Exhibit 99.4
(GRAPHIC)
Points International Ltd.
2003 Annual Report
(POINTS INTERNATIONAL LTD LOGO)
Points operates the leading loyalty program currency exchange, located at
www.points.com. Now, consumers can exchange their loyalty points and miles to
earn the rewards they want - faster than ever before. Points also offers a suite
of private branded solutions for its loyalty program partners.
(GRAPHIC)
More About Points International Ltd. and the Points Solutions
Points International Ltd. (herein referred to as "Points" or the
"Corporations") 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 December 31, 2003, the Points Exchange had attracted 35 loyalty
program participants (39 as at the date hereof), 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.
For more information, visit us online at www.points.com.
Table of Contents
(GRAPHIC)
MESSAGE FROM CHAIRMAN AND CEO ............................................. 4
CORPORATE HIGHLIGHTS ...................................................... 6
MANAGEMENT TEAM ........................................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS ...................................... 10
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING ....................... 38
FINANCIAL STATEMENTS AND NOTES ............................................ 40
AUDITORS'REPORT ........................................................... 42
CORPORATE INFORMATION ..................................................... 68
3
(GRAPHIC)
Message from
Chairman and CEO
The year 2003 has been an impressive one for Points - with the development of
major partnerships and corporate relationships among our most important
achievements. Through 2003 and into early 2004, the Points team launched and
enhanced a number of vital relationships with the world's leading loyalty
players, including American Airlines, eBay and many others.
In addition, 2004 got off to an exciting start when, on March 11, 2004, Points
announced the acquisition of the assets of MilePoint. Through this transaction,
we look forward to further developing relationships with its major loyalty
program partners, including Northwest Airlines, Delta Air Lines and Starwood
Hotels & Resorts.
When MilePoint's partners and our dynamic partner base are combined, the
prospects for the suite of Points Solutions, particularly our key focus - the
Points Exchange - are truly impressive. To date, billions of points and miles
have been exchanged, sold and transferred, and we look forward to accelerating
our growth through 2004 and beyond.
In 2003, Points entered into an important strategic partnership with
InterActiveCorp ("IAC"), the leading online travel and retail player. This
transaction closed during the second quarter of 2003, raising $15.1 million. We
believe that the relationship with IAC gives Points the momentum and resources
to capitalize on opportunities in the growing loyalty industry. In addition,
Points believes that there are interesting revenue opportunities presented
within the IAC group of companies and their numerous partners in the travel,
retail, ticketing, personals, local services and financial services. As Points
builds initiatives with a number of IAC properties, the team is also in a strong
position to develop relationships with the important industry players currently
partnering with IAC properties. The unique suite of Points Solutions, combined
with the strengths of the IAC group, provides a foundation for business
development opportunities.
It is also important to highlight a new multi-year agreement with cornerstone
partner the American Airlines Aadvantage program, the world's largest loyalty
program. The additional commitment of the AAdvantage program offers significant
growth potential for Points, extending a number of existing short-term
agreements through 2007, including those for the Points Exchange solution, along
with other Points Solutions including POINTSpurchase, POINTStransfer and
POINTSelite.
An exciting new relationship was commenced in 2003 with eBay, the "World's
Online Marketplace". Points invested significant resources and effort to build
and launch several critical solutions for the eBay Anything Points(TM) program -
eBay's new loyalty program. These solutions, along with participation in the
Points Exchange, have provided the early basis for a great long-term
relationship. In fact, what excites management about the future with eBay is
that every eBay Anything Point that is exchanged, sold or earned moves through
Points' technology platform.
During 2003, Points enhanced the points.com site to increase customer usability.
The initial feedback has been very positive and management will continue to
enhance the customer experience through 2004.
While Points'board of directors has remained relatively consistent over the past
few years, we had the opportunity to welcome two new members in 2003 - Erik
Blachford and Eric Korman. We would like to take this opportunity to thank Erik
Blachford for his contribution to the board of directors in the past year. Erik
leaves Points to accept additional responsibilities within the IAC group of
companies. We wish Erik well in his expanded role within IAC.
Dan Marriott will be replacing Erik as one of the two board nominees from IAC.
Dan, currently the Senior Vice President, Interactive Development, at IAC brings
a wealth of online experience to Points. Prior to directly joining IAC, Dan held
a senior role at IAC affiliate Ticketmaster, the world's leading ticketing
company.
The Points team continues to achieve extraordinary results, capitalizing on
important opportunities in a growing industry. On behalf of the Points' board of
directors, we recognize this impressive contribution and thank all Points
employees.
The year ahead holds much promise. We look forward to continued revenue growth
and exciting new partnerships. Around the globe, the opportunities for Points
continue to abound.
/s/ Douglas Carty /s/ Robert MacLean
- ------------------------------------- ----------------------------------------
Douglas Carty Robert MacLean
Chairman Chief Executive Officer
April 22, 2004
5
(GRAPHIC)
Corporate Highlights
HIGHLIGHTS
April 2004
- Starbucks, the leading retailer, roaster and brand of specialty coffee
in the world, joins the Points Exchange.
- S&H greenpoints(R), the digital reincarnation of S&H Green Stamps, the
most successful loyalty program in history, also joins the Points
Exchange.
- Points reaches commercial agreement with IAC affiliate Interval
International.
- Launched renewal functionality on the Points Exchange including the
addition of PAY WITH POINTS technology allowing members to perform
exchanges and renew their membership using loyalty miles and points.
March 2004
- Points announces and completes the acquisition of the assets of
MilePoint.
- Points celebrates over 3 billion points and miles exchanged through
the Points Exchange.
- Implemented large-scale, back-end architecture enhancements to the
Points Exchange; setting the stage for cost effective growth, enhanced
security and future development efficiencies.
- US Airways(R) joins the Points Exchange.
February 2004
- Points re-launches POINTSelite solution for American Airlines.
- Points shares graduate to trading on the TSX.
January 2004
- Points receives conditional TSX listing approval.
- Points partners with Scandinavian Airlines Systems (SAS), enabling
EuroBonus members to buy points online.
- Points launches POINTSgift, the second product for Lufthansa.
December 2003
- Focused on merchandising 3,600 available exchange options with the
launch of a redesigned look and feel, navigation and brand on the
Points Exchange.
- IAC affiliate ReserveAmerica joins the Points Exchange.
- Points reaches an agreement with Hbc; Points will deliver
POINTScorporate solution, powering the sale of Hbc Rewards to
corporate partners.
- New relationship between Marriott International Inc. and Points
begins. Agreement allows members to exchange their loyalty program
miles and points into Marriott TravelCards(sm).
November 2003
- Points is selected by eBay as vendor for new loyalty initiative; eBay
Anything Points(TM) "Offer Manager" powered by Points.
- Points and Vesdia Corp. sign exclusive multi-year agreement. U.S.
residents are now allowed to convert points and miles into college and
retirement savings.
- Optimized the customer experience on the Points Exchange with the
implementation of a guided 3-step process for completion of exchanges.
September 2003
- Points and American Airlines expand their relationship with a
comprehensive multi-year agreement. The agreement significantly
enhances the commercial relationship for both parties.
- Supported an enhanced member acquisition strategy with deployment of a
simplified one-page enrolment process on the Points Exchange.
August 2003
- Points and eBay execute an additional commercial agreement to enhance
eBay's Anything Points(TM) program and select Points as the key vendor
in supplying technology and services to eBay's program. The agreement
engages Points to develop and power new functionality for eBay
Anything Points that will enable sellers to offer points to buyers.
The Offer Manager will allow eBay sellers to issue eBay Anything
Points to buyers who purchase their goods and services on eBay.
- Ramada(R) selects Points technology for its TripRewards program.
June 2003
- Points welcomes board members Erik Blachford and Eric Korman from
InterActiveCorp.
May 2003
- Implemented a major initiative to re-launch the Points Exchange with a
focus on usability and functionality enhancements.
- Points and eBay form a strategic relationship to launch eBay's new
Anything Points(TM) program.
April 2003
- POINTSpurchase solution is launched for Lufthansa. Points welcomes
this relationship with its first European partner.
- Points and InterActiveCorp ("IAC") close $15.1 million strategic
investment. IAC acquires a 19.9% stake in Points, able to acquire 55%
within three years (as of the date hereof, approximately two years
remain in the term of the warrant and the investment would require an
additional investment of $82.4 million to $91.6 million by IAC into
Points).
- Spiegel Incentives joins the Points Exchange; adds new retail option.
- Points and InterContinental Hotels launch a suite of Points Solutions.
Points powers the online sale of Priority Club(R) Rewards member
benefits, along with other enhancements.
March 2003
- Points celebrates over a billion points and miles transacted.
- Points welcomes new board member Christopher Payne of CIBC Capital
Partners.
February 2003
- eBay enters into an agreement with Points. Points celebrates exciting
new relationship, with work underway to develop a number of solutions
for eBay.
7
(GRAPHIC)
Management Team
ROBERT MACLEAN, Chief Executive Officer: Mr. MacLean has served as Chief
Executive Officer of Points since February 2000, and is a member of the
Corporation's board of directors. A founder of the organization, Rob champions
the vision for this revolutionary business and directs an exceptional team of
senior managers delivering impressive results. Previously, Rob held a variety of
positions with major airlines in Canada over a 12-year period, most recently as
Vice President, Sales with Canadian Airlines, with responsibility for the
Canadian Plus loyalty program.
CHRISTOPHER BARNARD, President: Mr. Barnard serves as President of Points, and
has been an officer of the Corporation since co-founding its predecessor,
Exclamation International Incorporated, in 1998. In this role, Christopher leads
financing and investment initiatives for the company and plays a key role in
guiding business strategy and the development of new partnerships.
STEPHEN YUZPE, Chief Financial Officer and Corporate Secretary: Mr. Yuzpe joined
the Corporation's predecessor, Exclamation International Incorporated, in
February 1999.As CFO, Stephen is responsible for managing the company's
financial well-being and guiding the growth of the business. He plays a critical
leadership role, overseeing accounting, legal, regulatory affairs, investor
relations and operations for the organization. In this capacity, he manages
relationships with a number of outside professional firms, including auditors
and external legal counsel.
DARLENE HIGBEE CLARKIN, Chief Technology Officer & Vice President: Ms. Higbee
Clarkin leads the ongoing development of Points web application and partner
integration and is responsible for Points' technology planning. Darlene directs
a highly skilled group of IT professionals to integrate new partnerships, to
support the Points Solutions web applications and to research and implement
future development. Darlene brings over 18 years of loyalty program and
information technology experience to Points.
GRAD CONN, Chief Marketing Officer: The Corporation was pleased to announce the
hiring of Grad Conn, Chief Marketing Officer, in May 2004. Grad will be
responsible for building a world-class marketing organization at Points. Grad's
20-year history in marketing includes nine years at Procter & Gamble, and most
recently as Vice President, Managing Director for Grey Direct + Interactive.
Grad also has a strong entrepreneurial background which includes CEO and Founder
of OpenCola Inc., which was declared by Fortune magazine to be "one of the 25
coolest technology companies of 2001".
WILLIAM THOMPSON, Senior Vice President, Partners: Bill Thompson joined Points
in August 2000. Based in Dallas, Texas, he leads the business development team
and is responsible for developing and managing loyalty program relationships for
all Points partners. Bill brings the depth of more than 30 years of industry
experience, and was previously a managing director with American Airlines.
MORLEY IVERS, Vice President, Business Strategy: In the role of Vice President,
Business Strategy, Mr. Ivers is responsible for developing strategies and
implementing solutions and key partnerships for many areas of the organization.
Since joining the team in April 2001, Morley has successfully identified,
developed and executed a number of strategic relationships for Points, including
those with eBay Inc. and Sabre Airline Solutions. He is currently focused on
establishing partnerships with industry-leading organizations in several
business verticals. Mr. Ivers is a graduate of The Richard Ivey School of
Business.
STEVE OGDEN, Vice President, Product Development: As Vice President of Product
Development and one of the original Points founders, Steve Ogden is responsible
for the design and implementation of the company's suite of custom technology
products. A strong professional asset to Points, Steve contributes 16 years of
product development, marketing, communications and loyalty program experience in
the dynamic and highly competitive airline industry.
JERRY PHILIP, Vice President, Business Development: Jerry Philip joined Points
in March 2000 as one of the original Points founders, and holds the position of
Vice President, Business Development. A 15-year veteran of the airline industry,
Mr. Philip supports business development for Points and plays a key role in
acquiring and managing partner relationships. Before joining Points, Jerry spent
more than 10 years with Canadian Airlines, most recently in the position of
Manager, Incentive Programs.
CHRISTINE VANDAELE, Vice President, Consumer Marketing: As the Vice President,
Consumer Marketing, Ms. Vandaele is responsible for strategic direction and
operations in the areas of product development, direct marketing, partner
marketing and public relations. Ms. Vandaele contributes over eight years of
experience in the areas of loyalty marketing and finance, specializing in
product development, pricing, financial modeling and supplier negotiations.
Prior to joining Points, she was a divisional controller at Canadian Airlines
and more recently, at Points, she headed up the business planning area.
Ms. Vandaele holds an MBA from Simon Fraser University.
IAIN WEBSTER, Vice President, Europe, the Middle East & Africa (U.K.
subsidiary): Iain Webster joined Points in June 2002, driving the expansion of
Points Solutions across key overseas markets. Based in London, England, Iain
works closely with Points distribution partner Sabre to accelerate business
development in these markets. Iain is a highly experienced loyalty-marketing
manager with a 25-year background in the global travel industry and new
technologies.
9
(GRAPHIC)
Management's
Discussion and
Analysis
The following management's discussion and analysis ("MD&A") of the performance,
financial condition and future prospects of Points should be read in conjunction
with the Corporation's audited consolidated financial statements (including the
notes thereon) for the year ended December 31, 2003. 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 April 22, 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.
Responsibility of Management
The preparation of the financial statements, including the accompanying notes,
is the responsibility of management. Management has the responsibility for
selecting the accounting policies used in preparing the financial statements. In
addition, management's judgement is required in preparing estimates contained in
the financial statements.
Management acknowledges their responsibility in their letter of representation
to the Corporation's Auditors, and this responsibility is referred to in the
audit opinion.
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
11
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 December 31, 2003, the Points Exchange had attracted 35 loyalty program
participants (39 as at the date hereof), 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.
Significant Business Developments in 2003 and the First Quarter of 2004
Strategic Investment by InterActiveCorp
On April 11, 2003, InterActiveCorp (formerly USA Interactive) ("IAC") made a
$15.1 million strategic investment (the "IAC Investment") in Points. The
investment was made through a wholly-owned affiliate of IAC, created for this
purpose, which purchased one Series Two Preferred Share and Common Share
purchase warrants. In addition to strategic guidance, Points enjoys cost savings
by being part of IAC's purchasing group. For example, Points receives cost
savings on procurement of computer hardware and software as a direct result of
its association with IAC.
Points believes that there are revenue opportunities available through its
association with the IAC group of companies as it develops or enhances its
individual loyalty strategies. Furthermore, numerous marketing opportunities
exist among the IAC group of companies.
For more information on the investment by IAC, see "Liquidity" below.
Enhanced Relationship with American Airlines
On September 5, 2003 (effective August 27, 2003), Points consummated an
agreement (the "Alignment Agreement") with American Airlines, Inc. ("American
Airlines") which significantly enhanced the commercial relationship between the
parties. Under the alignment agreement, certain contracts between the parties
were extended for five years. In addition, Points acquired from American
Airlines outstanding warrants and warrant acquisition rights exercisable to
acquire up to 4,827,255 common shares of Points' subsidiary Points.com
Inc. ("Points.com"). American Airlines, through its AAdvantage program, has been
and continues to be Points' most important business partner.
New Strategic Relationship with eBay
In 2003, Points developed a significant relationship with online leader eBay
Inc. ("eBay"). Under this relationship, eBay's Anything Points ("EAP") program
became an anchor Points Exchange partner, and Points implemented a number of
Points Solutions to power core elements of the EAP program, including
POINTSintegrate. In addition, in August 2003, eBay selected
Points to develop and operate a POINTScustom product, the "Offer Manager", for
their EAP program. The Offer Manager allows eBay sellers to issue EAPs to buyers
who purchase their goods and services on eBay.
In March 2004, Points and eBay agreed to continue eBay's participation on the
Points Exchange through at least December 2005 and eBay made Points the
exclusive exchange vehicle for all airline, hotel, car rental and major online
loyalty programs participating with eBay's EAP program.
Toronto Stock Exchange Listing
On February 24, 2004, Points' Common Shares were listed for trading on the
Toronto Stock Exchange under the symbol "PTS". The Corporation's Common Shares
ceased to trade on the TSX Venture Exchange at the close of trading on February
23, 2004.
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.
In 2003, MilePoint had unaudited earned revenue of $2.2 million and was slightly
profitable. Points expects to realize significant operating synergies by
integrating MilePoint's products into Points' operations. Management expects
that most of the synergies will be achieved by the end of 2004.
For further information on the MilePoint Acquisition, see "Results of
Operations" below.
Revenue Recognition Policies
The revenue recognition policies for the Points Solutions are as follows:
Points Exchange:
- Revenues from transaction processing 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).
- Exchange commissions are a percentage of the exchanged value.
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.
13
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 which 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 15 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 16 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 19 hereof.
Results of Operations - Revenues
Overview
2003 2002 2001
---------- ---------- ----------
Points operations $5,502,744 $2,308,846 $ 686,194
Revenue from other sources(1) -- -- 112,033
Interest and other revenue 355,960 59,446 207,744
TOTAL REVENUE $5,858,704 $2,368,392 $1,005,971
Note: (1) In 2001, prior to restructuring, a subsidiary of the Corporation
recognized revenues of $89,035 attributed to "appreciation on dilution of
investment" and $22,998 attributed to "consulting".
Total revenue increased from $2,368,392 in 2002 to $5,858,704 in 2003, an
increase of 147%. The increase in revenue in 2002 relative to 2001 was 135%. The
provision of Points Solutions accounted for approximately 94% of the revenues in
2003 ($5,502,744). Interest income accounted for the remaining 6% of the
Corporation's revenues.
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 two 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.
For the year ended December 31, 2003, two key customers represented
approximately 61% (2002 - 77%) of the Corporation's gross revenues and two key
customers represented approximately 58% (2002 - 91%) of the Corporation's
deposits. Management expects the economic dependence on key customers to
continue on a downward trend.
Management recognizes that the Corporation must achieve profitability through
revenue growth and cost management. By
2005, management expects that Points' revenues will exceed its general and
administrative expenses.
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 on-going 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.
Partner Summary - Total Number of Partners(1) 2003 2002 2001
- --------------------------------------------- ----- ---- ----
Points Exchange 35 25 13
Private Branded Solutions 12 6 3
Cumulative Miles Transacted (000,000's) 3,027 977 100
Notes: (1) Partners may be included in both the Private Branded Solutions and
the Points Exchange.
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. The Corporation has been focused on website
usability and other enhancements throughout 2002 and 2003. In particular, 2003
saw numerous important product enhancements to the Points Exchange, including
three version releases enhancing website usability and the addition and
implementation of email promotions, off-line databases, and message centre
tools. In 2004, Points expects to release further website enhancements and
expand its marketing promotions and programs to accelerate growth of the Points
Exchange.
Growth in activity on the Points Exchange is heavily affected by partner
activity. The number of loyalty program participants, their industry mix and the
average ratio of loyalty currency exchanged to new loyalty currency issued (the
"Trade Ratio"), which has been steadily improving, are important elements in the
growth of the Points Exchange. Points continues to focus its business
development efforts on adding the optimal partners according to size and
industry to the Points Exchange, and has been and will continue to work with
existing program participants to improve the Trade Ratio. Management expects to
continue to see successes in these areas in 2004. The number of trades completed
on the Points Exchange has grown year over year and management expects this
trend to continue.
Points Exchange METRICS DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2001
- ----------------------- ------------- ------------- -------------
Total Loyalty Programs 35 25 13
Trade Ratio(1) 1.68 to 1 1.94 to 1 2.58 to 1
Year over Year Growth in Total Trades (%) 279 230 n/a
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 fiscal year.
15
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.
Private Branded Solution METRICS DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2001
- -------------------------------- ------------- ------------- -------------
Total Unique Partners 12 6 3
Total Private Branded Solutions 30 17 6
Product Summary - Total Number of Private Branded Solutions
Private Branded Solutions(1) 2003 2002 2001
- ---------------------------- ---- ---- ----
POINTSpurchase 9 6 3
POINTSgift 8 6 3
POINTStransfer 2 1 0
POINTScorporate 4 2 0
POINTSelite 2 1 0
POINTScustom 2 0 0
POINTSintegrate partners(2) 3 1 0
TOTAL PRIVATE BRANDED SOLUTIONS 30 17 6
Notes: (1) Includes products sold to new and existing customers.(2) Each
POINTSintegrate partner will have third parties integrated into their technology
platform. There are 14 existing partner integration add-ons among the three
POINTSintegrate partners.
Sources of Revenue Growth
Approximately 94% 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.
% of Revenues From: 2004 (PROJECTED) 2003 (ACTUAL) 2002 (ACTUAL)
- ------------------- ---------------- ------------- -------------
Organic growth of existing Points Solutions(1) 73% 66% 63%
New contracted Points Solutions with new and
existing partners 27% 34% 37%
TOTAL 100% 100% 100%
Note: (1) Includes MilePoint solutions placed with partners acquired from
MilePoint.
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 66% of revenues in
2003. Revenue from organic growth grew by 150%, from $1.45 million in 2002 to
$3.6 million in 2003. Management expects this trend to continue as the base of
existing products continues to grow.
New Contracted Points Solutions
Selling new 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.
Revenue from the sale of new Points Solutions grew by 119%, from $845,000 in
2002 to $1.9 million in 2003. Revenue growth was attributed to growth in both
the number of partners participating on the Points Exchange and the number of
Private Branded Solutions placed with existing and new partners. Points sold new
Private Branded Solutions products to six new loyalty program partners in 2003,
doubling its unique partnership base for the sale of these products (in
particular, Points deployed three new POINTSpurchase products, two new
POINTSgift products, one POINTStransfer product, two new POINTScorporate
products, one POINTSelite product, two POINTScustom products and two new
POINTSintegrate products with 14 add-on integrations). In addition, 10 new
loyalty program partners were added to the Points Exchange during 2003.
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 to sales to
new partners. Management is focused 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 income of $355,960 in 2003, compared with
$59,446 in 2002. The major factor resulting in higher interest income is the
growth in the Corporation's cash reserves. Interest revenue is a function of the
Corporation's cash balances and the prevailing interest rates. Canadian cash
reserves are invested in a combination of short-term liquid assets and
short-term bonds. The bond portfolio has a duration of less than three years and
yield over 3%. Foreign currency continues
17
to be invested in short-term and money market instruments. Points' cash and
short-term investments are valued quarterly at the lower of cost and market
value. As Points' business continues to grow, cash reserves and related interest
income are also expected to increase, although this growth is not expected to be
a material portion of the Corporation's revenue going forward. Interest rates
will continue to influence interest earnings. The Corporation's bond portfolio
is exposed to financial risk that arises from the credit quality of the
underlying bond issuers. The Corporation seeks to mitigate the credit risk by
diversifying its bond holdings and only investing in securities with a credit
rating of "A" or higher.
A summary of the Corporation's investments is as follows:
US$ OTHER
YIELD (%) CREDIT RATING C$ TOTAL DENOMINATED DENOMINATED
--------- ------------- ----------- ----------- -----------
Cash held at bank(1) 0.78 n/a $10,651,461 $6,938,320 534,303
Money market securities 2.44(2) R1 - High 41,620 n/a n/a
Bonds(3) 4.46 A - AAA 9,581,755 n/a n/a
TOTAL $20,274,836 $6,938,320 534,303
Notes:(1) C$ 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 December 31,
2003. (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 US
dollar-based revenue will not decrease significantly in 2004.
Approximately 61% of the Corporation's expenses are in Canadian dollars, 37% are
U.S. dollar-based and 2% 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.
As the following table highlights, the Canadian dollar strengthened in 2003,
which had a material, negative impact on the translation of the Corporation's
U.S. dollar revenues. Compared to 2002, the Canadian-based revenue growth was
reduced by 11.2% relative to U.S. - dollar revenue growth in 2003. In dollar
terms, Points revenue would have been approximately $6,512,000 (actual revenues
for 2003 were $5,858,704, a difference of approximately $655,000) had FX Rates
in 2003 been the same as the rates in 2002. U.S. dollar expenses and commitments
were also reduced by 4.7% due to the strengthening Canadian dollar. In dollar
terms, Points' general and administrative expenses would have been approximately
$8,409,000 (actual expenses for 2003 were $8,029,471, a difference of
approximately $380,000) had FX Rates in 2003 been the same as the rates in 2002.
In summary, the strengthening Canadian dollar increased Points'net loss in 2003
by approximately $275,000 or 4%.
The Corporation's revenue growth will slow (in Canadian dollar terms) if the
Canadian dollar continues its trend of strengthening relative to the U.S.
dollar. Similarly, it is expected that Points' expenses should also decrease,
dampening the negative impact to net income.
U.S. - CANADIAN FX RATES 2003 2002 2001
- ------------------------ ----- ----- -----
Year Start 1.573 1.592 1.499
Year End 1.295 1.577 1.591
Year Average 1.401 1.570 1.549
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 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 16% in 2003. This increase reflects
the cost of expanding operations, including the launch of a number of Private
Branded Solutions to new and existing customers. The Corporation continues to
make significant expenditures for its technology, its technological expertise
and its industry expertise, in order to have the appropriate infrastructure and
personnel required to deal with large, established companies. The Corporation's
investment in the above areas was critical in completing its commercial
agreements with its strategic partners (for example, American Airlines, eBay and
IAC). In the past two years, there has been little inflationary pressure on
costs. Management expects that, while unlikely in 2004, inflation may be a
factor in 2005 and beyond. The Corporation will manage its expenses accordingly,
should inflation in technology-related costs (employment expenses, technology
services, etc.) occur again, as it did in 1998 to 2000.
As the Corporation is still in the process of enhancing and maintaining its
technology and increasing loyalty program participation in and sales of the
Points Solutions, significant resources continue to be required. While
management has made
19
controlling costs a priority, costs are expected to rise in 2004 by more than
the increase in 2003 over 2002, as the Corporation continues 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 and begin the
transition associated with assimilating the business of MilePoint.
A significant percentage of the planned expense increases in 2004 are either
discretionary or variable. Points 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.
A summary of the Corporation's general and administrative expenses are as
follows:
GENERAL AND ADMINISTRATIVE EXPENSES 2003 2002 2001
- ----------------------------------- ---------- ---------- ----------
Employment Costs(1) $5,186,899 $4,004,093 $3,132,263
Technology Services(2) 803,222 1,042,427 1,279,624
Marketing and Communications 386,512 120,861 872,057
Other(3) 1,652,838 1,773,688 884,539
TOTAL $8,029,471 $6,941,069 $6,168,483
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 interest expenses. (3) Other expenses include foreign
exchange losses (or gains), sales commissions and related expenses, travel
expenses, professional fees, insurance, office rent and expenses and regulatory
expenses.
Employment Costs
As at December 31, 2003, Points had 64 employees. As at March 31, 2004, Points
had 68 full-time employees.
2003 2002
---------------------- ----------------------
HEADCOUNT % OF TOTAL HEADCOUNT % TO TOTAL
--------- ---------- --------- ----------
Technology Group 41 64 26 70
Finance 10 16 2 5
Business Development 8 13 7 19
Marketing 5 8 2 5
TOTAL 64 100% 37 100%
The Corporation saw an increase in employment costs in 2003 due predominantly to
growth in its technology group to meet the demand for its Private Branded
Solutions and continued version enhancements of the Points Exchange platform.
Management expects that in 2004 the Corporation will hire additional personnel
in business development, marketing and the technology group. Overall, 2004
employment costs are likely to increase moderately relative to 2003. This
increase is expected to result from new hiring, annualizing the employment costs
of employees hired part way through 2003 and annual salary increases. The
Corporation expects to hire fewer personnel in 2004 than in previous years.
Technology Services
Technology Services expenses increase in increments based on business growth and
product performance. 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 increase in 2004 will be driven by
products launched, loyalty program partners acquired and the speed with which
Points completes the transition of the MilePoint business. As technology
services costs are a function of the number of partners and Points Solutions
products, these costs grow proportionately to revenue growth.
Marketing and Communications
In 2003, external marketing expenditures primarily involved partner media
sources (for example, in-flight magazines, e-mail and newsletter campaigns,
etc.) and/or bonus miles (from the Corporation's prepaid miles - see "Long-term
Liabilities and Commitments" for additional information on prepaid miles)
awarded for purchasing a PointsPlus membership, conducting an exchange or
entering a promotional sweepstakes. Marketing expenses associated with the sale
of PointsPlus memberships are amortized over the term of the membership, while
the other marketing expenditures are recognized in the period of use.
The Corporation expects to significantly 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.
Results of Operations - Operating Efficiency
In 2003, the Corporation experienced 147% revenue growth, improved efficiencies
in employment costs and initiated a very targeted approach to its marketing
expenditures. The Corporation's operating ratio (defined as the ratio of general
and administrative expenses to revenues) has improved by 52% over 2002 and is
expected to continue to improve in 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.
EFFICIENCY MEASURE 2003 2002 2001
- ------------------ ---- ---- ----
Operating Ratio 1.4 2.9 6.1
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.
21
Amortization Expenses
The Corporation recorded amortization expenses of $2,877,321 in 2003, compared
to $2,408,800 in 2002. The increase was attributed to the charges outlined in
the following table:
AMORTIZATION EXPENSE 2004 2003 2002
- -------------------- ---------- ---------- ----------
Deferred costs $ 658,064 $ 531,914 $ 328,763
Intangible assets(1) 1,287,655 756,201 567,150
Property, Plant and Equipment 358,585 1,589,206 1,512,887
TOTAL AMORTIZATION $2,304,304 $2,877,321 $2,408,800
Note: (1) 2004 includes amortization of intangible assets ($3,725,000) acquired
in the MilePoint Acquisition.
Amortization of Deferred Costs
2004 2003 2002 2001
---------- ---------- -------- --------
Annual amortization $ 658,064 $ 531,914 $328,763 $246,572
Closing balance $2,234,646 $2,790,816 $410,954 $739,717
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. Points reports deferred financing charges in connection with the 11%,
$6,000,000 senior secured convertible debenture (the "Debenture") issued to
CIBC Capital Partners as this financial instrument is classified as debt.
The related balance sheet value will be nil at March 31, 2004.
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 37 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 19 amortization periods remaining.
d. The Corporation posted approximately $57,000 in fees in 2003 associated
with the MilePoint Acquisition. These deferred costs and all other fees
associated with MilePoint Acquisition incurred in 2004 will be included as
part of the costs of acquisition.
Amortization of Intangible Assets
2004 2003 2002
---------- ---------- ----------
Annual Amortization(1) $1,287,655 $ 756,201 $ 567,150
Closing balance $3,758,037 $1,320,692 $1,946,539
Note: (1) 2004 includes amortization of intangible assets ($3,725,000) acquired
in the MilePoint Acquisition.
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. Certain intangible assets (i.e., partner
contracts) acquired through the MilePoint Acquisition will be amortized
commencing in 2004 (see "Commitments Related to MilePoint Acquisition" 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.
Amortization of Property, Plant and Equipment
2004 2003 2002
---------- ---------- ----------
Annual amortization $ 358,585 $1,589,206 $1,512,890
Closing balance $1,482,951 $ 513,723 $1,764,199
The following initiatives in 2004 are expected to affect future period plant,
property and equipment amortization expense:
a. Leasehold improvements and furniture and equipment costs are expected to
increase by approximately $517,800 as a result of the move to a new
facility.
b. Technology costs are expected to increase by approximately $811,000 as a
result of the MilePoint Acquisition and organic growth of the Corporation's
existing products.
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" below) 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" below.
Interest on the outstanding principal amount of the Debenture accrues at a rate
of 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.
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) 12,457 12,200 10,991 9,902 8,920 8,036 7,183 6,522
Interest on the Series Two Preferred Share
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 20.9 20.0 19.1 18.2 17.4 16.5 15.6 14.8 13.9 13.0
23
Results of Operations - Earnings and Shareholder Equity
Net Loss
The Corporation reported a net loss of $6,536,191 for 2003, compared with a net
loss of $7,807,378 for 2002. The major factor in the reduction of net losses was
the growth in revenue.
Included in the 2003 net loss amount are non-cash expenses totalling $4,355,671,
accounting for approximately 67% of the net loss and 35% of total expenses.
Non-cash expenses contributing to the 2002 net loss totalled $3,068,800 or 39%
of the net loss and 30% of total expenses.
Shareholder Equity
The deficit in shareholder equity has increased from $4,414,195 at December 31,
2002 to $5,222,809 at December 31, 2003. The increased deficit was largely
related to Points' operating loss for 2003. Management expects 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 year, which amounted to
58,823,652 shares at December 31, 2003, compared with 51,656,033 shares at
December 31, 2002.
The Corporation reported a net loss of $0.11 per share for 2003, compared to a
net loss of $0.15 for 2002. For 2003 and 2002, 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 fiscal 2003 and 2002 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 of liquidity include cash, accounts
receivable and accounts payable. Earnings before interest, taxes, depreciation
and amortization ("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
The Corporation uses earnings (loss) before interest, amortization and other
deductions ("EBITDA") as an internal measure. Management believes that EBITDA is
an important 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 expects the Corporation to have a positive EBITDA in 2005.
For the year ending December 31, 2003, the Corporation's EBITDA was
($2,170,767), compared with ($4,572,777) for 2002. The decrease in the loss was
related to the growth of revenues, partially offset by a smaller increase in the
management of general and administrative expenses, each as discussed herein.
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"
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
21,868,750 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 80,743,867 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
At December 31, 2003, the Corporation had a consolidated cash position of
$20,274,836, compared with $7,341,700 at December 31, 2002. Current assets at
December 31, 2003 were $22,104,427, compared with $8,266,699 at December 31,
2002.
2003 2002 2001
----------- ---------- ----------
Current assets $22,104,427 $8,266,699 $3,568,458
Cash increased by $12,933,136 in 2003 over 2002. The primary reason for this
increase in cash was the $15.1 million investment by IAC. This transaction was a
one-time event and Points does not expect to raise capital again in this
fashion. In addition, the growing operations of Points, including the number of
new partners and Points Solutions contracted, increased cash (and, to a lesser
extent, deposits). Management expects Points to continue to generate increasing
amounts of cash through operations in 2004.
2003 2002 2001
----------- ---------- ----------
Cash and short-term investments $20,274,836 $7,341,700 $2,894,380
Cash From Exercise of Certain Warrants and Options
Certain "in-the-money" warrants and options are due to expire in 2004 and in the
first quarter of 2005. 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 $1.65 million - assuming
the exercise in full of these securities, issued and outstanding Common Shares
will increase by over 10 million shares.
25
EXERCISE / CONVERSION
------------------------------- PROCEEDS UPON
SECURITY TYPE EXPIRY DATE NUMBER PRICE EXERCISE
- ------------- ----------- ---------- ------------------ -------------
Warrants 21-Oct-04 2,500 $ 0.28 $ 700
Broker Warrants 30-Nov-04 88,525 $ 0.25 $ 22,131
Warrants 30-Nov-04 2,229,481 $ 0.25 $ 557,370
Points International Ltd. Options 14-Feb-05 1,752,000 $ 0.50 $ 876,000
Points International Ltd. Options 14-Mar-05 201,400 $ 0.50 $ 100,700
Options in subsidiary with liquidity put 17-Feb-05 641,501 Fair Market Value $ 14,091
Options in subsidiary with liquidity put 31-Mar-05 5,455,288 Fair Market Value $ 80,059
TOTAL 10,370,695 $1,651,051
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's accounts receivable, which primarily reflect December Points
Solutions revenues, account for, on average, 17% of annual revenues. The
Corporation expects accounts receivable to grow proportionately with growth in
revenues. Management deems the risk of bad debts to be minimal based on the
structure and nature of the Corporation's cash flows.
2003 2002 2001
---------- -------- --------
Accounts receivables $1,004,370 $267,632 $103,180
Ability to Fund Future Growth
In 2003 the Corporation had cash flows of ($1,406,454) after changes in non-cash
balances related to operations, after reporting positive cash flows in 2002.
Management expects that the Corporation will generate positive cash flows from
its operating activities in 2004 and beyond. 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.
Working Capital
Working capital (defined as current assets minus current liabilities) has
reversed from a negative position in 2002 to $10,461,182 in 2003 as a result of
both the IAC Investment and growth of the Corporation's revenues. Management
expects working capital to remain positive and not degrade materially in 2004.
As revenues increase, the Corporation expects cash and current assets to
increase proportionately. If, as expected, the Corporation achieves operating
profitability in 2005, working capital will continue to grow.
Pursuant to contractual commitments, the Corporation will take the necessary
actions to ensure that its current assets are greater than its current
liabilities.
Property, Plant and Equipment
The Corporation reported a decrease in property, plant and equipment to $513,723
at December 31, 2003, from $1,764,199 at December 31, 2002. The decrease was
related to the amortization of property, plant and equipment during the year.
Technology costs under capital lease are depreciated on a straight-line basis
over three years. These costs account for 58% of gross property, plant and
equipment costs in 2003. The Corporation's technology costs are currently, and
are expected to remain, below industry averages as a result of prudent cost
containment initiatives.
The carrying amount of existing property, plant and equipment will continue to
decrease in 2004. However, leasehold improvements at the Corporation's new
facility will increase property, plant and equipment and the corresponding
amortization in 2004 and beyond.
Property, Plant and Equipment (net carrying amount)
2003 2002 2001
-------- ---------- ----------
Furniture and equipment $124,868 $ 139,523 $ 172,186
Computer equipment 206,494 98,013 140,018
Software 105,762 134,300 218,497
Technology costs 23,782 317,361 597,575
Technology costs under capital lease -- 989,898 1,979,793
Leasehold improvements 52,817 85,104 123,466
TOTAL PLANT, PROPERTY AND EQUIPMENT $513,723 $1,764,199 $3,231,535
Goodwill
2003 2002 2001
---------- ---------- --------
Goodwill and Other Intangibles(1) $1,320,692 $1,946,539 $120,312
Note: (1) On February 8, 2002, the Corporation completed a restructuring in
which it acquired the 5% interest in its subsidiary Points.com that it did not
already own, and discontinued all of its other operations. To acquire the
remaining shares and outstanding broker warrants of Points.com, the Corporation
issued 7,286,160 Common Shares, valued at $1,821,540 and 4,446,453 share
purchase warrants with an exercise price of $0.25, valued at $331,512. An
additional 595,667 share purchase warrants with an exercise price of $0.25,
valued at $37,825, were issued to acquire existing warrants of Points.com and an
additional 250,000 common shares, valued at $62,500, were issued to CIBC Capital
Partners as a restructuring fee in connection with the restructuring of the
Debenture. Legal fees of $139,750 were incurred with respect to the
restructuring. The total consideration in the restructuring was $2,393,127, of
which $134,524 was allocated to non-controlling interests and $2,258,603 to the
cost of acquired technology.
Subsequent to the 2003 year-end, the Corporation completed the MilePoint
Acquisition with $3,725,000 to be allocated to amortizing intangible assets and
$3,775,000 to (non-amortizing) 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.
Current Liabilities
Current liabilities at December 31, 2003 were $11,643,245, compared with
$10,371,715 at December 31, 2002. The increase was related to increased
deposits, accounts payable and deferred revenue (membership fees received in
advance for services to be provided over a future period are recorded as
deferred revenue and recognized as revenue evenly over the term of service).
27
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 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.
The 2003 accounts payable and accrued liabilities include 2003 employee bonus
accruals paid in January 2004, and other accrued charges. Accounts payable and
accrued liabilities as a percent of annual revenues have declined from 48% in
2001 to 20% in 2003. It is expected that this percentage will continue its
downward trend as the Corporation realizes economies of scale resulting in cost
containment and increased revenues. 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.
2003 2002 2001
----------- ---------- ----------
Accounts payable and accrued liabilities $ 1,187,598 $1,017,955 $ 486,605
Deposits 10,455,646 8,946,631 2,096,865
Current portion of obligation under capital lease -- $ 407,128 $ 736,749
Long-Term Liabilities and Commitments
PAYMENTS DUE BY PERIOD (AGGREGATE AMOUNT FOR MULTI-YEAR PERIODS) (000'S)
----------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL(1) 2009 + 2008 2007 2006 2005 2004
- ----------------------- --------- --------- -------- -------- -------- -------- --------
Long Term Debt(2)
(non-cash until repayment) $ 12,457 -- $6,257.2 $1,209.0 $1,089.2 $ 981.2 $ 884.0
Series Two Preferred Share
(non-cash until repayment) 21,080.0 16,115.5 868.0 868.0 868.0 868.0 868.0
Capital Lease Obligations -- -- -- -- -- -- --
Operating Leases(3) 2,487.2 11.3 107.4 395.6 395.6 436.9 1,140.4
Partner Purchase
Commitments(4) 3,974.2 -- 299.4 1,365.8 1,025.4 748.2 535.4
MilePoint Acquisition(5) (6) 4,419.5 400.0 842.0 3,177.5
TOTAL CONTRACTUAL
OBLIGATIONS (000'S) $44,417.9 $16,126.8 $7,531.9 $3,838.4 $3,778.2 $3,876.3 $6,605.3
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. 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) Operating leases and
partner purchase commitments, when combined, are equal to Note 17,
"Commitments", of the audited annual consolidated financial statements. (6) Cash
commitments related to the MilePoint Acquisition include the purchase price
($3.5 million), anticipated transition costs (up to US$505,000) 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 December 31, 2003 is $2,036,372 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.
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.
29
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.
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(1)
2008 2007 2006 2005 2004
-------- ---------- ---------- -------- --------
Mileage/ Point Purchase
Commitments $278,339 $ 990,369 $ 727,673 $536,180 $396,471
Marketing Commitments 21,037 375,434 297,758 211,991 138,914
TOTAL PARTNER PURCHASE
COMMITMENTS $299,376 $1,365,803 $1,025,431 $748,171 $535,385
Note: (1) U.S.dollar commitments have been converted at the year-end exchange
rate of US$1 = C$1.2946.
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 miles 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.
The percent of prepaids and sundry assets as a percentage of annual revenues has
declined from 57% in 2001 to 14% in 2003. It is expected that this percentage
will level off as the Corporation continues to offer incentives and other
marketing programs. While prepaid miles may remain the same or lower as an
overall percentage of prepaids and sundry assets, management expects the prepaid
miles account to increase as a result of the mileage purchase commitments from
various partners.
2003 2002 2001
-------- -------- --------
Prepaid mileage $516,651 $313,454 $ 35,000
Sundry assets 308,570 343,913 535,899
TOTAL $825,221 $657,367 $570,899
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. Fees incurred in the transaction, estimated at
$200,000, have been capitalized as goodwill.
In 2003, MilePoint earned revenue of $2.2 million (unaudited) and was slightly
profitable. Points expects to realize significant operating synergies by
integrating MilePoint's products into Points' operations. Management expects
that most of the synergies will be achieved by the end of 2004.
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.
31
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 $3,725,000 and goodwill by $3,975,000 ($3,775,000
attributed to the purchased assets and $200,000 to fees incurred). 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 at December
31, 2004 are expected to be as follows:
2004
----------
Amortization Expense 534,787
Closing Balance (Intangible Assets) $3,390,213
Goodwill 3,975,000
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 TOTALS
--------------------------------------------------------------------- ----------------------
PAYOUT 0 4 6 12 18 24 SHARES CASH
- ------ ---------- ---------- -------- -------- ---------- -------- --------- ----------
Cash $1,900,000 $400,000 $400,000 $ 400,000 $400,000 $3,500,000
Shares 1,300,000 700,000 1,500,000 500,000 4,000,000
Share Value(1) $1,300,000 $700,000 $1,500,000 $500,000 $4,000,000
TOTAL 4,000,000 $7,500,000
Note: (1) Based on the simple 20-day weighted average Common Share price of
$1.00 per share at signing.
In 2004, the Corporation is required to pay $2,300,000 ($1.9 million on March 31
and $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$505,000. 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 will move to
significantly larger facilities in the second quarter of 2004 to accommodate the
increase in employees. In 2004, the Corporation will be paying approximately
$240,000 for its current office facilities and $104,000 for its new office
facilities. Property lease costs are outlined in the table below. Management is
seeking a sublet arrangement for the remaining duration of its lease at its
current location, which expires in February 2005.
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.
Capital Leases
2003 2002 2001
---- -------- --------
Current portion of obligation under capital leases -- $407,128 $736,749
Operating Leases
2008 2007 2006 2005 2004
-------- -------- -------- -------- ----------
Property Lease $ 96,075(1) $384,300 $384,300 $402,911 $ 344,228
Technology Services Commitments 11,287 11,287 11,287 34,051 796,189
OPERATING LEASE COMMITMENTS $107,362 $395,587 $395,587 $436,962 $1,140,417
Note: (1) Commitment ends February 28, 2008.
Capital Resources
Planned Capital Expenditures
In 2003, the Corporation purchased new equipment to allocate to new and existing
partners and products. Approximately 91% of the Corporation's gross capital
expenditure costs are technology (hardware and software) related.
2004 2003 2002 2001
---------- -------- ------- ----------
Leasehold Improvements $ 516,800 $ 20,794 $ 1,973 $ 84,105
Computer Hardware and Software 811,013 317,936 43,578 1,241,381
TOTAL CAPITAL EXPENDITURES $1,327,813 $338,730 $45,551 $1,325,486
In 2004, the Corporation will incur significant costs in connection with its
move to new facilities in the second quarter of 2004. Management expects that
leasehold improvements and furniture for the new premises will cost
approximately $516,800.
The Corporation expects to increase its capital expenditures related to computer
hardware and software to approximately $811,000; a 255% increase over 2003.
Expected software expenditures include: licenses ($225,000), 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 expects to fund 2004 capital expenditures from its working capital.
33
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 that the
Corporation requires additional capital, it does not expect that any required
consents would 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 68,046,319 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 21,868,750
Common Shares.
The Corporation has outstanding options exercisable to acquire up to 5,777,784
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 2,929,054 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 7,334,057 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 83,541,484
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.
Selected Financial Results and Highlights
(Prior years restated to reflect the 2002 restructuring)
INCOME STATEMENT
YEAR ENDED DECEMBER 31
----------------------------------------
2003 2002 2001
----------- ----------- ------------
Revenue $ 5,858,704 $ 2,368,292 $ 1,005,971(1)
General and administrative expenses 8,029,471 6,941,069 6,168,483
Loss before interest, amortization
and other deductions (2,170,767) (4,572,777) (5,162,512)
Income (loss) before discontinued operations
and extraordinary items (6,536,191) (7,691,648) (7,365,633)
Net income (loss) per share - before discontinued
operations and extraordinary items
- basic (0.11) (0.15) (0.24)
- fully diluted n/a n/a n/a
Net income (loss) (6,536,191) (7,807,378) (11,199,492)
Net income (loss) per share
- basic (0.11) (0.15) (0.36)
- fully diluted n/a n/a n/a
Note: (1) In 2001, prior to restructuring, a subsidiary of the Corporation
recognized revenues of $89,035 attributed to "appreciation on dilution of
investment" and $22,998 attributed to "consulting".
BALANCE SHEET
AS AT DECEMBER 31
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash and short-term investments $ 20,274,836 $ 7,341,700 $ 2,894,380
Total assets(1) 27,481,286 13,140,020 8,421,152
Long-term liabilities 21,060,850 7,182,500 6,962,198
CASH DIVIDENDS DECLARED - PER SHARE -- -- --
SHAREHOLDERS EQUITY
- warrants 2,785,737 425,588 --
- capital stock 17,728,461 14,361,033 9,532,173
- retained earnings (25,737,007) (19,200,816) (11,393,438)
TOTAL ($5,222,809) ($4,414,195) ($1,861,265)
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.
35
Selected Quarterly Information (Consolidated)
2003 INCOME STATEMENT
Q4 Q3 Q2 Q1
----------- ----------- ----------- -----------
Revenue $ 1,449,378 $ 1,647,566 $ 1,457,568 $ 1,304,192
General and administrative 2,651,317 2,160,978 1,710,455 1,506,721
Operating Loss - before interest,
amortization and other deductions (1,201,939) (513,412) (252,887) (202,529)
Income (loss) before discontinued
operations and extraordinary items (2,605,974) (1,628,391) (1,283,337) (1,018,489)
Net income (loss) per share
- continuing operations (0.04) (0.03) (0.02) (0.02)
Net income (loss) (2,605,974) (1,628,391) (1,283,337) (1,018,489)
Net income (loss) per share (0.04) (0.03) (0.02) (0.02)
2003 BALANCE SHEET
Q4 Q3 Q2 Q1
------------ ------------ ------------ ------------
Cash and short-term investments $ 20,274,836 $ 21,833,287 $ 24,396,879 $ 10,470,735
Total assets(1) 27,481,286 29,456,797 30,507,645 16,144,871
Long-term liabilities 21,060,850 20,484,978 20,102,978 7,347,500
CASH DIVIDENDS DECLARED
- PER SHARE -- -- -- --
SHAREHOLDERS EQUITY
- warrants 2,785,737 2,785,737 2,805,308 390,573
- capital stock 17,728,461 17,726,761 15,371,255 14,549,703
- retained earnings (25,737,007) (23,131,032) (21,502,641) (20,219,305)
TOTAL ($5,222,809) ($2,618,534) ($3,326,078) ($5,279,029)
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.
2002 INCOME STATEMENT
Q4 Q3 Q2 Q1
----------- ------------ ----------- -----------
Revenue $ 911,940 $ 729,467 $ 427,534 $ 299,351
General and administrative 1,772,433 1,656,786 2,044,452 1,467,398
Operating Loss - before interest,
amortization and other deductions (860,493) (927,319) (1,616,918) (1,168,047)
Income (loss) before discontinued
operations and extraordinary items. (1,762,215) (1,725,072) (2,390,069) (1,814,292)
Net income (loss) per share
- continuing operations (0.03) (0.03) (0.05) (0.04)
Net income (loss) (1,762,000) (1,725,072)) (2,390,069) (1,930,237)
Net income (loss) per share (0.03) (0.03) (0.05) (0.04)
2002 BALANCE SHEET
Q4 Q3 Q2 Q1
------------ ------------ ------------ ------------
Cash and short-term investments $ 7,341,700 $ 4,424,308 $ 4,985,387 $ 5,341,778
Total assets(1) 13,140,020 10,864,170 11,370,933 12,380,615
Long-term liabilities 7,182,500 7,017,500 6,856,810 6,780,292
CASH DIVIDENDS DECLARED
- PER SHARE -- -- -- --
SHAREHOLDERS EQUITY
- warrants 425,588 425,588 -- --
- capital stock 14,361,033 14,362,084 14,213,686 14,337,092
- retained earnings (19,200,816) (17,438,815) (15,713,743) (13,323,674)
TOTAL ($4,414,195) ($2,651,143) ($1,500,057) $ 1,013,418
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.
37
(GRAPHIC)
MANAGEMENT'S
RESPONSIBILITY FOR
FINANCIAL REPORTING
Management has prepared the information contained in the financial statements
and in the Annual Report. Some numbers presented in the financial statements are
based on estimates and judgments; the integrity and fairness of this information
is the responsibility of management. The company has prepared the financial
statements according to Canadian generally accepted accounting principles. All
of the information throughout the Annual Report is consistent with the financial
statements.
The company maintains internal control, accounting and administrative procedures
to provide reasonable assurance that the financial information is relevant,
reliable, accurate and fairly presented.
The Board of Directors is responsible for governance and fair presentation of
the financial statements. The Board of Directors accepts this charge and carries
out this responsibility primarily through its audit committee.
The Board of Directors appoints the audit committee. All members of the audit
committee are outside directors. The committee met with management and auditors
before approving the financial statements. The audit committee reports its
findings to the Board of Directors and recommends approval of the financial
statements by the Board of Directors.
The company's external auditors, Mintz & Partners LLP, have conducted an
independent audit of the financial statements in accordance with Canadian
generally accepted auditing standards. The external auditors had full and
unrestricted access to the audit committee and management. Management
acknowledges their responsibility in their letter of representation to the
Corporation's Auditors and to the Corporation's board of directors. This
responsibility is referred to in the audit opinion.
/s/ Robert MacLean /s/ Stephen Yuzpe
- ------------------------------------- ----------------------------------------
Robert MacLean Stephen Yuzpe
Chief Executive Officer Chief Financial Officer
Points International Ltd.
39
(GRAPHIC)
Financial
Statements
AUDITORS' REPORT .......................................................... 42
CONSOLIDATED FINANCIAL STATEMENTS:
- CONSOLIDATED BALANCE SHEETS .......................................... 44
- CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT .................... 46
- CONSOLIDATED STATEMENTS OF CASH FLOWS ................................ 47
- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... 48
41
(GRAPHIC)
Auditor's
Report
To the Shareholders of Points International Ltd.,
We have audited the consolidated balance sheets of Points International Ltd. as
at December 31, 2003 and 2002 and the consolidated statements of operations and
deficit and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the corporation as at December 31,
2003 and 2002 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
(MINTZ & PARTNERS LLP)
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 4, 2004
43
POINTS INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31 2003 2002
- ----------------- ----------- -----------
ASSETS
CURRENT
Cash and cash equivalents (Note 3) $20,274,836 $ 7,341,700
Accounts receivable 1,004,370 267,632
Prepaids and sundry assets 825,221 657,367
----------- -----------
22,104,427 8,266,699
LONG-TERM INVESTMENTS (Note 4) 161,629 161,629
PROPERTY, PLANT AND EQUIPMENT (Note 5) 513,723 1,764,199
INTANGIBLE ASSETS (Note 6) 1,320,692 1,946,539
FUTURE INCOME TAXES RECOVERABLE 590,000 590,000
DEFERRED COSTS (Note 23) 2,790,816 410,954
----------- -----------
$27,481,286 $13,140,020
=========== ===========
APPROVED ON BEHALF OF THE BOARD:
/s/ Robert MacLean
----------------------------------------
Robert MacLean
Director
/s/ Christopher Barnard
----------------------------------------
Christopher Barnard
Director
POINTS INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31 2003 2002
- ----------------- ------------ ------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 1,187,598 $ 1,017,955
Deposits 10,455,646 8,946,631
Current portion of obligation under capital leases -- 407,128
------------ ------------
11,643,245 10,371,715
CONVERTIBLE DEBENTURE (Note 7) 8,036,372 7,182,500
CONVERTIBLE PREFERRED SHARES (Note 8) 13,024,478 --
------------ ------------
32,704,095 17,554,215
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 9) 17,728,461 14,361,033
WARRANTS (Note 10) 2,785,737 425,588
DEFICIT (25,737,007) (19,200,816)
------------ ------------
(5,222,809) (4,414,195)
------------ ------------
$ 27,481,286 $ 13,140,020
============ ============
45
POINTS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
AS AT DECEMBER 31 2003 2002
- ----------------- ------------ ------------
REVENUES
Points operations $ 5,502,744 $ 2,308,846
Interest and other revenue 355,960 59,446
------------ ------------
5,858,704 2,368,292
GENERAL AND ADMINISTRATION 8,029,471 6,941,069
------------ ------------
LOSS - Before interest, amortization and other deductions (2,170,767) (4,572,777)
------------ ------------
Interest on convertible debenture (Note 7) 853,872 660,000
Interest on Series Two Preferred Share (Note 8) 624,478 --
Interest and bank charges 9,753 50,071
Amortization of property, plant and equipment,
intangible assets and deferred costs 2,877,321 2,408,800
------------ ------------
4,365,424 3,118,871
------------ ------------
LOSS - From continuing operations (6,536,191) (7,691,648)
Loss from discontinued operations -- (115,730)
------------ ------------
NET LOSS (6,536,191) (7,807,378)
DEFICIT - Beginning of year (19,200,816) (11,393,438)
------------ ------------
DEFICIT - End of year $(25,737,007) $(19,200,816)
============ ============
LOSS PER SHARE - From continuing operations (Note 11) $ (0.11) $ (0.15)
============ ============
NET LOSS PER SHARE (Note 11) $ (0.11) $ (0.15)
============ ============
POINTS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS AT DECEMBER 31 2003 2002
- ----------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(6,536,191) $(7,691,648)
Items not affecting cash
Amortization of property, plant and equipment 1,589,206 1,512,887
Amortization of deferred costs 531,914 328,763
Amortization - acquired technology 756,201 567,150
Shares issued in exchange for services -- 366,379
Warrants issued in exchange for services -- 2,775
Interest on Series Two Preferred Share 624,478 --
Interest accrued on convertible debenture 853,872 660,000
----------- -----------
(2,180,520) (4,253,694)
Changes in non-cash balances related to
operations (Note 12 (a)) 774,066 7,130,198
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,406,454) 2,876,504
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of loans receivable from
significantly influenced companies -- 19,500
Purchase of property, plant and equipment,
net of proceeds (338,730) (45,551)
Purchase of intangible assets (130,353) (144,774)
Fees paid on acquisition (Note 13) -- (139,750)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (469,083) (310,575)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred financing costs (3,039,774) --
Repayment of obligations under capital leases (407,128) (634,795)
Issuance of warrants 2,700,000 --
Issuance of Series Two Preferred Share 12,400,000 --
Issuance of capital stock, net of share issue costs 3,155,575 2,631,916
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 14,808,673 1,997,121
----------- -----------
INCREASE IN CASH FROM CONTINUING ACTIVITIES 12,933,136 4,563,050
CASH FLOWS USED IN DISCONTINUED OPERATIONS -- (115,730)
----------- -----------
INCREASE IN CASH FROM ALL ACTIVITIES 12,933,136 4,447,320
CASH AND CASH EQUIVALENTS - Beginning of year 7,341,700 2,894,380
----------- -----------
CASH AND CASH EQUIVALENTS - End of year $20,274,836 $ 7,341,700
=========== ===========
47
POINTS INTERNATIONAL LTD.
Notes to consolidated financial statements
December 31, 2003 and 2002
1. BASIS OF PRESENTATION AND BUSINESS OF THE CORPORATION
The accompanying consolidated financial statements of Points International
Ltd. (the "Corporation") include the financial position, results of
operations and cash flows of the Corporation and its wholly-owned
subsidiaries, Exclamation Inc., Points International (US) Ltd. and Points
International (UK) Limited and its indirect wholly-owned subsidiary,
Points.com Inc.
The Corporation operates the Points Exchange, the only independent loyalty
points exchange allowing consumers to exchange points and miles from one
participating loyalty program to another to achieve the rewards they want
faster than ever before.
In addition, the Corporation develops technology solutions for the loyalty
program industry. The Corporation's portfolio of custom solutions
facilitates the online sale, transfer and exchange of miles, points and
currencies for a number of major loyalty programs.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Use of estimates
The preparation of these consolidated financial statements, in
conformity with Canadian generally accepted accounting principles, has
required management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent liabilities as at December 31, 2003 and 2002 and the
revenues and expenses reported for the years then ended. Actual
results may differ from those estimates.
b) Revenue recognition
Revenues from transaction processing are recognized as the services
are provided under the terms of related contracts. Membership fees
received in advance for services to be provided over a future period
are recorded as deferred revenue and recognized as revenue evenly over
the term of service. Related direct costs are also recognized over the
term of the membership.
Revenues from the sales of loyalty program points are recorded net of
costs, in accordance with Abstract 123 of the Emerging Issues
Committee ("EIC") of the Canadian Institute of Chartered Accountants
("C.I.C.A."), "Reporting Revenue Gross as a Principal Versus Net as an
Agent", when the collection of the sales proceeds is reasonably
assured and other material conditions of the exchange are met. Gross
proceeds received on the resale of loyalty program points, net of the
commissions earned, are included in deposits in the attached
consolidated balance sheet until remitted.
Nonrefundable partner sign-up fees with no fixed term, and for which
the Corporation is under no further obligations, are recognized as
revenue when received.
Custom website design revenues are recorded on the
percentage-of-completion basis.
c) Cash and cash equivalents
Cash and cash equivalents include amounts on deposit at the
Corporation's bank and amounts held for the Corporation by a third
party credit card processor. Such amounts represent a reserve in
respect of purchases of miles/points.
Short-term investments are accounted for at the lower of cost and net
realizable value.
d) Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated
amortization. Rates and basis of amortization applied by the
Corporation to write off the cost of the property, plant and equipment
over their estimated useful lives are as follows:
Furniture and equipment 20% declining balance basis
Computer equipment 30% declining balance basis
Software 30% straight-line basis
Technology costs straight-line over 3 years
Technology costs under capital lease straight-line over 3 years
Leasehold improvements straight-line over 5 years
e) Intangible assets
Effective January 1, 2002, the Corporation adopted Section 3062
("Goodwill and Other Intangible Assets") of the C.I.C.A. Handbook. The
effect of this was to reclassify $50,000 of goodwill, representing the
value of the public listing, to intangible assets. Since the public
listing has an indefinite life, no further amortization will be
recorded.
Patents will be amortized over the remaining life of the patent
commencing when the patents have been granted. The remaining life of
the patent is determined as 20 years less the time between the date of
filing and the patent grant date. Registered trademarks have an
indefinite life and will not be amortized unless it is determined that
they have become impaired.
Acquired technology, representing the excess of the cost over the
values attributed to the underlying net assets of the acquired shares
of Points.com Inc. (Note 13), will be amortized on a straight-line
basis over a period of three years.
If the Corporation determines that there is permanent impairment in
the value of the unamortized portion of the intangible assets, and
future earnings will not be realized as projected, an appropriate
amount of unamortized balance of intangible assets will be charged to
income as an "impairment charge" at that time.
f) Long-term investments
Investments in shares of companies over which the Corporation
exercises significant influence are accounted for using the equity
method.
Investments in shares of companies over which the Corporation does not
exercise significant influence are accounted for using the cost basis.
The Corporation reviews all of its long-term investments regularly and
provides for any decline, other than a temporary decline, in the value
of the investment to the estimated net recoverable amount.
g) Deferred finance charges
Charges incurred in respect of certain financings are deferred and
charged to income on a straight-line basis over three years. Deferred
finance charges represent legal and other related fees incurred to
obtain the financing described in Notes 7 and 8.
49
h) Capital leases
Leases that transfer substantially all of the benefits and risks of
ownership of the property to the Corporation are treated as an
acquisition of an asset and an obligation.
i) Costs of raising capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
j) Translation of foreign currency
Assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at exchange rates prevailing at the
balance sheet date for monetary items. Income and expenses are
translated at average exchange rates prevailing during the year.
Realized and unrealized foreign exchange gains and losses are
accounted for in general and administrative expenses and consequently
included in net earnings.
The results of foreign operations, which are financially and
operationally integrated with the Corporation, are translated using
the temporal method. Under this method, monetary assets and
liabilities denominated in foreign currencies have been translated
into Canadian dollars at the rate of exchange prevailing at year-end.
Fixed assets have been translated at the rates prevailing at the dates
of acquisition. Revenue and expense items are translated at the
average rate of exchange for the year. Exchange gains or losses on
translation are accounted for in general and administrative expenses
and consequently included in net income.
k) Income taxes
The Corporation follows the asset and liability approach to accounting
for income taxes.
The income tax provision differs from that calculated by applying the
statutory rates to the changes in current or future income tax assets
or liabilities during the year.
Current income taxes payable differ from the total tax provisions as a
result of changes in taxable and deductible temporary differences
between the tax basis of assets and liabilities and their carrying
amounts in the balance sheet.
l) Non-monetary transactions
Transactions in which shares or other non-cash consideration are
exchanged for assets or services are valued at the fair value of the
assets or services involved in accordance with Section 3830
("Non-monetary Transactions") of the C.I.C.A. Handbook.
m) Earnings per share
The Corporation uses Section 3500 ("Earnings per Share") of the
C.I.C.A. Handbook, which directs that the treasury stock method be
used to calculate diluted earnings per share.
Diluted earnings per share considers the dilutive impact of the
exercise of outstanding stock options, warrants, conversion of
preferred shares and the convertible debenture, as if the events had
occurred at the beginning of the period or at a time of issuance, if
later. Fully diluted loss per share has not been presented, as the
effect would be anti-dilutive.
n) Stock-based compensation
Effective January 1, 2002, the Corporation adopted Section 3870
("Stock-Based Compensation and Other Stock-Based Payments") of the
C.I.C.A. Handbook. As permitted by Section 3870, the Corporation has
applied this change prospectively for new awards granted on or after
January 1, 2002. In periods prior to January 1, 2002, the Corporation
recognized no compensation when stock options or warrants were issued
to employees or non-employees.
Employees
The Corporation has chosen to recognize no compensation when stock
options are granted to employees and directors under stock option
plans with no cash settlement features. Pro-forma net income and
earnings per share, as if the fair value based accounting method had
been used to account for stock-based compensation cost, are provided.
Non-employees
For stock-based compensation issued to non-employees, the Corporation
recognizes an asset or expense based on the fair value of the equity
instrument issued.
3. CASH AND CASH EQUIVALENTS
Cash equivalents include cash held at the company's bank, invested through
an interest rate agreement earning prime rate less 225 basis points for
Canadian funds and 80% of the U.S. T-Bill rate for U.S. funds, and cash
held by the third party credit processor. Cash equivalents also include
investments in short- and mid-term bonds maturing on various dates. The
investments could be liquidated at any time at the option of the
Corporation with no loss in value.
4. LONG-TERM INVESTMENTS
The Corporation's investment that is not consolidated in the attached
financial statements is:
2003 2002
-------- --------
(i) ThinApse Corporation
- 12% interest (fully diluted), cost basis
Shares at cost $161,629 $161,629
======== ========
The share component of this investment has options and warrants attached.
No value has been assigned to these options and warrants or any other
interest attached to the long-term investment.
51
5. PROPERTY, PLANT AND EQUIPMENT
Accumulated Net Carrying
2003 Cost Amortization Amount
- ---- ---------- ------------ ------------
Furniture and equipment $ 251,998 $ 127,130 $124,868
Computer equipment 398,316 191,822 206,494
Software 411,951 306,189 105,762
Technology costs 958,446 934,664 23,782
Technology costs under capital lease 3,033,818 3,033,818 --
Leasehold improvements 197,875 145,059 52,817
---------- ---------- --------
$5,252,406 $4,738,683 $513,723
========== ========== ========
Accumulated Net Carrying
2002 Cost Amortization Amount
- ---- ---------- ------------ ------------
Furniture and equipment $ 237,277 $ 97,753 $ 139,523
Computer equipment 236,098 138,086 98,012
Software 330,431 196,131 134,300
Technology costs 948,372 631,011 317,361
Technology costs under capital lease 2,969,694 1,979,796 989,898
Leasehold improvements 191,804 106,700 85,104
---------- ---------- ----------
$4,913,676 $3,149,477 $1,764,199
========== ========== ==========
Included in property, plant and equipment are assets originally acquired
under capital lease with a cost of $3,033,818 (2002 - $2,969,694). During
the year, amortization of $1,054,022 (2002 - $989,898) were recorded on
these assets.
6. INTANGIBLE ASSETS
Accumulated Net Carrying
2003 Cost Amortization Amount
- ---- ---------- ------------ ------------
Public status $ 150,000 $ 100,000 $ 50,000
Patents and trademarks 335,439 -- 335,439
Acquired technology 2,258,603 1,323,351 935,253
---------- ---------- ----------
$2,744,042 $1,423,351 $1,320,692
========== ========== ==========
Accumulated Net Carrying
2002 Cost Amortization Amount
- ---- ---------- ------------ ------------
Public status $ 150,000 $100,000 $ 50,000
Patents and trademarks 205,086 -- 205,086
Acquired technology 2,258,603 567,150 1,691,453
---------- -------- ----------
$2,613,689 $667,150 $1,946,539
========== ======== ==========
7. CONVERTIBLE DEBENTURE
On March 15, 2001 the Corporation issued to CIBC Capital Partners, a
division of Canadian Imperial Bank of Commerce, an 11% $6 million senior
secured convertible debenture (the "CIBC Debenture"), which debenture was
amended and restated as of February 8, 2002 in connection with the
reorganization of the Corporation effected on that date. The CIBC Debenture
was subsequently amended on April 11, 2003 in connection with the issuance
to Points Investments, Inc., an unrelated entity, of the Series Two
Preferred Share and a Common Share purchase warrant (the "PII Warrant").
The CIBC Debenture is not convertible while the PII Warrant, as described
in Note 8, is outstanding.
On December 16, 2003, CIBC Capital Partners extended the CIBC Debenture's
maturity date, by one year, to March 15, 2005. An additional three one-year
extensions at the option of CIBC Capital Partners are available. The
Corporation is not entitled to pre-pay the CIBC Debenture other than in
connection with a change in control of the Corporation upon the exercise in
full of the PII Warrant (in which circumstances payment of accrued interest
is waived). In the event that the PII Warrant ceases to be held by
InterActiveCorp or an affiliate thereof, the $6,000,000 principal amount of
the CIBC Debenture will be convertible at the option of CIBC Capital
Partners into 18,908,070 Common Shares and accrued interest on any
principal amount so converted ceases to be payable. The CIBC Debenture will
automatically convert into Common Shares immediately preceding any one of
(i) the sale of all outstanding Common Shares for a price per share of at
least $1.26928, (ii) the sale of all or substantially all of the assets of
the Corporation yielding net proceeds per Common Share (after giving effect
to the conversion of the CIBC Debenture) of at least $1.26928, and (iii) a
public offering of Common Shares raising at least $30 million at an issue
price per share of at least $1.26928 where the Corporation has a
pre-offering equity value of at least $175 million and the Common Shares
are listed on the Toronto Stock Exchange.
The CIBC Debenture contains negative covenants in favour of CIBC Capital
Partners such that CIBC Capital Partners' consent is required for, among
other things, (i) the sale by the Corporation of all or substantially all
of its assets, (ii) any transaction to reorganize the Corporation's capital
structure or merge with another person, (iii) certain sales of treasury
stock at a price per share of less than $0.40, (iv) the payment of
dividends or distributions on share capital or the purchase or redemption
of outstanding securities, (v) amendments to the articles or by-laws of the
Corporation and (vi) material changes to the business of the Corporation.
8. CONVERTIBLE PREFERRED SHARES
a) Series One Preferred Share
The Series One Preferred Share was created by Articles of Amendment
dated December 20, 2001 and was issued on February 8, 2002.
The Series One Preferred Share is non-voting and not entitled to
dividends other than as set out below.
53
The Series One Preferred Share will automatically convert into one
Common Share upon (i) conversion into Common Shares of greater than
$2,000,000 of the $6,000,000 principal amount of the CIBC Debenture,
(ii) repayment in full of the CIBC Debenture or (iii) payment of the
Dividend (as defined below) (each a "Conversion Event").
In the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of assets of the Corporation for the
purpose of winding-up its affairs prior to a Conversion Event, the
holder of the Series One Preferred Share is entitled to (a) receive
from the assets of the Corporation a payment of $4,000,000 before any
amounts shall be paid to the holders of any Common Shares and (b)
share pro rata (on the basis that the Series One Preferred Share
represents that number of Common Shares into which the CIBC Debenture
is then convertible) with the holders of all other participating
shares in further distributions from the assets of the Corporation to
an aggregate maximum of $20,000,000 in addition to the sum specified
in (a).
The holder of the Series One Preferred Share is entitled to a dividend
(the "Dividend") in the event that, prior to a Conversion Event, (i)
there is a merger or consolidation of the Corporation (or a subsidiary
of the Corporation which owns all or substantially all of the assets
of the Corporation) with another corporation where, following such
event, the shareholders of the Corporation will not hold at least a
majority of the voting power of the surviving/acquiring corporation,
(ii) any person (other than the Canadian Imperial Bank of Commerce or
any of its affiliates) or any persons acting jointly or in concert
beneficially own greater than 50% of (A) the votes attached to the
Corporation's securities entitled to vote for the election of the
Corporation's Board of Directors, or (B) the equity, by value, of the
Corporation, or (iii) there is a sale of all or substantially all of
the assets of the Corporation. The Dividend is approximately equal to
the liquidation preference described above and, for this purpose, the
value of the assets of the Corporation available for distribution on
this notional dissolution is the value attributable to the equity of
the Corporation 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.
The Series One Preferred Share ranks equally with the Series Two
Preferred Share and Series Three Preferred Share and in priority to
the Common Shares.
The terms of the Series One Preferred Share have been amended twice.
On April 8, 2003 the terms were amended to delete a redundant ranking
provision. On June 27, 2003 the terms were amended to provide that a
dividend was payable upon any person owning greater than 50% of the
votes attached to the Corporation's securities entitled to vote for
the election of the Corporation's Board of Directors; prior to this
amendment the Dividend was payable upon any person owning greater than
50% of the Common Shares.
b) Series Two Preferred Share
The Series Two Preferred Share was created by Articles of Amendment
dated April 10, 2003 and was issued on April 11, 2003.
The Corporation is not entitled to declare or pay any dividend on the
Common Shares unless it concurrently declares and pays a dividend on
the Series Two Preferred Share in an amount equal to the product of
the number of Common Shares comprising the Underlying Shares (as
defined below) and the dividend declared or paid per Common Share. Any
such dividend is to be paid to the holder of the Series Two Preferred
Share in the same form as it is paid to the holders of the Common
Shares.
The holder of the Series Two Preferred Share has the right,
exercisable at any time prior to 5:00 p.m. (Eastern Standard Time) on
March 31, 2013, to convert the Series Two Preferred Share, for no
additional consideration, into 20,323,561 Common Shares (as at
February 20, 2004), subject to anti-dilution adjustment (the
"Underlying Shares").
In addition, the Series Two Preferred Share benefits from
anti-dilution for the issuance of any Common Shares or securities
convertible into Common Shares of the Corporation after April 11, 2003
other than any issuance of Common Shares in connection with
convertible instruments outstanding on March 21, 2003.
The Series Two Preferred Share will automatically convert into one
Series Three Preferred Share on the earlier of the date that (i) the
Series Two Preferred Share is directly or indirectly transferred to a
person that is not an affiliate of InterActiveCorp, and (ii) the
holder of the Series Two Preferred Share ceases to be an affiliate of
InterActiveCorp.
Unless a notice of conversion has been delivered, the Corporation will
redeem the Series Two Preferred Share upon the earlier of (i) March
31, 2013 and (ii) the third business day following a "Change of
Control" of the Corporation. For this purpose, a "Change of Control"
of the Corporation will be deemed to have occurred if, before the
expiry of the PII Warrant (Note 7), any combination of a person (other
than the holder of the Series Two Preferred Share), its affiliates or
associates and persons acting jointly or in concert with any of them
becomes the beneficial owner of shares of the Corporation sufficient
to elect a majority of the Board of Directors.
In the event of redemption on March 31, 2013, the amount payable will
equal the greater of (i) the subscription price of the Series Two
Preferred Share plus 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 market value of the Common Shares into which the
Series Two Preferred Share may then be converted. In the event of
redemption on a Change of Control, the amount payable on redemption
will equal the greater of (i) 125% of the amount specified in clause
(i) of the preceding sentence 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 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 Change of Control.
In the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of assets of the Corporation among
its shareholders for the purpose of winding up its affairs, the holder
of the Series Two Preferred Share will be entitled to receive from the
assets of the Corporation an amount equal to the greater of (i) the
subscription price of the Series Two Preferred Share plus a return on
that subscription price equal to 7% per annum, calculated on a daily
basis from the date of issue of the Series Two Preferred Share to the
date on which the liquidation event occurred and (ii) the product of
the number of Underlying Shares and the per share amount to be
distributed to the holders of the Common Shares upon the liquidation
event after giving effect to any payments to be paid on the Series Two
Preferred Share and any other shares (other than the Series Two
Preferred Share) ranking prior to the Common Shares upon the
liquidation event.
The Series Two Preferred Share ranks equally with the Series One
Preferred Share and Series Three Preferred Share and in priority to
the Common Shares.
55
c) Series Three Preferred Share
The Series Three Preferred Share was created by Articles of Amendment
dated April 10, 2003 and has not been issued.
The Series Three Preferred Share is non-voting and not entitled to
receive dividends.
If issued, the Corporation will redeem the Series Three Preferred
Share upon the earlier of (i) March 31, 2013 and (ii) the third
business day following a "Change of Control" of the Corporation. For
this purpose, a "Change of Control" of the Corporation will be deemed
to have occurred if, before the expiry of the PII Warrant, any
combination of a person (other than the holder of the Series Two
Preferred Share), its affiliates or associates and persons acting
jointly or in concert with any of them, becomes the beneficial owner
of shares of the Corporation sufficient to elect a majority of the
Board of Directors.
In the event of redemption on March 31, 2013, the amount payable will
equal the subscription price of the Series Two Preferred Share plus a
return on that subscription price equal to 7% per annum, calculated
from the date of issue of the Series Two Preferred Share (April 11,
2003) to the date on which the Series Three Preferred Share is
redeemed. In the event of redemption on a Change of Control, the
amount payable on redemption will equal an amount equal to 125% of the
amount specified in the preceding sentence.
In the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of assets of the Corporation among
its shareholders for the purpose of winding up its affairs, whether
voluntary or involuntary, the holder of the Series Three Preferred
Share will be entitled to receive from the assets of the Corporation
an amount equal to the subscription price of the Series Three
Preferred Share plus a return on that subscription price equal to 7%
per annum, calculated on a daily basis from the date of issue of the
Series Three Preferred Share to the date on which the liquidation
event occurred.
The Series Three Preferred Share ranks equally with the Series One
Preferred Share and Series Two Preferred Share and in priority to the
Common Shares.
9. CAPITAL STOCK
Authorized
Unlimited Common Shares
Unlimited Series A preference shares, convertible into one
common share and one half of one Series B common
share purchase warrant
1 Series One preference share, non-voting, convertible into
one common share
1 Series Two Preferred Share
1 Series Three Preferred Share
Issued
The balance of capital stock is summarized as follows:
2003 2002
----------- -----------
Common shares $17,728,459 $14,361,032
Series One preference share 1 1
Series Two preference share 1 --
----------- -----------
$17,728,461 $14,361,033
=========== ===========
Common shares Number Amounts
- ------------- ---------- -----------
Balance January 1, 2002 32,812,712 $ 9,532,173
Issued on acquisition of Points.com Inc. shares (i) 7,536,160 1,884,040
Issued in exchange for consulting services (ii) 1,187,290 151,379
Issued in private placement (iii) 12,000,000 3,000,000
Issued on exercise of options 99,155 2,178
Issued in exchange for services (iv) 861,000 215,000
---------- -----------
54,496,317 14,784,770
Less: share issue costs -- 423,738
---------- -----------
Balance December 31, 2002 54,496,317 14,361,032
Issued on exercise of warrants (v) 3,139,943 1,001,869
Issued on exercise of stock options (vi) 446,773 122,975
Issued on exchange for property (shares in subsidiary) (vii) 2,329,954 13,961
Issued in exchange for property (viii) 2,196,635 2,240,568
---------- -----------
62,609,622 17,739,405
Less: share issue costs -- 10,944
---------- -----------
Balance December 31, 2003 62,609,622 $17,728,461
========== ===========
Series One Preference Shares Number Amounts
- ---------------------------- ------ -------
Issued on restructuring of convertible debenture (Note 8) 1 $--
=== ===
57
Series Two Preferred Share Number Amounts
- -------------------------- ------ -------
Issued on restructuring of convertible debenture (Note 8) 1 $--
=== ===
(i) On February 8, 2002, the Corporation completed its restructuring described
in Note 19 and issued 7,286,160 common shares in exchange for the remaining
5% interest in Points.com Inc. The Corporation issued an additional 250,000
common shares to the holder of the debenture described in Note 7 as
compensation for renegotiating the terms.
(ii) The Corporation issued 1,187,290 common shares in exchange for consulting
services provided by a director of the Corporation. These services were
provided under a contract that expired in 2002.
(iii) The Corporation issued 12,000,000 common shares in a private placement at
$0.25 per share. 922,000 warrants, valued at $53,476 and a commission of
$230,500 were paid in connection with this private placement.
(iv) 611,000 common shares were issued to pay off outstanding accounts payable
of $152,500 and 250,000 common shares were issued in exchange for marketing
services of $62,500.
(v) 2,128,443 common share purchase warrants, issued in connection with
restructuring and acquisition of the interest in Points.com Inc. that the
Corporation did not already own, were exercised at $0.25 per share. In
addition, 922,000 broker warrants issued in respect of a financing in 2003
were exercised at $0.25 per share and 89,500 warrants issued in respect of
a consulting agreement with an independent consulting firm were exercised
at $0.28 per share.
(vi) 446,773 options previously issued to employees, directors, advisors and
consultants were exercised at prices ranging from $0.20 to $0.50 per share.
(vii) 2,329,954 options previously issued to Points.com Inc. founders,
employees, directors and advisors were exercised in Points.com Inc. and put
to the Corporation at fair market value.
(viii) 2,196,635 shares were issued to a commercial partner for warrants to
acquire 1,055,328 common shares of subsidiary Points.com Inc., warrant
acquisition rights to acquire warrants exercisable to acquire 3,771,927
common shares of subsidiary Points.com Inc. and for a series of amendments
to commercial agreements, including a long-term extension to the contract
term, as described in Note 10 (e).
10. OPTIONS AND WARRANTS
a) Stock option plan
The Corporation has a stock option plan under which employees,
directors and consultants are periodically granted stock options to
purchase common shares at prices not less than the market price of the
share on the day of grant. The options vest over a three-year period
and expire five years from the grant date.
2003 2002
---------- ----------
Options Authorized by Shareholders 8,030,424 7,559,496
Less: Options Exercised (1,565,523) (1,118,750)
---------- ----------
Net Options Authorized 6,464,901 6,440,746
Less: Options Granted (5,598,127) (5,131,900)
---------- ----------
Options Available to Grant 866,774 1,308,846
b) Stock options
2002 2001
-------------------- --------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
--------- -------- --------- --------
Beginning of year 5,131,900 $0.43 4,248,400 $0.52
Granted 1,322,000 0.88 1,553,357 0.27
Exercised (446,773) 0.28 -- --
Forfeited (409,000) 0.88 (669,857) 0.66
--------- ----- --------- -----
End of year 5,598,127 $0.51 5,131,900 $0.43
========= ===== ========= =====
Exercisable at end of year 3,937,228 $0.41 3,555,176 $0.47
========= ===== ========= =====
Options outstanding
----------------------------------
Weighted Options exercisable
average --------------------
remaining Weighted Weighted
contractual average average
Number of life exercise Number of exercise
Range of exercise prices options (years) price options price
- ------------------------ --------- ----------- -------- --------- --------
$0.01 to $0.49 2,015,477 2.31 $0.39 1,511,775 $0.23
$0.50 to $0.99 2,750,650 1.56 0.53 2,425,453 0.51
$1.00 and over 832,000 4.89 1.11 -- --
Subsequent to year-end, as described in Note 22, 583,250 options were exercised.
59
c) Stock options of Points.com Inc.
In addition to the stock options described above, Points.com Inc., the
Corporation's indirect wholly-owned subsidiary, previously issued and,
therefore, has outstanding stock options. The options outstanding are as
follows:
2003 2002
--------------------------- --------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
---------- -------------- --------- --------------
Beginning of year 4,077,781 $0.03 4,868,238 $0.49
Granted -- -- -- --
Exercised (930,529) 0.02 (39,600) 0.06
Forfeited (32,200) 0.06 (750,857) 2.91
--------- ----- --------- -----
End of year 3,115,052 $0.04 4,077,781 $0.03
========= ===== ========= =====
Exercisable at end of year 3,115,052 $0.04 3,361,617 $0.03
========= ===== ========= =====
Options outstanding
----------------------------
Weighted Options exercisable
average -------------------------------------------
remaining Weighted Weighted
Number of contractual life average Number of average
Range of exercise prices options (years) exercise price options exercise price
- ------------------------ --------- ---------------- -------------- --------- --------------
$0.01 to $0.49 3,115,052 1.31 $0.04 3,115,052 $0.04
The holders of 3,115,052 options (all with strike prices at or below $0.055
per share) have been granted the right to put to the Corporation the common
shares of Points.com Inc. acquired on the exercise of such options for
common shares in the Corporation. The Corporation has used a ratio of
2.5039 common shares per Points.com Inc. common share (equivalent to
7,799,781 common shares) for this purpose.
Subsequent to year end, as described in Note 22,63,901 shares in
Points.com Inc., acquired from the exercise of options, were exchanged for
160,003 common shares of the Corporation.
d) Warrants
2003 2002
--------------------------- ---------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
---------- -------------- ---------- --------------
Beginning of year 7,056,116 $0.25 -- $ --
Granted 76,348,559 0.97 7,056,116 0.25
Exercised (3,139,943) 0.25 -- --
Forfeited (833,333) 0.25 -- --
---------- ----- --------- -----
End of year 79,431,399 $0.94 7,056,116 $0.25
========== ===== ========= =====
Exercisable at end of year 79,428,899 $0.94 6,036,116 $0.25
========== ===== ========= =====
Warrants outstanding
----------------------------------------------
Weighted Warrants exercisable
average ---------------------------
remaining Weighted Weighted
Number of contractual life average Number of average
Range of exercise prices options (years) exercise price options exercise price
- ------------------------ ---------- ---------------- -------------- ---------- --------------
$0.20 to $0.49 3,082,840 1.19 $0.25 3,080,340 $0.25
$0.50 to $0.99 76,348,559 2.28 0.97 76,348,559 0.97
Subsequent to year-end, as described in Note 22,285,223 warrants were
exercised.
e) Warrants of Points.com Inc.
On September 5, 2003 the Corporation acquired warrants and warrant
acquisition rights exercisable to acquire 4,827,255 common shares in the
Corporation's indirect wholly-owned subsidiary Points.com Inc. from an
airline partner, as described in Note 9 (viii).
In addition to the warrants and warrant acquisition rights acquired by the
Corporation, Points.com Inc. has issued or committed to issue an additional
4,103,378 warrants to airline partners with expiry dates between March 28,
2006 and April 1, 2007. Each warrant entitles the holder to acquire one
common share of Points.com Inc. with an exercise price of US$1.96. The
exercise of these warrants would dilute the Corporation's interest in
Points.com Inc. by 11%.
f) Fair value
The weighted-average grant-date fair value of stock options granted to
employees and directors during 2003 has been estimated to range from $0.21
to $1.09 (2002 - $0.06) using the Black-Scholes option-pricing model. For
purposes of pro-forma disclosures, the estimated fair value of the options
granted after January 1, 2002 is amortized to expense over the options'
vesting periods. The Corporation's pro-forma net loss under Canadian
generally accepted accounting principles would be increased by $106,603
(2002 - $27,394) for the year ended December 31, 2003. Loss per share
figures would not
61
have changed. The pricing model assumes weighted-average risk-free interest
rates of 4.5%, weighted-average expected dividend yields of nil,
weighted-average expected common stock price volatility ranging from 12.88%
to 187% and a weighted-average expected life of 5 years.
The weighted-average grant-date fair value of warrants granted during 2003
has been estimated at $0.035 (2002 - $0.06) using the Black-Scholes
option-pricing model. The pricing model assumes a weighted-average
risk-free interest rates of 4.5%, weighted-average expected dividend yields
of nil, weighted-average expected common stock price volatility of 12.88%
and a weighted-average expected life of 3.5 years.
11. EARNINGS PER SHARE
a) Basic loss per share
Loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the year that amounted to
58,823,652 shares (2002 - 51,656,033).
b) Fully-diluted earnings per share
The fully-diluted earnings per share have not been computed, as the
effect would be anti-dilutive.
12. STATEMENT OF CASH FLOWS
a) Changes in non-cash balances related to operations are as follows:
2003 2002
---------- ----------
(Increase) in accounts receivable $ (736,738) $ (165,452)
(Increase) in prepaids and sundry assets (167,854) (86,468)
Increase in accounts payable and accrued liabilities 169,643 531,352
Increase in deposits 1,509,015 6,849,766
---------- ----------
$ 774,066 $7,130,198
========== ==========
b) Supplemental information
Interest and taxes
Interest of $7,378 (2002 - $50,071) was paid during the year. Interest
revenue of $355,960 (2002 - $59,446) was received during the year. No
income taxes have been paid.
Non-cash transactions
Non-cash transactions in 2003 were as follows:
(i) 930,529 shares of Points.com Inc. were acquired in exchange for
2,329,954 shares of the Corporation (Note 9 (vii)).
(ii) 2,196,635 shares were issued in connection with the acquisition
of warrants, warrant acquisition rights and amendment to the
commercial agreement. (Note 9 (viii)).
(iii) $42,030 of revenue was 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 $114,394 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 $853,872 was accrued on the convertible debenture
(Note 7).
(vi) Interest on $624,478 was accrued on the Series Two Preferred
Share (Note 8 (b)).
(vii) The company issued share capital of $211,851 on the exercise of
warrants.
Non-cash transactions in 2002 were as follows:
(vii) Shares of Points.com Inc. were acquired in exchange for shares
of the Corporation valued at $1,821,540 and warrants valued at
$331,512. Fees associated with this transaction valued at $100,325
were also settled in exchange for shares and warrants (Note 9 (i)(iv)
and Note 13).
(ix) Consulting fees of $151,379 were paid by the issuance of shares
(Note 9 (ii)).
(x) Share issue costs were paid by the issuance of warrants with a
fair value of $53,476 and advertising costs were paid by the issuance
of warrants with a fair value of $2,775 (Note 10 (f)).
(xi) Marketing services of $62,500 were paid by the issuance of shares
and are being expensed over a one-year period (Note 9 (iv)).
(xii) Other accounts payable of $152,500 were settled with shares of
the Corporation (Note 9 (iv)).
(xiii) $31,315 of miles, received in exchange for hosting services
provided, were valued at the purchase price of the miles. These were
recognized as a charge to prepaid expenses and included in revenue.
The expense will be recognized as the miles are used.
(xiv) Interest of $660,000 was accrued on the convertible debenture
(Note 7).
c) Cash and short-term investments consist of:
2003 2002
----------- ----------
Cash (Note 3) $ 9,046,701 $3,845,470
Short-term investments (Note 3) 9,627,468 2,193,891
Cash held by credit card processor 1,600,667 1,302,339
----------- ----------
$20,274,836 $7,341,700
=========== ==========
13. ACQUISITIONS
Acquisition of Points.com Inc.
On February 8, 2002, the Corporation completed a restructuring in which it
acquired the 5% interest in Points.com Inc. it did not already own and
discontinued all of its other operations (Note 19). To acquire the
remaining common and Class C shares and outstanding broker warrants of
Points.com Inc., the Corporation issued 7,286,160 common shares, valued at
$1,821,540 (Note 9(i)) and 4,446,453 share purchase warrants with an
exercise price of $0.25, valued at $331,512 (Note 10 (f)).
595,667 common share purchase warrants with an exercise price of $0.25,
valued at $37,825, were issued to acquire existing warrants of Points.com
Inc. 250,000 common shares, valued at $62,500, were issued to the debenture
holder, described in Note 9 (iv), in consideration for the restructuring.
Legal fees of $139,750 were incurred with respect to the restructuring.
The total consideration paid in respect of this transaction was $2,393,127.
$134,524 was allocated to non-controlling interests with the excess,
$2,258,603, allocated to the cost of acquired technology (Note 6).
63
14. FINANCIAL INSTRUMENTS
The Corporation's significant financial assets and liabilities are cash,
short-term investments and convertible loans, which are substantially
stated at fair value. Interest rates, maturities and security affecting the
currency, interest and credit risk of the Corporation's financial assets
and liabilities have been disclosed in Notes 3 and 7.
15. INCOME TAXES
The total provision for income taxes differs from that amount which would
be computed by applying the Canadian federal income tax rate to the loss
before provision for income taxes. The reasons for these differences are as
follows:
2003 2002
----------- -----------
Income tax recovery at statutory rate $(2,450,000) $(3,017,000)
Amortization of intangible assets
for which there is no tax effect 1,323,531 567,000
Losses for which no benefit has been recorded 1,126,649 2,450,000
----------- -----------
Net income tax recovery $ -- $ --
=========== ===========
The Corporation has non-capital losses carry-forward for income tax purposes in
the amount of $19,701,019, which may be applied against future years' taxable
income. The losses may be used to reduce future years' taxable income and expire
approximately as follows:
2005 $ 179,000
2006 $ 604,000
2007 $2,662,000
2008 $6,659,000
2009 $5,729,000
2010 $3,868,000
The nature and tax effects of the temporary differences that give rise to
significant portions of the future income tax assets and future income tax
liabilities are as follows:
Future income tax assets are comprised of:
2003 2002
----------- -----------
Losses carried forward $ 7,608,000 $ 6,114,000
Property, plant and equipment 1,468,000 964,000
Share issue costs 499,000 492,000
----------- -----------
9,575,000 7,570,000
Valuation allowance (8,985,000) (6,980,000)
----------- -----------
Net future income tax asset $ 590,000 $ 590,000
=========== ===========
16. RELATED PARTY TRANSACTIONS
The following are the transactions and balances with related parties:
a) Prepaids and sundry assets include a loan of $25,000 (2002 - $50,000)
plus accrued interest due from a director of the Corporation.
b) In fiscal 2003, certain officers and directors exercised stock options
in the Corporation and the Corporation's subsidiary Points.com
Inc. (Note 9 (vi) and Note 9 (vii)).
17. COMMITMENTS
The Corporation is obligated under various operating leases for premises,
purchase commitments and equipment and service agreements for web hosting
services expiring through 2008 to aggregate annual rentals as follows:
2004 $1,675,802
2005 $1,185,133
2006 $1,421,019
2007 $1,761,390
2008 $ 406,739
2009 $ 11,287
18. SEGMENTED INFORMATION
a) Reportable segments
The Corporation has only one operating segment, the portfolio of
technology solutions to the loyalty program industry (refer to the
Management Discussion and Analysis for a description of Points
Solutions, the Points Exchange and Points' Private Branded Solutions),
in each of 2003 and 2002 whose operating results were regularly
reviewed by the Corporation's chief operating decision maker and for
which complete and discrete financial information is available.
b) Enterprise-wide disclosures - Geographic information
$5,391,735 (2002 - $1,931,723) of the Corporation's revenues were
generated in the U.S., $466,969 were generated in Canada and the
remaining revenues generated outside North America.
At December 31, 2003 and 2002, substantially all of the Corporation's
assets were in Canada.
19. DISCONTINUED OPERATIONS
During the fourth quarter of the year ended December 31, 2001, the
Corporation adopted a formal plan of disposal of Exclamation Europe S.A.,
ThinOffice Inc. and Exponential Entertainment Inc. On February 25, 2002, as
part of the restructuring, the Corporation signed an agreement to dispose
of its interest in Bigtree.com Ltd.
Prior to December 31, 2001, the Corporation sold its entire interest in
Exclamation Europe S.A. to a shareholder and director of the Corporation
for $2.
In 2002, the Corporation sold its entire interest in ThinOffice Inc. to an
employee of ThinOffice Inc. for $2 and an option to acquire 15% of
ThinOffice Inc. No value has been assigned to this option.
The Corporation still owns the shares of Exponential Entertainment Inc. but
the entity has ceased all operations.
65
None of the above entities recorded any revenues for either fiscal 2002 or
fiscal 2001, with the exception of ThinOffice Inc., which recorded revenues of
$29,280 in fiscal 2001.
The loss from discontinued operations is comprised as follows:
2003 2002
---- --------
Net loss from ThinOffice Inc. $-- $110,730
Net loss from Exponential Entertainment Inc. -- 5,000
Net loss from Exclamation Europe S.A. -- --
Amortization of goodwill related to
Exponential Entertainment Inc. -- --
Amortization of goodwill related to Bigtree.com Ltd. -- --
--- --------
$-- $115,730
=== ========
20. FINANCIAL INSTRUMENTS
The Corporation is not exposed to financial risk that arises from
fluctuations in interest rates as all of its interest-bearing obligations
are fixed rate. As well, the Corporation has sufficient foreign currency to
satisfy its foreign currency based obligations.
a) Fair Value:
In accordance with the disclosure requirements of the CICA Handbook
Section 3860 (paragraphs 3860.78, .101), the Corporation is required
to disclose certain information concerning its "financial
instruments", defined as a contractual right to receive or deliver
cash or another financial asset. The fair value of the majority of the
Corporation's financial assets and liabilities approximate their
recorded values at December 31, 2003. In these circumstances, the fair
value of the assets or liabilities is determined to be the lower of
cost and market value.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect estimates.
b) Summary of Significant Financial Instruments
The significant financial instruments of the Corporation, their
carrying values and exposure to U.S. dollar denominated monetary
assets and liabilities, as of December 31, 2003 are as follows:
C$ Total US$ Denominated
----------- ---------------
Cash and cash equivalents $20,274,836 US$6,938,320
Accounts receivable 1,004,370 497,723
Accounts payable and accrued liabilities 1,187,598 275,521
Deposits 10,455,646 7,067,550
21. ECONOMIC DEPENDENCE
Approximately 61% (2002 - 77%) of the Corporation's revenues are from its
two largest customers. In addition, 58% (2002 - 91%) of the Corporation's
deposits are due to these two customers.
22. SUBSEQUENT EVENTS
a) Subsequent to year-end, 583,250 options in the Corporation were
exercised at a weighted average exercise price of $0.20 per share
(Note 10(b)).
b) Also subsequent to year-end, 63,901 options in Points.com Inc. were
exercised at a weighted average exercise price of $0.002 per share and
put to the Corporation for 160,003 common shares (Note 10(c)).
c) Subsequent to year-end, the Corporation acquired substantially all of
the assets of MilePoint, Inc., an unrelated entity in a similar line
of business, in consideration for a combination of cash and Common
Shares. Certain expenses incurred in 2003, totaling approximately
$57,000, related to the transaction, have been classified as deferred
costs and will be included as part of the costs of acquisition in
2004.
23. DEFERRED COSTS
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.
Accumulated Net Carrying
2003 Cost Amortization Amount
- ---- ---------- ------------ ------------
Convertible Debenture $ 986,289 $ 904,098 $ 82,191
Series Two Preferred Share and Warrant 717,050 53,779 663,271
MilePoint Acquisition & Other 82,158 -- 82,158
Share Issuance to Partner 2,112,568 149,372 1,963,196
---------- ---------- ----------
$4,026,064 $1,107,249 $2,790,816
========== ========== ==========
Accumulated Net Carrying
2002 Cost Amortization Amount
- ---- -------- ------------ ------------
Convertible Debenture $986,289 $575,335 $410,954
-------- -------- --------
$986,289 $575,335 $410,954
======== ======== ========
24. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified in accordance
with the current year's presentation.
67
Corporate Information
(GRAPHIC)
DIRECTORS
Douglas Carty (Chairman)
Chief Financial Officer, Laidlaw Inc.
Marc Lavine (Vice-Chairman)
Chief Executive Officer, President
and Chief Financial Officer,
Chrysalis Capital Corporation
Robert MacLean (Chief Executive Officer)
Christopher Barnard (President)
Erik Blachford(1)
President and Chief Executive Officer,
Travel Division, InterActiveCorp
Rowland Fleming
Director of a number of public
and private companies
Former President, Toronto Stock Exchange
Jim Kranias
Consultant
Eric Korman
Vice President, Mergers & Acquisitions,
InterActiveCorp
Grant McCutcheon
Partner, Lawrence & Company
Incorporated
Christopher Payne
Managing Director, CIBC World Markets
John Thompson
Former Managing Director, Kensington
Capital Partners Limited
AUDIT COMMITTEE
Douglas Carty (Chair)
Rowland Fleming
Grant McCutcheon
John Thompson
HUMAN RESOURCES COMMITTEE
Rowland Fleming (Chair)
Eric Korman
Christopher Payne
John Thompson
OFFICERS
Christopher Barnard
President
Darlene Higbee Clarkin
Chief Technology Officer & Vice President
Grad Conn (hired in Q2 2004)
Chief Marketing Officer
Morley Ivers
Vice President, Business Strategy
Robert MacLean
Chief Executive Officer
Steve Ogden
Vice President, Product Development
Jerry Philip
Vice President, Business Development
William Thompson
Senior Vice President, Partners
Christine Vandaele
Vice President, Consumer Marketing
Stephen Yuzpe
Chief Financial Officer
and Corporate Secretary
INVESTOR RELATIONS
Stephen Yuzpe (416.596.6382)
steve.yuzpe@points.com
Robert MacLean (416.596.6390)
rob.maclean@points.com
AUDITORS
Mintz & Partners LLP
EXTERNAL LEGAL COUNSEL
Davies Ward Phillips & Vineberg LLP
TRANSFER AGENT
Computershare Trust Company of Canada
LISTING
Shares are listed on the Toronto Stock
Exchange (TSX) under the symbol PTS
ANNUAL MEETING
June 24, 2004 at 4:30 p.m.
Stock Market Place
The Exchange Tower
130 King Street West
Toronto, Ontario M5X 1J2
ADDRESS
Points International Ltd.
800 - 179 John Street
Toronto, Ontario M5T 1X4
Phone: 416.595.0000
Fax: 416.595.6444
www.points.com
(1) Dan Marriott (board nominee June 2004), Senior Vice President, Interactive
Development, InterActiveCorp will replace Erik Blachford as the holder of
the Series Two Preferred Share's second (of two) board nominees.
69
Points International Ltd.
800 - 179 John Street
Toronto, Ontario
M5T 1X4
Phone: 416.595.0000
Fax: 416.595.6444
www.points.com
(GRAPHIC)