envoy communications
group inc.
3rd quarter report 2001
energy
focus
strength
Management Discussion and Analysis
Results of Operations
Nine Months Ended June 30, 2001 compared with Nine Months Ended June 30, 2000.
Net Revenue
Net revenue increased by 60% to $62.9 million for the nine months ended June 30,
2001, from $39.4 million in the nine months ended June 30, 2000. This increase
is a result of both growth through acquisition and organic growth. Effective
January 1, 2001, we acquired all of the shares of the International Design Group
(Canada) Inc. (IDG), a retail planning and design firm. This acquisition was
accounted for using purchase accounting, and as a result of this acquisition,
there are six months of net revenues included in the nine months ended June 30,
2001. In fiscal 2000, Envoy completed two acquisitions: the acquisition of Sage
Information Consultants, effective June 1, 2000, and the acquisition of
Gilchrist Brothers Limited, effective July 1, 2000. As a result of the
acquisitions of Sage and Gilchrist, there are an additional eight and nine
months of net revenues for these companies, respectively, included in the
June 30, 2001 results of operations that were not included in our results of
operations for the nine months ended June 30, 2000. Organic growth accounted
for approximately $7.7 million or 14% of the overall increase in net revenue
for the period.
In the nine months ended June 30, 2001, net revenue from our marketing services
represented approximately 31% of our net revenue, while design and technology
represented 49% and 20% respectively. In the nine months ended June 30, 2000,
marketing services represented approximately 57% of net revenue, with design
and technology services representing 35% and 8% respectively.
We have continued to geographically diversify our revenue base. The geographical
breakdown of our net revenue for the nine months ended June 30, 2001 was 50%
from the United States, 23% from the United Kingdom and Continental Europe,
and 27% from Canada. Net revenue for the nine months ended June 30, 2000 was 63%
from the United States and 37% from Canada.
EBITDA Before and After Unusual Items
For the nine months ended June 30, 2001, we earned $9.2 million in earnings
before interest expense, income taxes, depreciation and amortization (EBITDA)
before unusual items, and our EBITDA after unusual items was $7.1 million.
For the nine months ended June 30, 2000, we earned $7 million in EBITDA.
Operating Expenses
Operating expenses increased by 66% to $53.8 million for the nine months ended
June 30, 2001, from $32.4 million for the nine months ended June 30, 2000. The
increase in salaries and benefits reflects staff of acquired operations plus the
additional management and client support employed to handle the continued growth
and expanded operations throughout the Company. As a percentage of net revenue,
salaries and benefits remained relatively constant at 63% for the nine months
ended June 30, 2001 and 60% for the nine months ended June 30, 2000. The
additional general and administrative expenses were largely due to expanded
business development activities by our existing business divisions as well as
new and expanded business development activity by the acquired businesses.
General and administrative expenses decreased slightly at 17% of net revenue
for the nine months ended June 30, 2001 compared with 18% of net revenue for
the nine months ended June 30, 2000. Occupancy costs increased due to additional
space required to support our growth from acquisitions. The additional
depreciation charges were due to the depreciation of the costs of our additional
leasehold improvements and of newly purchased capital equipment as a result of
acquisitions.
The increase in interest charges was due to the additional debt relating to
acquisitions.
See Note 1 to the consolidated financial statements. During the quarter, 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. The impact of this was to expense $2.1 million of costs relating
to the proposed acquisition. Costs include legal, accounting, consulting and
other out-of-pocket expenses incurred in the negotiating and preparation of
legal documents and preparation of long-form prospectus materials.
See Note 2 to the consolidated financial statements. Effective October 1, 2000,
the Company was required to adopt on a retroactive basis the new accounting
standards of the Canadian Institute of Chartered Accountants ("CICA") for income
taxes. As a result of the December 2000 announcement by the government to
introduce legislation to reduce income tax rates over the next four years,
the Company was required to revalue its future tax assets as at December 31,
2000 to reflect the reduction in future expected tax rates. This increased the
Company's tax provision for the three months ended December 31, 2000 by
$100,000. Under the CICA's new accounting standard 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.
Net Earnings Before and After Unusual Items
For the nine months ended June 30, 2001, we earned $1.3 million in net earnings
before unusual items, and our net earnings after unusual items was $135,000.
For the nine months ended June 30, 2000, we earned $2.2 million in net earnings.
Per Share Amounts Before and After Unusual Items
Before unusual items: For the nine months ended June 30, 2001, the EBITDA before
unusual items per share was $0.43, the earnings before goodwill before unusual
items per share was $0.17 and the net earnings before unusual items per share
was $0.06. After unusual items: For the nine months ended June 30, 2001, the
EBITDA per share was $0.33, the earnings before goodwill per share was $0.11
and the net earnings per share was $0.01. For the nine months ended June 30,
2000, the EBITDA per share was $0.38, the earnings before goodwill per share
was $0.17 and the net earnings per share was $0.12.
Cash Flows
Nine months ended June 30, 2001 compared with nine months ended June 30, 2000.
Net cash provided by operating activities before any increase and decrease in
non-cash operating working capital was $4.9 million for the nine months ended
June 30, 2001 and $4.4 million for the nine months ended June 30, 2000.
Increase in net cash provided by operating activities is primarily due to
increased earnings of acquisitions, as discussed previously.
Net cash used in financing activities was ($3.6) million for the nine months
ended June 30, 2001, and net cash provided by financing activities was $11.8
million for the nine months ended June 30, 2000. The decrease is primarily due
to a public offering in the prior year and the repayment of debt in the current
year. In June 2000, the Company issued 1,533,571 common shares for net proceeds
of $10 million. In addition, in June 2000, we established a new US$8 million
revolving credit facility, and borrowed US$3.1 million under the facility. In
January 2001, we borrowed an additional US$1 million, which has been used in
part to fund the acquisition of IDG. In February 2001, we repaid US$3.1 million
of the facility using cash from operations.
Results of Operations
Three months ended June 30, 2001 compared with three months ended June 30, 2000.
Net Revenue
Net revenue increased by 51% to $20.7 million in the three months ended June 30,
2001, from $13.7 million in the three months ended June 30, 2000. This increase
occurred as a result of both growth through acquisition and organic growth. As
a result of the acquisition of IDG there are three months of net revenues
included in the three months ended June 30, 2001 that were not included in
our results of operations for the three months ended June 30, 2000. As a result
of the acquisitions of Sage and Gilchrist, there are three and two months of net
revenues for these companies, respectively, included in the June 30, 2001
results of operations that were not included in our results of operations for
the three months ended June 30, 2000. Organic growth was approximately $1.8
million or 10% for the period.
EBITDA Before and After Unusual Items
For the three months ended June 30, 2001, we earned $1.7 million in EBITDA
before unusual items, and our EBITDA after unusual items resulted in a loss of
($447,000). For the three months ended June 30, 2000, we earned $2.8 million
in EBITDA.
Operating Expenses
Operating expenses increased by 75% to $19.1 million for the three months ended
June 30, 2001 from $10.9 million for the three months ended June 30, 2000. The
primary reasons for the increase are increases in salaries and benefits of
$6.6 million or 82%; an increase in general and administrative expenses of
$949,000 or 42%; and an increase in occupancy costs of $619,000 or 104%. There
were also increases in depreciation of $233,000 or 53%, and in goodwill
amortization net of income taxes of $364,000 or 97%. The explanations for the
increases are the same as previously discussed in the nine-month comparison,
including the acquisitions of Sage, Gilchrist and IDG.
See Note 1 to the consolidated financial statements and previously discussed
explanation on unusual items in the nine-month comparison.
The increase in interest charges was due to the additional debt relating to
acquisitions.
Goodwill amortization increased from $374,000 to $738,000, due largely to the
increased amount of goodwill derived from the acquisitions discussed above.
Net Earnings (Loss) Before and After Unusual Items
For the three months ended June 30, 2001, we earned ($273,000) in net earnings
before unusual items, and our net loss after unusual items was ($1.5) million.
For the three months ended June 30, 2000, we earned $971,000 in net earnings.
Per Share Amounts Before and After Unusual Items
Before unusual items: For the three months ended June 30, 2001, the EBITDA
before unusual items per share was $0.08, the earnings before goodwill before
unusual items per share was $0.02 and the net earnings before unusual items per
share was ($0.01). After unusual items: For the three months ended June 30,
2001, the EBITDA per share was ($0.02), the loss before goodwill per share was
($0.04) and the net loss per share was ($0.07). For the three months ended
June 30, 2000, the EBITDA per share was $0.15, the earnings before goodwill per
share was $0.07 and the net earnings per share was $0.05.
Cash Flows
Three months ended June 30, 2001 compared with three months ended June 30, 2000.
Net cash used in operating activities before any increase and decrease in non-
cash operating working capital was $45,000 for the three months ended June 30,
2001 and $1.8 million for the three months ended June 30, 2000.
Net cash used in financing activities was ($5.0) million for the three months
ended June 30, 2001, and net cash provided by financing activities was $3.3
million for the three months ended June 30, 2000. The explanations for the
decreases are the same as previously discussed in the nine-month comparison.
Financial Condition
As at June 30, 2001 compared with September 30, 2000.
The working capital balance was $10.5 million and the cash balance was $12.3
million at June 30, 2001. At September 30, 2000, working capital was $11.4
million and the cash balance was $7.1 million. Additional cash balance is
primarily due to an increase in outstanding accounts payable and accrued
liabilities as a result of timing of payments.
Cash flow from operations as well as the availability of the remaining existing
credit facilities and the net proceeds of any future share offerings are
expected to provide the liquidity to meet current foreseeable cash needs for at
least the next year.
Consolidated Balance Sheets
(In Canadian dollars)
(Unaudited-Prepared by Management)
June 30 September 30
As at 2001 2000
ASSETS
Current assets:
Cash $ 12,304,360 $ 7,105,418
Restricted cash 551,102 -
Accounts receivable 31,695,683 34,234,974
Prepaid expenses 2,524,149 1,732,212
47,075,294 43,072,604
Restricted cash - 832,337
Capital assets 10,479,922 10,448,625
Goodwill and other assets 45,529,927 46,987,707
Deferred income taxes 642,151 966,715
$ 103,727,294 $ 102,307,988
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 30,425,905 $ 24,247,075
Income taxes payable 289,165 1,190,313
Deferred revenue 413,371 1,044,873
Amounts collected in excess
of pass-through costs incurred 2,350,355 2,307,047
Current portion of long-term debt 3,064,718 2,848,430
36,543,514 31,637,738
Long-term debt 3,691,968 7,983,449
Shareholders' equity:
Share capital 55,509,715 54,597,762
Retained earnings 8,538,756 8,403,367
Cumulative translation adjustment (556,659) (314,328)
63,491,812 62,686,801
$ 103,727,294 $ 102,307,988
Consolidated Statements of Operations and Retained Earnings
(In Canadian dollars)
(Unaudited-Prepared by Management)
June 30 June 30
For the nine months ended 2001 2000
Net revenue $ 62,954,227 $ 39,358,968
Operating expenses:
Salaries and benefits 39,925,588 23,524,816
General and administrative 10,391,596 7,190,469
Occupancy costs 3,475,816 1,640,810
53,793,000 32,356,095
Earnings before interest expense,
income taxes,depreciation, goodwill
amortization, and unusual items 9,161,227 7,002,873
Depreciation 2,177,500 1,269,901
Interest expense 529,304 245,966
Earnings before income taxes, goodwill
amortization,and unusual items 6,454,423 5,487,006
Impact of unusual items (Note 1) 2,100,000 -
Earnings before income taxes and
goodwill amortization 4,354,423 5,487,006
Income tax expense, excluding the undernoted 1,899,911 2,374,993
Impact of tax rate changes (Note 2) 100,000 -
Earnings before goodwill amortization 2,354,512 3,112,013
Goodwill amortization, net of income taxes
of $18,000 (2000-$18,000) 2,219,123 909,816
Net earnings $ 135,389 $ 2,202,197
Retained earnings, beginning of period 8,403,367 5,492,940
Retained earnings, end of period $ 8,538,756 $ 7,695,137
Net earnings per share-basic $ 0.01 $ 0.12
Net earnings per share-fully diluted 0.01 0.12
Earnings per share before goodwill
amortization-basic 0.11 0.17
Earnings per share before goodwill
amortization-fully diluted 0.11 0.17
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flow
(In Canadian dollars)
(Unaudited-Prepared by Management)
June 30 June 30
For the nine months ended 2001 2000
Cash flows from operating activities:
Net earnings $ 135,389 $ 2,202,197
Items not involving cash:
Deferred income taxes 306,508 1,032
Depreciation 2,177,500 1,269,901
Goodwill amortization 2,237,123 927,816
Net changes in non-cash working capital balances:
Increase in restricted cash (551,102) -
Accounts receivable 3,578,587 4,518,384
Prepaid expenses (781,795) (626,661)
Accounts payable and accrued liabilities 7,135,141 (5,371,285)
Income taxes payable (766,977) (895,264)
Deferred revenue (633,403) 335,053
Amounts collected in excess of
pass-through costs incurred 36,968 1,685,346
Net cash provided by operating activities 12,873,939 4,046,519
Cash flows from financing activities:
Long-term debt 334,613 3,391,756
Long-term debt repayments (5,542,692) (1,779,630)
Issuance of common shares for cash 415,993 10,478,808
Reduction (increase) in restricted cash 834,962 (300,854)
Other 389,171 -
Net cash provided by (used in)
financing activities (3,567,953) 11,790,080
Cash flows from investing activities:
Acquisition of subsidiaries (net of
cash acquired(bank indebtedness assumed)
of $214,179; 2000-nil) (1,905,133) (2,205,892)
Purchase of capital assets (2,082,771) (1,765,020)
Net cash used in investing activities (3,987,904) (3,970,912)
Change in cash balance due to foreign exchange (119,140) 78,440
Increase in cash 5,198,942 11,944,127
Cash, beginning of period 7,105,418 15,300,454
Cash, end of period $ 12,304,360 $ 27,244,581
Cash flow from operations per share:
Basic $ 0.23 $ 0.24
Fully diluted $ 0.23 $ 0.24
Supplemental cash flow information:
Interest paid $ 268,102 $ 218,891
Income taxes paid 2,069,069 2,903,844
Shares issued for non-cash consideration 4,123,821 6,848,173
Consolidated Statements of Operations and Retained Earnings
(In Canadian dollars)
(Unaudited-Prepared by Management)
June 30 June 30
For the three months ended 2001 2000
Net revenue $ 20,747,839 $ 13,716,105
Operating expenses:
Salaries and benefits 14,654,133 8,044,640
General and administrative 3,223,366 2,274,531
Occupancy costs 1,217,593 598,192
19,095,092 10,917,363
Earnings before interest expense,
income taxes,depreciation, goodwill
amortization, and unusual items 1,652,747 2,798,742
Depreciation 672,738 439,684
Interest expense 159,023 82,956
Earnings before income taxes, goodwill
amortization, and unusual items 820,986 2,276,102
Impact of unusual items (Note 1) 2,100,000 -
Earnings (loss) before income taxes and (1,279,014) 2,276,102
goodwill amortization
Income taxes (536,290) 930,874
Earnings (loss) before goodwill amortization (742,724) 1,345,228
Goodwill amortization, net of income taxes
of $6,000 (2000-$6,000) 738,107 374,493
Net earnings (loss) $ (1,480,831) $ 970,735
Net earnings per share-basic $ (0.07) $ 0.05
Net earnings per share-fully diluted (0.07) 0.05
Earnings per share before goodwill
amortization-basic (0.04) 0.07
Earnings per share before goodwill
amortization-fully diluted (0.04) 0.07
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flow
(In Canadian dollars)
(Unaudited-Prepared by Management)
June 30 June 30
For the three months ended 2001 2000
Cash flows from operating activities:
Net earnings (loss) $ (1,480,831) $ 970,735
Items not involving cash:
Deferred income taxes 18,994 26,189
Depreciation 672,738 439,684
Goodwill amortization 744,107 380,493
Net changes in non-cash working capital balances:
Reduction (increase) in restricted cash (551,102) -
Accounts receivable 2,231,471 10,993,980
Prepaid expenses 922,304 (444,966)
Accounts payable and accrued liabilities (5,780,443) (8,706,342)
Income taxes payable (1,050,685) 1,469,988
Deferred revenue (258,684) 335,053
Amounts collected in excess of pass-through
costs incurred (327,206) (2,192,413)
Other (144,904) -
Net cash provided by (used in)
operating activities (5,004,241) 3,272,401
Cash flows from financing activities:
Long-term debt 334,613 2,841,756
Long-term debt repayments (589,114) (152,764)
Issuance of common shares for cash 18,100 9,915,158
Reduction in restricted cash 1,089,361 293,969
Other 1,002,336 -
Net cash provided by financing activities 1,855,296 12,898,119
Cash flows from investing activities:
Acquisition of subsidiaries 110,213 (19,687)
Purchase of capital assets (641,348) (218,818)
Net cash used in investing activities (531,135) (238,505)
Change in cash balance due to foreign exchange (471,511) 155,163
Increase in cash (4,151,591) 16,087,178
Cash, beginning of period 16,455,951 11,157,403
Cash, end of period $ 12,304,360 $ 27,244,581
Cash flow from operations per share:
Basic $ 0.00 $ 0.10
Fully diluted $ 0.00 $ 0.10
Supplemental information:
Interest paid $ 51,001 $ 56,503
Income taxes paid 779,248 433,861
Shares issued for non-cash consideration - 4,417,973
Notes to Consolidated Financial Statements
1. Unusual Items
During the quarter 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 negotiating and preparation of
legal documents and preparation of long-form prospectus materials.
2. Income Taxes
Effective October 1, 2000, the Company was required to adopt on a retroactive
basis the new accounting standards 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 these new standards, future tax assets and liabilities attributable to
all temporary differences are measured using the future tax rates expected to
be in effect when the items are recovered or settled. The effect of a change in
tax rates must be recognized in income at the enactment date.
Previously, future tax assets and liabilities were recorded at the tax rate in
effect in the period in which the temporary difference arose and were not
adjusted for subsequent tax rate changes. The Company's temporary differences
are principally in respect to deductible share issue costs that were recorded
directly in capital stock rather than as a credit to income tax expense. There
is no cumulative effect as of October 1, 2000 of this change in accounting
policy.
As a result of the December 2000 announcement by the government to introduce
legislation to reduce income tax rates over the next four years, the Company
was required to revalue its future tax assets as at December 31, 2000 to reflect
the reduction in future expected tax rates. The impact of this was to increase
the Company's tax provision for the three months ended December 31, 2000 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.
3. 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:
By Customer Location By Geographic Area
June 30, 2001 Net Capital Goodwill
Revenue Assets
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
$ 62,954,227 $ 10,479,922 $ 45,430,112
June 30, 2000
Canada $ 14,537,694 $ 7,625,559 $ 23,045,522
United States 24,821,274 885,030 11,256,691
United Kingdom and
Continental Europe - - -
$ 39,358,968 $ 8,510,589 $ 34,302,213
The Company's external net revenue by type of service is as follows:
June 30 2001 2000
Net revenue:
Marketing $ 19,789,373 $ 22,543,012
Design 30,632,540 13,562,558
Technology 12,532,314 3,253,398
$ 62,954,227 $ 39,358,968