##### 



Envoy Capital Group Inc.
Consolidated Financial Statements
(Expressed in Canadian dollars)
For the years ended September 30, 2007,
2006 and 2005
 ContentsAuditors Report  BDO Dunwoody LLP
    
    2Comments by Auditor for U.S. Readers on Canada-U.S.
Reporting Differences
    
    3Financial StatementsConsolidated Balance Sheets
    
    4Consolidated Statements of Operations
    
    5Consolidated Statements of Comprehensive Income
    
    6Consolidated Statements of Retained Earnings
    
    7Consolidated Statements of Cash Flows
    
    8Consolidated Statement of Shareholders Equity
    
    9Notes to Consolidated Financial Statements
    10-4
    3




---



##### 



Auditors Report
 To the Shareholders of Envoy Capital Group Inc.
    
  
 BDO
Dunwoodyllpis a Limited Liability
Partnership registered in Ontario
 2




---



##### 



Comments by Auditors for U.S. Readers
On Canada-U.S. Reporting Differences
  
  
 BDO Dunwoody llp is a Limited Liability Partnership
registered in Ontario
 3




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Balance Sheets
(Expressed In Canadian dollars)
 As at:
    
    
    
    
    
    September 30
    
    
    September 302007
    
    
    2006AssetsCurrentCash
    
    
    
    
    
    $
    759,475
    
    
    $
    758,195Cash held in escrow
    
    note 19
    
    
    2,803,549
    
    
    
    2,700,000Investments held for trading
    
    note 3
    
    
    27,601,815
    
    
    
    57,367,535Accounts receivable
    
    note 4
    
    
    5,305,952
    
    
    
    4,659,635Future income taxes
    
    note 13
    
    
    1,133,258
    
    
    
    963,967Prepaid expenses and deferred charges
    
    
    
    
    
    
    734,409
    
    
    
    1,758,889Loans receivable
    
    
    
    
    
    
    493,746
    
    
    
    492,92338,832,204
    
    
    
    68,701,144Investments
    
    note 3
    
    
    1,674,105
    
    
    
    1,001,354Loans receivable
    
    
    
    
    
    
    864,056
    
    
    
    1,357,802Property, plant and equipment
    
    note 5
    
    
    1,444,603
    
    
    
    2,057,542Goodwill and other assets
    
    
    
    
    
    
    4,407,434
    
    
    
    4,416,609Future income taxes
    
    note 13
    
    
    3,569,912
    
    
    
    3,739,203$
    50,792,314
    
    
    $
    81,273,654Liabilities and Shareholders EquityCurrentBank indebtedness
    
    note 8
    
    $
    1,975,000
    
    
    $
    Accounts payable and accrued liabilities
    
    
    
    
    
    
    2,993,462
    
    
    
    4,885,496Deferred revenue
    
    
    
    
    
    
    509,374
    
    
    
    1,089,534Current portion of long-term debt
    
    note 9
    
    
    87,878
    
    
    
    84,8625,565,714
    
    
    
    6,059,892Long-term debt
    
    note 9
    
    
    69,599
    
    
    
    167,1735,635,313
    
    
    
    6,227,065Shareholders equityShare capital
    
    note 10
    
    
    10,516,344
    
    
    
    97,186,342Contributed surplus
    
    note 11
    
    
    24,216,052
    
    
    
    10,787,651Warrants
    
    
    
    
    
    
    6,542,456
    
    
    
    6,542,456Stock based compensation
    
    note 10
    
    
    864,533
    
    
    
    847,546Retained earnings (deficit)
    
    
    
    
    
    
    3,094,135
    
    
    
    (40,266,401
    )Accumulated other comprehensive income (restated)
    
    note 2
    
    
    (76,519
    )
    
    
    (51,005
    )45,157,001
    
    
    
    75,046,589$
    50,792,314
    
    
    $
    81,273,654
 On behalf of the Board:(signed)
    
    (signed)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director
  4




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group
Inc.) Consolidated Statements of Operations
(Expressed In Canadian dollars)
 For the years ended:
    
    
    
    
    
    September 30
    
    
    September 30
    
    
    September 302007
    
    
    2006
    
    
    2005Net revenue from consumer branding business
    
    note 4
    
    $
    12,402,688
    
    
    $
    9,671,504
    
    
    $
    19,567,045Net investment gains
    
    note 3
    
    
    4,061,467Interest and dividend income
    
    note 3
    
    
    1,086,970
    
    
    
    
    
    
    
    17,551,125
    
    
    
    9,671,504
    
    
    
    19,567,045Operating expenses:Salaries and benefits
    
    note 10
    
    
    11,319,127
    
    
    
    10,674,384
    
    
    
    14,691,680General and administrative
    
    
    
    
    
    
    2,635,005
    
    
    
    3,029,595
    
    
    
    2,890,539Occupancy costs
    
    
    
    
    
    
    540,762
    
    
    
    1,029,385
    
    
    
    1,098,50914,494,894
    
    
    
    14,733,364
    
    
    
    18,680,728Depreciation
    
    
    
    
    
    
    748,335
    
    
    
    799,961
    
    
    
    966,282Investment earnings
    
    note 3
    
    
    (386,404
    )
    
    
    (1,016,632
    )
    
    
    (2,830,676
    )Interest expense (income) and financing costs
    
    
    
    
    
    
    96,868
    
    
    
    24,333
    
    
    
    (19,231
    )14,953,693
    
    
    
    14,541,026
    
    
    
    16,797,103Earnings (loss) before restructuring expense, income taxes
and discontinued operations
    
    
    
    
    
    
    2,597,432
    
    
    
    (4,869,522
    )
    
    
    2,769,942Restructuring expense
    
    note 14
    
    
    
    
    
    
    642,897
    
    
    
    Earnings (loss) before income taxes and discontinued
operations
    
    
    
    
    
    
    2,597,432
    
    
    
    (5,512,419
    )
    
    
    2,769,942Income tax recovery
    
    note 13
    
    
    (43,773
    )
    
    
    (120,393
    )
    
    
    (303,731
    )Earnings (loss) from continuing operations
    
    
    
    
    
    
    2,641,205
    
    
    
    (5,392,026
    )
    
    
    3,073,673Gain on disposal of discontinued operations, net of
income taxes
    
    note 19
    
    
    375,514
    
    
    
    5,721,229
    
    
    
    1,799,631Earnings from discontinued operations, net of income taxes
    
    note 19
    
    
    
    
    
    
    1,806,983
    
    
    
    1,068,386Net earnings
    
    
    
    
    
    $
    3,016,719
    
    
    $
    2,136,186
    
    
    $
    5,941,690Earnings per share
    
    note 12Basic
    
    
    
    
    
    $
    0.23
    
    
    $
    0.10
    
    
    $
    0.27Diluted
    
    
    
    
    
    $
    0.23
    
    
    $
    0.10
    
    
    $
    0.27Earnings (loss) per share  continuing operationsBasic
    
    
    
    
    
    $
    0.20
    
    
    $
    (0.27
    )
    
    $
    0.14Diluted
    
    
    
    
    
    $
    0.20
    
    
    $
    (0.27
    )
    
    $
    0.14Earnings per share  discontinued operationsBasic
    
    
    
    
    
    $
    0.03
    
    
    $
    0.37
    
    
    $
    0.13Diluted
    
    
    
    
    
    $
    0.03
    
    
    $
    0.37
    
    
    $
    0.13Weighted
average number of common shares outstanding 
basic
    
    
    
    
    
    
    13,147,793
    
    
    
    20,450,230
    
    
    
    22,137,757Weighted average number of common shares outstanding  fully diluted
    
    
    13,155,910
    
    
    
    20,459,736
    
    
    
    22,165,754
  5




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group
Inc.) Consolidated Statements of Comprehensive Income
(Expressed In Canadian dollars)
 For the years ended:
    
    September 30
    
    
    September 30
    
    
    September 302007
    
    
    2006
    
    
    2005Net earnings
    
    $
    3,016,719
    
    
    $
    2,136,186
    
    
    $
    5,941,690Other comprehensive income:Loss on foreign currency translation
    
    
    (25,514
    )
    
    
    
    
    
    
    Comprehensive income
    
    $
    2,991,205
    
    
    $
    2,136,186
    
    
    $
    5,941,690
  6




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Retained Earnings
(Expressed In Canadian dollars)
 For the years ended:
    
    
    
    
    
    September 30
    
    
    September 30
    
    
    September 302007
    
    
    2006
    
    
    2005Deficit, beginning of period
    
    
    
    
    
    $
    (40,266,401
    )
    
    $
    (42,402,587
    )
    
    $
    (48,344,277
    )Transitional adjustment on adoption of financial
instruments
    
    note 2
    
    
    77,416
    
    
    
    
    
    
    
    Net earnings
    
    
    
    
    
    
    3,016,719
    
    
    
    2,136,186
    
    
    
    5,941,690Deficit reduction applied against share capital
    
    note 10
    
    
    40,266,401
    
    
    
    
    
    
    
    Retained earnings (deficit), end of period
    
    
    
    
    
    $
    3,094,135
    
    
    $
    (40,266,401
    )
    
    $
    (42,402,587
    )
  7




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
 For the years ended:
    
    September 30
    
    
    September 30
    
    
    September 302007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net earnings
    
    $
    3,016,719
    
    
    $
    2,136,186
    
    
    $
    5,941,690Items not involving cash:Gain on disposal of discontinued operations
    
    
    (375,514
    )
    
    
    (5,721,229
    )
    
    
    (1,799,631
    )Income from discontinued operations
    
    
    
    
    
    
    (1,806,983
    )
    
    
    (1,068,386
    )Depreciation
    
    
    748,335
    
    
    
    799,961
    
    
    
    966,282Stock based compensation
    
    
    16,987
    
    
    
    57,754
    
    
    
    344,150Future income taxes
    
    
    
    
    
    
    906,303
    
    
    
    (618,188
    )Realized (gains) losses on investment portfolio
    
    
    91,690
    
    
    
    65,490
    
    
    
    (1,633,967
    )Net change in non-cash working capital balances:Accounts receivable
    
    
    (646,317
    )
    
    
    4,482,082
    
    
    
    (1,195,206
    )Prepaid expenses and deferred charges
    
    
    1,024,480
    
    
    
    (1,266,832
    )
    
    
    (129,649
    )Investments held for trading
    
    
    284,130
    
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    (1,892,034
    )
    
    
    2,498,989
    
    
    
    855,398Deferred revenue
    
    
    (580,160
    )
    
    
    475,483
    
    
    
    (1,437,146
    )Cash held in escrow
    
    
    (103,549
    )
    
    
    
    
    
    
    Other
    
    
    9,175
    
    
    
    25,784
    
    
    
    (75,449
    )Net cash provided by (used in) operating activities
    
    
    1,593,942
    
    
    
    2,652,988
    
    
    
    149,898Cash flows from financing activities:Operating line of credit
    
    
    1,975,000
    
    
    
    
    
    
    
    Long-term debt repayments
    
    
    (94,558
    )
    
    
    (108,983
    )
    
    
    (279,405
    )Issuance of common shares, net of share issue costs
    
    
    66,584
    
    
    
    25,000
    
    
    
    47,917Share buy back under substantial issuer bid
    
    
    (30,218,722
    )
    
    
    
    
    
    
    Share buy back under normal course issuer bid
    
    
    (2,823,058
    )
    
    
    (2,829,831
    )
    
    
    (7,442,910
    )Net cash provided by (used in) financing activities
    
    
    (31,094,754
    )
    
    
    (2,913,814
    )
    
    
    (7,674,398
    )Cash flows from investing activities:Loans receivable
    
    
    492,923
    
    
    
    224,760
    
    
    
    33,516Cash outlay on sale of subsidiary
    
    
    
    
    
    
    (794,453
    )
    
    
    Purchase of capital assets
    
    
    (135,396
    )
    
    
    (23,320
    )
    
    
    (771,531
    )Proceeds on sale of subsidiary, net of cash held in escrow
    
    
    
    
    
    
    24,300,000
    
    
    
    Investments
    
    
    28,717,149
    
    
    
    (25,326,184
    )
    
    
    14,956,214Net cash provided by (used in) investing activities
    
    
    29,074,676
    
    
    
    (1,619,197
    )
    
    
    14,218,199Change in cash balance due to foreign exchange
    
    
    51,902
    
    
    
    480,322
    
    
    
    383,934Net change in cash from continuing operations
    
    
    (374,234
    )
    
    
    (1,399,701
    )
    
    
    7,077,633Cash flows from discontinued operationsNet cash provided by operating activities
    
    
    
    
    
    
    4,835,618
    
    
    
    1,742,742Net cash provided by (used in) financing activities
    
    
    
    
    
    
    (4,614,317
    )
    
    
    (1,129,458
    )Net cash provided by (used in) investing activities
    
    
    375,514
    
    
    
    (1,376,485
    )
    
    
    (7,916,224
    )Change in cash balance due to foreign exchange
    
    
    
    
    
    
    (552,754
    )
    
    
    (208,036
    )Net change in cash from discontinued operations
    
    
    375,514
    
    
    
    (1,707,938
    )
    
    
    (7,510,976
    )Net change in cash
    
    
    1,280
    
    
    
    (3,107,639
    )
    
    
    (433,343
    )Cash,
beginning of period  continued operations
    
    
    758,195
    
    
    
    2,324,074
    
    
    
    1,479,156Add: cash, beginning of period for the discontinued operations
    
    
    
    
    
    
    1,885,846
    
    
    
    3,164,107Less: cash, end of period for the discontinued operations
    
    
    
    
    
    
    (344,086
    )
    
    
    (1,885,846
    )Cash, end of period
    
    $
    759,475
    
    
    $
    758,195
    
    
    $
    2,324,074Supplemental cash flow information:Interest paid
    
    $
    96,868
    
    
    $
    24,333
    
    
    $
    34,559Income taxes paid
    
    
    
    
    
    
    
  8




---



##### 



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, 2006
    
    $
    97,186,342
    
    
    $
    10,787,651
    
    
    $
    6,542,456
    
    
    $
    847,546
    
    
    $
    (40,266,401
    )
    
    $
    (51,005
    )
    
    $
    75,046,589Transitional adjustment on
adoption of financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,416
    
    
    
    
    
    
    
    77,416Share repurchases pursuant
to
substantial issuer bid
(note 10)
    
    
    (45,048,658
    )
    
    
    14,829,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,218,722
    )Share repurchases pursuant
to
normal course issuer bid
(note 10)
    
    
    (1,421,523
    )
    
    
    (1,401,535
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,823,058
    )Share issuances pursuant to
stock
options exercised (note 10)
    
    
    66,584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,584Deficit reduction pursuant
to
special resolution (note 10)
    
    
    (40,266,401
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,266,401
    
    
    
    
    
    
    
    Stock option expense (note
10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,987
    
    
    
    
    
    
    
    
    
    
    
    16,987Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,016,719
    
    
    
    
    
    
    
    3,016,719Unrealized loss on foreign
exchange translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,514
    )
    
    
    (25,514
    )Balance, September 30, 2007
    
    $
    10,516,344
    
    
    $
    24,216,052
    
    
    $
    6,542,456
    
    
    $
    864,533
    
    
    $
    3,094,135
    
    
    $
    (76,519
    )
    
    $
    45,157,001
  9




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 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 20.(b)
    
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2007.
 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.Significant subsidiaries as at September 30, 2007, 2006 and 2005 are as follows:
 2007
    
    
    2006
    
    
    2005
    
    
    Jurisdiction ofCompany
    
    % ownership
    
    
    % ownership
    
    
    % ownership
    
    
    incorporationWatt International
Inc.
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    OntarioWatt Gilchrist
Limited
    
    
    
    
    
    
    
    
    
    
    100
    
    
    United KingdomParker Williams Design Limited
    
    
    
    
    
    
    
    
    
    
    65
    
    
    United Kingdom
 10




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2.
    
    Significant Accounting Policies (continued)
 (b)
    
    Use of Estimates
  (c)
    
    Property, Plant and Equipment
  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 periodEquipment under capital leases
    
    Straight line
    
    3 - 5 years
 (d)
    
    Revenue Recognition
  (i)
    
    deferred revenue representing fees billed and collected in advance of such fees being earned;(ii)
    
    unbilled accounts receivable representing fees earned but not yet billed as well
as well as reimbursable pass-through costs; and(iii)
    
    work in process represents costs incurred on projects for which revenue has not yet
been recognized for accounting purposes.
  11




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2.
    
    Significant Accounting Policies (continued)
   (e)
    
    Goodwill
    (f)
    
    Intangible assets
  12




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2.
    
    Significant Accounting Policies (continued)
  (g)
    
    Foreign currency translation
   (h)
    
    Income taxes
  13




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2.
    
    Significant Accounting Policies (continued)
 (i)
    
    Stock-based compensation
  (j)
    
    Earnings per share
  (k)
    
    Business combinations
  (l)
    
    Financial instruments  change in Accounting Policy
   14




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##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2.
    
    Significant Accounting Policies (continued)
   Cash
    
    Designated as held-for-tradingCash held in trust
    
    Designated as held-for-tradingCash held in escrow
    
    Designated as held-for-tradingInvestments held for trading
    
    Designated as held-for-tradingAccounts receivable
    
    Loans and receivablesLoans receivable
    
    Loans and receivablesInvestments
    
    Available-for-saleBank indebtedness
    
    Other financial liabilityAccounts payable
    
    Other financial liabilityLong-term debt
    
    Other financial liability
     15




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2. Significant Accounting Policies (continued)
              16




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2. Significant Accounting Policies (continued)
     (m)
    
    Comprehensive income
  
    
    changes in the currency translation adjustment relating to self-sustaining foreign operations
    
    unrealized gains or losses on available-for-sale investments.
 (n)
    
    Hedges
   
    
    changes in the fair value of a hedged item and a hedging item
    
    changes in the cash flows attributable to a hedged item and a hedging item; or
    
    changes resulting from a risk exposure relating to a hedged item and a hedging item.
 17




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 2. Significant Accounting Policies (continued)
  (o)
    
    Impairment of long-lived assets
  (p)
    
    Discontinued operations
  3. Investments
 2007
    
    
    2006Investments held for tradingCash and equivalents
    
    $
    673,141
    
    
    $
    696,013Publicly-traded investmentsFixed income
    
    
    10,278,656
    
    
    
    4,674,554Equities
    
    
    14,817,518
    
    
    
    22,280,931GICs
    
    
    
    
    
    
    23,000,000Discount securities
    
    
    
    
    
    
    6,716,03725,096,174
    
    
    
    56,671,522Privately-held investmentsEquities
    
    
    1,832,500
    
    
    
    Total investments held for trading
    
    $
    27,601,815
    
    
    $
    57,367,535
 18




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 3. Investments (continued)
 2007
    
    
    2006InvestmentsReal estate
    
    $
    1,474,105
    
    
    $
    1,001,354Investment in Capital Pool Company
    
    
    200,000
    
    
    
    Total investments
    
    $
    1,674,105
    
    
    $
    1,001,354
     4. Accounts receivable
 2007
    
    
    2006Trade receivables
    
    $
    3,563,446
    
    
    $
    2,981,562Accrued revenue
    
    
    887,370
    
    
    
    463,193Work in process
    
    
    855,136
    
    
    
    1,214,880$
    5,305,952
    
    
    $
    4,659,635
 19




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 4. Accounts receivable (continued)
  5. Property, plant and equipment
 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
 Accumulated
    
    
    Net book2006
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    3,644,508
    
    
    $
    3,024,008
    
    
    $
    620,500Furniture and equipment
    
    
    471,909
    
    
    
    433,945
    
    
    
    37,964Leasehold improvements
    
    
    3,636,285
    
    
    
    2,260,912
    
    
    
    1,375,373Equipment under capital leases
    
    
    968,330
    
    
    
    944,625
    
    
    
    23,705$
    8,721,032
    
    
    $
    6,663,490
    
    
    $
    2,057,542
 6. Acquisition of subsidiaries
   20




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 6. Acquisition of subsidiaries (continued)
      Discontinued operations
 Parker Williams acquisition in Canadian Dollars
 Original
    
    Additional
    
    AdditionalAcquisition
    
    Acquisition
    
    AcquisitionAssets acquired and liabilities assumed:
    
    (65%)
    
    (5%)
    
    (approx.10%)Total assets
    
    $
    1,796,438
    
    
    $
    2,489,308
    
    
    $
    2,313,451Total liabilities
    
    
    (1,324,541
    )
    
    
    (1,099,084
    )
    
    
    (1,169,003
    )Previously owned
    
    
    
    
    
    
    (903,646
    )
    
    
    (801,113
    )Minority interest
    
    
    (165,164
    )
    
    
    (417,067
    )
    
    
    (214,667
    )Net assets acquired
    
    
    306,733
    
    
    
    69,511
    
    
    
    128,668
 21




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 6. Acquisition of subsidiaries (continued)
 Original
    
    Additional
    
    AdditionalAcquisition
    
    Acquisition
    
    AcquisitionAssets acquired and liabilities assumed:
    

    (65%)
    
    

    (5%)
    
    



    (approx.10%)Intangible assets
    
    
    330,849
    
    
    
    
    
    
    
    Goodwill
    
    
    4,152,369
    
    
    
    35,247
    
    
    
    686,612Purchase price including costs
    
    $
    4,789,951
    
    
    $
    104,758
    
    
    $
    815,280
 7. Related party transactions
     8. Bank indebtedness
  22




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 9. Long-term debt
 2007
    
    2006Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in blended monthly
instalments of $7,666
    
    $
    157,477
    
    
    $
    252,035Less current portion
    
    
    87,878
    
    
    
    84,862$
    69,599
    
    
    $
    167,173
 10. Share capital
 
    2007
    
    
    
    
    
    2006
    
    
    
    
    
    2005Number
    
    
    
    
    
    Number
    
    
    
    
    
    Numberof shares
    
    Amount
    
    of shares
    
    Amount
    
    of shares
    
    AmountBalance, beginning of year
    
    
    19,421,415
    
    
    $
    97,186,342
    
    
    
    21,007,517
    
    
    $
    105,204,765
    
    
    
    23,416,600
    
    
    $
    117,447,261Common shares issued
(cancelled) pursuant to:Repurchase of shares pursuant
to substantial issuer bid (c)
    
    
    (9,002,383
    )
    
    
    (45,048,658
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    31,667
    
    
    
    66,584
    
    
    
    20,000
    
    
    
    25,000
    
    
    
    38,334
    
    
    
    47,917Deficit reduction pursuant to
special resolution (b)
    
    
    
    
    
    
    (40,266,401
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares pursuant
to normal course issuer bid (c)
    
    
    (813,466
    )
    
    
    (1,421,523
    )
    
    
    (1,606,102
    )
    
    
    (8,043,423
    )
    
    
    (2,447,417
    )
    
    
    (12,290,413
    )Balance, end of year
    
    
    9,637,233
    
    
    $
    10,516,344
    
    
    
    19,421,415
    
    
    $
    97,186,342
    
    
    
    21,007,517
    
    
    $
    105,204,765
 23




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 10. Share capital (continued)
            24




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 10. Share capital (continued)
     WeightedaverageNumber
    
    
    exercise priceof options
    
    
    per shareOptions outstanding, September 30, 2005
    
    
    401,950
    
    
    $
    4.10Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (20,000
    )
    
    
    1.25Options cancelled
    
    
    (88,400
    )
    
    
    5.71Options outstanding, September 30, 2006
    
    
    293,550
    
    
    
    3.81Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (31,667
    )
    
    
    2.10Options cancelled
    
    
    (3,550
    )
    
    
    15.25Options outstanding, September 30, 2007
    
    
    258,333
    
    
    $
    3.86Number of options exercisableOptions exercisable, September 30, 2007
    
    
    258,333
    
    
    $
    3.86Options exercisable, September 30, 2006
    
    
    211,883
    
    
    $
    3.72Options exercisable, September 30, 2005
    
    
    295,283
    
    
    $
    4.29
 25




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 10. Share capital (continued)
  WeightedExercise
    
    
    
    
    
    Number
    
    Average
    
    NumberPrice
    
    
    
    
    
    Outstanding
    
    Contractual Life
    
    Exercisable$1.25
    
    
    
    
    
    
    13,333
    
    
    
    0.07
    
    
    
    13,333$4.00
    
    
    
    
    
    
    245,000
    
    
    
    1.65
    
    
    
    245,000258,333
    
    
    
    
    
    
    
    258,333
   11. Contributed Surplus
    26




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 11. Contributed Surplus (continued)
  12. Earnings per Share
  2007
    
    
    2006
    
    
    2005Numerator for EPS calculations:Net earnings
    
    $
    3,016,719
    
    
    $
    2,136,186
    
    
    $
    5,941,690Denominator:Denominator for basic net
earnings per share -
weighted average shares
outstanding
    
    
    13,147,793
    
    
    
    20,450,230
    
    
    
    22,137,757Effect of dilutive potential
common shares issuable:- under stock options
    
    
    8,117
    
    
    
    9,506
    
    
    
    27,997Denominator for diluted net
earnings per share
    
    
    13,155,910
    
    
    
    20,459,736
    
    
    
    22,165,754
  Anti-dilutive potential securities
    
    2007
    
    
    2006
    
    
    2005Common shares potentially issuable:- pursuant to warrants
    
    
    5,526,317
    
    
    
    5,526,317
    
    
    
    5,526,317- under stock options
    
    
    245,000
    
    
    
    263,550
    
    
    
    351,9505,771,317
    
    
    
    5,789,867
    
    
    
    5,878,267
 27




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 13.
    
    Income taxesIncome tax expense (recovery) for the years ended September 30, 2007, 2006 and 2005 consists
of:
 2007
    
    
    2006
    
    
    2005Current
    
    $
    
    
    
    $
    (1,026,696
    )
    
    $
    314,457Future
    
    
    (43,773
    )
    
    
    906,303
    
    
    
    (618,188
    )$
    (43,773
    )
    
    $
    (120,393
    )
    
    $
    (303,731
    )
 The income tax expense (recovery) attributable to income (loss) differs from the amounts
computed by applying the Canadian statutory rates of 36.12% (2006  36.12%; 2005  36.12%) to
the (loss) earnings before income taxes and discontinued operations as a result of the
following:
 2007
    
    2006
    
    2005Income tax expense (recovery)
at statutory rates
    
    $
    938,192
    
    
    
    36.1
    %
    
    $
    (1,991,086
    )
    
    
    (36.1
    %)
    
    $
    1,000,503
    
    
    
    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
    
    
    28,404
    
    
    
    1.1
    %
    
    
    127,012
    
    
    
    2.3
    %
    
    
    139,889
    
    
    
    5.1
    %Change in valuation
allowance
    
    
    (1,429,871
    )
    
    
    (55.1
    %)
    
    
    1,820,581
    
    
    
    33.0
    %
    
    
    (2,042,816
    )
    
    
    (73.8
    %)Adjustment to future tax
for substantively enacted
changes in tax laws and rates
    
    
    705,939
    
    
    
    27.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (286,437
    )
    
    
    (11.0
    %)
    
    
    (76,900
    )
    
    
    (1.4
    %)
    
    
    598,693
    
    
    
    21.6
    %$
    (43,773
    )
    
    
    (1.7
    %)
    
    $
    (120,393
    )
    
    
    (2.2
    %)
    
    $
    (303,731
    )
    
    
    (11.0
    %)
 28




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 13.
    
    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, 2007 and 2006 are presented below:
 2007
    
    
    2006Future tax assets:Property, plant and equipment
    
    $
    1,023,527
    
    
    $
    980,566Share issuance costs
    
    
    404,945
    
    
    
    886,462Non-capital losses expiring by 2027
    
    
    6,023,230
    
    
    
    7,018,783Other
    
    
    14,943
    
    
    
    10,7057,466,645
    
    
    
    8,896,516Less valuation allowance
    
    
    2,763,475
    
    
    
    4,193,346Total net future tax assets
    
    
    4,703,170
    
    
    
    4,703,170Less current portion
    
    
    1,133,258
    
    
    
    963,967$
    3,569,912
    
    
    $
    3,739,203
 At September 30, 2007, the Company has non-capital losses of approximately $18,200,000
available to reduce future years taxable income, which expire as follows:
 2008
    
    $
    2,400,0002009
    
    
    3,300,0002010
    
    
    4,600,0002014
    
    
    2,800,0002015
    
    
    1,600,0002026
    
    
    2,300,0002027
    
    
    1,200,000$
    18,200,000
 The Company has realized net capital losses of approximately $2,397,000 available for carry
forward to be applied against future taxable gains for Canadian tax purposes. The losses are
available for carry forward indefinitely.The Company has capital losses of approximately $7,400,000 for United States income tax
purposes available for carry forward to be applied against future capital gains expiring in
2008.
 29




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 13.
    
    Income taxes (continued)No provision has been made in the financial statements with respect to any potential future
income tax assets which may be associated with these capital losses.14.
    
    Restructuring costsIn response to a number of economic uncertainties, competitive challenges and business risks
that will impact 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. Management believed that, by implementing this restructuring plan,
Envoy would be better positioned to remain profitable, if its clients historical spending
patterns did not materialize in the short term. 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.Total restructuring costs accrued at September 30 are classified as:
 2007
    
    
    2006
    
    
    2005Accounts payable and accrued liabilities
    
    $
    
    
    
    $
    19,456
    
    
    $
    15,620
 15.
    
    Commitments and contingencies
 (a)
    
    The Company has entered into operating lease agreements for office premises and
equipment with minimum annual lease payments over the next four years to expiry as
follows:
 2008
    
    $
    820,1782009
    
    
    768,7242010
    
    
    306,6812011
    
    
    3,040$
    1,898,623
 Rent expense under operating leases for the year ended September 30, 2007 amounted to
$754,926 (2006  $663,013; 2005  $697,875).
 30




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 16.
    
    Financial instrumentsRisk management activities:
 (i)
    
    Currency risk:The Company is subject to currency risk through its activities in the United
States. 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. As at September
30, 2007, there were no foreign currency contracts outstanding.(ii)
    
    Credit risk:The Company manages its credit risk with respect to accounts receivable by acting
as an agent for its customers, by dealing primarily with large creditworthy
customers and by billing whenever possible in advance of rendering services. As at
September 30, 2007, one customer represented 19% of accounts receivable (2006  one
customer represented 21% of accounts receivable).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 the sale of its investments and advances to investee
companies.(iii)
    
    Interest rate risk:It is managements opinion that the Company is not exposed to significant interest
rate risk.
 31




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 17.
    
    Segmented informationAs 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 has amended its segmented disclosures for 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, 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
 32




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 17. 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
 33




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 17. Segmented information (continued)
 For the year endedSeptember 30, 2005Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalNet revenue
    
    $
    19,567,045
    
    
    
    
    
    
    
    
    
    
    $
    19,567,045Operating expenses:Salaries and benefits
    
    
    12,418,443
    
    
    
    
    
    
    
    2,273,237
    
    
    
    14,691,680General and administrative
    
    
    1,296,813
    
    
    
    
    
    
    
    1,593,726
    
    
    
    2,890,539Occupancy costs
    
    
    1,407,375
    
    
    
    
    
    
    
    (308,866
    )
    
    
    1,098,509Depreciation
    
    
    602,206
    
    
    
    
    
    
    
    364,076
    
    
    
    966,282Investment earnings
    
    
    
    
    
    
    
    
    
    
    (2,830,676
    )
    
    
    (2,830,676
    )Interest (income) expense
    
    
    22,739
    
    
    
    
    
    
    
    (41,970
    )
    
    
    (19,231
    )Earnings (loss) before income
taxes and discontinued operations
    
    
    3,819,469
    
    
    
    
    
    
    
    (1,049,527
    )
    
    
    2,769,942Income tax recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (303,731
    )Earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,073,673Earnings from discontinued operations,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,868,017Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,941,690
  Consumer and
    
    
    MerchantRetail Branding
    
    
    Banking
    
    
    Corporate
    
    
    TotalSeptember 30, 2007
    
    $
    11,411,256
    
    
    $
    34,948,296
    
    
    $
    4,432,762
    
    
    $
    50,792,314September 30, 2006
    
    $
    12,839,214
    
    
    
    
    
    
    $
    68,434,440
    
    
    $
    81,273,654
 34




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 17. Segmented information (continued)
  2007
    
    
    2006
    
    
    2005Net revenue:Consumer and retail branding
    
    $
    12,402,688
    
    
    $
    9,671,504
    
    
    $
    19,567,045Merchant banking
    
    
    5,148,437
    
    
    
    
    
    
    
    $
    17,551,125
    
    
    $
    9,671,504
    
    
    $
    19,567,045
  2007
    
    
    2006
    
    
    2005Net revenue:Canada
    
    $
    9,222,222
    
    
    $
    4,991,114
    
    
    $
    5,751,537USA/South America
    
    
    6,410,926
    
    
    
    3,534,355
    
    
    
    13,483,041Middle East/Asia
    
    
    1,917,977
    
    
    
    1,146,035
    
    
    
    332,467$
    17,551,125
    
    
    $
    9,671,504
    
    
    $
    19,567,045
 18. Subsequent events
  35




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 19. Discontinued operations
   ECG Holdings (UK) Limited and related companiesFiscal year:
    
    2007
    
    
    2006
    
    
    2005Net revenue
    
    $
    
    
    
    $
    21,432,172
    
    
    $
    23,589,979Operating expenses
    
    
    
    
    
    
    17,460,973
    
    
    
    20,205,104Interest income
    
    
    
    
    
    
    (60,327
    )
    
    
    (62,248
    )Depreciation
    
    
    
    
    
    
    1,294,822
    
    
    
    1,720,920Income tax expense
    
    
    
    
    
    
    582,122
    
    
    
    509,885Earnings from discontinued operations
(excluding gain on sale)
    
    
    
    
    
    
    2,154,582
    
    
    
    1,216,318Minority interest
    
    
    
    
    
    
    347,599
    
    
    
    149,808Gain on sale of discontinued operations
    
    
    375,514
    
    
    
    5,721,229
    
    
    
    Earnings from discontinued operations
    
    $
    375,514
    
    
    $
    7,528,212
    
    
    $
    1,066,510
  36




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 19. Discontinued operations (continued)
 John Street Inc.Fiscal year:
    
    2007
    
    
    2006
    
    
    2005Net revenue
    
    $
    
    
    
    $
    
    
    
    $
    3,151,083Operating expenses
    
    
    
    
    
    
    
    
    
    
    3,047,312Interest expense
    
    
    
    
    
    
    
    
    
    
    50,625Depreciation
    
    
    
    
    
    
    
    
    
    
    49,132Income tax expense
    
    
    
    
    
    
    
    
    
    
    2,138Earnings from discontinued operations
(excluding gain on sale)
    
    
    
    
    
    
    
    
    
    
    1,876Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,799,631Earnings from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    1,801,507Total earnings from discontinued operations
    
    $
    375,514
    
    
    $
    7,528,212
    
    
    $
    2,868,017
 20. Reconciliation to United States generally accepted accounting principles
  2007
    
    
    2006
    
    
    2005Net earnings based on
Canadian GAAP
    
    $
    3,016,719
    
    
    
    2,136,186
    
    
    $
    5,941,690Stock-based compensation (a)
    
    
    
    
    
    
    
    
    
    
    344,151Cash held in escrow (b)
    
    
    (103,549
    )
    
    
    (2,700,000
    )
    
    
    Capitalized incorporation costs (g)
    
    
    (66,339
    )
    
    
    
    
    
    
    Income recognized on reclassification
of investments (h)
    
    
    77,416
    
    
    
    
    
    
    
    Gains on privately-held securities (h)
    
    
    (1,147,500
    )
    
    
    
    
    
    
    Net earnings (loss) based on
U.S. GAAP
    
    $
    1,776,747
    
    
    
    (563,814
    )
    
    $
    6,285,841
 37




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    Reconciliation to United States generally accepted accounting principles
(continued)
 2007
    
    
    2006
    
    
    2005Net earnings (loss) from continuing
operations
    
    $
    1,401,233
    
    
    
    (5,392,026
    )
    
    $
    3,417,824Net earnings from discontinued
operations (Note 19)
    
    $
    375,514
    
    
    
    4,828,212
    
    
    $
    2,868,017
 The following table sets forth the computation of basic and diluted earnings (loss) per
share:
 2007
    
    
    2006
    
    
    2005Net earnings (loss) per share:Basic
    
    $
    0.14
    
    
    
    (0.03
    )
    
    $
    0.28Diluted
    
    
    0.14
    
    
    
    (0.03
    )
    
    
    0.28Net earnings (loss) per share from continuing
operations:Basic
    
    $
    0.11
    
    
    
    (0.27
    )
    
    $
    0.15Diluted
    
    
    0.11
    
    
    
    (0.27
    )
    
    
    0.15Net earnings per share from discontinued
operations:Basic
    
    $
    0.03
    
    
    
    0.24
    
    
    $
    0.13Diluted
    
    
    0.03
    
    
    
    0.24
    
    
    
    0.13
 The calculation of diluted earnings (loss) 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 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.
 38




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    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:
 2007
    
    
    2006Total assets based on Canadian GAAP
    
    $
    50,792,314
    
    
    $
    81,273,654Cash held in escrow (b)
    
    
    (2,803,549
    )
    
    
    (2,700,000
    )Capitalized incorporation costs (g)
    
    
    (66,339
    )
    
    
    Investments held for trading (h)
    
    
    (1,147,500
    )
    
    
    242,378Total assets based on U.S. GAAP
    
    $
    46,774,926
    
    
    $
    78,816,032
 The following adjustments are required in order to conform shareholders equity based on
Canadian GAAP to shareholders equity based on U.S. GAAP:
 2007
    
    
    2006Shareholders equity based on Canadian GAAP
    
    $
    45,157,001
    
    
    $
    75,046,589Cash held in escrow (b)
    
    
    (2,803,549
    )
    
    
    (2,700,000
    )Accumulated other comprehensive income (loss) (c )
    
    
    
    
    
    
    242,378Capitalized incorporation costs (g)
    
    
    (66,339
    )
    
    
    Gains on privately-held securities (h)
    
    
    (1,147,500
    )
    
    
    Shareholders equity based on U.S. GAAP
    
    $
    41,139,613
    
    
    $
    72,588,967
 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)
    
    Stock-based compensation disclosures:For fiscal 2006, the Company adopted SFAS 123(R) which requires that all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair value. The Company applied this using the
modified prospective method. For fiscal 2005 and prior years, the Company measured
compensation expense relating to employee stock option plans for U.S. GAAP purposes using
the intrinsic value method specified by APB Opinion No. 25.In the Companys circumstances APB No. 25 was not materially different from compensation
expense as determined under Canadian GAAP for fiscal 2003 and prior years. For fiscal
2005, the Company adopted new provisions of the CICA
 39




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    Reconciliation to United States generally accepted
accounting principles (continued)
 handbook which required a fair value method of accounting for stock-based compensations.
Under these provisions the expense for stock-based compensation under Canadian GAAP for
fiscal 2005 is $344,151 greater than under US GAAP.There were no options granted in fiscal 2007, 2006 or 2005. The fair value of each option
granted was estimated at the date of the grant using the Black-Scholes fair value option
pricing model. Compensation cost is reflected over the expected lives of the options. The
notional compensation expense associated with the Companys options is not deductible for
Canadian income tax purposes.(b)
    
    Cash held in escrow:Cash held in escrow represents funds held in common trust with the purchaser of the UK
operations, as per the terms of the purchase and sale agreement. The amount is being held
in joint trust as security for indemnities provided to the purchaser at closing and was
scheduled to be released on the first anniversary date of the transaction. Canadian GAAP
allows the recognition of this amount in determining the gain on sale. Under US GAAP
these funds cannot be recognized until they are released from escrow or otherwise under
exclusive control of the Company.(c)
    
    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.
 2007
    
    
    2006
    
    
    2005Net earnings (loss) for the year in
accordance with U.S. GAAP
    
    $
    1,776,747
    
    
    $
    (563,814
    )
    
    $
    6,285,841Unrealized gain (loss) on available
for sale securities arising during
the year
    
    
    
    
    
    
    242,378
    
    
    
    (5,859
    )Less: reclassification adjustment
for gains realized in net income
    
    
    (242,378
    )
    
    
    5,859
    
    
    
    (174,426
    )Change in cumulative translation
adjustment account
    
    
    (25,514
    )
    
    
    2,101,995
    
    
    
    (2,183,228
    )$
    1,508,855
    
    
    $
    1,786,418
    
    
    $
    3,922,328
 40




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    Reconciliation to United States generally accepted accounting principles
(continued)
 (d)
    
    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 and $9,886,961 as at September 30, 2007 and 2006, respectively.(e)
    
    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.(f)
    
    Restructuring charges:Under U.S. GAAP restructuring charges would be included as operating expenses in the
consolidated statement of operations.(g)
    
    Capitalized incorporation costs:Certain costs relating to the establishment of an office in Dubai, UAE were capitalized
for Canadian GAAP purposes. These costs are not permitted to be capitalized under US GAAP.(h)
    
    Investments:The Company accounts for its investments in accordance with FAS 115, Accounting for
Certain Investments in Debt and Equity Securities under US GAAP. In fiscal 2007, the
Company elected under FAS 115, paragraph 15 to redesignate its investments from an
available-for-sale classification to a trading classification. As of September 30, 2007,
all of the Companys investments have been classified as held-for-trading and
accordingly, recorded at market value. 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. Upon redesignation of investments to the trading
category, unrealized gains of $242,378 were reversed from comprehensive income and
recorded in net income. The impact
 41




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    Reconciliation to United States generally accepted accounting principles
(continued)
 of the reversal on net income was $77,416, net of associated payroll expenses of $121,189
and tax expense of $43,773.In addition, the Company recognized unrealized gains of $1,147,500 based on an increase
in fair value of privately-held equity securities for Canadian GAAP purposes. Under U.S.
GAAP, these investments would be accounted for at cost and no gain 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.(i)
    
    Consolidated statements of cash flows:Under Canadian GAAP, proceeds from the sale of investments used to fund the substantial
issuer bid 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
would be higher by $29,389,900 and net cash provided by investing activities would be lower
by the same amount.(j)
    
    Recent accounting pronouncements:Accounting for Uncertainty in Income Taxes  an interpretation of FAS Statement No. 109
(FIN 48)FASB issued an interpretation under FIN 48 which prescribes a recognition and measurement
model for uncertain tax positions taken or expected to be taken in the Companys tax
returns. FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting for interim periods and disclosure. FIN 48 is applicable for
fiscal years beginning on or after December 15, 2006. The adoption of this statement is
not expected to have a material effect on the Companys future reported financial
position or results of operations.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 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 interpretation.
 42




---



##### 



Envoy Capital Group Inc. (formerly Envoy Communications Group Inc.)
Notes to Consolidated Financial Statements
 For the years ended September 30, 2007, 2006 and 2005
 20.
    
    Reconciliation to United States generally accepted accounting principles
(continued)
 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 assets and 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
interpretation.
 43