##### 



MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of CryptoLogic Inc. are the responsibility of
Management and have been approved by the Board of Directors. The consolidated financial statements have been prepared by Management in accordance with Canadian
generally accepted accounting principles. These statements include some amounts that are based on
best estimates and judgment. Management has determined such amounts on a reasonable basis in order
to ensure that the financial statements are presented fairly, in all material respects. CryptoLogics policy is to maintain systems of internal accounting and administrative controls of
high quality, consistent with reasonable cost. Such systems are designed to provide reasonable
assurance that the financial information is relevant, accurate and reliable and that the Companys
assets are appropriately accounted for and adequately safeguarded. The Board of Directors is responsible for ensuring that Management fulfills its responsibilities
for financial reporting and is ultimately responsible for approving the financial statements. The
Board carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board and is comprised of a majority of outside Directors.
The committee meets periodically with Management and the external auditors to discuss internal
controls over the financial reporting process, auditing matters and financial reporting issues to
satisfy itself that each party is properly discharging its responsibilities. The Audit Committee
reviews the Companys annual consolidated financial statements, the external auditors report and
other information in the Annual Report. The committee reports its findings to the Board for
consideration by the Board when it approves the financial statements for issuance to the
shareholders. On behalf of the shareholders, the financial statements have been audited by KPMG LLP, the external
auditors, in accordance with Canadian generally accepted auditing standards. KPMG LLP has full and
free access to the Audit Committee. /s/ LEWIS ROSE
    
    /s/ JENIFER CUALewis Rose
    
    Jenifer CuaPresident and CEO
    
    Interim Chief Financial OfficerFebruary 16, 2005




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##### 



AUDITORS REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of CryptoLogic Inc. as at December 31, 2004
and 2003 and the consolidated statements of earnings, retained earnings and cash flows for the
years then ended. 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 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, 2004 and 2003 and the results of its
operations and its cash flows for the years then ended in accordance with Canadian generally
accepted accounting principles. /s/ KPMG LLP
Chartered Accountants Toronto, Canada February 16, 2005




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##### 



Consolidated Balance Sheets  December 31, 2004 and 2003 2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    43,182
    
    
    $
    44,010Security deposits (note 2)
    
    
    7,000
    
    
    
    6,550Short term investments
    
    
    35,782
    
    
    
    16,747Accounts receivable and other (note 3)
    
    
    6,487
    
    
    
    2,389Prepaid expenses
    
    
    1,754
    
    
    
    1,16394,205
    
    
    
    70,859User funds on deposit
    
    
    18,908
    
    
    
    9,394Capital assets (note 4)
    
    
    9,227
    
    
    
    3,915Intangible assets (note 5)
    
    
    106
    
    
    
    122Goodwill (note 6)
    
    
    1,776
    
    
    
    1,776$
    124,222
    
    
    $
    86,066Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    30,056
    
    
    $
    25,063Income taxes payable
    
    
    1,331
    
    
    
    1,06331,387
    
    
    
    26,126User funds held on deposit
    
    
    18,908
    
    
    
    9,394Future income taxes (note 11)
    
    
    1,840
    
    
    
    52,135
    
    
    
    35,520Shareholders equity:Share capital (note 7)
    
    
    20,380
    
    
    
    11,350Stock options (note 8)
    
    
    1,114
    
    
    
    438Retained earnings
    
    
    50,593
    
    
    
    38,75872,087
    
    
    
    50,546Commitments and contingencies (note 9)$
    124,222
    
    
    $
    86,066
 See accompanying notes to consolidated financial statements. On behalf of the Board:/s/ Robert H. Stikeman
    
    Director, Chairman/s/ Lewis N. Rose
    
    Director
 1




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##### 



Consolidated Statements of Earnings  Years ended December 31, 2004 and 2003 2004
    
    
    2003Revenue
    
    $
    63,714
    
    
    $
    44,211Expenses:Operating costs
    
    
    39,975
    
    
    
    27,204General and administrative
    
    
    6,028
    
    
    
    5,161Finance
    
    
    374
    
    
    
    350Amortization
    
    
    2,089
    
    
    
    1,53348,466
    
    
    
    34,248Earnings before undernoted
    
    
    15,248
    
    
    
    9,963Interest income
    
    
    1,293
    
    
    
    691Earnings before income taxes
    
    
    16,541
    
    
    
    10,654Income taxes (note 11):Current
    
    
    1,033
    
    
    
    1,213Future
    
    
    1,840
    
    
    
    2,873
    
    
    
    1,213Earnings
    
    $
    13,668
    
    
    $
    9,441Earnings per common share (note 10):Basic
    
    $
    1.05
    
    
    $
    0.77Diluted
    
    
    1.01
    
    
    
    0.75
 See accompanying notes to consolidated financial statements. Consolidated Statements of Retained Earnings  Years ended December 31, 2004 and 2003 2004
    
    
    2003Retained earnings, beginning of year
    
    $
    38,758
    
    
    $
    30,376Earnings
    
    
    13,668
    
    
    
    9,441Dividends paid
    
    
    (1,833
    )
    
    
    (369
    )Registration costs (note 7)
    
    
    
    
    
    
    (690
    )Retained earnings, end of year
    
    $
    50,593
    
    
    $
    38,758See accompanying notes to consolidated financial statements.
 2




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##### 



Consolidated Statements of Cash Flows    2004
    
    
    2003Cash flows from (used in) operating activities:Earnings
    
    $
    13,668
    
    
    $
    9,441Adjustments to reconcile earnings to cash
provided by (used in) operating activities:Amortization
    
    
    2,089
    
    
    
    1,533Future income taxes
    
    
    1,840
    
    
    
    Gain on sale of investments
    
    
    
    
    
    
    (31
    )Stock options
    
    
    1,200
    
    
    
    438Change in operating assets and liabilities:Security deposits
    
    
    (450
    )
    
    
    9,190Accounts receivable and other
    
    
    (4,098
    )
    
    
    (729
    )Prepaid expenses
    
    
    (591
    )
    
    
    (246
    )Accounts payable and accrued liabilities
    
    
    4,993
    
    
    
    17,458Income taxes payable
    
    
    268
    
    
    
    1,64618,919
    
    
    
    38,700Cash flows from (used in) financing activities:Issue of capital stock
    
    
    8,506
    
    
    
    630Registration costs
    
    
    
    
    
    
    (690
    )Dividends paid
    
    
    (1,833
    )
    
    
    (369
    )6,673
    
    
    
    (429
    )Cash flows from (used in) investing activities:Purchase of intangible assets
    
    
    (89
    )
    
    
    (13
    )Purchase of capital assets
    
    
    (7,296
    )
    
    
    (2,618
    )Investment in subsidiary
    
    
    
    
    
    
    (111
    )Short term investments
    
    
    (19,035
    )
    
    
    (5,890
    )Sale of investment
    
    
    
    
    
    
    711(26,420
    )
    
    
    (7,921
    )Increase (decrease) in cash and cash equivalents
    
    
    (828
    )
    
    
    30,350Cash and cash equivalents, beginning of year
    
    
    44,010
    
    
    
    13,660Cash and cash equivalents, end of year
    
    $
    43,182
    
    
    $
    44,010Supplemental cash flow information:Income taxes paid
    
    $
    765
    
    
    $
    678Interest received
    
    
    1,095
    
    
    
    614Non-cash portion of option exercised
    
    
    524
    
    
    
    
 See accompanying notes to consolidated financial statements. 3




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##### 



Notes to Consolidated Financial Statements
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003   CryptoLogic Inc. (the Company) is a software development company with leading proprietary
commerce-enabling technology, permitting secure, reliable, high-speed and private financial
transactions over the Internet. The Company operates in one segment and its software is currently
being used for online gaming and related electronic commerce. Substantially all of the Companys
revenue is earned in US dollars, British pounds and Euros in the form of licensing fees and support
services from licensees located outside of North America. Revenue from the top seven licensees
constituted 93% (2003 - 94%) of revenue. The licensees internet businesses are licensed by the
governments of Alderney in the British Isles and Netherlands Antilles. The Company measures and
reports its results in US dollars.  1.
    Significant accounting policies: The consolidated financial statements are prepared in accordance with Canadian generally
accepted accounting principles, and except as described in note 13, conform in all material
respects with accounting principles generally accepted in the United States. A summary of
significant accounting policies is set out below: (a) Basis of presentation: The consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have been
eliminated. (b)  Revenue recognition: Revenue from providing software and support services to licensees is recognized on a
daily basis based on the agreements with the licensees. Revenue from the customization
of the software graphics, sound and texts to the specifications of the licensees is
recognized on a straight-line basis over the term of the software and support agreements. (c)  Cash and cash equivalents: Cash and cash equivalents include highly liquid investments with original maturity dates
of 90 days or less, and are stated at cost, which approximates market value. 4




---



##### 



Notes to Consolidated
Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    1.
    Significant accounting policies (continued):  (d)
    Short term investments: Short term investments include highly liquid investments with original maturity dates
between 3 and 12 months, and are stated at lower of cost or market value. At balance
sheet date, cost approximates market value.  (e)
    Capital assets: Capital assets are stated at cost less accumulated amortization. Amortization, based on
the estimated useful lives of the assets, is provided using the following methods and
annual rates: Asset
    
    Basis
    
    RateComputer equipment
    
    Diminishing balance
    
    
    30
    %Office furniture and equipment
    
    Diminishing balance
    
    
    20
    %Computer software and licenses
    
    Straight line
    
    3 - 5 yearsCapitalized software development
    
    Straight line
    
    5 yearsLeasehold improvements
    
    Straight line
    
    Term of lease
  (f)
    Software development: Costs related to the development of software are expensed as incurred unless such costs
meet the criteria for deferral and amortization under Canadian generally accepted
accounting principles. Under The Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3450, Research and Development Costs and Statement of Financial
Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed, the Company is capitalizing certain computer software
production costs incurred subsequent to establishing technological feasibility; and will
be amortizing the capitalized software development cost using the straight line method
over the estimated useful life of the software once the software is available for general
release. 5




---



##### 



Notes to Consolidated
Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003   1. Significant accounting policies (continued):  (g)
    Income taxes: The Company uses the asset and liability method of accounting for income taxes. Future
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss carry forwards.
Future income tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on future
income tax assets and liabilities of a change in tax rates is recognized in income in the
year that includes the enactment or substantive enactment date.  (h)
    Stock-based compensation: The Company has a stock option plan for directors, officers and other key employees.
Effective January 1, 2003, the Company has adopted the amended recommendations of CICA
with respect to accounting for stock-based compensation and other stock-based payments.
These recommendations are applied in accordance with the transitional provisions relating
to prospective application to all stock-based payments to non-employees, and to employee
awards that are direct awards of stock, call for settlement in cash or other assets. The
Company applies the fair value method to all grants of stock options. Based on the
transitional provisions, all stock options granted on or after January 1, 2003 are
accounted for as capital transaction at the time of the grant and are reflected as stock
options in shareholders equity. The fair value of options granted is estimated at the
date of grant using the Black-Scholes option pricing model incorporating assumptions
regarding risk-free interest rates, dividend yield, volatility factor of the expected
market price of the Companys stock and a weighted average expected life of options. The
estimated fair value of the options is recorded over the options vesting period. Any
consideration paid on the exercise of stock options is credited to share capital.  (i)
    Foreign currency translation: Monetary items denominated in other than US dollars are translated into US dollars at
exchange rates in effect at the balance sheet dates, and non-monetary items are
translated at rates of exchange in effect when the assets were acquired or obligations
incurred. Revenue and expenses are translated at rates in effect at the time of the
transactions. Foreign exchange gains and losses are included in the statement of
earnings. 6




---



##### 



Notes to Consolidated
Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    1.
    Significant accounting policies (continued):  (j)
    Intangible assets: Intangible assets consist of the following:  (i)
    Customer list represents a database of registered subscribers to the
WinnerOnLine web site acquired in the purchase of ALI Online Inc. (ALI).
Amortization is provided for on a straight-line basis over three years. Customer
list has been fully amortized in 2004.  (ii)
    Domain names are amortized on a straight-line basis over five years.  (k)
    Goodwill: Goodwill is the residual amount that results when the purchase price of an acquired
business exceeds the sum of the amounts allocated to the assets acquired, less
liabilities assumed, based on their fair values. Goodwill is not amortized and is tested for impairment annually, or more frequently, if
events or changes in circumstances indicate that the asset might be impaired. The
impairment test is carried out in two steps. In the first step, the carrying amount is
compared with its fair value. When the fair value exceeds its carrying amount, goodwill
is considered not to be impaired and the second step of the impairment test is
unnecessary. The second step is carried out when the carrying amount exceeds its fair
value, in which case, the implied fair value of the goodwill is compared with its
carrying amount to measure the amount of the impairment loss, if any. The implied fair
value of goodwill is determined in the same manner as the value of goodwill is determined
in a business combination described in the preceding paragraph, using the fair value as
if it was the purchase price. When the carrying amount of goodwill exceeds the implied
fair value of the goodwill, an impairment loss is recognized in an amount equal to the
excess and is presented as a separate line item in the statement of earnings. For the years ended December 31, 2004 and 2003, the Company assessed impairment of
goodwill and has determined that there was no impairment in value. 7




---



##### 



Notes to Consolidated
Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    1.
    Significant accounting policies (continued):  (l)
    Earnings per common share: The Company uses the treasury stock method in computing diluted earnings per common
share. The treasury stock method is a method of recognizing the use of proceeds that
could be obtained upon the exercise of options and warrants in computing diluted earnings
per common share. It assumes that any proceeds would be used to purchase its common
shares at the average market price during the year being reported on.  (m)
    Derivative instruments: The Company is party to certain derivative financial instruments, principally forward
foreign exchange contracts (used to manage foreign currency exposures on operating
costs). The Companys policy is not to utilize derivative financial instruments for
trading or speculative purposes. The Company has not designated these contracts as hedges for accounting purposes and
therefore has not formally documented all relationships between hedging instruments and
hedged items. Accordingly, the forward foreign exchange contracts are recorded at fair
value based on quoted market value and any change in fair value is recognized in
operating costs in the statement of earnings; and included in either accounts receivable
and other or accounts payable and accrued liabilities.  (n)
    Use of estimates: The preparation of 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 at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the year. Actual amounts could
differ from those estimates.  2.
    Security deposits: Security deposits are amounts held by the Companys bank as collaterals granted to foreign
banks and payment processors that process deposit and credit card transactions on its behalf
and as security for forward foreign exchange contracts. 8




---



##### 



Notes to Consolidated Financial Statements
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    3.
    Accounts receivable and other: Included in accounts receivable and other are reserves with processors in the amount of $218
(2003 - $236). The terms of the agreement with payment providers require the Company to
maintain US dollar-denominated funds for reserves in non-interest bearing accounts with the
processors. In 2004, two licensees assumed responsibilities for their own E-cash processing
which is reflected in accounts receivable and other.  4.
    Capital assets: 2004
    
    
    2003CostComputer equipment
    
    $
    5,559
    
    
    $
    3,283Office furniture and equipment
    
    
    1,226
    
    
    
    543Computer software and licenses
    
    
    5,386
    
    
    
    2,962Capitalized software development
    
    
    1,316
    
    
    
    Leasehold improvements
    
    
    1,004
    
    
    
    43614,491
    
    
    
    7,224Less accumulated amortizationComputer equipment
    
    
    2,393
    
    
    
    1,675Office furniture and equipment
    
    
    371
    
    
    
    222Computer software and licenses
    
    
    1,907
    
    
    
    1,085Leasehold improvements
    
    
    593
    
    
    
    3275,264
    
    
    
    3,309Net book valueComputer equipment
    
    
    3,166
    
    
    
    1,608Office furniture and equipment
    
    
    855
    
    
    
    321Computer software and licenses
    
    
    3,479
    
    
    
    1,877Capitalized software development
    
    
    1,316
    
    
    
    Leasehold improvements
    
    
    411
    
    
    
    109Total net book value
    
    $
    9,227
    
    
    $
    3,915
 Amortization
expense for capital assets was $1,984 (2003 - $1,416). 9




---



##### 



Notes to Consolidated Financial Statements
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    5.
    Intangible assets: 2004
    
    
    2003CostCustomer list
    
    $
    315
    
    
    $
    315Domain names
    
    
    155
    
    
    
    66470
    
    
    
    381Less accumulated amortizationCustomer list
    
    
    315
    
    
    
    230Domain names
    
    
    49
    
    
    
    29364
    
    
    
    259Net book valueCustomer list
    
    
    
    
    
    
    85Domain names
    
    
    106
    
    
    
    37Total net book value
    
    $
    106
    
    
    $
    122
 Amortization
expense for intangible assets was $105 (2003 - $117).  6.
    Goodwill: Goodwill relates to the acquisition on October 1, 2001 of ALI Online, a gaming content
provider operating WinnerOnLine website. 10




---



##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    7.
    Share capital:  (a)
    Authorized:  Unlimited common sharesIssued and outstanding: Common shares
    
    

Series F Warrants
    
    
    TotalNumber
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    amount(000s)
    
    
    
    
    
    
    (000s)Balance, December 31, 2002
    
    
    12,206
    
    
    $
    10,448
    
    
    
    30
    
    
    $
    272
    
    
    $
    10,720Exercise of stock options
    
    
    94
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    630Balance, December 31, 2003
    
    
    12,300
    
    
    
    11,078
    
    
    
    30
    
    
    
    272
    
    
    
    11,350Exercise of stock options
    
    
    1,011
    
    
    
    9,030
    
    
    
    
    
    
    
    
    
    
    
    9,030Balance, December 31, 2004
    
    
    13,311
    
    
    $
    20,108
    
    
    
    30
    
    
    $
    272
    
    
    $
    20,380
  Series F warrants:During fiscal 2001, the Company issued Series F warrants to acquire 30,000 common shares of the Company for Cdn. $23.00 per share pursuant to the acquisition of ALI Online
(note 6). The warrants vest in equal amounts over a four-year period and expire in
October 2005. As at December 31, 2004, no warrants have been exercised.  (b)
    Normal course issuer bid:  In September 2004, the Board of Directors approved the repurchase and cancellation of up
to 1,250,000 of the Companys outstanding common shares for the period commencing
September 23, 2004 and ending on September 22, 2005. The Company has not repurchased any shares under this bid during 2004.  (c)
    Registration costs:  During 2003, the Company filed a prospectus to have its shares listed on the Main Market
of the London Stock Exchange. Capital was not raised as part of the listing transaction.
Total costs of $690 related to the listing have been charged to retained earnings as
registration costs in 2003. 11




---



##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    8.
    Stock option plan:  Under the stock option plan, the Company can grant options to directors, officers and other
key employees to purchase common shares. Under the plan, a maximum of 3,000,000 common
shares may be issued. The exercise price of the options may not be less than the fair market
value of the underlying common shares on the date of grant. As at December 31, 2004, the
Company had not granted stock options with an exercise price below the fair market value at
the date of grant. There are 277,209 (2003 - 355,821) common shares available to be issued
under the stock option plan as at December 31, 2004. Options typically vest over a period of
three or four years and the term of the options may not exceed five years.  Details of stock option transactions are as follows: 2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber
    
    
    exercise
    
    
    Number
    
    
    exerciseof
    
    
    price of
    
    
    of
    
    
    price ofoptions
    
    
    options
    
    
    options
    
    
    options(Cdn$)
    
    
    
    
    
    
    (Cdn$)Options outstanding,
beginning of year
    
    
    2,317,650
    
    
    $
    13.32
    
    
    
    2,239,448
    
    
    $
    15.19Granted
    
    
    483,500
    
    
    
    18.94
    
    
    
    823,980
    
    
    
    9.70Exercised
    
    
    (1,011,101
    )
    
    
    10.86
    
    
    
    (94,529
    )
    
    
    8.42Forfeited
    
    
    (362,388
    )
    
    
    25.98
    
    
    
    (651,249
    )
    
    
    14.25Options outstanding, end of year
    
    
    1,427,661
    
    
    
    13.75
    
    
    
    2,317,650
    
    
    
    13.32Options exercisable, end of year
    
    
    452,606
    
    
    $
    12.77
    
    
    
    1,146,686
    
    
    $
    16.19
 12




---



##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    8.
    Stock option plan (continued): Options outstanding,
    
    
    Options exercisable,2004
    
    
    2004Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageNumber
    
    
    remaining
    
    
    exercise
    
    
    Number
    
    
    exerciseRange of exercise price
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    exercisable
    
    
    price(Cdn$)
    
    
    
    
    
    
    
    
    
    (Cdn$)
    
    
    
    
    
    
    (Cdn$)$  5.00 - $10.00
    
    
    651,069
    
    
    
    2.89
    
    
    $
    7.92
    
    
    
    227,526
    
    
    $
    8.46$10.01 - $15.00
    
    
    181,125
    
    
    
    1.69
    
    
    
    13.12
    
    
    
    138,750
    
    
    
    13.25$15.01 - $20.00
    
    
    409,917
    
    
    
    4.16
    
    
    
    17.43
    
    
    
    59,667
    
    
    
    17.18$20.01 - $25.00
    
    
    131,000
    
    
    
    4.61
    
    
    
    24.00
    
    
    
    
    
    
    
    $25.01 - $30.00
    
    
    19,800
    
    
    
    4.81
    
    
    
    25.72
    
    
    
    600
    
    
    
    26.58$30.01 - $35.00
    
    
    18,000
    
    
    
    1.45
    
    
    
    33.96
    
    
    
    13,500
    
    
    
    33.96$35.01 - $40.00
    
    
    6,750
    
    
    
    1.45
    
    
    
    36.13
    
    
    
    5,063
    
    
    
    36.13$40.01 - $45.00
    
    
    10,000
    
    
    
    1.60
    
    
    
    44.34
    
    
    
    7,500
    
    
    
    44.341,427,661
    
    
    
    3.25
    
    
    
    13.75
    
    
    
    452,606
    
    
    
    12.77
 Options outstanding,
    
    
    Options exercisable,2003
    
    
    2003Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageNumber
    
    
    remaining
    
    
    exercise
    
    
    Number
    
    
    exerciseRange of exercise price
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    exercisable
    
    
    price(Cdn$)
    
    
    
    
    
    
    
    
    
    (Cdn$)
    
    
    
    
    
    
    (Cdn$)$  5.00 - $10.00
    
    
    1,150,250
    
    
    
    3.86
    
    
    $
    8.05
    
    
    
    276,687
    
    
    $
    8.44$10.01 - $15.00
    
    
    702,350
    
    
    
    1.39
    
    
    
    12.81
    
    
    
    640,025
    
    
    
    12.82$15.01 - $20.00
    
    
    176,500
    
    
    
    4.80
    
    
    
    15.95
    
    
    
    4,500
    
    
    
    18.73$20.01 - $25.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $25.01 - $30.00
    
    
    78,800
    
    
    
    2.53
    
    
    
    26.66
    
    
    
    33,400
    
    
    
    27.42$30.01 - $35.00
    
    
    89,400
    
    
    
    0.96
    
    
    
    31.81
    
    
    
    80,400
    
    
    
    31.57$35.01 - $40.00
    
    
    31,350
    
    
    
    0.77
    
    
    
    39.03
    
    
    
    27,674
    
    
    
    39.43$40.01 - $45.00
    
    
    89,000
    
    
    
    0.42
    
    
    
    40.67
    
    
    
    84,000
    
    
    
    40.452,317,650
    
    
    
    2.85
    
    
    
    13.32
    
    
    
    1,146,686
    
    
    
    16.19
 13




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##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    8.
    Stock option plan (continued):  In accordance with the CICA Handbook, the Company has expensed the cost of all stock option
grants issued on or after January 1, 2003, determined using the fair value method. The
estimated fair value of the options is recorded over the periods that the options vest. The
fair value of options granted during the years ended December 31, 2004 and 2003 were
estimated using the Black-Scholes option pricing model with the following weighted average
assumptions: 2004
    
    
    2003Dividend yield
    
    
    0.75%
    
    
    
    0.75%Risk-free interest rate
    
    
    2.75%
    
    
    
    2.75%Expected volatility
    
    
    50.00%
    
    
    
    50.00%Expected life of options in years
    
    
    5
    
    
    
    5
  Included in the operating costs is the cost of stock options in the amount of $1,200 (2003 -
$438).For the year ended December 31, 2002, no compensation cost was recorded on the grant of stock
options during that year. In accordance with the transitional provisions related to the CICA
Handbook, additional pro forma disclosure is provided as if the fair value method of
accounting had been used to account for the stock options. The fair value of options granted
in 2002 was determined using the Black-Scholes option pricing model, using the following
weighted average assumptions: Dividend yield
    
    
    0.00%Risk-free interest rate
    
    
    2.00%Expected volatility
    
    
    100.00%Expected life of options in years
    
    
    5
 14




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##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    8.
    Stock option plan (continued):  Had compensation expense been determined based on the fair value of the employee stock option
awards at the grant dates in accordance with the new accounting recommendations, the
Companys earnings for the year and earnings per share would have been changed to the
following pro forma amounts: 2004
    
    
    2003As reported
    
    
    Pro forma
    
    
    As reported
    
    
    Pro formaEarnings
    
    $
    13,668
    
    
    $
    13,090
    
    
    $
    9,441
    
    
    $
    8,706Earnings per common share:Basic
    
    $
    1.05
    
    
    $
    1.01
    
    
    $
    0.77
    
    
    $
    0.71Diluted
    
    
    1.01
    
    
    
    0.96
    
    
    
    0.75
    
    
    
    0.69
  For stock options issued in 2002, the compensation cost, net of tax, for the year ended
December 31, 2004 would have been $578 (2003 - $735)  9.
    Commitments and contingencies:  (a)
    The Company has entered into lease agreements for premises expiring at various
periods up to July 2015. The future minimum annual rental payments on the operating
leases are as follows: 2005
    
    $
    1,1492006
    
    
    1,6162007
    
    
    1,6132008
    
    
    1,3212009
    
    
    1,107Thereafter
    
    
    6,524
 15




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##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    9.
    Commitments and contingencies (continued):  (b)
    The Company and its subsidiaries are involved in certain litigation arising out
of the ordinary course and conduct of business. While it is not possible to estimate
the outcome of these proceedings at this time, such actions have generally been resolved
with minimal damages or expenses as part of amounts provided. The Company does not
believe that it will incur any significant additional loss or expenses in connection
with existing claims.  Should there be additional loss from the resolution of these claims, such loss would be
accounted for as a charge to income in the period in which settlement is reasonably
determinable.  (c)
    In order to manage a portion of its exposure to foreign currency risk, the
Company has entered into forward foreign exchange contracts to purchase Canadian
dollars. The fair value of the forward foreign contracts is $48 as at December 31,
2004.  10.
    Earnings per common share:  Basic and diluted earnings per common share were calculated using the weighted average common
shares and weighted average potential common shares. 2004
    
    
    2003(000s)Weighted average number of common shares outstanding
    
    
    12,971
    
    
    
    12,245Weighted
average number of common shares outstanding - diluted
    
    
    13,586
    
    
    
    12,604
 16




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##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    10.
    Earnings per common share (continued):  The computations for basic and diluted earnings per common share are as follows: 2004
    
    
    2003Earnings
    
    $
    13,668
    
    
    $
    9,441Earnings per common share:Basic
    
    $
    1.05
    
    
    $
    0.77Diluted
    
    
    1.01
    
    
    
    0.75
  Options to purchase 165,000 common shares (2003  1,151,000) were excluded from the
computation of diluted earnings per share as the exercise price exceeded the average market
price of common shares for the reporting year.  11.
    Income taxes:  The income tax provision differs from amount which would be obtained by applying the
Canadian statutory income tax rate to the earnings before income taxes. The following
explains the major differences: 2004
    
    
    2003Earnings before income taxes
    
    $
    16,541
    
    
    $
    10,654Income taxes based on a statutory rate of 36.12%
(2003 - 36.6%)
    
    $
    5,975
    
    
    $
    3,899Increase (decrease) in income taxes resulting from:Lower effective income tax rates in foreign jurisdictions
    
    
    (6,537
    )
    
    
    (4,859
    )Non-deductible capital losses
    
    
    
    
    
    
    415Non-recognition of tax benefit of losses
    
    
    1,372
    
    
    
    218Non-recognition of other temporary differences
    
    
    (39
    )
    
    
    1,590Tax cost of non deductible items
    
    
    1,621
    
    
    
    Recognition of benefit on non-capital loss carry-forward
    
    
    (595
    )
    
    
    Future income tax liability related to foreign exchange gains
    
    
    2,249
    
    
    
    Release of valuation allowance
    
    
    (1,687
    )
    
    
    Other
    
    
    514
    
    
    
    (50
    )Actual income tax expense
    
    $
    2,873
    
    
    $
    1,213
 17




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##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    11.
    Income taxes (continued):  The tax effects of temporary differences that give rise to significant portions of the future
income tax assets and future income tax liabilities at December 31, 2004 and 2003 are as
follows: 2004
    
    
    2003Future income tax assets:Non-capital tax losses carried forward
    
    $
    163
    
    
    $
    163Deferred financing charges
    
    
    14
    
    
    
    27Capital assets
    
    
    394
    
    
    
    409Reserves not deductible for income taxes
    
    
    523
    
    
    
    510Unrealized foreign exchange losses
    
    
    
    
    
    
    1,2631,094
    
    
    
    2,372Future income tax liabilities:Unrealized foreign exchange gains
    
    
    (2,249
    )
    
    
    (1,155
    )
    
    
    2,372Less valuation allowance
    
    
    685
    
    
    
    2,372Net future income tax liabilities
    
    $
    (1,840
    )
    
    $
    
  Non-capital losses of $446 (2003 - $446) carried forward expire in 2005.  12.
    Fair values of financial instruments:  The carrying values of financial instruments, which consist of cash and cash equivalents,
security deposits, short term investments, accounts receivable and other, user funds on
deposit, accounts payable and accrued liabilities and user funds held on deposit, approximate
their fair values due to the short term nature of these instruments. For foreign exchange
contracts refer to note 9(c). 18




---



##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    13.
    Differences between Canadian and United States generally accepted accounting principles:  The Companys consolidated balance sheets and consolidated statements of earnings, retained
earnings and cash flows have been prepared in accordance with Canadian generally accepted
accounting principles (Canadian GAAP) which conform, except as detailed below, in all
material aspects applicable to the Company, with generally accepted accounting principles in
the United States (US GAAP) during the years presented.  (a)
    Registration costs:  In 2003, the Company issued a prospectus in the United Kingdom to register its shares on
the London Stock exchange. No proceeds were received as a result of this registration.
Pursuant to Securities and Exchange Commission rules, the costs of such registration
should be expensed in the year incurred. Accordingly, earnings for 2003 under US GAAP
would have been reduced to $8,751. Basic earnings per share and diluted earnings per
share for 2003 would have been $0.71 and $0.69 respectively.  (b)
    Comprehensive income:  In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the
reporting and disclosure of comprehensive income and its components in financial
statements. Components of comprehensive income or loss include net earnings or loss and
all other changes in other non-owner changes in equity, such as the change in the
cumulative translation adjustment and the unrealized gain or loss for the year on
available-for-sale securities. For the periods presented, no comprehensive income
would be recognized. 19




---



##### 



Notes to Consolidated Financial Statements (continued)
(In thousands of US dollars, except per share disclosure and where indicated otherwise) Years ended December 31, 2004 and 2003    13.
    Differences between Canadian and United States generally accepted accounting principles
(continued):  (c)
    Derivative instruments:  SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and
SAFS No 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and Amendment of SFAS 133 require contemporaneous documentation of the
hedging relationship and the entitys risk management objective and strategy for entering
into the hedge as well as initial and periodic effectiveness assessments. The derivative
instruments entered into by the Company do not meet the hedge criteria as the required
documentation and assessment of the effectiveness of hedges is not performed. Under both
US and Canadian GAAP, the change in fair value of these derivative instruments has been
recognized in the statement of earnings. 20