Envoy Communications
Group Inc.
Annual Report 2000
Energy Focus Strength
1
Table of Contents
Our International Spectrum 2
Best of Breed 4
Integration 6
Case Studies 8
Message to Shareholders
from the Chief Executive Officer 12
Message from the Chief Financial Officer 14
Management Discussion and Analysis 16
Financials 21
2
Envoy Annual Report 2000
As an international marketing communications company, Envoy builds on the
strength that comes from being an international player, and the mix means
everything. Our strength lies not only in our ability to cultivate strong
organic growth but also in our ability to find and acquire companies with
a spark of brilliance those that complement, strengthen and add intensity.
3
Our International Spectrum
THE ENERGY AND FLUIDITY OF COLOR ARE REFLECTED IN ENVOY'S INTERNATIONAL
scope. We are not bound by convention we create with artistry, flare
and unrivaled strategy and precision. There is a richness and depth in
our approach to international growth. Envoy companies have a presence in
seven major markets around the world including London, Leeds, Paris,
Stockholm, New York, San Francisco and Toronto, and we will stay focused
on the further development of key markets globally. This focus on global
expansion and diversification is essential to our goal of meeting our
client's needs, whether those needs are on a local or an international
stage.
The combinations and layers achieved through the growth process create
a vibrant, diversified group that draws strength and inspiration from
each other and from being part of an evolving global company.
LONDON NEW YORK STOCKHOLM PARIS SAN FRANCISCO LEEDS TORONTO
4
Envoy Annual Report 2000
A real master uses only the best tools and materials to create an
unparalleled product, brand or work of art. Envoy uses that same
principle as it focuses on becoming a true best of breed company. It
is committed to looking for only the best and brightest as it continues
its creative exploration and its ascent to the pinnacle of the marketing
communications industry.
5
Best of Breed
THE ENVOY BEST OF BREED MANDATE IS THE DRIVING FORCE BEHIND OUR continuing
quest to offer our clients a distinctive kind of strength and intensity in
our service offerings. Services that are, quite simply, the best in their
class. Envoy companies are brilliant pools of talent that are always
pushing the boundaries, always determined to lead the charge, and always
eager to create the big picture. Watt International, the world's foremost
retail branding and design firm, is just such a company. All of the
companies under the Envoy umbrella strive to achieve the kind of
international recognition Watt has garnered. They grow from within. They
are both inspired by and pushed by each other's success, and the result
is a group of companies committed to being best of breed.
PASSION ENERGY DRIVE INTENSITY EXCEPTIONAL FOCUS
6
Envoy Annual Report 2000
A mix of skills and specialties under one umbrella gives Envoy the unique
ability to work towards creating true integration a process that allows
each company to lend its own expertise in order to create a perfectly
blended solution, and to achieve end-to-end management of client
communication needs.
7
Integration
A COLOR HAS THE POWER TO INFUSE NEW LIFE INTO ANOTHER. A drop of blue in a
sea of yellow creates an entirely new shade. A touch more deepens the hue.
Yellow transforms as it is influenced by the presence of a different color.
It changes its perspective and becomes something entirely new. Envoy's
group of companies share this trait. Each is strong and bold on its own,
yet each has the power to strengthen and support another simply by
lending its own knowledge and expertise its own characteristic hue.
The result of this strategic integration is the potential for a dynamic mix
of world-class skills and an ideal palette of resources. It also means total
business management and the ease of dealing with a common culture and a
group of companies with common goals and values. It's one voice under one
umbrella, but it's also a powerful blend of specialties that creates an
unrivaled creative scope.
STRENGTH SUPPORT BALANCE SYNERGY COMPLEMENT BLEND
8
A Technology Solution
When Panasonic Canada Inc. decided to launch a groundbreaking extranet that
would build closer ties with the business partners that service its products,
they collaborated with our technology group to explore possible solutions.
Through detailed analysis and strategic technological support, the goal was
transformed into reality.
Using a technology solution based on the Microsoft platform, two Web
applications were designed, one for use by the service centers and the other
for use by PCI to administer the application. The solution's architecture
was developed in such a way that allows the application to grow while
keeping the initial hardware costs down.
Only then was PCI able to achieve its first priority, which was to help
service centers improve the quality of service to consumers. They now have
up-to-date manuals, service literature and online parts-ordering capabilities.
ADIDAS-SALOMON ARMSTRONG BASF CIBC CASTROL CDNOW KIA
FEDEX HEWLETT PACKARD NATIONAL DISCOUNT BROKERS SAFEWAY
INTEL JD EDWARDS PIZZA HUT OXFORD PROPERTIES LEXUS IMAX
9
A Corporate Branding Solution
Oxford Properties is beginning to change traditional industry standards by
focusing on service and not just on steel and girders. A key component in
Oxford's evolution was the development of a detailed branding program. Our
brand consultancy worked with key Oxford executives to design a program to
educate Oxford tenants, allowing them to get maintenance issues solved
quickly and simply. The result was MAXX: a cartoon maintenance man whose
name is featured in both the phone and Web elements of the program. Results
show that 85% of tenants now know to call 310-MAXX whereas, prior to the
program, very few tenants knew where to go for help.
During the process, the branding team also recognized that there was an
opportunity for the Oxford master brand's visual identity to be more closely
linked with its Building Relationships philosophy. An identity system
featuring a "dynamic O" that graphically depicted the company's flexibility
and foresight, and a communications style and voice for the brand were created.
A brand champion day was also held to educate key stakeholders, ensuring that
the brand was understood and supported from within the organization.
HONDA HUMMINGBIRD MAC COSMETICS LCBO SPRINT CANADA
PETSMART PANASONIC WAL-MART PRUDENTIAL (USA) IDEACITY
STEELCASE SALOMONSMITHBARNEY TD WATERHOUSE (USA) CIBC
10
An Advertising Solution
Drawing on the strategic and creative strength of our New York based
advertising agency, a hard-driving advertising campaign was developed for
Castrol GTX to take advantage of subtle changes that were occurring in the
market. The approach worked.
Relying on evoking emotion in a category filled with rational claims, the
campaign linked the love a man has for his car with his tough driving style
and his need for the best protection money can buy. It focused on a man's
relationship with his car a relationship that's unlike anything else in a
car lover's life. The campaign gave men permission to drive hard.
Results tracked since the launch of the campaign indicate that awareness is
growing and sales have increased. In fact, within the first four months of
the campaign, unaided brand awareness and share grew significantly among
Castrol's core target market.
ARMSTRONG ARXX BUILDING PRODUCTS JD EDWARDS BASF CANADA
SPAR AEROSPACE IDEACITY LCBO LEXUS PANASONIC WAL-MART
THE LOYALTY GROUP PIZZA HUT INTEL OXFORD PROPERTIES KIA
11
A Retail Branding and Design Solution
Wal-Mart has a long-standing relationship with our retail branding and
design group. When Wal-Mart formed an agreement to license the General
Electric brand for an exclusive line of small appliances, they drew upon
the expertise of this group. This partnership produced a strategic design
solution that promoted the premium nature of the products while maintaining
the integrity of the worldwide GE brand.
The result was a product-focused design that featured a clear explanation
of the unique benefits and key features, supported by lifestyle photography
that reflected the typical Wal-Mart consumer. The design also included
information about the GE/Wal-Mart partnership and explained how, together,
the two brands are bringing innovation, affordability and quality to shoppers.
After the initial launch, data showed that sales exceeded expectations, and
the program will now be launched in Mexico, Canada and other global markets.
NATIONAL DISCOUNT BROKERS ARMSTRONG CASTROL CDNOW
MAC COSMETICS SAFEWAY BASF PETSMART ADIDAS-SALOMON
INTEL PRUDENTIAL (USA) JD EDWARDS HEWLETT PACKARD IMAX
12
Envoy Annual Report 2000
New opportunities give life color. What you do with those opportunities
gives life power. In 2000 Envoy seized strategic opportunities, infusing
vibrancy and strength into the company and creating a palette that is,
quite simply, brilliant.
2000: A BRIGHT YEAR
2000 was indeed a bright year for Envoy as we recorded yet another year of
record performance. Our commitment and focus was to aggressively grow the
company and deliver our organization to the next level of strength.
Financially Envoy has never been stronger. We posted record growth in both
net revenue and EBITDA (earnings before interest expense, income taxes,
depreciation and amortization) in 2000. We communicated a target of $10
million in EBITDA, which was a growth rate of 39% over 1999, and we delivered
on that goal. We also targeted a $100 million net revenue run rate by the
end of December 2000, and with the planned acquisition of Leagas Delaney, we
have well surpassed that goal. Actual net revenue for the year was $58.6
million, up 40% from 1999. We are also pleased to report that along with the
strong growth in net revenue, we were able to maintain our operating margin
at 17.3%. This performance against operating margin keeps Envoy among the
top performers in our industry.
Key to our development in 2000 was the further expansion and diversification
of the business. In particular, our efforts have been focused on
diversification of both our services and our geographical presence. We added
service capabilities in the rapidly expanding area of entertainment complex
and shopping center design, as well as significant muscle in our abilities to
manage back-end e-business solutions for our clients. Through both organic
growth and acquisitions, we expanded into the U.S. market by opening offices
in San Francisco, and in Europe through added facilities in London, Leeds,
Paris and Stockholm. We believe that this further diversification will better
enable Envoy to protect our margins and overall financial performance from
unique market and industry economic slowdowns.
Our focus on best of breed remains a key driver in our efforts to grow
organically. Watt International continued to extend its reputation as one of
the premier branding and design companies in the world. We also significantly
enhanced our technology capabilities with the addition of Sage Information
Consultants, a leading back-end e-business solutions provider. This collection
of leading-edge strength on a multidiscipline global platform ensures that we
are able to attract marquee international clients as well as the best and
brightest minds in the industry.
Finally, we had set a goal to expand our presence in the U.S. financial
community.
This was achieved in June 2000 when we gained a listing for our stock on the
New York based NASDAQ exchange.
As you can see, 2000 was a year of great success and accomplishment.
13
Letter to Shareholders
2001 AND BEYOND: A BRILLIANT FUTURE
2001 will see us reap the rewards of our investments and provide a platform for
us to further extend our vision.
We aspire to be our clients' most valued marketing communications business
partner in building and leveraging their brands through strategically and
creatively lead integrated services. The core disciplines of design, marketing
and technology will be the cornerstone of our integrated marketing
communications offering.
In the next 12 to 18 months, we will build on our successes of 2000. We will
focus on three key areas:
1. We will further strengthen our financial performance. Net revenue and
EBITDA growth rates are projected to achieve record results, exceeding
40% growth. Operating margins will remain in the top quartile of
performance compared with others in our industry.
2. We will continue to drive strong organic growth within the organization.
Our best of breed service offerings will continue to enhance the
reputation that our brands have built for delivering high-quality
services. We will expand our existing client base through the
integration and cross-selling of our services internationally. Our
current clients see this convergence as a positive factor for them,
and it is also strong leverage in attracting new business and retaining
prominent clients and key industry professionals.
3. We intend to continue to pursue strategic acquisitions as a secondary
vehicle to expand and diversify our business. We will focus our efforts
on the further development of both the U.S. and European markets as our
primary targets. Of note, with our planned acquisition of Leagas
Delaney, we will further enhance our presence in London, Paris and San
Francisco, and will also add Hamburg and Rome to our locations. We also
plan to explore new business development opportunities to expand our
current service offerings. Key areas of interest are public relations,
branding and identity, and strategic consulting.
We at Envoy thank you for your support. It is important in our ability to
continue to grow. We are well positioned to take advantage of opportunities on
a worldwide scale, and we look forward to a year of strength and future promise.
Geoff Genovese
President and Chief Executive Officer
Envoy Communications Group Inc.
14
Envoy Annual Report 2000
In last year's annual report I stated that we were pleased with the progress
we had made to date but that we were committed to building additional value
for our shareholders.
I believe that our accomplishments this year, both strategic and financial,
have built additional value for our shareholders.
Our strategic goals in 2000 were to list Envoy shares on the NASDAQ, expand
our operations internationally, strengthen our technology offering and expand
our marketing capabilities internationally. In June 2000, Envoy shares were
listed on the NASDAQ Small-Cap Market. We believe that this listing has
long-term strategic value for Envoy and our shareholders because it
establishes our shares on a major international exchange and makes them more
valuable as currency as we seek to expand through strategic acquisitions. In
completing the acquisition of Sage we added the additional back-end programming
capabilities we required. We also grew internationally by acquiring U.K. based
Gilchrist to support our design business in the U.K. and Europe, and we opened
an office of Watt International in Sweden to capitalize on new opportunities in
that market. The pending acquisition of Leagas Delaney adds another important
component to our service offering, enabling us to provide best of breed
integrated services to our clients on an international platform across our
three core disciplines: marketing, design and technology.
I mentioned in last year's annual report that as Envoy continues to grow
through strategic acquisition we will be impacted by higher goodwill
amortization expense. This goodwill expense represents a non-cash charge
against our current earnings and, depending on the amortization period adopted
by other companies, it can distort comparability of operating performance
amongst peer group companies. We feel that more meaningful measurements of
operating performance for a growth company like Envoy are growth in revenue
and earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA").
FINANCIAL HIGHLIGHTS ($000's)
INCOME STATEMENT 2000 1999 % Increase
Net revenue $ 58,606 $ 41,787 40
EBITDA 10,151 7,280 39
Earnings before income taxes
and goodwill amortization 7,757 5,490 41
Earnings before goodwill
amortization 4,504 3,487 29
Net earnings 2,910 2,877 1
EBITDA profit margin 17.3% 17.4% (0.5)
Fully diluted per-share amounts*
EBITDA $ 0.53 $ 0.49 8
Earnings before goodwill
amortization 0.24 0.24 N.C.
Net earnings 0.15 0.20 (25)
BALANCE SHEET 2000 1999
Working capital $ 11,435 $ 11,536
Shareholders' equity 62,687 40,612
* Based on 19,156,626 shares in 2000, and 14,750,247 shares in 1999
15
Message from Chief Financial Officer
Our financial performance, as summarized in the table on the opposite page, was
strong again in 2000. Our net revenue (formerly referred to as gross margin)
increased by approximately 40%, both through strategic acquisition and organic
growth. We set a goal of achieving a net revenue run rate of over $100 million
by the end of December 2000. With the planned acquisition of Leagas Delaney,
Envoy's net revenue run rate will be approximately $165 million. We set a
target to achieve $10 million in EBITDA in 2000. We accomplished this
objective by earning $10.2 million, an increase of 39% over 1999. Envoy's
EBITDA profit margin was 17.3% in 2000, which is comparable to 1999. This
level of profitability ranks Envoy near the top of its peer companies in
terms of EBITDA profit margin.
The following factors influenced growth in per-share amounts. Although we
had capital on hand to fund acquisition growth, we deferred the execution
and implementation of our acquisition strategy until our NASDAQ listing was
complete. Our net earnings were impacted by higher goodwill amortization
charges, and the benefit of all tax loss carryforward amounts was utilized in
1999. Going forward we have our acquisitions in place and fully financed,
and we expect to resume the growth in our per-share amounts.
In December 2000, the Financial Accounting Standards Board ("FASB") in the
United States announced that it is proposing that goodwill should no longer be
amortized but should remain on the balance sheet at its original value, subject
to an annual impairment test. The Canadian Accounting Standards Board has
expressed some preliminary views that if the above proposals were approved in
the United States, Canadian accounting standards would be conformed as well.
In addition, the FASB has proposed to eliminate the pooling of interests as a
method of accounting for business combinations in the United States. We believe
that this announcement by FASB supports our position on the inconsistency and
incomparability of operating results caused by different accounting standards
for business combinations and different treatment of goodwill amortization.
In summary, Envoy is well positioned to capitalize on the growth opportunities
in each of our core disciplines: marketing, design and technology. We have
brought together a group of companies that are profitable, strategically
focused, creatively driven and technologically savvy. Our goal in 2001 is to
continue to integrate our service offerings, achieve higher organic growth,
maintain strong operating profits and unlock the value that we believe is
inherent in our company for the benefit of shareholders.
Joe Leeder
Chief Financial Officer
Envoy Communications Group Inc.
16
Envoy Annual Report 2000
Management Discussion and Analysis
The following section of our annual report sets forth management's discussion
and analysis of the financial performance of Envoy for the year ended September
30, 2000 compared with the year ended September 30, 1999. The analysis is
based on our audited financial statements, including the accompanying notes,
which are presented elsewhere in this report.
Our net revenue (previously referred to as "gross margin" in the Company's
Form 20-F) represents our compensation for services. A portion of our
compensation from agency or advertising/marketing services is generated from
non-refundable monthly agency fees and the balance is from commissions. Our
compensation from non-agency or "project related" services is primarily
generated from project fees and hourly charges. Net revenue does not include
the recovery of any pass-through costs, such as media and production costs,
incurred on behalf of clients in acting as agent for them.
Salaries and benefits and general and administrative costs represent our two
largest operating expenses. Salaries and benefits expenses include salaries,
employee benefits, incentive compensation and other payroll-related costs,
which are expensed as incurred. General and administrative costs include
business development, office costs and professional services. Business
development activities include new business pitches to potential clients and
existing clients or their respective affiliates with respect to new products
and services, client presentations, our own advertising and promotional
costs, award entry fees and research.
NET REVENUE
Net revenue increased by 40% to $58.6 million in the year ended September
30, 2000 from $41.8 million in the year ended September 30, 1999. This
increase occurred as a result of both growth through acquisition and organic
growth. Effective July 1, 2000, we acquired Gilchrist Brothers Limited and
effective June 1, 2000 we acquired Sage Information Consultants Inc. Both
acquisitions were accounted for using purchase accounting and our results of
operations reflect net revenue from the respective effective dates. These
acquisitions accounted for approximately $8.6 million, or 51% of the overall
increase in net revenue. Our organic growth in 2000 was $4.5 million,
representing 27% of the overall increase in net revenue for the year.
In fiscal 1999, Envoy completed three acquisitions: the acquisition of Hampel
Stefanides effective October 1, 1998, the acquisition of Devlin Multimedia
Inc., effective January 1, and the acquisition of Watt International Inc.,
effective
17
Management Discussion & Analysis
May 1. Envoy's results of operations for fiscal 1999 include the acquired
operations from the respective effective dates of the acquisitions. As a
result of the acquisitions of Devlin and Watt, there are an additional three
and seven months of net revenues for these companies, respectively, included
in the September 30, 2000 results of operations that were not included in our
results of operations for the year ended September 30, 1999. This accounted
for $10.1 million of additional net revenue in fiscal 2000 over fiscal 1999.
There are 12 months of net revenues for Hampel Stefanides included in our
results of operations for the year ended September 30, 1999.
In fiscal 2000, net revenue from our advertising/marketing services
represented approximately 49% of net revenue, while design and technology
services represented 38% and 13% respectively. In 1999 advertising/marketing
services accounted for approximately 73% of net revenue, with design and
technology services accounting for 22% and 5% respectively.
Net revenues from customers located in the United States have continued to
grow from $22.6 million in 1999 to $32.6 million in 2000. As a result of
acquisitions, in fiscal 2000 net revenues of $4 million were generated
from customers in the United Kingdom and continental Europe.
In fiscal 2000 we have endeavored to continue to expand our client base and
our five largest clients accounted for 33.7% of our fiscal 2000 net revenue
for such period compared to 37.7% of our fiscal 1999 net revenue. No single
client accounted for over 15% of our net revenue in either year.
EBITDA
Management believes that the most important measure of profitability when
evaluating a company growing through acquisitions is earnings before interest
expense, income taxes, depreciation and amortization ("EBITDA"). Using EBITDA
eliminates distortions created by goodwill amortization, tax rates and interest
charges and makes the operating results more comparable to other companies,
particularly those companies that account for acquisitions using pooling of
interests accounting.
In fiscal 2000, we earned $10.2 million in EBITDA compared with $7.3 million in
fiscal 1999. This represents a growth of 39% year over year. The EBITDA profit
margin in 2000 was 17.3%, similar to the EBITDA profit margin achieved in 1999.
OPERATING EXPENSES
Operating expenses increased by 40% to $48.5 million for fiscal 2000 from $34.5
million. As a percentage of net revenue, operating expenses remained constant
at 83% for fiscal 2000 and fiscal 1999.
The primary reasons for the increase in operating expenses were an increase in
salaries and benefits of $9.4 million, or 37%; an increase in general and
administrative expenses of $3.9 million, or 56%; and an increase in occupancy
costs of $675,000, or 36%. There were also increases in depreciation of
$543,000, or 38%, and in goodwill amortization net of taxes of $984,000, or
161%.
The increase in salaries and benefits reflects staff of acquired operations
plus the additional management and client support personnel employed to handle
the continued growth and expanded operations throughout the Company and
related recruiting and hiring costs. As a percentage of net revenue, salaries
and benefits remained relatively constant at 60% for fiscal 2000 compared with
62% in fiscal 1999.
18
envoy annual report 2000
The additional general and administrative expenses were largely due to expanded
business development activities by our existing business divisions as well as
new and expanded business development activity by the acquired businesses.
General and administrative expenses remained relatively constant at 18% of net
revenue for fiscal 2000 compared with 17% of net revenue for fiscal 1999.
Occupancy costs increased due to additional space required to support our
growth in Toronto and New York, the inclusion of the Watt Group's occupancy
costs for an additional seven months and the occupancy costs associated with
the acquisition of Sage and Gilchrist.
The additional depreciation charges were due to the depreciation of the costs
of our additional leasehold improvements and of newly purchased capital
equipment as a result of acquisitions.
The increase in interest charges was largely due to additional debt relating
to acquisitions.
Earnings before income taxes and goodwill amortization increased from $5.5
million to $7.8 million, an increase of 41.3%.
In 2000, our effective income tax rate as a percentage of net income before
goodwill amortization was 41.9% compared with our 1999 effective tax rate of
36.5%. The difference relates primarily to the utilization in 1999 of tax
loss carryforwards, reducing our Canadian income tax liability as set forth
in Note 10 of the Notes to Consolidated Financial Statements.
Goodwill amortization increased from $610,000 to $1.6 million due largely to
the increased amount of goodwill derived from the acquisitions discussed
above. In addition, we reduced the goodwill amortization period for Devlin
from 25 years to 7 years, effective October 1, 1999, on a prospective basis.
Our goodwill is largely not deductible for income tax purposes.
NET INCOME
Primarily as a result of the foregoing factors, net income remained
relatively constant at $2.9 million in fiscal 2000 and fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Envoy's principal capital requirements have been to fund acquisitions and
capita expenditures and for working capital purposes. Liquidity needs were
met in recent years through funds provided from operating activities,
equity offerings, and from long-term borrowings as described below.
The working capital balance was $11.4 million and the cash balance was
$7.1 million at September 30, 2000. At September 30, 1999 working capital
was $11.5 million and cash was $15.3 million.
Net cash provided by operating activities before any increase or decrease
in non-cash operating working capital was $6.2 million for the year ended
September 30, 2000 and $5 million for the year ended September 30, 1999.
Additional cash may be payable in respect of the acquisition of Hampel
Stefanides through September 30, 2002 depending on the financial
performance of Hampel Stefanides over that period (to a maximum of $3.2
million in cash and 725,705 common shares); in respect of the acquisition
of Sage through May 31, 2004 depending on the financial performance of Sage
over that period (to a maximum of $11.5 million in cash and 1,446,541 common
19
Management Discussion & Analysis
shares); and in respect of Leagas Delaney over a four-year period depending
on the financial performance of Leagas Delaney over that period (to a
maximum of 10 million british pounds in cash and 6,944,000 common shares).
EQUITY ISSUANCES
On June 5, 2000, we issued 1,533,571 common shares through a public share
offering for aggregate gross proceeds of $10.7 million (or $7.00 per share).
Of the proceeds (after deduction of the agent's fee and expenses of the
issue totaling $1.2 million), $6.8 million was used to finance the cash
payment made subsequent to June 30, 2000 on the closing of the Sage
acquisition and the remainder for acquisitions and general corporate
purposes.
On May 11, 1999, we issued 3,300,000 special warrants to acquire common
shares for an aggregate purchase price of $18.2 million or $5.50 per common
share acquired. On August 12, 1999, each outstanding warrant was automatically
exercised in accordance with its terms for one common share for no additional
consideration. Of the proceeds (after deduction of the agent's fee and
expenses of the issue totalling $1.9 million), $4.5 million was used to repay
the credit facility described below, $7.0 million was used to finance the
acquisition of the business of Watt Design and the remainder was used for
general corporate purposes.
Hampel Stefanides has a letter of credit in the amount of US$250,000 to serve
as a security deposit under a Hampel Stefanides sublease. Such letter of
credit is secured by a restricted cash deposit. In addition, other restricted
cash of $457,000 at September 30, 2000 ($175,000 at September 30, 1999)
represented customer deposits. See Note 4 of the Notes to Consolidated
Financial Statements.
In June 2000, we established a new US$8 million revolving credit facility,
and borrowed US$3.1 million under the facility, a portion of which was used
to repay a pre-existing credit facility, which had been used, in part, to
fund the acquisition of Hampel Stefanides. The purpose of this facility was
to supplement our working capital position and assist with acquisitions.
Cash flow from operations as well as the availability of the remaining $4.9
million under existing credit facilities and the net proceeds of any future
share offerings are expected to provide the liquidity to meet current
foreseeable cash needs for at least the next year. Suitable businesses will
be sought for acquisition in furtherance of the expansion strategy, and
additional equity or debt financings may be effectuated to fund such
acquisitions.
20
Envoy Annual Report 2000
Management Discussion & Analysis
FINANCIAL RISKS AND UNCERTAINTIES
Envoy management monitors, understands and manages the risks associated with
its business transactions and the general economic environment in which it
operates. Risks reflect uncertainty regarding potential outcomes from changes
in political, economic and capital market conditions. The Company is subject
to these risks and uncertainties and actively manages them as follows:
Interest rate risk: The Company's debt under its lending facility is described
in Note 8 of the Notes to Consolidated Financial Statements. The interest on
the facility is subject to market fluctuation. However, management believes
that its level of debt relative to its assets and shareholders' equity is
modest and, consequently, Envoy is not subject to any significant interest
rate risk.
Foreign currency risk: The Company's U.S. and U.K. subsidiaries are
self-sustaining operations. Consequently, the cash flow from its U.S. and
U.K. subsidiaries is naturally hedged against its U.S. and U.K. liabilities
including future earn-out payments. Watt also earns a significant portion of
its revenue in U.S. dollars.
The Company entered into foreign currency contracts to manage its exposure to
this foreign currency risk. As at September 30, 2000, Envoy had outstanding
foreign currency contracts to sell US$3,135,000 in exchange for Canadian
dollars over a period of 12 months at a weighted average exchange rate of
CDN$1.46.
Credit risk: Envoy manages its credit risk with respect to accounts receivable
by dealing with primarily large creditworthy customers and by billing whenever
possible in advance of rendering services or making commitments. Management
believes that the Company is not subject to significant concentration of
credit risk since no customer represented more than 10% of accounts receivable
as at September 30, 2000 (one customer represented 15.4% of accounts receivable
as at September 30, 1999).
FORWARD-LOOKING STATEMENTS
The Company and its representatives periodically make written and spoken
statements, including those contained in the annual report. By their nature,
forward-looking statements are subject to risks and uncertainties that could
result in actual performance being materially different from anticipated
results. The Company cautions readers when making decisions to consider the
risks and uncertainties of forward-looking statements.
The Canadian Institute of Chartered Accountants has issued a new accounting
standard for "Earnings Per Share," which is effective for fiscal years
beginning on or after January 1, 2001. This new standard, which is
consistent with the comparable U.S. accounting standard, uses the treasury
stock method instead of the imputed interest approach for determining the
dilutive effects of warrants, options and similar instruments. Under this
method, diluted earnings per share for the year ended September 30, 2000
remain unchanged at $0.15, and there is no difference in the calculation of
basic earnings per share.
21
Financials
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Envoy Communications
Group Inc. as at September 30, 2000 and 1999 and the consolidated statements
of operations, retained earnings and cash flows for each of the years in the
two-year period ended September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
With respect to the consolidated financial statements for the year ended
September 30, 2000, we conducted our audit in accordance with Canadian
generally accepted auditing standards and United States generally accepted
auditing standards. With respect to the consolidated financial statements
for the year ended September 30, 1999, we conducted our audit in accordance
with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
2000 and 1999 and the results of its operations and its cash flows for each of
the years in the two-year period ended September 30, 2000 in accordance with
Canadian generally accepted accounting principles.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States.
A description of significant differences, as applicable to the Company, is
included in note 17 to the consolidated financial statements.
The consolidated financial statements as at September 30, 1998 and for the
year then ended were audited by other auditors who expressed an opinion
without reservation on those statements in their report dated December 4,
1998.
Chartered Accountants
Toronto, Canada
November 24, 2000
22
Envoy Annual Report 2000
CONSOLIDATED BALANCE SHEETS
(In Canadian dollars)
September 30, 2000 and 1999
2000 1999
ASSETS
Current assets:
Cash $ 7,105,418 $ 15,300,454
Accounts receivable (note 3) 34,234,974 27,910,032
Prepaid expenses 1,732,212 1,310,608
43,072,604 44,521,094
Restricted cash (note 4) 832,337 545,982
Capital assets (note 6) 10,448,625 7,869,486
Goodwill and other assets (note 7) 46,987,707 22,186,265
Deferred income taxes 966,715 625,587
$102,307,988 $ 75,748,414
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 24,247,075 $ 27,713,688
Income taxes payable 1,190,313 1,698,638
Deferred revenue 1,044,873 -
Amounts collected in excess of
pass-through costs incurred 2,307,047 1,745,814
Current portion of long-term
debt (note 8) 2,848,430 1,827,086
31,637,738 32,985,226
Long-term debt (note 8) 7,983,449 2,151,185
Shareholders' equity:
Share capital (notes 9 and 11) 54,597,762 35,613,907
Retained earnings 8,403,367 5,492,940
Cumulative translation adjustment (314,328) (494,844)
62,686,801 40,612,003
Subsequent events (notes 2(e) and 16)
Commitments (note 12)
Contingencies (note 2)
Canadian and United States accounting
policy differences (note 17)
$102,307,988 $ 75,748,414
See accompanying notes to consolidated financial statements.
On behalf of the Board:
______________________________________________ Director
______________________________________________ Director
23
Financials
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Canadian dollars)
Years ended September 30, 2000, 1999 and 1998
2000 1999 1998
Net revenue $ 58,606,235 $ 41,787,125 $ 13,491,015
Operating expenses:
Salaries and benefits 35,132,814 25,710,153 5,938,833
General and administrative 10,769,853 6,918,465 5,048,167
Occupancy costs 2,552,854 1,878,090 414,278
48,455,521 34,506,708 11,401,278
Earnings before interest expense,
income taxes, depreciation
and goodwill amortization 10,150,714 7,280,417 2,089,737
Depreciation 1,986,691 1,444,110 462,682
Interest expense 407,473 346,515 20,000
Earnings before income taxes
and goodwill amortization 7,756,550 5,489,792 1,607,055
Income taxes (note 10) 3,252,354 2,002,995 -
Earnings before goodwill
amortization 4,504,196 3,486,797 1,607,055
Goodwill amortization, net of
income taxes of $24,000
(1999 - $11,000; 1998 - nil) 1,593,769 610,034 104,256
Net earnings $ 2,910,427 $ 2,876,763 $ 1,502,799
Net earnings per share (note 9(g)):
Basic $ 0.15 $ 0.20 $ 0.15
Fully diluted 0.15 0.20 0.15
Earnings per share before goodwill
amortization:
Basic 0.24 0.24 0.16
Fully diluted 0.24 0.24 0.16
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Canadian dollars)
Years ended September 30, 2000, 1999 and 1998
2000 1999 1998
Retained earnings, beginning of year $ 5,492,940 $ 2,682,142 $ 1,179,343
Loss on redemption of shares (note 9(f )) - (65,965) -
Net earnings 2,910,427 2,876,763 1,502,799
Retained earnings, end of year $ 8,403,367 $ 5,492,940 $ 2,682,142
See accompanying notes to consolidated financial statements.
24
Envoy Annual Report 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Canadian dollars)
Years ended September 30, 2000, 1999 and 1998
2000 1999 1998
Cash flows from operating activities:
Net earnings $ 2,910,427 $ 2,876,763 $ 1,502,799
Items not involving cash:
Deferred income taxes (285,344) 76,000 -
Depreciation 1,986,691 1,444,110 462,682
Goodwill amortization 1,617,769 621,034 104,256
Net change in non-cash working capital balances:
Accounts receivable 1,823,856 (1,395,987) (1,377,220)
Prepaid expenses 17,385 (397,950) (317,575)
Accounts payable and accrued
liabilities (10,519,909) 229,132 (313,986)
Income taxes payable (787,622) 1,794,028 124,541
Deferred revenue 1,044,873 - -
Amounts collected in excess of
pass-through costs incurred 518,410 (3,656,333) (249,212)
Other (9,783) 46,284 (69,935)
Net cash provided by (used in)
operating activities (1,683,247) 1,637,081 (133,650)
Cash flows from financing activities:
Long-term debt 5,198,442 5,000,000 300,379
Long-term debt repayments (5,497,140) (1,410,467) -
Issuance of common shares for cash 10,939,807 1,361,172 2,401,846
Redemption of common shares - (65,965) -
Reduction (increase) in restricted
cash(277,330) 187,718 -
Net proceeds from special warrant issue - 16,192,731 4,825,364
Net cash provided by financing
activities 10,363,779 21,265,189 7,527,589
Cash flows from investing activities:
Acquisition of subsidiaries (net of
cash acquired (bank indebtedness
assumed) of ($941,385); 1999 -
$5,919,627; 1998 - $675,072) (14,640,994) (8,416,977) (2,639,960)
Purchase of capital assets (2,428,228) (2,017,796) (3,128,519)
Increase in other assets (67,356) (20,000) (200,000)
Net cash used in investing
activities (17,136,578) (10,454,773) (5,968,479)
Change in cash balance due to foreign
exchange 261,010 (267,201) -
Increase (decrease) in cash (8,195,036) 12,180,296 1,425,460
Cash, beginning of year 15,300,454 3,120,158 1,694,698
Cash, end of year $ 7,105,418 $ 15,300,454 $ 3,120,158
Cash flow from operations per share (note 9(g)):
Basic $ 0.33 $ 0.34 $ 0.21
Fully diluted $ 0.33 $ 0.34 $ 0.20
Supplemental cash flow information:
Interest paid $ 407,474 $ 334,229 $ 20,001
Income taxes paid 3,489,185 68,774 -
Shares issued during the year for
non-cash consideration 6,850,311 3,691,800 500,000
See accompanying notes to consolidated financial statements.
25
Financials
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Canadian dollars)
Years ended September 30, 2000, 1999 and 1998
The Company, continued under the Business Corporations Act (Ontario), with
operations in the United States, the United Kingdom, Continental Europe
and Canada, provides integrated e-marketing and communication services.
The core disciplines are advertising, branding and digital professional
services, which include strategy, creative design and technology
infrastructure services necessary to build and maintain successful
e-businesses.
1. Significant accounting policies
(a) Basis of presentation:
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada, which vary in
certain significant respects from generally accepted accounting
principles in the United States. A description of certain significant
differences, as applicable to the Company, is included in note 17.
(b) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries, collectively known as Envoy
Communications Group Inc. Intercompany balances and transactions are
eliminated on consolidation.
Significant subsidiaries are as follows:
% of Jurisdiction of
Company ownership incorporation
Communique Incentives Inc. 100 Ontario
The Communique Group Inc. 100 Ontario
Promanad Communications Inc. 100 Ontario
Hampel Stefanides, Inc. 100 Delaware
Devlin Multimedia Inc. 100 Ontario
Watt International Inc. 100 Ontario
Sage Information Consultants Inc. 100 Ontario
Gilchrist Brothers Limited 100 United Kingdom
Effective October 1, 2000, Promanad Communications Inc. was amalgamated
with The Communique Group Inc.
(c) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
(d) Capital assets:
Capital assets are recorded at cost and are depreciated over their
estimated useful lives as follows:
Asset Basis Rate
Audiovisual equipment Straight line 2-5 years
Computer equipment Declining balance 30-50%
Furniture and equipment Declining balance 20%
Leasehold improvements Over term of leases
(e) Revenue recognition:
Effective September 30, 2000, the Company presents, as net revenue,
its net commission and fee income earned as compensation for its
services. Previously, the Company presented as revenue its gross
billings to its customers, which included the recovery of pass-through
costs incurred in connection with its agency services. This change in
presentation has no impact on the Company's net earnings and these
financial statements have been adjusted to reflect this change.
Further, the balance sheet has been adjusted to reflect the following:
(i) the reclassification out of deferred revenue, those amounts
collected from customers in excess of pass-through costs incurred
such that deferred revenue would represent only fees billed and
collected in advance of such fees being earned; and
(ii) the reclassification of reimbursable pass-through costs to
unbilled accounts receivable.
26
Envoy Annual Report 2000
Net revenue represents the Company's compensation for its agency and
non-agency services and is recognized only when collection of such net revenue
is probable. Agency services are those that require the Company to incur
external media and production costs on behalf of its clients and for which it
is entitled to pass through the costs for reimbursement from its clients. The
reimbursement of pass-through costs are not included in net revenue. The
Company's agency and non-agency projects are short term in nature.
Fees earned for non-agency services are recognized either upon the
performance of the Company's services when the Company earns a per-diem fee,
or in the case of a fixed fee, when the Company's services are substantially
complete and accepted by the client. Fees earned but not yet billed are included
in accounts receivable. Fees billed to clients in excess of fees recognized as
net revenue are classified as deferred revenue.
When the Company's compensation for its agency services is based on
commissions, net revenue comprises (i) commissions earned from media
expenditures, which are recognized at the time the advertising appears or is
broadcast, or in respect of on-line advertising, either ratably over the period
of time the advertising appears or based on the actual impressions delivered at
the contractual rate per impression, depending upon the terms of the
arrangement, and (ii) commissions earned on expenditures for the production of
advertisements, which are recognized upon the completion of the Company's
services and acceptance by the client, being the time at which the Company has
no further substantial obligations with respect thereto.
When the Company's compensation for its agency services is fee based, net
revenue comprises non-refundable monthly agency fees, which are recognized in
the month earned.
Pass-through costs related to production are accrued and recorded in accounts
receivable, as unbilled reimbursable costs, at the time the third party
suppliers render their services. Pass-through costs related to media are
accrued at the time the advertisement appears or is broadcast.
(f) Goodwill:
Goodwill, being the excess of purchase price over the fair values of
net assets acquired, is initially stated at cost with amortization
being provided on a straight-line basis ranging from 7 to 25 years.
Annually, the Company assesses the recoverability of the carrying value
of its goodwill and the related amortization period. As part of the
evaluation, the Company considers several factors, including the
operating results and trends, movement in major clients and key client
service personnel, changes in client relationships and general economic
conditions. Significant changes in these factors could result in a
permanent impairment of goodwill.
Goodwill is considered to be impaired if the future anticipated
undiscounted operating cash flows from the acquired businesses are
less than the carrying value of the goodwill . These cash flow
projections require management to make certain assumptions regarding
future revenue and expenses. When impairment is determined, the related
loss is charged to earnings and is measured by the excess of the carrying
value of the goodwill over its fair value based on estimated discounted
future operating cash flows. The impact of such write-downs on the
amortization period is simultaneously assessed. The Company believes
there has been no impairment in the value of goodwill.
(g) Foreign currency translation:
With the exception of translation of the Company's foreign subsidiaries
and certain of its long-term debt, at the transaction date, each asset,
liability, revenue and expense is translated into Canadian dollars by the
use of the exchange rate in effect at that date. At the year-end date,
monetary assets and liabilities are translated into Canadian dollars by
using the exchange rate in effect at that date. The resulting foreign
exchange gains and losses are included in earnings in the current year.
Unrealized gains or losses on long-term debt that is designated as a
hedge of foreign subsidiaries are deferred and recorded as a separate
component of shareholders' equity.
The financial statements of the Company's foreign subsidiaries, all of
which are self-sustaining operations, are translated using the current
rate method, whereby the assets and liabilities of such foreign
operations are translated at the exchange rate in effect at the balance
sheet date. Revenue and expenses are translated at the average exchange
rate for the year. Translation gains or losses are deferred and
included as a separate component of shareholders' equity.
(h) Income taxes:
Income taxes are provided using the tax allocation method whereby
income taxes are recorded in the period in which transactions affect
earnings, regardless of the period in which transactions are recognized
for income tax purposes.
2. Acquisition of subsidiaries
(a) Effective July 1, 2000, the Company acquired 100% of the outstanding
shares of Gilchrist Brothers Limited (Gilchrist), a United
Kingdom-based digital imaging and design firm, in exchange for cash
consideration of $3,235,798 (1,460,000 british pounds) and a $5,325,215
(2,402,750 british pounds) non-interest-bearing promissory note payable,
repayable in semi-annual instalments over the next two years to June 30,
2002. The Company has the option to prepay the promissory note on or
before December 31, 2000 in exchange for a cash payment of $4,676,393
(2,110,000 british pounds). The present value of the promissory note
of $4,458,614 (2,011,738 british pounds) together with the initial cash
consideration represent the total purchase price.
27
Financials
The acquisition has been accounted for using the purchase method of accounting
and the resulting goodwill is being amortized over 20 years. The fair value of
the net assets acquired at July 1, 2000 was as follows:
Non-cash working capital $ 1,046,094
Capital assets 2,001,319
Long-term debt (2,165,325)
Net assets 882,088
Total consideration including bank indebtedness assumed 8,593,970
Excess of purchase price over fair value
of net assets acquired allocated to goodwill $ 7,711,882
(b) Effective June 1, 2000, the Company acquired 100% of the outstanding
shares of Sage Information Consultants Inc. (Sage), a digital
professional service firm operating in the United States and Canada,
in exchange for cash consideration of $6,750,000 and the issuance of
503,145 common shares of the Company with a fair value of $4,000,000.
The Company may be required to pay additional consideration, to a
maximum amount of $11,500,000 in cash and 1,446,541 common shares,
based on the attainment of certain operating results over each of the
next four years to May 31, 2004. The acquisition has been accounted
for using the purchase method of accounting and the resulting goodwill
is being amortized over 10 years. Future consideration will be
accounted for as goodwill at the time it becomes payable. The fair
value of the net assets acquired at June 1, 2000 was as follows:
Non-cash working capital $ 104,663
Capital assets 141,578
Deferred income taxes 53,000
Net assets 299,241
Total consideration including bank indebtedness assumed 12,270,724
Excess of purchase price over fair value of net assets
acquired allocated to goodwill $ 11,971,483
(c) Effective May 1, 1999, the Company acquired substantially all of the
assets and the liabilities of The Watt Design Group Inc. (Watt), a
packaging and retail environment design business, in exchange for cash
consideration of $6,700,000. Costs associated with the acquisition of
$470,000 were satisfied by the issuance of 100,000 common shares of the
Company with a fair value of $470,000. The acquisition has been
accounted for using the purchase method of accounting and the resulting
goodwill is being amortized over 25 years. The fair value of the net
assets acquired at May 1, 1999 was as follows:
Non-cash working capital $ 4,054,000
Capital assets 939,000
Net assets 4,993,000
Total consideration less cash acquired 7,569,000
Excess of purchase price over fair value of
net assets acquired allocated to goodwill $ 2,576,000
(d) Effective January 1, 1999, the Company acquired 100% of the outstanding
shares of Devlin Multimedia Inc. (Devlin), an interactive communication
services business, in exchange for initial cash consideration of
$575,000 and the issuance of 225,060 common shares of the Company with a
fair value of $925,000. The Company may be required to pay additional
consideration, to a maximum of $4,500,000, based on Devlin's attainment
of certain operating results over the next two years to December 31,
2001. However, management believes the likelihood of paying this
contingent consideration is remote. The acquisition has been accounted
for using the purchase method of accounting and the resulting goodwill
is being amortized over seven years. Future consideration, if any, will
be accounted for as additional goodwill at the time it becomes payable.
28
Envoy Annual Report 2000
The fair value of the net assets acquired at January 1, 1999 was as
follows:
Non-cash working capital $ 9,000
Capital assets 158,000
Long-term debt (88,000)
Net assets 79,000
Total consideration including bank indebtedness assumed 1,613,000
Excess of purchase price over fair value
of net assets acquired allocated to goodwill $ 1,534,000
(e) Effective October 1, 1998, the Company acquired 100% of the outstanding
shares of Hampel Stefanides, Inc. (Hampel Stefanides), a full-service
advertising and commercial design agency operating in the United States,
in exchange for initial cash consideration of $5,587,349 (US$3,649,000)
and the issuance of 581,395 common shares with a fair value of
$2,296,800 (US$1,500,000). In September 1999, the Company recorded
additional consideration of $4,134,002. The consideration was paid on
November 4, 1999 by way of a cash payment of $1,703,802 and the
issuance of 450,040 common shares of the Company with a fair value of
$2,430,200. During the year, additional cash consideration of $554,788
(US$375,000) was paid. Additional cash consideration of $375,875
(US$250,000) is included in accounts payable and accrued liabilities as
at September 30, 2000 and has been included as part of total
consideration.
In September 2000, the Company determined that additional consideration
was owing, in the form of cash and shares of the Company, based on
Hampel Stefanides's operating results for the year ended September 30,
2000 and such amount has been recorded as at September 30, 2000. The
aggregate consideration of $5,348,600 was paid on November 1, 2000 by
way of a cash payment of $1,724,776, which is included in accounts
payable and accrued liabilities, and the issuance of 444,641 common
shares of the Company with a fair value of $3,623,824, which are
included in share capital as at September 30, 2000, as shares to be
issued (note 9(a)).
The Company may be required to pay additional consideration, to a
maximum amount of $3,190,908 (US$2,100,000) in cash and 725,705 common
shares, based on the attainment of operating results over the next two
years to September 30, 2002. Future consideration, if any, will be
accounted for as additional goodwill at the time it becomes payable.
The acquisition has been accounted for using the purchase method of
accounting and the resulting goodwill is being amortized over 25
years. The fair value of the net liabilities acquired on October 1,
1998 and consideration accounted for to date was as follows:
Non-cash working capital deficiency $ (6,171,687)
Capital assets 1,676,664
Restricted cash 765,600
Net liabilities (3,729,423)
Consideration less cash acquired, September 30, 1999 7,475,961
Additional consideration:
Cash 1,724,776
Issuance of 444,641 common shares 3,623,824
Total consideration less cash acquired 12,824,561
Purchase price and fair value of net liabilities
acquired allocated to goodwill $ 16,553,984
(f) Effective June 1, 1998, the Company acquired 100% of the outstanding
shares of Promanad Communications Inc. (Promanad), a full-service
advertising agency, in exchange for initial cash consideration of
$2,937,142 and the issuance of 119,047 common shares of the Company
with a fair value of $500,000. In June 1999, the Company determined
that additional cash consideration of $661,675 and the issuance of
52,514 common shares of the Company with a fair value of $367,598
was payable.
In June 2000, the Company determined that additional consideration
was payable based on Promanad's operating results for the 12 months
ended May 31, 2000. The consideration comprised cash of $678,636 and
the issuance of 53,860 common shares of the Company with a fair value
of $420,108.
This acquisition was accounted for using the purchase method of
accounting and the resulting goodwill is being amortized over 25 years.
29
Financials
The fair value of the net liabilities acquired at June 1, 1998 and
consideration accounted for to date was as follows:
Non-cash working capital deficiency $ (954,000)
Capital assets 522,000
Net liabilities (432,000)
Consideration, net of cash acquired, September 30, 1999 3,977,415
Additional consideration:
Cash 678,636
Issuance of 53,860 common shares 420,108
Total consideration less cash acquired 5,076,159
Purchase price and fair value of net liabilities
acquired allocated to goodwill $ 5,508,159
3. Accounts receivable
Accounts receivable comprises the following:
2000 1999
Trade receivables $ 25,844,406 $ 22,377,718
Accrued revenue 2,652,275 2,140,203
Unbilled pass-through costs 5,738,293 3,392,111
$ 34,234,974 $ 27,910,032
4. Restricted cash
Restricted cash includes the following:
(a) $375,875 (US$250,000) (1999 - $371,002 (US$250,000)) bank certificate
of deposit pledged against a letter of credit for a building lease of
Hampel Stefanides.
(b) A trust account established for Communique Incentives Inc. for customer
deposits of $456,462 (1999 - $174,980).
5. Related party transactions
Certain management and administrative costs and costs relating to
acquisitions totalling $300,000 (1999 - $250,000, 1998 - $175,000)
were paid during the year to a company controlled by a director and
are recorded at the exchange amount, being the amount agreed to by the
related parties.
6. Capital assets
Accumulated Net book
2000 Cost depreciation value
Audiovisual equipment $ 780,918 $ 741,376 $ 39,542
Computer equipment 5,353,477 2,716,779 2,636,698
Furniture and equipment 3,104,075 1,899,577 1,204,498
Leasehold improvements 7,586,318 2,000,031 5,586,287
Assets under capital leases 1,055,624 74,024 981,600
$ 17,880,412 $ 7,431,787 $ 10,448,625
Accumulated Net book
1999 Cost depreciation value
Audiovisual equipment $ 780,918 $ 727,323 $ 53,595
Computer equipment 3,469,173 1,783,760 1,685,413
Furniture and equipment 2,828,225 1,569,315 1,258,910
Leasehold improvements 4,671,562 1,235,742 3,435,820
Assets under construction 1,435,748 - 1,435,748
$ 13,185,626 $ 5,316,140 $ 7,869,486
30
Envoy Annual Report 2000
7. Goodwill and other assets
2000 1999
Goodwill, net of accumulated amortization
of $2,934,156 (1999 - $1,316,387) $ 46,707,924 $ 21,916,265
Mortgage receivable (i) 200,000 200,000
Other 79,783 70,000
$ 46,987,707 $ 22,186,265
(i) Mortgage receivable:
The Company holds a non-interest-bearing, second mortgage receivable
from one of its senior officers.
The mortgage receivable has the following repayment schedule:
2002 $ 8,000
2003 8,000
2004 12,000
2005 12,000
Thereafter 160,000
$ 200,000
8. Long-term debt
2000 1999
Revolving credit facility, U.S. prime rate
plus 0.125% to 0.250% or at the London
Inter-Bank Offered Rate plus 1.75%
to 2.25% (i) $ 4,727,043 $ -
Non-interest-bearing promissory note, issued
July 1, 2000, repayable in semi-annual
installments over three years to June 30,
2002 (note 2(a)) 4,564,856 -
Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly
installments of $7,665 principal and interest 694,337 200,000
Loan payable to landlord, 0.925% per annum, due
January 1, 2003, repayable in monthly
installments of $6,728 principal and interest 180,379 260,380
Capital lease, 12.3% over the lease period,
repayable in quarterly installments of
$56,139 (25,330 british pounds) principal and interest,
due January 2003 459,731 -
Capital leases, 11.1% to 13.9% over the lease
period, repayable in quarterly installments of
$43,771 (19,750 british pounds) principal and interest,
due between April 2001 and April 2002 178,563 -
Term loan, prime plus 1.5% per annum, due October
2002, repayable in monthly principal installments
of $138,889, plus interest - 3,472,222
Other 26,970 45,669
10,831,879 3,978,271
Less current portion 2,848,430 1,827,086
$ 7,983,449 $ 2,151,185
31
Financials
(i) During the year, the Company established a US$8 million revolving
credit facility and repaid its existing term loan. The term of the
facility is two years and can be converted on June 29, 2002, being
the second anniversary date, into a three-year term loan. Interest
rates on the facility are variable based on certain leverage ratios
and as at September 30, 2000 the interest rate was 9.5%. The
facility is secured by a registered general security agreement
guarantee. Under the terms of the debt facility the Company is
required to maintain certain financial ratios.
Principal repayments are as follows:
2001 $ 2,848,430
2002 2,625,741
2003 150,584
2004 76,520
2005 79,221
Thereafter 5,051,383
$ 10,831,879
9. Share capital
(a) Authorized:
50,000,000 common shares without par value (1999 - 50,000,000;
1998 - 50,000,000)
Issued:
2000 1999 1998
Number Number Number
of shares Amount of shares Amount of shares Amount
Balance,
beginning
of year 18,349,005 $35,613,907 13,231,618 $10,634,371 7,604,635 $2,757,164
Common shares issued
for cash pursuant to:
Public
offering 1,533,571 10,128,823 - - - -
Stock
options
exercised 214,000 811,100 273,000 873,810 205,000 243,925
Acquisitions 557,005 4,420,108 958,969 4,076,544 157,021 649,997
Special
warrants
exercised - - 3,300,000 17,111,620 1,633,382 4,825,364
Warrants
exercised - - 135,378 487,362 3,631,580 2,157,921
20,653,581 50,973,938 17,898,965 33,183,707 13,231,618 10,634,371
Shares to be issued in respect
of contingent consideration
(note 2(e)) 444,641 3,623,824 450,040 2,430,200 - -
Balance,
end of
year 21,098,222$54,597,762 18,349,005 $35,613,907 13,231,618$10,634,371
(b) Public offering:
On June 5, 2000, the Company issued 1,533,571 common shares through a
public share offering for gross proceeds of $7.00 per share and aggregate
proceeds of $10,734,997. Net proceeds recorded as share capital were
$10,128,823 after deducting issue costs of $1,195,965 and recording the
related tax recovery of $589,791.
(c) Private placement transaction:
On May 11, 1999, the Company issued 3,300,000 special warrants in a
private placement for cash consideration of $5.50 per special warrant
and aggregate proceeds of $18,150,000. Net proceeds recorded as share
capital, after deducting issue costs of $1,957,269 and the related tax
recovery of $918,889, were $17,111,620. On July 30, 1999, the Company
filed a final prospectus with certain securities commissions in Canada
to qualify 3,300,000 common shares which were issued on the exercise
of the special warrants.
(d) Stock option plans:
The Company has reserved 3,000,000 common shares under its stock option
plans. Under the plans, the options are exercisable for one common share
and the exercise price of the option must equal the market price of the
underlying share at the grant date. Options granted after November 1997
have vesting periods ranging from date of grant and up to five years.
Options granted prior to November 1997 vested upon grant. Once vested,
options are exercisable at any time until expiry. Expiry dates range
between 2000 and 2005.
32
envoy annual report 2000
Details of the options are as follows:
Weighted average
exercise
Number of options price per share
Options outstanding, September 30, 1997 655,000 $ 2.51
Options granted 1,240,000 3.79
Options exercised (205,000) 1.19
Options canceled (135,000) 2.94
Options outstanding, September 30, 1998 1,555,000 3.60
Options granted 1,116,500 4.86
Options exercised (273,000) 3.20
Options canceled (322,000) 3.75
Options outstanding, September 30, 1999 2,076,500 4.30
Options granted 774,000 7.43
Options exercised (214,000) 3.79
Options canceled (296,000) 4.72
Options outstanding, September 30, 2000 2,340,500 $ 5.33
Options exercisable, September 30, 2000 1,137,673 $ 5.05
Options exercisable, September 30, 1999 638,333 $ 4.64
The range of exercise prices for options outstanding and options exercisable at
September 30, 2000 are as follows:
Options outstanding Options exercisable
Weighted Weighted
average Weighted average
Range of exercise average exercise
exercise price Number price contractual life Number price
$ 3.62-4.70 1,260,000 $ 3.89 2.79 years 659,168 $ 3.81
6.20-7.70 1,080,500 7.02 4.25 years 480,505 6.74
(e) Common share purchase warrants:
In 1996, pursuant to two private placement transactions, the Company
issued 2,631,580 common share purchase warrants, having an exercise
price of $0.44 to January 29, 1998 and 1,000,000 common share purchase
warrants, having an exercise price of $0.85 to September 12, 1997 and
$1.00 thereafter to September 30, 1998. During 1998, all of the
3,631,580 warrants were exercised at prices ranging from $0.44 per
share to $1.00 per share and an equivalent number of common shares were
issued for aggregate cash proceeds of $2,157,921.
(f) Loss on redemption of shares:
During 1999, the Company paid $65,965 to an employee upon the surrender
and cancellation of 97,000 vested stock options. The cash payment
represented the excess of the fair value of the options of $332,040 over
the aggregate exercise price of $266,075 and has been charged to retained
earnings as a loss on redemption of shares.
(g) Net earnings and cash flow from operations per share:
Earnings and cash flow figures per share are based on the weighted
average number of basic common shares outstanding during the year of
19,156,626 (1999 - 14,750,247; 1998 - 10,075,366) and fully diluted
common shares outstanding of 19,156,626 (1999 - 14,750,247; 1998 -
10,653,351).
Basic and fully diluted cash flow from operations per share have been
calculated using the cash flows from operating activities, excluding net
changes in non-cash working capital balances.
33
Financials
10. Income taxes
The income tax expense in the consolidated statement of operations varies
from the amount that would be computed by applying Canadian statutory
rates to earnings before income taxes and goodwill charges.
2000 1999 1998
Income taxes at statutory
rates $ 3,420,638 44.1% $ 2,448,447 44.6% $ 716,746 44.6%
Increase (decrease) in income
taxes resulting from:
Expenses deducted in the
accounts which have no
corresponding deduction
for income taxes 168,476 2.1 215,548 3.9 16,000 1.0
Lower basic tax rate on
earnings of foreign
subsidiary (111,815)(1.4) - - - -
Utilization of previous
years' losses - - (721,000) (13.1) (742,000)(46.2)
Other (224,945)(2.9) 60,000 1.1 9,254 0.6
$ 3,252,354 41.9% $ 2,002,995 36.5% $ - - %
11. Reduction of capital
During 1997, the share capital of the Company was reduced by $9,886,961
pursuant to a special resolution of the share-holders dated August 15,
1997. The reduction in share capital was applied against the opening
deficit of $9,886,961.
12. Commitments
The Company has entered into operating lease agreements for office
premises and equipment with minimum annual lease payments over the next
five years as follows:
2001 $ 2,805,580
2002 2,540,668
2003 2,023,681
2004 1,886,214
2005 2,319,982
$ 11,576,125
13. Financial instruments
(a) The carrying value and estimated fair values of the Company's financial
instruments are as follows:
(i) The carrying amounts of cash, restricted cash, accounts receivable
and accounts payable and accrued liabilities approximate their fair
values due to the short-term nature of these instruments.
(ii) The fair value of the mortgage receivable cannot be determined.
(iii) The fair values of the Company's capital leases, revolving credit
facility and term loan approximate their carrying values that bear
interest at current market rates. The carrying values of the loans
payable to landlords and the non-interest-bearing promissory note
approximate their fair values based on the Company's current
borrowing rate.
(iv) The fair value of foreign currency contracts are estimated by
obtaining quotes of the amount that the Company would have to pay
counterparties to terminate agreements. The carrying amounts of the
contracts are nil and the fair value as at September 30, 2000 is
($143,015) (1999 - $16,928).
(b) Risk management activities:
(i) Currency risk:
During 2000, the Company entered into foreign currency contracts
to manage certain of its exposures to foreign currency risk. The
Company has provided as security all of Watt's assets to support
these financial instruments. As at September 30, 2000, the Company
had outstanding foreign exchange contracts to sell US$3,135,000
(1999 - US$3,839,000) in exchange for Canadian dollars over a period
of 12 months at a weighted average exchange rate of Cdn$1.46
(1999 - $1.47).
During the year, the Company established a US$8 million revolving
credit facility. This facility serves as a hedge against the
Company's investment in its U.S. operations, managing exposure to
foreign currency risk. The Company's promissory note with Gilchrist
(note 2(a)) serves as a hedge against the Company's investment in
its U.K. operations, managing exposure to foreign currency risk.
34
envoy annual report 2000
(ii) Credit risk:
The Company manages its credit risk with respect to accounts
receivable by acting as an agent for its customers, by dealing
primarily with large creditworthy customers and by billing
whenever possible in advance of rendering services. As at
September 30, 2000, the Company has no customers which represent
greater than 10% 1999 - one customer represented 15.4%) of
accounts receivable.
The Company is exposed to credit risk in the event of
non-performance by counterparties in connection with its foreign
currency contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk but
mitigates this risk by dealing only with financially sound
counterparties and, accordingly, does not anticipate loss for
non-performance.
14. Segmented information
The Company provides integrated marketing communication services to its
clients. While the Company has subsidiaries in Canada, the United
States, the United Kingdom and Continental Europe, it operates as a
global business and has no distinct operating segments.
(a) The Company's external net revenue by geographic region based on the
region in which the customer is located is as follows:
2000 1999 1998
Net revenue:
Canada $ 21,980,668 $ 19,153,216 $ 13,491,015
United States 32,559,550 22,633,909 -
United Kingdom and
Continental Europe 4,066,017 - -
$ 58,606,235 $ 41,787,125 $ 13,491,015
(b) The Company's identifiable assets for each geographic area in which it
has operations are as follows:
2000 1999
Capital assets:
Canada $ 7,597,499 $ 6,772,417
United States 805,482 1,097,069
United Kingdom and
Continental Europe 2,045,644 -
$ 10,448,625 $ 7,869,486
2000 1999
Goodwill:
Canada $ 22,438,433 $ 10,357,020
United States 16,654,008 11,559,245
United Kingdom and
Continental Europe 7,615,483 -
$ 46,707,924 $ 21,916,265
(c) The Company's external net revenue by type of service is as follows:
2000 1999 1998
Net revenue:
Advertising and marketing $ 28,772,421 $ 30,317,254 $ 13,491,015
Design 22,247,353 9,420,744 -
Technology 7,586,461 2,049,127 -
$ 58,606,235 $ 41,787,125 $ 13,491,015
(d) In 2000, the Company had one customer that represented 11.3% of net
revenue. In 1999 and 1998, the Company had different customers that
represented 10.3% and 18% of net revenue, respectively.
35
Financials
15. Comparative figures
Certain of the comparative figures have been reclassified to conform with
the current year's financial statement presentation.
16. Subsequent events
(a) On November 6, 2000, the Company announced that it has entered into a
non-binding agreement to acquire all of the outstanding shares of Leagas
Delaney Group Limited, a London-based international advertising agency.
Under the terms of the acquisition, the maximum consideration is
approximately $132,000,000 (60,000,000 british pounds), of which
$29,550,400 (13,432,000 british pounds) in cash consideration along with
2,500,000 common shares of the Company is due upon closing. Concurrent
with the acquisition of Leagas Delaney Group Limited, the Company will
repay secured loan notes of Leagas Delaney Group Limited in the amount
of $5,555,000 (2,525,000 british pounds) and will redeem the cumulative
participating preference shares in the amount of $94,600 (43,000 british
pounds). The total cash consideration for this acquisition is
$35,200,000 (16,000,000 british pounds). Additional consideration may
be paid over a four-year period if certain performance milestones are
achieved. This consideration is to be satisfied by the delivery of a
maximum of 6,944,000 common shares of the Company and a maximum of
10,000,000 british pounds in cash.
(b) On September 6, 2000, the Company announced that it has entered into a
non-binding agreement to acquire all of the outstanding shares of The
International Design Group, a Toronto-based international retail
planning and design firm. Under the terms of the acquisition, the
maximum purchase price is approximately $5,000,000, of which $1,250,000
in cash consideration along with 61,728 common shares of the Company is
due upon closing. Additional consideration may be paid over a three-year
period if certain performance milestones are achieved. The earn-out
amounts will be satisfied by a maximum of $2,000,000 in cash and a
maximum of 154,321 common shares of the Company.
17. Reconciliation to United States generally accepted accounting principles
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) as applied in
Canada. Set out below are the material adjustments to net earnings for
the years ended September 30, 2000, 1999 and 1998 required in order to
conform to U.S. GAAP.
2000 1999 1998
Net earnings:
Net earnings for the year based
on Canadian GAAP $ 2,910,427 $ 2,876,763 $ 1,502,799
Adjustment to income tax
provision (a) - (721,000) (711,000)
Stock-based compensation
expense (b) - (226,965) -
Net earnings for the year based
on U.S. GAAP $ 2,910,427 $ 1,928,798 $ 791,799
No material adjustments are required in order to conform shareholders'
equity based on Canadian GAAP to shareholders' equity based on U.S. GAAP.
Summary of accounting policy differences:
The areas of material difference between Canadian and U.S. GAAP and their
impact on the consolidated financial statements of the Company are set
out below:
(a) Income taxes:
U.S. GAAP requires that deferred income taxes be accounted for under the
liability method, whereas Canadian GAAP requires the use of the deferral
method.
Under Canadian GAAP, the Company must be virtually certain of the
realization of income tax loss carryforwards and unclaimed future tax
deductions at the time they arise in order to recognize the related tax
benefit in its accounts. This condition of virtual certainty did not
exist when the losses arose and, therefore, the related deferred income
tax assets were not recorded at that time and are being recognized in
earnings only when they are realized.
U.S. GAAP requires the Company to record the deferred tax benefit
associated with tax loss carryforwards and future tax deductions if the
realization of amounts is more likely than not, and accordingly these
amounts were recorded for U.S. GAAP purposes in 1997. As a result, the
realization of these tax losses in the years ended September 30, 1999
and 1998 for Canadian GAAP purposes must be reversed under U.S. GAAP.
36
Envoy Annual Report 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
2000 1999
Deferred tax assets:
Share issue costs $ 981,373 $ 688,958
Less:
Capital assets, being excess of book
over tax basis 14,658 63,371
Net deferred tax asset $ 966,715 $ 625,587
The Company's income tax expense consists of the following:
2000 1999 1998
Net earnings before income taxes
based on U.S. GAAP $ 6,138,781 $ 4,641,793 $ 1,502,799
Computed tax expense (recovery) at
basic tax rate of 44.1%
(1999 and 1998 - 44.6%) $ 2,707,200 $ 2,070,000 $ 670,000
Increase (decrease) in income taxes
resulting from:
Non-deductible goodwill amortization 689,500 265,000 46,000
Non-deductible stock-based compensation - 101,000 -
Lower basic tax rate on earnings of
foreign subsidiary (111,800) - -
Other expenses deducted in the accounts
that have no corresponding deduction
for income taxes 168,500 217,000 8,000
Other (225,000) 60,000 (13,000)
$ 3,228,400 $ 2,713,000 $ 711,000
(b) Stock-based compensation expense:
U.S. GAAP requires that the excess of the fair value of options
repurchased by the Company over their aggregate exercise price be
recorded as compensation expense. Under Canadian GAAP, the excess
of $65,965 is charged to retained earnings and, accordingly, there is
no adjustment required to shareholders' equity under U.S. GAAP.
In addition, during 1999, the Company granted stock options to
non-employees as compensation for services rendered. U.S. GAAP
requires that the Company measure compensation cost for these options
based on their fair value at the grant date, whereas Canadian GAAP does
not require the recognition of compensation expense for such options.
The fair value of these options is estimated to be $161,000.
(c) Business combinations:
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Gilchrist as if it had occurred as of October 1, 1998, which are as
follows:
2000 1999
Net revenue $ 68,242,235 $ 55,744,775
Net earnings 2,602,527 1,509,570
Basic net earnings per share 0.14 0.10
Diluted net earnings per share 0.13 0.09
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Sage as if it had occurred as of October 1, 1998, which are as follows:
2000 1999
Net revenue $ 63,102,395 $ 49,359,412
Net earnings 950,950 3,303,875
Basic net earnings per share 0.05 0.22
Diluted net earnings per share 0.05 0.20
37
Financials
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Watt as if it had occurred as of October 1, 1997, which are as follows:
1999 1998
Net revenue $ 49,286,614 $ 24,024,264
Net earnings 1,684,125 502,512
Basic net earnings per share 0.11 0.05
Diluted net earnings per share 0.10 0.05
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Devlin as if it had occurred as of October 1, 1997, which are as follows:
1999 1998
Net revenue $ 41,932,376 $ 14,084,384
Net earnings 1,853,251 694,587
Basic net earnings per share 0.13 0.07
Diluted net earnings per share 0.11 0.07
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Hampel Stefanides as if it had occurred as of October 1, 1997, which
are as follows:
1998
Net revenue $ 32,187,996
Net earnings 169,250
Basic net earnings per share 0.02
Diluted net earnings per share 0.02
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations giving effect to the acquisition of
Promanad as if it had occurred as of October 1, 1997, which are as
follows:
1998
Net revenue $ 17,511,092
Net earnings 1,060,199
Basic net earnings per share 0.11
Diluted net earnings per share 0.10
(d) Net earnings per share:
Earnings per common share amounts in accordance with U.S. GAAP are based
on U.S. GAAP net earnings. The calculation of basic net earnings per
share is the same under both Canadian and U.S. GAAP. However, for
purposes of calculating diluted net earnings per share, the dilutive
effects of outstanding options and warrants is computed by applying the
treasury stock method under U.S. GAAP, which is not permitted under
Canadian GAAP.
Basic net earnings per share under U.S. GAAP for the year ended September
30, 2000 is $0.15 (1999 - $0.13; 1998 - $0.08). Diluted net earnings per
share under U.S. GAAP for the year ended September 30, 2000 is $0.15
(1999 - $0.12; 1998 - $0.08).
The diluted weighted average number of shares outstanding is calculated
as follows:
2000 1999 1998
Weighted average basic number
of shares outstanding 19,156,626 14,750,247 10,075,366
Dilutive effect of:
Special warrants - 786,575 -
Warrants 75 8,885 17,402
Options 773,276 682,732 186,085
Weighted average diluted number
of shares outstanding 19,929,977 16,228,439 10,278,853
38
Envoy Annual Report 2000
(e) Stock-based compensation disclosures:
The Company measures compensation expense relating to employee stock
option plans for U.S. GAAP purposes using the intrinsic value method
specified by APB Opinion No. 25, which in the Company's circumstances
would not be materially different from compensation expense as
determined under Canadian GAAP, except as disclosed in note 17(b).
Had the Company determined compensation costs based on the fair value at
the grant date of its stock options consistent with the method
prescribed under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards No. 123 (SFAS 123), the Company's net
earnings and earnings per share would have been reported as the pro
forma amounts indicated below:
2000 1999 1998
Net earnings in accordance with
U.S. GAAP as reported $ 2,910,427 $ 1,928,798 $ 791,799
Pro forma net earnings 1,853,385 1,335,046 606,018
Pro forma basic earnings per share 0.10 0.09 0.06
Pro forma diluted earnings per share 0.09 0.08 0.06
Pro forma net earnings reflect only those options granted during the
five years ended September 30, 2000. Therefore, the full impact of
calculating compensation costs for stock options under SFAS 123 is not
reflected in the pro forma net earnings amounts presented above because
compensation cost is reflected over the expected lives of the options
and the compensation cost for options granted prior to October 1, 1995
is not considered. The notional compensation expense associated with
the Company's options is not deductible for Canadian income tax purposes.
Accordingly, the full amount of compensation expense is reflected in the
pro forma figures above, without any related tax recovery.
The weighted average estimated fair value at the date of the grant, as
defined by SFAS 123, for options granted in fiscal 2000 was $3.07 per
share (1999 - $1.20; 1998 - $0.73).
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing model with the
following assumptions:
2000 1999 1998
Risk-free interest rate 4.70% 4.70% 4.70%
Dividend yield - - -
Volatility factor of the future
expected market price of the
Company's common shares 60% 40% 22%
Weighted average expected life
of the options 2.56 years 2.50 years 1.75 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected price volatility. Because the Company's employee share options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee share options.
For the purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period
on a straight-line basis.
(f) Comprehensive income:
The Company's comprehensive income represents U.S. GAAP net earnings
plus the change in the cumulative translation adjustment account, in
respect of foreign operations as follows:
2000 1999 1998
Net earnings for the year in
accordance with U.S. GAAP $ 2,910,427 $ 1,928,798 $ 791,799
Decrease (increase) in cumulative
translation adjustment account 180,516 (494,844) -
$ 3,090,943 $ 1,433,954 $ 791,799
39
Financials
(g) Reduction of capital:
In 1997, the share capital of the Company was reduced by $9,886,961,
pursuant to a special resolution of its shareholders and was applied
against the deficit. This reduction in capital is not permitted under
U.S. GAAP. While the adjustment has no impact on shareholders' equity,
under U.S. GAAP, capital stock would be increased by $9,886,961 and
retained earnings would be decreased by $9,886,961 as at September 30,
1999 and 1998.
(h) Statement of cash flows:
The Company has disclosed cash flow from operations per share, which
is not permitted under U.S. GAAP.
(i) Other disclosures:
U.S. GAAP requires the Company to disclose the following items,
for which disclosure is not required under Canadian GAAP:
(i) The allowance for doubtful accounts as at September 30, 2000
was $493,659 (1999 - $285,570).
(ii) Rent expense under operating leases for the year ended
September 30, 2000 amounted to $1,680,822 (1999 - $1,187,989;
1998 - $626,874).
(iii) As at September 30, 2000, the Company had a $15,218,794
(1999 - $1,000,000) unused line of credit.
(iv) U.S. GAAP requires the disclosure of accrued liabilities.
Accrued liabilities included in accounts payable and accrued
liabilities as at September 30, 2000 were $7,492,551 (1999 -
$7,031,774). At September 30, 2000, accrued liabilities
included $2,100,651 related to additional consideration for the
acquisition of Hampel Stefanides (note 2(e)) and $935,439
related to accrued acquisition expenses. At September 30,
2000, there were no other accrued liabilities that exceeded 5%
of current liabilities.
(v) The Company has disclosed both net earnings before goodwill
amortization and net earnings per share before goodwill
amortization, which are not permitted disclosures under U.S.
GAAP.
(j) Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), which established
accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for the Company's fiscal year ending September
30, 2001. Management believes the adoption of SFAS No. 133 will not
have a material effect on the Company's financial position or results
of operations.
The Canadian Institute of Chartered Accountants has issued two
pronouncements entitled Income Taxes and Employee Future Benefits, both
of which are effective for the Company's first quarter of its fiscal
year ending September 30, 2001. Management believes the adoption of
these pronouncements will not have a material effect on its
consolidated financial statements.
40
envoy annual report 2000
Shareholder Information
Envoy Communications Group Inc.
HEAD OFFICE OFFICERS AUDITORS
26 Duncan Street Geoffrey Blaine Genovese KPMG LLP
Toronto, Canada M5V 2B9 President & CEO Yonge Corporate Centre
Telephone: (416) 593-1212 4120 Yonge Street, Suite 500
Facsimile: (416) 593-4434 J. Joseph Leeder Toronto, Canada M2P 2B8
www.envoy.to Vice President & CFO
DIRECTORS Stephen J. Miller LEGAL COUNSEL
Vice President Blake, Cassels & Graydon LLP
Geoffrey Blaine Genovese Corporate Development Box 25, Commerce Court West
President & CEO Toronto, Canada M5L 1A9
Envoy Communications John H. Bailey
Group Inc. Corporate Secretary INVESTOR RELATIONS
Carabiner Inc.
Don Watt AUDIT COMMITTEE (416) 599-2256
Chairman 1 800 761-4944
Watt International John H. Bailey
David I. Hull ANNUAL SHAREHOLDERS
John H. Bailey Hugh Aird MEETING
Barrister & Solicitor
BCom, LLB, LLM COMPENSATION COMMITTEE Tuesday, March 6, 2001
11:00 am
David I. Hull John H. Bailey TSE Conference Centre
President David I. Hull Exchange Tower
Hull Life Insurance Duncan Shirreff 130 King Street West
Agencies Inc. Toronto, Canada M5X 1E3
TRANSFER AGENT
Hugh Aird STOCK TRADING
Chairman Montreal Trust INFORMATION
DRIA Capital Inc. 100 University Avenue,
11th floor Toronto Stock Exchange ECG
Toronto, Canada M5J 2Y1 NASDAQ Exchange ECGI
Duncan Shirreff
Vice President & Director BANKERS
Yorkton Securities Inc.
Bank of Montreal
One First Canadian Place
100 King Street West
Toronto, Canada M5X 1A3
Fleet Bank
1185 Avenue of the Americas
New York, New York, U.S.A. 10036