ADX: TSX
TORONTO, Sept. 28 /CNW/ - Advantex Marketing International Inc. (TSX:ADX)
today announced its results for the fiscal year ended June 30, 2006.
"We are very pleased with the progress that the Company has made on both
financial and operational fronts," said G. Randall Munger, Chairman and Chief
Executive Officer of Advantex. "The positive impact of these changes were not
fully evident in the financial results of Fiscal 2006 but are the driving
force behind the quarter over quarter improvements that we expect to report
throughout Fiscal 2007."
The following are highlights of the Company's accomplishments during
Fiscal 2006:
<<
1. Results from operations improved by $0.8 million year over year;
$2.3 million loss from operations in Fiscal 2006 compared to a
$3.1 million loss from operations in Fiscal 2005, after adjusting
for non-recurring factors in both years.
2. In October 2005, Advantex announced the appointment of Kelly E.
Ambrose as President and Chief Operating Officer. Mr. Ambrose is
responsible for the management of the operations of the Company.
3. In November 2005, the Company initiated a major cost reduction
program including selective staff reductions, lower occupancy
costs and reductions in other overhead expenses with expected
savings of $1.5 million on an annualized basis. Fiscal 2006
General and Administrative costs of $4.5 million were
approximately $1.0 million lower than the previous year. Included
were one-time costs in Fiscal 2006 primarily related to
restructuring totaling $0.3 million, compared to $0.6 million in
the previous year. On an annualized basis, the cost savings are on
target.
4. The Company completed a Private Placement common share offering on
March 14, 2006, raising $3.0 million providing net proceeds of
$2.6 million. The size of the offering was increased from the
original $2.0 million to $3.0 million as a result of over-
subscription.
5. The Company successfully introduced its new Advance Purchase
Marketing program for merchants, expanding upon the Company's
successful and established business model. Under the Advance
Purchase Marketing Program, Advantex purchases future credit card
transactions at a discount from merchants, providing them with
cash in advance along with marketing, customer incentives and
business intelligence. The Advance Purchase enhancement to our
basic merchant programs is having a significant impact on the
future prospects of the Company, driving revenue and increasing
profitability.
6. Proceeds from the Private Placement were utilized in part to
support the initial introduction of the Advance Purchase Marketing
Programs. The Advance Purchase Programs are offered in conjunction
with Canadian Credit Card Loyalty Programs. A pilot seasonal
Advance Purchase Marketing program was successfully launched with
golf courses, setting the stage for expansion into this and other
seasonal retail merchant categories. Results have been positive,
and the Company is seeking additional funding to support further
growth of its Advance Purchase Marketing Programs.
>>
"The significant operational improvements made over the past year are
expected to positively impact upon the Company's financial performance in
Fiscal 2007," said Kelly E. Ambrose, President and Chief Operating Officer of
Advantex. "We've lowered our operating cost structure, went to market with our
new Advance Purchase Marketing product offering for merchants, and implemented
organizational efficiencies, all of which enable us to scale for growth and
accelerate our progress towards profitability."
Financial Performance
The positive impact of the new Advance Purchase Marketing program is
reflected in the growth of Transaction Credits on the Balance Sheet.
Transaction Credits at June 30, 2006 were $3.9 million, an increase of
$1.6 million or 66% over the previous year. Transaction Credits represent the
Company's rights to cash flow from future designated credit card transactions
at its Merchant Partners and are a likely indicator of future profitability.
Results from operations improved by $0.8 million year over year;
$2.3 million loss from operations in Fiscal 2006 compared to a $3.1 million
loss in operations from Fiscal 2005, after adjusting for non-recurring factors
in both years. Before adjustments, the Company's Net Loss was $2.5 million
($0.04 per share) compared with $1.0 million ($0.02 per share) in Fiscal 2005.
Net Revenue from the Canadian Credit Card Loyalty program began to rise
in the final quarter of the fiscal year over the corresponding period in the
previous year, corresponding to the introduction of the new Advance Purchase
Marketing program. The Company expects growth in Net Revenue from its Canadian
Credit Card Loyalty Program to accelerate in future quarters as a result of
its new Advance Purchase Marketing program.
Net Revenue from the Company's Online Mall programs increased 12% (in US
dollars) when compared with the previous year. The Company earns its income
from its Online Shopping Malls in US dollars which is expressed in Canadian
dollars for the purpose of the consolidated financial statements. Revenue from
Online Shopping Malls increased by 4.3% year over year when expressed in
Canadian dollars, reflecting the impact of currency exchange rates.
Outlook
At the end of Fiscal 2005, Advantex stated that it had emerged as a
stronger and leaner company, with a clear focus on profitable growth in the
programs and areas in which it enjoys a leadership position. In Fiscal 2006,
the Company continued to make improvements to its operating structure,
reducing costs and increasing merchant participation through the introduction
of its Advance Purchase Marketing Programs. It is the Company's intention to
remain on this path during Fiscal 2007, proceeding toward profitability by
demonstrating improved quarter over quarter financial results.
The Company is experiencing significant demand for its Advance Purchase
Marketing Programs in the dining, golf, ski, hospitality, and spa categories,
and expects to aggressively expand this area of its business.
There are more than 30,000 full-service restaurants in Canada (source:
Statistics Canada). Two-thirds of these restaurants are owner-operated
(source: Canadian Restaurant and Foodservices Association), the target market
for the Company's Advance Purchase Marketing programs.
Golf courses and ski resorts are excellent examples of seasonal
businesses with a need for pre-season working capital and marketing, which the
Company's Advance Purchase Marketing Programs satisfy. There are approximately
1,300 golf courses and 150 ski resorts in Canada (source: Statistics Canada).
There are also more than 2,800 hotels, inns and resorts in Canada.
(source: Statistics Canada). Advantex has developed tailored Advance Purchase
Marketing programs for independent and small chain properties.
Retail is a major growth area for the Company, many times larger than the
current merchant categories in which it operates. Advantex expects to have
retail merchants participating in its Advance Purchase Marketing program in
calendar 2007. There are approximately 100,000 retailers in the shopping
categories that Advantex will be targeting (source: Statistics Canada).
Revenue from the Company's Online Shopping Malls is expected to continue
its annual upward trend. A new management team with extensive experience in
online marketing was hired to drive this business forward. Business reviews
were held with all of the Company's key airline partners resulting in
comprehensive marketing plans and commitments going forward. Online Shopping
Malls are being enhanced with new personalization features, powerful search
capabilities and greater analytics to drive usage and sales revenue.
The Company's fifth Online Shopping Mall, shopmilesandmore.com, will be
launched in October 2006, for Lufthansa German Airlines and its Miles and More
frequent flyer program. Lufthansa ranks among the top ten airlines in the
world and is Europe's second largest airline, with more than 12 million
members of its frequent flyer program globally, 10% of which live in North
America.
About Advantex Marketing International Inc.
Advantex is a leader in the marketing services industry. The Company
develops and manages merchant-based loyalty programs for financial
institutions, airlines and other major organizations through which their
customers accelerate earning frequent flyer miles and/or other rewards on
purchases at participating merchants. Under the umbrella of each program,
Advantex provides merchants with marketing, customer incentives, and secured
future sales through its Advance Purchase Marketing model. Advantex partners
include more than 700 restaurants, online retailers, golf courses, small inns
and resorts, and major organizations including CIBC, United Airlines, Delta
Air Lines, The New York Times, Alaska Airlines and Lufthansa German Airlines.
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 includes 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.
<<
Management's Responsibility for Financial Reporting
>>
To our Shareholders:
The accompanying consolidated financial statements have been prepared by
management and approved by the Board of Directors of the Company. Management
is responsible for the information and representations contained in these
consolidated financial statements and other sections of this Annual Report.
The Company maintains appropriate processes to ensure that relevant and
reliable financial information is produced. The consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in Canada. The significant accounting policies which
management believes are appropriate for the Company are described in note 1 to
the consolidated financial statements.
The Board of Directors is responsible for reviewing and approving the
consolidated financial statements and overseeing management's performance of
its financial reporting responsibilities. An Audit Committee, the majority of
whose members are non-management Directors, is appointed by the Board. The
Audit Committee reviews the consolidated financial statements, adequacy and
internal controls, the audit process and financial reporting with management
and the external auditors. The Audit Committee reports to the Directors prior
to the approval of the audited consolidated financial statements for
publication.
PricewaterhouseCoopers LLP, the Company's external auditors, audited the
consolidated financial statements in accordance with generally accepted
auditing standards to enable them to express to the shareholders their opinion
on the consolidated financial statements. Their report is set out on the
following page.
<<
(signed) (signed)
G. Randall Munger Robert von der Porten
Chairman and Chief Executive Officer Acting Chief Financial Officer
AUDITORS' REPORT
>>
To the Shareholders of Advantex Marketing International Inc.:
We have audited the consolidated balance sheet of Advantex Marketing
International Inc. as at June 30, 2006 and the consolidated statements of
loss, deficit and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at June 30,
2006 and the results of its operations and its cash flows for the year then
ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements of the company as at June 30, 2005
and for the year then ended were audited by other independent accountants
whose report dated August 5, 2005 expressed an unqualified opinion on those
financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
September 28, 2006
Toronto, Canada
<<
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2006 AND 2005
2006 2005
---- ----
ASSETS NOTE
Current:
Cash and cash equivalents $ 1,807,042 $ 2,970,627
Accounts receivable 909,158 1,238,719
Transaction credits 1e 3,916,302 2,363,428
Prepaid expenses and sundry assets 154,837 225,069
------------ ------------
6,787,339 6,797,843
------------ ------------
Long Term:
Capital and other assets 2 623,831 874,017
Deferred financing charges 3 189,170 292,844
------------ ------------
813,001 1,166,861
------------ ------------
TOTAL ASSETS $ 7,600,340 $ 7,964,704
------------ ------------
------------ ------------
LIABILITIES
Current:
Accounts payable and accrued
liabilities $ 3,122,006 $ 3,844,261
Long Term:
Convertible debenture payable 4 3,518,706 3,459,695
------------ ------------
6,640,712 7,303,956
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 5
Class A preference shares 3,815 3,815
Common shares 24,106,281 21,462,938
------------ ------------
24,110,096 21,466,753
Contributed surplus 243,448 59,992
Equity portion of convertible
debenture 4 848,297 880,308
Deficit (24,242,213) (21,746,305)
------------ ------------
959,628 660,748
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 7,600,340 $ 7,964,704
------------ ------------
------------ ------------
(see accompanying notes)
Approved by the Board:
Director: (signed) Director: (signed)
--------------- ---------------
William Polley G. Randall Munger
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
---- ----
NOTE
GROSS REVENUE $ 68,678,621 $ 71,374,798
Cost of purchasing transaction
credits 1c/e 60,051,933 61,646,617
------------ ------------
NET REVENUE 8,626,688 9,728,181
Direct expenses 2,785,216 2,878,297
------------ ------------
GROSS PROFIT 5,841,472 6,849,884
OPERATING EXPENSES
Selling 2,898,667 3,025,891
General and administrative 4,524,672 5,499,279
------------ ------------
7,423,339 8,525,170
LOSS BEFORE AMORTIZATION AND INTEREST (1,581,867) (1,675,286)
Amortization 293,274 395,981
Interest expense
Stated interest on convertible
debenture 408,082 407,773
Accretion on convertible debenture
and amortization of deferred
financing charges 312,685 271,036
------------ ------------
720,767 678,809
------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,595,908) (2,750,076)
Earnings from discontinued operations 6 100,000 1,745,361
------------ ------------
NET LOSS $ (2,495,908) $ (1,004,715)
------------ ------------
------------ ------------
EARNINGS (LOSS) PER COMMON SHARE 9
Continuing Operations $ (0.04) $ (0.05)
Discontinued Operations 0.00 0.03
------------ ------------
NET LOSS PER COMMON SHARE $ (0.04) $ (0.02)
------------ ------------
------------ ------------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF DEFICIT
YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
---- ----
BALANCE AT THE BEGINNING OF THE YEAR $(21,746,305) $(20,741,590)
Net Loss (2,495,908) (1,004,715)
------------ ------------
BALANCE AT THE END OF THE YEAR $(24,242,213) $(21,746,305)
------------ ------------
------------ ------------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
---- ----
NOTE
OPERATING ACTIVITIES
Net loss from continuing operations $ (2,595,908) $ (2,750,076)
Items not affecting cash
Amortization of capital assets 293,274 395,981
Accretion charge 4 209,011 179,439
Amortization of deferred financing
charges 103,674 91,597
Cost of shares issued to CIBC 35,000 -
Cost of stock options 59,756 -
------------ ------------
(1,895,193) (2,083,059)
------------ ------------
Changes in non-cash working capital
items
Accounts receivable 329,561 16,461
Transaction credits (1,552,874) 32,033
Prepaid expenses and sundry assets 70,232 (34,213)
Accounts payable and accrued liabilities (722,255) 613,613
------------ ------------
(1,875,336) 627,894
------------ ------------
(3,770,529) (1,455,165)
FINANCING ACTIVITIES
Share issue proceeds 2,550,032 -
INVESTING ACTIVITIES
Net proceeds on sale of business 6 100,000 2,234,863
Purchase of capital assets (43,088) (164,420)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CONTINUING OPERATIONS (1,163,585) 615,278
DISCONTINUED OPERATIONS 6 - 18,819
Cash and cash equivalents at the
beginning of the year 2,970,627 2,336,530
------------ ------------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 1,807,042 $ 2,970,627
------------ ------------
------------ ------------
ADDITIONAL INFORMATION
Interest paid $ 412,500 $ 403,000
------------ ------------
------------ ------------
(see accompanying notes)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2006 and 2005
1. SIGNIFICANT ACCOUNTING POLICIES
a. Nature of business
Advantex Marketing International Inc. ("the Company") is a public
company with common shares listed on The Toronto Stock Exchange
(trading symbol ADX.TO). Advantex operates in the marketing services
industry. The Company develops and manages loyalty programs for
financial institutions, airlines and other major organizations
through which their customers earn frequent flyer miles or points on
purchases at a wide selection of participating merchants. Under the
umbrella of each program, Advantex provides merchants with marketing,
customer incentives, and secured future sales through its Advance
Purchase Marketing model.
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. (US), Advantex Marketing (Maryland) Inc., 1600011
Ontario Limited, and Advantex GP Inc. The accounts of Advantex
Systems Limited Partnership ("ASLP") have also been consolidated with
those of the company (note 7).
c. Revenue recognition
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 designated credit
card transactions at a discount from the face value from
participating establishments. The Company records the
entire credit card transaction as revenue and records its
costs to acquire the rights as cost of transaction credits.
(ii) The Company does not acquire the rights to future
designated credit card transactions 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 consumer makes a
designated credit card purchase from participating establishments
enrolled in these programs.
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. Transaction credits
The Company purchases the rights to receive future cash flows
associated with designated credit card purchases at a discount from
participating establishments. The Company continuously reviews its
transaction credits and records an estimated allowance for amounts
deemed uncollectible.
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
Capital assets are tested for impairment when evidence of a decline
in value exists. If it is determined that the carrying value of the
capital assets is not recoverable, a writedown to fair value is
charged to earnings in the period that such a determination is made.
g. Deferred financing charges
Deferred financing charges are amortized over the term of the
convertible debenture payable.
h. Income taxes
The Company provides for income taxes using the liability method of
income 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 the
corresponding income 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.
i. 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.
j. 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 foreign currency translation are included
in earnings.
k. Use of estimates
The preparation of these consolidated financial statements, in
accordance 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, 2006
-------------
Computer equipment $ 2,812,686 $ 2,465,228 $ 347,458
Furniture and equipment 1,108,921 937,694 171,227
Leasehold improvements 504,647 504,647 -
Computer software 1,606,801 1,501,655 105,146
--------- --------- -------
$ 6,033,055 $ 5,409,224 $ 623,831
--------- --------- -------
--------- --------- -------
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
--------- --------- -------
--------- --------- -------
3. DEFERRED FINANCING CHARGES
2006 2005
Initial costs incurred on convertible
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) 125,000 125,000
Less accumulated amortization (287,775) (184,101)
--------- ---------
$ 189,170 $ 292,844
--------- ---------
--------- ---------
The deferred financing charges relate to the convertible debenture 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 convertible 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.
The fair value of the conversion option at the time of issue of the
convertible 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.
In order to facilitate the tax assisted financing described in
note 7, 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 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 the 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.
During March 2006, $150,000 of convertible debenture was converted at
the exercise option price of $0.15 per share for 1,000,000 common
shares of the Company. A proportionate amount, $32,011, was
transferred from the equity portion of convertible debenture to
capital stock (note 5) related to this conversion.
The Company met its financial covenants under the convertible
debenture agreement as at June 30, 2006.
Interest expense relating to the accretion of the convertible
debenture was $209,011 (2005 -$179,439).
Convertible Debenture Payable: Debt Equity
Portion Portion
------------ ------------
Balance as at June 30, 2004 $ 3,155,256 $ 880,308
Additional portion of issue costs
allocated 125,000 -
Accretion charge 179,439 -
---------------------------------------------------------------------
Balance as at June 30, 2005 $ 3,459,695 $ 880,308
---------------------------------------------------------------------
Conversion of debenture - note 5 (150,000) (32,011)
Accretion charge 209,011 -
---------------------------------------------------------------------
Balance as at June 30, 2006 $ 3,518,706 $ 848,297
---------------------------------------------------------------------
$ 3,975,000 will be repayable on maturity of the convertible
debenture on April 25, 2008
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 shares
2006 2005
---- ----
459,781 shares $ 3,815 $ 3,815
----- -----
----- -----
(c) Issued common shares
Number Amount
------ ------
Balance as at June 30, 2005 58,493,831 $ 21,462,938
Issue of common shares - i 500,000 35,000
Issue of common shares - ii - net 37,037,037 2,426,332
Issue of common shares - iii 1,000,000 150,000
Conversion of debenture - note 4 - 32,011
----------- -----------
Balance as at June 30, 2006 97,030,868 $ 24,106,281
----------- -----------
----------- -----------
i. On July 12, 2005, the Company issued 500,000 common shares to
CIBC, by way of a private settlement, 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)). The value assigned to the shares
issued was based on the Company's share price at that time.
ii. On March 14, 2006 the Company issued 37,037,037 common shares by
way of a private placement for net proceeds of $2,550,032 (gross
proceeds of $3,000,000). In addition to the cash issue costs of
$449,968, the Company's exclusive agent for the private
placement received 3,552,716 stock options exercisable at the
offering price of 8.1 cents for a period of 24 months from the
closing date (note 12(i)). The Company used the Black-Scholes
option pricing model to determine the fair value of the options
to be $123,700. The assumptions were expected life of two years,
expected volatility of 74%, and risk-free rate of return of 5%.
Gross proceeds $ 3,000,000
Issue costs - cash (449,968)
---------
Net proceeds 2,550,032
Issue costs - fair value of options
- transfer to Contributed Surplus (123,700)
---------
Increase in issued Common Stock $ 2,426,332
------------
------------
iii. During March 2006, $150,000 of convertible debenture was
converted at the exercise option price of $0.15 per share for
1,000,000 common shares of the Company. Related to this
conversion a proportionate amount, $32,011, was transferred from
the equity portion of the convertible debenture to capital
stock.
(d) Stock options
The Company has a stock option plan for directors, officers,
employees and consultants. 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 five
years, and payment for the optioned shares is required to be made in
full on the exercise of the options. The options are subject to
various vesting provisions, determined by the Board of Directors,
ranging from immediately to four years. On January 26, 2006, the
Company received approval from shareholders to amend its stock option
plan from a fixed maximum number of common shares issuable to a
rolling maximum number of common shares issued and outstanding
(calculated on a non-diluted basis).
A summary of the status of the Company's stock option plan as at
June 30, 2006 and 2005, and changes during the years ended on those
dates is presented below:
2006 2005
---------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- ----------
Outstanding at the
beginning of the year 2,927,500 $0.40 3,407,500 $0.58
Granted 4,735,000 0.09 1,700,000 0.24
Forfeited and expired (2,395,000) 0.43 (2,180,000) 0.57
---------------------------------- -----------
Outstanding at the
end of the year 5,267,500 $0.10 2,927,500 $0.40
---------------------------------- -----------
Options exercisable at
the end of the year 4,500,000 2,392,500
---------------------------------- -----------
Of the total stock options issued in 2006, 4,000,000 were issued to
certain directors at exercise prices ranging between $0.07 and
$0.135 per common share. The earliest expiry date is October 20, 2010
and the latest May 11, 2011. 2,000,000 of the foregoing options were
exercisable upon grant; others vest equally over four years.
The following table summarizes information about stock options
outstanding at June 30, 2006:
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
---------------------------------------------------------------------
$0.07 to 0.13 4,007,500 2.1 0.08 3,955,000 0.07
$0.135 to 0.33 1,260,000 2.8 0.17 545,000 0.07
--------- -------
$0.07 to 0.33 5,267,500 2.3 0.10 4,500,000 0.07
The number of stock options which are available for future issuance
as at June 30 is:
2006 2005
---- ----
Maximum number reserved for issuance 9,703,087 6,599,700
Less: Forfeited and expired since inception - (1,869,000)
Less: Outstanding at end of year (5,267,500) (2,927,500)
----------- -----------
Number of options available for future
issuance 4,435,587 1,803,200
--------- ---------
--------- ---------
The Company calculated the fair value of the stock options issued
during 2006 using the Black-Scholes option pricing model and
determined their value to be $210,907 (2005 $nil); $59,756 of stock
option expense for the year ended June 30, 2006 was recorded in these
consolidated financial statements upon the issue of these options.
The assumptions used in the model were:
2006 2005
---- ----
Expected life of stock option 1 to 5 years 5 years
Expected volatility of common share price 74 to 100% 10%
Risk free rate of return 5.0% 4.4%
(e) Shareholders' Rights Plan
Under the shareholders rights plan, certain rights become exercisable
and permit shareholders to purchase common shares from the Company at
50% of the then current market price if any entity or person 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, 2006:
Remaining
Exercise Number Contractual
Price Outstanding Life (yrs.) Expiry Date
----- ----------- ----------- -----------
$0.32 124,185 (i) 0.5 January 2, 2007
----------------------------------------------------------------
$0.32 124,185 0.5
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. A total of 175,974 warrants were issued under the agreement to
the entities based on their contribution to the growth of the Company
from new programs over the period ended December 31, 2005. 51,789
Incentive Warrants expired on January 2, 2006. The fair value of
these warrants was calculated to be a nominal amount and no expense
has been recorded in these consolidated financial statements on the
issue of these warrants. No incentive warrants were issued with
respect to the 2005 calendar year and the agreement has expired.
On July 12, 2005, the Company and CIBC signed a supplementary
agreement in which CIBC waived its right to any additional Incentive
Warrants.
6. DISCONTINUED OPERATIONS
The Company sold its Samplex business in fiscal 2005 by way of an
asset sale as it was determined not to be core to the Company's
objectives. 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 Company was entitled to receive additional
consideration during the year ended June 30, 2006 based on the
occurrence of certain events. Results of the operations for the year
ended June 30, 2005, and additional consideration received during the
year ended June 30, 2006 have been classified as discontinued
operations.
Statements of Income - Discontinued Operations
2006 2005
---- ----
Revenue $ - $ 5,638,839
Expenses - 5,963,055
----------- -----------
Net loss - (324,216)
Gain on sale of business 100,000 2,069,577
----------- -----------
Net income - discontinued operations $ 100,000 $ 1,745,361
----------- -----------
----------- -----------
Statements of Cash Flows
- Discontinued Operations
2006 2005
---- ----
Net Income - discontinued operations $ 100,000 $ 1,745,361
Gain on sale of business (100,000) (2,069,577)
----------- -----------
Funds provided by (used in)
discontinued operations - (324,216)
----------- -----------
Changes in non-cash working capital
balances
Assets of discontinued operations - (209,787)
Liabilities of discontinued
operations - 552,822
----------- -----------
- 343,035
----------- -----------
Cash provided by discontinued
operations $ - $ 18,819
----------- -----------
----------- -----------
The gain on the sale of the Samplex business was determined as
follows:
2006 2005
---- ----
Consideration received $ 129,440 $ 2,549,863
Less: Financing and other related
costs (29,440) (315,000)
----------- -----------
Net proceeds on sale of business 100,000 2,234,863
Less: Net assets sold - (165,286)
----------- -----------
Gain on sale of business $ 100,000 $ 2,069,577
----------- -----------
----------- -----------
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 were 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 totaling $8,760,000 and the issuance of
8,000,000 common shares of the Company. 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 there under 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 risk exposure is limited in its accounts receivable and
transaction credits.
(b) Currency Risk
The Company is exposed to foreign exchange risk as a portion of its
revenues is earned in US dollars and it has assets and liabilities
that will be settled in US 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:
2006 2005
(expressed in US dollars)
----------------------------------------------------------------
Cash and cash equivalents $ 428,791 $ 717,251
Accounts receivable 458,370 508,268
Accounts payable and accrued
liabilities 239,362 371,351
(c) Fair value
The carrying value of cash and cash equivalents, accounts receivable,
transaction credits, accounts payable and accrued liabilities
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 $20,005,000 (2005 - $17,918,000) of non-capital
losses available to be applied against future taxable income. The
losses expire as follows:
Year ending June 30, 2007 - $ 1,863,000
2008 - 3,869,000
2009 - 1,959,000
2010 - 2,344,000
2014 - 1,177,000
2015 and thereafter - 8,793,000
---------
$20,005,000
-----------
-----------
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:
2006 2005
---- ----
Income tax effect of:
Non-capital losses carried forward $ 7,328,000 $ 6,472,000
Capital assets 9,000 23,000
Deferred financing charges 88,000 26,000
Research and development 65,000 116,000
Other 27,000 17,000
----------- -----------
7,517,000 6,654,000
Valuation allowance (7,517,000) (6,654,000)
----------- -----------
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, 2007 - $ 204,000
2008 - 190,000
2009 - 38,000
2010 - 28,000
2011 - 14,000
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) On January 17, 2006 the Company entered into an agreement
appointing Notre-Dame Capital Inc ("Notre-Dame") to act as its
exclusive agent in connection with a series of financing
transactions. In addition, Notre-Dame was appointed as the Company's
exclusive financial advisor for a period of two years from
January 17, 2006; which appointment the Company upon 30 days written
notice can terminate. The agreement allows the agent to earn a
commission on issuance of common shares and debentures plus, in case
of common shares, stock options corresponding to 10% of the common
shares sold. On March 14, 2006 the Company issued 37,037,037 common
shares by way of a private placement. (note 5(c)(ii)), and in its
capacity as agent for the private placement Notre-Dame earned and was
paid commission of $287,770 and received 3,552,716 stock options
exercisable at the offering price of 8.1 cents for a period of
24 months from the closing date of the placement. In its capacity of
financial advisor Notre-Dame is paid a monthly fee of $3,000. The
President and Managing Partner of Notre-Dame has been a director of
the Company since January 26, 2006.
(ii) In April 2004, the Company entered into a financial advisory
agreement with Quorum Funding Corporation ("Quorum") to assist the
Company in developing strategic alternatives and in arranging future
financing. This agreement expired 30 June, 2005. An independent
committee of the Board of the Company was established to manage the
process. The Chief Executive Officer of Quorum was a director of the
Company for the period from August 28, 2003 to June 20, 2005, and
during this period exercised control or direction over the voting
rights attached to 6,700,000 common shares of the Company.
Total fees paid to Quorum during 2006 were $nil (2005 - $354,000);
and included a fee of $250,000 related to the sale of Samplex (see
note 6).
(iii) The following related parties are holders of the convertible
debenture described in note 4:
Principal
Title Amount
------
Chief Executive Officer and director $ 75,000
Member of the immediate family of Chief
Executive Officer 75,000
Director 150,000
(iv) During the fiscal years ended June 30, 2005 and 2006, a director
of the Company was a partner with the law firm engaged by the Company
to provide legal and tax services. During 2006, the Company paid
$129,680 for services provided by this firm (2005 - $212,487).
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 restructuring under the Companies' Creditor
Arrangement Act 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.
14. COMPARATIVES
Certain of the comparative figures have been reclassified to conform
to consolidated financial statement presentation adopted in the
current year.
>>
%SEDAR: 00004122E
