##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 6-K Report of Foreign Issuer Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934 For the month of September 30, 2004 COUNSEL CORPORATION(Translation of registrants name into English) Scotia Plaza
Suite 3200
40 King St. West
Toronto, Ontario
M5H 3Y2
(Address of principal executive offices) [Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.] Form 20-F þ                    Form 40-F o [Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.] Yes o                    No þ [If Yes is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-]




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##### 



TABLE OF CONTENTS 2004 Third Quarter Report Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Counsel CorporationBy:
    /s/ Gary M. CliffordName:
    Gary M. CliffordDate: November 17, 2004
    
    Title:
    Chief Financial Officer




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##### 



Counsel Corporation (COUNSEL CORPORATION LOGO) 2004 Third Quarter Report
For the Period Ending September 30, 2004




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##### 



REPORT TO SHAREHOLDERS We are pleased to report Counsel Corporations consolidated results for the
third quarter of 2004. All amounts are stated in US dollars unless noted. Significant developments that took place during the quarter were: Communications  
    
    In August, Acceris Communications Inc. implemented a plan to reduce
operating costs and appropriately staff its organization in line with
revenue expectations for the remainder of 2004. Management has recorded
approximately $0.4 million in expenses related to the August 2004
restructuring in the third quarter of 2004 and anticipates that it will
record expenses in future periods of $1.0 to $1.5 million related to
the anticipated closure of facilities and the removal of assets from
production. The restructuring was necessary due to softness in revenue,
which has been attributed to regulatory uncertainties surrounding
competitive local exchange carriers, Acceris decision to not actively
market to 10-10-XXX customers and the continued price competition for
international calls.
    
    In October, Acceris was granted Chinese Patent No. ZL97192954.8 by
the State Intellectual Property Office of the Peoples Republic of
China for its proprietary technology that enables Voice over Internet
Protocol (VoIP) communications as it is most widely used today.
    
    In October, Acceris issued a $5 million convertible term note with
a three year term, convertible at the option of the holder at any time
for $0.88 per share. In conjunction with the transaction, one million
detachable warrants were granted with various exercise prices from
$1.00 to $1.20 per share.
    
    Mr. Jim Meenan appointed non-executive Chairman of Acceris
Board of Directors. Real Estate  
    
    In October 2004, Counsel Real Estate acquired a 50% interest in a
shopping centre in Welland, Ontario having a gross leaseable area of
approximately 170,000 square feet. The purchase price was $2.8 million
which was funded by an advance on a first mortgage of $2.1 million,
secured by the property. Corporate  
    
    In August 2004, Counsel received a Nasdaq Listing Qualifications
Panel determination denying Counsels request for continued inclusion
on The Nasdaq SmallCap Market due to non-compliance with the
shareholders equity /market value of listed securities/net income and
bid price requirements. Consequently,




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##### 



Counsels common stock was delisted from the Nasdaq Smallcap Market, and
now trades on the OTC Electronic Bulletin Board.  
    
    In October 2004, income tax legislation was passed in a foreign
jurisdiction that confirms the release of a material future income tax
obligation. In the fourth quarter of 2004, the Company expects to
record a reduction in its future income tax liabilities of
approximately $25 million, primarily as a result of this legislation
being passed. For the third quarter ended September 30, 2004, the Companys consolidated
revenue from continuing operations was $29.6 million, a decrease of 22% from
$38.0 million in the same period in 2003. The decrease in revenue is
attributable to our communications business as a result of subscriber
attrition, lower average revenue per minute and non-recurring revenue of $3.0
million that was recorded in the third quarter of 2003. The Company incurred a
loss from continuing operations of $8.5 million, or $0.18 per share, basic and
diluted, in the three months ended September 30, 2004, compared with income of
$0.4 million, or a loss of $0.01 per share, in the three months ended September
30, 2003. The Company incurred a net loss of $8.5 million or $0.18 per share,
basic and diluted, for the three months ended September 30, 2004, compared with
net income of $0.8 million, or $0.01 per share, for the three months ended
September 30, 2003. For the nine months ended September 30, 2004, consolidated revenue decreased
14% to $94.1 million from $109.4 million in the same period last year. The net
loss was $15.9 million or $0.32 per share, basic and diluted, for the first
nine months of 2004 compared to $17.2 million, or $0.90 per share, basic and
diluted, in the first nine months of 2003. On behalf of the Board, (SIGNED ALLAN SILBER)
ALLAN SILBER
Chairman and Chief Executive Officer
November 12, 2004




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##### 



COUNSEL CORPORATION
INTERIM MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004
(All dollar amounts are in thousands of US dollars, unless otherwise indicated) INTRODUCTION This managements discussion and analysis (MD&A) of the results of operations
of Counsel Corporation (Counsel, the Company) for the three months and nine
months ended September 30, 2004 and its financial condition as at September 30,
2004 is based on the Companys interim consolidated financial statements
prepared in accordance with accounting principles generally accepted in Canada
(Canadian GAAP) and should be read in conjunction with the audited annual
consolidated financial statements for the year ended December 31, 2003 and the
notes thereto. References to interim financial statements are to the unaudited
consolidated financial statements of Counsel as at and for the three and nine
months ended September 30, 2004. Additional information about the Company,
including the Annual Information Form, can be found on www.sedar.com. The
effective date of this MD&A is November 10, 2004. As of October 29, 2004, the
Company had 47,797,262 common shares and 10,319,731 Series A preferred shares
(convertible into common shares on a one-for-one basis) issued and outstanding. Forward-looking information This MD&A contains forward-looking statements that involve risks and
uncertainties. These statements can be identified by the use of
forward-looking terminology such as may, will, expect, anticipate,
estimate, plans, continue, or the negative thereof or other variations
thereof or comparable terminology referring to future events or results. The
Companys actual results could differ materially from those anticipated in
these forward-looking statements as a result of numerous factors. These
factors include, without limitation: the timing of acquisitions and expansion
opportunities, technological changes and changes to the business environment
that may impact the Companys capital expenditures and competitive factors that
may impact revenue and operating costs and alter the timing and amount of the
Companys capital expenditures. Any of these factors could cause actual
results to vary materially from current results or from the Companys currently
anticipated future results and financial condition. The Company wishes to
caution readers not to place undue reliance on such forward-looking statements
that speak only as of the date made, and that the Company undertakes no
responsibility to update such information. Additional information concerning
factors that may cause actual results to materially differ from those in such
forward-looking statements is contained in the Companys filings with Canadian
and United States securities regulatory authorities. Definitions The Companys discussion of its financial results focuses on operating income
(loss) and net earnings (loss). Operating income (loss) and net earnings (loss)
are presented in the Companys unaudited consolidated statement of operations.
Operating income (loss) is defined as earnings from continuing operations
before other gains, other losses and impairments, interest and taxes. It is
important to note that operating income (loss) is not a measure of performance
under Canadian GAAP. Operating income (loss) should not be considered in
isolation or as a substitute for net earnings (loss) prepared in accordance
with Canadian GAAP, or as a measure of operating performance or profitability.
Operating income (loss) does not have a standardized meaning prescribed by GAAP
and is not necessarily comparable to similar measures presented by other
companies. Certain comparative figures have been reclassified to conform to the current
period financial statement presentation. 1




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##### 



OVERVIEW Counsel is a diversified company focused on acquiring and building businesses
in two specific sectors: communications in the United States and real estate in
Canada. The Company entered the communications sector in March 2001 when it acquired a
controlling interest in I-Link Incorporated (name changed to Acceris
Communications Inc. in 2003, Acceris). Acceris is a supplier of voice, data
and enhanced communications products and services. Acceris operates as a
facilities based telecommunications carrier providing local and long distance
voice services to retail customers in the United States, and voice and data
services to small and medium-sized businesses in the United States. Acceris
also licenses a fully developed network convergence solution for voice and data
based on its Internet Protocol (IP) communications technology, and is
pursuing a patent enhancement strategy to protect/realize on the value of its
assets. The Company entered the real estate sector in 2002, when it completed the
acquisition of five income-producing properties, consisting of approximately
730,000 square feet of leasable area and 13 acres of vacant land zoned for
retail development in Canada. At September 30, 2004, Counsel owns seven income
producing properties, consisting of 820,000 square feet, has two development
projects ongoing, and has 13 acres of vacant land zoned for retail development
in Canada. 2




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##### 



CONSOLIDATED RESULTS OF OPERATIONS The following table sets out the Companys consolidated quarterly results of
operations for the eight quarters ended September 30, 2004, under the basis of
presentation utilized in its Canadian GAAP financial statements. Unaudited
    
    UnauditedNine months endedSeptember 302002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004
    
    2003
    
    2004Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q3
    
    Q3$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesUnited StatesTelecommunications
    
    
    21,623
    
    
    
    30,367
    
    
    
    36,252
    
    
    
    35,003
    
    
    
    32,126
    
    
    
    33,054
    
    
    
    26,419
    
    
    
    27,389
    
    
    
    101,622
    
    
    
    86,862Technologies
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    450
    
    
    
    90
    
    
    
    
    
    
    
    2,099
    
    
    
    54021,670
    
    
    
    30,367
    
    
    
    37,302
    
    
    
    36,052
    
    
    
    32,191
    
    
    
    33,504
    
    
    
    26,509
    
    
    
    27,389
    
    
    
    103,721
    
    
    
    87,402CanadaReal estate
    
    
    1,704
    
    
    
    1,783
    
    
    
    1,988
    
    
    
    1,901
    
    
    
    2,127
    
    
    
    2,270
    
    
    
    2,181
    
    
    
    2,229
    
    
    
    5,672
    
    
    
    6,68023,374
    
    
    
    32,150
    
    
    
    39,290
    
    
    
    37,953
    
    
    
    34,318
    
    
    
    35,774
    
    
    
    28,690
    
    
    
    29,618
    
    
    
    109,393
    
    
    
    94,082Operating costs and expenses:Telecommunication costs1
    
    
    14,453
    
    
    
    25,748
    
    
    
    21,319
    
    
    
    20,072
    
    
    
    18,867
    
    
    
    16,635
    
    
    
    15,477
    
    
    
    15,349
    
    
    
    67,139
    
    
    
    47,461Income producing properties1
    
    
    946
    
    
    
    944
    
    
    
    1,047
    
    
    
    882
    
    
    
    999
    
    
    
    1,266
    
    
    
    1,256
    
    
    
    1,127
    
    
    
    2,873
    
    
    
    3,649Selling, general and administrative
    
    
    12,805
    
    
    
    15,530
    
    
    
    15,906
    
    
    
    14,777
    
    
    
    15,198
    
    
    
    15,943
    
    
    
    15,404
    
    
    
    15,378
    
    
    
    46,213
    
    
    
    46,725Research and development
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    119
    
    
    
    
    
    
    
    225Provision for doubtful accounts
    
    
    2,273
    
    
    
    1,175
    
    
    
    1,131
    
    
    
    1,465
    
    
    
    1,667
    
    
    
    1,227
    
    
    
    1,740
    
    
    
    941
    
    
    
    3,771
    
    
    
    3,908Depreciation and amortization
    
    
    2,079
    
    
    
    2,568
    
    
    
    2,362
    
    
    
    2,597
    
    
    
    2,326
    
    
    
    2,480
    
    
    
    2,437
    
    
    
    2,326
    
    
    
    7,527
    
    
    
    7,243Operating loss before undernoted items
    
    
    (9,417
    )
    
    
    (13,815
    )
    
    
    (2,475
    )
    
    
    (1,840
    )
    
    
    (4,739
    )
    
    
    (1,777
    )
    
    
    (7,730
    )
    
    
    (5,622
    )
    
    
    (18,130
    )
    
    
    (15,129
    )Gains and other income:Short-term investments
    
    
    405
    
    
    
    448
    
    
    
    1,929
    
    
    
    1,617
    
    
    
    1,224
    
    
    
    570
    
    
    
    668
    
    
    
    124
    
    
    
    3,994
    
    
    
    1,362Other
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    2,578
    
    
    
    1,079
    
    
    
    767
    
    
    
    
    
    
    
    204
    
    
    
    2,578
    
    
    
    971Impairments and other losses:Write-down of short-term investments
    
    
    (80
    )
    
    
    (98
    )
    
    
    (35
    )
    
    
    
    
    
    
    (6
    )
    
    
    (71
    )
    
    
    (431
    )
    
    
    (9
    )
    
    
    (133
    )
    
    
    (511
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (400
    )
    
    
    (650
    )
    
    
    (400
    )Other
    
    
    (1,159
    )
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (368
    )
    
    
    (37
    )
    
    
    (376
    )
    
    
    (73
    )
    
    
    (657
    )
    
    
    (486
    )Interest income
    
    
    49
    
    
    
    38
    
    
    
    114
    
    
    
    395
    
    
    
    73
    
    
    
    66
    
    
    
    111
    
    
    
    126
    
    
    
    547
    
    
    
    303Interest expense
    
    
    (801
    )
    
    
    (871
    )
    
    
    (1,071
    )
    
    
    (804
    )
    
    
    (755
    )
    
    
    (1,537
    )
    
    
    (1,464
    )
    
    
    (1,523
    )
    
    
    (2,746
    )
    
    
    (4,524
    )Earnings (loss) before income taxes, non-controlling
interest and discontinued operations
    
    
    (10,221
    )
    
    
    (14,298
    )
    
    
    (2,188
    )
    
    
    1,289
    
    
    
    (3,492
    )
    
    
    (2,019
    )
    
    
    (9,222
    )
    
    
    (7,173
    )
    
    
    (15,197
    )
    
    
    (18,414
    )Income taxes
    
    
    (2,253
    )
    
    
    
    
    
    
    14
    
    
    
    882
    
    
    
    2,041
    
    
    
    427
    
    
    
    359
    
    
    
    1,286
    
    
    
    896
    
    
    
    2,072Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    33
    
    
    
    13
    
    
    
    
    
    
    
    56Earnings (loss) from continuing operations
    
    
    (7,968
    )
    
    
    (14,298
    )
    
    
    (2,202
    )
    
    
    407
    
    
    
    (5,533
    )
    
    
    (2,456
    )
    
    
    (9,614
    )
    
    
    (8,472
    )
    
    
    (16,093
    )
    
    
    (20,542
    )Discontinued operations:Medical products and servicesMedical products
    
    
    (1,213
    )
    
    
    211
    
    
    
    10
    
    
    
    29
    
    
    
    70
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    22Pharmaceutical products
    
    
    (209
    )
    
    
    (17
    )
    
    
    145
    
    
    
    (6
    )
    
    
    137
    
    
    
    (12
    )
    
    
    (222
    )
    
    
    35
    
    
    
    122
    
    
    
    (199
    )Pharmacy services
    
    
    (1,958
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Communications
    
    
    (3,366
    )
    
    
    (277
    )
    
    
    371
    
    
    
    213
    
    
    
    223
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    307
    
    
    
    103Long-term care
    
    
    (1,007
    )
    
    
    (904
    )
    
    
    (1,067
    )
    
    
    140
    
    
    
    86
    
    
    
    (162
    )
    
    
    4,902
    
    
    
    (46
    )
    
    
    (1,831
    )
    
    
    4,694Net earnings (loss)
    
    
    (15,721
    )
    
    
    (15,285
    )
    
    
    (2,743
    )
    
    
    783
    
    
    
    (5,017
    )
    
    
    (2,505
    )
    
    
    (4,934
    )
    
    
    (8,483
    )
    
    
    (17,245
    )
    
    
    (15,922
    )Weighted average number of
common shares outstanding (in thousands)
    
    
    21,928
    
    
    
    21,491
    
    
    
    21,060
    
    
    
    20,593
    
    
    
    39,102
    
    
    
    48,587
    
    
    
    48,587
    
    
    
    48,268
    
    
    
    21,045
    
    
    
    48,480Basic and diluted net earnings (loss) per share from:Continuing operations
    
    
    (0.40
    )
    
    
    (0.70
    )
    
    
    (0.14
    )
    
    
    (0.01
    )
    
    
    (0.15
    )
    
    
    (0.05
    )
    
    
    (0.20
    )
    
    
    (0.18
    )
    
    
    (0.85
    )
    
    
    (0.42
    )Discontinued operations
    
    
    (0.35
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.01
    
    
    
    (0.00
    )
    
    
    0.10
    
    
    
    (0.00
    )
    
    
    (0.05
    )
    
    
    0.10Basic and diluted net earnings (loss) per share
    
    
    (0.75
    )
    
    
    (0.75
    )
    
    
    (0.16
    )
    
    
    0.01
    
    
    
    (0.14
    )
    
    
    (0.05
    )
    
    
    (0.10
    )
    
    
    (0.18
    )
    
    
    (0.90
    )
    
    
    (0.32
    )
 1 exclusive of depreciation and amortization expense noted separately 3




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##### 



Three-Month Period Ended September 30, 2004 Compared to Three-Month Period
Ended September 30, 2003 In order to more fully understand the results of continuing operations for the
three months ended September 30, 2004 as compared to the same period in 2003,
it is important to note the following significant changes that occurred in the
Companys operations:  
    
    In November 2002, the Company began to sell a network product
obtained from one new supplier. The sale of the product ceased in late
July 2003. Revenue from this offering is recognized using the
unencumbered cash method. In the third quarter of 2004, $161 in cash
receipts from prior periods became unencumbered and recognized as
revenue, versus the recognition of $3,079 of revenue during the same
period in 2003. Further, most expenses associated with this offering
were recorded when incurred. The Company recorded a $nil of
telecommunications network costs in the third quarter of 2004, versus
$807 during the same period in 2003. The cessation of this product does
not qualify as discontinued operations under generally accepted
accounting principles.
    
    In January 2004, the Company commenced offering local dial tone
services via the UNE-P platform. Acceris now offers these services in
five states and has approximately 24,000 local customers.
    
    In August 2004, the Company implemented a resizing of its
telecommunications organization targeted at reducing its operating
costs. The cost cutting reflects both the continued efficiencies created
by the ongoing integration of the telecommunications operations, related
to its four acquisitions over the last three years. As a result of the
resizing, the Companys work force was reduced by approximately 20
percent. The reduction affected staff in the San Diego, Pittsburgh and
Somerset facilities. Management has recorded approximately $400 in
expenses related to the August 2004 restructuring, of which $326 was
paid in the third quarter, recorded in selling, general and
administration expense and anticipates that it will incur expenses, in
the fourth quarter, of $1,000 to $1,500 related to anticipated exit of
facilities and the removal of assets from production.
    
    In the real estate segment, two tenants of Imperial Square started
leasing in the first quarter of 2004: A&W Restaurants and Galaxy
Theatres. Reference should also be made to the supplemental statistical and financial
data disclosed herein. Revenues: Telecommunications revenue decreased $7,614 to $27,389 in the third quarter of
2004 from $35,003 in the same period during 2003. The primary reasons for the
decrease were related to:  
    
    Our 10-10-XXX customer base is 125,000 at September 30, 2004
representing a 39.5% decline from September 2003. The customer attrition
is a result of the Companys decision to not directly market 10-10-XXX
services since 2002. The Company has also seen the dial around monthly
average revenue per user (ARPU) decline from $22.07 to $19.15, in the
same period. This is attributed to increased cellular penetration and
deregulation in various countries which have lower rates per month in
those markets and due to greater competition from 1+ and local bundled
offerings.
    
    The 1+ customer base is 164,000, representing a 2.5% decline in
subscribers from September 2003. ARPU declined 4.2% from $24.17 to $23.15
in the same period. Management attributes the decline in customer base
to our decision to lead our sales offering with a local bundle versus a
1+ offering. ARPU has declined primarily due to continued price compression
in the long distance business and as a result of the continued migration of
people to greater cellular usage. 4




---



##### 




    
    The enterprise customer base was 238 (2003  236) customers at the end
of September 2004. The top ten customers account for 19.5% of all direct
sales billings. Included in the third quarter of 2004 is $1,400 of direct
sales revenue from one customer who has subsequently moved to another
carrier.
    
    The Companys local bundled customers increased to 24,000 as at
September 30, 2004, while ARPU was $37.62. The Company commenced
offering a local bundle in five states (New York, New Jersey, Florida,
Pennsylvania, and Massachusetts) during 2004 under the UNE-P platform.
Local bundled customers are expected to have a longer life and higher
ARPU than the Companys existing 10-10-XXX and 1+ customers.
    
    A decline of $2,918 due the discontinuance in July 2003 of the network
service offering product. In November 2002, we began to sell a network
service offering obtained from a new supplier. The sale of that product
ceased in late July 2003. Revenue from this offering is recognized using
the unencumbered cash method. In the third quarter of 2004, $161 was
recognized in revenue compared to $3,079 in the same quarter of 2003. Technology licensing and related services revenue was $nil in the third quarter
of 2004 compared to $1,049 in the third quarter of 2003. The revenues in 2003
related to two contracts. Real estate revenues increased $328 from $1,901 for the three months ended
September 30, 2003 to $2,229 for the three months ended September 30, 2004.
The main reason for the increase is the addition of two new tenants for our
recently developed Imperial Square site in Guelph, Ontario, A&W Restaurants and
Galaxy Theatres, which contributed $290. Telecommunication costs: Telecommunications network expense was $15,349 in the three months ended
September 30, 2004, as compared to $20,072 during the same period in 2003,
(including costs associated with our network service offering of $nil and $807,
respectively). Telecommunications services margins (telecommunications services revenues less
telecommunications network expenses) continue to fluctuate significantly from
period to period, and are expected to continue to fluctuate significantly for
the foreseeable future. Predicting whether margins will increase or decline is
difficult to do with certainty. Factors that have affected and continue to
affect margins include:  
    
    Differences in attributes associated with the various long-distance
programs in place at the Company. The effectiveness of each offering
can change margins significantly from period to period. Some factors
that affect the effectiveness of any program include the ongoing
deregulation of phone services in various countries where customer
traffic terminates, actions and reactions by competitors to market
pricing, the trend toward bundled service offerings and the increasing
level of wireline to cellular connections. In addition, changes in
customer traffic patterns also increase and decrease margins.
    
    Both the frame relay network and the voice network have significant
fixed cost elements and minor variable per minute cost of traffic
carried elements. Significant fluctuations in the number of minutes
carried from month to month can significantly affect the margin
percentage from period to period. Management has reduced the fixed
network monthly costs by approximately $84 per month by September 2004.
    
    Changes in contribution rates to the Universal Service Fund and
other regulatory changes associated with the Fund include increases and
decreases in contribution rates, changes in the method of determining
assessments, changes in the definition of assessable revenue, and the
limitation that Universal Service Fund charges collected from customers
can no longer exceed contributions. 5




---



##### 




    
    The expensing, on a period basis, of costs associated with a
network service offering that was introduced in November 2002 and
terminated in July 2003. Income producing properties expense: Income producing properties expense increased by $245 to $1,127 in the third
quarter of 2004 from $882 in the third quarter of 2003. The increase relates
to additional Imperial Square operating costs for the two new tenants of $75,
and general increases in all other operating expenses for the other properties,
which are being offset by the recoveries recorded in revenues. Other operating costs and expenses: The Companys selling, general and administrative (S,G&A) expense was $15,349
in the three months ended September 30, 2004 compared to $14,777 during the
same period of 2003. Costs are higher in 2004 as a percentage of revenue for a
number of reasons including the $400 in costs related to the August 2004
resizing of the organization targeted at reducing its operating costs. The cost
cutting reflects the continued efficiencies created by the ongoing integration
of the telecommunications operations, related to its four acquisitions over the
last three years. As a result of the resizing, the telecommunications work
force was reduced by approximately 20 percent. The reduction affected staff in
the San Diego, Pittsburgh and Somerset facilities. Management expects future
expenses of $1,000 to $1,500 related to the anticipated closure of facilities
and the removal of assets from production, related to the August restructuring.
Additionally in 2004, legal costs were incurred relating to various litigation
matters including shareholder direct and derivative actions, and the Companys
patent enforcement strategy. The Company also incurred higher telemarketing and
infrastructure costs relating to our entry into the local dial tone business
throughout 2004. The Companys research and development expense was $119 for the third quarter
of 2004. This program was commenced in second quarter 2004 and is expected to
allow the Company to provide enhanced telecommunication services to its
customer base in the near term. The Company did not carry out any research and
development work in 2003. The provision for doubtful accounts was $941 in the three months ended
September 30, 2004 as compared to $1,465 for the same period of 2003. The
provision for doubtful accounts as a percent of revenue, excluding revenue from
the discontinued network service offering, was approximately 3.4% for the three
months ended September 30, 2004, versus approximately 4.6% for the three months
ended September 30, 2003. Management is taking steps to bring the bad debt
provision more into line with historical averages by tightening the credit
granting process. Depreciation and amortization was $2,326 in the three months ended September
30, 2004 compared to $2,597 during the same period of 2003. Gains and other income: The Company makes investments in equities of publicly traded companies,
categorized as short-term investments. Gain on sale of short-term investments
was $124 for the third quarter of 2004, compared to $1,617 for the third
quarter of 2003. Other income for the third quarter of 2004 was $204, compared to $2,578 for the
same period in 2003. During the third quarter of 2004, other income relates to
the estate of WorldxChange Communications, Inc. (WorldxChange) agreement to
offset an unrecorded receivable of the Company against a legal obligation to
the estate relating to the 2001 acquisition of the WorldxChange business from
bankruptcy. The Company recognized a gain of $2,578 in the third quarter of
2003 on the assignment of certain liabilities of Acceris, owed to Winter Harbor
LLC, to Counsel pursuant to a settlement agreement between the Company and
Winter Harbor. 6




---



##### 



Impairments and other losses: The Company recorded impairments on short-term investments of $9 in the third
quarter of 2004 and $nil in the third quarter of 2003. Impairments are
recorded when market prices decline below the cost of marketable securities. The Company recorded impairments of certain portfolio investments of $400 in
the third quarter of 2004 and $nil in the third quarter of 2003. One of the
Companys portfolio investment went into liquidation. Management concluded that
there was uncertainty as to the recoverability of the investment and a full
provision was recorded against the asset. In the third quarter of 2004, the Company recorded other losses of $73 compared
to $657 for the same period in 2003. The other loss in the third quarter of
2003, relates to the Companys unsuccessful offer to acquire at least 45% of
its then outstanding $40.8 million of 6% convertible unsecured subordinated
debentures. Interest income and expense: Interest income was $126 for the third quarter of 2004 compared to $395 during
the third quarter of 2003. Interest expense increased $719 to $1,523 in the third quarter of 2004 from
$804 during the same period of 2003. The increase was primarily due to the
financing costs related to convertible preferred shares issued in December
2003. Income taxes: The income tax expense for the Company was $1,286 for the third quarter of
2004, compared to $882 for the same period in 2003. Counsel operates in Canada
and the United States and is therefore subject to income taxes in multiple
jurisdictions. The income tax expense reported in the statement of operations
is based on a number of different estimates made by management. The effective
tax rate can change from year to year based on the mix of income or loss among
the different jurisdictions in which the Company operates, changes in tax laws
in these jurisdictions, and changes in the estimated values of future tax
assets and liabilities recorded on the balance sheet. The income tax expense
reflects an estimate of cash taxes expected to be paid in the current year, as
well as a provision for changes arising this year in the value of future tax
assets and liabilities. The likelihood of recovering value from future tax
assets such as loss carry forwards and the future tax depreciation of capital
assets are assessed at each quarter-end and a valuation allowance may be
established or modified. Changes in the amount of the valuation allowance
required can materially increase or decrease the tax expense in a period.
Significant judgment is applied to determine the appropriate amount of
valuation allowance to record. Material changes in income tax assets,
liabilities, expense and recoveries may occur in the short term. In October 2004, income tax legislation was passed in a foreign jurisdiction
that confirms the release of a material future income tax obligation. In the
fourth quarter of 2004, the Company expects to record a reduction in the future
income tax liabilities of approximately $25,000, primarily as a result of this
legislation being passed. Discontinued Operations: In the third quarter of 2004, the Company recorded a loss from discontinued
operations of $11 compared to earnings of $376 in the third quarter of 2003.
In the third quarter of 2003, the communications business recognized $213 of
contingent consideration from the sale of its VoIP network and customers to
Buyers United Inc. (BUI). 7




---



##### 



Nine-Month Period Ended September 30, 2004 Compared to Nine-Month Period Ended
September 30, 2003 In order to more fully understand the results of continuing operations for the
nine months ended September 30, 2004 as compared to the same period in 2003, it
is important to note the following significant changes that occurred in the
Companys operations:  
    
    In July 2003, the Company purchased all the outstanding shares of
Transpoint. The operations of Transpoint have been included in the
statement of operations for 2004. However, there were no such
operations in the first six months of 2003.
    
    In November 2002, the Company began to sell a network product
obtained from one new supplier, who had not been utilized prior to that
date. The sale of the product ceased in late July 2003. Revenue from
this offering is recognized using the unencumbered cash method. In the
nine month period ended September 30, 2004, $5,047 in cash receipts
from prior periods became unencumbered and were recognized as revenue,
versus the recognition of $7,221 of revenue during the same period in
2003. Further, most expenses associated with this offering were
recorded when incurred. The Company recorded a $203 recovery of
telecommunications network costs in the nine month period ended
September 30, 2004, versus $9,197 in expenses during the same period in
2003. The cessation of this product does not qualify as discontinued
operations under generally accepted accounting principles.
    
    In January 2004, the Company commenced offering local dial tone
services via the UNE-P platform. Acceris now offers these services in
five states and has approximately 24,000 local customers.
    
    In August 2004, the Company implemented a resizing of its
telecommunication organization targeted at reducing its operating
costs. The cost cutting reflects both the continued efficiencies
created by the ongoing integration of the telecommunications
operations, related to its four acquisitions over the last three years.
As a result of the resizing, the Companys work force was reduced by
approximately 20 percent. The reduction affected staff in the San
Diego, Pittsburgh and Somerset facilities. Management has recorded
approximately $400 in expenses related to the August 2004
restructuring, of which $326 was paid in the third quarter, recorded in
selling, general and administration expense and anticipates that it
will expenses, in the fourth quarter, of $1,000 to $1,500 related to
anticipated exit of facilities and the removal of assets from
production.
    
    In the real estate segment, two tenants of Imperial Square started
leasing in the first quarter of 2004: A&W Restaurants and Galaxy
Theatres. Reference should also be made to the supplemental statistical and financial
data disclosed herein. Revenues: Telecommunications revenue decreased $14,760 to $86,862 in the first nine
months of 2004 from $101,622 in the same period during 2003. The primary
reasons for the decrease were:  
    
    Our 10-10-XXX customer base is 125,000 at September 30, 2004
representing a 39.5% decline from September 2003. The customer attrition
is a result of the Companys decision to not directly market 10-10-XXX
services since 2002. The Company has also seen the dial around monthly
ARPU decline from $22.07 to $19.15, in the same period. This is
attributed to increased cellular penetration and deregulation in various
countries which have lower rates per month in those markets and due to
greater competition from 1+ and local bundled offerings.
    
    The 1+ customer base is 164,000, representing a 2.5% decline in
subscribers from September 2003. ARPU declined 4.2% from $24.17 to $23.15
in the same period. Management attributes the decline in customer base to our decision to lead our sales offering with a
local bundle versus a 1+ 8




---



##### 



offering. ARPU has declined primarily due to
continued price compression in the long distance business and as a result
of the continued migration of people to greater cellular usage.
    
    The enterprise customer base was 238 (2003  236) customers at the end
of September 2004. The top ten customers account for 19.5% of all direct
sales billings. Included in the nine months ended September 30, 2004 is
$2,800 of direct sales revenue from one customer who has subsequently
moved to another carrier.
    
    The Companys local bundled customers increased to 24,000 as at
September 30, 2004, while ARPU was $37.62. The Company commenced
offering a local bundle in five states (New York, New Jersey, Florida,
Pennsylvania, and Massachusetts) during 2004 under the UNE-P platform.
Local bundled customers are expected to have a longer life and higher
ARPU than the Companys existing 10-10-XXX and 1+ customers.
    
    A $2,174 decrease in revenue related to the network service offering
product that was discontinued in July 2003. In November 2002, we began to
sell a network service offering obtained from a new supplier. The sale of
that product ceased in late July 2003. Revenue from this offering is
recognized using the unencumbered cash method. In the first nine months
of 2004, $5,047 was recognized in revenue compared to $7,221 in the same
period of 2003. Technology licensing and related services revenue was $540 in the first nine
months of 2004 compared to $2,099 in the same period of 2003. In the first
nine months of 2003, the Company recorded revenue from two contracts: the
AccessLine contract and a contract with a Japanese company. The revenue in 2004
relates to a contract that was entered into with a Japanese company in the
third quarter of 2003. Under the terms of the contract, we earned $540 based on
the receipt of funds related to the delivery of product in 2003. The Company
has no continuing obligation related to this contract. Technology licensing
revenues are project-based and, as such, these revenues will vary from period
to period based on timing and size of technology licensing projects and
payments. Real estate revenues increased $1,008 from $5,672 for the nine months ended
September 30, 2003 to $6,680 for the nine months ended September 30, 2004. The
main reason for the increase was the addition of two new tenants for Imperial
Square, A&W Restaurants and Galaxy Theatres, for $840, and a general increase
in rents, operating and realty tax recoveries from other properties. Telecommunication costs: Telecommunications network expense was $47,461 for the nine months ended
September 30, 2004, as compared to $67,139 during the same period in 2003,
(including costs (recovery) associated with the network service offering of
($203) and $9,177, respectively). Telecommunications services margins (telecommunications services revenues less
telecommunications network expenses) continue to fluctuate significantly from
period to period, and are expected to continue to fluctuate significantly for
the foreseeable future. Predicting whether margins will increase or decline is
difficult to estimate with certainty. Factors that have affected and continue
to affect margins include:  
    
    Differences in attributes associated with the various long-distance
programs in place at the Company. The effectiveness of each offering
can change margins significantly from period to period. Some factors
that affect the effectiveness of any program include the ongoing
deregulation of phone services in various countries where customer
traffic terminates, actions and reactions by competitors to market
pricing, the trend toward bundled service offerings and the increasing
level of wireline to cellular connections. In addition, changes in
customer traffic patterns also increase and decrease margins.
    
    Both the frame relay network and the voice network have significant
fixed cost elements and minor variable per minute cost of traffic
carried elements. Significant fluctuations in the number of minutes
carried from month to month can significantly affect the margin
percentage from period to 9




---



##### 



period. Management has reduced the fixed network monthly costs by
approximately $84 per month by September 2004.
    
    Changes in contribution rates to the Universal Service Fund and
other regulatory changes associated with the Fund include increases and
decreases in contribution rates, changes in the method of determining
assessments, changes in the definition of assessable revenue, and the
limitation that Universal Service Fund charges collected from customers
can no longer exceed contributions.
    
    The expensing, on a period basis of costs associated with the
network service offering that was introduced in November 2002 and
terminated in July 2003. In the first nine months of 2004, a recovery
of $203 was recorded from the network service offering, versus $9,177
in expenses for the same period of 2003. Income producing properties expense: Income producing properties expense increased by $776 to $3,649 for the first
nine months of 2004 from $2,873 in the same period in 2003. The increase
relates primarily to additional Imperial Square operating costs for the two new
tenants of $229, and general increases in all other operating expenses for the
other properties, which are being offset by the recoveries recorded in
revenues. Other operating costs and expenses: The Companys S,G&A expense was $46,725 in the nine months ended September 30,
2004 as compared to $46,213 during the same period of 2003. Costs are higher in
2004 as a percentage of revenue for a number of reasons including the $400 in
costs related to the August 2004 resizing of the organization targeted at
reducing its operating costs. The cost cutting reflects the continued
efficiencies created by the ongoing integration of the telecommunications
operations, related to its four acquisitions over the last three years. As a
result of the resizing, the telecommunications work force was reduced by
approximately 20 percent. The reduction affected staff in the San Diego,
Pittsburgh and Somerset facilities. Management expects future expenses of
$1,000 to $1,500 related to the anticipated closure of facilities and the
removal of assets from production, related to the August restructuring.
Additionally in 2004, legal costs were incurred relating to various litigation
matters including shareholder direct and derivative actions, and the Companys
patent enforcement strategy. The Company also incurred higher telemarketing and
infrastructure costs relating to our entry into the local dial tone business
throughout 2004. The Company commenced a research and development program in the second quarter
of 2004, incurring costs of $225 in the nine months ended September 30, 2004.
This program is expected to allow the Company to provide enhanced
telecommunication services to its customer base in the near term. The Company
did not carry out any research and development work in 2003. The provision for doubtful accounts was $3,908 in the nine months ended
September 30, 2004 as compared to $3,771 for the same period of 2003. The
provision for doubtful accounts as a percent of revenue, excluding revenue from
the network service offering, was approximately 4.7% for the nine months ended
September 30, 2004, versus approximately 4.0% for the nine months ended
September 30, 2003. Management is taking steps to bring the bad debt provision
more into line with historical averages by tightening the credit granting
process. Depreciation and amortization was $7,243 in the nine months ended September 30,
2004 compared to $7,527 during the same period of 2003. Gains and other income: The Company makes investments in equities of publicly traded companies,
categorized as short-term investments. Gain on sale of short-term investments
was $1,362 for the first nine months of 2004, 10




---



##### 



compared to $3,994 for the first nine months of 2003. Included in 2004, was a
gain of $1,090 related to the sale of BUI common stock. At the end of the
second quarter of 2004, the Company no longer had any ownership in BUI. Other income was $971 for the nine months ended September 30, 2004, compared to
$2,578 in the same period in 2003. The other income for 2004 included a $767
gain related to the discharge of certain obligations associated with the
Companys former participation with a consortium of owners in an indefeasible
right of usage and $204 from the estate of WorldxChange agreement to offset an
unrecorded receivable of the Company against a legal obligation to the estate
relating to the 2001 acquisition of the WorldxChange business from
bankruptcy. The Company recognized a gain of $2,578 in the third quarter of 2003 on the
assignment of certain liabilities of Acceris, owed to Winter Harbor LLC, to
Counsel pursuant to a settlement agreement between the Company and Winter
Harbor. Impairments and other losses: The Company recorded impairments on short-term investments of $511 the first
nine months of 2004 and $133 in the first nine months of 2003. Impairments are
recorded when market prices decline below cost of marketable securities. During the first nine months of 2004, the Company recorded impairments on
portfolio investments of $400 compared to $650 in the first nine months of
2003. The impairment in 2004 relates to one of the Companys portfolio
investments that went into liquidation. Management concluded that there was
uncertainty as to the recoverability of the investment, and a full provision
was recorded against the asset. In the first nine months of 2004, the Company recorded other losses of $486
compared to $657 for the same period in 2003. The 2004 loss relates to the
write down of a loan to a former employee that has gone into default. The
Company has taken legal action to enforce collection. The 2003 loss relates to
the Companys unsuccessful offer to acquire at least 45% of its then
outstanding $40.8 million of 6% convertible unsecured subordinated debentures. Interest income and expense: Interest income was $303 for the nine months ended September 30, 2004 compared
to $547 during the same period of 2003. Interest expense increased $1,778 to $4,524 in the first nine months of 2004
from $2,746 during the same period of 2003. The increase was primarily due to
the dividend expense and accretion liability accrual on the convertible
preferred shares issued in December 2003. Income taxes: The income tax expense for the Company was $2,072 for the first nine months of
2004, compared to $896 for the same period in 2003. Counsel operates in Canada
and the United States and is therefore subject to income taxes in multiple
jurisdictions. The income tax expense reported in the statement of operations
is based on a number of different estimates made by management. The effective
tax rate can change from year to year based on the mix of income or loss among
the different jurisdictions in which the Company operates, changes in tax laws
in these jurisdictions, and changes in the estimated values of future tax
assets and liabilities recorded on the balance sheet. The income tax expense
reflects an estimate of cash taxes expected to be paid in the current year, as
well as a provision for changes arising this year in the value of future tax
assets and liabilities. The likelihood of recovering value from future tax
assets such as loss carry forwards and the future tax depreciation of capital
assets are assessed at each quarter-end and a valuation allowance may be
established or modified. Changes in the amount of the valuation allowance
required can materially increase or decrease the tax expense in a period.
Significant judgment is applied to determine the appropriate amount of
valuation allowance to record. Material changes in income tax assets,
liabilities, expense and recoveries may occur in the short term. 11




---



##### 



In October 2004, income tax legislation was passed in a foreign jurisdiction
that confirms the release of a material future income tax obligation. In the
fourth quarter of 2004, the Company expects to record a reduction in the future
income tax liabilities of approximately $25,000, primarily as a result of this
legislation being passed. Discontinued Operations: In the first nine months of 2004, the Company recorded earnings from
discontinued operations of $4,620 compared to a loss of $1,152 in the same
period of 2003. In 2004, the Company recorded a $4,563 gain from the sale of
its retirement homes, pursuant to the lessees exercise of its option to
purchase the homes. The sale closed on May 31, 2004. 12




---



##### 



Supplemental Statistical and Financial Data The following data is provided for additional information about the Companys
telecommunications operations. It should be read in conjunction with the
quarterly segment analysis provided herein. All amounts below are unaudited. 2003
    
    2004(In millions of dollars, except where indicated)
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3Gross revenues  product mixDomestic long-distance
    
    $
    7.8
    
    
    $
    7.8
    
    
    $
    7.4
    
    
    $
    7.5
    
    
    $
    6.4
    
    
    $
    5.6
    
    
    $
    5.4International long-distance
    
    
    12.8
    
    
    
    14.4
    
    
    
    15.3
    
    
    
    15.1
    
    
    
    13.0
    
    
    
    11.3
    
    
    
    10.5Local dial tone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    1.0
    
    
    
    2.7MRC/USF(1)
    
    
    2.3
    
    
    
    2.4
    
    
    
    2.8
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    2.7
    
    
    
    2.3Dedicated voice
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Direct sales revenues
    
    
    7.1
    
    
    
    6.8
    
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.4
    
    
    
    5.1
    
    
    
    5.8Other
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Total telecommunications revenue
    
    $
    30.4
    
    
    $
    31.8
    
    
    $
    32.0
    
    
    $
    31.9
    
    
    $
    28.3
    
    
    $
    26.2
    
    
    $
    27.3Network service offering
    
    
    
    
    
    
    4.1
    
    
    
    3.1
    
    
    
    0.4
    
    
    
    4.7
    
    
    
    0.2
    
    
    
    0.1Technology licensing and development
    
    
    
    
    
    
    1.1
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.1
    
    
    
    Total revenues
    
    $
    30.4
    
    
    $
    37.0
    
    
    $
    36.1
    
    
    $
    32.4
    
    
    $
    33.5
    
    
    $
    26.5
    
    
    $
    27.4Telecommunications revenue by customer type:Dial-around
    
    $
    14.8
    
    
    $
    13.3
    
    
    $
    13.7
    
    
    $
    13.3
    
    
    $
    10.3
    
    
    $
    9.0
    
    
    $
    7.21+
    
    
    8.5
    
    
    
    11.6
    
    
    
    12.2
    
    
    
    12.7
    
    
    
    12.4
    
    
    
    11.0
    
    
    
    11.4Local dial tone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    1.0
    
    
    
    2.7Direct sales
    
    
    7.1
    
    
    
    6.8
    
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.4
    
    
    
    5.0
    
    
    
    5.8Other
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Total telecommunications revenues
    
    $
    30.4
    
    
    $
    31.8
    
    
    $
    32.0
    
    
    $
    31.9
    
    
    $
    28.3
    
    
    $
    26.2
    
    
    $
    27.3Gross revenue  product mix (%):Domestic long-distance
    
    
    25.6
    %
    
    
    24.6
    %
    
    
    23.1
    %
    
    
    23.5
    %
    
    
    22.6
    %
    
    
    21.4
    %
    
    
    19.9
    %International long-distance
    
    
    42.1
    %
    
    
    45.3
    %
    
    
    47.8
    %
    
    
    47.3
    %
    
    
    45.9
    %
    
    
    43.1
    %
    
    
    38.4
    %Local dial tone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    %
    
    
    3.8
    %
    
    
    9.8
    %MRC/USF(1)
    
    
    7.6
    %
    
    
    7.5
    %
    
    
    8.8
    %
    
    
    9.4
    %
    
    
    10.6
    %
    
    
    10.3
    %
    
    
    8.5
    %Dedicated voice
    
    
    1.3
    %
    
    
    0.9
    %
    
    
    1.3
    %
    
    
    1.3
    %
    
    
    1.0
    %
    
    
    1.1
    %
    
    
    1.3
    %Direct sales revenues
    
    
    23.4
    %
    
    
    21.4
    %
    
    
    18.4
    %
    
    
    18.5
    %
    
    
    19.1
    %
    
    
    19.5
    %
    
    
    21.4
    %Other
    
    
    
    
    
    
    0.3
    %
    
    
    0.6
    %
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    0.8
    %
    
    
    0.8
    %Total telecommunications revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross revenues  product mix (minutes)Domestic long-distance(5)
    
    
    135,236,248
    
    
    
    140,798,912
    
    
    
    134,198,098
    
    
    
    121,880,023
    
    
    
    129,293,178
    
    
    
    134,649,835
    
    
    
    176,065,320International long-distance
    
    
    83,191,655
    
    
    
    93,896,850
    
    
    
    98,873,877
    
    
    
    98,978,290
    
    
    
    91,288,985
    
    
    
    83,923,345
    
    
    
    79,458,519Dedicated voice
    
    
    9,571,155
    
    
    
    7,772,277
    
    
    
    9,364,583
    
    
    
    8,653,038
    
    
    
    9,653,915
    
    
    
    9,374,236
    
    
    
    14,751,696Active Retail Subscribers (in number of people):Dial-around(2)Beginning of Period
    
    
    199,375
    
    
    
    228,330
    
    
    
    215,187
    
    
    
    206,937
    
    
    
    192,678
    
    
    
    164,331
    
    
    
    138,857Adds
    
    
    112,223
    
    
    
    85,246
    
    
    
    100,624
    
    
    
    63,349
    
    
    
    46,518
    
    
    
    40,094
    
    
    
    37,582Churn
    
    
    (83,268
    )
    
    
    (98,389
    )
    
    
    (108,874
    )
    
    
    (77,608
    )
    
    
    (74,865
    )
    
    
    (65,568
    )
    
    
    (51,237
    )End of Period
    
    
    228,330
    
    
    
    215,187
    
    
    
    206,937
    
    
    
    192,678
    
    
    
    164,331
    
    
    
    138,857
    
    
    
    125,202Local dial toneBeginning of Period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,895
    
    
    
    14,359Adds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,112
    
    
    
    13,493
    
    
    
    12,772Churn
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (217
    )
    
    
    (2,029
    )
    
    
    (3,512
    )End of Period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,895
    
    
    
    14,359
    
    
    
    23,6191+(3)Beginning of Period
    
    
    72,008
    
    
    
    136,896
    
    
    
    174,486
    
    
    
    168,242
    
    
    
    161,570
    
    
    
    165,847
    
    
    
    172,162Adds
    
    
    109,646
    
    
    
    81,040
    
    
    
    43,964
    
    
    
    25,356
    
    
    
    25,344
    
    
    
    27,093
    
    
    
    23,574Churn
    
    
    (44,758
    )
    
    
    (43,450
    )
    
    
    (50,208
    )
    
    
    (32,028
    )
    
    
    (21,067
    )
    
    
    (20,778
    )
    
    
    (31,795
    )End of Period
    
    
    136,896
    
    
    
    174,486
    
    
    
    168,242
    
    
    
    161,570
    
    
    
    165,847
    
    
    
    172,162
    
    
    
    163,941Total subscribers (End of Period)
    
    
    365,226
    
    
    
    389,673
    
    
    
    375,179
    
    
    
    354,248
    
    
    
    333,073
    
    
    
    325,378
    
    
    
    312,762Direct Sales(6)Active Customer Base
    
    
    276
    
    
    
    254
    
    
    
    236
    
    
    
    227
    
    
    
    256
    
    
    
    252
    
    
    
    238Total top 10 billing
    
    $
    1,243
    
    
    $
    1,163
    
    
    $
    1,094
    
    
    $
    1,050
    
    
    $
    926
    
    
    $
    1,034
    
    
    $
    1,130Avg monthly revenue per user
(active subscriptions) in absolute dollars:(4)Dial-around
    
    $
    21.61
    
    
    $
    20.60
    
    
    $
    22.07
    
    
    $
    23.01
    
    
    $
    20.89
    
    
    $
    21.61
    
    
    $
    19.15Local dial tone
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11.51
    
    
    $
    28.53
    
    
    $
    37.621+
    
    $
    20.70
    
    
    $
    22.16
    
    
    $
    24.17
    
    
    $
    26.20
    
    
    $
    24.92
    
    
    $
    21.30
    
    
    $
    23.15
 13




---



##### 



1
    
    MRC/USF represents Monthly Recurring Charges and Universal Service Fund fees charged to the customers.2
    
    Dial-around refers to a product which allows a customer to make a call from any phone by dialing a 10-10-XXX prefix.3
    
    1+ refers to a product which allows a retail customer to directly make a long-distance call from their own phone by dialing 1 plus the
destination number.4
    
    Average monthly revenues per user is calculated as the revenues of the quarter divided by the number of users at the end divided by 3 to
get per monthly amount.5
    
    Includes Local Product Line Bulk/Package Rate Domestic Minutes6
    
    Represents Number of Parent Customers with Revenues greater than $0 in each calendar month. The following data is provided as additional information about the Companys
real estate operations. It should be read in conjunction with the quarterly
segment analysis provided herein. All amounts below are unaudited. Income producing properties
    
    September 30, 2004Occupancy
    
    Net Book
    
    
    
    
    
    Net
    
    Net Operating
    
    Interest
    
    NOI less
    
    Non-leveraged
    
    LeveragedProperty
    
    Location
    
    Rates
    
    Value
    
    Mortgage
    
    Equity
    
    Income (NOI)
    
    Expense
    
    Interest
    
    Return
    
    Return$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    %
    
    %Portage Place
    
    Peterborough, Ontario
    
    
    97.54
    %
    
    
    19,118
    
    
    
    9,926
    
    
    
    9,192
    
    
    
    1,530
    
    
    
    501
    
    
    
    1,028
    
    
    
    11
    %
    
    
    15
    %Southland Mall
    
    Winkler, Manitoba
    
    
    94.92
    %
    
    
    7,217
    
    
    
    5,299
    
    
    
    1,918
    
    
    
    690
    
    
    
    266
    
    
    
    424
    
    
    
    13
    %
    
    
    29
    %Suncoast Mall
    
    Goderich, Ontario
    
    
    97.17
    %
    
    
    7,731
    
    
    
    4,472
    
    
    
    3,259
    
    
    
    669
    
    
    
    229
    
    
    
    440
    
    
    
    12
    %
    
    
    18
    %Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    100.00
    %
    
    
    4,622
    
    
    
    2,326
    
    
    
    2,296
    
    
    
    376
    
    
    
    46
    (ii)
    
    
    331
    
    
    
    11
    %
    
    
    19
    %Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    83.76
    %
    
    
    1,156
    
    
    
    
    
    
    
    1,156
    
    
    
    108
    
    
    
    
    
    
    
    108
    
    
    
    12
    %
    
    
    12
    %1250 Steeles Ave. West
    
    Brampton, Ontario
    
    
    100.00
    %
    
    
    2,486
    
    
    
    1,608
    
    
    
    878
    
    
    
    229
    
    
    
    61
    
    
    
    168
    
    
    
    12
    %
    
    
    26
    %Imperial Square
    
    Guelph, Ontario
    
    
    100.00
    %
    
    
    5,573
    
    
    
    2,527
    
    
    
    3,046
    
    
    
    381
    
    
    
    68
    
    
    
    313
    
    
    
    
    (ii)
    
    
    
    (ii)47,903
    
    
    
    26,158
    
    
    
    21,745
    
    
    
    3,983
    
    
    
    1,171
    
    
    
    2,812Mortgages allocated to real estate under development
    
    
    
    
    
    
    
    
    
    
    2,886Other loans and mortgages
    
    
    
    
    
    
    
    
    
    
    1,13047,903
    
    
    
    30,174
    
    
    
    21,745Less: Internal management fees (i)
    
    
    (176
    )Other corporate costs
    
    
    (775
    )3,032
  (i)
    
    Income producing properties are internally managed and management fees are eliminated on consolidation(ii)
    
    During the first quarter of 2004, Imperial Square commenced its rental cycle through the opening of its anchor tenant,
Galaxy Theatre in January and a free standing A&W restaurant pad in March. An 11,200 sq ft
centre and a second restaurant pad are scheduled for completion in 2005, at which time, the Company expects to complete the
first mortgage financing. Current operations, net book value and net equity figures are not representative
of the final balances, therefore leveraged and non-leveraged returns are not being provided at this stage. 14




---



##### 



Segment analysis: The Company believes that providing the results of business segments on a
rolling eight-quarter basis, supplemented by commentary, provides meaningful
information for users of the consolidated financial statements. The Companys
continuing communications operations are: Telecommunications and Technologies.
Its other reportable segments are Real Estate and Corporate. Telecommunications Unaudited
    
    UnauditedNine months endedSeptember 302002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    2003
    
    2004$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesRetail
    
    
    21,623
    
    
    
    30,367
    
    
    
    32,110
    
    
    
    31,924
    
    
    
    31,718
    
    
    
    28,358
    
    
    
    26,229
    
    
    
    27,228
    
    
    
    94,401
    
    
    
    81,815Network services
    
    
    
    
    
    
    
    
    
    
    4,142
    
    
    
    3,079
    
    
    
    408
    
    
    
    4,696
    
    
    
    190
    
    
    
    161
    
    
    
    7,221
    
    
    
    5,04721,623
    
    
    
    30,367
    
    
    
    36,252
    
    
    
    35,003
    
    
    
    32,126
    
    
    
    33,054
    
    
    
    26,419
    
    
    
    27,389
    
    
    
    101,622
    
    
    
    86,862Operating costs and expenses:Telecommunication costs (exclusive of network
services, depreciation and amortization shown below)
    
    
    12,458
    
    
    
    19,543
    
    
    
    19,154
    
    
    
    19,265
    
    
    
    18,941
    
    
    
    16,635
    
    
    
    15,680
    
    
    
    15,349
    
    
    
    57,962
    
    
    
    47,664Telecommunication costs  network services
    
    
    1,995
    
    
    
    6,205
    
    
    
    2,165
    
    
    
    807
    
    
    
    (70
    )
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    9,177
    
    
    
    (203
    )Selling, general and administrative
    
    
    8,667
    
    
    
    13,556
    
    
    
    13,158
    
    
    
    13,027
    
    
    
    13,000
    
    
    
    13,990
    
    
    
    13,454
    
    
    
    13,126
    
    
    
    39,741
    
    
    
    40,570Provision for doubtful accounts
    
    
    2,273
    
    
    
    1,175
    
    
    
    1,131
    
    
    
    1,465
    
    
    
    1,661
    
    
    
    1,227
    
    
    
    1,740
    
    
    
    941
    
    
    
    3,771
    
    
    
    3,908Depreciation and amortization
    
    
    1,291
    
    
    
    1,826
    
    
    
    1,757
    
    
    
    1,994
    
    
    
    1,528
    
    
    
    1,602
    
    
    
    1,549
    
    
    
    1,415
    
    
    
    5,577
    
    
    
    4,566Operating loss
    
    
    (5,061
    )
    
    
    (11,938
    )
    
    
    (1,113
    )
    
    
    (1,555
    )
    
    
    (2,934
    )
    
    
    (400
    )
    
    
    (5,801
    )
    
    
    (3,442
    )
    
    
    (14,606
    )
    
    
    (9,643
    )
 Telecommunications business includes the operations of Acceris Communications
Corp. (formerly WorldxChange Corp.), acquired in June 2001, and the Agent and
Enterprise business of RSL.COM USA Inc. acquired in December 2002. The core
business is as a U.S. facilities-based telecommunications provider in the
retail long distance market. Telecommunications also provided a network
service offering that commenced in the fourth quarter of 2002 and was
discontinued in the third quarter of 2003. Telecommunications started offering
local dial tone products to its residential and small business customers in the
fourth quarter of 2003. Industry Regulation The telecommunications industry is subject to government regulation at federal,
state and local levels. Any change in current government regulation regarding
telecommunications pricing, system access, consumer protection or other
relevant legislation could have a material impact on results of operations.
Most of Acceris current operations are subject to regulation by the Federal
Communications Commission (FCC) under the Communications Act of 1934. In
addition, certain of its operations are subject to regulation by state public
utility or public service commissions. Changes in, or changes in interpretation
of, legislation affecting Acceris, could adversely affect operating results. The Telecommunication Act of
1996 (the 1996 Act), among other things, allows
the Regional Bell Operating Companies (RBOC) and others to enter the
long-distance business. Entry of the RBOCs or other entities, such as electric
utilities and cable television companies, into the long-distance business may
have a negative impact on Acceris business or its customers. Some of these
entrants are expected to prove to be strong competitors because they are better
capitalized, already have substantial customer bases, and enjoy cost advantages
relating to local telecom lines and access charges. This could adversely impact
operating results. In addition, the 1996 Act provides that state proceedings
may in certain instances determine access charges that must be paid to the
local exchange carriers. If these proceedings occur, rates could increase which
could lead to a loss of customers and weaker operating results. 15




---



##### 



Overview of Federal Regulation As a carrier offering telecommunications services to the public, Acceris is
subject to the provisions of the Communications Act of 1934, as amended, and
FCC regulations issued thereunder. These regulations require Acceris, among
other things, to offer its regulated services to the public on a
non-discriminatory basis at just and reasonable rates. Acceris is subject to
FCC requirements that they obtain prior FCC approval for transactions that
would cause a transfer of control of one or more regulated subsidiaries. Such
approval requirements may delay, prevent or deter transactions. International Service Regulation.Acceris possesses authority from the FCC,
granted pursuant to Section 214 of the Communications Act of 1934, to provide
international telecommunications service. The FCC has streamlined regulation of
competitive international services and has removed certain restrictions against
providing certain services. Presently, the FCC is considering a number of
international service issues that may further alter the regulatory regime
applicable to us. For instance, the FCC is considering revisions to the rules
regarding the rates that international carriers like us pay for termination of
calls to mobile phones located abroad. Pursuant to FCC rules, Acceris has cancelled its international and domestic FCC
tariffs and replaced them with a general service agreement and price lists. As
required by FCC rules, Acceris has posted these materials on its web site. The
detariffing of Acceris services has given it greater pricing flexibility for
its services, but it is not entitled to the legal protection provided by the
filed rate doctrine, which generally provides protections to carriers from
legal actions by customers that challenge the terms and conditions of service. Interstate Service Regulation.As an interexchange carrier (IXC), Acceris
interstate telecommunications services are regulated by the FCC. While Acceris
is not required to obtain FCC approval to begin or expand its interstate
operations, it is required to obtain FCC approvals for certain transactions
that would affect its ownership or the services it provides. Additionally,
Acceris must file various reports and pay certain fees and assessments. Acceris
is subject to the FCCs complaint jurisdiction and must contribute to the
federal Universal Service Fund (USF). Acceris must also comply with the
Communications Assistance for Law Enforcement Act (CALEA), and certain FCC
regulations which require telecommunications common carriers to modify their
networks to allow law enforcement authorities to perform electronic
surveillance. Overview of State Regulation Through certain of its subsidiaries, Acceris is authorized to provide
intrastate interexchange telecommunications services and, in certain states, is
authorized to provide competitive local exchange services by virtue of
certificates granted by state public service commissions. Acceris regulated
subsidiaries must comply with state laws applicable to all similarly certified
carriers including the regulation of services, payment of regulatory fees and
preparation and submission of reports. The adoption of new regulations or
changes to existing regulations may adversely affect its ability to provide
telecommunications services. Consumers may file complaints against Acceris at
the public service commissions. The certificates of authority Acceris holds can
be generally conditioned, modified, cancelled, terminated or revoked by state
public service commissions. Further, many states require prior approval or
notification for certain stock or asset transactions, or in some states, for
the issuance of securities, debts, guarantees or other financial transactions.
Such approvals can delay or prevent certain transactions. Overview of Ongoing Policy Issues Local Service. Through the 1996 Act, Congress sought to establish a competitive
and deregulated national policy framework for advanced telecommunications and
information technologies. To date, local exchange competition has not
progressed to a point where significant regulatory intervention is no longer
required. Regulators believed that a hands-off policy would drive local
exchange service into an adequately competitive market, but there continues to
be a strong need for policy issue clarification and 16




---



##### 



construction. Some policy changes have been addressed through the court system,
not the regulatory system. For instance, the FCC has attempted several times to
develop a list of UNEs which are portions of the Incumbent Local Exchange
Carrier (ILEC) networks and services that must be sold separately to
competitors. On several occasions, the courts have rejected the FCCs approach
to defining UNEs. The FCCs most recent attempt to develop rules, the Triennial
Review Order, was vacated by the U.S. Circuit Court of Appeals in Washington
D.C. on March 4, 2004. The Courts ruling went into effect on June 16, 2004.
In response, several competitive carriers filed appeals with the U.S. Supreme
Court to seek a stay and review of the U.S. Circuit Courts ruling. Those
requests for appeal have been denied. On August 20, 2004, the FCC issued interim UNE rules to replace those vacated
by the DC Circuit Court (Interim Rules) as well as a Notice of Proposed
Rulemaking (NPRM) seeking comments on new UNE rules. The Interim Rules
provide for a twelve-month transition plan consisting of two phases. First, on
an interim basis, ILECs are required to continue providing access to switching,
enterprise market loops, and dedicated transport under the same rates, terms
and conditions that applied under their interconnection agreements as of June
15, 2004. These rates, terms, and conditions shall remain in place until the
earlier of (1) the effective date of final unbundling rules, or (2) March 14,
2005. If there are no permanent rules by then, under phase two ILECs will only
be required to lease UNE-P switching at the higher of (1) the rate charged on
June 15, 2004 plus one dollar, or (2) the rate a state public utility
commission sets before March 14, 2005, plus one dollar. Second, in the absence
of FCC rules on enterprise loops or transport, an ILEC will only be required to
lease them at the higher of (1) 115% of the rate paid on June 15, 2004, or (2)
115% of the rate set by the state public utilities commission. This transition
period applies to existing customers / facilities and does not permit CLECs to
add new customers at these rates. On August 23, 2004, a group of ILECs appealed the Interim Rules to the D.C.
Circuit Court claiming that the FCC had impermissibly granted itself a stay of
the effect of the D.C. Circuit Courts earlier decision. In response, the
Court issued an Order on October 6, 2004 holding its proceedings in abeyance
until January 4, 2005. This court action ensures that the Interim Rules will
remain in place until at least January 4, 2005. Universal Service Fund. In 1997, the FCC issued an order implementing Section
254 of the 1996 Act, regarding the preservation of universal telephone service.
Section 254 and related regulations require all interstate and certain
international telecommunications carriers to contribute toward the USF, a fund
that provides subsidies for the provision of service to schools and libraries,
rural health care providers, low income consumers and consumers in high cost
areas. Quarterly, the Universal Service Administrative Company (USAC), which
oversees the USF, reviews the need for program funding and determines the
applicable USF contribution percentage that interstate telecommunications
carriers must contribute. While carriers are permitted to pass through the USF
charges to consumers, the FCC has strictly limited amounts passed through to
consumers in excess of a carriers determined contribution percentage. As discussed below, the industry is moving from traditional circuit-switched
telephone service to digitized IP-based communications. It is possible that
this trend could threaten the amount of revenues USAC can collect through the
USF system, and that the resulting revenue shortfall could prevent the system
from meeting its funding demands. Separately from the FCCs inquiry into the
regulation of IP-based voice service, the FCC could exercise its so called
permissive authority under the 1996 Act and assess USF contribution on VoIP
providers. To date, only some VoIP providers contribute to the USF. If VoIP
providers were exempted from USF contributions, telecommunications carriers
would likely pay significantly higher USF contributions; conversely, if VoIP
providers were required to contribute, traditional telecommunications carriers
would contribute less. In addition to the FCC, Congress is considering this
issue. Current Congressional debates are divided over whether IP-based
telephony service providers should be required to contribute to the USF. A
decision to require VoIP providers to contribute to the USF may adversely
affect Acceris provision of VoIP services. VoIP Notice of Proposed Rule Making.In March 2004, the FCC issued the VoIP
Notice of Proposed Rulemaking to solicit comments on many aspects of the
regulatory treatment of VoIP services (the VoIP 17




---



##### 



NPRM). The FCC continues to consider the possibility of regulating access to
IP-based services, but has not yet decided on the appropriate level of
regulatory intervention for IP-based service applications. Should the FCC rule
that Acceris software-based solution for VoIP deployment, and other similar
service applications should be regulated, its VoIP services may be adversely
affected. Further, the VoIP NPRM will likely address the applicability of access charges
to VoIP services. Access charges provide compensation to local exchange
carriers for traffic that originates or terminates on their networks. Certain
LECs have argued that certain types of VoIP carriers provide the same basic
functionality as traditional telephone service carriers, in that they carry a
customers call from an origination point to a termination destination. Any
ruling or decision from the FCC requiring VoIP carriers to pay access charges
to ILECs for local loop use may adversely affect Acceris VoIP services. The VoIP NPRM is also expected to address the extent to which CALEA will be
applicable to VoIP services. Recently, in a separate proceeding, the Federal
Bureau of Investigation and other federal agencies have asked the FCC to
clarify that VoIP is a telecommunications service, for the purpose of
subjecting VoIP to CALEAs wiretapping requirements. Broadband Deployment. Broadband refers to any platform capable of providing
high bandwidth-intensive content and advanced telecommunications capability.
The FCCs stated goal for broadband services is to establish regulatory
policies that promote competition, innovation and investment in broadband
services and facilities. Broadband technologies encompass evolving high-speed
digital technologies that offer integrated access to voice, high-speed data,
video-on-demand or interactive delivery services. The FCC is seeking to 1)
encourage the ubiquitous availability of broadband access to the Internet, 2)
promote competition across different platforms for broadband services, 3)
ensure that broadband services exist in a minimal regulatory environment that
promotes investment and innovation and 4) develop an analytical framework that
is consistent, to the extent possible, across multiple platforms. The FCC has
opened several inquiries to determine how to promote the availability of
advanced telecommunications capability with the goal of removing barriers to
deployment, encouraging competition and promoting broadband infrastructure
investment. For instance, the FCC is considering the appropriate regulatory
requirements for ILEC provision of domestic broadband telecommunications
services. The FCCs concern is whether the application of traditional common
carrier regulations to ILEC-provided broadband telecommunications services is
appropriate. On October 14, the FCC adopted an Order concluding that
fiber-to-the-curb (FTTC) loops shall be treated in the same manner as
fiber-to-the-home (FTTH) loops. Accordingly, ILECs will not be required to
offer FTTC to competitors as UNEs. The FCC defined FTTC as a local loop
consisting of fiber optic cable connecting to a copper distribution plant that
is not more than 500 feet from the customers premises or, in the case of
predominantly residential multiple dwelling units (MDUs), not more than 500
feet from the MDUs. The FCC also clarified that ILECs are not required to
build TDM capabilities into new packetized transmission facilities or add them
to facilities where they never existed. Under other existing regulations,
ILECs are treated as dominant carriers absent a specific finding to the
contrary for a particular market and, as dominant carriers, shall still be
subject to numerous regulations, such as tariff filing and pricing
requirements. On February 7, 2002, the FCC released its third biennial report on the
availability of broadband, in which it concluded that broadband is being
deployed in a reasonable and timely manner. The report showed that the advanced
telecommunications services market continues to grow and that the availability
of and subscribership to high-speed services increased significantly since the
last report. Additionally, the report noted that investment in infrastructure
for advanced telecommunications remains strong. The data in the report is
gathered largely from standardized information from providers of advanced
telecommunications capability including wireline telephone companies, cable
providers, wireless providers, satellite providers, and any other
facilities-based providers of 250 or more high-speed service lines (or wireless
channels) in a given state. Internet Service Regulation. The demand for high-speed Internet access has
increased significantly over the past several years as consumers increase their
Internet use. The FCC is active in reviewing the need for regulatory oversight
of Internet services and to date has advocated less regulation and more
market-based competition for broadband providers. The FCCs stated policy is to
promote the continued 18




---



##### 



development of the Internet and other interactive computer-based communications
services. There can be no certainty that the FCC will continue to take a
deregulatory approach to the Internet. Should the FCC increase regulatory
oversight of Internet services, Acceris cost for providing those services
could increase. Telecommunications revenue was $86,862 in the first nine months of 2004,
compared to $101,622 for the same period in 2003. The primary reason for the
decrease was related to reduced traffic on the Companys dial-around product.
The decrease in traffic for this product was due primarily to an internal
initiative to focus on a 1+ customer base with higher monthly billings. While
this improved the quality of the Companys revenue, the initial impact was a
decrease in gross revenues associated with this product. In addition, a $2,174
decrease in revenue related to the network service offering product that was
discontinued in July 2003. Telecommunications network expense was $47,461 in the first nine months of
2004, compared to $67,139 for the same period in 2003. The decrease over 2003
relates primarily to the inclusion of costs related to the network service
offering of $9,177 in the first nine months of 2003 and $203 recovery of costs
in 2004, related to the discontinued network service offering. The remainder of
the decrease is due to the decrease in telecommunications traffic, as discussed
above. Telecommunications S, G & A was $40,570 in the first nine months of 2004,
compared to $39,741 for the same period in 2003. Telecommunications provision for doubtful accounts was $3,908 in the first
nine months of 2004 compared to $3,771 in the first nine months of 2003. This
decrease is directly related to the shift of collection efforts to an external
resource and, to a lesser extent, the change in product mix throughout the year
and the shift in channels. Technologies Unaudited
    
    UnauditedNine months endedSeptember 302002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    2003
    
    2004$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesTechnology and patents
    
    
    47
    
    
    
    
    
    
    
    1,050
    
    
    
    1,049
    
    
    
    65
    
    
    
    450
    
    
    
    90
    
    
    
    
    
    
    
    2,099
    
    
    
    540Operating costs and expenses:Telecommunication costs (exclusive of depreciation
and amortization shown below)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    1,350
    
    
    
    669
    
    
    
    1,652
    
    
    
    954
    
    
    
    962
    
    
    
    774
    
    
    
    699
    
    
    
    830
    
    
    
    3,275
    
    
    
    2,303Research and development
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    119
    
    
    
    
    
    
    
    225Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    470
    
    
    
    517
    
    
    
    517
    
    
    
    517
    
    
    
    528
    
    
    
    564
    
    
    
    565
    
    
    
    566
    
    
    
    1,551
    
    
    
    1,695Operating loss
    
    
    (2,008
    )
    
    
    (1,186
    )
    
    
    (1,119
    )
    
    
    (422
    )
    
    
    (1,427
    )
    
    
    (888
    )
    
    
    (1,280
    )
    
    
    (1,515
    )
    
    
    (2,727
    )
    
    
    (3,683
    )
 The Technologies segment offers a proven network convergence solution for the
deployment of IP-based voice and data services over a single network. Acceris
has over nine years of experience developing Voice over Internet Protocol
(VoIP) technologies. The Companys proprietary soft-switch solution both
enables existing telecom service providers to reduce telecommunications costs
and permits new
communications service providers to enter the enhanced communications market
with limited investment. In addition, the Company has a patent portfolio that
includes two VoIP patents (the VoIP Patents) which the Company believes are
foundational VoIP patents for communications over traditional telecommunication
networks. The Company is pursuing opportunities to leverage its patents
through a focused licensing strategy that targets carriers, equipment vendors
and customers who are deploying IP for phone-to-phone communication. Technology licensing revenues and contributions are project based and, as such,
these amounts will vary from period to period based on the timing and size of
technology licensing projects and payments. 19




---



##### 



Technologies reported revenue of $540 in the first nine months of 2004 compared
to $2,099 for the same period of 2003. The revenue in 2004 relates to a
contract, which was entered into with a Japanese company in the third quarter
of 2003. The revenues in 2003 relate to two contracts, Accessline and the
Japanese company noted above. In the first nine months of 2004, Technologies S, G & A expense was $2,303,
down from $3,275 for the same period in 2003. It is anticipated that selling,
general and administrative expense will change from year to year and
quarter-to-quarter, based on the business volumes in the segment. Real Estate Unaudited
    
    UnauditedNine months endedSeptember 302002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    2003
    
    2004$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $RevenuesCanada
    
    
    1,704
    
    
    
    1,783
    
    
    
    1,988
    
    
    
    1,901
    
    
    
    2,127
    
    
    
    2,270
    
    
    
    2,181
    
    
    
    2,229
    
    
    
    5,672
    
    
    
    6,680Operating costs and expenses:Income producing properties
    
    
    946
    
    
    
    944
    
    
    
    1,047
    
    
    
    882
    
    
    
    999
    
    
    
    1,266
    
    
    
    1,256
    
    
    
    1,127
    
    
    
    2,873
    
    
    
    3,649Depreciation and amortization
    
    
    60
    
    
    
    102
    
    
    
    63
    
    
    
    68
    
    
    
    253
    
    
    
    298
    
    
    
    304
    
    
    
    321
    
    
    
    233
    
    
    
    923Operating income
    
    
    698
    
    
    
    737
    
    
    
    878
    
    
    
    951
    
    
    
    875
    
    
    
    706
    
    
    
    621
    
    
    
    781
    
    
    
    2,566
    
    
    
    2,108
 The Companys real estate business, Counsel Real Estate Inc., invests in and
develops income-producing commercial properties, primarily retail shopping
centres, and provides property management services. Revenue generated in the first nine months of 2004 was $6,680 compared to
$5,672 in the same period of 2003. The main reason for the increase was the
addition of two new tenants for Imperial Square, Galaxy Theatres and A&W
Restaurants for $840, and a general increase in rents, operating and realty tax
recoveries from other properties. Income producing properties expense increased by $776 to $3,649 for the first
nine months of 2004 compared to $2,873 in the same period in 2003. The increase
relates primarily to additional Imperial Square operating costs for the two new
tenants of $229, and general increases in all other operating expenses for the
other properties, which are being offset by the recoveries recorded in
revenues. The Company has two active development projects, Imperial Square and 1250
Steeles. Imperial Square, an approximately 57,000 sq. ft. retail centre, is located in
Guelph, Ontario. The Imperial Square property development of the strip centre
is expected to cost approximately $8,700, and will be completed in the fourth
quarter of 2004. The Company is funding this development through a
non-revolving construction loan of up to $4,948, bearing interest at the
greater of 9.25% or prime plus 3%. The other development project, 1250 Steeles Avenue West, is located in
Brampton, Ontario. Construction commenced in the third quarter of 2004 and is
expected to cost approximately $1,500. The
project is scheduled for completion in the fourth quarter of 2004. 20




---



##### 



Corporate Unaudited
    
    UnauditedNine months endedSeptember 302002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    2003
    
    2004$
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Operating costs and expenses:Selling, general and administrative
    
    
    2,788
    
    
    
    1,305
    
    
    
    1,096
    
    
    
    796
    
    
    
    1,236
    
    
    
    1,179
    
    
    
    1,251
    
    
    
    1,422
    
    
    
    3,197
    
    
    
    3,852Depreciation and amortization
    
    
    258
    
    
    
    123
    
    
    
    25
    
    
    
    18
    
    
    
    17
    
    
    
    16
    
    
    
    19
    
    
    
    24
    
    
    
    166
    
    
    
    59Operating loss
    
    
    (3,046
    )
    
    
    (1,428
    )
    
    
    (1,121
    )
    
    
    (814
    )
    
    
    (1,253
    )
    
    
    (1,195
    )
    
    
    (1,270
    )
    
    
    (1,446
    )
    
    
    (3,363
    )
    
    
    (3,911
    )
 Head office costs for the nine months ended September 30, 2004 amounted to
$3,911 compared to $3,363 for the same period in 2003. Management expects
corporate costs to remain at levels experienced in recent quarters. 21




---



##### 



CAPITAL RESOURCES AND LIQUIDITY Summary of Consolidated Balance Sheet Data September 30,
    
    December 31,2004
    
    2003$
    
    $Total assets
    
    
    108,630
    
    
    
    143,589Working capital deficiency
    
    
    (31,761
    )
    
    
    (21,933
    )Long-term financial liabilities
    
    
    75,446
    
    
    
    88,693
 Working capital The Companys working capital declined $9,828 in the first nine months of 2004
resulting in a working capital deficit of $31,761 at September 30, 2004,
compared to $21,933 at December 31, 2003. The primary change in working
capital in the nine months is the decline in cash and cash equivalents used to
fund Acceris operations. Uses of cash in 2004 are described below. Sources of funding The Company has $7,680 in cash and cash equivalents and short-term investments
at September 30, 2004 compared to $19,377 at December 31, 2003. Sources of
funding for the first nine months were from the proceeds from the sale of the
retirement homes of $8,400, the sale of the BUI shares of $3,581 and real
estate operations. In October 2004, Acceris completed the issuance of a $5,000 convertible term
note. This financing is intended to fund Acceris for the remainder of 2004,
reducing its reliance on Counsel for funding. Uses of funding In the first nine months of 2004, $11,702 was used to fund the operations of
Acceris under the Keep Well agreement (discussed below). Acceris used the funds
to fund operations of $6,960, improve working capital by $4,484, reduce
borrowings from its asset based lender by $4,862 and to make scheduled lease
payments of $2,104. In addition to funding from Counsel, Acceris also disposed
of its BUI shares for proceeds of $3,581. Counsel also made scheduled mortgage
payments and acquired common shares for cancellation pursuant to our normal
course issuer bid. Acceris has incurred substantial operating losses and negative cash flows from
operations since inception and had a shareholders deficit of $58,190 and
negative working capital of $22,092 at September 30, 2004. Acceris is
financing its operations through amounts provided by Counsel with an
outstanding loan balance of $50,006 and a revolving credit facility with an
outstanding balance of $7,265, as of September 30, 2004. Counsel has agreed to
fund, through long-term inter-company advances or equity contributions, all
capital investment, working capital or other operational cash requirements of
Acceris (the Keep Well). The Keep Well obligates Counsel to continue its
financial support of Acceris through June 30, 2005. During the first nine
months of 2004, Counsel advanced Acceris approximately $11,702 under its Keep
Well. During 2004, Acceris intends to approach the capital markets directly to
raise funds. Should this not occur Acceris will call upon the Keep Well. At
September 30, 2004, Counsel has $7,680 in cash and equivalents and short-term
investments to support any requirements under the Keep Well. Counsel also has
the ability to obtain additional financing on its existing assets, including
but not limited to its 91% equity interest in Acceris and loans receivable from
Acceris, as well as its long-term care, real estate and other corporate assets.
While management believes that the Company will be able to meet its
commitments, the possibility exists that unforeseen events, adverse business
conditions, or other factors 22




---



##### 



could affect the Companys liquidity. If such events or conditions occur,
management believes the Company could pursue alternative plans. However, there
can be no assurance that such alternatives will be available or that management
will be successful in their implementation. In August 2004, the Company implemented a resizing of Acceris targeted at
reducing its operating costs. The cost cutting reflects the continued
efficiencies created by the ongoing integration of the telecommunications
operations, related to its four acquisitions over the last three years. As a
result of the resizing, the telecommunications work force was reduced by
approximately 20 percent. The reduction affected staff in the San Diego,
Pittsburgh and Somerset facilities. Management has recorded approximately $400
in expenses related to the August 2004 restructuring in the third quarter,
recorded in selling, general and administration expense and anticipates that it
will incur expenses, in the fourth quarter, of $1,000 to $1,500 related to
anticipated exit of facilities and the removal of assets from production. While management believes that the Company will be able to meet its
commitments, the possibility exists that unforeseen events, adverse business
conditions, or other factors could affect the Companys liquidity. If such
events or conditions occur, management believes the Company could pursue
alternative plans. However, there can be no assurance that such alternatives
will be available or that management will be successful in their
implementation. Convertible preferred shares On December 19, 2003, the Company completed a private placement of a new series
of convertible preferred shares for proceeds of $15,000. The preferred shares
are entitled to a dividend of 6% per annum, payable semi-annually on January 1
and July 1 of each year, commencing July 1, 2004. If cash dividends are not
paid when due, the Company must pay the dividend via the issuance of additional
preferred shares, subject to an aggregate maximum of 2,000,000 Series A
preferred shares. The preferred shares are convertible on a one-for-one basis
into common shares by the holder and the Company, contingent on certain
conversion factors. The preferred shares are redeemable at the option of the
holder, commencing on January 1, 2009, at their original price plus all accrued
and unpaid dividends. Under Canadian GAAP, the Company accounts for such a financial instrument as a
hybrid instrument because of its debt and equity components. At December 19,
2003, $11,200 of the instrument was included in liabilities, while $3,800 of
the instrument was included in shareholders equity. On July 1, 2004, the Company declared a dividend on its Series A preferred
shares, which was paid by the issuance of 319,731 preferred shares. Property, plant and equipment Investment in property, plant and equipment for the three and nine months ended
September 30, 2004 was $478 and $886, respectively, (same
periods in 2003 
$333 and $1,710, respectively). The Company expects to invest approximately
$1,500 in property, plant and equipment during fiscal 2004. Funding for these
investments is expected to come from cash on hand and short-term investments,
operating cash flows, and from funds raised by Acceris. Property under development Investment in property under development for the three months and nine months
ended September 30, 2004 was $439 and $3,884, respectively (same periods in
2003  $994 and $1,777, respectively). The Company expects to invest
approximately $5,600 in property under development in fiscal 2004. Funding for
these investments is expected to come from long term financing, cash on hand
and short-term investments, and real estate operating cash flows. 23




---



##### 



Acquisition of securities On December 12, 2003, the Company renewed its normal course issuer bid to
purchase up to 2,430,113 common shares or 5% of the outstanding common shares
of the Company, during the 12-month period beginning December 16, 2003 and
ending on December 15, 2004. During the first nine months of 2004 the Company acquired 700,000 common shares
for $408 pursuant to the bid, compared to 1,337,200 shares acquired for $3,431
in first nine months of 2003 (third quarter 2003  313,300 shares for $1,430).
In the first nine months of 2003, the Company retired $1,700 of convertible
debentures for $1,289. Contingencies The Company, from time to time, is involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. Other
than set out below, the Company is not aware of any pending or threatened
proceedings that would have a material adverse effect on the consolidated
financial condition or future results of the Company. On October 31, 2003, the Company settled its outstanding 6% convertible
debentures at maturity by delivering 690 common shares for each thousand
dollars of principal, resulting in the issuance of 28.2 million common shares.
A significant debenture holder filed a lawsuit to restrain the Company from
satisfying its obligation to repay the debentures at maturity by delivering
common shares. On October 28, 2003 the Ontario Superior Court of Justice
dismissed the lawsuit. The debenture holder has appealed this decision. On April 16, 2004, certain shareholders of Acceris (the Plaintiffs) filed a
putative derivative complaint in the Superior Court of the State of California
in and for the County of San Diego, (the Complaint) against Acceris,
WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel as well
as certain present and former officers and directors of Acceris, some of whom
also are or were directors and/or officers of the other corporate defendants
(collectively, the Defendants). The Complaint alleges, inter alia, that the
Defendants, in their respective roles as controlling shareholder and directors
and officers of Acceris committed breaches of the fiduciary duties of care,
loyalty and good faith and were unjustly enriched, and that the individual
Defendants committed waste of corporate assets, abuse of control and gross
mismanagement. The Plaintiffs seek compensatory damages, restitution,
disgorgement of allegedly unlawful profits, benefits and other compensation,
attorneys fees and expenses in connection with the Complaint. Acceris and
Counsel believe that these claims, in their entirety, are without merit and
intend to vigorously defend this action. There is no assurance that this
matter will be resolved in Acceris or Counsels favour and an unfavourable
outcome of this matter could have a material adverse impact on the Companys
business, results of operations, financial position or liquidity. Counsel, Acceris and several of Acceris current and former executives and
Acceris board members were named in a securities action filed in the Superior
Court of the State of California in and for the County of San Diego on April
16, 2004, in which the plaintiffs made claims nearly identical to those set
forth in the derivative suit described above. Acceris and Counsel believe that
these claims in their entirety are without merit and intend to vigorously
defend this action. There is no assurance that this matter will be resolved in
Acceris and Counsels favour and an unfavourable outcome of this matter could
have a material adverse impact on the Companys business, results of
operations, financial position or liquidity. In connection with Acceris efforts to enforce its patent rights, Acceris
Communications Technologies Inc. filed a patent infringement lawsuit against
ITXC Corp. (ITXC) in the United States District Court of the District of New
Jersey on April 14, 2004. The complaint alleges that ITXCs VoIP services and
systems infringe the Companys U.S. Patent No. 6,243,373, entitled Method and
Apparatus for Implementing a Computer Network/Internet Telephone System. On
May 7, 2004, ITXC filed a lawsuit against Acceris Communications Technologies
Inc., and the Company, in the United States District Court for the District of
New Jersey for infringement of five ITXC patents relating to VoIP technology,
directed generally to the transmission of telephone calls over the Internet and
the completion of telephone calls by switching 24




---



##### 



them off the Internet and onto a public switched telephone network. Acceris
believes that the allegations contained in ITXCs complaint are, in their
entirety, without merit and Acceris intends to provide a vigorous defense to
ITXCs claims. There is no assurance that this matter will be resolved in
Acceris favour and an unfavourable outcome of this matter could have a
material adverse impact on the
Companys business, results of operations, financial position or liquidity. At Acceris Adjourned Meeting of Stockholders held on December 30, 2003, the
stockholders approved an amendment to the Articles of Incorporation, deleting
Article VI thereof (regarding liquidations, reorganizations, mergers and the
like). Stockholders who were entitled to vote at the meeting and advised
Acceris in writing prior to the vote on the amendment, that they dissented and
intended to demand payment for their shares if the amendment was effectuated,
were entitled to exercise their appraisal rights and obtain payment in cash for
their shares under Sections 607.1301  607.1333 of the Florida Business
Corporation Act, provided their shares were not voted in favor of the
amendment. In January 2004, appraisal notices in compliance with Florida
corporate statutes were sent to all stockholders who had advised Acceris of
their intention to exercise their appraisal rights. The appraisal notices
included Acceris estimate of the fair value of its shares, being $4.00 per
share on a post-split basis. These stockholders had until February 29, 2004 to
return their completed appraisal notices along with certificates for the shares
for which they were exercising their appraisal rights. Approximately 33
stockholders holding approximately 74,000 shares had returned completed
appraisal notices by February 29, 2004. A stockholder of 20 shares notified
accepted of the offer of $4.00 per share, while the stockholders of the
remaining shares did not accept the offer. Subject to the qualification that
Acceris may not make any payment to a stockholder seeking appraisal rights if,
at the time of payment, its total assets are less than its total liabilities,
stockholders who accepted its offer to purchase their shares at the estimated
fair value will be paid for their shares within 90 days of receipt of a duly
executed appraisal notice. If Acceris should be required to make any payments
to dissenting stockholders, Counsel will fund any such amounts through the
purchase of shares of common stock. Stockholders who did not accept Acceris
offer were required to indicate their own estimate of fair value. Because
Acceris did not agree with the estimates submitted by most of the dissenting
shareholders, Acceris has sought a judicial determination of the fair value of
the common stock held by the dissenting stockholders. On June 24, 2004,
Acceris filed suit against the dissenting shareholders seeking a declaratory
judgment, appraisal and other relief in the Circuit Court for the 17th Judicial
District in Broward County, Florida. There is no assurance that this matter
will be resolved in Acceris favour and an unfavourable outcome of this matter
could have a material adverse impact on the Companys business, results of
operations, financial position or liquidity. Guarantees The Company has guaranteed the repayment of certain mortgages amounting to
$40,447. Seven of these mortgages, amounting to $31,103, are payable by a
limited partnership in which the Company has a 50% equity interest. The
Companys investment in this limited partnership has a carrying value of $nil.
In 1984 the Company sold seven long-term care facilities to the limited
partnership, and the Company continues to act as guarantor for the repayment of
the first mortgages on the facilities, which were assumed by the limited
partnership. The limited partnership is in compliance with the terms of the
mortgages and, accordingly, the Company has not recognized any liability that
may arise under the guarantees provided. The Company believes that the value
of the facilities, which have been provided as collateral for the guarantee, is
in excess of the amount of the mortgages and, on a sale or liquidation, would
be sufficient to reimburse the Company for any payments that became due under
these guarantees. In addition, the Company has provided a guarantee for the repayment of a
mortgage of $9,344 payable by another limited partnership. In 1985 the Company
sold a long-term care facility to the limited partnership. The mortgage on the
facility was assumed by the partnership and continues to be guaranteed by the
Company. The Company receives a fee for this guarantee. The Company has no
equity interest in the partnership; however, it does receive an annual
incentive fee from the partnership based on the partnerships financial
performance, and is entitled to participate in the proceeds of a sale or
refinancing of the facility. The limited partnership is in compliance with the
terms of the mortgage and, accordingly, the Company has not recognized any
liability that may arise under this guarantee. The 25




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##### 



Company believes that the value of the facility, which has been provided as
collateral for the guarantee, is in excess of the amount of the mortgage and,
on a sale or liquidation, would be sufficient to reimburse the
Company for any payment that became due under this guarantee. In October 2004, Counsel agreed to subordinate all of its loans in Acceris in
favour of both the revolving credit facility and newly issued convertible term
note. Under the subordination agreement, Counsel further agreed to guarantee
Acceris revolving credit facility and the October 2004 convertible term note
with a face obligation of $5,000 and to pledge all of its shares owned in
Acceris as security for the related debts. At September 30, 2004, $7,265 was
owing under the revolving credit facility. CRITICAL ACCOUNTING ESTIMATES Managements Discussion and Analysis (MD&A) of financial condition and
results of operations discusses the Companys interim consolidated financial
statements, which have been prepared in accordance with accounting policies
generally accepted in Canada (Canadian GAAP). The preparation of these
interim financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgments, including those related to the
application of purchase accounting, the assessment of recoverability of
customer and loans receivables, the valuation of portfolio investments, and the
cash-flows expected to be derived from long lived assets including property
under development, income producing properties, property, plant and equipment
and intangible assets. Management bases its estimates and judgments on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. This discussion and analysis should be read in conjunction with the Companys
audited annual consolidated financial statements for the year ended December
31, 2003 and the notes thereto. To aid in the understanding of the Companys
financial reporting, its critical accounting policies are described below.
These policies have the potential to significantly impact the Companys
financial statements, either because of the significance of the financial
statement item to which they relate, or because they require judgment and
estimation due to the uncertainty involved in measuring, at a specific point in
time, events which are continuous in nature. The Company has identified its
most critical accounting estimates to be the following: Revenue recognition Telecommunication services Revenue is generally recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Companys
price to the customer is fixed or determinable, and collection of the resulting
receivable is reasonably assured. Revenue is derived from telecommunications
usage, based on minutes of use. Revenue derived from usage is recognized as
services are provided, based on agreed upon usage rates and net of estimated
bad debts, customer credits and billing errors, which are recorded at the same
time the corresponding revenue is recognized. Revenue for a period is
calculated from information received through the Companys network switches.
Bad debts, customer credits and billing errors are significant estimates made
by management based on a number of factors including historical experience and
current trends. Revenues from billings for services rendered where
collectibility cannot be determined are recognized when the cash collections to
be retained by the Company are finalized. Revenues for the Companys network service offering, which it began to sell in
November 2002 and ceased selling in July 2003, are accounted for using the
unencumbered cash method. The Company determined that collectibility of the
amounts billed to customers was not reasonably assured at the time of the
billing. Under its agreements with local exchange carriers (LECs), cash
collections remitted to the Company are subject to adjustment, generally over
several months. Accordingly, the Company 26




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##### 



recognizes revenue when the actual cash collections to be retained by the
Company are finalized and unencumbered. There is no further billing of
customers for the network service offering subsequent to the programs
termination. Technology licensing Revenue from the sale of software licenses is recognized when a non-cancelable
agreement is in force, the license fee is fixed or determinable, acceptance has
occurred and collectibility is reasonably assured. Maintenance and support
revenue is recognized ratably over the term of the related agreements. When a
license of technology requires continued support or involvement of the Company,
contract revenue is spread over the period of the required support or
involvement. Valuation of portfolio investments Portfolio investments represent investments in both publicly traded and
privately held companies. These investments are accounted for using the cost
method. Under the cost method, the investment is initially recorded at cost
and earnings from such investments are only recognized to the extent received
or receivable. Provisions for loss in value are recorded if a decline in value
is considered to be other than temporary. Neither unrealized gains nor
recoveries in valuation, if any, are reflected in the consolidated financial
statements. Valuation of intangible assets Effective 2002, companies are no longer permitted to amortize goodwill on a
periodic or routine basis. Instead, the carrying value of goodwill must be
assessed at least annually based on a comparison of a reporting units carrying
amount, including goodwill, to the fair value of the reporting unit. Intangible assets are recorded at fair value upon acquisition. Finite-life
intangible assets are amortized on a straight-line basis over their estimated
useful life of one to five years. On an ongoing basis, management reviews the carrying value of intangible assets
and the amortization of finite-life intangible assets, taking into
consideration any events and circumstances that might have impaired their
carrying values. The Company assesses impairment by determining whether the
carrying value exceeds the fair value, determined as the consideration that
would be agreed upon in an arms length transaction. If the fair value is
determined to be less than the net book value, the excess of the net book value
over the fair value is charged to operations in the period in which such
impairment is determined by management. Valuation of income producing properties Income producing properties are carried at the lower of depreciated cost and
net recoverable amount. A write-down to net recoverable amount is recognized
when a propertys undiscounted cash flows are less than its carrying value.
Projections of future cash flows take into account the specific business plan
for each property and managements best estimate of the most probable set of
economic conditions anticipated to prevail in the market. The use of net
recoverable amount to assess the carrying value at which a property is reported
assumes the property will be held for the long term. Otherwise, the net
realizable value method is used. Estimated net realizable value represents the
estimated selling price reduced by any costs expected until final disposition,
assuming reasonable market conditions. Income taxes Counsel operates in Canada and the United States and is therefore subject to
income taxes in multiple jurisdictions. The income tax expense reported in the
statement of operations is based on a number of different estimates made by
management. The effective tax rate can change from year to year based on the
mix of income or loss among the different jurisdictions in which the Company
operates, changes in tax laws in these jurisdictions, and changes in the
estimated values of future tax assets and liabilities recorded on the balance
sheet. The income tax expense reflects an estimate of cash taxes expected to 27




---



##### 



be paid in the current year, as well as a provision for changes arising this
year in the value of future tax assets and liabilities. The likelihood of
recovering value from future tax assets such as loss carry forwards and the
future tax depreciation of capital assets are assessed at each quarter-end and
a valuation allowance may be established or modified. Changes in the amount of
the valuation allowance required can materially increase or decrease the tax
expense in a period. Significant judgment is applied to determine the
appropriate amount of valuation allowance to record. Material changes in
income tax assets, liabilities, expense and recoveries may occur in the short
term. Restrictions in the Companys ability to utilize income tax loss carry forwards
have occurred in the past due to the application of change in ownership tax
rules in the United States. There is no certainty that the application of
these rules may not re-occur, resulting in further restrictions on the
Companys income tax loss carry forwards existing at a particular time. Any
such additional limitations could require the Company to pay income taxes in
the future and record an income tax expense to the extent of such liability. The Company could be liable for income taxes on an overall basis while having
unutilized tax loss carry forwards, since these losses may be applicable to one
jurisdiction and/or particular line of business while earnings may be
applicable to a different jurisdiction and/or line of business. Additionally,
income tax loss carry forwards may expire before the Company has the ability to
utilize such losses in a particular jurisdiction and there is no certainty that
current income tax rates will remain in effect at the time when the Company has
the opportunity to utilize reported tax loss carry forwards. 28




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##### 



NEW ACCOUNTING PRONOUNCEMENTS Generally accepted accounting principles and general standards of financial
statement presentation Effective January 1, 2004, the Company has adopted the new recommendation of
the Canadian Institute of Chartered Accountants (CICA) with respect to
accounting standards surrounding GAAP and general standards of financial
statement presentation. These standards lay out a framework for application of
GAAP and the fair presentation of financial standards in accordance with GAAP.
This standard is effective for fiscal years beginning on or after October 1,
2003. As a result of these new recommendations, effective January 1, 2004, the
Company adopted the change to amortize its income producing properties on a
straight-line basis, over their remaining useful economic life, as the sinking
fund method of amortization is no longer considered to be GAAP. Previously,
income producing properties were amortized using the sinking fund method,
whereby the cost of the building was amortized over a maximum period of 30
years in a series of annual installments increasing at a rate of 5%, compounded
annually. This change in accounting policy has been applied prospectively and
has the effect of increasing the net loss for the nine months ended September
30, 2004 by $459. Stock-based compensation Effective January 1, 2004, the Company adopted Section 3870 of the CICA
Handbook, Stock-based Compensation and Other Stock-based Payments(CICA HB
3870). This standard requires the Company to recognize an expense in the
financial statements for all forms of employee stock-based compensation,
including stock options. The adoption of the new accounting principle for the
Company has been applied retroactively, without restatements to prior periods.
Retained earnings at December 31, 2003 was reduced by $528, with an offsetting
increase in contributed surplus. A compensation expense of $599 has been
recognized in first nine months of 2004. Consolidation of variable interest entities The CICA issued accounting guideline AcG-15, Consolidation of Variable Interest
Entities(VIEs), which will be effective for all fiscal periods beginning on
or after November 1, 2004. The guideline requires the Company to identify VIEs
in which it has an interest, determine whether it is the primary beneficiary of
such entities, and, if so, to consolidate the VIE. A VIE is an entity that is
structured such that either (a) the equity is not sufficient to permit the
entity to finance its activities without external support, or (b) equity
investors lack either direct or indirect ability to make decisions about the
entitys activities, an obligation to absorb expected losses or the right to
receive expected residual returns. A primary beneficiary is an enterprise that
will absorb a majority of a VIEs expected losses, receive a majority of its
expected residual returns, or both. The Company is currently in the process of
identifying any potential impact on its financial statements and is planning on
implementing this standard in 2005. 29




---



##### 



CONSOLIDATED
FINANCIAL STATEMENTS COUNSEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars) September 30,
    
    December 31,2004
    
    2003$
    
    $(Unaudited)
    
    (Audited)AssetsCurrent assetsCash and cash equivalents
    
    
    3,404
    
    
    
    16,996Short-term investments (market value $4,592; 2003 - $4,525)
    
    
    4,276
    
    
    
    2,381Accounts receivable (net of allowance for doubtfulaccounts of $2,267; 2003 - $3,008)
    
    
    14,664
    
    
    
    18,719Loans receivable
    
    
    2,911
    
    
    
    2,773Prepaid expenses and deposits
    
    
    2,770
    
    
    
    2,863Assets of
discontinued operations (note 9)
    
    
    1,629
    
    
    
    2,31529,654
    
    
    
    46,047Long-term assetsIncome producing properties (note 4)
    
    
    47,903
    
    
    
    42,225Properties under development (note 5)
    
    
    6,114
    
    
    
    7,600Loans receivable
    
    
    3,380
    
    
    
    3,894Portfolio investments
    
    
    4,295
    
    
    
    4,745Property, plant and equipment, net
    
    
    4,988
    
    
    
    7,787Intangible assets, net
    
    
    5,872
    
    
    
    8,546Goodwill
    
    
    947
    
    
    
    947Other assets
    
    
    1,245
    
    
    
    896Assets of
discontinued operations (note 9)
    
    
    4,232
    
    
    
    20,902108,630
    
    
    
    143,589LiabilitiesCurrent liabilitiesRevolving credit facility
    
    
    7,265
    
    
    
    12,127Accounts payable and accrued liabilities
    
    
    33,241
    
    
    
    33,404Unearned revenue
    
    
    970
    
    
    
    4,011Current portion of mortgages and loans payable
    
    
    6,390
    
    
    
    4,377Current portion of capital leases
    
    
    2,140
    
    
    
    2,715Future income tax liabilities
    
    
    1,501
    
    
    
    1,110Income tax payable
    
    
    1,030
    
    
    
    524Liabilities of discontinued operations (note 9)
    
    
    8,878
    
    
    
    9,71261,415
    
    
    
    67,980Long-term liabilitiesMortgages and loans payable
    
    
    23,784
    
    
    
    24,057Capital leases
    
    
    
    
    
    
    1,631Convertible preferred shares
    
    
    12,115
    
    
    
    11,200Future income tax liabilities
    
    
    39,547
    
    
    
    37,934Liabilities of discontinued operations (note 9)
    
    
    
    
    
    
    13,871136,861
    
    
    
    156,673Non-controlling interest
    
    
    1,154
    
    
    
    1,066Contingencies and guarantees (note 6)Shareholders equity (deficiency)
    
    
    (29,385
    )
    
    
    (14,150
    )108,630
    
    
    
    143,589
 The accompanying notes are an integral part of these interim consolidated
financial statements. These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2003. 30




---



##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY)
For the period ended September 30, 2004 (In thousands of U.S. dollars)
(Unaudited) Equity
    
    EquityCapital Stock
    
    
    
    
    
    component
    
    component
    
    Foreign
    
    
    
    
    
    Totalof convertible
    
    of convertible
    
    currency
    
    Retained
    
    Shareholders'No. of common
    
    
    
    
    
    Contributed
    
    preferred
    
    debentures
    
    translation
    
    earnings
    
    equityshares
    
    Amount
    
    surplus
    
    shares
    
    payable
    
    adjustment
    
    (deficit)
    
    (deficiency)(In 000's)
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $Balance   December 31, 2001
    
    
    22,493
    
    
    
    102,852
    
    
    
    8,883
    
    
    
    
    
    
    
    41,833
    
    
    
    
    
    
    
    (118,074
    )
    
    
    35,494Common shares purchased for cancellation
    
    
    (748
    )
    
    
    (3,418
    )
    
    
    1,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,532
    )Accretion of equity component of convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,029
    
    
    
    
    
    
    
    (3,029
    )
    
    
    Gain on retirement of convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    payable, net of income taxes of $15
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    (147
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,931
    )
    
    
    (28,931
    )Balance   December 31, 2002
    
    
    21,745
    
    
    
    99,434
    
    
    
    10,832
    
    
    
    
    
    
    
    44,652
    
    
    
    
    
    
    
    (150,034
    )
    
    
    4,884Common shares purchased for cancellation
    
    
    (1,352
    )
    
    
    (6,153
    )
    
    
    3,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,525
    )Equity component of convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800Debentures converted to common shares
    
    
    28,194
    
    
    
    40,861
    
    
    
    4,474
    
    
    
    
    
    
    
    (45,335
    )
    
    
    
    
    
    
    
    
    
    
    Accretion of equity component of convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,515
    
    
    
    
    
    
    
    (2,515
    )
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,112
    
    
    
    
    
    
    
    3,112Gain on retirement of convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    payable, net of income taxes of $66
    
    
    
    
    
    
    
    
    
    
    671
    
    
    
    
    
    
    
    (1,832
    )
    
    
    
    
    
    
    
    
    
    
    (1,161
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,260
    )
    
    
    (22,260
    )Balance   December 31, 2003
    
    
    48,587
    
    
    
    134,142
    
    
    
    19,605
    
    
    
    3,800
    
    
    
    
    
    
    
    3,112
    
    
    
    (174,809
    )
    
    
    (14,150
    )Adjustment related to the adoption of
new accounting pronouncement (note 2)
    
    
    
    
    
    
    
    
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528
    )
    
    
    Re-stated balance   December 31, 2003
    
    
    48,587
    
    
    
    134,142
    
    
    
    20,133
    
    
    
    3,800
    
    
    
    
    
    
    
    3,112
    
    
    
    (175,337
    )
    
    
    (14,150
    )Common shares purchased for cancellation
    
    
    (700
    )
    
    
    (1,932
    )
    
    
    1,594
    
    
    
    
    
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    (408
    )Equity component of convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120Dividend on convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    (120
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    486Stock based compensation (note 2)
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,922
    )
    
    
    (15,922
    )Balance  September 30, 2004
    
    
    47,887
    
    
    
    132,210
    
    
    
    22,336
    
    
    
    3,920
    
    
    
    
    
    
    
    3,528
    
    
    
    (191,379
    )
    
    
    (29,385
    )
 The accompanying notes are an integral part of these interim consolidated
financial statements. These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2003. 31




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##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30 (In thousands of U.S. dollars)
(Unaudited) Three months ended September 30
    
    Nine months ended September 302004
    
    2003
    
    2004
    
    2003$
    
    $
    
    $
    
    $RevenuesTelecommunication services
    
    
    27,389
    
    
    
    35,003
    
    
    
    86,862
    
    
    
    101,622Communication technology licensing
    
    
    
    
    
    
    1,049
    
    
    
    540
    
    
    
    2,099Income producing properties
    
    
    2,229
    
    
    
    1,901
    
    
    
    6,680
    
    
    
    5,67229,618
    
    
    
    37,953
    
    
    
    94,082
    
    
    
    109,393Operating costs and expensesTelecommunication costs (exclusive of depreciation
and amortization shown below)
    
    
    15,349
    
    
    
    20,072
    
    
    
    47,461
    
    
    
    67,139Income producing properties (exclusive of depreciation
and amortization shown below)
    
    
    1,127
    
    
    
    882
    
    
    
    3,649
    
    
    
    2,873Selling, general and administrative
    
    
    15,497
    
    
    
    14,777
    
    
    
    46,950
    
    
    
    46,213Provision for doubtful accounts
    
    
    941
    
    
    
    1,465
    
    
    
    3,908
    
    
    
    3,771Depreciation and amortization
    
    
    2,326
    
    
    
    2,597
    
    
    
    7,243
    
    
    
    7,52735,240
    
    
    
    39,793
    
    
    
    109,211
    
    
    
    127,523Operating loss before undernoted items
    
    
    (5,622
    )
    
    
    (1,840
    )
    
    
    (15,129
    )
    
    
    (18,130
    )Gains and other incomeGain on sale of short-term investments
    
    
    124
    
    
    
    1,617
    
    
    
    1,362
    
    
    
    3,994Other
    
    
    204
    
    
    
    2,578
    
    
    
    971
    
    
    
    2,578Impairments and other lossesWrite-down of short-term investments
    
    
    (9
    )
    
    
    
    
    
    
    (511
    )
    
    
    (133
    )Write-down of portfolio investments
    
    
    (400
    )
    
    
    
    
    
    
    (400
    )
    
    
    (650
    )Other
    
    
    (73
    )
    
    
    (657
    )
    
    
    (486
    )
    
    
    (657
    )Income (loss) before the undernoted
    
    
    (5,776
    )
    
    
    1,698
    
    
    
    (14,193
    )
    
    
    (12,998
    )Interest income
    
    
    126
    
    
    
    395
    
    
    
    303
    
    
    
    547Interest expense
    
    
    (1,523
    )
    
    
    (804
    )
    
    
    (4,524
    )
    
    
    (2,746
    )Income (loss) before income taxes, non-controlling
interest and discontinued operations
    
    
    (7,173
    )
    
    
    1,289
    
    
    
    (18,414
    )
    
    
    (15,197
    )Provision for income taxes
    
    
    (1,286
    )
    
    
    (882
    )
    
    
    (2,072
    )
    
    
    (896
    )Non-controlling interest
    
    
    (13
    )
    
    
    
    
    
    
    (56
    )
    
    
    Income (loss) from continuing operations
    
    
    (8,472
    )
    
    
    407
    
    
    
    (20,542
    )
    
    
    (16,093
    )Income
(loss) from discontinued operations (note 9)
    
    
    (11
    )
    
    
    376
    
    
    
    4,620
    
    
    
    (1,152
    )Net income (loss)
    
    
    (8,483
    )
    
    
    783
    
    
    
    (15,922
    )
    
    
    (17,245
    )Basic and
diluted net income (loss) per share (note 7):Continuing operations
    
    
    (0.18
    )
    
    
    (0.01
    )
    
    
    (0.42
    )
    
    
    (0.85
    )Discontinued operations
    
    
    (0.00
    )
    
    
    0.02
    
    
    
    0.10
    
    
    
    (0.05
    )Basic and diluted net income (loss) per share
    
    
    (0.18
    )
    
    
    0.01
    
    
    
    (0.32
    )
    
    
    (0.90
    )Weighted average number of common shares
outstanding (in thousands)  Basic and diluted
    
    
    48,268
    
    
    
    20,593
    
    
    
    48,480
    
    
    
    21,045
 The accompanying notes are an integral part of these interim consolidated
financial statements. These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2003. 32




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##### 



COUNSEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30 (In thousands of U.S. dollars)
(Unaudited) Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003$
    
    $
    
    $
    
    $Cash provided by (used in)Operating activitiesIncome (loss) from continuing operations
    
    
    (8,472
    )
    
    
    407
    
    
    
    (20,542
    )
    
    
    (16,093
    )Non-cash
items
Future income taxes
    
    
    464
    
    
    
    889
    
    
    
    1,613
    
    
    
    938Depreciation of property, plant and equipment
    
    
    1,153
    
    
    
    1,499
    
    
    
    3,636
    
    
    
    4,952Depreciation of income producing properties
    
    
    309
    
    
    
    
    
    
    
    884Amortization of intangible assets
    
    
    850
    
    
    
    1,098
    
    
    
    2,674
    
    
    
    2,531Other amortization
    
    
    14
    
    
    
    
    
    
    
    49
    
    
    
    Gain on sale of short-term investments
    
    
    (124
    )
    
    
    (1,617
    )
    
    
    (1,362
    )
    
    
    (3,994
    )Write-down of short-term investments
    
    
    9
    
    
    
    
    
    
    
    511
    
    
    
    133Write-down of portfolio investments
    
    
    400
    
    
    
    
    
    
    
    400
    
    
    
    650Gain on discharge of obligation
    
    
    
    
    
    
    
    
    
    
    (667
    )
    
    
    Other impairments or losses
    
    
    73
    
    
    
    
    
    
    
    439
    
    
    
    Loss on sale of other assets
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    Accretion of liability component of convertible debentures payable
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    36Stock received on sale transactions
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    (1,223
    )Assignment of certain assets
    
    
    
    
    
    
    (2,578
    )
    
    
    
    
    
    
    (2,578
    )Discharge of obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (394
    )Dividends on preferred shares
    
    
    480
    
    
    
    
    
    
    
    480
    
    
    
    Accretion of liability component of convertible preferred shares
    
    
    306
    
    
    
    
    
    
    
    555
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    Non-controlling interest
    
    
    13
    
    
    
    
    
    
    
    56
    
    
    
    Changes in
non-cash working capital related to operations
(Increase) decrease in accounts receivable
    
    
    106
    
    
    
    2,026
    
    
    
    4,055
    
    
    
    (128
    )(Increase) decrease in income taxes recoverable
    
    
    666
    
    
    
    1,104
    
    
    
    897
    
    
    
    3,840(Increase) decrease in other assets
    
    
    7
    
    
    
    943
    
    
    
    (305
    )
    
    
    (139
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    297
    
    
    
    718
    
    
    
    117
    
    
    
    2,372Increase (decrease) in unearned revenue
    
    
    (526
    )
    
    
    (304
    )
    
    
    (3,041
    )
    
    
    9,003Cash provided by (used in) continuing operations
    
    
    (3,975
    )
    
    
    4,074
    
    
    
    (8,895
    )
    
    
    (94
    )Cash provided by (used in) discontinued operations
    
    
    444
    
    
    
    359
    
    
    
    (839
    )
    
    
    (2,122
    )(3,531
    )
    
    
    4,433
    
    
    
    (9,734
    )
    
    
    (2,216
    )Investing activitiesPurchase of short-term investments
    
    
    
    
    
    
    
    
    
    
    (5,689
    )
    
    
    (185
    )Purchase of property, plant and equipment
    
    
    (478
    )
    
    
    (333
    )
    
    
    (886
    )
    
    
    (1,710
    )Investment in property under development
    
    
    (439
    )
    
    
    (994
    )
    
    
    (3,884
    )
    
    
    (1,777
    )Proceeds on sale of short-term investments
    
    
    941
    
    
    
    2,476
    
    
    
    4,695
    
    
    
    6,438Proceeds on
sale of portfolio investments
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125Proceeds on sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160Discontinued operations
    
    
    
    
    
    
    
    
    
    
    22,067
    
    
    
    1,58324
    
    
    
    1,274
    
    
    
    16,303
    
    
    
    4,634Financing activitiesNet draws (repayments) on revolving credit facility
    
    
    111
    
    
    
    (929
    )
    
    
    (4,862
    )
    
    
    4,833Repayment of mortgages and loans payable
    
    
    (247
    )
    
    
    (93
    )
    
    
    (1,836
    )
    
    
    (421
    )Borrowing of mortgages and loans payable
    
    
    1,062
    
    
    
    
    
    
    
    2,916
    
    
    
    Capital lease repayments
    
    
    (876
    )
    
    
    (601
    )
    
    
    (2,206
    )
    
    
    (1,869
    )Common shares purchased for cancellation
    
    
    (408
    )
    
    
    (511
    )
    
    
    (408
    )
    
    
    (2,512
    )Retirement of convertible debentures payable
    
    
    
    
    
    
    (534
    )
    
    
    
    
    
    
    (1,148
    )Repayment of liability component of convertible debenture payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,416
    )Non-controlling interest
    
    
    68
    
    
    
    
    
    
    
    32
    
    
    
    Discontinued operations
    
    
    
    
    
    
    (67
    )
    
    
    (13,866
    )
    
    
    829(290
    )
    
    
    (2,735
    )
    
    
    (20,230
    )
    
    
    (1,704
    )Increase (decrease) in cash and cash equivalents
    
    
    (3,797
    )
    
    
    2,972
    
    
    
    (13,661
    )
    
    
    714Cash and cash equivalents   beginning of period
    
    
    8,071
    
    
    
    7,779
    
    
    
    17,935
    
    
    
    10,037Cash and cash equivalents   end of period
    
    
    4,274
    
    
    
    10,751
    
    
    
    4,274
    
    
    
    10,751Less: cash and cash equivalents  discontinued operations
    
    
    870
    
    
    
    2,920
    
    
    
    870
    
    
    
    2,920Cash and cash equivalents  continuing operations
    
    
    3,404
    
    
    
    7,831
    
    
    
    3,404
    
    
    
    7,831Supplementary informationCash paid (received) during the periodInterest
    
    
    1,118
    
    
    
    930
    
    
    
    3,357
    
    
    
    3,866Income taxes
    
    
    (16
    )
    
    
    (1,431
    )
    
    
    (47
    )
    
    
    (4,031
    )Non-cash investing and financing activities:Mortgages and loans assumed on acquisition of income
producing properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,328Communications shares acquired on sale transaction
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    1,816Assets acquired on purchase transaction
    
    
    
    
    
    
    2,836
    
    
    
    
    
    
    
    2,836Notes payable incurred for the purchase of software and
software licenses
    
    
    
    
    
    
    921
    
    
    
    
    
    
    
    921
 The accompanying notes are an integral part of these interim consolidated
financial statements. These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2003. 33




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##### 



COUNSEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(In thousands of U.S. dollars, except per share amounts) 1. Description of the business Counsel Corporation (Counsel or the Company) is a diversified company
focused on acquiring and building businesses in two specific sectors:
communications in the United States and real estate in Canada. The Company engages in the communications sector through its investment in
Acceris Communications Inc. (Acceris). Acceris is a supplier of voice, data
and enhanced communications products and services. Through direct and indirect
subsidiaries in the United States, Acceris operates a U.S. facilities-based
telecommunications carrier providing long distance voice services to retail
customers, and long distance voice and data services to small- to medium-sized
businesses. Acceris also licenses a fully developed network convergence
solution for voice and data based on its Internet Protocol communications
technology, and commenced a patent enforcement strategy to protect its
intellectual property. Acceris has incurred substantial operating losses and negative cash flows from
operations since inception and had a shareholders deficit of $58,190 and
negative working capital of $22,092 at September 30, 2004. Acceris is
financing its operations through amounts provided by Counsel with an
outstanding loan balance of $50,006 and a revolving credit facility with an
outstanding balance of $7,265, respectively, as of September 30, 2004. Counsel
has agreed to fund, through long-term inter-company advances or equity
contributions, all capital investment, working capital or other operational
cash requirements of Acceris (the Keep Well). The Keep Well obligates Counsel
to continue its financial support of Acceris through June 30, 2005. During the
first nine months of 2004, Counsel advanced Acceris approximately $11,702 under
its Keep Well. During 2004, Acceris intends to approach the capital markets
directly to raise funds. Should this not occur Acceris will call upon the Keep
Well. At September 30, 2004, Counsel has $7,680 in cash and equivalents and
short-term investments to support any requirements under the Keep Well. Counsel
also has the ability to obtain additional financing on its existing assets,
including but not limited to its 91% equity interest in Acceris and loans
receivable from Acceris, as well as its long-term care, real estate and other
corporate assets. While management believes that the Company will be able to
meet its commitments, the possibility exists that unforeseen events, adverse
business conditions, or other factors could affect the Companys liquidity. If
such events or conditions occur, management believes the Company could pursue
alternative plans. However, there can be no assurance that such alternatives
will be available or that management will be successful in their
implementation. The independent registered
public accounting firms report on the consolidated
financial statements of Acceris Communications Inc., a subsidiary of the
Company, included in its annual report on Form 10-K/A#1 for the year ended
December 31, 2003, an explanatory paragraph regarding the
Acceris ability to
continue as a going concern. The Company entered the real estate sector during the third quarter of 2002
through the acquisition of five retail shopping centres in Canada. The Company
has property under development in Brampton, Guelph and Peterborough, Ontario. 2. Summary of significant accounting policies Basis of presentation The consolidated financial statements of the Company are prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) and
are presented in U.S. dollars. These interim consolidated financial statements
should be read in conjunction with the most recent audited annual financial
statements, as at December 31, 2003, and the notes thereto. In the opinion of 34




---



##### 



management, all adjustments considered necessary for a fair presentation of
results for the periods reported have been included. The interim consolidated
financial statements conform in all material respects to the requirements of
Canadian GAAP for interim financial statements and, accordingly, do not contain
all the note disclosures found in the annual financial statements. The interim
consolidated financial statements follow the same accounting policies and
methods of their application as the audited annual financial statements. Certain comparative figures have been reclassified to conform to the current
period financial statement presentation. Significant Accounting policies Discussed below, are the new policies adopted in the period from those set out
in Note 2 of the consolidated financial statements at December 31, 2003. Income producing properties Effective January 1, 2004, the Company adopted the new recommendations of the
Canadian Institute of Chartered Accountants (CICA) with respect to GAAP and
general standards of financial statement presentation. These standards lay out
a framework for the application of GAAP and the fair presentation of financial
standards in accordance with GAAP. This standard is effective for fiscal years
beginning on or after October 1, 2003. As a result of these new
recommendations, effective January 1, 2004, the Company adopted the change to
amortize its buildings on a straight-line basis, over their remaining useful
economic life, as the sinking fund method of amortization is no longer
considered to be GAAP. Previously, buildings were amortized using the sinking
fund method whereby the cost of the building was amortized over a maximum
period of 30 years in a series of annual installments increasing at a rate of
5%, compounded annually. This change in accounting policy has been applied
prospectively and has the effect of increasing the net loss for the nine months
ended September 30, 2004 by $459. Stock-based compensation plans In the first quarter of 2004, the Company adopted Section 3870 of the CICA
Handbook, Stock-based Compensation and Other Stock-based Payments (CICA HB
3870). This standard requires the Company to recognize an expense in the
financial statements for all forms of employee stock-based compensation,
including stock options. The adoption of the new accounting principle for the
Company has been applied retroactively, without restatements to prior periods.
Retained earnings at December 31, 2003 was reduced by $528, with an offsetting
increase in contributed surplus for those periods. A compensation expense of
$599 has been recognized in first nine months of 2004. The table below discloses the pro forma effect on the three and nine months
ended September 30, 2003, had those prior periods been subject to CICA HB 3870: Three months ended
    
    Nine months endedSeptember 30, 2003
    
    September 30, 2003$
    
    $Net income (loss), as reported
    
    
    783
    
    
    
    (17,245
    )Stock based compensation adjustment
    
    
    (415
    )
    
    
    (957
    )Adjusted net income (loss) for the period
    
    
    368
    
    
    
    (18,202
    )Adjusted basic and diluted net earnings (loss) per share
    
    
    (0.02
    )
    
    
    (0.97
    )
 3. Recent accounting pronouncements Consolidation of variable interest entities The CICA issued accounting guideline AcG-15, Consolidation of Variable Interest
Entities(VIEs), which 35




---



##### 



will be effective for all fiscal periods beginning on or after November 1,
2004. The guideline requires the Company to identify VIEs in which the Company
have an interest, determine whether the Company is the primary beneficiary of
such entities, and if so, to consolidate the VIE. A VIE is an entity that is
structured such that either (a) the equity is not sufficient to permit the
entity to finance its activities without external support, or (b) equity
investors lack either direct or indirect ability to make decisions about the
entitys activities, an obligation to absorb expected losses or the right to
receive expected residual returns. A primary beneficiary is an enterprise that
will absorb a majority of a VIEs expected losses, receive a majority of its
expected residual returns, or both. The Company is currently in the process of
identifying any potential impact on its financial statements and is planning to
implement this standard in 2005. 4. Income producing properties Income producing properties are as follows: September 30, 2004AccumulatedCost
    
    deprecation
    
    NetProperty
    
    Location
    
    $
    
    $
    
    $Portage Place
    
    Peterborough, Ontario
    
    
    19,807
    
    
    
    (689
    )
    
    
    19,118Southland Mall
    
    Winkler, Manitoba
    
    
    7,475
    
    
    
    (258
    )
    
    
    7,217Suncoast Mall
    
    Goderich, Ontario
    
    
    8,009
    
    
    
    (278
    )
    
    
    7,731Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    4,789
    
    
    
    (167
    )
    
    
    4,622Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    1,197
    
    
    
    (41
    )
    
    
    1,1561250 Steeles Ave. West I
    
    Brampton, Ontario
    
    
    2,620
    
    
    
    (134
    )
    
    
    2,486Imperial Square
    
    Guelph, Ontario
    
    
    5,667
    
    
    
    (94
    )
    
    
    5,57349,564
    
    
    
    (1,661
    )
    
    
    47,903
 December 31, 2003AccumulatedCost
    
    deprecation
    
    NetProperty
    
    Location
    
    $
    
    $
    
    $Portage Place
    
    Peterborough, Ontario
    
    
    19,384
    
    
    
    (316
    )
    
    
    19,068Southland Mall
    
    Winkler, Manitoba
    
    
    7,316
    
    
    
    (116
    )
    
    
    7,200Suncoast Mall
    
    Goderich, Ontario
    
    
    7,833
    
    
    
    (126
    )
    
    
    7,707Willowcreek Centre I
    
    Peterborough, Ontario
    
    
    4,686
    
    
    
    (76
    )
    
    
    4,610Humboldt Mall
    
    Humboldt, Saskatchewan
    
    
    1,171
    
    
    
    (18
    )
    
    
    1,1531250 Steeles Ave. West I
    
    Brampton, Ontario
    
    
    2,564
    
    
    
    (77
    )
    
    
    2,48742,954
    
    
    
    (729
    )
    
    
    42,225
 5. Properties under development Properties under development are as follows: 36




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##### 



September 30,
    
    December 31,2004
    
    2003Property
    
    Location
    
    $
    
    $Imperial Square
    
    Guelph, Ontario
    
    
    1,347
    
    
    
    3,411Willowcreek II
    
    Peterborough, Ontario
    
    
    3,721
    
    
    
    3,5111250 Steeles Ave. West II
    
    Brampton, Ontario
    
    
    1,046
    
    
    
    6786,114
    
    
    
    7,600
 In the first nine months of 2004, the Company continued the development of the
Imperial Square property. During 2004, $5,668 has been transferred to income
producing properties due to the commencement of leases with new tenants.
Construction of the strip centre is expected to be completed in 2004. Subsequent to the second quarter of 2004, the Company commenced construction of
two restaurant pads adjoining its income producing property at 1250 Steeles Ave
West. The development is expected to cost approximately $1,500. The costs to
complete are approximately $1,200, with completion expected by the end of 2004.
The Company has secured a renewal of its mortgage on the property and increased
its development loan facility to $1,050. 6. Contingencies and guarantees Contingencies The Company, from time to time, is involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. Other
than set out below, the Company is not aware of any pending or threatened
proceedings that would have a material adverse effect on the consolidated
financial condition or future results of the Company. On October 31, 2003, the Company settled its outstanding 6% convertible
debentures at maturity by delivering 690 common shares for each thousand
dollars of principal, resulting in the issuance of 28.2 million common shares.
A significant debenture holder filed a lawsuit to restrain the Company from
satisfying its obligation to repay the debentures at maturity by delivering
common shares. On October 28, 2003 the Ontario Superior Court of Justice
dismissed the lawsuit. The debenture holder has appealed this decision. On April 16, 2004, certain shareholders of Acceris (the Plaintiffs) filed a
putative derivative complaint in the Superior Court of the State of California
in and for the County of San Diego, (the Complaint) against Acceris,
WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel as well
as certain present and former officers and directors of Acceris, some of whom
also are or were directors and/or officers of the other corporate defendants
(collectively, the Defendants). The Complaint alleges, inter alia, that the
Defendants, in their respective roles as controlling shareholder and directors
and officers of Acceris committed breaches of the fiduciary duties of care,
loyalty and good faith and were unjustly enriched, and that the individual
Defendants committed waste of corporate assets, abuse of control and gross
mismanagement. The Plaintiffs seek compensatory damages, restitution,
disgorgement of allegedly unlawful profits, benefits and other compensation,
attorneys fees and expenses in connection with the Complaint. Acceris and
Counsel believe that these claims, in their entirety, are without merit and
intend to vigorously defend this action. There is no assurance that this
matter will be resolved in Acceris or Counsels favour and an unfavourable
outcome of this matter could have a material adverse impact on the Companys
business, results of operations, financial position or liquidity. Counsel, Acceris and several of Acceris current and former executives and
Acceris board members were named in a securities action filed in the Superior
Court of the State of California in and for the County of San Diego on April
16, 2004, in which the plaintiffs made claims nearly identical to those set
forth in the
derivative suit described above. Acceris and Counsel believe that these claims
in their entirety are without merit and intend to vigorously defend this
action. There is no assurance that this matter will be resolved in 37




---



##### 



Acceris and Counsels favour and an unfavourable outcome of this matter could
have a material adverse impact on the Companys business, results of
operations, financial position or liquidity. In connection with Acceris efforts to enforce its patent rights, Acceris
Communications Technologies Inc. filed a patent infringement lawsuit against
ITXC Corp. (ITXC) in the United States District Court of the District of New
Jersey on April 14, 2004. The complaint alleges that ITXCs VoIP services and
systems infringe the Companys U.S. Patent No. 6,243,373, entitled Method and
Apparatus for Implementing a Computer Network/Internet Telephone System. On
May 7, 2004, ITXC filed a lawsuit against Acceris Communications Technologies
Inc., and the Company, in the United States District Court for the District of
New Jersey for infringement of five ITXC patents relating to VoIP technology,
directed generally to the transmission of telephone calls over the Internet and
the completion of telephone calls by switching them off the Internet and onto a
public switched telephone network. Acceris believes that the allegations
contained in ITXCs complaint are, in their entirety, without merit and Acceris
intends to provide a vigorous defense to ITXCs claims. There is no assurance
that this matter will be resolved in Acceris favour and an unfavourable
outcome of this matter could have a material adverse impact on the
Companys business, results of operations, financial position or liquidity. At Acceris Adjourned Meeting of Stockholders held on December 30, 2003, the
stockholders approved an amendment to the Articles of Incorporation, deleting
Article VI thereof (regarding liquidations, reorganizations, mergers and the
like). Stockholders who were entitled to vote at the meeting and advised
Acceris in writing prior to the vote on the amendment, that they dissented and
intended to demand payment for their shares if the amendment was effectuated,
were entitled to exercise their appraisal rights and obtain payment in cash for
their shares under Sections 607.1301  607.1333 of the Florida Business
Corporation Act, provided their shares were not voted in favor of the
amendment. In January 2004, appraisal notices in compliance with Florida
corporate statutes were sent to all stockholders who had advised Acceris of
their intention to exercise their appraisal rights. The appraisal notices
included Acceris estimate of the fair value of its shares, being $4.00 per
share on a post-split basis. These stockholders had until February 29, 2004 to
return their completed appraisal notices along with certificates for the shares
for which they were exercising their appraisal rights. Approximately 33
stockholders holding approximately 74,000 shares had returned completed
appraisal notices by February 29, 2004. A stockholder of 20 shares notified
accepted of the offer of $4.00 per share, while the stockholders of the
remaining shares did not accept the offer. Subject to the qualification that
Acceris may not make any payment to a stockholder seeking appraisal rights if,
at the time of payment, its total assets are less than its total liabilities,
stockholders who accepted its offer to purchase their shares at the estimated
fair value will be paid for their shares within 90 days of receipt of a duly
executed appraisal notice. If Acceris should be required to make any payments
to dissenting stockholders, Counsel will fund any such amounts through the
purchase of shares of common stock. Stockholders who did not accept Acceris
offer were required to indicate their own estimate of fair value. Because
Acceris did not agree with the estimates submitted by most of the dissenting
shareholders, Acceris has sought a judicial determination of the fair value of
the common stock held by the dissenting stockholders. On June 24, 2004,
Acceris filed suit against the dissenting shareholders seeking a declaratory
judgment, appraisal and other relief in the Circuit Court for the 17th Judicial
District in Broward County, Florida. There is no assurance that this matter
will be resolved in Acceris favour and an unfavourable outcome of this matter
could have a material adverse impact on the Companys business, results of
operations, financial position or liquidity. Guarantees The Company has guaranteed the repayment of certain mortgages amounting to
$40,447. Seven of these mortgages, amounting to $31,103, are payable by a
limited partnership in which the Company has a 50% equity interest. The
Companys investment in this limited partnership has a carrying value of $nil.
In 1984 the Company sold seven long-term care facilities to the limited
partnership. The Company continues to act as guarantor for the repayment of
the first mortgages on the facilities, which were assumed by the limited
partnership. The limited partnership is in compliance with the terms of the
mortgages and, accordingly, the Company has not recognized any liability that
may arise under the guarantees provided. The Company believes that the value
of the facilities, which have been provided as collateral for the guarantee, is
in excess of the amount of the mortgages and, on a sale or liquidation, 38




---



##### 



would be sufficient to reimburse the Company for any payments that become due
under these guarantees. In addition, the Company has provided a guarantee for the repayment of a
mortgage of $9,344 payable by another limited partnership. In 1985 the Company
sold a long-term care facility to the limited partnership. The mortgage on the
facility was assumed by the partnership and continues to be guaranteed by the
Company. The Company receives a fee for this guarantee. The Company has no
equity interest in the partnership; however, it does receive an annual
incentive fee from the partnership based on the partnerships financial
performance and is entitled to participate in the proceeds of a sale or
refinancing of the facility. The limited partnership is in compliance with the
terms of the mortgage and, accordingly, the Company has not recognized any
liability that may arise under this guarantee. The Company believes that the
value of the facility, which has been provided as collateral for the guarantee,
is in excess of the amount of the mortgage and, on a sale or liquidation, would
be sufficient to reimburse the Company for any payment that becomes due under
this guarantee. In October 2004, Counsel agreed to subordinate all of its debt in Acceris in
favour of both the revolving credit facility and newly issued convertible
debenture (as discussed in Note 10). Under the subordination agreement,
Counsel further agreed to guarantee Acceris revolving credit facility and
convertible debentures and to pledge all of its shares owned in Acceris as
security for the related debts. 7. Supplemental information The following is a reconciliation of the numerators and denominators used in
computing basic and diluted loss per share. Three months ended
    
    Nine months endedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Basic and diluted net earnings (loss) per share:Numerator:Loss from continuing operations
    
    $
    (8,472
    )
    
    $
    407
    
    
    $
    (20,542
    )
    
    $
    (16,093
    )Accretion of equity component of debentures payable
    
    $
    
    
    
    $
    (702
    )
    
    $
    
    
    
    $
    (2,232
    )Loss attributable to common shareholders  continuing operations
    
    $
    (8,472
    )
    
    $
    (295
    )
    
    $
    (20,542
    )
    
    $
    (18,325
    )Income (loss) from discontinued operations
    
    $
    (11
    )
    
    $
    376
    
    
    $
    4,620
    
    
    $
    (1,152
    )Denominator:Weighted average common shares outstanding (000s)
    
    
    48,268
    
    
    
    20,593
    
    
    
    48,480
    
    
    
    21,045Basic and diluted loss per share from continuing operations
    
    $
    (0.18
    )
    
    $
    (0.01
    )
    
    $
    (0.42
    )
    
    $
    (0.85
    )Basic and diluted income (loss) per share from discontinued operations
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    (0.05
    )Basic and diluted net income (loss) per share
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.32
    )
    
    $
    (0.90
    )
 Potential common share equivalents, incremental shares from stock options, and
shares issuable upon conversion of convertible debentures and the convertible
preferred shares have been excluded from the loss per share calculation, as
they are anti-dilutive. 8. Agent warrant program During the first quarter of 2004, Acceris launched the Acceris Communications
Inc. Platinum Agent Program (the Agent Warrant Program), which provides for
the issuance of warrants to purchase up to 1,000,000 shares of Acceris common
stock to independent agents who participate in the Agent Warrant Program. The
Agent Warrant Program was established to encourage and reward consistent,
substantial
and persistent production by selected commercial agents serving Acceris
domestic markets and to strengthen Acceris relationships with these agents by
granting long-term incentives in the form of the warrants to purchase the
Acceris common stock at current price levels. The Agent Warrant Program is 39




---



##### 



administered by the Compensation Committee of the Board of Directors of
Acceris. Participants in the Agent Warrant Program will be granted warrants upon
commencement, the vesting of which is based on maintaining certain revenue
levels for a period of 24 months. The grants are classified into tiers based
on commissionable revenue levels, the vesting period of which begins upon the
achievement of certain commissionable revenue levels during the eighteen month
period beginning February 1, 2004. Vesting of warrants within each tier occurs
50% after 12 months and 100% after 24 months, dependent on the agent
maintaining the associated revenue level for the entire period of vesting. As of September 30, 2004, 600,000 warrants have been issued under the Agent
Warrant Program, none of which have met the requirements to begin vesting. The
warrants issued under the plan will be accounted for under CICA HB 3870 Stock
Based Compensation. Accordingly, the Company will recognize an expense
associated with these warrants over the vesting period based on the then
current fair market value of the warrants calculated at each reporting period.
At such time as the vesting for any warrants begins, the expense will be
included in selling, general and administrative expense. As the vesting period
has not commenced for any of the warrants issued prior to September 30, 2004,
no expense has been recognized in the accompanying interim consolidated
statement of operations for the three or nine months ended September 30, 2004. 9. Discontinued operations The Company has a number of discontinued operations. Long-term care is subject
to a formal plan of disposal while medical products and services (MPS) and
communications operations have been sold. Discontinued operations have been presented on a segmented basis to enhance the
readers understanding of the financial information presented. Long-term care
During the fourth quarter of 2002, the Company adopted a formal plan of
disposal for its long-term care facilities, due to a strategic decision to exit
the business. In October 2003, the Company received notices of intent from the lessee of five
retirement centres in Ontario and British Columbia to exercise options to
purchase the centres. The total purchase price pursuant to the options is Cdn
$30,000, before costs of disposition. The sale closed May 31, 2004, with a
$4,563 gain on sale being recognized in discontinued operations. The remaining seniors living facilities are expected to be sold within the next
12 months. Communications
During the fourth quarter of 2002, the Companys subsidiary, Acceris, adopted a
formal plan of disposal for its VoIP network and customers. On December 6, 2002, the Company entered into an agreement to sell
substantially all of the assets and customer base of I-Link Communications Inc.
(ILC), a wholly owned subsidiary, to Buyers United, Inc. (BUI). The sale
includes the physical assets required to operate Acceris nationwide network
using its patented VoIP technology (constituting the core business of ILC) and
a license in perpetuity to use Acceris proprietary software platform. The sale
closed on May 1, 2003 and provided for a post closing cash settlement between
the parties. The sale price consisted of 300,000 shares of Series B convertible
preferred stock (8% dividend) of BUI, subject to adjustment in certain
circumstances, of which 75,000 shares were subject to an earn-out provision
(contingent consideration). During the twelve months ending December 31, 2003,
64,286 shares of the contingent consideration were earned and were included as
a component of gain (loss) from discontinued operations. The fair value of the
225,000 shares (non-contingent consideration to be received) of BUI convertible
preferred stock was determined to be $1,350 as of December 31, 2002. As of
December 31, 2003, the combined fair value of the original shares (225,000) and
the shares earned from the contingent consideration (64,286 shares) was
determined to be $1,916, which increase was included in the calculation of gain
(loss) from discontinued 40




---



##### 



operations for the year ended December 31, 2003. In the first quarter of 2004,
the Company recorded a gain from discontinued operations of $103. This gain
was due to the receipt of the remaining 10,714 shares of common stock as
contingent consideration, which is recorded as additional gain on assets held
for sale. MPS
Medical products and services (MPS) represents the Companys discontinued
medical products operations, pharmaceutical products operations, pharmacy
services operations, and home health care operations. A summary of the carrying value of the assets and liabilities for discontinued
operations is as follows: September 30,
    
    December 31,2004
    
    2003Long-termcare
    
    Communications
    
    Total
    
    Total$
    
    $
    
    $
    
    $AssetsCurrentCash and cash equivalents
    
    
    870
    
    
    
    
    
    
    
    870
    
    
    
    939Accounts receivable
    
    
    507
    
    
    
    
    
    
    
    507
    
    
    
    500Other assets
    
    
    252
    
    
    
    
    
    
    
    252
    
    
    
    8761,629
    
    
    
    
    
    
    
    1,629
    
    
    
    2,315Long-termMortgage receivable
    
    
    2,028
    
    
    
    
    
    
    
    2,028
    
    
    
    1,952Property, plant and equipment, net
    
    
    2,204
    
    
    
    
    
    
    
    2,204
    
    
    
    18,665Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2854,232
    
    
    
    
    
    
    
    4,232
    
    
    
    20,902Total assets
    
    
    5,861
    
    
    
    
    
    
    
    5,861
    
    
    
    23,217LiabilitiesCurrentAccounts payable and accrued liabilities
    
    
    8,878
    
    
    
    
    
    
    
    8,878
    
    
    
    9,262Mortgages and loans payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238Unearned revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2128,878
    
    
    
    
    
    
    
    8,878
    
    
    
    9,712Long-termMortgages and loans payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,871
    
    
    
    
    
    
    
    
    
    
    
    13,871Total liabilities
    
    
    8,878
    
    
    
    
    
    
    
    8,878
    
    
    
    23,583
 41




---



##### 



The composition of earnings (loss) from discontinued operations is as follows: For the three months ended September 30, 2004Long-term care
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    9,284
    
    
    
    
    
    
    
    
    
    
    
    9,284Earnings (loss) before income taxes
    
    
    (29
    )
    
    
    
    
    
    
    35
    
    
    
    6Income taxes
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Net earnings (loss)
    
    
    (46
    )
    
    
    
    
    
    
    35
    
    
    
    (11
    )
  For the three months ended September 30, 2003Long-term care
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    9,397
    
    
    
    
    
    
    
    
    
    
    
    9,397Earnings (loss) before income taxes
    
    
    94
    
    
    
    213
    
    
    
    23
    
    
    
    330Income taxes (credit)
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )Net earnings (loss)
    
    
    140
    
    
    
    213
    
    
    
    23
    
    
    
    376
  For the nine months ended September 30, 2004Long-term care
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    28,265
    
    
    
    
    
    
    
    
    
    
    
    28,265Earnings (loss) before income taxes
    
    
    4,909
    
    
    
    103
    
    
    
    (177
    )
    
    
    4,835Income taxes (credit)
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    215Net earnings (loss)
    
    
    4,694
    
    
    
    103
    
    
    
    (177
    )
    
    
    4,620
  For the nine months ended September 30, 2003Long-term care
    
    Communications
    
    MPS
    
    Total$
    
    $
    
    $
    
    $Revenue
    
    
    27,371
    
    
    
    2,022
    
    
    
    
    
    
    
    29,393Earnings (loss) before income taxes
    
    
    (1,785
    )
    
    
    307
    
    
    
    372
    
    
    
    (1,106
    )Income taxes
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Net earnings (loss)
    
    
    (1,831
    )
    
    
    307
    
    
    
    372
    
    
    
    (1,152
    )
 42




---



##### 



10. SUBSEQUENT EVENTS In October 2004, Acceris entered into an agreement for the issuance of a
Convertible Term Note in the principal amount of $5,000 due October 14, 2007.
The Note provides that the principal amount outstanding bears interest at the
prime rate as published in the Wall Street Journal plus 3% (but not less than
7% per annum) decreasing by 2% (but not less than 0%) for every 25% increase in
the Market Price (as defined therein) above the fixed conversion price
following the effective date of the registration statement covering the Common
Stock issuable upon conversion of the Note. Should Acceris default under the
agreement and fail to remedy the default on a timely basis, interest under the
note will increase by 2% per month and the note may become immediately due
inclusive of a 20% premium to the then outstanding principal. Interest is
payable monthly in arrears, commencing November 1, 2004. Principal is payable
at the rate of approximately $147 per month commencing January 1, 2005, in cash
or registered common stock. Payment amounts will be converted into stock if
(i) the average closing price for five trading days immediately preceding the
repayment date is at least 100% of the Fixed Conversion Price, (ii) the amount
of the conversion does not exceed 25% of the aggregate dollar trading volume
for the 22-day trading period immediately preceding the repayment date, (iii) a
registration statement is effective covering the issued shares and (iv) no
Event of Default exists and is continuing. In the event the monthly payment
must be paid in cash, then the Company shall pay 102% of the amount due in
cash. Acceris has the right to prepay the Note, in whole or in part, at any
time by giving seven business days written notice and paying 120% of the
outstanding principal amount of the Note. The holder may convert the Note, in
whole or in part, into shares of Common Stock at any time upon one business
days prior written notice. The Note is convertible into shares of the
Companys common stock at an initial fixed conversion price of $0.88 per share
of common stock (105% of the average closing price for the 30 trading days
prior to the issuance of the Note) not to exceed, however, 4.99% of the
outstanding shares of common stock, of Acceris, (including issuable shares from
the exercise of the warrants payments of interest, or any other shares owned). Pursuant to a Master Security Agreement, Acceris granted a blanket lien on all
its property and that of certain of its subsidiaries to secure repayment of the
obligation and, pursuant to a Stock Pledge Agreement, Counsel Communications,
LLC and Counsel Corporation (US) pledged the shares of Acceris held by it as
further security. In addition, Acceris Communications Technologies, Inc.,
Acceris Communications Corp., Counsel Corporation and Counsel Communications
LLC and Counsel Corporation (US) jointly and severally guaranteed the
obligations to the Lender. Acceris paid a closing fee of 3.9% of the aggregate
principal amount of the Note or $195 and reimbursed the Purchaser for its
expenses in connection with the transaction in the aggregate amount of $31. So
long as 25% of principal amount of the Note is outstanding, Acceris agreed that
it will not pay dividends on its Common Stock, among other things. In addition, Acceris issued its Common Stock Purchase Warrant (the Warrant)
to the Purchaser, entitling the Purchaser to purchase up to one million shares
of Acceris common stock, subject to adjustment. The Warrant entitles the
Purchaser to purchase the stock through the earlier of (i) October 13, 2009 or
(ii) the date on which the average closing price for any consecutive ten
trading dates shall equal or exceed 15 times the Exercise Price. The Exercise
Price shall equal $1.00 per share as to the first 250,000 shares, $1.08 per
share for the next 250,000 shares and $1.20 per share for the remaining 500,000
shares, or 125%, 135% and 150% of the average closing price for ten trading
days immediately prior to the date of the Warrant, respectively. Acceris
agreed, pursuant to a Registration Rights Agreement, to file, within 30 days, a
registration statement under the Securities Act of 1933, as amended, to
register the shares issuable upon conversion of the Note as well as those
issuable pursuant to the Warrant. The Company is in the process of assessing the appropriate accounting for this
multi-element financial instrument. In October 2004, income tax legislation was passed in a foreign jurisdiction
that confirms the release of a material future income tax obligation. In the
fourth quarter of 2004, the Company expects to record a
reduction in the future income tax liabilities of approximately $25,000,
primarily as a result of this 43




---



##### 



legislation being passed. On October 2004, Counsel Real Estate acquired a 50% interest in a shopping
centre in Welland, Ontario, having a gross leasable area of approximately
170,000 square feet. The purchase price of $2,800 was funded by an advance on
a first mortgage of $2,100, secured by the property. Included in the first
mortgage is additional financing of $800 which is being held in trust, to be
released upon execution of a remerchandising plan specific to this centre. 11. SEGMENTED INFORMATION The Company currently operates in two sectors, communications and real estate. The communications sector consists of the Companys subsidiary, Acceris.
Acceris operates in two reportable segments, Telecommunications and
Technologies:  
    
    Telecommunications includes the operations of Acceris Communications
Corp. acquired in June 2001, and the former agent, residential and
enterprise business of RSL, which was acquired in December 2002. This
segment offers dial-around telecommunications product, 1+ product
through two channels, namely, multi-level marketing (MLM) and commercial
agents, and voice and data solutions to enterprise customers through an
in-house sales force.
    
    Technologies is the former technology services segment, acquired in
March 2001, which offers a fully developed network convergence software
solution for voice and data. The Company licenses certain developed
technology to third party users. The Company entered the real estate sector in 2002, when it completed the
acquisition of five income-producing properties, consisting of approximately
730,000 square feet of leasable area and 13 acres of vacant land zoned for
retail development in Canada. At September 30, 2004, Counsel owns seven income
producing properties, consisting of 820,000 square feet, has two development
projects ongoing, and has 13 acres of vacant land zoned for retail development
in Canada Each segment operates as a strategic business unit with separate operating
management. The Company assesses performance based on operating income. The
accounting policies for the segments are the same as those described in note 2
to these consolidated financial statements. 44




---



##### 



For the three months ended September 30, 2004RealTelecommunications
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    2,229
    
    
    
    
    
    
    
    2,229United States
    
    
    27,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,38927,389
    
    
    
    
    
    
    
    2,229
    
    
    
    
    
    
    
    29,618Operating costs and expenses:Telecommunication costs
    
    
    15,349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,349Income producing properties
    
    
    
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    1,127Selling, general and administrative
    
    
    13,126
    
    
    
    949
    
    
    
    
    
    
    
    1,422
    
    
    
    15,497Provision for doubtful accounts
    
    
    941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    941Depreciation and amortization
    
    
    1,415
    
    
    
    566
    
    
    
    321
    
    
    
    24
    
    
    
    2,326Operating income (loss) before undernoted items
    
    
    (3,442
    )
    
    
    (1,515
    )
    
    
    781
    
    
    
    (1,446
    )
    
    
    (5,622
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    124Other
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Impairments and other losses:Write-down of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (400
    )
    
    
    (400
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (73
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    126Interest expense
    
    
    (706
    )
    
    
    
    
    
    
    (425
    )
    
    
    (392
    )
    
    
    (1,523
    )Earnings (loss) before income taxes and
non-controlling interest
    
    
    (3,944
    )
    
    
    (1,515
    )
    
    
    356
    
    
    
    (2,070
    )
    
    
    (7,173
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,286
    )
    
    
    (1,286
    )Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Segment earnings (loss) from continuing operations
    
    
    (3,944
    )
    
    
    (1,515
    )
    
    
    343
    
    
    
    (3,356
    )
    
    
    (8,472
    )Segment assets as of September 30Continuing operations
    
    
    26,304
    
    
    
    3,230
    
    
    
    2,095
    
    
    
    71,140
    
    
    
    102,769Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,86126,304
    
    
    
    3,230
    
    
    
    2,095
    
    
    
    71,140
    
    
    
    108,630Segment long-lived assets as of September 30(Income producing property, property under development, property, plant & equipment, intangibles and goodwill)Canada
    
    
    
    
    
    
    
    
    
    
    54,043
    
    
    
    1,081
    
    
    
    55,124United States
    
    
    8,346
    
    
    
    2,281
    
    
    
    
    
    
    
    73
    
    
    
    10,7008,346
    
    
    
    2,281
    
    
    
    54,043
    
    
    
    1,154
    
    
    
    65,824Goodwill as of September 30
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947Capital expenditures
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    204
    
    
    
    524Other significant non-cash items:Amortization of deferred revenue
    
    
    1,352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,352Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,858
    )
    
    
    (2,858
    )Accretion of liability component
of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    306
 45




---



##### 



For the three months ended September 30, 2003RealTelecommunications
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    1,901
    
    
    
    
    
    
    
    1,901United States
    
    
    35,003
    
    
    
    1,049
    
    
    
    
    
    
    
    
    
    
    
    36,05235,003
    
    
    
    1,049
    
    
    
    1,901
    
    
    
    
    
    
    
    37,953Operating costs and expensesTelecommunication costs
    
    
    20,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,072Income producing properties
    
    
    
    
    
    
    
    
    
    
    882
    
    
    
    
    
    
    
    882Selling, general and administrative
    
    
    13,027
    
    
    
    954
    
    
    
    
    
    
    
    796
    
    
    
    14,777Provision for doubtful accounts
    
    
    1,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,465Depreciation and amortization
    
    
    1,994
    
    
    
    517
    
    
    
    68
    
    
    
    18
    
    
    
    2,597Operating income (loss) before undernoted items
    
    
    (1,555
    )
    
    
    (422
    )
    
    
    951
    
    
    
    (814
    )
    
    
    (1,840
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,617
    
    
    
    1,617Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,578
    
    
    
    2,578Impairments and other losses:Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (657
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    395
    
    
    
    395Interest expense
    
    
    (416
    )
    
    
    38
    
    
    
    (363
    )
    
    
    (63
    )
    
    
    (804
    )Earnings (loss) before income taxes
    
    
    (1,971
    )
    
    
    (384
    )
    
    
    588
    
    
    
    3,056
    
    
    
    1,289Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (882
    )
    
    
    (882
    )Segment earnings (loss) from continuing operations
    
    
    (1,971
    )
    
    
    (384
    )
    
    
    588
    
    
    
    2,174
    
    
    
    407Capital expenditures
    
    
    1,230
    
    
    
    
    
    
    
    21
    
    
    
    3
    
    
    
    1,254Other significant non-cash items:Amortization of unearned revenue
    
    
    9,935
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    10,265Accretion of liability component
of debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    12
 46




---



##### 



For the nine months ended September 30, 2004RealTelecommunications
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    6,680
    
    
    
    
    
    
    
    6,680United States
    
    
    86,862
    
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    87,40286,862
    
    
    
    540
    
    
    
    6,680
    
    
    
    
    
    
    
    94,082Operating costs and expensesTelecommunication costs
    
    
    47,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,461Income producing properties
    
    
    
    
    
    
    
    
    
    
    3,649
    
    
    
    
    
    
    
    3,649Selling, general and administrative
    
    
    40,570
    
    
    
    2,528
    
    
    
    
    
    
    
    3,852
    
    
    
    46,950Provision for doubtful accounts
    
    
    3,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,908Depreciation and amortization
    
    
    4,566
    
    
    
    1,695
    
    
    
    923
    
    
    
    59
    
    
    
    7,243Operating income (loss) before undernoted items
    
    
    (9,643
    )
    
    
    (3,683
    )
    
    
    2,108
    
    
    
    (3,911
    )
    
    
    (15,129
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    1,090
    
    
    
    
    
    
    
    272
    
    
    
    1,362Other
    
    
    971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    971Impairments and other losses:Write-down and loss on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (511
    )
    
    
    (511
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (400
    )
    
    
    (400
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486
    )
    
    
    (486
    )Interest income
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    303Interest expense
    
    
    (2,186
    )
    
    
    (13
    )
    
    
    (1,171
    )
    
    
    (1,154
    )
    
    
    (4,524
    )Earnings (loss) before income taxes and
non-controlling interest
    
    
    (10,814
    )
    
    
    (2,606
    )
    
    
    937
    
    
    
    (5,931
    )
    
    
    (18,414
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,072
    )
    
    
    (2,072
    )Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Segment earnings (loss) from continuing operations
    
    
    (10,814
    )
    
    
    (2,606
    )
    
    
    881
    
    
    
    (8,003
    )
    
    
    (20,542
    )Segment assets as at September 30Continuing operations
    
    
    26,304
    
    
    
    3,230
    
    
    
    2,095
    
    
    
    71,140
    
    
    
    102,769Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,86126,304
    
    
    
    3,230
    
    
    
    2,095
    
    
    
    71,140
    
    
    
    108,630Segment long-lived assets as at September 30(Income producing property, property under development, property, plant & equipment, intangibles and goodwill)Canada
    
    
    
    
    
    
    
    
    
    
    54,043
    
    
    
    1,081
    
    
    
    55,124United States
    
    
    8,346
    
    
    
    2,281
    
    
    
    
    
    
    
    73
    
    
    
    10,7008,346
    
    
    
    2,281
    
    
    
    54,043
    
    
    
    1,154
    
    
    
    65,824Goodwill as of September 30
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947Capital expenditures
    
    
    715
    
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    934Other significant non-cash items:Amortization of unearned revenue
    
    
    6,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,851Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,072
    )
    
    
    (2,072
    )Accretion of liability component
of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555
    
    
    
    555
 47




---



##### 



For the nine months ended September 30, 2003RealTelecommunications
    
    Technologies
    
    estate
    
    Corporate
    
    Total$
    
    $
    
    $
    
    $
    
    $RevenueCanada
    
    
    
    
    
    
    
    
    
    
    5,672
    
    
    
    
    
    
    
    5,672United States
    
    
    101,622
    
    
    
    2,099
    
    
    
    
    
    
    
    
    
    
    
    103,721101,622
    
    
    
    2,099
    
    
    
    5,672
    
    
    
    
    
    
    
    109,393Operating costs and expensesTelecommunication costs
    
    
    67,139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,139Income producing properties
    
    
    
    
    
    
    
    
    
    
    2,873
    
    
    
    
    
    
    
    2,873Selling, general and administrative
    
    
    39,741
    
    
    
    3,275
    
    
    
    
    
    
    
    3,197
    
    
    
    46,213Provision for doubtful accounts
    
    
    3,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,771Depreciation and amortization
    
    
    5,577
    
    
    
    1,551
    
    
    
    233
    
    
    
    166
    
    
    
    7,527Operating income (loss) before undernoted items
    
    
    (14,606
    )
    
    
    (2,727
    )
    
    
    2,566
    
    
    
    (3,363
    )
    
    
    (18,130
    )Gains and other income:Gain on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,994
    
    
    
    3,994Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,578
    
    
    
    2,578Impairments and other losses:Write-down and loss on sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )
    
    
    (133
    )Portfolio investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    (650
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (657
    )Interest income
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    545
    
    
    
    547Interest expense
    
    
    (1,227
    )
    
    
    (259
    )
    
    
    (1,070
    )
    
    
    (190
    )
    
    
    (2,746
    )Earnings (loss) before income taxes
    
    
    (15,831
    )
    
    
    (2,986
    )
    
    
    1,496
    
    
    
    2,124
    
    
    
    (15,197
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (896
    )
    
    
    (896
    )Segment earnings (loss) from continuing operations
    
    
    (15,831
    )
    
    
    (2,986
    )
    
    
    1,496
    
    
    
    1,228
    
    
    
    (16,093
    )Capital expenditures
    
    
    2,535
    
    
    
    
    
    
    
    41
    
    
    
    55
    
    
    
    2,631Other significant non-cash items:Amortization of unearned revenue
    
    
    17,044
    
    
    
    484
    
    
    
    
    
    
    
    
    
    
    
    17,528Accretion of liability component
of debentures payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    36
 48




---



##### 



CORPORATE AND SHAREHOLDER INFORMATION CORPORATE INFORMATION
COUNSEL CORPORATION
Scotia Plaza
Suite 3200
40 King Street West
Toronto, Ontario M5H 3Y2
Tel: 416 866 3000
Fax: 416 866 3061
Website: www.counselcorp.com
    
    SHAREHOLDER INFORMATION
AUDITORS
BDO Dunwoody LLP
Chartered Accountants
TRANSFER AGENTS & REGISTRARS
Computershare Trust Company of Canada
Tel: 416 981 9500
Computershare Trust Company Inc
Tel: 303 984 4034
CAPITAL STOCK & EXCHANGE LISTINGS
At September 30, 2004 there were 48,887,262 common shares outstanding.
Counsel Corporations common shares are
listed on The Toronto Stock Exchange
under the symbol CXS and also trade on the
OTC Electronic Bulletin Board in United
States under the symbol CXSN.
SHAREHOLDER
& INVESTOR CONTACT
STEPHEN WEINTRAUBSenior Vice President & Secretary
Tel: 416 866 3058
Fax: 416 866 3061
E-mail: saw@counselcorp.com
 49