Exhibit 99.8
POINTS INTERNATIONAL LTD.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
Page 1 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
AS AT 2004 2003
- ----- ----------- ------------
ASSETS
CURRENT
Cash and cash equivalents 18,427,174 20,274,836
Accounts receivable 1,339,237 1,004,370
Prepaids and sundry assets 1,271,451 825,221
----------- -----------
21,037,862 22,104,427
LONG-TERM INVESTMENTS 161,629 161,629
PROPERTY,PLANT AND EQUIPMENT 1,116,157 513,723
INTANGIBLE ASSETS (Note 7) 8,736,664 1,320,692
DEFERRED COSTS 2,420,745 2,790,816
FUTURE INCOME TAXES RECOVERABLE 590,000 590,000
----------- -----------
13,025,194 5,376,859
$34,063,056 $27,481,286
=========== ===========
Page 2 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
AS AT 2004 2003
- ----- ------------ ------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 931,188 1,187,598
Deposits 14,668,589 10,455,646
Current portion of acquisition loan payable 819,208 --
------------ ------------
16,418,985 11,643,244
ACQUISITION LOAN PAYABLE 765,123 --
CONVERTIBLE DEBENTURE 8,469,055 8,036,372
CONVERTIBLE PREFERRED SHARES 13,458,478 13,024,478
------------ ------------
39,111,640 32,704,094
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK 21,983,696 17,728,461
WARRANTS 2,759,390 2,785,737
RETAINED EARNINGS (29,791,670) (25,737,007)
------------ ------------
(5,048,584) (5,222,809)
------------ ------------
$ 34,063,056 $ 27,481,286
============ ============
Page 3 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS AND DEFICIT
6 Month Period 3 Month Period
----------------------------- -----------------------------
FOR THE PERIOD ENDED JUNE 30, 2004 Jan-Jun 30/04 Jan-Jun 30/03 Apr-Jun 30/04 Apr-Jun 30/03
- ---------------------------------- ------------- ------------- ------------- -------------
REVENUES
Points operations $ 3,481,082 $ 2,626,368 $ 1,948,570 $ 1,342,847
Interest revenue 168,618 135,393 83,566 114,721
------------ ------------ ------------ ------------
3,649,700 2,761,761 2,032,136 1,457,568
GENERAL AND ADMINISTRATION 5,749,749 3,217,177 3,098,792 1,710,455
------------ ------------ ------------ ------------
LOSS - Before interest, amortization
and other deductions (2,100,048) (455,416) (1,066,656) (252,887)
------------ ------------ ------------ ------------
Interest on Convertible Debt 432,683 330,000 225,659 165,000
Interest on Series Two Preferred Share 434,000 190,478 217,000 190,478
Interest and Bank Charges 70,702 6,912 70,441 2,364
Amortization of Capital & Intangible
Assets and Deferred Costs 1,017,229 1,319,019 573,312 672,608
------------ ------------ ------------ ------------
1,954,614 1,846,409 1,086,412 1,030,450
------------ ------------ ------------ ------------
LOSS - From continuing operations (4,054,663) (2,301,825) (2,153,069) (1,283,337)
------------ ------------ ------------ ------------
NET LOSS (4,054,663) (2,301,825) (2,153,069) (1,283,337)
DEFICIT - Beginning of period (25,737,007) (19,200,816) (27,638,601) (20,219,304)
DEFICIT - End of period (29,791,670) (21,502,641) (29,791,670) (21,502,641)
============ ============ ============ ============
LOSS PER SHARE (Note 2) ($0.06) ($0.04) ($0.03) ($0.02)
============ ============ ============ ============
Page 4 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS
6 Month Period 3 Month Period
------------------------------ -----------------------------
FOR THE PERIOD ENDED JUNE 30, 2004 Jan-June 30/04 Jan-Jun 30/03 Apr-Jun 30/04 Apr-Jun 30/03
- ---------------------------------- -------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,054,663) $(2,301,825) $(2,153,069) $(1,283,337)
Items not affecting cash
Amortization of property, plant and equipment 149,061 758,611 92,707 383,440
Amortization of deferred costs 327,472 182,306 128,126 100,116
Amortization of intangible assets 540,696 378,100 352,479 189,050
Cancellation of warrants issued for services (1,167) -- -- --
Interest on Series Two Preferred Shares 434,000 190,478 217,000 190,478
Interest accrued on convertible debenture 432,683 330,000 225,659 165,000
----------- ----------- ----------- -----------
(2,171,918) (462,330) (1,137,098) (255,253)
Changes in non-cash balances related to operations (Note 6 a) 3,182,347 2,766,004 (1,977,032) (646,686)
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 1,010,429 2,303,674 (3,114,130) (901,939)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, net of proceeds (751,495) (121,711) (539,831) (41,764)
Purchase of intangible assets (20,283) (91,962) (3,279) (56,588)
Payments for the acquisition of MilePoint, Inc. (1,900,000) (1,900,000)
Costs related to the acquisition of MilePoint, Inc. (Note 7) (486,385) -- (286,385) --
----------- ----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (3,158,163) (213,673) (2,729,495) (98,352)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Warrants -- 2,700,000 -- 2,700,000
Issuance of Series Two Preferred Share -- 12,400,000 -- 12,400,000
Deferred financing costs 70,018 (717,048) -- (717,048)
Repayment of obligations under capital leases -- (235,716) -- (120,804)
Issuance of capital stock, net of share issue costs 230,053 817,942 27,568 664,287
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 300,071 14,965,178 27,568 14,926,435
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH (1,847,662) 17,055,179 (5,816,057) 13,926,144
CASH AND CASH EQUIVALENTS - Beginning of period 20,274,836 7,341,700 24,243,231 10,470,735
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of period $18,427,174 $24,396,879 $18,427,174 $24,396,879
=========== =========== =========== ===========
Page 5 of 9
POINTS INTERNATIONAL LTD.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
1. Accounting policies
The company's interim financial statements have been prepared using accounting
policies consistent with those used for the preparation of its annual financial
statements. These interim financial statements should be read in conjunction
with the company's 2003 audited consolidated financial statements. These
financial statements contain all adjustments which management believes necessary
for fair presentation of the financial position, results of operations and cash
flows.
a) Basis of presentation
The consolidated financial statements include the accounts of the
Company and from their respective dates of acquisition of control or
formation of its wholly owned subsidiaries. All inter-company
transactions and amounts have been eliminated on consolidation.
b) Goodwill
Goodwill represents the excess of the purchase price of acquired
companies over the estimated fair value of the tangible and intangible
net assets acquired. Goodwill is not amortized. The company currently
compares the carrying amount of the goodwill to the fair value, at
least annually, and recognizes in net income any impairment in value.
c) Intangible assets
Intangible assets represent the fair value of contracts acquired by
the company on MilePoint, Inc, acquisition. The carrying value of
these contracts will be amortized on a straight-line basis over the
life of the contracts.
2. Loss per share
a) Loss per share
Loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the six months ended June 30,
2004 that amounted to 64,250,018 shares (June 30, 2003 - 55,287,446).
b) Fully-diluted loss per share
The fully-diluted loss per share has not been computed, as the effect
would be anti-dilutive.
Page 6 of 9
3. Segmented information
Reportable segments: The company has only one operating segment whose operating
results are regularly reviewed by the company's chief operating decision maker
and for which complete and discrete financial information is available. The
company's business is carried on in the industry of loyalty program asset
management. The attached consolidated balance sheets as at June 30, 2004 and
December 31, 2003 present the financial position of this segment. The continuing
operations reflected on the attached consolidated statements of operations are
those of this operating segment.
Enterprise-wide disclosures: $3,351,765 (June 30, 2003 - $2,598,340) of the
company's revenues were generated in the U.S. for the six month period, with the
remaining revenues generated in Canada, Europe and Asia. A significant majority
of the company's assets are located in Canada.
4. Economic dependence
For the six-month period ended June 30, 2004, approximately 51% of the company's
revenues are from its two largest customers (63% at June 30, 2003). In addition,
as at June 30, 2004, 73% of the company's deposits are due to these customers
(64% as at June 30, 2003).
5. Stock-based compensation
Effective January 1, 2002 the company adopted CICA 3870 ("Stock-based
Compensation and Other Stock-based Payments"). As permitted by CICA 3870 the
company has applied this change prospectively for new awards granted on or after
January 1, 2002. The company has chosen to recognize no compensation when stock
options are granted to employees and directors under stock option plans with no
cash settlement features. In periods prior to January 1, 2002 the company
recognized no compensation when stock or stock options were issued to employees.
Supplementary pro forma information regarding net income is required by CICA
3870 as if the company had accounted for its employee stock options granted
after December 31, 2001 under the fair value method.
During the quarter ended June 30, 2004, 869,407 were issued to employees. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The company's pro forma
net income under Canadian GAAP would be reduced [loss increased] by
approximately $173,579 for the six months ended June 30, 2004. Loss-per-share
figures would not have changed.
Page 7 of 9
6. Statement of Cash Flows
a) Changes in non-cash balances related to operations are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- --------- ---------- ----------
Decrease (Increase) in accounts receivable $ (452,137) $(458,002) $ (334,867) $ (692,145)
Decrease(Increase) in prepaid and sundry assets (145,784) 36,166 (446,230) (136,596)
Decrease(Increase) in deferred costs (27,420) -- (27,420) --
Increase (Decrease) in accounts payable and accrued liabilities (30,620) 357,722 (256,411) 218,702
Increase (Decrease) in deposits (1,280,895) (582,572) 4,212,942 3,376,043
Increase (Decrease) in liability related to MilePoint, Inc. acquisition (40,176) -- 34,333 --
----------- --------- ---------- ----------
$(1,977,032) $(646,686) $3,182,347 $2,766,004
=========== ========= ========== ==========
b) Supplemental information
Interest and taxes
Interest of $70,702 was paid during the six month period ended June
30, 2004. Interest of $154,354 was received during the six month
period ended June 30, 2004. No income taxes have been paid.
Non-cash transactions
Non-cash transactions for the six months ended June 30, 2004 are as
follows:
(i) 406,954 shares of Points.com Inc. were acquired in exchange for
1,018,974 shares of the Corporation.
(ii) 4,000,000 shares (valued at $4,000,000) of the Corporation were
issued as part consideration in the acquisition of MilePoint,
Inc. (see Note 7).
(iii) $20,000 of revenue earned for hosting services provided was paid
in loyalty currency. The currency was valued at the purchase
price of the miles. The expense will be recognized as the
currency is used.
(iv) The Corporation received $80,643 of loyalty currency from a
partner as reimbursement of a portion of the partner's direct
expenses for the services provided by the Corporation.
(v) Interest of $432,683 was accrued on the convertible debenture.
(vi) Interest of $434,000 was accrued on the Series Two Preferred.
Page 8 of 9
c) Cash and cash equivalents consist of:
June 30, December 31,
AS AT 2004 2003
- ----- ----------- ------------
Cash $11,826,968 $ 9,046,701
Short-term investments $ 4,366,931 $ 9,627,468
Cashheld by credit card processor $ 2,233,275 $ 1,600,667
----------- -----------
Total $18,427,174 $20,274,836
=========== ===========
7. MilePoint Inc. Acquisition
On March 31, 2004 Points acquired substantially all of the assets of MilePoint,
Inc., a loyalty program technology provider and operator. The purchase price of
$7.5 million was satisfied through a combination of $3.5 million in cash
payable, without interest, over two years and four million common shares.
The cost of the acquisition and the fair values assigned are as follows:
Intangibles $ 225,000
Contracts with Partners 3,450,000
Goodwill 4,261,385
----------
$7,936,385
==========
Consideration:
Cost of Transaction $ 486,385
Capital Stock Issued 4,000,000
Acquisition Loan Payable 3,450,000
----------
$7,936,385
==========
The acquired contracts with partners will be amortized over the life of the
contracts. The goodwill and other intangibles will not be amortized; these will
be reviewed annually and any permanent impairment will be recorded and charged
to income in the year that the impairment has occurred.
The loan payable, which has a face value of $3,500,000, is discounted to its
fair value as it is non interest bearing and due over two years.
8. MilePoint Inc. Acquisition Payments
Remaining payments under the terms of the acquisition loan payable are as
follows:
Acquisition Loan Payable $1,584,331
Less: Current Portion 819,208
----------
Long-Term Portion $ 765,123
==========
Page 9 of 9
POINTS INTERNATIONAL LTD.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
The following interim management's discussion and analysis ("MD&A") of the
performance, financial condition and future prospects of Points International
Ltd. (which is also referred to herein as "Points" or the "Corporation") should
be read in conjunction with the Corporation's consolidated financial statements
(including the notes thereon) for the quarter ended June 30, 2004 and with the
Corporation's 2003 audited consolidated financial statements. Further
information, including Points' Annual Information Form ("AIF") for the year
ended December 31, 2003, may be accessed at www.sedar.com. All financial data
herein has been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and all dollar amounts herein are in Canadian
dollars unless otherwise specified. This MD&A is dated as of July 30, 2004.
FORWARD-LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this MD&A,
including those relating to Points' strategies and other statements that are
predictive in nature, that depend upon or refer to future events or conditions,
or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" or similar expressions, are forward-looking statements
within the meaning of Canadian securities laws. Forward-looking statements
include, without limitation, the information concerning possible or assumed
future results of operations of Points as set forth herein. These statements are
not historical facts but instead represent only Points' expectations, estimates
and projections regarding future events.
The forward-looking statements contained or incorporated by reference in this
MD&A are not guarantees of future performance and involve certain risks and
uncertainties that are difficult to predict. The future results and shareholder
value of Points may differ materially from those expressed in the
forward-looking statements contained or incorporated by reference in this MD&A
due to, among other factors, the risks and uncertainties discussed herein, the
matters set forth under "Risks and Uncertainties" contained in Points' AIF filed
with Canadian securities regulators and the factors detailed in Points' other
filings with Canadian securities regulators, including the factors detailed in
Points' annual and interim financial statements and the notes thereto. Points
does not undertake any obligation to update or release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this MD&A or to reflect the occurrence of unanticipated events, except as
required by law.
Page 1 of 29
OVERVIEW OF POINTS' BUSINESS
CORE BUSINESS - Points Solutions
Points has developed a proprietary technology platform that allows it to offer a
portfolio of solutions, referred to as the Points Solutions, to the loyalty
program industry. The Points platform was designed to create value for consumers
and loyalty programs alike. The Points Solutions are comprised of the Points
Exchange and a suite of Private Branded Solutions available to loyalty program
operators.
The Points Exchange
In April 2001, Points launched its cornerstone product, the proprietary Points
Exchange. The Points Exchange is an online service allowing consumers who are
members of participating loyalty programs to exchange their loyalty program
points and/or miles between the participating loyalty programs. The Points
Exchange also serves as a central resource to help individuals track their
account balances with a number of their major loyalty programs. Management
believes that the Points Exchange is currently the only independent loyalty
Points Exchange of its kind.
As at June 30, 2004, the Points Exchange had attracted 40 loyalty program
participants (as at the date hereof 4 additional partners are under contract but
not yet launched), including the loyalty programs of leading airlines, hotels,
online businesses, retail businesses and gift certificate programs.
Private Branded Solutions
In addition to the Points Exchange, Points offers a portfolio of Private Branded
Solutions to loyalty programs. This suite of technologies includes:
POINTSpurchase and POINTSgift - facilitates the online sale and gift of miles,
points and other loyalty program currencies.
POINTScorporate - facilitates the sale of loyalty program currencies to
corporate customers.
POINTStransfer - facilitates the amalgamation or transfer of loyalty program
currencies among multiple accounts.
POINTSintegrate - functions as a common platform to process transactions between
third-party loyalty programs, to simplify and automate a complex and
resource-intensive process, with a single integration.
POINTSelite - facilitates the online sale of tier status to members of loyalty
programs.
POINTScustom - custom applications developed for select large loyalty program
partners.
Page 2 of 29
SIGNIFICANT BUSINESS DEVELOPMENTS IN THE SECOND QUARTER OF 2004
SUITE OF POINTS SOLUTIONS SOLD TO FRONTIER AIRLINES
As previously announced, EarlyReturns, the loyalty program for Frontier Airlines
("FRONTIER"), will join the Points Exchange as a tradable loyalty currency.
Frontier will also begin using the suite of Points Solutions to support
EarlyReturns. These components, hosted and maintained by Points will work
seamlessly with Frontier's website to enhance the capabilities of EarlyReturns,
allowing members to buy, share, or transfer frequent flyer miles among friends,
family and other members. The suite of Points Solutions, expected to launch in
2004, includes POINTSpurchase, POINTSgift, POINTStransfer, and the
POINTScorporate solution.
EIGHT NEW PARTNERS JOIN THE POINTS EXCHANGE
In the second quarter of 2004 Points added four new partners to the Point
Exchange. In addition, Points completed contracts to add an additional four new
partners to the Points Exchange. These new partners add breadth to the Points
Exchange, further expanding the number and variety of exchange options.
MILEPOINT ACQUISITION
On March 31, 2004, Points acquired substantially all of the assets of MilePoint,
Inc. ("MilePoint"), a leading loyalty program technology and service provider
(the "MilePoint Acquisition"). The MilePoint Acquisition has allowed Points to
add to its partner base relationships with Northwest Airlines, Delta Air Lines
and Starwood Hotels, among others, and increase the potential of both the Points
Exchange and the Corporation's broad portfolio of Private Branded Solutions. In
connection with the MilePoint Acquisition, Points has retained for one year, as
consultants, MilePoint's founders and loyalty industry veterans, Mark Lacek and
Peter Brennan.
Beginning April 1, Points began to recognize both the revenue and expenses
associated with the transaction. All revenue and expenses are incorporated into
Points' financial results.
REVENUE RECOGNITION POLICIES
The revenue recognition policies for the suite of Points Solutions are as
follows:
Points Exchange:
- Exchange commissions are a percentage of the exchanged value and are
recognized as the services are provided under the terms of related
contracts.
- Membership dues received in advance for services are recognized over
the term of service. Membership dues are $19.95 annually for a
PointsPlus membership.
- One-time trading fees ($5.95 per trade) are recognized at the time of
the trade (for non-PointsPlus members).
Page 3 of 29
- Non-refundable partner sign-up fees, for which the Corporation is
under no further obligations, are recognized when the program becomes
available as an exchange partner on the Points Exchange.
Private Branded Solutions:
- Revenues from the sale of loyalty program points are recorded net of
costs.
- Hosting and management fees are recognized in the period of service.
- Non-refundable partner sign-up fees with no fixed term, and for which
the Corporation is under no further obligations, are recognized as
revenue when received.
- Technology design, development and maintenance revenues are recorded
on a "percentage-of-completion" basis.
KEY BUSINESS DRIVERS
Revenue growth has historically been, and will continue to be, generated by
growth of membership in and use of the suite of Points Solutions (i.e., the
Points Exchange and Private Branded Solutions).
Growth in the number of individual members using the Points Exchange is driven
by three factors that contribute to increased site traffic and the ease with
which a consumer can join the Points Exchange to conduct exchange transactions.
These factors are website usability and enhancements, marketing (awareness and
brand) and partner activity. For additional information, see "Points Exchange
Growth" on page 6 hereof.
Growth in Private Branded Solutions will occur from organic growth of existing
partner relationships, supplemented with new business relationships established
throughout the year. For additional information, see "Private Branded Solutions
Growth" on page 7 hereof.
While the Corporation has no control over the growth of the loyalty program
industry, management considers it an important factor in the Corporation's
growth prospects. For additional information, see "Growth of Loyalty Program
Industry" on page 11 hereof.
RESULTS OF OPERATIONS - REVENUES
OVERVIEW
Revenue for the three months ended June 30, 2004 was $2,032,136 representing a
year over year increase of 39% and an increase of 26% over the prior quarter
(March 31, 2004). The provision of Points Solutions accounted for approximately
96% of the revenues in the second quarter (interest and other revenue accounted
for the remaining four percent). The results for the six-month period ended June
30, 2004 represented a 32% increase in revenues year over year.
Page 4 of 29
For the three months ended For the six months ended
------------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
REVENUES 2004 2004 2003 2004 2003
- -------- ---------- ---------- ---------- ---------- ----------
Points Operations $1,948,570 $1,532,513 $1,342,847 $3,481,083 $2,626,368
Interest and other revenue 83,566 85,052 114,721 168,618 135,392
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE $2,032,136 $1,617,565 $1,457,568 $3,649,701 $2,761,760
========== ========== ========== ========== ==========
A substantial portion of Points' revenue is generated through the provision of
Private Branded Solutions for loyalty programs by way of fees for technology
services and transaction fees or commissions paid to Points by the operators of
the loyalty programs.
Points earns revenue from the Points Exchange in three principal ways. First,
Points charges a commission on all exchanges, based on a value of the loyalty
currency tendered for exchange by the loyalty program member. Through the
exchange model, the participating loyalty program sets a value on the currency
tendered for "sale". Based on this valuation, a percentage is remitted to Points
and the remaining balance is used to purchase the currency of another
participating loyalty program. Second, loyalty program members pay Points either
a fee for each exchange transaction on the Points Exchange or an annual fee for
a membership that includes unlimited exchange transactions. Finally, Points may
earn a non-refundable partner sign-up fee when a partner joins the Points
Exchange.
For the three-month period ended June 30, 2004, two key customers represented
approximately 40% of the Corporation's gross revenues (for the three-month
period ended June 30, 2003, two key customers represented 63% of the
Corporation's gross revenues). In addition, two key customers, measured by
revenue, represented approximately 73% (June 30, 2003 - 64%) of the
Corporation's deposits. One of the two customers in 2004 is not the same
customer as in 2003. As additional partner relationships are established and
revenues grow, management expects the economic dependence on any key customer to
be reduced.
In 2004, approximately 97% of the Corporation's revenues were recurring revenues
(e.g. revenues from monthly management fees, membership fees and transaction
fees) and 3% were from non-recurring sources (e.g. one-time web development and
integration fees).
For the three months ended For the six months ended
------------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
REVENUES 2004 2004 2003 2004 2003
- -------- ---------- ---------- ---------- ---------- ----------
Recurring revenues $1,973,231 $1,572,116 $1,209,788 $3,545,347 $2,223,674
Non-recurring revenues 58,905 45,449 247,780 104,354 538,086
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE $2,032,136 $1,617,565 $1,457,568 $3,649,701 $2,761,760
========== ========== ========== ========== ==========
Management recognizes that the Corporation must achieve profitability through
revenue growth and cost management. As stated in prior disclosure, management
continues to expect that Points' revenues will exceed its general and
administrative expenses at some point during 2005.
Page 5 of 29
REVENUE GROWTH
Revenue growth has historically been, and will continue to be, generated by
growth of membership in and use of the suite of Points Solutions products.
Growth in product usage will occur from the organic growth of existing
relationships, supplemented with new business relationships established
throughout the year. Management expects the existing contracts to continue to
generate growing revenues and, based on continuing business development efforts,
is optimistic about new revenue sources in 2004.
Growth in Use of the Points Solutions
The suite of Points Solutions experiences revenue growth based on the number of
loyalty program partners and consumer members who participate in the various
programs.
For the three months ended
Partner Summary - Total Number ----------------------------
of Partners(1) JUNE 30 MARCH 31 JUNE 30
NUMBER OF PARTNERS AS AT 2004 2004 2003
- ------------------------------ ------- -------- -------
Points Exchange 40 36 30
Private Branded Solutions(2) 19 18 10
Cumulative Points Transacted (000,000's) 4,866 3,810 1,827
Notes:
(1) Partners may be included in both the Private Branded Solutions and the
Points Exchange.
(2) Includes seven additional partners acquired in the MilePoint Acquisition as
at March 31, 2004.
Points Exchange Growth
Growth in the number of consumer members using the Points Exchange is driven by
three factors that contribute to both increased site traffic and the ease with
which a consumer can join the Points Exchange and then conduct exchange
transactions: website usability and enhancements; marketing (awareness and
brand) and partner activity. Continued enhancements have been made to the
website that simplify processes and will allow Points to grow while incurring
fewer costs. Points will continue to explore feature and functional
improvements, release further enhancements and expand its marketing promotions
and programs. To support growth in the Points Exchange, the Corporation hired a
Chief Marketing Officer in May 2004 to lead the marketing group. Growth in
activity on the Points Exchange is also heavily impacted by partner activity.
The number of loyalty program participants, their industry mix and the average
number of points/miles required to acquire one point/mile of another loyalty
currency (the "Trade Ratio") are important elements in the growth of the Points
Exchange.
Page 6 of 29
For the three months ended
---------------------------------
JUNE 30 MARCH 31 JUNE 30
POINTS EXCHANGE METRICS 2004 2004 2003
- ----------------------- --------- --------- ---------
Total Loyalty Programs - cumulative 40 36 30
Trade Ratio(1) 1.48 to 1 1.59 to 1 1.59 to 1
Notes:
(1) Average rates are based on all miles and points exchanged and excludes gift
certificates. The results are based on actual trades made during the
applicable period.
The number of loyalty programs participating on the Points Exchange has
increased by 33% since the second quarter of 2003 and 11% since the March 31,
2004. Points continues to focus its business development efforts on adding the
optimal partners by size and industry to the Points Exchange. Management
continuously works with new and existing program participants in an effort to
improve the Trade Ratio. Through these efforts, the Trade Ratio has improved
relative to June 30, 2003 and March 31, 2004. Management believes that the Trade
Ratio is an important (and relative) measure since a better ratio implies a more
attractive consumer value proposition. An improved consumer value proposition
should lead to more members and more trades. The Trade Ratio is, however,
impacted by the number and type of promotions run by the Corporation and by the
partners. It can be expected that the Trade Ratio will fluctuate (positively and
negatively) over time. Total trades grew by 131% compared to the first quarter
of 2004. Management expects to continue to see improvement in this area in 2004.
Private Branded Solutions Growth
The Private Branded Solutions have been designed with each partner's look and
branding. As a result, Points has little impact on driving traffic and
transactions through its partners' sites. However, Points has seen continuous
growth in the products since each launch. Management expects this trend to
continue for new and existing Private Branded Solutions.
JUNE 30 MARCH 31 JUNE 30
PRIVATE BRANDED SOLUTIONS METRICS AS AT 2004 2004 2003
- --------------------------------------- ------- -------- -------
Total Unique Partners(1) 19 18 10
Total Private Branded Solutions(2) 48 45 26
Notes:
(1) Includes seven additional partners acquired in the MilePoint Acquisition as
at March 31, 2004.
(2) Includes 17 additional products acquired in the MilePoint Acquisition as at
March 31, 2004.
Page 7 of 29
PRIVATE BRANDED SOLUTIONS(1)(2) JUNE 30 MARCH 31 JUNE 30
NUMBER OF PRODUCTS AS AT 2004 2004 2003
- ------------------------------- ------- -------- -------
POINTSpurchase 14 13 8
POINTSgift 14 13 7
POINTStransfer 3 3 2
POINTScorporate 8 7 3
POINTSelite 2 2 2
POINTScustom 3 3 1
POINTSintegrate partners(3)(4) 4 4 3
Total Private Branded Solutions 48 45 26
Notes:
(1) Includes products sold to new and existing customers.
(2) Includes 17 additional products acquired in the MilePoint Acquisition as at
March 31, 2004.
(3) Each POINTSintegrate partner will have third parties integrated into its
technology platform.
(4) There are 22 existing partner integration add-ons among the four
POINTSintegrate partner as at June 30, 2004.
SOURCES OF REVENUE GROWTH
Approximately 96% of the Corporation's revenue is generated through its Points
Solutions, which have two primary sources for growth: organic growth through
increased use of existing contracted Points Solutions; and the development of
new contracted Points Solutions.
For the three months ended For the six months ended
---------------------------- ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
PERCENTAGE OF REVENUES BY SOURCE 2004 2004 2003 2004 2003
- -------------------------------- ------- -------- ------- ------- -------
Organic Growth of existing Points Solutions 97.1% 97.0% 72.3% 97.1% 75.7%
New contracted Points Solutions with new and
existing partners 2.9% 3.0% 27.7% 2.9% 24.3%
Organic Growth of Existing Points Solutions
The large majority of existing products that Points operates, including those on
behalf of partner loyalty programs, continue to grow through increased consumer
awareness, consumer adoption and loyalty program growth. As Points earns
transaction fees or commissions on the majority of these products and as the
products continue to grow, Points expects to continue to derive a large portion
of its revenues in this manner.
Organic growth of existing Points Solutions accounted for 97% of revenues in the
second quarter of 2004. Revenue from organic growth grew by 87% from $1.05
million in the second quarter of 2003 to $1.973 million in the second quarter of
2004, and by 26% from the first quarter of 2004. Management expects this trend
to continue as the base of existing products continues to grow.
Sales of the POINTSelite product are seasonal. Management expects that the first
quarter will account for 75% of the annual POINTSelite revenue.
Page 8 of 29
New Contracted Points Solutions
Selling additional Points Solutions is an important source of new revenue. New
Points Solutions sold to loyalty program partners grow the base of products
being managed and therefore the organic revenue base and, in the case of sales
to new loyalty program partners, provide an opportunity to place additional
Points Solutions with the same partner.
Since June 30, 2003, Points has grown the number of products placed with
partners from 26 to 48 as at June 30, 2004. In addition, 22 third party
integrations have been implemented with the four POINTSintegrate partners.
Points believes that its suite of Points Solutions is applicable to all of its
large loyalty program partners and will continue to focus business development
resources on both the sale of new products to current partners and on sales to
new partners. Management is continuing to focus on expanding the Points Exchange
partnership base in 2004 across various loyalty verticals. In particular, Points
will continue to focus on new partnerships in the hotel, retail, car rental,
online, and financial services categories throughout 2004.
Projected revenues for 2004 attributed to the deployment of Points Solutions to
new loyalty program partners are considerably riskier than organic growth of
existing Points Solutions. Revenue growth is still substantially dependent on
generating new contracts for the purchase of Points Solutions products. While
management expects continued business development success, there is no certainty
that Points will continue with its past success of acquiring new contracts with
new or existing partners.
OTHER FACTORS CONTRIBUTING TO REVENUE GROWTH
In addition to the sources of revenue and growth described above, three other
factors contribute to the Corporation's financial performance: interest income,
fluctuations in foreign exchange rates and the growth of the loyalty program
industry.
Interest Revenue
The Corporation earned interest revenue of $83,566 for the second quarter of
2004, compared with $114,721 in the second quarter of 2003 and $85,052 in the
first quarter of 2004. The decrease in interest revenue year over year and
quarter over quarter is largely a function of the shorter duration of the
investment portfolio and the subsequently lower average yield of the
investments. Management expects the interest revenue to continue to decline in
the short term as cash reserves are reduced as a consequence of the MilePoint
Acquisition and growth of its operations. Interest revenue is a function of the
Corporation's cash balances and the prevailing interest rates. Canadian cash
reserves are invested in a combination of short-term liquid assets and
short-term bonds. The bond and money market portfolio has a duration of less
than two years. Foreign currency continues to be invested in short-term and
money market instruments. Points' cash and short-term investments are valued
quarterly at the lower of cost and market value. In the longer term, as Points'
business continues to grow, cash reserves and related interest income are also
expected to increase, although this growth is not expected to be a material
portion of the Corporation's revenue going forward. Interest rates will continue
to influence interest earnings. The Corporation's bond portfolio is exposed to
financial risk that
Page 9 of 29
arises from the credit quality of the underlying bond issuers. The Corporation
seeks to mitigate the credit risk by diversifying its bond holdings and only
investing in securities with a credit rating of "A" or higher. A summary of the
Corporation's investments is as follows:
US$ OTHER
AS AT JUNE 30, 2004 YIELD % CREDIT RATING C$ TOTAL DENOMINATED DENOMINATED
- ------------------- ------- ------------- ----------- ----------- -----------
Cash held at bank(1) 0.81 n/a $14,060,243 $9,607,895 E695,745
Money market securities 1.79(2) R1 - High 2,365,786 n/a n/a
Bonds(3) 3.11 A - AAA 2,001,145 n/a n/a
----------- ---------- --------
TOTAL $18,427,174 $9,607,895 E695,745
=========== ========== ========
Notes:
(1) C$ Total represents total cash held at bank inclusive of all denominations;
US$ and Other Denominated currencies are a subset of the C$ Total and are
represented in their local currency amount.
(2) Yield as at June 30, 2004.
(3) Bond yield is calculated as the simple average of the portfolio's
semi-annual yield to maturity.
Foreign Exchange Rates
The translation of the Corporation's revenues and expenses from U.S. to Canadian
dollars is, and will continue to be, sensitive to changes in the U.S./Canadian
foreign exchange rates ("FX Rates"). Changes to FX Rates will have greater
impact on the Corporation's revenues than on its expenses as approximately 92%
of the Corporation's revenues are in U.S. dollars and the remaining 8% are split
between Canadian dollars and Euros. Management expects that the percentage of
U.S. dollar-based revenue will not decrease significantly in 2004. Approximately
68% of the Corporation's expenses were in Canadian dollars, 27% are U.S.
dollar-based and 5% are based in other foreign currencies. The Corporation does
not have material foreign exchange risk with its cash expenses as it has
sufficient foreign currency reserves to meet its foreign obligations.
The average quarterly FX Rate has stabilized relative to the first quarter 2004.
The FX rate differential for the quarter was approximately 3%. The impact of
this differential was positive, but not material.
The translation of the Corporation's revenues will be lower in Canadian dollar
terms if the Canadian dollar strengthens relative to the U.S. dollar.
Conversely, Points' expenses would decrease, dampening the negative impact to
net income. The opposite would be true if the Canadian dollar weakened relative
to the U.S. dollar.
For the three months ended For the six months ended
---------------------------- ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
U.S. - CANADIAN FX RATES 2004 2004 2003 2004 2003
- ------------------------ ------- -------- ------- ------- -------
Period Start 1.311 1.297 1.468 1.297 1.573
Period End 1.345 1.308 1.348 1.345 1.348
Period Average 1.359 1.318 1.399 1.339 1.455
Page 10 of 29
Growth of Loyalty Program Industry
The Economist reported on the growing importance of loyalty programs in an
article from its May 2, 2002 issue, entitled "Fly me to the moon", noting that
on an annual basis, airlines sold "roughly US$10 billion worth of miles to
partners, such as credit card firms". In another article (entitled
"Frequent-flyer economics," from the same issue), The Economist reported that
"frequent flyer miles started as a marketing gimmick, but they have become a
lucrative business," that "roughly half of all miles are now earned on the
ground, not in the air," and that with "the world-wide stock of unredeemed miles
.... close to 8.5 trillion ... the total global stock of frequent flyer miles may
now be worth almost US$500 billion".
Management understands that members of loyalty programs are much more likely to
utilize the Points Exchange and the other products from the suite of Points
Solutions when they are close to a level at which they can redeem an award. The
redemption level for an award varies by type of award (for example, a
business-class flight takes more miles that an economy-class flight) and by
program type (the "cost" of a flight typically starts between 15,000 and 25,000
miles whereas a night in a hotel starts at 10,000 points). Therefore, growth in
consumer loyalty program account balances will create demand for Points
Solutions. Growth in program balances is a function of the growth in the number
of programs, the number of participating consumers, time and the number of
consumers moving through a loyalty redemption (for example, receiving an award
of some type).
Several respected periodicals estimate strong growth in the popularity of and
participation in loyalty programs. For example, in addition to The Economist,
cited above, according to the "frequent flyer facts" section of the website of
InsideFlyer magazine (www.webflyer.com), a leading publication for members of
frequent traveler programs:
"loyalty programs grow at a rate of 11% per annum, with over 120 million
members worldwide. While there are about 92 frequent flyer/guest programs
in the world, American AAdvantage, the largest frequent flyer program in
the world, began with 283,000 members in 1981 and has grown to more than 45
million members".
RESULTS OF OPERATIONS - GENERAL AND ADMINISTRATIVE EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses grew by 17% relative to the first quarter of
2004 and by 81% over the second quarter of 2003. The increase over the first
quarter of 2004 reflects the cost of expanding operations, including new
contracted relationships with Private Branded Solutions and Points Exchange
partners. Significant changes occurred in the general and administrative
expenses relative to the first quarter, including sales commission (-$108,051),
employment costs (+$165,384), other operating (-$151,200), marketing and
communications (-$250,419) and technology services (-$103,550). Material changes
in expenses will be described in each section below.
Page 11 of 29
For the three months ended For the six months ended
------------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
GENERAL AND ADMINISTRATIVE EXPENSES 2004 2004 2003 2004 2003
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Employment Costs(1) $1,665,730 $1,831,114 $1,175,325 $3,496,844 $2,276,696
Technology Services(2) 264,856 161,307 254,097 $ 426,163 $ 454,381
Marketing and Communications 452,521 202,102 54,603 $ 654,623 $ 52,708
Sales Commission and Related Expenses 132,754 24,703 101,652 $ 157,457 $ 150,783
Other(3) 582,931 431,731 124,778 $1,014,662 $ 282,609
---------- ---------- ---------- ---------- ----------
TOTAL $3,098,792 $2,650,957 $1,710,455 $5,749,749 $3,217,177
========== ========== ========== ========== ==========
Notes:
(1) Wages and employment costs include salaries, contract labour charges,
recruiting, benefits and government charges (CPP and EI).
(2) Technology expenses include online hosting and managed services, equipment
rental, software licenses and capital lease expenses.
(3) Other expenses include foreign exchange losses (or gains), travel expenses,
professional fees, insurance, office rent and expenses and regulatory
expenses.
As the Corporation is still in the process of increasing loyalty program
participation in and sales of the Points Solutions, significant resources
continue to be required. While management has made controlling costs a priority,
costs will continue to increase in 2004. Management expects the general and
administrative expenses in the remaining two quarters to be higher than in the
second quarter as employment costs and marketing expenses are increased.
However, a large percentage of the marketing expenses expected to be incurred
will be non-cash as the Corporation is expensing its pre-paid mileage asset
account. The Corporation will continue to scale its infrastructure, add new
partners to its suite of products, move from trial/test marketing to a more
comprehensive marketing and branding program.
A significant percentage of the planned expense increases in 2004 are either
discretionary or variable (for example new hires and marketing expenditures).
Points still expects that a series of significant marketing and branding
programs will begin in the latter half of 2004. The actual expense incurred will
be a function of the types of marketing media employed and incentives offered,
as well as the timing of the programs' launch dates. If actual revenue growth
projected from the marketing plan does not meet expectations, the expenditures
can either be reduced or reallocated to more successful programs.
EMPLOYMENT COSTS
As at June 30, 2004, Points had 66 full-time employees.
JUNE 30 MARCH 31 JUNE 30
HEADCOUNT BY DEPARTMENT AS AT 2004 2004 2003
- ----------------------------- ------- -------- -------
Technology 36 42 28
Finance and Administration 12 10 6
Business Development 8 8 6
Marketing and Customer Service 10 8 6
--- --- ---
TOTAL 66 68 46
=== === ===
Page 12 of 29
Employment costs decreased versus the first quarter of 2004 primarily due to a
reduction in recruiting, one-time charges and a slightly reduced headcount.
Overall, 2004 employment costs are likely to increase throughout the year as
additional technology and marketing staff will be hired to continue the
acceleration of the Points.com consumer business.
TECHNOLOGY SERVICES
Technology services expenses increase in increments based on business growth and
product performance. As technology services costs are a function of the number
of partners and Points Solutions products, these costs grow as revenue grows. In
general, as loyalty program partners and products are added to the
infrastructure and transactional volume increases, additional servers,
processors, bandwidth, memory, etc., are required to provide a secure and robust
production environment. The second quarter of 2004 saw a quarter over quarter
increase of $103,550 (64%) as additional services were required for new products
associated with the MilePoint Acquisition and the expansion of other Points
Solutions. Management expects these costs to be flat for the third and fourth
quarter of 2004. Products launched and loyalty program partners acquired are the
key drivers of technology services expenses.
MARKETING AND COMMUNICATIONS
Marketing costs increased by $250,419 (124%) relative to the first quarter of
2004. The increase in the marketing expenditures includes the expenditure of
pre-paid mileage purchases issued through various marketing programs, including
sweepstakes and mileage promotional campaigns. Additional expenditures were also
made in joint marketing, advertising and public relations campaigns with Points
Exchange partners. Beginning in the first quarter of 2003, an accounting
adjustment related to the expense recognition of promotional points tied to
PointsPlus membership purchases was enacted. Prior to the first quarter of 2003,
the cost of these points was recorded as an expense in the period they were
issued. Beginning January 1, 2003, marketing expenses associated with the sale
of PointsPlus memberships are being amortized over the term of the membership,
while the other marketing expenditures are recognized in the period of use.
The Corporation expects to increase its marketing expenditures in the latter
half of 2004, primarily focusing on customer acquisition and retention. The
marketing and branding foundation built in 2003 has made it possible to expand
audience reach and effectively execute large-scale, multi-channel promotions.
Advertising expenditures will continue to be focused on partner media as this
approach dovetails with business development strategies and is the most
cost-effective means to reach Points' target audience. A smaller portion of the
budget will be used for targeted non-partner advertising. It is anticipated that
marketing and communication expenses could increase substantially if the
programs are successful at customer acquisition and retention. If the programs
do not meet management's expectations in driving revenue growth, marketing
expenses can be eliminated or reallocated in the short term. Management expects
that the results of the carefully planned marketing strategy will accelerate
Points Exchange activity.
Page 13 of 29
SALES COMMISSIONS AND EXPENSES
Sales Commissions and expenses have increased by $108,051 in the second quarter
of 2004 over the first quarter. The increase primarily reflects increased
payments to sales agents and credit card charges for products that are not
reimbursed by partners. In the future, sales commissions will adjust according
to partners contracted and growth of existing products.
OTHER OPERATING EXPENSES
Other operating expenses include office overhead, travel expenses professional
fees and foreign exchange gain and/or loss. Other operating expenses increased
by $151,200 in the second quarter relative to the first quarter. A significant
component of the increase relates to professional fees incurred in completing
certain international contracts, the annual general and special meeting in June,
regulatory expenses and other corporate disclosure matters. Management expects
other operating expenses to remain flat in the third quarter relative to the
second quarter.
RESULTS OF OPERATIONS - OPERATING EFFICIENCY
The Corporation's operating ratio (defined as the ratio of general and
administrative expenses to revenues) has improved by 7% over the first quarter
of 2004. The Corporation expects the improvement in operating efficiencies to
continue through to 2005 as revenues grow and costs stabilize, thereby achieving
a ratio less than one.
For the three months ended For the six months ended
---------------------------- ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
EFFICIENCY MEASURE 2004 2004 2003 2004 2003
- ------------------ ------- -------- ------- ------- -------
Operating Ratio 1.52 1.64 1.17 1.58 1.16
RESULTS OF OPERATIONS - NON-CASH EXPENSES
Forward-looking statements contained in this section, "Results of Operations -
Non-Cash Expenses", with respect to future expenses of the Corporation, are not
guarantees of such future expenses and involve certain risks and uncertainties
that are difficult to predict. Any changes in the Corporation's amortizing
assets will subsequently change the Corporation's amortizing expenses.
AMORTIZATION EXPENSES
The Corporation recorded amortization expenses of $573,312 in the second quarter
compared to $443,917 for the quarter ended March 31, 2004 and $672,606 for the
quarter ending June 30, 2003. The increase was attributed to the charges
outlined in the following table:
Page 14 of 29
For the three months ended For the six months ended
------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
AMORTIZATION EXPENSES 2004 2004 2003 2004 2003
- --------------------- -------- -------- -------- ---------- ----------
Deferred Costs $128,126 $199,346 $100,116 $ 327,472 $ 182,306
Intangible Assets 352,479 188,217 189,050 $ 540,696 $ 378,100
Property, Plant and Equipment 92,707 56,354 383,440 $ 149,061 $ 758,611
TOTAL $573,312 $443,917 $672,606 $1,017,229 $1,319,017
AMORTIZATION OF DEFERRED COSTS
For the three months ended For the six months ended
------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
DEFERRED COSTS 2004 2004 2003 2004 2003
- -------------- -------- -------- -------- -------- --------
Amortization $128,126 $199,346 $100,116 $327,472 $182,306
Charges incurred in respect of certain financings are deferred and charged to
income on a straight-line basis over an applicable time period. Deferred finance
charges represent legal, accounting and other related fees incurred to obtain
the financings. Points has incurred deferred costs in connection with the
following financial transactions:
a. In prior quarters, Points reported deferred financing charges in connection
with the 11%, $6,000,000 senior secured convertible debenture (the
"Debenture") issued to CIBC Capital Partners. The first quarter of 2004 was
the final amortization period for the deferred costs associated with the
Debenture.
b. The Corporation reports deferred financing charges in connection with the
Series Two Preferred Share issued pursuant to the IAC Investment, as this
financial instrument is also classified as debt. The Series Two Preferred
Share has 35 amortization periods remaining.
c. In consideration of the value to the Corporation of the Alignment Agreement
with American Airlines, the Corporation issued 2,196,635 Common Shares to
American Airlines valued at $2,240,568. The Common Shares have been
classified as deferred costs and will be amortized over a period of five
years. There are 17 amortization periods remaining.
AMORTIZATION OF INTANGIBLE ASSETS
The excess of the cost over the value attributed to the underlying net assets of
the shares of Points.com acquired in 2002 is amortized on a straight-line basis
over a period of three years. The increase in the amortization expense of
intangible assets in the second quarter is related to the intangible assets
(i.e., partner contracts) acquired through the MilePoint Acquisition (see
"Commitments Related to MilePoint Acquisition" on page 25 for additional
information). Goodwill related to the acquisition will not be amortized unless
the assets are deemed to have become impaired, in which case the goodwill will
be written off in the appropriate period.
Page 15 of 29
For the three months ended For the six months ended
------------------------------ ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
INTANGIBLE ASSETS 2004 2004 2003 2004 2003
- ----------------- -------- -------- -------- -------- --------
Amortization $352,479 $188,217 $189,050 $540,696 $378,100
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
The increase in the amortization expenses relative to the first quarter of 2004
reflects the completion of the leasehold improvements, office furniture
purchases and technology assets acquired during the quarter. Management expects
the amortization to increase in the third and fourth quarter as older technology
assets are replaced.
For the three months ended For the six months ended
----------------------------- -------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
PROPERTY, PLANT AND EQUIPMENT 2004 2004 2003 2004 2003
- ----------------------------- ------- -------- -------- -------- --------
Amortization $92,707 $56,354 $383,440 $149,061 $758,611
OTHER NON-CASH EXPENSES
Interest on Convertible Debenture
Accrued interest on any principal amount of the Debenture that is converted into
common shares ceases to be payable. In addition, in the event that an exercise
of the Warrants (as defined in "Liquidity - IAC Investment" on page 18) results
in a change of control of Points, accrued interest on the Debenture will be
waived and the principal amount of the Debenture will be repayable within 30
days. See "Commitments Related to the Terms of Certain Financing Arrangements"
on page 22.
INTEREST ON CONVERTIBLE DEBENTURE 2008 2007 2006 2005 2004 2003 2002 2001
- --------------------------------- ------ ------ ------ ----- ----- ----- ----- -----
Accrued Interest ($000's) 257 1,209 1,089 981 884 854 660 522
Debenture Value ($000's) 12,456 12,199 10,990 9,901 8,920 8,036 7,182 6,522
Interest on the outstanding principal amount of the Debenture accrues at a rate
1of 11% per annum. Interest compounds on an annual basis on the day immediately
prior to each anniversary of the original issue date, being March 15, 2001.
Thereafter, interest accrues on such compounded interest at the rate of 11% per
annum.
Page 16 of 29
Interest on the Series Two Preferred Share
INTEREST ON SERIES TWO
PREFERRED SHARED 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Accrued Interest ($000's) 244 868 868 868 868 868 868 868 868 868 624
Series Two Preferred
Share Value ($000,000's) 21.1 20.8 19.9 19.1 18.2 17.3 16.5 15.6 14.7 13.9 13.0
RESULTS OF OPERATIONS - EARNINGS AND SHAREHOLDER EQUITY
NET LOSS
The Corporation reported a net loss of $2,153,069 for the second quarter of
2004, compared with a net loss of $1,283,337 for the second quarter of 2003 and
a net loss of $1,901,594 for the first quarter of 2004. The net loss increased
relative to the first quarter of 2004 due to the Corporation's investment in
marketing its products and costs related to closing new partners and contracts.
SHAREHOLDER EQUITY
The deficit in shareholder equity increased from $2,923,084 at March 31, 2004 to
$5,048,584 at June 30, 2004. The increase was a result of the net loss for the
period of $2,153,069 million. Management continues to expect the growth in this
deficit to decrease as Points' business grows.
LOSS PER SHARE
The Corporation's loss per share is calculated on the basis of the weighted
average number of outstanding Common Shares for the period, which amounted to
64,250,018 shares at June 30, 2004, compared with 63,394,531 shares at March 31,
2004 and 55,287,446 at June 30, 2003.
The Corporation reported a net loss of $0.03 per share for each of the quarters
ending June 30 and March 31, 2004, compared with a net loss of $0.02 per share
for the second quarter of 2003. For 2004 and 2003, the number of fully diluted
shares outstanding has not been computed as the effect would be anti-dilutive
(meaning that the loss per share would decrease on a fully diluted basis) and
therefore, in accordance with Canadian generally accepted accounting principles,
fully diluted loss per share is not computed. The fully diluted calculation for
both 2004 and 2003 would have otherwise included Common Shares underlying
outstanding securities, such as options, warrants and preferred shares
convertible or exercisable to acquire Common Shares.
LIQUIDITY
OVERVIEW OF LIQUIDITY
Management views liquidity as the Corporation's ability to generate sufficient
cash (or cash equivalents) to meet its obligations as they become due. Balance
sheet liquidity indicators provide management with a test of the Corporation's
current liquidity. Balance Sheet indicators
Page 17 of 29
of liquidity include cash, accounts receivable and accounts payable. Earnings
(loss) before interest, amortization and other deductions ("EBITDA") are the key
indicator of the change in the liquidity of Points' operations over a defined
period of time. As the Corporation continues to add contracts to its portfolio
of Private Branded Solutions and to the Points Exchange, revenues are expected
to grow, resulting in increased liquidity.
EARNINGS (LOSS) BEFORE INTEREST, AMORTIZATION AND OTHER DEDUCTIONS
Management believes that EBITDA is an important internal measure and financial
benchmark for its shareholders because it is a recognizable and understandable
measure of the Corporation's cash burn or growth, and is a standard often
scrutinized by investors in small to mid-capitalization companies. For example,
the Corporation has incurred large non-cash expenses (depreciation and
amortization) over the past several fiscal years that distort the financial and
strategic gains the Corporation has made. Management continues to expect that
Points' revenues will exceed its general and administrative expenses at some
point during 2005.
For the quarter ending June 30, 2004, the Corporation's EBITDA was ($1.07
million). This compares with EBITDA of ($1.03 million) for the quarter ending
March 31, 2004. The increase in the loss relative to the first quarter of 2004
reflects the Corporation's increased expenditure in marketing and other
operating expenses.
IAC INVESTMENT
The following is a general summary of the terms of the IAC Investment. More
comprehensive disclosure of the IAC Investment is contained in Points' Material
Change Report dated March 21, 2003, which is hereby incorporated by reference.
See also "Commitments Related to the Terms of Certain Financing Arrangements" on
page 22 below.
Under the IAC Investment, Points issued one convertible preferred share (the
"Series Two Preferred Share") and Common Share purchase warrants (the
"Warrants") for aggregate cash consideration of $12.4 million and $2.7 million,
respectively. Based on Points' capitalization as at the date hereof, the Series
Two Preferred Share is convertible, for no additional consideration, into
21,855,791 Common Shares. The Warrants are exercisable for three years from
their date of issue (April 11, 2003) to acquire up to 55% of the Common Shares
of Points (calculated on an adjusted fully diluted basis) less the number of
Common Shares issued or issuable on conversion of the Series Two Preferred
Share. As at the date hereof and based on Points current capitalization, the
Warrants are exercisable to acquire 80,706,911 Common Shares at an effective
price per Common Share of $1.02 between April 11, 2004 and April 10, 2005 and
$1.13 between April 11, 2005 and April 10, 2006 (resulting in an additional
investment by IAC in Points, if exercised in full and depending on the year of
exercise, of up to approximately $82.4 million or $91.6 million). Each of the
Series Two Preferred Share and the Warrants contain anti-dilution protection
provisions.
CASH AND CURRENT ASSETS
The Corporation had a consolidated cash (and cash equivalents) position of
$18,427,174 at June 30, 2004, compared to the $24,243,231 at March 31, 2004, and
$24,396,879 at June 30, 2003.
Page 18 of 29
JUNE 30 MARCH 31 JUNE 30
AS AT 2004 2004 2003
- ----- ----------- ----------- -----------
Cash and Cash Equivalents $18,427,174 $24,243,231 $24,396,879
Accounts Receivable 1,339,237 887,100 959,777
Prepaids and Sundry Assets 1,271,451 1,125,666 793,963
----------- ----------- -----------
TOTAL CURRENT ASSETS $21,037,862 $26,255,997 $26,150,619
=========== =========== ===========
Cash and cash equivalents decreased by $5,816,057 from March 31, 2004. The
primary reasons for the decrease in cash relative to the first quarter of 2004
was related to the operating loss for the quarter, the scheduled payments for
the MilePoint Acquisition and the decrease in deposits from the POINTSelite
sales (see revenues Revenue Growth - "Organic Growth of Existing Points
Solutions" for additional detail).
Cash From Exercise of Certain Warrants and Options
Certain "in-the-money" warrants and options are due to expire within 12 months.
Assuming that the market price of the Common Shares remains above the exercise
price of these securities, management expects the securities to be exercised. If
exercised in full, the proceeds from the exercise of these securities will
increase cash by approximately $1.59 million assuming the exercise in full of
these securities, issued and outstanding Common Shares will increase by over
10.26 million shares.
Securities with Near-Term Expiry Dates - Outstanding Amounts as at June 30, 2004
SECURITY TYPE EXPIRY DATE NUMBER EXERCISE PRICE PROCEEDS
------------- ----------- ---------- ------------------ ----------
Warrants 10/21/2004 2,500 $ 0.28 $ 700
Broker Warrants 11/30/2004 88,525 0.25 22,131
Warrants 11/30/2004 2,015,925 0.25 503,981
Points International Ltd. Options 2/14/2005 1,727,000 0.50 863,500
Points International Ltd. Options 3/14/2005 201,400 0.50 100,700
Options in subsidiary with liquidity put 2/17/2005 627,479 Fair Market Value 13,783
Options in subsidiary with liquidity put 3/31/2005 5,597,213 Fair Market Value 87,632
---------- ----------
TOTAL 10,260,042 $1,592,428
========== ==========
It is probable that investors will sell some amount of the Common Shares
acquired through the exercise of these securities to cover the cash cost, any
tax expense or simply to realize a gain. Increased selling pressure on the
Common Shares may cause short-term downward pressure on the market price of the
Common Shares.
Accounts Receivable
The Corporation expects accounts receivable to grow proportionately with growth
in revenues, however there is some variability in this trend. Management deems
the risk of bad debts to be minimal based on the structure and nature of the
Corporation's cash flows.
Page 19 of 29
ABILITY TO FUND FUTURE GROWTH
In the second quarter of 2004, the Corporation had cash flows provided by
operating activities of ($3,114,130) after changes in non-cash balances related
to operations. Management is confident that the Corporation's cash position is
adequate to cover expenses and commitments in the short term, even if revenue
growth is slower than planned, and expects that the revenue from the Points
Solutions will generate sufficient cash to maintain capacity in the short term
and grow capacity and resources in the long term. However, the Corporation is
currently not generating an operating profit (revenues minus general and
administrative expenses) and cannot be assured that revenue growth will be
sufficient to meet liabilities as they come due.
PROPERTY, PLANT AND EQUIPMENT
The Corporation reported an increase in property, plant and equipment in the
first quarter due to leasehold improvements, furniture and equipment relating to
the new premises. Technology costs under capital lease are depreciated on a
straight-line basis over three years. The Corporation's technology costs are
currently, and are expected to remain, below industry averages as a result of
prudent cost containment initiatives.
Additional leasehold improvements at the Corporation's new facility will
increase property, plant and equipment and the corresponding amortization in
2004 and beyond.
JUNE 30 MARCH 31 JUNE 30
AS AT 2004 2004 2003
- ----- ---------- -------- ----------
Furniture and equipment $ 295,979 $199,489 $ 126,099
Computer equipment 234,339 213,686 101,929
Software 100,756 113,702 108,772
Technology costs 16,973 21,815 721,246
Leasehold improvements 468,109 200,340 69,253
---------- -------- ----------
TOTAL PLANT, PROPERTY AND EQUIPMENT $1,116,157 $669,032 $1,127,299
========== ======== ==========
GOODWILL
The MilePoint Acquisition resulted in $3,675,000 allocated to amortizing
intangible assets and $3,975,000 ($3,775,000 from goodwill and $200,000 for
other costs and deductions) to goodwill. In accordance with CICA handbook,
Section 3062 goodwill will not be expensed unless it is deemed to have become
impaired. Management has tested, and concluded, that none of the Corporation's
goodwill has become impaired.
In the second quarter, $286,385 of charges relating to transition services for
the MilePoint Acquisition were incurred and charged to Goodwill.
CURRENT LIABILITIES
Current liabilities at June 30, 2004 were $16,418,985, compared with $19,670,674
at March 31. The decrease was primarily related to payments for the MilePoint
Acquisition and decreased
Page 20 of 29
deposits as a result of POINTSelite product sales, although the decrease was
partially offset by the increase in sales in other products.
Through arrangements with partner loyalty programs such as those for
POINTSpurchase and POINTScorporate solutions, Points processes transactions
involving the online sale of loyalty currencies and collects the funds on behalf
of the loyalty program partner. Gross proceeds received on the sale of loyalty
program points, net of the commissions earned, are included in deposits and
deferred revenue in the attached consolidated balance sheets until ultimately
remitted. The level of deposits is influenced by partner activity and trends in
the overall loyalty industry. As activity increases, the Corporation's deposits
increase. The Corporation expects deposits to increase as it experiences organic
growth with existing partners, establishes new partner relationships and
integrates the MilePoint Acquisition.
JUNE 30 MARCH 31 JUNE 30
CURRENT LIABILITIES AS AT 2004 2004 2003
- ------------------------- ----------- ----------- -----------
Accounts payable and accrued liabilities $ 931,188 $ 961,807 $ 1,236,658
Deposits 14,668,589 15,949,483 12,322,674
Current portion of obligation under capital lease -- -- 171,412
Current portion of acquisition loan payable 819,208 2,759,384 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES $16,418,985 $19,670,674 $13,730,743
=========== =========== ===========
The June 30, 2004 accounts payable and accrued liabilities includes 2004
employee bonus accruals to be paid in January 2005, and other accrued charges.
The Corporation has sufficient foreign currency reserves to meet its foreign
currency obligations and, as such, does not utilize any hedging or other
strategies involving interest rate or currency derivatives.
WORKING CAPITAL
Working capital (defined as current assets minus current liabilities) has
declined relative to the first quarter of 2004 to $4,618,877. Management
continues to expect working capital to remain positive throughout the remainder
of 2004. As revenues increase, the Corporation expects cash and current assets
to increase proportionately. If, as expected, the Corporation's revenues exceed
its general and administrative expenses during 2005, working capital will begin
to grow at that point in time.
Pursuant to contractual commitments, the Corporation will take the necessary
actions to ensure that its current assets are greater than its current
liabilities.
Page 21 of 29
LONG-TERM LIABILITIES AND COMMITMENTS
PAYMENTS DUE BY PERIOD (AGGREGATE AMOUNT FOR MULTI-PERIODS)
-----------------------------------------------------------
FUTURE OBLIGATIONS (000,000'S) TOTAL(1) 2009+ 2008 2007 2006 2005 2004
- ------------------------------ -------- ------ ----- ----- ----- ----- -----
Long-Term Debt(2)
(non-cash until repayment) $12.46 -- $6.26 $1.21 $1.09 $0.98 $0.88
Series Two Preferred Share
(non-cash until repayment) 21.08 16.12 0.87 0.87 0.87 0.87 0.87
Capital Lease Obligations -- -- -- -- -- -- --
Operating Leases(3) 2.78 0.11 0.11 0.40 0.41 0.50 1.26
Partner Purchase Commitments(4) 4.90 0.02 0.37 1.58 1.22 0.93 0.78
MilePoint Acquisition(5) 4.23 -- -- - 0.40 0.83 3.00
------ ------ ----- ----- ----- ----- -----
Total Contractual Obligations $45.45 $16.24 $7.61 $4.05 $3.98 $4.12 $6.79
====== ====== ===== ===== ===== ===== =====
Notes:
(1) Represents the aggregate amount for the full duration of the contractual
obligations (including years post 2008 and prior to 2004).
(2) The Debenture is due on March 15, 2005. However, for the purposes of the
above table, the maximum obligation with all four extensions exercised has
been included. The holder of the Debenture has the right to extend the term
by one year for up to three consecutive years. See "Interest on Convertible
Debenture" above for a summary of payments in a fiscal year if the
Debenture matures.
(3) Includes technology services commitments and hardware and software
operating leases.
(4) Includes mileage purchase and co-marketing commitments, see "Partner
Purchase Commitments" below.
(5) Cash commitments related to the MilePoint Acquisition include the purchase
price ($3.5 million), anticipated transition costs (up to US$417,000) and
anticipated consulting fees (US$120,000).
Elements of the foregoing table are explained in more detail in the following
sections.
Commitments Related to the Terms of Certain Financing Arrangements
Background
On March 15, 2001, Points issued to CIBC Capital Partners, a division of
Canadian Imperial Bank of Commerce ("CIBC Capital Partners"), the 11% $6,000,000
Debenture, which was amended and restated on February 8, 2002 and further
amended effective April 11, 2003. The full principal amount of the Debenture was
set to mature on March 15, 2004. However, in December 2003, CIBC Capital
Partners exercised its right to extend the maturity date until March 15, 2005.
CIBC Capital Partners has the option to extend the maturity date from March 15,
2005 for up to three more one-year extensions. Accrued interest on the Debenture
as of June 30, 2004 is $2,469,055 and is included with the Debenture in
long-term debt as a non-current liability in the consolidated balance sheet.
The $6,000,000 principal amount of the Debenture is convertible at the option of
CIBC Capital Partners into up to 18,908,070 Common Shares. Accrued interest on
any principal amount as converted ceases to be payable. The Debenture will also
automatically convert in full into Common Shares immediately preceding certain
liquidity events. The Debenture contains certain negative covenants in favour of
CIBC Capital Partners.
Page 22 of 29
As part of the reorganization of Points completed on February 8, 2002, Points
issued to CIBC Capital Partners one preference share (the "Series One Preferred
Share"). The holder of the Series One Preferred Share is entitled to a dividend
(the "Dividend") in the event that, prior to an automatic conversion of the
Debenture, (i) there is a merger or consolidation of Points (or a subsidiary of
Points which owns all or substantially all of the assets of Points) with another
corporation where, following such event, the shareholders of Points will not
hold at least a majority of the voting power of the surviving/acquiring
corporation, (ii) any person (other than CIBC Capital Partners) or persons
acting jointly or in concert acquire 50% voting control or 50% of the equity of
Points (a "Change of Control"), or (iii) there is a sale of all or substantially
all of the assets of Points. The Dividend is approximately equal to $4,000,000
plus an amount calculated on the basis of a notional dissolution of the
Corporation where the holder of the Series One Preferred Share is entitled to
share pro rata (on the basis that the Series One Preferred Share represents that
number of Common Shares into which the Debenture is then convertible) with the
holders of all other participating shares in distributions from the assets of
Points and assuming, for this purpose, that the value of the assets of Points
available for distribution on this notional dissolution is the value
attributable to the equity of Points implied by the transaction giving rise to
the dividend event, as adjusted for the value of non Common Share equity not
valued in the transaction giving rise to the Dividend. In no event may the
Dividend exceed $24,000,000. Where an event occurs giving rise to the Dividend,
CIBC Capital Partners is entitled to accelerate all amounts owing under the
Debenture.
In connection with the IAC Investment, the Debenture was amended such that (i)
the Debenture is repayable (without accrued interest, the repayment of which is
waived) by Points within 30 days of a Change of Control of Points resulting from
the exercise of the Warrants and (ii) the Debenture is not convertible for so
long as the Warrants are outstanding and will not be convertible after the
Warrants are exercised if the Debenture is repaid within 30 days of the Change
in Control resulting from the exercise of the Warrants. Points and CIBC Capital
Partners also acknowledged, in connection with the IAC Investment, that in the
event of the exercise of the Warrants resulting in a Change of Control, the
application of the terms of the Series One Preferred Share in that situation
results in the Dividend equalling the lesser of (i) $24,000,000 and (ii)
$4,000,000 plus the number of Common Shares into which the Debenture is then
convertible, multiplied by the exercise price paid per Common Share on the
exercise of the Warrants. Points has agreed that, within 30 days of the exercise
of the Warrants in full, it will pay all amounts owing under the Debenture and
the Series One Preferred Share. Except in connection with the exercise of the
Warrants by IAC, Points is not entitled to pre-pay the Debenture.
Maturity of Debenture
Assuming the Warrants have not been exercised and the Debenture matures on March
15, 2005, the Corporation will be required to repay $6 million of principal and
$3,108,422 of accrued interest. It is possible that the repayment of $9,108,422
of principal and accrued interest will cause the Corporation to be in a negative
working capital position, may materially threaten its solvency and/or may
severely restrict the ability to grow its business. There is no certainty that
the Corporation would have sufficient cash at such time to make the repayment.
Page 23 of 29
Exercise of Warrants
If the Warrants are exercised resulting in a Change of Control prior to the
maturity of the Debenture, as at the date hereof and based on the Corporation's
current share capitalization, the Corporation would receive between
approximately $82.4 million and $91.6 million, depending on the year of
exercise. On the exercise of the Warrants resulting in a Change of Control, the
Corporation would be required to repay the $6 million principal amount of the
Debenture and pay the Dividend, which would then be payable on the Series One
Preferred Share (up to a maximum of $24 million). In this situation, management
expects that Points would have sufficient cash to make such payments.
Redemption Rights of Series Two Preferred Share Holder
Unless the Series Two Preferred Share has been converted at the option of the
holder, Points will be required to redeem the Series Two Preferred Share upon
the earlier of (i) March 31, 2013 and (ii) a person (other than the holder of
the Series Two Preferred Share) acquiring shares of Points sufficient to elect a
majority of the board of directors of Points (a "Series Two Share Change of
Control").
In the event of redemption of the Series Two Preferred Share on a Series Two
Share Change of Control, the redemption amount payable will be equal to the
greater of (i) 125% of the amount equal to (A) the subscription price of the
Series Two Preferred Share plus (B) a return on that subscription price equal to
7% per annum, calculated from the date of issue of the Series Two Preferred
Share to the date on which the Series Two Preferred Share is redeemed and (ii)
the greater of (A) the value of the Common Shares into which the Series Two
Preferred Share then could be converted on the day immediately prior to public
announcement of the Series Two Share Change of Control and (B) the product of
the Common Shares into which the Series Two Preferred Share then could be
converted and the fair market value of the consideration paid per Common Share
in the transaction resulting in the Series Two Share Change of Control.
Other Change of Control Event
Upon the occurrence of an event that is a Change of Control and a Series Two
Share Change of Control, and is unrelated to the exercise of the Warrants by
IAC, Points may not have sufficient cash to pay the Dividend, the amounts due
under the Debenture and/or the redemption amount on the Series Two Preferred
Share. As such, it is unlikely that management would consider a transaction that
triggered the above payments unless the transaction provided for payment of the
outstanding obligations.
Partner Purchase Commitments
JUNE 30 MARCH 31 JUNE 30
ASSET RELATED TO MILEAGE PURCHASES AS AT 2004 2004 2003
- ---------------------------------------- ---------- ---------- --------
Prepaid Mileage $ 592,707 $ 655,294 $462,766
Sundry assets and other prepaid expenses 678,744 470,372 331,197
---------- ---------- --------
TOTAL $1,271,451 $1,125,666 $793,963
========== ========== ========
Page 24 of 29
As part of the contractual requirements of certain commercial agreements, Points
has committed to purchase miles and points from partners at predetermined rates.
When purchased, the points are recorded as an asset (i.e., prepaid expense)
until expensed as marketing expenditures in the period of use.
A large portion of the current prepaids and sundry assets of the Corporation
include prepaid mileage commitments purchased from the Corporation's partners.
While prepaid points may remain the same or lower as an overall percentage of
prepaids and sundry assets, management expects the prepaid points account to
increase as a result of the mileage purchase commitments from various partners.
Commitments Related to Milepoint Acquisition
On March 31, 2004 Points completed the MilePoint Acquisition. The purchase price
for the assets of MilePoint was $7.5 million and was satisfied through a
combination of $3.5 million in cash and four million Common Shares (worth
approximately $4 million). An initial $1.9 million was paid in cash on closing,
with the balance payable semi-annually over two years. The four million shares
were issued into escrow on closing and will be released to MilePoint in four
unequal tranches over two years. To date, professional fees of approximately
$200,000 and payments for transition services of $286,385 have been incurred in
the transaction and have been capitalized as goodwill. A portion of the
Acquisition Payable (short term and long term) are interest free and discounted
at the appropriate current market rate. The total discount of $50,000 will be
charged to interest expense over the life of the Acquisition Payable.
Points' business objective in acquiring the assets of MilePoint was to increase
its volume of business at minimal additional costs outside of the purchase price
and transition costs. Management expects that the acquisition will increase
revenues and, including all amortizations, be accretive to net income by the end
of 2004. It is expected that the revenue/cash flow from the acquired assets will
be sufficient to pay the cash portion of the purchase price over the 24-month
period following the acquisition.
Management believes that the Corporation's established facilities and existing
employees, working in conjunction with MilePoint resources retained during the
transition period, will be sufficient to sustain the additional volume of
business from the acquired assets.
The impact of the acquisition to Points' balance sheet in 2004 will be to
increase intangible assets by $3,675,000 and goodwill by $3,975,000. The
amortization of the assets is based on the estimated life of the acquired assets
(i.e., the partner contracts).
The amortization and the balance of the purchased intangible assets are
approximately as follows:
ANNUAL AMOUNT IN ($000'S) 2004
- ------------------------- ------
Amortization Expense $ 535
Intangible Asset - Closing Balance 3,140
Goodwill 4,261
Page 25 of 29
In addition to the existing revenue streams acquired from MilePoint, offering
Points Solutions to the customers acquired from MilePoint represents a
potentially valuable stream of revenue.
As with any acquisition, the smooth transition into the Corporation's operations
poses challenges. Transition risks include difficulties in integrating
MilePoint's business into the Corporation's and the possibility of human
resources capacity limits to launch additional new partners during the
transition.
The payment of the purchase price under the terms of the MilePoint Acquisition
is as follows:
Months from Closing
----------------------------------------------
Payout (000's) 0 4 6 12 18 24 SHARES CASH
- -------------- ------ ------ ---- ---- ------ ----- ------ ------
Cash $1,900 $ -- $400 $400 $ 400 $400 $3,500
Shares -- 1,300 -- 700 1,500 500 4,000
Share Value(1) -- 1,300 -- 700 1,500 500 4,000
------ ------ ---- ---- ------ ---- ----- ------
TOTAL 4,000 $7,500
===== ======
Note:
(1) Based on the simple 20-day weighted average Common Share price of $1.00 per
share at signing.
In 2004, the Corporation paid $1.9 million on April 1 and is required to pay
$400,000 on September 30 in cash in partial satisfaction of the purchase price
for MilePoint's business. In addition, MilePoint and the Corporation are party
to a Transition Services Agreement ("TSA") whereby MilePoint employees and
resources will continue to support the products and partner relationships
throughout 2004. Under the TSA, the Corporation has agreed to reimburse
MilePoint for expenses incurred in providing transition services, to a maximum
of US$417,000 (of which C$286,385 or US$212,137 has been paid to date). Points
has also entered into two consulting agreements with MilePoint and the senior
business development principals at MilePoint. The two consultants will be
focused on supporting existing relationships and selling Points Solutions to
existing and new partners.
Management of Points expects that the cash cost of the MilePoint Acquisition
will largely be recaptured through the new revenue provided by the purchased
assets over the 24-month period following March 31, 2004.
Commitments Related to Lease Financing Arrangements
While the Corporation has completed its capital lease obligations in 2003,
several operating leases for hardware and premises remain outstanding.
The Corporation's lease on its current premises will expire in February 2005.
The Corporation has signed a 45-month sublease agreement and has moved to
significantly larger facilities during the second quarter of 2004 to accommodate
the increase in employees. In 2004, the Corporation will be paying approximately
$226,000 for its former office facilities and $190,000 for its new, current
office facilities. Property lease costs are outlined in the table below.
Beginning June 1, 2004, the Corporation was able to complete a sublet
arrangement for a portion of the former premises. The sublet covers
approximately 25% of the cost of the premises, which expires in February 2005.
Page 26 of 29
The projected figures do not include leasehold improvement amounts for Points'
new facilities. Leasehold improvements for the new facilities are included in
2004 capital expenditures (see "Planned Capital Expenditures" below). The
operating leases primarily relate to specific office technology and technology
service commitments.
ANNUAL AMOUNTS IN ($000'S) 2008 2007 2006 2005 2004
- -------------------------- ---- ---- ---- ---- ------
OPERATING LEASES $ 96 $384 $401 $418 $ 346
Property lease
Technology services
commitment 11 11 11 85 912
OPERATING LEASES TOTAL 107 396 412 502 1,258
---- ---- ---- ---- ------
CAPITAL LEASES TOTAL $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ======
CAPITAL RESOURCES
PLANNED CAPITAL EXPENDITURES
In the second quarter of 2004, the Corporation incurred significant costs in
connection with its move to new facilities. Management expects that leasehold
improvements and furniture for the new premises will cost approximately between
$600,000 and $700,000.
For the three months ended For the six months ended
----------------------------- ------------------------
JUNE 30 MARCH 31 JUNE 30 JUNE 30 JUNE 30
CAPITAL EXPENDITURES AS AT 2004 2004 2003 2004 2003
- -------------------------- -------- -------- ------- -------- --------
Leasehold Improvements $305,158 $158,248 $ -- $463,406 $ --
Computer Hardware, Software and Other 234,673 53,416 41,764 288,089 $121,865
-------- -------- ------- -------- --------
TOTAL $539,831 $211,664 $41,764 $751,495 $121,865
======== ======== ======= ======== ========
The Corporation expects to increase its capital expenditures related to computer
hardware and software to approximately $670,000; a 186% increase over 2003.
Expected software expenditures include: licenses ($70,000), marketing tools
($135,000), upgrades to internal reporting tools ($215,000) and development
tools ($60,000). Management believes that the hardware and software capital
expenditures are necessary to keep the development of the Corporation's primary
technology assets in line with industry standards.
Management will continue to fund 2004 capital expenditures from its working
capital.
UNPLANNED SECURITIES ISSUANCES
Pursuant to the terms of the Debenture, the Investor's Rights Agreement dated
April 11, 2003 between IAC, Points and an affiliate of IAC and the terms of the
Series Two Preferred Share, IAC and CIBC Capital Partners have significant
control over the Corporation's ability to raise capital whether by way of an
equity issuance or the incurrence of debt. However, in the event the Corporation
requires additional capital, it does not expect that any required consents would
Page 27 of 29
be unreasonably withheld. Based on expected revenue and available resources,
Points does not expect to require any additional equity financing to facilitate
growth of the business or current operations.
Outstanding Share Data
As at the date hereof, the Corporation has 68,806,275 Common Shares outstanding,
one Series One Preferred Share and one Series Two Preferred Share. The Series
One Preferred Share is convertible into one Common Share in certain
circumstances. Subject to anti-dilution adjustment, based on Points' current
capitalization, the Series Two Preferred Share is convertible into 21,855,791
Common Shares.
The Corporation has outstanding options exercisable to acquire up to 5,629,238
Common Shares. The options have exercise prices ranging from $0.20 to $1.37 with
a weighted average exercise price of $0.68. The expiration dates of the options
range from March 22, 2004 to April 21, 2009.
The Corporation's subsidiary, Points.com, has outstanding options exercisable to
acquire up to 2,708,099 common shares of Points.com. The holders of these
options have been granted the right to put the shares acquired on the exercise
thereof to the Corporation in return for Common Shares with a fair market value
equal to the fair market value so put. The Corporation has used a ratio of
2.5039 Common Shares to one Points.com share for this purpose and has authorized
the issuance of up to a maximum of 6,780,806 Common Shares in this regard. The
Points.com options have exercise prices ranging from $0.005 to $0.055 with a
weighted average exercise price of $0.04. The expiration dates of the options
range from February 17, 2005 to September 1, 2005.
The Corporation has outstanding warrants exercisable to acquire up to 83,409,528
Common Shares. The warrants have exercise prices ranging from $0.25 to $1.02
with a weighted average exercise price of $1.00. The expiration dates of the
options range from October 21, 2004 to April 11, 2006.
The Corporation has outstanding an 11% $6,000,000 senior secured convertible
Debenture which is convertible into 18,908,070 Common Shares. The Debenture is
not convertible for the period that the Warrants are outstanding. At the option
of the Debenture holder, the maturity of the Debenture is extendible for up to
three additional one-year periods. Assuming the Warrants have not been exercised
and the Debenture matures on March 15, 2005, the Corporation will be required to
repay $6 million of principal and $3,108,422 of accrued interest. It is possible
that the repayment of $9,108,422 million of principal and accrued interest will
cause the Corporation to be in a negative working capital position, may
materially threaten its solvency and/or may severely restrict the ability to
grow its business. There is no certainty that the Corporation would have
sufficient cash at such time to make the repayment.
Page 28 of 29
Selected Financial Results and Highlights
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------ ---------------------------
INCOME STATEMENT JUN 30, 2004 MAR 31, 2004 JUN 30, 2003 JUN 30, 2004 JUN 30, 2003
- ---------------- ------------ ------------ ------------ ------------ ------------
Revenue $ 2,032,136 $ 1,617,565 $ 1,457,568 $ 3,649,700 $ 2,761,761
General and administrative expenses 3,098,792 $ 2,650,957 1,710,455 5,749,749 3,217,177
Loss before interest, amortization and other (1,066,656) (1,033,392) (252,888) (2,100,048) (455,416)
and other deductions
Net income (loss) (2,153,069) $(1,901,594) (1,283,337) (4,054,663) (2,301,825)
Net income (loss) per share
- basic ($0.03) ($0.03) ($0.02) ($0.06) ($0.04)
- fully diluted n/a n/a n/a n/a n/a
BALANCE SHEET AS AT JUN 30, 2004 MAR 31, 2004 DEC 31,2003 JUN 30, 2003
- ------------------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 18,427,174 $24,243,231 $ 20,274,836 $ 24,396,879
Total assets(1) $ 34,063,056 38,997,588 27,481,286 30,507,645
Long-term liabilities 22,692,655 22,249,996 21,060,850 20,102,978
CASH DIVIDENDS DECLARED PER SHARE -- -- -- --
SHAREHOLDERS EQUITY
- warrants 2,759,390 2,766,610 2,785,737 2,805,308
- capital stock 21,983,696 21,948,908 17,728,461 15,371,255
- retained earnings (29,791,670) (27,638,601) (25,737,007) (21,502,640)
------------ ------------ ------------ ------------
TOTAL $ (5,048,584) $ (2,923,084) $ (5,222,809) $ (3,326,076)
============ ============ ============ ============
Note:
(1) Financial results from minority holdings are not consolidated into the
Corporation's consolidated financial statements, as the Corporation does
not exercise control in these entities.
POINTS INTERNATIONAL LTD.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED REVENUE NET LOSS LOSS PER SHARE(1)
- ------------- ---------- ----------- -----------------
June 30, 2004 $2,032,136 ($2,153,069) ($0.03)
March 31, 2004 $1,617,565 ($1,901,594) ($0.03)
December 31, 2003 $1,449,378 ($2,605,974) ($0.04)
September 30, 2003 $1,647,566 ($1,628,391) ($0.03)
June 30, 2003 $1,457,568 ($1,283,337) ($0.02)
March 31, 2003 $1,304,192 ($1,018,489) ($0.02)
December 31, 2002 $ 911,940 ($1,762,000) ($0.03)
September 30, 2002 $ 729,467 ($1,725,072) ($0.03)
Note: (1) The fully diluted loss per share has not been computed, as the effect
would be anti-dilutive.
Page 29 of 29
FORM 52-109FT2 - CERTIFICATION OF INTERIM FILINGS
DURING TRANSITION PERIOD
I, T. Robert MacLean, Chief Executive Officer of Points International
Ltd., certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Points International Ltd., (the issuer) for
the interim period ending June 30, 2004;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 9 day of August, 2004.
[original signature]
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T. Robert MacLean
Chief Executive Officer
FORM 52-109FT2 - CERTIFICATION OF INTERIM FILINGS
DURING TRANSITION PERIOD
I, Stephen Yuzpe, Chief Financial Officer of Points International
Ltd., certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Points International Ltd., (the issuer) for
the interim period ending June 30, 2004;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 9 day of August, 2004.
[original signature]
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Stephen Yuzpe
Chief Financial Officer