##### 



Envoy Communications Group Inc.
 Second Quarter Report 2006




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##### 








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##### 



Envoy
Communications Group Inc.




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##### 



Envoy
Communications Group Inc.  Consolidated Balance Sheets  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 As at:
    
    
    
    
    
    March 31
    
    
    September 302006
    
    
    2005AssetsCurrentCash
    
    
    
    
    
    $
    2,780,744
    
    
    $
    4,209,920Investments
    
    note 2
    
    
    5,000,000
    
    
    
    22,113,957Accounts receivable
    
    
    
    
    
    
    10,331,049
    
    
    
    16,665,140Future income taxes
    
    
    
    
    
    
    301,384
    
    
    
    301,384Prepaid expenses
    
    
    
    
    
    
    1,135,806
    
    
    
    1,203,814Loans receivable
    
    note 9
    
    
    265,082
    
    
    
    265,08219,814,065
    
    
    
    44,759,297Investments
    
    note 2
    
    
    32,782,824
    
    
    
    10,994,238Loans receivable
    
    note 9
    
    
    1,743,625
    
    
    
    1,810,403Capital assets
    
    note 5
    
    
    6,564,573
    
    
    
    6,879,312Goodwill
    
    note 5
    
    
    12,812,255
    
    
    
    12,949,126Intangible assets
    
    note 5
    
    
    206,039
    
    
    
    241,886Other assets
    
    
    
    
    
    
    9,176
    
    
    
    9,176Future income taxes
    
    
    
    
    
    
    5,901,786
    
    
    
    5,308,089$
    79,834,343
    
    
    $
    82,951,527
 Liabilities and Shareholders Equity
 CurrentAccounts payable and accrued liabilities
    
    
    
    
    
    $
    6,476,052
    
    
    $
    7,663,658Income taxes payable
    
    
    
    
    
    
    435,925
    
    
    
    456,459Deferred revenue
    
    
    
    
    
    
    584,289
    
    
    
    614,051Current portion of long-term debt
    
    note 4
    
    
    92,114
    
    
    
    108,9257,588,380
    
    
    
    8,843,093Long-term debt
    
    note 4
    
    
    209,974
    
    
    
    252,0937,798,354
    
    
    
    9,095,186Minority interest
    
    note 3
    
    
    294,913
    
    
    
    300,858Shareholders equityShare capital
    
    note 6
    
    
    104,853,064
    
    
    
    105,204,765Contributed surplus
    
    
    
    
    
    
    5,800,759
    
    
    
    5,574,057Warrants
    
    
    
    
    
    
    6,542,456
    
    
    
    6,542,456Deficit
    
    
    
    
    
    
    (43,965,198
    )
    
    
    (42,402,587
    )Stock based compensation
    
    note 8
    
    
    834,430
    
    
    
    789,792Cumulative translation adjustment
    
    
    
    
    
    
    (2,324,435
    )
    
    
    (2,153,000
    )71,741,076
    
    
    
    73,555,483$
    79,834,343
    
    
    $
    82,951,527
 See accompanying notes to consolidated financial statements.




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##### 



Envoy
Communications Group Inc.  Consolidated Statements of Operations  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 For the six months ended:
    
    
    
    
    
    March 31
    
    
    March 312006
    
    
    2005Net revenue
    
    note 5
    
    $
    16,397,691
    
    
    $
    19,258,764Operating expenses:Salaries and benefits
    
    note 8
    
    
    12,616,952
    
    
    
    12,533,269General and administrative
    
    
    
    
    
    
    2,860,849
    
    
    
    3,693,070Occupancy costs
    
    
    
    
    
    
    1,554,703
    
    
    
    1,825,24617,032,504
    
    
    
    18,051,585Depreciation
    
    
    
    
    
    
    1,043,505
    
    
    
    1,175,446Amortization of intangible assets
    
    
    
    
    
    
    35,629
    
    
    
    Investment Earnings
    
    note 2
    
    
    (1,423,234
    )
    
    
    (1,502,555
    )Interest (income) expense and financing costs
    
    
    
    
    
    
    (43,445
    )
    
    
    (21,846
    )16,644,959
    
    
    
    17,702,630(Loss) earnings before restructuring expense, income taxes, minority interest and discontinued operations
    
    
    (247,268
    )
    
    
    1,556,134Restructuring expense
    
    note 10
    
    
    (1,856,417
    )
    
    
    (Loss) earnings before income taxes, minority interest and discontinued operations
    
    
    (2,103,685
    )
    
    
    1,556,134Income tax (recovery) expense
    
    
    
    
    
    
    (818,565
    )
    
    
    29,185(Loss) earnings before minority interest and discontinued operations
    
    
    (1,285,120
    )
    
    
    1,526,949Minority interest
    
    note 3
    
    
    277,491
    
    
    
    8,012(Loss) earnings from continuing operations
    
    
    
    
    
    
    (1,562,611
    )
    
    
    1,518,937(Loss) earnings from discontinued operations, net of income taxes
    
    note 7
    
    
    
    
    
    
    (60,188
    )Net (loss) earnings
    
    
    
    
    
    $
    (1,562,611
    )
    
    $
    1,458,749(Loss) earnings per shareBasic
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.06Diluted
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.06(Loss) earnings per share  continuing operationsBasic
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.07Diluted
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.07(Loss) earnings per share  discontinued operationsBasic
    
    
    
    
    
    $
    
    
    
    $
    (0.00
    )Diluted
    
    
    
    
    
    $
    
    
    
    $
    (0.00
    )Weighted average number of common shares outstanding  basic
    
    
    
    
    
    
    21,004,935
    
    
    
    22,705,236Weighted average number of common shares outstanding  fully diluted
    
    
    
    
    
    
    21,019,136
    
    
    
    22,705,236
 Envoy
Communications Group Inc.  Consolidated Statement of Deficit  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 Deficit, beginning of period
    
    $
    (42,402,587
    )
    
    $
    (48,344,277
    )Net (loss) earnings
    
    
    (1,562,611
    )
    
    
    1,458,749Deficit, end of period
    
    $
    (43,965,198
    )
    
    $
    (46,885,528
    )
 See accompanying notes to consolidated financial statements.




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##### 



Envoy
Communications Group Inc.  Consolidated Statements of Cash Flows  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 For the six months ended:
    
    March 31
    
    
    March 312006
    
    
    2005Cash flows from operating activities:Earnings (loss) from continuing operations
    
    $
    (1,562,611
    )
    
    $
    1,518,937Items not involving cash:Future income taxes
    
    
    (593,697
    )
    
    
    (345,743
    )Depreciation
    
    
    1,043,505
    
    
    
    1,175,446Minority interest
    
    
    277,491
    
    
    
    8,012Amortization of intangible assets
    
    
    35,629
    
    
    
    Stock based compensation
    
    
    44,638
    
    
    
    306,641Net change in non-cash working capital balances:Accounts receivable
    
    
    6,334,091
    
    
    
    (155,721
    )Prepaid expenses
    
    
    68,008
    
    
    
    131,474Accounts payable and accrued liabilities
    
    
    (1,187,606
    )
    
    
    (1,810,603
    )Income taxes payable/recoverable
    
    
    (20,534
    )
    
    
    (191,381
    )Deferred revenue
    
    
    (29,762
    )
    
    
    (646,390
    )Long-term restructuring costs
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    4,409,152
    
    
    
    (9,328
    )Cash flows from financing activities:Long-term debt repayments
    
    
    (58,930
    )
    
    
    (211,088
    )Dividend payment to minority shareholders
    
    
    (213,925
    )
    
    
    Share buy back under normal course issuers bid
    
    
    (124,999
    )
    
    
    (4,517,102
    )Net cash (used in) provided by financing activities
    
    
    (397,854
    )
    
    
    (4,728,190
    )Cash flows from investing activities:Acquisition of subsidiaries, net of cash acquired of $62,727
( 2005  $730,496)
    
    
    (42,031
    )
    
    
    (4,050,024
    )Loans receivable
    
    
    66,777
    
    
    
    Purchase of capital assets
    
    
    (728,766
    )
    
    
    (1,400,630
    )Investments
    
    
    (4,674,628
    )
    
    
    8,256,354Net cash provided by (used in) investing activities
    
    
    (5,378,648
    )
    
    
    2,805,700Change in cash balance due to foreign exchange
    
    
    (61,826
    )
    
    
    (60,525
    )Discontinued operations
    
    
    
    
    
    
    20,444Net change in cash
    
    
    (1,429,176
    )
    
    
    (1,971,899
    )Cash,beginning of period
    
    
    4,209,920
    
    
    
    4,643,263Cash,end of period
    
    $
    2,780,744
    
    
    $
    2,671,364Supplemental cash flow information:Interest paid
    
    $
    15,572
    
    
    $
    36,959Income taxes paid (received)
    
    
    (162,051
    )
    
    
    365,968
 See accompanying notes to consolidated financial statements.




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##### 



Envoy
Communications Group Inc.  Consolidated Statements of Operations  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 For the three months ended:
    
    
    
    
    
    March 31
    
    
    March 312006
    
    
    2005Net revenue
    
    note 5
    
    $
    7,655,664
    
    
    $
    10,156,871Operating expenses:Salaries and benefits
    
    note 8
    
    
    6,316,308
    
    
    
    6,508,351General and administrative
    
    
    
    
    
    
    1,187,215
    
    
    
    2,027,666Occupancy costs
    
    
    
    
    
    
    764,351
    
    
    
    946,4828,267,874
    
    
    
    9,482,499Depreciation
    
    
    
    
    
    
    506,855
    
    
    
    599,036Amortization of intangible assets
    
    
    
    
    
    
    17,924
    
    
    
    Investment Earnings
    
    note 2
    
    
    (490,699
    )
    
    
    (487,038
    )Interest (income) expense and financing costs
    
    
    
    
    
    
    (26,645
    )
    
    
    (29,945
    )8,275,309
    
    
    
    9,564,552(Loss) earnings before income taxes, minority interest and discontinued operations
    
    
    (619,645
    )
    
    
    592,319Income tax (recovery) expense
    
    
    
    
    
    
    (301,364
    )
    
    
    (233,541
    )(Loss) earnings before minority interest and discontinued
operations
    
    
    
    
    
    
    (318,281
    )
    
    
    825,860Minority interest
    
    note 3
    
    
    116,796
    
    
    
    8,012(Loss) earnings from continuing operations
    
    
    
    
    
    
    (435,077
    )
    
    
    817,848(Loss) earnings from discontinued operations, net of income taxes
    
    note 7
    
    
    
    
    
    
    (5,729
    )Net (loss) earnings
    
    
    
    
    
    $
    (435,077
    )
    
    $
    812,119(Loss) earnings per shareBasic
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.04Diluted
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.04(Loss) earnings per share  continuing operationsBasic
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.04Diluted
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.04(Loss) earnings per share  discontinued operationsBasic
    
    
    
    
    
    $
    
    
    
    $
    (0.00
    )Diluted
    
    
    
    
    
    $
    
    
    
    $
    (0.00
    )Weighted average number of common shares outstanding  basic
    
    
    
    
    
    
    20,999,739
    
    
    
    22,329,631Weighted average number of common shares outstanding  fully diluted
    
    
    
    
    
    
    21,013,941
    
    
    
    22,329,631
 Envoy Communications Group Inc.
Consolidated Statement of Deficit
Unaudited  Prepared by Management
(Expressed In Canadian dollars)
 Deficit, beginning of period
    
    $
    (43,530,121
    )
    
    $
    (47,697,647
    )Net (loss) earnings
    
    
    (435,077
    )
    
    
    812,119Deficit, end of period
    
    $
    (43,965,198
    )
    
    $
    (46,885,528
    )
 See accompanying notes to consolidated financial statements.




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##### 



Envoy
Communications Group Inc.  Consolidated Statements of Cash Flows  Unaudited  Prepared by Management  (Expressed In Canadian dollars)
 For the three months ended:
    
    March 31
    
    
    March 312006
    
    
    2005Cash flows from operating activities:Earnings (loss) from continuing operations
    
    $
    (435,077
    )
    
    $
    817,848Items not involving cash:Future income taxes
    
    
    (592,571
    )
    
    
    (693,686
    )Depreciation
    
    
    506,855
    
    
    
    599,036Minority interest
    
    
    116,796
    
    
    
    8,012Amortization of intangible assets
    
    
    17,924
    
    
    
    Stock based compensation
    
    
    25,780
    
    
    
    183,233Net change in non-cash working capital balances:Accounts receivable
    
    
    1,864,298
    
    
    
    (1,285,718
    )Prepaid expenses
    
    
    207,098
    
    
    
    (23,981
    )Accounts payable and accrued liabilities
    
    
    (18,864
    )
    
    
    969,257Income taxes payable/recoverable
    
    
    435,925
    
    
    
    25,708Deferred revenue
    
    
    (100,981
    )
    
    
    (259,429
    )Long-term restructuring costs
    
    
    (14,917
    )
    
    
    Net cash provided by operating activities
    
    
    2,012,266
    
    
    
    340,280Cash flows from financing activities:Long-term debt repayments
    
    
    (26,161
    )
    
    
    (62,056
    )Dividend payment to minority shareholders
    
    
    (213,925
    )
    
    
    Share buy back under normal course issuers bid
    
    
    (124,999
    )
    
    
    (2,138,700
    )Net cash (used in) provided by financing activities
    
    
    (365,085
    )
    
    
    (2,200,756
    )Cash flows from investing activities:Acquisition of subsidiaries, net of cash acquired of $62,727
(2005  $730,496)
    
    
    (42,031
    )
    
    
    (4,050,024
    )Loans receivable
    
    
    66,777
    
    
    
    Purchase of capital assets
    
    
    (340,694
    )
    
    
    (534,947
    )Investments
    
    
    (2,669,230
    )
    
    
    5,517,186Net cash provided by (used in) investing activities
    
    
    (2,985,178
    )
    
    
    932,215Change in cash balance due to foreign exchange
    
    
    (188,628
    )
    
    
    (313,228
    )Discontinued operations
    
    
    
    
    
    
    (380,521
    )Net change in cash
    
    
    (1,526,625
    )
    
    
    (1,622,010
    )Cash,beginning of period
    
    
    4,307,369
    
    
    
    4,293,374Cash,end of period
    
    $
    2,780,744
    
    
    $
    2,671,364Supplemental cash flow information:Interest paid
    
    $
    7,446
    
    
    $
    8,099Income taxes paid (received)
    
    
    (162,051
    )
    
    
    174,090
 See accompanying notes to consolidated financial statements.




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##### 



1.
    
    Basis of Presentation
 (a)
    
    These unaudited interim consolidated financial statements have been prepared by
management in
accordance with generally accepted accounting principles in Canada for interim financial
statements. These interim financial statements do not include all the note disclosure
required for annual financial statements and therefore should be read in conjunction with
Envoys annual consolidated financial statements for the year ended September 30, 2005. The
significant accounting policies follow that of the most recently reported annual financial
statements.(b)
    
    Certain comparative figures have been reclassified to conform to the financial statement
presentation adopted for 2006.
 2.
    
    Investments
 March 31,
    
    
    September 30,2006
    
    
    2005Short termCash
    
    $
    1,120,060
    
    
    $
    1,217,017Discount securities
    
    
    3,879,940
    
    
    
    20,896,940$
    5,000,000
    
    
    $
    22,113,957Long termDiscount securities
    
    $
    490,927
    
    
    $
    8,541,760Fixed income
    
    
    20,534,288
    
    
    
    1,703,543Equities
    
    
    11,757,609
    
    
    
    748,935$
    32,782,824
    
    
    $
    10,994,238Total investments
    
    $
    37,782,824
    
    
    $
    33,108,195
 The portfolio is invested in marketable securities, including discount notes, fixed income
securities and common shares. All financial instruments held in the portfolio are traded in
active and liquid markets, and the fair market value of the portfolio was determined by using
the closing market prices at March 31, 2006 of the individual financial instruments. At March
31, 2006, the discount securities mature within six months at the face value. The fixed
income securities are interest bearing instruments with maturities up to ten years, and bear
interest at rates that average 3.0%.The fair value of the short term and long term investments at March 31, 2006 was $5,000,000
and $32,922,291 (at September 30, 2005, $22,113,957 and $10,988,369), respectively. The
investment portfolio earned $1,423,234 during the first two quarters ended March 31, 2006,
compared to $1,502,555 for the same period in fiscal 2005, after deducting expenses.3.
    
    Acquisition of subsidiaryOn 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 has 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. The
resulting excess purchase price, including acquisition expenses, over the fair value of the net
assets acquired of £1,884,894 was allocated to goodwill and an amount of £139,000 was allocated
to intangible assets consisting of customer relationships and non-compete agreements.In March 2006, the Company, through its subsidiary ECGH, acquired an additional 5% of the
shares of Parker Williams from two former employees as per the terms and conditions of the
sale and purchase agreement for £52,679 ($104,758).The additional acquisition has been accounted for using the purchase method of accounting. The
fair value of the net assets acquired was £34,955 ($69,511) consisting of working capital and
capital assets, resulting in goodwill of £17,725 ($35,247).Parker Williams acquisition in Canadian Dollars
 Original
    
    
    AdditionalAssets acquired and liabilities assumed:
    
    Acquisition
    
    
    Acquisition(65%)
    
    
    (5%)Total assets
    
    $
    1,796,438
    
    
    
    2,489,308Total liabilities
    
    
    (1,324,541
    )
    
    
    (1,099,084
    )Previously owned
    
    
    
    
    
    
    (903,646
    )Minority interest
    
    
    (165,164
    )
    
    
    (417,067
    )Net Assets acquired
    
    
    306,733
    
    
    
    69,511Intangible assets
    
    
    330,849
    
    
    
    Goodwill
    
    
    4,152,369
    
    
    
    35,247Purchase price including costs
    
    $
    4,789,951
    
    
    $
    104,758
 4.
    
    Long term debt
 March 31
    
    
    September 302006
    
    
    2005Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly installments of
$7,665 principal and interest
    
    $
    283,687
    
    
    $
    324,341Capital leases, 8.6% to 14% over the lease
period, repayable in monthly installments of
$36,273 principal and interest, due between April
2006 and February 2007
    
    
    18,401
    
    
    
    36,677302,088
    
    
    
    361,018Less current portion
    
    
    92,114
    
    
    
    108,925$
    209,974
    
    
    $
    252,093




---



##### 



5.
    
    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 revenueNet revenue by region in which the customer is located
 March 31
    
    
    March 31For the six months ended:
    
    2006
    
    
    2005Canada
    
    $
    2,831,025
    
    
    $
    3,277,550United States
    
    
    2,344,521
    
    
    
    5,040,204United Kingdom and Continental Europe
    
    
    11,222,145
    
    
    
    10,941,010$
    16,397,691
    
    
    $
    19,258,764
 Net revenue by type of service
 March 31
    
    
    March 31For the six months ended:
    
    2006
    
    
    2005Consumer and retail branding
    
    $
    16,397,691
    
    
    $
    19,258,764
 (b)
    
    The Companys identifiable assets for each geographic area in which it has operations:Capital assets
 March 31
    
    
    September 30As at:
    
    2006
    
    
    2005Canada
    
    $
    2,344,848
    
    
    $
    2,755,415United Kingdom and Continental Europe
    
    
    4,219,725
    
    
    
    4,123,897$
    6,564,573
    
    
    $
    6,879,312
 Goodwill
 March 31
    
    
    September 30As at:
    
    2006
    
    
    2005Canada
    
    $
    2,725,296
    
    
    $
    2,725,296United Kingdom and Continental Europe
    
    
    10,086,959
    
    
    
    10,223,830$
    12,812,255
    
    
    $
    12,949,126
 Intangible assets
 March 31
    
    
    September 30As at:
    
    2006
    
    
    2005United Kingdom and Continental Europe
    
    $
    206,039
    
    
    $
    241,886




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##### 



6.
    
    Share capitalAuthorized: 40,000,000 common shares without par valueIssued:
 Six months ended
    
    
    Fiscal year endedMarch 31, 2006
    
    
    September 30, 2005Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    AmountBalance, beginning of period
    
    
    21,007,517
    
    
    $
    105,204,765
    
    
    
    23,416,600
    
    
    $
    117,447,261Common shares issued
pursuant to:Stock options exercised
    
    
    
    
    
    
    
    
    
    
    38,334
    
    
    
    47,917Repurchase of shares
pursuant to
share issuer bid
    
    
    (70,200
    )
    
    
    (351,701
    )
    
    
    (2,447,417
    )
    
    
    (12,290,413
    )Balance, end of period
    
    
    20,937,317
    
    
    $
    104,853,064
    
    
    
    21,007,517
    
    
    $
    105,204,765
 Under the terms of the normal course issuer bid, the Company may repurchase and cancel
up to 10% of the public float of the shares over the twelve month period commencing August
26, 2004.7.
    
    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.
 Income Statement  John Street
    
    March 31
    
    
    March 31For the six months ended:
    
    2006
    
    
    2005Net revenue
    
    $
    
    
    
    $
    1,957,766Operating expenses
    
    
    
    
    
    
    1,984,793Interest expense
    
    
    
    
    
    
    33,750Depreciation
    
    
    
    
    
    
    28,596Income Taxes
    
    
    
    
    
    
    (29,185
    )Earnings from discontinued operations
    
    $
    
    
    
    $
    (60,188
    )




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##### 



8.
    
    Stock based compensationOn May 25th, 2004, the Company granted certain employees and directors a total of 375,000
options at an exercise price of $4.00 per share. These options vest over periods ranging from
one year to three years, and expire on May 24th, 2009. The value of the options granted has
been calculated using the Black-Scholes Option pricing model and the option value will be
expensed over the vesting period of the options. For the six months ended March 31, 2006, an
expense of $44,638 ($306,641 for the six months ended March 31, 2005), reflecting the option
amortization for the period, has been included in salaries and benefits expense.9.
    
    Related party transactionsAt 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. 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 these loans requires
quarterly payments totaling $100,501 to be made by June 30, 2006, followed by 48 monthly
payments of $41,145 beginning July 31, 2006. These loans are secured against 100% of the
common shares in the capital of John Street Inc. and security interest in the assets. At
March 31, 2006, the amount of these loans receivable was $2,008,707 of which $265,082 was
current and $1,743,625 was long term.Related party transactions are recorded at the exchange amount, being the amount agreed to by
related parties.




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##### 



10.
    
    Restructuring costsIn response to a number of economic uncertainties, competitive challenges and business risks
that will impact client spending commitments of its operating subsidiaries, in November 2005,
the Company announced that its Board of Directors had approved the immediate implementation
of a restructuring plan. Management believes that, by implementing this restructuring plan,
Envoy will be better positioned to remain profitable, if its clients historical spending
patterns do not materialize in the short term. The restructuring involved the downsizing of
its subsidiaries workforce, and writing off redundant capital assets.
Accordingly, the
Company recorded a restructuring expense of $1.9 million in the first quarter of fiscal 2006.
Termination costs related to 73 employees, of which 44 employee terminations are in North
America and 29 in the United Kingdom and Continental Europe.Total restructuring costs accrued at March 31, 2006 are classified as:
 Accounts payable and accrued liabilities
    
    $
    674,808
 The tables below set out the following information:The Companys total restructuring activities:
 Contractual
    
    
    
    
    
    
    Total
    
    
    Non-Termination
    
    
    
    
    
    
    Accrued
    
    
    cashBenefits
    
    
    Other
    
    
    Liability
    
    
    Charge
    
    
    TotalOctober 1, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Provision
    
    
    1,625,284
    
    
    
    156,839
    
    
    
    1,782,123
    
    
    
    68,971
    
    
    
    1,851,094Non cash charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,971
    )
    
    
    (68,971
    )Cash payments
    
    
    (960,182
    )
    
    
    (147,133
    )
    
    
    (1,107,315
    )
    
    
    
    
    
    
    (1,107,315
    )Amounts Outstanding
at March 31, 2006
    
    $
    665,102
    
    
    $
    9,706
    
    
    $
    674,808
    
    
    $
    
    
    
    $
    674,808
 We expect to complete these restructuring actions throughout fiscal 2006 and into fiscal 2007.
Cash outlays are funded from cash on hand.




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##### 



Envoy
Communications Group Inc.  Management Discussion and Analysis  Second quarter of fiscal 2006  May 8, 2006
  Discussion of results
  OVERVIEW
 Corporate  significant items
 th
  th
 st




---



##### 



th




---



##### 



Operating companies  significant items




---



##### 



RESULTS OF OPERATIONS
 COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2006 WITH THE SIX MONTHS ENDED MARCH 31, 2005
 Foreign exchange rates
 Net revenue
  Net revenue by type of service and by customer location:
 Net Revenue for the Six months ended March 31(in millions)By type of service
    
    2006
    
    
    % of total
    
    
    2005
    
    
    % of totalConsumer and retail branding
    
    $
    16.4
    
    
    
    100
    %
    
    $
    19.3
    
    
    
    100
    %
 By customer location
    
    2006
    
    
    % of total
    
    
    2005
    
    
    % of totalCanada
    
    $
    2.8
    
    
    
    17
    %
    
    $
    3.3
    
    
    
    17
    %United States
    
    
    2.4
    
    
    
    15
    %
    
    
    5.1
    
    
    
    26
    %Europe *
    
    
    11.2
    
    
    
    68
    %
    
    
    10.9
    
    
    
    57
    %$
    16.4
    
    
    
    100
    %
    
    $
    19.3
    
    
    
    100
    %
 *
    
    Europe includes the United Kingdom and Continental Europe
 Net revenue by type of service:
 Net revenue by customer location:




---



##### 



Operating Expenses
     Depreciation and Amortization of intangible assets
 Investment Earnings
 Restructuring charge




---



##### 



(Loss) Earnings from discontinued operations net of income taxes
 (Loss) Net earnings
 Liquidity and Capital Resources




---



##### 



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2006 WITH THE THREE MONTHS ENDED MARCH 31, 2005
 Foreign exchange rates
 Net revenue
  Net revenue by type of service and by customer location:
 Net Revenue for the three months ended March 31(in millions)By type of service
    

2006
    
    
    % of total
    
    
    2005
    
    
    % of totalConsumer and retail branding
    
    $
    7.7
    
    
    
    100
    %
    
    $
    10.2
    
    
    
    100
    %
 By customer location
    
    2006
    
    
    % of total
    
    
    2005
    
    
    % of totalCanada
    
    $
    1.5
    
    
    
    19
    %
    
    $
    1.7
    
    
    
    17
    %United States
    
    
    0.4
    
    
    
    5
    %
    
    
    2.7
    
    
    
    26
    %Europe *
    
    
    5.8
    
    
    
    76
    %
    
    
    5.8
    
    
    
    57
    %$
    7.7
    
    
    
    100
    %
    
    $
    10.2
    
    
    
    100
    %
 *
    
    Europe includes the United Kingdom and Continental Europe
 Net revenue by type of service:
 Net revenue by customer location:




---



##### 



Operating Expenses
    Depreciation expense
 Investment Earnings
 Restructuring charge
 (Loss) Earnings from discontinued operations net of income taxes
 (Loss) Net earnings




---



##### 



Liquidity and Capital Resources
     COMMITMENTS AND CONTRACTUAL OBLIGATIONS
 Set out below is a summary of the amounts due and committed under contractual cash obligations at March 31, 2006:
 Due in 1
    
    
    Due between
    
    
    Due between
    
    
    Due after 5Total
    
    
    year or less
    
    
    years 2 and 3
    
    
    years 4 and 5
    
    
    yearsOperating leases
    
    $
    8,204,216
    
    
    $
    1,346,698
    
    
    $
    2,752,340
    
    
    $
    1,931,366
    
    
    $
    2,173,812Long term debt
    
    
    302,088
    
    
    
    92,114
    
    
    
    209,974
    
    
    
    
    
    
    
    Total
contractual cash
obligations
    
    $
    8,506,304
    
    
    $
    1,438,812
    
    
    $
    2,962,314
    
    
    $
    1,931,366
    
    
    $
    2,173,812




---



##### 



SUMMARY OF QUARTERLY RESULTS
 Q2 2006
    
    
    Q1 2006
    
    
    Q4 2005
    
    
    Q3 2005Net revenue
    
    $7.7 million
    
    $8.7 million
    
    $11.9 million
    
    $12.0 millionNet earnings (loss):From continuing operations
    
    $(0.4) million
    
    $(1.1) million
    
    $0.9 million
    
    $1.7 millionIncluding discontinued
operations
    
    $(0.4) million
    
    $(1.1) million
    
    $0.9 million
    
    $3.6 millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    0.08Diluted
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    0.08Including discontinued operationsBasic
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    0.17Diluted
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.04
    
    
    $
    0.17
 Q2 2005
    
    
    Q1 2005
    
    
    Q4 2004
    
    
    Q3 2004Net revenue
    
    $10.2 million
    
    $9.1 million
    
    $9.1 million
    
    $10.0 millionNet earnings (loss):From continuing operations
    
    $0.8 million
    
    $0.7 million
    
    $(0.3) million
    
    $1.1 millionIncluding discontinued operations
    
    $0.8 million
    
    $0.6 million
    
    $(0.3) million
    
    $1.2 millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.05Diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.05Including discontinued operationsBasic
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06Diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06
 TRANSACTIONS WITH RELATED PARTIES




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##### 



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
    Goodwill
  Intangible assets
 Income Taxes




---



##### 



Stock Based Compensation and Other Stock based Payments
 Restructuring charges
 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
 Merchant Banking Services




---



##### 



OTHER INFORMATION
 Share Consolidation (Reverse stock split)
 Increase in authorized share capital
 Other items
 www.sedar.com
 Forward Looking Statements




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##### 



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
    
    J. Joseph LeederChief Financial Officer and VicePresident Mergers and AcquisitionsBANKERSDIRECTORS
    
    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 COUNSELConsultant
    
    David Parkes (Chair)
    
    Blake, Cassels & Graydon LLPDavid Parkes & Associates
    
    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
    
    NOMINATING AND CORPORATE
    
    Web site at www.envoy.toHull Life Insurance Agencies Inc.
    
    GOVERNANCE COMMITTEEDavid I. Hull (Chair)Hugh Aird (Lead Director)
    
    Hugh Aird
    
    STOCK TRADING INFORMATIONDirector of Business Development
    
    David Parkes
    
    Toronto Stock Exchange: ECGBlackmont Capital Inc.
    
    
    
    NASDAQ Exchange: ECGITRANSFER AGENTComputershare TrustCompany of Canada100 University Avenue, 9th FloorToronto, Canada M5J 2Y1