As filed with the Securities and Exchange Commission on February 14, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] Registration statement pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
OR
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 0-30082
ENVOY COMMUNICATIONS GROUP INC.
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(Exact name of Registrant as specified in its charter)
ENVOY COMMUNICATIONS GROUP INC.
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(Translation of Registrant's name into English)
Ontario, Canada
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(Jurisdiction of incorporation or organization)
26 Duncan Street, Toronto, Ontario, Canada M5V 2B9
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON SHARES
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(Title of Class)
NONE
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(Name of each exchange on which registered)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: At September 30, 2001 there were 20,725,950 common shares outstanding.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
Indicate by check mark which financial statement item the Registrant has
Elected to follow: Item 17 ____ Item 18 X
Currency and Exchange Rates
All monetary amounts contained in this Form 20-F are, unless otherwise
indicated, expressed in Canadian dollars. On February 14, 2002 the noon buying
rate for Canadian Dollars as reported by the Federal Reserve Bank of New York
was $1.00 U.S. to $1.592 Cdn. (see Item 9 for further exchange rate
information to U.S. currency.)
TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds
Item 15. Reserved
Item 16. Reserved
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
PART I
Item 1. Identity of Directors, Senior Management and Advisers
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"Not applicable"
Item 2. Offer Statistics and Expected Timetable
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"Not applicable"
Item 3. Key Information
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A. Selected financial data(1)
The following table sets forth in Canadian dollars selected financial data for
Envoy for the fiscal years indicated below prepared in accordance with Canadian
generally accepted accounting principles unless otherwise noted. The following
selected financial data should be read in conjunction with the more detailed
financial statements and the related notes thereto appearing elsewhere in this
Form 20-F and the discussion under Item 5 "Operating and Analysis of Financial
Condition and Results of Operation" herein. The statements of operations data
of Envoy for the fiscal years ended September 30, 1997 and 1998, and the
balance sheet data of Envoy as of September 30, 1997 and 1998, are derived from
financial statements of Envoy that have been audited by BDO Dunwoody LLP,
independent public accountants, which are not included in this Form 20-F. The
selected financial data does not include statements of operations data or
balance sheet data of any acquired operations prior to their respective
acquisition effective dates.
(1) The financial statements of Envoy are prepared in accordance with Canadian
Generally Accepted Accounting Principles ("Canadian GAAP"), which differs in
certain significant respects from U.S. Generally Accepted Accounting Principles
("U.S. GAAP"). Reconciliation to U.S. GAAP is set forth in Note 15 to the
Notes to the audited Financial Statements of Envoy as well as in Note 4 to the
following table. Envoy's results of operations under U.S. GAAP for the years
ended September 30, 2001, 2000 and 1999 are as disclosed in Note 15 to the
Notes to the audited Financial Statements of Envoy.
September 30
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2001(1) 2000(2) 1999(3) 1998(4) 1997
(all amounts in 000s of Canadian dollars, except per share data)
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Statement of Operations Data:
Net revenue 80,792 58,606 41,787 13,491 8,675
EBITDA(5) 7,003 10,151 7,280 2,090 1,393
Net Earnings(6) (2,895) 2,910 2,877 1,503 1,179
Net Earnings per Share(6) ($0.14) $0.15 $0.20 $0.15 $0.12
September 30
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2001 2000 1999 1998 1997
(all amounts in 000s of Canadian dollars)
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Balance Sheet Data:
Current Assets 51,138 43,337 44,521 15,684 6,352
Total Assets 113,850 102,308 75,748 25,330 8,709
Total Debt(7) 11,928 10,832 3,978 300 -
Shareholders' Equity(8) 61,319 62,687 40,612 13,317 3,937
Retained Earnings(9) $5,603 $8,403 $5,493 $2,682 $1,179
(1) The Statement of Operations Data for the year ended September 30, 2001
includes the results of operations of IDG, acquired effective as of January 1,
2001, for the nine month period from January 1, 2001 to September 30, 2001. See
Item 4 "Information on the Company" for a description of this acquisition. The
exchange rate utilized with respect to the Statement of Operations Date of
Gilchrist is british pounds 1.00 to $2.2122 Cdn. and with respect to the
Balance Sheet Date of Gilchrist is british pounds 1.00 to $2.3264 Cdn. The
exchange rate utilized with respect to the Statement of Operations Data of
Hampel Stefanides is $1.00 U.S. to $1.5785 Cdn. and with respect to the
Balance Sheet Data of Hampel Stefanides is $1.00 U.S. to $1.5352 Cdn. Except
as set forth in footnotes 2, 3 and 4, no other acquisitions by Envoy
materially affects the comparability of the information in the Selected
Financial Data.
(2) The Statement of Operations Data for the year ended September 30, 2000
includes the results of operations of Sage, acquired effective as of June 1,
2000, for the four month period from June 1, 2000 to September 30, 2000 and the
results of operations of Gilchrist, acquired effective as of July 1, 2000, for
the three month period from July 1, 2000 to September 30, 2000. See Item 4
"Information on the Company" for a description of such acquisitions. The
exchange rate utilized with respect to the Statement of Operations Date of
Gilchrist is british pounds 1.00 to $2.1885 Cdn. and with respect to the
Balance Sheet Date of Gilchrist is british pounds 1.00 to $2.2163 Cdn. The
exchange rate utilized with respect to the Statement of Operations Data of
Hampel Stefanides is $1.00 U.S. to $1.4722 Cdn. and with respect to the
Balance Sheet Data of Hampel Stefanides is $1.00 U.S. to $1.5035 Cdn. Except
as set forth in footnotes 1, 3, and 4, no other acquisitions by Envoy
materially affect the comparability of the information in the Selected
Financial Data.
(3) The Statement of Operations Data for the year ended September 30, 1999
includes the results of operations of Hampel Stefanides acquired effective as
of October 1, 1998, for the entire twelve month period, the results of
operations of Devlin acquired effective as of January 1, 1999 for the nine
month period from January 1, 1999 to September 30, 2000, and the results of
operations of Watt International, acquired effective as of May 1, 1999, for the
five month period from May 1, 1999 to September 30, 1999. See Item 4
"Information on the Company" for a description of such acquisitions. The
exchange rate utilized with respect to the Statement of Operations Data of
Hampel Stefanides is $1.00 U.S. to $1.5029 Cdn. and with respect to the Balance
Sheet Data of Hampel Stefanides is $1.00 U.S. to $1.4674 Cdn. Except as set
forth in footnotes 1, 2 and 4, no other acquisitions by Envoy materially affect
the comparability of the information in the Selected Financial Data.
(4) The Statement of Operations Data for the year ended September 30, 1998
includes the results of operations for the four month period from June 1, 1998
to September 30, 1998 of Promanad, acquired effective as of June 1, 1998. See
Item 4 "Information on the Company" for a description of such acquisition.
Except as set forth in footnote 1, 2 and 3, no other acquisitions by Envoy
materially affect the comparability of the information in the Selected
Financial Data.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization.
(6) As reflected in Note 15 to the Notes to the audited Financial Statements
of Envoy, in accordance with the reconciliation to U.S. GAAP set forth therein,
the net earnings (loss) for the years ended September 30, 2001 was
($3,830,675), $2,910,427 and $1,928,798; and the diluted net earnings per share
for the years ended September 30, 2001, 2000 and 1999 was ($0.18), $0.15 and
$0.12, respectively.
(7) Total debt includes both the current and long term portion of debt.
(8) As reflected in Note 15 to the Notes to the audited Financial Statements
of Envoy, in accordance with the reconciliation to U.S. GAAP set forth therein,
the shareholders' equity as at September 30, 2001 and 2000 was $61,270,082 and
$62,686,801, respectively.
(9) During 1997, the share capital of Envoy was reduced by $9,886,961 pursuant
to a special resolution of the shareholders dated August 15, 1997. The
reduction in share capital was applied against the opening deficit of
$9,886,961. Retained earnings as at September 30, 2001, 2000, and 1999,
excludes the cumulative foreign currency translation adjustment of $832,880,
($314,328) and ($494,844), respectively. See Note 1(g) to the Notes to the
audited consolidated Financial Statements of Envoy. This amount is not
recorded for U.S. GAAP purposes.
Envoy has never paid any dividends on its common shares and does not anticipate
that it will pay any cash dividends on its common shares in the foreseeable
future.
Exchange Rates
On February 14, 2002, the noon buying rate for Canadian dollars as reported by
the Federal Reserve Bank of New York was $1.00 U.S. to 1.592 Cdn. The
following table sets forth for the periods indicated certain information
regarding the exchange rate into U.S. currency of Canadian dollars. The rate
of exchange means the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.
September 30
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1997 1998 1999 2000 2001
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Average* 1.3702 1.5265 1.5033 1.4724 1.5353
* The average rate means the average of the exchange rates on the last day of
each month during the fiscal period.
For the month ending
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January December November October September August
2002 2001 2001 2001 2001 2001
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High 1.5162 1.5458 1.5600 1.5311 1.5797 1.5490
Low 1.4944 1.4995 1.5263 1.4954 1.5535 1.5275
B. Capitalization and indebtedness
"Not applicable"
C. Reasons for the offer and use of proceeds
"Not applicable"
D. Risk factors
Envoy's business, financial condition and results of operations could be
materially adversely affected by any of the following risks.
This Form 20-F contains forward-looking statements that involve risks and
uncertainties. Envoy's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by Envoy described below and elsewhere in
this form.
Non-compliance with financial covenants of debt facility. Under the terms of
our debt facility, Envoy is required to maintain certain financial ratios. As
at September 30, 2001 Envoy was not in compliance with one of the debt
covenants involving trailing twelve months earnings before taxes, interest,
depreciation and amortization and Envoy will continue to be in violation of
this covenant in fiscal 2002. The lenders have waived the violation of this
covenant as of September 30, 2001 and are in discussions with Envoy regarding
amendments to the covenant calculations going forward and any actions to be
taken by Envoy at the request of the lenders, although no assurances can be
made that the lenders will agree to such amendments or that we will be able to
take any action which may be requested by the lenders. Under the terms of the
facility, if the covenants are not met, the lenders can demand repayment of the
outstanding borrowings. We are in the process of considering possible actions
which we might take if the lenders demand such repayment.
The marketing communications, design and technology industries are highly
competitive. Envoy has competition in each of the markets in which it
operates. In the advertising/marketing field, Envoy competes with companies
such as Omnicom Group Inc., Interpublic Group of Companies Inc., WPP Group PLC,
Ogilvy & Mather (Canada) Ltd., Bcom3 Group Inc., Havas Advertising and Cossette
Communications Group Inc. In the design field, Envoy's design company Watt has
competitors including Enterprise IG, Landor Associates, Interbrand Group, The
FutureBrand Company Seigelgale, and Fitch Inc. In technology, we compete with
companies such as IBM services, Modem Media Inc., and Cyberplex Inc. Envoy
faces competition from numerous national and regional advertising agencies as
well as specialized and integrated marketing communications firms.
There can be no assurance that Envoy will continue to be profitable. Although
Envoy has had positive net revenue and EBITDA and experienced revenue growth in
recent periods, our net revenue growth rate may not be sustainable or
indicative of future operating results. In addition, Envoy has incurred
substantial costs to expand and integrate its operations and it intends to
continue to invest heavily in ongoing expansion. Envoy's ongoing integration
costs will include the combination of the financial, information and
communications systems of the various acquired companies. Envoy's ongoing
expansion costs will include the costs of acquiring new businesses, leasing of
additional office space, hiring new employees and purchasing new computer and
communications equipment. As a result of these and other costs, Envoy may
incur future operating losses, and there can be no assurance that Envoy will
sustain profitability. In the current year Envoy had a net loss of $2.9
million.
Envoy's results of operations and its business depend on its relationship with
a limited number of large clients. Set forth below is the percentage of net
revenue during the fiscal year ended September 30, 2001 for each of Envoy's
clients that accounted for 10% or more of its net revenue and for Envoy's five
largest clients combined:
Client Year Ended September 30, 2001
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Asda Stores Limited 13.6%
Five largest clients combined 37.5%
There can be no assurance that Envoy will be able to maintain its historical
rate of growth or its current level of gross margin derived from any client in
the future.
As is customary in the industries in which we operate, Envoy does not have
long-term contracts with any of its clients. Envoy's clients generally have
the right to terminate their relationships with Envoy without penalty and with
relatively short or no notice. The termination of Envoy's business
relationships with any significant client, or a material reduction in the use
of Envoy's services by any significant client, could adversely affect Envoy's
future financial performance.
Envoy's operating results may vary from period to period. Envoy's operating
results have fluctuated in the past, and may continue to fluctuate in the
future, as a result of a variety of factors, many of which are outside of
Envoy's control, including:
- timing of new projects;
- reductions, cancellations or completions of major projects;
- the loss of one or more significant clients;
- the opening or closing of an office;
- Envoy's relative mix of business;
- changes in pricing by Envoy or competitors;
- employee utilization rates;
- changes in personnel;
- costs related to expansion of Envoy's business, including by acquisition;
- increased competition; and
- marketing budget decisions by Envoy's clients.
As a result of these fluctuations, period-to-period comparisons of Envoy's
operating results cannot necessarily be relied upon as indicators of future
performance. In some fiscal quarters Envoy's operating results may fall below
the expectations of securities analysts and investors due to any of the
factors described above.
The integration of acquired businesses may adversely affect Envoy's operating
results. Envoy expects that the integration of businesses recently acquired
by it as well as future acquisitions, if any, will place a significant burden
on Envoy's management. Such integration is subject to risks and uncertainties,
including:
- the inability to effectively assimilate the operations, services,
technologies, personnel and cultures of the acquired entities;
- the potential disruption of Envoy's business; and
- the impairment or loss of relationships with employees and clients.
If in connection with Envoy's business acquisitions Envoy fails to integrate
Envoy's operations successfully or on a timely basis, or if Envoy incurs
unforeseen expenses, Envoy's financial performance could be materially and
adversely affected. In addition, if Envoy is unable to identify complementary
businesses to acquire or is unable to consummate acquisitions on acceptable
terms, Envoy's expansion plans may be materially and adversely affected.
Continued growth of Envoy's business will place increased demands on its
systems and resources and may impact Envoy's operating results. The expansion
of Envoy's business and customer base has placed increased demands on Envoy's
management, operating systems, internal controls and financial and physical
resources. Envoy's continued growth, if any, may strain existing management
and human resources, in particular, affecting Envoy's ability to attract and
retain sufficient talented personnel. Consequently, Envoy may be required to
increase expenditures to hire new employees, open new offices and invest in new
equipment or make other capital expenditures. Any failure to expand any of the
foregoing areas in an efficient manner could adversely affect Envoy's business.
There also can be no assurance that Envoy will be able to sustain the rates of
growth that Envoy has experienced in the past.
Envoy depends on its key management personnel for its future success. Envoy
relies on its key management personnel. Envoy's future success will depend
upon its ability to attract and retain additional highly skilled personnel.
If any of Envoy's officers or key employees leave Envoy, the relationships that
they have with Envoy's clients could be lost. In addition, Envoy's ability to
generate revenues directly relates to Envoy's personnel, both in terms of the
number and expertise of the personnel Envoy has available to work on its
projects and the mix of full time employees, temporary employees and contract
service providers Envoy utilizes. The competition for employees at all levels
of the marketing communications industry, especially the technology industry,
is intense and is increasing. As a result, if Envoy fails to retain existing
employees or hire new employees when necessary, Envoy's business, financial
condition and operating results could be materially and adversely affected.
Conflicts of interest and exclusivity arrangements with Envoy's clients may
limit Envoy's ability to provide services to others. Conflicts of interest
between clients and potential clients are inherent in the marketing
communications, design and technology industry. Moreover, as is customary in
the marketing communications industry, Envoy has entered into exclusivity
arrangements with many of Envoy's largest clients that restrict Envoy's ability
to provide services to their competitors. Envoy has in the past been, and may
in the future be, unable to take on new clients because such opportunities
would require it to provide services to direct competitors of its existing
clients. In addition, Envoy risks harming relationships with existing clients
when it agrees to provide services to indirect competitors of existing clients.
Prospective clients also may choose not to retain Envoy for reasons of actual
or perceived conflicts of interest.
The marketing communications, design and technology industries are cyclical
and a downturn in the industry may adversely affect Envoy's business. The
marketing communications industry is cyclical and as a result it is subject to
downturns in general economic conditions and changes in one or more client
business and marketing budgets. Our prospects, business, financial condition
and results of operations may be materially adversely affected by a downturn
in general economic conditions in one or more markets or changes in our
clients business and marketing budgets.
The market for certain of Envoy's technology services is subject to
uncertainties. The market for Internet technology professional services
("ITPS") is changing rapidly. The market success of ITPS providers is subject
to a high level of uncertainty and is dependent on a number of factors,
primarily:
- the growth in consumer access to and acceptance of new interactive
technologies, such as the Internet, online services and corporate
intranets; and
- the ability to anticipate new technologies and incorporate them into
ITPS offerings in a timely fashion.
Future commercial use of platforms currently serviced by ITPS providers may
change dramatically, negatively impacting the demand for ITPS providers
dependent on outdated technology. Other issues include security, privacy,
reliability, cost, ease of use and quality of service of the underlying
technology. If the market for ITPS develops more slowly than we expect, or if
our technology services do not continue to achieve market acceptance, our
future operating performance could be materially adversely affected.
Item 4. Information on the Company
-----------------------------------
The following Information on the Company contains forward-looking statements,
which involve risks and uncertainties. Envoy's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Item 3-Risk
Factors" and elsewhere in this Form 20-F.
ENVOY COMMUNICATIONS GROUP INC.
General
Envoy Communications Group Inc. ("Envoy") is an international design, marketing
and technology company with offices in North America and Europe. Combining
strategy, creativity, and innovation, Envoy's interconnected network of
companies delivers business-building solutions to over 200 leading global
brands and has successfully completed assignments in more than 40 countries
around the world. Our clients include Adidas/Salomon Canada Ltd.,
("Adidas/Salomon"), Asda Stores Limited ("Asda"), BASF Corporation ("BASF"),
CDNOW, Federal Express Canada ("FedEX), JP Morgan Chase, Lexus a division of
Toyota Canada Inc. ("Lexus"), Nissan Canada Inc. ("Nissan"), Panasonic Canada
Inc. ("Panasonic Canada"), Safeway Incorporated ("Safeway"), Sprint Canada Inc.
("Sprint Canada"), Steelcase Canada Incorporated Ltd. ("Steelecase Canada"),
Steelcase USA, TD Waterhouse Investor Services Inc. ("TD Waterhouse Investor
Services"), and Wal-Mart Stores Inc. ("Wal-Mart"). As of September 30, 2001,
we served over 250 clients. We generated $80.8 million Cdn. of net revenue for
our fiscal year ended September 30, 2001 and $58.6 million Cdn. for the year
ended September 30, 2000.
The principal place of business of Envoy is located at 26 Duncan Street,
Toronto, Canada M5V 2B9. Envoy may be reached by telephone: (416) 593-1212;
or facsimile: (416) 593-4434. Envoy's website is www.envoy.to Information
contained in our website does not constitute a part of this Form 20-F.
A. History and development of the company
Envoy was incorporated under the laws of the Province of British Columbia,
Canada as "Potential Mines Ltd." in December 1973 and was continued under the
laws of the Province of Ontario, Canada in December 1997. Since Envoy's
acquisition in July 1991 of The Incentive Design Company Ltd. ("IDC"), Envoy
has shifted the nature of its business to providing marketing communications
services for promoting clients' products, services and business messages
utilizing such media as print, broadcast and the Internet. Envoy has grown,
in large part, through strategic acquisitions. Certain material acquisitions
by Envoy are described below.
In July 1991, Envoy acquired IDC, a group of companies engaged in business and
marketing communications, corporate incentive planning and corporate travel
from Geoffrey Genovese and Christine Genovese, his wife. Geoffrey B. Genovese
was the President and Chief Executive Officer of IDC at the time of such
acquisition and has served in such capacities for Envoy since October 1993.
Envoy acquired The Communique Group Inc. (the "Communique Group") in October
1992.
In October 1997, Envoy effected an amalgamation of the Communique Group and
three other subsidiaries of Envoy through which Envoy's business communications
and product design services were provided, with the Communique Group being the
continuing entity. Effective as of June 1, 1998, Envoy acquired Promanad
Communications Inc. ("Promanad"), an advertising and public relations agency
Envoy expanded its geographic reach into the U.S. marketplace through its
acquisition of Hampel Stefanides Inc. ("Hampel Stefanides"), effective as of
October 1, 1998. Effective as of January 1, 1999, Envoy acquired Devlin
Multimedia Inc. ("Devlin"), a Toronto-based website design and development
company. Effective as of May 1, 1999, Envoy acquired Watt International Inc.
("Watt International"), through which Envoy acquired the operations,
substantially all of the assets and certain of the liabilities of The Watt
Design Group Inc. ("Watt Design"), a Toronto-based provider of design,
packaging and marketing identity services to retailers. Donald G. Watt was
Chairman of Watt Design prior to such acquisition by Envoy and now serves as
Chairman of Watt International and a Director of Envoy.
Effective as of June 1, 2000, Envoy acquired Sage Information Consultants Inc.
("Sage"), a digital professional service firm operating in the United States
and Canada. Envoy expanded its geographical reach into the United Kingdom and
the continental Europe marketplace through its acquisition of Gilchrist
Brothers Limited ("Gilchrist"), a United Kingdom based digital imaging and
design firm, effective as of July 1, 2000. Effective as of January 1, 2001,
Envoy acquired The International Design Group (Canada) Inc. ("IDG"), a Toronto-
based retail planning and design firm.
During July 2001, Envoy launched John Street Inc. a Toronto based advertising
and Communications initiative to replace the advertising business previously
conducted by the Communique Group Inc.
B. Business overview
Our Solution
Our aim and motivation is to work with clients who are brand conscious and
value creative solutions to their marketing communication, design and
technology needs. They have expectations that advertising/marketing, design
and technology can positively affect their business in a fundamental way and
they require our Company to act as their business partner. We have developed
a working methodology, which ensures that strategic solutions go beyond a
simplistic response to consumer views and attitudes. Strategic planning at
Envoy is rooted not only in our client's brand and its relationship with the
consumer but as importantly within the context of the clients' business
objectives.
We focus on developing strategies which provide solutions to business problems
and which inspire creative teams to produce solutions that are original,
distinctive and also commercially relevant.
Our strategic planning tools have been refined to raise the level of
contribution to client business.
Our approach appeals particularly to clients who demand outstanding creative
work and thinking that has an impact on the consumer and provides a catalyst
for change within their organization.
As we move towards an ever increasingly complex media environment, our clients
appreciate our ability to produce brand ideas that are capable of exploitation
across all channels of communication. Envoy is recognized as an innovator of
branding ideas which work in multi-channel broadcast, print, public relations,
retail and digital formats.
By providing the option of accessing the integrated services of several of our
operating divisions, we can provide clients the opportunity to communicate in
one clear voice through a range of media channels. Our employees have
expertise in a broad range of disciplines including business strategy,
marketing, branding, information technology and creative design. We can work
with a client from the analysis of its business objectives to the
implementation of an appropriate solution. As a result, clients can benefit
not only from the time and cost savings of working with a single firm, but also
from the integrated marketing communications strategy made possible by our
integrated and coordinated range of marketing communications services. Based
upon various competitors' public information and management's dealings with
clients and prospective clients, we believe that this differentiates us from
advertising/marketing, brand design or Internet service providers that focus
on a single aspect of the range of marketing communications services.
Our Strategy
Our goal is to be our clients' most valued business partner in building and
leveraging their brands through marketing services, design services and
technology. We believe that we have brought together best of breed companies
and talent to offer our clients a truly integrated marketing communication
strategy. We plan to pursue the following strategies:
Deliver high quality and internationally recognized services in each of our
core disciplines.
Our brands have built strong reputations for delivering high quality services
internationally. We intend to continue to offer services at this high
standardin each of our core disciplines of marketing, design and technology.
We believe that this focus on internationally based, leading edge capabilities
will ensure that Envoy continues to attract and retain prominent clients and
key talent.
Develop our client base through the cross-selling of our services.
We plan to continue offering integrated service on an international platform.
We intend to capitalize on the convergence in the demand for our services in
the marketplace by cross-selling our services to existing clients and
leveraging our platform to win new business.
Expand our service offerings
We intend to pursue opportunities to expand our service offerings, either by
extending the core disciplines beyond design, marketing and technology, or by
development of new service offerings within the current three disciplines.
Examples of further core disciplines may include strategic consulting and
public relations.
Pursue strategic acquisitions
We intend to continue to pursue strategic acquisitions to extend both our depth
of expertise and our geographic reach in each of our core disciplines. The
efforts to extend Envoy's geographic reach and breadth of service offering add
a significant degree of diversification and strength to our business model.
Our Services
We provide strategic and creative marketing, design and technology services
that help our clients build, maintain and leverage their products and brands.
Our services help our clients build their public image, generate new revenue,
create first-to-market opportunities and increase efficiencies and customer
care.
Net revenue by type of service for the last three fiscal years is as follows:
(all amounts in 000's Canadian dollars)
Net revenue: Fiscal 2001 Fiscal 2000 Fiscal 1999
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Marketing $24,375 $28,772 $30,317
Design 41,444 22,247 9,421
Technology 14,973 7,586 2,049
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$80,792 $58,606 $41,787
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Net revenue by geographic region, based on the region the customer is located,
is as follows: (all amounts in 000's Canadian dollars)
Net revenue: Fiscal 2001 Fiscal 2000 Fiscal 1999
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Canada $19,833 $21,981 $19,153
United States 40,970 32,559 22,634
United Kingdom
and Continental Europe 19,989 4,066 -
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$80,792 $58,606 $41,787
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Marketing
We provide comprehensive advertising/marketing services across various media.
These services include strategic planning and consulting, creative concept
development, off-line and on-line advertising production, account planning,
market research, media planning and buying, event marketing and public
relations.
We are committed to creating brand propositions that are unique, ownable and
sustainable. Our various agencies operate across the U.S., Europe and Canada to
provide our clients with a consistent international marketing message. We have
created numerous memorable marketing communications campaigns for our clients
including "We Make a Lot of the Products you use Better" for BASF.
Design
Our retail design group has designed many shopping malls, entertainment
complexes, specialty retailers, superstores, airport retail spaces, retail
department stores, banks and automobile maintenance stores. Our retail
concepts have been utilized in over 40 countries, representing over 25
industries.
Our staff of designers, architects and strategists help our clients develop
new retail store concepts, design store layouts and assess and predict
consumer shopping behavior in both brick-and-mortar and online retail
environments.
We are involved with all aspects of the creation and execution of brand
strategy. We help our clients develop national and private label brands,
including the development of the product concept, brand name, image, brand
packaging, design and marketing strategies.
We are involved in the strategic naming, developing and positioning of
corporate images. We help our clients establish identities across their
organizations by creating consistent identities for every aspect of their
business. We focus on every aspect of the client's brand and identity, and we
conduct brand audits to assess the impact and efficiency of client's brands.
Technology
We provide our clients with technology solutions that encompass front-end user
interfaces and back-end transactional capability as well as proprietary
collaborative software. Our technology services are compatible with Microsoft,
IBM and Oracle and can provide clients with complete and fully integrated
digital solutions.
Our front-end services include the design, usability assessment, development
and maintenance of our clients' websites, research and strategic consulting
regarding the Internet and the design and production of on-line advertisements.
Our back-end services complement our web-development services with leading
edge e-commerce, knowledge management and infrastructure solutions. We are a
leading Microsoft Solution Provider Partner in Canada and New York and are
part of an elite group of organizations that sit on Microsoft's Partner
Advisory Council. Through the council, we assist in providing guidance on
key issues that ultimately shape Microsoft's channel strategy for delivering
solutions and services.
We have developed a proprietary web-based communications tool referred to as
"Decision Room". Decision Room is an on-line "meeting room" that allows users
to easily exchange graphic or text files through password-protected access and
enables review, feedback and approval in virtual business meetings.
By combining Sage's back-end solutions and Microsoft accreditation, with
Devlin's award winning web design skills and IBM and Oracle expertise, our
technology group is platform agnostic and can therefore provide our clients
with complete and fully integrated digital solutions.
Industry Overview
-- Worldwide Advertising Market
The combined worldwide advertising expenditures is now forecast for a gain of
6.2% to $494.1 billion in year 2001, according to ABC News. Companies are
increasingly focused on the image and brand of their organizations, products
and services and are spending more advertising dollars to differentiate
themselves from competitors and increase customer loyalty. In addition,
corporate consolidation has resulted in worldwide brands that must be supported
across many markets.
Increased advertising expenditures are being supported by increased spending
on below-the-line marketing services, as companies aim to reach their target
audiences and quantify the effectiveness of their communications. Companies
are increasingly utilizing interactive marketing, in-store concepts, database
marketing and other direct marketing tools to deepen relationships with their
existing customers and attract and retain new customers.
In this environment, we believe that companies are seeking to work with
agencies that can deliver proven creative talent, a consistent marketing
message worldwide and an integrated offering of advertising and marketing
services that includes creative concept development, strategic planning and
consulting, advertising production, media planning and buying, event marketing
and public relations.
-- Design Services
In all areas of marketing and product design, we believe that companies are
looking to extend their customer relationships and influence consumer behavior.
Design services encompass the entire customer experience, from product
packaging to the retail environment, and are a key component of a company's
marketing communications strategy.
The design services sector is rapidly evolving into a global marketplace, as
companies are increasingly looking for expertise in the development and
maintenance of their brands on a global basis. Companies are looking to firms
that can deliver a consistent message to consumers through packaging and retail
design, regardless of geography.
-- Technology Services
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit its potential to extend and enhance their
brands and business activities. Companies are increasingly using the Internet
to communicate and transact business on a one-to-one basis with existing
customers and to target and acquire new customers. As a result, organizations
are investing in the strategic use of Internet solutions to transform their
businesses.
Worldwide spending on information and communication technology totaled more
than US$2.1 trillion in 2001 and was expected to surge 50% by 2004. It is
expected to surpass $3 trillion in 2003. (The World Information Technology and
Service Alliance.)
While many Internet professional services firms focus on either the creative,
strategic or technical aspects of Internet communications, few firms are able
to successfully integrate all three into their offering. Companies are
seeking to work with Internet solutions providers that have expertise in
technical, as well as the creative and strategic aspects of the Internet.
-- Convergence
We believe, as companies become global, their marketing strategies become
global and the Internet becomes an important part of reaching existing and
prospective customers, companies are looking to integrate their marketing
communications strategies. We believe that companies will look to partner
with firms that can seamlessly provide an integrated global offering that
encompasses advertising, marketing, design and technology.
-- Government Regulations
The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth in and
fairness of advertising. There are also a number of US federal and state laws
and regulations directed at the advertising and marketing of specific products,
such as food and drug products. In addition, there has been an increasing
tendency on the part of businesses to resort to the judicial system, as well
as industry self-regulatory procedures, to challenge comparative advertising
of their competitors on the grounds that the advertising is false and
deceptive. There can be no assurance Envoy will not be subject to claims
against it or Envoy's clients by other companies or governmental agencies or
that such claims, regardless of merit, would not have a material adverse
effect on Envoy's future operating performance.
Due to the increasing popularity and use of the Internet services, any number
of Canadian federal or provincial or foreign international laws and
regulations may be adopted regarding libel, pricing, acceptable content,
intellectual property ownership, taxation and quality of products and services.
US law makers have enacted legislation that regulates aspects of the Internet,
including domain name disputes and trademark infringement, the use of filters
in schools and libraries, piracy of digital content, liability for online
copyright infringement, e-commerce taxation, electronic signatures, disclosure
of financial information, children's privacy and children's access to adult
content. In addition, U.S. lawmakers have introduced legislation relating to
the Internet that would govern online gambling, unsolicited commercial email,
employer monitoring of employees, Internet access charges, and consumer
privacy. Any new legislation in these areas has the potential to inhibit the
growth in use of the Internet and decrease the acceptance of the Internet as a
communications and commercial medium, or could in turn decrease the demand for
Envoy's services or otherwise have a material adverse effect on Envoy's future
operating performance.
C. Organizational structure
Envoy has operations in the United States, the United Kingdom, Continental
Europe and Canada. Significant subsidiaries are as follows:
% of Jurisdiction of
Company ownership incorporation
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Communique Incentives 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
Watt Russell (USA) Inc. 75 Delaware
John Street Inc. 65 Ontario
D. Property, plants and equipment
We currently operate offices in the following cities: London and Leeds (UK),
Paris, Stockholm, New York, San Francisco, Boston and Toronto. The terms of
our principal leases are as follows:
Envoy's principal executive offices consist of a five-story office building of
approximately 36,000 square feet located at 26-28 Duncan Street, Toronto,
Ontario, Canada. The offices are leased pursuant to a lease with an initial
term of five years expiring on September 30, 2002 and a current rent of
$180,000 Cdn. per annum. The lease may be renewed by Envoy on six months
prior written notice for a first option term of three years, a second option
term of two years and a third option term of five years at specified increased
rents per each renewal period. Notice has been given for the first option
term. In connection with the lease negotiation, the landlord advanced to
Envoy $400,000 Cdn. as a loan, with an interest rate of 0.925% per annum, for
leasehold improvements, to be repaid over five years which repayment commenced
October 1, 1997. The leasehold improvements involved modernization of the
facilities and other modifications expected to benefit both Envoy and the
landlord. The principal balance of such loan at September 30, 2001 was
$101,000 Cdn.
Envoy has additional office space which consists of a five-story office
building of approximately 20,000 square foot located at 172 John Street,
Toronto, Ontario. These premises have been leased pursuant to a lease with a
term which commenced on July 1, 1999 and expires in June 2002, and a current
annual rent of $124,800 Cdn. which rent increases each year of the lease term.
The lease may be renewed by Envoy on six months prior written notice for three
further terms of two years for the first option and five years for the second
and third options at specified increased rents for each year of the renewal
terms. Notice has been given for the first option term. In connection with
the lease negotiation, the landlord advanced to Envoy $750,000 Cdn. as a loan,
with an interest rate of 3.5% per annum to be repaid over 10 years. The
leasehold improvements involved modernization of the facilities and other
modifications expected to benefit both Envoy and the landlord. The principal
balance of this loan at September 30, 2001 was $625,000 Cdn.
The offices of Envoy's wholly-owned subsidiary Devlin are currently located at
185 Fredrick Street, Ground 100, Toronto, Ontario, Canada. The premises are
leased pursuant to a lease with a current annual rent of $82,138 Cdn. which
expires in July 2002. Management is currently in discussions regarding the
renewal of this lease.
The executive offices of Envoy's wholly-owned subsidiary, Hampel Stefanides,
are located at 111 Fifth Avenue, New York, New York. The offices consist
primarily of (i) 18,000 square feet of office space leased pursuant to a lease
(the "HSI Lease") that expires in June 2004 with a current annual rent of
approximately US$324,000 with annual rent increases each year of the lease
term; and (ii) 18,000 square feet of office space pursuant to a lease that
expires in May 2011 with a current annual rent of approximately US$846,000
with annual rent increases each year of the lease term.
The HSI Lease requires Hampel Stefanides to maintain a letter of credit in the
amount of US$250,000, secured by a restricted cash deposit, to serve as a
security deposit.
The offices of Envoy's wholly-owned subsidiary, Watt International, consist of
an office building of approximately 26,600 square feet located at 300 Bayview,
Toronto, Ontario, Canada. The premises are leased pursuant to a lease with a
current annual rent of $243,318 Cdn. which expires in March 2005.
The offices of Envoy's wholly-owned subsidiary, Gilchrist, consist of an
office building of approximately 72,000 square feet located on Ring Road, West
Park, Leeds, West Yorkshire, England. The premises are leased pursuant to a
lease with a current annual rent of british pounds 136,000 which expires in
February 2009. Gilchrist has additional office space of approximately 3,000
square feet located at 156-164 Tooley Street, London SE1, England. The
premises are leased pursuant to a lease with a current annual rent of british
pounds 26,550 which expires in December 2002.
Clients
Our customers consist primarily of large multinational businesses and regional
accounts. No single client accounted for over 18% of net revenue for the year
ended September 30, 2001. Our clients include: Adidas/Salomon, Asda, BASF,
CDNow, FedEX, JP Morgan Chase, Lexus, Microsoft, Nissan, Panasonic Canada.,
Sprint Canada, Safeway Inc., Steelcase Canada, Steelecase USA, TD Waterhouse
Investor Services, and Wal-Mart
Item 5. Operating and Financial Review and Prospects
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The following discussion should be read in conjunction with, and is qualified
in its entirety by, the financial statements of Envoy and notes relating
thereto included elsewhere in this Form 20-F. The information contained in
this Item# 5 refers to financial statements of Envoy, which are presented in
Canadian dollars and are prepared in accordance with Canadian GAAP. Canadian
GAAP differs in certain significant respects from U.S. GAAP. Reconciliation
to U.S. GAAP is set forth in Note 15 to the Notes to the audited Financial
Statements of Envoy. Historical results of operations, percentage
relationships and any trends that may be inferred therefrom are not
necessarily indicative of the operating results of any future period.
The following discussion contains forward-looking statements that are subject
to significant risks and uncertainties. There are a number of important
factors that could cause actual results to differ materially from historical
results and percentages and results anticipated by the forward-looking
statements contained in the following discussion. Statements in this
Form 20-F concerning Envoy's outlook or future economic performance,
anticipated profitability, revenues, commissions and fees, expenses or other
financial items and statements made with respect to any future events,
conditions, performance or other matters are "forward looking statements" as
that term is defined under the U.S. federal securities laws. Forward-looking
statements are subject to risks, uncertainties, and other factors which could
cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not
limited to, (i) the uncertain acceptance of the Internet and Envoy's Internet
and other technology, (ii) that Envoy has grown rapidly in the last several
years and there can be no assurance that Envoy will continue to be able to
grow profitably or manage its growth, (iii) risks associated with
acquisitions, (iv) risks associated with competition, (v) that Envoy's
quarterly operating results have fluctuated in the past and are expected to
fluctuate in the future, and (vi) that the loss of services of certain key
individuals could have a material adverse effect on Envoy's business,
financial condition or operating results.
Overview
Envoy is an international design, marketing and technology company with
offices throughout North America and Europe. Combining strategy, creativity
and innovation, Envoy's interconnected network of companies delivers business-
building solutions to over 200 leading global brands and has successfully
completed assignments in more than 40 countries around the world. Our clients
include Asda, BASF, CDNOW, Safeway and Wal-Mart. As of September 30, 2001, we
served over 250 clients. We generated $80.8 Cdn. million of net revenue for
the year ended September 30, 2001 and $58.6 Cdn. million for the year ended
September 30, 2000.
-- Net Revenue
(Previously referred to as "gross margin" in fiscal 1999) net revenue
represents Envoy'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 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 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 is comprised of: (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 expenditure
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 is comprised of non-refundable monthly agency fees, which are
recognized in the month earned.
-- Operating Expenses
Salaries and benefits and general and administrative costs represent Envoy's
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, and Envoy's own advertising and promotion
costs, award entry fees and research.
-- Recognition Policies
In general, Envoy recognizes its compensation for its services as follows.
Fees earned for non-agency services are recognized either upon the performance
of Envoy's services when Envoy earns a per diem fee or, in the case of a fixed
fee, upon substantial completion of Envoy's services and acceptance by the
client. Fees earned but not yet billed are included in accounts receivable.
Fees billed and collected from clients in excess of fees recognized as net
revenue are classified as deferred revenue.
When Envoy's compensation for its agency services are commission based, net
revenue is comprised of (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 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 Envoy's services
and acceptance by the client, being the time at which Envoy has no further
substantial obligations with respect thereto. When Envoy's compensation for
its agency services is fee based, net revenue is comprised of 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.
-- Tax Matters
With respect to Envoy's 1998 fiscal year, Envoy had tax loss
carryforwards sufficient to cover its Canadian income tax liabilities. In
1999, Envoy fully utilized previous tax loss carryforwards to reduce its
Canadian income tax liability as set forth in Note 10 to the Notes to the
audited consolidated Financial Statements of Envoy.
A. Operating results
Year Ended September 30, 2001 compared to Year Ended September 30, 2000
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-- Net revenue
Net revenue increased by 38% to $80.8 million in the year ended September 30,
2001 from $58.6 million in the year ended September 30, 2000. This increase
occurred as a result of both growth through acquisition and organic growth.
Effective January 1, 2001 Envoy acquired the International Design Group. This
acquisition was accounted for using purchase accounting and Envoy's results of
operations reflect net revenue from the effective date of the acquisition.
This acquisition accounted for approximately $2.8 million, or 13% of the
overall increase in net revenue. Our organic growth rate for the entire
Company in 2001 was 4.8%.
In fiscal 2000, Envoy completed two acquisitions: the acquisition of Gilchrist
effective July 1, 2000, and the acquisition of Sage, effective June 1, 2000.
Envoy's results of operations for fiscal 2000 include the acquired operations
from their respective dates of the acquisitions. As a result of the
acquisitions of Gilchrist and Sage, there are an additional nine and eight
months of net revenues for these companies, respectively, included in the
September 30, 2001 results of operations that were not included in the results
of operations for the year ended September 30, 2000. In fiscal 2001, net
revenue from Envoy's marketing services represented approximately 30% of net
revenue, while design and technology services represented 51% and 19%
respectively.
Net revenues from customers located in the United States have continued to
grow from $32.6 million in fiscal 2000 to $41 million in fiscal 2001, partly
due to the acquisition of Sage in late fiscal 2000. Net revenues from the
United Kingdom and continental Europe have continued to grow from $4.1 million
in 2000 to $20 million in 2001 largely due to the acquisition of Gilchrist in
late 2000.
Our five largest clients in fiscal 2001 accounted for 37.5% of our net revenue
for such period, while our five largest clients in fiscal 2000 accounted for
33.7% of our net revenue for such period. No single client accounted for over
18% of our net revenue in either year.
-- EBITDA
Management believes that earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") is an important measure of
profitability when evaluating a company growing through acquisitions. EBITDA
is a standard measure that is commonly reported and widely used by analysts,
investors and other interested parties in the marketing industry, accordingly
this information has been disclosed herein to permit a more complete
comparative analysis of our operating performance. Using EBITDA, eliminates
distortions created by goodwill amortization, tax rates, interest charges and
other non-recurring charges or gains and makes the operating results more
comparable to those of other companies, particularly those companies which
account for acquisitions using pooling of interests accounting. In computing
EBITDA we have excluded the charge taken in 2001 in respect of the costs
associated with an aborted acquisition and the related equity offering, which
is presented as an unusual item under generally accepted accounting
principals. We have excluded this charge, as management believes such costs
are non-recurring in nature. There were no similar unusual charges or unusual
gains in prior years. EBITDA should not be considered as a substitute or
alternative for net earnings or cash flow.
In fiscal 2001, Envoy earned $7 million in EBITDA before unusual items
compared with $10.2 million in fiscal 2000. This represents a decrease of 31%
year over year. In 2001, our EBITDA profit margin before unusual items was
8.7%, compared to 17.3% in 2000. The decrease is largely due to the general
economic slowdown in the last quarter. During the fourth quarter the Company
experienced a loss of $3 million dollars. The principal reasons for this in
our fourth quarter were the slowdown in our technology business, which
experienced a loss of approximately $1.5 million, as well as losses resulting
from the closure of Communique Advertising in Canada. In addition goodwill
amortization for the fourth quarter amounted to approximately $800,000.
-- Operating Expenses
Operating expenses increased by 52% to $73.8 million for fiscal 2001 from
$48.5 million for fiscal 2000. As a percentage of net revenue, operating
expenses increased to 91% for fiscal 2001 from 83% in fiscal 2000. The
primary reasons for the increase in operating expenses were an increase in
salaries and benefits of $18.5 million, or 53%; an increase in general and
administrative expenses of $4.6 million or, 43%; and an increase in occupancy
costs of $2.2 million, or 86%. There were also increases in depreciation of
$880,000, or 44%, and of goodwill amortization net of taxes of $1.4 million,
or 89%. 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
Envoy and related recruiting and hiring costs. As a percentage of net
revenue, salaries and benefits increased to 66% for fiscal 2001 compared with
60% in fiscal 2000. The percentage increase in salary expense is a result of
a combination of factors including the cost of winding up our Canadian
advertising business during the year, an increase in staff to accommodate the
growth in our technology business and, the delay in the launch by clients of
certain major projects which resulted in underutilized staff at certain times
during the year. 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 by the
acquired businesses. General and administrative expenses remained relatively
constant at 19% of net revenue for fiscal 2001 compared with 18% of net
revenue for fiscal 2000. Occupancy costs increased due to additional space
required to support our growth in New York, San Francisco and Sweden, and the
occupancy costs associated with the acquisition of Gilchrist for an additional
three months in fiscal 2001. The additional depreciation charges were due to
the depreciation of leasehold costs associated with our acquired operations
and additional office space; depreciation of newly purchased capital equipment
and depreciation from acquired businesses. As a percentage of revenue,
depreciation remained relatively consistent at approximately 3.4% year over
year. The increase in interest charge was largely due to additional debt used
to funds acquisitions as well as an increase in interest rates year over year
on our floating rate debt.
During the year we announced that we terminated our discussions in connection
with the proposed acquisition of Leagas Delaney. Generally accepted
accounting principles require that all costs associated with the proposed
acquisitions and the related equity financing need to be expensed at the date
of abandonment. These costs include legal, accounting, consulting and other
out-of-pocket expenses, all of which amounted to approximately $1.9 million.
The above factors resulted in a decrease in our earnings before income taxes
and goodwill amortization from $7.8 million to $1.5 million.
In 2001, our effective income tax rate as a percentage of net income before
goodwill amortization was 92.2% compared to our 2000 effective tax rate of
41.9%. The difference relates primarily to expenses deducted in the accounts
which have no corresponding deduction for income taxes as set forth in Note 10
to our audited consolidated financial statements. These expenses increased in
2001 due to certain costs incurred in connection with aborted acquisitions and
equity financing, and certain compensation expense both of which may not be
deductible for tax purposes. See Note 2(d) and Note 11 in our audited
consolidated financial statements.
Goodwill amortization increased from $1.6 million to $3 million due largely to
the increased amount of goodwill derived from the acquisitions discussed above
as well as additional earn-out payments. Goodwill is largely not deductible
for income tax purposes.
-- Net income
Primarily as a result of the foregoing factors, net income decreased from $2.9
million in fiscal 2000 to ($2.9) million in fiscal 2001.
Year Ended September 30, 2000 compared to Year Ended September 30, 1999
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-- 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 Envoy acquired Gilchrist and effective June 1, 2000,
Envoy acquired Sage. Both acquisitions were accounted for using purchase
accounting and Envoy's results of operations reflect net revenue from their
respective effective dates. These acquisitions accounted for approximately
$8.6 million, or 51% of the overall increase in net revenue. Envoy's increase
in net revenue was due to organic growth in fiscal 2000 of $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, effective
January 1, 1999 and the acquisition of Watt International, effective May 1,
1999. Envoy's results of operations for fiscal 1999 include the acquired
operations from their respective dates of the acquisitions. As a result of
the acquisitions of Devlin and Watt International, 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 the results of operations for the year ended September 30, 1999.
There are twelve months of net revenues of Hampel Stefanides included in our
results of operations for the year ended September 30, 1999.
In fiscal 2000, net revenue from Envoy's marketing services represented
approximately 49% of net revenue, while design and technology services
represented 38% and 13% respectively.
Net revenues from customers located in the United States grew from $22.6
million in fiscal 1999 to $32.6 million in fiscal 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 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 as 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
In fiscal 2000, Envoy earned $10.2 million in EBITDA compared with $7.3
million in fiscal 1999. This represents a growth rate of 39% year over year.
The EBITDA profit margin in 2000 was 17.3%, similar to the EBITDA profit
margin of 17.4% achieved in 1999.
-- Operating Expenses
Operating expenses increased by 40% to $48.5 million for fiscal 2000 from
$34.5 million for fiscal 1999. 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 of 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
Envoy and related recruiting and hiring costs. As a percentage of net
revenue, salaries and benefits decreased somewhat to 60% for fiscal 2000
compared with 62% in fiscal 1999. 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
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
Watt International'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 our expanded operations. The increase in interest charge 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 in fiscal 2000, an increase of 41.3%.
In fiscal 2000, our effective income tax rate as a percentage of net income
before goodwill amortization was 41.9% compared with our fiscal 1999 effective
tax rate of 36.5%. The difference in the rate relates primarily to the
utilization in fiscal 1999 of remaining tax loss carryforwards, reducing our
Canadian income tax liability as set forth in Note 10 of the Notes to our
audited consolidated financial statements of Envoy.
Goodwill amortization increased from $610,000 in fiscal 1999 to $1.6 million
in fiscal 2000 due largely to the increased amount of goodwill derived form
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 Earnings
Primarily as a result of the foregoing factors, net earnings remained
relatively constant at $2.9 million in fiscal 2000 and fiscal 1999.
B. Liquidity and capital resources
Envoy's principal capital requirements have been to fund acquisitions,
including related earn-outs, capital expenditures and for working capital
purposes. During the year, the Company established an extendable revolving
line of credit under which it can borrow funds in either Canadian dollars,
U.S. dollars or U.K. Pounds Sterling, provided the aggregate borrowings do not
exceed $40,000,000 Canadian. Advances under the line of credit can be used
for general purposes (to a maximum of $2,000,000) and for financing
acquisitions which have been approved by the lenders. Envoy intends to
continue to seek suitable businesses to acquire in furtherance of our
expansion strategy. Envoy may issue additional equity or draw on the debt
facility to fund any such acquisitions. Envoy used its borrowings under this
facility to repay its US dollar revolving credit facility. As at September 30,
2001 only $7.8 million had been borrowed under the facility, none of which was
for general corporate purposes.
Under the terms of our debt facility, Envoy is required to maintain certain
financial ratios. As at September 30, 2001 Envoy was not in compliance with
one of the debt covenants involving trailing twelve months earnings before
taxes, interest, depreciation and amortization and Envoy will continue to be
in violation of this covenant in fiscal 2002. The lenders have waived the
violation of this covenant as of September 30, 2001 and are in discussions
with Envoy regarding amendments to the covenant calculations going forward.
Under the terms of the facility, if the covenants are not met, the lenders can
demand repayment of the outstanding borrowings. We are in the process of
considering possible actions, which we might take if the lenders demand such
repayment.
Envoy had a working capital deficit of ($430,000) and a cash balance of $21.8
million at September 30, 2001. The decrease in working capital is a result of
the entire amount of Envoys bank debt as well as the Gilchrist note, being
classified as a current liability. At September 30, 2000 working capital was
$11.7 million and cash was $7.1 million. See Note 8 to our audited
consolidated financial statements.
Net cash provided by operating activities before any increase or decrease in
non-cash operating working capital was $2.5 million for the fiscal year ended
September 30, 2001 and 6.2 million for the fiscal year ended September 30,
2000.
Additional consideration 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 $770,000 in
cash and 258,936 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 $10.1 million in cash and 1,358,984 common shares).
On June 5, 2000, Envoy issued 1,533,571 common shares through a public
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
totalling $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. See Item 4
"Information on the Company" for a description of such acquisition.
At September 30, 2001, Envoy had restricted cash of $159,000 ($457,000 at
September 30, 2000) representing customer deposits. See Note 4 to our audited
consolidated financial statements.
C. Research and development, patents and licenses, etc.
"Not applicable"
D. Trend Information
"Not applicable"
Item 6. Directors, Senior Management and Employees
---------------------------------------------------
A. Directors and senior management
The following table sets forth certain information regarding the directors and
senior managers of Envoy as of January 31, 2002. Each director is elected at
the annual meeting of shareholders to serve until the next annual meeting or
until a successor is elected or appointed.
Name Positions held with Envoy
-------------------------------------------------------------------------------
Geoffrey B. Genovese Chairman and Chief Executive Officer and Director
John H. Bailey (1),(2) Secretary and Director
David Hull (2) Director
Hugh Aird (1),(2) Director
Eric A. Demirian (1) Director
Tom E. S. Wright President and Chief Operating Officer and Director
Donald G. Watt Director
Stephen J. Miller Vice President, Marketing and Corporate Communications
J. Joseph Leeder Vice President and Chief Financial Officer
-------------------------------------------------------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The principal occupations and positions for the past five years and, in
certain cases, prior years of the directors and executive officers of Envoy
are as follows:
-- Geoffrey B. Genovese
Mr. Genovese founded The Incentive Design Company Ltd., a business and
marketing communications company, in 1981. Envoy acquired IDC in July 1991.
Mr. Genovese became Chairman of Envoy in October 2001, and currently serves as
Chairman and President of Envoy Communications Group Inc. Mr. Genovese served
as President and Chief Executive Officer of Envoy from October 1993 to
September 2001. Mr. Genovse has been a Director of Envoy since July 1991.
-- John H. Bailey
Mr. Bailey is a barrister and a solicitor who has been in private practice
since 1973. Mr. Bailey earned a Bachelor of Commerce and a Bachelor of Laws
degree from the University of Toronto and a Master of Laws degree from York
University. Mr. Bailey has been a Director of Envoy since April 1994 and
Secretary of Envoy since August 1997.
-- David Hull
Mr. Hull has been the President of Hull Life Insurance Agencies Inc. since May
1991. Hull Life Insurance Agencies Inc. specializes in estate planning and
life and disability insurance. Prior thereto, Mr. Hull served as Executive
Vice President of Hull Life Insurance Agencies Ltd. and Thomas I. Hull
Insurance Ltd., members of The Hull Group of Companies. Mr. Hull has been a
Director of Envoy since January 1995.
-- Hugh Aird
Mr. Aird has been Vice President Business Development of Mulvihill Capital
Management, a financial consulting company, since November 2001. Mr. Aird was
Chairman and Chief Executive Officer of DRIA Capital Inc., a financial
consulting company, from November 1998 to November 2001. From February 1995
to November 1998, Mr. Aird was the Vice-Chairman and a Director of Merrill
Lynch Canada Inc. (formerly Midland Walwyn Capital Inc.). From February 1986
to 1996, Mr. Aird was President and Chief Executive Officer of Trilon
Securities Corporation, a securities firm. Mr. Aird has been a Director of
Envoy since August 1997. Mr. Aird has been a Director of Invesprint
Corporation, a label and packaging material manufacturer listed on the TSE,
since March 1996 and of Digital Processing Systems Inc., a designer,
manufacturer and marketer of electronic hardware and software listed on the
TSE, since May 1996.
-- Eric A. Demirian
Mr. Demirian has been the Executive Vice President of Corporate Development
for GT Telecom, Inc. since January 2000. From October 1992 to January 2000,
Mr. Demirian was a partner with Pricewaterhouse Coopers LLP where he was the
head of its Information and Communications Industry Practice for Canada. Mr.
Demirian received a Bachelor of Business Management from Ryerson University
and is a Certified General Accountant and a Chartered Accountant. Mr. Demirian
became a director of Envoy in January 2002.
-- Tom E. S. Wright
Mr. Wright joined Envoy as President and Chief Operating Officer in October
2001. Prior to joining Envoy, Mr. Wright was President and CEO of Salomon
North America, a division of Adidas-Salomon AG from March 1999 to December
2000. From January 1988 to March 1998, Mr. Wright was the President of Adidas
Canada Ltd. Mr. Wright became a director of Envoy in April 2001.
-- Donald G. Watt
Mr. Watt founded the predecessor to Watt Design in 1966 and served as its
President from its inception until 1992 when it was acquired by Cott
Corporation, a supplier of retail branded beverages listed on the TSE and
Nasdaq. Mr. Watt served as Watt Design's Chairman from 1992 until the
acquisition of substantially all of Watt Design's assets by Envoy. In
addition, during the period from 1992 to 1995, Mr. Watt served as the
President of Retail Brands Corporation, the marketing arm of Cott Corporation.
Mr. Watt has been Chairman of Watt International since its acquisition by
Envoy. Mr. Watt became a director of Envoy in June 1999. Mr. Watt is also a
Director of Cott Corporation, The Forzani Group Limited, a retailer of
sporting goods company listed on the TSE and Montreal Stock Exchange, Indigo
Books & Music Inc., a retailer of books and music, GTR Group Inc., a supplier
of republished and previously played video games listed on the TSE, Aastra
Technologies Limited, a manufacturer of telecommunications equipment listed on
the TSE and Alberta Stock Exchange, and Partyco Holdings Ltd., a retailer of
party supplies listed on the Alberta Stock Exchange. See "Item 9.A -Offer and
listing details" for discussion of a strategic alliance agreement between the
Watt International and a company of which Mr. Watt is the principal.
-- Stephen J. Miller
Mr. Miller joined Envoy as Vice President, Corporate Development in October
2000. Prior to joining Envoy, Mr. Miller was the Vice President, Sales and
Marketing of the Canadian operations of Dunlop Maxfli Sports from 1998 to 2000.
From 1997 to 1998, Mr. Miller was the Vice President, Sales and Marketing of
Mary Kay Cosmetics and prior thereto the Regional Sales Director of Johnson &
Johnson, from 1991 to 1996.
-- J. Joseph Leeder
Mr. Leeder joined Envoy in November 1998 as Vice President and Chief Financial
Officer. Prior to joining Envoy, Mr. Leeder was a partner of KPMG LLP in
Canada, an accounting firm, and an executive vice president of KPMG Corporate
Finance Inc., a subsidiary of KPMG LLP.
The Ontario Business Corporations Act requires that a majority of Envoy's
directors be Canadian residents. There are no arrangements or understandings
between any director or executive officer of Envoy pursuant to which he was
selected as such.
B. Compensation
The following table sets forth in Canadian dollars all compensation for the
fiscal year ended September 30, 2001 paid to the President and Chief Executive
Officer of Envoy and the four other most highly compensated officers who
served as executive officers of the Company (the "Named Executive Officers"):
Annual Compensation
-------------------------------------------------------------------------------
Name and Position Salary Bonus Other Annual
($) ($) Compensation ($)
-------------------------------------------------------------------------------
Geoffrey B. Genovese, 356,250 - 685,000(1)
Chairman and Chief
Executive Officer
J.Jospeh Leeder, 238,767 170,000 -
Vice President, and
Chief Financial Officer
Brian Goodall, 350,000(2) - -
President,
Hampel Stefanides, Inc.
Stephen Miller, 162,917(3) - -
Vice President Marketing
and Corporate Communications
Chetan Mathur, 487,488 - -
C.E.O., Sage Information
Consultants Inc.
Long Term All Other
Compensation Compensation
----------------------------------------
Awards Payouts
-------------------------------------------------------------------------------
Name and Position Securities Restricted LTIP
Under Shares or Payouts($)
Option/SARs Restricted
Granted (#) Share Units ($)
-------------------------------------------------------------------------------
Geoffrey B. Genovese, - - - -
Chairman and Chief
Executive Officer
J. Jospeh Leeder, - - - -
Vice President, and
Chief Financial Officer
Brian Goodall, - - - -
President,
Hampel Stefanides, Inc.
Stephen Miller, 25,000 - - -
Vice President Marketing
and Corporate Communications
Chetan Mathur, - - - -
C.E.O., Sage Information
Consultants Inc.
(1) The amount was paid to a corporation related to Mr. Genovese and includes
$75,000 as an annual management fee and the balance as a fee for successful
completion of acquisitions by and the credit facility for the Corporation.
(2) Mr. Goodall's compensation is stated and paid in US dollars.
(3) Mr. Miller became an executive officer of the Corporation on October 16,
2000. The information is provided for all compensation paid from the date to
September 30, 2001.
The following table sets forth options granted under the Stock Option Plan to
the Named Executive Officers of the Company in the most recently completed
fiscal year:
Stock Options Granted During 2001 Fiscal Year
------------------------------------------------------------------------------
Stephen Miller
Shares Under Options Granted (#) 25,000(1)
Percentage of Total Options Granted to Employees(1) (%) 3.2%
Date of Grant January 24, 2001
Exercise Price ($/Share) $4.80
Market Value of Shares Underlying Options on $4.80
Date of Grant ($/Share)
Expiry Date January 23, 2006
(1) These options vest at the rate of 1/3 on each of the first three
anniversaries of the date of grant.
The following table sets forth options exercised under the Stock Option Plan to
the Named Executive Officers of the Company in the most recently completed
fiscal year and the value of unexercised options held by them as at the most
recent fiscal year:
Stock Options Exercised During 2001 Fiscal Year
------------------------------------------------------------------------------
Geoffrey B. Genovese
Number of Shares Acquired on Exercise Nil
Aggregate Value Realized ($) Nil
Unexercised Options at FY-End (#)
Exercisable/Unexercisable 450,000/nil
Value of Unexercised In-the Money Options at FY-End ($)
Exercisable/Unexercisable(1) 0/nil
Joseph Leeder
Number of Shares Acquired on Exercise Nil
Aggregate Value Realized ($) Nil
Unexercised Options at FY-End (#)
Exercisable/Unexercisable 150,000/100,000
Value of Unexercised In-the Money Options at FY-End ($)
Exercisable/Unexercisable(1) 0/0
Brian Goodall
Number of Shares Acquired on Exercise Nil
Aggregate Value Realized ($) Nil
Unexercised Options at FY-End (#)
Exercisable/Unexercisable 50,000/50,000
Value of Unexercised In-the Money Options at FY-End ($)
Exercisable/Unexercisable(1) 0/0
Stephen Miller
Number of Shares Acquired on Exercise Nil
Aggregate Value Realized ($) Nil
Unexercised Options at FY-End (#)
Exercisable/Unexercisable nil/25,000
Value of Unexercised In-the Money Options at FY-End ($)
Exercisable/Unexercisable(1) 0/0
Chetan Mathur
Number of Shares Acquired on Exercise Nil
Aggregate Value Realized ($) Nil
Unexercised Options at FY-End (#)
Exercisable/Unexercisable nil/nil
Value of Unexercised In-the Money Options at FY-End ($)
Exercisable/Unexercisable(1) 0/0
(1) The closing stock price of the Common Shares of the Company on the Toronto
Stock Exchange on September 28, 2001 was $2.16.
Envoy does not provide any pension, retirement plan or other remuneration for
its directors or executive officers that constitutes an expense to Envoy, nor
are there any plans or other arrangements in respect of compensation received
or that may be received by executive officers in Envoy's most recently
completed or current financial year to compensate such officers in the event
of the termination of employment or a change in control of Envoy.
Certain directors, who are not officers of the Company or any of its
affiliations, are compensated for their services as directors and members of a
committee through a combination of annual and meeting attendance fees. Each
of Messrs. Aird, and Demirian are entitled to receive an annual director's fee
of $20,000. In addition, each of Messrs. Aird, Demirian and Hull are entitled
to receive a fee of $500 for each Board meeting and $1,000 for each Committee
meeting attended. No compensation was paid to the other directors for their
services as directors or members of committees. Directors are also entitled
to participate in the Corporation's Stock Option Plan.
Employment Contracts and Termination Agreements
The Corporation, its wholly owned subsidiary, Hampel Stefanides, Inc.
("Hampel"), and Sage Information Consultants Inc. ("Sage") have entered into
employment contracts with the Named Executive Officers.
Geoffrey B. Genovese has agreed to act as the Corporation's Chairman and Chief
Executive Officer at an annual base salary of $550,000, together with a
discretionary bonus based on the achievement of agreed upon criteria
established from time to time by the Compensation Committee. During the period
from February 1, 2002 to September 30, 2002, Mr. Genovese has agreed to a 10%
reduction in his base salary. This agreement provides for a severance payment
equivalent to $300,000 plus an amount equal to two times the total
remuneration and other compensation paid to Mr. Genovese and his management
company during the 12 month period preceding termination, if Mr. Genovese's
employment is terminated, without cause, by the Corporation. An annual fee of
$150,000 is also payable to Mr. Genovese's management company pursuant to a
management agreement with the Corporation. The management agreement has a
fixed term ending on September 30, 2003.
Tom Wright has agreed to act as the Corporation's President and Chief
Operating Officer, effective October 1, 2001, at an annual base salary of
$400,000, together with a discretionary bonus based on the achievement of
agreed upon criteria established from time to time by the Compensation
Committee. During the period from February 1, 2002 to September 30, 2002,
Mr. Wright has agreed to a 10% reduction in his base salary. This agreement
provides for a severance payment equivalent to up to 18 months base salary and
benefits if his employment is terminated, without cause, by the Corporation or
24 months if his employment is terminated, without cause, by the Corporation
following a change of control of the Corporation.
Joseph Leeder has agreed to act as the Corporation's Vice President and Chief
Financial Officer at an annual base salary of $300,000, together with a
discretionary bonus based on the achievement of agreed upon criteria
established from time to time by the Chief Executive Officer. During the
period from February 1, 2002 to September 30, 2002, Mr. Leeder has agreed
to a 10% reduction in his base salary. This agreement provides for a severance
payment equivalent to his base salary for a period of three months for each
year of employment (to a maximum of six months), if Mr. Leeder's employment is
terminated, without cause, by the Corporation, and for a period of twelve
months, if Mr. Leeder's employment is terminated, without cause, by the
Corporation within six months of a change of control of the Corporation.
Brian Goodall has agreed to act as Hampel's President at an annual base salary
of US$350,000. This agreement has a fixed term of 4 years ending on September
30, 2002.
Stephen Miller has agreed to act as the Corporation's Vice President,
Marketing and Corporate Communications, at an annual base salary of $170,000,
together with a discretionary bonus of up to 25% of his base salary. This
agreement provides for a severance payment equivalent to his base salary for
a period of six months, if his employment is terminated by the Corporation.
Chetan Mathur has agreed to act as Sage's Chief Executive Officer at an annual
base salary of US$325,000. This agreement has a fixed term of 4 years ending
on June 1, 2004.
Compensation of Directors
There are no standard or other arrangements under which directors of Envoy who
are also officers of Envoy or otherwise have a business relationship with
Envoy were compensated by Envoy during the most recently completed fiscal year
for acting in their capacity as directors. Outside directors, who have no
business relationship with Envoy other than service as a director, are
entitled to receive an annual retainer for service as a director and fees for
attendance at meetings of the Board of Directors and committees thereof.
Except as set forth below, there are no arrangements under which directors of
Envoy were compensated by Envoy during the most recently completed fiscal year
for services rendered as consultants or experts. In the fiscal year ended
September 30, 2001, Envoy paid approximately $242,000Cdn. to John H. Bailey,
Barrister & Solicitor, for legal services provided to Envoy.
Directors' and Officers' Liability Insurance
Envoy maintains liability insurance with total annual coverage of $10,000,000
Cdn. per incident for all its directors and officers in their capacities as
such.
C. Board Practices
CORPORATE GOVERNANCE
The following describes the Corporation's corporate governance practices.
Mandate of the Board
The Board of Directors (the "Board") holds meetings whenever appropriate to
oversee the conduct of the Corporation's business and monitor and evaluate the
day-to-day management of the Corporation. With respect to risk management
activities, the Board is presented, at each meeting, reports on operations,
financial status, material contracts and litigation.
In addition to the Board's statutory responsibilities under the Business
Corporations Act of Ontario, the Board's "stewardship" responsibilities
include the following: (a) assessing the principal risks arising from or
incidental to the business activities of the Corporation; (b) appointing all
senior executives of the Corporation and, through the Compensation Committee
of the Board, developing and implementing the executive compensation policies
and reviewing the performance of senior executives with reference to the
Corporation's policies, stated budget and other objectives; (c) overseeing
the Corporation's policies regarding public communications, investor relations
and shareholder communications; and (d) monitoring and assessing, through the
Audit Committee of the Board, the scope, implementation and integrity of the
Corporation's internal information, audit and control systems.
The Corporation has delegated the responsibility for monitoring the
effectiveness of the Corporation's international information systems to the
Audit Committee of the Board. The Audit Committee is also responsible for
reviewing and appraising the soundness, adequacy and application of financial
and other operating controls, determining the extent of compliance with
established policies, plans and procedures and ascertaining the reliability
and timeliness of management data developed within the organization.
Composition of the Board
The articles of the Corporation provide that there shall be a Board of not
less than 3 or more than 10 directors. There are currently seven directors of
the Corporation, three of whom are "inside" or "related" directors and three
of whom are "outside" and "unrelated" directors, and one of whom is an
"outside" but "related" director (as such terms are defined in the TSE Report).
Geoffrey Genovese, the Chairman and Chief Executive Officer of the Corporation,
Tom Wright, the President and Chief Operating Officer of the Corporation and
Donald Watt, the Chairman of the Corporation's wholly owned subsidiary, Watt
International Inc., are the "inside" and "related" directors. Hugh Aird,
David Hull and Eric Demirian are the "outside" and "unrelated" directors of
the Corporation. John H. Bailey is an outside director but, as counsel who
provides ongoing legal services to the Corporation, may be considered to be a
"related" director. The Board intends to periodically examine its size and
constitution to ensure responsible corporate governance and effective
corporate management.
Governing Committees
The directors have established the Audit Committee and the Compensation
Committee to focus resources and expertise in certain areas of the Board's
mandate.
The Board has delegated to the Audit Committee of the Board responsibility for
ensuring management has designed and implemented an effective management
system and for reviewing internal information, audit, control and management
systems. The Audit Committee is comprised of three directors Hugh Aird, Eric
Demirian and John H. Bailey. The TSE Report recommends that all members of
the Audit Committee should be "outside" directors. Although John H. Bailey is
an "outside" director, he may be considered a "related" director (see above).
However, the Board has waived the independence requirements for John H. Bailey,
as it believes that his presence on the Audit Committee facilitates the
remaining members understanding of industry and related issues and is in the
best interests of the Corporation.
The Audit Committee is responsible for reviewing the Corporation's annual
consolidated financial statements and reporting to the Board in connection
therewith. The Audit Committee is also responsible for monitoring the
Corporation's internal controls and information gathering systems and dealing
with the Corporation's external auditors. On February 22, 2000, the Audit
Committee adopted a formal written audit committee charter which specifies the
auditor's accountability to the Board and the authority and responsibilities
of the Audit Committee.
The Compensation Committee is comprised of three directors David Hull, Hugh
Aird and John H. Bailey, all of whom are "outside" directors. The Compensation
Committee reviews, administers and monitors the Corporation's executive
compensation plans, policies and programs, including the compensation of all
executive officers and, if requested by the Chief Executive Officer, reviews
the compensation of any other officer or senior employee.
The Board has not, as yet, established a Corporate Governance Committee as
recommended in the TSE Report and believes that the matters ordinarily
considered by such a committee are effectively administered by the Board's
"outside" and "unrelated" directors. Although, at present, the Board has
determined this to be the most practical approach to responsible corporate
governance, the Board will continue to evaluate this determination as
circumstances dictate.
Expectations of the Board
The Board expects management of the Corporation to report to the Board in a
comprehensive, accurate and timely fashion on the business and affairs of the
Corporation generally and on specific matters that it considers to have
material consequences for the Corporation and its shareholders. Management is
expected to continually develop and review the Corporation's strategic plan to
make the decisions necessary to give effect to the plan; to adhere to the
Corporations' operational policies; and to monitor the Corporation's financial
performance in comparison to the annual budget, with the ultimate goal of
enhancing shareholder value.
Shareholder Communication
The objective of the Corporation's shareholder communication policy is to
ensure open and timely exchange of information relating to the Corporation's
business, affairs and performance, subject to the requirements of applicable
securities legislation and other statutory and contractual obligations
limiting the disclosure of such information. Information material to the
Corporation's business is released through news wire services, the general
media, telephone conferences and shareholder mailings, thereby ensuring timely
dissemination. Additionally, individual queries, comments or suggestions can
be made at any time directly to the Corporation's secretarial department
located at its head office.
D. Employees
As of January 31, 2002, Envoy had 292 full time employees based in Toronto,
Canada, 60 based in the United States, and 158 based in the United Kingdom and
Continental Europe. Of this total, 75 employees were engaged in marketing,
369 in design, and 73 in technology. As of January 31, 2001, Envoy had 354
full time employees based in Toronto, Canada, 54 based in the United States
and 151 based in the United Kingdom and Continental Europe. Of this total 115
employees were engaged in advertising/marketing, 344 in design, and 100 in
technology. As of January 31, 2000, Envoy had 250 full time employees based
in Toronto, Canada, and 56 based in the United States. Of this total 143
employees were engaged in advertising/marketing 149 in design, and 14 in
technology.
E. Share Ownership
As of January 31, 2002, the options and other rights to purchase common shares
of Envoy consisted of options to purchase 2,487,500 common shares and other
contingent rights to purchase up to 2,867,131 common shares, all as described
below.
Options
Stock Option Plan
Envoy has established a stock option plan (the "Stock Option Plan"), pursuant
to which options to purchase common shares and stock appreciation rights
("SARs") may be granted to directors, officers, employees or certain
consultants to Envoy, as determined by the Board of Directors, at a price to
be fixed by the directors, subject to limitations imposed by the TSE or any
other Canadian stock exchange on which the common shares may become listed for
trading and any other regulatory authority having jurisdiction in such matters.
The common shares subject to each option shall become purchasable at such time
or times as may be determined by the directors. SARs may only be granted in
conjunction with an option and, when exercised, entitle the holder to receive
an amount equal in value to the excess of the market value on the date of
exercise of the common shares over the option price of the related option.
The excess amount is payable in common shares having a market value equal to
such excess. Options are non-assignable and non-transferable by the option-
holder and may only be exercised during the option-holder's lifetime by the
option-holder. SARs are non- transferable and terminate when the related
option terminates.
The maximum number of common shares reserved for issuance upon exercise of
options under the Stock Option Plan is 4,000,000. As at January 31, 2002,
options to purchase 2,487,500 common shares and no SARs are outstanding under
the Stock Option Plan. The aggregate number of common shares issued to any
one Insider (as such term is defined in the Stock Option Plan) and to all
Insiders as a group under the Stock Option Plan and any other share
compensation arrangement within a one year period may not exceed 5% and 10%,
respectively, of the issued and outstanding common shares immediately prior to
the issuance in question. No optionee may hold options to purchase more than
5% of the outstanding common shares of Envoy. The option price per share
shall not be less than the closing price of the common shares of Envoy on the
TSE on the last trading day prior to the option grant. Envoy is required to
enter into a written agreement with each option-holder under the Stock Option
Plan, which agreement shall set out the option price and terms and conditions
upon which such option may be exercised, in accordance with the provisions of
the Stock Option Plan.
The following table describes the options to acquire common shares that are
outstanding pursuant to the Stock Option Plan or otherwise as of January 31,
2002 (utilizing Canadian dollars):
Class of Optionee Number of Common Exercise Date of Expiry
Shares Under Price
Options Granted
Geoffrey B. Genovese 200,000 $3.62 December 16, 2002
------------------------------------------------------------------------------
Geoffrey B. Genovese 100,000 $6.20 August 10, 2004
------------------------------------------------------------------------------
Geoffrey B. Genovese 150,000 $7.40 March 30, 2005
------------------------------------------------------------------------------
Tom Wright 20,000 $3.05 June 27, 2006
------------------------------------------------------------------------------
Tom Wright 150,000 $3.05 October 1, 2006
------------------------------------------------------------------------------
Tom Wright 150,000 $2.05 November 7, 2006
------------------------------------------------------------------------------
J.Joseph Leeder 100,000 $4.10 December 16, 2003
------------------------------------------------------------------------------
J.Joseph Leeder 100,000 $6.20 August 10, 2004
------------------------------------------------------------------------------
J.Joseph Leeder 50,000 $7.40 March 30, 2005
------------------------------------------------------------------------------
Brian Goodall 100,000 $4.00 November 10, 2003
------------------------------------------------------------------------------
Stephen Miller 25,000 $4.80 January 23, 2006
------------------------------------------------------------------------------
Other 20,000 $4.10 July 22, 2003
325,000 $4.00 November 10, 2003
70,000 $3.90 March 7, 2004
60,000 $4.70 April 22, 2004
12,500 $7.50 May 10, 2004
115,000 $6.20 August 10, 2004
10,000 $7.70 November 24, 2004
60,000 $7.40 March 30, 2005
150,000 $7.40 April 11, 2005
165,000 $8.15 October 1, 2005
380,000 $3.05 June 27, 2006
------------------------------------------------------------------------------
Total 2,512,500
------------------------------------------------------------------------------
The following table sets forth shares owned by the Chairman and Chief Executive
Officer of Envoy and the four other most highly compensated officers who served
as executive officers of the Corporation as of January 31, 2002 (the "Named
Executive Officers"):
Identity of Person Amount Owned Percent of Class
------------------------------------------------------------------------------
Geoffrey B. Genovese 1,251,606 6.1%
Tom Wright 20,000 0.09%
J.Joseph Leeder Nil Nil
Brian Goodall 209,390 1.0%
Stephen Miller 3,000 0%
Chetan Mathur 488,805 2.4%
Other Rights
Pursuant to the acquisition agreements in connection with Envoy's acquisition
of Hampel Stefanides, certain executive officers of Hampel Stefanides have the
right to receive up to an additional 258,936 common shares in the aggregate
through September 30, 2002 depending upon the financial performance of Hampel
Stefanides for the fiscal years included therein.
Pursuant to the acquisition agreement in connection with Envoy's acquisition
of Devlin, the principal executive officer of Devlin has the right to receive
up to an additional 1,094,890 common shares through September 2002 dependent
upon satisfaction of predetermined performance targets of Devlin.
Pursuant to the acquisition agreement in connection with Envoy's acquisition
of Sage, certain executive officers of Sage have the right to receive up to an
additional 1,358,984 common shares in the aggregate through May 31, 2004
depending upon the financial performance of Sage for the fiscal years included
therein.
Pursuant to the acquisition agreement in connection with Envoy's acquisition
of IDG, certain executive officers of IDG have the right to receive up to an
additional 154,321 common shares in the aggregate through January 1, 2004
depending upon the financial performance of IDG for the fiscal years included
therein.
Item 7. Major Shareholders and Related Party Transactions
----------------------------------------------------------
Ownership of Envoy's securities are recorded on the books of its transfer
agent in registered form, however the majority of such shares are registered
in the name of intermediaries such as brokerage firms and clearing houses on
behalf of their respective clients and in general Envoy does not have
knowledge of the beneficial owners thereof, except for the beneficial
ownership by officers and directors of Envoy. Envoy is not directly or
indirectly owned or controlled by another corporation or entity or by any
foreign government. Envoy is not a party to any arrangement, and does not
know of any other arrangements, the operation of which may at a subsequent
date result in a change in control of Envoy.
As of January 31, 2002, Envoy had an authorized share capital of 50,000,000
common shares without par value, of which 20,426,550 shares were issued and
outstanding.
The following table sets forth certain information regarding the ownership of
outstanding common shares of Envoy as of January 31, 2002 with respect to each
person known by Envoy to be the owner either of record or beneficially of more
than 5% of the issued and outstanding common shares of Envoy. As used in this
table, "beneficial ownership" refers to the sole or shared power to vote or
direct the voting or to dispose or direct the disposition of any security. A
person is deemed to be the beneficial owner of securities that can be acquired
within 60 days from the date of this Form 20-F through the exercise of any
option, warrant or right. Common shares subject to options, warrants or
rights which are currently exercisable or exercisable within 60 days are
deemed outstanding for computing the ownership percentage of the person
holding such options, warrants or rights, but are not deemed outstanding for
computing the ownership percentage of any other person.
Identity of Person or Group Amount Owned Percent of Class
------------------------------------------------------------------------------
CDS & Co.(1) ______________ 16,521,797 76.6%
NCI Account
P.O. Box 1038 Station A
25 The Esplanade
Toronto, Ontario M5W 1G5
Cede & Co.(1) ______________ 2,762,223 8.0%
P.O. Box 20
Bowling Green Station
New York, NY 10274
USA
Geoffrey B. Genovese(2) 1,251,606 6.1%
(1) CDS & Co. and Cede & Co., respectively, are the record holders of these
shares and in general the ultimate beneficial owners of these shares are not
known to Envoy.
(2) Includes common shares held by family members.
See also Item 6.E."Share Ownership" for information regarding outstanding
options to purchase 2,487,500 common shares and certain other rights to
purchase up to 2,867,131 common shares of Envoy.
Under the applicable Canadian provincial securities laws, insiders (generally
officers and directors of the Registrant and its subsidiaries) are required to
file individual insider reports of changes in their ownership in the
Registrant's securities within 10 days following any trade in Envoy's
securities. Copies of such reports are available for public inspection at the
offices of the British Columbia Securities Commission, Suite 1100, 865 Hornby
Street Vancouver, British Columbia V6Z 21-14 (telephone 604/660-4800), at the
offices of the Alberta Securities Commission, 410-300 5th Avenue, S.W.,
Calgary, Alberta T2P 3C4 (telephone 403/297-6454), at the offices of the
Quebec Securities Commission, Stock Tower Exchange, 800 Victoria Square,
Montreal, Quebec M42 1G3 (telephone 514/940-2150) and at the offices of the
Ontario Securities Commission, 20 Queen Street West, 18th Floor, Toronto,
Ontario M5H 358 (telephone 416/597-0681).
Item 8. Financial Information
------------------------------
See Item 17 & Item 18 "Financial Statements".
Item 9. The Offer and Listing
------------------------------
A. Offer and listing details
Envoy's common shares are listed for trading on the Toronto Stock Exchange
(the "TSE") under the symbol "ECG" and on the Nasdaq Small Cap Market
("Nasdaq") under the symbol "ECGI". The common shares began trading on Nasdaq
on June 6, 2000 and on the TSE on September 3, 1997. From March 1984 until
September 2, 1997 Envoy's shares traded on the Vancouver Stock Exchange.
The following table sets forth the reported high and low sale prices in
Canadian dollars for the common shares on the TSE for the fiscal, quarterly
and monthly periods indicated.
High Low
----------------------------------------------------
Fiscal 1999 9.20 3.40
Fiscal 2000
First Quarter 8.95 4.80
Second Quarter 10.30 6.70
Third Quarter 10.35 6.00
Fourth Quarter 8.70 6.90
Fiscal 2001
First Quarter 8.75 3.01
Second Quarter 6.65 3.05
Third Quarter 4.99 3.04
Fourth Quarter 3.49 2.10
For the month ending
January 31, 2002 2.25 1.56
December 31, 2001 2.90 1.80
November 30, 2001 2.20 1.45
October 31, 2001 2.25 1.55
September 29, 2001 2.96 2.16
August 31, 2001 3.15 2.25
The following table sets forth the reported high and low sale prices in US
dollars of trading for the common shares as reported on Nasdaq for the fiscal,
quarterly and monthly periods indicated.
High Low
----------------------------------------------------
Fiscal 2000
Second Quarter 10.50 5.50
Third Quarter 6.00 4.56
Fourth Quarter 5.81 4.34
Fiscal 2001
First Quarter 5.88 1.88
Second Quarter 4.56 1.97
Third Quarter 3.25 1.75
Fourth Quarter 2.25 1.40
For the month ending
January 31, 2002 1.42 .97
December 31, 2001 1.85 1.10
November 30, 2001 1.33 0.93
October 31, 2001 1.43 1.00
September 29, 2001 1.94 1.41
August 31, 2001 2.25 1.48
On January 31, 2002, the closing price of the common shares as reported on the
TSE was $1.66 Cdn., and on Nasdaq was US$1.04. As of January 31, 2002, there
were 20,426,550 outstanding common shares of Envoy of which 17,625,316 were
held of record by 60 Non-U.S. residents and 2,801,234 of which were held of
record by 121 U.S. residents. The foregoing information regarding the number
and the country of residence of Envoy's shareholders does not reflect those
shareholders whose shares are being held of record by brokerage clearing
houses and in general the ultimate beneficial owners of these shares are not
known to Envoy.
Effective as of May 1, 1999, Envoy purchased all of the outstanding shares of
Watt International in exchange for cash and 100,000 common shares of Envoy.
The 100,000 shares of Envoy are being held in escrow and will be released in
part to the beneficial owner from time to time until June 17, 2002. The
periodic release of the escrowed shares is conditioned on the performance of a
3-year strategic alliance agreement between Watt International and Deuteronomy
Inc., a Toronto-based provider of retail and manufacturing consulting services,
the principal of which is Donald G. Watt, a Director of Envoy. The purpose of
the escrow arrangement is to restrict transferability of the shares pending
the period of the agreement. The 100,000 escrow shares are reflected as
issued and outstanding share capital of Envoy from and after the closing of
the Watt International acquisition.
See Item 6.E. with respect to "Share Ownership" for information regarding
outstanding options to purchase 2,487,500 common shares and certain other
rights to purchase up to 2,867,131 common shares of Envoy.
B. Plan of distribution
"Not applicable"
C. Markets
See above section A. "Offer and listing details".
D. Selling Shareholders
"Not applicable"
E. Dilution
"Not applicable"
F. Expenses of the issue
"Not applicable"
Item 10. Additional Information
--------------------------------
A. Share Capital
"Not applicable"
B. Memorandum and articles of association
Envoy's memorandum and articles of association were previously filed with our
registration statement on Form 20-f dated April 20, 2000.
C. Material Contracts
"Not applicable"
D. Exchange Controls and Other Limitations Affecting Security Holders
There is no governmental law, decree or regulation in Canada that restricts
the export or import of capital, or that affects the remittance of dividends,
interest or other payments to a non-resident holder of common shares of Envoy,
other than withholding tax requirement. See Item 10.E. "Taxation."
There is no limitation imposed by the laws of Canada, the laws of Ontario or
British Columbia or by the charter or other constituent documents of Envoy on
the right of a non-resident to hold or vote common shares of Envoy, other than
as provided in the Investment Canada Act (Canada) (the "Investment Act"). The
following discussion summarizes the material provisions of the Investment Act
which relate to the acquisition by a non-resident of common shares of Envoy.
This summary is not a substitute for independent advice from an investor's own
advisor, and it does not take into account any future statutory or regulatory
amendments.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless after review the minister
responsible for the Investment Act (the "Minister') is satisfied that the
investment is likely to be of net benefit to Canada. An investment in common
shares of Envoy by a non-Canadian, other than a WTO investor (as defined in
the Investment Act) at any time Envoy is not controlled by a WTO investor, is
reviewable under the Investment Act if the investment is to acquire control of
Envoy and the value of the assets of Envoy is over $5,000,000 Cdn. for a
direct acquisition and over $50,000,000 Cdn. for an indirect acquisition or if
an order for review is made by the Federal Cabinet on the grounds that the
investment relates to Canada's cultural heritage or national identity. An
investment in common shares of Envoy by a WTO investor, or by a non-Canadian
at any time Envoy is controlled by a WTO investor, is reviewable under the
Investment Act if the investment is to acquire control of Envoy and the value
of the assets of Envoy is not less than Cdn. $150,000,000 Cdn. in terms of
"constant 1992 dollars", which for 2002 is $218,000,000 Cdn. A non-Canadian
would acquire control of Envoy for the purposes of the Investment Act if such
investor acquired a majority of the common shares of Envoy unless it could be
established that, on the acquisition, Envoy was not controlled in fact by the
acquiror through the ownership of common shares.
Certain transactions relating to common shares of Envoy would be exempt from
the Investment Act including:
(a) an acquisition of common shares of Envoy by a person in the ordinary
course of that person's business as a trader or dealer in securities,
(b) an acquisition of control of Envoy in connection with the realization of
security granted for a loan or other financial assistance and not for a
purpose related to the provision of the Investment Act,
(c) an acquisition of control of Envoy by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct
or indirect control in fact of Envoy through the ownership of common shares,
remained unchanged,
(d) an acquisition of voting interests by any person in the ordinary course
of a business carried on by that person that consists of providing, in Canada,
venture capital on terms and conditions not inconsistent with such terms and
conditions as may be fixed by the Minister, and
(e) an acquisition of control of a Canadian business for the purpose of
facilitating its financing and not for any purpose related to the provisions
of the Investment Act on the condition that the acquirer divest itself of
control within two years after it is acquired or within such longer period as
is approved by the Minister.
E. Taxation
The following discussion is intended to be a general summary of certain
material Canadian federal income tax considerations applicable to holders of
common shares described below and is not intended to be, nor should it be
construed to be, legal or tax advice to any particular person, and no opinion
or representation with respect to income tax considerations is hereby given or
made. It does not take into account any particular party's individual
circumstances and does not address consequences peculiar to any party subject
to special provisions of Canadian income tax law. Each person should consult
their own tax advisors with respect to the tax consequences of an investment
in the common shares in their own particular circumstances.
The following summary is based upon the current provisions of the Income Tax
Act (Canada) (the "ITA") and the regulations thereunder and the Canada-United
States Income Tax Convention (1980), as amended (the "Convention"), all
proposed amendments to the ITA and the regulations thereunder and the
Convention publicly announced by the Department of Finance, Canada prior to
the date hereof, and the current published administrative policies and
assessing practices of the Canada Customs and Revenue Agency.Except for the
foregoing, this summary does not take into account or anticipate any changes
in the law or the Convention or the administrative policies or assessing
practices of the Canada Customs and Revenue Agency whether by legislative,
governmental or judicial action or decision and does not take into account or
anticipate provincial, territorial or foreign tax legislation or
considerations, which may differ significantly from the Canadian federal
income tax considerations described herein.
The summary discusses the principal Canadian federal income tax considerations
under the ITA and the regulations thereunder generally applicable to
purchasers of common shares who at all times: (i) for purposes of the ITA, are
not, have not been and will not be or be deemed to be resident in Canada while
they held or hold common shares, deal at arm's length with Envoy, are not
affiliated with Envoy, hold their common shares as capital property, do not
use or hold, and will not and will not be deemed to use or hold their common
shares in, or in the course of carrying on a business in Canada, and are not
"financial institutions" for the purposes of the mark-to-market rules, and
(ii) for purposes of the Convention, are residents of the U.S. and not
residents of Canada and will not hold their common shares as part of the
business property of, or so that their common shares are effectively connected
with, a permanent establishment in Canada or in connection with a fixed base
in Canada (a "U.S. Holder").
Amounts in respect of common shares paid or credited or deemed to be paid or
credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a U.S. Holder will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a rate of 25%, which may
be reduced pursuant to the terms of the Convention. Under the Convention, the
rate of Canadian non-resident withholding tax on the gross amount of dividends
beneficially owned by a U.S. Holder is 15%. However, where such beneficial
owner is a company which owns at least 10% of the voting stock of Envoy, the
rate of such withholding is 5%.
A U.S. Holder will not be subject to tax under the ITA in respect of any
disposition of common shares (other than a disposition to Envoy) unless at the
time of such disposition such common shares constitute "taxable Canadian
property" of the holder for purposes of the ITA. If the common shares are
listed on a prescribed stock exchange, for the purposes of the ITA, such as
the TSE, at the time they are disposed of, they will generally not constitute
"taxable Canadian property" of the U.S. Holder at the time of a disposition of
such shares unless at any time during the 60-month period immediately
preceding the disposition of the common shares, 25% or more of the issued
shares of any class or series of Envoy, or an interest therein or an option in
respect thereof, was owned by the U.S. Holder, by persons with whom the U.S.
Holder did not deal at arm's length or by the U.S. Holder and persons with
whom the U.S. Holder did not deal at arm's length. The common shares may also
be taxable Canadian property in certain other circumstances. Under the
Convention, gains derived by a U.S. Holder from the disposition of common
shares that constitute "taxable Canadian property" will generally not be
taxable in Canada unless the value of the common shares is derived principally
from real property situated in Canada. If the common shares are listed on a
prescribed stock exchange for the purposes of the ITA at the time they are
disposed of by a U.S. Holder, the U.S. Holder will not be required to comply
with the provisions of section 116 of the ITA, which requires notification to
be given to the Canada Customs and Revenue Agency when certain property is
disposed of.
F. Dividend and paying agents
"Not applicable"
G. Statement by experts
"Not applicable"
H. Documents on Display
Item 11. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
A U.S. Holder will not be subject to tax under the ITA in respect of any
disposition of common shares unless at the time of such disposition such
common shares constitute "taxable Canadian property" of the holder for
purposes of the ITA. If the common shares are listed on a prescribed stock
exchange, such as the TSE on which Envoy's shares are listed, for the purposes
of the ITA at the time they are disposed of, they will generally not
constitute "taxable Canadian property" of the U.S. Holder at the time of a
disposition of such shares unless at any time during the five year period
immediately preceding the disposition of the common shares, 25% or more of the
issued shares of any class or series of Envoy, or an interest therein or an
option in respect thereof, was owned by the U.S. Holder, by persons with whom
the U.S. Holder did not deal at arm's length or by the U.S. Holder and persons
with whom the U.S. Holder did not deal at arm's length. The common shares may
also be taxable Canadian property in certain other circumstances. Under the
Convention, gains derived by a U.S. Holder from the disposition of common
shares that constitute "taxable Canadian property" will generally not be
taxable in Canada unless the value of the common shares is derived principally
from real property situated in Canada. ve acquisition effective dates.
Except as described below, Envoy does not have any material position or
exposure with respect to any market risk sensitive instruments (as defined in
Item 11 in Form 20-F).
Interest Rates
Envoy's debt under its lending facility is described in Note 8 to the Notes to
our Audited Consolidated Financial Statements of Envoy. 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 Exchange Rates
Envoy's U.S. and U.K. subsidiaries have historically been self-sustaining
operations. Consequently, the cash flow from its U.S. and U.K. subsidiaries
has been naturally hedged against its U.S. and U.K. liabilities including
future earn-out payments. To the extent that Envoy needs to fund any of these
operations in the future we will consider hedging any risks as deemed
appropriate. Watt International also earns a significant portion of its
revenue in U.S. dollars. Envoy entered into foreign currency contracts to
manage its exposure to this foreign currency risk. As at September 30, 2001,
Envoy had outstanding foreign currency contracts to sell US$4,689,000 in
exchange for Canadian dollars over a period of twelve months at a weighted
average exchange rate of $1.5407 Cdn.
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 Envoy is not subject to significant concentration of credit risk. As at
September 30, 2001, Envoy had one customer, which represented 18% of accounts
receivable. (No customers exceeded 10% of accounts receivable as at
September 30, 2000).
B. Interest of management in certain transactions
Except as disclosed above, no director or executive officer, and no relative
or spouse of the foregoing persons (or relative of such spouse) who has the
same house as such person or is an executive officer or director of any parent
or subsidiary of Envoy, has, or during the last fiscal year of Envoy had, any
material interest, direct or indirect, in any transactions, or in any proposed
transaction, which in either such case has materially affected or will
materially affect Envoy. During the last fiscal year of Envoy, no director,
executive officer or associate of any such person has been indebted to Envoy.
Item 12. Description of Securities Other than Equity Securities
----------------------------------------------------------------
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Deliquencies
--------------------------------------------------------
A. There has been no material default in the payment of principal, interest,
a sinking or purchase fund installment.
B. There is no preferred stock of Envoy or any of its significant
subsidiaries and accordingly there has been no material arrearage in the
payment of dividends or any other material delinquency not cured within 30
days, with respect to any class of preferred stock of Envoy or any of its
significant subsidiaries.
Item 14.
--------
Material Modifications to the Rights of Security Holders and Use of Proceeds
----------------------------------------------------------------------------
A. There have been no material modifications in the constituent instruments
defining any class of registered securities of Envoy.
B. There has been no material limitation or qualification of the rights
evidenced by any class of registered securities of Envoy by the issuance or
modification of any other class of securities of Envoy.
C. There has been no material withdrawal or substitution of assets securing
any class of registered securities of Envoy.
D. Not applicable.
E. Not applicable.
Item 15. Reserved
------------------
Not applicable.
Item 16. Reserved
------------------
Not applicable.
PART III
Item 17. Financial Statements
------------------------------
Envoy has elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
------------------------------
(a) Envoy Communications Group Inc. F-1
(i) Auditors' Report on the financial statements
for the year ended September 30, 2001 and 2000 F-2
(ii) Consolidated Balance Sheets as at
September 30, 2001 and 2000 F-3
(iii) Consolidated Statements of Operations for the years
ended September 30, 1999, 2000 and 2001 F-4
(iv) Consolidated Statements of Retained Earnings for the
years ended September 30, 1999, 2000 and 2001 F-5
(v) Consolidated Statements of Cash Flows for the years
ended September 30, 1999, 2000 and 2001 F-6
(vi) Summary of Significant Accounting Policies F-7
(vii) Notes to Consolidated Financial Statements F-12
Item 19. Financial Statements and Exhibits
-------------------------------------------
(1) Envoy Communications Group Inc.
(i) Auditors' Report on the financial statements for the year ended
September 30, 2001 and 2000
(ii) Consolidated Balance Sheets as at September 30, 2000 and 2001
(iii) Consolidated Statements of Operations for the years ended
September 30, 1999, 2000 and 2001
(iv) Consolidated Statements of Retained Earnings for the years ended
September 30, 1999, 2000 and 2001
(v) Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 2000 and 2001
(vi) Summary of Significant Accounting Policies
(vii) Notes to Consolidated Financial Statements
(b) Exhibit 1 -- By-Law No. 1 of Envoy (as amended on May 2, 2000) &
Articles of Incorporation. Previously filed on
May 15, 2000 with the annual report.
Exhibit 2 -- Not Applicable
Exhibit 3 -- Not Applicable
Exhibit 4 -- Not Applicable
Exhibit 5 -- Not Applicable
Exhibit 6 -- Not Applicable
Exhibit 7 -- Not Applicable
Exhibit 8 -- Subsidiaries
Envoy has operations in the United States, the United
Kingdom, Continental Europe and Canada. Significant
subsidiaries are as follows:
% of Jurisdiction of
Company ownership incorporation
------------------------------------------------------------
Communique Incentives Inc. 100 Ontario
The Communique Group 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
Watt Russell (USA) Inc. 75 Delaware
John Street Inc. 65 Ontario
Exhibit 9 -- Not Applicable
Exhibit 10 -- Not Applicable
Consolidated Financial Statements
(Expressed in Canadian dollars)
ENVOY COMMUNICATIONS GROUP INC.
Years ended September 30, 2001, 2000 and 1999
F-1
Auditors' Report to the shareholders
We have audited the consolidated balance sheets of Envoy Communications
Group Inc. as at September 30, 2001 and 2000 and the consolidated statements
of operations, retained earnings and cash flows for each of the years in the
three-year period ended September 30, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
With respect to the consolidated financial statements for the years ended
September 30, 2001 and 2000, we conducted our audits 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 out 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,
2001 and 2000 and the results of its operations and its cash flows for each of
the years in the three-year period ended September 30, 2001 in accordance with
Canadian generally accepted accounting principles.
KPMG
Chartered Accountants
Toronto, Canada
November 23, 2001
F-2
ENVOY COMMUNICATIONS GROUP INC.
Consolidated Balance Sheets
(In Canadian dollars)
September 30, 2001 and 2000
2001 2000
------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 21,781,809 $ 7,105,418
Restricted cash (note 4) 158,500 456,462
Accounts receivable (note 3) 26,940,137 34,234,974
Income taxes recoverable 230,389 -
Future income taxes 712,000 -
Prepaid expenses 1,315,009 1,540,159
----------------------------------------------------------------------------
51,137,844 43,337,013
Restricted cash (note 4) - 375,875
Capital assets (note 6) 11,533,736 10,448,625
Goodwill and other assets (note 7) 50,356,502 47,179,760
Future income taxes 822,156 966,715
------------------------------------------------------------------------------
$ 113,850,238 $ 102,307,988
------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 38,728,210 $ 24,247,075
Income taxes payable - 1,190,313
Deferred revenue 300,071 1,044,873
Amounts collected in excess of
pass-through costs incurred 1,574,407 2,307,047
Current portion of long-term debt (note 8) 10,965,089 2,848,430
----------------------------------------------------------------------------
51,567,777 31,637,738
Long-term debt (note 8) 963,076 7,983,449
Shareholders' equity:
Share capital (note 9) 54,883,305 54,597,762
Retained earnings 5,603,200 8,403,367
Cumulative translation adjustment 832,880 (314,328)
----------------------------------------------------------------------------
61,319,385 62,686,801
Subsequent events (note 2(f))
Commitments (note 12)
Contingencies (note 2)
Reconciliation to United States
accounting principles (note 15)
------------------------------------------------------------------------------
$ 113,850,238 $ 102,307,988
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
On behalf of the Board:
------------------------------- Director
------------------------------- Director
F-3
ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Operations
(In Canadian dollars)
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
------------------------------------------------------------------------------
Net revenue $ 80,792,381 $ 58,606,235 $ 41,787,125
Operating expenses:
Salaries and benefits 53,653,694 35,132,814 25,710,153
General and administrative 15,380,269 10,769,853 6,918,465
Occupancy costs 4,754,875 2,552,854 1,878,090
------------------------------------------------------------------------------
73,788,838 48,455,521 34,506,708
------------------------------------------------------------------------------
Earnings before depreciation,
interest expense, income taxes
and goodwill amortization 7,003,543 10,150,714 7,280,417
Depreciation 2,866,679 1,986,691 1,444,110
Interest expense 743,600 407,473 346,515
------------------------------------------------------------------------------
Earnings before income taxes, goodwill
amortization and unusual items 3,393,264 7,756,550 5,489,792
Unusual items (note 11) 1,917,334 - -
------------------------------------------------------------------------------
Earnings before income taxes and
goodwill amortization 1,475,930 7,756,550 5,489,792
Income tax expense, excluding
the undernoted (note 10) 1,259,731 3,252,354 2,002,995
Impact of tax rate changes
(note 10) 100,000 - -
------------------------------------------------------------------------------
Earnings before
goodwill amortization 116,199 4,504,196 3,486,797
Goodwill amortization, net of income
tax recovery of $24,000
(2000 - $24,000; 1999 - $11,000) 3,011,571 1,593,769 610,034
------------------------------------------------------------------------------
Net earnings (loss) $ (2,895,372) $ 2,910,427 $ 2,876,763
------------------------------------------------------------------------------
Net earnings (loss) per share (note 9(g)):
Basic $ (0.14) $ 0.15 $ 0.20
Fully diluted (0.14) 0.15 0.20
Earnings per share before goodwill
amortization:
Basic 0.01 0.24 0.24
Fully diluted 0.01 0.24 0.24
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Retained Earnings
(In Canadian dollars)
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
------------------------------------------------------------------------------
Retained earnings,
beginning of year $ 8,403,367 $ 5,492,940 $ 2,682,142
Gain (loss) on redemption of shares
(note 9(d) and (f)) 95,205 - (65,965)
Net earnings (loss) (2,895,372) 2,910,427 2,876,763
------------------------------------------------------------------------------
Retained earnings, end of year $ 5,603,200 $ 8,403,367 $5,492,940
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Cash Flows
(In Canadian dollars)
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (2,895,372) $ 2,910,427 $ 2,876,763
Items not involving cash:
Future income taxes (567,441) (285,344) 76,000
Depreciation 2,866,679 1,986,691 1,444,110
Goodwill amortization 3,035,571 1,617,769 621,034
Amortization of deferred
financing charges 65,936 9,990 -
Net change in non-cash working
capital balances:
Restricted cash 297,962 - -
Accounts receivable 7,389,275 1,823,856 (1,395,987)
Prepaid expenses (174,654) 124,424 (397,950)
Accounts payable and
accrued liabilities 12,440,922 (10,519,909) 229,132
Income taxes payable (1,145,133) (787,622) 1,794,028
Deferred revenue (758,380) 1,044,873 -
Amounts collected in excess of
pass-through costs incurred (777,930) 518,410 (3,656,333)
Other 159,003 (126,812) 46,284
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 19,936,438 (1,683,247) 1,637,081
Cash flows from financing activities:
Long-term debt 8,137,183 5,198,442 5,000,000
Long-term debt repayments (8,097,536) (5,497,140) (1,410,467)
Issuance of common shares for cash 383,670 10,939,807 1,361,172
Redemption of common shares (1,295,475) - (65,965)
Reduction (increase) in
restricted cash 394,625 (277,330) 187,718
Net proceeds from special warrant issue - - 16,192,731
Other 190,143 - -
---------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (287,390) 10,363,779 21,265,189
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash
acquired (bank indebtedness assumed)
of $214,179 (2000 - $(941,385);
1999 - $5,919,627) (1,669,168) (14,640,994) (8,416,977)
Purchase of capital assets (3,756,134) (2,428,228) (2,017,796)
Increase in other assets - (67,356) (20,000)
---------------------------------------------------------------------------
Net cash used in
investing activities (5,425,302) (17,136,578) (10,454,773)
Change in cash balance due to
foreign exchange 452,645 261,010 (267,201)
------------------------------------------------------------------------------
Increase (decrease) in cash 14,676,391 (8,195,036) 12,180,296
Cash, beginning of year 7,105,418 15,300,454 3,120,158
------------------------------------------------------------------------------
Cash, end of year $ 21,781,809 $ 7,105,418 $ 15,300,454
------------------------------------------------------------------------------
Cash flow from operations per share
(note 9(g)):
Basic $ 0.12 $ 0.33 $ 0.34
Fully diluted 0.12 0.33 0.34
------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 704,604 $ 407,474 $ 334,229
Income taxes paid 3,407,801 3,489,185 68,774
------------------------------------------------------------------------------
Supplemental disclosure of non-cash
transactions:
Shares issued for non-cash
consideration $ 3,908,156 $ 6,850,311 $ 3,691,800
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements
(In Canadian dollars)
Years ended September 30, 2001, 2000 and 1999
The Company, continued under the Business Corporations Act (Ontario), with
operations in the United States, the United Kingdom, Continental Europe and
Canada, provides integrated 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 the significant differences, as applicable
to the Company, is included in note 15.
Certain of the comparative figures have been reclassified to conform with
the current year's financial statement presentation.
(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
International Design Group 100 Ontario
John Street Inc. 70 Ontario
--------------------------------------------------------------------------
Effective October 1, 2000, Promanad Communications Inc. was amalgamated
with The Communique Group Inc.
F-7
Effective July 2001, the Company established John Street 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 and software Declining balance 30% - 50%
Furniture and equipment Declining balance 20%
Leasehold improvements Over term of leases
---------------------------------------------------------------------------
(e) Revenue recognition:
The Company presents as net revenue its net commission and fee income
earned as compensation for its services. Further, the balance sheet
reflects the following:
(i) deferred revenue represents only fees billed and collected in advance
of such fees being earned; and
(ii) the reimbursable pass-through costs are included in unbilled accounts
receivable.
F-8
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 is comprised of: (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 is comprised of 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-9
(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 seven 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:
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.
In respect of the Company's and its subsidiaries' foreign currency
transactions, 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. However, unrealized
gains or losses on long-term debt that is designated as a hedge of
investments in foreign subsidiaries are deferred and recorded as a
separate component of shareholders' equity.
The Company used derivative financial instruments to manage risks from
fluctuations in foreign exchange rates. These instruments are foreign
exchange forward contracts, and are used only for risk management
purposes and are designated as hedges of accounts receivable and future
cash flows. The Company accounts for these financial instruments as
hedges and, as a result, the carrying values of the financial instruments
designated as hedges of future cash flows are not adjusted to reflect
their current market values.
F-10
(h) Income taxes:
Effective October 1, 2000, the Company was required to adopt on a
retroactive basis the new accounting standard of The Canadian Institute
of Chartered Accountants ("CICA") for income taxes. Under this accounting
standard, the Company is not required to restate its comparative figures
for prior years.
Under this new standard, future tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be received or settled. A valuation allowance is recorded
against any future income tax asset if it is more likely than not that the
asset will not be realized. Income tax expense or benefit is the sum of
the Company's provision for current income taxes and the difference
between opening and ending balances of future income tax assets and
liabilities.
Prior to adoption of this new standard, income tax expense was determined
using the deferred method. Under this method, deferred income tax expense
was based on differences between the accounting and tax incomes and was
measured at tax rates in effect in the year the differences originated.
The benefits of tax losses were not recognized at the time they were
incurred unless there was virtual certainty of realization.
There is no cumulative effect as of October 1, 2000 of this change in
accounting policy.
As at October 1, 2000, the Company's temporary differences are principally
in respect of deductible share issue costs that were recorded directly in
capital stock rather than as a credit to income tax expense. As a result
of the announcements by the government to introduce legislation to reduce
income taxes over the next four years, the Company was required to revalue
its future tax assets during the year by $100,000. Under the CICA's new
accounting standards, the Company is required to record this item as an
adjustment to income tax expense, notwithstanding the fact that such
amounts were not previously reflected in income tax expense when recorded.
(i) Stock-based compensation:
The Company has a stock option plan for key employees and officers. All
stock options issued under this plan have an exercise price equal to or
greater than the fair market value of the underlying common shares on the
date of the grant. The Company does not record compensation expense on the
grant or modification of options under the Plan. The stock option plan is
described in note 9(e).
(j) Deferred financing charges:
The costs of obtaining bank and other debt financing are deferred and
amortized on a straight-line basis over the effective life of the debt to
which they relate.
F-11
2. Acquisition of subsidiaries:
(a) Effective January 1, 2001, the Company acquired 100% 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
initial purchase price, which consisted of $1,090,000 in cash
consideration and 61,728 common shares of the Company with a fair value
of $284,332, was paid upon closing. Additional consideration may be paid
over a three-year period if certain performance milestones are achieved
for the 12-month periods ending December 31. The earn-out amounts earned
will be satisfied by a maximum of $2,000,000 in cash and a maximum of
154,321 common shares of the Company. The acquisition has been accounted
for using the purchase method of accounting.
The fair value of the net assets acquired was $1,198,684, excluding cash
acquired of $214,179. The net assets acquired consisted of working
capital and fixed assets. The resulting excess purchase price over the
fair value of the net assets acquired of $336,382 was allocated to
goodwill and is being amortized over 25 years.
(b) Effective July 1, 2000, the Company acquired 100% of the outstanding
shares of Gilchrist Brothers Ltd. ("Gilchrist"), a United Kingdom-based
digital imaging and design firm, in exchange for cash consideration of
$3,235,798 (british pounds 1,460,000) and a $5,325,215 (british pounds
2,402,750) non-interest bearing promissory note, repayable in semi-annual
instalments over the next two years to June 30, 2002. The present value
of the promissory note of $5,067,763 (british pounds 2,261,486), together
with the initial cash consideration, represent the total purchase price.
At September 30, 2001, $2,689,781 (british pounds 1,156,200) (2000 -
$4,564,856 (british pounds 2,059,674)) is included in long-term debt
(note 8). 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
-------------------------------------------------------------------------
F-12
(c) 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.
During 2001, the Company reached an agreement with the former owner of
Sage to extend his indemnification of receivables at the acquisition date
to also cover receivables arising out of contracts in progress on the date
of acquisition. Under this indemnification, the Company is owed $1,714,047
as at September 30, 2001 (note 5).
In June 2001, the Company determined that additional consideration was
payable based on Sage's operating results for the twelve months ended
May 31, 2001 and agreed to amend the terms of the purchase agreement with
respect to the payment of the earnout for this period. Under the amended
terms, the Company agreed to pay $1,392,154 in cash consideration, rather
than the issuance of cash and shares under the original terms. The excess
of the cash consideration payable over the fair value of the cash and
shares otherwise issuable amounted to $362,485 and is required to be
expensed under generally accepted accounting principles. As a result,
only $1,029,669 of the amount payable has been recorded as additional
goodwill. The Company may be required to pay additional consideration, to
a maximum amount of $10,107,846 in cash and 1,358,984 common shares, based
on the attainment of certain operating results over each of the next three
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
Future income taxes 53,000
--------------------------------------------------------------------------
Net assets 299,241
Total consideration, including bank indebtedness
assumed, June 1, 2000 12,270,724
Additional cash consideration 1,029,669
--------------------------------------------------------------------------
Excess of purchase price over fair value
of net assets acquired allocated to goodwill $ 13,001,152
--------------------------------------------------------------------------
F-13
(d) Effective May 1, 1999, the Company acquired substantially all of the
assets and the liabilities of Watt International Inc. (formerly 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
--------------------------------------------------------------------------
(e) 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 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.
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
--------------------------------------------------------------------------
F-14
(f) 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 (U.S. $3,649,000)
and the issuance of 581,395 common shares with a fair value of $2,296,800
(U.S. $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
fiscal 2000, additional cash consideration of $554,788 (U.S. $375,000)
was paid. Additional cash consideration of $375,875 (U.S. $250,000) is
included in accounts payable and accrued liabilities as at September 30,
2001 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 were included in share capital as at
September 30, 2000.
In December 2001, the Company determined that additional consideration
was owing in the form of cash and shares, based on Hampel Stefanides's
operating results for the year ended September 30, 2001 and such amount
has been recorded as at September 30, 2001. The aggregate consideration
of $2,909,150 consists of cash consideration of $1,900,929, which is
included in accounts payable and accrued liabilities, and the issuance of
466,769 common shares of the Company with a fair value of $1,008,221,
which are included in share capital as at September 30, 2001 as shares to
be issued (note 9(a)).
The Company may be required to pay additional consideration, to a maximum
amount of $769,456 (U.S. $487,460) in cash and 258,936 common shares,
based on the attainment of operating results 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, September 30, 2000:
Cash 1,724,776
Issuance of 444,641 common shares 3,623,824
Additional consideration, September 30, 2001:
Cash 1,900,929
Issuance of 466,769 common shares 1,008,221
--------------------------------------------------------------------------
Total consideration, less cash acquired, September 30, 2001 15,733,711
--------------------------------------------------------------------------
Purchase price and fair value of net liabilities
acquired allocated to goodwill $ 19,463,134
--------------------------------------------------------------------------
F-15
(g) 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 twelve months ended
May 31, 2000. The consideration was comprised of 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.
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:
2001 2000
------------------------------------------------------------------------------
Trade receivables $ 20,501,517 $ 25,844,406
Accrued revenue 118,414 2,652,275
Unbilled pass-through costs 6,320,206 5,738,293
------------------------------------------------------------------------------
$ 26,940,137 $ 34,234,974
------------------------------------------------------------------------------
F-16
4. Restricted cash:
Restricted cash includes the following:
(a) A trust account established for Communique Incentives Inc. for customer
deposits of $158,500 (2000 - $456,462).
(b) At September 30, 2000, $375,875 (U.S. $250,000) bank certificate of
deposit pledged against a letter of credit for a building lease of Hampel
Stefanides. There were no amounts outstanding under this letter of credit
at September 30, 2001.
5. Related party transactions:
Certain management and administrative costs totalling $685,000
(2000 - $300,000; 1999 - $250,000) were incurred during the year in respect of
a company controlled by a director and are recorded at the exchange amount,
being the amount agreed to by the related parties. At September 30, 2001,
$338,400 (2000 - nil) of such amount was unpaid and was included in accounts
payable and accrued liabilities.
Included in accounts receivable as at September 30, 2001 is a net balance
of $321,893 owing from the former owner of Sage in respect of indemnified
receivables, net of the earnout payment owing by Envoy (note 2(c)).
6. Capital assets:
Accumulated Net book
2001 Cost depreciation value
------------------------------------------------------------------------------
Audiovisual equipment $ 780,919 $ 750,126 $ 30,793
Computer equipment and software 10,704,399 7,575,183 3,129,216
Furniture and equipment 3,967,088 2,714,054 1,253,034
Leasehold improvements 9,700,446 3,209,833 6,490,613
Equipment under capital leases 1,393,849 763,769 630,080
------------------------------------------------------------------------------
$ 26,546,701 $ 15,012,965 $ 11,533,736
------------------------------------------------------------------------------
Accumulated Net book
2000 Cost depreciation value
------------------------------------------------------------------------------
Audiovisual equipment $ 780,918 $ 741,376 $ 39,542
Computer equipment and software 8,860,993 6,107,275 2,753,718
Furniture and equipment 3,346,760 2,158,219 1,188,541
Leasehold improvements 7,900,367 2,314,080 5,586,287
Equipment under capital leases 1,416,437 535,900 880,537
------------------------------------------------------------------------------
$ 22,305,475 $ 11,856,850 $ 10,448,625
------------------------------------------------------------------------------
F-17
7. Goodwill and other assets:
2001 2000
------------------------------------------------------------------------------
Goodwill, net of accumulated amortization
of $5,969,743 (2000 - $2,934,156) $ 49,675,115 $ 46,707,924
Deferred financing charges, net of
accumulated amortization of
$70,410 (2000 - $9,990) 634,936 192,053
Mortgage receivable - 200,000
Other 46,451 79,783
------------------------------------------------------------------------------
$ 50,356,502 $ 47,179,760
------------------------------------------------------------------------------
8. Long-term debt:
2001 2000
------------------------------------------------------------------------------
Revolving credit facility, with annual
interest rates of Canadian prime plus
0% to 0.75% or at banker's acceptance plus
0.50% to 1.00%, U.S. base plus 0% to 0.75%
or at U.S. LIBOR plus 0.50% to 1.00%
or U.K. LIBOR plus 0.50% to 1.00% (a) $ 7,841,329 $ -
Revolving credit facility, U.S. prime rate
plus 0.125% to 0.250% or at LIBOR plus
1.75% to 2.25% (b) - 4,727,043
Non-interest bearing promissory note,
issued July 1, 2000, repayable in semi-annual
instalments over two years to
June 30, 2002 (c) 2,689,781 4,564,856
Loan payable to landlord, 3.5% per annum,
Due July 1, 2009, repayable in monthly
Instalments of $7,665 principal and interest 625,382 694,337
Loan payable to landlord, 0.925% per annum,
due January 1, 2003, repayable in monthly
instalments of $6,728 principal and interest 100,925 180,379
Loan payable to landlord, 10% per annum,
due April 1, 2010, repayable in monthly
instalments of $5,999 principal and interest 357,016 -
Capital lease, 12.3% over the lease period,
Repayable in quarterly instalments of
$60,129 (british pounds 25,330)
(2000 - $56,139 (british pounds 25,330))
principal and interest, due January 2003 284,507 459,731
Capital leases, 10.3% to 13.9% over the
lease period, repayable in quarterly
instalments of $14,950 (british pounds 6,426);
(2000 - $43,771 (british pounds 19,750))
principal and interest, due between
March 2002 and April 2002 29,225 178,563
Other - 26,970
------------------------------------------------------------------------------
11,928,165 10,831,879
Less current portion 10,965,089 2,848,430
------------------------------------------------------------------------------
$ 963,076 $ 7,983,449
------------------------------------------------------------------------------
F-18
(a) During 2001, the Company established an extendable revolving line of credit
under which it can borrow funds in either Canadian dollars, U.S. dollars or
U.K. Pounds Sterling, provided the aggregate borrowings do not exceed Cdn.
$40,000,000. Advances under the line of credit can be used for general
corporate purposes (to a maximum of Cdn. $2,000,000) and for financing
acquisitions which have been approved by the lenders. The Company used
its borrowings under this facility to repay its U.S. dollar revolving
credit facility (note 8(b)). Included in the Company's borrowings as at
September 30, 2001, are foreign denominated loans of U.S. $1,914,250.
As at September 30, 2001, the Company had not drawn upon that portion of
the facility available for general corporate purposes.
Each year, the Company can request to have the facility renewed for a
subsequent one-year period subject to approval by the lenders. If not
renewed, the revolving credit facility becomes a reducing three-year term
loan. Interest rates on the facility are variable based on certain
leverage ratios and, at September 30, 2001, the effective interest rate
was 4.25%. The facility is secured by a general security agreement
guarantee against the Company and all of its subsidiaries.
Under the terms of the facility, the Company is required to maintain
certain financial ratios. As at September 30, 2001 the Company was not
in compliance with one of the debt covenants involving trailing 12 months
earnings before taxes, interest, depreciation and amortization and the
Company will continue to be in violation of this covenant in fiscal 2002.
The lenders have waived the violation of this covenant as of September 30,
2001 and are in discussions with the Company regarding amendments to the
covenant calculations going forward. Under the terms of the facility, if
the covenants are not met, the lenders can demand repayment of the
outstanding borrowings. Accordingly the entire amount of the loan is
classified as a current liability based on the lenders ability to
accelerate payment.
(b) In 2000, the Company established an $8,000,000 U.S. dollar revolving
credit facility and repaid its existing term loan. The term of the
facility was two years and could be converted on June 29, 2002, being the
second anniversary date, into a three-year term loan. Interest rates on
the facility were variable based on certain leverage ratios. At
September 30, 2001, the interest rate was 9.5%. The facility was secured
by a registered general security agreement guarantee. Under the terms of
the debt facility, the Company was required to maintain certain financial
ratios. The facility was repaid in 2001 using the Company's new revolving
credit facility described in note 8(a).
(c) The non-interest bearing promissory note due on June 30, 2002 in respect
of the Gilchrist acquisition (note 2(b)) (the "Gilchrist note") will be
refinanced under the Company's revolving credit facility. However, due
to a violation of one of the covenants under the facility, the Gilchrist
note cannot be presented as long-term debt.
Principal repayments are as follows:
2002, including the amounts borrowed under the
revolving credit facility and the Gilchrist note $ 10,965,089
2003 187,034
2004 113,108
2005 138,152
2006 363,358
Thereafter 161,424
--------------------------------------------------------------------------
$ 11,928,165
--------------------------------------------------------------------------
F-19
9. Share capital:
(a) Authorized:
50,000,000 common shares without par value
(2000 - 50,000,000; 1999 - 50,000,000)
Issued:
2001 2000 1999
------------------------------------------------------------------------------
Number Number Number
of shares Amount of shares Amount of shares Amount
------------------------------------------------------------------------------
Balance, beginning of year
21,098,222 $54,597,762 18,349,005 $35,613,907 13,231,618 $10,634,371
Common shares issued for cash pursuant to:
Public offering
- - 1,533,571 10,128,823 - -
Stock options exercised
101,000 383,670 214,000 811,100 273,000 873,810
Acquisitions (note 2)
61,728 284,332 557,005 4,420,108 958,969 4,076,544
Repurchase of shares pursuant to share issuer bid
(535,000) (1,390,680) - - - -
Special warrants exercised
- - - - 3,300,000 17,111,620
Warrants exercised
- - - - 135,378 487,362
------------------------------------------------------------------------------
20,725,950 53,875,084 20,653,581 50,973,938 17,898,965 33,183,707
Shares to be issued in respect of contingent consideration (note 2(f))
466,769 1,008,221 444,641 3,623,824 450,040 2,430,200
------------------------------------------------------------------------------
Balance, end of year
21,192,719 $54,883,305 21,098,222 $54,597,762 18,349,005 $35,613,907
------------------------------------------------------------------------------
F-20
(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) Repurchase of shares:
During 2001, pursuant to a normal course issuer bid, the Company
repurchased and cancelled 535,000 common shares at an average price of
$2.42 per common share for total consideration of $1,295,475. As a result
of these repurchases, $95,205 was recorded as a gain on redemption of
shares in retained earnings. Under the terms of the normal course issuer
bid, the Company may repurchase and cancel up to 10% of the public float
to July 26, 2002.
(e) Stock option plan:
The Company has reserved 4,000,000 common shares under its stock option
plan. Under the plan, 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 2001 and 2006.
F-21
Details of the options are as follows:
Weighted
Number average exercise
of options price per share
--------------------------------------------------------------------------
Options outstanding, September 30, 1998 1,555,000 $ 3.60
Options granted 1,116,500 4.86
Options exercised (273,000) 3.20
Options cancelled (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 cancelled (296,000) 4.72
--------------------------------------------------------------------------
Options outstanding, September 30, 2000 2,340,500 5.33
Options granted 780,000 5.30
Options exercised (101,000) 3.80
Options cancelled (340,000) 5.87
--------------------------------------------------------------------------
Options outstanding, September 30, 2001 2,679,500 5.31
--------------------------------------------------------------------------
Options exercisable, September 30, 2001 1,491,510 $ 5.07
--------------------------------------------------------------------------
Options exercisable, September 30, 2000 1,137,673 $ 5.05
--------------------------------------------------------------------------
The range of exercise prices for options outstanding and options
exercisable at September 30, 2001 are as follows:
Options outstanding Options exercisable
----------------------------------- --------------------
Weighted Weighted Weighted
average average average
Range of exercise contractual exercise
exercise price Number price life Number price
--------------------------------------------------------------------------
$ 3.62 - 4.70 1,434,000 $ 3.67 2.63 years 856,668 $ 3.77
6.20 - 8.15 1,245,500 7.20 3.49 years 634,842 6.83
--------------------------------------------------------------------------
F-22
(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 (loss) and cash flows from operations per share:
Earnings (loss) and cash flow figures per share are based on the weighted
average number of basic common shares outstanding during the year of
21,160,616 (2000 - 19,156,626; 1999 - 14,750,247) and fully diluted common
shares outstanding of 21,160,616 (2000 - 19,156,626; 1999 - 14,750,247).
Basic and fully diluted cash flows from operations per share have been
calculated using the cash flows from operating activities, excluding net
changes in non-cash working capital balances.
10. Income taxes:
Income tax expense (recovery) for the years ended September 30, 2001, 2000 and
1999 consists of:
Current Future Total
------------------------------------------------------------------------------
2001 $ 1,927,172 $ (567,441) $ 1,359,731
2000 3,537,698 (285,344) 3,252,354
1999 1,926,995 76,000 2,002,995
F-23
The income tax expense attributable to income from continuing operations
differs from the amounts computed by applying the Canadian statutory rates of
42.5% (2000 - 44.1%; 1999 - 44.6%) pre-tax income as a result of the following.
2001 2000 1999
------------------------------------------------------------------------------
Income taxes at statutory rates
$ 627,270 42.5% $ 3,420,638 44.1% $ 2,448,447 44.6%
Increase (decrease) in income taxes resulting from:
Adjustment to future tax assets for substantively
enacted changes in tax laws and rates
100,000 6.8 - - - -
Expenses deducted in the accounts which have
no corresponding deduction for income taxes
665,323 45.1 168,476 2.1 215,548 3.9
Lower basic tax rate on earnings
of foreign subsidiaries
(185,524) (12.6) (111,815) (1.4) - -
Utilization of previous years' losses
- - - - (721,000) (13.1)
Other 152,662 10.4 (224,945) (2.9) 60,000 1.1
------------------------------------------------------------------------------
$ 1,359,731 92.2% $ 3,252,354 41.9% $ 2,002,995 36.5%
------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the future tax assets and liabilities at September 30, 2001 are presented
below:
Future tax assets:
Capital assets $ 333,006
Share issuance costs 530,891
Non-capital losses expiring in 2008 712,000
----------------------------------------------------------------------------
Total gross future tax assets 1,575,897
Future tax liabilities:
Goodwill 41,741
------------------------------------------------------------------------------
Total net future tax assets 1,534,156
Less current portion 712,000
------------------------------------------------------------------------------
$ 822,156
------------------------------------------------------------------------------
F-24
11. Unusual items:
During the year, the Company announced that it was terminating its discussions
in connection with the proposed acquisition of Leagas Delaney. Generally
accepted accounting principles require that all costs in connection with the
proposed acquisition and the related equity financing need to be expensed in
full as of the date of abandonment. Costs include legal, accounting,
consulting and other out-of-pocket expenses incurred in the negotiation and
preparation of legal documents and preparation of long-form prospectus
materials prepared in connection with the abandoned acquisition.
12. Commitments:
(a) 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:
2002 $ 4,029,233
2003 3,662,992
2004 3,424,226
2005 3,820,658
2006 3,706,608
--------------------------------------------------------------------------
$ 18,643,717
--------------------------------------------------------------------------
(b) At September 30, 2001, the Company has letters of credit outstanding of
$1,952,450 (U.S. $500,000 and british pounds 500,000) (2000 - nil).
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,
accounts payable and accrued liabilities and non-interest bearing
promissory note approximate their fair values due to the short-term
nature of these instruments.
(ii) The fair values of the Company's capital leases and revolving credit
facilities approximate their carrying values as they bear interest
rates that approximate current market rates. The carrying values of
the loans payable to landlords are not significantly different from
their fair values.
(iii) 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. As at September 30, 2001,
the carrying amounts of the contracts were $(104,218)
(2000 - $(119,254)) and their fair values were $(189,224)
(2000 - $(143,015)).
F-25
(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 on its U.S.
dollar receivables and future cash flows. The Company has provided
as security all of Watt's assets to support these foreign currency
contracts. As at September 30, 2001, the Company had outstanding
foreign exchange contracts to sell U.S. $4,689,000 (2000 - U.S.
$3,135,000) in exchange for Canadian dollars over a period of
12 months at a weighted average exchange rate of Cdn. $1.5407
(2000 - $1.46).
During 2001, the Company established a $40,000,000 revolving credit
facility. The U.S. dollar borrowings under this facility serve as a
hedge against the Company's investment in its U.S. operations,
managing exposure to foreign currency risk.
The Company's promissory note payable issued in connection with its
acquisition of Gilchrist (note 2(b)) serves as a hedge against the
Company's investment in its U.K. operations, managing exposure to
foreign currency risk.
(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, 2001,
the Company has one customer, which represents 18% of accounts
receivable (2000 - no customers exceeded 10% 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.
F-26
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 an international
business and has no distinct reportable business segments.
The tables below set out the following information:
(a) The Company's external net revenue by geographic region based on the
region in which the customer is located is as follows:
2001 2000 1999
--------------------------------------------------------------------------
Net revenue:
Canada $ 19,833,117 $ 21,980,668 $ 19,153,216
United States 40,970,400 32,559,550 22,633,909
United Kingdom and
Continental Europe 19,988,864 4,066,017 -
--------------------------------------------------------------------------
$ 80,792,381 $ 58,606,235 $ 41,787,125
--------------------------------------------------------------------------
(b) The Company's identifiable assets for each geographic area in which it has
operations are as follows:
2001 2000
--------------------------------------------------------------------------
Capital assets:
Canada $ 7,997,668 $ 7,597,499
United States 1,316,098 805,482
United Kingdom and
Continental Europe 2,219,970 2,045,644
--------------------------------------------------------------------------
$ 11,533,736 $ 10,448,625
--------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------
Goodwill:
Canada $ 21,956,307 $ 22,438,433
United States 19,706,227 16,654,008
United Kingdom and
Continental Europe 8,012,581 7,615,483
--------------------------------------------------------------------------
$ 49,675,115 $ 46,707,924
--------------------------------------------------------------------------
F-27
(c) The Company's external net revenue by type of service is as follows:
2001 2000 1999
--------------------------------------------------------------------------
Net revenue:
Marketing $ 24,374,986 $ 28,772,421 $ 30,317,254
Design 41,444,289 22,247,353 9,420,744
Technology 14,973,106 7,586,461 2,049,127
--------------------------------------------------------------------------
$ 80,792,381 $ 58,606,235 $ 41,787,125
--------------------------------------------------------------------------
(d) In 2001, the Company had one customer, which represented 13.6% of net
revenue. In each of 2000 and 1999, the Company had different customers
which represented 11.3% and 10.3% of net revenue, respectively.
15. 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, 2001, 2000 and 1999 required in order to conform to U.S. GAAP.
2001 2000 1999
------------------------------------------------------------------------------
Net earnings (loss):
Net earnings (loss) based
on Canadian GAAP $ (2,895,372) $ 2,910,427 $ 2,876,763
Adjustment to income tax
provision (a) - - (721,000)
Stock-based compensation
expense (b) (886,000) - (226,965)
Foreign currency contracts,
net of income tax recovery
of $35,703 (e) (49,303) - -
------------------------------------------------------------------------------
Net earnings (loss)
based on U.S. GAAP $ (3,830,675) $ 2,910,427 $ 1,928,798
------------------------------------------------------------------------------
The following adjustments are required in order to conform shareholders' equity
based on Canadian GAAP to shareholders' equity based on U.S. GAAP:
2001 2000
------------------------------------------------------------------------------
Shareholders' equity based on Canadian GAAP $ 61,319,385 $ 62,686,801
Foreign currency contracts, net of
income tax recovery of $35,703 (e) (49,303) -
------------------------------------------------------------------------------
Shareholders' equity based on U.S. GAAP $ 61,270,082 $ 62,686,801
------------------------------------------------------------------------------
F-28
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:
Effective October 1, 2000, the Company adopted on a retroactive basis new
Canadian accounting standards for income taxes, which now require income
taxes to be accounted for using the asset and liability method, consistent
with U.S. GAAP. Previously, under Canadian GAAP, the deferral method of
providing for income taxes was used.
Under Canadian accounting standards, the Company is not required to restate
its comparative figures for prior years and, accordingly, there continue to
be differences between Canadian and U.S. GAAP pertaining to income taxes
for the year ended September 30, 2000 and 1999. There is no cumulative
effect as of October 1, 2000 of this change in accounting policy and there
should be no new differences between Canadian and U.S. GAAP with respect
to income taxes for periods subsequent to October 1, 2000.
The comparative disclosure required under U.S. GAAP for periods prior to
October 1, 2000 are set out below.
The Company's U.S. GAAP income tax expense consists of the following:
2001 1999
--------------------------------------------------------------------------
Earnings before income taxes
based on U.S. GAAP $ 6,138,781 $ 4,641,793
--------------------------------------------------------------------------
Computed income tax expense at basic
tax rate of 44.1% (1999 - 44.6%) $ 2,707,200 $ 2,070,000
Increase (decrease) in income taxes
resulting from:
Non-deductible goodwill amortization 689,500 265,000
Non-deductible stock-based compensation - 101,000
Lower basic tax rate on earnings of
foreign subsidiary (111,800) -
Other expenses deducted in the accounts
which have no corresponding deduction
for income taxes 168,500 217,000
Other (225,000) 60,000
--------------------------------------------------------------------------
$ 3,228,400 $ 2,713,000
--------------------------------------------------------------------------
F-29
(b) Stock-based compensation expense:
U.S. GAAP requires the Company to record compensation expense when
modifications are made which extend the lives of options. During the
year ended September 30, 2001, the Company extended the life of an
individual's option award and has therefore recorded the intrinsic value
of the option at the date of the extension as compensation expense.
U.S. GAAP requires that the excess of the fair value of options repurchased
by the Company in 1999 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 for the year ended September 30, 2000
giving effect to the acquisition of Gilchrist as if it had occurred as of
October 1, 1999 which are as follows:
--------------------------------------------------------------------------
Net revenue $ 68,242,235
Net earnings 2,602,527
Basic net earnings per share 0.14
Diluted net earnings per share 0.13
--------------------------------------------------------------------------
U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations for the year ended September 30, 2000
giving effect to the acquisition of Sage as if it had occurred as of
October 1, 1999 which are as follows:
--------------------------------------------------------------------------
Net revenue $ 63,102,395
Net earnings 950,950
Basic net earnings per share 0.05
Diluted net earnings per share 0.05
--------------------------------------------------------------------------
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 (loss) per share under U.S. GAAP for the year ended
September 30, 2001 is $(0.18) (2000 - $0.15; 1999 - $0.13). Diluted net
earnings (loss) per share under U.S. GAAP for the year ended September 30,
2001 is $(0.18) (2000 - $0.15; 1999 - $0.12).
F-30
The diluted weighted average number of shares outstanding is calculated
as follows:
2001 2000 1999
--------------------------------------------------------------------------
Weighted average basic number
of shares outstanding 21,160,616 19,156,626 14,750,247
Dilutive effect of:
Special warrants - - 786,575
Warrants - 75 8,885
Options 102,410 773,276 682,732
Shares to be issued in
respect of contingent
consideration 466,769 - -
--------------------------------------------------------------------------
Weighted average diluted number
of shares outstanding 21,729,795 19,929,977 16,228,439
--------------------------------------------------------------------------
(d) 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 15(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
(loss) and earnings (loss) per share would have been reported as the pro
forma amounts indicated below:
2001 2000 1999
--------------------------------------------------------------------------
Net earnings (loss)
in accordance with
U.S. GAAP as reported $ (3,830,675) $ 2,910,427 $ 1,928,798
Pro forma net
earnings (loss) (4,719,780) 1,853,385 1,335,046
--------------------------------------------------------------------------
Pro forma basic earnings
(loss) per share $ (0.22) $ 0.10 $ 0.09
Pro forma diluted earnings
(loss) per share (0.22) 0.09 0.08
--------------------------------------------------------------------------
F-31
Pro forma net earnings (loss) reflect only those options granted during the
five years ended September 30, 2001. 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 2001 was $2.39 per
share (2000 - $3.07; 1999 - $1.20).
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:
2001 2000 1999
--------------------------------------------------------------------------
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 65% 60% 40%
Weighted average expected
life of the options 2.33 years 2.56 years 2.50 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-32
(e) Derivative financial instruments:
The Company enters into forward contracts to manage its exposure to
fluctuations in foreign exchange rates. Effective October 1, 2000, the
Company adopted the provisions of FASB Statement No. 133, "Accounting For
Derivatives and Hedging Activities." SFAS No. 133 requires that all
derivatives be recognized as assets and liabilities on the balance sheet
and measured at fair value. Hedge accounting is only applied to
derivatives if the hedging relationship has been identified, and the
Company has formally documented the designation of the hedging relationship
and the method for assessing the effectiveness of the hedging relationship.
Both at inception of the hedging relationship and throughout its term, the
relationship must be effective in achieving offsetting changes in the cash
flows of the hedged item.
Under SFAS No. 133 for derivatives designated and effective as hedges of
future cash flows, changes in the fair value of the derivative are
recognized in other comprehensive income, with no impact on net earnings
until the hedged item is recognized in earnings. To the extent the hedge
is ineffective, or not designated or documented as a hedge, the change in
fair value of the hedge would be recognized in earnings each period.
During 2001, the Company had not designated and documented its foreign
exchange contracts as a hedge of future cash flows and, therefore, must
record the change in fair value as a charge against earnings.
Under Canadian GAAP, no accounting recognition is given to the fair value
of those forward contracts which are a hedge of future cash flows. As at
September 30, 2001, the fair value of foreign exchange forward contracts,
which were otherwise designated as a hedge of future cash flows for
Canadian GAAP, totalled $(85,006). This amount represents an additional
liability under U.S. GAAP, and this amount net of the related tax recovery
is recorded as a charge to U.S. GAAP net earnings. On initial adoption of
SFAS No. 133 on October 1, 2000, the fair value of such foreign exchange
contracts totalled $(23,716).
(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:
2001 2000 1999
--------------------------------------------------------------------------
Net earnings (loss) for
the year in accordance
with U.S. GAAP $ (3,830,675) $ 2,910,427 $ 1,928,798
Decrease (increase) in
cumulative translation
adjustment account 1,147,208 180,516 (494,844)
--------------------------------------------------------------------------
$ (2,683,467) $ 3,090,943 $ 1,433,954
--------------------------------------------------------------------------
F-33
(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,
2001 and 2000.
(h) Statements of cash flows:
The Company has disclosed cash flows from operations per share, which is
not permitted under U.S. GAAP.
(i) Other disclosures:
U.S. GAAP and the United States Securities and Exchange Commission require
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, 2001 was
$1,432,668 (2000 - $493,659).
(ii) Rent expense under operating leases for the year ended September 30,
2001 amounted to $1,980,592 (2000 - $1,680,822).
(iii) As at September 30, 2001, the Company had a $32,158,672 (2000 -
$15,218,794) unused line of credit, of which $2,000,000 is available
for general corporate purposes and the remainder for permitted
acquisitions.
(iv) U.S. GAAP requires the disclosure of accrued liabilities. Accrued
liabilities included in accounts payable and accrued liabilities as
at September 30, 2001 were $6,330,821 (2000 - $7,492,551). At
September 30, 2001, accrued liabilities include $2,263,266 related
to additional consideration for the acquisition of Hampel Stefanides
(note 2(f)). At September 30, 2000, accrued liabilities include
$2,100,651 related to additional consideration for the acquisition
of Hampel Stefanides and $935,439 related to accrued acquisition
expenses.
At September 30, 2001, 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.
F-34
(j) Recent accounting pronouncements:
(i) In July 2001, the CICA and FASB issued new similar standards for
Business Combinations, Goodwill and Other Intangible Assets. These
standards provide new guidance on the accounting for a business
combination at the date a business combination is completed.
Specifically, they require use of the purchase method of accounting
for all business combinations initiated after June 30, 2001, thereby
eliminating use of the pooling-of-interests method. These standards
also require that goodwill and certain other intangible assets will
no longer be amortized and will be tested for impairment at least
annually and written down only when impaired. These statements will
apply to existing goodwill and intangible assets, and must be
adopted by the Company no later than its fiscal year beginning
October 1, 2002. The Company has not determined the impact of the
adoption of these standards on its consolidated financial statements.
(ii) Effective October 1, 2001, the Company will adopt the new Canadian
accounting standard for earnings per share. Under this new standard,
in computing diluted earnings per share, the dilutive effect of
outstanding options and warrants is computed by applying the treasury
stock method, consistent with the method required under U.S. GAAP.
(iii) In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated
asset retirement costs. SFAS No. 143 is effective for the Company's
fiscal year beginning October 1, 2002. The Company does not believe
that the adoption of SFAS No. 143 will have a material impact on its
consolidated financial statements.
(iv) In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" and related literature and
establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of
by sale. The Company is required to adopt SFAS No. 144 for its
fiscal year beginning October 1, 2002. The Company does not believe
that the adoption of SFAS No. 144 will have a material impact on its
consolidated financial statements.
F-35
(v) Effective October 1, 2002, the Company will adopt the new Canadian
accounting standard for stock-based compensation and other stock-
based payments. The new standards will require additional
disclosures for options granted to employees and that a compensation
cost be recorded for the fair value of options granted to non-
employees. The new standards for non-employees will be similar in
many respects to SFAS No. 123. The Company has not determined the
impact of the adoption of these standards on its consolidated
financial statements.
(vi) Effective October 1, 2003, the Company will be required to adopt the
new Canadian Accounting Guideline, Hedging Relationships, that
establishes standards for the documentation and effectiveness of
hedging relationships that are substantially similar to the
corresponding requirements in SFAS No. 133. The Company has not
determined the impact of the adoption of these standards on its
consolidated financial statements.
F-36
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Envoy Communications Group Inc.
Date: February 14, 2002 /s/ Geoffrey B. Genovese
-------------------------------
Name: Geoffrey B. Genovese
Title: Chairman and Chief Executive Officer
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