ADX: TSX
TORONTO, Sept. 14 /CNW/ - Advantex Marketing International Inc.
("TSX:ADX") is pleased to report on the Company's performance for the fiscal
year ended June 30, 2005.
Highlights and important developments of the year include:
- The sale of the Samplex Group, generating initial net proceeds of
$2.2 million
- Renewal of the Company's long-term agreement with CIBC
- Renewal of the long-term agreement with United Airlines for the
Mileage Plus Online Mall
- Strong performance in Online Shopping Mall programs
- Suspension of our U.S. Retail pilot programs and other
initiatives, resulting in cost savings
- Gross Contribution percentage improvement to 10.5%, from 9.0% in
fiscal 2004
"We accomplished a great deal in fiscal 2005. It is our intention to
build on these accomplishments, focusing on our merchant-based programs in
Canada, and our Online Shopping Malls with major U.S. airlines," said
G. Randall Munger, Chairman and Chief Executive Officer of Advantex.
"Leveraging the businesses in which Advantex already enjoys a leadership
position is clearly the most expedient way to reach profitability. New
products and services will be introduced in fiscal 2006, designed specifically
to enhance and grow these programs."
Overall Performance
For the fiscal year ended June 30, 2005, Sales and Fees from continuing
operations were $71.8 million, compared with Sales and Fees of $76.6 million
in fiscal 2004. The change reflects the impact of migrating certain merchants
during fiscal 2005 from a Pre-Purchase model whereby the Company pre-purchases
future credit card transactions to a Post-Settlement model whereby the Company
does not pre-purchase future credit card transactions, reducing top-line
revenue while having little impact on overall profitability. Also, Sales and
Fees in fiscal 2004 included $3.3 million from the Company's discontinued
Canadian Retail Program, which was terminated at the end of Q2 2004, after Air
Canada repudiated its commercial agreements with Advantex as part of the
airline's restructuring process under the Companies' Creditor Arrangement Act
(CCAA).
Gross Contribution percentage for fiscal 2005 was 10.5%, compared to 9.0%
in the previous year, an improvement primarily due to increased merchant
transaction fee rates earned in the Online Shopping Mall business from
seasonal promotional campaigns.
The Company's Net Loss improved by $0.8 million or 45% over the previous
year, from $1.8 million ($0.04 per share) in fiscal 2004 to $1.0 million
($0.02 per share) in fiscal 2005. The improvement reflects strong performance
in Online Shopping Mall programs and cost savings associated with the
suspension of the U.S. Credit Card Loyalty programs and other initiatives,
partially offset by a $0.6 million severance charge, payable to the Company's
President pursuant to her employment contract. Ms. Smith has agreed to defer
payment of her severance on terms to be mutually agreed upon.
As at June 30, 2005, the Company had Cash and Cash Equivalents of
$3.0 million compared to $2.4 million at June 30, 2004. The increase is mainly
due to proceeds on the sale of the Samplex business, offset by cash used in
continuing operations.
Working capital was $3.0 million at June 2005 versus $3.5 million at
June 30, 2004, broken down as follows:
<<
(In millions of dollars) 2005 2004
------------------------ ---- ----
Continuing Operations 3.0 3.0
Discontinued Operations 0.0 0.5
--- ---
Total Working Capital 3.0 3.5
--- ---
The Board of Directors has concluded its strategic alternatives
initiative to maximize value for the company's shareholders.
A Special Committee of independent directors of the Board, established to
supervise the strategic initiative, considered proposals from several parties
during the past year, resulting in the sale of the Samplex Group on June 30,
2005. The directors concluded that the interest expressed by several parties
in the acquisition of, or merger with, Advantex would not create sufficient
additional value for shareholders and therefore will not be pursued at this
time.
Over the past several months, the Board discussed with Allison Smith
their request for her resignation to address current and evolving corporate
governance standards and practices, and their concerns regarding perceived and
potential conflicts of interest arising out of her positions as President, COO
and a director of Advantex, and her marital relationship with G. Randall
Munger, Advantex's Chairman and Chief Executive Officer. Ms. Smith agreed with
the Board's request to relinquish her positions with the Company and to
postpone her resignation pending the completion of the strategic alternatives
initiative, given the possible sale or merger of the company.
As the strategic initiative is now ended and no further transactions are
contemplated at this time, Ms. Smith has now agreed to continue as the
President and COO of Advantex until her successor is hired, or until such
earlier date as requested by the Board. She will not stand for re-election as
a director at the company's annual meeting.
Outlook
Plans are underway to leverage the Company's sales, marketing,
transaction processing and data capture technology infrastructure to expand
the scope and depth of the services it offers to merchants, including a
Merchant Funding Program and online marketing.
Merchant Funding Program
Programs that provide merchants with additional working capital based on
future credit card sales are growing in popularity throughout the United
States. An estimated 20,000 U.S. merchants are taking advantage of this easy
access to capital. Advantex plans to introduce a Merchant Funding Program in
connection with its Canadian Credit Card Loyalty programs during fiscal 2006.
Presently, Advantex offers participating merchants limited cash advances
through its Canadian Credit Card Loyalty programs. The Merchant Funding
Program provides participating merchants with larger cash advances based on
longer periods of future credit card transactions, typically four to six
months. The advances are repaid as cardholders make purchases at participating
establishments; Advantex earns the difference between the discounted amount it
paid for the transaction and the price paid by the cardholder. The Company
plans to introduce the Merchant Funding Program beginning in fiscal 2006.
Online Marketing
New online marketing programs will further broaden the scope of the
Company's merchant-based programs. Advantex online marketing will enable
participating merchants to increase direct communication with their customers.
Targeted email campaigns, contests, sweepstakes, and customer surveys are
among the new initiatives that are being planned.
Restaurants are adopting online marketing as an effective way to promote
their business and increase customer traffic. Bonus offers, information about
new menu items, holiday promotions, and invitations to special events can be
more quickly and cost-effectively disseminated through targeted online
campaigns than through other traditional media.
Online marketing and the use of the Internet by consumers continues to
grow in popularity. New research shows that 70% of U.S. adults use the
Internet as an information source when shopping locally for products and
services.
Online Shopping Malls
Advantex improved the technology platform for its Online Shopping Mall
during fiscal 2005. The new Online Shopping Mall platform is expected to
increase the company's speed to market of new customized mall programs and
provide greater flexibility in creating and managing special promotions, both
of which are important competitive advantages. New online shopping mall
programs will commence in fiscal 2006.
The company expects its Online Shopping Malls to grow in terms of volume
and profitability, the result of enhanced marketing support for the purpose of
increasing enrolment among non-registered members, and driving purchase
activity through current mall programs.
About Advantex Marketing International Inc.
Advantex Marketing International Inc. is a leading marketing services
company, specializing in integrated marketing solutions for its Merchant and
Channel Partner clients. Advantex offers a range of products and services
including coalition loyalty rewards programs, online shopping malls, direct
marketing, online and email promotion; and data capture and award processing
systems. Advantex loyalty partners include CIBC, United Airlines, Delta Air
Lines, The New York Times, Alaska Airlines, US Airways, and other major North
American corporations, as well as a growing list of restaurants, online
retailers, golf courses, small inns and resorts. Advantex is a public company,
traded on the Toronto Stock Exchange under the symbol "ADX". For additional
information on Advantex, please visit www.advantex.com.
This press release may include statements about expected future events
and/or financial results that are forward-looking in nature and subject to
risks and uncertainties. Advantex cautions that actual performance will be
affected by a number of factors, many of which are beyond its control. Future
events and results may vary substantially from what Advantex currently
foresees. Discussion of the various factors that may affect future results is
contained in Advantex's recent filings with Canadian securities regulatory
authorities.
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2005 AND 2004
2005 2004
---- ----
ASSETS NOTE
Current:
Cash and cash equivalents $2,970,627 $2,336,530
Accounts receivable 1,238,719 1,255,180
Purchased receivables 2,363,428 2,395,461
Assets of discontinued
operations 6 - 2,640,701
Prepaid expenses and sundry
assets 225,069 190,856
------- -------
6,797,843 8,818,728
--------- ---------
Long Term:
Capital and other assets 2 874,017 1,105,578
Deferred financing charges 3 292,844 259,441
------- -------
1,166,861 1,365,019
--------- ---------
TOTAL ASSETS $7,964,704 $10,183,747
---------- -----------
---------- -----------
LIABILITIES
Current:
Accounts payable and accrued
liabilities $3,803,834 $2,858,741
Liabilities of discontinued
operations 6 - 2,132,380
Deferred revenue 40,427 371,907
------ -------
3,844,261 5,363,028
Long Term:
Convertible debenture payable 4 3,459,695 3,155,256
--------- ---------
7,303,956 8,518,284
--------- ---------
SHAREHOLDERS' EQUITY
Capital Stock 5
Class A preference shares 3,815 3,815
Common shares 21,462,938 20,814,938
---------- ----------
21,466,753 20,818,753
Contributed surplus 59,992 59,992
Equity portion of convertible
debenture 4 880,308 880,308
Reserve for issuance of shares 7 - 648,000
Deficit (21,746,305) (20,741,590)
------------ ------------
660,748 1,665,463
------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,964,704 $10,183,747
---------- -----------
---------- -----------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED JUNE 30, 2005 AND 2004
2005 2004
---- ----
NOTE
REVENUE
Sales and fees $71,766,969 $76,621,009
Direct costs 64,214,518 69,691,627
---------- ----------
7,552,451 6,929,382
OPERATING EXPENSES
Selling 4,115,438 4,845,453
General and administrative 5,112,299 4,492,158
--------- ---------
9,227,737 9,337,611
LOSS BEFORE AMORTIZATION,
INTEREST AND INCOME TAXES (1,675,286) (2,408,229)
----------- -----------
Amortization 395,981 470,306
Interest 678,809 594,393
------- -------
1,074,790 1,064,699
--------- ---------
LOSS BEFORE INCOME TAXES
- CONTINUING OPERATIONS (2,750,076) (3,472,928)
Realization of income tax benefits 7 - 1,424,000
--- ---------
NET LOSS - CONTINUING OPERATIONS (2,750,076) (2,048,928)
NET INCOME - DISCONTINUED OPERATIONS 6 1,745,361 224,846
--------- -------
NET LOSS $(1,004,715) $(1,824,082)
------------ ------------
------------ ------------
EARNINGS (LOSS) PER COMMON SHARE 9
- Continuing Operations $(0.05) $(0.04)
- Discontinued Operations 0.03 0.00
---- ----
NET LOSS PER COMMON SHARE $(0.02) $(0.04)
------- -------
------- -------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF DEFICIT
YEARS ENDED JUNE 30, 2005 AND 2004
2005 2004
---- ----
BALANCE AT THE BEGINNING OF THE YEAR $(20,741,590) $(18,917,508)
Net Loss (1,004,715) (1,824,082)
----------- -----------
BALANCE AT THE END OF THE YEAR $(21,746,305) $(20,741,590)
------------- -------------
------------- -------------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005 AND 2004
2005 2004
---- ----
NOTE
OPERATING ACTIVITIES
Net loss - continuing operations $(2,750,076) $(2,048,928)
Items not affecting cash
Amortization of capital assets 395,981 470,306
Accretion charge 4 179,439 126,365
Amortization of deferred
financing charges 91,597 71,722
------ ------
(2,083,059) (1,380,535)
----------- -----------
Changes in non-cash working
capital items
Accounts receivable 16,461 (34,630)
Purchased receivables 32,033 216,363
Prepaid expenses and sundry assets (34,213) 62,413
Accounts payable and accrued
liabilities 945,093 (578,733)
Deferred revenue (331,480) 201,221
--------- -------
627,894 (133,366)
------- ---------
(1,455,165) (1,513,901)
FINANCING ACTIVITIES
Obligation to issue shares 7 - 648,000
INVESTING ACTIVITIES
Net proceeds on sale of business 6 2,234,863 -
Purchase of capital assets (164,420) (108,014)
--------- ---------
2,070,443 (108,014)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - CONTINUING OPERATIONS 615,278 (973,915)
DISCONTINUED OPERATIONS 6 18,819 52,304
Cash and cash equivalents at the
beginning of the year 2,336,530 3,258,141
--------- ---------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $2,970,627 $2,336,530
---------- ----------
---------- ----------
ADDITIONAL INFORMATION
Interest paid $403,000 $400,000
---------- ----------
---------- ----------
(see accompanying notes)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2005 and 2004
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of business
Advantex Marketing International Inc. ("the Company") is a public
company for which the common shares are listed on The Toronto Stock
Exchange (trading symbol ADX). The Company is a diversified marketing
firm offering customer value management services. Its affinity
loyalty programs influence the purchasing behaviour of large
dedicated groups of consumers, to enhance customer loyalty and
generate incremental revenues for program sponsors and participants.
(b) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Advantex Dining
Corporation, Advantex Marketing Corporation, Advantex Marketing
International Inc. (U.S.), Advantex Marketing (Maryland) Inc.,
1600011 Ontario Limited, and Advantex GP Inc. The accounts of
Advantex Systems Limited Partnership have also been consolidated with
those of the company (note 7).
(c) Revenue recognition
The Company derives its revenue from two operating groups: Advantex
and Samplex. On June 30, 2005, the Samplex business was sold
(note 6).
The Advantex Group provides marketing services to participating
establishments and provides awards to customers who make purchases at
participating establishments. There are two types of agreements with
participating establishments:
(i) The Company acquires the rights to future customer
purchases at a discount from participating
establishments. The Company records the entire credit
card transaction as revenue and records its costs to
acquire the rights as a direct cost.
(ii) The Company does not acquire the rights to future
customer purchases from participating establishments and
records revenue as a percentage of customer purchases
made at participating establishments. The revenue is
recognized at the time that a customer purchases services
or products from the member participants of these
programs.
The Samplex Group derived its revenue from the sale of
consumer-related themed pack programs. Revenue from theme packs was
recognized when the goods were shipped.
(d) Cash and cash equivalents
Cash and cash equivalents include highly liquid investments
redeemable at any time and are stated at cost, which approximates
market value.
(e) Purchased receivables
The Company, under its Advantex Group, purchases the rights to
receive future cash flows associated with goods and services at a
discount from participating establishments. The Company continuously
reviews its receivables. It sets up an estimated allowance for
amounts deemed uncollectible and writes off amounts from
establishments that have ceased operations.
(f) Capital assets
Capital assets are stated at cost less accumulated amortization.
Amortization is provided for at the following annual rates:
Computer equipment - 30% on the declining balance
Furniture and equipment - 20% on the declining balance
Leasehold improvements - Straight line over the term of the
lease
Computer software - 3 to 5 years straight line
(g) Deferred financing charges
Deferred financing charges are amortized over the term of the
convertible debenture payable.
(h) Deferred Revenue
Deferred revenue is taken into income over the period to which it
pertains.
(i) Income taxes
The Company provides for income taxes using the liability method of
tax allocation. Under this method, future income tax assets and
liabilities are determined based on deductible or taxable temporary
differences between financial statement values and tax values of
assets and liabilities using enacted income tax rates expected to be
in effect for the year in which the differences are expected to
reverse. The Company establishes a valuation allowance against future
income tax assets if, based on available information, it is more
likely than not that some or all of the future income tax assets will
not be realized.
(j) Stock option plan
The Company has a stock option plan which is described in Note 5(d).
The Company uses the Black-Scholes option pricing model to determine
the fair value of stock options.
Effective July 1, 2003, the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants relating to stock
based compensation. The Company records the fair value of employee
stock options, rather than to disclose pro forma information only.
This policy has been applied on a prospective basis.
(k) Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at exchange rates in effect at the
balance sheet date. Non-monetary assets and liabilities are
translated at rates of exchange at each transaction date. Revenue and
expenses are translated at the average rate of exchange for the
period. Gains or losses on translation are included in earnings.
(l) Use of estimates
The preparation of these consolidated financial statements, in
conformity with Canadian generally accepted accounting principles,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
2. CAPITAL ASSETS
Net
Accumulated Book
Cost Amortization Value
---- ------------ -----
June 30, 2005
-------------
Computer equipment $ 2,800,136 $ 2,328,745 $ 471,391
Furniture and equipment 1,097,799 899,581 198,218
Leasehold improvements 504,647 504,647 -
Computer software 1,587,386 1,382,978 204,408
--------- --------- -------
$ 5,989,968 $ 5,115,951 $ 874,017
--------- --------- -------
June 30, 2004
-------------
Computer equipment $ 2,724,954 $ 2,139,123 $ 585,831
Furniture and equipment 1,092,590 850,412 242,178
Leasehold improvements 490,396 471,578 18,818
Computer software 1,498,719 1,239,968 258,751
--------- --------- -------
$ 5,806,659 $ 4,701,081 $ 1,105,578
----------- ----------- -----------
3. DEFERRED FINANCING CHARGES
2005 2004
---- ----
Initial costs incurred on debenture
financing $ 457,502 $ 457,502
Less issue costs allocated to equity (see
note 4) (105,557) (105,557)
Additional financing costs (see note 4) 125,000 -
Less accumulated amortization (184,101) (92,504)
--------- --------
$ 292,844 $ 259,441
------- -------
------- -------
The initial costs incurred for deferred financing charges relate to
the convertible debenture fee as described in note 4. The
amortization of deferred financing charges is included in interest
expense.
4. CONVERTIBLE DEBENTURE PAYABLE
In 2003, the Company issued a $4,000,000 senior convertible debenture
(the "convertible debenture") for net proceeds of $3,542,498 after
issuance costs of $457,502 (see note 3). The convertible debenture
bears interest at 10% per annum payable semi-annually and matures on
April 25, 2008. The debenture is secured by a general security
agreement over all the assets of the Company and its subsidiaries and
an assignment of insurance, with certain financial covenants to be
maintained. The debenture is convertible into common shares of the
Company at the holder's option in denominations of $10,000. The
conversion price at the time of issue was $0.17 per common share (the
"conversion option") and a total of 23,529,412 common shares were
issuable upon conversion of the debenture.
In order to facilitate the tax assisted financing described in
note 6, the consent of the holder of the Company's convertible
debenture was required and received in December 2003. In
consideration for giving such consent, the conversion price per
common share was reduced from $0.17 to $0.15 and, as a consequence,
the number of common shares issuable upon conversion of the debenture
was increased from 23,529,412 to 26,666,666 shares. The Company
derived the fair value of the conversion option and the adjustment to
the conversion option using the Black-Scholes option pricing model.
The fair value of the conversion option at the time of issue of the
debenture was determined to be material. As a result, the convertible
debenture was bifurcated into debt and equity portions and the debt
portion of the convertible debenture is being accreted to its face
value at maturity over the term of the debt by way of a charge to
interest expense.
The fair value of the adjustment to the conversion option in December
2003 was determined to be $369,093. Accordingly, the equity portion
of the convertible option was increased by this amount and the
convertible debenture payable was decreased by this amount. In
addition, $35,100 of deferred financing charges were reclassified to
the equity portion of convertible debenture. The amortization of
deferred financing charges and accretion of the debt portion of the
convertible debenture were adjusted on a prospective basis beginning
January 1, 2004.
In July 2004, certain of the financial covenants under the
convertible debenture agreement were amended in exchange for the
issuance of 500,000 warrants to debenture holders with each warrant
entitling the holder to purchase one Advantex common share at $0.25
per share. The debenture holders had the right to require the Company
to repurchase the warrants for a payment of $0.25 per warrant
($125,000 in total), exercisable before November 15, 2004. All of the
debenture holders exercised this right. The Company satisfied its
obligation to repurchase the warrants by increasing the principal
amount of the convertible debenture by $125,000 and increasing
deferred financing charges by the same amount. The conversion price
associated with this amount is $0.13 per common share and the
additional number of common shares which may be issued upon
conversion is 961,538, increasing the total number of common shares
which may be issued upon conversion to 27,628,204; the fair value of
the equity portion of the conversion option was not recorded because
the amount was determined to be nominal.
The Company met its financial covenants under the convertible
debenture agreement as at June 30, 2005.
Interest expense relating to the accretion of the convertible
debenture was $179,439 (2004 - $126,365).
Convertible Debenture Payable: Debt Equity
Portion Portion
------------ ------------
Balance as at June 30, 2003 $ 3,397,984 $ 546,315
Fair value adjustment (369,093) 369,093
Additional portion of issue costs allocated - (35,100)
Accretion charge 126,365 -
---------------------------------------------------------------------
Balance as at June 30, 2004 $ 3,155,256 $ 880,308
---------------------------------------------------------------------
Additional convertible debenture issued 125,000 -
Accretion charge 179,439 -
---------------------------------------------------------------------
Balance as at June 30, 2005 $ 3,459,695 $ 880,308
---------------------------------------------------------------------
The following factors and assumptions were used in the Black-Scholes
option pricing model to determine the fair value of the adjustment to
the conversion option in 2004:
Common share price $ 0.16
Exercise price of conversion option $ 0.15
Expected life of conversion option 4.3 years
Expected volatility of common share price 26 %
Risk free rate of return 4.42%
5. CAPITAL STOCK
(a) Authorized
Class A preference - 500,000 shares non-voting, non-participating,
redeemable (at stated capital amount), 8% (of stated capital amount)
non-cumulative dividend rate
Class B preference - Unlimited number of shares, issuable in series
with rights, privileges, restrictions and conditions determined by
the Board of Directors at time of issue
Common - Unlimited number of shares
(b) Issued Class A preference
2005 2004
---- ----
459,781 shares $ 3,815 $ 3,815
----- -----
----- -----
(c) Issued common
Number Amount
------ ------
Balance as at June 30, 2003 and 2004 50,493,831 $20,814,938
Issue of common shares in 2005 (note 7) 8,000,000 648,000
--------- -------
Balance as at June 30, 2005 58,493,831 $21,462,938
---------- -----------
---------- -----------
Subsequent to the year end, on July 12, 2005, the Company issued
500,000 common shares to CIBC in consideration of the signing of a
long-term agreement to continue Advantex's merchant-based loyalty
programs and the agreement to cancel CIBC's rights to additional
Incentive Warrants under a previous agreement (note 5(f)(i)). Under
the terms of the private placement, the common shares are subject to
a resale restriction of four months.
(d) Stock options
The Company has a stock option plan for directors, officers,
employees and consultants. The maximum number of shares reserved for
issuance under the plan is 6,599,700. The options are non assignable;
the option price is to be fixed by the Board of Directors (but may
not be less than the closing price on the day immediately preceding
the date of the grant of the option); the term of the options may not
exceed 5 years, and payment for the optioned shares is required to be
made in full on the exercise of the option. The options are subject
to various vesting provisions, determined by the Board of Directors,
ranging from immediately to 5 years.
A summary of the status of the Company's stock option plan as at
June 30, 2005 and 2004, and changes during the years ending on those
dates is presented below:
2005 2004
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at the
beginning of the
year 3,407,500 $0.58 3,841,000 $0.62
Granted 1,700,000 0.24 1,242,500 0.14
Forfeited and
expired (2,180,000) 0.57 (1,676,000) 0.34
---------------------------------------------------------------------
Outstanding at the
end of the year 2,927,500 0.40 3,407,500 0.58
---------------------------------------------------------------------
Options exercisable
at the end of the
year 2,392,500 2,124,500
---------------------------------------------------------------------
Of the total stock options issued in 2005, 1,500,000 were issued to
certain directors at an exercise price of $0.25 per common share and
an expiry date of June 20, 2009; these options are exercisable at any
time.
The following table summarizes information about stock options
outstanding at June 30, 2005:
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
---------------------------------------------------------------------
$0.13 to 0.48 2,327,500 3.62 0.22 1,819,500 0.24
$0.82 to 1.08 530,000 0.42 1.07 515,000 1.07
$1.30 70,000 0.03 1.30 58,000 1.30
---------------------------------------------------------------------
$0.13 to 1.30 2,927,500 2.96 0.40 2,392,500 0.44
---------------------------------------------------------------------
The number of stock options which are available for future issuance
as at June 30 is:
2005 2004
---- ----
Maximum number reserved for issuance 6,599,700 6,599,700
Less: Forfeited and expired since inception (1,869,000) (1,869,000)
Less: Outstanding at end of year (2,927,500) (3,407,500)
----------- -----------
Number of options available for future
issuance 1,803,200 1,323,200
--------- ---------
--------- ---------
The Company calculated the fair value of the stock options issued
during 2005 and 2004, using the Black-Scholes option pricing model
and determined their value to be immaterial. Accordingly, no expense
has been recorded in these financial statements upon the issue of
these options. The assumptions used in the model were:
2005 2004
---- ----
Expected life of stock option 5 years 5 years
Expected volatility of common share price 10% 10%
Risk free rate of return 4.4% 4.4%
(e) Shareholders' Rights Plan
The rights become exercisable and permit shareholders to purchase
common shares from the Company at 50% of the then current market
price if any entity acquires or announces an intention to acquire 20%
or more of the common shares, other than with the approval of the
Board of Directors or pursuant to the "Permitted Bid" procedures, as
defined by the Rights Plan. The rights plan expires on July 10, 2007.
(f) Warrants
The following table summarizes information about outstanding warrants
to purchase common shares at June 30, 2005:
Remaining
Exercise Number Contractual
Price Outstanding Life (yrs.) Expiry Date
----- ----------- ----------- -----------
$0.93 51,789 (i) 0.51 January 2, 2006
$0.32 124,185 (i) 1.51 January 2, 2007
$1.08 15,000,000 0.61 February 6, 2006
---------------------------------------------------------------------
$1.07 15,175,974 0.62
---------------------------------------------------------------------
i) On February 6, 2001, the Company agreed to issue up to
55,000,000 Incentive Warrants to Air Canada and CIBC, allocated
on a 50:50 basis. Incentive warrants may be issued on March 1
of each year in respect of the prior calendar year. A total of
175,974 warrants have been issued for prior calendar years. The
fair value of these warrants was calculated to be a nominal
amount, and no expense has been recorded in these financial
statements on the issue of these warrants. Additional incentive
warrants to purchase up to 54,824,026 Advantex common shares
may be awarded to the entities based on their contribution to
the growth of the Company from new programs over the period
ending on December 31, 2005. The number of warrants issued each
calendar year is based on the contribution from new programs
that the two entities make to Advantex annual revenue growth.
The exercise price of the earned incentive warrants is based on
the prevailing market price at the end of each calendar year.
No incentive warrants were issued with respect to the 2004
calendar year and no incentive warrants are expected to be
issued in the future.
On July 12, 2005, the Company and CIBC signed a supplementary
agreement in which CIBC waived its right to any additional
Incentive Warrants. Accordingly, the additional Incentive
Warrants which may be awarded was reduced to 27,412,013, all in
respect of Air Canada.
ii) On December 6, 2001, the Company created a retailer/sponsor
warrant plan where a maximum of 950,000 shares are currently
reserved for issuance under the plan. The warrants are non-
assignable, the warrant price is to be fixed by the Board of
Directors, the term of the warrants may not exceed 5 years and
payment for the common shares is required to be made in full on
the exercise of the warrants. No warrants under this plan were
outstanding as at June 30, 2005.
iii) In connection with the convertible debenture payable, the
Company issued 1,000,000 compensation warrants to the agent to
purchase 1,000,000 common shares at an exercise price of $0.17
per common share. These options expired during fiscal 2005.
(g) Convertible debentures
The debentures payable are convertible into common shares of the
Company, as described in note 4.
6. DISCONTINUED OPERATIONS
The Company sold its Samplex business on June 30, 2005 by way of an
asset sale as it was determined not to be core to the Company's
objectives. Results of the operations of the Samplex business have
been classified as discontinued operations for the years ended
June 30, 2004 and 2005. Under the terms of the sale agreement, the
purchaser acquired substantially all of the net assets of Samplex
including accounts receivable, inventory and accounts payable and
accrued liabilities.
The following table provides additional information with respect to
amounts included in the financial statements as discontinued
operations:
Assets and Liabilities - Discontinued Operations
2005(x) 2004
------- ----
Accounts receivable $ 1,079,099 $ 852,453
Inventory 1,758,132 1,788,248
Other assets 13,258 -
--------- ---------
Assets 2,850,489 2,640,701
--------- ---------
Accounts payable and accrued liabilities 2,612,022 1,968,965
Deferred income 73,180 163,415
--------- ---------
Liabilities 2,685,202 2,132,380
--------- ---------
Net assets $ 165,287 $ 508,321
--------- ---------
--------- ---------
(x)The fiscal 2005 column represents the value of assets and
liabilities sold on June 30, 2005.
Statements of Income - Discontinued Operations
2005 2004
---- ----
Revenue $ 5,638,839 $ 5,778,675
Expenses 5,963,055 5,553,829
------------ ------------
Net income (loss) (324,216) 224,846
Gain on sale of business 2,069,577 -
------------ ------------
Net income - discontinued operations $ 1,745,361 $ 224,846
------------ ------------
------------ ------------
Statements of Cash Flows - Discontinued Operations
2005 2004
---- ----
Net Income - discontinued operations $ 1,745,361 $ 224,846
Gain on sale of business (2,069,577) -
------------ ------------
Funds provided by (used in) discontinued
operations (324,216) 224,846
------------ ------------
Changes in non-cash working capital balances
Assets of discontinued operations (209,787) (97,492)
Liabilities of discontinued operations 552,822 (75,050)
------------ ------------
343,035 (172,542)
------------ ------------
Cash provided by discontinued operations $ 18,819 $ 52,304
------------ ------------
------------ ------------
The gain on the sale of the Samplex business was determined as
follows:
Consideration received $ 2,549,864
Less: financing and other related costs (315,000)
------------
Net proceeds on sale of business 2,234,864
Less: Net assets sold (165,287)
------------
Gain on sale of business $ 2,069,577
------------
------------
The Company is entitled to receive additional consideration during
the next year based on the occurrence of certain events. The amounts
cannot be reasonably estimated and consequently are not included in
these financial statements
7. TAX ASSISTED FINANCING
Description of the Transaction
On December 31, 2003 the Company completed a tax assisted financing
which raised gross cash proceeds of $2,400,000. Pursuant to a series
of transactions, certain assets (computer hardware and software) of
the Information Technology Support Division (the "Support Division")
of the Company's wholly owned subsidiary, Advantex Dining Corporation
("Advantex Dining"), were acquired by a limited partnership, Advantex
Systems Limited Partnership ("ASLP"). The aggregate acquisition price
was $12,000,000 in exchange for cash of $1,200,000, a short term
promissory note of $1,200,000, the assignment of long term promissory
notes from investors of $8,760,000 (the "Investor Notes" as described
below) and $840,000 of limited partnership units of ASLP. The Support
Division continued to provide its services to Advantex Dining and is
managed by the general partner of ASLP, Advantex GP Inc., which is a
wholly-owned subsidiary of the Company.
Pursuant to an offering by way of private placement of Class A units
("Class A Units") of the Madison Grant Limited Partnership III (the
"Offering Partnership") which closed on December 31, 2003, investors
subscribed for Class A Units for an aggregate subscription price of
$12,000,000 (comprised of $3,240,000 in cash and $8,760,000 in
Investor Notes). The Offering Partnership then subscribed for
$11,160,000 Units of ASLP. The Offering Partnership satisfied its
obligations under the acquisition above by paying $1,200,000 in cash
and $1,200,000 in a promissory note receivable and assigning the
Investor Notes of $8,760,000. The balance of $840,000 in cash was
used by the Offering Partnership to pay the fees and expenses of the
offering.
In order to facilitate the above transactions, the consent of the
holder of the Company's convertible debenture was required (see
note 4).
Subsequent to the closing of the financing, a director and officer of
the general partner of the Offering Partnership was elected as a
director of the Company.
In March 2005, the Company purchased the Offering Partnership's
interest in ASLP in exchange for an assignment of the Investor Notes
and the issuance of 8,000,000 shares, as described below.
Accounting and Tax Treatment for the Transaction
The sale of the assets by Advantex Dining in 2003 was not accounted
for as a divestiture since the transactions were between related
parties and it was intended that, through a series of transactions,
the ASLP units and therefore the Support Division would be reacquired
under the Call Option Agreement. Accordingly, neither the gain on
sale of the assets nor the Investor Notes of $8,760,000 were
recognized in these consolidated financial statements and the above
transactions have been accounted for on the basis of their substance
rather than their legal form. The financial position and results of
operations of ASLP was consolidated with those of the Company.
The net proceeds of $2,072,000 ($2,400,000 net of financing costs of
$328,000) consisted of two components: i) a deposit against the
future issuance of up to 8 million common shares of the Company
pursuant to a Call Option Agreement and ii) proceeds related to the
realization of previously unrecognized income tax losses. Management
anticipated that the Call Option would be exercised and that up to
8 million shares would be issued at that time. Management estimated
the fair value of the common shares reserved for issuance at
$648,000. This amount was computed using a weighted average market
price for the shares at the date of the transaction, discounted by
25% to reflect the time value of money from the date of the
transaction to the date that the call option was expected to be
exercised, the inherent volatility of the share price during that
period and the risk that the shares may not be fully issued. The
balance of $1,424,000 was recorded as a realization of income tax
benefits. The sale of assets gave rise to income for income tax
purposes. This income was absorbed by non-capital losses that had not
previously been recognized for accounting purposes.
In March 2005, the Company exercised its right to purchase all of the
issued and outstanding units of ASLP held by the Offering
Partnership. The units were purchased in exchange for an assignment
of the promissory notes totalling $8,760,000 and the issuance of
8,000,000 common shares of the Company (note 5(c)). Upon completion
of the acquisition, a marketing agreement among the Company, the
Offering Partnership and ASLP was terminated and, accordingly, the
Company's financial commitment for marketing and promotion thereunder
was also terminated. The Company transferred the amount recorded as
Reserve of Issuance of Share of $648,000 to common shares.
8. FINANCIAL INSTRUMENTS
(a) Credit risk
Credit risk arises from the possibility that counterparties will be
unable to discharge their obligations. The Company routinely assesses
the financial strength of its merchants and as a consequence,
believes that its accounts receivable and purchased receivable credit
risk exposure is limited.
(b) Currency Risk
The Company is exposed to foreign exchange risk as a portion of its
revenues is earned in U.S. dollars and it has assets and liabilities
that will be settled in U.S. dollars. Foreign exchange risk arises
due to fluctuations in foreign currency rates, which could affect the
Company's financial results.
Included in the undernoted accounts are the following:
(expressed in US dollars) 2005 2004
---------------------------------------------------------------------
Cash and cash equivalents $ 717,251 $ 1,548,832
Accounts receivable 508,268 435,541
Accounts payable 371,351 85,785
(c) Fair value
The carrying value of cash and cash equivalents, accounts receivable,
purchased receivables, accounts payable and accrued liabilities and
deferred revenue approximate their fair value due to the short term
maturity of these instruments.
The stated value of the convertible debenture payable approximates
its fair value, as its interest rate is representative of current
market rates for loans with similar terms, conditions and maturities.
(d) Interest rate risk
The company is exposed to price risk on the convertible debenture
payable as this amount is subject to a fixed interest rate.
9. LOSS PER COMMON SHARE
Loss per share is calculated on the basis of net loss divided by the
weighted average number of common shares outstanding for the year.
Diluted loss per share is calculated using the treasury stock method,
giving effect to the exercise of all dilutive instruments. Diluted
loss per share information has not been presented as the effect of
potential exercise of the convertible debenture, stock options and
warrants would be anti-dilutive.
10. INCOME TAXES
The Company has $17,918,000 (2004 - $16,438,000) of non-capital
losses available to be applied against future taxable income. The
losses expire as follows:
Year ending June 30, 2006 300,000
2007 2,116,000
2008 3,869,000
2009 1,959,000
2010 2,356,000
2011 1,177,000
2012 981,000
2013 - 2019 5,160,000
The tax effect of these losses and other temporary differences give
rise to future income tax assets against which a valuation allowance
has been applied as follows:
2005 2004
---- ----
Tax effect of:
Non-capital losses carried forward $ 6,472,000 $ 5,937,000
Capital assets 23,000 24,000
Deferred financing charges 26,000 97,000
Research and development 116,000 116,000
Other 17,000 22,000
------------ ------------
6,654,000 6,196,000
Valuation allowance (6,654,000) (6,196,000)
------------ ------------
Future income taxes $ - $ -
------------ ------------
11. LEASE COMMITMENT
The Company is committed to minimum rental payments under existing
leases for equipment and premises for the next five years as follows:
Year ending June 30, 2006 222,000
2007 201,000
2008 184,000
2009 11,000
2010 2,000
12. RELATED PARTY TRANSACTIONS
The following transactions are in the normal course of business and
are measured at the exchange amount of consideration established and
agreed to by the related parties:
i) In April 2004, the Company entered into a financial advisory
agreement with Quorum Funding Corporation to assist the Company
in developing strategic alternatives and in arranging future
financing. Under the agreement as amended, Quorum Funding
earned a base fee and may also earn a success fee paid in cash
of the greater of US$300,000 and the sum of 5.25% of the
transaction value less any base fees previously paid,
contingent upon the closing of a financing transaction. A
financing transaction includes the raising of equity or debt,
an acquisition or disposition of a business or assets of a
business or a merger of the Company with another company. With
respect to a financing transaction that is a private placement,
Quorum shall only be paid by the Company a cash fee equal to
5.25% of the gross proceeds of the sale of the Common Shares
less any base fee previously paid. The agreement with Quorum
expired on October 31, 2004 and was extended until June 30,
2005, at which time it terminated. An independent committee of
the Board of the Company was established to manage the process.
The Chief Executive Officer of Quorum Funding was a director of
the Company for the period from August 28, 2003 to
June 20, 2005. Quorum Funding (SME) Corporation, a wholly owned
subsidiary of Quorum Funding Corporation, manages Ontario SME
Corporation. Ontario SME Corporation exercises control or
direction over the voting rights attached to 6,700,000 common
shares of the Company.
Total fees paid to Quorum during 2005 were $354,000 (2004 -
$35,000) and includes a fee of $250,000 related to the sale of
Samplex (see note 6). The fee was shared on a 50:50 basis with
an unrelated party.
ii) The following related parties are holders of the convertible
debenture described in note 4:
Title Principal
Amount
------
Chief Executive Officer and director $ 75,000
President and director 75,000
Director 150,000
iii) The Company engages a law firm to provide legal and tax
services. A director of the Company is a partner with the law
firm. During 2005, the Company paid $212,487 for services
provided by this firm (2004 - $357,500) and $33,170 was payable
at June 30, 2005 (2004 - $51,500).
13. ECONOMIC DEPENDENCE
A significant portion of the Company's current revenue is dependent
upon its offline value added loyalty program agreement with CIBC
under which Aeroplan Miles are awarded to holders of certain CIBC
Visa credit cards. The Company purchases Aeroplan Miles from CIBC
which in turn purchases Aeroplan Miles from Aeroplan LP, a subsidiary
of ACE Aviation Holdings Inc.
The agreement with CIBC was renewed in July 2005, on similar terms,
for an additional term ending on December 31, 2009. The agreement may
be renewed for a further three years upon mutual agreement. If CIBC
terminates its offline value added loyalty program agreement with the
Company, this could materially and adversely affect the Company.
However, CIBC can only terminate such agreement with the Company if
the Company is in material breach thereof. In the event that the
agreement expires or is terminated by the Company as a result of a
breach by CIBC, CIBC is not entitled to offer a similar offline
program to its Visa cardholders for a period of six months and the
Company will be entitled to offer such cardholders a similar
replacement program on the Company's behalf.
As part of Air Canada's CCAA restructuring in 2004, Air Canada and
CIBC entered into a new contract under which CIBC is entitled to
purchase Aeroplan Miles which will be available to support the CIBC
Aerogold ADVANTEX Benefit program respecting restaurants, golf
courses, and small inns and resorts. If Aeroplan Miles cease to be
available for award in respect of purchases by holders of CIBC Visa
credit cards, the Company has agreed to offer to such cardholders the
same rewards as CIBC offers to them as a replacement for Aeroplan
Miles, so long as the per unit cost of such rewards to the Company is
the same or less than the Company's per unit cost of Aeroplan Miles.
As part of the restructuring, Air Canada advised the Company that
effective December 31, 2003 it was repudiating its online and retail
reward program agreements with Advantex and its agreement to permit
Advantex to award Aeroplan Miles under the CIBC Aerogold ADVANTEX
Benefit program for purchases at participating retail outlets. The
termination of these agreements had minimal adverse impact on the
Company's operations.
>>
%SEDAR: 00004122E
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