##### 



Annual Report 2005




---



##### 



Dear Shareholders
      Recent developments and highlights of 2005
 
    
    Effective February 28, 2005, through its UK subsidiary, Envoy acquired 65% of Parker
Williams Design Group. PW clients include Norden Coop, Sainsburys and others.
    
    On June 30, 2005, Envoy sold its investment in John Street Inc. subsidiary to the
management of the company and, as a result, showed a gain from discontinued operations of
$1.8 million in fiscal 2005.
    
    To ensure compliance with its NASDAQ listing requirements, Envoy affected a 5 for 1
share consolidation in February 2005.
    
    Envoy purchased and cancelled 2,447,417 of its common shares during fiscal 2005, under
the terms of a normal course issuer bid.
    
    For fiscal 2005, the Company will be considered to be a Passive Foreign Investment
Company (PFIC) under the U.S. Internal Revenue Code.




---



##### 



Envoy Communications Group Inc.
Management Discussion and Analysis
Fiscal year ended September 30, 2005
December 21, 2005
  OVERVIEW
 Corporate  significant items




---



##### 








---



##### 



Operating companies  significant items




---



##### 



Discussion of results




---



##### 



SELECTED ANNUAL INFORMATION
 Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003Net revenue
    
    $43.2 million
    
    $37.0 million
    
    $37.7 millionNet earnings (loss):From continuing operations
    
    4.1 million
    
    (2.7) million
    
    2.5 millionFrom discontinued operations
    
    1.8 million
    
    (0.4) million
    
    - millionTotal
    
    $  5.9 million
    
    ($3.1) million
    
    $  2.5 millionNet earnings (loss) per shareTotalBasic
    
    $
    0.27
    
    
    $
    (0.18
    )
    
    $
    0.58Diluted
    
    
    0.27
    
    
    
    (0.18
    )
    
    
    0.43From continuing operationsBasic
    
    $
    0.19
    
    
    $
    (0.16
    )
    
    $
    0.57Diluted
    
    
    0.19
    
    
    
    (0.16
    )
    
    
    0.42From discontinued operationsBasic
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.01Diluted
    
    
    0.08
    
    
    
    (0.02
    )
    
    
    0.01
 As at:
    
    Sep 30, 2005
    
    
    Sep 30, 2004
    
    
    Sep 30, 2003Total assets
    
    $
    83.0 million
    
    $
    88.9 million
    
    
$  38.0 millionTotal long-term financial liabilities
    
    $
    0.3 million
    
    $
    0.4 million
    
    
    $    4.9 millionCash dividends declared
    
    $
nil
    
    $
nil
    
    
$                nil




---



##### 



RESULTS OF OPERATIONS
 FISCAL YEAR ENDED SEPTEMBER 30, 2005, COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2004
 Net revenue
  Net revenue by type of service and by customer location:
 Net Revenue for the twelve months endedSeptember 30(in millions)By type of service
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalConsumer and retail branding
    
    $
    43.2
    
    
    
    100
    %
    
    $
    37.0
    
    
    
    100
    %
 By customer location
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalCanada
    
    $
    5.7
    
    
    
    13
    %
    
    $
    2.1
    
    
    
    6
    %United States
    
    
    14.5
    
    
    
    34
    %
    
    
    14.2
    
    
    
    38
    %Europe *
    
    
    23.0
    
    
    
    53
    %
    
    
    20.7
    
    
    
    56
    %$
    43.2
    
    
    
    100
    %
    
    $
    37.0
    
    
    
    100
    %
  * Europe includes the United Kingdom and Continental Europe
 Net revenue by type of service:
 Net revenue by customer location:




---



##### 



Operating Expenses
     Depreciation expense
 Interest (income) expense and financing costs and accreted interest
 Investment earnings




---



##### 



Income from discontinued operations
 Net earnings (loss)




---



##### 



ANALYSIS OF USE OF PROCEEDS FROM PUBLIC OFFERING
  Fiscal 2004(in millions)Net proceeds from public offering
    
    $
    60.1Net proceeds were used to:Repay short-term debt
    
    
    6.9Redeem outstanding shares
    
    
    0.8Repay outstanding long-term debt
    
    
    5.2Allocated to investment portfolio
    
    
    46.7Other working capital changes
    
    
    0.5Total use of proceeds
    
    $
    60.1
  COMMITMENTS AND CONTRACTUAL OBLIGATIONS
 Set out below is a summary of the amounts due and committed under contractual cash obligations at
September 30, 2005:
  Due in 1
    
    
    Due between
    
    
    Due between
    
    
    Due after 5Total
    
    
    year or less
    
    
    years 2 and 3
    
    
    years 4 and 5
    
    
    yearsOperating leases
    
    $
    9,185,268
    
    
    $
    1,756,172
    
    
    $
    2,900,498
    
    
    $
    1,952,240
    
    
    $
    2,576,358Long term debt
    
    
    361,018
    
    
    
    108,925
    
    
    
    252,093
    
    
    
    
    
    
    
    Total contractual
cash obligations
    
    $
    9,546,286
    
    
    $
    1,865,097
    
    
    $
    3,152,591
    
    
    $
    1,952,240
    
    
    $
    2,576,358




---



##### 



SUMMARY OF QUARTERLY RESULTS
 Q4 2005
    
    
    Q3 2005
    
    
    Q2 2005
    
    
    Q1 2005Net revenue
    
    $
    11.9 million
    
    
    $
    12.0 million
    
    
    $
    10.2 million
    
    
    $
    9.1 millionNet earnings (loss):From continuing operations
    
    $
    0.9 million
    
    
    $
    1.7 million
    
    
    $
    0.8 million
    
    
    $
    0.7 millionIncluding discontinued operations
    
    $
    0.9 million
    
    
    $
    3.6 million
    
    
    $
    0.8 million
    
    
    $
    0.6 millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.04
    
    
    $
    0.03Diluted
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.04
    
    
    $
    0.03Including discontinued operationsBasic
    
    $
    0.04
    
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.03Diluted
    
    $
    0.04
    
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.03
 Q4 2004
    
    
    Q3 2004
    
    
    Q2 2004
    
    
    Q1 2004Net revenue
    
    $
    9.1 million
    
    
    $
    10.0 million
    
    
    $
    9.7 million
    
    
    $
    8.2 millionNet earnings (loss):From continuing operations
    
    ($
    0.3) million
    
    
    $
    1.1 million
    
    
    ($
    3.0) million
    
    
    ($
    0.5) millionIncluding discontinued operations
    
    ($
    0.3) million
    
    
    $
    1.2 million
    
    
    ($
    3.6) million
    
    
    ($
    0.5) millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    ($
    0.01
    )
    
    $
    0.05
    
    
    ($
    0.26
    )
    
    ($
    0.06
    )Diluted
    
    ($
    0.01
    )
    
    $
    0.05
    
    
    ($
    0.26
    )
    
    ($
    0.06
    )Including discontinued operationsBasic
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.30
    )
    
    ($
    0.06
    )Diluted
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.30
    )
    
    ($
    0.06
    )




---



##### 



Liquidity and Capital Resources




---



##### 



THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004
 Net revenue
 Net revenue by type of service and by customer location:
 Net Revenue for the three months endedSeptember 30(in millions)By type of service
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalConsumer and retail branding
    
    $
    11.9
    
    
    
    100
    %
    
    $
    9.1
    
    
    
    100
    %
 By customer location
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalCanada
    
    $
    1.6
    
    
    
    14
    %
    
    $
    0.6
    
    
    
    6
    %United States
    
    
    4.3
    
    
    
    35
    %
    
    
    2.6
    
    
    
    29
    %Europe *
    
    
    6.0
    
    
    
    51
    %
    
    
    5.9
    
    
    
    65
    %$
    11.9
    
    
    
    100
    %
    
    $
    9.1
    
    
    
    100
    %
 
 *
    
    Europe includes the United Kingdom and Continental Europe Net revenue by type of service:
  Net revenue by customer location:
    Operating Expenses




---



##### 



Depreciation expense
 Interest (income) expense and financing costs
 Investment earnings
 Earnings (loss) from discontinued operations
 Net earnings (loss)
 TRANSACTIONS WITH RELATED PARTIES




---



##### 








---



##### 



CRITICAL ACCOUNTING POLICIES
    Goodwill
  Intangible assets
 Income Taxes
 Stock Based Compensation and Other Stock based Payments




---



##### 



IMPACT OF RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS
  IMPACT OF RECENTLY ISSUED UNITED STATES ACCOUNTING STANDARDS




---



##### 



RISKS AND UNCERTAINTIES
  General economic conditions
 Client concentration
 Interest rate risk
 Market risk
 Foreign currency risk
 International exposure
 Key personnel




---



##### 



Credit risk
 Future acquisitions
 OTHER INFORMATION
 Share Consolidation (Reverse stock split)
 Amendment to terms of warrants
 Increase in authorized share capital
 Other items
 www.sedar.com.




---



##### 



Forward Looking Statements




---



##### 



Envoy Communications
Group 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




---



##### 



(BDO LOGO)
    
    BDO Dunwoody LLP
    
    60 Columbia Way   Suite 400Chartered Accountants
    
    Markham, Ontario Canada L3R 0C9and Advisors
    
    Telephone: (905) 946-1066Telefax: (905) 946-9524
 Auditors Report
 
 To the Shareholders of Envoy Communications Group Inc.
    
  
 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
 2




---



##### 



(BDO LOGO)
    
    BDO Dunwoody LLP
    
    60 Columbia Way Suite 400Chartered Accountants
    
    Markham, Ontario Canada L3R 0C9and Advisors
    
    Telephone: (905) 946-1066Telefax: (905) 946-9524
 Comments
by Auditor for U.S. Readers 
On Canada-U.S. Reporting Differences
  
  
 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario
 3




---



##### 



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
 On behalf of the Board:(signed)
    
    (signed)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director
  4




---



##### 



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
    )
    
    
    (46,103
    )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
    )
    
    $
    2,538,762Earnings (loss) per share(Note 14)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
    )
    
    $
    0.01Weighted average number of common
shares outstanding
    
    
    22,137,757
    
    
    
    17,062,152
    
    
    
    4,334,813
  5




---



##### 



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
    )
  6




---



##### 



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
    )
  7




---



##### 



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
    
    
    
    
  8




---



##### 



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 KingdomCommuniqueIncentives Inc.
    
    
    
    
    
    
    
    
    
    
    100
    
    
    OntarioJohn Street Inc.
    
    
    
    
    
    
    100
    
    
    
    70
    
    
    OntarioParker WilliamsDesign Limited
    
    
    65
    
    
    
    
    
    
    
    
    
    
    United Kingdom
 (b)
    
    Use of Estimates
  9




---



##### 



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.
    10




---



##### 



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
   11




---



##### 



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
  12




---



##### 



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
   13




---



##### 



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
 14




---



##### 



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$
    16,741,148
    
    
    $
    11,625,325
    
    
    $
    5,115,823
 15




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 7.
    
    Acquisition of subsidiaries
    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
 16




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 8.
    
    Related party transactions
         17




---



##### 



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.
  18




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 9.
    
    Long-term debt (continued)
   10.
    
    Convertible debentures
       19




---



##### 



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) costs
  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
  20




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital
     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
     21




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
         22




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
          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
 23




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
  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
 24




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 12.
    
    Share capital (continued)
  2003Pro forma net earnings
    
    $
    2,386,827Pro forma earnings per shareBasic
    
    $
    0.55Diluted
    
    $
    0.42
  13.
    
    Contributed Surplus
   25




---



##### 



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.
    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
 26




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 15. Income taxes
  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
    %
 27




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 15. Income taxes (continued)
  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
  28




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 16. Closure of Hampel Stefanides Inc. (Hampel)
   17. Closure of Subsidiaries
    29




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 18. Restructuring costs
   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
  (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.
 30




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 20. Financial instruments
  (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).
 31




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For
the years ended September 30, 2005, 2004 and 2003
 21. Segmented 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.
 32




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 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 events
  33




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 23.
    
    Discontinued operations
  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
 34




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24. Reconciliation to United States generally accepted accounting principles
  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
  35




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
  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
       36




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (b)
    
    Convertible debentures:
     37




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (c)
    
    Discontinued operations:
    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
 38




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (d)
    
    Comprehensive income:
  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:
  (f)
    
    Restructuring charges:
  (g)
    
    Investments:
  39




---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements
 For the years ended September 30, 2005, 2004 and 2003
 24.
    
    Reconciliation to United States generally accepted accounting principles (continued)
 (h)
    
    Cash flows from discontinued operations:
  (i)
    
    Recent accounting pronouncements:
    40




---



##### 



Shareholder Information
 HEAD OFFICE
    
    OFFICERS
    
    AUDITORS172 John Street
    
    Geoffrey B. Genovese
    
    BDO Dunwoody LLPToronto, Canada M5T 1X5
    
    President, Chairman
    
    60 Columbia Way, Suite 400and Chief Executive Officer
    
    Markham, Canada L3R 0C9Telephone: (416) 593-1212Facsimile: (416) 593-4434
    
    Linda GilbertChief Financial OfficerBANKERSDIRECTORS
    
    John H. Bailey
    
    RBC Royal BankJohn H. Bailey
    
    Executive Vice President
    
    200 Bay StreetB.Comm, J.D., LL.M
    
    and Corporate Secretary
    
    Toronto, Canada M5J 2J5Barrister & SolicitorDavid Parkes
    
    AUDIT COMMITTEE
    
    LEGAL COUNSELPresident and CEO,
    
    David Parkes (Chair)
    
    Blake, Cassels & Graydon LLPFreefone Inc.
    
    Hugh Aird
    
    Box 25, Commerce Court WestDavid I. Hull
    
    Toronto, Canada M5L 1A9Geoffrey B. GenovesePresident, Chairman and
    
    COMPENSATION COMMITTEE
    
    INVESTOR RELATIONSChief Executive Officer
    
    David I. Hull (Chair)
    
    E-mail: info@envoy.toEnvoy Communications Group Inc.
    
    Hugh AirdDavid Parkes
    
    Additional information isDavid I. Hull
    
    
    
    available on ourPresident
    
    
    
    Web site at www.envoy.toHull
Life Insurance Agencies Inc.NOMINATING AND CORPORATE
    
    STOCK TRADING INFORMATIONGOVERNANCE COMMITTEEHugh Aird (Lead Director)
    
    David I. Hull (Chair)
    
    Toronto Stock Exchange: ECGDirector of Business Development
    
    Hugh Aird
    
    NASDAQ Exchange: ECGIBlackmont Capital Inc.
    
    David ParkesTRANSFER AGENTComputershare TrustCompany of Canada100 University Avenue, 9th FloorToronto, Canada M5J 2Y1