Dear Shareholders
The restructuring that your Company went through in the first half of this
year is starting to produce a positive impact on our bottom line.
We are pleased to report an EBITDA profit in the quarter ending June 30, 2002,
of $623,000 or $0.03 cents per share. This improvement is a direct result of
the restructuring efforts your management made in the first half of the year.
We are continuing to make additional progress in expense reduction wherever
possible.
We have also seen an increase in revenues in our business units and believe
that this positive trend will continue.
We are very focused on continued debt reduction. Our working capital has
improved over the quarter by $1.8 million and we plan to further strengthen
our balance sheet over the next several quarters through profitability,
raising capital and selling non-strategic assets.
We are confident that the positive trends will continue throughout the fourth
quarter ending September 31, 2002, and into fiscal 2003.
Watt International also launched and implemented our proprietary software
"ODIN" to its three largest customers. "ODIN" will assist our employees to
help our customers get their products on the shelf faster and save them money.
I would also like to acknowledge our employees, who have helped management
through this difficult period. Our group of talented professionals continued
to do great work for our customers and assisted us in returning to
profitability before interest, taxes, depreciation and amortization.
Yours truly,
Geoffrey B. Genovese
Chairman & Chief Executive Officer
Envoy Communications Group Inc.
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------
RESULTS OF OPERATIONS
---------------------
Nine months ended June 30, 2002 compared with nine months ended
June 30, 2001
Net Revenue
-----------
Net revenue for the nine months ended June 30, 2002 was $45.2 million
compared to $63 million for the nine months ended June 30, 2001, representing
a decrease of $17.8 million or 28%. The decrease in revenue resulted from a
combination of general economic slowdown in the North American and U.K.
marketplace as well as a specific slowdown within the advertising and
technology markets, particularly in New York. Our revenue from marketing
activities decreased $9.5 million from $19.8 million to $10.3 million, the
largest portion of this decrease being a decline in revenue in New York of
$10 million and a further decrease of approximately $500,000 in revenue
relating to Canadian marketing. Technology revenue decreased $5.2 million
from $12.5 million to $7.3 million. Again, the reduction in revenue relates
largely to the decline in business at our New York operations. Net revenue
from design services decreased $3.0 million from $30.6 million to $27.6
million.
EBITDA before goodwill write-down, restructuring costs and unusual item
-----------------------------------------------------------------------
For the nine months ended June 30, 2002, we had an EBITDA loss before goodwill
write-down, restructuring costs and unusual item of ($2.2) million, and for
the nine months ended June 30, 2001, we earned $9.2 million in EBITDA before
unusual item.
Operating Expenses
------------------
Operating expenses for the nine months ended June 30, 2002 were $47.3 million,
compared to $53.8 million for the nine months ended June 30, 2001,
representing a decrease of $6.5 million.
Salaries and benefits expenses for the nine months ended June 30, 2002
were $36.2 million compared to $39.9 million for the nine months ended
June 30, 2001. In response to the significant decrease in revenue experienced
by the Company during the first six months of the year, management implemented
a plan to reduce salary and benefit expenses during the second quarter. As a
result of this downsizing, a saving of approximately $14.5 million in annual
salary and benefit expenses will be realized. Management believes that the
ongoing salary and benefit expenses will be more in line with expected
revenues.
General and administrative expenses for the nine months ended June 30, 2002
were $7.6 million, compared to $10.4 million for the nine months ended
June 30, 2001, representing a decrease of $2.8 million. The decrease in
general and administrative expenses was largely due to reduced expenditures
in the areas of marketing and promotion and in shareholder relations, as well
as reduced expenditures associated with the reduced level of revenue.
Occupancy costs for the nine months ended June 30, 2002 were $3.6 million
compared to $3.5 million for the nine months ended June 30, 2001. Management
has accrued for the anticipated costs of restructuring certain U.S. leases in
the second quarter and continues to look at ways to reduce its occupancy costs
by subleasing redundant office space.
Interest charges for the nine months ended June 30, 2002 were $631,000
compared to $529,000 for the nine months ended June 30, 2001. The increase in
interest expense is due to additional financing fees incurred in connection
with the credit facility. See Note 2B to the consolidated financial
statements.
Restructuring costs for the nine months ended June 30, 2002 were $7.2 million.
In response to the general economic downturn impacting our business,
management implemented a restructuring plan during the first half of this
fiscal year in order to bring costs more in line with expected revenues.
See Note 3 to the consolidated financial statements.
The unusual item for the nine months ended June 30, 2002 was $752,000.
The unusual item represents the write-off of unamortized financing fees
incurred in connection with the credit facility. See Note 2 to the
consolidated financial statements.
The above factors resulted in a decrease in our earnings before income taxes
and goodwill amortization and write-down from $6.5 million in 2001 to a loss
of ($5.0) million in 2002.
Goodwill amortization decreased from $2.2 million to $1.9 million due to the
decreased amount of goodwill. In the second quarter of 2002, a $28.4 million
write-down of goodwill was recorded, as discussed in Note 3 to the
consolidated financial statements.
Net Earnings (Loss)
-------------------
As a result of the foregoing factors, we had a net loss of ($38) million for
the nine months ended June 30, 2002, compared to net earnings of $135,000 for
the nine months ended June 30, 2001.
Per Share Amounts
-----------------
The per share amounts are as follows: for the nine months ended June 30, 2002,
the fully diluted EBITDA loss before goodwill write-down, restructuring and
unusual item per share was ($0.10), the fully diluted earnings (loss) before
amortization and write-down of goodwill per share was ($0.37) and the fully
diluted net earnings (loss) per share was ($1.82). For the nine months ended
June 30, 2001, the fully diluted EBITDA before unusual item per share was
$0.43, the fully diluted earnings before goodwill amortization per share was
$0.11 and the fully diluted net earnings per share was $0.01.
CASH FLOWS
----------
Net cash provided by (used in) operating activities before any increase/
decrease in non-cash operating working capital was ($6.9) million for the
nine months ended June 30, 2002 and $4.9 million for the nine months ended
June 30, 2001. The decrease in net cash provided by operating activities was
primarily due to decreased earnings, offset by the write-down of goodwill,
as discussed previously.
Net cash provided by (used in) financing activities was $1.4 million for the
nine months ended June 30, 2002 and ($3.6) million for the nine months ended
June 30, 2001. The increase was primarily due to the increase in debt, and the
issuance of convertible debentures, offset by the redemption of common shares.
Net cash (used in) investing activities was ($1.5) million for the nine months
ended June 30, 2002 and ($4.0) million for the nine months ended June 30, 2001.
The decrease was primarily due to fewer payments related to acquired businesses
and a decrease in the purchase of capital assets.
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 2002 compared with three months ended June 30, 2001
Net Revenue
-----------
Net revenue for the three months ended June 30, 2002 was $14.5 million,
compared to $20.7 million in the three months ended June 30, 2001, representing
a decrease of $6.2 million or 30%. The explanation for the decrease is the
same as previously discussed in the nine-month comparison.
EBITDA before Goodwill write-down, Restructuring costs and Unusual item
-----------------------------------------------------------------------
For the three months ended June 30, 2002, we had EBITDA before goodwill
write-down, restructuring costs and unusual item of $623,000, and for the
three months ended June 30, 2001, we earned $1.7 million in EBITDA before
unusual item.
Operating Expenses
------------------
Operating expenses for the three months ended June 30, 2002 were $13.9
million compared to $19.1 million for the three months ended June 30, 2001,
representing a decrease of $5.2 million. As discussed above in the nine-month
comparison, management has implemented a restructuring plan, primarily
enacted during the first half of this fiscal year. See Note 3 to the
consolidated financial statements.
Net Earnings (Loss)
-------------------
As a result of the restructuring charges and the goodwill write-down noted
above, we had a net loss of ($351,000) for the three months ended
June 30, 2002, compared to a net loss of ($1.5) million for the three
months ended June 30, 2001.
Per Share Amounts
-----------------
The per share amounts are as follows: for the three months ended June 30, 2002,
the fully diluted EBITDA loss before goodwill write-down, restructuring and
unusual item per share was $0.03, the fully diluted earnings (loss) before
amortization and write-down of goodwill per share was ($0.02) and the fully
diluted net earnings (loss) per share was ($0.01). For the nine months ended
June 30, 2001, the fully diluted EBITDA before unusual item per share was
$0.08, the fully diluted earnings before goodwill amortization per share was
($0.07) and the fully diluted net earnings per share was ($0.04).
CASH FLOWS
----------
Net cash provided by (used in) operating activities before any increase/
decrease in non-cash operating working capital was $378,000 for the three
months ended June 30,2002 and ($45,000) for the three months ended June 30,2001.
The increase in net cash provided by operating activities is primarily
due to increased earnings.
Net cash provided by financing activities was $1.7 million for the three
Months ended June 30, 2002 compared with $1.9 million for the three months
ended June 30, 2001.
Net cash (used in) investing activities for the three months ended
June 30, 2002 was ($635,000), compared with ($531,000) for the three months
ended June 30, 2001. The use of cash relates to the purchase of capital
assets and the payment of a contingent consideration relating to prior
acquisitions.
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
As at June 30, 2002 compared to September 30, 2001
As at June 30, 2002 and September 30, 2001, the Company was not in compliance
with its covenant calculations under the terms of its revolving credit
facility in respect to 12 month earnings before interest, taxes, deprecation
and amortization. The lenders have the right to demand repayment of the
outstanding borrowings. Additional borrowings under the facility are subject
to the approval of the lenders. The Company is continuing to have discussions
with its lenders regarding amendments to the terms of the facility.
The Company is considering all of the options available to it to finance the
amounts owing under the restructuring plans and expected cash flow shortfalls
in the next three months (or other operating obligations). These options
include additional debt or equity financing under private placements,
renegotiating its bank facilities and the sale of some of its businesses.
In addition, management has made every effort to negotiate the restructuring
charges in such a way as to minimize short-term cash requirements.
The ability of the Company to continue as a going concern and to realize the
carrying value of its assets and discharge its liabilities when due is
dependent on the continued support of its lenders and/or successful completion
of the actions discussed above.
During fiscal 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 $40.0 million Canadian. Advances under the line of credit can be used
for general purposes (to a maximum of $2.0 million) and for financing
acquisitions that have been approved by the lenders. As at June 30, 2002,
approximately $9.8 million had been borrowed under the facility, none of which
was used for general corporate purposes.
As at June 30, 2002 the Company had a working capital deficit of ($5.4)
million compared with a working capital deficit of ($430,000) at
September 30, 2001. This working capital deficiency arises due to the fact
that the borrowings under the bank credit facility must be classified as a
current liability as a result of the Company not being in compliance with its
covenant calculations. The decrease in working capital in this period was
primarily the result of the operating loss during the period.
During the third quarter, the Company negotiated new repayment terms for the
Promissory Note due June 30, 2002. The Promissory Note is to be repaid in
five monthly installments commencing July 1, 2002 with interest on the
principal balance charged at 8%.
On April 29, 2002, as disclosed in Note 2 to the consolidated financial
statements, the Company issued $1.8 million in convertible debentures.
The net proceeds from the sale of the debentures were used for general
working capital purposes to support the Company's restructuring activities.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
As at June 30 September 30
2002 2001
-------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 2,116,608 $ 21,781,809
Restricted cash 639,791 158,500
Accounts receivable 21,872,493 26,940,137
Income taxes recoverable 3,222,121 230,389
Future income taxes 2,105,000 712,000
Prepaid expenses 860,770 1,315,009
-------------------------------------------------------------------------------
30,816,783 51,137,844
Capital assets 9,983,777 11,533,736
Goodwill 18,816,132 49,675,115
Other assets 221,730 681,387
Future income taxes 1,804,695 822,156
-------------------------------------------------------------------------------
$61,643,117 $113,850,238
-------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and
accrued liabilities $ 21,385,232 $ 38,728,210
Deferred revenue 739,084 300,071
Amounts collected in excess
of pass-through costs incurred 2,796,822 1,574,407
Bank credit facility and current
portion of long-term debt
(Note 1 and 2) 11,348,263 10,965,089
-------------------------------------------------------------------------------
36,269,401 51,567,777
Long-term debt (Notes 1 and 2) 1,893,475 963,076
Long-term portion of
restructuring costs (Note 3) 1,010,542 -
-------------------------------------------------------------------------------
2,904,017 963,076
Shareholders' equity:
Share capital 54,468,380 54,883,305
Convertible debentures (Note 2) 736,899 -
Retained earnings (Deficit) (32,384,020) 5,603,200
Cumulative translation adjustment (351,560) 832,880
-------------------------------------------------------------------------------
22,469,699 61,319,385
-------------------------------------------------------------------------------
$ 61,643,117 $ 113,850,238
-------------------------------------------------------------------------------
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT / RETAINED EARNINGS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
For the nine months ended June 30 June 30
2002 2001
-------------------------------------------------------------------------------
Net revenue $ 45,175,277 $62,954,227
Operating expenses:
Salaries and benefits 36,191,779 39,925,588
General and administrative 7,595,636 10,391,596
Occupancy costs 3,559,178 3,475,816
-------------------------------------------------------------------------------
47,346,593 53,793,000
-------------------------------------------------------------------------------
Earnings (loss) before interest expense,
income taxes, depreciation goodwill
amortization and write-down, restructuring
costs and unusual item (2,171,316) 9,161,227
Depreciation 2,156,070 2,177,500
Interest expense (Note 2) 630,592 529,304
-------------------------------------------------------------------------------
Earnings (loss) before income taxes and
goodwill amortization and write-down (4,957,978) 6,454,423
Restructuring costs and
unusual item (Note 3) 7,998,458 2,100,000
Income tax expense (recovery) (5,341,754) 1,999,911
-------------------------------------------------------------------------------
Earnings (loss) before goodwill
amortization and write-down (7,614,682) 2,354,512
Goodwill amortization, net of income
taxes of $12,000 (2001-$12,000) 1,946,272 2,219,123
Write-down of Goodwill (Note 3) 28,426,266 -
-------------------------------------------------------------------------------
Net earnings (loss) $ (37,987,220) $135,389
Retained earnings, beginning of period 5,603,200 8,403,367
-------------------------------------------------------------------------------
Retained earnings (Deficit),
end of period $(32,384,020) $8,538,756
-------------------------------------------------------------------------------
Net earnings (loss) per share - basic $(1.82) $0.01
Net earnings (loss) per share - fully diluted (1.82) 0.01
Earnings (loss) per share before goodwill
amortization and write-down - basic (0.37) 0.11
Earnings (loss) per share before goodwill
amortization and write-down - fully diluted (0.37) 0.11
-------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 20,835,436 21,195,209
-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Canadian dollars)
(Unaudited-Prepared by Management)
-------------------------------------------------------------------------------
For the nine months ended June 30 June 30
2002 2001
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) ($ 37,987,220) $ 135,389
Items not involving cash:
Future income tax expense (recovery) (2,375,539) 306,508
Depreciation 2,156,070 2,177,500
Goodwill amortization 1,964,272 2,237,123
Amortization of deferred financing charges 96,263 -
Write-down of capital assets 843,219 -
Write-down of goodwill 28,426,266 -
Net changes in non-cash working capital balances:
Restricted cash (481,291) (551,102)
Accounts receivable 5,414,526 3,578,587
Prepaid expenses 474,239 (781,795)
Accounts payable and accrued liabilities (17,600,934) 7,135,141
Income taxes recoverable (3,033,861) (766,977)
Deferred revenue 439,013 (633,403)
Amounts collected in excess of
pass-through costs incurred 516,786 36,968
Long-term restructuring costs 1,010,542 -
Other 363,395 -
-------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (19,774,254) 12,873,939
-------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt borrowings 1,803,276 334,613
Long-term debt repayments (1,552,804) (5,542,692)
Issuance of common shares for cash - 415,993
Issuance of convertible debentures 1,800,000 -
Redemption of common shares (628,083) -
Reduction in restricted cash - 834,962
Other - 389,171
-------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,422,389 (3,567,953)
-------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of subsidiaries (52,497) (1,905,133)
Purchase of capital assets (1,491,170) (2,082,771)
Net proceeds on disposal of capital assets 53,000 -
-------------------------------------------------------------------------------
Net cash used in investing activities (1,490,667) (3,987,904)
-------------------------------------------------------------------------------
Change in cash balance due to
foreign exchange 177,331 (119,140)
-------------------------------------------------------------------------------
(Decrease)/increase in cash (19,665,201) 5,198,942
Cash, beginning of period 21,781,809 7,105,418
-------------------------------------------------------------------------------
Cash, end of period $ 2,116,608 $ 12,304,360
-------------------------------------------------------------------------------
Cash flow from operations per share:
Basic $ (0.33) $ 0.23
Fully diluted (0.33) 0.23
-------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 471,632 $ 268,102
Income taxes paid 453,694 2,069,069
-------------------------------------------------------------------------------
Supplemental disclosure of non-cash transactions:
Shares issued for non-cash consideration 213,000 4,123,821
-------------------------------------------------------------------------------
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
For the three months ended June 30 June 30
2002 2001
-------------------------------------------------------------------------------
Net revenue $ 14,519,366 $ 20,747,839
Operating expenses:
Salaries and benefits 10,894,849 14,654,133
General and administrative 1,929,648 3,223,366
Occupancy costs 1,072,067 1,217,593
-------------------------------------------------------------------------------
13,896,564 19,095,092
-------------------------------------------------------------------------------
Earnings (loss) before interest expense,
income taxes, depreciation goodwill
amortization and write-down,
restructuring costs and unusual item 622,802 1,652,747
Depreciation 649,318 672,738
Interest expense 289,911 159,023
-------------------------------------------------------------------------------
Earnings (loss) before income taxes and
goodwill amortization and write-down (316,427) 820,986
Restructuring costs and unusual
item (Note 3) (25,984) 2,100,000
Income tax expense (recovery) (134,751) (536,290)
-------------------------------------------------------------------------------
Earnings (loss) before goodwill
amortization and write-down (155,692) (742,724)
Goodwill amortization, net of
income taxes of $6,000 (2001-$6,000) 195,221 738,107
Write-down of Goodwill (Note 3) - -
-------------------------------------------------------------------------------
Net earnings (loss) $ (350,913) $ (1,480,831)
-------------------------------------------------------------------------------
Net earnings (loss) per share - basic $ (0.02) $(0.07)
Net earnings (loss) per share - fully diluted (0.02) (0.07)
Earnings (loss) per share before goodwill
amortization and write-down - basic (0.01) (0.04)
Earnings (loss) per share before goodwill
amortization and write-down - fully diluted (0.01) (0.04)
-------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 20,882,414 21,192,462
-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Canadian dollars)
(Unaudited-Prepared by Management)
-------------------------------------------------------------------------------
For the three months ended June 30 June 30
2002 2001
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($ 350,913) ($ 1,480,831)
Items not involving cash:
Future income tax expense (recovery) (126,826) 18,994
Depreciation 649,318 672,738
Goodwill amortization 201,221 744,107
Amortization of deferred financing charge 4,915 -
Write-down of capital assets - -
Write-down of goodwill - -
Net changes in non-cash working capital balances:
Restricted cash (21,125) (551,102)
Accounts receivable 4,247,718 2,231,471
Prepaid expenses 522,467 922,304
Accounts payable and accrued liability (4,798,321) (5,780,443)
Income taxes (recoverable) payable 209,358 (1,050,685)
Deferred revenue (281,359) (258,684)
Amounts collected in excess of
pass-through costs incurred (2,403,811) (327,206)
Long-term restructuring costs (90,690) -
Other (130,381) (144,904)
-------------------------------------------------------------------------------
Net cash used in operating activities (2,368,429) (5,004,241)
-------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt borrowings - 334,613
Long-term debt repayments (113,737) (589,114)
Issuance of common shares for cash - 18,100
Issuance of convertible debentures 1,800,000
Redemption of common shares - -
Reduction in restricted cash - 1,089,361
Other - 1,002,336
-------------------------------------------------------------------------------
Net cash provided by financing activities 1,686,263 1,855,296
-------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of subsidiaries - 110,213
Purchase of capital assets (644,047) (641,348)
Net proceeds on disposal of capital assets 8,951 -
-------------------------------------------------------------------------------
Net cash used in investing activities (635,096) (531,135)
-------------------------------------------------------------------------------
Change in cash balance due to
foreign exchange 589,154 (471,511)
-------------------------------------------------------------------------------
Decrease in cash (728,108) (4,151,591)
Cash, beginning of period 2,844,716 16,455,951
-------------------------------------------------------------------------------
Cash, end of period $ 2,116,608 $ 12,304,360
-------------------------------------------------------------------------------
Cash flow from operations per share:
Basic $ (0.03) $ -
Fully diluted (0.03) -
-------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 410,129 $ 51,001
Income taxes paid 286,165 779,248
-------------------------------------------------------------------------------
Supplemental disclosure of non-cash transactions:
Shares issued for non-cash consideration 213,000 -
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Financing
As at June 30, 2002 and September 30, 2001, the Company was not in compliance
with its covenant calculations under the terms of its revolving credit
facility (Note 2) in respect of 12-month earnings before interest, taxes,
depreciation and amortization. The lenders have the right to demand repayment
of the outstanding borrowings. Additional borrowings under the facility are
subject to the approval of the lenders. The Company is continuing to have
discussions with its lenders regarding amendments to the terms of the facility.
The Company is considering all of the options available to it to finance the
amounts owing under the restructuring plans and expected cash flow shortfalls
in the next four months (or other operating obligations). These options
include, additional debt or equity financing under private placements,
renegotiating its bank facilities and the sale of some of its businesses.
The ability of the Company to continue as a going concern and to realize the
carrying value of its assets and discharge its liabilities when due is
dependent on the continued support of its lenders and/or the successful
Completion of the actions discussed above.
2A. Bank Credit Facility and Other Debt
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Revolving credit facility (a) $ 9,769,404 $ 7,841,239
Promissory Note, 8% per annum,
repayable in five monthly installments
commencing June 30, 2002 (b) 1,334,576 2,689,781
Current portion of loans payable to
landlords and capital leases 244,283 434,069
-------------------------------------------------------------------------------
$ 11,348,263 $ 10,965,089
-------------------------------------------------------------------------------
Long-term portion of loans payable to
landlords and capital leases $ 826,180 $ 963,076
Convertible Debenture ( c ) 1,067,295 -
-------------------------------------------------------------------------------
Total long-term debt $ 1,893,475 $ 963,076
-------------------------------------------------------------------------------
(a) Revolving credit facility
During fiscal 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
$40,000,000 Canadian. Advances under the line of credit can be used for
general purposes (to a maximum of $2,000,000) and financing acquisitions
that have been approved by the lenders. As at June 30, 2002 approximately
$9,800,000 has been borrowed under the facility, none of which is for general
corporate purposes.
As indicated in Note 1, the Company is not in compliance with its covenant
calculations and the lenders have the right to demand repayment of the
outstanding borrowings.
As a result of the ongoing discussions with the lenders regarding the terms of
the credit facility and the limitations on the amounts that can be borrowed,
as at March 31, 2002 the Company wrote off $751,968 of remaining unamortized
financing fees incurred in connection with this facility and the entire amount
of the debt has been classified as a current liability.
(b) Promissory Note
During the third quarter, the Company negotiated new repayment terms for the
Promissory Note due June 30, 2002. The Promissory Note is to be repaid in five
monthly installments commencing July 1, 2002 with interest on the principal
balance charged at 8%.
(c) Convertible debentures
On April 29, 2002 the Company issued $1,800,000 in 10% convertible debentures
which mature on April 29, 2007 (the "Maturity Date"). The debentures are
convertible until Maturity Date into 2.5 million units of the Company
("Units") at a Conversion Price of $0.72 per Unit. Each Unit consists of one
common share in the capital of the Company and one purchase warrant of the
Company ("Warrant"). Each Warrant entitles the holder to purchase one common
share (2.5 million commons shares in aggregate) within the earlier of (1)
12 months of the date of conversion of the debenture, and (2) the Maturity
Date at a price of $0.90 per common share. Holders also have the right to
require the Company to purchase all or a portion of their notes on or after
April 29, 2004. The net proceeds from the sale of the debentures were used for
general corporate purposes.
In accordance with Canadian generally accepted accounting principles, the
notes have been split between debt and, equity with proceeds allocated as
$1,017,770 to long-term debt and $782,230 to shareholders' equity. Estimated
offering expenses related to the debt component of $58,981 have been recorded
as deferred financing fees and $45,331 applied to reduce the equity allocation.
All of the proceeds allocated to equity will be charged as interest expense
using the effective interest rate method over two years, being the date at
which they are redeemable at the option of the holder.
2B. Interest Expense
Interest expense for the nine months ending June 30 comprised the following:
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Cash interest paid on credit facility,
landlord loans and capital leases $ 311,219 $ 336,120
Accrued interest on debentures 30,000 -
Interest computed on debentures
and promissory note 127,531 155,621
Financing fee charges on credit facility 161,842 37,563
-------------------------------------------------------------------------------
$ 630,592 $ 529,304
-------------------------------------------------------------------------------
3. Restructuring Costs and Unusual Item
During the third quarter ending June 30, 2001, the Company announced that it
was terminating its discussions in connection with the proposed acquisition of
Leagas Delaney and recorded an usual item expense of $2,100,000. Generally
accepted accounting principles require that all costs in connection with the
proposed acquisition and related equity financing are 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.
During the second quarter ending March 31, 2002, the Company recorded charges
for restructuring activities and the write-down of goodwill and other assets
totaling $36,424,724, as summarized below.
Total Paid By
Cash Non-cash Provision June 30
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Severance $ 2,799,166 $ - $ 2,799,166 $ 2,450,143
Write down of fixed assets - 843,219 843,219 843,219
Lease exit costs 3,380,079 224,026 3,604,105 425,360
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Restructuring charge 6,179,245 1,067,245 7,246,490 3,718,722
Unusual Item (Note 2) 751,968 751,968
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6,179,245 1,819,213 7,998,458 3,718,722
Write-down of goodwill - 28,426,266 28,426,266 -
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Total charges $ 6,179,245 $ 30,245,479 $ 36,424,724 $ 3,718,722
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(a) Restructuring charge
In response to a general economic downturn impacting our business, management
implemented a restructuring plan during the first half of this fiscal year in
order to bring costs more in line with expected revenues. The restructuring
involved downsizing the workforce, exiting excess office space and the
redundant fixed assets. Accordingly, the Company has recorded a restructuring
expense of $7,246,490 of which $386,000 was expensed in the first quarter and
$6,886,475 was expensed in the second quarter. The restructuring includes a
reduction of 125 people as well as the abandonment of 18,000 square feet of
leased office space in New York City. The annual expense savings in salaries,
benefits, and occupancy costs associated with this restructuring is
approximately $15,750,000.
(b) Write-down of Goodwill
The Company performed an assessment of the carrying values of goodwill
recorded in connection with our various businesses. The assessment was
performed because a number of factors indicated that an impairment had arisen
in the period ending March 31, 2002. The main indicators of impairment were
significant changes in valuations of companies in the technology and
marketing/advertising sectors, and the impact of significant negative industry
and economic trends on both current operations and expected future growth
rates. Based on these factors, the Company concluded that a significant
permanent impairment existed with respect to the Company's goodwill and other
assets, which primarily related to the goodwill associated with the businesses
of Sage, Promanad and Hampel.
In quantifying the impairment charge, the Company compared the expected future
Cash flows of each acquisition to the respective carrying value of the assets
of the business, including assigned goodwill. The cash flow periods used ranged
between 5 and 20 years, consistent with the remaining goodwill amortization
period.
As a result of this review, the Company determined that the carrying values of
the acquired businesses were not fully recoverable. Accordingly, in the second
quarter of 2002 the Company recorded a $28,426,266 write-down of goodwill
based on the amount by which the carrying amount of the goodwill exceeded the
expected future cash flows calculated as described in the preceding paragraph.
4. Segmented Information
The Company provides integrated marketing communication services to its
clients. While the Company has subsidiaries in Canada, the United States,
the United Kingdom and Continental Europe, it operates as a global business
and has no distinct operating segments.
The tables below set out the following information:
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By Customer Location By Geographic Area
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June 30, 2002 Net Capital Goodwill
Revenue Assets
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Canada $ 13,032,094 $ 7,580,515 $ 2,885,119
United States 21,364,625 264,208 8,547,849
United Kingdom and
Continental Europe 10,778,558 2,139,054 7,383,164
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$ 45,175,277 $ 9,983,777 $ 18,816,132
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June 30, 2001
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Canada $ 16,955,785 $ 7,873,752 $ 21,783,752
United States 31,404,861 664,109 16,208,576
United Kingdom and
Continental Europe 14,593,581 1,942,061 7,437,784
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$ 62,954,227 $ 10,479,922 $ 45,430,112
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The Company's external net revenue by type of service is as follows:
June 30 2002 2001
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Net Revenue:
Marketing $ 10,272,016 $ 19,789,373
Design 27,595,577 30,632,540
Technology 7,307,684 12,532,314
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$ 45,175,277 $ 62,954,227
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