(BDO LOGO)
    
    BDO Dunwoody llp
    
    60 Columbia Way Suite 400Chartered Accountants and Advisors
    
    Markham Ontario Canada L3R 0C9Telephone: (905) 946-1066Fax: (905) 946-9524www.bdo.ca
 Auditors Report
 To the Shareholders of Envoy Capital Group Inc.
    
  
 BDO Dunwoody llp is a Limited Liability Partnership registered in Ontario




---



##### 



(BDO LOGO)
    
    BDO Dunwoody llp
    
    60 Columbia Way Suite 400Chartered Accountants and Advisors
    
    Markham Ontario Canada L3R0C9Telephone: (905) 946-1066Fax: (905) 946-9524www.bdo.ca
 Comments by Auditors for U.S. Readers
On Canada-U.S. Reporting Differences
  
  
 BDO Dunwoody llp is a Limited Liability Partnership registered in Ontario




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Balance Sheets
(Expressed In Canadian dollars)
 As at:
    
    
    
    
    
    September 30
    
    
    September 302008
    
    
    2007AssetsCurrentCash
    
    
    
    
    
    $
    1,279,269
    
    
    $
    759,475Cash held in escrow
    
    note 21
    
    
    
    
    
    
    2,803,549Investments held for trading
    
    note 3
    
    
    17,750,970
    
    
    
    27,601,815Accounts receivable
    
    note 4
    
    
    8,387,477
    
    
    
    5,305,952Future income taxes
    
    note 14
    
    
    650,791
    
    
    
    1,133,258Prepaid expenses
    
    
    
    
    
    
    388,736
    
    
    
    710,159Loans receivable
    
    note 5
    
    
    365,625
    
    
    
    493,74628,822,868
    
    
    
    38,807,954Investments
    
    note 3
    
    
    224,250
    
    
    
    224,250Real estate
    
    note 6
    
    
    1,539,592
    
    
    
    1,474,105Loans receivable
    
    note 5
    
    
    
    
    
    
    864,056Property, plant and equipment
    
    note 7
    
    
    1,150,465
    
    
    
    1,444,603Goodwill
    
    
    
    
    
    
    4,407,434
    
    
    
    4,407,434Future income taxes
    
    note 14
    
    
    337,435
    
    
    
    3,569,912$
    36,482,044
    
    
    $
    50,792,314Liabilities and Shareholders EquityCurrentBank indebtedness
    
    note 9
    
    $
    
    
    
    $
    1,975,000Accounts payable and accrued liabilities
    
    
    
    
    
    
    3,521,264
    
    
    
    2,993,462Deferred revenue
    
    
    
    
    
    
    731,860
    
    
    
    509,374Current portion of long-term debt
    
    note 10
    
    
    69,599
    
    
    
    87,8784,322,723
    
    
    
    5,565,714Long-term debt
    
    note 10
    
    
    
    
    
    
    69,5994,322,723
    
    
    
    5,635,313Shareholders equityShare capital
    
    note 11
    
    
    9,370,741
    
    
    
    10,516,344Contributed surplus
    
    note 12
    
    
    22,445,601
    
    
    
    24,216,052Warrants
    
    note 11
    
    
    6,542,456
    
    
    
    6,542,456Stock based compensation
    
    note 11
    
    
    864,533
    
    
    
    864,533(Deficit) retained earnings
    
    
    
    
    
    
    (7,064,010
    )
    
    
    3,094,135Accumulated other comprehensive income (loss)
    
    note 2
    
    
    
    
    
    
    (76,519
    )32,159,321
    
    
    
    45,157,001$
    36,482,044
    
    
    $
    50,792,314
 On behalf of the Board:(signed)
    
    (signed)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Operations
(Expressed In Canadian dollars)
 For the year ended:
    
    
    
    
    
    September 30
    
    
    September 30
    
    
    September 302008
    
    
    2007
    
    
    2006Net revenue from consumer branding business
    
    note 4
    
    $
    15,514,533
    
    
    $
    12,402,688
    
    
    $
    9,671,504Net investment (losses) gains
    
    note 3
    
    
    (4,930,185
    )
    
    
    4,061,467Interest and dividend income
    
    note 3
    
    
    675,519
    
    
    
    1,086,970
    
    
    
    11,259,867
    
    
    
    17,551,125
    
    
    
    9,671,504Operating expenses:Salaries and benefits
    
    note 11
    
    
    12,815,891
    
    
    
    11,319,127
    
    
    
    10,674,384General and administrative
    
    
    
    
    
    
    3,581,721
    
    
    
    2,635,005
    
    
    
    3,029,595Occupancy costs
    
    
    
    
    
    
    560,757
    
    
    
    540,762
    
    
    
    1,029,38516,958,369
    
    
    
    14,494,894
    
    
    
    14,733,364Depreciation
    
    
    
    
    
    
    737,132
    
    
    
    748,335
    
    
    
    799,961Investment earnings
    
    
    
    
    
    
    
    
    
    
    (386,404
    )
    
    
    (1,016,632
    )Interest expense and financing costs
    
    
    
    
    
    
    33,347
    
    
    
    96,868
    
    
    
    24,33317,728,848
    
    
    
    14,953,693
    
    
    
    14,541,026(Loss) earnings before restructuring expense, income taxes
and discontinued operations
    
    
    
    
    
    
    (6,468,981
    )
    
    
    2,597,432
    
    
    
    (4,869,522
    )Restructuring expense
    
    note 15
    
    
    
    
    
    
    
    
    
    
    642,897(Loss) earnings before income taxes
    
    
    
    
    
    
    (6,468,981
    )
    
    
    2,597,432
    
    
    
    (5,512,419
    )Income tax expense (recovery)
    
    note 14
    
    
    3,689,164
    
    
    
    (43,773
    )
    
    
    (120,393
    )(Loss) earnings before discontinued operations
    
    
    
    
    
    
    (10,158,145
    )
    
    
    2,641,205
    
    
    
    (5,392,026
    )Gain on disposal of discontinued operations, net of
income taxes
    
    note 21
    
    
    
    
    
    
    375,514
    
    
    
    5,721,229Earnings from discontinued operations, net of income taxes
    
    note 21
    
    
    
    
    
    
    
    
    
    
    1,806,983Net (loss) earnings
    
    
    
    
    
    $
    (10,158,145
    )
    
    $
    3,016,719
    
    
    $
    2,136,186(Loss) earnings per shareBasic
    
    
    
    
    
    $
    (1.11
    )
    
    $
    0.23
    
    
    $
    0.10Diluted
    
    
    
    
    
    $
    (1.11
    )
    
    $
    0.23
    
    
    $
    0.10(Loss) earnings per share  continuing operationsBasic
    
    
    
    
    
    $
    (1.11
    )
    
    $
    0.20
    
    
    $
    (0.27
    )Diluted
    
    
    
    
    
    $
    (1.11
    )
    
    $
    0.20
    
    
    $
    (0.27
    )Earnings per share  discontinued operationsBasic
    
    
    
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.37Diluted
    
    
    
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.37Weighted average number of common shares outstanding  basic
    
    
    
    
    
    
    9,122,688
    
    
    
    13,147,793
    
    
    
    20,450,230Weighted average number of common shares outstanding  fully
diluted
    
    
    
    
    
    
    9,122,688
    
    
    
    13,155,910
    
    
    
    20,459,736




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Comprehensive Income (Loss)
(Expressed In Canadian dollars)
 For the year ended:
    
    September 30
    
    
    September 30
    
    
    September 302008
    
    
    2007
    
    
    2006Net (loss) earnings
    
    $
    (10,158,145
    )
    
    $
    3,016,719
    
    
    $
    2,136,186Other comprehensive income (loss):Gain (loss) on foreign currency translation
    
    
    76,519
    
    
    
    (25,514
    )
    
    
    Comprehensive (loss) income
    
    $
    (10,081,626
    )
    
    $
    2,991,205
    
    
    $
    2,136,186




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Retained Earnings (Deficit)
(Expressed In Canadian dollars)
 For the year ended:
    
    
    
    
    
    September 30
    
    
    September 30
    
    
    September 302008
    
    
    2007
    
    
    2006Retained earnings (deficit), beginning of period
    
    
    
    
    
    $
    3,094,135
    
    
    $
    (40,266,401
    )
    
    $
    (42,402,587
    )Transitional adjustment on adoption of
financial instruments
    
    
    
    
    
    
    
    
    
    
    77,416
    
    
    
    Net (loss) earnings
    
    
    
    
    
    
    (10,158,145
    )
    
    
    3,016,719
    
    
    
    2,136,186Deficit reduction applied against share capital
    
    Note 11
    
    
    
    
    
    
    40,266,401
    
    
    
    (Deficit) retained earnings, end of period
    
    
    
    
    
    $
    (7,064,010
    )
    
    $
    3,094,135
    
    
    $
    (40,266,401
    )




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
 For the year ended:
    
    September 30
    
    
    September 30
    
    
    September 302008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net (loss) earnings
    
    $
    (10,158,145
    )
    
    $
    3,016,719
    
    
    $
    2,136,186Items not involving cash:Gain on disposal of discontinued operations
    
    
    
    
    
    
    (375,514
    )
    
    
    (5,721,229
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,806,983
    )Depreciation
    
    
    737,132
    
    
    
    748,335
    
    
    
    799,961Stock based compensation
    
    
    
    
    
    
    16,987
    
    
    
    57,754(Gain) loss on foreign exchange
    
    
    (76,519
    )
    
    
    
    
    
    
    Future income taxes
    
    
    3,714,944
    
    
    
    
    
    
    
    906,303Change in fair value of held for trading investments
    
    
    4,917,237
    
    
    
    (4,061,467
    )
    
    
    65,490Net change in non-cash working capital balances:Accounts receivable
    
    
    (3,081,525
    )
    
    
    (646,317
    )
    
    
    4,482,082Prepaid expenses
    
    
    321,423
    
    
    
    1,024,480
    
    
    
    (1,266,832
    )Investments held for trading
    
    
    4,920,660
    
    
    
    4,345,597
    
    
    
    Accounts payable and accrued liabilities
    
    
    527,802
    
    
    
    (1,892,034
    )
    
    
    2,498,989Deferred revenue
    
    
    222,486
    
    
    
    (580,160
    )
    
    
    475,483Other
    
    
    
    
    
    
    9,175
    
    
    
    25,784Net cash provided by (used in) operating activities
    
    
    2,045,495
    
    
    
    1,605,801
    
    
    
    2,652,988Cash flows from financing activities:Operating line of credit
    
    
    (1,975,000
    )
    
    
    1,975,000
    
    
    
    Long-term debt repayments
    
    
    (87,878
    )
    
    
    (94,558
    )
    
    
    (108,983
    )Issuance of common shares
    
    
    16,666
    
    
    
    66,584
    
    
    
    25,000Share buy back under substantial issuer bid
    
    
    
    
    
    
    (30,218,722
    )
    
    
    Share buy back under normal course issuer bid
    
    
    (2,932,720
    )
    
    
    (2,823,058
    )
    
    
    (2,829,831
    )Net cash provided by (used in) financing activities
    
    
    (4,978,932
    )
    
    
    (31,094,754
    )
    
    
    (2,913,814
    )Cash flows from investing activities:Loans receivable
    
    
    992,177
    
    
    
    492,923
    
    
    
    224,760Cash outlay on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    (794,453
    )Purchase of capital assets
    
    
    (442,994
    )
    
    
    (135,396
    )
    
    
    (23,320
    )Proceeds on sale of subsidiary
    
    
    2,803,549
    
    
    
    (103,549
    )
    
    
    24,300,000Investment in real estate
    
    
    (65,487
    )
    
    
    (472,751
    )
    
    
    (1,001,354
    )Investments
    
    
    
    
    
    
    29,281,590
    
    
    
    (24,324,830
    )Net cash provided by (used in) investing activities
    
    
    3,287,245
    
    
    
    29,062,817
    
    
    
    (1,619,197
    )Change in cash balance due to foreign exchange
    
    
    165,986
    
    
    
    51,902
    
    
    
    480,322Net change in cash from continuing operations
    
    
    519,794
    
    
    
    (374,234
    )
    
    
    (1,399,701
    )Cash flows from discontinued operationsNet cash provided by operating activities
    
    
    
    
    
    
    
    
    
    
    4,835,618Net cash provided by (used in) financing activities
    
    
    
    
    
    
    
    
    
    
    (4,614,317
    )Net cash provided by (used in) investing activities
    
    
    
    
    
    
    375,514
    
    
    
    (1,376,485
    )Change in cash balance due to foreign exchange
    
    
    
    
    
    
    
    
    
    
    (552,754
    )Net change in cash from discontinued operations
    
    
    
    
    
    
    375,514
    
    
    
    (1,707,938
    )Net change in cash
    
    
    519,794
    
    
    
    1,280
    
    
    
    (3,107,639
    )Cash,beginning of period
    
    
    759,475
    
    
    
    758,195
    
    
    
    2,324,074Add: cash,beginning of period for the discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,885,846Less: cash,end of period for the discontinued operations
    
    
    
    
    
    
    
    
    
    
    (344,086
    )Cash,end of period
    
    $
    1,279,269
    
    
    $
    759,475
    
    
    $
    758,195Supplemental cash flow information:Interest paid
    
    $
    44,165
    
    
    $
    96,868
    
    
    $
    24,333Income taxes (received) paid
    
    
    (25,780
    )
    
    
    




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statement of Shareholders Equity
(Expressed In Canadian dollars)
 Accumulatedothercomprehensive
    
    TotalContributed
    
    
    
    
    
    Stock based
    
    Retained
    
    income
    
    shareholders'Share capital
    
    surplus
    
    Warrants
    
    compensation
    
    earnings
    
    (restated)
    
    equityBalance, October 1, 2007
    
    $
    10,516,344
    
    
    $
    24,216,052
    
    
    $
    6,542,456
    
    
    $
    864,533
    
    
    $
    3,094,135
    
    
    $
    (76,519
    )
    
    $
    45,157,001Share repurchases pursuant
to normal course issuer
bid (note 11)
    
    
    (1,162,269
    )
    
    
    (1,770,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,932,720
    )Share issuances pursuant
to stock options exercised
(note 11)
    
    
    16,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,666Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,158,145
    )
    
    
    
    
    
    
    (10,158,145
    )Realized gain on foreign
exchange translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,519
    
    
    
    76,519Balance, September 30, 2008
    
    $
    9,370,741
    
    
    $
    22,445,601
    
    
    $
    6,542,456
    
    
    $
    864,533
    
    
    $
    (7,064,010
    )
    
    $
    
    
    
    $
    32,159,321




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 
 1.
    
    Nature of BusinessThe Company, continued under the Business Corporations Act (Ontario),
operated in the United States and Canada during the year, providing
merchant banking and consumer and retail branding services.Pursuant to a vote of shareholders, effective March 30, 2007, the Company changed its legal
name to Envoy Capital Group Inc.Basis of Presentation
 (a)
    
    The consolidated financial statements have been prepared by management in
accordance with generally accepted accounting principles in Canada, which vary in certain
significant respects from generally accepted accounting principles in the United States.
A description of the significant differences, as applicable to the Company, is included
in note 22.(b)
    
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2008.
 2.
    
    Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and
its subsidiaries, collectively known as Envoy Capital Group Inc. Intercompany
balances and transactions are eliminated on consolidation.Subsidiaries as at September 30, 2008, 2007 and 2006 are as follows:
 2008
    
    
    2007
    
    
    2006
    
    
    Jurisdiction ofCompany
    
    % ownership
    
    
    %ownership
    
    
    %ownership
    
    
    incorporationWatt International Inc.
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    Ontario1632159 Ontario Ltd.
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    OntarioECG Properties Inc.
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    Ontario




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
 (b)
    
    Use of EstimatesThe preparation of 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the year. Significant areas requiring the use of management estimates
include discount factors relating to fair value measurements, valuation allowance for
future tax assets, determination of percentage of completion for revenue recognition and
variables used in stock based compensation calculations. While management believes the
estimates are reasonable, actual results could differ from those estimates and could
impact future results of operations and cash flows.(c)
    
    Property, Plant and EquipmentProperty, plant and equipment are recorded at cost and are depreciated over their
estimated useful lives as follows:
 Asset
    
    Basis
    
    RateComputer equipment and software
    
    Declining balance
    
    30% - 50%Furniture and equipment
    
    Declining balance
    
    20%Leasehold improvements
    
    Straight line
    
    initial term of lease + 1 option period
 (d)
    
    Revenue RecognitionConsumer and Retail Branding:Net revenue for the Consumer and Retail Branding segment represents compensation for
services rendered, net of any pass-through costs such as production costs incurred on
behalf of clients in acting as agent for them. In circumstances where the Company retains
subcontractors, such as architects or engineers, to perform services as an agent to the
Company, the revenue for such services is included in net revenue and the cost of the
subcontractors services is included in salaries and benefits expense or general and
administrative expenses, as appropriate.The Company recognizes net revenue and profits for Consumer and Retail Branding on the
completed contract basis, and accordingly revenue and profit are recognized only when the
contract or contract milestone is substantially complete. Anticipated losses are provided
for when the estimate of total costs on a contract indicates a loss.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 
 2.
    
    Significant Accounting Policies (continued)Further, the balance sheet reflects the following:
 (i)
    
    deferred revenue representing fees billed and collected in advance of such
fees being earned;(ii)
    
    unbilled revenue representing fees earned but not yet billed as well as
well as reimbursable pass-through costs; and(iii)
    
    work in process representing costs incurred on projects for which revenue
has not yet been recognized for accounting purposes.
    (e)
    
    GoodwillGoodwill represents the price paid for acquisitions in excess of the fair market value of
net tangible and intangible assets acquired. Goodwill is carried at cost, less impairment
losses if any.The Company uses a two-step impairment test on an annual basis, or when
significant business changes have occurred that may have had an adverse impact on the
fair value of the goodwill. To determine whether impairment has occurred, the fair
value of the reporting unit to which goodwill has been attributed is compared to its
carrying amount including goodwill. When the fair value is in excess of its carrying
amount, the goodwill is not considered to be impaired, and the second step of the
impairment test is not necessary.When the carrying amount of the reporting unit as determined in the first step
exceeds the fair value, then the fair value of the goodwill is determined in the same
manner as followed in a business combination. An impairment loss is recognized
when the carrying amount of the goodwill of a reporting unit exceeds its fair value.
It is not reversed in the event that the fair value subsequently increases.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
 (f)
    
    Foreign currency translationThe financial statements of the Companys previously owned foreign subsidiaries, all of
which were self-sustaining operations, were translated using the current rate method,
whereby the assets and liabilities of such foreign operations were translated at the
exchange rate in effect at the balance sheet date. Revenue and expenses were translated
at the average exchange rate for the year. Translation gains or losses were deferred and
included as a separate component of shareholders equity as Accumulated Other
Comprehensive Income (Loss) until the subsidiary was disposed.In respect of the Company and its subsidiaries foreign currency transactions, at the
transaction date each asset, liability, revenue and expense is translated into the
functional currency of the Company at the exchange rate in effect at the date of the
transaction. At the year-end date, monetary assets and liabilities are translated into
the functional currency of the Company at the exchange rate in effect at that date. The
resulting foreign exchange gains and losses are included in earnings in the current year.
 (g)
    
    Income taxesThe Company accounts for income taxes using the asset and liability method. Under this
method, future income taxes are recognized at the enacted or substantially enacted tax
rate expected to be applicable at the date of reversal for all significant temporary
differences between the tax and accounting bases of assets and liabilities and for certain
tax carryforward items. Future income tax assets are recognized only to the extent that,
in the opinion of management, it is more likely than not that the future income tax assets
will be realized. Future income tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of the substantive enactment of the change.(h)
    
    Stock-based compensationThe Company calculates the fair value of the stock-based compensation on all awards
granted and recognizes the expense from the date of grant and is amortized over the
vesting period. The company determines the fair value of stock options granted using the
Black-Scholes option pricing model.(i)
    
    Earnings per shareBasic earnings per share is computed using the weighted average number of common
shares that are outstanding during the year. Diluted earnings per share is computed
using the weighted average number of common and potential common shares outstanding
during the year. Potential common shares consist of the




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
 incremental common shares issuable upon the exercise of stock options and warrants under
the treasury stock method and potential shares issuable upon conversion of
convertible debt using the if converted method.(j)
    
    Business combinationsAll business combinations are accounted for using the purchase method of accounting. The
value of shares issued in a business combination are measured using the average share
price for a reasonable period before and after the date the terms of the acquisition are
agreed to and announced. Intangible assets that meet specific criteria are recognized and
reported apart from goodwill.(k)
    
    Financial instrumentsFinancial assets and financial liabilities are initially recognized at fair value and
their subsequent measurement is dependent on their classification as described below. The
change in policy was applied retrospectively in fiscal 2007 with no restatement of
comparative figures. The effect of the adjustment was a net increase to retained earnings
of $77,416.The classification depends on the purpose for which the financial instruments were
acquired or issued, their characteristics and the Companys designation of such
instruments. The standards require that all financial assets be classified either as
held-for-trading (HFT), available-for-sale (AFS), held-to-maturity (HTM), or loans
and receivables. The standards require that all financial assets, including all
derivatives, be measured at fair value with the exception of loans and receivables, debt
securities classified as HTM, and AFS financial assets that do not have quoted market
prices in an active market.The following is a summary of the accounting model the Company has elected to apply to
each of its significant categories of financial instruments outstanding at September 30,
2008:
 Cash
    
    Held-for-tradingCash held in trust
    
    Held-for-tradingCash held in escrow
    
    Held-for-tradingInvestments held for trading
    
    Held-for-tradingAccounts receivable
    
    Loans and receivablesLoans receivable
    
    Loans and receivablesForeign currency contracts
    
    Held-for-tradingBank indebtedness
    
    Other financial liabilityAccounts payable
    
    Other financial liabilityLong-term debt
    
    Other financial liability




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
         (l)
    
    Comprehensive incomeEffective October 1, 2006, the Company adopted section 1530 of the CICA Handbook,
Comprehensive Income. Comprehensive income is the change in a
companys net assets that results from transactions, events and circumstances from sources
other than the companys shareholders. It includes items that would not normally be
included in net earnings, such as:
 
    
    changes in the currency translation adjustment relating to self-sustaining
foreign operations
    
    unrealized gains or losses on available-for-sale investments.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
 (m)
    
    HedgesIn conjunction with the above new sections, the Company also adopted section 3865 of the
CICA Handbook, Hedges. The section describes when and how hedge accounting can be used.
The Company currently does not have any hedge transactions.(n)
    
    Impairment of long-lived assetsAssets are tested for impairment when a triggering event occurs which indicates that the
asset may be impaired. An impairment loss is recognized when the carrying amount of
an asset held for use exceeds the sum of the undiscounted cash flows expected from
its use and eventual disposition. An impairment loss is measured as the amount by
which the assets carrying amount exceeds its fair value.(o)
    
    Discontinued operationsThe results of operations of a business that has either been disposed of, or is
held for sale is reported as discontinued operations if the operations and cash flows
of the component have been (or will be) eliminated from the Companys ongoing
operations, and the Company will not have any significant continuing involvement in
the operations of the component after the disposal transaction. The results of
discontinued operations, less applicable taxes are reported as a separate element of
income or loss before extraordinary items for prior periods.(p)
    
    Recently adopted accounting policiesEffective October 1, 2007, the Company adopted prospectively the following Canadian
Institute of Chartered Accountants Handbook (CICA Handbook) new accounting standards
for interim and annual financial statements for fiscal years beginning on or after
October 1, 2007:




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 2.
    
    Significant Accounting Policies (continued)
   (q)
    
    Recent accounting pronouncementsThe CICA issued a new accounting standard, Section 3064, Goodwill and Intangible Assets,
which clarifies that costs can be deferred only when they relate to an item that meets
the definition of an asset. As a result, start-up costs must be expensed as incurred.
Section 1000, Financial Statement Concepts, was also amended to provide consistency with
this new standard. These new standards are effective for years beginning on or after
October 1, 2008. The Company is currently assessing the impact of these standards on its
consolidated financial statements.On February 13, 2008 the Canadian Accounting Standards Board (AcSB) confirmed January
1, 2011 as the official changeover date for publicly listed Canadian companies to start
using International Financial Reporting Standards (IFRS). The transition will affect
interim and annual financial statements relating to years beginning on or after January
1, 2011. The Company continues to monitor, and assess, the impact of the convergence of
Canadian GAAP and IFRS.
 3. Investments
 2008
    
    
    2007Investments held for tradingCash and equivalents
    
    $
    5,997,502
    
    
    $
    673,141Publicly-traded investmentsFixed income
    
    
    99,434
    
    
    
    10,278,656Equities
    
    
    7,051,786
    
    
    
    14,817,518Discount securities
    
    
    4,602,248
    
    
    
    11,753,468
    
    
    
    25,096,174Privately-held investments Equities
    
    
    
    
    
    
    1,832,500Total investments held for trading
    
    $
    17,750,970
    
    
    $
    27,601,815




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 3.
    
    Investments (continued)Investments
 Investment in capital pool company
    
    $
    200,000
    
    
    $
    200,000Available for sale investments in private equity
    
    
    24,250
    
    
    
    24,250Total investments
    
    $
    224,250
    
    
    $
    224,250
 As at September 30, 2008 the portfolio of investments held for trading was invested in
marketable securities, including fixed income securities, bonds and common shares, as well as
common shares in privately held companies. The specific investments within the portfolio
will vary depending on market conditions. The investment portfolio, including interest and
dividend income, had a loss of ($4,254,666) during fiscal 2008 (2007  earnings of
$5,534,841 and 2006  earnings of $1,016,632), after deducting fees and expenses.At September 30, 2008, cash and equivalents included cash of $3,297,502 and interest-bearing
money market funds totalling $2,700,000. Fixed income securities consist of mid-term large
cap U.S. corporate bonds with 5.45% to 5.7% coupons. Discount securities are comprised
mainly of short-term Canadian bankers acceptance notes with face values ranging from
$100,000 to $4,000,000, bearing interest at rates from 3.0% to 3.9% and maturing within 30
days.In April 2007, Envoy founded Sereno Capital Corporation (Sereno), a Capital Pool Company,
under the specific provisions of the TSX-V program. During the year, the Company invested
$200,000 in Sereno and as at September 30, 2008 Envoy owned an approximate 30% interest.
Members of Envoys management group are also officers and directors of Sereno and exercise
significant influence. The investment in Sereno has been accounted for using the equity
method. The Sereno shares trade under the symbol SZZ.P and based on market prices at
September 30, 2008, had a fair value of $285,000. Sereno is currently in the process of
evaluating opportunities and has not yet completed a qualifying transaction.4.
    
    Accounts receivable
 2008
    
    
    2007Trade receivables
    
    $
    6,199,726
    
    
    $
    3,563,446Unbilled revenue
    
    
    1,332,334
    
    
    
    887,370Work in process
    
    
    855,407
    
    
    
    855,136$
    8,387,477
    
    
    $
    5,305,952
 Included in net revenue are disbursement costs of $2,440,015 in 2008 and $1,154,249 and
$893,904 in 2007 and 2006 respectively.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 5.
    
    Loans receivableEffective June 30, 2005, the Company completed the sale of its John Street, Inc. subsidiary
and related assets to the management of John Street. The Company financed a portion of the
sale through loans receivable, secured by a general security agreement and collateralized by
the underlying shares. Loans at September 30 are as follows:
 2008
    
    
    2007Loan receivable, 8.0% per annum, due
June 30, 2009, repayable in monthly
instalments of $20,833, plus interest
    
    $
    
    
    
    $
    687,489Loan receivable, 8.0% per annum, due
June 30, 2009, repayable in monthly
instalments of $28,125, plus interest
    
    
    253,125
    
    
    $
    464,063Loan receivable, 8.0% per annum, due
June 30, 2009, repayable in monthly
instalments of $12,500, plus interest
    
    $
    112,500
    
    
    $
    206,250365,625
    
    
    
    1,357,802Less current portion
    
    
    365,625
    
    
    
    493,746$
    
    
    
    $
    864,056
 6.
    
    Real estateThe Company currently owns two investment properties on Queen St. in Toronto, which it plans
to develop for resale. The properties have been valued at cost, representing the cost of
acquisition plus related development costs.
 7.
    
    Property, plant and equipment
 Accumulated
    
    
    Net book2008
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    4,171,636
    
    
    $
    3,687,146
    
    
    $
    484,490Furniture and equipment
    
    
    501,234
    
    
    
    470,957
    
    
    
    30,277Leasehold improvements
    
    
    3,647,838
    
    
    
    3,014,078
    
    
    
    633,760Equipment under capital leases
    
    
    963,519
    
    
    
    961,581
    
    
    
    1,938$
    9,284,227
    
    
    $
    8,133,762
    
    
    $
    1,150,465




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 7.
    
    Property, plant and equipment (continued)
 Accumulated
    
    
    Net book2007
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    3,777,183
    
    
    $
    3,367,630
    
    
    $
    409,553Furniture and equipment
    
    
    473,349
    
    
    
    455,073
    
    
    
    18,276Leasehold improvements
    
    
    3,642,377
    
    
    
    2,636,192
    
    
    
    1,006,185Equipment under capital leases
    
    
    963,519
    
    
    
    952,930
    
    
    
    10,589$
    8,856,428
    
    
    $
    7,411,825
    
    
    $
    1,444,603
 8.
    
    Related party transactionsDuring the year, the Company paid $215,000 (2007  $244,786; 2006  $230,785) for legal
services to a director of the Company. Subsequent to year end, this director became an
employee of the Company.During fiscal 2006, ECG Properties Inc. (ECGP), a newly created wholly-owned subsidiary of
the Company, entered into an agreement with an officer of the Company to jointly purchase
three investment properties located on Queen Street West in Toronto. The agreement provided
that the costs of acquisition, including legal fees, disbursements, land transfer taxes and
development costs, be funded equally by both parties. During the first quarter of fiscal
2007 the agreement was terminated and the Company purchased the related partys interest in
the properties for a cash payment of $945,133 net of a loan receivable of $56,221.In June 2007, ECGP sold one of its investment properties to an officer of the Company. The
net selling price was $625,000, resulting in a gain of approximately $5,000.Related party transactions are recorded at the exchange amount, being the amount agreed to by
the related parties, as these are not considered to be in the ordinary course of business.
 9.
    
    Bank indebtednessThe Company has access to a revolving demand credit facility of $2 million in order to manage
day-to-day operating requirements. Amounts borrowed under the facility bear interest at the
bank prime rate. Drawings under the credit facility are secured by the Companys investment
portfolio. Borrowings under the facility were $nil at September 30, 2008 (2007 -
$1,975,000). The credit facility has no set maturity date.At September 30, 2008, the Company had approximately $87,000 on deposit as a
guarantee pursuant to a client contract. Subsequent to year end the guarantee was
cancelled by the client.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 10.
    
    Long-term debt
 2008
    
    
    2007Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in blended monthly
instalments of $7,666.
    
    $
    69,599
    
    
    $
    157,477Less current portion
    
    
    69,599
    
    
    
    87,878$
    
    
    
    $
    69,599
 11.
    
    Share capital
 (a)
    
    Authorized:
 Unlimited common shares without par value (2007  unlimited; 2006  40,000,000)At a special meeting of shareholders held on March 30, 2007 the shareholders approved an
amendment to the articles of the Company to increase its authorized share capital from
40,000,000 common shares to an unlimited number of common shares.Issued:
 2008
    
    
    2007
    
    
    2006Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    Amount
    
    
    of shares
    
    
    AmountBalance, beginning of year
    
    
    9,637,233
    
    
    $
    10,516,344
    
    
    
    19,421,415
    
    
    $
    97,186,342
    
    
    
    21,007,517
    
    
    $
    105,204,765Common shares issued (cancelled)
pursuant to:Repurchase of shares pursuant
to substantial issuer bid (c)
    
    
    
    
    
    
    
    
    
    
    (9,002,383
    )
    
    
    (45,048,658
    )
    
    
    
    
    
    
    Stock options exercised
    
    
    13,333
    
    
    
    16,666
    
    
    
    31,667
    
    
    
    66,584
    
    
    
    20,000
    
    
    
    25,000Deficit reduction pursuant to
special resolution (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,266,401
    )
    
    
    
    
    
    
    Repurchase of shares pursuant
to normal course issuer bid (c)
    
    
    (1,064,930
    )
    
    
    (1,162,269
    )
    
    
    (813,466
    )
    
    
    (1,421,523
    )
    
    
    (1,606,102
    )
    
    
    (8,043,423
    )Balance, end of year
    
    
    8,585,636
    
    
    $
    9,370,741
    
    
    
    9,637,233
    
    
    $
    10,516,344
    
    
    
    19,421,415
    
    
    $
    97,186,342
 (b)
    
    Deficit reduction
 On March 30, 2007, shareholders of the Company approved a special resolution to reduce the
stated capital of the common shares of the Company by $40,266,401. The reduction in share
capital was applied against the opening deficit of 2007 in the same amount.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 
 11.
    
    Share capital (continued)
 (c)
    
    Repurchase of shares
 During fiscal 2008, the Company repurchased and cancelled 1,064,930 common shares for cash
consideration of $2,932,720. The Company repurchased 188,309 shares for cash consideration
of $572,942 pursuant to the terms of a normal course issuer bid which began on February 7,
2007 and ended on February 6, 2008. In addition, the Company repurchased 876,621 shares for
cash consideration of $2,359,778 pursuant to the terms of a normal course issuer bid which
began on February 7, 2008 and ends on February 6, 2009. The Company is authorized to
repurchase and cancel up to 10% of the public float of the shares.Pursuant to the terms of a substantial issuer bid via a modified Dutch Auction which began
on September 15, 2006 and ended on January 24, 2007, the Company re-purchased, for
cancellation, 9,002,383 shares at a price of US$2.70 (CDN$3.19) per share. Total cash
consideration, including associated costs, was $30,218,722, or $3.36 per share.During fiscal 2007, the Company repurchased and cancelled 813,466 common shares for cash
consideration of $2,823,058, pursuant to the terms of a normal course issuer bid which began
on February 7, 2007 and ended on February 6, 2008.During fiscal 2006, the Company repurchased and cancelled 1,606,102 common shares for cash
consideration of $2,829,831, pursuant to the terms of a normal course issuer bid which began
on August 26, 2005 and ended on August 25, 2006.
 (d)
    
    Stock option plan
 The Company has reserved 800,000 common shares under its stock option plan. Under the plan,
the options are exercisable for one common share and the exercise price of the option must
equal the market price of the underlying share at the grant date.The options have vesting periods ranging from the date of grant up to five years. Once
vested, options are exercisable at any time until expiry. All outstanding options expire in
May 24, 2009.There were no options granted during fiscal 2008, 2007 and 2006.On May 25, 2004, the Company granted certain employees and directors a total of 375,000
options at an exercise price of $4.00 per share. These options vest over periods ranging
from one to three years, and expire on May 24, 2009.The estimated fair value of the options granted during fiscal 2004, using the Black-Scholes
option pricing model, was $864,533 of which $16,987 was expensed in the




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 11.
    
    Share capital (continued)
 financial statements in fiscal 2007, $57,754 was expensed in fiscal 2006 and the remaining
option value of $789,792 was expensed in prior years. The amounts have been included as part
of stock based compensation in Shareholders Equity.
 (e)
    
    Stock option details
 Details of the outstanding options are as follows:
 WeightedaverageNumber
    
    
    exercise priceof options
    
    
    per shareOptions outstanding, September 30, 2006
    
    
    293,550
    
    
    
    3.81Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (31,667
    )
    
    
    2.10Options expired
    
    
    (3,550
    )
    
    
    15.25Options outstanding, September 30, 2007
    
    
    258,333
    
    
    
    3.86Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (13,333
    )
    
    
    1.25Options cancelled
    
    
    (20,000
    )
    
    
    4.00Options outstanding, September 30, 2008
    
    
    225,000
    
    
    $
    4.00Number of options exercisableOptions exercisable, September 30, 2008
    
    
    225,000
    
    
    $
    4.00Options exercisable, September 30, 2007
    
    
    258,333
    
    
    $
    3.86Options exercisable, September 30, 2006
    
    
    211,883
    
    
    $
    3.72
 The range of exercise prices for options outstanding and exercisable options at September 30,
2008 are as follows:
 WeightedExercise
    
    Number
    
    Average
    
    NumberPrice
    
    Outstanding
    
    Contractual Life
    
    Exercisable$4.00
    
    225,000
    
    0.65
    
    225,000




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 11.
    
    Share capital (continued)
 (f)
    
    Warrants
 There are currently 27,631,585 issued and outstanding warrants. A warrantholder is required
to exercise five (5) whole warrants in order to purchase one common share for a price of CDN
$9.00 per common share. The warrants expire on February 20, 2009.
 12.
    
    Contributed Surplus
 During fiscal 2008, pursuant to the normal course issuer bid described in Note 9(c), the
Company repurchased and cancelled 1,064,930 common shares at an average price of $2.75 per
common share for total cash consideration of $2,932,720 including related expenses. As the
average price paid was more than the average per share value of the outstanding common
shares, $1,770,451 was recorded as a reduction of contributed surplus.On January 25, 2007, pursuant to the substantial issuer bid described in Note 9(c), the
Company repurchased and cancelled 9,002,383 common shares at an average price of $3.36 per
common share for total cash consideration of $30,218,722 including related expenses. As the
average price paid was less than the average per share value of the outstanding common
shares, $14,829,936 was recorded in contributed surplus as a gain on redemption of shares.During fiscal 2007, pursuant to the normal course issuer bid described in Note 9(c), the
Company repurchased and cancelled 813,466 common shares at an average price of $3.47 per
common share for total cash consideration of $2,823,058 including related expenses. As the
average price paid was more than the average per share value of the outstanding common
shares, $1,401,535 was recorded as a reduction of contributed surplus.During fiscal 2006, pursuant to the normal course issuer bid described in Note 9(c), the
Company repurchased and cancelled 1,606,102 common shares at an average price of $1.76 per
common share for total cash consideration of $2,829,831 including related expenses. As the
average price paid was less than the average per share value of the outstanding common
shares, $5,213,592 was recorded in contributed surplus as a gain on redemption of shares.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 13.
    
    Earnings per Share
 The following table sets forth the computation of basic and diluted earnings per share:
 2008
    
    
    2007
    
    
    2006Numerator for EPS calculations:Net (loss) earnings
    
    $
    (10,158,145
    )
    
    $
    3,016,719
    
    
    $
    2,136,186Denominator:Denominator for basic net
earnings per share -
weighted average shares
outstanding
    
    
    9,122,688
    
    
    
    13,147,793
    
    
    
    20,450,230Effect of dilutive potential
common shares issuable: under stock options
    
    
    
    
    
    
    8,117
    
    
    
    9,506Denominator for diluted net
earnings per share
    
    
    9,122,688
    
    
    
    13,155,910
    
    
    
    20,459,736
 Details of anti-dilutive potential securities outstanding not included in diluted EPS
calculations at September 30 are as follows:
 Anti-dilutive potential securities
    
    2008
    
    
    2007
    
    
    2006Common shares potentially issuable: pursuant to warrants
    
    
    5,526,317
    
    
    
    5,526,317
    
    
    
    5,526,317 under stock options
    
    
    225,000
    
    
    
    245,000
    
    
    
    263,5505,751,317
    
    
    
    5,771,317
    
    
    
    5,789,867




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 14.
    
    Income taxesIncome tax expense (recovery) for the years ended September 30, 2008, 2007 and 2006 consists
of:
 2008
    
    
    2007
    
    
    2006Current (recovery)
    
    $
    (25,780
    )
    
    $
    
    
    
    $
    (1,026,696
    )Future
    
    
    3,714,944
    
    
    
    (43,773
    )
    
    
    906,303$
    3,689,164
    
    
    $
    (43,773
    )
    
    $
    (120,393
    )
  2008
    
    2007
    
    2006Income tax (recovery) expense
at statutory rates
    
    $
    (2,209,157
    )
    
    
    (34.2
    %)
    
    $
    938,192
    
    
    
    36.1
    %
    
    $
    (1,991,086
    )
    
    
    (36.1
    %)Increase (decrease) in
income taxes resulting from:Expenses (revenue)
deducted (included) in
the accounts that have no
corresponding deduction
(inclusion) for income taxes
    
    
    (92,814
    )
    
    
    (1.4
    %)
    
    
    28,404
    
    
    
    1.1
    %
    
    
    127,012
    
    
    
    2.3
    %Change in valuation
allowance
    
    
    5,618,446
    
    
    
    86.8
    %
    
    
    (1,429,871
    )
    
    
    (55.1
    %)
    
    
    1,820,581
    
    
    
    33.0
    %Adjustment to future tax
for substantively enacted
changes in tax laws and rates
    
    
    74,393
    
    
    
    1.2
    %
    
    
    705,939
    
    
    
    27.2
    %
    
    
    
    
    
    
    Other
    
    
    298,296
    
    
    
    4.6
    %
    
    
    (286,437
    )
    
    
    (11.0
    %)
    
    
    (76,900
    )
    
    
    (1.4
    %)$
    3,689,164
    
    
    
    57.0
    %
    
    $
    (43,773
    )
    
    
    (1.7
    %)
    
    $
    (120,393
    )
    
    
    (2.2
    %)




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 14.
    
    Income taxes (continued)The tax effects of temporary differences that give rise to significant portions of the future
tax assets and liabilities at September 30, 2008 and 2007 are presented below:
 2008
    
    
    2007Future tax assets:Property, plant and equipment
    
    $
    1,094,932
    
    
    $
    1,023,527Share issuance costs
    
    
    
    
    
    
    404,945Non-capital losses expiring by 2028
    
    
    8,273,890
    
    
    
    6,023,230Other
    
    
    1,325
    
    
    
    14,9439,370,147
    
    
    
    7,466,645Less valuation allowance
    
    
    8,381,921
    
    
    
    2,763,475Total net future tax assets
    
    
    988,226
    
    
    
    4,703,170Less current portion
    
    
    650,791
    
    
    
    1,133,258$
    337,435
    
    
    $
    3,569,912
  2009
    
    $
    3,300,0002010
    
    
    4,900,0002014
    
    
    2,800,0002015
    
    
    1,600,0002026
    
    
    1,800,0002027
    
    
    1,400,0002028
    
    
    9,300,000$
    25,100,000




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 15.
    
    Restructuring costsIn response to a number of economic uncertainties, competitive challenges and business risks
that impacted client spending commitments of its operating subsidiaries, in November 2005,
the Company announced that its Board of Directors had approved the immediate implementation
of a restructuring plan. The restructuring involved the downsizing of its subsidiaries
workforce, and writing off redundant capital assets. Accordingly, the Company recorded
restructuring costs of $642,897 in fiscal 2006 arising from termination costs related to 44
employees.16.
    
    Commitments and contingenciesThe Company has entered into operating lease agreements for office premises and equipment
with minimum annual lease payments over the next three years to expiry as follows:
 2009
    
    $
    770,0002010
    
    
    318,0002011
    
    
    2,000$
    1,090,000
 Rent expense under operating leases for the year ended September 30, 2008 amounted to
$801,291 (2007  $754,926; 2006  $663,013).17.
    
    Management of capitalThe Company includes the following in its definition of capital:
 2008
    
    
    2007Bank indebtedness
    
    $
    
    
    
    $
    1,975,000Long-term debt
    
    
    69,599
    
    
    
    157,477Shareholders equity comprised of Share capital
    
    
    9,370,741
    
    
    
    10,516,344Contributed surplus
    
    
    22,445,601
    
    
    
    24,216,052Warrants
    
    
    6,542,456
    
    
    
    6,542,456Stock based compensation
    
    
    864,533
    
    
    
    864,533(Deficit) Retained earnings
    
    
    (7,064,010
    )
    
    
    3,094,135$
    32,228,920
    
    
    $
    47,365,997




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 17.
    
    Management of capital (continued)The Companys objectives when managing capital are:
 (a)
    
    to allow the Company to respond to changes in economic and/or marketplace
conditions by maintaining the Companys ability to purchase new investments;(b)
    
    to give shareholders sustained growth in shareholder value by increasing
shareholders equity;(c)
    
    to ensure that the Company maintains the level of capital necessary to meet the
requirements of its bank; and(d)
    
    to maintain a flexible capital structure which optimizes the cost of capital at
acceptable levels of risk.
  (a)
    
    realizing proceeds from the disposition of its investments;(b)
    
    utilizing leverage in the form of third party debt and the Companys bank credit
line (bank indebtedness);(c)
    
    raising capital through equity financings; and(d)
    
    purchasing the Companys own shares for cancellation pursuant to its normal
course issuer bid.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 18.
    
    Financial instrumentsThe investment operations of the Companys business involve the purchase and sale of
securities and, accordingly, the majority of the Companys assets are currently comprised of
financial instruments. The use of financial instruments can expose the Company to several
risks, including market, credit and liquidity risks. A discussion of the Companys use of
financial instruments and its risk management is provided below.
 (i)
    
    Liquidity riskLiquidity risk is the risk that the Company will have sufficient cash resources to meet
its financial obligations as they come due. The Companys liquidity and operating
results may be adversely affected if the Companys access to the capital markets is
hindered, whether as a result of a downturn in stock market conditions generally or
related to matters specific to the Company, or if the value of the Companys investments
declines, resulting in losses upon disposition.The Company generates cash flow primarily from its financing activities and proceeds
from the disposition of its investments, in addition to interest and dividend income
earned on its investments. From time to time, the Company will invest in private
equities which have no immediate market and would be illiquid until one is created.
Investments in private equities tend to be relative small, comprising less than 5% of
available capital and the Company has sufficient marketable securities which are freely
tradable and relatively liquid to fund its obligations as they become due under normal
operating conditions.(ii)
    
    Market risk:Market risk is the risk that the fair value of, or future cash flows from, the Companys
financial instruments will significantly fluctuate because of changes in market prices.
The value of the financial instruments can be affected by changes in interest rates,
foreign exchange rates, and equity and commodity prices. The Company is exposed to
market risk in trading its investments and unfavourable market conditions could result
in dispositions of investments at less than favourable prices. The Company manages
market risk by having a portfolio which is not singularly exposed to any one issuer or
class of issuers. The Company also has set thresholds on purchases of investments over
which the approval of the board of directors is required.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 18.
    
    Financial instruments (continued)
  Change in net after-tax
    
    Change in net after-taxPercentage change in
    
    income (loss) from %
    
    income (loss) from %closing price
    
    increase in closing price
    
    decrease in closing price2%
    
    $
    135,111
    
    
    $
    (135,111
    )4%
    
    
    270,222
    
    
    
    (270,222
    )6%
    
    
    405,333
    
    
    
    (405,333
    )8%
    
    
    540,443
    
    
    
    (540,443
    )10%
    
    
    675,554
    
    
    
    (675,554
    )
 (iii)
    
    Currency risk:The Company is subject to currency risk through its activities in the United States and
overseas. The Company invoices a substantial portion of its consumer branding customers
in foreign currency and, as such, changes in the exchange rate affect the operating
results of the Company. The Company does not actively use derivative instruments to
reduce its exposure to foreign currency risk. However, dependent on the nature, amount
and timing of foreign currency receipts and payments, the Company may from time to time
enter into foreign currency contracts to mitigate the associated risks. At September
30, 2008, the Company had outstanding foreign exchange contracts to purchase 500,000 US
dollars at 1.0641 expiring November 2008 and 5,000,000 Euros at an average rate of
1.5090 expiring between October and December 2008. The Company also had an outstanding
contract to sell 1,000,000 Euros at 1.4920, expiring September 30, 2009. The net
liability of $83,650 arising from these contracts has been included in accounts payable
and accrued liabilities. The gains and losses from these contracts have been included
in general and administrative expenses.The following assets and liabilities were denominated in foreign currencies at September
30, 2008 (US dollar 1.0642, UAE Dirham 0.2886, British Pound 1.8920, Euro dollar
1.4923):
 2008
    
    
    2007Denominated in U.S. dollarsCash
    
    $
    951,929
    
    
    $
    900,324Investments held for trading
    
    
    1,486,504
    
    
    
    678,304Accounts receivable
    
    
    2,052,966
    
    
    
    2,552,631Accounts payable
    
    
    (136,945
    )
    
    
    (18,705
    )Net assets denominated in U.S. dollars
    
    $
    4,354,454
    
    
    $
    4,112,554




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 18.
    
    Financial instruments (continued)
 2008
    
    
    2007Denominated in U.A.E dirhamCash
    
    $
    41,338
    
    
    $
    Accounts receivable
    
    
    2,723,905
    
    
    
    Accounts payable
    
    
    (872,975
    )
    
    
    Net assets denominated in U.A.E dirham
    
    $
    1,892,268
    
    
    $
    Denominated in British poundsAccounts receivable
    
    $
    143,254
    
    
    $
    81,442Accounts payable
    
    
    (104,493
    )
    
    
    Net assets denominated in British pounds
    
    $
    38,761
    
    
    $
    81,442Denominated in Euro dollarsAccounts payable
    
    $
    (83,600
    )
    
    $
    Net assets denominated in Euro dollars
    
    $
    (83,600
    )
    
    $
    
  Change in net after-tax
    
    Change in net after-taxPercentage change in
    
    income (loss) from %
    
    income (loss) from %foreign currencies
    
    increase in foreign currency
    
    decrease in foreign currency2%
    
    $
    234,453
    
    
    $
    (234,453
    )4%
    
    
    468,905
    
    
    
    (468,905
    )6%
    
    
    703,358
    
    
    
    (703,358
    )8%
    
    
    937,811
    
    
    
    (937,811
    )10%
    
    
    1,172,263
    
    
    
    (1,172,263
    )
 (iv)
    
    Credit risk:The Company manages its credit risk with respect to accounts receivable by dealing
primarily with large creditworthy customers and by billing whenever possible in advance
of rendering services. As at September 30, 2008, one customer represented 32% of
accounts receivable (2007  one customer represented 19% of accounts receivable).




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 18.
    
    Financial instruments (continued)
 At September 30, 2008, the composition of trade receivables was as follows:
 2008
    
    
    2007Current
    
    $
    2,580,171
    
    
    $
    2,444,451Past due 1-30
    
    
    1,338,149
    
    
    
    624,885Past due 31-90
    
    
    1,747,837
    
    
    
    44,223More than 90 days past due
    
    
    533,569
    
    
    
    449,887Total trade receivables
    
    $
    6,199,726
    
    
    $
    3,563,446
 The Company records an allowance for doubtful accounts when the likely recovery is less
than the outstanding amount. There are several amounts due from customers which are
more than 90 days overdue but are not included in the allowance. These amounts are not
allowed for as they are balances with large customers for which the Company has
transacted business for many years. The relationships with these customers are such
that management is confident that the full amount will ultimately be collected.At September 30, 2008, the Companys allowance for doubtful accounts was as follows:
 2008
    
    
    2007Opening balance
    
    $
    88,034
    
    
    $
    78,111Additions
    
    
    73,225
    
    
    
    53,091Write-offs
    
    
    (24,682
    )
    
    
    (43,168
    )Ending balance
    
    $
    136,577
    
    
    $
    88,034
 The Companys loans receivable are secured by both a general security agreement on the
assets in the investee company as well as collateralized by the underlying shares.Certain of the Companys financial assets, including cash and cash equivalents are
exposed to the risk of financial loss occurring as a result of default of a counterparty
on its obligations to the Company. The Company may, from time to time, invest in debt
obligations. The Company is also exposed, in the normal course of business, to credit
risk from advances to investee companies.(v)
    
    Interest rate risk:Interest risk is the impact that changes in interest rates could have on the Companys
earnings and liabilities. All of the Companys interest bearing investments are at
fixed rates, hence there is no exposure to interest rate




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 18.
    
    Financial instruments (continued)
 fluctuations while investments are held. As at September 30, 2008, the Company had no
liabilities which bore interest at rates fluctuating with the prime rate or overnight
lending rate. The Company has a credit facility which can be repaid by the Company at
any time, without notice or penalty, which provides the Company with some ability to
manage and mitigate its interest risk. It is managements opinion that the Company is
not exposed to significant interest rate risk.
 19.
    
    Segmented information
 As of October 1, 2006, the Company changed its corporate structure to include a focus on its
Merchant Banking operations. In prior periods, the Company had only one operating segment.
Accordingly, the Company amended its segmented disclosures in fiscal 2007 and restated
comparative figures to conform to the current presentation.Summary of financial information concerning the Companys operating segments is shown in the
following tables:(a) Summary of operating results:
 For the year endedSeptember 30, 2008Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalNet revenue
    
    $
    15,514,533
    
    
    $
    (4,254,666
    )
    
    $
    
    
    
    $
    11,259,867Operating expenses:Salaries and benefits
    
    
    10,975,740
    
    
    
    848,433
    
    
    
    991,718
    
    
    
    12,815,891General and administrative
    
    
    1,737,792
    
    
    
    550,442
    
    
    
    1,293,487
    
    
    
    3,581,721Occupancy costs
    
    
    844,763
    
    
    
    75,380
    
    
    
    (359,386
    )
    
    
    560,757Depreciation
    
    
    391,717
    
    
    
    11,572
    
    
    
    333,843
    
    
    
    737,132Interest (income) expense
    
    
    (10,759
    )
    
    
    
    
    
    
    44,106
    
    
    
    33,347Earnings (loss) before income
taxes
    
    
    1,575,280
    
    
    
    (5,740,493
    )
    
    
    (2,303,768
    )
    
    
    (6,468,981
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,689,164Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (10,158,145
    )




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 19.
    
    Segmented information (continued)
 For the year endedSeptember 30, 2007Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalNet revenue
    
    $
    12,402,688
    
    
    $
    5,148,437
    
    
    $
    
    
    
    $
    17,551,125Operating expenses:Salaries and benefits
    
    
    8,031,440
    
    
    
    1,464,649
    
    
    
    1,823,038
    
    
    
    11,319,127General and administrative
    
    
    1,429,480
    
    
    
    341,255
    
    
    
    864,270
    
    
    
    2,635,005Occupancy costs
    
    
    769,046
    
    
    
    75,425
    
    
    
    (303,709
    )
    
    
    540,762Depreciation
    
    
    392,865
    
    
    
    14,580
    
    
    
    340,890
    
    
    
    748,335Investment earnings
    
    
    
    
    
    
    
    
    
    
    (386,404
    )
    
    
    (386,404
    )Interest expense and financing
    
    
    18,156
    
    
    
    
    
    
    
    78,712
    
    
    
    96,868Earnings (loss) before income
taxes and discontinued operations
    
    
    1,761,701
    
    
    
    3,252,528
    
    
    
    (2,416,797
    )
    
    
    2,597,432Income tax recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,773
    )Earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,641,205Earnings
from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375,514Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,016,719




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 19.
    
    Segmented information (continued)
 For the year endedSeptember 30, 2006Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalNet revenue
    
    $
    9,671,504
    
    
    $
    
    
    
    $
    
    
    
    $
    9,671,504Operating expenses:Salaries and benefits
    
    
    8,159,158
    
    
    
    
    
    
    
    2,515,226
    
    
    
    10,674,384General and administrative
    
    
    1,599,103
    
    
    
    
    
    
    
    1,430,492
    
    
    
    3,029,595Occupancy costs
    
    
    1,186,576
    
    
    
    
    
    
    
    (157,191
    )
    
    
    1,029,385Depreciation
    
    
    451,303
    
    
    
    
    
    
    
    348,658
    
    
    
    799,961Investment earnings
    
    
    
    
    
    
    
    
    
    
    (1,016,632
    )
    
    
    (1,016,632
    )Interest expense and financing
    
    
    17,377
    
    
    
    
    
    
    
    6,956
    
    
    
    24,333Loss before restructuring
expense, income taxes
and discontinued operations
    
    
    (1,742,013
    )
    
    
    
    
    
    
    (3,127,509
    )
    
    
    (4,869,522
    )Restructuring expense
    
    
    558,517
    
    
    
    
    
    
    
    84,380
    
    
    
    642,897Loss before income taxes
and discontinued operations
    
    
    (2,300,530
    )
    
    
    
    
    
    
    (3,211,889
    )
    
    
    (5,512,419
    )Income tax recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,393
    )Loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,392,026
    )Earnings
from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,528,212Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,136,186
 All of the goodwill on the Companys balance sheet is related to the Consumer and Retail
branding segment.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 19.
    
    Segmented information (continued)(b) Summary of total assets
 Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalSeptember 30, 2008
    
    $
    14,252,978
    
    
    $
    21,476,157
    
    
    $
    752,909
    
    
    $
    36,482,044September 30, 2007
    
    $
    11,411,256
    
    
    $
    34,948,296
    
    
    $
    4,432,762
    
    
    $
    50,792,314
 (c) Net revenue by type of service
 2008
    
    
    2007
    
    
    2006Net revenue:Consumer and retail branding
    
    $
    15,514,533
    
    
    $
    12,402,688
    
    
    $
    9,671,504Merchant banking
    
    
    (4,254,666
    )
    
    
    5,148,437
    
    
    
    $
    11,259,867
    
    
    $
    17,551,125
    
    
    $
    9,671,504
 (d) Net revenue by customer location
 2008
    
    
    2007
    
    
    2006Net revenue:USA/South America
    
    $
    6,395,333
    
    
    $
    6,410,926
    
    
    $
    3,534,355Middle East/Asia
    
    
    3,789,765
    
    
    
    1,917,977
    
    
    
    1,146,035Canada
    
    
    1,074,769
    
    
    
    9,222,222
    
    
    
    4,991,114$
    11,259,867
    
    
    $
    17,551,125
    
    
    $
    9,671,504
 (e) Net revenue from major customersIn fiscal 2008, there were five customers who individually represented more than 10% of the
Companys net revenue. Total net revenue from these customers was approximately $8,836,000
(2007  one customer $1,847,000, 2006  one customer $1,422,000).
 20.
    
    Subsequent eventsOn October 2, 2008, the Company transferred approximately $7,544,000 to Monaco in order to
capitalize its newly created foreign subsidiary, Envoy Capital Group Monaco, S.A.M (ECGM).
On November 25, 2008, the formation of the company was officially approved by the Monaco
authorities and ECGM was incorporated. The mandate for ECGM will be mainly to attract new
investment opportunities and promote the services of the Company in the European market.




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 21.
    
    Discontinued operationsThrough its wholly owned subsidiary ECG Holdings (UK) Limited the Company provided brand
strategy, package design, brand management, pre-press, film services in UK and Europe. During
fiscal 2006, Envoys management decided to sell ECG (UK) in order to re-deploy the capital in
its Merchant Banking business.Effective September 15, 2006, Envoy completed the sale of shares of its wholly owned
subsidiary, ECG (UK) and related business and all the assets of Watt Gilchrist Limited and
Parker Williams Design Limited. The sale price was $27,000,000 paid in cash. Pursuant to the
terms and conditions of sale purchase agreement $2,700,000 was held in escrow to secure
potential fourth party claims. In January, 2008, the Company received $2,834,568,
representing the withheld amount plus accrued interest.
 ECG Holdings (UK) Limited and related companies
 Fiscal year:
    
    2008
    
    
    2007
    
    
    2006Net revenue
    
    $
    
    
    
    $
    
    
    
    $
    21,432,172Operating expenses
    
    
    
    
    
    
    
    
    
    
    17,460,973Interest income
    
    
    
    
    
    
    
    
    
    
    (60,327
    )Depreciation
    
    
    
    
    
    
    
    
    
    
    1,294,822Income tax expense
    
    
    
    
    
    
    
    
    
    
    582,122Earnings from discontinued operations
(excluding gain on sale)
    
    
    
    
    
    
    
    
    
    
    2,154,582Minority interest
    
    
    
    
    
    
    
    
    
    
    347,599Gain on sale of discontinued operations
    
    
    
    
    
    
    375,514
    
    
    
    5,721,229Earnings from discontinued operations
    
    $
    
    
    
    $
    375,514
    
    
    $
    7,528,212
 22.
    
    Reconciliation to United States generally accepted accounting principlesThese consolidated financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) as applied in Canada. Set out below are the
material adjustments to net earnings (loss) for the years ended September 30, 2008, 2007 and
2006 required to conform to US GAAP.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 2008
    
    
    2007
    
    
    2006Net (loss) earnings based on
Canadian GAAP
    
    $
    (10,158,145
    )
    
    $
    3,016,719
    
    
    $
    2,136,186Cash held in escrow (a)
    
    
    2,803,549
    
    
    
    (103,549
    )
    
    
    (2,700,000
    )Capitalized incorporation costs (f)
    
    
    66,339
    
    
    
    (66,339
    )
    
    
    Income recognized on reclassification
of investments (g)
    
    
    
    
    
    
    77,416
    
    
    
    Gains on privately-held securities (g)
    
    
    
    
    
    
    (1,147,500
    )
    
    
    Fair value adjustment on restricted
securities (g)
    
    
    1,619,615
    
    
    
    
    
    
    
    Net (loss) earnings based on
U.S. GAAP
    
    $
    (5,668,642
    )
    
    $
    1,776,747
    
    
    $
    (563,814
    )
 2008
    
    2007
    
    2006Net (loss) earnings from continuing
operations
    
    $
    (8,472,191
    )
    
    $
    1,401,233
    
    
    $
    (5,392,026
    )Net earnings from discontinued
operations (Note 21)
    
    $
    2,803,549
    
    
    $
    375,514
    
    
    $
    4,828,212
 The following table sets forth the computation of basic and diluted earnings (loss) per share:
 2008
    
    
    2007
    
    
    2006Net (loss) earnings per share:Basic
    
    $
    (0.62
    )
    
    
    0.14
    
    
    
    (0.03
    )Diluted
    
    
    (0.62
    )
    
    
    0.14
    
    
    
    (0.03
    )Net (loss) earnings per share from continuing
operations:Basic
    
    $
    (0.93
    )
    
    
    0.11
    
    
    
    (0.27
    )Diluted
    
    
    (0.93
    )
    
    
    0.11
    
    
    
    (0.27
    )Net earnings per share from discontinued
operations:Basic
    
    $
    0.31
    
    
    
    0.03
    
    
    
    0.24Diluted
    
    
    0.31
    
    
    
    0.03
    
    
    
    0.24
 The calculation of diluted (loss) earnings per share used income from continuing operations as
the control number in determining whether potential common shares are dilutive or
antidilutive. Since the Company experienced a loss in fiscal 2008 and fiscal 2006 from
continuing operations, all potential common shares outstanding from dilutive securities are
considered antidilutive and are excluded from the calculation of diluted loss per share for
that year.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)The following adjustments are required in order to conform total assets based on Canadian GAAP
to total assets based on U.S. GAAP:
 2008
    
    
    2007Total assets based on Canadian GAAP
    
    $
    36,482,044
    
    
    $
    50,792,314Cash held in escrow (a)
    
    
    
    
    
    
    (2,803,549
    )Capitalized incorporation costs (f)
    
    
    
    
    
    
    (66,339
    )Investments held for trading (g)
    
    
    
    
    
    
    (1,147,500
    )Fair value adjustment on restricted securities (g)
    
    
    472,115
    
    
    
    Total assets based on U.S. GAAP
    
    $
    36,954,159
    
    
    $
    46,774,926
 The following adjustments are required in order to conform shareholders equity based on
Canadian GAAP to shareholders equity based on U.S. GAAP:
 2008
    
    
    2007Shareholders equity based on Canadian GAAP
    
    $
    32,159,321
    
    
    $
    45,157,001Cash held in escrow (a)
    
    
    
    
    
    
    (2,803,549
    )Capitalized incorporation costs (f)
    
    
    
    
    
    
    (66,339
    )Gains on privately-held securities (g)
    
    
    
    
    
    
    (1,147,500
    )Fair value adjustment on restricted securities (g)
    
    
    472,115
    
    
    
    Shareholders equity based on U.S. GAAP
    
    $
    32,631,436
    
    
    $
    41,139,613
 Summary of accounting policy differences:The areas of material difference between Canadian and U.S. GAAP and their impact on the
consolidated financial statements of the Company are set out below:
 (a)
    
    Cash held in escrow:Cash held in escrow represents funds which were held in common trust with the
purchaser of the UK operations, as per the terms of the purchase and sale agreement.
The amount was held in joint trust as security for indemnities provided to the
purchaser at closing and was released on the first anniversary date of the transaction,
including accrued interest. Canadian GAAP allowed the recognition of this amount in
determining the gain on sale. Under US GAAP these funds could not be recognized until
they were released from escrow. As described in Note 21 during January, 2008 the
Company received the cash previously held in escrow and as a result the amount was
recognized in US GAAP income.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (b)
    
    Comprehensive income:The Companys comprehensive income represents U.S. GAAP net earnings plus the results of
certain changes in shareholders equity during a period from non-owner sources that are not
reflected in the consolidated statements of operations.
 2008
    
    
    2007
    
    
    2006Net (loss) earnings for the year in
accordance with U.S. GAAP
    
    $
    (5,668,642
    )
    
    $
    1,776,747
    
    
    $
    (563,814
    )Unrealized gain (loss) on available
for sale securities arising during
the year
    
    
    
    
    
    
    
    
    
    
    242,378Less: reclassification adjustment
for gains realized in net income
    
    
    
    
    
    
    (242,378
    )
    
    
    5,859Change in cumulative translation
adjustment account
    
    
    76,519
    
    
    
    (25,514
    )
    
    
    2,101,995$
    (5,592,123
    )
    
    $
    1,508,855
    
    
    $
    1,786,418
 (c)
    
    Reduction of capital:In 2007, the share capital of the Company was reduced by $40,266,401 pursuant to a special
resolution of its shareholders and was applied against the deficit. Also, in 1997, the
share capital of the Company was reduced by $9,886,961 pursuant to a special resolution of
its shareholders and was applied against the deficit. These reductions in capital are not
permitted under U.S. GAAP. While the adjustments have no impact on shareholders equity,
under U.S. GAAP, share capital and deficit would be increased by $50,153,362 as at September
30, 2008 and 2007.(d)
    
    Revenue:Under U.S. GAAP net investment gains and interest and dividend income would be included as
investment earnings in the consolidated statement of operations.(e)
    
    Restructuring charges:Under U.S. GAAP restructuring charges would be included as operating expenses in the
consolidated statement of operations.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (f)
    
    Capitalized incorporation costs:Certain costs relating to the establishment of an office in Dubai, UAE were capitalized for
Canadian GAAP purposes in fiscal 2007 and expensed in fiscal 2008. These costs were
not permitted to be capitalized under US GAAP.(g)
    
    Investments:As at September 30, 2008, the Company has categorized certain investments as held-for
trading for Canadian GAAP purposes which requires that these investments be accounted for at
fair value with changes in fair value through the Statement of Operations. For US GAAP
purposes the Company accounts for these investments in accordance with FAS 115, Accounting
for Certain Investments in Debt and Equity Securities, with the exception of two securities:During fiscal 2008, a private entity in which the Company held an investment completed its
Initial Public Offering and a second investment in a Capital Pool Company completed its
qualifying transaction. As a result of these transactions the Companys shares in these
entities had escrow restrictions imposed by the exchange on which the shares are listed.
Under Canadian GAAP the Company recorded these shares at fair value which was determined
using valuation techniques to reflect the restriction on these securities. Under US GAAP,
those shares which will be released from escrow in less than twelve months are recorded at
the quoted market price at September 30, 2008 and those shares which will be released from
escrow in greater than twelve months are recorded at cost. The result was a combined US GAAP
net income difference totaling $1,619,615 and a difference in total assets at September 30,
2008 of $472,115.As of September 30, 2007, the Company categorized certain investments as held-for-trading
and accordingly, recorded at market value for Canadian GAAP. As a result, the Company
recognized a fair value adjustment of $1,147,500 based on an increase in fair value of
privately-held equity securities. Under U.S. GAAP, these investments would be accounted for
at cost and therefore no fair value adjustment would be recognized. As a result of these
differences, investments held for trading would have been $1,147,500 lower than the amount
reported in our audited financial statements at September 30, 2007. Also in fiscal 2007
certain of the Companys investments which had been categorized as available-for-sale were
disposed of resulting in the realization of gains in the amount of $242,378 which were
reversed from comprehensive income and recorded in net income. The impact of the reversal on
net income for fiscal 2007 was $77,416, net of associated payroll expenses of $121,189 and
tax expense of $43,773.




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 As of September 30, 2006, all of the Companys investments were classified as
available-for-sale. In fiscal 2006, unrealized gains and losses on these investments were
included in other comprehensive income, as a separate component of shareholders equity.(h)
    
    Consolidated statements of cash flows:Under U.S. GAAP, the escrow funds received as proceeds on the sale of its subsidiary would
be included as part of discontinued operations. Under Canadian GAAP, these cash flows were
included as net cash from investing activities. Under U.S. GAAP, net cash from investing
activities in fiscal 2008 would be lower by $2,803,549 and net change in cash from
discontinued operations would be higher by the same amount.Also, under Canadian GAAP, proceeds from the sale of investments used to fund the
substantial issuer bid in fiscal 2007 were included as cash flows from investing activities
in the Consolidated Statements of Cash Flows. Under U.S. GAAP, these cash flows would be
included as net cash provided by operating activities. Under U.S. GAAP, net cash provided
by operating activities in fiscal 2007 would be higher by $29,389,900 and net cash provided
by investing activities would be lower by the same amount.(i)
    
    Accounting for Uncertainty in Income Taxes  an interpretation of FAS Statement No.
109 (FIN 48)FASB issued an interpretation under FIN 48, effective for fiscal years beginning after
December 15, 2006, which clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in the Companys tax returns. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company has assessed the Companys tax positions
with respect to FIN 48 and has determined that it is more likely than not that all tax
positions taken will be sustained upon examination based on the technical merits of the
positions.(j)
    
    Recent accounting pronouncements:Fair Value Measurements (SFAS 157)FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair
value in U.S. GAAP and expands disclosures about fair values. This Standard applies under
other accounting pronouncements where fair value is the




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2008, 2007 and 2006
 22.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 relevant measurement attribute and as a result does not require any new fair value
measurements. The Standard is applicable for fiscal years beginning after November 15, 2007.
The Company is currently considering the impact of the adoption of this Standard but
believes that the impact will not be significant.Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 permits companies to measure financial instruments
and certain other items at fair value. The objective of this statement is to improve
financial reporting by providing companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related financial assets and financial liabilities
differently without having to apply complex hedge accounting provisions. SFAS No. 159 is
expected to expand the use of fair value measurement for accounting for financial
instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company is currently considering the impact of the adoption of this Standard but
believes that the impact will not be significant.FIN 141(R), Business Combinations and FAS 160, Noncontrolling Interests in Consolidated
Financial StatementsThese Statements are effective for fiscal years beginning after December 15, 2008. FIN
141(R) requires the acquiring entity in a business combination to recognize all (and only)
the assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired and
liabilities assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial effect of
the business combination. FAS160 requires all entities to report non-controlling (minority)
interests in subsidiaries in the same way  as equity in the consolidated financial
statements. The impact of adopting these Standards is not expected to be material.FAS 161, Disclosures about Derivative Instruments and Hedging Activities.This standard is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early adoption encouraged. The impact of adopting
this Standard is not expected to be material.