt. Given the recapitalization process in which we were engaged, we decided to
terminate all our hedging agreements in 2002. These terminations, as well as
the de-designation of the cross-currency swap on the principal balance of the
2009 Senior Discount Notes due in 2009 we had before the recapitalization
process, created a net gain in the amount of $6.6 million in 2002. In addition,
at the end of 2002, we wrote down $18.9 million of deferred financing costs, a
$17.7 million deferred loss on financial instruments, and a $19.7 million
deferred gain on financial instruments for a net total loss of $16.9 million,
all which related to the long-term debt in default as at December 31, 2002. 50




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For 2003, we posted a gain in value of
investments, marketable securities and other assets of $2.9 million compared
with a loss of $16.1 million in 2002. This was mainly due to the gain we made
on the sale of our investment in Saraide Inc. at the end of 2003 compared with
the fact that many of our investments were reduced to their net estimated fair
value during 2002 in order to reflect the general decline in market conditions
for high-technology companies, which were the main component of our portfolio. The share of loss in investees for the year ended December 31, 2003 was
nil, compared with $13.2 million for 2002. The loss in 2002 was due primarily
to the recognition of our share of the loss sustained by GSM Capital Limited
Partnership [GSM Capital"], brought about mainly by the general decline in
market conditions for high-technology companies during 2002, which were the
main components of GSM Capitals portfolio. The $2.4 million of income tax expense for 2003 is composed exclusively of
large corporation tax. In 2002, we recorded an income tax benefit of $71.9
million as a result of the write-down in the value of the MCS licenses to nil.
Accordingly, this led to the reversal of the cost of future income tax related
to these licenses, which arose from the difference between the carrying value
and the tax basis of the acquired licenses. For the twelve months ended December 31, 2003, we recorded net income of
$33.4 million [composed of net income of $45.5 million for the four-month
pre-reorganization period and a net loss applicable to the Class A and class B
non-voting shares of $12.1 million for the eight-month post-reorganization
period], as well as basic and diluted earnings per share of $0.19 for the first
four months of 2003 and a basic and diluted loss per share of $3.22 for the
following eight months. This compared with a net loss of $570.5 million and a
basic and diluted loss per share of $2.37 for 2002. The net loss figures for
2002 included a $150.5 million non-cash net charge to account for the
impairment in the value of the MCS licenses. This non-cash charge represented a
$223.4 million write-down in the value of the MCS licenses net of related
income tax benefits of $72.9 million arising from the difference between the
carrying value of the licenses and the tax basis of the intangible assets
acquired. During 2003, we reserved approximately 2 million shares for issuance under
our new stock option plan. The use of equity-based compensation provides
additional performance-based incentives and assists in the retention of
qualified management employees. Our board of Directors approved the granting of
stock options to purchase a total of 1.7 million Class B Non-Voting Shares in
2003. As all the options granted under the old stock option plan were cancelled
with the implementation of the plan of reorganization, our Board of Directors
approved such grant of options as an employee retention tool and in order to
provide an opportunity, through options, for our executive officers and
selected employees to participate in our future growth and development. 51




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SELECTED FOURTH QUARTER INFORMATION
(In thousands of Canadian dollars, unless otherwise indicated) Three months endedDecember 312003
    
    2002$
    
    $Revenues
    
    
    151,434
    
    
    
    150,751Operating loss
    
    
    (19,658
    )
    
    
    (52,240
    )OIBDA
(1)
    
    
    (1,669
    )
    
    
    21,070Loss before income taxes
    
    
    (19,599
    )
    
    
    (123,496
    )Net loss
    
    
    (11,248
    )
    
    
    (123,662
    )Basic and diluted loss per share (in dollars)
    
    $
    (4.42
    )
    
    $
    (0.51
    )Capital expenditures
    
    
    36,670
    
    
    
    5,977Total assets (end of period)
    
    
    808,706
    
    
    
    912,854Long-term debt (end of period)
    
    
    315,164
    
    
    
    2,032,678Cash dividends declared
    
    
    nil
    
    
    
    nilOther data:ARPU (in dollars)Postpaid
    
    $
    60.61
    
    
    $
    59.01Prepaid(3)
    
    $
    18.33
    
    
    $
    20.86Blended (1)(3)
    
    $
    37.99
    
    
    $
    39.42COA (in dollars) (2)
    
    $
    241
    
    
    $
    297Churn rate (3)
    
    
    3.3
    %
    
    
    3.8
    %Net retail subscriber additionsPostpaid
    
    
    75,116
    
    
    
    (59,789
    )Prepaid
    
    
    32,306
    
    
    
    29,577Total
    
    
    107,422
    
    
    
    (30,212
    )Total retail subscribers, end of periodPostpaid
    
    
    592,180
    
    
    
    545,062Prepaid
    
    
    652,966
    
    
    
    619,459Total
    
    
    1,245,146
    
    
    
    1,164,521
 (1) Reconciliation of OIBDA and blended ARPU Three months endedDecember 312003
    
    2002(In thousands of Canadian dollars, unless otherwise indicated)
    
    $
    
    $Operating loss
    
    
    (19,658
    )
    
    
    (52,240
    )Depreciation and amortization
    
    
    17,989
    
    
    
    73,310OIBDA
    
    
    (1,669
    )
    
    
    21,070Service revenues for the period
    
    
    134,616
    
    
    
    140,730Average number of subscribers (in thousands) (4)
    
    
    3,538
    
    
    
    3,537Average monthly service revenue per user (in dollars)
    
    $
    38.05
    
    
    $
    39.79Net impact of promotions, non-retail revenues and other
    
    $
    (0.06
    )
    
    $
    (0.37
    )Blended ARPU
    
    $
    37.99
    
    
    $
    39.42
  (2)
    
    Beginning with the second quarter of 2003, we adjusted our calculation of
COA to include shrinkage and obsolescence. All comparative figures were
adjusted accordingly. 52




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(3)
    
    Calculation excludes 50,000 inactive prepaid service customers accounted
for in Q2-2002.  (4)
    
    The average number of subscribers for the period is equal to the sum of
the average postpaid subscribers for each month covered by the period. Three-month period ended December 31, 2003, compared with three-month period
ended December 31, 2002. Operating results for our interim periods are not necessarily indicative
of the results that may be expected for the full year. Specifically, during the
fourth quarter, our operations are subject to certain seasonal factors
associated with subscriber acquisition during the holiday period, which
historically is the largest acquisition period of the year for the wireless
industry. As a result, operating and net income during this period will be
affected by the cost of acquiring a proportionately higher number of
subscribers compared to each of the other three quarters of the year. During the fourth quarter of 2003, we activated 230,045 new gross retail
customers, more than double the 110,347 we acquired during the same quarter in
2002. The significant year-over-year improvement in quarterly gross activations
reflects an increase in both postpaid and prepaid subscriber additions. This
result reflects our return to the wireless market as a fully active competitor,
compared with the fourth quarter of the previous year when we consciously
decided to restrict subscriber acquisition in order to preserve cash while we
continued pursuing our financial restructuring activities. Despite the highly
competitive market conditions within the Canadian wireless industry, we believe
our estimated market share of industry gross additions for the fourth quarter
of 2003 in regions where Fido service is offered exceeded 22%, compared with
13% for the same quarter in 2002. This result continues the positive trend
towards our return to historic market share levels for new industry gross
additions. Although the fourth quarter is a period when prepaid activations are
traditionally higher due to the commitment-free, gift-giving nature of the
product, our postpaid additions were higher, which demonstrates the impact on
consumers from our competitive promotions, high-profile advertising campaigns,
and new City Fido service in Vancouver. Accordingly, postpaid subscriber
additions represented 135,540, or 59%, of the total gross activations for the
fourth quarter of 2003, up significantly from 25,690, or 23%, in the same
quarter last year, while prepaid accounted for the remaining 94,505, or 41%,
gross customer additions, compared with 84,657, or 77% for the fourth quarter
of 2002. Our blended monthly churn rate for the three-month period ended December
31, 2003 improved to 3.3% from 3.8% for the same three months in 2002. The
year-over-year decrease was due to both lower postpaid churn and lower prepaid
churn. Although our fourth-quarter postpaid churn rate decreased slightly from
3.0% in 2002 to 2.9% in 2003, we experienced an increase in this rate compared
with the previous quarter. We believe that the sequential quarterly increase
was due largely to the effect of the attacks launched by our competitors
directly at our customers in central and eastern Canada in response to our new
City Fido service in Vancouver. We are addressing this issue pro-actively by
designing retention programs aimed at increasing our customers level of
satisfaction and loyalty, which should make us less vulnerable to our
competitors attacks in future quarters. As a result, we accelerated a handset
replacement and upgrade program via a telemarketing and direct mail campaign
targeted at our high-value subscribers. We also recently launched a loyalty
program, whereby our customers can accumulate reward points based on spending
that can be redeemed toward the purchase of a handset of their choice. In
addition, we introduced optional loyalty agreements for our postpaid customers
starting in February 2004. Our prepaid churn rate decreased to 3.7% in the fourth quarter of 2003
from 4.5% in the same quarter one year earlier. The year-over-year improvement
can be attributed primarily to the success of our marketing program to reduce
the number of inactive prepaid accounts and to stimulate usage among
occasional, security-type wireless customers both by offering a differentiated
rate structure, that includes a low-cost weekend and evening rate to better
address their lifestyle and usage patterns, and by educating them on our
business rules regarding voucher expiry, airtime account replenishment and
deactivation. Due to the combined effects of a significantly larger number of new gross
activations and lower customer churn, we added 107,422 new net retail customers
in the fourth quarter of 2003, 75,116, or 70%, of which were on higher-value
postpaid platforms. This result compared with the reduction of 30,212
customers, including the loss of 59,789 postpaid subscribers, for the same
quarter in 2002. 53




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Revenues(in millions of Canadian dollars) Three
    
    Threemonths
    
    monthsended
    
    endedDecember 31
    
    December 312003
    
    2002$
    
    $Services
    
    
    134.6
    
    
    
    140.8Equipment sales
    
    
    16.8
    
    
    
    10.0Revenues
    
    
    151.4
    
    
    
    150.8
 Service revenues for the three-month period ended December 31, 2003
decreased by $6.2 million to $134.6 million from $140.8 million for the fourth
quarter of 2002. The year-over-year difference was composed of: a $3.1 million
decrease in prepaid revenues resulting mainly from lower prepaid ARPU, despite
a higher average number of prepaid subscribers in the customer base; a $2.8
million decrease in postpaid revenues due primarily to a lower average number
of postpaid subscribers, offset partially by higher postpaid ARPU; and lower
wholesale revenues for $0.3 million. Equipment sales were $16.8 million for the fourth quarter of 2003,
compared with $10.0 million for the same quarter in 2002. Despite lower average
handset prices as a result of holiday season promotional offers, fourth-quarter
equipment sales improved year-over-year due primarily to a higher number of
handsets sold, resulting directly from a significant increase in the number of
gross activations. Postpaid ARPU increased by 3% to $60.61 for the fourth quarter of 2003
from $59.01 for the same three-month period in 2002. The improvement was due
largely to an increase in the recurring portion of monthly revenues per user
resulting from the positive impact of City Fido on our price plan mix,
increased value-added service and data-related revenues per user, greater long
distance usage per user. This was partially offset by a reduction in extra
airtime revenues per user as a result of greater in-bucket usage. Average
monthly usage by our postpaid subscribers for the fourth quarter of 2003 was
421 minutes, compared with 365 minutes for the same quarter one year earlier.
The increase can be attributed mainly to our new City Fido service in Vancouver
that offers unlimited local usage for a fixed price of $40 per month. The ARPU
for our retail prepaid service decreased in the fourth quarter of 2003 to
$18.33 from $20.86 in 2002, primarily as a result of decreased minutes of
usage. Average monthly usage by our prepaid customers in the fourth quarter was
61 minutes, compared with 67 minutes in 2002. Despite higher postpaid ARPU
compared to one year ago, on a blended basis, our combined postpaid and prepaid
ARPU for the three months ended December 31, 2003 decreased to $37.99 from
$39.42 for the same period in 2002, due to the combination of a proportionately
greater number of prepaid subscribers in our customer base and lower prepaid
ARPU. Costs and operating expenses(in millions of Canadian dollars) Three
    
    Threemonths
    
    Monthsended
    
    endedDecember 31
    
    December 312003
    
    2002$
    
    $Cost of services
    
    
    47.9
    
    
    
    45.9Cost of products
    
    
    49.2
    
    
    
    29.2Selling and marketing
    
    
    34.6
    
    
    
    24.0General and administrative
    
    
    21.4
    
    
    
    26.9Restructuring charges
    
    
    
    
    
    
    3.7Depreciation and amortization
    
    
    18.0
    
    
    
    73.3Costs and operating expenses
    
    
    171.1
    
    
    
    203.0
 We continued to exercise careful cost control and showed financial
discipline in the fourth quarter of 2003, despite increased expenses due
primarily to a greater level of subscriber acquisition activity during the most
important retail period of the year for wireless operators. Costs and operating
expenses (excluding depreciation and amortization) for the three-month period
ended December 31, 2003 were $153.1 million, compared with $129.7 million for
the same quarter in 2002. The year-over-year increase was attributable to
higher cost of products and services and higher selling and marketing expenses,
offset partly by lower general and administrative expenses. 54




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Fourth-quarter cost of services increased to $47.9 million in 2003 from
$45.9 million in 2002. The $2.0 million variance was composed of a $2.4 million
increase in customer care, training and billing costs and a $0.2 million
increase in network operating costs, which was compensated for, in part, by a
$0.6 million reduction in contribution charges paid to the CRTC. Our cost of products for the fourth quarter of 2003 was $49.2 million, up
from $29.2 million for the fourth quarter of 2002. The $20.0 million
year-over-year increase was due primarily to: a higher volume of handsets and
accessories sold, resulting in an incremental expense of $19.0 million;
increased per-unit handset costs for an aggregate amount of $2.9 million,
attributable to a higher-cost mix of handsets sold; and higher assembly,
refurbishing and packaging costs of $0.6 million. These cost increases were
partially offset by a decrease in prepaid voucher production costs of $1.6
million, and lower obsolescence and inventory devaluation of $0.9 million. For the three months ended December 31, 2003, selling and marketing
expenses increased to $34.6 million from $24.0 million for the same period in
2002. The comparatively lower spending in the fourth quarter of 2002 can be
explained by our focus on cash preservation at that time, as we continued to
concentrate on our financial reorganization, which had a direct impact on our
ability to remain competitive. By the fourth quarter of 2003, we had fully
re-established our market presence and resumed normal spending levels for
subscriber acquisition. Accordingly, the higher selling and marketing costs in
the fourth quarter of 2003 reflect an increase in retail partner compensation
due to a greater overall level of sales in combination with a higher proportion
of postpaid gross activations, an increase in promotional discounts and
advertising expenses as a result of the step-up in our holiday season marketing
campaign and the launch of City Fido in Vancouver, and continued spending on
customer retention. Despite a higher mix of postpaid versus prepaid gross additions and
increased spending on promotions and advertising, our COA decreased 19% to $241
per gross addition for the fourth quarter of 2003 from $297 per gross addition
for the same quarter in the previous year, due directly to the substantially
greater number of quarterly gross additions, year-over-year. G&A expenses decreased to $21.4 million for the last three months of 2003
from $26.9 million for the same period in 2002. The 20% improvement was on
account of lower bad debt expense stemming from the higher credit worthiness of
the Companys current customer base and to reduced salaries and benefits as a
result of a decrease in the number of full-time equivalent employees. Our operating loss for the three months ended December 31, 2003 was $19.7
million, compared with an operating loss of $52.2 million for the same period
in 2002. The improvement was mainly due to the decrease in depreciation and
amortization expense of $55.3 million following the reduction in property,
plant and equipment as a result of fresh start accounting. OIBDA for the three
months ended December 31, 2003 was negative $1.7 million, compared with OIBDA
of $21.1 million for the same period in 2002. The decrease resulted primarily
from an increase in the costs associated with financing the acquisition of
approximately 120,000 additional subscribers in the fourth quarter of 2003,
compared with the fourth quarter of 2002. Accordingly, total operating costs
and expenses before depreciation and amortization increased by 18%,
year-over-year. Other(In millions of Canadian dollars) Three
    
    Threemonths
    
    Monthsended
    
    endedDecember 31
    
    December 312003
    
    2002$
    
    $Net interest expense and financing charges
    
    
    (4.2
    )
    
    
    (54.6
    )Foreign exchange gain
    
    
    1.7
    
    
    
    7.5Loss on financial instruments
    
    
    
    
    
    
    (2.2
    )Write-down of deferred financing costs and
deferred gain and loss on financial
instruments
    
    
    
    
    
    
    (16.9
    )Gain (loss) in value of investments,
marketable securities and other assets
    
    
    2.5
    
    
    
    (4.7
    )Share of net loss in investees
    
    
    
    
    
    
    (0.2
    )Income tax benefit (provision)
    
    
    8.4
    
    
    
    (0.2
    )Net loss
    
    
    (11.2
    )
    
    
    (123.7
    )Net loss applicable to Class A and Class B
Shares
    
    
    (17.8
    )
    
    
    n/a
 55




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For the fourth quarter of 2003, interest expense and financing charges
(net of interest income) were $4.2 million, compared with $54.6 million for the
same period one year earlier. The decrease was the direct result of the
reduction in long-term debt following the implementation of our
recapitalization plan on May 1, 2003, the appreciation of the Canadian dollar
relative to the U.S. dollar, and the absence of amortizable deferred financing
costs in 2003 following their complete write-off at the end of 2002 due to the
impending financial reorganization. Cash interest of $4.7 million and debt
principal repayments of $2.6 million were paid during the fourth quarter of
2003. The foreign exchange gain for the fourth quarter of 2003 decreased to $1.7
million from $7.5 million for the same three-month period in 2002. The decline
was due to the greater positive impact in the fourth quarter of 2002 of a
favorable change in the U.S./Canadian foreign exchange rate on a relatively
higher level of U.S.dollar-denominated long-term debt outstanding. We had
approximately $1.4 billion of U.S.dollar long-term debt outstanding and
unhedged in the fourth quarter of 2002. Given the recapitalization process in which we were engaged, we decided to
terminate all our hedging agreements in 2002. These terminations, as well as
the de-designation of the cross-currency swap on the principal balance of the
2009 Senior Discount Notes due in 2009 we had before the recapitalization
process, created a net loss on financial instruments of $2.2 million for the
three-month period ended December 31, 2002. In addition, at the end of 2002, we
wrote down $18.9 million of deferred financing costs, a $17.7 million deferred
loss on financial instruments, and a $19.7 million deferred gain on financial
instruments for a net total loss of $16.9 million, all which related to the
long-term debt in default as at December 31, 2002. During the fourth quarter of 2003, we posted a gain in value of
investments, marketable securities and other assets of $2.5 million compared
with a loss of $4.7 million during the same period in 2002. This was mainly due
to the gain we made on the sale of our investment in Saraide Inc. at the end of
2003 compared with the fact that our investment in Argo II: The Wireless
Internet Fund Limited Partnership (Argo II) was reduced to its estimated fair
value of nil as at December 31, 2002. On May 1, 2003, the Companys tax losses and net deductible temporary
differences were not included in the fresh start accounting adjustments since
a valuation allowance was provided for the entire amount of the related net tax
benefit. Accordingly, if and when it is more likely than not that the tax
benefits related to both the unrecognized tax losses carried forward and the
net deductible temporary differences will be realized, they will first be
applied to reduce the unamortized amount of intangible assets that were
recorded as at May 1, 2003. As at December 31, 2003, the Companys tax losses
and net deductible temporary differences were approximately $1.9 billion. The
income tax benefit for the fourth quarter of 2003 was mainly due to a recovery
in 2003 income tax expense following a fourth quarter where we posted a loss
before income taxes of $19.6 million. We posted a consolidated net loss of $11.2 million and a consolidated net
loss applicable to the Class A and Class B Shares of $17.8 million (when
considering the accretion of the redemption price on the Preferred Shares) for
the fourth quarter of 2003. As a result, basic and diluted loss per share for
the three months ended December 31, 2003 was $4.42. This compared with a
consolidated net loss of $123.7 million and a basic and diluted loss per share
of $0.51 for the same quarter in 2002. The year-over-year improvement in
fourth-quarter net loss was due primarily to lower interest expense arising
from the reduction of debt related to the financial reorganization and
decreased depreciation and amortization resulting from the revaluation of
property, plant and equipment under the fresh start accounting. Year ended December 31, 2002, compared with year ended December 31, 2001 Our financial results for the periods described herein are not necessarily
indicative of our future operating results given the risks and uncertainties
associated with our operations and the Canadian wireless industry in general. As at December 31, 2002, we offered PCS in twenty-one census metropolitan
areas in Canada. In addition, we have deployed our GSM network in smaller
communities and along major highway corridors. We estimate that our PCS
network reaches some 19 million people or 61% of the Canadian population.
Beyond this network footprint, we provide analog cellular roaming capabilities
on the networks of other carriers, which increase our service area to 94% of
the total Canadian population. During 2002, we had 548,079 gross activations, down 11% from 612,883 in
2001. The decline in gross activations was the result of a decrease in
postpaid gross activations, particularly in the second half of 2002, reflecting
continuing competitive market conditions within the Canadian wireless industry,
as well as our prudent approach toward customer acquisition given our uncertain
financial situation and recapitalization process. Accordingly, postpaid
subscribers accounted for 45% of the total gross activations in 2002, compared
with 51% in 2001. As at December 31, 2002, we provided wireless service to 1,164,521 retail
PCS customers, 545,062 of which were on postpaid plans and 619,459 on prepaid
plans. We added 137,947 new net prepaid additions for full-year 2002, compared
with 116,803 in the 56




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previous year. However, our postpaid subscriber base decreased by 92,636
in 2002, compared with an increase of 169,880 in 2001, due primarily to
substantially higher involuntary churn to disconnect non-paying customers,
increased migration of postpaid customers to prepaid service, a reduction in
marketing-related promotions in light of our financial condition, and a
pronounced emphasis on postpaid customer acquisition by the competition. In addition, as at December 31, 2002, we provided PCS network access to
20,845 wholesale subscribers, compared with 20,631 at the end of 2001. This
result is consistent with our strategy of discontinuing active solicitation of
the wholesale business, while continuing to support our existing third-party
service providers. The blended churn increased to 3.4% for full-year 2002 from 2.6% in the
previous year, and was the result of higher both postpaid churn and prepaid
churn. Postpaid churn was 3.0% in 2002, compared with 2.0% in 2001, while
prepaid churn increased to 3.8% from 3.2% for the same period. The
year-over-year increases were due primarily to the negative publicity
surrounding us and our financial condition, increasingly competitive handset
offers, the effects of changes made to our prepaid pricing structure in August
2002 that shortened the validity period and increased the price per minute on
certain airtime vouchers, thereby contributing to higher churn among
occasional, security-type users as well as continuing high Microcell-initiated
churn to disconnect non-paying customers. We generated significant involuntary
customer churn due to certain marketing programs and policies implemented
throughout 2001 and at the beginning of 2002 to increase postpaid customer
acquisition. In particular, a special plan was devised to allow customers with
a low credit rating to access a postpaid plan that included a variable-spending
limit. Although this program was terminated during the third quarter of 2002,
the churn rate was negatively impacted in the fourth quarter of 2002. However, our revenues, which consist primarily of subscriber service
revenues generated from monthly billings for access fees, incremental airtime
charges, prepaid time consumed or expired, roaming, fees for value-added
services, and revenues from equipment sales, increased compared to the previous
year. Revenues[In millions of Canadian dollars] Twelve
    
    Twelvemonths
    
    Monthsended
    
    endedDecember 31
    
    December 312002
    
    2001$
    
    $Services
    
    
    566.7
    
    
    
    509.1Equipment sales
    
    
    24.4
    
    
    
    32.4Revenues
    
    
    591.1
    
    
    
    541.5
 Service revenues grew by 11% to $566.7 million for the year ended December
31, 2002, from $509.1 million for the previous year. The increase reflects a
higher average number of active subscribers. This was partially offset by
lower blended ARPU and softer wholesale revenues. Equipment sales were $24.4
million for full-year 2002, compared with $32.4 million one year earlier. The
decrease in equipment sales was due primarily to fewer gross activations, lower
handset prices in the first three quarters of 2002 as a result of promotional
offers on several new models, a greater volume of retention and satisfaction
discounts, as well as decreased accessory sales. Our postpaid ARPU was $59.12 for 2002, compared with $60.56 for 2001. The
decrease reflects a decline in airtime revenues. This decline resulted mainly
from lower billable minutes due to greater in-bucket usage stemming from the
high take-up of promotional plans that offered free bundled weeknight and
weekend usage, from bundling value-added service options, such as voice mail
and caller ID, in the basic monthly service packages, as well as from higher
customer satisfaction and retention-related credits. Average monthly postpaid
minutes of usage for 2002 was higher at 361 minutes compared with 319 minutes
in 2001 due primarily to greater off-peak usage arising from promotional plans
that offered free weeknight and weekend airtime. Our prepaid ARPU for 2002 decreased to $18.64 from $20.99 in 2001 mainly
as a result of lower minutes of usage. The reduction in prepaid minutes of
usage stemmed from the migration of high-usage prepaid customers to postpaid
monthly plans. Average monthly prepaid minutes of usage for 2002 was 57
minutes compared with 62 minutes for the previous year. Our blended ARPU
decreased to $39.73 in 2002 from $41.14 for 2001. Fido prepaid and postpaid
customers sent approximately 42.4 million text messages in 2002 up 91% from
2001. 57




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The calculation of both prepaid and blended ARPU for 2002 includes an
adjustment made during the second quarter of 2002 to remove 90,000 inactive
prepaid customers from our retail customer base. We define inactive prepaid
service customers as those who have not made or received a call for a period of
more than 30 days. Of these 90,000 inactive prepaid service customers, 40,000
customers were deactivated following the termination of a customer retention
program. The 90,000 figure represents approximately the average monthly number
of inactive accounts in our prepaid customer base in the twelve months
preceding the second quarter of 2002. By excluding these inactive accounts
from the reported customer base, we believe that we are providing a more
accurate representation of our quarterly and year-to-date prepaid operating
statistics for ARPU and average monthly usage. We intend to review this
provision on a yearly basis or as required. Costs and operating expenses[in millions of Canadian dollars] Twelve
    
    Twelvemonths
    
    monthsended
    
    endedDecember 31
    
    December 312002
    
    2001$
    
    $Cost of services
    
    
    187.0
    
    
    
    193.6Cost of products
    
    
    102.1
    
    
    
    143.2Selling and marketing
    
    
    102.9
    
    
    
    115.6General and administrative
    
    
    108.0
    
    
    
    98.9Restructuring charges
    
    
    7.5
    
    
    
    5.2Depreciation and amortization
    
    
    465.8
    
    
    
    178.0Costs and operating expenses
    
    
    973.3
    
    
    
    734.5
 In keeping with our focus on cash preservation, we carefully managed costs
during 2002. Costs and operating expenses, excluding impairment of intangible
assets, restructuring charges, depreciation and amortization, decreased by
$51.2 million when compared to 2001. Expenses for 2002 included a
clarification of provincial sales tax legislation related to handset subsidies,
which resulted in the reversal of a previously accounted for provision of $13.8
million. Excluding this reduction in expenses, costs and operating expenses for
2002 decreased by $37.4 million. The $6.6 million year-over-year improvement in cost of services for 2002
resulted from a $14.1 million reduction in contribution charges paid to the
CRTC and from the reduced activities in our wholly-owned subsidiary Microcell
i5 Inc [$4.1 million]. During the fourth quarter, the CRTC finalized the 2002
contribution rate at 1.3% of eligible revenues, retroactive to January 1, 2002,
which compares favorably to the interim rate of 1.4% for 2002 and to the 2001
rate of 4.5%. This cost reduction was offset partially by a $3.5 million
increase in customer care expenses, as well as by a $8.1 million increase in
network operating costs that can be explained by the receipt of certain
non-recurring credits for maintenance costs and license fees in 2001. Adjusted
for these non-recurring credits, network operating costs for 2002 were flat,
year-over-year. The $41.1 million, or 29%, improvement in cost of products for 2002, was
composed of the aforementioned $13.8 million sales tax provision reversal; a
reduced volume of handset sales and lower per-unit cost for handsets sold
resulting in savings of $22.5 million; lower assembly, packaging and prepaid
voucher production costs of $2.5 million; a lower cost of accessory sales of
$1.1 million; and reduced shrinkage, obsolescence and devaluation of
inventories of $1.2 million. In an effort to preserve cash as we continued pursuing our financial
restructuring activities, we reduced the scale of our holiday marketing
campaign and promotions during the fourth quarter of 2002. We believe this had
a direct impact on our ability to remain competitive during the busiest
acquisition period of the year for wireless operators. The improved cost
performance also reflects lower salaries and benefits resulting from a reduced
sales force, and reduced retail partner compensation attributable to lower
overall sales and a higher proportion of prepaid gross activations.
Consequently, selling and marketing expenses decreased by $12.7 million,
year-over-year, in 2002, despite increased spending on retention initiatives
associated with our customer life cycle program and higher retail partner
compensation rates. The COA improved 12% to $287 per gross addition for full-year 2002,
compared with $325 per gross addition for the previous year, despite 11% fewer
new gross customer activations. The year-over-year improvement was due to
tight controls over spending on advertising and promotions, reduced handset
subsidies resulting from a lower-cost mix of PCS handsets negotiated by us, the
higher mix of prepaid versus postpaid gross additions, as well as lower channel
compensation costs. 58




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General and administrative expenses were $108 million for 2002, compared
to $98.9 million in 2001. The increase was due primarily to higher bad debt
expense, which can be attributed to a larger number of lower-credit customers
in the subscriber base as a result of past marketing programs and policies
implemented to optimize postpaid customer acquisition. As a percentage of
service revenue, however, general and administrative expenses remained
virtually unchanged, year-over-year, reflecting our ability to control overhead
costs and achieve additional operating efficiency. The restructuring charges of $7.5 million for 2002 compared with $5.2
million in 2001, related primarily to severance payments made to approximately
350 employees who were laid-off during 2002 compared with approximately 200
employees laid-off in 2001. These measures were taken in order to adjust our
workforce to the requirements of our operating plan and were the result of
increased productivity from the consolidation of certain administrative and
operating support services, and the suspension of certain projects due to
difficult financial market conditions. Depreciation and amortization increased by $287.8 million in 2002 mainly
due to an impairment charge in the amount of $223.4 million, which was
accounted for to write down the value of the Companys MCS licenses to nil.
For a period of time during 2002, we had been pursuing negotiations with
potential business partners to secure financing for our MCS project to be
carried out by Inukshuk. During 2002, the likelihood of concluding such an
agreement became uncertain. Given this fact, and considering the difficult
financial market conditions that the telecommunications industry was facing, we
wrote down the value of our MCS licenses. In addition, we wrote down certain of
our property, plant and equipment to their net recoverable value for an amount
of $37.3 million. The remaining of the variance is mainly due to network
enhancement since December 2001. The cost of future income tax related to the
MCS licenses, resulting from the difference between the carrying value and the
tax basis of the assets acquired, which was capitalized to the MCS licenses,
was reversed, resulting in an income tax benefit in the amount of $72.9
million. As a result of the above, we posted an operating loss of $382.3 million in
2002 compared with an operating loss of $193.0 million in 2001. OIBDA for 2002
increased by $98.5 million to $83.5 million from negative $15.0 million in
2001. Despite high churn, this result was achieved because of a 10%
year-over-year increase in service revenues, as well as an 9% reduction in
costs and operating expenses [before depreciation and amortization]
attributable to lower contribution fees, lower handset costs and tight controls
over selling and marketing expenses. The OIBDA margin expanded to 14% for the
year ended December 31, 2002 from negative 3% one year earlier. While part of
the margin improvement, year-over-year, relates to slow customer growth and
hence lower marketing expenses, it also relates to improved operating cost
efficiencies, as well as to the favorable impact from the reversal of a
cumulative handset sales tax provision in the second quarter. Excluding the
favorable $13.8 million provincial sales tax clarification on handset
subsidies, OIBDA for 2002 was $69.7 million. Other[In millions of Canadian dollars] Twelve
    
    Twelvemonths
    
    monthsended
    
    endedDecember 31
    
    December 312002
    
    2001$
    
    $Net interest expenses and financing charges
    
    
    (221.4
    )
    
    
    (217.7
    )Foreign exchange gain (loss)
    
    
    0.9
    
    
    
    (51.1
    )Gain on financial instruments
    
    
    6.6
    
    
    
    Write-down of deferred financing costs and
deferred gain and loss on financial
instruments
    
    
    (16.9
    )
    
    
    Loss in value of investments, marketable
securities and other assets
    
    
    (16.1
    )
    
    
    (33.1
    )Share of net loss in investees
    
    
    (13.2
    )
    
    
    (5.3
    )Income tax benefit
    
    
    71.9
    
    
    
    1.7Net loss
    
    
    (570.5
    )
    
    
    (498.5
    )
 The net interest expenses and financing charges in 2002 are consistent
with 2001 with a slight increase of $3.7 million. 59




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The decrease in foreign exchange loss of $52 million in 2002 was mainly
due to the improvement of the exchange rate of the Canadian dollar relative to
the U.S. dollar, especially on our long-term U.S. dollar-denominated debt. Given the recapitalization process in which we were engaged in 2002, we
decided to terminate all our hedging agreements. These terminations, as well
as the de-designation of the cross-currency swap on the principal balance of
the 2009 Senior Discount Notes due in 2009, created a net gain in the amount of
$6.6 million for the whole year. We wrote down $18.9 million of deferred financing costs, $17.7 million of
deferred loss on financial instruments and $19.7 million deferred gain on
financial instruments for a net total of $16.9 million, all of which related to
the long-term debt in default. The decrease of $17.0 million in the loss in value of investments,
marketable securities and other assets for 2002 was mainly due to a lower
number of investments and marketable securities in our portfolio during 2002.
The $7.9 million increase in the share of net loss in investees for 2002 was
the result of a general decline in market conditions for high-technology
companies in 2002, which were the main component of GSM Capitals portfolio. As a result, we posted consolidated net losses of $570.5 million for the
year ended December 31, 2002 compared with $498.5 million for 2001. Basic and
diluted losses per share decreased from $4.56 in 2001 to $2.37 in 2002. This
was mainly due to the increase in the weighted-average number of shares
following the December 2001 rights issue. Liquidity and capital resources Cash flows[In millions of Canadian dollars] Eight
    
    Four
    
    Twelve
    
    Twelve
    
    Twelvemonths
    
    months
    
    months
    
    months
    
    monthsended
    
    ended
    
    ended
    
    ended
    
    endedDecember
    
    April
    
    December
    
    December
    
    December31
    
    30
    
    31
    
    31
    
    312003
    
    2003
    
    2003
    
    2002
    
    2001$
    
    $
    
    $
    
    $
    
    $Cash provided by
(used in) operating
activities
    
    
    54.6
    
    
    
    14.5
    
    
    
    69.1
    
    
    
    (41.0
    )
    
    
    (122.3
    )Cash provided by
(used in) investing
activities
    
    
    (115.9
    )
    
    
    70.3
    
    
    
    (45.6
    )
    
    
    (20.6
    )
    
    
    (383.9
    )Cash provided by
(used in) financing
activities
    
    
    (7.3
    )
    
    
    
    
    
    
    (7.3
    )
    
    
    69.5
    
    
    
    437.8
 As at December 31, 2003, we had cash and cash equivalents of $43.1 million
and short-term investments of $60.9 million compared with $111.8 million and
$9.9 million respectively, as at May 1, 2003. Our cash and cash equivalents as
at December 31, 2003 were composed of $42.8 million in Canadian dollars and
$0.3 in U.S. dollars. In addition, as at December 31, 2003, we had access to a
revolving bank credit facility in the amount of $25 million. Pursuant to the
terms of this credit agreement, we were entitled to raise up to an additional
$50 million in revolving bank credit facility if necessary. As at December 31,
2003, no amounts were drawn on this facility. As at December 31, 2003, we had
outstanding letters of guarantee for an aggregate amount of $0.4 million. As at December 31, 2003, we had outstanding amounts of $271.8 million as
Tranche B Debt and $52.7 million as Tranche C Debt for total borrowings of
$324.5 million [including a current portion of $9.3 million]. The Tranche B
Debt bears interest at one of the following rates, which is payable on a
monthly basis: prime plus 3.0%, base rate plus 3.0% or bankers acceptance rate
plus 4.0%. The principal is payable in quarterly installments, which started in
June 2003 and will mature in December 2008. The Tranche B Debt is
collateralized by a second lien on all our assets. The Tranche C Debt bears
interest at the rate of 8.0% payable semi-annually at our discretion in cash or
by accruing and compounding such interest semi-annually until paid. The
principal and the accumulated unpaid interest are payable in April 2013.
Tranche B Debt and Tranche C Debt have been refinanced in March 2004 as
described above. 60




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We entered into swap transactions with a preferred shareholder, who was
also a lender, to manage our exposure to foreign exchange rate fluctuations on
a portion of the U.S. dollar-denominated portion of the Tranche B Debt. We
swapped $50 million [US$35.5 million] of the principal of the Tranche B Debt at
a rate of 1.3986 and $50 million [US$36.7 million] of the principal of the
Tranche B Debt at a rate of 1.3548. The swap transactions were renewed on
November 28, 2003 for a period of three months. These swap transactions, which
have not been designated as hedging instruments, are presented at their fair
value as derivative instruments on the balance sheet and changes in fair value
are recognized within foreign exchange gain (loss). These swap transactions
have been terminated in March 2004. On January 22, 2004, we announced that we would begin holding lenders
meetings with a view to voluntarily refinancing, on more favorable terms, our
existing senior credit facilities with up to $450 million of new secured debt.
We announced on March 17, 2004 the successful closing of new senior secured
credit facilities in an aggregate principal amount equivalent to $450 million
for our wholly-owned subsidiary, Solutions, with a syndicate of lenders. The
proceeds have been used mainly to refinance our previous senior secured credit
facilities in an aggregate amount of approximately $334 million. Our new credit
facilities provide us with greater financial flexibility by adding
approximately $80 million of incremental cash availability, which will be used
to fund capital expenditures as well as for general corporate purposes. The new facilities consist of an undrawn six-year $50 million first lien
revolving credit facility, of a seven-year first lien term loan, and of a
seven-and-a-half-year second lien term loan, each in an amount equivalent to
$200 million. The revolving credit facility is denominated in Canadian dollars
and both term loans are denominated in U.S. dollars. We have the ability,
subject to certain conditions, to increase, at a later date, our first lien
term loan facility or revolving credit facility by an additional $25 million,
and our second lien term loan facility by an additional $50 million. Loan
pricing is LIBOR plus 4% for the revolving credit facility and the first lien
term loan and LIBOR plus 7% for the second lien term loan. The loan pricing for
the second lien term loan includes a LIBOR floor of 2%. The credit facilities
are guaranteed by Microcell, and are secured by a pledge on substantially all
of our assets. In connection with our new credit facilities, we entered into new swap
transactions to manage our exposure to foreign exchange rate fluctuations on
the U.S.-dollar-denominated Term Loan A and Term Loan B. We swapped, in March
2004, the total principal of Term Loan A and Term Loan B in the amount of $400
million [US$299.9 million] at a rate of 1.3340. We also swapped the floating
interest rate of Libor plus 4% on Term Loan A, payable in US dollars, to a
floating interest rate of Libor plus 5.085%, payable in Canadian dollars. We
also swapped the floating interest rate of Libor plus 7% on Term Loan B,
payable in US dollars, to a floating interest rate of Libor plus 8.485%,
payable in Canadian dollars. The maturity of the swap transactions corresponds
to the maturity of both term loans. These swap transactions, which have not
been designated as hedging instruments, are presented at their fair value as
derivative instruments on the balance sheet and changes in fair value are
recognized in income as foreign exchange gains or losses. As of March 31, 2004,
fair value of these swaps represented for us a liability of $11.8 million. Pursuant to a final prospectus dated March 24, 2004, the Company
distributed to the holders of its class A restricted voting shares, class B
non-voting shares, First Preferred Voting Shares, First Preferred Non-Voting
Shares, Second Preferred Voting Shares and Second Preferred Non-Voting Shares,
rights to subscribe for an aggregate of 4,519,636 class B non-voting shares.
Each five rights entitled the holder thereof to purchase one class B non-voting
share at a subscription price of $22 per share. In connection with the rights
offering, the Company entered into a standby purchase agreement with COM
pursuant to which it has agreed to purchase, at the rights subscription price,
all class B non-voting shares not otherwise purchased pursuant to the rights
offering. In addition, to the extent COM Canada, LLC purchased less than $50
million of such shares, it committed to purchase, at the subscription price,
additional class B non-voting shares having an aggregate subscription price
equal to the deficiency. The closing of the rights offering occurred on April 30, 2004. The rights
offering resulted in the issuance by Microcell of 4,519,636 class B non-voting
shares. Microcell issued concurrently, at a price of $22.00 per share,
2,272,727 class B non-voting shares pursuant to the standby purchase agreement.
Furthermore, Microcell granted COM, 3,977,272 warrants to acquire, at a price
of $22.00 per share, additional class B non-voting shares for exercise at a
later date. The net proceeds from the rights offering and private placement to
COM amounted to approximately $147 million [net of approximately $2 million of
issuance fees] and have been used by Microcell to redeem the 75,233 outstanding
preferred shares (see below), for a total of $1.2 million. The remaining
balance of $145.8 million will be used to fund capital expenditures and for
general corporate purposes. On April 7, 2004, we gave a notice of redemption pursuant to which we
stated that we would redeem, as of May 1, 2004, all our outstanding preferred
shares as at 5:00 p.m. (Montreal time) on April 30, 2004, in accordance with
the provisions of our restated articles of incorporation. Such redemption was
subject to the right of the holders of preferred shares to convert such shares
into class A restricted voting shares or class B non-voting shares prior to
their redemption. The redemption price of each preferred share was 61




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$16.39 per share, representing the first preferred share redemption price,
or FPS Redemption Price, and second preferred share redemption price, or SPS
Redemption Price, as the case may be, as computed pursuant to our restated
articles of incorporation as of that date. Up to May 1, 2004, 190,647 First
Preferred Voting Shares, 5,782,980 First Preferred Non-Voting Shares, 14,602
Second Preferred Voting Shares and 3,309,989 Second Preferred Non-Voting Shares
were converted into 146,708 class A restricted voting shares and 9,151,510
class B non-voting shares. As of May 1, 2004 we redeemed the 75,233 preferred
shares outstanding as at April 30, 2004. As a result of this rights offering and following the redemption of our
preferred shares, our share capital as at May 31, 2004, was composed of the
following: 193,840 class A restricted voting shares; 29,121,474 class B
non-voting shares; 3,998,302 Warrants 2005; 6,663,943 Warrants 2008; and,
3,977,272 new warrants issued pursuant to the private placement. In addition,
there were 1,789,185 outstanding stock options for class B non-voting shares. Our working capital, or current assets less current liabilities, was
$102.4 million as at December 31, 2003 compared with $142.9 million as at May
1, 2003 for a decrease of $40.5 million. As our current assets remained the
same, it was mainly due to higher accounts payable in our current liabilities
following increased capital expenditures during the last two months of the
year. Capital expenditures for 2003 were $36.7 million and $72.8 million,
respectively, compared with spending of $6.0 million and $124.7 million for the
same periods in 2002. The year-over-year increase in fourth-quarter capital
expenditures, reflected a return to more normal spending levels for network
signal and capacity improvements, as well as the additional costs associated
with the launch and on-going support of City Fido in Vancouver. The significant
reduction in yearly capital spending for 2003, however, was due to our
self-imposed growth slowdown during the financial restructuring process in
order to preserve cash. The following table summarizes our future contractual cash obligations,
excluding interest, as at December 31, 2003. The contractual obligations under
the operating leases related to sites, switch rooms, offices and stores: Contractual
    
    Payment due by periodobligations [Inmillion of Canadian
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    More thandollars]
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    5 yearsDescription
    
    $
    
    $
    
    $
    
    $
    
    $Long-term debt
    
    
    324.5
    
    
    
    9.3
    
    
    
    23.2
    
    
    
    239.4
    
    
    
    52.6Operating leases
    
    
    158.9
    
    
    
    34.1
    
    
    
    51.2
    
    
    
    32.2
    
    
    
    41.4
 Operating activities We generated $69.1 million of cash from our operating activities in 2003,
compared with cash used of $41.0 million in 2002. The $110.1 million increase
in cash provided by operating activities in 2003 as compared to 2002 resulted
from a higher operating income of $9.4 million [net of depreciation and
amortization and of the reversal of a non-cash sales tax provision of $13.8
million incurred in 2002] and the absence of restructuring charges in 2003
results compared with a charge of $7.5 million in 2002. In addition, lower
other cash expenses of $78.9 million, consisting mainly of reduced cash
interest expense [mainly due to the new capital structure] and an improvement
of $14.2 million in cash provided by operating assets and liabilities
contributed to the favorable variance. We used $41.0 million of cash in operating activities for the year ended
December 31, 2002, compared with $122.3 million in 2001, for a decrease of
$81.3 million. This favorable variance resulted primarily from an operating
income [excluding depreciation, amortization and the reversal of a non-cash
sales tax provision of $13.8 million] of $69.7 million for the twelve-month
period ended December 31, 2002, compared with an operating loss [excluding
depreciation and amortization] of $15.0 million for 2001, and a decrease in
cash used in operating assets and liabilities of $82.3 million. These
decreases in cash used in operating activities were partially offset by an
increase in cash interest expense and other of $85.7 million, mainly due to the
interest payable on the senior discount notes due 2006 and 2007. Investing activities 62




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Cash used for investing activities was $45.6 million in 2003, compared
with $20.6 million in 2002. This increase of $25.0 million in cash used in
investing activities was mainly attributable to lower proceeds, in 2003, from
the sale of short-term investments and marketable securities of $53.2 million
and of $31 million from the termination of hedging agreements. This was
partially offset by lower additions to property, plant and equipment of $51.9
million, resulting from lower cash investments in the PCS network during our
financial reorganization in 2003. It was also offset by higher proceeds from
the sale of long-term investments of $3.7 million in 2003 [mainly generated
through the distribution of assets by a limited partnership in which we were
associated and the sale of our investment in Saraide Inc.] and by a lower level
of long-term investments acquisition of $3.6 million. Cash used in investing activities was $20.6 million for the year ended
December 31, 2002, compared with $383.9 million during 2001, for a decrease of
$363.3 million. This difference was mainly attributable to lower additions to
property, plant and equipments of $152.7 million, resulting from lower cash
investments in the PCS network, which reflected our continuing focus on cash
preservation. It was also due to lower additions to intangible assets of
$130.0 million, the amount that was paid by us in 2001 as the final installment
for the acquisition of the remaining 50% interest in Inukshuk. In addition,
higher proceeds from the sale of short-term investments and marketable
securities of $40.3 million in 2002 contributed to the favorable variance. The
remaining can be explained by proceeds of $32.0 million received in 2002 mainly
from the termination of our hedging agreements and by lower additions to
long-term investments and other non-current assets of $8.3 million in 2002. Financing activities Cash used in financing activities was $7.3 million in 2003, compared with
cash provided by financing activities of $69.5 million in 2002. This
year-over-year difference was due to the obtaining, in the first quarter of
2002, of a then new senior secured credit facility of $100 million [the Tranche
F]. This was partially offset by the absence of deferred financing costs in
2003 compared with $19.7 million of such costs in 2002 associated with the
Tranche F and by lower repayment of long-term debt in 2003 of $3.4 million due
to a reduced debt load following the recapitalization process. Cash provided by financing activities for the twelve-month period ended
December 31, 2002 was $69.5 million, compared with $437.7 million for 2001, for
a decrease of $368.2 million. This decrease was mainly due to the lower amount
of cash provided as a result of the issuance of $439.3 million in shares
related to our two equity financing initiatives in 2001174,691,777 Class B
Non-Voting Shares issued in 2001 compared with nil in 2002partially offset by
the closing, in the first quarter of 2002, of a new $100.0 million senior
secured credit facility, which we refer to as Tranche F. In addition, higher
deferred financing costs of $18.2 million and the repayment of senior secured
loans in the amount of $10.7 million contributed to the variance. 63




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Risks and uncertainties Cash flow and capital requirements Sources of funding for our further financing or refinancing requirements
may include, in addition to our existing credit facilities, incremental bank
financing, vendor financing, public offerings or private placements of equity
or debt securities, and capital contributions from shareholders. However,
there can be no assurance that such additional financing will be available to
us or, if available, that it can be obtained on a timely basis and on terms
acceptable to us. Furthermore, given the complex nature of our capital
structure, there is no assurance that the proceeds made available from such
financing transactions could be used to fund our on-going business operations
or new growth opportunities. Failure to obtain such additional financing, when
and if required, could impair our ability to grow our business and meet our
bank covenants. This could have a material adverse effect on our business,
including, default under our existing credit agreement, the failure to retain
customers, and the inability to compete effectively. Our credit facilities contain restrictive covenants which may affect, and
in some cases significantly limit or prohibit, among other things, our ability
to incur indebtedness, raise equity, create liens, make capital expenditures
above certain threshold and engage in acquisitions, mergers, amalgamations and
consolidations. In addition, our credit facilities require us to maintain
certain financial ratios. If we fail to comply with the various covenants of
our indebtedness, we will be in default under the terms of that indebtedness,
which would permit holders of the indebtedness to accelerate the maturity of
that indebtedness and could cause defaults under other indebtedness or
agreements. In these circumstances, the lenders under our credit facilities
could foreclose upon all or substantially all of our assets and our
subsidiaries, which are pledged to secure the obligations of the borrowers
thereunder. Exchange rate fluctuations As most of our revenues are expected to be received in Canadian dollars,
we are exposed to foreign exchange risk on repayments at maturity of part of
our Term Loan A and Term Loan B denominated in U.S. dollars. In March 2004, we entered into new swap transactions to manage our
exposure to foreign exchange rate fluctuations on our new
U.S.-dollar-denominated Term Loan A and Term Loan B. We swapped the total
principal of Term Loan A and Term Loan B in the amount of $400 million
[US$299.9 million] at a rate of 1.3340. We also swapped the floating interest
rate of Libor plus 4% on Term Loan A, payable in US dollars, to a floating
interest rate of Libor plus 5.085%, payable in Canadian dollars. We also
swapped the floating interest rate of Libor plus 7% on Term Loan B, payable in
US dollars, to a floating interest rate of Libor plus 8.485%, payable in
Canadian dollars. The maturity of the swap transactions corresponds to the
maturity of both term loans. These swap transactions, which have not been
designated as hedging instruments, are presented at their fair value as
derivative instruments on the balance sheet and changes in fair value are
recognized in income as foreign exchange gains or losses. As of March 31, 2004,
fair value of these swaps represented for us a liability of $11.8 million and a
foreign exchange loss of $11.8 million was recognized in our income statement. Although we may enter into other such transactions to hedge the exchange
rate risk with respect to any other U.S. dollar-denominated debt and
transactions, there can be no assurance that we will engage in such
transactions or, if we decide to engage in any such transaction, that we will
be successful and that changes in exchange rates will not have a material
adverse effect on our ability to make payments in respect of its future U.S.
dollar-denominated debt. Such transactions may require that we provide cash or
other collateral to secure our obligations. As at December 31, 2003,
borrowings of approximately $70 million were in U.S. dollars and unhedged. A
$0.01 variation in exchange rates affected our annual foreign exchange loss or
gain by approximately $0.6 million. For the purposes of financial reporting, any change in the value of the
Canadian dollar against the U.S. dollar during a given financial reporting
period would result in a foreign exchange loss or gain on the translation of
any U.S. cash and cash equivalents or U.S. dollar-denominated debt into
Canadian currency. Such foreign exchange gain or loss on the translation of
U.S. dollar-denominated long-term debt is included in income as it arises.
Consequently, our reported earnings could fluctuate materially as a result of
foreign exchange translation gains or losses. Interest rate fluctuations As at March 31, 2004, Term Loan A in the amount of $196.6 million and Term
Loan B of $196.6 million have a floating interest rate and we did not hold any
interest rate swap agreements related to this exposure. A fluctuation of one
percentage point would affect our cash flow by approximately $4.0 million
annually. 64




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##### Table of Contents



Future cash flows; ability to service debt We may experience growth-related capital requirements arising from the
need to fund network capacity improvements and ongoing maintenance and to fund
the cost of acquiring new PCS customers. Our ability to generate positive net
income and cash flow in the future is dependent upon various factors, including
the level of market acceptance of our services, the degree of competition
encountered by us, the cost of acquiring new customers, technology risks, the
future availability of financing, the results of our equity investments,
general economic conditions and regulatory requirements. There can be no
assurance that we will achieve or sustain positive cash flow from operating
activities. If we cannot maintain positive cash flow from operating
activities, we may not be able to meet our debt service or working capital
requirements or obtain additional capital required to meet all of our cash
requirements. In addition, we will be required to make interest payments under
certain financing arrangements and will be required to make payments of
principal thereunder. Contingencies On April 10, 2002, ASP Wireless Net Inc., or ASP, a former service
provider of Solutions, filed a notice of arbitration pursuant to an agreement
that ASP had with Solutions. ASP claims in the notice of arbitration that
Solutions has breached its agreements with ASP, and ASP therefore suffered
damages in the amount of $18.5 million, which ASP is claiming from us. The
breach alleged by ASP relates to Microcells failure to provide ASP access to
Microcells PCS network. We consider ASPs claim frivolous and unfounded in
fact and in law and intend to vigorously contest it. On April 21, 2004, UBS filed a lawsuit against Microcell, Solutions,
Inukshuk and Allstream in the Ontario Superior Court of Justice. In its
statement of claim, UBS claims [for, amongst other things, specific
performance, breach of contract, breach of confidence and breach of fiduciary
duty] from Microcell, Solutions and Inukshuk damages totaling $160 million. UBS
also claims certain other equitable relief, including disgorgement of profits
that UBS alleges would otherwise unjustly enrich Inukshuk, Solutions and
Microcell. The action is at a very early stage with no statement of defense yet
delivered. Based on information currently available, management considers that
the companies have substantive defenses to the action brought by UBS and intend
to vigorously defend the action. Furthermore, the Company is involved from time to time in other legal and
regulatory proceedings incidental to its business. The Company does not
believe that such proceedings will have, individually or in the aggregate, a
materially adverse effect on the results. Guidance for 2004 Revised Guidance
    
    2004 YTD Actuals
    
    2004 TargetsGross additions
    
    No change
    
    
    119,364
    
    
    
    580,000 to 610,000Blended churn
    
    No change
    
    
    2.8
    %
    
    
    2.7% to 3.0%Service revenues
    
    No change
    
    $134.9
    million
    
    
    $615 to $640 millionOperating income (loss)
    
    No change
    
    ($1.6
    ) million
    
    
    $15 to $25 millionDepreciation and
amortization
    
    No change
    
    $19.0
    million
    
    
    $100 millionOIBDA
    
    No change
    
    $17.4
    million
    
    
    $115 to $125 millionCapital expenditures
    
    No change
    
    $75.0
    million
    
    
    $170 to $180 million
 65




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ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS AND SENIOR MANAGEMENT Board of Directors The table below sets forth the name, principal occupation and date of the
appointment of each actual member of our current board since the implementation
of the plan of reorganization on May 1, 2003. Director ofName
    
    Principal Occupation
    
    Microcell SinceAndré Bureau
    
    Chairman of the Board of Microcell and of Astral
Media Inc., Counsel at Heenan Blaikie LLP
    
    May 1998André Tremblay
    
    President and Chief Executive Officer of
Microcell
    
    May 1995Charles Sirois
    
    Chairman and President of Telesystem Ltd.
    
    December 1993James Continenza
    
    President and Chief Executive Officer of
Teligent, Inc.
    
    May 2003Christian Dubé
    
    Senior Vice-President and Chief Financial Officer
of Domtar Inc.
    
    May 2003Gary Goertz
    
    Corporate Director
    
    May 2003Robert Latham
    
    President of RFL Consulting
    
    May 2003Paul McFarlane
    
    Corporate Director
    
    May 2003I. Berl Nadler
    
    Partner with Davies Ward Phillips & Vineberg LLP
    
    May 2003Steven D. Scheiwe
    
    President of Ontrac Advisors Inc.
    
    May 2003Lorie Waisberg
    
    Corporate Director
    
    May 2003
   Pursuant to the plan of reorganization: (1) Mr. André Bureau, Mr. Jim
Continenza, Mr. Christian Dubé, Mr. Gary Goertz, Mr. Robert Latham, Mr. Paul
McFarlane and Mr. I. Berl Nadler were nominated by the secured creditors; (2)
Mr. Steven D. Scheiwe and Mr. Lorie Waisberg were nominated by the noteholders;
and (3) Mr. Charles Sirois was nominated by the Old Board. See Composition of
the Board below for more details on the nomination of the directors on our
current board. The principal occupation of each director during the past five years is as
follows: André Bureauwas appointed a director of Microcell on May 8, 1998. Since
May 14, 2003 Mr. Bureau has been Chairman of Microcell. Since December 1997, he
has been Chairman of the board of Astral Media Inc., Canadas largest operator
of English and French specialty, pay and pay-per-view television services.
Astral also owns 24 radio stations in Quebec and the Atlantic provinces of
Canada, as well as Astral Affichage, for outdoor advertising, and was President
and Chief Executive Officer of Astral Broadcasting Group Inc. from 1993 until
October 2001. Mr. Bureau is also counsel at Heenan Blaikie LLP. Before 1989,
Mr. Bureau was Chairman of the CRTC. André Tremblayhas been President and Chief Executive Officer of Microcell
since May 1995 and was Chairman of Microcell from August 10, 1999 to March 9,
2000. Mr. Tremblay has been actively involved in the telecommunications
industry since 1989. Prior to 1989, Mr. Tremblay was a tax partner and member
of the management committee of Raymond, Chabot, Grant, Thornton, a Canadian
accounting firm. Charles Siroishas been a director of Microcell since December 9, 1993.
Mr. Sirois was the Chairman of Microcell until May 1, 2003. Since 1990, Mr.
Sirois has been Chairman and President of Telesystem Ltd., an entrepreneurial
private equity company of which he is the founder and principal shareholder.
Mr. Sirois is also Chairman of Telesystem International Wireless Inc. From 1992
to February 2000, Mr. Sirois was Chairman and Chief Executive Officer of
Teleglobe Inc., a leading global provider of broadband services with the most
extensive global Internet network. From 1988 to 1990, Mr. Sirois was Chairman
and Chief Executive Officer of BCE Mobile Inc. He currently sits on the board
of directors of the Canadian Imperial Bank of Commerce and is Chairman and CEO
of Enablis Entrepreneurial Network, a non-profit organization sponsored by the
G8 DotForce. He was also a member of the G8 dot force, of the National
Broadband Task Force and was a founding member of the Washington-based Global
Information Infrastructure Commission. 66




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James Continenzahas been a director of Microcell since May 1, 2003. Mr.
Continenza is Chief Executive Officer and a director of Teligent, Inc. a full
service facilities based communications company offering small and medium size
business customers local and long-distance telephony, high speed data and
internet access services. Prior to September 2002, Mr. Continenza was Chief
Operating Officer and a Director of Teligent, Inc. From September 2000 to May
2001, Mr. Continenza served as Senior Vice-President Strategic Operations of
Teligent, Inc. Prior to joining Teligent, Inc., Mr. Continenza was President
and Chief Executive Officer of Lucent Technologies Product Finance where he
worked for eleven years with Lucent and its predecessor AT&T. Mr. Continenza
holds a degree in business administration from the University of Wisconsin. Christian Dubéhas been a director of Microcell since May 1, 2003. Mr.
Dubé is Senior Vice-President and Chief Financial Officer of Domtar Inc., the
third largest integrated manufacturer and marketer of fine paper in North
America. From 1996 to 1998 he was Vice-President Corporate Development of
Domtar Inc. Mr. Dubé is a director of Norampac Inc. and of NB Capital
Corporation. He has been a Chartered Accountant since 1979 and holds a
bachelors degree in business administration from Laval University. Gary Goertzhas been a director of Microcell since May 1, 2003. Mr. Goertz
was Executive Vice-President, Finance and Chief Financial Officer of MDS Inc.,
the largest health and life science company in Canada from September 1999 to
February 2003. From March 1994 to August 1999, Mr. Goertz was Executive
Vice-President & CFO of TELUS Corporation Inc., formerly BCT.Telus
Communications Inc. Mr. Goertz is a Chartered Accountant. Mr. Goertz is also a
director of CML Healthcare Inc. and Cipher Pharmaceuticals Inc. and is a
trustee of Associated Brands Income Fund and Associated Brands Operating Trust. Robert Lathamhas been a director of Microcell since May 1, 2003. Since
April 2001, he has been the President of RFL Consulting, a company providing
consulting advice to small entrepreneurial companies and other organizations
developing and expanding new business. Since February 2003, he has been the
Chairman of Tela Wireless Devices Inc. From February 2001 to April 2001 he was
Chairman and Chief Executive Officer of Axxent Inc. a telecommunications
company in Canada where he also served as President and Chief Executive Officer
from September 1999 to February 2001. From January 1998 to September 1999, he
was President of ORBCOMM Global L.P. a telecommunications company based in
Dulles, Virginia. He also served as Executive Vice-President of ORBCOMM from
April 1997 to January 1998. From February 1996 to February 1997, Mr. Latham was
Managing Director, Telecom for Bell Canada International Management Ltd., U.K.
From April 1996 until November 1996, Mr. Latham was seconded to Mercury
Communications Limited in London England, a facilities-based carrier, as the
Managing Director, Commercial Service. Mr. Latham spent the previous 28 years
with Bell Canada in a wide variety of Sales, Marketing, Operations, Customer
Service and Regulatory assignments. During this period, he was the President
and CEO of Bell Cellular from August 1986 until August 1991 and responsible for
the Signature Service Organization from July 1992 until October 1994. Paul McFarlanehas been a director of Microcell since May 1, 2003. Mr.
McFarlane retired from the Canadian Imperial Bank of Commerce in December 2002
after more than forty years of service in numerous regional and head office
positions most recently as Senior Vice-President, Special Loans, Head Office
from 1994 until retirement. Mr. McFarlane is also a director of Brookfield
Properties Corporation having served since May 1998. I. Berl Nadlerhas been a director of Microcell since May 1, 2003. Mr.
Nadler has been a partner of Davies Ward Phillips & Vineberg LLP, and its
predecessor firm, Davies Ward & Beck, in Toronto, since 1984 and is a member of
the firms management committee. Mr. Nadler is a graduate of the Faculty of Law
McGill University and of the Harvard Law School. Steven D. Scheiwehas been a director of Microcell since May 1, 2003. Mr.
Scheiwe is currently President of Ontrac Advisors Inc., a consulting firm
providing analysis and management services to private equity groups, privately
held companies and fund/traders of distressed corporate debt issues. Mr.
Scheiwe has also been a director of Assisted Living Concepts, Inc.
since June 2004, General Chemical Industrial Products, Inc.
since March 2004, Reptron Electronics, Inc. since February 2004, Neff
Corporation since May 2001 and Metrocall Holdings, Inc. since October 2002.
From April 1999 to May 2001, Mr. Scheiwe was the Chief Executive Officer and a
director of Teletrac Inc., a provider of wireless fleet management location and
communication services. From January 1996 to April 1999, Mr. Scheiwe was
Vice-President, General Counsel and Secretary of Teletrac Inc. Lorie Waisberghas been a director of Microcell since May 1, 2003. Mr.
Waisberg is also a director of McWatters Mining Inc., Chemtrade Logistics
Income Fund and Specialty Foods Group Income Fund. From August 2000 to October
2002, Mr. Waisberg was Executive Vice-President Finance and Administration of
Co-Steel Inc., a steel manufacturer. Prior to that, Mr. Waisberg was a partner
at the law firm of Goodmans LLP and predecessor firms in Toronto, Ontario,
where he had been partner since 1974. 67




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Officers of Microcell The following table indicates the name of the present officers of
Microcell, along with their positions held with Microcell. Name
    
    Office
    
    Principal OccupationAlain Rhéaume
    
    President and Chief Operating
Officer of Solutions
    
    President and Chief Operating
Officer of SolutionsAndré Tremblay
    
    President and Chief Executive
Officer
    
    President and Chief Executive
Officer of MicrocellBruno Péloquin
    
    Vice-President, Customer Relations
and Operations, Solutions
    
    Vice-President, Customer
Relations and Operations of
SolutionsCarl Dexter
    
    Vice-President, Network Services,
Solutions
    
    Vice-President, Network
Services, of SolutionsDean Proctor
    
    Vice-President, Regulatory Affairs
    
    Vice-President, Regulatory
Affairs of MicrocellGaétan Jacques
    
    Vice-President, Human Resources,
Administration and Special
Projects Microcell
    
    Vice-President, Human Resources,
Administration and Special
Projects of MicrocellJacques Leduc
    
    Chief Financial Officer and
Treasurer
    
    Chief Financial Officer and
Treasurer of MicrocellJocelyn Côté
    
    Vice-President, Legal Affairs and
Assistant Secretary
    
    Vice-President, Legal Affairs
and Assistant Secretary of
MicrocellMichel Cordeau
    
    Secretary
    
    LawyerPierre Bonin
    
    Chief Information Officer,
Solutions
    
    Chief Information Officer of
SolutionsRené Bousquet
    
    Vice-President, Marketing,
Solutions
    
    Vice-President, Marketing of
SolutionsRobert Fortier
    
    Vice-President, Finance and
Corporate Controller
    
    Vice-President, Finance and
Corporate Controller of
MicrocellSteven Picco
    
    Vice-President, Sales, Solutions
    
    Vice-President, Sales of
Solutions
 The principal occupation of each officer (other than André Tremblay)
during the past five years is as follows: Alain Rhéaumewas appointed President and Chief Operating Officer of
Solutions on May 1, 2003. He was President and Chief Executive Officer of
Microcells PCS division from February 12, 2001 to April 30, 2003. From June
1996 to February 2001, Mr. Rhéaume was Chief Financial Officer and Treasurer of
Microcell and from May 1998 to February 2001, he was also Executive
Vice-President, Corporate Services. Prior to joining Microcell, Mr. Rhéaume had
worked for the Government of the Province of Québec at the Ministry of Finance
since 1974. Mr. Rhéaume was Deputy Minister of Finance from 1992 to 1996 and
prior to that he was Associate Deputy Minister of Finance from November 1988 to
October 1992. Bruno Péloquinjoined Microcell in 1997 and is Vice-President, Customer
Relations and Operations, Solutions. Prior to joining Microcell, Mr. Péloquin
held positions in eastern and western Canada as Regional Director of Sales and
Operations with United Parcel Service Canada Ltd. He was also Vice-President,
Operations, with Diners Club/enRoute. Carl Dexterjoined Microcell in January 2001 as Vice-President, National
Network and Services Operation. Mr. Dexter has 26 years of experience in the
telecom industry, mainly at MTT, now Aliant Telecom, in Nova Scotia. The last
position he held at MTT was that of Vice-President, Network Operations and
Customer Services. Immediately prior to joining Microcell, Mr. Dexter was
Vice-President, Operations Support, of the international wireless operating
companies of Telesystem International Wireless. Dean Proctorhas been Vice-President of Microcell since February 1996.
Prior to joining Microcell, Mr. Proctor practiced law in Montreal and Ottawa,
focusing on broadcasting and telecommunications matters. He is a Director of
the Wireless Communications Association, based in Washington, D.C., and acts as
Microcells Privacy Ombudsman. Mr. Proctor graduated from the University of
Saskatchewan with a Bachelor of Arts degree in 1984 and received bachelor
degrees in Common Law and Civil Law from McGill University in 1988. Mr. Proctor
is a member of the Bars of Québec and Ontario. 68




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Gaétan Jacqueswas appointed Vice-President of Microcell on August 10,
1999. From June 2003 to December 2003, Mr. Jacques acted as interim
Vice-President, Sales of Solutions. Before joining Microcell, Mr. Jacques was
Director, Human Resources at the Canadian Broadcasting Corporation from
1993-1994 and from 1994-1999, General Manager, Technical Products and
Engineering at the CBC. He also has worked for several large corporations,
including Stone-Consolidated, where he performed various duties in human
resources and quality management. Mr. Jacques holds an MBA and a bachelors
degree in Industrial Relations. Jacques Leducwas appointed Chief Financial Officer and Treasurer of
Microcell on February 12, 2001. From May 1999 to February 2001, Mr. Leduc was
Vice-President Finance of Microcell. From January 1995 to May 1999, he was
Director, Financial Planning of Microcell. Prior to joining Microcell, Mr.
Leduc was the Corporate Controller and Officer of a privately owned business in
the manufacturing and food industry from 1990 to 1995. Mr. Leduc holds a
masters degree in business administration from HEC Montréal, which was
formerly known as École des Hautes Études Commerciales (University of
Montreal). He also holds a bachelors degree in business administration from
the University of Québec in Montreal and was admitted by the Canadian Institute
of Chartered Accountants in 1986. Jocelyn Côtéwas appointed Vice-President of Microcell on August 10, 2001
and Assistant Secretary on May 10, 2001. From February 1998 to August 2001, Mr.
Côté was Director, Legal Affairs of Microcell. Prior to joining Microcell, he
was, from 1997 to 1998, legal counsel at Le Groupe Vidéotron Ltd. and, prior to
that, practiced corporate and tax law at the law firm Stikeman Elliott LLP in
Montreal. Mr. Côté holds a law degree from Laval University and a masters
degree in Taxation from Sherbrooke University. Mr. Côté is a member of the Bar
of Québec. Michel Cordeauwas appointed Secretary of Microcell on May 8, 1998. Mr.
Cordeau was, from February 1996 to August 2001, Vice-President, Legal Affairs
of Microcell. From March 1996 to May 1998, he was Assistant-Secretary of
Microcell. Mr. Cordeau is also legal counsel for Telesystem Ltd. Mr. Cordeau
was a partner of the law firm of Hickson, Martin, Blanchard in Québec City,
where he practiced corporate and bankruptcy law from 1974 to 1999. Mr. Cordeau
holds a law degree and a masters degree in Law from Laval University. Mr.
Cordeau is a member of the Bar of Québec. Pierre Boninwas appointed Chief Information Officer of the Company on
December 12, 2000. Prior to joining Microcell, Mr. Bonin worked for Bell Canada
from 1987 to 2000 where he held various senior management positions, including
Vice-President, Information Technology and Vice-President, Finance and
Administration. Mr. Bonin holds an MBA from HEC Montréal, which was formerly
known as École des Hautes Études Commerciales (University of Montreal), and
other computer sciences degrees. Robert Fortierwas appointed Vice-President of the Company on August 9,
2002. From January 1995 to August 9, 2002, Mr. Fortier was Director, Corporate
Controller of Microcell. Mr. Fortier chaired the Taxation Committee of the
Canadian Wireless Telecommunications Association from 1997 until 2002. He holds
a Bachelors degree in Accounting from the Université du Québec à
Trois-Rivières and has been a member of the Ordre des comptables agréés du
Québec since 1983. René Bousquetjoined Microcell in March 1996 and held the position of
Director with the Financial Planning and Corporate Planning departments before
becoming Vice-President, Finance of Solutions in May 2002 and Vice-President,
Marketing of Solutions in June 2003. Prior to joining Microcell, Mr. Bousquet
held a number of management positions in marketing, including Director at
PricewaterhouseCoopers. Mr. Bousquet holds a Bachelors degree in Business
Administration (Marketing and Finance) from the Université de Sherbrooke and a
Masters degree in Business Administration from the same institution. Steven Piccojoined Microcell in January 2004 as Vice-President, Sales for
Solutions. Prior to joining Microcell, Mr. Picco was an executive with Procter
& Gamble for the last 16 years, most recently as the head of the business
transition that ensured from Procter & Gambles acquisition of Clairol and,
during a five-year period, as the head of Procter & Gamble product distribution
through Costco superstores. COMPENSATION OF DIRECTORS AND OFFICERS Remuneration of Directors For the fiscal year ended December 31, 2003, directors of Old Microcell
who served as directors until April 30, 2003 and who were not officers or
employees of Microcell or our subsidiaries or of a shareholder for whom they
were the designated nominees, received $3,332 until that date as well as an
attendance fee per board or committee meeting. Due to his extensive involvement
in the 69




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business of Old Microcell, the chairman of the board of Old Microcell
received a fee of $20,000 per month until April 30, 2003 and each committee
chairman of the committee of Old Microcell, except for the special committee
chairman, received a fee of $667 until April 2003. His duties as a chairman
consisted of being responsible for the management, development and effective
performance of the board of directors. The chairman also advised our president
and chief executive officer in all matters concerning the interest and
management of the Company. Since May 1, 2003, our directors receive a yearly
fee of $35,000, plus an attendance fee per board or committee meeting of $1,500
for an attendance in person and $750 for an attendance by telephone. Such
attendance fee amounts to $3,000 per board or committee meeting held outside of
the Montreal-Ottawa-Toronto corridor. Members of the committees of our current
board receive a fee of $2,000 per year. The chairman of our current board
receives an annual fee of $150,000, considering the significant amount of time
dedicated by him to the governance, management and business of the Company. For
example, he oversees the strategies of the Company, the remuneration of key
employees, the strategic position of the Company and the communications between
the Company and the board. The chairman of our current board is also chairman
of the board of Astral Media Inc. and counsel at Heenan Blaikie LLP. The
chairman of the human resources, corporate governance and audit committees
receive respectively a fee of $3,000, $3,000 and $6,000 per year. We have no
service contracts with our directors. Remuneration of Members of Special Committee At the time of the establishment of the special committee, established in
connection with our restructuring, compensation in respect of the members of
the special committee was based in part upon attendance at meetings. However,
in light of the difficulties of administering such a method of compensation
given the frequent communications among the members of the special committee,
the compensation arrangements were amended, with effect from September 1, 2002,
to be $10,000 per month, with the chairman of the special committee receiving
an additional amount of $40,000 per month. In February 2004, our board of
directors granted a non-recurring bonus of $200,000 to the chairman of the
special committee following the successful closing of our restructuring. No
amounts based upon the number of meetings of the special committee were payable
in addition to these monthly fees. The members of the special committee were
also entitled to reimbursement of reasonable out of pocket expenses incurred in
the course of performing their functions. The mandate of the special committee
was subsequently expanded to include the powers of our human resources
committee and the term of the special committees mandate was extended and
expired on May 1, 2003. Remuneration of Executive Officers The table below shows certain compensation information for the respective
fiscal years ended December 31, 2003, 2002 and 2001 for Mr. André Tremblay,
president and chief executive officer of Microcell, and certain other executive
officers of Microcell. This information includes the dollar value of base
salaries, bonus awards, long-term incentive plan payments, the number of
options granted, and certain other compensation, if any, whether paid or
deferred. 70




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SUMMARY COMPENSATION TABLE Annual Compensation
    
    Long-Term Compensation AwardAwards
    
    PayoutsSecurities
    
    
    
    
    
    Long-TermUnder
    
    Restricted
    
    IncentiveOther Annual
    
    Options/
    
    Shares or
    
    Program
    
    All OtherSalary
    
    Bonus
    
    Compensation
    
    SARs
    
    Restricted
    
    Payouts
    
    CompensationName and Principal Position
    
    Years
    
    (Cdn.$)
    
    (Cdn.$)
    
    (Cdn.$)(1)
    
    Granted(2)
    
    Share Units
    
    (Cdn.$)
    
    (Cdn.$)(3)André Tremblay
    
    
    2003
    
    
    
    515,000
    
    
    
    453,200
    
    
    
    
    
    
    
    270,000
    
    
    
    
    
    
    
    
    
    
    
    605,000President, Chief
Executive
    
    
    2002
    
    
    
    514,654
    
    
    
    169,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,000Officer and Director
    
    
    2001
    
    
    
    498,077
    
    
    
    247,500
    
    
    
    
    
    
    
    531,681
    
    
    
    
    
    
    
    
    
    
    
    Alain Rhéaume
    
    
    2003
    
    
    
    375,000
    
    
    
    270,000
    
    
    
    
    
    
    
    160,000
    
    
    
    
    
    
    
    
    
    
    
    371,250President and Chief
    
    
    2002
    
    
    
    374,423
    
    
    
    101,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271,250Operating Officer,
Microcell
    
    
    2001
    
    
    
    344,956
    
    
    
    138,200
    
    
    
    
    
    
    
    378,776
    
    
    
    
    
    
    
    
    
    
    
    80,000Solutions Inc.Pierre Bonin
    
    
    2003
    
    
    
    250,000
    
    
    
    140,000
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    267,000Chief Information
Officer,
    
    
    2002
    
    
    
    249,770
    
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,000Microcell Solutions Inc.
    
    
    2001
    
    
    
    223,558
    
    
    
    82,200
    
    
    
    
    
    
    
    160,647
    
    
    
    
    
    
    
    
    
    
    
    Jacques Leduc
    
    
    2003
    
    
    
    220,000
    
    
    
    140,800
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    
    
    
    
    357,000Chief Financial Officer
and
    
    
    2002
    
    
    
    219,768
    
    
    
    52,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,000Treasurer
    
    
    2001
    
    
    
    206,249
    
    
    
    72,700
    
    
    
    
    
    
    
    226,058
    
    
    
    
    
    
    
    
    
    
    
    Bruno Péloquin
    
    
    2003
    
    
    
    197,500
    
    
    
    100,980
    
    
    
    
    
    
    
    57,500
    
    
    
    
    
    
    
    
    
    
    
    185,625Vice-President, Customer
    
    
    2002
    
    
    
    189,655
    
    
    
    34,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,875Relations and Operations,
    
    
    2001
    
    
    
    174,712
    
    
    
    47,250
    
    
    
    
    
    
    
    98,930
    
    
    
    
    
    
    
    
    
    
    
    Microcell Solutions Inc.
   (1)
    
    The aggregate value of perquisites and other benefits does not exceed,
for each named executive officer, the lesser of $50,000 or 10% of the
total salary and bonus.(2)
    
    For 2003 indicates the number of options granted under our existing stock
option plan. For 2001 indicates the number of options granted under the
old stock option plan. All the options granted under the old stock option
plan were cancelled on May 1, 2003.(3)
    
    All other compensation for 2003 represents payments under our retention
plan for key employees, as described below and, in the case of Mr.
Tremblay, Mr. Rhéaume and Mr. Leduc also represents a non recurring
restructuring success bonus in the amounts of $200,000, $100,000 and
$200,000 respectively. All other compensation for 2002 represents payments
under our retention plan for key employees that was put in place for the
purpose of our restructuring, as described below. In the case of Mr.
Rhéaume, the amount for 2001 was paid in respect to his relocation to
Montreal. In order to receive payments under the retention plan, each
named executive officer was required to remit for cancellation the
following number of options granted under the Old Stock Option Plan: André
Tremblay  126,348; Alain Rhéaume  88,443; Pierre Bonin  60,647; Jacques
Leduc  53,066 and Bruno Péloquin  44,222. Option Grants in last Financial Year The following table sets forth details of options granted under the new
stock option plan to the executive officers named above during the financial
year ended December 31, 2003. Each option granted under the new stock option
plan covers one common share. The new stock option plan is described under the
heading Long-Term Executive Compensation  New Stock Option Plan. % of Total
    
    
    
    
    
    Market Value ofSecurities Under
    
    Options/SARs
    
    
    
    
    
    Securities UnderlyingOptions/SARs
    
    Granted to
    
    Exercise or
    
    Options/SARs on theGranted
    
    Employees in
    
    Base Price
    
    Date of Grant(#)
    
    Financial Year
    
    ($/Security)
    
    ($/Security)
    
    Expiration DateName (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)André Tremblay
    
    
    270,000
    
    
    
    15.2
    %
    
    $
    10.50
    
    
    $
    10.50
    
    
    June 20, 2008Alain Rhéaume
    
    
    160,000
    
    
    
    9.0
    %
    
    $
    10.50
    
    
    $
    10.50
    
    
    June 20, 2008Pierre Bonin
    
    
    75,000
    
    
    
    4.2
    %
    
    $
    10.50
    
    
    $
    10.50
    
    
    June 20, 2008Jacques Leduc
    
    
    85,000
    
    
    
    4.8
    %
    
    $
    10.50
    
    
    $
    10.50
    
    
    June 20, 2008Bruno Péloquin
    
    
    57,500
    
    
    
    3.2
    %
    
    $
    10.50
    
    
    $
    10.50
    
    
    June 20, 2008
 As of December 31, 2003, stock options to purchase a total of 919,500
Class B Non-voting Shares were granted to our twelve 71




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executive officers. These executive officers are: Pierre Bonin, René
Bousquet, Jocelyn Côté, Carl Dexter, Robert Fortier, Gaétan Jacques, Jacques
Leduc, Bruno Péloquin, Dean Proctor, Alain Rhéaume and André Tremblay. Our
employees at the manager and director levels have also received options. As
of March 31, 2004, stock options to purchase a total of 990,500 Class B
Non-Voting Shares were granted to our executive officers. Aggregate Option Exercises in Last Financial Year and Financial Year-End Option
Values The following table summarizes, for each of the executive officers named
above, the number of stock options under the new stock option plan, if any,
exercised during the financial year ended December 31, 2003, the aggregate
value realized upon exercise and the total number of exercisable and
unexercisable options, if any, held at December 31, 2003. Value realized upon
exercise is the difference between the fair market value of the underlying
class B non-voting shares of Microcell on the exercise date and the exercise or
base price of the option. Value of unexercised in-the-money options at
financial year-end is the difference between its exercise or base price and the
closing fair market value of the underlying class B non-voting shares of
Microcell on December 31, 2003, which was $17.29 per share. These values,
unlike the amounts set forth in the column Aggregate Value Realized, have not
been, and may never be, realized. There can be no assurance that these values
will be realized. Unexercisable options are those which have been held for less
than the time required for vesting. Value of UnexercisedUnexercised Options at
    
    in-the-Money*December 31, 2003
    
    Options/SARs at(#)
    
    December 31, 2003(2)Securities Acquired
    
    Aggregate Valueon Exercise
    
    Realized(1)Name
    
    (#)
    
    (Cdn.$)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableAndré Tremblay
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270,000
    
    
    
    
    
    
    
    1,833,300Alain Rhéaume
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,000
    
    
    
    
    
    
    
    1,086,400Pierre Bonin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    509,250Jacques Leduc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,000
    
    
    
    
    
    
    
    577,150Bruno Péloquin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,500
    
    
    
    
    
    
    
    390,425
  (1)
    
    Aggregate value realized is calculated using the closing price of the
class B non-voting shares of Microcell on the TSX on the date of exercise.  (2)
    
    The value of unexercised in-the-money options is calculated using the
closing price of the class B non-voting shares of Microcell on the TSX on
December 31, 2003, which was $17.29 per share less the exercise price of
the in-the-money options.  *
    
    in-the-money options are options for which the market value of the
underlying securities is higher than the price at which such securities
may be exercised. Pension Plans for Executive Officers We have not implemented a pension plan. There is only a deferred profit
sharing plan under which we make a defined contribution for the employees. Our
total contribution under such plan for our executive officers in 2003 totaled
$82,250. Employment Agreements We are a party to employment contracts with Mr. André Tremblay, Mr. Alain
Rhéaume and Mr. Jacques Leduc which provide that in the event of termination by
us without just and sufficient cause, lay-off following a major change or
resignation within 30 days of a major change, they are entitled to receive an
amount equal to two years base salary, increased by their target bonus, and to
exercise all vested and unvested options to acquire our shares. However, in the
event termination by us without just and sufficient cause or lay-off following
a major change occurs after September 30, 2004, Mr. Leduc is entitled to
receive an amount equal to one years base salary, increased by his target
bonus, which is generally consistent with our employment arrangements with all
of our executive officers in such circumstances. Mr. Pierre Bonin is entitled
to exercise all vested and unvested options in the case of a layoff or
resignation within 30 days following a major change. In the context of the review of our capital structure in 2002, we amended
and restated the terms and expanded the scope of our existing retention program
for key employees in order to mitigate the risks related to other recruiting
activities and to maintain in our 72




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employment the employees necessary for the successful completion of our
recapitalization. Amounts payable by us under our retention program were equal
to the annual compensation of each employee and were payable in installments
until August 2003, to the extent the employee continued to be employed at the
date of each payment. Executive Compensation Policy A total compensation policy was introduced in 1994 to recognize and reward
individual contributions to our short-term and long-term success and also
ensure that we offer competitive compensation. This compensation policy was
reviewed in 2003 and certain adjustments were made to ensure that it remained
competitive with the industry. According to this policy, executive compensation is based on three major
components: base salary, benefits and incentive compensation. We aim to provide
base salaries and benefits targeted at a selected market median level as well
as incentive programs designed to bring executive total compensation in the
upper quartile upon the achievement of superior results. Incentive compensation
is awarded through plans and criteria approved by the Human Resources
Committee. The benefits consist of standard deferred profit sharing plan and
insurance coverage arrangements and allowance for certain expenses. Short-Term Incentive Compensation The short-term incentive compensation offers bonuses tied to our financial
performance and the achievement of strategic corporate and business unit
objectives established on a yearly basis. Our finance performance is mainly
measured by the level of our revenues and our OIBDA (operating income before
depreciation and amortization). Our strategic corporate business objective
consists of ARPU levels, churn levels and number of subscribers acquisitions. In the case of the named executive officers, incentive bonuses range from
30% to 55% of base salary when the financial and strategic objectives are
achieved. When such objectives are exceeded, bonuses are higher; when the
objectives are not met, the incentive bonuses are lower, or they may not be
paid at all under certain circumstances. The human resources committee reviewed and recommended to the board of Old
Microcell the approval of the 2002 bonuses on the basis that managements
performance did not entirely meet the set of objectives presented to the board
of Old Microcell at the beginning of the year. Bonuses were granted in 2002 as
a retention tool in order to retain our valuable employees. At the time the
bonuses were declared, the company had reasonable assurance that its
restructuring process would be successfully completed which is one additional
reason why these bonuses were declared and paid. Long-Term Executive Compensation The long-term incentive component is made up of our stock option plan. Old Stock Option Plan Introduced in 1994 and revised from time to time, the old stock option
plan was designed to motivate employees to share interest with the Old
Microcells shareholders over the long-term and provided salary- linked stock
option grants. It was of limited duration and was subject to human resources
committee review to ensure maintenance of its market competitiveness. With the
implementation of the plan on May 1, 2003, the old stock option plan, and all
outstanding options issued pursuant thereto, were cancelled. The old stock option plan provided for the issuance of options to
employees to purchase class B non-voting shares of Old Microcell. Each
participant in the old stock option plan was entitled to receive one grant of
options per year, except for certain classes of participants who may only
receive one grant of options per 3-year period. The number of options was based
on the grant amount value for a class of employees multiplied by a factor of
between 0 and 1.5 depending on the individual contribution of the employee and
divided by the reference price fixed by the board of Old Microcell on or around
July 1 of each year. The first year began on July 1, 2001 and the reference
price was set at $35.00. During 2001, the class of employees eligible to be
participants in the old stock option plan was extended to almost all employees
as a result of the overall review of the compensation policy. 73




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Pursuant to the old stock option plan, options for no more than 19,000,000
class B non-voting shares of Old Microcell could be granted. The exercise price
of the options was determined by the board of Old Microcell at the time of
granting the options, subject to compliance with the rules of all stock
exchanges on which the class B non-voting shares were listed and with all
relevant securities legislation. Options granted pursuant to the old stock option plan were exercisable as
to 25% of the options on the first, second, third and fourth anniversaries of
the date of the grant. Options were exercisable for a period of seven years
from the date on which they are initially granted. Any option granted pursuant to the old stock option plan lapsed 30 days
after the date on which the holder thereof ceased to be an officer, director or
employee of Old Microcell or of one of its subsidiaries. In the event of death,
any option held by the optionee lapsed 180 days after the date of such death. New Stock Option Plan With the implementation of the plan of reorganization on May 1, 2003, a
new stock option plan of Microcell has been adopted. No further approval or
ratification by shareholders will be sought or required in connection
therewith. The purpose of the new stock option plan is to provide an opportunity,
through options, for the officers and employees of Microcell and our
subsidiaries to purchase class A restricted voting shares, in the case of a
Canadian, or class B non-voting shares, in the case of a non-Canadian, upon
exercise of options granted pursuant to the new stock option plan and thereby
participate in our future growth and development. Our current board, or if it so resolves, a committee thereof, administers
the new stock option plan including the allocation thereof. Under the new stock option plan, we have reserved for issuance class A
restricted voting shares and class B non-voting shares, representing, together
with such shares reserved for issuance in connection with the new stock
purchase plan, in the aggregate 10% of the aggregate number of class A
restricted voting shares and class B non-voting shares outstanding immediately
after implementation of the plan of reorganization, assuming conversion of all
first preferred shares and second preferred shares. Options granted under the
new stock option plan will have the terms and conditions, including exercise
prices, vesting and expiration, as will be established by our current board,
from time to time, provided that the pricing of options will be in accordance
with the requirements of the TSX and will not be less than the market prices
for the class A restricted voting shares and class B non- voting shares at the
time of the grant of options. As at May 31, 2004, 1,789,185 options granted to
our senior officers and certain of our employees were outstanding. Compensation Plan Control and Review The human resources committee is responsible for ensuring that executive
compensation conforms to our total compensation policy. Indebtedness of Directors and Officers As at and since December 31, 2003, neither Microcell nor our subsidiaries
has made any loan to officers, directors, employees and former officers,
directors and employees of Microcell and our subsidiaries. Directors and Officers Liability Insurance Pursuant to our by-laws, we may indemnify a director or officer in any
legal proceeding if such person acted honestly and in good faith, and had
reasonable grounds to believe that such persons conduct was lawful. We maintain insurance protection against liability incurred by our
officers and directors as well as those of our subsidiaries in the performance
of their duties. We paid the entire premium of U.S.$750,000 in 2003. The
aggregate limit of liability in respect of any and all claims is U.S.$31
million per year. The policy provides for the indemnification of directors and
officers in the case of claims for which we have not indemnified or are not
permitted by law to indemnify them, and for the reimbursement to us, subject to
a deductible of U.S.$1,000,000, in the case of claims for which we have
indemnified or were permitted to indemnify the directors or 74




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officers involved. BOARD PRACTICES Role and Responsibilities of the Board The board is responsible for orientation and follow-up of the achievement
of business objectives and of our activities. The board is responsible for
approving and ensuring that the mission, the vision and the strategy we have
adopted are respected in the pursuit of our business objectives. The board
holds regular meetings on a quarterly basis as well as additional meetings to
consider particular issues or conduct specific reviews whenever deemed
appropriate. The board approves our ethical values and ensures that our major
business risks are identified and measured and that a proper management process
is implemented. Before the start of every fiscal year, the board receives and approves an
annual budget submitted by the president and chief executive officer. The board monitors and evaluates the performance of the president and
chief executive officer and of senior management. Finally, the board reviews
those matters requiring the boards approval pursuant to the law or our
articles and by-laws. All our important decisions and those of our wholly-owned
subsidiaries are subject to approval by the board. Composition of the Board Our board was designated by the Court as part of the sanction order and
the directors of the current board were appointed on May 1, 2003, the effective
date of the plan of reorganization. The board has been fixed at 11 directors
initially, one of which is our chief executive officer from time to time. A
majority of members of the board must be Canadians. The initial members of the board were nominated as follows: (1) seven appointees were selected by the secured creditors as holders
of the first preferred voting shares; (2) two appointees were selected by the AHB Committee; and (3) one appointee was selected by the board of Old Microcell. On January
27, 2003 the board of Old Microcell selected Mr. Charles Sirois as its
appointee. The initial chairman of our current board, Mr. André Bureau, has been
selected by the members of the board appointed by the secured creditors as
holders of first preferred voting shares. As redemptions or conversions of first preferred shares, or first units,
will occur over time, the number of directors nominated and elected to our
current board by holders of first preferred voting shares, or first units
comprised of first preferred voting 2 shares, will be reduced according to the
number of first preferred shares, or first units, outstanding relative to the
aggregate number originally issued, as follows: % First Preferred Shares(or First Unit) Remaining Outstanding
    
    No. of Directors70% or more
    
    
    750% to 69.99%
    
    
    630% to 49.99%
    
    
    310% to 29.99%
    
    
    2Less than 10%
    
    
    0
 If holders of the first preferred shares, or first units, lose the
entitlement to nominate and elect one or more director(s) of the board in
accordance with the foregoing, holders of the class A restricted voting shares
shall correspondingly acquire the entitlement to elect additional director(s)
such that the number of directors shall always equal eleven, until changed in
accordance with the Canada Business Corporations Act. Pursuant to our articles, the board has been divided into two groups: a
first group, or group A, to consist of six directors appointed to hold office
for a stated term expiring at the close of the third annual meeting of
shareholders following May 1, 2003 75




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and a second group, or group B, to consist of five directors appointed to
hold office for a stated term expiring at the close of the second annual
meeting of shareholders following May 1, 2003. At the end of their respective
initial terms of office, elections of directors shall be for terms of two years
each. The table below identifies, in respect of each individual listed therein,
whether such individual is part of group A or group B. Name
    
    GroupAndré Bureau
    
    
    AJim Continenza
    
    
    BChristian Dubé
    
    
    BGary Goertz
    
    
    BRobert Latham
    
    
    BI. Berl Nadler
    
    
    BPaul McFarlane
    
    
    BSteven D. Scheiwe
    
    
    ACharles Sirois
    
    
    AAndré Tremblay
    
    
    ALorie Waisberg
    
    
    A
 Human Resources Committee As at March 31, 2004, the human resources committee of our board was
composed of the following individuals: Mr. Charles Sirois, Mr. Lorie Waisberg,
Mr. Gary Goertz, Mr. Jim Continenza and Mr. André Bureau. None were officers,
employees or former officers of Microcell or of our subsidiaries, except for
Mr. Charles Sirois who was Chairman of Old Microcell before May 1, 2003. The human resources committee is a committee of our board of directors. It
is mandated to review and make recommendations to the board in connection with
the appointment and remuneration of senior officers of Microcell and of our
subsidiaries, including the chief executive officer. In addition, the human
resources committee determines the options to be granted under the stock option
plan in accordance with the rules adopted by the board. Our relative position
in terms of compensation levels is determined annually through studies
performed by independent consulting firms using a selected reference market of
comparable companies. Internal pay equity studies are a key factor to complete
the process and provide necessary adjustments where required. Audit Committee As at March 31, 2004, the audit committee was composed of five
individuals, namely Mr. Paul McFarlane, Mr. Christian Dubé, Mr. Charles Sirois,
Mr. Steven D. Scheiwe and Mr. André Bureau, all of whom are independent
directors. The audit committee oversees our financial reporting process on
behalf of the board of directors. Management has the primary responsibility for
the financial statements and the reporting process, including the systems of
internal controls. In fulfilling its responsibilities, the audit committee
reviews our audited financial statements with management and with the auditors. The audit committee reviews with the auditors their judgments as to the
quality of our accounting principles and such other matters as are required to
be discussed under generally accepted auditing standards. In addition, the
audit committee discusses with the independent auditors their independence from
management, including the matters in the written disclosures required by the
independence standards board. The audit committee discusses with our internal
and independent auditors the overall scope and plans for their respective
audits. The audit committee meets with the internal and independent auditors,
with and without management presence, to discuss the result of their
examinations, their evaluations of our internal controls, and the overall
quality of our financial reporting. Corporate Governance Committee We consider good corporate governance to be important to our effective
operations. The corporate governance committee ensured that the corporate
governance policy complied with the TSX guidelines. It approved any material
transactions with a related party having a significant impact on our business
and affairs. Our corporate governance committee is composed of five independent
directors: Mr. André Bureau, Mr. I. Berl Nadler, Mr. Lorie Waisberg, Mr. Robert
F. Latham and Mr. Christian Dubé. EMPLOYEES As at March 31, 2004, we had approximately 2,229 employees, expressed in
full-time equivalent employees. We are not party to any collective labor
agreements and none of our employees are represented by a union. We believe
that we enjoy good relations with 76




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our employees. As of December 31, 2003, 2002, 2001, and 2000, we had
respectively approximately 2,200, 2,026, 2,377 and 2,603 employees (expressed
in full-time equivalent employees). SHARE OWNERSHIP Besides Mr. Charles Sirois, who beneficially owns 5,665 class A restricted
voting shares, to our knowledge, no director or officer beneficially owns more
than 1% of each of our classes of securities. Directors and officers of
Microcell as a group own: (1) 5,665 class A restricted voting shares, or 19.1%
of that class, all of which are owned directly and indirectly by Mr. Charles
Sirois; and (2) 1,914 class B non voting shares, 2 of which are owned directly
by Mr. Alain Rhéaume, 12 of which are owned, directly and indirectly, by Mr.
André Tremblay, and 1,900 of which are owned directly and indirectly by Mr.
André Bureau. 77




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ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS MAJOR SHAREHOLDERS Prior to May 1, 2003, the effective date of the plan of reorganization,
Telesystem Ltd. was the major shareholder of Old Microcell with 72.1% of the
votes and 25% of the equity of Old Microcell. T-Mobile USA, Inc. and Capital
Communications CDPQ Inc., with respectively 14.6% and 16.6% of the equity of
Old Microcell, were the other principal shareholders of Old Microcell. The following table and notes thereto set forth certain information, to
our knowledge, regarding ownership of our securities outstanding as of May 28,
2004, namely the, class A restricted voting shares and class B non-voting
shares, and Warrants, for the following persons:  (1)
    
    each person who is known by Microcell to be the beneficial owner of
5% or more of any of our classes of shares or Warrants; and(2)
    
    directors and officers of Microcell; and(3)
    
    all other stakeholders as a group. Expressed as a % of All Outstanding Class ARestricted
    
    Class BVoting
    
    Non-Voting
    
    Warrants
    
    WarrantsName of Beneficial Owner
    
    Shares(1)
    
    Shares(2)
    
    2005(3)
    
    2008(4)Harbert Management Corporation(7)
    
    
    9.0
    
    
    
    18.3
    
    
    
    9.9
    
    
    
    9.5Greenlight Capital Inc.(7)
    
    
    
    
    
    
    12.3
    
    
    
    
    
    
    
    CFSC Wayland Advisers Inc.(7)
    
    
    
    
    
    
    10.6
    
    
    
    
    
    
    
    York Capital Management, L.P(7)
    
    
    
    
    
    
    9.4
    
    
    
    
    
    
    
    COM Canada, LLC(5)(7)
    
    
    
    
    
    
    7.8
    
    
    
    
    
    
    
    Directors and Executive Officers
of Microcell as a group (6)
    
    
    2.8
    
    
    
    
    
    
    
    16.7
    
    
    
    16.7Other Holders
    
    
    88.2
    
    
    
    41.6
    
    
    
    73.4
    
    
    
    73.8Total
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
   (1)
    
    Based on a total of 199,325 class A restricted voting shares
outstanding. The holdings for each named beneficial holder is 17,626 for
Harbert Management Corporation.(2)
    
    Based on a total of 29,115,989 class B non-voting shares outstanding.
The holdings for each named beneficial holder are 5,326,760 for Harbert
Management Corporation, 3,573,270 for Greenlight Capital Inc.,
3,083,294 for CFSC Wayland Advisers Inc., 2,747,946 for York Capital
Management LP and 2,272,727 for COM Canada, LLC.(3)
    
    Based on a total of 3,998,302 Warrants 2005. The holdings for each
named beneficial holder are 397,210 for Harbert Management Corporation,
and 669,128 for Telesystem Ltd.(4)
    
    Based on a total of 6,663,943 Warrants 2008. The holdings for each
named beneficial holder are 633,690 for Harbert Management Corporation,
and 1,115,214 for Telesystem Ltd.(5)
    
    Includes securities held by COM Canada, LLC Irrevocable Trust of
2004. COM Canada, LLC is a private holding company of Craig O. McCaw.(6)
    
    Includes securities held by Telesystem Ltd. and its subsidiaries,
ultimately controlled by Charles Sirois. All other directors and
executive officers of Microcell, excluding Mr. Sirois, hold less than
0.1% of each of these classes of securities.(7)
    
    To our knowledge, these persons or entities are residents of the U.S. To our knowledge, other than as disclosed in this prospectus, the
aforementioned beneficial holders did not, as of May 28, 2004, own or exercise
control over any of our other securities. RELATED PARTY TRANSACTIONS From the beginning of our last full fiscal year up to the latest
practicable date, we have entered into transactions with shareholders and
companies under common control, which were not material to us or the related
party. These transactions were undertaken in the normal course of operations
and were measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. These transactions consisted
primarily of our purchase or sale of management services and telecommunication
services or equipment. 78




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During all of 2001, Telesystem Ltd., which owned approximately 72.1% of
the voting common shares of Old Microcell, owned 50% of Spectra
Telecommunications Inc. which provides engineering consulting for us. During
2001, these services amounted to $1,684,448. In February 2002, Telesystem Ltd.
sold its 50% interest to SNC  Lavalin Inc., the other shareholder of Spectra
Telecommunications Inc. 79




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ITEM 8  FINANCIAL INFORMATION CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Our consolidated financial statements for the for the eight months ended
December 31, 2003, the four months ended April 30, 2003 and the years ended
December 31, 2002 and 2001 and the auditors report signed by Ernst & Young LLP
are presented at Item 18 of this report. LEGAL PROCEEDINGS On April 10, 2002, ASP, a former service provider of Solutions, filed a
notice of arbitration pursuant to an agreement that ASP had with Solutions. ASP
claims in the notice of arbitration that Solutions has breached its agreements
with ASP and ASP therefore suffered damages in the amount of $18.5 million,
which ASP is claiming from us. The breach alleged by ASP relates to Microcells
failure to provide ASP access to Microcells PCS network. We consider ASPs
claim frivolous and unfounded in fact and in law and we intend to vigorously
contest it. On April 21, 2004, Unique Broadband Wireless Services, Inc., or UBS, filed
a lawsuit against Microcell, Solutions, Inukshuk and Allstream in the Ontario
Superior Court of Justice. In its statement of claim, UBS claims (for, amongst
other things, specific performance, breach of contract, breach of confidence
and breach of fiduciary duty) from Microcell, Solutions and Inukshuk damages
totaling $160 million. UBS also claims certain other equitable relief,
including disgorgement of profits that UBS alleges would otherwise unjustly
enrich Inukshuk, Solutions and Microcell. The action is at a very early stage
with no statement of defense yet delivered. Based on information currently
available, management considers that the companies have substantive defenses to
the action brought by UBS and intends to vigorously defend the action. Furthermore, we are involved from time to time in other legal and
regulatory proceedings incidental to our business. We do not believe that such
proceedings will have, individually or in the aggregate, a materially adverse
effect on us. SIGNIFICANT CHANGES New Credit Facilities On March 17, 2004, we obtained financing of an aggregate principal amount
equivalent to $450 million for our wholly owned subsidiary, Solutions, from a
syndicate of lenders. The proceeds were used mainly to refinance our previous
senior secured credit facilities. The new facilities consist of a six-year $50
million first lien revolving credit facility, and of a seven-year first lien
term loan and of a seven-and-a-half-year second lien term loan, each in an
amount equivalent to $200 million. The revolving credit facility is denominated
in Canadian dollars, and both term loans are denominated in U.S. dollars.
Pricing is LIBOR plus 4% for the revolving credit facility and the first lien
term loan and LIBOR plus 7% for the second lien term loan. The loan pricing for
the second lien term loan includes a LIBOR floor of 2%. The credit facilities
are secured by a pledge on substantially all of our assets. Swap Transactions In March 2004, we entered into swap transactions to manage our exposure to
foreign exchange rate fluctuations on the new U.S.-dollar-denominated first and
second lien term loan described above. We swapped the total principal of both
term loans in the amount of $400 million [US$299.9 million] at a rate of
1.3340. We also swapped the floating interest rate of Libor plus 4% on the
first lien term loan, payable in US dollars, to a floating interest rate of
Libor plus 5.085%, payable in Canadian dollars. We also swapped the floating
interest rate of Libor plus 7% on the second lien term loan, payable in US
dollars, to a floating interest rate of Libor plus 8.485%, payable in Canadian
dollars. The maturity of the swap transactions corresponds to the maturity of
both term loans. These swap transactions are presented at their fair value as
derivative instruments on the balance sheet and changes in fair value are
recognized in income as foreign exchange gains or losses. Rights Offering Pursuant to a final prospectus dated March 24, 2004, we distributed to the
holders of our class A restricted voting shares, class B non-voting shares,
first preferred voting shares, first preferred non-voting shares, second
preferred voting shares and second preferred non-voting shares, rights to
subscribe for an aggregate of 4,519,636 class B non-voting shares. Each five
rights entitled the holder thereof to purchase one class B non-voting share at
a subscription price of $22 per share. In connection with the rights 80




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offering, the Company entered into a standby purchase agreement with COM
Canada, LLC, which we refer to as COM, pursuant to which it has agreed to
purchase, at the rights subscription price, all class B non-voting shares not
otherwise purchased pursuant to the rights offering. In addition, to the extent
COM purchased less than $50 million of such shares, it committed to purchase,
at the subscription price, additional class B non-voting shares having an
aggregate subscription price equal to the deficiency. The closing of the rights offering occurred on April 30, 2004. The rights
offering resulted in the issuance by us of 4,519,636 class B non-voting shares.
COM purchased concurrently, at a price of $22.00 per share, 2,272,727 class B
non-voting shares. Furthermore, we granted COM 3,977,272 warrants to acquire,
at a price of $22.00 per share, additional class B non-voting shares for
exercise at a later date. The net proceeds from the rights offering and private
placement to COM amounted to approximately $147 million [net of approximately
$2 million of issuance fees] and have been used by us to redeem 75,233
outstanding preferred shares, at a price of $16.39 per share, for a total of
$1.2 million. The remaining balance of $145.8 million will be used to fund
capital expenditures and for general corporate purposes. As a result, our share capital as at May 31, 2004, was composed of the
following: 193,840 class A restricted voting shares; 29,121,474 class B
non-voting shares; 3,998,302 Warrants 2005; 6,663,943 Warrants 2008; and,
3,977,272 new warrants issued to COM. In accordance with the warrant indentures
governing the Warrants 2005 and the Warrants 2008, the number of shares
issuable upon the exercise of the Warrants 2005 and the Warrants 2008 had been
adjusted from 1.0 to 1.02 class A shares or class B shares, as the case may be,
for each warrant. This adjustment has been made as a result of our rights
offering. Amortization of Fido brand name On March 19, 2004, we received a letter from the SEC in connection with
its review of our registration statement on Form F-1 with respect to our
Warrants 2005 and Warrants 2008. The SEC staff, among other things, have
questioned whether our Fido brand name has an indefinite useful life and
consequently whether it should be subject to periodic amortization. We believe
such brand name should be considered to have an indefinite life. However, were
periodic amortization to be applied, assuming hypothetically a useful life of
ten years, this would reduce net income by $1.9 million, increase loss per
share by $0.50 but have no effect on cash flows for the eight months ended
December 31, 2003, and shareholders equity would decrease by $1.9 million as
of December 31, 2003. The hypothetical amortization period of ten years is
presented for illustrative purposes only. The resolution of the above issues
with SEC staff may require us to restate our financial statements for the eight
months ended December 31, 2003. TELUS Bid On May 17, 2004, TELUS Corporation launched unsolicited offers to purchase
our class A restricted voting shares for $29.00 per share, class B non-voting
shares for $29.00 per share, Warrants 2005 for $9.67 per warrant and Warrants
2008 for $8.89 per warrant. On May 20, 2004, we announced that, after careful
review and analysis of the TELUS Offers performed with the assistance of our
legal and financial advisors, our board of directors recommended that holders
of these securities not tender into the TELUS Offers. We have sent to all
holders of our equity securities our directors circular, dated May 28, 2004, which
contains a description of the TELUS Offers, including the conditions to closing
of the offers. We are actively considering strategic and financial alternatives
to the TELUS Offers. On June 22, 2004, TELUS announced that it would extend
the TELUS Offers until July 22, 2004. On June 22, 2004 TELUS
announced that it would extend the TELUS Offers until July 22,
2004. On June 29, 2004, we issued a press release confirming the
recommendation in our directors circular. We are actively considering strategic and
financial alternatives to the TELUS Offers. To that end, we and
our advisors have entered into discussions with a number of
parties, including TELUS. This process is ongoing and may result
in additional discussions or negotiations regarding a sale of
our company to TELUS or another party, an equity investment in
our company by a strategic or financial investor, the separation
of certain of our assets, or some combination of these
alternatives. However, there can be no assurance that the
process we have initiated, or the TELUS Offers themselves, will
lead to any transaction. 81




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ITEM 9  THE OFFER AND LISTING OFFER AND LISTING DETAILS Not applicable. PLAN OF DISTRIBUTION Not applicable. MARKETS Old Microcells Class B Non-Voting Shares Microcell has been a public company since October 1997. Our old class B
non-voting shares were listed for trading on the TSX under the symbol MTI.B
from October 7, 1997 to April 30, 2003, as well as on The Nasdaq Stock Market
Inc., or Nasdaq, under the symbol MICTF from October 7, 1997 to July 10, 2002
and on the OTC Bulletin Board from July 11, 2002 to April 30, 2003. On May 1,
2003, we completed our recapitalization process, which resulted in a new
capital structure being established and, as a result, new securities being
issued. Consequently, our old class B non-voting shares represented by the
CUSIP number 59501T304 were delisted on April 30, 2003 and there are no longer
any holders of our Class B non-voting shares. The following table sets forth,
for the years, calendar quarters and months indicated, the range of high and
low closing sale prices for the class B non-voting shares as reported on the
TSX and the Nasdaq and OTC Bulletin Board. Nasdaq or OTC Bulletin BoardTSX Price Range
    
    Price Range(Cdn.$)
    
    (Cdn.$)
    
    (000s)
    
    (U.S.$)
    
    (U.S.$)
    
    (000s)High
    
    Low
    
    Volume
    
    High
    
    Low
    
    Volume1998
    
    
    14.00
    
    
    
    7.30
    
    
    
    20,780
    
    
    
    9.625
    
    
    
    4.6875
    
    
    
    16,4301999
    
    
    47.50
    
    
    
    9.40
    
    
    
    24,080
    
    
    
    32.875
    
    
    
    6.1875
    
    
    
    52,9602000
    
    
    77.50
    
    
    
    25.45
    
    
    
    11,150
    
    
    
    54.25
    
    
    
    15.75
    
    
    
    56,0202001
    
    
    38.66
    
    
    
    1.34
    
    
    
    100,430
    
    
    
    25.625
    
    
    
    0.82
    
    
    
    48,3002002
    
    
    3.89
    
    
    
    0.055
    
    
    
    278,660
    
    
    
    2.46
    
    
    
    0.032
    
    
    
    25,2102001First quarter
    
    
    38.66
    
    
    
    17.60
    
    
    
    6,490
    
    
    
    25.625
    
    
    
    11.125
    
    
    
    9,120Second quarter
    
    
    17.71
    
    
    
    10.50
    
    
    
    12,090
    
    
    
    11.49
    
    
    
    6.77
    
    
    
    16,550Third quarter
    
    
    14.41
    
    
    
    3.24
    
    
    
    8,860
    
    
    
    9.40
    
    
    
    1.96
    
    
    
    7,090Fourth quarter
    
    
    4.30
    
    
    
    1.34
    
    
    
    72,990
    
    
    
    2.64
    
    
    
    0.82
    
    
    
    15,5402002First quarter
    
    
    3.89
    
    
    
    1.78
    
    
    
    37,520
    
    
    
    2.46
    
    
    
    1.15
    
    
    
    6,270Second quarter
    
    
    2.00
    
    
    
    0.13
    
    
    
    88,700
    
    
    
    1.21
    
    
    
    0.09
    
    
    
    11,940Third quarter
    
    
    0.25
    
    
    
    0.055
    
    
    
    62,950
    
    
    
    0.15
    
    
    
    0.038
    
    
    
    3,430Fourth quarter
    
    
    0.20
    
    
    
    0.06
    
    
    
    89,490
    
    
    
    0.12
    
    
    
    0.032
    
    
    
    3,5702003First quarter
    
    
    0.185
    
    
    
    0.085
    
    
    
    124,180
    
    
    
    0.115
    
    
    
    0.054
    
    
    
    5,451
 Nasdaq or OTC Bulletin BoardTSX Price Range
    
    Price Range(Cdn.$)
    
    (Cdn.$)
    
    (000s)
    
    (U.S.$)
    
    (U.S.$)
    
    (000s)High
    
    Low
    
    Volume
    
    High
    
    Low
    
    VolumeNovember 2002
    
    
    0.17
    
    
    
    0.10
    
    
    
    34,770
    
    
    
    0.12
    
    
    
    0.06
    
    
    
    1,300December 2002
    
    
    0.125
    
    
    
    0.08
    
    
    
    26,240
    
    
    
    0.075
    
    
    
    0.053
    
    
    
    1,320January 2003
    
    
    0.185
    
    
    
    0.125
    
    
    
    66,170
    
    
    
    0.11
    
    
    
    0.075
    
    
    
    1,930February 2003
    
    
    0.185
    
    
    
    0.12
    
    
    
    22,050
    
    
    
    0.115
    
    
    
    0.08
    
    
    
    911March 2003
    
    
    0.15
    
    
    
    0.085
    
    
    
    35,960
    
    
    
    0.10
    
    
    
    0.054
    
    
    
    2,610April 2003
    
    
    0.14
    
    
    
    0.085
    
    
    
    26,930
    
    
    
    0.09
    
    
    
    0.056
    
    
    
    2,600
 Microcell New Shares & Warrants The new shares and Warrants issued by us upon the effective implementation
of our plan of reorganization on May 1, 2003 consisted of: first preferred
voting shares (represented by the CUSIP number 59501T502), first preferred
non-voting shares (represented by the CUSIP number 59501T601), second preferred
voting shares (represented by the CUSIP number 59501T700), second preferred
non-voting shares (represented by the CUSIP number 59501T809), Class A
restricted voting shares (represented by the CUSIP number 59501T882), and class
B non-voting shares (represented by the CUSIP number 59501T874), as well as the
Warrants 2005 (represented by CUSIP number 59501T163) and the Warrants 2008
(represented by CUSIP number 59501T171). 82




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The issue price of all the new shares was Cdn.$15 per share. Shareholders, at the close of business on April 30, 2003, received, on May
1, 2003, one new Microcell class B non-voting share in exchange for every
10,630 Old Microcell shares, as well as one Warrant 2005 in exchange for every
90 Old Microcell shares and one Warrant 2008 in exchange for every 54 Old
Microcell shares. Fractional securities were not issued, nor any compensation
paid for any such fraction. Where the exchange resulted in less than one new
security being otherwise issuable, no new security was issued. In addition, pursuant to a final prospectus dated March 24, 2004, we
distributed to the holders of our Class A Shares, Class B Shares, First
Preferred Voting Shares, First Preferred Non-Voting Shares, Second Preferred
Voting Shares and Second Preferred Non-Voting Shares, rights to subscribe for
an aggregate of 4,519,636 Class B Shares. Each five rights entitled the holder
thereof to purchase one Class B Share at a subscription price of $22 per share.
In connection with the rights offering we entered into a standby purchase
agreement with COM Canada, LLC pursuant to which it agreed to purchase, at the
rights subscription price, all Class B Shares not otherwise purchased pursuant
to the rights offering. The closing of the rights offering occurred on April
30, 2004. The rights offering resulted in the issuance of 4,519,636 Class B
Shares. COM purchased concurrently, at a price of $22.00 per share, 2,272,727
Class B Shares. Furthermore, we granted COM 3,977,272 warrants to acquire, at a
price of $22.00 per share, additional Class B Shares for exercise at a later
date. Each whole Warrant 2005 entitles its holder to purchase either one class A
restricted voting share or one class B non-voting share at a price of
Cdn.$19.91, subject to adjustment, until May 1, 2005. Similarly, each whole
Warrant 2008 entitles its holder to purchase either one class A restricted
voting share or one class B non-voting share at a price of Cdn.$20.69, subject
to adjustment, until May 1, 2008. In accordance with the warrant indentures
governing the Warrants 2005 and the Warrants 2008, and as a result of our
rights offering described above, the number of shares issuable upon the
exercise of the Warrants 2005 and the Warrants 2008 had been adjusted from 1.0
to 1.02 Class A Share or Class B Shares, as the case may be, for each warrant. Non-voting shares are exchangeable, at the option of the holder, at any
time, into voting shares of the same class upon provision by the holder of a
residency declaration in prescribed form to our transfer agent, Computershare
Trust Company of Canada, certifying that the holder is Canadian. The new shares of Microcell and the Warrants have been listed for trading
on the TSX since May 1, 2003. There is no comparable listing on any recognized
U.S.-based exchange. The following table indicates the trading symbol for each
of the new equity-based securities, as well as the total number of shares or
Warrants issued and outstanding as of December 31, 2003, as well
as the closing price for the Class A restricted voting shares,
Class B non-voting shares, Warrants 2005 and Warrants 2008 on
the TSX on June 28, 2004. On May 1, 2004, we
redeemed all our outstanding preferred shares. Approximate
    
    TSXIssued and
    
    Issued and
    
    number of
    
    Closing PriceTSX Trading
    
    Outstanding
    
    Outstanding
    
    registered and
    
    June 28, 2004Security
    
    Symbol
    
    December 31, 2003
    
    May 31, 2004
    
    beneficial holders
    
    Cdn $First preferred voting shares
    
    MT.PR.A
    
    
    252,296
    
    
    
    0
    
    
    
    0
    
    
    
    First preferred Non-voting shares
    
    MT.PR.B
    
    
    11,415,204
    
    
    
    0
    
    
    
    0
    
    
    
    Second preferred voting shares
    
    MT.PR.C
    
    
    14,782
    
    
    
    0
    
    
    
    0
    
    
    
    Second preferred Non-voting shares
    
    MT.PR.D
    
    
    6,979,528
    
    
    
    0
    
    
    
    0
    
    
    
    Class A restricted voting shares
    
    MT.A
    
    
    30,038
    
    
    
    193,840
    
    
    
    50
    
    
    
    32.64Class B non-voting shares
    
    MT.B
    
    
    3,906,336
    
    
    
    29,121,474
    
    
    
    3,600
    
    
    
    32.50Warrants 2005
    
    MT.WT.A
    
    
    3,998,302
    
    
    
    3,998,302
    
    
    
    10,250
    
    
    
    13.11Warrants 2008
    
    MT.WT.B
    
    
    6,663,943
    
    
    
    6,663,943
    
    
    
    12,600
    
    
    
    12.35
 The following table sets forth for the month indicated the range of high
and low closing sale prices for each new class of Microcell shares and Warrants
as reported on the TSX. TSXPrice Range for September 2003(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    19.00
    
    
    
    15.50
    
    
    
    6First preferred Non-voting shares
    
    
    17.50
    
    
    
    14.50
    
    
    
    363Second preferred voting shares
    
    
    15.00
    
    
    
    13.75
    
    
    
    0.1
 83




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TSXPrice Range for September 2003(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeSecond preferred Non-voting shares
    
    
    18.00
    
    
    
    16.00
    
    
    
    127Class A restricted voting shares
    
    
    17.00
    
    
    
    13.75
    
    
    
    2Class B non-voting shares
    
    
    17.00
    
    
    
    13.71
    
    
    
    787Warrants 2005
    
    
    2.15
    
    
    
    0.70
    
    
    
    761Warrants 2008
    
    
    2.75
    
    
    
    1.15
    
    
    
    431
 TSXPrice Range for October 2003(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    19.00
    
    
    
    16.75
    
    
    
    283First preferred Non-voting shares
    
    
    18.50
    
    
    
    17.00
    
    
    
    204Second preferred voting shares
    
    
    16.25
    
    
    
    15.00
    
    
    
    56Second preferred Non-voting shares
    
    
    17.75
    
    
    
    16.00
    
    
    
    1,157Class A restricted voting shares
    
    
    18.00
    
    
    
    16.02
    
    
    
    4Class B non-voting shares
    
    
    18.00
    
    
    
    16.50
    
    
    
    465Warrants 2005
    
    
    1.85
    
    
    
    1.30
    
    
    
    290Warrants 2008
    
    
    2.71
    
    
    
    2.10
    
    
    
    296
 TSXPrice Range for November 2003(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    19.48
    
    
    
    16.90
    
    
    
    0.2First preferred Non-voting shares
    
    
    19.40
    
    
    
    17.50
    
    
    
    229Second preferred voting shares
    
    
    18.14
    
    
    
    16.25
    
    
    
    0.2Second preferred Non-voting shares
    
    
    18.24
    
    
    
    17.40
    
    
    
    60Class A restricted voting shares
    
    
    18.24
    
    
    
    16.50
    
    
    
    1Class B non-voting shares
    
    
    19.00
    
    
    
    17.50
    
    
    
    362Warrants 2005
    
    
    1.90
    
    
    
    1.50
    
    
    
    252Warrants 2008
    
    
    3.00
    
    
    
    2.20
    
    
    
    390
 TSXPrice Range for December 2003(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    19.48
    
    
    
    17.50
    
    
    
    2First preferred Non-voting shares
    
    
    19.00
    
    
    
    17.25
    
    
    
    2Second preferred voting shares
    
    
    18.14
    
    
    
    18.14
    
    
    
    0Second preferred Non-voting shares
    
    
    18.00
    
    
    
    16.35
    
    
    
    9Class A restricted voting shares
    
    
    19.00
    
    
    
    17.02
    
    
    
    2Class B non-voting shares
    
    
    18.00
    
    
    
    16.10
    
    
    
    55Warrants 2005
    
    
    1.97
    
    
    
    1.56
    
    
    
    404Warrants 2008
    
    
    2.83
    
    
    
    1.70
    
    
    
    129
 TSXPrice Range for January 2004(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    18.88
    
    
    
    17.50
    
    
    
    0.1First preferred Non-voting shares
    
    
    23.40
    
    
    
    17.25
    
    
    
    1,271Second preferred voting shares
    
    
    18.88
    
    
    
    18.14
    
    
    
    0.1Second preferred Non-voting shares
    
    
    23.15
    
    
    
    16.98
    
    
    
    225Class A restricted voting shares
    
    
    22.24
    
    
    
    17.50
    
    
    
    1Class B non-voting shares
    
    
    24.60
    
    
    
    17.30
    
    
    
    611Warrants 2005
    
    
    5.90
    
    
    
    1.80
    
    
    
    678Warrants 2008
    
    
    6.45
    
    
    
    2.66
    
    
    
    724
 84




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TSXPrice Range for February 2004(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    24.20
    
    
    
    18.88
    
    
    
    0.6First preferred Non-voting shares
    
    
    25.75
    
    
    
    23.25
    
    
    
    433Second preferred voting shares
    
    
    18.88
    
    
    
    18.88
    
    
    
    0Second preferred Non-voting shares
    
    
    25.75
    
    
    
    23.00
    
    
    
    58Class A restricted voting shares
    
    
    26.50
    
    
    
    22.24
    
    
    
    0.6Class B non-voting shares
    
    
    26.00
    
    
    
    23.50
    
    
    
    569Warrants 2005
    
    
    6.40
    
    
    
    4.00
    
    
    
    392Warrants 2008
    
    
    7.55
    
    
    
    5.00
    
    
    
    330
 TSXPrice Range for March 2004(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    24.20
    
    
    
    24.20
    
    
    
    0First preferred Non-voting shares
    
    
    26.99
    
    
    
    24.90
    
    
    
    23Second preferred voting shares
    
    
    25.20
    
    
    
    18.88
    
    
    
    0.1Second preferred Non-voting shares
    
    
    25.85
    
    
    
    24.50
    
    
    
    93Class A restricted voting shares
    
    
    26.01
    
    
    
    25.00
    
    
    
    26Class B non-voting shares
    
    
    26
    
    
    
    24.40
    
    
    
    945Warrants 2005
    
    
    6.50
    
    
    
    5.70
    
    
    
    380Warrants 2008
    
    
    7.85
    
    
    
    6.68
    
    
    
    328
 TSXPrice Range for April 2004(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeFirst preferred voting shares
    
    
    24.20
    
    
    
    22.53
    
    
    
    15First preferred Non-voting shares
    
    
    24.90
    
    
    
    24.00
    
    
    
    56Second preferred voting shares
    
    
    25.20
    
    
    
    25.20
    
    
    
    0Second preferred Non-voting shares
    
    
    25.01
    
    
    
    22.68
    
    
    
    74Class A restricted voting shares
    
    
    25.00
    
    
    
    22.60
    
    
    
    11Class B non-voting shares
    
    
    25.00
    
    
    
    22.99
    
    
    
    1,908Warrants 2005
    
    
    6.12
    
    
    
    4.00
    
    
    
    186Warrants 2008
    
    
    7.30
    
    
    
    6.10
    
    
    
    189
 TSXPrice Range for May 2004(Cdn.$)
    
    (Cdn.$)
    
    (000s)High
    
    Low
    
    VolumeClass A restricted voting shares
    
    
    32.20
    
    
    
    21.00
    
    
    
    137Class B non-voting shares
    
    
    32.25
    
    
    
    21.01
    
    
    
    18,833Warrants 2005
    
    
    12.98
    
    
    
    3.40
    
    
    
    2,950Warrants 2008
    
    
    12.29
    
    
    
    5.20
    
    
    
    3,539
 Old Microcells Senior Discount Notes In June 1996, we issued 14% Senior Discount Notes due June 1, 2006, which
we refer to as the 2006 Notes, with a nominal value of U.S.$418 million. In
October 1997, we issued 11.125% senior discount notes, which we refer to as the
2007 Notes, with a nominal value of $429 million. In May 1999, we issued 12%
senior discount notes, which we refer to as the 2009 Notes, with a nominal
value of U.S.$270 million (the 2006 Notes, the 2007 Notes and the 2009 Notes
are referred to collectively as the Notes). All the Notes were unsecured and
were due June 1, 2006, October 15, 2007, and June 1, 2009, respectively, with
cash interest payable in arrears semi-annually commencing June 1, 2002, April
15, 2003, and December 1, 2004. Pursuant to the plan of reorganization, the
Notes were tendered by a nominee for The Depository Trust Company, or DTC, and
CDS & Co. (the record holders), and cancelled by us in exchange for equity in
Microcell. On May 1, 2003, holders of the Notes received their pro rata
distribution (based on the 85




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principal or accreted amount of the outstanding unsecured notes plus any
accrued interest as of April 30, 2003) of second preferred shares, in an
aggregate amount of $54.0 million, and common equity, in an aggregate amount of
$54.1 million, as well as their pro rata distribution of 1,329,312 Warrants
2005 and 2,215,521 Warrants 2008, subject to certain conditions. The following
table sets forth the conversion rates per $1,000 principal amount at maturity
of the Notes into the equity-based securities of Microcell: Conversion rate per $1,000 principal amount at maturitySecond preferred
    
    Class A restricted
    
    Class Bnon-voting shares
    
    voting shares
    
    non-voting shares
    
    Warrants 2005
    
    Warrants 20082006 Notes
    
    
    3.9710
    
    
    
    0.0331
    
    
    
    3.9473
    
    
    
    1.4662
    
    
    
    2.44372007 Notes
    
    
    2.5677
    
    
    
    0.0214
    
    
    
    2.5524
    
    
    
    0.9481
    
    
    
    1.58022009 Notes
    
    
    3.1026
    
    
    
    0.0259
    
    
    
    3.0841
    
    
    
    1.1456
    
    
    
    1.9093
 86




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ITEM 10  ADDITIONAL INFORMATION SHARE CAPITAL MEMORANDUM AND ARTICLES OF ASSOCIATION Our authorized share capital consists of four classes of shares: (1) an unlimited number of first preferred shares, issuable as first
preferred voting shares, first preferred non-voting shares, first preferred
voting 2 shares and first preferred non-voting 2 shares; (2) an unlimited number of second preferred shares issuable as second
preferred voting shares, second preferred non-voting shares, second preferred
voting 2 shares and second preferred non-voting 2 shares; (3) an unlimited number of class A restricted voting shares; and (4) an unlimited number of class B non-voting shares. First Preferred Shares Issue price.First preferred voting shares and first preferred non-voting
shares were issued at $15 per share. As of May 1, 2004, we redeemed all our
outstanding first preferred shares. Rights upon liquidation.Holders of first preferred shares are entitled
to receive, on our winding-up, liquidation or dissolution and in priority to
any payment or distribution in respect of shares of any other class, an amount
per share equal to the first preferred shares redemption price (as described
below) plus any declared but unpaid dividends. Voting.Holders of first preferred voting shares are entitled to receive
notice of and to attend and vote at all meetings of our shareholders (except
meetings at which only the holders of another specified class or series of
shares (other than the class A restricted voting shares or class B non-voting
shares, as the case may be) are entitled to vote separately as a class or
series as provided by law or in our articles) and each first preferred voting
share confers the right to one vote (in person or by proxy) at all such
meetings. Holders of first preferred voting shares are also entitled to vote
together with the class A restricted voting shares and, if applicable, the
class B non-voting shares on an as converted basis, on any matter on which
the class A restricted voting shares or class B non-voting shares, as the case
may be, are entitled to vote. Except as otherwise provided by law or in our
articles, holders of first preferred non-voting shares are not entitled to vote
at any meetings of our shareholders, but otherwise enjoy the same rights,
privileges and economic entitlements as are enjoyed by holders of the first
preferred voting shares. The holders of first preferred non-voting shares are
entitled to receive notice of and to attend meetings of the holders of first
preferred voting shares and class A restricted voting shares. Each first
preferred non-voting share confers the right to one vote (in person or by
proxy) at any meeting at which the holders of first preferred non-voting shares
are entitled to vote and is entitled to vote on an as converted basis at any
meeting at which the class B non-voting shares, as the case may be, are
entitled to vote. Non-Cumulative Dividend.The holders of first preferred voting shares and
first preferred non-voting shares are entitled to a fixed, non-cumulative
preferential dividend at the rate of 9% per annum, from time to time and
payable semi-annually in arrears in cash. All dividends declared on the first
preferred shares shall be declared and paid at the same time, and in equal
amounts, share for share, without any preference or priority of one series over
the other. Maturity.The first preferred shares shall be mandatorily redeemed on May
1, 2013. First Preferred Shares Redemption Price.The first preferred shares
redemption price, or FPS redemption price, is initially the issue price
therefor, increased at the beginning of each semi-annual period commencing on
November 1, 2003 by (1) an amount equal to the dividend accrued during such period; less (2) the amount of any cash dividend that has been declared and paid in
respect of such semi-annual period. In the event of any redemption or mandatory conversion of first preferred
shares other than as at the end of a semi-annual period, 87




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the FPS redemption price is to be adjusted by adding the accrued dividend
on a pro rata basis with reference to the number of days from the beginning of
the then current semi-annual period to the date of such redemption or
conversion, less the amount of any cash dividend that has been declared and
paid in respect of such period. Redemption.The first preferred shares are redeemable as follows: (1) in whole or in part at any time at the option of Microcell at the
then current FPS redemption price, payable in cash, provided however that
holders of first preferred shares may exercise any conversion rights prior to
any such redemption; (2) at maturity, (a) mandatorily at a price per share equal to the then
current FPS redemption price payable in cash or (b) at Microcells option, if
the class A restricted voting shares and the class B non-voting shares
continue to be listed and posted for trading on a recognized exchange, in
consideration of the issuance of a number of class A restricted voting shares
or class B non-voting shares (as the case may be) equal to the FPS redemption
price divided by the average share price of such shares; (3) mandatorily prior to maturity at the then current FPS redemption
price to the extent that Microcell has funds available for such purpose
(determined by reference to certain thresholds established in the Articles);
and (4) at any time prior to maturity, in whole or in part, at the option of
Microcell upon payment of the then current FPS redemption price by issuing
first units comprised of a note and a first preferred voting 2 share or first
preferred non-voting 2 share. Intra Class Exchange Rights.The first preferred non-voting shares are
exchangeable, at the option of the holders, into first preferred voting shares
on a share-for-share basis, in the following circumstances: (1) at any time upon provision by a holder of preferred shares
certifying that the holder is a Canadian; (2) upon a bid being made for the first preferred voting shares where no
equivalent bid is made for the first preferred non-voting shares for the
purposes of allowing the first preferred non-voting shares to tender to an
exclusionary bid; (3) automatically upon the repeal or relaxation of the Canadian rules
restricting Microcells ownership and control, but only to the extent of such
repeal or relaxation and non-Canadian ownership and control of Microcell and
its subsidiaries not otherwise being restricted by law. The first preferred voting shares are exchangeable, at the option of the
holders, into first preferred non-voting shares on a share-for-share basis. Conversion Features.The first preferred shares have the following
conversion features: (1) at any time, the first preferred voting shares and the first
preferred non-voting shares are convertible, at the option of the holders
into class A restricted voting shares and class B non-voting shares
respectively on a share-for-share basis; (2) if at any time prior to May 1, 2008, Microcell shall complete an
offering of class A restricted voting shares or class B non-voting shares for
gross proceeds of not less than $150 million and at a per share price equal
to or greater than 200% of the then current FPS redemption price and the
proceeds thereof are used as provided in the articles, the first preferred
voting shares and the first preferred non-voting shares which remain
outstanding after the application of such proceeds will be converted, at the
option of Microcell, into class A restricted voting shares and class B
non-voting shares respectively on a share-for-share basis; and (3) if at any time on or after May 1, 2008, on the 25th day (or if such
day is not a trading day, then on the next following trading day) following
the release by Microcell of its quarterly or annual financial statements, as
the case may be, the first preferred voting shares and the first preferred
non-voting shares are in-the-money (namely that the FPS redemption price is
less than the average share price of the class A restricted voting shares and
class B non-voting shares), they will be converted automatically into class A
restricted voting shares and class B non-voting shares respectively on a
share-for-share basis. Upon conversion of any first preferred voting shares or first preferred
non-voting shares into class A restricted voting shares or class B non-voting
shares, the holders of such first preferred voting shares or first preferred
non-voting shares will have no right to 88




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receive any payment in cash on account of the FPS redemption price. All conversion rights described above are subject to a registration
statement having been filed by Microcell and having become effective under the
United States Securities Act of 1933, or Securities Act, or to an exemption
being available under the Securities Act in connection with the issuance of
shares resulting from the exercise of such conversion right. If such exemption
was not available, Microcell agreed to file, on a date not earlier than six
months and not later than seven months after May 1, 2003, a registration
statement with the SEC in respect of shares to be issued upon the exercise of
conversion rights and to use reasonable commercial efforts to have the SEC
declare the registration statement effective. We believe that an exemption
under Section 3(a)(9) of the Securities Act was available for the issuance of
the class A restricted voting shares or class B non-voting shares issuable upon
conversion of any first preferred voting shares or first preferred non-voting
shares, and therefore filed a registration statement relating to the shares
resulting from the exercise of these conversion rights. Anti-layering provisions.The articles of Microcell provide that, so long
as there remain outstanding first preferred shares (or first units, if issued)
representing in the aggregate an initial issue price in excess of $75 million,
the approval: (1) by written resolution signed by the holders of a majority of the
aggregate number (or principal amount, as the case may be) of first preferred
shares (or first units, if issued) then outstanding or (2) by a majority of the holders of first preferred shares (or first
units, if issued) then outstanding represented in person or by proxy at a
meeting of such holders called for such purpose, will be required before Microcell and its subsidiaries either (X) issue any shares ranking prior to or pari passu with the first
preferred shares (or first units, if issued) or (Y) incur funded debt (other than permitted debt under Microcells
credit facilities, first units and second units), as a result of which the aggregate consolidated funded debt thereof would be in
excess of 4.0 times consolidated annual EBITDA, calculated on a pro forma basis
based upon the four consecutive quarters ended as at the fiscal quarter-end
immediately prior to the date of the resolution of the board of Microcell
approving such issuance or incurrence, as the case may be. Foreign Ownership Restrictions.The first preferred shares shall be
subject to sale in a manner that will ensure compliance with the Canadian rules
governing the ownership and control of Microcell, for so long as same remain in
effect. Second Preferred Shares Issue price.Second preferred voting shares and second preferred
non-voting shares were issued at $15 per share. As of May 1, 2004, we redeemed
all our outstanding second preferred shares. Rights upon liquidation.Holders of second preferred shares are entitled
to receive, on the winding-up, liquidation or dissolution of Microcell and in
priority to any payment or distribution in respect of shares of any other
class, other than the first preferred shares, an amount per share equal to the
second preferred shares redemption price (as described below) plus any declared
but unpaid dividends. Voting.Holders of second preferred voting shares are entitled to receive
notice of and to attend and vote at all meetings of the shareholders of
Microcell (except meetings at which the holders of another specified class or
series of shares (other than the class A restricted voting shares or class B
non-voting shares, as the case may be) are entitled to vote separately as a
class or series as provided by law or in the articles of Microcell) and each
second preferred voting share confers the right to one vote (in person or by
proxy) at all such meetings. Holders of second preferred voting shares are also
entitled to vote together with the class A restricted voting shares and, if
applicable, the class B non-voting shares on an as converted basis on any
matter on which the class A restricted voting shares or class B non-voting
shares, as the case may be, are entitled to vote. Except as otherwise provided
in the Canada Business Corporations Act or in the articles of Microcell,
holders of second preferred non-voting shares are not entitled to vote at any
meetings of the shareholders of Microcell, but otherwise enjoy the same rights,
privileges and economic entitlements as are enjoyed by holders of the second
preferred voting shares. The holders of second preferred non-voting shares are
entitled to receive notice of and to attend meetings of the holders of second
preferred voting shares and class A restricted voting shares. Each second
preferred non-voting share confers the right to one vote (in person or by
proxy) at any meeting at which the holders of 89




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second preferred non-voting shares are entitled to vote and shall be
entitled to vote on an as converted basis at any meeting at which the class B
non-voting shares, as the case may be, are entitled to vote. Non-Cumulative Dividend.The holders of second preferred voting shares
and second preferred non-voting shares are entitled to a fixed, non-cumulative
preferential dividend at the rate of 9% per annum, from time to time and
payable semi-annually in arrears in cash. All dividends declared on the second
preferred shares shall be declared and paid at the same time, and in equal
amounts, share for share, without any preference or priority of one series over
the other, but subject to the prior declaration and payment (or setting apart
for payment) of dividends on the first preferred shares in respect of the
corresponding period. Maturity.The second preferred shares shall be mandatorily redeemed on
May 1, 2013. Second Preferred Shares Redemption Price.The redemption price of each
second preferred share is initially the issue price therefor, increased at the
beginning of each semi-annual period beginning on November 1, 2003 by (1) an amount equal to divided accrued during such period; less (2) the amount of any cash dividend that has been declared and paid in
respect of such semi-annual period. In the event of any redemption or conversion other than as at the end of a

semi-annual period, the second preferred shares redemption price, or SPS
redemption price, is to be adjusted by adding the accrued dividend on a pro
rata basis with reference to the number of days from the beginning of the then
current semi-annual period to the date of such redemption or conversion, less
the amount of any cash dividend that has been declared and paid in respect of
such period. Redemption.The second preferred shares are redeemable as follows: (1) Subject to the prior redemption for cash of all first preferred
 shares (except for any first preferred shares which have been voluntarily
redeemed or converted for shares by the holder thereof), in whole or in part
at any time at the option of Microcell at the then current SPS redemption
price, payable in cash, provided however that holders of second preferred
 shares may exercise any conversion rights prior to any such redemption; (2) at maturity, (a) mandatorily at a price per share equal to the then
current SPS redemption price payable in cash, subject to the prior redemption
for cash of all first preferred shares (except for any first preferred shares
which have been voluntarily redeemed or converted for shares by the holder
thereof) or (b) at Microcells option, if the class A restricted voting
 shares and the class B non-voting shares continue to be listed and posted for
trading on a recognized exchange, in consideration of the issuance of a
number of class A restricted voting shares or class B non-voting shares (as
the case may be) equal to the SPS redemption price divided by the average
share price of such shares; (3) mandatorily prior to maturity at the then current SPS redemption
price to the extent that Microcell has remaining funds available for such
purpose (determined by reference to certain thresholds established in the
articles), subject to the prior redemption for cash of all outstanding first
preferred shares; and (4) at any time prior to maturity, in whole or in part, at the option of
Microcell upon payment of the then current SPS redemption price by issuing
second units composed of a note and a second preferred voting 2 share or
second preferred non-voting 2 share. Intra Class Exchange Rights.The second preferred non-voting shares are
exchangeable, at the option of the holders, into second preferred voting shares
on a share-for-share basis, in the following circumstances: (1) at any time upon provision by a holder of second preferred
non-voting shares of a residency declaration to Microcell and the transfer
agent of second preferred shares certifying that the holder is a Canadian; (2) upon a bid being made for the second preferred voting shares where
no equivalent bid is made for the second preferred non-voting shares, for the
purposes of allowing the second preferred non-voting shares to tender to an
exclusionary bid; and (3) automatically upon the repeal or relaxation of the Canadian rules
restricting Microcells ownership and control, but only to the extent of such
repeal or relaxation and non-Canadian ownership and control of Microcell and
its subsidiaries not otherwise 90




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being restricted by law. The second preferred voting shares will at any time be exchangeable, at
the option of the holders, into second preferred non-voting shares on a
share-for-share basis. Conversion Features.The second preferred shares have the following
conversion features: (1) at any time, the second preferred voting shares and the second
preferred non-voting shares are convertible, at the option of the holders,
into class A restricted voting shares and class B non-voting shares
respectively on a share-for-share basis; (2) if at any time prior to May 1, 2008, Microcell shall complete an
offering of class A restricted voting shares or class B non-voting shares for
gross proceeds of not less than $150 million and at a per share price equal
to or greater than 200% of the then current SPS redemption price and the
proceeds thereof are used as provided in the articles, the second preferred
voting shares and the second preferred non-voting shares which remain
outstanding after the application of such proceeds will be converted, at the
option of Microcell, into class A restricted voting shares and class B
non-voting shares respectively on a share-for-share basis; and (3) if at any time on or after May 1, 2008, on the 25th day (or if such
is not a trading day, then on the next following trading day) following the
release of Microcells quarterly or annual financial statements, as the case
may be, the second preferred voting shares and the second preferred
non-voting shares are in-the-money (namely that the SPS redemption price is
less than the average share price of the class A restricted voting shares and
class B non-voting shares), they will be converted automatically into class A
restricted voting shares and class B non-voting shares respectively on a
share-for-share basis. Upon conversion of any second preferred voting shares or second preferred
non-voting shares into class A restricted voting shares or class B non-voting
shares, the holders of such second preferred voting shares or second preferred
non-voting shares will have no right to receive any payment in cash on account
of the SPS redemption price. All conversion rights described above are subject to a registration
statement having been filed by Microcell and having become effective under the
Securities Act, or to an exemption being available under the Securities Act in
connection with the issuance of shares resulting from the exercise of such
conversion right. If such exemption was not available, Microcell agreed to
file, on a date not earlier than six months and not later than seven months
after May 1, 2003, a registration statement with the SEC in respect of shares
to be issued upon the exercise of conversion rights and to use reasonable
commercial efforts to have the SEC declare the registration statement
effective. We believe that an exemption under Section 3(a)(9) of the Securities
Act was available for the issuance of the class A restricted voting shares or
class B non-voting shares issuable upon conversion of any second preferred
voting shares or second preferred non-voting shares, and therefore filed a
registration statement relating to the shares resulting from the exercise of
these conversion rights. Anti-Layering Provisions.The articles of Microcell provide that, so long
as there remain outstanding second preferred shares (or second units, if
issued) representing in the aggregate an initial issue price in excess of $50
million, the approval: (1) by written resolution signed by the holders of a majority of the
aggregate number (or principal amount, as the case may be) of second
preferred shares (or second units, if issued) then outstanding or (2) by a majority of the holders of second preferred shares (or second
units, if issued) represented in person or by proxy at a meeting of such
holders called for such purposes will be required before Microcell and its subsidiaries either (X) issue any shares ranking prior to or pari passu with the second
preferred shares (or second units, if issued) (other than first preferred
 shares issued on May 1, 2003), or (Y) incur funded debt (other than permitted debt under Microcells
credit facilities, first units and second units), as a result of which the aggregate consolidated funded debt thereof would be in
excess of 4.0 times consolidated annual EBITDA, calculated on a pro forma basis
based upon the four consecutive quarters ended as at the fiscal quarter-end
immediately prior to the date of the resolution of the board of Microcell
approving such issuance or incurrence, as the case may be. 91




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Class A Restricted Voting Shares Voting.Holders of class A restricted voting shares are entitled to
receive notice of and to attend and vote at all meetings of the shareholders of
Microcell (except meetings at which only the holders of another specified class
or series are entitled to vote separately as a class as provided in the Canada
Business Corporations Act or in the articles of Microcell) and each class A
restricted voting share confers the right to one vote (in person or by proxy)
at all such meetings. Except as to voting the class A restricted voting shares will have equal
rights to the class B non-voting shares on a share-for-share basis. Dividends.All dividends declared on the class A restricted voting shares
and the class B non-voting shares shall be declared and paid at the same time,
and in equal amounts, share for share, without any preference or priority of
one class over the other. Rights upon liquidation.Holders of class A restricted voting shares are
entitled to receive the remaining assets of Microcell on the winding up,
liquidation or dissolution of Microcell, pari passu with the holders of class B
non-voting shares, on a per share basis. Exchange Right.The class A restricted voting shares are exchangeable at
any time, at the option of the holders, into class B non-voting shares on a
share-for-share basis. Foreign Ownership Restrictions.The class A restricted voting shares are
subject to sale in a manner that will ensure compliance with the Canadian rules
relating to Microcells ownership and control, for so long as same remain in
effect. For more information on these rules, readers are referred to the
description of these rules under the heading Foreign Ownership Restrictions
below. Class B Non-Voting Shares Voting.Except as otherwise provided by law or in the articles of
Microcell, holders of class B non-voting shares are not entitled to vote at any
meetings of the shareholders of Microcell, but otherwise enjoy the same rights,
privileges and economic entitlements as are enjoyed by holders of the class A
restricted voting shares. The holders of class B non-voting shares are entitled
to receive notice of and to attend meetings of the holders of class A
restricted voting shares. Each class B non-voting share confers the right to
one vote (in person or by proxy) at any meeting at which the holders of class B
non-voting shares are entitled to vote. Dividends.All dividends declared on the class A restricted voting shares
and the class B non-voting shares shall be declared and paid at the same time,
and in equal amounts, share for share, without any preference or priority of
one class over the other. Rights upon liquidation.Holders of class B non-voting shares are
entitled to receive the remaining assets of Microcell on the winding up,
liquidation or dissolution of Microcell, pari passu with the holders of class A
restricted voting shares, on a per share basis. Exchange Right.The class B non-voting shares are exchangeable, at the
option of the holders, into class A restricted voting shares on a
share-for-share basis, in the following circumstances: (1) any time upon provision by a holder of class B non-voting shares of
a residency declaration to Microcell and the transfer agent of the class A
restricted voting shares certifying that the holder is a Canadian; (2) upon a bid being made for the class A restricted voting shares where
no equivalent bid is made for the class B non-voting shares, for the purposes
of allowing the class B non-voting shares to tender to an exclusionary bid;
and (3) automatically upon the repeal or relaxation of the Canadian rules
governing Microcells ownership and control, but only to the extent of such
repeal or relaxation and non-Canadian ownership and control of Microcell and
its subsidiaries not otherwise being restricted by law. Warrants Microcell issued on May 1, 2003 two series of warrants, which we
collectively refer to in this section as the Warrants, entitling holders
thereof to purchase class A restricted voting shares or class B non-voting
shares (based on Canadian residency status) being 92




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the Warrants 2005 (having a two-year term and an exercise price per share
of $19.91) and Warrants 2008 (having a five-year term and an exercise price per
share of $20.69). The indentures relating to the Warrants provide that in the event of
certain fundamental transactions, (1) the holders of Warrants shall, upon exercise of the Warrants
following any such fundamental transactions, be entitled to receive the same
number and kind of securities, cash or other property that they would have
been entitled to receive had they exercised their Warrants prior to any such
fundamental transactions; (2) where the consideration payable to holders of equity shares of
Microcell is payable solely in cash, the holders of Warrants are required to
surrender or exercise their Warrants and are entitled to receive, upon
surrender or exercise thereof, payments on an equal basis with holders of
such shares as if the Warrants had been exercised immediately prior to such
fundamental transactions, less the exercise price thereof, and upon receipt
of such payment, if any, the rights of a holder of such Warrant shall
terminate and cease and such holders Warrants shall expire (for greater
certainty, in all cases without regard to whether or not the holders have
exercised their Warrants); and (3) where applicable, the successor corporation to Microcell (if
applicable) shall expressly assume the performance of Microcell covenants and
conditions under the indentures relating to the Warrants. No Warrants may be exercised until the date that a registration statement
filed by Microcell under the Securities Act with respect to the exercise of
Warrants has been declared effective by the SEC. Microcell has filed a
registration statement with the SEC in respect of the shares issuable upon
exercise of the Warrants and has agreed to use reasonable commercial efforts to
have the SEC declare this registration statement effective. In accordance with
the warrant indentures governing the 2005 and 2008 Warrants, the number of
shares issuable upon the exercise of such warrants has been adjusted from 1.00
to 1.02 class A or class B shares, as the case may be, per warrant. This
warrant share-rate adjustment was made as a result of the Companys rights
offering. Description of Units The first preferred voting shares and first preferred non-voting shares
are redeemable at any time prior to maturity at the option of Microcell in
consideration of the issuance of first units (voting and non-voting series).
The second preferred voting shares and second preferred non-voting shares are
redeemable at any time prior to maturity by Microcell in consideration of the
issuance of second units (voting and non-voting series). The first units and second units are hybrid instruments designed to
duplicate the economic interest and other features (including as to voting
entitlements) attaching to the first preferred shares and second preferred
shares. Each unit is composed of a note, which provides the holder of the unit
with an economic interest similar to that of a holder of first preferred share,
together with a first preferred voting 2 share or first preferred non-voting 2
share (in the case of first units) or with a second preferred voting 2 share or
second preferred non-voting 2 share (in the case of second units). The first units are senior in right of payment to the second units. Microcell has entered into two unit indentures, respectively in respect of
first units and second units, which provide for similar redemption and
conversion features attaching to the units as those attaching to the first
preferred shares and second preferred shares under the articles. The indentures
relating to the units also provide for certain adjustment mechanisms in the
event of fundamental transactions, as well as provisions customarily found in
indentures governing issuances of notes. No units may be converted into class A restricted voting shares or class B
non-voting shares until the date that a registration statement filed by
Microcell under the Securities Act has been declared effective by the SEC. Meetings of Shareholders Subject to the provisions of the CBCA and the articles of Microcell, an
annual meeting of the shareholders of Microcell will be held on such date in
each year, at such time and place as the board may determine, to receive and
consider the financial statements with the report of the auditor or auditors,
to elect directors, to appoint an auditor or auditors and to fix or to
authorize the board to fix the auditors remuneration and to consider, deal
with and dispose of such other business as may properly come before a meeting
of shareholders. 93




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Special meetings of the shareholders may be called at any time by
resolution of the board or by the president or the chairman of the board and
shall be called when required by the shareholders in conformity with the Canada
Business Corporations Act. Any person entitled to attend a meeting of shareholders may participate in
the meeting, to the extent and in the manner permitted by law, by means of a
telephonic, electronic or other communication facility that permits all
participants to communicate adequately with each other during the meeting, if
Microcell makes available such a communication facility. Notice of each annual meeting and of each special meeting of the
shareholders is given in the manner provided in the by-laws of Microcell to the
shareholders entitled to vote thereat, to the shareholders entitled to receive
such notice, to the directors and to the auditor or auditors at their
respective addresses as they appear in the records of Microcell. The quorum of shareholders at an annual or special meeting of shareholders
is fixed at five shareholders entitled to vote at such meeting, present in
person or represented either by proxy or by an individual acting on behalf of a
body corporate or association and duly authorized by a resolution of the board
or governing body of the body corporate or association to represent it at
meetings of shareholders of Microcell, irrespective of the number of shares
held by such shareholders. If a quorum is present at the opening of the
meeting, the shareholders present or represented may proceed with the business
of the meeting, notwithstanding the fact that a quorum is not present
throughout the meeting. Every question submitted to any meeting of shareholders shall be decided
by a show of hands unless a ballot is ordered or required in the manner
hereinafter set out. The chairman of such meeting may, in his discretion, order
a ballot. Moreover, any shareholder or its representative, where the
shareholder is a body corporate or an association, or his proxyholder, either
before or after any vote by show of hands, may require a ballot on any question
at any time before the termination of the meeting. A demand for a ballot may be
withdrawn. At all meetings of shareholders, every shareholder entitled to vote
thereat, whether present in person or by proxyholder, or, in the case of a body
corporate or association by a duly authorized representative, shall be entitled
to exercise the number of votes per share as is prescribed in the articles of
Microcell; however, if by virtue of the Canada Business Corporations Act
another scale of voting rights is fixed with respect to a particular matter or
to another class of shares, such scale of voting shall be adopted. Foreign Ownership Restrictions Solutions and Inukshuk are required, as radiocommunication carriers and by
the conditions of their respective licenses, to comply with the Canadian
ownership and control provisions. The Canadian ownership and control provisions
must also be respected by Solutions and Inukshuk to maintain their eligibility
to operate as Canadian carriers under the Telecommunications Act and to hold
and have renewed the PCS license and MCS licenses. The Canadian ownership and control provisions require Solutions and
Inukshuk to be Canadian-owned and controlled corporations incorporated or
continued under the laws of Canada or a province of Canada. Solutions and
Inukshuk are deemed to be Canadian-owned and controlled as long as: (1) not less than 80% of the members of their respective boards of
directors are individual Canadians; (2) Canadians beneficially own not less than 80% of their respective
issued and outstanding voting shares; and (3) they are not otherwise controlled in fact by non-Canadians. A Canadian is defined to include a Canadian citizen who is ordinarily
resident in Canada, a permanent resident of Canada, various Canadian government
agencies, various qualified trusts, mutual insurance companies, and
corporations in which Canadians beneficially own and control in the aggregate
not less than 66 2/3% of the issued and outstanding voting shares and which are
not otherwise controlled in fact by non-Canadians. In the case of Microcell, as the ultimate parent corporation of both
Solutions and Inukshuk, the Canadian ownership and control provisions require,
for Solutions and Inukshuk to be considered eligible thereunder, that not less
than 66 2/3% of the issued and outstanding voting shares (i.e. the class A
restricted voting shares) of Microcell be owned by Canadians, and that
Microcell not otherwise be controlled in fact by non-Canadians. A voting
share for purposes of the Telecommunications Act means a share or 94




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class of shares of a corporation carrying voting rights under all
circumstances or by reason of an event that has occurred and is continuing or
by reason of a condition that has been fulfilled and includes a security that
is convertible into such a share at the time that a calculation referred to in
that clause is made. Microcells class A restricted voting shares are voting
shares for the purpose of the Telecommunications Act. Microcell may restrict the issue, transfer and ownership of voting shares,
if necessary, to ensure that Microcell remains in conformity with the Canadian
ownership and control provisions. For such purposes, in particular but without
limitation, Microcell may, in accordance with the provisions of the Canadian
ownership and control provisions, to the extent applicable: (1) refuse to accept any subscription for any voting shares; (2) refuse to allow any transfer of voting shares to be recorded in
Microcells share register; (3) suspend the rights of a holder of voting shares to vote at a meeting
of the shareholders of Microcell; and (4) sell, repurchase or redeem any voting shares. Microcells articles of incorporation provide that Microcell may, in
connection with the issue, or transfer of ownership, of voting shares in its
capital, take any action, or refuse to take any action, as the case may be, to
the extent necessary to ensure that any subsidiary of Microcell is and
continues to be eligible to operate as a Canadian carrier under the
Telecommunications Act or to be issued, to hold and to renew radio
authorizations or radio licenses under the Radiocommunication Act, if and only
to the extent that the business activities of such subsidiary require such
eligibility. Microcell, Solutions and Inukshuk may not be otherwise controlled by
non-Canadians. In other words, a non-Canadian cannot exercise control in fact
over these companies. Failure by Microcell to comply with the requirements relating to the
Canadian ownership and control provisions may affect the ability of Solutions
and Inukshuk to operate as Canadian carriers and to hold and have renewed the
PCS license and the MCS licenses. Corporate Stability Provisions The articles of Microcell provide that, until May 1, 2005 (except if
varied or waived by a special resolution of holders of all voting and
non-voting shares (and all units comprised of notes and preferred shares, if
issued, voting on an as converted basis), voting as a single class, of
Microcell adopted by a 66 2/3% majority thereof represented and voting in
person or by proxy at a meeting called for such purpose and, for greater
certainty, at which the voting limitations provided for herein shall be
applicable), no person or company, acting alone or acting jointly or in concert
with any other person or company with respect to the acquisition, disposition
or voting of securities of Microcell, shall be permitted to exercise on any
resolution submitted to a vote of holders of securities, voting rights
representing in excess of 20% of the aggregate voting rights exercisable with
respect to the particular resolution. Such restriction does not apply to any
person or company that makes an offer to acquire all the preferred and common
shares (and units comprised of notes and preferred shares, if any are issued)
of Microcell and acquires such number of such securities so as to hold
thereafter at least 66 2/3% of the equity securities of Microcell on a fully
diluted basis. Shareholder Rights Plan This is a summary of our Rights Plan only; you should refer to the Rights
Plan itself filed as an exhibit to this annual report, in particular to defined
terms used in this section, for details. The objective of the Rights Plan is to ensure, to the extent possible,
that all shareholders of the Company will be treated equally and fairly in
connection with any take-over offer for the Company. The Rights Plan is designed to prevent the use of coercive and/or abusive
takeover techniques and to encourage any potential acquiror to negotiate
directly with our current board for the benefit of all shareholders of the
Company. In addition, the Rights Plan is intended to provide increased
assurance that a potential acquiror would pay an appropriate control premium in
connection with any acquisition of the Company. 95




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The Rights Plan utilizes the mechanism of a permitted bid (as described
therein) to attempt to ensure that a person seeking to acquire beneficial
ownership of 10% or more of the shares (and units if issued) of the Company
(treated for such purposes as though they were a single class and on a fully
diluted basis, assuming full conversion but without giving effect to management
and employee options and exercise of Warrants), gives shareholders and our
current board sufficient time to evaluate the transaction, negotiate with the
proposed acquiror, encourage competing bids to emerge, and ensure that all
alternatives to the transaction designed to maximize shareholder value have
been considered. We have the ability to raise such 10% threshold and may in
future consider the possibility of doing so. The Rights Plan will provide our current board with time to review any
unsolicited take-over bid that may be made and to take action, if appropriate,
to enhance shareholder value. The Rights Plan attempts to protect shareholders
by requiring all potential bidders to comply with the conditions specified in
the Permitted Bid provisions, failing which such bidders are subject to the
dilutive features of the Rights Plan. By creating the potential for substantial
dilution of a bidders position, the Rights Plan encourages an offeror to
proceed by way of a Permitted Bid or to approach our current board with a view
to a negotiation. Pursuant to the Rights Plan, one Right has been issued in respect of each
share issued on May 1, 2003. In addition, one Right will be issued for each
additional share (or unit) issued thereafter. Each Right entitles the
registered holder thereof to purchase from Microcell 1.0229 Class A Share or
Class B Share, as the case may be, at a price of $97.76, subject to certain
anti-dilution adjustments. In addition, following a Flip-In Event (as defined
below), each Right initially entitled the holder thereof to purchase Shares
having a fair market value of $195.52 for $97.76. The Rights are not
exercisable until the separation time. Trading and Exercise of Rights Until the separation time, the Rights trade together with the shares (or
units, if issued). After the separation time, the Rights are exercisable, and
are transferable separately from the shares (or units, if issued). Flip-In Event The acquisition by a person making an unsolicited take-over bid for
Microcell, including others acting jointly or in concert, of beneficial
ownership of 10% of the shares (or units, if issued) (treated for such purposes
as though they were a single class and on a fully diluted basis assuming full
conversion but without giving effect to management and employee options and
exercise of the Warrants), other than by way of a permitted bid is referred to
as a Flip-In Event. As indicated above, we have the ability to raise such 10%
threshold and may in the future consider the possibility of doing so. Any
Rights beneficially owned by an Acquiring Person upon the occurrence of any
Flip-In Event will be void, as will any Rights beneficially owned by
associates, affiliates or Persons acting jointly or in concert with an
Acquiring Person, and transferees thereof. After the occurrence of a Flip-In
Event, each Right (other than those that are void) will permit the holder to
purchase from the Company class A restricted voting shares or class B
non-voting shares, as the case may be, with a total market value on the date of
occurrence of the Flip-In Event equal to twice the exercise price for an amount
in cash equal to the exercise price. Permitted Bid Requirements The requirements of a permitted bid include the following: (1) the take-over bid must be made by way of a take-over bid circular; (2) the take-over bid must be made to all registered holders of all
outstanding shares (and units, if issued) (other than shares (and units, if
issued) held by the offeror or any associate or affiliate of the offeror); (3) the take-over bid must contain, and the take-up and payment for
securities tendered or deposited thereunder is subject to, irrevocable and
unqualified conditions that (1) no new instruments shall be taken up or paid
for pursuant to the take-over bid prior to the close of business on the date
which is not less than 60 days following the date of the take-over bid and
(2) no shares (and units, if issued) shall be taken up or paid for pursuant
to the take-over bid unless, at the date referred to in (1) above, more than
50% of the aggregate outstanding shares (and units, if issued) held by
independent shareholders shall have been deposited or tendered pursuant to
the take-over bid and not withdrawn; (4) the take-over bid must contain an irrevocable and unqualified
provision that, unless the take-over bid is withdrawn, shares 96




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(and units, if issued) may be deposited pursuant to such take-over bid
at any time prior to the close of business on the date of first take-up or
payment for shares (and units, if issued) and that any shares (and units, if
issued) deposited pursuant to the take-over bid may be withdrawn until taken
up and paid for; and (5) the take-over bid must contain an irrevocable and unqualified
provision that if, on the date on which shares (and units, if issued) may be
taken up or paid for, more than 50% of the aggregate outstanding shares (and
units, if issued) held by independent shareholders shall have been
deposited or tendered pursuant to the take-over bid and not withdrawn, the
offeror will make a public announcement of that fact and the take-over bid
will remain open for deposits and tenders of shares (and units, if issued)
for not less than ten Business Days from the date of such public
announcement. The usual provisions regarding permitted lock-up agreements are included
in the Rights Plan. The Rights Plan allows a Competing Bid to be made while a Permitted Bid is
in existence. A Competing Bid must satisfy all the requirements of a Permitted
Bid. MATERIAL CONTRACTS We have been party to the following material contracts in the last two
years. We have entered into a first unit indenture, made as of May 30, 2003, with
Computershare Trust Company of Canada as trustee, providing for the issuance of
first units, consisting of a first note and first preferred 2 share. We have also entered into a second unit indenture, made as of May 30,
2003, with Computershare Trust Company of Canada as trustee, providing for the
issuance of second units, consisting of a second note and second preferred 2
share. We are party to the warrant indenture for the Warrants 2005 dated as of
May 1, 2003 and amended on November 20, 2003 with Computershare Trust Company
of Canada, as trustee, providing for the issuance of the Warrants 2005
entitling their holders to subscribe, until May 1, 2005 for class A restricted
voting shares or class B non-voting shares, as the case may be, at an exercise
price of Cdn.$19.91 per share. We are also party to the warrant indenture for the Warrants 2008 dated as
of May 1, 2003 and amended on November 20, 2003 with Computershare Trust
Company of Canada, as trustee, providing for the issuance of the Warrants 2008
entitling their holders to subscribe, until May 1, 2008 for class A restricted
voting shares or class B non-voting shares, as the case may be, at an exercise
price of Cdn.$20.69 per share. A shareholder rights plan agreement dated as of May 1, 2003 between
Computershare Trust Company of Canada, as Rights Agent, and us, ensures, to the
extent possible, that all our shareholders will be treated equally and fairly
in connection with any take-over offer for Microcell. Our amended and restated tranche A exit facility agreement dated as of
March 17, 2004 among us, as parent, Solutions, as borrower, the financial
institutions from time to time parties thereto as lenders, and JP Morgan Chase
Bank, Toronto Branch, as administrative agent, collateral agent and issuing
bank, provides for a credit facility of $50 million, which may be increased up
to $75 million, and was established in favor of Solutions. Also, our tranche B-term loan A credit agreement dated as of March 17,
2004 among us, as parent, Solutions, as borrower, the financial institutions
from time to time parties thereto, as lenders, and JP Morgan Chase Bank,
Toronto Branch, as administrative agent and collateral agent, provides for a
term loan to Solutions of $200,000,000 . Our tranche B-term loan B credit agreement dated as of March 17, 2004
among us, as parent, Solutions, as borrower, the financial institutions from
time to time parties thereto as lenders, and JP Morgan Chase Bank, Toronto
Branch, as administrative agent and collateral agent, provides for a term loan
to Solutions in the aggregate amount of $200,000,000. We are party to an amended and restated intercreditor and collateral
agency agreement, dated as of March 17, 2004, among Solutions, as borrower,
Microcell, as guarantor, each of the persons listed on the execution pages
thereto under the Tranche A Lenders, Tranche B-Term Loan A Lenders and
Tranche B-Term Loan B Lenders heading, each of the lenders listed therein, JP
Morgan Chase Bank, Toronto Branch, in several capacities, Computershare Trust
Company Of Canada, as trustee for the holders of 97




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the first units, and for the holders of the second units. We have a lease dated as of August 1, 1998, as amended from time to time,
with WPBI Property Management Inc. for the lease of approximately 300,000
square feet of office and switchroom space at 800 de La Gauchetière Street West
in Montreal, Quebec. We are also a party to a purchase and licence agreement with Nortel
Networks Corporation, dated December 21, 2001 and amended on January 16, 2004,
whereby Nortel is our exclusive supplier for GSM and UMTS core wireless network
equipment until December 31, 2006. This agreement grants to Nortel an
exclusivity for provisioning GSM MSC (Mobile Switching Centre), HLR (Home
Location Register) and call server products. We are party to a warrant agreement with COM Canada, LLC, a Washington
limited liability company, effective May 3, 2004, which provides for the
issuance to COM Canada, LLC of 3,977,272 warrants to purchase class B
non-voting shares. EXCHANGE CONTROLS There are currently no laws, decrees, regulations or other legislation in
Canada that restricts the export or import of capital, or affects the
remittance of dividends, interest or other payments to non-resident holders of
Microcells securities, other than withholding tax requirements. There is no limitation imposed by Canadian law or by the articles of
incorporation or other charter documents of Microcell on the right of a
non-resident to hold voting shares of Microcell, other than as provided by the
Canadian ownership and control provisions, the Investment Canada Act, as
amended, as amended by the North American Free Trade Agreement (NAFTA)
Implementation Act (Canada), and the World Trade Organization (WTO) Agreement
Implementation Act. This legislation requires notification and, in certain
cases, advance review and approval by the Government of Canada of the
acquisition by a non- Canadian of control of a Canadian business, all as
defined in the relevant legislation. Generally, the threshold for review will
be higher in monetary terms for a member of the WTO or NAFTA. TAXATION Certain Canadian Federal Income Tax Considerations The following is a summary of certain Canadian federal income tax
considerations relating to an investment in either: (1) Class A Restricted
Voting Shares and Class B Non-Voting Shares; and (2) Warrants (together, also
referred to as the Securities or the Microcell Securities). The summary is only applicable to a holder of Microcell Securities who,
for the purposes of the Income Tax Act (Canada) (also referred to as ITA) and
the Canada-United States Income Tax Convention (also referred to as the
Convention), is a resident of the United States and is not resident in Canada,
deals at arms length with Microcell and is not affiliated with Microcell and
holds its Securities as capital property (also referred to as the U.S. Holder).
For this purpose, related persons are deemed not to deal with each other at
arms length. A person and a corporation are related if the person controls the
corporation or is a member of a related group that controls the corporation. It
is a question of facts whether persons not related to each other are dealing
with each other at arms length. The Securities will generally be considered to
be capital property for this purpose to a U.S. Holder unless either the U.S.
Holder holds such securities in the course of carrying on a business, or the
U.S. Holder has acquired such securities in a transaction or transactions
considered to be an adventure in the nature of trade. This summary is not applicable to a U.S. Holder that is a financial
institution (as defined in the ITA) for purposes of the mark-to-market rules.
In addition, this discussion does not apply to an insurer or an authorized
foreign bank, who carries on an insurance business or a bank business in Canada
and elsewhere. This summary is based upon the current provisions of the ITA and counsels
understanding of the current published administrative practices and policies of
the Canada revenue agency (CRA). It also takes into account all specific
proposals to amend the ITA publicly announced by or on behalf of the Canadian
Minister of Finance prior to the date of this Circular (the Tax Proposals),
and assumes that all such Tax Proposals will be enacted. This summary does not
otherwise take into account or anticipate any changes in law, whether by way of
legislative, judicial or administrative action or interpretation, nor does it
address any provincial, territorial or foreign tax considerations. No assurance
can be given that the Tax Proposals will be enacted in the form proposed or at
all. 98




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This summary is of a general nature only and is not intended to be, nor
should it be construed to be, legal or tax advice to any particular U.S.
Holder. Consequently, U.S. Holders are urged to consult their own tax advisors
for advice as to the tax considerations in respect of holding Microcell
Securities having regard to their particular circumstances. All amounts, including the cost of interest or dividends received and
accrued on, and proceeds of disposition from the Class A Restricted Voting
Shares and Class B Non-Voting Shares, and Warrants must be determined in
Canadian dollars at applicable exchange rates for the purposes of the ITA. The
amount of interest and any capital gain or capital loss of a U.S. Holder may be
affected by fluctuations in Canadian dollar exchange rates. Holding and Disposition of Class A Restricted Voting Shares and Class B
Non-Voting Shares. Dividends paid or deemed paid by Microcell to a U.S. Holder on its Class A
Restricted Voting Shares and Class B Non-Voting Shares will be subject to a
Canadian withholding tax in the amount of 25%. Such withholding tax may be
reduced by virtue of the provisions of any income tax treaty or convention.
Under the Convention, the rate of withholding tax in respect of dividends or
deemed dividends beneficially owned by a resident of the United States is
generally reduced to 15%. Moreover, under the Convention, dividends paid to
certain religious, scientific, literary, education or charitable organizations
that are resident in, and generally exempt from tax in, the United States, are
exempt from Canadian non-resident withholding tax. Provided certain
administrative procedures are observed by such an organization, Microcell would
not be required to withhold such tax from dividends paid or credited to such
organization. A U.S. Holder will not be subject to tax under the ITA on any Taxable
Capital Gain (or will not be entitled to deduct any Allowable Capital Loss in
computing taxable income earned in Canada) realized on a disposition of Class A
Restricted Voting Shares, Class B Non-Voting Shares and Warrants, as the case
may be, unless the shares or the Warrants constitute taxable Canadian
property (as defined in the ITA) at the time of their disposition. Class A
Restricted Voting Shares, Class B Non-Voting Shares, the Warrants and options
to acquire Class A Restricted Voting Shares or Class B Non-Voting Shares,
assuming the Class A Restricted Voting Shares or the Class B Non-Voting Shares,
as the case may be, remain listed on a recognized exchange at the time of such
disposition, generally would not constitute taxable Canadian property to a U.S.
Holder unless at any time during the 60-month period immediately preceding
their disposition, the U.S. Holder, persons with whom the U.S. Holder did not
deal at arms length, or the U.S. Holder together with all such persons, owned
25% or more of the issued shares of any class or series of Microcell. The Convention provides for an exemption under the terms of which capital
gain on shares of Canadian corporations, the value of which is not derived
principally from real estate situated in Canada, are exempt from Canadian
income tax, and, as a result, U.S. Holders may not be liable to Canadian tax
(or will not be entitled to deduct any allowable capital loss in computing
taxable income earned in Canada). Exercise of Warrants No gain or loss will be realized by a U.S. Holder upon exercise of
Warrants. When a Warrant is exercised, the cost to the U.S. Holder of the Class
A Restricted Voting Shares thus acquired will be the aggregate of the adjusted
cost base, for that U.S. Holder, of the Warrant and the price paid for the
Class A Restricted Voting Shares upon exercise of the Warrant. To the extent that a U.S. Holder receives a cash payment in lieu of a
fractional share as a result of the exercise of a Warrant, the CCRA generally
allows a shareholder who receives cash not exceeding $200 in lieu of a
fractional share to recognize a capital gain or capital loss on the disposition
of the fractional share in the taxation year in which the cash payment was
received in lieu of the fractional share or, alternatively, to reduce the
adjusted cost base of the shares received by such shareholder by the cash
amount. Expiry of Warrants The expiry of an unexercised Warrant will generally result in a capital
loss to the U.S. Holder equal to the adjusted cost base of the Warrant
immediately before its expiry. Provided that such Warrant consisted of taxable
Canadian property to such U.S. Holder one-half of such loss will be considered
an Allowable Capital Loss deductible against Taxable Capital Gains from
taxable Canadian property. For more details on this issue, see the discussion
above under the heading Holding and Disposition of First Preferred Shares,
Second Preferred Shares, Class A Restricted Voting Shares and Class B
Non-Voting Shares". Exchange of Class B Non-Voting Shares for Class A Restricted Voting Shares 99




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A U.S. Holder will not be subject to Canadian tax in respect of the
exchange of Class B Non-Voting Shares for Class A Restricted Voting Shares. The
adjusted cost base of Class A Restricted Voting Shares into which the Class B
Non-Voting Shares were exchanged will equal the adjusted cost base of the Class
B Non-Voting Shares. Certain U.S. Federal Income Tax Considerations The following is a discussion of the material U.S. federal income tax
considerations applicable to an investment in class A restricted voting shares,
class B non-voting shares (collectively, shares) and warrants, in each case
by a U.S. holder (defined below). This discussion is limited to consequences
related to shares and warrants held as capital assets within the meaning of
section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the
Code). This discussion is based on the Code, Treasury regulations promulgated
under the Code, and judicial and administrative interpretations thereof, all as
in effect on the date hereof and all of which are subject to change, which
change may be retroactive and may affect the tax consequences described herein.
This discussion does not address the tax consequences of an investment in
shares or warrants to any particular U.S. holder, and does not deal with
persons that may be subject to special treatment under the U.S. federal income
tax laws (including, without limitation, insurance companies, tax-exempt
organizations, individual retirement accounts and other tax-deferred accounts,
regulated investment companies, financial institutions, broker-dealers,
individuals subject to section 877 of the Code, U.S. holders whose functional
currency is not the U.S. dollar, U.S. holders that hold a share or a warrant
as a position in a straddle, hedge, constructive sale transaction,
conversion transaction or other integrated transaction or persons who mark to
market their securities). For purposes of this discussion, the term U.S. holder means a beneficial
owner of shares or warrants that is, for U.S. federal income tax purposes:  
    
    an individual who is a citizen or resident of the United States;  
    
    a corporation, or other entity treated as a corporation for U.S.
federal income tax purposes, created or organized in or under the laws
of the United States, any State thereof or the District of Columbia;  
    
    an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or  
    
    a trust the administration of which is subject to the primary
supervision of a court in the United States and for which one or more
U.S. persons have the authority to control all substantial decisions. If a partnership holds shares or warrants, the U.S. federal income tax
treatment of a partner generally will depend upon the status of the partner and
the activities of the partnership. U.S. holders should consult their own tax advisors with respect to the tax
consequences to them of an investment in shares or warrants in light of their
particular circumstances, including the tax consequences under state, local,
non-U.S. and other tax laws and the possible effects of changes in U.S. federal
and other tax laws. Distributions on Shares Distributions on shares, whether in cash or in property, that are paid out
of our current or accumulated earnings and profits (as determined for U.S.
federal income tax purposes) will generally be includible in income by a U.S.
holder as a dividend when actually or constructively received. The amount of
the dividend will equal the amount of cash and the fair market value of the
property received. To the extent a U.S. holder receives a distribution that
exceeds our current and accumulated earnings and profits, the distribution will
be treated first as a non-taxable return of capital that reduces the holders
adjusted tax basis in the shares (to the extent of such basis) and thereafter
as taxable gain from the sale or exchange of the shares. Generally, the
dividends received deduction and Code section 1059 extraordinary dividend
provisions will not apply to U.S. holders. 100




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For taxable years beginning before January 1, 2009, dividends received by
an individual from a qualified foreign corporation are eligible for
preferential rates of taxation, subject to minimum holding period and other
requirements. The determination of whether a dividend would qualify for the
preferential rates must be made at the time the dividend is paid. Dividends paid in Canadian dollars (including the amount of any Canadian
taxes withheld therefrom) will be included in a U.S. holders income in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
the dividends are actually or constructively received by the U.S. holder,
regardless of whether the Canadian dollars are converted to U.S. dollars at
that time. U.S. holders should consult their own tax advisors regarding the
possible effect and rate of any Canadian withholding tax and the reduction of
such withholding rate under the income tax treaty between the United States and
Canada. Sales, Exchanges or Other Dispositions of Shares Upon the sale, exchange or other disposition of shares, a U.S. holder will
recognize capital gain or loss equal to the difference between the amount
realized and the U.S. holders adjusted tax basis in the shares. Such gain or
loss will be long-term capital gain or loss if the shares have been held for
more than one year and otherwise will be short-term capital gain or loss.
Long-term capital gains of individuals are eligible for preferential rates of
taxation, which have been reduced for long-term capital gains recognized before
January 1, 2009. Short-term capital gains are taxed at the rates applicable to
ordinary income, which, for gains recognized before January 1, 2009, will be
higher than the rates applicable to dividends. The deductibility of capital
losses is subject to limitations. Exchanges of Class B Non-Voting Shares for Class A Restricted Voting Shares A U.S. holder will recognize no gain or loss upon an exchange of class B
non-voting shares for class A restricted voting shares. The U.S. holders
adjusted tax basis in the class A restricted voting shares received in the
exchange will equal the holders adjusted tax basis in the class B non-voting
shares exchanged therefor, and the U.S. holders holding period for the class A
restricted voting shares will include the holding period for the class B
non-voting shares exchanged therefor. Warrants Upon the exercise of warrants, a U.S. holder will not recognize gain or
loss and will have a tax basis in the shares acquired pursuant to such exercise
equal to such holders tax basis in the exercised warrants plus the exercise
price. The holding period for such shares will commence on the date of exercise
of the warrants. Upon the sale, exchange or other disposition of a warrant, a U.S. holder
will recognize gain or loss in an amount equal to the amount realized and the
U.S. holders tax basis in the warrant. Such gain or loss will be long-term
capital gain or loss if the warrant has been held for more than one year, and
otherwise will be short-term capital gain or loss. Long-term capital gains of
individuals are eligible for preferential rates of taxation, which have been
reduced for long-term capital gains recognized before January 1, 2009.
Short-term capital gains are taxed at the rates applicable to ordinary income,
which, for gains recognized before January 1, 2009, will be higher than the
rates applicable to dividends. The deductibility of capital losses is subject
to limitations. If a warrant expires unexercised, a U.S. holder will recognize a capital
loss equal to the holders tax basis in the expired warrant. Foreign Tax Credit Considerations For U.S. foreign tax credit limitation purposes, dividends on shares
generally will be treated as foreign source income, and gain or loss recognized
on the sale, exchange or other disposition of shares will be treated as from
U.S. sources. To the extent Canadian withholding tax is payable in respect of a
distribution or payment to a U.S. holder, the holder may be eligible for a
foreign tax credit 101




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or deduction. Further, foreign source income has an effect on a U.S.
holders ability to absorb foreign tax credits. The rules relating to U.S.
foreign tax credits are extremely complex, and U.S. holders should consult
their tax advisors regarding the application of the U.S. foreign tax credit
rules to their particular situations. Passive Foreign Investment Company Considerations The Code provides special anti-deferral rules regarding certain
distributions received by U.S. persons with respect to, and sales and other
dispositions (including pledges) of stock of, a passive foreign investment
company (PFIC). A foreign corporation will be treated as a PFIC if 75% or
more of its gross income is passive income for a taxable year or if the average
percentage of its assets (by value) that produce, or are held for the
production of, passive income is at least 50% for a taxable year. We do not believe that we are currently a PFIC, and we anticipate that we
will not become a PFIC. If we become a PFIC, U.S. holders may become subject to
adverse U.S. federal income tax consequences. U.S. holders should consult their
tax advisors regarding those consequences and possible ameliorative actions. Backup Withholding and Information Reporting The payment within the United States of dividends on, or the proceeds from
a disposition of, shares held by certain non-corporate holders may be subject
to U.S. information reporting rules. Such payments may also be subject to U.S.
backup withholding, unless a holder provides a taxpayer identification number
and satisfies certain other conditions or otherwise establishes an exemption
under the Code. Backup withholding is not an additional tax, and may be
credited against a holders U.S. federal income tax liability or refunded if
the amounts so withheld exceed the holders U.S. federal income tax liability. DIVIDENDS AND PAYING AGENTS Not applicable. STATEMENT BY EXPERTS Not applicable. DOCUMENTS ON DISPLAY Any documents referred to in this annual report may be inspected at our
office at 800 de La Gauchetière Street West, Suite 4000, Montreal, Quebec,
Canada, H5A 1K3. 102




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ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since December 31, 2003,
we have entered into amended and restated credit agreements and new
hedging transactions. Therefore, the information in this section is presented
as of March 31, 2004. Qualitative Market Risk Disclosures Market Risk As most of our revenues are expected to be received in Canadian dollars,
we are exposed to foreign exchange risk on periodic interest payments and
principal repayments at maturity of the Tranche B Term Loan A and Term Loan B,
which are both denominated in US dollars. We use derivatives such as foreign
exchange swap agreements to manage certain elements of our cash flow exposure
resulting from foreign exchange fluctuations. We do not hold derivatives for
trading purposes. It is our policy to enter into foreign currency and other hedging
transactions to manage financial risk exposures and to protect cash flow from
market volatility, while minimizing the costs associated with any hedging
program. To date, we have hedged our foreign exchange risk exposure to mitigate
the impact of changes in foreign exchange rates on our cash flow resulting from
the US dollar denominated Tranche B Term Loan A and Term Loan B. The fair value of Tranche B Term Loan A and Term Loan B debt is determined
based on current quoted value on the over the counter market at the balance
sheet date. The fair value of the derivative instruments is determined based on market
rates prevailing at the balance sheet date obtained from the companys
financial institution for similar derivative instruments. Interest Rate Risk Management The Tranche A Exit Facility consists of a CAD $50 million line of credit
which remains undrawn as at March 31, 2004. Of this CAD $50 million, CAD $16
million has been carved-out to mitigate the credit exposure due to the
Companys swap transactions. This debt carries a floating interest rate based
on Canadian B/As. The Tranche B Term Loan A and Term Loan B are both denominated in US
dollars at $149.925 million each, for a total of US $299.85 Million. The
equivalent in Canadian dollars is CAD $200 million for Tranche B Term Loan A
and CAD $200 million for Tranche B Term Loan B. As of March 31, 2004, we did
not hold any interest rate swap agreements related to our interest rate
exposure. A fluctuation of one percentage point in the US Libor rate would
affect our cash flow by approximately CAD $4 million annually. As our policy is to hold all cash equivalents and short-term investments
to maturity, short-term fluctuations in interest rates would not materially
impact the realization value of these investments. Foreign Exchange Risk Management Our objective in managing foreign exchange risk is to protect against cash
flow and balance sheet volatility resulting from changes in foreign exchange
rates. Long-term debt denominated in U.S. dollars exposes us to changes in
foreign exchange rates. In March 2004, we entered into swap transactions to manage our exposure to
foreign exchange rate fluctuations on the U.S.-dollar-denominated Term Loan A
and Term Loan B. We swapped the total principal of Term Loan A and Term Loan B
in the amount of $400 million [US$299.9 million] at a rate of 1.3340. We also
swapped the floating interest rate of Libor plus 4% on Term Loan A, payable in
US dollars, to a floating interest rate of Libor plus 5.085%, payable in
Canadian dollars. We also swapped the floating interest rate of Libor plus 7%
on Term Loan B, payable in US dollars, to a floating interest rate of Libor
plus 8.485%, payable in Canadian dollars. The maturity of the swap transactions
corresponds to the maturity of both term loans. These swap transactions, which
have not been designated as hedging instruments, are presented at their fair
value as derivative instruments on the balance sheet and changes in fair value
are recognized in income as foreign exchange gains or losses. As of March 31,
2004, fair value of these swaps represented a liability of $11.8 million for us
and a foreign exchange loss of $11.8 million was recognized in the income
statement. 103




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Bank Debt Applicable RateTranche A Exit Facility
    
    CAD B/A + 3.50%Tranche B Term Loan A
    
    LIBOR + 4.0%Tranche B term Loan B
    
    LIBOR + 7.0%(LIBOR floor: 2.0%)
 Swaps Applicable RateTranche B Term Loan A
    
    LIBOR + 5.085%Tranche B Term Loan B
    
    LIBOR + 8.485%
 Quantitative Market Risk Disclosure Interest Rate Sensitivity The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For long-term debt, the table presents principal repayments and
related interest rates by expected maturity dates based on the historical
exchange rate of 1.3340. (In thousands of Canadian dollars, unless otherwise indicated) Fair value2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    March 31, 2004LONG-TERM DEBT DENOMINATED IN FOREIGN
CURRENCY ($US)Secured LoanTranche A Exit Facility
    
    undrawn
    
    undrawn
    
    undrawn
    
    undrawn
    
    undrawn
    
    undrawn
    
    undrawn
    
    
    Tranche B Debt Loan A ($)
    
    
    7,500
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    152,500
    
    
    
    200,00
    
    
    
    199,660Tranche B Debt Loan B ($)
    
    
    1,500
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    190,500
    
    
    
    200,00
    
    
    
    200,500Interest RateTranche A Exit Facility (%)
    
    
    7.0
    
    
    
    7.5
    
    
    
    8.0
    
    
    
    8.5
    
    
    
    9.0
    
    
    
    9.0
    
    
    
    N/A
    
    
    
    Spread
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
    
    
    
    N/A
    
    
    
    CAD B/As
    
    
    3.5
    
    
    
    4.0
    
    
    
    4.5
    
    
    
    5.0
    
    
    
    5.5
    
    
    
    5.5
    
    
    
    N/A
    
    
    
    Tranche B Debt Loan A (%)
    
    
    5.5
    
    
    
    6.0
    
    
    
    6.5
    
    
    
    7.0
    
    
    
    7.5
    
    
    
    8.0
    
    
    
    N/A
    
    
    
    Spread
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    US Libor
    
    
    1.5
    
    
    
    2.0
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    Tranche B Debt Loan B (%)
    
    
    9.0
    
    
    
    9.0
    
    
    
    9.5
    
    
    
    10.0
    
    
    
    10.5
    
    
    
    11.0
    
    
    
    N/A
    
    
    
    Spread
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    N/A
    
    
    
    US Libor
(2.0% floor)
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    Cross-Currency swapTranche B Loan A Debt  1.334CAD/USPeriodic $ CAD Outflows
    
    
    7,500
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    152,500
    
    
    
    200,000
    
    
    
    (5,393
    )Periodic $ US Inflows
    
    
    5,622
    
    
    
    7,496
    
    
    
    7,496
    
    
    
    7,496
    
    
    
    7,496
    
    
    
    114,319
    
    
    
    149,925
    
    
    
    Interest Rate (%)
    
    
    6.6
    
    
    
    7.1
    
    
    
    7.6
    
    
    
    8.1
    
    
    
    8.6
    
    
    
    9.1
    
    
    
    N/A
    
    
    
    Spread
    
    
    5.1
    
    
    
    5.1
    
    
    
    5.1
    
    
    
    5.1
    
    
    
    5.1
    
    
    
    5.1
    
    
    
    N/A
    
    
    
    US Libor
    
    
    1.5
    
    
    
    2.0
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    Tranche B Loan B Debt  1.334CAD/USPeriodic $ CAD Outflows
    
    
    1,500
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    190,500
    
    
    
    200,000
    
    
    
    (6,450
    )Periodic $ US Inflows
    
    
    1,125
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    142,800
    
    
    
    149,925
    
    
    
    Interest Rate (%)
    
    
    10.0
    
    
    
    10.5
    
    
    
    11.0
    
    
    
    11.5
    
    
    
    12.0
    
    
    
    12.5
    
    
    
    N/A
    
    
    
    Spread
    
    
    8.5
    
    
    
    8.5
    
    
    
    8.5
    
    
    
    8.5
    
    
    
    8.5
    
    
    
    8.5
    
    
    
    N/A
    
    
    
    US Libor
    
    
    1.5
    
    
    
    2.0
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    
 104




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ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 105




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PART II 
 ITEM 13  DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES None. 
 ITEM 14  MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS None. 
 ITEM 15 - CONTROLS AND PROCEDURES As of the end of the period covered by this Annual Report on Form 20-F,
Microcell Telecommunications Inc. conducted an evaluation (under the
supervision and with the participation of Microcell Telecommunications Inc.s
management, including the chief executive officer and chief financial officer),
pursuant to Rule 13a-15 promulgated under the Exchange Act, of the
effectiveness of the design and operation of Microcells disclosure controls
and procedures. Based on this evaluation, Microcells chief executive officer
and chief financial officer concluded that as of the evaluation date, such
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by Microcell in reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. There have not been any changes in our internal control over financial
reporting during the period covered by this Annual Report on Form 20-F that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 106




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ITEM 16 [RESERVED] Not applicable. 107




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ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has
determined that Christian Dubé, a member of the
audit committee of our Board of Directors, is an audit committee financial
expert as defined by the SEC for purposes of this Item 16A. 108




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ITEM 16B CODE OF ETHICS We have adopted a code of ethics that applies to our Chief Executive Officer,
our Chief Financial Officer and our Corporate Controller. The full text of our
code of ethics is posted on our corporate website, www.microcell.ca. As of the
date hereof, there has not been any amendment or waiver of any provision of the
code of ethics since its adoption. 109




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ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES On a consolidated basis, aggregate audit fees, audit-related fees, tax
fees and the aggregate of all the other fees, including expenses, billed by
Ernst & Young LLP and affiliate offices in 2003 and 2002 amounted to the
following: In Canadian dollars 2003
    
    2002Audit fees
    
    
    423,700
    
    
    
    269,875Audit-related fees
    
    
    476,766
    
    
    
    492,176Tax fees
    
    
    148,851
    
    
    
    14,735Other fees
    
    
    754,042
    
    
    
    2,152Total fees
    
    
    1,803,359
    
    
    
    778,938
 Audit-related fees primarily relate to services rendered in connection
with our various securities exchange and commission filings, the Companys
quarterly review and various consultations regarding the accounting treatment
of non-recurring transactions. Tax fees relate primarily to tax compliance services, tax planning and
various tax advisory services. Other fees primarily relate to court-appointed monitoring services during
the CCAA process and to translation services. 110




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ITEM 16D EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 111




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ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 112




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PART III 
 ITEM 17  FINANCIAL STATEMENTS Not applicable. 113




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ITEM 18  FINANCIAL STATEMENTS Presented below are the audited comparative consolidated financial statements for the eight
months ended December 31, 2003, the four months ended April 30, 2003 and the
years ended December 31, 2002 and 2001 and the auditors report signed by Ernst
& Young LLP. 
 INDEX TO FINANCIAL STATEMENTS PageAuditors Report
    
    
    116Consolidated Balance Sheet
    
    
    117Consolidated Statements of Net Income and Deficit
    
    
    118Consolidated Statements of Cash Flow
    
    
    119Notes to Consolidated Financial Statements
    
    
    120 114




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Consolidated Financial Statements

Microcell Telecommunications Inc.

December 31, 2003


115



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AUDITORS REPORT

To the Shareholders of

Microcell Telecommunications Inc.


We have audited the consolidated balance sheets
of Microcell Telecommunications Inc. as at
December 31, 2003, May 1, 2003 and December 31,
2002, and the consolidated statements of net income (loss) and
deficit and cash flows for the eight months ended
December 31, 2003, the four months ended April 30,
2003 and the years ended December 31, 2002 and 2001. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
Canadian and United States generally accepted auditing
standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2003,
May 1, 2003 and December 31, 2002, and the results of
its operations and its cash flows for the eight months ended
December 31, 2003, the four months ended April 30,
2003 and the years ended December 31, 2002 and 2001 in
accordance with Canadian generally accepted accounting
principles.



| |                                
| | -------------------------------
| | (ERNST AND YOUNG LLP SIGNATURE)
| | Chartered
    Accountants      

Montreal, Canada,

February 11, 2004


[except for note 20 which is as at June 22,
2004]


116



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MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|----------------------------------------------------------------- |  | ---------------------------------- | ------- | ----- |  | ------------------ | ------- |  |  |  | ---------- | -
|                                                                  |  |                                    |         |       |  | Pre-reorganization
|                                                                  |  |                                    |         |       |  |                   
|                                                                  |  | December 31                        |         | May 1 |  | December 31       
|                                                                  |  | 2003                               |         | 2003  |  | 2002              
|                                                                  |  |                                    |         |       |  |                   
|                                                                  |  | $                                  |         | $     |  | $                 
|                                                                  |  |                                    |         |       |  | [note 1]          
|                                                                  |  |                                   
|                                                                  |  | [In thousands of Canadian dollars]
|ASSETS[note 8]                                                   
|Current assets                                                    |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Cash and cash equivalents                                         |  |                                    | 43,094  |       |  |                    | 111,765 |  |  |  | 26,979     |  
|Short-term investments                                            |  |                                    | 60,927  |       |  |                    | 9,912   |  |  |  | 83,181     |  
|Marketable securities                                             |  |                                    |        |       |  |                    |        |  |  |  | 164        |  
|Receivables [note 3]                                              |  |                                    | 76,796  |       |  |                    | 64,552  |  |  |  | 61,889     |  
|Inventories                                                       |  |                                    | 27,593  |       |  |                    | 21,865  |  |  |  | 19,527     |  
|Prepaid license fees, rental sites and other
    prepaid expenses |  |                                    | 26,850  |       |  |                    | 34,043  |  |  |  | 19,021     |  
|Deferred charges                                                  |  |                                    | 10,601  |       |  |                    | 7,044   |  |  |  | 16,525     |  
|Other current assets                                              |  |                                    | 6,188   |       |  |                    | 2,906   |  |  |  | 4,070      |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Total current assets                                              |  |                                    | 252,049 |       |  |                    | 252,087 |  |  |  | 231,356    |  
|Property, plant and equipment [note 4]                            |  |                                    | 318,041 |       |  |                    | 289,692 |  |  |  | 655,646    |  
|Intangible assets [note 5]                                        |  |                                    | 233,819 |       |  |                    | 241,202 |  |  |  | 2,727      |  
|Long-term investments and other non-current
    assets [note 6]   |  |                                    | 4,797   |       |  |                    | 5,227   |  |  |  | 12,335     |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|                                                                  |  |                                    | 808,706 |       |  |                    | 788,208 |  |  |  | 902,064    |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                         
|Current liabilities                                               |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Accounts payable and accrued liabilities
    [note 7]             |  |                                    | 91,634  |       |  |                    | 65,026  |  |  |  | 121,539    |  
|Deferred revenues                                                 |  |                                    | 42,328  |       |  |                    | 34,207  |  |  |  | 37,573     |  
|Derivative instruments [note 8]                                   |  |                                    | 6,348   |       |  |                    |        |  |  |  |           |  
|Current portion of long-term debt
    [note 8]                    |  |                                    | 9,298   |       |  |                    | 10,000  |  |  |  | 7,500      |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Total current liabilities                                         |  |                                    | 149,608 |       |  |                    | 109,233 |  |  |  | 166,612    |  
|Long-term debt [note 8]                                           |  |                                    | 315,164 |       |  |                    | 340,000 |  |  |  | 2,032,678  |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|                                                                  |  |                                    | 464,772 |       |  |                    | 449,233 |  |  |  | 2,199,290  |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Shareholders equity
    (deficiency)                             |  |                                    |         |       |  |                    |         |  |  |  |            |  
|Share capital [note 9]                                            |  |                                    | 338,154 |       |  |                    | 321,049 |  |  |  | 1,167,678  |  
|Warrants [note 9]                                                 |  |                                    | 17,926  |       |  |                    | 17,926  |  |  |  | 1,770      |  
|Deficit                                                           |  |                                    | (12,146 | )     |  |                    |        |  |  |  | (2,466,674 | )
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|                                                                  |  |                                    | 343,934 |       |  |                    | 338,975 |  |  |  | (1,297,226 | )
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  
|                                                                  |  |                                    | 808,706 |       |  |                    | 788,208 |  |  |  | 902,064    |  
|                                                                  |  |                                    |         |       |  |                    |         |  |  |  |            |  

Commitments and contingencies
[note 15]

On behalf of the Board:

|                                                |  |                                   
|----------------------------------------------- |  | ----------------------------------
|André Tremblay (signed)                         |  | André Bureau (signed)             
|Director, President and Chief Executive Officer |  | Director and Chairman of the Board

See accompanying notes

117



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MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF

NET INCOME (LOSS) AND DEFICIT


|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------- | -------------------------- |  | ----------- | ---------- | ----------- |  |  | ---------- | - |  |  | ---------- | -
|                                                                                                             |  |                                    |         |                           
|                                                                                                             |  |                                    |         | Pre-reorganization[note 1]
|                                                                                                             |  |                                    |         |                           
|                                                                                                             |  | Eight months                       |         | Four months                |  |            
|                                                                                                             |  | ended                              |         | ended                      |  | Year ended  |            | Year ended 
|                                                                                                             |  | December 31                        |         | April 30                   |  | December 31 |            | December 31
|                                                                                                             |  | 2003                               |         | 2003                       |  | 2002        |            | 2001       
|                                                                                                             |  |                                    |         |                            |  |             |            |            
|                                                                                                             |  | $                                  |         | $                          |  | $           |            | $          
|                                                                                                             |  |                                   
|                                                                                                             |  | [In thousands of Canadian dollars,
|                                                                                                             |  | except for per share data]        
|Revenues                                                                                                     |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Services                                                                                                     |  |                                    | 357,483 |                            |  |             | 170,196    |             |  |  | 566,706    |   |  |  | 509,082    |  
|Products                                                                                                     |  |                                    | 35,610  |                            |  |             | 7,498      |             |  |  | 24,356     |   |  |  | 32,408     |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|                                                                                                             |  |                                    | 393,093 |                            |  |             | 177,694    |             |  |  | 591,062    |   |  |  | 541,490    |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Costs and expenses[notes 10 and 12]                                                                          |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Cost of services [exclusive of items shown
    separately below]                                             |  |                                    | 123,029 |                            |  |             | 59,079     |             |  |  | 187,042    |   |  |  | 193,539    |  
|Cost of products                                                                                             |  |                                    | 93,552  |                            |  |             | 23,416     |             |  |  | 102,110    |   |  |  | 143,214    |  
|Selling and marketing                                                                                        |  |                                    | 73,185  |                            |  |             | 24,585     |             |  |  | 103,953    |   |  |  | 119,410    |  
|General and administrative                                                                                   |  |                                    | 55,306  |                            |  |             | 32,058     |             |  |  | 106,945    |   |  |  | 95,130     |  
|Restructuring charges [note 10]                                                                              |  |                                    |        |                            |  |             |           |             |  |  | 7,494      |   |  |  | 5,226      |  
|Depreciation and amortization
    [note 10]                                                                  |  |                                    | 46,771  |                            |  |             | 59,388     |             |  |  | 465,815    |   |  |  | 177,990    |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|                                                                                                             |  |                                    | 391,843 |                            |  |             | 198,526    |             |  |  | 973,359    |   |  |  | 734,509    |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Operating income (loss)                                                                                      |  |                                    | 1,250   |                            |  |             | (20,832    | )           |  |  | (382,297   | ) |  |  | (193,019   | )
|Interest income                                                                                              |  |                                    | 2,609   |                            |  |             | 1,888      |             |  |  | 5,479      |   |  |  | 6,553      |  
|Interest expenses [note 10]                                                                                  |  |                                    | (14,817 | )                          |  |             | (70,608    | )           |  |  | (226,829   | ) |  |  | (224,237   | )
|Foreign exchange gain (loss)                                                                                 |  |                                    | 13,926  |                            |  |             | 136,553    |             |  |  | 926        |   |  |  | (51,129    | )
|Gain on financial instruments
    [note 10]                                                                  |  |                                    |        |                            |  |             |           |             |  |  | 6,570      |   |  |  |           |  
|Write-down of deferred financing costs and
    deferred gain and loss on financial instruments
    [note 10] |  |                                    |        |                            |  |             |           |             |  |  | (16,947    | ) |  |  |           |  
|Gain (loss) on investments, marketable securities
    and other assets [note 10]                             |  |                                    | 2,578   |                            |  |             | 312        |             |  |  | (16,086    | ) |  |  | (33,093    | )
|Share of net loss in investees                                                                               |  |                                    |        |                            |  |             |           |             |  |  | (13,212    | ) |  |  | (5,282     | )
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Income (loss) before income taxes                                                                            |  |                                    | 5,546   |                            |  |             | 47,313     |             |  |  | (642,396   | ) |  |  | (500,207   | )
|Income tax benefit (expense) [note 13]                                                                       |  |                                    | (587    | )                          |  |             | (1,796     | )           |  |  | 71,895     |   |  |  | 1,722      |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Net income (loss)                                                                                            |  |                                    | 4,959   |                            |  |             | 45,517     |             |  |  | (570,501   | ) |  |  | (498,485   | )
|Accretion on redemption price 
    Preferred Shares [note 9]                                                |  |                                    | (17,105 | )                          |  |             |           |             |  |  |           |   |  |  |           |  
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Net income (loss) applicable to
    Class                                                                    |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|A and Class B shares[for the eight months ended
    December 31, 2003 only]                                  |  |                                    | (12,146 | )                          |  |             | 45,517     |             |  |  | (570,501   | ) |  |  | (498,485   | )
|Deficit, beginning of period                                                                                 |  |                                    |        |                            |  |             | (2,466,674 | )           |  |  | (1,896,173 | ) |  |  | (1,397,688 | )
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Deficit, end of period                                                                                       |  |                                    | (12,146 | )                          |  |             | (2,421,157 | )           |  |  | (2,466,674 | ) |  |  | (1,896,173 | )
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  
|Basic and diluted earnings (loss) per share
    [note 11]                                                    |  |                                    | (3.22   | )                          |  |             | 0.19       |             |  |  | (2.37      | ) |  |  | (4.56      | )
|                                                                                                             |  |                                    |         |                            |  |             |            |             |  |  |            |   |  |  |            |  

See accompanying notes

118



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MICROCELL TELECOMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | -------- | ------------------ |  | ----------- | -------- | ----------- |  |  | -------- | - |  |  | -------- | -
|                                                                                                  |  |                                                               |          |                   
|                                                                                                  |  |                                                               |          | Pre-reorganization
|                                                                                                  |  |                                                               |          |                   
|                                                                                                  |  | Eight months                                                  |          | Four months        |  |            
|                                                                                                  |  | ended                                                         |          | ended              |  | Year ended  |          | Year ended 
|                                                                                                  |  | December 31                                                   |          | April 30           |  | December 31 |          | December 31
|                                                                                                  |  | 2003                                                          |          | 2003               |  | 2002        |          | 2001       
|                                                                                                  |  |                                                               |          |                    |  |             |          |            
|                                                                                                  |  | $                                                             |          | $                  |  | $           |          | $          
|                                                                                                  |  |                                                              
|                                                                                                  |  | [In thousands of Canadian dollars, except for per share data]
|OPERATING ACTIVITIES                                                                              |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Net income (loss)                                                                                 |  |                                                               | 4,959    |                    |  |             | 45,517   |             |  |  | (570,501 | ) |  |  | (498,485 | )
|Adjustments to reconcile net income (loss) to
    cash provided by (used in) operating activities |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Depreciation and amortization                                                                     |  |                                                               | 46,771   |                    |  |             | 59,388   |             |  |  | 465,815  |   |  |  | 177,990  |  
|Accreted interest on long-term debt                                                               |  |                                                               | 2,693    |                    |  |             | 13,425   |             |  |  | 72,762   |   |  |  | 158,194  |  
|Amortization of deferred financing costs                                                          |  |                                                               |         |                    |  |             |         |             |  |  | 9,128    |   |  |  | 7,674    |  
|Income tax provision                                                                              |  |                                                               | (507     | )                  |  |             |         |             |  |  | (73,519  | ) |  |  | (3,966   | )
|Foreign exchange (gain) loss                                                                      |  |                                                               | (14,542  | )                  |  |             | (130,166 | )           |  |  | (493     | ) |  |  | 50,281   |  
|Write-down of deferred financing costs and
    deferred gain and loss on financial instruments    |  |                                                               |         |                    |  |             |         |             |  |  | 16,947   |   |  |  |         |  
|Reversal of provision for sales tax                                                               |  |                                                               |         |                    |  |             |         |             |  |  | (13,806  | ) |  |  |         |  
|Gain on financial instruments                                                                     |  |                                                               |         |                    |  |             |         |             |  |  | (6,570   | ) |  |  |         |  
|Loss (gain) in value of investments and
    marketable securities                                 |  |                                                               | (2,436   | )                  |  |             | 14       |             |  |  | 16,005   |   |  |  | 33,079   |  
|Gain on disposal of assets                                                                        |  |                                                               |         |                    |  |             | (326     | )           |  |  |         |   |  |  |         |  
|Share of net loss in investees                                                                    |  |                                                               |         |                    |  |             |         |             |  |  | 13,212   |   |  |  | 5,282    |  
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|                                                                                                  |  |                                                               | 36,938   |                    |  |             | (12,148  | )           |  |  | (71,020  | ) |  |  | (69,951  | )
|Changes in operating assets and liabilities
    [note 14]                                         |  |                                                               | 17,616   |                    |  |             | 26,665   |             |  |  | 30,038   |   |  |  | (52,303  | )
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Cash provided by (used in) operating
    activities                                               |  |                                                               | 54,554   |                    |  |             | 14,517   |             |  |  | (40,982  | ) |  |  | (122,254 | )
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|INVESTING ACTIVITIES                                                                              |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Decrease (increase) in short-term investments and
    marketable securities                       |  |                                                               | (51,015  | )                  |  |             | 73,680   |             |  |  | 75,851   |   |  |  | 35,529   |  
|Additions to property, plant and equipment                                                        |  |                                                               | (67,318  | )                  |  |             | (5,500   | )           |  |  | (124,683 | ) |  |  | (277,395 | )
|Additions to intangible assets                                                                    |  |                                                               |         |                    |  |             |         |             |  |  |         |   |  |  | (130,000 | )
|Proceeds from termination of derivative
    instruments                                           |  |                                                               |         |                    |  |             |         |             |  |  | 31,041   |   |  |  |         |  
|Additions to long-term investments and other
    non-current assets                               |  |                                                               | (133     | )                  |  |             |         |             |  |  | (3,728   | ) |  |  | (12,023  | )
|Proceeds from the sale of long-term investments                                                   |  |                                                               | 2,581    |                    |  |             | 2,089    |             |  |  | 949      |   |  |  |         |  
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Cash provided by (used in) investing
    activities                                               |  |                                                               | (115,885 | )                  |  |             | 70,269   |             |  |  | (20,570  | ) |  |  | (383,889 | )
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|FINANCING ACTIVITIES                                                                              |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Issuance of shares                                                                                |  |                                                               |         |                    |  |             |         |             |  |  |         |   |  |  | 450,755  |  
|Share issuance costs                                                                              |  |                                                               |         |                    |  |             |         |             |  |  |         |   |  |  | (11,434  | )
|Increase in long-term debt                                                                        |  |                                                               |         |                    |  |             |         |             |  |  | 100,000  |   |  |  | 270,813  |  
|Repayment of long-term debt                                                                       |  |                                                               | (7,340   | )                  |  |             |         |             |  |  | (10,732  | ) |  |  | (270,809 | )
|Deferred financing costs                                                                          |  |                                                               |         |                    |  |             |         |             |  |  | (19,742  | ) |  |  | (1,555   | )
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Cash provided by (used in) financing
    activities                                               |  |                                                               | (7,340   | )                  |  |             |         |             |  |  | 69,526   |   |  |  | 437,770  |  
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Increase (decrease) in cash and cash equivalents
    for the period                               |  |                                                               | (68,671  | )                  |  |             | 84,786   |             |  |  | 7,974    |   |  |  | (68,373  | )
|Cash and cash equivalents, beginning of period                                                    |  |                                                               | 111,765  |                    |  |             | 26,979   |             |  |  | 19,005   |   |  |  | 87,378   |  
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Cash and cash equivalents, end of
    period                                                      |  |                                                               | 43,094   |                    |  |             | 111,765  |             |  |  | 26,979   |   |  |  | 19,005   |  
|                                                                                                  |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Additional information                                                                            |  |                                                               |          |                    |  |             |          |             |  |  |          |   |  |  |          |  
|Interest paid                                                                                     |  |                                                               | 12,710   |                    |  |             | 13       |             |  |  | 82,348   |   |  |  | 49,933   |  
|Income taxes paid                                                                                 |  |                                                               | 1,034    |                    |  |             | 639      |             |  |  | 2,294    |   |  |  | 2,249    |  

See accompanying notes.

119



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MICROCELL TELECOMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                                
|-- | -------------------------------------------------------------------------------
|1. | DESCRIPTION OF BUSINESS, FINANCIAL
    REORGANIZATION AND BASIS OF PRESENTATION



| |                        
| | -----------------------
| | Description of Business

Microcell Telecommunications Inc.
[Microcell] is incorporated under the Canada
Business Corporations Act[CBCA] and is a
provider of wireless telecommunications services in Canada. As
at December 31, 2003, Microcell conducted its wireless
communications business through two wholly owned subsidiaries
[collectively, the Company], which were: Microcell
Solutions Inc. [Solutions] and Inukshuk Internet
Inc. [Inukshuk].

Solutions operates a Global System for Mobile
Communication [GSM] network across Canada and
markets Personal Communications Services [PCS] and
General Packet Radio Service [GPRS] under the Fido
brand name pursuant to a 30Mhz PCS license [the PCS
license] issued by the Minister of Industry (Canada)
[Industry Canada].

Inukshuk was awarded Multipoint Communication
Systems [MCS] Licenses to deploy a high-speed
Internet Protocol-based data network using MCS technology in
Canada. In November 2003, Inukshuk entered into a new venture
with two partners which, depending on the results of
phase 1 of the project, may result in the deployment of a
MCS network in Canada. As at December 31, 2003, the
activities of this venture were not significant for the Company.

The Company continues to experience
growth-related capital requirements arising from the need to
fund network capacity improvements, ongoing maintenance and the
cost of acquiring new PCS customers. Microcells ability to
generate positive net income and cash flow in the future is
dependent upon various factors, including the level of market
acceptance of its services, the degree of competition
encountered by the Company, the cost of acquiring new customers,
technology risks, general economic conditions and regulatory
requirements.



| |                         
| | ------------------------
| | Financial reorganization

On May 1, 2003, the predecessor company of
Microcell [Old Microcell], and certain subsidiaries
of Old Microcell, emerged from a restructuring plan under the
Companies Creditors Arrangement Act[CCAA] and CBCA. The terms of Old
Microcells restructuring plan are set out in Old
Microcells plan of reorganization and of compromise and
arrangement [the Plan], a copy of which is contained
in the Information Circular and Proxy Statement dated
February 17, 2003 [the Circular] filed on SEDAR
on February 19, 2003 and on EDGAR with the
U.S. Securities and Exchange Commission [SEC]
on Form 6-K on February 20, 2003. Pursuant to the
Plan, Microcell became a holding company for Old Microcell, its
previous subsidiaries, which amalgamated together to form
Solutions and Inukshuk. The Board of directors was replaced by a
new Board of directors and Microcells long-term debt
obligations decreased by approximately $1.6 billion. On
December 31, 2003, Old Microcell was liquidated into
Microcell.

Prior to May 1, 2003, Old Microcells
Class B Non-Voting Shares were registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934. Under
the terms of the Plan, Microcell issued First Preferred Voting
Shares, First Preferred Non-Voting Shares, Second Preferred
Voting Shares, Second Preferred Non-Voting Shares, Class A
Restricted Voting Shares [Class A Shares], new
Class B Non-Voting Shares [Class B Shares]
and warrants. Two series of warrants [collectively the
Warrants] were issued pursuant to the Plan:
[i] 2-year warrants entitling the holders thereof to
subscribe, until May 1, 2005, for Class A Shares or
Class B Shares of Microcell, as the case may be, at an
exercise price of $19.91 per share [the Warrants
2005]; and [ii] 5-year warrants entitling the holders
thereof to subscribe, until May 1, 2008, for Class A
Shares or Class B Shares of Microcell, as the case may be,
at an exercise price of $20.69 per share [the
Warrants 2008].

For a more detailed description of the
transactions related to the Plan, readers are referred to the
Plan.

120



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Basis of Presentation

Effective May 1, 2003, the date of
reorganization, the Company has accounted for its financial
reorganization by using the principles of fresh start
accounting. Accordingly, all assets and liabilities were
revalued at estimated fair values and Microcells deficit
was eliminated. Microcell determined that its enterprise value
was $689 million of which $350 million has been
allocated to long-term debt and $339 million to equity.
This enterprise value was determined based on several
traditional valuation methodologies, utilizing projections
developed by management including discounted cash flow analysis
and comparable company trading analysis. A comprehensive
revaluation of the assets and liabilities of the Company has
been done based on this enterprise value.

The following table summarizes the adjustments
recorded to implement the financial reorganization and to
reflect the fresh start basis of accounting:

|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|---------------------------------------- |  | -------------- | ---------- | --------------- |  |  | ---------- | ----------------- |  |  | ---- |  |  |  | ------- | 
|                                         |  | Microcell      |            |                 |  |  |            |                  
|                                         |  | as at          |            |                 |  |  |            | Microcell        
|                                         |  | April 30, 2003 |            | Reorganization  |  |  |            | as at            
|                                         |  | Prior to       |            | and fresh start |  |  |            | May 1, 2003      
|                                         |  | reorganization |            | adjustments     |  |  |            | After adjustments
|                                         |  |                |            |                 |  |  |            |                  
|                                         |  | $              |            | $               |  |  |            | $                
|Assets                                   |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|Current assets                           |  |                | 288,849    |                 |  |  | (36,762    | )                 |  |  | [i]  |  |  |  | 252,087 | 
|Property, plant and equipment            |  |                | 602,066    |                 |  |  | (312,374   | )                 |  |  | [i]  |  |  |  | 289,692 | 
|Intangible assets                        |  |                | 2,727      |                 |  |  | 238,475    |                   |  |  | [i]  |  |  |  | 241,202 | 
|Long-term investments and other assets   |  |                | 8,972      |                 |  |  | (3,745     | )                 |  |  | [i]  |  |  |  | 5,227   | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|                                         |  |                | 902,614    |                 |  |  | (114,406   | )                 |  |  |      |  |  |  | 788,208 | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|Liabilities                              |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|Accounts payable and accrued liabilities |  |                | 196,501    |                 |  |  | (131,475   | )                 |  |  | [ii] |  |  |  | 65,026  | 
|Deferred revenues                        |  |                | 34,207     |                 |  |  |           |                   |  |  |      |  |  |  | 34,207  | 
|Current portion of long-term debt        |  |                | 10,000     |                 |  |  |           |                   |  |  |      |  |  |  | 10,000  | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|                                         |  |                | 240,708    |                 |  |  | (131,475   | )                 |  |  |      |  |  |  | 109,233 | 
|Senior Secured Term Loans                |  |                | 543,925    |                 |  |  | (203,925   | )                 |  |  | [ii] |  |  |  | 340,000 | 
|Senior Discount Notes                    |  |                | 1,369,690  |                 |  |  | (1,369,690 | )                 |  |  | [ii] |  |  |  |        | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|                                         |  |                | 2,154,323  |                 |  |  | (1,705,090 | )                 |  |  |      |  |  |  | 449,233 | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|Shareholders equity
    (deficiency)    |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|Share capital                            |  |                | 1,167,678  |                 |  |  | (846,629   | )                 |  |  | [ii] |  |  |  | 321,049 | 
|Warrants                                 |  |                | 1,770      |                 |  |  | 16,156     |                   |  |  | [ii] |  |  |  | 17,926  | 
|Deficit                                  |  |                | (2,421,157 | )               |  |  | 2,421,157  |                   |  |  |      |  |  |  |        | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|                                         |  |                | (1,251,709 | )               |  |  | 1,590,684  |                   |  |  |      |  |  |  | 338,975 | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 
|                                         |  |                | 902,614    |                 |  |  | (114,406   | )                 |  |  |      |  |  |  | 788,208 | 
|                                         |  |                |            |                 |  |  |            |                   |  |  |      |  |  |  |         | 



| |                       
| | ----------------------
| | Summary of adjustments

[i] The Company revalued its assets and
liabilities and adjusted their carrying values to reflect the
enterprise value of the Company following the financial
reorganization. This resulted in a reduction of the current
assets [mainly consisting of the deferred charges incurred
during the recapitalization process], the property, plant and
equipment, the long-term investments and the accrued
liabilities. The Company also

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assigned a value, calculated at managements
best estimate of fair value, to the Companys intangible
assets, which are the PCS license at $188 million,
determined using the replacement cost based on comparable
transactions, the Fido brand name at $28.5 million,
determined using the replacement cost method, and the customer
list at $24.7 million, determined using the discounted
future cash flows method.

[ii] Pursuant to the Plan, the senior
secured term loans of Old Microcell [carrying value of
$553.9 million], the unpaid accrued interest
[$12.2 million], and a net payable to Old Microcells
secured creditors relating to cross currency and interest rate
swaps terminated in December 2002 [$9.4 million], were
converted into a term loan of $300 million [the
Tranche B Debt], a term loan of
$50 million [the Tranche C Debt],
11,766,667 First Preferred Shares [$176.5 million] and
3,600,186 Second Preferred Shares [$54 million] for a total
equity interest in the new Company of 68% and 95.6% of voting
rights.

Old Microcells senior discount
notes [carrying value of $1.4 billion] and the unpaid
accrued interest thereon [$103.6 million] were converted
into 3,600,186 Second Preferred Shares [$54 million],
30,000 Class A Shares [$0.3 million], 3,578,676
Class B Shares [$36 million], 1,329,312 Warrants 2005
[$1.5 million] and 2,215,521 Warrants 2008
[$4.4 million] for a total equity interest in the new
Company of 31.9% and 4.4% of voting rights.

The shareholders of Old Microcell [carrying value
of $1.2 billion] received 22,469 Class B Shares
[$0.2 million], 2,668,990 Warrants 2005 [$3.1 million]
and 4,448,422 Warrants 2008 [$8.9 million] for a total
equity interest in the new Company of 0.1% and no voting rights.



| |                    
| | -------------------
| | Comparative figures

Comparative financial statements for periods
prior to May 1, 2003 have been presented pursuant to
regulatory requirements. In reviewing these comparative
financial statements, readers are reminded that they do not
reflect the effects of the Plan nor the application of fresh
start accounting.



|   |                                               
|-- | ----------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES

These consolidated financial statements have been
prepared by management in accordance with Canadian generally
accepted accounting principles [Canadian GAAP]. As
further described in note 18, these accounting principles
differ in certain respects from those that would have been
followed if these financial statements had been prepared in
conformity with accounting principles generally accepted in the
United States [US GAAP] and related rules and
regulations adopted by the SEC.

The preparation of financial statements by
management in accordance with Canadian GAAP requires the
selection of accounting policies from existing acceptable
alternatives. The summary of significant accounting policies is
as follows:



| |                 
| | ----------------
| | Use of estimates

The preparation of the consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.



| |                      
| | ---------------------
| | Long-term investments

The consolidated financial statements include the
results of operations of Microcell and all of its subsidiaries
as well as its share of assets, liabilities, revenues and
expenses of all joint ventures, if any, in which the Company
participates. Intercompany transactions and balances are
eliminated on consolidation.

122



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company accounts for investments in which it
exercises significant influence using the equity method. Other
investments are accounted for at cost. The investments are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable, and a provision for loss in value is recorded when
a decline in value below the carrying amount is considered to be
other than temporary.



| |                    
| | -------------------
| | Revenue recognition

Monthly access charges are billed in advance and
recognized when the services are provided and collection is
reasonably assured. Airtime charges are recognized as revenue
when provided. City Fidos activation fees are deferred and
recognized as revenue over the estimated life of a subscriber.
Sales of products such as handsets and related equipment are
recognized when goods and services are delivered and collection
is reasonably assured. Prepaid service revenues are deferred and
recognized when services are provided. When prepaid airtime
vouchers are sold to retailers, the revenue for airtime is
measured at the amount paid by the subscriber and is recorded
when services are provided to the subscriber. Commissions paid
on prepaid airtime vouchers to third party retailers are
classified within cost of products and cost of services.



| |                             
| | ----------------------------
| | Subscriber acquisition costs

The excess of the cost of handsets to the Company
over the amount recovered from sales to subscribers is
recognized upon the sale of the handsets and is recorded in the
cost of products.



| |                  
| | -----------------
| | Advertising costs

Advertising costs are expensed as incurred.



| |                 
| | ----------------
| | Cash equivalents

Cash equivalents are short-term, highly liquid,
held-to-maturity, investment-grade debt securities with
maturities of 90 days or less from the date of purchase.



| |                       
| | ----------------------
| | Short-term investments

Short-term investments consist of highly liquid,
held-to-maturity, investment-grade debt securities, such as term
deposits, commercial paper and similar instruments, with
maturities greater than 90 days but not exceeding twelve
months. Short-term investments are accounted for at the lower of
cost and market value. As at December 31, 2003, interest
rates on most of the short-term investments vary from 2.5% to
2.8% [3.5% on May 1, 2003].



| |                      
| | ---------------------
| | Marketable securities

Marketable securities are recorded at the lower
of cost and fair market value.



| |            
| | -----------
| | Inventories

Inventories consist of handsets, subscriber
identity module [SIM] cards and accessories held for
resale, and are stated at the lower of cost [on a first-in,
first-out basis] and replacement cost.



| |                              
| | -----------------------------
| | Property, plant and equipment

Property, plant and equipment are recorded at
cost. The PCS network includes direct costs such as equipment,
material, labor, engineering, site development, interest
incurred during the network buildout, and overhead costs. The
costs of PCS network construction in progress are transferred to
the PCS network in

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

service as construction projects are completed
and put into commercial service. Depreciation starts when the
assets are put into service, and is provided on a straight-line
basis over their estimated useful lives as follows:

|                                        |  |                           
|--------------------------------------- |  | --------------------------
|PCS network  Switches                  |  | 7 years                   
|PCS network  Infrastructure and towers |  | 20 years                  
|PCS network  Radio equipment           |  | 8 years                   
|Application hardware and software       |  | 5 years                   
|Computer hardware and software          |  | 3 years                   
|Office furniture and equipment          |  | 5 years                   
|Leasehold improvements                  |  | Term of the related leases

For property, plant and equipment that existed as
at May 1, 2003, the above periods of depreciation were
reduced in order to reflect a new cost basis as a result of
applying fresh start accounting.

The cost of maintenance and replacement of minor
items of property, plant and equipment are charged to
maintenance expense. Enhancements and improvements are
capitalized.



| |                  
| | -----------------
| | Intangible assets

Intangible assets consist of the Companys
PCS license, the Fido brand name and the customer list. The
customer list is amortized over 30 months. The PCS license
and the Fido brand name were determined to have an indefinite
useful life and are not being amortized.

The annual licensing fees are charged to expense
as incurred.



| |                                    
| | -----------------------------------
| | Impairment of long-lived
    assets

When events or changes in circumstances indicate
that the carrying amount of a long-lived asset or group of
assets held for use, including property, plant and equipment and
intangible assets subject to amortization, may not be
recoverable, an impairment loss is recognized when the carrying
amount of those assets exceeds the sum of the undiscounted
future cash flows related to them. The impairment loss is
included in the statement of operations and the carrying value
of the asset or group of assets is reduced to its fair value as
determined by the sum of the discounted future cash flows
related to those assets.

Intangible assets that are not subject to
amortization are tested for impairment on an annual basis, or
more frequently if events or changes in circumstances indicate
that the assets might be impaired. The impairment test consists
of a comparison of the carrying amount with the fair value of
the intangible asset. When the carrying amount of the intangible
asset exceeds its fair value, an impairment loss is recognized
in an amount equal to the excess.

Impairment charge, if any, is presented within
depreciation and amortization expense of the related long-lived
assets in the statement of income (loss).



| |                       
| | ----------------------
| | Derivative instruments

Derivative financial instruments are accounted
for at fair value with changes in fair value affecting income
unless designated as effective hedges in which case the gains
(losses) on these instruments are recognized in the income
statement when the hedged item affects earnings. As at
December 31, 2003, the Company has not designated its
financial instruments as hedges [see note 8].

124



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | Financing costs

The costs of obtaining debt financing are
deferred and amortized over the life of the debt to which they
relate. The costs of issuing equity are recorded as a reduction
of the item to which they relate.



| |                  
| | -----------------
| | Stock option plan

The Company has a stock option plan, which is
described in note 9. The Company has chosen to recognize no
compensation when stock options are granted to employees and
directors under stock option plans with no cash settlement
features. Direct awards of stock to employees and stock and
stock option awards granted to non-employees are accounted for
in accordance with the fair value method of accounting for
stock-based compensation. The fair value of direct awards of
stock is determined by the quoted market price of the
Companys stock on the grant date, and the fair value of
stock options is determined using the Black-Scholes option
pricing model. Pro forma information regarding net income is
required and has been determined as if the Company had accounted
for its employee stock options under the fair value method
[see note 9].

Up to December 31, 2003, no compensation
expense was recognized for these plans when stock options were
issued to employees. Any consideration paid by employees on
exercise of stock options is credited to share capital.



| |             
| | ------------
| | Income Taxes

The Company follows the liability method of
accounting for income tax allocation. Under this method,
deferred income tax assets and liabilities are determined based
on the differences between the financial reporting and tax bases
of assets and liabilities, and are measured using the
substantively enacted tax rates and laws that are expected to be
in effect in the periods in which the deferred income tax assets
or liabilities are expected to be realized or settled. Deferred
income tax assets, net of an appropriate valuation allowance,
are recognized only to the extent that management believes it to
be more likely than not that the assets will be realized and
will first be applied to reduce the unamortized amount of
intangible assets that were recognized as at May 1, 2003.



| |                         
| | ------------------------
| | Research and development

Research costs are charged against income in the
year of expenditure. Development costs are charged against
income in the year of expenditure unless a development project
meets the criteria under Canadian generally accepted accounting
principles for deferral and amortization.



| |                 
| | ----------------
| | Foreign currency

The Companys functional currency is the
Canadian dollar. Monetary assets and liabilities denominated in
foreign currencies are translated at the rates of exchange
prevailing at the period-end. Revenues and expenses denominated
in foreign currencies are translated at the rates of exchange
prevailing on the transaction dates. Realized and unrealized
gains and losses on currency transactions are included in income
as they arise.



| |                          
| | -------------------------
| | Earnings (loss) per share

Basic and diluted earnings (loss) per share are
calculated using the treasury stock method. Basic earnings
(loss) per share is calculated using the weighted average number
of Class A Shares and Class B Shares. Diluted earnings
(loss) per share are calculated taking into consideration the
effect of the exercise of securities, which have a dilutive
effect.

125



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Recent developments

The CICA modified Section 3870, Stock-based
compensation and other stock-based payments. This section has
been amended to require the expensing of certain stock-based
compensation awards for fiscal years beginning on or after
January 1, 2004. As permitted by this amendment, the
Company will apply this new standard retroactively, without
restatement, beginning January 1, 2004, for options granted
since May 1, 2003. Consequently, the opening deficit as at
January 1, 2004 will be adjusted to reflect an expense of
$1.3 million relating to options granted since May 1,
2003.

The CICA also modified Section 3860,
Financial instruments  disclosure and presentation.
This section has been amended to provide guidance for
classifying certain financial instruments that embody
obligations that may be settled by the issuance of the
issuers equity shares when the instrument that embodies
the obligations does not establish an ownership relationship.
The new standard is effective for fiscal years beginning on or
after November 1, 2004. Initial application should be
recognized on a retroactive basis and disclosed as an accounting
policy change. As a result, the Company assesses that its
Preferred Shares having an accreted value of $296.9 million
and $284.5 million as at December 31, 2003 and
May 1, 2003, respectively, which are classified as equity
instruments under current rules, would have to be reclassified
as liabilities. The accreted of their redemption price of
$17.1 million during the eight-month period ended
December 31, 2003 presented as an adjustment to the
retained earnings (deficit) would have to be presented as
an interest expense in the determination of the net income
(loss). There would be no impact on the net loss attributable to
Class A and B shares and on the earnings per share.



|   |            
|-- | -----------
|3. | RECEIVABLES

|                                  |  |             |        |       |  |                  |         |   |  |  |         |  
|--------------------------------- |  | ----------- | ------ | ----- |  | ---------------- | ------- | - |  |  | ------- | -
|                                  |  |             |        |       |  | Pre-organization
|                                  |  | December 31 |        | May 1 |  | December 31     
|                                  |  | 2003        |        | 2003  |  | 2002            
|                                  |  |             |        |       |  |                 
|                                  |  | $           |        | $     |  | $               
|Trade receivables                 |  |             | 79,901 |       |  |                  | 73,553  |   |  |  | 73,024  |  
|Allowance for doubtful accounts   |  |             | (6,627 | )     |  |                  | (11,844 | ) |  |  | (14,885 | )
|Receivable from related companies |  |             |       |       |  |                  |        |   |  |  | 866     |  
|Taxes receivable                  |  |             | 3,164  |       |  |                  | 2,830   |   |  |  | 2,866   |  
|Interest receivable               |  |             | 358    |       |  |                  | 13      |   |  |  | 18      |  
|                                  |  |             |        |       |  |                  |         |   |  |  |         |  
|                                  |  |             | 76,796 |       |  |                  | 64,552  |   |  |  | 61,889  |  
|                                  |  |             |        |       |  |                  |         |   |  |  |         |  

126



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|4. | PROPERTY, PLANT AND EQUIPMENT

|                                  |                           |                   |         |              |  |                   |        |              |  |                    |         |              |  |  |   |   |  |  |           |         |  |  |         |         | 
|--------------------------------- | ------------------------- | ----------------- | ------- | ------------ |  | ----------------- | ------ | ------------ |  | ------------------ | ------- | ------------ |  |  | - | - |  |  | --------- | ------- |  |  | ------- | ------- | 
|                                  |                           |                   |         |              |  |                   |        |              |  |                   
|                                  |                           |                   |         |              |  |                   |        |              |  | Pre-reorganization
|                                  |                           |                   |         |              |  |                   |        |              |  |                   
|                                  |                           |                   |         |              |  |                  
|                                  |                           | December 31, 2003 |         | May 1, 2003  |  | December 31, 2002
|                                  |                           |                   |         |              |  |                  
|                                  |                           |                   |         | Accumulated  |  |                   |        | Accumulated  |  |                    |         | Accumulated 
|                                  |                           | Cost              |         | depreciation |  | Cost              |        | depreciation |  | Cost               |         | depreciation
|                                  |                           |                   |         |              |  |                   |        |              |  |                    |         |             
|                                  |                           | $                 |         | $            |  | $                 |        | $            |  | $                  |         | $           
|PCS network                       |                           |                   |         |              |  |                   |        |              |  |                    |         |              |  |  |   |   |  |  |           |         |  |  |         |        
|                                  | Switches                  |                   |         | 137,461      |  |                   |        | 18,008       |  |                    |         | 119,034      |  |  |   |  |  |  |           | 533,511 |  |  |         | 199,433 | 
|                                  | Infrastructure and towers |                   |         | 111,564      |  |                   |        | 6,034        |  |                    |         | 96,303       |  |  |   |  |  |  |           | 352,234 |  |  |         | 231,510 | 
|                                  | Radio equipment           |                   |         | 51,747       |  |                   |        | 4,410        |  |                    |         | 33,931       |  |  |   |  |  |  |           | 256,660 |  |  |         | 168,680 | 
|Application hardware and software |                           |                   | 37,912  |              |  |                   | 7,822  |              |  |                    | 26,991  |              |  |  |  |   |  |  | 198,215   |         |  |  | 110,413 |        
|Computer hardware and software    |                           |                   | 8,280   |              |  |                   | 1,346  |              |  |                    | 5,277   |              |  |  |  |   |  |  | 26,426    |         |  |  | 22,432  |        
|Office furniture and equipment    |                           |                   | 4,860   |              |  |                   | 618    |              |  |                    | 4,491   |              |  |  |  |   |  |  | 32,588    |         |  |  | 23,196  |        
|Leasehold improvements            |                           |                   | 5,187   |              |  |                   | 732    |              |  |                    | 3,665   |              |  |  |  |   |  |  | 26,912    |         |  |  | 15,236  |        
|                                  |                           |                   |         |              |  |                   |        |              |  |                    |         |              |  |  |   |   |  |  |           |         |  |  |         |        
|                                  |                           |                   | 357,011 |              |  |                   | 38,970 |              |  |                    | 289,692 |              |  |  |  |   |  |  | 1,426,546 |         |  |  | 770,900 |        
|Accumulated depreciation          |                           |                   | 38,970  |              |  |                   |        |              |  |                    |        |              |  |  |   |   |  |  | (770,900  | )       |  |  |         |        
|                                  |                           |                   |         |              |  |                   |        |              |  |                    |         |              |  |  |   |   |  |  |           |         |  |  |         |        
|Net carrying value                |                           |                   | 318,041 |              |  |                   |        |              |  |                    | 289,692 |              |  |  |   |   |  |  | 655,646   |         |  |  |         |        
|                                  |                           |                   |         |              |  |                   |        |              |  |                    |         |              |  |  |   |   |  |  |           |         |  |  |         |        

The PCS network includes PCS network construction
in progress, amounting to $7.7 million as at
December 31, 2003.



|   |                  
|-- | -----------------
|5. | INTANGIBLE ASSETS

|                                                                                           |  |             |         |       |  |                    |         |  |  |  |       | 
|------------------------------------------------------------------------------------------ |  | ----------- | ------- | ----- |  | ------------------ | ------- |  |  |  | ----- | 
|                                                                                           |  |             |         |       |  | Pre-reorganization
|                                                                                           |  | December 31 |         | May 1 |  |                   
|                                                                                           |  | 2003        |         | 2003  |  | December 31 2002  
|                                                                                           |  |             |         |       |  |                   
|                                                                                           |  | $           |         | $     |  | $                 
|PCS license                                                                                |  |             | 188,002 |       |  |                    | 188,002 |  |  |  | 2,727 | 
|Fido brand name                                                                            |  |             | 28,493  |       |  |                    | 28,493  |  |  |  |      | 
|Customer list, net of accumulated amortization of
    $7.4 million as at December 31, 2003 |  |             | 17,324  |       |  |                    | 24,707  |  |  |  |      | 
|                                                                                           |  |             |         |       |  |                    |         |  |  |  |       | 
|                                                                                           |  |             | 233,819 |       |  |                    | 241,202 |  |  |  | 2,727 | 
|                                                                                           |  |             |         |       |  |                    |         |  |  |  |       | 

Radio and spectrum licenses are issued for a term
and may be renewed at Industry Canadas discretion.
Revocation is rare and licenses have a high expectation of
renewal unless a breach of a license condition has occurred, a
fundamental reallocation of spectrum to a new service is
required, or an overriding policy need arises. The Company
intends to renew the PCS license indefinitely, and expects to be
able to do so. The technology used in wireless
telecommunications is not expected to be replaced by another
technology in the foreseeable future. In December of 2003,
Industry Canada issued its Spectrum Licensing Policy for
Cellular and Incumbent Personal Communications Services, in
which it announced the results of its review of the PCS terms,
fees and conditions, as well as its intention to renew the
Companys PCS license up to March 31, 2011. Industry
Canada also announced its intention to renew the PCS license
every 10 years instead of every 5 years. Therefore,
the Company anticipates generating sales and cash flows under
its PCS license for an indefinite period of time and as a
result, has classified the PCS license under this basis.

The Company has determined that its Fido brand
name has an indefinite life because there are no legal,
regulatory, contractual or other factors that limit the useful
life of the brand name, the Company considers the brand name to
be effective in the market place and the Company anticipates
generating sales and cash flows under this brand name for an
indefinite period of time.

127



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|6. | LONG-TERM INVESTMENTS AND OTHER NON-CURRENT
    ASSETS

|                                                           |  |             |       |       |  |                    |       |  |  |  |        | 
|---------------------------------------------------------- |  | ----------- | ----- | ----- |  | ------------------ | ----- |  |  |  | ------ | 
|                                                           |  |             |       |       |  | Pre-reorganization
|                                                           |  |             |       |       |  |                   
|                                                           |  | December 31 |       | May 1 |  | December 31       
|                                                           |  | 2003        |       | 2003  |  | 2002              
|                                                           |  |             |       |       |  |                   
|                                                           |  | $           |       | $     |  | $                 
|Equity interest in a venture capital entity, at
    equity |  |             | 3,955 |       |  |                    | 4,100 |  |  |  | 9,898  | 
|Other equity interest, at cost                             |  |             | 189   |       |  |                    | 189   |  |  |  | 773    | 
|Other non-current assets                                   |  |             | 653   |       |  |                    | 938   |  |  |  | 1,664  | 
|                                                           |  |             |       |       |  |                    |       |  |  |  |        | 
|                                                           |  |             | 4,797 |       |  |                    | 5,227 |  |  |  | 12,335 | 
|                                                           |  |             |       |       |  |                    |       |  |  |  |        | 



|   |                                             
|-- | --------------------------------------------
|7. | ACCOUNTS PAYABLE AND ACCRUED
    LIABILITIES

|                                                     |  |             |        |       |  |                    |        |  |  |  |         | 
|---------------------------------------------------- |  | ----------- | ------ | ----- |  | ------------------ | ------ |  |  |  | ------- | 
|                                                     |  |             |        |       |  | Pre-reorganization
|                                                     |  | December 31 |        | May 1 |  |                   
|                                                     |  | 2003        |        | 2003  |  | December 31 2002  
|                                                     |  |             |        |       |  |                   
|                                                     |  | $           |        | $     |  | $                 
|Accounts payable  trade                             |  |             | 46,548 |       |  |                    | 35,793 |  |  |  | 22,345  | 
|Accounts payable  property, plant and
    equipment |  |             | 16,420 |       |  |                    | 8,513  |  |  |  | 5,858   | 
|Accounts payable  related companies                 |  |             |       |       |  |                    |       |  |  |  | 23      | 
|Accrued interest                                     |  |             |       |       |  |                    |       |  |  |  | 64,055  | 
|Wages and benefits                                   |  |             | 22,636 |       |  |                    | 13,123 |  |  |  | 11,355  | 
|Other current liabilities                            |  |             | 6,030  |       |  |                    | 7,597  |  |  |  | 17,903  | 
|                                                     |  |             |        |       |  |                    |        |  |  |  |         | 
|                                                     |  |             | 91,634 |       |  |                    | 65,026 |  |  |  | 121,539 | 
|                                                     |  |             |        |       |  |                    |        |  |  |  |         | 



|   |               
|-- | --------------
|8. | LONG-TERM DEBT

|                                   |                                                                                                                |             |         |       |  |                    |         |   |  |  |           |         | 
|---------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----------- | ------- | ----- |  | ------------------ | ------- | - |  |  | --------- | ------- | 
|                                   |                                                                                                                |             |         |       |  | Pre-reorganization
|                                   |                                                                                                                | December 31 |         | May 1 |  |                   
|                                   |                                                                                                                | 2003        |         | 2003  |  | December 31 2002  
|                                   |                                                                                                                |             |         |       |  |                   
|                                   |                                                                                                                | $           |         | $     |  | $                 
|Tranche B Debt                     |                                                                                                                |             | 271,769 |       |  |                    | 300,000 |   |  |  |          |        
|Tranche C Debt                     |                                                                                                                |             | 52,693  |       |  |                    | 50,000  |   |  |  |          |        
|Long-term debt Pre-reorganization: |                                                                                                                |             |         |       |  |                    |         |   |  |  |           |        
|                                   | Sernior Secured Term Loans                                                                                     |             |         |      |  |                    |         |  |  |  |           | 590,048 | 
|                                   | Series B Senior Discount Notes due 2006,
    interest payable semi-annually beginning June 1, 2002             |             |         |      |  |                    |         |  |  |  |           | 659,394 | 
|                                   | Series A and B Senior Discount Notes due
    2007, interest payable semi-annually beginning April 15,
    2003 |             |         |      |  |                    |         |  |  |  |           | 429,443 | 
|                                   | Series B Senior Discount Notes due 2009,
    interest payable semi-annually beginning December 1, 2004         |             |         |      |  |                    |         |  |  |  |           | 357,638 | 
|                                   | Other                                                                                                          |             |         |      |  |                    |         |  |  |  |           | 3,655   | 
|                                   |                                                                                                                |             |         |       |  |                    |         |   |  |  |           |        
|                                   |                                                                                                                |             | 324,462 |       |  |                    | 350,000 |   |  |  | 2,040,178 |        
|Less current portion of principal  |                                                                                                                |             | (9,298  | )     |  |                    | (10,000 | ) |  |  | (7,500    | )      
|                                   |                                                                                                                |             |         |       |  |                    |         |   |  |  |           |        
|                                   |                                                                                                                |             | 315,164 |       |  |                    | 340,000 |   |  |  | 2,032,678 |        
|                                   |                                                                                                                |             |         |       |  |                    |         |   |  |  |           |        

128



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The minimum contractual payments of
Tranche B Debt and Tranche C Debt for the next five
years are as follows: $9.3 million in 2004;
$9.3 million in 2005; $13.9 million in 2006;
$13.9 million in 2007; and $225.5 million in 2008.

The financing arrangements of the Company, as at
December 31, 2003, consisted of the following credit
agreements:



| |                   
| | ------------------
| | Tranche A Facility

The Company has access to a revolving bank credit
facility [the Tranche A Facility] of
$25 million, which bears interest at the prime rate plus
2.5%, base rate plus 2.5% or bankers acceptance rate plus
3.5%. Pursuant to the terms of the credit agreement of the
Tranche A Facility, the Company is entitled to raise up to
an additional $50 million in revolving bank credit
facility. The Tranche A Facility is payable in April 2006.
A commitment fee computed at the rate of 1.0% per annum on
the aggregate undrawn amount of the Tranche A Facility is
payable on a quarterly basis. The Tranche A Facility is
collateralized by a first lien on all of the Companys
assets. As at December 31, 2003 and May 1, 2003, no
amounts were drawn on this facility.



| |               
| | --------------
| | Tranche B Debt

The Tranche B Debt, a term loan in the
amount of $300 million, comprising a Canadian dollar series
in the amount of $104.8 million and a U.S. dollar
series with a principal amount equivalent to Canadian
$195.2 million [US$134.3 million]. The Tranche B
Debt bears interest at the prime rate plus 3.0%, base rate plus
3.0% or bankers acceptance rate plus 4.0%. The
Tranche B Debt is payable in quarterly installments, which
started in June 2003 and will mature in December 2008. The
Tranche B Debt is collateralized by a second lien on all of
the Companys assets. Reimbursements of Tranche B Debt
are as follows: 2.5% of the principal amount was reimbursed in
2003; 3.33% will be reimbursed in 2004; 3.33% in 2005; 5% in
2006; 5% in 2007; and 80.84% in 2008. As at December 31,
2003, the effective interest rate on Tranche B Debt was
6.5%.

The Company entered into swap transactions with a
preferred shareholder, who is also a lender, to manage its
exposure to foreign exchange rate fluctuations on part of the
U.S. dollar denominated portion of the Tranche B Debt;
the Company swapped, in November 2003, $50 million
[US$35.5 million] of the principal of the Tranche B
Debt at a rate of 1.4072 and $50 million
[US$36.7 million] of the principal of the Tranche B
Debt at a rate of 1.3634. The swap transactions have a duration
of three months. These swap transactions, which have not been
designated as hedging instruments, are presented at their fair
value as derivative instruments on the balance sheet and changes
in fair value are recognized within foreign exchange gain (loss).



| |               
| | --------------
| | Tranche C Debt

The Tranche C Debt, a term loan in the
amount of $50 million, is payable in April 2013. The
Tranche C Debt bears interest at the rate of 8.0% payable
semi-annually at the Companys discretion: [i] in cash; or
[ii] accruing and compounding such interest semi-annually until
paid. As at December 31, 2003, $2.7 million of such
accreted interest has been capitalized to the Tranche C
Debt. The Tranche C Debt is collateralized by a third lien
on all of the Companys assets.



| |          
| | ---------
| | Covenants

Under the above credit agreements, the Company is
committed to respect certain covenants, including restrictions
on the ability to incur certain indebtedness, pay dividends,
make certain other payments, create liens, sell assets and
engage in mergers.

The Company must also maintain certain financial
covenants and ratios under the credit agreements of the
Tranche A Facility and Tranche B Debt, including
minimum EBITDA [as defined in the credit

129



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreements], number of subscribers, average
retail revenue per subscriber per month, liquidity and maximum
capital expenditures.



| |                       
| | ----------------------
| | Excess cash flow sweep

The Articles of the Company, and the credit
agreements governing the Tranche B Debt and Tranche C
Debt, require the Company to make the following payments to the
Tranche B Debt and Tranche C Debt lenders and to the
holders of First and Second Preferred Shares [or Units if
issued]: [i] the net sale proceeds of material asset sales
[sale of more than $2 million]; [ii] 75% of the amount
calculated each fiscal year equal to excess cash flow [as this
term is defined in the Articles of the Company and in the credit
agreements]; and [iii] 75% of the amount of net proceeds
from equity offerings [including proceeds from the exercise of
Warrants]. Each payment on account of material asset sales and
net proceeds from equity offerings has to be made within five
business days following receipt of the proceeds thereof, and
each payment hereunder on account of excess cash flow has to be
made on or before March 31 of each fiscal year, commencing
on March 31, 2004, with respect to the excess cash flow [if
any] for the previous fiscal year.

Subject to the maintenance of a minimum cash
balance of $45 million as at each year-end [prior to the
Companys 25% share of such years excess cash flow],
such amounts are to be applied in the order of priority set
forth below when First and Second Preferred Shares are issued:
[i] repayment of the Tranche B Debt, up to 25% of the
principal amount thereof; [ii] payment of interest on the
Tranche C Debt; [iii] payment of dividends on the
First Preferred Shares; [iv] until May 1, 2008, on a
pro rata basis, repayment of the principal amount of the
Tranche C Debt, up to 25% of the principal amount thereof,
and redemption of up to 75% of the number of First Preferred
Shares originally issued; [v] payment of dividends on the
Second Preferred Shares; [vi] until May 1, 2008,
redemption of up to 75% of the number of Second Preferred Shares
originally issued; [vii] after May 1, 2008, on a pro
rata basis, repayment of remaining principal amount of the
Tranche C Debt and redemption of First Preferred Shares
originally issued; and [viii] after May 1, 2008,
redemption of the remaining Second Preferred Shares. If First
and Second Units are issued, the order of priority set forth
above is substantially similar, with the exception that the
repayment of First and Second Units is limited to 25% until
May 1, 2008.

As of December 31, 2003, the Company
reimbursed $0.4 million to the Tranche B Debt, under
the excess cash flow sweep rules, following the sale of its
equity investment in Saraide Inc.



| |                                        
| | ---------------------------------------
| | Long-term debt 
    Pre-reorganization

Prior to the financial reorganization, as at
December 31, 2002, the long-term debt, all of which was in
default, consisted of the following:



| |                          
| | -------------------------
| | Senior Secured Term Loans



| |          
| | ---------
| | Tranche A

Term Loan of $151.2 million, bearing
interest at the prime rate plus 1% or Bankers Acceptance
rate plus 2%, payable in quarterly installments starting in June
2002 and maturing in December 2005.



| |          
| | ---------
| | Tranche B

Term Loan of US$50.9 million, bearing
interest at the U.S. base rate plus 2% or the
U.S. LIBOR rate plus 3%, payable in quarterly installments
starting in June 2002 and maturing in March 2006.

130



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |          
| | ---------
| | Tranche C

Term Loan of $18.8 million, bearing interest
at the prime rate plus 1% or Eurocanadian plus 2%, payable in
quarterly installments starting in June 2002 and maturing in
December 2005.



| |          
| | ---------
| | Tranche D

Term Loan of $34.2 million, bearing interest
at the prime rate plus 1% or Eurocanadian plus 2%, payable in
quarterly installments starting in September 2002 and maturing
in December 2005.



| |          
| | ---------
| | Tranche E

Term Loan of US$137.6 million, bearing
interest at the U.S. base rate plus 2.25% or the
U.S. LIBOR rate plus 3.25%, payable in quarterly
installments starting in June 2002 and maturing in March 2006.



| |          
| | ---------
| | Tranche F

Term Loan of US$62.9 million, bearing
interest at the U.S. base rate plus 2.5% or the
U.S. LIBOR rate plus 3.5%, payable in quarterly
installments starting in March 2003 and maturing in February
2007.

As of December 31, 2002, the full amounts
were drawn on all Tranches of the Senior Secured Term Loans.

The Senior Secured Loans were collateralized by
debentures of $1,100,000,000, issued under trust deeds. The
debentures were collateralized by a first ranking security
interest in all property and assets of these companies.



| |                                            
| | -------------------------------------------
| | Series B Senior Discount Notes due
    2006

The unsecured Senior Discount Notes due 2006
consist of 417,973 Units, each Unit consisting of US$1,000 at
maturity, 14% Series B Senior Discount Notes due on
June 1, 2006 and four initial warrants each to
purchase 2.1899 Class B Non-Voting Shares issued for
gross proceeds of $273.3 million [US$200 million].



| |                                                         
| | --------------------------------------------------------
| | Series A and Series B Senior
    Discount Notes due 2007

The unsecured Senior Discount Notes due 2007
consist of $429.4 million, 11 1/8% Series A and B
Senior Discount Notes due on October 15, 2007, issued for
gross proceeds of $250 million.



| |                                            
| | -------------------------------------------
| | Series B Senior Discount Notes due
    2009

The unsecured Senior Discount Notes due 2009
consist of US$270 million, 12% Series B Senior
Discount Notes due on June 1, 2009, issued for gross
proceeds of $221.2 million [US$150.5 million].



|   |              
|-- | -------------
|9. | SHARE CAPITAL



| |           
| | ----------
| | Authorized

An unlimited number of Class A Shares;

An unlimited number of Class B Shares;

An unlimited number of First Preferred Shares,
issuable as First Preferred Voting Shares, First Preferred
Non-Voting Shares, First Preferred Voting 2 Shares and
First Preferred Non-Voting 2 Shares; and

An unlimited number of Second Preferred Shares
issuable as Second Preferred Voting Shares, Second Preferred
Non-Voting Shares, Second Preferred Voting 2 Shares and
Second Preferred Non-Voting 2 Shares.

131



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |               
| | --------------
| | Class A Shares



| |                                          
| | -----------------------------------------
| | Dividends and Rights upon
    liquidation

Holders of Class A Shares are entitled to
receive dividends, and the remaining assets of the Company on
the winding-up, liquidation or dissolution of the Company, pari
passu with the holders of Class B Shares, on a per share
basis.



| |                
| | ---------------
| | Exchange Rights

Each Class A Share may, at the option of the
holders, be exchanged at any time into one Class B Share.



| |               
| | --------------
| | Class B Shares



| |                                          
| | -----------------------------------------
| | Dividends and Rights upon
    liquidation

Holders of Class B Shares are entitled to
receive dividends, and the remaining assets of the Company on
the winding-up, liquidation or dissolution of the Company, pari
passu with the holders of Class A Shares, on a per share
basis.



| |                
| | ---------------
| | Exchange Rights

The Class B Shares are exchangeable, at the
option of the holders, into Class A Shares on a
share-for-share basis, in the following circumstances: [i] any
time upon provision by a holder of Class B Shares of a
residency declaration to the Companys transfer agent
certifying that the holder is a Canadian; [ii] upon a bid being
made for the Class A Shares where no equivalent bid is made
for the Class B Shares, for the purposes of allowing the
Class B Shares to tender to an exclusionary bid; and [iii]
automatically upon the repeal or relaxation of the Canadian
rules governing the Companys ownership and control, but
only to the extent of such repeal or relaxation and non-Canadian
ownership and control of the Company and its subsidiaries not
otherwise being restricted by law.



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | First and Second Preferred Shares,
    excluding First and Second Preferred 2 Shares [the
    Preferred Shares]



| |                        
| | -----------------------
| | Rights upon liquidation

Holders of First Preferred Shares are entitled to
receive, on the winding-up, liquidation or dissolution of the
Company and in priority to any payment or distribution in
respect of shares of any other class, an amount per share equal
to the PS Redemption Price [as described below] plus any
declared but unpaid dividends.

Holders of Second Preferred Shares are entitled
to receive, on the winding-up, liquidation or dissolution of the
Company and in priority to any payment or distribution in
respect of shares of any other class, other than the First
Preferred Shares, an amount per share equal to the Preferred
Share Redemption Price [as described below] plus any declared
but unpaid dividends.



| |                        
| | -----------------------
| | Non-Cumulative Dividend

The holders of Preferred Shares are entitled to a
fixed, non-cumulative preferential dividend at the rate of
9% per annum, from time to time and payable semi-annually
in arrears in cash.

132



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |         
| | --------
| | Maturity

The Preferred Shares shall be mandatorily
redeemed on May 1, 2013.



| |                 
| | ----------------
| | Redemption Price

The redemption price of each Preferred Share [the
PS Redemption Price] is initially the issue price
therefor, increased at the beginning of each semi-annual period
commencing on November 1, 2003 by [i] an amount equal to
the dividend accrued during such period; less [ii] the amount of
any cash dividend that has been declared and paid in respect of
such semi-annual period. As at December 31, 2003, the PS
Redemption Price is estimated to be $15.91 per share. In
the event of any redemption or mandatory conversion of Preferred
Shares other than as at the end of a semi-annual period, the PS
Redemption Price is to be adjusted by adding the accrued
dividend on a pro rata basis with reference to the number of
days from the beginning of the then current semi-annual period
to the date of such redemption or conversion, less the amount of
any cash dividend that has been declared and paid in respect of
such period.



| |           
| | ----------
| | Redemption

The Preferred Shares are redeemable as follows:
[i] in whole or in part at any time at the option of the Company
at the then current PS Redemption Price, payable in cash,
provided however that holders of Preferred Shares may exercise
any conversion rights prior to any such redemption; [ii] at
maturity, [a] mandatorily at a price per share equal to the then
current PS Redemption Price payable in cash or [b] at the
Companys option, if the Class A Shares and the
Class B Shares continue to be listed and posted for trading
on a recognized exchange, in consideration of the issuance of a
number of Class A Shares or Class B Shares [as the
case may be] equal to the PS Redemption Price divided by the
average share price of such shares; [iii] mandatorily prior to
maturity at the then current PS Redemption Price to the extent
that the Company has funds available for such purpose
[determined by reference to certain thresholds established in
the Articles]; and [iv] at any time prior to maturity, in whole
or in part, at the option of the Company upon payment of the
then current PS Redemption Price by issuing Units composed of a
note and a Preferred Voting 2 Share or Preferred Non-Voting
2 Share.



| |                            
| | ---------------------------
| | Intra Class Exchange Rights

The First Preferred Non-Voting Shares are
exchangeable, at the option of the holders, into First Preferred
Voting Shares on a share-for-share basis, and the Second
Preferred Non-Voting Shares are exchangeable, at the option of
the holders, into Second Preferred Voting Shares on a
share-for-share basis, in the following circumstances: [i] at
any time upon provision by a holder of Preferred Non-Voting
Shares of a residency declaration to the Companys transfer
agent certifying that the holder is a Canadian; [ii] upon a bid
being made for the Preferred Voting Shares where no equivalent
bid is made for the Preferred Non-Voting Shares for the purposes
of allowing the Preferred Non-Voting Shares to tender to an
exclusionary bid; [iii] automatically upon the repeal or
relaxation of the Canadian rules restricting the Companys
ownership and control, but only to the extent of such repeal or
relaxation and non-Canadian ownership and control of the Company
and its subsidiaries not otherwise being restricted by law. The
First Preferred Voting Shares are exchangeable, at the option of
the holders, into First Preferred Non-Voting Shares on a
share-for-share basis. The Second Preferred Voting Shares are
exchangeable, at the option of the holders, into Second
Preferred Non-Voting Shares on a share-for-share basis.



| |                    
| | -------------------
| | Conversion Features

The Preferred Shares have the following
conversion features: [i] at any time, the Preferred Voting
Shares and the Preferred Non-Voting Shares are convertible, at
the option of the holders into Class A Shares and
Class B Shares, respectively, on a share-for-share basis;
[ii] if at any time prior to May 1, 2008, the Company

133



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shall complete an offering of Class A Shares
or Class B Shares for gross proceeds of not less than
$150 million and at a per share price equal to or greater
than 200% of the then current PS Redemption Price and the
proceeds thereof are used as provided in the Articles, the
Preferred Voting Shares and the Preferred Non-Voting Shares that
remain outstanding after the application of such proceeds will
be converted, at the option of the Company, into Class A
Shares and Class B Shares, respectively, on a
share-for-share basis; and [iii] if at any time on or after
May 1, 2008, on the 25th day [or if such day is not a
trading day, then on the next following trading day] following
the release by the Company of its quarterly or annual financial
statements, as the case may be, the Preferred Voting Shares and
the Preferred Non-Voting Shares are in-the-money [namely that
the PS Redemption Price is less than the average share price of
the Class A Shares and Class B Shares], they will be
converted automatically into Class A Shares and
Class B Shares respectively on a share-for-share basis.

Upon conversion of any Preferred Voting Shares or
Preferred Non-Voting Shares into Class A Shares or
Class B Shares, the holders of such Preferred Voting Shares
or Preferred Non-Voting Shares will have no right to receive any
payment in cash on account of the PS Redemption Price.



| |                         
| | ------------------------
| | Anti-layering provisions

The Articles of the Company provide that, so long
as there remain outstanding First Preferred Shares [or First
Units, if issued] representing in the aggregate an initial issue
price in excess of $75 million, or Second Preferred Shares
[or Second Units, if issued] representing in the aggregate an
initial issue price in excess of $50 million, the approval:
[i] by written resolution signed by the holders of a
majority of the aggregate number [or principal amount, as the
case may be] of First Preferred Shares [or First Units, if
issued] and, as the case may be, Second Preferred Shares [or
Second Units if issued] then outstanding or [ii] by a
majority of the holders of First Preferred Shares [or First
Units, if issued] and, as the case may be, Second Preferred
Shares [or Second Units if issued] then outstanding represented
in person or by proxy at a meeting of such holders called for
such purpose, will be required before the Company and its
subsidiaries either [X] issue any shares ranking prior to
or pari passu with the First Preferred Shares [or First Units,
if issued] and, as the case may be, Second Preferred Shares [or
Second Units if issued] or [Y] incur funded debt [other
than permitted debt under the Companys credit facilities,
First Units and Second Units], as a result of which the
aggregate consolidated funded debt thereof would be in excess of
4.0 times consolidated annual EBITDA [as defined in the
credit agreements], calculated on a pro forma basis based upon
the four consecutive quarters ended as at the fiscal quarter-end
immediately prior to the date of the resolution of the Board of
the Company approving such issuance or incurrence, as the case
may be.



| |                       
| | ----------------------
| | Excess cash flow sweep

The Preferred Shares are subject to the excess
cash flow sweep described in note 8 of these financial
statements.



| |                                                                   
| | ------------------------------------------------------------------
| | First and Second Preferred 2 Shares
    [the Preferred 2 Shares]



| |                        
| | -----------------------
| | Rights upon liquidation

Holders of First Preferred 2 Shares are
entitled to receive, on the winding-up, liquidation or
dissolution of the Company and in priority to any payment or
distribution in respect of shares of any other class, an amount
per share equal to the Preferred 2 Shares Redemption Price
[the PS2 Redemption Price, as described below] plus
any declared but unpaid dividends. Holders of Second Preferred
2 Shares are entitled to receive, on the winding-up,
liquidation or dissolution of the Company and in priority to any
payment or distribution in respect of shares of any other class,
other than the First Preferred 2 Shares, an amount per
share equal to the PS2 Redemption Price [as described below]
plus any declared but unpaid dividends.

134



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |          
| | ---------
| | Dividends

The holders of Preferred 2 Shares are not
entitled to receive any dividends in respect thereof.



| |           
| | ----------
| | Redemption

The Preferred 2 Shares will be automatically
redeemed at the PS2 Redemption Price [as described below]
upon the repayment, redemption or conversion of the First and
Second Units, as the case may be, of which they form part. The
PS2 Redemption Price is equal to $0.0001 per Preferred
2 Share.



| |                                         
| | ----------------------------------------
| | First and Second Units [the
    Units]

The Units are hybrid instruments designed to
duplicate the economic interest and other features [including as
to voting entitlements] attaching to the Preferred Shares. Each
Unit is composed of a note, which provides the holder of the
Unit with an economic interest similar to that of a holder of
Preferred Share, together with a First Preferred Voting
2 Share or First Preferred Non-Voting 2 Share [in the
case of First Units] or with a Second Preferred Voting
2 Share or Second Preferred Non-Voting 2 Share [in the
case of Second Units]. The First Units are senior in right of
payment to the Second Units. As at December 31, 2003, no
Units were issued.



| |       
| | ------
| | Issued



| |                        
| | -----------------------
| | Number of shares issued

|                                |  |                 |          |                 |  |                  |            |                  |  |         |         |         |  |  |           |   |  |  |        |  |  |  |           | 
|------------------------------- |  | --------------- | -------- | --------------- |  | ---------------- | ---------- | ---------------- |  | ------- | ------- | ------- |  |  | --------- | - |  |  | ------ |  |  |  | --------- | 
|                                |  |                 |          | First Preferred |  |                  |            | Second Preferred |  |         |         |        
|                                |  | First Preferred |          | Non-Voting      |  | Second Preferred |            | Non-Voting       |  | Class A |         | Class B
|                                |  | Voting Shares   |          | Shares          |  | Voting Shares    |            | Shares           |  | shares  |         | shares 
|                                |  |                 |          |                 |  |                  |            |                  |  |         |         |        
|Balance as at May 1, 2003       |  |                 | 544,828  |                 |  |                  | 11,221,839 |                  |  |         | 106,400 |         |  |  | 7,093,972 |   |  |  | 30,000 |  |  |  | 3,601,145 | 
|Converted                       |  |                 | (292,532 | )               |  |                  | 193,365    |                  |  |         | (91,618 | )       |  |  | (114,444  | ) |  |  | 38     |  |  |  | 305,191   | 
|                                |  |                 |          |                 |  |                  |            |                  |  |         |         |         |  |  |           |   |  |  |        |  |  |  |           | 
|Balance as at December 31, 2003 |  |                 | 252,296  |                 |  |                  | 11,415,204 |                  |  |         | 14,782  |         |  |  | 6,979,528 |   |  |  | 30,038 |  |  |  | 3,906,336 | 
|                                |  |                 |          |                 |  |                  |            |                  |  |         |         |         |  |  |           |   |  |  |        |  |  |  |           | 



| |                                
| | -------------------------------
| | Carrying value of shares issued

|                                |  |           |        |            |  |           |         |            |  |         |        |         |  |          |         |   |  |  |     |   |  |  |        |  |  |  |         | 
|------------------------------- |  | --------- | ------ | ---------- |  | --------- | ------- | ---------- |  | ------- | ------ | ------- |  | -------- | ------- | - |  |  | --- | - |  |  | ------ |  |  |  | ------- | 
|                                |  | First     |        | First      |  | Second    |         | Second     |  |         |        |         |  |         
|                                |  | Preferred |        | Preferred  |  | Preferred |         | Preferred  |  |         |        |         |  | Total   
|                                |  | Voting    |        | Non-Voting |  | Voting    |         | Non-Voting |  | Class A |        | Class B |  | Value of
|                                |  | Shares    |        | Shares     |  | Shares    |         | Shares     |  | shares  |        | shares  |  | Shares  
|                                |  |           |        |            |  |           |         |            |  |         |        |         |  |         
|                                |  | $         |        | $          |  | $         |         | $          |  | $       |        | $       |  | $       
|Balance as at May 1, 2003       |  |           | 8,172  |            |  |           | 168,328 |            |  |         | 1,596  |         |  |          | 106,410 |   |  |  | 302 |   |  |  | 36,241 |  |  |  | 321,049 | 
|Converted                       |  |           | (4,510 | )          |  |           | 2,978   |            |  |         | (1,412 | )       |  |          | (1,755  | ) |  |  | (2  | ) |  |  | 4,701  |  |  |  |        | 
|Accretion on redemption price   |  |           | 352    |            |  |           | 10,311  |            |  |         | 51     |         |  |          | 6,391   |   |  |  |    |   |  |  |       |  |  |  | 17,105  | 
|                                |  |           |        |            |  |           |         |            |  |         |        |         |  |          |         |   |  |  |     |   |  |  |        |  |  |  |         | 
|Balance as at December 31, 2003 |  |           | 4,014  |            |  |           | 181,617 |            |  |         | 235    |         |  |          | 111,046 |   |  |  | 300 |   |  |  | 40,942 |  |  |  | 338,154 | 
|                                |  |           |        |            |  |           |         |            |  |         |        |         |  |          |         |   |  |  |     |   |  |  |        |  |  |  |         | 

Prior to the financial reorganization, authorized
and issued share capital were as follow:



| |                                    
| | -----------------------------------
| | Authorized 
    Pre-reorganization

Unlimited number of Common Shares, each of which
may, at any time, at the holders option, be converted into
one Class B Non-Voting Share or into one Class A
Non-Voting Share, if necessary, to comply with the restrictions
on non-Canadian ownership and control.

135



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Unlimited number of participating Class A
Non-Voting Shares, each of which may, at any time, at the
holders option, be converted into one Class B
Non-Voting Share or into one Common Share, to the extent that
the Company does not cease to comply with the restrictions on
non-Canadian ownership and control as a result.

Unlimited number of participating Class B
Non-Voting Shares.

Unlimited number of Non-Voting First Preferred
Shares issuable in one or more series.



| |                                
| | -------------------------------
| | Issued 
    Pre-reorganization

|                                |  |               |            |                   |  |                   |        |       |  |        |           |   |  |   |         |  |  |  |             |  |  |  |         |  |  |  |           | 
|------------------------------- |  | ------------- | ---------- | ----------------- |  | ----------------- | ------ | ----- |  | ------ | --------- | - |  | - | ------- |  |  |  | ----------- |  |  |  | ------- |  |  |  | --------- | 
|                                |  |               |            |                   |  |                   |        |       |  |       
|                                |  |               |            | Class A           |  | Class B           |        |      
|                                |  | Common Shares |            | Non-Voting Shares |  | Non-Voting Shares |        |      
|                                |  |               |            |                   |  |                   |        | Total
|                                |  | Number        |            | $                 |  | Number            |        | $     |  | Number |           | $ |  | $
|                                |  |               |            |                   |  |                   |        |       |  |        |           |   |  |  
|Balance as of December 31, 2001 |  |               | 27,631,537 |                   |  |                   | 73,888 |       |  |        | 9,590,000 |   |  |   | 394,477 |  |  |  | 202,951,539 |  |  |  | 699,006 |  |  |  | 1,167,371 | 
|Issued                          |  |               |           |                   |  |                   |       |       |  |        |          |   |  |   |        |  |  |  |            |  |  |  |        |  |  |  |          | 
|Converted                       |  |               |           |                   |  |                   |       |       |  |        |          |   |  |   |        |  |  |  |            |  |  |  |        |  |  |  |          | 
|Exercise of warrants            |  |               |           |                   |  |                   |       |       |  |        |          |   |  |   |        |  |  |  | 43,372      |  |  |  | 307     |  |  |  | 307       | 
|                                |  |               |            |                   |  |                   |        |       |  |        |           |   |  |   |         |  |  |  |             |  |  |  |         |  |  |  |           | 
|Balance as of December 31, 2002 |  |               | 27,631,537 |                   |  |                   | 73,888 |       |  |        | 9,590,000 |   |  |   | 394,477 |  |  |  | 202,994,911 |  |  |  | 699,313 |  |  |  | 1,167,678 | 
|                                |  |               |            |                   |  |                   |        |       |  |        |           |   |  |   |         |  |  |  |             |  |  |  |         |  |  |  |           | 



| |         
| | --------
| | Warrants

|                                                  |  |             |        |       |  |                    |        |  |  |  |       | 
|------------------------------------------------- |  | ----------- | ------ | ----- |  | ------------------ | ------ |  |  |  | ----- | 
|                                                  |  |             |        |       |  | Pre-reorganization
|                                                  |  |             |        |       |  |                   
|                                                  |  | December 31 |        | May 1 |  | December 31       
|                                                  |  | 2003        |        | 2003  |  | 2002              
|                                                  |  |             |        |       |  |                   
|                                                  |  | $           |        | $     |  | $                 
|3,998,302 Warrants 2005, exercise price of $19.91 |  |             | 4,598  |       |  |                    | 4,598  |  |  |  |      | 
|6,663,943 Warrants 2008, exercise price of $20.69 |  |             | 13,328 |       |  |                    | 13,328 |  |  |  |      | 
|115,700 initial warrants                          |  |             |       |       |  |                    |       |  |  |  | 1,770 | 
|                                                  |  |             |        |       |  |                    |        |  |  |  |       | 
|                                                  |  |             | 17,926 |       |  |                    | 17,926 |  |  |  | 1,770 | 
|                                                  |  |             |        |       |  |                    |        |  |  |  |       | 

In connection with the Plan, the Company issued
on May 1, 2003 two series of warrants entitling holders
thereof, at any time, to purchase one Class A Share or
Class B Share as the case may be, for each warrant at the
exercise price until their maturity on May 1, 2005 and
May 1, 2008, respectively.

The initial warrants were each exercisable for
2,899 Class B non-voting shares at an exercise price of
US$0.01 per share.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

The Company has a stock purchase plan for its
employees under which participants can contribute up to 10% of
their salary. The Company makes a contribution in shares for the
benefit of the participant equal to one-third the number of
shares purchased with the participants contribution during
the year [up to 5% of the participants salary]. The
Companys contribution is executed only if, on June 30
of the following year, the participant is still an employee of
the Company and still holds the shares purchased with their
contributions during the year. The Company may choose to make
its contribution in treasury shares or to deposit with the
administrative agent of the plan a sufficient amount of money to
enable the administrative agent of the plan to purchase the
appropriate number of shares in the market. The total number of
treasury Class A Shares and

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Class B Shares that can be issued by the
Company in order to make its contribution pursuant to this plan
shall not exceed 250,000 shares. As at December 31,
2003, no shares were issued under this stock purchase plan.



| |                  
| | -----------------
| | Stock Option Plan

A new stock option plan was implemented on
May 1, 2003. The new stock option plan, as amended on
November 20, 2003, authorizes the issuance of up to 3,000
Class A Shares and 2,006,818 Class B Shares. The Board
may amend, supersede or terminate the stock option plan.

The stock option plan is administered by the
Board, which has sole discretion to designate the recipients of
options and to determine the number of Class A Shares or
Class B Shares of the Company covered by each of such
options, the date of grants and the subscription price of each
option. Each option allows its holder to acquire one
Class A Share or one Class B Share, as the case may
be, at its exercise price following the vesting period. Options
granted under the stock option plan have the terms and
conditions, including exercise price, vesting and expiration, as
established by the Board, from time to time, provided that the
pricing of options is in accordance with the requirements of the
Toronto Stock Exchange and is not less than the market prices
for the Class A Shares and Class B Shares at the time
of the grant of options.

During the eight-month period ended
December 31, 2003, the Company granted 1,781,359 options
and 48,400 options were forfeited. As a result, 1,732,959
options were outstanding as of December 31, 2003. 50%, 25%
and 25% will vest and become exercisable on the second, third
and fourth anniversaries of the grant. Accelerated vesting will
be applicable after the first anniversary date of the grant in
the event that the market price of the shares reaches a certain
level.

|                                |  |              |           |                    |  |             |           |             |  |  |           |  |  |  |           | 
|------------------------------- |  | ------------ | --------- | ------------------ |  | ----------- | --------- | ----------- |  |  | --------- |  |  |  | --------- | 
|                                |  |              |           |                   
|                                |  |              |           | Pre-reorganization
|                                |  |              |           |                   
|                                |  | Eight months |           | Four months        |  |            
|                                |  | ended        |           | ended              |  | Year ended  |           | Year ended 
|                                |  | December 31  |           | April 30           |  | December 31 |           | December 31
|Weighted-average assumptions    |  | 2003         |           | 2003               |  | 2002        |           | 2001       
|                                |  |              |           |                    |  |             |           |            
|                                |  | $            |           | $                  |  | $           |           | $          
|Risk-free interest rate         |  |              | 3.0%      |                    |  |             | 3.0%      |             |  |  | 3.0%      |  |  |  | 3.0%      | 
|Expected dividend yield         |  |              | 0%        |                    |  |             | 0%        |             |  |  | 0%        |  |  |  | 0%        | 
|Expected share price volatility |  |              | 64.6%     |                    |  |             | 107.9%    |             |  |  | 107.9%    |  |  |  | 89.8%     | 
|Expected life                   |  |              | 5.0 years |                    |  |             | 5.5 years |             |  |  | 5.5 years |  |  |  | 5.5 years | 

For the purposes of pro forma disclosures, the
estimated fair value of the options at the grant date is
amortized to expense over the options vesting periods.

All the outstanding options granted under the
prior stock option plan were cancelled upon the implementation
of the Companys financial reorganization on May 1,
2003.

137



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                       
| | ------------------------------------------------------
| | Pro forma disclosure regarding stock options
    plan:

|                                                                                                                                                                                               |  |              |         |                    |  |             |        |             |  |  |          |   |  |  |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------------ |  | ----------- | ------ | ----------- |  |  | -------- | - |  |  | -------- | -
|                                                                                                                                                                                               |  |              |         |                   
|                                                                                                                                                                                               |  |              |         | Pre-reorganization
|                                                                                                                                                                                               |  |              |         |                   
|                                                                                                                                                                                               |  | Eight months |         | Four months        |  |            
|                                                                                                                                                                                               |  | ended        |         | ended              |  | Year ended  |        | Year ended 
|                                                                                                                                                                                               |  | December 31  |         | April 30           |  | December 31 |        | December 31
|                                                                                                                                                                                               |  | 2003         |         | 2003               |  | 2002        |        | 2001       
|                                                                                                                                                                                               |  |              |         |                    |  |             |        |            
|                                                                                                                                                                                               |  | $            |         | $                  |  | $           |        | $          
|Net income (loss) for basic earnings (loss) per
    share calculation                                                                                                                          |  |              | (12,146 | )                  |  |             | 45,517 |             |  |  | (570,501 | ) |  |  | (498,485 | )
|Stock-based employee compensation costs that
    would have been included in the determination of net income if
    the fair value based method had been applied to all awards as
    reported |  |              | (1,327  | )                  |  |             | (1,577 | )           |  |  | (2,228   | ) |  |  | (6,155   | )
|                                                                                                                                                                                               |  |              |         |                    |  |             |        |             |  |  |          |   |  |  |          |  
|Pro forma net income (loss) as if the fair value
    based method had been applied to all awards                                                                                               |  |              | (13,473 | )                  |  |             | 43,940 |             |  |  | (572,729 | ) |  |  | (504,640 | )
|                                                                                                                                                                                               |  |              |         |                    |  |             |        |             |  |  |          |   |  |  |          |  
|Basic and diluted earnings (loss) per share as if
    the fair value based method had been applied to all awards                                                                               |  |              | (3.57   | )                  |  |             | 0.18   |             |  |  | (2.38    | ) |  |  | (4.62    | )
|                                                                                                                                                                                               |  |              |         |                    |  |             |        |             |  |  |          |   |  |  |          |  

The following table summarizes information about
stock options outstanding, none of which were exercisable, as of
December 31, 2003:

|                         |  |                     |           |                  |  |                  |            |  |  |  |       | 
|------------------------ |  | ------------------- | --------- | ---------------- |  | ---------------- | ---------- |  |  |  | ----- | 
|                         |  |                    
|                         |  | Options Outstanding
|                         |  |                    
|                         |  | Number              |           | Weighted-average |  | Weighted-average
|                         |  | outstanding as at   |           | remaining        |  | exercise        
|Range of exercise prices |  | December 31, 2003   |           | life             |  | price           
|                         |  |                     |           |                  |  |                 
|$10.50 to $11.25         |  |                     | 1,648,544 |                  |  |                  | 4.48 years |  |  |  | 10.51 | 
|$17.75 to $18.74         |  |                     | 84,415    |                  |  |                  | 4.20 years |  |  |  | 18.51 | 
|                         |  |                     |           |                  |  |                  |            |  |  |  |       | 
|$10.50 to $18.74         |  |                     | 1,732,959 |                  |  |                  | 4.46 years |  |  |  | 10.90 | 
|                         |  |                     |           |                  |  |                  |            |  |  |  |       | 

138



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                          
|--- | -------------------------------------------------------------------------
|10. | SUPPLEMENTARY CONSOLIDATED STATEMENT OF NET
    INCOME (LOSS) INFORMATION

|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|------------------------------------------------------------- |  | ------------ | ------ | ------------------ |  | ----------- | ------ | ----------- |  |  | ------- |  |  |  | ------- | 
|                                                              |  |              |        |                   
|                                                              |  |              |        | Pre-reorganization
|                                                              |  |              |        |                   
|                                                              |  | Eight months |        | Four months        |  |            
|                                                              |  | ended        |        | ended              |  | Year ended  |        | Year ended 
|                                                              |  | December 31  |        | April 30           |  | December 31 |        | December 31
|                                                              |  | 2003         |        | 2003               |  | 2002        |        | 2001       
|                                                              |  |              |        |                    |  |             |        |            
|                                                              |  | $            |        | $                  |  | $           |        | $          
|Depreciation and amortization                                 |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Property, plant and equipment                                 |  |              | 38,970 |                    |  |             | 59,121 |             |  |  | 240,384 |  |  |  | 176,712 | 
|Intangible assets                                             |  |              | 7,383  |                    |  |             |       |             |  |  | 223,399 |  |  |  |        | 
|Other non-current assets                                      |  |              | 418    |                    |  |             | 267    |             |  |  | 2,032   |  |  |  | 1,278   | 
|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|                                                              |  |              | 46,771 |                    |  |             | 59,388 |             |  |  | 465,815 |  |  |  | 177,990 | 
|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Depreciation and amortization related to cost of
    services |  |              | 43,657 |                    |  |             | 56,246 |             |  |  | 226,567 |  |  |  | 164,386 | 
|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Interest expenses                                             |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Interest on long-term debt                                    |  |              | 14,705 |                    |  |             | 70,174 |             |  |  | 208,389 |  |  |  | 202,429 | 
|Other interest                                                |  |              | 112    |                    |  |             | 434    |             |  |  | 7,867   |  |  |  | 13,459  | 
|Amortization of deferred financing costs                      |  |              |       |                    |  |             |       |             |  |  | 10,573  |  |  |  | 8,349   | 
|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|                                                              |  |              | 14,817 |                    |  |             | 70,608 |             |  |  | 226,829 |  |  |  | 224,237 | 
|                                                              |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Other information                                             |  |              |        |                    |  |             |        |             |  |  |         |  |  |  |         | 
|Bad debt expense                                              |  |              | 2,853  |                    |  |             | 4,153  |             |  |  | 32,306  |  |  |  | 16,148  | 
|Advertising costs                                             |  |              | 31,823 |                    |  |             | 8,290  |             |  |  | 37,341  |  |  |  | 33,293  | 

Intangible assets amortization for the next
two years is expected to be approximately $8.6 million per
year. Costs of products and costs of services are exclusive of
depreciation and amortization, which are shown separately.



| |                    
| | -------------------
| | Post-reorganization



| |                                                                       
| | ----------------------------------------------------------------------
| | Gain (loss) on investments, marketable
    securities and other assets

During the eight-month period ended
December 31, 2003, the Company received proceeds of
$2.4 million following the sale of its equity investment in
Saraide Inc., which was previously written down to a value of
nil. The entire amount was recorded as a gain on investments.



| |                   
| | ------------------
| | Pre-reorganization



| |                     
| | --------------------
| | Impairment of assets

In 2002, the Company wrote down the value of its
MCS Licenses to nil and an impairment charge of
$223.4 million was recorded and included with depreciation
and amortization of intangible assets. A related deferred income
tax recovery of $72.9 million was also recorded. Also
included with depreciation and amortization of property, plant
and equipment in 2002 was an impairment charge of
$37.3 million as a result of write-downs related to the
network and to application software.

In light of the decline in market conditions for
high-technology companies, the Company reduced the value of
certain of its investments to their net estimated realizable
value. Accordingly, write-downs of $11.8 million were
recorded in 2002 and $28.0 million in 2001.

139



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Restructuring charges

In 2002, the Company laid off approximately 350
employees [approximately 200 in 2001] to adjust its work force
to the requirements of its operating plan. The restructuring
charges of $7.5 million recorded in 2002 [$5.2 million
in 2001] relate primarily to severance payments to the employees
laid off.



| |                              
| | -----------------------------
| | Gain on financial instruments

During 2002, the Company terminated
cross-currency swaps, interest rate swaps and hedging agreements
related to the old long-term debt. These terminations generated
net proceeds of $21.5 million, net deferred gain of
$3.1 million and gain on financial instruments of
$5.5 million. The net gain on financial instruments in 2002
also includes the amortization of the deferred gains of
$1.4 million and the amortization of the deferred losses
generated by the termination of the interest rate swaps of
$0.3 million.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Write-down of deferred financing costs and
    deferred gain and loss on financial instruments

In 2002, the Company wrote down
$18.9 million of deferred financing costs,
$17.7 million of deferred loss on financial instruments and
$19.7 million of deferred gain on financial instruments for
a net total of $16.9 million, all of which related to the
Companys long-term debt, which was in default as at
December 31, 2002.

140



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                          
|--- | -------------------------
|11. | EARNINGS (LOSS) PER SHARE

The reconciliation of the numerator and
denominator for the calculation of earnings (loss) per share is
as follows:

|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|----------------------------------------------------------------------- |  | ------------ | ------- | ------------------ |  | ----------- | ------- | ----------- |  |  | -------- | - |  |  | -------- | -
|                                                                        |  |              |         |                   
|                                                                        |  |              |         | Pre-reorganization
|                                                                        |  | Eight months |         |                   
|                                                                        |  | ended        |         | Four months        |  | Year ended  |         | Year ended 
|                                                                        |  | December 31  |         | ended              |  | December 31 |         | December 31
|                                                                        |  | 2003         |         | April 30 2003      |  | 2002        |         | 2001       
|                                                                        |  |              |         |                    |  |             |         |            
|                                                                        |  | $            |         | $                  |  | $           |         | $          
|Numerator:                                                              |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Net income (loss) for diluted earnings (loss) per
    share calculation |  |              | 4,959   |                    |  |             | 45,517  |             |  |  | (570,501 | ) |  |  | (498,485 | )
|Accretion on redemption price of First and Second
    Preferred Shares  |  |              | (17,105 | )                  |  |             |        |             |  |  |         |   |  |  |         |  
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Net income (loss) for basic earnings (loss) per
    share calculation   |  |              | (12,146 | )                  |  |             | 45,517  |             |  |  | (570,501 | ) |  |  | (498,485 | )
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|                                                                        |  |              | Number  |                    |  |             | Number  |             |  |  | Number   |   |  |  | Number   |  
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Denominator: (in thousands)                                             |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Weighted-average number of shares outstanding                           |  |              | 3,774   |                    |  |             | 240,217 |             |  |  | 240,204  |   |  |  | 108,915  |  
|Shares issuable pursuant to the exercise of
    initial warrants        |  |              |        |                    |  |             | 253     |             |  |  | 253      |   |  |  | 297      |  
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Number of shares for basic earnings (loss) per
    share calculation    |  |              | 3,774   |                    |  |             | 240,470 |             |  |  | 240,457  |   |  |  | 109,212  |  
|Additional shares for diluted loss per share
    calculation            |  |              |        |                    |  |             |        |             |  |  |         |   |  |  | 3,312    |  
|Shares issuable pursuant to the conversion of
    Preferred Shares      |  |              | 18,662  |                    |  |             |        |             |  |  |         |   |  |  |         |  
|Shares issuable pursuant to the exercise of stock
    options           |  |              | 463     |                    |  |             |        |             |  |  |         |   |  |  |         |  
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Number of shares for diluted earnings (loss) per
    share calculation  |  |              | 22,899  |                    |  |             | 240,470 |             |  |  | 240,457  |   |  |  | 112,524  |  
|                                                                        |  |              |         |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Basic and diluted earnings (loss) per share
    (in dollars)            |  |              | (3.22   | )                  |  |             | 0.19    |             |  |  | (2.37    | ) |  |  | (4.56    | )

Basic and diluted earnings (loss) per share are
identical, as the effect of dilutive securities is antidilutive.



|    |                           
|--- | --------------------------
|12. | RELATED PARTY TRANSACTIONS

Since May 1, 2003, certain holders of the
long-term debt and the derivative instruments are also
shareholders of the Company.

During the pre-reorganization period, the Company
has entered into transactions with shareholders, companies under
common control, joint ventures and equity-accounted companies.
These transactions are undertaken in the normal course of
operations and are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related
parties. Amounts due from or to related parties are payable or
receivable in cash on demand. These transactions consist
primarily of the purchase or sale by the Company of engineering,
telecommunications, development and management services or
equipment. The

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effect on the consolidated financial statements,
excluding amounts related to long-term debt and derivative
instruments, is as follows:

|                                                                            |  |                  |   |                    |  |             |     |             |  |  |       |  |  |  |       | 
|--------------------------------------------------------------------------- |  | ---------------- | - | ------------------ |  | ----------- | --- | ----------- |  |  | ----- |  |  |  | ----- | 
|                                                                            |  |                  |   |                   
|                                                                            |  |                  |   | Pre-reorganization
|                                                                            |  |                  |   |                   
|                                                                            |  | Eight months     |   | Four months        |  | Year ended  |     | Year ended 
|                                                                            |  | ended            |   | ended              |  | December 31 |     | December 31
|                                                                            |  | December 31 2003 |   | April 30 2003      |  | 2002        |     | 2001       
|                                                                            |  |                  |   |                    |  |             |     |            
|                                                                            |  | $                |   | $                  |  | $           |     | $          
|Costs capitalized to property, plant and
    equipment and deferred charges |  |                  |  |                    |  |             |    |             |  |  |      |  |  |  | 5,165 | 
|Cost of products and services                                               |  |                  |  |                    |  |             |    |             |  |  | 3,007 |  |  |  | 6,965 | 
|General and administrative services                                         |  |                  |  |                    |  |             | 103 |             |  |  | 304   |  |  |  | 562   | 
|Selling and marketing                                                       |  |                  |  |                    |  |             |    |             |  |  |      |  |  |  | 225   | 
|Equipment sales and service revenues                                        |  |                  |  |                    |  |             |    |             |  |  | 4,698 |  |  |  | 5,470 | 
|Equipment purchases                                                         |  |                  |  |                    |  |             |    |             |  |  | 224   |  |  |  | 192   | 

13.     INCOME
TAXES

Significant components of the income tax benefit
(expense) consist of the following:

|                                                                              |  |                  |      |                    |  |             |        |             |  |  |         |   |  |  |         |  
|----------------------------------------------------------------------------- |  | ---------------- | ---- | ------------------ |  | ----------- | ------ | ----------- |  |  | ------- | - |  |  | ------- | -
|                                                                              |  |                  |      |                   
|                                                                              |  |                  |      | Pre-reorganization
|                                                                              |  |                  |      |                   
|                                                                              |  | Eight months     |      | Four months        |  | Year ended  |        | Year ended 
|                                                                              |  | ended            |      | ended              |  | December 31 |        | December 31
|                                                                              |  | December 31 2003 |      | April 30 2003      |  | 2002        |        | 2001       
|                                                                              |  |                  |      |                    |  |             |        |            
|                                                                              |  | $                |      | $                  |  | $           |        | $          
|Current income tax benefit (expense) before
    the following:                |  |                  | (587 | )                  |  |             | (6,180 | )           |  |  | (80,484 | ) |  |  | (40,101 | )
|Tax benefit of previously unrecognized losses and
    temporary differences   |  |                  |     |                    |  |             | 4,384  |             |  |  | 78,860  |   |  |  | 37,857  |  
|                                                                              |  |                  |      |                    |  |             |        |             |  |  |         |   |  |  |         |  
|Current income tax benefit (expense)                                          |  |                  | (587 | )                  |  |             | (1,796 | )           |  |  | (1,624  | ) |  |  | (2,244  | )
|Deferred income tax recovery related to reversal
    of temporary differences |  |                  |     |                    |  |             |       |             |  |  | 73,519  |   |  |  | 3,966   |  
|                                                                              |  |                  |      |                    |  |             |        |             |  |  |         |   |  |  |         |  
|Income tax benefit (expense)                                                  |  |                  | (587 | )                  |  |             | (1,796 | )           |  |  | 71,895  |   |  |  | 1,722   |  
|                                                                              |  |                  |      |                    |  |             |        |             |  |  |         |   |  |  |         |  

142



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The reconciliation of income tax computed at the
statutory income tax rates to the income tax benefit
(expense) is as follows:

|                                                                                                                          |  |                  |        |                    |  |             |         |             |  |  |          |   |  |  |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ------------------ |  | ----------- | ------- | ----------- |  |  | -------- | - |  |  | -------- | -
|                                                                                                                          |  |                  |        |                   
|                                                                                                                          |  |                  |        | Pre-reorganization
|                                                                                                                          |  |                  |        |                   
|                                                                                                                          |  | Eight months     |        | Four months        |  | Year ended  |         | Year ended 
|                                                                                                                          |  | ended            |        | ended              |  | December 31 |         | December 31
|                                                                                                                          |  | December 31 2003 |        | April 30 2003      |  | 2002        |         | 2001       
|                                                                                                                          |  |                  |        |                    |  |             |         |            
|                                                                                                                          |  | $                |        | $                  |  | $           |         | $          
|Income tax benefit (expense) based on the
    combined statutory income tax rate of 33% [32% in 2002 and 33%
    in 2001] |  |                  | (1,830 | )                  |  |             | (15,613 | )           |  |  | 205,567  |   |  |  | 165,068  |  
|Non-taxable portion of capital items                                                                                      |  |                  | 2,825  |                    |  |             | 16,519  |             |  |  | (3,665   | ) |  |  | (14,596  | )
|Unrecognized tax expense (benefit) of losses and
    temporary differences                                                |  |                  | (913   | )                  |  |             | (5,264  | )           |  |  | (210,063 | ) |  |  | (187,376 | )
|Tax benefit of previously unrecognized losses and
    temporary differences                                               |  |                  |       |                    |  |             | 4,384   |             |  |  | 78,860   |   |  |  | 37,857   |  
|Large corporations tax                                                                                                    |  |                  | (587   | )                  |  |             | (1,796  | )           |  |  | (1,624   | ) |  |  | (2,244   | )
|Other                                                                                                                     |  |                  | (82    | )                  |  |             | (26     | )           |  |  | 2,820    |   |  |  | 3,013    |  
|                                                                                                                          |  |                  |        |                    |  |             |         |             |  |  |          |   |  |  |          |  
|Income tax benefit (expense)                                                                                              |  |                  | (587   | )                  |  |             | (1,796  | )           |  |  | 71,895   |   |  |  | 1,722    |  
|                                                                                                                          |  |                  |        |                    |  |             |         |             |  |  |          |   |  |  |          |  

Significant components of the Companys
deferred tax assets and liabilities as of December 31, 2003
are as follows:

|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|-------------------------------------------------------------------------------------- |  | ----------- | -------- | ----- |  | ------------------ | -------- | - |  |  | -------- | -
|                                                                                       |  |             |          |       |  | Pre-reorganization
|                                                                                       |  | December 31 |          | May 1 |  |                   
|                                                                                       |  | 2003        |          | 2003  |  | December 31 2002  
|                                                                                       |  |             |          |       |  |                   
|                                                                                       |  | $           |          | $     |  |                   
|Deferred income tax liabilities:                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Deferred gains and other                                                               |  |             | 2,779    |       |  |                    | 517      |   |  |  | 873      |  
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Total deferred income tax liabilities                                                  |  |             | 2,779    |       |  |                    | 517      |   |  |  | 873      |  
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Deferred income tax assets:                                                            |  |             |          |       |  |                    |          |   |  |  |          |  
|Tax values of marketable securities and
    investments in excess of accounting values |  |             | 416      |       |  |                    | 416      |   |  |  | 4,568    |  
|Operating losses carried forward                                                       |  |             | 542,552  |       |  |                    | 612,370  |   |  |  | 481,105  |  
|Tax values of capital assets in excess of
    accounting values                        |  |             | 55,849   |       |  |                    | 40,553   |   |  |  | 162,806  |  
|Provisions and other temporary differences                                             |  |             | 23,906   |       |  |                    | 25,651   |   |  |  | 83,576   |  
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Total deferred income tax assets                                                       |  |             | 622,723  |       |  |                    | 678,990  |   |  |  | 732,055  |  
|Valuation allowance                                                                    |  |             | (619,944 | )     |  |                    | (678,473 | ) |  |  | (731,182 | )
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Net deferred income tax assets                                                         |  |             | 2,779    |       |  |                    | 517      |   |  |  | 873      |  
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  
|Net deferred income tax                                                                |  |             |         |       |  |                    |         |   |  |  |         |  
|                                                                                       |  |             |          |       |  |                    |          |   |  |  |          |  

Approximately $1.8 billion of the operating
losses carried forward and $200 million of temporary
differences existed at the date of the Companys financial
reorganization as described in note 1. The tax benefits
related to these operating losses carried forward and temporary
differences were not included in the assets as part of the fresh
start accounting, as a valuation allowance of approximately
$678 million was provided. Accordingly, if and when it is
more likely than not that the tax benefits of these unrecognized
losses

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

carried forward and temporary differences will be
realized, they will be applied to reduce unamortized intangible
assets to nil. During the period of eight months ended
December 31, 2003, no amount of tax benefits related to
these losses and temporary differences was realized.

As at December 31, 2003, the Company had net
operating losses carried forward for income tax purposes
totaling $1.6 billion, which expire as follows: 2004,
$217.8 million; 2005, $57.9 million; 2006,
$283.7 million; 2007, $282.6 million; 2008,
$322.0 million; 2009, $480.1 million. The Company had
also approximately $234.5 million of deductible temporary
differences.

In addition, the use of tax losses carried
forward will generally be restricted in future years to profits
from those businesses carried on prior to the restructuring plan.



|    |                                                                      
|--- | ---------------------------------------------------------------------
|14. | SUPPLEMENTARY INFORMATION ON CONSOLIDATED
    STATEMENT OF CASH FLOWS

|                                                         |  |              |         |                    |  |             |         |             |  |  |        |   |  |  |         |  
|-------------------------------------------------------- |  | ------------ | ------- | ------------------ |  | ----------- | ------- | ----------- |  |  | ------ | - |  |  | ------- | -
|                                                         |  |              |         |                   
|                                                         |  |              |         | Pre-reorganization
|                                                         |  |              |         |                   
|                                                         |  | Eight months |         | Four months        |  |            
|                                                         |  | ended        |         | ended              |  | Year ended  |         | Year ended 
|                                                         |  | December 31  |         | April 30           |  | December 31 |         | December 31
|Changes in operating assets and liabilities              |  | 2003         |         | 2003               |  | 2002        |         | 2001       
|                                                         |  |              |         |                    |  |             |         |            
|                                                         |  | $            |         | $                  |  | $           |         | $          
|Receivables                                              |  |              | (12,244 | )                  |  |             | (2,689  | )           |  |  | 13,783 |   |  |  | (18,947 | )
|Inventories                                              |  |              | (5,728  | )                  |  |             | (4,035  | )           |  |  | 370    |   |  |  | 17,545  |  
|Prepaid license fees, rental sites and other
    prepaid |  |              | 7,193   |                    |  |             | (14,188 | )           |  |  | (1,235 | ) |  |  | (980    | )
|Deferred charges                                         |  |              | (3,557  | )                  |  |             | 9,481   |             |  |  | (5,477 | ) |  |  | (7,727  | )
|Other current assets                                     |  |              | (3,282  | )                  |  |             | (34,250 | )           |  |  | 6,754  |   |  |  | 13,116  |  
|Accounts payable and accrued liabilities                 |  |              | 27,113  |                    |  |             | 75,712  |             |  |  | 16,385 |   |  |  | (61,289 | )
|Deferred revenues                                        |  |              | 8,121   |                    |  |             | (3,366  | )           |  |  | (542   | ) |  |  | 5,979   |  
|                                                         |  |              |         |                    |  |             |         |             |  |  |        |   |  |  |         |  
|Net change in operating assets and
    liabilities       |  |              | 17,616  |                    |  |             | 26,665  |             |  |  | 30,038 |   |  |  | (52,303 | )
|                                                         |  |              |         |                    |  |             |         |             |  |  |        |   |  |  |         |  



|    |                              
|--- | -----------------------------
|15. | COMMITMENTS AND CONTINGENCIES



| |                 
| | ----------------
| | Operating leases

The aggregate minimum annual payments under
operating leases related to sites, switch rooms, offices and
stores are as follows:

|                   |  |   |         | 
|------------------ |  | - | ------- | 
|                   |  | $
|                   |  |  
|2004               |  |   | 34,148  | 
|2005               |  |   | 29,774  | 
|2006               |  |   | 21,399  | 
|2007               |  |   | 17,528  | 
|2008               |  |   | 14,653  | 
|Subsequent to 2008 |  |   | 41,384  | 
|                   |  |   | 158,886 | 

Rental expenses for the eight months ended
December 31, 2003 and for the four months ended
April 30, 2003 amounted to $19.0 million and
$9.7 million respectively [$29.7 million for 2002 and
$29.5 million for 2001].

144



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under its site leases, the Company is generally
committed to returning each site to its original state. The
associated exit costs are expected to be insignificant because
the Company estimates that most of its lease sites will be
renewed at their expiry. Consequently, no provision has been
recorded for asset retirement obligations and the associated
exit costs will be provided for when such liabilities arise.



| |                  
| | -----------------
| | Letters of credit

As at December 31, 2003, the Company had
outstanding letters of credit for an aggregate amount of
$0.4 million [$1.3 million as at May 1, 2003].



| |                 
| | ----------------
| | Supply Agreement

Under a supply agreement, the Company is
committed until 2006 to acquire certain of its core wireless
network equipment and call server products from a major
supplier. Under this agreement, the Company has no unconditional
purchase commitments.



| |            
| | -----------
| | PCS License

On April 15, 1996, the Company was informed
of the conditions attached to its PCS license, which had an
initial term of five years. On March 29, 2001, Industry
Canada renewed the Companys PCS license for a second
five-year term, commencing on April 1, 2001. On
December 12, 2003, Industry Canada issued Canada Gazette
Notice DGRB-006-03 announcing that the license terms of existing
cellular and PCS licensees, including the Company, will be
extended to March 31, 2011. Industry Canada also announced
that it will make certain changes to the cellular and PCS
license conditions, including granting licensees the power to
divide and transfer their licenses, by both spectrum amount and
geographic area.

Other License conditions detailed in Gazette
Notice DGRB-006-03 that apply to the Company include:

[i] to comply with applicable spectrum
aggregation limits;

[ii] to comply with the Canadian ownership and
control provisions;

[iii] to ensure that radio stations are installed
and operated in compliance with applicable regulations from
Health Canada [electromagnetic field exposure] and Transport
Canada [air navigation], and only after meaningful consultations
have taken place with applicable local land use authorities;

[iv] to invest a minimum of 2% of adjusted gross
revenues resulting from operations in the spectrum, over the
term of the License, in eligible research and development
activities. As at December 31, 2003, 2% of the
Companys adjusted gross revenues represented a cumulative
amount of $26.7 million. Up to December 31, 2003, the
Company has spent approximately $15.9 million;

[v] to provide for and maintain lawful
interception activities as authorized by law; and

[vi] to offer PCS resale to other PCS licensees
on a non-discriminatory basis.



| |             
| | ------------
| | MCS Licenses

In November 2003, Inukshuk announced the creation
of a new venture with two partners. The new company plans to
build a MCS network to offer high speed Internet, IP-based voice
and local networking services using broadband wireless access
technology. Each partner owns one-third of the new company,
which will operate as an independent entity. The first phase
will allow partners to validate technological and commercial
acceptance to develop a detailed business plan. The first
commercial service launches are planned for early 2004. Inukshuk
will contribute the use of 60 MHz of its MCS Licenses, but
no monetary investment. Contributions to the venture will be
made in two phases and the second phase is subject to certain
conditions.

145



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003, the venture was at
an early stage of activities and had no significant impact on
the Companys financial statements.



| |            
| | -----------
| | Litigations

On April 10, 2002, ASP Wireless Net Inc., or
ASP, a former service provider of Solutions, filed a notice of
arbitration pursuant to an agreement that ASP had with
Solutions. ASP claims in the notice of arbitration that
Solutions has breached its agreements with ASP and ASP therefore
suffered damages in the amount of $18.5 million, which ASP
is claiming from the Company. The breach alleged by ASP relates
to Microcells failure to provide ASP access to
Microcells PCS network. The Company considers ASPs
claim frivolous and unfounded in fact and in law and intends to
vigorously contest it.

Furthermore, the Company is involved from time to
time in other legal and regulatory proceedings incidental to its
business. The Company does not believe that such proceedings
will have, individually or in the aggregate, a materially
adverse effect on the Company.



|    |                      
|--- | ---------------------
|16. | FINANCIAL INSTRUMENTS



| |                             
| | ----------------------------
| | Concentration of credit risk

The Company has a limited concentration of credit
risk due to the composition of its customer base, which includes
a large number of individuals and businesses. The Company
evaluates the credit-worthiness of customers in order to limit
the amount of credit extended where appropriate and establishes
an allowance for doubtful accounts receivable sufficient to
cover probable and reasonably estimated losses. Cash and cash
equivalents and short-term investments are contracted with a
limited number of financial institutions. However, risk of
losses is managed by the Company through a policy of dealing
only with large, creditworthy financial institutions.



| |                   
| | ------------------
| | Interest Rate Risk

The Company has exposure to interest rate risk
for both fixed interest rate and floating interest rate
instruments. Fluctuations in interest rates will have an effect
on the valuation and the collection or repayment of these
instruments.



| |                           
| | --------------------------
| | Foreign exchange rate risk

The Company is subject to foreign exchange rate
fluctuations as a portion of its assets and liabilities are
unhedged and denominated in currencies other than Canadian
dollars.



| |           
| | ----------
| | Fair value

Fair value estimates are made as of a specific
point in time, using available information about the financial
instruments. These estimates are subjective in nature and often
cannot be determined with precision.

The fair value of cash and cash equivalents,
short-term investments, receivables, accounts payable and
accrued liabilities approximate their carrying value due to the
short-term maturity of these instruments.

The fair value of the Tranche B Debt and
Tranche C Debt is determined based on an amount quoted on
the over-the-counter market at the balance sheet date. The fair
value of the derivative instruments is determined based on
market rates prevailing at the balance sheet date obtained from
the Companys financial institutions for similar derivative
instruments.

146



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Fair values of the Companys financial
instruments, as at December 31, 2003, where the fair values
differ from the carrying amounts on the financial statements,
are as follows:

|               |  |          |         |                |  |  |         | 
|-------------- |  | -------- | ------- | -------------- |  |  | ------- | 
|               |  | Carrying |         | Estimated fair
|               |  | value    |         | value         
|               |  |          |         |               
|               |  | $        |         | $             
|Tranche B Debt |  |          | 271,769 |                |  |  | 266,334 | 
|Tranche C Debt |  |          | 52,693  |                |  |  | 41,100  | 



|    |                      
|--- | ---------------------
|17. | SEGMENTED INFORMATION

In the preceding years, the Company carried out
its operations through three strategic business segments: PCS,
wireless Internet and investments. As a result of the
restructuring process, the Company realigned its cash flows to
concentrate on the PCS activities. Consequently, the Company has
determined that it operates in one segment since January 1,
2003, as the wireless internet and investments operations were
no longer significant.



|    |                                                                  
|--- | -----------------------------------------------------------------
|18. | ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
    THE UNITED STATES

These financial statements were prepared in
accordance with Canadian GAAP. The following summary sets out
the material adjustments to the Companys financial
statements, which would be required to conform to U.S. GAAP.

147



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Reconciliation of consolidated net income
    (loss) and comprehensive income (loss)

|                                                                                                              |                                                                          |              |       |                    |   |             |           |             |  |  |          |          |   |  |          |          |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------ | ----- | ------------------ | - | ----------- | --------- | ----------- |  |  | -------- | -------- | - |  | -------- | -------- | -
|                                                                                                              |                                                                          |              |       |                   
|                                                                                                              |                                                                          |              |       | Pre-reorganization
|                                                                                                              |                                                                          |              |       |                   
|                                                                                                              |                                                                          | Eight months |       | Four months        |   |            
|                                                                                                              |                                                                          | ended        |       | ended              |   | Year ended  |           | Year ended 
|                                                                                                              |                                                                          | December 31  |       | April 30           |   | December 31 |           | December 31
|                                                                                                              |                                                                          | 2003         |       | 2003               |   | 2002        |           | 2001       
|                                                                                                              |                                                                          |              |       |                    |   |             |           |            
|                                                                                                              |                                                                          | $            |       | $                  |   | $           |           | $          
|Net income (loss) under Canadian
    GAAP                                                                     |                                                                          |              | 4,959 |                    |   |             | 45,517    |             |  |  | (570,501 | )        |   |  | (498,485 | )       
|[a]   Reversal of amortization of
    Intangible assets                                                       |                                                                          |              |      |                    |   |             |          |             |  |  |         |          |   |  | 139      |         
|[b]   Share of net income (net
    loss) in investees                                                         |                                                                          |              |      |                    |   |             | (500      | )           |  |  | 4,772    |          |   |  | (22,079  | )       
|[d]   Development costs                                                                                       |                                                                          |              |      |                    |   |             |          |             |  |  | 6,108    |          |   |  | (3,502   | )       
|[e]   Stock compensation                                                                                      |                                                                          |              |      |                    |   |             |          |             |  |  | 478      |          |   |  | (478     | )       
|[g]   Reorganization items                                                                                    |                                                                          |              |      |                    |   |             | 1,253,660 |             |  |  |         |          |   |  |         |         
|[d]   Amortization of net deferred
    gain on financial instruments                                          |                                                                          |              |      |                    |   |             |          |             |  |  | (1,110   | )        |   |  |         |         
|[d]   Amortization of other
    comprehensive income related to financial instruments                         |                                                                          |              |      |                    |   |             |          |             |  |  | 1,110    |          |   |  |         |         
|[i]   Changes in fair market value
    of a fair value hedge                                                  |                                                                          |              |      |                    |   |             |          |             |  |  |         |          |   |  | 1,367    |         
|[i]   Cumulative effect as of
    January 1, 2001 resulting from the adoption of SFAS 133                     |                                                                          |              |      |                    |   |             |          |             |  |  |         |          |   |  | (900     | )       
|[h]   Effect of legislated tax
    rate changes on deferred tax liabilities                                   |                                                                          |              |      |                    |   |             |          |             |  |  |         |          |   |  | 25,771   |         
|[a]   Impairment of intangible
    assets                                                                     |                                                                          |              |      |                    |   |             |          |             |  |  | (25,771  | )        |   |  |         |         
|                                                                                                              |                                                                          |              |       |                    |   |             |           |             |  |  |          |          |   |  |          |         
|                                                                                                              | Net income (loss) under
    U.S. GAAP                                    |              |       | 4,959              |   |             |           | 1,298,677   |  |  |          | (584,914 | ) |  |          | (498,167 | )
|[c]   Unrealized gain (loss) in
    value of marketable securities                                            |                                                                          |              |      |                    |   |             | (145      | )           |  |  | (177     | )        |   |  | 322      |         
|[i]   Changes in fair market value
    of cash flow hedges                                                    |                                                                          |              |      |                    |   |             |          |             |  |  | 367      |          |   |  | (1,364   | )       
|[d]   Reversal of cumulative
    income taxes related to changes in fair market value of cash
    flow hedges |                                                                          |              |      |                    |   |             |          |             |  |  | 1,036    |          |   |  |         |         
|[d]   Amortization of other
    comprehensive income related to financial instruments                         |                                                                          |              |      |                    |   |             |          |             |  |  | (1,110   | )        |   |  |         |         
|[i]   Write off of other
    comprehensive income related to financial instruments                            |                                                                          |              |      |                    |   |             |          |             |  |  | (1,968   | )        |   |  |         |         
|[i]   Cumulative effect as of
    January 1, 2001, resulting from the adoption of
    SFAS 133                |                                                                          |              |      |                    |   |             |          |             |  |  |         |          |   |  | 3,939    |         
|                                                                                                              |                                                                          |              |       |                    |   |             |           |             |  |  |          |          |   |  |          |         
|                                                                                                              | Comprehensive income (loss) under
    U.S. GAAP                          |              |       | 4,959              |   |             |           | 1,298,532   |  |  |          | (586,766 | ) |  |          | (495,270 | )
|                                                                                                              |                                                                          |              |       |                    |   |             |           |             |  |  |          |          |   |  |          |         
|                                                                                                              | Basic and diluted earnings (loss) per share
    under U.S. GAAP[dollars] |              |       | (3.22              | ) |             |           | 5.40        |  |  |          | (2.43    | ) |  |          | (4.56    | )



| |                                                      
| | -----------------------------------------------------
| | Reconciliation of consolidated cash flow
    captions

There are no significant differences between
Canadian GAAP and U.S. GAAP, which affect the captions of
the cash flow statements.

148



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                          
| | ---------------------------------------------------------
| | Reconciliation of consolidated balance
    sheet captions

|               |  |                                                    |  |                   |          |             |  |              |          |      |  |                |          |   |  |  |          |   |  |  |            |  
|-------------- |  | -------------------------------------------------- |  | ----------------- | -------- | ----------- |  | ------------ | -------- | ---- |  | -------------- | -------- | - |  |  | -------- | - |  |  | ---------- | -
|               |  |                                                    |  |                   |          |             |  |              |          |      |  | Pre-          
|               |  |                                                    |  |                   |          |             |  |              |          |      |  | reorganization
|               |  |                                                    |  |                   |          |             |  |              |          |      |  |               
|               |  |                                                    |  |                   |          | May 1,      |  | December 31,
|               |  |                                                    |  | December 31, 2003 |          | 2003        |  | 2002        
|               |  |                                                    |  |                   |          |             |  |             
|               |  |                                                    |  | Canadian          |          |             |  | U.S.         |          | U.S. |  | U.S.          
|               |  |                                                    |  | GAAP              |          | Adjustments |  | GAAP         |          | GAAP |  | GAAP          
|               |  |                                                    |  |                   |          |             |  |              |          |      |  |               
|               |  |                                                    |  | $                 |          | $           |  | $            |          | $    |  | $             
|Debit (credit) |  |                                                    |  |                   |          |             |  |              |          |      |  |                |          |   |  |  |          |   |  | 
|[c]            |  | Marketable securities                              |  |                   |         |             |  |              |         |      |  |                |         |   |  |  |         |   |  |  | 309        |  
|[a]            |  | Intangible assets                                  |  |                   | 233,819  |             |  |              |         |      |  |                | 233,819  |   |  |  | 241,202  |   |  |  |           |  
|[b]            |  | Long-term investments and other non current assets |  |                   | 4,797    |             |  |              |         |      |  |                | 4,797    |   |  |  |         |   |  |  | 11,947     |  
|[f]            |  | Preferred shares                                   |  |                   |         |             |  |              | (296,912 | )    |  |                | (296,912 | ) |  |  | (284,506 | ) |  |  |           |  
|[f][k]         |  | Share capital                                      |  |                   | (338,154 | )           |  |              | 309,058  |      |  |                | (29,096  | ) |  |  | (36,543  | ) |  |  | (1,228,401 | )
|[f]            |  | Deficit                                            |  |                   | 12,146   |             |  |              | (12,146  | )    |  |                |         |   |  |  |         |   |  |  | 2,528,848  |  
|[c]            |  | Accumulated other comprehensive income             |  |                   |         |             |  |              |         |      |  |                |         |   |  |  |         |   |  |  | (145       | )



| |                                                         
| | --------------------------------------------------------
| | [a] Amortization and impairment of intangible
    assets

The PCS license, which included certain
development costs, and other costs associated with obtaining the
PCS license from Industry Canada were deferred under Canadian
GAAP. Under U.S. GAAP, such development costs are expensed
as incurred. This difference created a reversal of amortization
of intangible assets of $0.1 million in 2001. During 2002,
the Company wrote down the value of the MCS Licenses to nil.
Prior to this write-down, the carrying values of these licenses
were $249.2 million and $223.4 million under
U.S. GAAP and Canadian GAAP respectively, representing a
difference of $25.8 million.



| |                                                              
| | -------------------------------------------------------------
| | [b] Investment in entity subject to
    significant influence

Under Canadian GAAP, the investor should continue
to record its portion of investee losses unless the investor
would be unlikely to share in losses of the investee. Under
U.S. GAAP, in situations where an investor is not required
to advance additional funds to the investee and where previous
losses have reduced the common and the preferred stock
investment account to zero, the Company should continue to
report its share of equity method losses in its statement of
operations to the extent of and as an adjustment to the loans to
the investee.

In addition, under Canadian GAAP, the share of
net income in an investee that is a private investment company
is calculated based on its realized gains or losses. Under
U.S. GAAP, the share of net income in such investees is
calculated based on both realized and unrealized gains or losses.



| |                          
| | -------------------------
| | [c] Marketable securities

Under Canadian GAAP, the marketable securities
are recorded as explained in note 2. Under U.S. GAAP,
the marketable securities are classified as available for sale,
and any changes to the market value, net of income taxes, are
recorded in other comprehensive income (loss). Fair value of
marketable securities was $0.3 million as at
December 31, 2002.

149



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                          
| | -----------------------------------------
| | [d] Deferred charges and other
    assets

Under Canadian GAAP, certain development costs
are deferred and amortized. Under U.S. GAAP, such costs
would be expensed as incurred.

Under Canadian GAAP, a deferred gain or loss is
recorded upon either the de-designation of a derivative
financial instrument as a hedge or upon the early termination of
a derivative financial instrument qualifying as a hedge. This
deferred gain or loss represents the appreciation or
depreciation of the fair market value of the derivative
financial instrument from its inception until the date of the
de-designation or early termination. The deferred gain or loss
is then amortized over the remaining life of the originally
hedged item. Under US GAAP, the appreciation or depreciation of
the fair market value of the derivative financial instrument
from its inception until the date of its de-designation or early
termination is accumulated in other comprehensive income. The
accumulated balance is then amortized to net income (loss) over
the remaining life of the originally hedged item.



| |                       
| | ----------------------
| | [e] Stock compensation

Under Canadian GAAP, certain costs related to
bonuses in connection with stock compensation awards granted
at-the-money with a minimum guaranteed performance, are not
accounted for until the bonus is likely to be paid out and the
amount can be quantified. Under U.S. GAAP, such costs are
accounted for on a combined basis with the recognition of
compensation cost over the service period equal to the bonus
element. As at December 31, 2002, all such stock
compensation awards granted in the past have been cancelled.



| |                                                        
| | -------------------------------------------------------
| | Additional disclosure regarding stock
    options plan:

|                                                                                                                                                                                                        |  |              |         |                    |  |             |           |             |  |  |          |   |  |  |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------------ |  | ----------- | --------- | ----------- |  |  | -------- | - |  |  | -------- | -
|                                                                                                                                                                                                        |  |              |         |                   
|                                                                                                                                                                                                        |  |              |         | Pre-reorganization
|                                                                                                                                                                                                        |  |              |         |                   
|                                                                                                                                                                                                        |  | Eight months |         | Four months        |  |            
|                                                                                                                                                                                                        |  | ended        |         | ended              |  | Year ended  |           | Year ended 
|                                                                                                                                                                                                        |  | December 31  |         | April 30           |  | December 31 |           | December 31
|                                                                                                                                                                                                        |  | 2003         |         | 2003               |  | 2002        |           | 2001       
|                                                                                                                                                                                                        |  |              |         |                    |  |             |           |            
|                                                                                                                                                                                                        |  | $            |         | $                  |  | $           |           | $          
|Net income (loss) under U.S. GAAP as reported                                                                                                                                                           |  |              | 4,959   |                    |  |             | 1,298,677 |             |  |  | (584,914 | ) |  |  | (498,167 | )
|Accretion on redemption price of First and Second
    Preferred Shares                                                                                                                                  |  |              | (17,105 | )                  |  |             |          |             |  |  |         |   |  |  |         |  
|                                                                                                                                                                                                        |  |              |         |                    |  |             |           |             |  |  |          |   |  |  |          |  
|Net loss applicable to Class A and
    Class B shares [for the eight months ended
    December 31, 2003 only]                                                                                           |  |              | (12,146 | )                  |  |             | 1,298,677 |             |  |  | (584,914 | ) |  |  | (498,167 | )
|Stock-based employee compensation costs that
    would have been included in the determination of net income if
    the fair value based method had been applied to all awards as
    reported [note 9] |  |              | (1,327  | )                  |  |             | (1,577    | )           |  |  | (2,228   | ) |  |  | (6,155   | )
|                                                                                                                                                                                                        |  |              |         |                    |  |             |           |             |  |  |          |   |  |  |          |  
|Pro forma net income (loss) under US GAAP as if
    the fair value based method had been applied to all awards                                                                                          |  |              | (13,473 | )                  |  |             | 1,297,100 |             |  |  | (587,142 | ) |  |  | (504,322 | )
|                                                                                                                                                                                                        |  |              |         |                    |  |             |           |             |  |  |          |   |  |  |          |  
|Basic and diluted earnings (loss) per share under
    US GAAP as reported                                                                                                                               |  |              | (3.22   | )                  |  |             | 5.40      |             |  |  | (2.43    | ) |  |  | (4.56    | )
|Pro forma basic and diluted earnings (loss) per
    share under US GAAP as if the fair value method had been applied
    to all awards                                                                  |  |              | (3.57   | )                  |  |             | 5.39      |             |  |  | (2.44    | ) |  |  | (4.62    | )

150



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                 
| | ----------------------------------------------------------------
| | [f] Classification of financial
    instrument as debt or equity

The preferred shares contain conversion features
which result in the Companys obligation to redeem such
shares being conditional. Therefore, under US GAAP, these shares
are outside the scope of SFAS 150. In such a case,
redeemable preferred shares subject to mandatory redemption
requirements that are outside the control of the issuer are
excluded from shareholders equity (deficiency)
and presented separately in the issuers balance sheet
between liabilities and shareholders equity (deficiency).
The related accretions are presented as a charge to retained
earnings or, in the absence of retained earnings, by charges
against share capital.



| |                         
| | ------------------------
| | [g] Reorganization items

Under U.S. GAAP, the forgiveness of debt and
the effects of the adjustments on the reported amounts of
individual assets and liabilities resulting from the adoption of
fresh start accounting should be reflected in the predecessor
entitys final statement of operations. Under Canadian
GAAP, such adjustments are reflected as capital transactions.
The reorganization items in the amount of $1.254 billion
were comprised of $1.366 billion of forgiveness of debt and
$112.5 million of adjustments resulting from the
application of fresh-start accounting.



| |                             
| | ----------------------------
| | [h] Deferred tax liabilities

Under Canadian GAAP, the impact of changes in
income tax rates on the measurement of deferred tax assets and
liabilities are recorded when the changes in tax rates have been
substantively enacted. Under U.S. GAAP, changes in income
tax rates are recorded when the change in tax rates has been
legislated. Under Canadian GAAP, the estimated deferred tax
liabilities related to the MCS Licenses acquired during 2001, in
the amount of $72.9 million, resulting from the difference
between the carrying value and the tax basis of the asset
acquired, was capitalized to the MCS Licenses. This amount was
determined using substantially enacted tax rates at the date of
acquisition. Using legislated tax rates at the date of
acquisition, the tax liability and related increase in the
carrying value of the asset was $98.7 million under US
GAAP. During 2001, the change in rates was legislated, which
resulted in a decrease in the deferred tax liability and a
credit to income of $25.8 million under U.S. GAAP.



| |                           
| | --------------------------
| | [i] Derivative instruments

The Financial Accounting Standards Board has
issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by Statements 137
and 138. The Company adopted SFAS 133 effective
January 1, 2001. The Statements require the Company to
recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the effective portion of the
fair value of derivatives are either offset against the change
in fair value of assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income
(loss) until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value
is recognized in earnings.

The adoption of SFAS 133, as amended by
Statements 137 and 138, resulted in the cumulative effect
as of January 1, 2001, of an accounting change of
$0.9 million being recognized as an expense in the
statement of net loss and as a credit of $3.9 million in
other comprehensive loss. For 2001, the adoption of
SFAS 133 resulted in $1.4 million being recognized as
income in the statement of net loss and in a charge of
$1.4 million in other comprehensive income. As of
December 31, 2002, all such derivative instruments have
been terminated.

151



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##### Table of Contents



MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                   
| | ------------------------------------------------------------------
| | [j] Additional disclosure under U.S. GAAP
    and SEC requirements

|                                                                     |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|-------------------------------------------------------------------- |  | ------------ | ------ | ------------------ |  | ----------- | ------ | ----------- |  |  | ------- | - |  |  | ------ | -
|                                                                     |  |              |        |                   
|                                                                     |  |              |        | Pre-reorganization
|                                                                     |  |              |        |                   
|                                                                     |  | Eight months |        | Four months        |  |            
|                                                                     |  | ended        |        | ended              |  | Year ended  |        | Year ended 
|                                                                     |  | December 31  |        | April 30           |  | December 31 |        | December 31
|                                                                     |  | 2003         |        | 2003               |  | 2002        |        | 2001       
|                                                                     |  |              |        |                    |  |             |        |            
|                                                                     |  | $            |        | $                  |  | $           |        | $          
|Provision for restructuring charges                                  |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|Balance, beginning of period                                         |  |              | 162    |                    |  |             | 1,036  |             |  |  | 2,314   |   |  |  |       |  
|Addition: severance expenses                                         |  |              |       |                    |  |             |       |             |  |  | 7,494   |   |  |  | 5,226  |  
|Deduction: severance payments and adjustments                        |  |              | (162   | )                  |  |             | (874   | )           |  |  | (8,772  | ) |  |  | (2,912 | )
|                                                                     |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|Balance, end of period                                               |  |              |       |                    |  |             | 162    |             |  |  | 1,036   |   |  |  | 2,314  |  
|                                                                     |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|Allowance for doubtful accounts                                      |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|Balance, beginning of period                                         |  |              | 11,844 |                    |  |             | 14,885 |             |  |  | 10,717  |   |  |  | 4,116  |  
|Addition: bad debt expenses                                          |  |              | 2,853  |                    |  |             | 4,153  |             |  |  | 32,306  |   |  |  | 16,148 |  
|Deduction: uncollectible accounts written off,
    net of recoveries |  |              | (8,070 | )                  |  |             | (7,194 | )           |  |  | (28,138 | ) |  |  | (9,547 | )
|                                                                     |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  
|Balance, end of period                                               |  |              | 6,627  |                    |  |             | 11,844 |             |  |  | 14,885  |   |  |  | 10,717 |  
|                                                                     |  |              |        |                    |  |             |        |             |  |  |         |   |  |  |        |  



| |                                                     
| | ----------------------------------------------------
| | [k] Option to purchase Class A non voting
    shares

In 1997, an amount of $67.7 million was
expensed with a corresponding increase in share capital under
U.S. GAAP representing stock options recorded using
APB 25.



|    |                    
|--- | -------------------
|19. | COMPARATIVE FIGURES

Some of the comparative figures have been
reclassified to conform to the presentation adopted in the
current year.



|    |                  
|--- | -----------------
|20. | SUBSEQUENT EVENTS

(1) On March 17, 2004, the Company
obtained financing of an aggregate principal amount equivalent
to $450 million for its wholly owned subsidiary, Solutions,
from a syndicate of lenders. The proceeds were used mainly to
refinance the Companys previous senior secured credit
facilities (see note 8). The new facilities consist of a
six-year $50 million first lien revolving credit facility,
and of a seven-year first lien term loan and of a
seven-and-a-half-year second lien term loan, each in an amount
equivalent to $200 million. The revolving credit facility
is denominated in Canadian dollars, and both term loans are
denominated in U.S. dollars. Pricing is LIBOR plus 4% for
the revolving credit facility and the first lien term loan and
LIBOR plus 7% for the second lien term loan. The loan pricing
for the second lien term loan includes a LIBOR floor of 2%. The
credit facilities are secured by a pledge on substantially all
of the Companys assets.

(2) In March 2004, the Company has entered
into swap transactions to manage its exposure to foreign
exchange rate fluctuations on the new U.S.-dollar-denominated
first and second lien term loan described above. The Company
swapped the total principal of both term loans in the amount of
$400 million [US$299.9 million] at a rate of 1.3340.
The Company also swapped the floating interest rate of Libor
plus 4% on the first lien term loan, payable in US dollars, to a
floating interest rate of Libor plus 5.085%, payable in Canadian
dollars. The Company also swapped the floating interest rate of
Libor plus 7% on the second lien term loan, payable in US
dollars, to a floating interest rate of Libor plus 8.485%,
payable in Canadian dollars. The maturity of the swap
transactions corresponds to the maturity of both term loans.
These swap transactions

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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

are presented at their fair value as derivative
instruments on the balance sheet and changes in fair value are
recognized in income as foreign exchange gains or losses.

(3) Pursuant to a final prospectus dated
March 24, 2004, the Company distributed to the holders of
its class A restricted voting shares, class B
non-voting shares, First Preferred Voting Shares, First
Preferred Non-Voting Shares, Second Preferred Voting Shares and
Second Preferred Non-Voting Shares, rights to subscribe for an
aggregate of 4,519,636 class B non-voting shares. Each five
rights entitled the holder thereof to purchase one class B
non-voting share at a subscription price of $22 per share.
In connection with the rights offering, the Company entered into
a standby purchase agreement with COM Canada, LLC
[COM] pursuant to which it has agreed to purchase,
at the rights subscription price, all class B non-voting
shares not otherwise purchased pursuant to the rights offering.
In addition, to the extent COM purchased less than
$50 million of such shares, it committed to purchase, at
the subscription price, additional class B non-voting
shares having an aggregate subscription price equal to the
deficiency.

The closing of the rights offering occurred on
April 30, 2004. The rights offering resulted in the
issuance by Microcell of 4,519,636 class B non-voting
shares. COM purchased concurrently, at a price of
$22.00 per share, 2,272,727 class B non-voting shares.
Furthermore, the Company granted COM, 3,977,272 warrants to
acquire, at a price of $22.00 per share, additional
class B non-voting shares for exercise at a later date. The
net proceeds from the rights offering and private placement to
COM amounted to approximately $147 million [net of
approximately $2 million of issuance fees] and have been
used by Microcell to redeem 75,233 outstanding preferred shares,
at a price of $16.39 per share, for a total of
$1.2 million. The remaining balance of $145.8 million
will be used to fund capital expenditures and for general
corporate purposes.

As a result, the Companys share capital as
at May 3, 2004, was composed of the following: 235,961
class A restricted voting shares; 29,079,353 class B
non-voting shares; 3,998,302 Warrants 2005; 6,663,943 Warrants
2008; and, 3,977,272 new warrants issued to COM. In accordance
with the warrant indentures governing the Warrants 2005 and the
Warrants 2008, the number of shares issuable upon the exercise
of the Warrants 2005 and the Warrants 2008 had been adjusted
from 1.0 to 1.02 Class A Share or Class B Shares, as
the case may be, for each warrant. This adjustment has been made
as a result of the Companys rights offering.

(4) On March 19, 2004, the Company
received a comment letter from the SEC in connection with its
review of the Companys registration statement filed on
March 3, 2004 for the registration of its Class A
Shares and Class B Shares issuable upon exercise of the
Warrants 2005 and the Warrants 2008. The SEC staff, among other
things,have questioned whether the Companys Fido brand
name has an indefinite useful life and consequently whether it
should be subject to periodic amortization. The Company believes
such brand name should be considered to have an indefinite life.
However, were periodic amortization to be applied, assuming
hypothetically a useful life of ten years, this would reduce net
income by $1.9 million, increase loss per share by $0.50
but have no effect on cash flows for the eight months ended
December 31, 2003, and shareholders equity would
decrease by $1.9 million as of December 31, 2003. The
hypothetical amortization period of ten years is presented for
illustrative purposes only. The resolution of the comment letter
issues with SEC staff may require the Company to restate its
financial statements for the eight months ended
December 31, 2003.

(5) On April 21, 2004, Unique Broadband
Wireless Services, Inc. [UBS] filed a lawsuit
against Microcell, Solutions, Inukshuk and Allstream in the
Ontario Superior Court of Justice. In its statement of claim,
UBS claims [for, amongst other things, specific performance,
breach of contract, breach of confidence and breach of fiduciary
duty] from Microcell, Solutions and Inukshuk damages totaling
$160 million. UBS also claims certain other equitable
relief, including disgorgement of profits that UBS alleges would
otherwise unjustly enrich Inukshuk, Solutions and Microcell. The
action is at a very early stage with no statement of defense yet
delivered. Based on information currently available, management
considers that the companies have substantive defenses to the
action brought by UBS and intend to vigorously defend the action.

153



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MICROCELL TELECOMMUNICATIONS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) On May 13, 2004, Microcell was
informed that TELUS Corporation intends to make an
unsolicited all-cash offer to purchase all of the outstanding
publicly traded shares and warrants of Microcell. On
May 17, 2004, TELUS Corporation filed its offer with
the Canadian Securities Commissions and the SEC. On May 20,
2004, the board of directors of Microcell [the
Board] announced its response to
TELUS Corporations unsolicited offers to purchase
Microcells Class A restricted voting shares for
C$29.00 per share, Class B non-voting shares for
C$29.00, 2005 Warrants for C$9.67, and 2008 Warrants for C$8.89
(the Offers). After careful review and analysis of
the Offers performed with the assistance of its legal and
financial advisors, the Board recommended that holders of the
Class A restricted voting shares, Class B non-voting
shares, 2005 Warrants and 2008 Warrants not tender into the
Offers. The Companys board of directors retained the
services of two financial advisors, one of which has affiliates
which are shareholders, lenders or the agent of the
Companys lenders. The terms of the agreements provide for
advisory services to be rendered up to May 2005 with
minimum fees of $6.5 million. Such fees will be recognized
over the estimated period for which the services are rendered.
On May 31, 2004, Microcell announced the mailing of its
Directors Circular containing the previously announced
recommendation of the board of directors that holders of
Microcells Class A Restricted Voting Shares,
Class B Non-Voting Shares, Warrants 2005 and Warrants 2008
not tender into the unsolicited offers from
TELUS Corporation commenced on May 17, 2004. On
June 22, 2004 TELUS announced that it would extend the
TELUS Offers until July 22, 2004.

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##### Table of Contents



ITEM 19  EXHIBITS 
 EXHIBITS The following documents are filed as exhibits to this Form 20-F: ExhibitNumber
    
    Description of Exhibit1.1
    
    
    Restated Certificate of Incorporation of Microcell
Telecommunications Inc. (Incorporated by reference to Exhibit 3.1 to
Amendment No. 2 to the Registrants Registration Statement on Form
F-1, as filed with the Commission on June 29, 2004).1.2
    
    
    General By-laws of Microcell Telecommunications Inc.
(Incorporated by reference to Exhibit 1.2 to the
Registrants Annual Report on Form 20-F, as filed with the
Commission on June 27, 2003).2.1
    
    
    First Unit Indenture made as of May 30, 2003 among Microcell
Telecommunications Inc. and Computershare Trust Company of
Canada as trustee (Incorporated by reference to Exhibit 2.1
to the Registrants Annual Report on Form 20-F, as filed
with the Commission on June 27, 2003).2.2
    
    
    Second Unit Indenture made as of May 30, 2003 among
Microcell Telecommunications Inc. and Computershare Trust
Company of Canada as trustee (Incorporated by reference to
Exhibit 2.2 to the Registrants Annual Report on Form 20-F,
as filed with the Commission on June 27, 2003).2.3
    
    
    Warrant Indenture for the Warrants 2005 dated as of May 1,
2003 among Microcell Telecommunications Inc. and
Computershare Trust Company of Canada, as Trustee
(Incorporated by reference to Exhibit 2.3 to the
Registrants Annual Report on Form 20-F, as filed with the
Commission on June 27, 2003).2.4
    
    
    First Amending Agreement to the Warrant Indenture for the
Warrants 2005 dated as of November 20, 2003 among Microcell
Telecommunications Inc. and Computershare Trust Company of
Canada, as Trustee. (Incorporated by reference to Exhibit 4.4 to
the Registrants Registration Statement on Form F-1, as filed
with the Commission on November 28, 2003).2.5
    
    
    Warrant Indenture for the Warrants 2008 dated as of May 1,
2003 among Microcell Telecommunications Inc. and
Computershare Trust Company of Canada, as Trustee
(Incorporated by reference to Exhibit 2.4 to the
Registrants Annual Report on Form 20-F, as filed with the
Commission on June 27, 2003).2.6
    
    
    First Amending Agreement to the Warrant Indenture for the
Warrants 2008 dated as of November 20, 2003 among Microcell
Telecommunications Inc. and Computershare Trust Company of
Canada, as Trustee. (Incorporated by reference to Exhibit 4.6 to
the Registrants Registration Statement on Form F-1, as filed
with the Commission on November 28, 2003).2.7
    
    
    Shareholder Rights Plan Agreement dated as of May 1, 2003
between Microcell Telecommunications Inc. and Computershare
Trust Company of Canada, as Rights Agent (Incorporated by
reference to Exhibit 2.5 to the Registrants Annual Report
on Form 20-F, as filed with the Commission on June 27,
2003).2.8
    
    
    Plan of Reorganization and of Compromise and Arrangement
(Incorporated by reference to Exhibit 2.5 to the
Registrants Report on Form 6-K, as furnished to the
 155




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##### Table of Contents



ExhibitNumber
    
    Description of ExhibitCommission on February 20, 2003).4.1
    
    
    Amended and Restated Tranche A Exit Facility Agreement dated
as of March 17, 2004 entered into among Microcell
Telecommunications Inc., as parent, Microcell Solutions Inc.,
as borrower, the financial institutions from time to time
parties hereto as lenders, and JP Morgan Chase Bank,
Toronto Branch, as administrative agent, Collateral Agent
and Issuing Bank.4.2
    
    
    Tranche B-Term Loan A Credit Agreement dated as of March 17,
2004 entered into among Microcell Telecommunications
Inc., as parent, Microcell Solutions Inc., as borrower,
the financial institutions from time to time parties thereto,
as lenders, and JP Morgan Chase Bank, Toronto Branch,
as administrative agent and Collateral Agent.4.3
    
    
    Tranche B-Term Loan B Credit Agreement dated as of March 17,
2004 entered into among Microcell Telecommunications
Inc., as parent, Microcell Solutions Inc., as borrower,
the financial institutions from time to time parties thereto
as lenders, and JP Morgan Chase Bank, Toronto Branch,
as administrative agent and Collateral Agent.4.4
    
    
    Amended and Restated Intercreditor And Collateral Agency
Agreement, dated as of March 17, 2004, made among
Microcell Solutions Inc., as borrower, Microcell
Telecommunications Inc., as guarantor, each of the persons
listed on the execution pages thereto under the Tranche A
Lenders heading, each of the persons listed on the
execution pages thereto under the Tranche B-Term Loan A
Lenders heading, each of the persons listed on the execution
pages thereto under the Tranche B-Term Loan B Lenders
heading, JP Morgan Chase Bank, Toronto Branch, as
administrative agent under the Amended and Restated Tranche
A Exit Facility Agreement, the Tranche B-Term Loan A
Credit Agreement and the Tranche B-Term Loan BCredit
Agreement,JP Morgan Chase Bank, Toronto Branch, as
collateral agent for each of the Tranche A Lenders, the
Tranche B-Term Loan A Lenders and the Tranche B-Term
Loan B Lenders and as fondé de pouvoir pursuant to the terms
of the Amended and Restated Tranche A Exit Facility Agreement, the Tranche B-Term Loan A Credit Agreement and the
Tranche B-Term Loan B Credit Agreement, Computershare
Trust Company Of Canada, as Trustee for the holders
of the First Units, and Computershare Trust Company
Of Canada, as Trustee for the holders of the Second Units.4.5
    
    
    Stock Option Plan of Microcell Telecommunications Inc. dated
May 1, 2003, as amended November 20, 2003. (Incorporated
by reference to Exhibit 10.5 to the Registrants Registration
Statement on Form F-1, as filed with the Commission on
November 28, 2003).4.6
    
    
    Stock Purchase Plan of Microcell Telecommunications Inc.
dated May 1, 2003 (Incorporated by reference to Exhibit 4.6
to the Registrants Annual Report on Form 20-F, as filed
with the Commission on June 27, 2003).4.7
    
    
    PCS license Conditions issued by Industry Canada
(Incorporated by reference to Exhibit 4.7 to the
Registrants Annual Report on Form 20-F, as filed with the
Commission on June 27, 2003).4.8
    
    
    Lease dated as of August 1, 1998 between Microcell
Telecommunications Inc. and WPBI Property Management Inc.,
as amended (Incorporated by reference to Exhibit 4.8 to the
Registrants Annual Report on Form 20-F, as filed with the
 156




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##### Table of Contents



ExhibitNumber
    
    Description of ExhibitCommission on June 27, 2003).4.9
    
    
    Purchase and Licence Agreement dated December 20, 2001
between Nortel Networks Corporation and Microcell Solutions
Inc. (Incorporated by reference to Exhibit 10.9 to Amendment
No. 1 to the Registrants Registration Statement on Form F-1,
as filed with the Commission on March 3, 2004).4.10
    
    
    GSM and IN Supplement to the Purchase and License Agreement
(Revision 2) dated as of January 16, 2004 between Nortel
Networks Corporation and Microcell Solutions Inc.
(Incorporated by reference to Exhibit 10.10 to Amendment
No. 1 to the Registrants Registration Statement on Form F-1,
as filed with the Commission on March 3, 2004).4.11
    
    
    Warrant Agreement effective May 3, 2004 between
Microcell Telecommunications Inc. and COM Canada, LLC.
(Incorporated by reference to Exhibit 10.11 to Amendment
No. 2 to the Registrants Registration Statement on Form F-1,
as filed with the Commission on June 29, 2004).8
    
    
    List of Subsidiaries (Incorporated by reference to Exhibit 21
to Amendment No. 2 to the Registrants Registration Statement
on Form F-1, as filed with the Commission on June 29, 2004).12.1
    
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a))12.2
    
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) (17CFR 240.13a-14(a))13
    
    
    Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant
to section 906 of the
Sarbanes Oxley Act of 2002.
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SIGNATURE Microcell Telecommunications Inc. hereby certifies that it meets all of
the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf. MICROCELL TELECOMMUNICATIONS INC.By:
    
    /s/ Jacques LeducName:
    
    Jacques LeducTitle:
    
    Chief Financial Officer and Treasurer
 Dated: June 30, 2004 158