##### 



BDO Dunwoody LLP
    
    60 Columbia Way Suite 400Chartered Accountants
    
    Markham, Ontario Canada L3R 0C9and Advisors
    
    Telephone: (905) 946-1066Item 1.
    
    
    
    Telefax: (905) 946-9524
 Exhibit 17
 Envoy CommunicationsGroup Inc.Consolidated Financial Statements(Expressed in Canadian dollars)For the years ended September 30, 2005,2004 and 2003
 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 Deficit
    
    
    6Consolidated Statements of Cash Flows
    
    
    7-8Notes to Consolidated Financial Statements
    
    
    9-40
 F-1
 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
 141




---



##### 



BDO Dunwoody LLP
    
    60 Columbia Way Suite 400Chartered Accountants
    
    Markham, Ontario Canada L3R 0C9and Advisors
    
    Telephone: (905) 946-1066Item 1.
    
    
    
    Telefax: (905) 946-9524
 Auditors Report
 To the Shareholders of Envoy Communications Group Inc.
    
  
 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
 142




---



##### 



Item 2.
    
    BDO Dunwoody LLP
    
    60 Columbia Way Suite 400Chartered Accountants
    
    Markham, Ontario Canada L3R 0C9and Advisors
    
    Telephone: (905) 946-1066Telefax: (905) 946-9524
 F-1
 Comments by Auditor for U.S. Readers
On Canada-U.S. Reporting Differences
  
  
 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
 143




---



##### 



F-2
 Envoy
Communications Group Inc.
 Consolidated Balance Sheets
(Expressed in Canadian dollars)
 September 30
    
    2005
    
    
    2004AssetsCurrentCash
    
    $
    4,209,920
    
    
    $
    3,655,338Investments (Note 3)
    
    
    22,113,957
    
    
    
    36,144,879Accounts receivable (Note 4)
    
    
    16,665,140
    
    
    
    14,807,829Future income taxes (Note 15)
    
    
    301,384
    
    
    
    1,500,000Prepaid expenses
    
    
    1,203,814
    
    
    
    1,018,091Loan receivable (Note 8)
    
    
    265,082
    
    
    
    Discontinued operations (Note 23)
    
    
    
    
    
    
    2,306,31944,759,297
    
    
    
    59,432,456Investments (Note 3)
    
    
    10,994,238
    
    
    
    10,285,563Loans receivable (Note 8)
    
    
    1,810,403
    
    
    
    Capital assets (Note 6 & Note 21)
    
    
    6,879,312
    
    
    
    5,115,823Goodwill (Note 5 & Note 21)
    
    
    12,949,126
    
    
    
    10,216,101Intangible assets (Note 5)
    
    
    241,886
    
    
    
    Other assets
    
    
    9,176
    
    
    
    34,377Future income taxes (Note 15)
    
    
    5,308,089
    
    
    
    3,491,285Discontinued operations (Note 23)
    
    
    
    
    
    
    303,922$
    82,951,527
    
    
    $
    88,879,527Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    $
    7,663,658
    
    
    $
    7,158,467Income taxes payable
    
    
    456,459
    
    
    
    485,217Deferred revenue
    
    
    614,051
    
    
    
    2,051,197Current portion of long-term debt (Note 9)
    
    
    108,925
    
    
    
    297,294Discontinued operations (Note 23)
    
    
    
    
    
    
    1,634,6238,843,093
    
    
    
    11,626,798Long-term debt (Note 9)
    
    
    252,093
    
    
    
    361,2309,095,186
    
    
    
    11,988,028Minority interest (Note 7)
    
    
    300,858
    
    
    
    Shareholders equityShare capital (Note 12)
    
    
    105,204,765
    
    
    
    117,447,261Contributed surplus (Note 13)
    
    
    5,574,057
    
    
    
    726,554Warrants (Note 12)
    
    
    6,542,456
    
    
    
    6,542,456Deficit
    
    
    (42,402,587
    )
    
    
    (48,344,277
    )Stock based compensation (Note 12)
    
    
    789,792
    
    
    
    445,641Cumulative translation adjustment
    
    
    (2,153,000
    )
    
    
    73,86473,555,483
    
    
    
    76,891,499$
    82,951,527
    
    
    $
    88,879,527
  144




---



##### 



On behalf of the Board:
 (signed)
    
    (signed)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director
  145




---



##### 



F-3
 Envoy Communications Group Inc.
 Consolidated Statements of Operations
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2005
    
    
    2004
    
    
    2003Net revenue
    
    $
    43,157,023
    
    
    $
    36,963,957
    
    
    $
    37,742,288Operating expenses:Salaries and benefits (Note 12)
    
    
    28,698,495
    
    
    
    24,846,926
    
    
    
    24,454,254General and administrative (Note 16)
    
    
    7,178,328
    
    
    
    6,378,590
    
    
    
    5,406,388Occupancy costs
    
    
    3,009,008
    
    
    
    2,743,120
    
    
    
    2,939,41838,885,831
    
    
    
    33,968,636
    
    
    
    32,800,060Depreciation
    
    
    2,641,875
    
    
    
    2,383,340
    
    
    
    2,280,644Amortization of intangible assets (Note 5)
    
    
    45,327
    
    
    
    
    
    
    
    Investment earnings (Note 3)
    
    
    (2,830,676
    )
    
    
    (406,683
    )
    
    
    Accreted interest imputed on warrants
and debentures (Notes 10 and 11)
    
    
    
    
    
    
    2,552,991
    
    
    
    718,321Interest (income) expense
and financing costs (Note 11)
    
    
    (81,479
    )
    
    
    995,601
    
    
    
    1,989,36638,660,878
    
    
    
    39,493,885
    
    
    
    37,788,391Earnings (loss) before, restructuring costs recovery,
gain on disposal of subsidiaries, income taxes,
minority interest and discontinued operations
    
    
    4,496,145
    
    
    
    (2,529,928
    )Restructuring costs recovery (Note 18)
    
    
    
    
    
    
    
    
    
    
    267,212Gain on disposal of subsidiaries (Notes 16 & 17)
    
    
    
    
    
    
    
    
    
    
    2,499,604Earnings (loss) before income taxes, minority
interest and discontinued operations
    
    
    4,496,145
    
    
    
    (2,529,928
    )
    
    
    2,720,713Income tax expense (Note 15)
    
    
    206,154
    
    
    
    150,424
    
    
    
    237,264Earnings (loss) before minority interest
and discontinued operations
    
    
    4,289,991
    
    
    
    (2,680,352
    )
    
    
    2,483,449Minority interest (Note 7)
    
    
    149,808
    
    
    
    
    
    
    
    Earnings (loss) from continuing operations
    
    
    4,140,183
    
    
    
    (2,680,352
    )
    
    
    2,483,449Earnings (loss) from discontinued operations,
net of income taxes (Note 23)
    
    
    1,801,507
    
    
    
    (426,452
    )
    
    
    55,313Net earnings (loss)
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )
    
    $
    2,538,762
 Earnings (loss) per share
 Net earnings (loss)Basic
    
    $
    0.27
    
    
    $
    (0.18
    )
    
    $
    0.58Diluted
    
    $
    0.27
    
    
    $
    (0.18
    )
    
    $
    0.43Continuing operationsBasic
    
    $
    0.19
    
    
    $
    (0.16
    )
    
    $
    0.57Diluted
    
    $
    0.19
    
    
    $
    (0.16
    )
    
    $
    0.42Discontinued operationsBasic
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.01Diluted
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.01
  146




---



##### 



Weighted average number of common
shares outstanding
    
    
    22,137,757
    
    
    
    17,062,152
    
    
    
    4,334,813
  147




---



##### 



F-4
 Envoy Communications Group Inc.
 Consolidated Statements of Deficit
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2005
    
    
    2004
    
    
    2003Deficit,beginning of year
    
    $
    (48,344,277
    )
    
    $
    (45,237,473
    )
    
    $
    (47,776,235
    )Net earnings (loss)
    
    
    5,941,690
    
    
    
    (3,106,804
    )
    
    
    2,538,762Deficit,end of year
    
    $
    (42,402,587
    )
    
    $
    (48,344,277
    )
    
    $
    (45,237,473
    )
  148




---



##### 



F-5
 Envoy Communications Group Inc.
 Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net earnings (loss)
from continuing operations
    
    $
    4,140,183
    
    
    $
    (2,680,352
    )
    
    $
    2,483,449Items not involving cash:Future income taxes (recovery)
    
    
    (618,188
    )
    
    
    (333,632
    )
    
    
    142,687Depreciation
    
    
    2,641,875
    
    
    
    2,383,340
    
    
    
    2,280,644Minority interest
    
    
    149,808
    
    
    
    
    
    
    
    Amortization of deferred financing
charges
    
    
    
    
    
    
    21,110
    
    
    
    108,996Amortization of intangible assets
    
    
    45,327
    
    
    
    
    
    
    
    Debentures and term notes accretion
    
    
    
    
    
    
    2,552,991
    
    
    
    718,321Stock based compensation
    
    
    344,151
    
    
    
    200,117
    
    
    
    23,268Realized (gains) losses on investments
    
    
    (1,633,967
    )
    
    
    61,650
    
    
    
    Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (2,499,604
    )Cumulative translation on closure
of Hampel Stefanides (Note 16)
    
    
    
    
    
    
    
    
    
    
    (841,081
    )Write-down of capital assets
    
    
    
    
    
    
    
    
    
    
    356,865Net change in non-cash working capital balances:Accounts receivable
    
    
    (1,024,182
    )
    
    
    (1,660,730
    )
    
    
    (444,960
    )Prepaid expenses
    
    
    (164,438
    )
    
    
    (200,984
    )
    
    
    (130,767
    )Accounts payable and accrued liabilities
    
    
    (631,070
    )
    
    
    (1,711,503
    )
    
    
    258,831Income taxes payable/recoverable
    
    
    (217,040
    )
    
    
    162,973
    
    
    
    2,863,177Deferred revenue
    
    
    (1,437,146
    )
    
    
    1,009,212
    
    
    
    (161,510
    )Amounts collected in excess of
pass-through costs incurred
    
    
    
    
    
    
    
    
    
    
    76,591Long-term restructuring costs
    
    
    
    
    
    
    (337,407
    )
    
    
    (454,868
    )Other
    
    
    43,368
    
    
    
    203,063
    
    
    
    41,693Net cash provided by (used in)
operating activities
    
    
    1,638,681
    
    
    
    (330,152
    )
    
    
    4,821,732Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    4,500,000
    
    
    
    1,079,441Long-term debt repayments
    
    
    (297,506
    )
    
    
    (5,150,000
    )
    
    
    (4,835,314
    )Short-term debt repayments
    
    
    
    
    
    
    (6,885,125
    )
    
    
    Issuance of common shares,
net of share issue costs
    
    
    47,917
    
    
    
    60,670,009
    
    
    
    109,084Issuance of convertible debentures
    
    
    
    
    
    
    
    
    
    
    2,000,000Redemption of common shares
    
    
    (7,442,910
    )
    
    
    (816,549
    )
    
    
    Net cash (used in) provided by
financing activities
    
    
    (7,692,499
    )
    
    
    52,318,335
    
    
    
    (1,646,789
    )
  149




---



##### 



F-5
 Envoy Communications Group Inc.
 Consolidated Statements of Cash Flows (continued)
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2005
    
    
    2004
    
    
    2003Cash flows from investing activities:Acquisition of subsidiaries, net of cash
acquired of $730,496 (2004 - $nil;
2003 - $nil)
    
    $
    (4,059,455
    )
    
    $
    
    
    
    $
    (104,137
    )Purchase of capital assets
    
    
    (4,387,425
    )
    
    
    (1,581,768
    )
    
    
    (1,018,910
    )Proceeds on sale of capital assets
    
    
    
    
    
    
    
    
    
    
    176,106Repayment on loan receivable
    
    
    33,516
    
    
    
    
    
    
    
    Investments
    
    
    14,956,214
    
    
    
    (46,444,152
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    6,542,850
    
    
    
    (48,025,920
    )
    
    
    (946,941
    )Change in cash balance due to foreign
exchange
    
    
    98,908
    
    
    
    (186,668
    )
    
    
    74,585Discontinued operations
    
    
    (33,358
    )
    
    
    (1,192,111
    )
    
    
    (590,231
    )Net change in cash
    
    
    554,582
    
    
    
    2,583,484
    
    
    
    1,712,356Cash,beginning of year
    
    
    3,655,338
    
    
    
    1,071,854
    
    
    
    (640,502
    )Cash,end of year
    
    $
    4,209,920
    
    
    $
    3,655,338
    
    
    $
    1,071,854Supplemental cash flow information:Interest paid
    
    $
    66,555
    
    
    $
    993,634
    
    
    $
    1,977,822Income taxes paid
    
    
    863,100
    
    
    
    742,443
    
    
    
    45,800Supplemental disclosure of non-cash
transactions:Conversion of debentures
    
    
    
    
    
    
    4,200,284
    
    
    
    1,540,343Capital assets acquired under capital
leases
    
    
    
    
    
    
    56,163
    
    
    
    
  
 150




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 1.
    
    Nature of Business
   (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 24.(b)
    
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2005.(c)
    
    The comparative figures have been restated as a result of the discontinued
operations described in Note 23.
 2.
    
    Significant Accounting Policies
 (a)
    
    Principles of Consolidation
   2005
    
    
    2004
    
    
    2003
    
    
    Jurisdiction ofCompany
    
    % ownership
    
    
    % ownership
    
    
    % ownership
    
    
    incorporationWatt International Inc.
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    OntarioWatt Gilchrist Limited
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    United KingdomCommunique
Incentives Inc.
    
    
    
    
    
    
    
    
    
    
    100
    
    
    OntarioJohn Street Inc.
    
    
    
    
    
    
    100
    
    
    
    70
    
    
    OntarioParker Williams
Design Limited
    
    
    65
    
    
    
    
    
    
    
    
    
    
    United Kingdom
 (b)
    
    Use of Estimates
  151




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
   152




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 2.
    
    Significant Accounting Policies (continued)
 (c)
    
    Capital Assets
  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 only fees billed and collected in advance
of such fees being earned;(ii)
    
    the reimbursable pass-through costs which are included in unbilled
accounts receivable; and(iii)
    
    work in process represents costs incurred on projects for which revenue has not yet
been recognized for accounting purposes.
    153




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 2.
    
    Significant Accounting Policies (continued)
 (e)
    
    Goodwill
   (f)
    
    Intangible assets
  (g)
    
    Foreign currency translation
   154




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 155




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 2.
    
    Significant Accounting Policies (continued)
 (h)
    
    Income taxes
  (i)
    
    Stock-based compensation
   (j)
    
    Earnings per share
  (k)
    
    Business combinations
  156




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
  157




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 2.
    
    Significant Accounting Policies (continued)
 (l)
    
    Investments
   (m)
    
    Impairment of long-lived assets
  (n)
    
    Discontinued operations
   158




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 3.
    
    Investments
 2005
    
    
    2004Short termCash
    
    $
    1,217,017
    
    
    $
    Discount securities
    
    
    20,896,940
    
    
    
    3,820,247Fixed income
    
    
    
    
    
    
    32,324,632$
    22,113,957
    
    
    $
    36,144,879Long termDiscount securities
    
    $
    8,541,760
    
    
    $
    Fixed income
    
    
    1,703,543
    
    
    
    9,432,175Equities
    
    
    748,935
    
    
    
    853,388$
    10,994,238
    
    
    $
    10,285,563Total investments
    
    $
    33,108,195
    
    
    $
    46,430,442
   4.
    
    Accounts receivable
 2005
    
    
    2004Trade receivables
    
    $
    11,040,626
    
    
    $
    7,275,956Accrued revenue
    
    
    3,926,699
    
    
    
    6,692,820Work in process
    
    
    1,697,815
    
    
    
    839,053$
    16,665,140
    
    
    $
    14,807,829
 159




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 5.
    
    Goodwill and other intangible assets
  2005
    
    
    2004Goodwill  beginning of year
    
    $
    10,216,101
    
    
    $
    10,059,178Additions (Note 7)
    
    
    4,152,369
    
    
    
    Cumulative translation adjustment
    
    
    (1,419,344
    )
    
    
    156,923Goodwill  end of year
    
    $
    12,949,126
    
    
    $
    10,216,101
   2005
    
    
    2004Intangible assets  beginning of year
    
    $
    
    
    
    $
    Additions (Note 7)
    
    
    330,849
    
    
    
    Amortization
    
    
    (45,327
    )
    
    
    Cumulative translation adjustment
    
    
    (43,636
    )
    
    
    Intangible assets  end of year
    
    $
    241,886
    
    
    $
    
  6.
    
    Capital assets
 Accumulated
    
    
    Net book2005
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    10,992,982
    
    
    $
    7,919,603
    
    
    $
    3,073,379Furniture and equipment
    
    
    1,056,443
    
    
    
    936,790
    
    
    
    119,653Leasehold improvements
    
    
    6,231,425
    
    
    
    2,584,920
    
    
    
    3,646,505Equipment under capital leases
    
    
    1,164,836
    
    
    
    1,125,061
    
    
    
    39,775$
    19,445,686
    
    
    $
    12,566,374
    
    
    $
    6,879,312
 Accumulated
    
    
    Net book2004
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    10,911,687
    
    
    $
    8,495,762
    
    
    $
    2,415,925Furniture and equipment
    
    
    493,436
    
    
    
    371,546
    
    
    
    121,890Leasehold improvements
    
    
    4,174,973
    
    
    
    1,893,191
    
    
    
    2,281,782Equipment under capital leases
    
    
    1,161,052
    
    
    
    864,826
    
    
    
    296,226
 160




---



##### 



F-6
 Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 Accumulated
    
    
    Net book2004
    
    Cost
    
    
    depreciation
    
    
    value$
    16,741,148
    
    
    $
    11,625,325
    
    
    $
    5,115,823
 161




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 7.
    
    Acquisition of subsidiariesOn February 28, 2005, the Company through its subsidiary ECG Holdings (UK) Limited (ECGH),
acquired 65% of the outstanding shares of Parker Williams Design Limited (Parker Williams),
a London, UK based packaging design and brand specialist company. The purchase price of
£1,818,000, equivalent to $4,324,113, was paid in cash on completion. The remaining 35% of
the Parker Williams shares (Management Shares) will continue to be held by senior
management of Parker Williams (Management Shareholders), subject to certain options
described below.ECGH will have the option to acquire from the Management Shareholders and the Management
Shareholders will have the option to require ECGH to purchase from them, at various stages
over a period of 4 years following completion, the Management Shares for a purchase price
based on the profitability of Parker Williams for certain defined periods following
completion.The acquisition has been accounted for using the purchase method of accounting. The fair
value of the net assets acquired was £128,961 consisting of working capital and capital
assets. Of the resulting excess purchase price, including acquisition expenses, over the
fair value of the net assets acquired of £1,884,894, an amount of £1,745,794 was allocated to
goodwill and an amount of £139,100 was allocated to intangible assets consisting of customer
relationships and non-compete agreements.
 Assets acquired and liabilities assumed:Total assets
    
    $
    1,796,438Total liabilities
    
    
    (1,324,541
    )Minority interest
    
    
    (165,164
    )Net assets acquired
    
    
    306,733Intangible assets
    
    
    330,849Goodwill
    
    
    4,152,369Purchase price including acquisition costs
    
    $
    4,789,951
 162




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 8.
    
    Related party transactionsDuring fiscal 2005, the Company paid one of its directors $57,500 (2004  $266,100; 2003 -
$312,589) for legal services.At September 30, 2004, Envoy purchased from the executive officers of John Street Inc. the
30% of the shares of John Street Inc. which it did not already own (see Note 23). Effective
June 30, 2005, Envoy completed the sale of the shares of its John Street Inc. subsidiary
(John Street) and related assets to the management of John Street for a gross sale price of
$1,500,000. The purchase price for the shares was $1,200,000 and for the related assets was
$300,000. The sale transaction produced a net gain of $1,801,507. As at June 30, 2005, John
Street was also indebted to Envoy in the amount of $675,000 on account of an inter-company
loan. These loans are payable over a period of 5 years and, except for interest free periods
totaling 12 months, carry interest at the rate of 8% per annum. The repayment of the loans
requires quarterly payments totaling $100,501 to be made by June 30, 2006, followed by 48
monthly payments of $41,145.50 beginning July 31, 2006. At September 30, 2005, the amount of
these loans receivable was $2,075,485, of which $265,082 was current and $1,810,403 was long
term. These loans are secured against 100 common shares in the capital of John Street Inc,
which represents all of the share capital of that company.During fiscal 2004, certain executives of the Company loaned the Company an amount of
$100,000, and a relative of a director loaned the Company an amount of $150,000. These
debentures bore an interest rate of 10% per annum, and included warrants to purchase a total
of 125,000 shares at $0.15 per share. During fiscal 2004, these debentures were repaid.During fiscal 2003, relatives of the Chief Executive Officer loaned the Company $225,000 of
which $150,000 was outstanding at September 30, 2003. The loan bore an interest rate of 10%
per annum and was repayable on demand. During fiscal 2004, the loan was repaid.During fiscal 2003, relatives of a director loaned the Company $75,000. The loan bore an
interest rate of 10% per annum, and was repayable on demand. The loan was repaid prior to the
fiscal 2003 year end.During fiscal 2003, relatives of the Chief Executive Officer and a director were part of the
group that loaned the Company $2,000,000 of convertible debentures. In total, these
relatives loaned the Company $1,850,000, of which $1,070,000 was outstanding at September 30,
2003. During fiscal 2004 all the debentures were converted into additional shares, as
described in Note 10.At January 1, 2004, the Company sold the operations of Communique Incentives Inc. to an
executive of the subsidiary (see Note 23).Related party transactions are recorded at the exchange amount, being the amount agreed to by
the related parties.
 163




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 9.
    
    Long-term debt
 2005
    
    
    2004Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly instalments
of $7,666 principal and interest
    
    $
    324,341
    
    
    $
    403,676Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments of
$742 principal and interest, repaid during fiscal 2005
    
    
    
    
    
    
    25,389Capital lease, 12.3% per annum over the lease period,
repayable in quarterly instalments of £7,919 principal and
interest, due November 2004, repaid during fiscal 2005
    
    
    
    
    
    
    18,101Capital leases, 8.6% to 14% per annum over the lease period,
repayable in monthly instalments of $36,273 principal
and interest, due between January 2005 and
January 2006
    
    
    36,677
    
    
    
    211,358361,018
    
    
    
    658,524Less current portion
    
    
    108,925
    
    
    
    297,294$
    252,093
    
    
    $
    361,230
 
 (a)
    
    In fiscal 2004, the Company reduced its demand operating facility from $7,000,000
to $3,000,000, using $3,800,000 of the proceeds from debentures that were issued on
October 31, 2003, and another $200,000 drawn from working capital. Warrants, (the Bank
Warrants) to purchase 460,000 of the Companys common shares were released by the
bankers upon the condition that Envoy raise additional funds to further reduce its bank
indebtedness. With the proceeds raised in the public offering, the Company paid off the
remaining balance outstanding and cancelled the demand operating facility. See note
12(b) for details of the public offering.(b)
    
    In September 2003, the holder of the $500,000 promissory note agreed to postpone
the maturity date of the promissory note from June 30, 2003 to September 30, 2006 and to
reduce the rate of interest from 15% to 10% per annum. In consideration of the
foregoing, in the first quarter of fiscal 2004, share purchase warrants to purchase, on
or before April 24, 2008, 10,000 of the Companys common shares at an exercise price of
$0.75 per share were transferred to the holder of the promissory note. This note was
repaid during fiscal 2004.(c)
    
    On October 31, 2003, the Company borrowed the amount of $4,500,000, of which
$4,000,000 was raised by way of secured debentures and $500,000 by way of unsecured term
notes. These loans carried interest at the rate of 10% per annum and had a maturity
date of October 31, 2006.As a condition to the making of these loans, share purchase warrants to purchase 450,000
of the Companys common shares, on or before April 24, 2008, at an exercise price of
$0.75 per share were transferred to the holders of the secured debentures and 164




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
  
 165




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 9.
    
    Long-term debt (continued)The secured debentures and unsecured term notes were bifurcated into a debt component,
representing a yield to maturity of 36.1% per annum over the three-year life, and an equity
component with proceeds allocated $2,073,281 to long-term debt and $2,426,719 to warrants in
shareholders equity.As a result of the additional cash raised from the public offering in the second quarter of
fiscal 2004, the Company reached an agreement with the holders of the secured debentures, the
unsecured term notes and the promissory note, resulting in the early repayment thereof during
the second quarter of fiscal 2004.10.
    
    Convertible debenturesIn April 2003, as part of the renegotiation of the debt facility existing at that time, the
Company amended the terms of the debentures issued on April 29, 2002 and September 12, 2002
as follows: the early repayment terms on the debentures were deferred to April 24, 2005; the
debentures became repayable in cash on maturity on April 24, 2008; both debentures were then
convertible into common shares at a price of $0.75 each, for a total of 5,066,667 common
shares; and, the warrants attached to the convertible debentures were cancelled.On April 24, 2003, the Company issued $2,000,000 in 10% convertible debentures as part of the
refinancing plan, which had a maturity date of April 24, 2008. These debentures were
convertible into common shares at a price of $0.75 each for a total of 2,666,667 common
shares. Holders also had the right to require the Company to purchase all or a portion of
their debentures on or after April 24, 2005 at the issue price plus accrued and unpaid
interest.The debentures were bifurcated into a debt component, representing a yield to maturity of
25.6% per annum over the five-year life, and an equity component with proceeds allocated
$1,465,929 to long-term debt and $534,071 to shareholders equity. That portion of offering
expenses, related to the debt component being $120,906 was recorded as deferred financing
fees which were included in prepaid expenses, with the remaining $44,049 applied to reduce
the equity component.During fiscal 2003, convertible debentures with a face value of $1,410,000 were converted
into 1,880,000 common shares of the Company.In the first quarter of fiscal 2004, convertible debentures with a face value of $2,420,000
were converted into 3,226,667 common shares. During the second quarter of fiscal 2004, the
remaining convertible debentures, with a face value of $1,970,000, were converted into an
additional 2,626,667 common shares.As at September 30, 2005, the aggregate debt component carrying values of all of the
Companys convertible debentures was $nil (2004  $nil).
 166




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 11.
    
    Interest expense and financing (income) costsInterest expense and financing (income) costs during the year arose from the following:
 2005
    
    
    2004
    
    
    2003Cash interest paid (earned) on credit facility,
landlord loans, capital leases and bank balances
    
    $
    (81,479
    )
    
    $
    354,781
    
    
    $
    912,255Financing fees on credit facility
    
    
    
    
    
    
    100,451
    
    
    
    311,053Negotiation fee for early repayment of debt (Note 9)
    
    
    
    
    
    
    435,000
    
    
    
    Accrued financing fee charges on credit facility
    
    
    
    
    
    
    
    
    
    
    179,685Accrued interest on debentures
    
    
    
    
    
    
    
    
    
    
    101,522Cash interest paid on convertible debentures
and amortization of debenture issue costs
    
    
    
    
    
    
    105,369
    
    
    
    484,851(81,479
    )
    
    
    995,601
    
    
    
    1,989,366Accreted interest imputed on warrants
and debentures
    
    
    
    
    
    
    2,552,991
    
    
    
    718,321Total interest expense and
financing (income) costs
    
    $
    (81,479
    )
    
    $
    3,548,592
    
    
    $
    2,707,687
  
 167




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital(a)
    
    Authorized :
    2005
    
    2004
    
    2003Number
    
    
    
    
    
    Number
    
    
    
    
    
    Numberof shares
    
    Amount
    
    of shares
    
    Amount
    
    of shares
    
    AmountBalance, beginning of year
    
    
    23,416,600
    
    
    $
    117,447,261
    
    
    
    6,209,406
    
    
    $
    55,988,817
    
    
    
    4,251,739
    
    
    $
    54,339,390Common shares issued pursuant to:Conversion of convertible
debentures (Note 10)
    
    
    
    
    
    
    
    
    
    
    5,853,333
    
    
    
    4,841,439
    
    
    
    1,880,000
    
    
    
    1,540,343Stock options exercised
    
    
    38,334
    
    
    
    47,917
    
    
    
    115,667
    
    
    
    224,852
    
    
    
    77,667
    
    
    
    109,084Conversion of warrants
(Note 9)
    
    
    
    
    
    
    
    
    
    
    460,000
    
    
    
    2,771,719
    
    
    
    
    
    
    
    Public Offering (b)
    
    
    
    
    
    
    
    
    
    
    11,052,634
    
    
    
    55,016,831
    
    
    
    
    
    
    
    Repurchase of shares pursuant
to share issuer bid (c)
    
    
    (2,447,417
    )
    
    
    (12,290,413
    )
    
    
    (274,440
    )
    
    
    (1,396,397
    )
    
    
    
    
    
    
    Balance, end of year
    
    
    21,007,517
    
    
    $
    105,204,765
    
    
    
    23,416,600
    
    
    $
    117,447,261
    
    
    
    6,209,406
    
    
    $
    55,988,817
 On January 15, 2005, the Companys board of directors approved the consolidation of
the common shares (a reverse stock split) on the basis of 1 for 5. On January 21, 2005
the Company filed Articles of Amendment consolidating its common shares on the basis of 1
new common share for every 5 common shares outstanding. The effective date for post
consolidation trading of the shares was February 10, 2005. Amounts shown for shares and
earnings per share figures for all periods presented have been adjusted to give effect to
the share consolidation.(b)
    
    Public OfferingThrough a public offering, on February 20, 2004, Envoy issued 5,263,160 units (the First
Units) at $6.65 per First Unit, each First Unit consisting of one common share and
one-half of one transferable common share purchase warrant. Each whole warrant
entitles the holder to purchase one common share at a price of $9.00 per common
share for a period ending February 20, 2009.
 168




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
  169




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
 with total gross proceeds of $40,250,016. As previously stated, part of the proceeds
were used to retire substantially all outstanding loan indebtedness. The balance of the
funds will be used for general corporate purposes and potential acquisition and
investment opportunities.Through a second public offering, on May 12, 2004, Envoy issued 5,000,000 units (the
Second Units) at $5.25 per Second Unit, each Second Unit consisting of one common share
and one-half of one transferable common share purchase warrant. Each whole warrant
entitles the holder to purchase one common share at a price of $9.00 per common share for
a period ending February 20, 2009. The total gross proceeds from the offering was
$26,250,000. The net proceeds of the Second Unit offering will be used for general
corporate purposes and potential acquisition and investment opportunities that the
Company determines have potential to create value for Envoy shareholders that either
complement, or provide an opportunity to diversify the current business of Envoy.The value assigned to these warrants was determined by deducting the $4,695,205 of
expense associated with the public offerings and the $245,524 assigned to the options
provided to the underwriter as indicated below, from the gross proceeds, to derive the
net proceeds. Using the ratio of the amounts that had been assigned to the warrants and
the common shares, as indicated in the short form prospectus for each public offering, a
value of $6,542,456 for the warrants was determined.At a meeting held on June 25, 2004, the holders of the warrants (the First
Warrantholders) issued pursuant to the warrant indenture (the First Warrant Indenture)
between Envoy and Computershare Trust Company of Canada (Computershare) dated February
20, 2004, the First Warrantholders approved the replacement of the warrant indenture (the
Second Warrant Indenture) between Envoy and Computershare dated May 12, 2004 by the
First Warrant Indenture as the instrument governing the terms of the warrants issued
pursuant to the Second Warrant Indenture.As part of the compensation for the public offering, the Company granted the underwriter
a total of 375,000 options at an exercise price of $5.25 per share. These options vested
immediately, and expired without being exercised on May 5, 2005.(c)
    
    Repurchase of sharesPursuant to the terms of a normal course issuer bid which began on August 26, 2005 and
will end on August 25, 2006, the Company is authorized to repurchase and cancel
up to 10% of the public float of the shares. Under this normal course issuer bid, up to September
30, 2005, the Company had repurchased and cancelled 407,080 common shares for cash
consideration of $1,100,229.Pursuant to the terms of a normal course issuer bid which began on August 26, 2004 and
ended on August 25, 2005, the Company was authorized to repurchase and cancel
 170




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 up to 10%
of the public float of the shares. During fiscal 2005, under this normal course issuer
bid, the Company repurchased and cancelled 2,040,337 common shares for cash consideration
of $6,342,681. During fiscal 2004 the Company repurchased and cancelled 274,440 common shares for cash consideration of $816,549 under this normal course issuer bid.
 171




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
 (d)
    
    Stock option planThe Company has reserved 800,000 common shares under its stock option. 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. Expiry dates range between 2005 and 2009. All
amounts shown for options are stated after giving effect to the share consolidation
described in (a).There were no options granted during fiscal 2005.On May 25, 2004 the Company granted certain employees and directors a total of 375,000
options at the 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 $344,151 was expensed in the
financial statements in fiscal 2005 and $200,117 was expensed in fiscal 2004. Of the
remaining option value, $74,741 will be expensed over the period ending May 2007, and
$245,524 has been included as part of stock based compensation in Shareholders Equity.The estimated fair value of the options granted during fiscal 2003, using the
Black-Scholes option pricing model, was $175,203 of which $23,268 was expensed in the
financial statements in fiscal 2003.No other value associated with the stock options was recognized in the accounts of the
Company.(e)
    
    Stock option detailsThe fair value of each option granted was estimated on the date of the grant using the
Black-Scholes fair value option pricing model with the following assumptions:
 2005
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    n/a
    
    
    
    3.1% - 4.0
    %
    
    
    4.00
    %Volatility factor of the future expected
market price of the Companys
common shares
    
    
    n/a
    
    
    
    54
    %
    
    
    83
    %Weighted average expected life of the
options
    
    
    n/a
    
    
    1.85 years
    
    1.95 yearsExpected dividends
    
    
    n/a
    
    
    Nil
    
    Nil
 172




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 173




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)Details of the options, after giving effect to the share consolidation described in (a),
are as follows:
 WeightedaverageexerciseNumber
    
    
    price perof options
    
    
    shareOptions outstanding, September 30, 2002
    
    
    639,800
    
    
    $
    15.30Options granted
    
    
    364,000
    
    
    
    1.30Options exercised
    
    
    (77,667
    )
    
    
    1.40Options cancelled
    
    
    (577,850
    )
    
    
    13.70Options outstanding, September 30, 2003
    
    
    348,283
    
    
    
    6.35Options granted
    
    
    375,000
    
    
    
    4.00Options exercised
    
    
    (115,667
    )
    
    
    1.75Options cancelled
    
    
    (21,666
    )
    
    
    15.10Options outstanding, September 30, 2004
    
    
    585,950
    
    
    
    5.45Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (38,334
    )
    
    
    1.25Options cancelled
    
    
    (145,666
    )
    
    
    10.26Options outstanding, September 30, 2005
    
    
    401,950
    
    
    $
    4.10Options exercisable, September 30, 2005
    
    
    295,283
    
    
    $
    4.29Options exercisable, September 30, 2004
    
    
    132,617
    
    
    $
    12.00Options exercisable, September 30, 2003
    
    
    209,950
    
    
    $
    9.75
  Number
    
    Weighted Average
    
    NumberExercise Price
    
    Outstanding
    
    Contractual Life
    
    Exercisable$1.25
    
    
    50,000
    
    
    
    2.07
    
    
    
    33,333$3.05
    
    
    15,000
    
    
    
    1.66
    
    
    
    15,000$4.00
    
    
    320,000
    
    
    
    3.65
    
    
    
    230,000$15.25
    
    
    12,000
    
    
    
    0.74
    
    
    
    12,000$15.25
    
    
    4,950
    
    
    
    1.84
    
    
    
    4,950401,950
    
    
    
    
    
    
    
    295,283
 174




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 175




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)In fiscal 2003, the Company did not expense the full value of the employee stock options in
the financial statements. The following pro forma information presents net income and
earnings per share, including the expense related to the stock options that would be
calculated under the fair value method:
 2003Pro forma net earnings
    
    $
    2,386,827Pro forma earnings per shareBasic
    
    $
    0.55Diluted
    
    $
    0.42
 As indicated in Note 2(h), the Company adopted the use of the fair value method for all stock
based compensation prospectively from fiscal 2004.13.
    
    Contributed SurplusDuring fiscal 2005, pursuant to the normal course issuer bid described in Note 12(c), the
Company repurchased and cancelled 2,447,417 common shares at an average price of $3.04 per
common share for total cash consideration, including related expenses, of $7,442,910. As the
average price paid was less than the average per share value of the outstanding common
            shares, $4,847,503 was recorded in contributed surplus as a gain on redemption of shares.During fiscal 2004, pursuant to the normal course issuer bid described in Note 12(c), the
Company repurchased and cancelled 274,440 common shares at an average price of $2.90 per
common share for total cash consideration plus related expenses of $816,549. As the average
price paid was less than the average per share value of the outstanding common shares,
$579,848 was recorded in contributed surplus as a gain on redemption of shares.
 176




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 14.
    
    Earnings per Share
  2005
    
    
    2004
    
    
    2003Numerator for basic EPS calculation:Net earnings (loss)
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )
    
    $
    2,538,762Denominator:Denominator for basic net
earnings (loss) per share -
weighted average shares
outstanding (as adjusted for share
consolidation (Note 12(a))
    
    
    22,137,757
    
    
    
    17,062,152
    
    
    
    4,334,813Effect of dilutive potential
common shares issuable:- pursuant to warrants
    
    
    
    
    
    
    
    
    
    
    180,992- under stock options
    
    
    27,997
    
    
    
    
    
    
    
    92,126- under conversion of debentures
    
    
    
    
    
    
    
    
    
    
    4,239,268Denominator for diluted net
earnings (loss) per share
    
    
    22,165,754
    
    
    
    17,062,152
    
    
    
    8,847,199
 
 (i)
    
    For fully diluted earnings per share in 2003, the numerator is
$3,843,456. This difference is due to the accounting for convertible debentures
which requires them to be treated as if converted for purposes of fully diluted
earnings per share.Included in the difference is cash interest of $477,377, accreted interest of $718,321
and amortized debenture issue costs of $108,996.   177




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##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 Anti-dilutive potential securities
    
    2005
    
    
    2004
    
    
    2003Common shares potentially issuable:- pursuant to warrants
    
    
    5,131,850
    
    
    
    5,526,317
    
    
    
    500,000- under stock options
    
    
    351,950
    
    
    
    960,950
    
    
    
    145,9505,483,800
    
    
    
    6,487,267
    
    
    
    645,950
 
 178




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 15.
    
    Income taxesIncome tax expense (recovery) for the years ended September 30, 2005, 2004 and 2003 consists
of:
 2005
    
    
    2004
    
    
    2003Current
    
    $
    824,342
    
    
    $
    484,056
    
    
    $
    94,577Future
    
    
    (618,188
    )
    
    
    (333,632
    )
    
    
    142,687$
    206,154
    
    
    $
    150,424
    
    
    $
    237,264
  2005
    
    
    2004
    
    
    2003Income tax expense (recovery)
at statutory rates
    
    $
    1,642,068
    
    
    
    36.1
    %
    
    $
    (913,810
    )
    
    
    (36.1
    %)
    
    $
    1,009,929
    
    
    
    37.1
    %Increase (decrease) in
income taxes resulting from:Adjustment to future tax
assets for substantively
enacted changes in tax
laws and rates
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (179,597
    )
    
    
    (6.6
    %)Expenses (revenue)
deducted (included) in
the accounts that have no
corresponding deduction
(inclusion) for income taxes
    
    
    139,889
    
    
    
    3.1
    %
    
    
    303,285
    
    
    
    12.0
    %
    
    
    (872,628
    )
    
    
    (32.1
    %)Impact of different tax
rate on earnings of
foreign subsidiaries
    
    
    (21,910
    )
    
    
    (0.5
    %)
    
    
    (43,454
    )
    
    
    (1.7
    %)
    
    
    (307,945
    )
    
    
    (11.3
    %)Change in valuation
allowance
    
    
    (2,042,816
    )
    
    
    (44.9
    %)
    
    
    1,044,524
    
    
    
    41.3
    %
    
    
    963,913
    
    
    
    35.4
    %Other
    
    
    488,923
    
    
    
    10.7
    %
    
    
    (240,121
    )
    
    
    (9.6
    %)
    
    
    (376,408
    )
    
    
    (13.8
    %)$
    206,154
    
    
    
    4.5
    %
    
    $
    150,424
    
    
    
    5.9
    %
    
    $
    237,264
    
    
    
    8.7
    %
 179




---



##### 



F-6
 Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 15.
    
    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, 2005 and 2004 are presented below:
 2005
    
    
    2004Future tax assets:Capital assets
    
    $
    1,024,064
    
    
    $
    1,318,783Share issuance costs
    
    
    1,329,694
    
    
    
    1,772,925Non-capital losses expiring by 2015
    
    
    5,632,312
    
    
    
    6,318,990Other
    
    
    47,031
    
    
    
    47,0318,033,101
    
    
    
    9,457,729Less valuation allowance
    
    
    2,372,765
    
    
    
    4,415,581Net future tax assets
    
    
    5,660,336
    
    
    
    5,042,148Future tax liabilities:Goodwill
    
    
    50,863
    
    
    
    50,863Total net future tax assets
    
    
    5,609,473
    
    
    
    4,991,285Less current portion
    
    
    301,384
    
    
    
    1,500,000$
    5,308,089
    
    
    $
    3,491,285
  2008
    
    
    2,300,0002009
    
    
    3,900,0002010
    
    
    6,300,0002014
    
    
    2,700,0002015
    
    
    100,000$
    15,300,000
  180




---



##### 



F-6
 16.
    
    Closure of Hampel Stefanides Inc. (Hampel)On February 7, 2003, the Company decided to cease the operations of Hampel after conducting a
review, in conjunction with the Companys banks, of the ongoing viability, future prospects,
cash needs and local debt situation of Hampel. As the Companys banks held a first charge on
the assets of Hampel, the net proceeds from the liquidation of those assets were applied in
reduction of the Companys debt obligations to the banks. Consequently, there were not
sufficient proceeds from the liquidation to make any payment to the unsecured creditors of
Hampel. As the Company has no obligation to pay the creditors of Hampel, the consolidated
accounts of the Company for fiscal 2003 reflect a gain on the shut-down of Hampel.Following the liquidation of the assets, the shares of Hampel were sold for a nominal
consideration, and the purchaser assumed the liabilities. Based on the sale of the shares of
Hampel, included in general and administrative expenses is the recognition of a cumulative
translation gain of $841,081 in fiscal 2003.17.
    
    Closure of SubsidiariesIn the first quarter of fiscal 2003, the assets of Envoys technology company Devlin
Multimedia Inc. (Devlin) were sold, and the Companys other technology company, Sage
Information Consultants Inc. (Sage), was shut down. The results of operations prior to
these closures have been included in the results of operations for 2003.The sale of assets of Devlin was completed on October 30, 2002 at a price equal to their net
book value, and correspondingly no gain or loss on the disposal was recorded. Legal expenses
related to the disposal were recorded to reduce the gain on disposal of subsidiaries, and
income taxes related to the closure of the company have been provided in the consolidated
provision in fiscal 2003.Sage was closed effective November 11, 2002. All operations of the business were halted and
the assets and liabilities of the company were realized over time. Envoy sold the right to
continue business with the customers of Sage to a company formed by certain management
employees of Sage, and the proceeds of this agreement were used to offset some of the costs
incurred to close the business. A loss of $114,684 has been recorded on the closure of Sage
in fiscal 2003.




---



##### 



F-6
 18.
    
    Restructuring costsThe restructuring undertaken in fiscal 2002 included the abandonment of leased office space
in New York City. During fiscal 2004, negotiations were held with the landlord resulting in
the Company discharging the ongoing payments to the landlord with a lump sum payment.Total restructuring costs accrued at September 30 are classified as:
 2005
    
    
    2004
    
    
    2003Accounts payable and accrued liabilities
    
    $
    15,620
    
    
    $
    28,471
    
    
    $
    214,060Long-term portion of restructuring costs
    
    
    
    
    
    
    
    
    
    
    -337,407$
    15,620
    
    
    $
    28,471
    
    
    $
    551,467
 Total
    
    
    Accrual atrecovery
    
    
    September 30,Cash
    
    
    Non-cash
    
    
    2003
    
    
    2003Severance
    
    $
    (74,969
    )
    
    $
    
    
    
    $
    (74,969
    )
    
    $
    56,885Lease exit costs
    
    
    (192,243
    )
    
    
    
    
    
    
    (192,243
    )
    
    
    494,582$
    (267,212
    )
    
    $
    
    
    
    $
    (267,212
    )
    
    $
    551,467
 19.
    
    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 five years and thereafter as
follows:
 2006
    
    $
    1,756,1722007
    
    
    1,543,3142008
    
    
    1,357,1842009
    
    
    1,112,5482010
    
    
    839,692Thereafter
    
    
    2,576,358$
    9,185,268
 Rent expense under operating leases for the year ended September 30, 2005 amounted to
$1,255,655 (2004  $1,201,267; 2003  $2,479,821).(b)
    
    In the ordinary course of business, the Company and its subsidiaries have legal
proceedings brought against them. Management does not expect the outcome of these
proceedings, in aggregate, to have a material adverse effect on the Companys
consolidated financial position or results of operations.




---



##### 



F-6
 20.
    
    Financial instrumentsThe estimated fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than a forced or
liquidation sale. These estimates, although based on the relevant market information about
the financial instrument, are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
 (a)
    
    The carrying values and estimated fair values of the Companys financial
instruments are as follows:
 (i)
    
    The carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities and promissory notes approximate their fair values due to the
short-term nature of these instruments.As at September 30, 2005, the carrying value of the loans payable to landlords was
$324,340 (2004  $429,065) and their fair value was $286,681 (2004  $351,728).Unless otherwise noted, the carrying value of other financial instruments
approximates their carrying value.(ii)
    
    The carrying amounts and fair value of short term investments and long
term investments are detailed in Note 3.
 (b)
    
    Risk management activities:
 (i)
    
    Currency risk:The Company is subject to currency risk through its activities in the United States
and the United Kingdom. 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 enter into foreign
currency contracts to mitigate the associated risks. As at September 30, 2005, 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, 2005, one customer represented 18% of accounts receivable (2004  one customer
represented 17% of accounts receivable).




---



##### 



F-6
 21.
    
    Segmented informationThe Company provides integrated marketing communication services to its clients. While the
Company has subsidiaries in Canada, the United States, the United Kingdom and Continental
Europe, it operates as an international business and has no distinct reportable business
segments.The tables below set out the following information:
 (a)
    
    The Companys external net revenue by geographic region based on the region in
which the customer is located is as follows:
 2005
    
    
    2004
    
    
    2003Net revenue:Canada
    
    $
    5,717,167
    
    
    $
    2,075,090
    
    
    $
    2,317,055United States
    
    
    14,514,570
    
    
    
    14,164,886
    
    
    
    18,149,813United Kingdom and
Continental Europe
    
    
    22,925,286
    
    
    
    20,723,981
    
    
    
    17,275,420$
    43,157,023
    
    
    $
    36,963,957
    
    
    $
    37,742,288
 (b)
    
    The Companys external net revenue by type of service is as follows:
 2005
    
    
    2004
    
    
    2003Net revenue:Consumer and retail branding
    
    $
    43,157,023
    
    
    $
    36,963,957
    
    
    $
    34,313,108Marketing
    
    
    
    
    
    
    
    
    
    
    3,137,326Technology
    
    
    
    
    
    
    
    
    
    
    291,854$
    43,157,023
    
    
    $
    36,963,957
    
    
    $
    37,742,288
 (c)
    
    In 2005, the Company had three customers, which represented 33%, 13% and 12% of
net revenue respectively. In 2004, the Company had three customers which represented
41%, 17% and 12% of net revenue respectively. In 2003, the Company had three customers
which represented 26%, 16% and 12% of net revenue, respectively.




---



##### 



F-6
 21.
    
    Segmented information (continued)
 (d)
    
    The Companys identifiable assets for each geographic area in which it has
operations are as follows:
 2005
    
    
    2004Capital assets:Canada
    
    $
    2,755,415
    
    
    $
    2,948,262United Kingdom and Continental Europe
    
    
    4,123,897
    
    
    
    2,167,561$
    6,879,312
    
    
    $
    5,115,823Goodwill:Canada
    
    $
    2,725,296
    
    
    $
    2,725,296United Kingdom and Continental Europe
    
    
    10,223,830
    
    
    
    7,490,805$
    12,949,126
    
    
    $
    10,216,101Intangible assets:United Kingdom and Continental Europe
    
    $
    241,886
    
    
    $
    
 22.
    
    Subsequent eventsIn November 2005, the Company announced that its Board of Directors has approved the
immediate implementation of a restructuring plan. Accordingly, Envoy will incur a
restructuring charge of approximately $1,600,000 in the first quarter of fiscal 2006.




---



##### 



F-6
 23.
    
    Discontinued operationsEffective June 30, 2005, Envoy completed the sale of the shares of its John Street Inc.
subsidiary (John Street) and related assets to the management of John Street. The purchase
price for the shares was $1,200,000 and for the related capital assets was $300,000. John
Street was also indebted to Envoy in the amount of $675,000 on account of an inter-company
loan. These loans are payable over a period of 5 years and, except for interest free periods
totaling 12 months, carry interest at the rate of 8% per annum. Prior to its sale, John
Street was reported primarily as part of Canadian net revenue in the marketing segment.
 John Street Inc.
 Fiscal year:
    
    2005
    
    
    2004
    
    
    2003Net revenue
    
    $
    3,151,083
    
    
    $
    3,838,833
    
    
    $
    3,110,995Operating expenses
    
    
    3,047,312
    
    
    
    3,757,571
    
    
    
    3,009,000Interest expense
    
    
    50,625
    
    
    
    
    
    
    
    Depreciation
    
    
    49,132
    
    
    
    42,572
    
    
    
    90,290Income tax expense
    
    
    2,138
    
    
    
    
    
    
    
    1,140Earnings from discontinued operations
(excluding gain on sale)
    
    
    1,876
    
    
    
    38,690
    
    
    
    10,565Gain on sale of discontinued operations
    
    
    1,799,631
    
    
    
    
    
    
    
    Earnings from discontinued operations
    
    $
    1,801,507
    
    
    $
    38,690
    
    
    $
    10,565
  Communique Incentives Inc.
 Fiscal year:
    
    2005
    
    
    2004
    
    
    2003Net revenue
    
    $
    
    
    
    $
    398,114
    
    
    $
    1,573,960Operating expenses
    
    
    
    
    
    
    389,394
    
    
    
    1,480,012Depreciation
    
    
    
    
    
    
    2,237
    
    
    
    16,883Amortization of intangible asset
    
    
    
    
    
    
    6,049
    
    
    
    24,197Income tax expense
    
    
    
    
    
    
    
    
    
    
    8,120Earnings from discontinued operations
(excluding loss on sale)
    
    
    
    
    
    
    434
    
    
    
    44,748Loss on sale of discontinued operations
    
    
    
    
    
    
    (465,576
    )
    
    
    (Loss) earnings from discontinued
operations
    
    $
    
    
    
    $
    (465,142
    )
    
    $
    44,748Total earnings (loss) from disc. ops.
    
    $
    1,801,507
    
    
    $
    (426,452
    )
    
    $
    55,313




---



##### 



F-6
 24.
    
    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, 2005, 2004 and
2003 required to conform to US GAAP.
 2005
    
    
    2004
    
    
    2003Net earnings (loss) based on
Canadian GAAP
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )
    
    $
    2,538,762Stock-based compensation (a)
    
    
    344,151
    
    
    
    200,117
    
    
    
    Convertible debentures (b)
    
    
    
    
    
    
    (664,516
    )
    
    
    67,538Net earnings (loss) based on
U.S. GAAP
    
    $
    6,285,841
    
    
    $
    (3,571,203
    )
    
    $
    2,606,300Net earnings (loss) from continuing
operations
    
    $
    4,484,334
    
    
    $
    (3,144,751
    )
    
    $
    (1,576,314
    )Net earnings (loss) from discontinued
operations (Notes 23 and 24(c))
    
    $
    1,801,507
    
    
    $
    (426,452
    )
    
    $
    4,182,614
  2005
    
    
    2004
    
    
    2003Net earnings (loss) per share:Basic
    
    $
    0.29
    
    
    $
    (0.21
    )
    
    $
    0.60Diluted
    
    
    0.29
    
    
    
    (0.21
    )
    
    
    0.60Net earnings (loss) per share from continuing
operations:Basic
    
    $
    0.21
    
    
    $
    (0.18
    )
    
    $
    (0.36
    )Diluted
    
    
    0.21
    
    
    
    (0.18
    )
    
    
    (0.36
    )Net earnings (loss) per share from discontinued
operations:Basic
    
    $
    0.08
    
    
    $
    (0.03
    )
    
    $
    0.96Diluted
    
    
    0.08
    
    
    
    (0.03
    )
    
    
    0.96




---



##### 



F-6
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)The following adjustments are required in order to conform shareholders equity based on
Canadian GAAP to shareholders equity based on U.S. GAAP:
 2005
    
    
    2004Shareholders equity based on Canadian GAAP
    
    $
    73,555,483
    
    
    $
    76,891,499Accumulated other comprehensive income (loss) (d)
    
    
    (5,859
    )
    
    
    174,426Shareholders equity based on U.S. GAAP
    
    $
    73,549,624
    
    
    $
    77,065,925
   (a)
    
    Stock-based compensation disclosures:For fiscal 2003, 2004 and 2005, 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, which in the Companys circumstances would not be
materially different from compensation expense as determined under Canadian GAAP for
2003. From fiscal 2004, the Company prospectively adopted the new provisions of the CICA
handbook as described in Note 2(h), under these provisions the expense for stock-based
compensation for fiscal 2005 under Canadian GAAP is $344,151 greater than under US GAAP
($200,117 greater in fiscal 2004).There were no options granted in fiscal 2005. The weighted average estimated fair value
at the date of the grant for options granted in fiscal 2004 and fiscal 2003 were $0.33
and $0.12 per share respectively. The fair value of each option granted was estimated at
the date of the grant using the Black-Scholes fair value option pricing model with the
assumptions as indicated in Note 12(e).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
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (b)
    
    Convertible debentures:During 2005, the Company did not issue any convertible debentures (2004  $nil, 2003 -
$2,000,000). The debentures issued in fiscal 2003, were convertible at any time at the
option of the holder into common shares and common share purchase warrants of the Company
(note 10), and were redeemable in cash at the option of the holder two years after the
issue date. Under Canadian GAAP, the debentures issued in fiscal 2003 were bifurcated
into a debt component and an equity component, based on relative fair values, which
resulted in aggregate proceeds in fiscal 2003 of $1,465,929, allocated to long-term debt,
and $534,071, to shareholders equity, respectively. Issue costs in 2003 were allocated
between the debt and equity components which resulted in $44,048 of the aggregate
$314,955 issue costs being applied to reduce the equity




---



##### 



F-6




---



##### 



F-6
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (c)
    
    Discontinued operations:The businesses disposed of during fiscal 2003 in the Gain on closure of subsidiaries
described in Notes 16 and 17, are treated as discontinued operations under U.S. GAAP.
This treatment requires that the results of operations of these businesses be removed
from the normal operations of the Company, and be presented in summary form as earnings
from operations, gain on disposal of, and income taxes from those discontinued
businesses. Effective May 1, 2003, the Company adopted the new provisions of the CICA
handbook, described in Note 2(n), which are materially similar to US GAAP requirements.
The differences reported below relate to dispositions that occurred prior to the adoption
of the new CICA handbook provisions. There is no difference between US GAAP and Canadian
GAAP for discontinued operations in fiscal 2005 or fiscal 2004.For fiscal 2005 and 2004, the amounts reported as assets and liabilities under US GAAP
and Canadian GAAP are the same.Under U.S. GAAP, the amounts reported as revenues and expenses in the Statements of
Operations of the Company would be different than those reported under Canadian GAAP for
fiscal 2003. The revenues and expenses of the discontinued operations were as follows:
 2005
    
    
    2004
    
    
    2003Net revenue
    
    $
    
    
    
    $
    
    
    
    $
    3,386,913Operating expenses
    
    
    
    
    
    
    
    
    
    
    2,649,784Depreciation
    
    
    
    
    
    
    
    
    
    
    70,217Interest expense and financing fees
    
    
    
    
    
    
    
    
    
    
    199Income taxes (recovery)
    
    
    
    
    
    
    
    
    
    
    (119,903
    )Earnings (loss) from discontinued
operations (excluding gain)
    
    $
    
    
    
    $
    
    
    
    $
    786,616Pre-tax earnings (loss) from
discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    906,519Gain on discontinued operations
    
    
    
    
    
    
    
    
    
    
    3,340,685Income taxes recovery from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    119,903Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    4,127,301Earnings (loss) from discontinued
operations accounted for consistent
with US GAAP (see Note 23)
    
    
    1,801,507
    
    
    
    (426,452
    )
    
    
    55,313$
    1,801,507
    
    
    $
    (426,452
    )
    
    $
    4,182,614




---



##### 



F-6
 24. Reconciliation to United States generally accepted accounting principles (continued)
 (d)
    
    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.
 2005
    
    
    2004
    
    
    2003Net earnings (loss) for the year in
accordance with U.S. GAAP
    
    $
    6,285,841
    
    
    $
    (3,571,203
    )
    
    $
    2,606,300Unrealized gain (loss) on available
for sale securities arising during
the year
    
    
    (5,859
    )
    
    
    174,426
    
    
    
    Less: reclassification adjustment
for gains realized in net income
    
    
    (174,426
    )
    
    
    
    
    
    
    Change in cumulative translation
adjustment account
    
    
    (2,183,228
    )
    
    
    310,087
    
    
    
    (1,584,672
    )$
    3,922,328
    
    
    $
    (3,086,690
    )
    
    $
    1,021,628
 (e)
    
    Reduction of capital: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. This reduction in
capital is not permitted under U.S. GAAP. While the adjustment has no impact on
shareholders equity, under U.S. GAAP, share capital would be increased by $9,886,961 and
deficit would be increased by $9,886,961 as at September 30, 2005 and 2004.(f)
    
    Restructuring charges:Under U.S. GAAP restructuring charges would be included as operating expenses in the
consolidated statement of operations.(g)
    
    Investments:The Company accounts for its investments in accordance with FAS 115, Accounting for
Certain Investments in Debt and Equity Securities under US GAAP. As of September 30,
2005, all of the Companys investments have been classified as available-for-sale and
accordingly, recorded at market value. Unrealized gains and losses on these investments
are included in other comprehensive income, as a separate component of shareholders
equity. Any unrealized losses are recorded as a charge to income when they are deemed to
be other than temporary. Under US GAAP, the total of short term and long term
investments would have been lower than




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F-6
 the amount reported in our audited financial
statements by $5,859 at September 30, 2005, and higher by $174,426 at September 30, 2004.
 24. Reconciliation to United States generally accepted accounting principles (continued)
 (h)
    
    Cash flows from discontinued operations:US GAAP requires the cash flow from discontinued operations to be reflected on the
statement of cash flows under cash flows from operating activities, financing activities,
investing activities, and the change due to foreign exchange. This would have resulted
in the cash flow from the discontinued operations being presented on the statement of
cash flows within the cash flows from operating activities.(i)
    
    Recent accounting pronouncements:In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123R (Revised), Share-Based Payment which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement
of Cash Flows. Statement No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements
based on their fair values. In addition, public companies using the fair value method
will recognize compensation expense for the unvested portion of awards outstanding as of
the effective date based on their grant date fair value as calculated under the original
provisions of SFAS 123.The pronouncement was to be effective at the beginning of the first interim or annual
period beginning after June 15, 2005, however, in April 2005, an amendment was issued to
delay the effective date to the first fiscal year that begins after June 15, 2005. The
Company will adopt the new pronouncement effective October 1, 2005.The Canadian and US GAAP difference relating to share-based payments to employees will be
eliminated for all such payments after the adoption of these standards. If the standard
had been effective for the year ended September 30, 2005, it would have resulted in a
$344,151 decrease in US GAAP net inc