MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------
RESULTS OF OPERATIONS
Six months ended March 31, 2002 compared with six months ended March 31, 2001.
Net Revenue
-----------
Net revenue for the six months ending March 31, 2002 was $30.7 million
compared to $42.2 million for the six months ended March 31, 2001,
representing a decrease of $11.5 million or 27%. The decrease in revenue
results from a combination of general economic slowdown in the North American
and the 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 $6.7 million from $14.3 million to $7.6 million. The
largest portion of this decrease being a decline in revenue in New York of
$5.8 million and a further decrease of approximately $1.0 million in revenue
relating to Canadian marketing. Technology revenue decreased $3.2 million
from $8.8 million to $5.6 million. Again the reduction in revenue relates
largely to the decline in business in our New York operations. Net revenue
from design services decreased $1.7 million from $19.2 million to $17.5
million.
In the six months ended March 31, 2002, net revenue from marketing represented
approximately 25% of our net revenue, while technology and design represented
18% and 57% respectively. In the six months ended March 31, 2001, marketing
represented approximately 34% of net revenue, while technology and design
represented 21% and 45% respectively.
The geographical breakdown of our net revenue for the six months ended
March 31, 2002 was 38% from the United States, 23% from the United Kingdom
and Continental Europe, and 39% from Canada. Net revenue for the six months
ended March 31, 2001 was 49% from the United States, 22% from the United
Kingdom and Continental Europe and 29% from Canada.
EBITDA before Goodwill write-down, Restructuring costs and Unusual item
-----------------------------------------------------------------------
For the six months ended March 31, 2002, we had an EBITDA loss, before
goodwill write-down, restructuring costs and unusual item of ($2.8) million
and for the six months ended March 31, 2001, we earned $7.5 million in EBITDA.
Operating Expenses
------------------
Operating expenses for the six months ended March 31, 2002 was $33.5 million
compared to $34.7 million for the six months ended March 31, 2001,
representing a decrease of $1.3 million.
Salaries and benefits expense remained consistent at $25.3 million for the six
months ended March 31, 2002 and 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 expense 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 six months ended March 31, 2002,
was $5.7 million compared to $7.2 million for the six months ended March 31,
2001, representing a decrease of $1.5 million. The decrease in general and
administrative expenses were largely due to reduced expenditures in the area
of marketing and promotion, shareholder relations as well as reduced
expenditures associated with reduced level of revenue.
Occupancy costs for the six months ended March 31, 2002 was $2.5 million
compared to $2.3 million for the six months ended March 31, 2001. Management
has accrued for the anticipated costs of restructuring certain US leases in
this quarter and continues to look at ways to reduce its occupancy expenses
by subleasing redundant office space.
Interest charges for the six months ended March 31, 2002, was $340,682
compared to in $370,281 in the six months ended March 31, 2001. The slight
decrease in interest charges was due to lower interest rates offset by
additional interest expense relating to the amortization of deferred
financing costs, which are recorded as interest expense.
Restructuring costs for the six months ended March 31, 2002, was $7.3 million.
In response to 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 the expected revenues. See Note 1 to
the consolidated financial statements.
Unusual item for the six months ended March 31, 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 from $5.6 million in 2001 to a loss of ($4.6)
million in 2002.
Goodwill amortization increased from $1.5 million to $1.8 million due to
increased amount of goodwill derived from acquisitions and earnout payments.
In the second quarter of 2002, a $28.4 million write-down of goodwill was
recorded, as discussed in Note 1 to the consolidated financial statements.
Net Earnings (Loss)
------------------
As a result of the foregoing factors, we had a net loss of ($37.6) million for
the six months ended March 31, 2002, compared to net earnings of $1.6 million
for the six months ended March 31, 2001.
Per Share Amounts
-----------------
The per share amounts are as follows: for the six months ended March 31, 2002,
the fully diluted EBITDA loss before goodwill write-down, restructuring, and
unusual item per share was ($0.13), the fully diluted earnings (loss) before
amortization and write-off of goodwill per share was ($0.36) and the fully
diluted net earnings (loss) per share was ($1.80). For the six months ended
March 31, 2001, the fully diluted EBITDA per share was $0.35, the fully
diluted earnings before goodwill amortization per share was $0.15 and the
fully diluted net earnings per share was $0.08.
Cash Flows
----------
Net cash provided by (used in) operating activities before any increase/
decrease in non-cash operating working capital was ($7.3) million for the six
months ended March 31, 2002, and $4.9 million for the six months ended
March 31, 2001. Decrease in net cash provided by operating activities is
primarily due to decreased earnings, offset by the write-down of goodwill,
as discussed previously.
Net cash used in financing activities was ($263,874) for the six months ended
March 31, 2002 and net cash used in financing activities was ($5.4) million
for the six months ended March 31, 2001. The decrease is primarily due to the
increase in debt in the current period reduced by the redemption of common
shares.
Net cash used in investing activities was ($855,571) for the six months ended
March 31, 2002 and ($3,456,789) for the six months ended March 31, 2001. The
decrease is primarily due to fewer payments related to acquired businesses and
a decrease in the purchase of capital assets.
RESULTS OF OPERATIONS
Three months ended March 31, 2002 compared with three months ended
March 31, 2001
Net Revenue
-----------
Net revenue for the three months ending March 31, 2002 was $14.0 million
compared to $20.4 million in the three months ended March 31, 2001,
representing a decrease of $6.4 million or 31%. The explanations for the
decreases are the same as previously discussed in the six month comparison.
EBITDA before Goodwill write-down, Restructuring costs and Unusual item
-----------------------------------------------------------------------
For the three months ended March 31, 2002, we had an EBITDA loss before
goodwill write-down, restructuring costs and unusual item, of ($2.5) million
and for the three months ended March 31, 2001, we earned $3.1 million in
EBITDA.
Operating Expenses
------------------
Operating expenses for the three months ended March 31, 2002 were $16.6
million, compared to $17.4 million for the three months ended March 31, 2001,
representing a decrease of $780,000. As discussed previously above in the
six-month comparison, management implemented a restructuring plan primarily
enacted during the first half of this fiscal year, see Note 1 to the
consolidated financial statements.
Net Earnings (Loss)
-------------------
As a result of the restructuring charges and goodwill write-downs noted above,
we had a net loss of ($35.8) million for the three months ended March 31, 2002,
compared to net earnings of $531,972 for the three months ended March 31, 2001.
Per Share Amounts
-----------------
The per share amounts are as follows: for the three months ended March 31,
2002, the fully diluted EBITDA loss before goodwill write-down, restructuring
and unusual item per share was ($0.12), the fully diluted earnings (loss)
before goodwill per share was ($0.31) and the fully diluted net earnings (loss)
per share was ($1.71). For the three months ended March 31, 2001, the fully
diluted EBITDA per share was $0.15, the fully diluted earnings before goodwill
per share was $0.06 and the fully diluted net earnings per share was $0.03.
Cash Flows
----------
Net cash used in operating activities before any increase/decrease in non-cash
operating working capital was ($6.3) million for the three months ended March
31, 2002 and $2.2 million for the three months ended March 31, 2001. Decrease
in net cash provided by operating activities is primarily due to decreased
earnings offset by the write down of goodwill.
Net cash provided by (used in) financing activities was ($105,204) for the
three months ended March 31, 2002 compared with a use of ($4.0) million for
the three months ended March 31, 2001. The use of cash in the current period
relates to a repayment of long-term debt.
Cash used from investing activities for the three months ended March 31, 2002
was $544,000, compared with $2.8 million for the three months ended March 31,
2001. The use of cash relates to the purchase of capital assets and the
payment of contingent consideration relating to prior acquisitions.
Financial Condition and Liquidity
---------------------------------
As at March 31, 2002 compared to September 30, 2001
As at March 31, 2002 the Company had a working capital deficit of ($7.3)
million compared with a working capital deficit of ($429,933) 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 one of its
covenants. The decrease in working capital in this period is primarily the
result of the operating loss during this period.
On April 29, 2002, as disclosed in Note 4 of 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. 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 financing acquisitions which have
been approved by the lenders. As at March 31, 2002 approximately $9.8 million
has been borrowed under the facility, none of which is for general corporate
purposes.
As at March 31, 2002 and September 30, 2001, the Company was not in compliance
with its covenant calculations involving trailing 12 month earnings before
interest, taxes, depreciation and amortization. As the lenders have the right
to demand repayment of the outstanding borrowings if the covenants are not
met, the entire amount of the debt is classified as a current liability.
The Company is continuing to have discussions with its lenders regarding the
amendments to the terms of the facility. The lenders have indicated
additional borrowings under the facility will not be permitted without their
prior approval, other than the $2.0 million available for general corporate
purposes.
Historically the Company has funded its liquidity needs through funds provided
from operating activities, equity offerings and long term borrowings.
Management believes that is has a number of options available to finance the
repayment of the non-interest bearing promissory notes due on June 30, 2002,
amounts owing under the restructuring plans and expected cashflow shortfalls
(or other operating obligations). These options include, additional debt or
equity financing under private placements, renegotiating its bank credit
facilities, renegotiating the payment terms of its promissory note, 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 the short
term cash requirements.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
As at March 31 September 30
2002 2001
-------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 2,844,716 $21,781,809
Restricted cash 618,666 158,500
Accounts receivable 26,120,211 26,940,137
Income taxes recoverable 3,434,479 230,389
Future income taxes 2,105,000 712,000
Prepaid expenses 1,479,500 1,315,009
-------------------------------------------------------------------------------
36,602,572 51,137,844
Capital assets 9,997,999 11,533,736
Goodwill 20,571,003 49,675,115
Other assets - 681,387
Future income taxes 1,677,869 822,156
-------------------------------------------------------------------------------
$ 68,849,444 $ 113,850,238
-------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and
accrued liabilities $ 26,183,553 $ 38,728,210
Deferred revenue 1,020,443 300,071
Amounts collected in excess
of pass-through costs incurred 5,200,634 1,574,407
Bank credit facility and
current portion of long-term
debt (Note 2a) 11,458,548 10,965,089
-------------------------------------------------------------------------------
43,863,179 51,567,777
Long-term debt (Note 2a) 833,826 963,076
Long-term portion of
restructuring costs (Note 1) 1,101,231 -
-------------------------------------------------------------------------------
1,935,057 963,076
Shareholders' equity:
Share Capital 54,468,380 54,883,305
Retained earnings (Deficit) (32,033,109) 5,603,200
Cumulative translation adjustment 615,937 832,880
-------------------------------------------------------------------------------
23,051,208 61,319,385
-------------------------------------------------------------------------------
$ 68,849,444 $ 113,850,238
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT / RETAINED EARNINGS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
For the six months ended March 31 March 31
2002 2001
-------------------------------------------------------------------------------
Net revenue $ 30,655,912 $ 42,206,388
Operating expenses:
Salaries and benefits 25,296,931 25,271,455
General and administrative 5,665,989 7,168,230
Occupancy costs 2,487,111 2,258,223
-------------------------------------------------------------------------------
33,450,031 34,697,908
Earnings (loss) before interest expense,
income taxes, depreciation, goodwill,
amortization and write-down,
restructuring costs and unusual item (2,794,119) 7,508,480
Depreciation 1,506,752 1,504,762
Interest expense 340,682 370,281
-------------------------------------------------------------------------------
Earnings (loss) before income taxes and
goodwill amortization and write-down (4,641,553) 5,633,437
Restructuring costs and unsual
item (Note 1) 8,024,442 -
Income tax expense (recovery) (5,207,003) 2,536,201
-------------------------------------------------------------------------------
Earnings (loss) before goodwill
amortization and write-down (7,458,993) 3,097,236
Goodwill amortization, net of income
taxes of $12,000 (2001-$12,000) 1,751,050 1,481,016
Write-down of Goodwill (Note 1) 28,426,266 -
-------------------------------------------------------------------------------
Net earnings (loss) $ (37,636,309) $ 1,616,220
Retained earnings, beginning of period 5,603,200 8,403,367
-------------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ 32,033,109) $ 10,019,587
-------------------------------------------------------------------------------
Net earnings (loss) per share - basic $ (1.80) $ 0.08
Net earnings (loss) per share - fully diluted (1.80) 0.08
Earnings (loss) per share before goodwill
amortization and write-down - basic (0.36) 0.15
Earnings (loss) per share before goodwill
amortization and write-down- fully diluted (0.36) 0.15
Weighted average number of common
shares outstanding 20,910,136 21,190,401
See accompanying notes to consolidated financial statements.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT / RETAINED EARNINGS
(In Canadian dollars)
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------------
For the three months ended March 31 March 31
2002 2001
-------------------------------------------------------------------------------
Net revenue $ 14,035,676 $ 20,430,030
Operating expenses:
Salaries and benefits 12,127,253 13,061,386
General and administrative 3,294,088 3,123,478
Occupancy costs 1,156,600 1,170,912
-------------------------------------------------------------------------------
16,577,941 17,355,776
-------------------------------------------------------------------------------
Earnings (loss) before interest expense,
income taxes, depreciation, goodwill
amortization and write-down,
restructuring costs and unusual item (2,542,265) 3,074,254
Depreciation 759,810 794,272
Interest expense 150,119 137,038
-------------------------------------------------------------------------------
Earnings (loss) before income taxes
and goodwill amortization (3,452,195) 2,142,944
Restructuring costs and unsual
item (Note 1) 7,638,442 -
Income tax expense (recovery) (4,666,213) 860,823
-------------------------------------------------------------------------------
Earnings (loss) before goodwill
amortization and write-down (6,424,425) 1,282,121
Goodwill amortization, net of income
taxes of $6,000 (2001-$6,000) 955,637 750,149
Write-down of Goodwill (Note 1) 28,426,266 -
-------------------------------------------------------------------------------
Net earnings (loss) $ (35,806,327) $ 531,972
-------------------------------------------------------------------------------
Net earnings (loss) per share - basic $(1.71) $0.03
Net earnings (loss) per share - fully diluted (1.71) 0.03
Earnings (loss) per share before goodwill
amortization and write-down - basic (0.31) 0.06
Earnings (loss) per share before goodwill
amortization and write-down- fully diluted (0.31) 0.06
-------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 20,892,584 21,192,462
See accompanying notes to consolidated financial statements.
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Canadian dollars)
(Unaudited-Prepared by Management)
-------------------------------------------------------------------------------
For the six months ended March 31 March 31
2002 2001
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) ($ 37,636,309) $ 1,616,220
Items not involving cash:
Future income tax expense (recovery) (2,248,713) 287,514
Depreciation 1,506,752 1,504,762
Goodwill amortization 1,763,050 1,493,016
Amortization of deferred financing charges 91,347 -
Write-down of capital assets 843,219 -
Write-down of goodwill 28,426,266 -
Net changes in non-cash working capital balances:
Restricted cash (460,166) -
Accounts receivable 1,166,808 1,347,116
Prepaid expenses (144,491) (1,704,099)
Accounts payable and accrued liabilities (12,802,612) 12,915,584
Income taxes (recoverable) payable (3,243,219) 283,708
Deferred revenue 720,372 (374,719)
Amounts collected in excess of
pass-through costs incurred 2,920,598 364,174
Long-term restructuring costs 1,101,231 -
Other 590,040 144,904
-------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (17,405,825) 17,878,180
-------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt borrowings 1,987,641 -
Long-term debt repayments (1,623,432) (4,953,578)
Issuance of common shares for cash - 397,893
Redemption of common shares (628,083) -
Reduction in restricted cash - (254,399)
Other - (613,165)
-------------------------------------------------------------------------------
Net cash (used in) financing activities (263,874) (5,423,249)
-------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of subsidiaries (52,497) (2,015,346)
Purchase of capital assets (847,123) (1,441,423)
Net proceeds on disposal of capital assets 44,049 -
-------------------------------------------------------------------------------
Net cash (used in) investing activities (855,571) (3,456,769)
-------------------------------------------------------------------------------
Change in cash balance due to
foreign exchange (411,822) 352,371
-------------------------------------------------------------------------------
(Decrease)/Increase in cash (18,937,093) 9,350,533
Cash, beginning of period 21,781,809 7,105,418
-------------------------------------------------------------------------------
Cash, end of period $ 2,844,716 $ 16,455,951
-------------------------------------------------------------------------------
Cash flow from operations per share:
Basic $ (0.35) $ 0.23
Fully diluted (0.35) 0.23
-------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 202,247 $ 217,101
Income taxes paid 434,504 1,289,821
-------------------------------------------------------------------------------
Supplemental disclosure of non-cash transactions:
Shares issued for non-cash consideration 213,000 4,123,821
-------------------------------------------------------------------------------
ENVOY COMMUNICATIONS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Canadian dollars)
(Unaudited-Prepared by Management)
-------------------------------------------------------------------------------
For the three months ended March 31 March 31
2002 2001
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) ($ 35,806,327) $ 531,972
Items not involving cash:
Future income tax expense (recovery) (1,565,024) 92,471
Depreciation 759,810 794,272
Goodwill amortization 961,637 756,149
Amortization of deferred financing charges 46,109 -
Write-down of capital assets 843,219 -
Write-down of goodwill 28,426,266 -
Net changes in non-cash working capital balances:
Restricted cash 69,678 -
Accounts receivable (5,139,767) 8,720,073
Prepaid expenses (15,320) (1,128,140)
Accounts payable and accrued liabilities 3,083,898 1,452,310
Income taxes (recoverable) payable (3,160,345) (23,733)
Deferred revenue 357,131 (369,419)
Amounts collected in excess of
pass-through costs incurred 3,924,116 21,580
Long-term restructuring costs 1,101,231 -
Other 771,735 217,923
-------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (5,341,953) 11,065,458
-------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt borrowings - -
Long-term debt repayments (105,204) (3,493,582)
Issuance of common shares for cash - 130,320
Redemption of common shares - -
Reduction in restricted cash - (8,641)
Other - (632,362)
-------------------------------------------------------------------------------
Net cash (used in) financing activities (105,204) (4,004,265)
-------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of subsidiaries (287,119) (2,015,346)
Purchase of capital assets (300,795) (829,225)
Net proceeds on disposal of capital assets 44,049 -
-------------------------------------------------------------------------------
Net cash (used in) investing activities (543,865) (2,844,571)
-------------------------------------------------------------------------------
Change in cash balance
due to foreign exchange (488,383) 395,530
-------------------------------------------------------------------------------
(Decrease)/Increase in cash (6,479,405) 4,612,152
Cash, beginning of period 9,324,121 11,843,799
-------------------------------------------------------------------------------
Cash, end of period $2,844,716 $16,455,951
-------------------------------------------------------------------------------
Cash flow from operations per share:
Basic $(0.30) $0.10
Fully diluted (0.30) 0.10
-------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $61,503 $217,101
Income taxes paid 167,529 263,615
-------------------------------------------------------------------------------
Supplemental disclosure of non-cash transactions:
Shares issued for non-cash consideration 213,000 499,997
1. Restructuring Costs and Unusual Item
For the six month period ending March 31, 2002, the Company recorded charges
for restructuring activities and the write-down of goodwill and other assets
totaling $36,450,709, as summarized below.
Total Paid By
Cash Non Cash Provision March 31
-------------------------------------------------------------------------------
Severance $ 2,799,166 $ - $ 2,799,166 $ 902,154
Write down of fixed assets - 843,219 843,219 843,219
Lease exit costs 3,380,079 250,011 3,630,090 418,611
-------------------------------------------------------------------------------
Restructuring charge 6,179,245 1,093,230 7,272,475 2,163,984
Unusual Item (Note 2) - 751,968 751,968 -
-------------------------------------------------------------------------------
6,179,245 1,845,198 8,024,443 2,163,984
Write-down of goodwill - 28,426,266 28,426,266 -
-------------------------------------------------------------------------------
Total charges $ 6,179,245 $ 30,271,463 $ 36,450,709 $ 2,163,984
-------------------------------------------------------------------------------
(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 its workforce, exiting excess office space and write-off
of redundant fixed assets. Accordingly, the Company has recorded a
restructuring expense of $7,272,475 (of which $386,000 was expensed in the
first 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 techology and
marketing/advertising sectors, and significant negative industry and economic
trends impacting 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
cashflows of each acquisition, to the respective carrying value of the assets
of the business, including assigned goodwill. The cashflow periods used ranged
between 5 and 20 years, consistent with the remaining goodwill amortization
period.
As a result of the review, the Company determined that the carrying values of
the acquired businesses were not fully recoverable. Accordingly, the Company
recorded, in the second quarter of 2002, a $28,426,266 write-down of goodwill
based on the amount by which the carrying amount of the goowill exceeded the
expected future cash flows calculated as described in the preceding paragraph.
Note 2. Bank Credit Facility and Long-term Debt
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Revolving credit facility $ 9,835,789 $ 7,841,239
Non-interest-bearing promissory note,
repayable in semi-annual
installments due June 30, 2002 1,309,169 2,689,781
Current portion of loans payable to
landlords and capital leases 313,590 434,069
-----------------------------------
$ 11,458,548 $ 10,965,089
-----------------------------------
Long term portion of loans payable to
landlords and capital leases $ 833,826 $ 963,076
-----------------------------------
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
which have been approved by the lenders. As at March 31, 2002 approximately
$9,800,000 has been borrowed under the facility, none of which is for general
corporate purposes.
As at March 31, 2002 and September 30, 2001, the Company was not in compliance
with its covenant calculations involving 12 month earnings before interest,
taxes, depreciation and amortization. As the lenders have the right to demand
repayment of the outstanding borrowings if the covenants are not met, the
entire amount of the debt is classified as a current liability. The Company is
continuing to have discussions with its lenders regarding the amendments to
the terms of the facility. The lenders have indicated additional borrowings
under the facility will not be permitted, other than the $2,000,0000 available
for general corporate purposes.
The Company is considering all of the options available to it to finance the
repayment of the non-interest bearing promissory notes due on June 30, 2002,
the amounts owing under the restructuring plans, and expected cashflow
shortfalls in the next six months (or other operating obligations ). These
options include, additional debt or equity financing under private placements,
renegotiating its bank credit facilities, renegotiating the payment terms of
its promissory note, and the sale of some of its businesses.
As a result of the ongoing discussions with the lenders regarding the terms of
the credit facility, and the limitations on the amounts which can be borrowed,
as at March 31, 2002 the Company has written off the $751,968 remaining
unamortized financing fees incurred in connection with this facility.
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
-------------------------------------------------------------------------------
March 31, 2002 Net Capital Goodwill
Revenue Assets
-------------------------------------------------------------------------------
Canada $ 11,961,610 $ 7,880,744 $ 3,251,824
United States 11,605,190 376,544 9,697,039
United Kingdom and
Continental Europe 7,089,112 1,740,711 7,622,140
-------------------------------------------------------------------------------
$ 30,655,912 $ 9,997,999 $ 20,571,003
-------------------------------------------------------------------------------
March 31, 2001
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Canada $ 12,105,212 $ 7,948,932 $ 22,104,621
United States 20,843,118 691,310 16,844,740
United Kingdom and
Continental Europe 9,258,058 1,903,402 7,856,344
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$ 42,206,388 $ 10,543,644 $ 46,805,705
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The Company's external net revenue by type of service is as follows:
March 31 2002 2001
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Net Revenue:
Marketing $ 7,610,699 $ 14,260,778
Design 17,473,700 19,154,239
Technology 5,571,513 8,791,371
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$ 30,655,912 $ 42,206,388
4. Subsequent Events:
On April 29, 2002 the Company issued $1,800,000 in 10% convertible debentures
which mature on April 27, 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 $.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) twelve
months of the date of conversion of the debenture, and (2) the Maturity Date
at a price of $.90 per common share. The net proceeds from the sale of the
debenture were used for general corporate purposes.