Envoy Communications
Group Inc.
2nd Quarter Report 2001
energy focus strength
www.envoy.to
Dear Shareholder,
I am pleased to report that Envoy continues to outpace our peer group, and has
now posted 21 consecutive quarters of year-over-year revenue and EBITDA growth.
It is our continued focus on our superior business model that has once again
resulted in record revenues and earnings for the six months ending March 31,
2001. Net revenue is up 65%, EBITDA is up 79%, earnings before goodwill are up
75%, and earnings per share before goodwill (cash EPS) are up 50% to $0.15 per
share.
Financial Highlights
For the six months ending March 31 2001 2000 % Change
Net revenue $42,206,388 $25,642,863 65%
EBITDA $7,508,480 $4,204,130 79%
Earnings before goodwill $3,097,236 $1,766,785 75%
Net earnings $1,616,220 $1,231,462 31%
EBITDA/share $0.35 $0.23 52%
Earnings before goodwill/share (cash EPS) $0.15 $0.10 50%
Fully diluted shares outstanding for the second quarter 2001 were 21,190,401,
and 18,436,601 for the second quarter 2000.
While I am pleased with this performance, it is even more encouraging to
report the consistency with which we are achieving our growth. In fact,
Envoy's business model emphasizes delivering 'best of breed' services
in the core areas of design, marketing and technology and doing so on an
international scale. We believe, and our track record supports, that our
diversified approach, both in terms of service offerings and by geographic
presence, helps to deliver balanced and consistently strong results.
As highlighted, one of the important outcomes of our model is diversification;
in essence, a manner in which we can effectively accelerate upside potential
and manage risk. For the six months ending March 31, 2001, while Envoy
experienced strong revenue growth in both the United States and Canada, we
also added revenue from the United Kingdom/Continental Europe, which now
accounts for 22% of revenues.
Region % of Revenue
Canada 29%
United States 49%
U.K. and Continental Europe 22%
With respect to the diversification of our service offering, again, Envoy is
well positioned.
Core Service Area % of Total Revenue
Marketing 34%
Design 45%
Technology 21%
As I have pointed out, our results for the first six months ending March 31,
2001 are very much in line with our expectations. While we recognize that
there are evolving market conditions in the North American market, Envoy
management, along with the management of our operating companies, are
working hard to maintain and enhance our performance track record. We believe
our business model offers the right balance, and as such, we remain cautiously
optimistic about our performance for the remainder of the year.
We also continue to consider strategic acquisitions that will help to expand
our business model and view the current time period as an opportunity to
selectively build further value through acquisition. As always, we will
ensure that increasing shareholder value is central in our decision-making
process.
Thank you for your support.
Geoffrey B. Genovese, President and Chief Executive Officer
Envoy Communications Group Inc.
Management Discussion and Analysis
Results of Operations
Six months ended March 31, 2001 compared with six months ended March 31, 2000.
Net Revenue
Net revenue increased by 65% to $42.2 million for the six months ended March
31, 2001 from $25.6 million in the six months ended March 31, 2000. The
increase is as 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 three months of net revenues included in the six
months ended March 31, 2001. In fiscal 2000, Envoy completed two acquisitions:
the acquisition of Sage, effective June 1, 2000, and the acquisition of
Gilchrist, effective July 1, 2000. As a result of the acquisitions of Sage and
Gilchrist, there are six months of net revenues for these companies included in
the March 31, 2001 results of operations that were not included in our results
of operations for the six months ended March 31, 2000. Organic growth was
approximately $6.1 million or 17% for the period.
In the six months ended March 31, 2001, net revenue from our marketing
services represented approximately 34% of our net revenue, while design and
technology represented 45% and 21% respectively. In the six months ended March
31, 2000, marketing services represented approximately 60% of net revenue,
while design and technology services represented 35% and 5% respectively.
We have continued to geographically diversify our revenue base. The
geographical breakdown of our 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. Net revenue for the six months
ended March 31, 2000 was 67% from the United States and 33% from Canada.
EBITDA
For the six months ended March 31, 2001, we earned $7.5 million in EBITDA
compared with $4.2 million for the six months ended March 31, 2000. This
represents a growth of 79%. The EBITDA profit margin for the six months
ended March 31, 2001 was 18%, compared to the EBITDA profit margin of 16%
achieved for the six months ended March 31, 2000.
Operating Expenses
Operating expenses increased by 62% to $34.7 million for the six months ended
March 31, 2001 from $21.4 million for the six months ended March 31, 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 constant at 60% for the six months ended
March 31, 2001. 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 six months ended March 31, 2001 compared with 19% of
net revenue for the six months ended March 31, 2000. Occupancy costs increased
due to the 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.
Earnings before income taxes and goodwill amortization increased from $3.2
million to $5.6 million, an increase of 75%.
See Note 1 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. 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 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.
Goodwill amortization increased from $535,000 to $1.5 million, due largely to
the increased amount of goodwill derived from the acquisitions discussed above.
Net Earnings
Primarily as a result of the foregoing factors, net earnings increased by 31%
to $1.6 million for the six months ended March 31, 2001 from $1.2 million for
the six months ended March 31, 2000.
Per Share Amounts
For the six months ended March 31, 2001, the EBITDA per share was $0.35, the
earnings before goodwill per share was $0.15 and the net earnings per share was
$0.08. For the six months ended March 31, 2000, the EBITDA per share was $0.23,
the earnings before goodwill per share was $0.10 and the net earnings per share
was $0.07.
Cash Flows
Six months ended March 31, 2001 compared with six months ended March 31, 2000.
Net cash provided by operating activities before any increase and decrease in
non-cash operating working capital was $4.9 million for the six months ended
March 31, 2001 and $2.6 million for the six months ended March 31, 2000.
Increase in net cash provided by operating activities is primarily due to
increased earnings of acquisitions, as discussed previously.
Net cash provided by financing activities were ($5.4) million for the six
months ended March 31, 2001 and ($1.1) million for the six months ended March
31, 2000. The decrease is primarily due to the repayment of debt. 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 March 31, 2001 compared with three months ended March 31,
2000.
Net Revenue
Net revenue increased by 58% to $20.4 million for the three months ended March
31, 2001 from $12.9 million for the three months ended March 31, 2000. This
increase occurred as a result of both growth through acquisition and organic
growth. As a result of the acquisitions of Sage, Gilchrist and IDG, there are
three months of net revenues for these companies, included in the March 31,
2001 results of operations that were not included in our results of operations
for the three months ended March 31, 2000. Organic growth was approximately
$1.7 million or 9% for the period.
EBITDA
For the three months ended March 31, 2001, we earned $3.1 million in EBITDA
compared with $2.1 million for the three months ended March 31, 2000. This
represents a growth of 44%. The EBITDA profit margin for the three months
ended March 31, 2001 was 15%, compared with the EBITDA profit margin of
16.5% achieved in the three months ended March 31, 2000.
Operating Expenses
Operating expenses increased by 61% to $17.4 million for the three months
ended March 31, 2001 from $10.8 million for the three months ended March 31,
2000. The primary reasons for the increase are increases in salaries and
benefits of $5.4 million, or 70%; an increase in general and administrative
expenses of $540,000, or 21%; and an increase in occupancy costs of $627,000,
or 115%. There were also increases in depreciation of $343,000, or 76%, and
in goodwill amortization net of taxes of $477,000, or 175%. The explanation
for the increases are the same as previously discussed in the six-month
comparison.
The increase in interest charges was due to the additional debt relating to
acquisitions.
Earnings before income taxes and goodwill amortization increased from $1.6
million to $2.1 million, an increase of 34%.
Goodwill amortization increased from $273,000 to $750,000 due largely to
the increased amount of goodwill derived from the acquisitions discussed
above.
Net Earnings
Primarily as a result of the foregoing factors, net earnings remained
relatively constant at $532,000 for the three months ended March 31, 2001
and $585,000 for the three months ended March 31, 2000.
Per Share Amounts
For the three months ended March 31, 2001, the EBITDA per share was $0.15,
the earnings before goodwill per share was $0.06 and the net earnings per
share was $0.03. For the three months ended March 31, 2000, the EBITDA per
share was $0.12, the earnings before goodwill per share was $0.05 and the
net earnings per share was $0.03.
Cash Flows
Three months ended March 31, 2001 compared with three months ended March 31,
2000.
Net cash provided by operating activities before any increase and decrease in
non cash operating working capital was $2.2 million for the three months
ended March 31, 2001 and $1.3 million for the three months ended March 31,
2000. Increase in net cash provided by operating activities is primarily due
to increased earnings of acquisitions, as discussed previously.
Net cash provided by financing activities were ($4) million for the three
months ended March 31, 2001 and ($1.1) million for the three months ended
March 31, 2000. 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.
Cash flow from investing activities has decreased from ($1.0) million for the
three months ended March 31, 2000 to ($2.8) million in March 31, 2001. The
decrease is due to the purchase of IDG. In January 2001, the company acquired
100% of the outstanding shares of IDG, in exchange for cash consideration of
$1,090,000 and the issuance of 61,728 common shares of the Company.
Financial Condition
As at March 31, 2001 compared with September 30, 2000
The working capital balance was $9.5 million and the cash balance was $16.5
million at March 31, 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)
March 31 September 30
As at 2001 2000
ASSETS
Current assets:
Cash $ 16,455,951 $ 7,105,418
Accounts receivable 34,494,450 34,234,974
Prepaid expenses 3,467,970 1,732,212
54,418,371 43,072,604
Restricted cash 1,104,936 832,337
Capital assets 10,543,644 10,448,625
Goodwill and other assets 47,584,771 46,987,707
Deferred income taxes 722,630 966,715
$ 114,374,352 $ 102,307,988
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 37,251,912 $ 24,247,075
Income taxes payable 1,152,926 1,190,313
Deferred revenue 683,333 1,044,873
Amounts collected in excess of
pass-through costs incurred 2,715,183 2,307,047
Current portion of long-term debt 3,148,254 2,848,430
44,951,608 31,637,738
Long-term debt 3,782,577 7,983,449
Shareholders' equity:
Share capital 55,495,653 54,597,762
Retained earnings 10,019,587 8,403,367
Cumulative translation adjustment 124,927 (314,328)
65,640,167 62,686,801
$ 114,374,352 $ 102,307,988
Consolidated Statements of Operations and Retained Earnings
(In Canadian dollars)
(Unaudited - Prepared by Management)
March 31 March 31
For the six months ended 2001 2000
Net revenue $ 42,206,388 $ 25,642,863
Operating expenses:
Salaries and benefits 25,271,455 15,480,176
General and administrative 7,168,230 4,915,939
Occupancy costs 2,258,223 1,042,618
34,697,908 21,438,733
Earnings before interest expense,
income taxes,depreciation and
goodwill amortization 7,508,480 4,204,130
Depreciation 1,504,762 830,217
Interest expense 370,281 163,010
Earnings before income taxes and goodwill
amortization 5,633,437 3,210,903
Income tax expense, excluding the
undernoted 2,436,201 1,444,118
Impact of tax rate changes (Note 1) 100,000 -
Earnings before goodwill amortization 3,097,236 1,766,785
Goodwill amortization, net of income
taxes of $12,000 (2000 - $12,000) 1,481,016 535,323
Net earnings $ 1,616,220 $ 1,231,462
Retained earnings, beginning of period 8,403,367 5,492,940
Retained earnings, end of period $ 10,019,587 $ 6,724,402
Net earnings per share - basic $ 0.08 $ 0.07
Net earnings per share - fully diluted 0.08 0.07
Earnings per share before goodwill
amortization - basic 0.15 0.10
Earnings per share before goodwill
amortization - fully diluted 0.15 0.10
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flow
(In Canadian dollars)
(Unaudited - Prepared by Management)
March 31 March 31
For the six months ended 2001 2000
Cash flows from operating activities:
Net earnings $ 1,616,220 $ 1,231,462
Items not involving cash:
Deferred income taxes 287,514 (25,157)
Depreciation 1,504,762 830,217
Goodwill amortization 1,493,016 547,323
Net changes in non-cash working capital balances:
Accounts receivable 1,347,116 (6,475,595)
Prepaid expenses (1,704,099) (181,695)
Accounts payable and accrued liabilities 12,915,584 3,335,056
Income taxes payable 283,708 (2,365,252)
Deferred revenue (374,719) -
Amounts collected in excess of pass-through
costs incurred 364,174 3,877,759
Other 144,904 -
Net cash provided by operating
activities 17,878,180 774,118
Cash flows from financing activities:
Long term debt - 550,000
Long term debt repayments (4,953,578) (1,626,866)
Issuance of common shares for cash 397,893 563,650
Reduction (Increase) in restricted cash (254,399) (594,823)
Other (613,165) -
Net cash used in financing activities (5,423,249) (1,108,039)
Cash flows from investing activities:
Acquisition of subsidiaries (net of cash
acquired(bank indebtedness assumed) of
$214,179; 2000-nil) (2,015,346) (2,186,205)
Purchase of capital assets (1,441,423) (1,546,202)
Net cash used in investing activities (3,456,769) (3,732,407)
Change in cash balance due to
foreign exchange 352,371 (76,723)
(Decrease)/Increase in cash 9,350,533 (4,143,051)
Cash, beginning of period 7,105,418 15,300,454
Cash, end of period $ 16,455,951 $ 11,157,403
Cash flow from operations per share:
Basic $ 0.23 $ 0.14
Fully diluted $ 0.23 $ 0.14
Supplemental cash flow information:
Interest paid $ 217,101 $ 162,388
Income taxes paid 1,289,821 2,469,983
Shares issued for non-cash consideration 4,123,821 2,430,200
Consolidated Statements of Operations and Retained Earnings
(In Canadian dollars)
(Unaudited - Prepared by Management)
March 31 March 31
For the three months ended 2001 2000
Net revenue $ 20,430,030 $ 12,938,527
Operating expenses:
Salaries and benefits 13,061,386 7,675,230
General and administrative 3,123,478 2,583,182
Occupancy costs 1,170,912 544,196
17,355,776 10,802,608
Earnings before interest expense,
income taxes, depreciation and
goodwill amortization 3,074,254 2,135,919
Depreciation 794,272 451,132
Interest expense 137,038 86,564
Earnings before income taxes and
goodwill amortization 2,142,944 1,598,223
Income taxes 860,823 740,937
Earnings before goodwill amortization 1,282,121 857,286
Goodwill amortization, net of income
taxes of $6,000 (2000-$6,000) 750,149 272,755
Net earnings $ 531,972 $ 584,531
Net income per share - basic $ 0.03 $ 0.03
Net income per share - fully diluted 0.03 0.03
Income per share before goodwill
amortization - basic 0.06 0.05
Income per share before goodwill
amortization - fully diluted 0.06 0.05
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flow
(In Canadian dollars)
(Unaudited - Prepared by Management)
March 31 March 31
For the three months ended 2001 2000
Cash flows from operating activities:
Net earnings $ 531,972 $ 584,531
Items not involving cash:
Deferred income taxes 92,471 19,147
Depreciation 794,272 451,132
Goodwill amortization 756,149 278,755
Net changes in non cash-working capital balances:
Accounts receivable 8,720,073 (4,041,650)
Prepaid expenses (1,128,140) (285,551)
Accounts payable and accrued liabilities 1,452,310 4,198,791
Income taxes payable (23,733) (147,428)
Deferred revenue (369,419) -
Amounts collected in excess of pass-through
costs incurred 21,580 3,004,830
Other 217,923 -
Net cash provided by operating activities 11,065,458 4,062,557
Cash flows from financing activities:
Long-term debt - 150,000
Long-term debt repayments (3,493,582) (1,185,100)
Issuance of common shares for cash 130,320 294,150
Reduction (Increase) in restricted cash (8,641) (369,809)
Other (632,362) -
Net cash used in financing activities (4,004,265) (1,110,759)
Cash flows from investing activities:
Acquisition of subsidiaries (net of cash acquired
(bank indebtedness assumed)
of $214,179; 2000-nil) (2,015,346) (115,552)
Purchase of capital assets (829,225) (933,551)
Net cash used in investing activities (2,844,571) (1,049,103)
Change in cash balance due to foreign
exchange 395,530 20,045
Increase in cash 4,612,152 1,922,740
Cash, beginning of period 11,843,799 9,234,663
Cash, end of period $ 16,455,951 $ 11,157,403
Cash flow from operations per share:
Basic $ 0.10 $ 0.07
Fully diluted $ 0.10 $ 0.07
Supplemental information:
Interest paid $ 176,682 $ 91,261
Income taxes paid 263,615 841,916
Shares issued for non-cash consideration 499,997 -
Notes to Consolidated Financial Statements
1. 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 the temporary difference arose and were not adjusted
for subsequent tax rate changes. The Company's temporary differences are
principally in respect of deductible share issue costs which 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 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.
2. 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, 2001 Net Capital Goodwill
Revenue Assets
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
$ 42,206,388 $ 10,543,644 $ 46,805,705
March 31, 2000
Canada $ 8,429,508 $ 7,627,540 $ 10,089,021
United States 17,213,355 959,364 11,205,915
United Kingdom and
Continental Europe - - -
$ 25,642,863 $ 8,586,904 $ 21,294,936
The Company's external net revenue by type of service is as follows:
March 31 2001 2000
Net revenue:
Marketing $ 14,260,778 $ 15,379,896
Design 19,154,239 8,981,154
Technology 8,791,371 1,281,813
$ 42,206,388 $ 25,642,863
Shareholder Information
Envoy Communications Group Inc.
Head Office Compensation Committee
26 Duncan Street
Toronto, Canada M5V 2B9 John H. Bailey
Telephone: (416) 593-1212 David I. Hull
Facsimile: (416) 593-4434 Duncan Shirreff
www.envoy.to
Transfer Agent
Directors Montreal Trust
100 University Avenue, 11th floor
Geoffrey Blaine Genovese Toronto, Canada M5J 2Y1
President & CEO
Envoy Communications Group Inc. Bankers
Don Watt Bank of Montreal
Chairman One First Canadian Place
Watt International 100 King Street West
Toronto, Canada M5X 1A3
John H. Bailey
Barrister & Solicitor Fleet Bank
BCom, LLB, LLM 1185 Avenue of the Americas
New York, New York, U.S.A. 10036
David I. Hull
President Auditors
Hull Life Insurance Agencies Inc.
KPMG LLP
Hugh Aird Yonge Corporate Centre
Chairman 4120 Yonge Street, Suite 500
DRIA Capital Inc. Toronto, Canada M2P 2B8
Duncan Shirreff Legal Counsel
Vice President & Director
Yorkton Securities Inc. Blake, Cassels & Graydon LLP
Box 25, Commerce Court West
Toronto, Canada M5L 1A9
Officers
Investor Relations
Geoffrey Blaine Genovese
President & CEO Carabiner Inc.
(416) 599-2256
J. Joseph Leeder 1 800 761-4944
Vice President & CFO
Annual Shareholders Meeting
Stephen J. Miller
Vice President Tuesday, March 6, 2001
Corporate Development 11:00 am
TSE Conference Centre
John H. Bailey Exchange Tower
Corporate Secretary 130 King Street West
Toronto, Canada M5X 1E3
Audit Committee
Stock Trading Information
John H. Bailey
David I. Hull Toronto Stock Exchange ECG
Hugh Aird NASDAQ Exchange ECGI